Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks second quarter conference call. At this time, all participants are in a listen-only mode. Following today’s presentations, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today, Thursday, January 25, 2007. I would now like to turn the call over to Michael Palu, Acting Chief Financial Officer for Extreme Networks. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us. On the call today is Mark A. Canepa, President and CEO of Extreme Networks. This afternoon, we issued a press release announcing our revenue results for the second quarter of fiscal year 2007. A copy of this release is available on our website at extremenetworks.com. This call is being broadcast live over the Internet today and it will be posted on our website and available for reply shortly after the conclusion of the call. Let me note that some of the remarks made during this call may contain forward-looking statements about financial and business guidance, product introductions, customer development, and prospective real estate transactions. These reflects the company’s current judgment on those issues. Because these statements deal with future events, they are subject to risks and uncertainties that could cause the actual results to differ materially. In addition to the factors that may be discussed during this call, important factors that could cause actual results to differ materially are contained in the company’s Form 10-Qs and 10-Ks, which are on file with the SEC and are available on our website. With that, let me turn the call over to Mark.Mark A. Canepa: Thanks, Mike, and thanks to everyone for joining us today. I’ll begin this call with a summary review of our quarterly revenue results, followed by customer and product highlights. I will also give you an update on other activities that have taken place during the past 90 days. Mike will then follow on with a more detailed discussion of our financial. This quarter, revenue increased modestly. Revenue for the quarter was $86.9 million, consisting of $71.1 million in product revenue and $15.8 million in service revenue. Product revenue increased 4% sequentially and decreased 8% year over year. Service revenues were…

Thank you, Mark. I am going to briefly review our revenue results for the quarter, and then provide you with some of our key balance sheet metrics. As previously announced, a special committee of Extreme’s Board of Directors has been conducting a review of the company’s historical practices related to stock option grants. This special committee has hired independent legal and financial experts to conduct the investigation. We have preliminarily concluded that the appropriate measurement dates for financial accounting purposes of certain stock option grants differ from the reported grant dates of those awards. The additional non-cash charges for stock-based compensation expense is expected to be material with respect to certain fiscal periods and the company will therefore restate certain historical financial statements to record the additional stock-based compensation expense, tax-related impacts, and will evaluate whether any other un-recorded adjustments previously determined to be immaterial need to now be recorded. Due to the fact that this review is ongoing and not yet complete, we have not filed our annual report on Form 10-K for the year ended July 2, 2006; our quarterly report on Form 10-Q for the first quarter of fiscal 2007; and nor have we included financial statements in our Q2 release. We do not expect the special committee’s review to be completed in time for the company to file its quarterly report on Form 10-Q for the quarter just ended by the SEC deadline of February 9, 2007. Following the completion of the special committee’s review, the company intends to file its Form 10-K for the year ended July 2, 2006 and to file its current year quarterly reports on Form 10-Q. Now, looking at revenue, revenue for the quarter was $86.9 million, consisting of $71.1 million in product revenue and $15.8 million in service revenue. Our…

Thank you, Mike. As you can see, we continue to make the changes that lay the foundation for future success. We’re in a growing market and the need for solutions to complex network problems does not appear to slow down anytime soon. So at this point, I would like to conclude the prepared remarks portion and open it up for questions.

(Operator instructions) Our first question comes from Sam Wilson with JMP Securities. Please go ahead, sir.

Good afternoon, gentlemen. A clarification and a couple of questions. On the clarification, I just missed what cash from operations was. Then, in terms of questions, just two: could you give us a sense of OEM sales and what the pricing environment was like during the last quarter? Thank you.

I’ll take the question on cash from operations and I’ll let Mark answer the second question. So it’s a little bit difficult to speak directly to cash flow from operations, given the fact that we are not presenting full financial statements in the current quarter. I did try to highlight in my prepared remarks some of the changes in the balance sheet accounts that I think will have an impact on the cash, namely the increase in the receivables in the quarter and the increase in inventory over the last few quarters, and the reduction in payables, which I think from those balance sheet account changes, we’ll see a use of cash from operations in the current quarter.

That’s what I thought.

Now, on the OEM sales, first of all, the overall pricing environment clearly continues to be very competitive. We’re out there kind of slugging it out every day, but that said, you’ve seen from our remarks that our overall product margins improved well this quarter, so our product costs are competitive. I feel that we have the wherewithal to go fight that competition. Now, with regard to the question of OEM sales, depending on -- we don’t break out OEM as a particular segment of our sales. What I could tell you is that we’ve been talking about sales to our strategic partners, Avaya, Ericcson and Siemens, and together, those three are at their highest levels they’ve ever been, so we continue to enjoy a lot of success with that kind of strategic partnerships.

Yes, I understand. Actually, I was asking specifically about the security products you OEM and --

Oh, okay. You know, I don’t have that data with me. I know we’ve been pretty aggressive this past quarter. We’ve run a number of promotions. We’ve tied together wired and wireless and security, so we’ve enjoyed good growth in unit counts of our Sentriant product line, for example, but I don’t have that revenue breakout off the top of my head here.

That’s fine, but it sounds like it’s growing quarter on quarter?

Yes, it is.

Great. Thank you.

Thank you, sir. The next question comes from the line of Tim Long with Banc of America Securities. Please go ahead, sir.

Good afternoon. This is Jeff [Hubert] dialing in for Tim. Much better results in Europe and Asia, excluding Japan. I just wanted to know if you think these trends are sustainable. Then, service provider business has been improving for two sequential quarters. Should we expect that to continue to go up on a go-forward basis? Do you have some sustainable advantage in service provider where we should see more of a focus there?

If you look at, particularly in EMEA and in Asia, we have a pretty good product line. The teams are focused. We’ve begun to address some execution issues here over the last few months. We have a long ways to go. That said, the competitive landscape is the competitive landscape. The enterprise business tends to be a little bit more predictable over time, given the fact that the deals tend to be, each one tends to be smaller. The service provider business tends to be lumpier, the deals tend to be bigger, but the service providers tend to purchase in a lumpier fashion. It’s hard to tell. The reason I think overall we’ve been successful over the last few quarters in the service provider space is that more service providers are beginning to get the idea that by using ethernet networks relative to legacy technologies they can in fact provider better services at a lower price. As more folks get that idea, I think our products are designed for that. We believe that over time, the market is kind of moving in our direction. That said, the smaller service providers around the world tend to be quicker to react to these trends because they have less of an installed base to have to deal with and amortize, which is why you see most of our business wins right now tending to be outside the United States. But we continue to focus on that and we feel that over time as more people catch on to that, are going to help. In addition, certain models of the X450 product line, in addition to the 12K, are well-designed for service providers. We believe that if we continue to put product out there, we’re going to start to see more wins.

Do you think the Americas has stabilized around here, or should we expect some more growing pains going forward?

I think we’re making progress in the Americas. I think we have more to go. We’re working pretty hard on it. We’ve got a lot of our energy focused in that area, but while the trend over a few quarters I think is going to be in the right directions, don’t be surprised if there’s a few bumps along as we’re going. I outlined a few things that we did during the quarter to bring this stuff into sharper focus, but it continues to be an area that uses up a fair amount of my attention right now.

Thank you, sir. The next question comes from the line of Jiong Shao with Lehman Brothers. Please go ahead.

I have a couple of questions as well. First, thank you so much for the color on the gross margin. I thought that was very helpful, but I would hope you can share a little bit details on the op-ex. I think you said op-ex sequentially, but I was wondering, is that lower or high -- or how did that compare to the June quarter last year? Any color you can provide would be helpful.

I’ll let Mike address that.

As we discussed exiting Q4 in our conference call, we disclosed that we were going to be expecting expenses to increase as we entered into fiscal ’07 and Q1, and hopefully we got that message across in the last call also, primarily in the sales and marketing area, but also a little bit in the research and development area. Now, this quarter, we have expenses down sequentially, primarily in the G&A area and primarily related to legal fees that we experienced in Q1 that didn’t recur in Q2, but as I mentioned, that will reappear as we move forward with some claims. In relation to Q4, we’re in close proximity to that number, without getting too specific on the exact numbers, given we can’t produce financials.

Okay, sure. So using that as sort of the rough gauge, if I do my rough math, it looks like the pro forma EPS, if I just plug in all these comments, is at $0.01 or $0.02? Am I in the right ballpark? Sorry, we just have to have a model.

I want to help you on this one, but given the fact that we can’t publish financial statements, I can’t give you a number.

Okay, but you’re profitable?

I think you are going in the right direction with your analysis.

Okay, great. My second question is about book-to-bill and also the Summit 450. I was hoping you could provide a little bit more color on book-to-bill. Is that a comfortable level? It sounds like you said the demand is significant above your expectation. I just want to make sure my understanding is right. It looks like that book-to-bill may be a comfortable level. Also, just for 450, could you elaborate, what’s special about 450? Why is that demand so strong, or stronger than you expected?

Let me start with the second question on the 450. The demand was strong for a simple reason: we finally got the power of XOS, you know, a modular, scalable open standards operating system with frankly, the feature set of things you would expect in big expensive boxes, and we were able to put it in a one-rack unit stackable with 24 ports or 48 ports, or enterprise version or service provider version, or a version with POE and a version with BC Power, so there’s a number of these kinds of models. So it’s a lot of features in a small package for a really good price. When you put out something like that, people catch on pretty quick. So we enjoyed very good success for that product, so we were able to build a bunch of backlog with it, which clearly is good on one side, but you want to work off as fast as you can. So we’re all being pretty aggressive in ensuring that we’re driving the supply chain in the right direction so that we can catch up with the bookings environment for that product. In terms of the backlog itself, the book-to-bill was clearly above one during the quarter. As I said, we built some reasonable backlog here in a few areas, but most notably because of the significant improvement in demand of the 450.

Okay, great. Thanks a lot.

Thank you, sir. The next question comes from the line of Matt Shimao with Bear Stearns. Please go ahead with your question, sir.

I wanted to ask again about the regional sales breakdown in Q2, maybe get some more color on the competitive dynamics in the Americas and international. I wanted to ask specifically, do you think the results properly reflect your competitive position in those regions, or are there some unusual non-recurring things going on that are important to understand? For example, large deals or something else like that? Thank you.

Let’s focus outside the Americas. I think if we look at our business in Asia and our business in India and Latin America, I don’t see any reason why businesses in those regions don’t reflect a normal competitive position. I didn’t see anything unusual in what was taking place in those areas this quarter. I think it’s a fairly, you know, as much as we can predict these things, as a reflection of what is kind of going on. I think the reflection of our performance in the Americas is still much more due to internal execution issues than it is to the overall effectiveness of the product line. After all, if we’re able to be very successful selling this stuff in EMEA and in Asia -- the competitive position, with the exception of perhaps the fact that outside the Americas, the average service provider tends to be a little smaller and a little quicker to move to sort of Ethernet-based technologies. Outside the U.S., we tend to have perhaps a few more mid-sized customers compared to the U.S., but aside from a couple of those areas, the competitive landscape isn’t hugely different. I believe that most of what we are facing here in the U.S. is basically internal execution issues.

Thank you, sir. The next question comes from the line of Eric Suppiger with Pacific Growth Equities.

Good afternoon. Just following up on Matt’s comments, can you say how North America did relative to your expectations going into the quarter? Was the market what you had been anticipating? Just give us a little flavor in terms of how it did compared to what you were looking for.

It was kind of about where we expected it, given everything that’s going on. But I’ll be honest with you, I certainly would’ve liked to have seen a little bit better performance in the Americas, and especially in the U.S. That’s why I continued to be very, very focused on the U.S. I spent a fair amount of my time in the country visiting the particular regions and talking to folks. There are some key challenges that remain. I want to make sure that they get solved, and I think with the right adjustments, we can make significant progress. Would I like to be further ahead in this process? Absolutely, but I think things just got -- they’re a little more stubborn than I probably wanted them to be, so yes, overall I would like to be a bit further along in the Americas. I think we’re making the right changes. It just seems like it’s taking a little longer for these changes to bite.

How is the recruiting going for bringing on additional sales?

The recruiting is going well. The key with all of this is to make sure that the right programs are in place to get them, once they are on board, to very quickly get them into their patch and for them to be able to build their pipeline as quickly as possible. We have the ability to hire. The team is hiring. They’re doing this consistently. The quality of the candidates is pretty good. I really am focusing making sure that we can get them up to speed as fast as possible. Like I said, we’re making progress but I wish we were a bit further along.

You talked a little bit about government. Any thoughts in terms of that vertical as you look -- I don’t know what your contribution from federal is, but any thoughts? That sounds like that could start getting weaker as we get into the March quarter. Any thoughts on that?

Well, I don’t know about that. We don’t break out our federal business separately, but what I can tell you, I was just with the director of our federal business, and we were kind of wandering around the country visiting a bunch of Defense Department customers. I asked him kind of that question, so what do you think is going on? Right now, he actually thinks the environment may get a bit better. The problem is the government is still operating on an continuing resolution mode, given the federal budget start of the fiscal year. Our buddies in Washington are still kind of working through all of this stuff, so he actually feels that right now, it’s a bit more hand-to-mouth because the government isn’t free to spend to its budget. So we’re going to have to see as the continuing resolutions turn into more formal budget allocations.

Lastly, just on the backlog, can you give us any flavor for what additional upside you might have had if you had had -- like, how significant was the constraint?

We don’t break out bookings nor backlog, so we can’t say much more than we’ve already said, other than to say we sold, we booked a lot of 450s that I wish I could have shipped.

Do you expect the book-to-bill to be less than one next quarter as you burn off some of that backlog?

You know, I don’t know. Mike, do you want to comment?

It’s hard to tell. One of the reasons we don’t break out backlog is because our orders tend to turn relatively quickly and the backlog, from our point of view, doesn’t represent a meaningful forecasting tool for everybody. So that’s one of the reasons why we don’t break it out. The change in the backlog and the change in the book-to-bill ratio are generally relatively small. Our billings and our bookings in revenue generally track pretty close in line.

That said, there’s a big incentive to get products shipped, mostly for customer satisfaction reason. I mean, new exciting products, people want them. When they want them, they want them. Financial issues aside, clearly the manufacturing team is working as hard as they can to get supply to catch up with demand.

Very good. Thank you very much.

Thank you, sir. The next question comes from the line of Subu Subrahmanyan with Sanders Morris. Please go ahead with your question.

Thank you. Two questions: first, just in terms of seasonal patterns, I know you’re not providing specific guidance, but can you talk about what the seasonal patterns you’re seeing into the March quarter are? Would you expect to see the normal kind of seasonality, some declines in Europe and U.S. enterprise? Also, could you speak to Japan, that business you talked about kind of stabilizing their cost situation, but NTT has this large build out plan. I know you guys have been suppliers to NTT in the past. Any sense on when the next generation effort starts and how that might benefit Extreme?

Okay, so first of all, seasonality, it’s hard to tell because when we go back and look at our seasonality, sometimes the business tends to follow the normal seasonality patterns that you would expect with the even quarters being a bit stronger than the odd quarters. Sometimes we buck that trend. So in many cases, as Mike said, sometimes a few deals moving one way or the other can change the seasonality pattern on that. With 50% of our business being in the last month of the quarter, it’s kind of early to tell how Q3 will be shaping up. Right now, I don’t have any words of wisdom as to whether we’re going to follow the seasonality or buck the seasonality this quarter. Regarding Japan, NTT continues to build for the deployments that they’re doing. While the business plan for Japan has specific direction to go build a more predictable enterprise business and we’re working pretty closely to cause it to happen, we’re still paying lots of attention to the service provider space. We’re there communicating with NTT on an ongoing basis. At some point, they’re going to go deploy a network that requires ethernet technology and we’re going to be right there with it. Meanwhile, the good news is that the same products are having quite a bit of success in other parts of, especially in EMEA and Latin America, so we’re not stopping our investment effort in the hardware and in XOS. So whenever NTT is ready to go do something, I think we’ll be there with some pretty good products to offer them.

Got it. Thank you.

Thank you, sir. The next question comes from the line of Munjal Shah with Piper Jaffray. Please go ahead with your question.

Yes, hi, this is Munjal Shah for Troy Jensen. A couple of questions, one on taxes. How should we model taxes going forward, and what percentage should we model? When do we expect you to be on a normal tax level?

The question on effective tax rate for us is a little bit more complicated than maybe normal, given the fact that we do have a full valuation allowance on our deferred tax assets. What I would recommend you to do is take a look at our public financial statements for the last two years and look at the actual level of tax expense in those financial statements and use that information in order to project forward into the current quarter. The effective tax rate on us is a little bit difficult because as we have increasing profits, we benefit from the net operating losses in the U.S., and given the fact that we have a lot of international subsidiaries that are structured in a manner that they pay taxes locally, we actually have kind of a fixed level of tax expense on an international basis. So when our revenues or taxable income grows, the taxes don’t change. But then, as our profits kind of approximate or come close to or below break-even, we don’t benefit from that either, because of the international taxes. Take a look at the prior financials and use your best guess there.

Sure. Can we do that for just the one quarter, or how about one year out or for fiscal ’08? Do you think it will be a similar phenomena?

Yes, I would say that for the next couple of years or through this year, and then if you want to use it to project forward, you could almost use a fixed amount of tax expense, regardless of the taxable income.

Okay, and one more question on U.S. I know you mentioned that most of the issues were related to the internal execution. If you were to point out to something outside of the company, would it be something like in terms of competitive dynamics or pricing or customer demand? Is there any one thing that you can point out to as to why U.S. was weaker?

There really isn’t. The pricing environment hasn’t changed dramatically here in the last few quarters. It’s mainly really getting the sales force in place with the right tools, focus on the right verticals, and a number of the things that we’ve already outlined.

Okay. All right, good. Thanks a lot, guys.

Thank you. The next question comes from the line of Tal Liani with Merrill Lynch. Please go ahead with your question.

Thanks. It’s actually Stan Kovler for Tal dialing in. I just have a quick question, first of all, on if you could help us estimate the interest income line. I wanted to see if you could give us the number of employees. I have some questions about the sales force, if I can follow up.

The other income line for us is going to include interest income on our $200 million plus of investments, so $200 million of investments and then pick your favorite interest rate. The other item that gets into the other income that kind of bounces up and down a little bit is foreign exchange gains or losses. I think the number that I had quoted earlier is for this quarter, give or take several hundred thousand dollars is probably a good number for your model going forward. On the headcount, I disclosed that in our prepared remarks. At the end of the quarter, we were at 874 employees.

Great. I was wondering if you can disclose how many of those are actually sales people? Just wondering from a high level, as you add employees to your sales force, what kind of productivity level are you looking for them to achieve? If you could talk about maybe a range six to nine months out when they get up to speed on the products and their customers.

We don’t break out sales headcount separately, but a good chunk of every net add in this company are going into the sales force, because it is clearly the area where we can generate the best short-term return on it. We don’t break out sales productivity. It gets kind of complicated. You have account managers, you have your CAs, you have people managing the channel, you have all sorts of different things. Breaking these things out starts to get complicated. But we do monitor those things internally very, very carefully and I do set goals for not only the sales force on a worldwide basis, but for each geography that has a cost to generate -- the number of pennies they get to have to generate a dollar in revenue. Those things are monitored very, very carefully on an ongoing basis.

Thanks. Maybe I can squeeze one in about the business model in general. I’m just wondering if you’re looking at it from an annual perspective, just give us a view of when we can expect or at what level we can expect you to achieve operating profitability? You came close, obviously, this quarter relative to September, but I was just wondering how many more quarters, or on an annual basis, what you think the break-even should be, just for our high level modeling? Thanks, that’s all for me.

It’s kind of tough to break that down on a quarter by quarter basis, right? I mean, there’s some things that spill over from one quarter to the other. I don’t try to manage every quarter by itself. I want to make sure that we are sustainably profitable and at the same time, we keep the product pipeline going in the right direction. Certainly I want to get the break-even of this company to be as absolutely as low as I can, consistent with a sustainable business. I continue to focus on that. I think as we get to the point of being able to get the 10-Ks and the 10-Qs published again, I think we can have a bit more of a rational conversation about that, because we’ll be able to lay a bunch more of the numbers in front of you. I’m spending most of my energy making sure that we can get through this period where our ability to give you information is limited and we can get back to a more normal place where we can have some more in-depth conversations.

Thank you, sir. Gentlemen, at this time, we have reached an hour. We have one final question from the line of [Carl Sadler] with Deutsche Bank. Please go ahead.

I may have missed it, but have you started recognizing revenue from Telefonica yet or not? I might have missed it. Sorry.

We didn’t mention it specifically, but Telefonica bought from us in this quarter, I can’t remember the numbers. I don’t look at it in any particular deal, but the build-out continues. We’ve received orders from the relationship during the quarter, so nothing major to report there.

Got it, and then just one last general question on Ethernet RFPs. Are you seeing an acceleration, deceleration, or you’re kind of the same number RFPs that you’ve been seeing maybe over the last six months? Thanks a lot.

I don’t know if I look at it on a per RFP point of view. What I could tell you in general is I am out there talking to a bunch of carriers, that the direction is definitely headed towards ethernet rather than away from it. The key question is how quickly. As I mentioned earlier, the smaller and mid-sized carriers tend to get there a whole lot quicker because they have fewer infrastructure to depreciate over these long depreciation cycles. Our game plan is pretty simple. We knock on the right doors and we’re there with the right products as they get there. Then, as the market transitions, our hope is to catch our share of it.

Gentlemen, please go ahead with your closing statements.

I’d like to thank all of you for your participation today. I will continue to provide time with you as a group more individually to discuss the continued progress that we’re making here at Extreme Networks. For now, thank you and I look forward to continued communication.

Thank you. Ladies and gentlemen, this concludes the Extreme Networks second quarter revenue results conference call. If you would like to listen to a replay of today’s conference, please dial toll free 1-800-405-2236, or 303-590-3000. The passcode for today’s conference will be 11081087. Once again, ladies and gentlemen, if you would like to listen to a replay of today’s conference, please dial toll free 1-800-405-2236, or 303-590-3000, with a passcode of 11081087. ACT would like to thank you for your participation. You may now disconnect. Thank you.