Welcome to Extreme Networks 2011 Second Quarter Conference Call. [Operator Instructions] On the call today from Extreme Networks are Oscar Rodriguez, President and CEO; and Bob L. Corey, CFO. As a reminder this conference is being recorded today, January 31, 2011. This afternoon, Extreme Networks issued a press release announcing the company's financial results for the second fiscal year of 2011. A copy of this release and the slide presentation of the supporting financial materials are available in the Investors Relations section of the company's website at www.extremenetworks.com. This call is being broadcast live over the Internet and will be posted on the Extreme Networks' website for replay shortly after the conclusion of the call. The company has asked me to remind you that this conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding the company's expectations regarding its financial performance, strategies, growth of customer bandwidth demand, development of new products, customer acceptance of the company's products, customer buying and spending patterns, overall trends and economic conditions in the company's markets. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors including, but not limited to: a challenging microeconomic environment worldwide; fluctuations in demand for company products and services; a highly competitive business environment for network switching equipment; the company's effectiveness in controlling expenses; the possibility that the company might experience delays in development of new technology and products; customer response to its new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation; and the dependency on third parties for certain components and for the manufacturing of company products. The company undertakes no obligation to update this information on the conference call. More information about potential factors that affect our business and financial results is included in the company's filings with the Securities and Exchange Commission. Throughout the conference call, the company will reference both GAAP and non-GAAP financial results. The company has provided a reconciliation table of GAAP to non-GAAP and information in the tables that accompany the press release on its website. Please go to the Investor Relations section of the company's website at www.extremenetworks.com. In addition, all announced results are preliminary and may be subject to change when the review of the fiscal quarter is concluded and/or a Form 10-Q is filed. I would now like to turn the call over to Bob L. Corey, Executive Vice President and CFO of Extreme Networks.

Thank you, Tyrone, and welcome to the Extreme Networks Q2 Fiscal 2011 Earnings Conference Call. I'm joined today by Oscar Rodriguez, our President and CEO. I'll turn the call over to Oscar for his comments regarding the focus and strategy and market dynamics. After that, I'll follow up with brief comments on the quarter. I'll summarize and provide guidance for Q3 fiscal '11, and then we'll open up the Q&A. So Oscar, I'll turn it over to you now.

Thank you, Bob. I've now been with Extreme for just over five months, and I'm pleased to participate on this, my second investor call. In our last call, I introduced my reasons for joining Extreme at this time. I provided an overview of the evolution of Ethernet technology and discussed how Ethernet has become the cost-effective, high-performance, resilient and reliable underlying data infrastructure that has served to transform the infrastructure of the campus, the Data Center and Service Provider markets worldwide. Through this transformation, Ethernet has come to enable the global communications infrastructure for Service Providers and allow Enterprise CIOs to deliver new services that drive high enterprise productivity by enabling mobility for applications, people and machines. I also briefly described the process we've employed to analyze the core competencies of our company so as to identify and highlight any unrealized potential within the organization. As we discussed last time, I believe that we have the innovative capacity to create leading-edge products and services that can deliver real customer value, that we have a solid team who are focused on serving our customers well and that our people have the passion and skills needed for Extreme to succeed. As a result of the analysis, we have sharpened our corporate strategy, and we believe that this new strategic focus will enable us to accelerate our ability to deliver double-digit operating income by driving both revenue creation in high-growth target vertical markets and by driving continued improvements in operating costs. I will discuss some of the aspects of this strategy today. First, I've taken steps to drive additional operating efficiencies by lowering costs and increasing productivity. In mid January, we reduced headcount and initiated programs aimed at driving additional efficiencies throughout the company. We believe these programs will accelerate our ability to…

Okay, great. Thank you, Oscar. As in previous periods, we've posted a slide presentation on our website at extremenetworks.com under Investor Relations that I hope you'll find useful. As a reminder, all of my comments will be non-GAAP except for the revenue and number of common shares. Non-GAAP results exclude stock-based compensation, restructuring charges and litigation settlements. There is a reconciliation from non-GAAP to GAAP financial results in the slide presentation under Investor Relations on our website that I mentioned previously. Once again, before I go any further, I want to thank every employee in our organization for their dedicated efforts and commitment, which contributed directly to our performance in Q2. Based upon solid sales in Europe and Asia Pacific, we're reporting total revenue of $85.1 million for the quarter, which is in the range of previously issued guidance of $85 million to $88 million. At 6% of revenue for the quarter, we're reporting net income of $5.1 million or earnings per share of $0.06, which is in the midpoint of our EPS guidance. During Q2, we continued to perform and drive operational execution as we reported product revenue of $70.3 million, representing an increase of 9% year-over-year and an increase of 2% sequentially from Q1. With regard to product revenue by geography, the Americas reported $19.8 million, EMEA reported $35.2 million and Asia Pac reported solid performance at $15.3 million. While product revenue for the Americas increased about 8% over Q2 last year, it did not meet our internal targets for performance in the quarter, as the number and size of larger deals in the U.S. were down in the quarter and we experienced softness in the eastern part of the U.S. We just appointed a new Vice President of North American Sales and have reorganized North America to…

[Operator Instructions] Our first question is from Rohit Chopra of Wedbush Securities.

So let me just ask you on the $8 million, first of all. How would you say that's split between savings and cost of goods versus on the operating expense side? Is it mostly people that you're taking out? So is it mostly going to be in sales and marketing or R&D? What's actually happening in that $8 million?

So it's up to $2 million in a quarter, $8 million in a year, like we said, and the lion's share of it is in the operating expense line. However, we are target on expanding the gross margin percentage with a variety of programs that we expect to be able to implement throughout Q3 and Q4, right? So hopefully, you'll see an uptick in the gross margin contribution and then some favorability in the operating expense line. As far as some of the actions we've taken, we did not significantly or really reduce any headcount in sales and marketing, except in the back office for channel management and sales, we did eliminate some positions. But primarily, we're going to continue to expand sales & marketing headcount on a geographic basis as we see an opportunity to grow revenue. And in the engineering side, we're looking to increase engineering headcount by about additional 20% over the coming quarters.

Engineering?

Yes.

Let's talk about that plan. Does the plan require new people in those specific verticals? Does it require new products? Does it require new channels? What actually has to be done? I mean, it's one thing to just say I'm going to target these verticals. I just want to know, what do you need to do to get to those verticals or penetrate them a little bit more? Because I know you have education, you do a little bit of work in each one. But what needs to be done here?

Rohit, it's Oscar. Let me take those -- it's a multifaceted question, so let me take the pieces one at a time if you don't mind. So first and foremost, when it comes to all of these verticals, the good market attack on some of the verticals is to already have established channels to market. For example, in the network equipment provider space where we're targeting the mobile Service Provider, we sell into that space into global mobile operators around the world and some of the biggest ones around the world, but we sell through large network equipment providers. And I'm not at liberty to mention their names, but they are four of the top six. Those are established channels to market and that particular vertical, what we'll be doing is creating a derivative product from the base technologies that we have in order to address the needs of the evolution from TDM and Ethernet combinations into pure Ethernet. So when that solution gets to be pure Ethernet, we're already there, and we'll be enhancing it with our existing ring technology and standardized capabilities that we clearly know how to do today. But in the process of getting there, there is an evolution path that requires some TDM interfaces and some synchronization to be added to those products. So I would characterize that as a specific development that then can be leveraged into other vertical markets as well. However, that's the first vertical market that will take that part of the development. So that vertical has established channels to market, established teams already in place, and what we're doing is creating a derivative product to address that market. So in the education market, that's clearly a market where we sell our existing products. We have existing regional channels to market,…

And then how do you get there? You're doing that on your own or you're working with partners?

So the way to get there -- there's a place where we definitely would be building an expansive partner base that's beyond what we have today. We do have partners there. We already have several wins over the course of the past year. Unfortunately, I don't have the liberty to mention the specific customers at this point, all of them at this point. But we already have some established channels to market, and we need to develop more of them.

How do you compete with end-to-end players that are out there who may be already in these markets or have broader product sets or they already have the partners in place? So what needs to be done to differentiate Extreme versus everybody else?

So specifically, in the cloud service, managed service provider market, is that correct, that vertical?

Sure, you can pick one. I mean, it's an overall question.

Yes, in that particular case, I believe that what we're seeing is an evolution of that marketplace. We're already seeing some consolidations happening where small, initial players are beginning to be consolidated into some of the larger players. We're beginning to see the traditional telecom operators that have been under fire in terms of their margin from over-the-top television services or over-the-top mobile applications now begin to look at managed services and either Infrastructure-as-a-Service, Software-as-a-Service or some derivative. Maybe applications-as-a-service is a good way for them to enhance their revenue streams and enhance their margins. Those are the types of operators, the types of customers that typically, because they've been traditional Service Provider operators, they like to select best of breed. They do their homework. They have deep engineering capabilities. They have the ability to select best of breeds. And traditionally, they have not selected a single vendor to do it all for them because if their network is exactly like their competitor's network and exactly like the one thereafter, then the cost of goods is exactly the same and the price flexibility isn't very much, isn't very high. So you wind up with an environment that's no more competitive or less competitive than someone else but no advantage in the marketplace in terms of flexibility or in terms of new service creation capability or new offerings or effectively even a way to control your cost more effectively. So we believe that those are the types of customers that are going to select individual best-of-breed vendors and as opposed to buying a one-size-fits-all. There may be some that buy one-size-fits-all, don't get me wrong, but I believe that increasingly as the pressure comes from pricing and the need comes to control their cost of goods and be able to have more flexibility in what they offer, I believe that they will increasingly embrace best of breed.

I’m going to wrap a couple of ideas into one question, and if I'm an investor and there's a lot of people listening to the call, people want to understand what the milestones are, what they can measure from quarter-to-quarter, so if you can provide that? And what's the timeframe that they could look at for a change in the overall business? I mean, that's how we're going to get the stock to work, right? There has to be some kind of deliverables, and that was the one thing missing in the presentation. I just want to get a sense of where do we go from here from quarter-to-quarter, what can we measure and what's the timeframe?

So two things. I think that you said it quite well in the recent publication that you created, which is this is not a one- or two-quarter strategy. This is a strategy that will clearly take four to six quarters to really begin to see the traction, and I think that the way you can measure it and the way we'll be measuring it as well, is not only in the customer wins that we report but also in the percentage of revenue that you'll see from each one of these vertical markets as a percentage of our overall revenue.

Can you tell us what that is now so then we can start working our way through the next few quarters?

No. I think at this point, we're not ready to discuss that, but I think we will be ready to discuss that as we go forward.

The next question or comment is from of Brian Vodman [ph] of Pelagic Capital [ph].

My question was very much similar to the last caller's closing comments, and that's just to try to get you to quantify the magnitude and timing of this organic growth from these initiatives that we might see. As an investor, it's really difficult to get our arms around it. I mean, it sounds wonderful and very exciting, but without any tangible metrics by which to look at, it's tough in my seat to really understand what's going on.

Yes, understood. Again, I believe that the timing is very similar to and the mileage is going to vary here, but I think it's very similar and appropriate to expect the four- to six-quarter type of evolution of the company and for us to be able to demonstrate traction. The real question, I think, that's still open that you're putting out is what is the percentage of revenue that we would assign to each vertical market as we go forward? And how do we see the revenue base transitioning for the company? And again, we're not ready to discuss that today, but I clearly take it as a view of something we have to come back with.

Is there a timing in which we could expect to hear -- quite frankly, I was expecting to hear some of those things today, and so is there a time in the future in which, I mean maybe it's not a time certain but after something has been accomplished in which we might hear more about that?

So yes, I think if you look at, in my seat, I'm looking at the pieces we have to put into place, and as I said, we've already begun to execute on the strategy. You should also expect that as we look at any verticals that we would come to market and come to the investor base with the view of how do we measure it, I think one of the things that we're going to do is get our arms around this and probably within a quarter, you should be able to see more tangible measurements that you can latch onto and you'll be able to follow.

And then the assets that are going to be written down, is that going to lower the D&A going forward?

No, what they are, this is Bob -- they're basically discontinuance of a product line as we reemphasize some of these verticals, right? And so we're going to be taking a charge to cost of goods. It will be in the third quarter in conjunction with the realignment of the strategy.

So is that inventory being written off?

Yes, it's inventory and associated assets. That's correct.

And then as it relates to the headcount reduction, it's unclear, where exactly are those? I mean, I know you said that some of them are going to be in the back office and channel management, but I can't imagine 5% of the workforce being there. Where else might those bodies come from? It sounds like you're adding to R&D, you're adding to Sales & Marketing so I guess it's...

Yes, overall, there's some shift in the location of headcounts, right? In some functions, we're looking for additional headcount in low-cost areas on a global basis, right? So in some cases, we've dialed down some certain positions, and then we'll be replacing those positions in the future. Those replacement positions will be focused principally in sales, marketing and engineering, right? We continue to drive efficiencies in the sales channel, right? That was the back office stuff that I mentioned before, right, plus in the finance and the operations area as well.

And any new development as it relates to the building sale or the land sale?

No. It's still progressing as we've previously discussed and disclosed. It's an option, and there are certain hurdles that -- what’s the name of the company? Trumark? Is that right? Trumark has to achieve, and we expect that moving forward as best as we would anticipate.

[Operator Instructions] Our next question is from Mike Jon [ph] of Hartland.

One housekeeping, I just want to make sure the $1 million to $1.5 million restructuring charge is separate from the $4 million to $4.5 million realignment charge.

It is.

So it's not included in your guidance, correct?

That's correct because our guidance relates to pro forma operating income, pro forma guidance and it's excluded.

On previous calls, you've talked about long-term profitability targets. My question is have they changed and how long until you get back to let's say double-digit operating margin? If the top line's going to take four to six quarters of transformation, how long until the bottom line or the operating margin takes shape?

Yes, this is Bob. I'll give you some color on that. October, last fall in 2009, when we restructured the company, we thought we reduced the breakeven for the company. And at that time, we said that the quarterly revenue target needed to get to double-digit operating income was around $90 million, okay? And then in fiscal 2011, we implemented some additional spending, things like we did a merit increase, right, for the non-executive employees. We instituted the non-executive bonus accrual. We reinstituted matching of 401(k), some things that we thought were important to do for retention and really to motivate the workforce. That obviously had an impact on pushing up the quarterly target to get to double-digit operating income. With the actions we've just taken, okay, we believe that we're getting closer to like $87 million a quarter now to get to double-digit operating income. So we will continue to keep double-digit operating income in close sight for all the actions we're trying to take to drive the business. So we're thinking after the actions are fully implemented that we're initiating now, we think around $87 million a quarter, we'll be able to do double-digit operating income contribution.

I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

All right, very good. So I want to thank everyone who participated on the call, and I encourage all of our investors to continue to dialogue with us. We look forward to having an active dialogue with all of our investors. And Bob and I will hopefully get a chance to meet all of you face to face very soon in the quarter. Thank you very much for joining, and thank you for being an Extreme investor.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.