Good day, ladies and gentlemen. Welcome to the Extreme Networks Fiscal Q1 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jim Judson, Interim CFO of Extreme Networks. You may begin.

Thank you, Latoya. Welcome to the Extreme Networks 2012 First Quarter Conference Call. [Operator Instructions] On the call today from Extreme Networks are Oscar Rodriguez, President and CEO; and myself, Jim Judson, the Interim CFO. As a reminder, this conference is being recorded today, November 2, 2011. This afternoon, Extreme Networks issued a press release announcing the company's financial results for the first quarter of fiscal 2012. A copy of this release and a slide presentation of the supporting financial materials are available in the Investor 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 a replay shortly after the conclusion of the call. Extreme Networks wants 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 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 macroeconomic environment worldwide, fluctuations in demand for the company's products and services, a highly competitive business environment for network switching equipment, the company's effectiveness in controlling expenses, including the company's cost restructuring efforts, the possibility that the company might experience delays in the development of new technology and product, 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 the company's products. The company undertakes no obligation…

Thank you, Jim. And I want to thank all of our investors for joining this call. As we've discussed over the past 3 quarters, we're in the process of transforming Extreme. We have structured our business with the goal of consistently being able to achieve double-digit operating income without the need for significant revenue growth. We are focusing our resources to deliver high customer value through innovation in some of the highest growth multibillion verticals in the communications market. We have a laser focus on delivering what we believe is a best-of-breed product portfolio designed to position Extreme as a leading competitor in these targeted vertical markets. Overall, we expect new revenue growth to provide increasing leverage to the bottom line and increasing free cash flow. Last quarter, I highlighted the steps we've been taking to lower our operating costs and increase productivity, including focusing our software development work and services capability into 2 established lower cost venues, consolidating and aligning sales management to drive sales focus across our geographies, reducing corporate marketing spend and shifting those resources to field marketing to drive increased customer awareness, and simplifying our processes, systems and infrastructure to drive reduced company overhead and drive greater supply chain efficiencies. As of the end of Q1, most of the major transformational cost adjustments to the company are now behind us, and we expect the remaining changes to be completed at the end of Q2. I am pleased to report that our company strategy transformation is on track and remains on track. With our cost structure changes largely behind us, we are intently focused now on revenue growth as a basis for further leveraging our bottom line. We continue to deliver on our vertical market strategy, focused on data center cloud operators, the education market and mobile…

Thank you, Oscar. As we discussed last quarter and mentioned briefly earlier, our restructuring plan announced at the start of Q1 is essentially complete. We have a handful of employees remaining whose divisions are being relocated to new locations. We will continue in incur some transition costs in Q2 as we replace headcount in service and operations in lower cost areas, replace and grow R&D headcount and consolidate labs and other resources in lower cost areas as well. We believe we are in track to have our cost target -- our target cost structure in place by the start of Q3. Turning to our guidance. For the second quarter, we expect revenue in the range of $81 million to $86 million and EPS in the range of $0.05 to $0.08 a share. Looking at the full year, we are reiterating our guidance of revenue for FY '12 in the range of $320 million to $340 million, and EPS of $0.28 to $0.35 per diluted share. With that, we'll open the call for questions. Latoya, if you would begin the polling.

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

This is Sanjit Singh for Rohit. A couple of questions, guys. Relative to visibility in general in the demand environment, are you seeing any weakness? You mentioned some signs of weakness in Europe. But if I could kind of tie it to your full year guidance, if I take the midpoint of Q2 and the midpoint of full year, it implies a ramp in the second half. What's giving you visibility that -- for that revenue to stretch in the ramp in the second half?

Sanjit, it's Oscar. We have new products that are coming online in the second half of the year. We're expecting some of these products to be available in the spring. The BD X8 will be then -- will be released to complement the X670 top-of-rack switch, which will give us more entry into larger, larger and higher scale cloud-scale data centers. We're expecting that we're going to see some revenue based on the BD X8. We're also expecting that we should see some revenue coming from the E4G family of mobile backhaul products. So we're expecting some level of ramp based on new products. Yes, there is some weakness that we're seeing in Southern Europe, and that's even creeping into a little bit in Central Europe. But for the most part, we're seeing the Americas to be strong with strong pipelines. And we don't see any weakness really developing in Asia at this point in time. So we believe that we've got a good visibility. And so far, what we were expecting is really what's being materialized so far. Jim, I don't know if you want to add anything to that?

Yes, the only thing I would add is that, we feel pretty comfortable with the range that we have out there. It's really, to your point, if you pick the midpoint of our revenue range for Q2, it's only modest revenue growth in the second half to get us to that midpoint of the range. So we're not counting on big blow-out numbers in the second half to meet our guidance.

That's fair. If I think of the conversations in gross margin, a nice bump-up in service gross margin along with a little ramp in product gross margin. How much more is there to go on the product side? And is the bump-up in service gross margin sustainable? I assume it has a little bit to do with the restructuring because of the headcount reductions that were implemented over the last 2 quarters.

Yes. Actually on the service margin, it had a lot to do with the restructuring in the lower cost structure we put in place there. So yes, we believe it's very maintainable going forward. It did benefit a little bit this quarter by some retroactive vendor revenue from some contract renewals but not significant. On the product side, we actually think that there's some -- and if you model it out, some pretty good improvement in margins as we go forward. We didn't have a lot of benefit in the Q1 time frame from some of the actions and works that we did with our supply chain, primarily because of it basically being left in inventory, if you will, as you look at first-in, first-out of cost, so we do believe we're going to pick up some benefit as we move forward based on some of the actions that we've had in our supply chain and working with our supply base.

This is Oscar. Let me just add to that. So of course, margin's very dependent on what's happening out in the market place in terms of ASPs and discounting and things of that nature. What I want to also emphasize is, as Jim said, the cost reduction activities on the product side are intended for us to be able to proactively address those pieces. And we've got also on the second half of the year, cost reductions coming online that will help us do that. So if we don't see the extra discounts, we'll benefit the margin. If we do see expected discounts, then our margins would still be in line.

Great. And then finally, as it relates to the operating margin targets. On the last call, you mentioned to get to double-digit operating margins, we're looking at a revenue level of approximately $80 million once we're fully -- once we fully implemented the restructuring plan. Is that still the case? And the $70 million is still your breakeven?

Yes. And we believe that by the time we get to the end of Q2 entering Q3, we'll have that cost structure in place. Those 2 metrics would still apply in terms of breakeven and where we think we could hit double-digit operating income.

Yes, I just want to remind us that we didn't say 80, we said low 80s, so just clarifying that.

[Operator Instructions] We have a follow-up question from Rohit.

Yes, I might as well go ahead and continue if I'm the only one on. On the competitive environment, maybe give us any update there. What are you seeing maybe as it relates to domestic versus international competitors? What do you see in the competitive environment in discounting in general?

From a discounting standpoint, so if we flashback to Q3, it was showing in some of The Dell'Oro Market Research, it was a very price-competitive environment. At Q3. I think, volumes were -- core volumes were up 9%, and I think revenue was down 6% across the industry. In Q4, we saw that moderate, and I would say we saw that continue into the Q1 time frame in terms of any significant change in pricing and discounting. So the aggressive price reductions we saw back in Q3, we haven't seen that follow through, at least in our space, in Q4 and Q1.

I really want to mention also as well another aspect of the competitive environment. That's where we've been looking at lately is how our products have been doing against our competitors. So we just recently want to look who's testing, right? The Lippis Report was -- is out, right? And Nick Lippis will be talking about what they found at the report. And our BD X8 was shown to be the lowest power consumption best latency, and this is pretty significant, right? The best latency product in the marketplace now opens up the door to being able to drive into competitive spaces where Extreme has not been perceived to be a competitor in the past. So if you look at other competitors like Arista, they've been sort of the kings of the latency space. And now our latency significantly beats Arista's latency. And we think that, that's a sustainable position because of the design of the products and the amount of time -- the time it takes before somebody even to copy what we've done is going to be a significant level on beat it. So I've been paying a lot of attention to best-of-breed products, and we believe that we have a best-of-breed products set coming now into the marketplace, not only in the data center and the cloud-scale marketplace but also in the mobile backhaul marketplace where we think we're going to have really world beating products and best-of-breed products there. So I've been paying a lot of attention to products because at the end of the day, what customers buy is product and what they deploy is product, and the value that they get long term out of a dealing with the company that's innovative and nimble like Extreme, is to get great product. So I just want to just reiterate that.

Got it. And if I -- if you look at the 3 main verticals that you've strategically focused on, mobile, the education and the cloud providers. Is any one of them gaining more traction than others? What areas of the business in terms of verticals is seeing the most strength? And then on the -- I'll call it the general enterprise business, what do the demand trends look like in that part of the business?

So let me just take that one, and let's talk about the 3 verticals. The 3 verticals clearly are educational vertical. And at the educational vertical, as you can see, we added 30 customers this quarter, and they're not small customers. These are marquee customers that are making key decisions for how they're going to run their networks. These are customers that value automation, so typically the university environment and school districts have few expert staff to run their networks. So they need networks that are much more automated, easier to configure, easy to deploy. All of those things are important in addition to having limited budgets and a great CapEx as well. So if we offer that right price performance, really what we call affordable rocket science, that we deliver to these customers, and by being able to really deploy -- show them what we can do, they're able to now deploy networks that they can rely on. On top of that, what we're doing now is we've just introduced a new product in our wireless LAN portfolio, which is through our OEM partner, Motorola Solutions. That new product is a wallplate AP that replaces the wallplate in a conference room that normally would have had Ethernet jacks that nobody connects into anymore, and enables that conference room to now have excellent coverage but we use the cables that are already there. One of the key aspects of -- and the key cost of deploying a new access point is running a new cable. So if you don't have to run a new cable and you cannot literally install this -- and we have a video on YouTube where you can see the installation of this product in 90 seconds. You can see there's a lot of value there.…

Right. Also in terms of the mobile operator market, there's been a lot of concern about CapEx budgets going into Q4 FY 2012. What is your read on CapEx spending from mobile carriers over the next few quarters?

Well, I have to tell you that truth, that we're kind of a small part of that overall CapEx. Our share of wallet of what a mobile operator spends is a lot smaller than maybe other companies or even other ones of our competitors that are selling core routers and selling other things where they may see a lot more exposure. We have not necessarily seen anything specific, but remember, we're one step removed from the CapEx discussion because we're a key part of the solution. And in a lot of ways, we OEM a lot of those pieces, so I'm not ready to comment on what I see personally on CapEx in the mobility space.

Our next question is from Ryan Bartman [ph] of Pelagic.

How do you stand on the CFO search? Or are you actively searching for a permanent CFO?

Ryan, it's Oscar. Jim is the Interim CFO, and I actually think he's been doing a good job. What we wanted to do was search for the best CFO we possibly can. And as went through our transformation, it occurred to me that we're going to be able to really attract a great CFO and put Jim back on the golf course where he preferred to be, I think. As soon as we get a lot of our transformations behind us, so I'm expecting that we will now pick that up more in earnest, but we want to right -- really find the right person, and so what we've done is extended Jim's contract through March. So that's really where we stand on, and I want a great -- get the best CFO we possibly can because I think this is a great company, and we're going to a lot of places, and we really the need to hire world-class talent.

Okay. Great. Going forward, do you think that -- or will EBIT be a reasonable proxy for operating cash flow? I know there's a handful of balance sheet items this quarter. But kind of going forward, is that going to be a reasonable approximation?

This quarter's results, are you saying?

No, I'm sorry -- yes, this quarter and kind of beyond.

So I would expect that as we move forward that our free cash flow will actually get better. I mean, we've -- we're fully expecting to return better earnings to the bottom line. We had a couple one-offs, this quarter was restructuring charges and some payments past litigation settlements. But we're relatively low CapEx and very low working capital kind of requirement, so I would expect it would improve as we go.

Okay. And then, I guess, last quarter I asked a question about trying to value the IP. Has there been any thought given to that? Or is that still maybe way in the -- still maybe an absurd sort of question?

So actually, we listen to our shareholders very carefully every time they ask us a question. They usually ask for a reason, so we've taken that to heart, and we are going to be doing an internal assessment and even an evaluation of that as well. So thank you for that question the last time, and thank you for the prompting.

Thank you. There are no further questions at this time. I'll turn the call back over for closing remarks.

Okay. Well, thank you very much, everyone, for joining us today, and we look forward to talking with you one-on-one in follow-up calls afterwards. Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.