Good day, ladies and gentlemen, and welcome to the Extreme Networks Q3 2012 Financial Results. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Judson, CFO. Please go ahead.

Thank you, Patrick. Welcome to the Extreme Networks 2012 Third 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, May 2, 2012. This afternoon, Extreme Networks issued a press release announcing the company's financial results for the third quarter of fiscal 2012. A copy of this release and the 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 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 patterns and spending patterns and overall trends and economic conditions in the company's markets. Actual results could differ materially from these projected in the forward-looking statements as a result of certain risk factors including, but not limited to, a challenging macro economic 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 technologies 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 the company's products. The company undertakes…

Thank you, Jim, and I want to thank all of our investors for joining this call. As we've discussed in past investors' calls, we have been in the process of transforming Extreme to take a leading position among pure play networking vendors. We are focused on structuring our business with a goal of consistently achieving double-digit operating income without the need for significant revenue growth. With our cost restructuring activities now behind us, we are driving the customer and market awareness needed to position Extreme as a leading competitor in specific target vertical markets. We have delivered a new portfolio of award-winning products that we believe are the best of breed for the markets they serve and are targeted at some of the highest growth multibillion-dollar market verticals in the communications market. We expect the combined effects of our award-winning products, the increased market awareness and our reduced cost structure will enable Extreme to drive growth in both revenue and market share. Now, we are focused on driving the sales execution needed to enable us to deliver revenue growth. We expect the revenue growth to provide increasing leverage to the bottom line and increasing free cash flow into FY '13. Over the past 2 quarters, I've described the ongoing development and customer beta testing of 3 product lines that are critical to our company's future success. These include the BlackDiamond X8 open fabric switch, the E4G Cell Site Router family and the Summit X440 intelligent edge product line. I'm pleased to announce that these 3 product families, all based on the latest version of our Extreme XOS operating system release 15.1 have successfully shipped to our first customers and the initial feedback is very encouraging. We have recently received significant publicity regarding the BlackDiamond X8 product and we expect it…

Thank you, Oscar. There is no change to the guidance previously issued as part of our earlier announcement. We estimate that our Q4 FY '12 revenue will be in the range of $82 million to $90 million, and fiscal year 2012 revenue will be in the range of $317 million to $325 million. We also estimate that non-GAAP EPS for Q4 will be in the range of $0.07 to $0.11 per share and fiscal year 2012 non-GAAP EPS will be in the range of $0.22 to $0.26 per diluted share. We will now open the call for questions. Patrick, you can start the polling.

[Operator Instructions] Our first question comes from Christian Schwab from Craig-Hallum Capital.

As we look -- now that you've had a little bit more time, Oscar, than when we spoke a few weeks ago, can you guys -- can you just walk us through your conviction level in the $82 million to $90 million guidance, how you got there, how you scrub through it, et cetera. If there's any more clarity you can add there, that'd be great.

Sure, Chris, and I'd be happy to. So one of the key things that I've done in order to get comfort on the guidance for Q4 is sit down with all those sales leaders and get down to the sales -- the individual subregional level as well because these regional leaders have subregions underneath them to really understand whether -- where their expectations are in terms of the actual deals that are on the table, size of the deal, diversity of the deal. Some of our business is statistical, so I'd like to understand the run rate of what we think. And a lot of what I use, as I look at our developing pipelines, and I can see that their pipelines have been growing really over the course of the last few months, and it's a question of closing those deals. So when I look at the pipeline and the sales cycles that are already entered around some of these larger deals and look at the timing associated with that, I now have a much better view of where the sales team -- what the sales team can do. I've also implemented a new deal desk process, which is a much more rigorous process that enables all the functions to understand what sales needs in order to close deals, so we can make sure that we don't delay when actions need to be taken. So that's given me a much better view of not only the pipeline that's out there, what they're working on, but what are the actions we need to take to make sure the deals are closed and they're closed on time. And as we go along, my expectation is that we will have a much better view of what's materializing and what's not materializing, so we can take action on the things that will and make sure that we understand the things that won't.

And I would assume after the Q3 results that we went into that with some measure of pessimism, is that accurate?

Yes. I think that you could say that. I think that in my position, I'm -- I believe in trust, but verify. And so, in addition to listening to what the folks have to say, I also am verifying that the things that they're saying really make sense from multiple angles including supply chain and all the things that are connected to closing a deal.

Fabulous. As we look to next year, given [indiscernible] growth in 10G, possible accelerated growth in the switch market and the aggregate itself, greater adoption of the BDX8 product, in particular, would you expect your business to have typical seasonality or modestly better than typical seasonality as you look out to the next fiscal year?

Right, so that's a great question because one of the things that we did mention on the prior call and the call 2 weeks ago is that we had expected we would be able to break some of that seasonality in Q3 and it didn't come through, right? So not being one to overcommit, right, but also not being one to believe that the past is an indicator of the future, or I wouldn't be here, right, my expectation is that we're going to begin to see growth in 10 gig and 40 gig and you can see some of the numbers that we shared with you today about 10 gig and 40 gig growth. We're very pleased that we're -- and seem to be outpacing with some of the reports have set out there in terms of the growth of those technologies. Of course, actual market share will be measured in the past. It will be measured in the future as opposed to forecast, right, so I think we need to see how everybody else did. But I'm pleased with the momentum of 10 gig and 40 gig and that's really what we're talking about when we're talking about the BDX8 and the X670 and really all the open family -- excuse me, open fabric family of products. So as I look at that architecture, the open fabric architecture, and the things that we're doing in there and really, indeed, some of the new things that we expect to materialize as new servers come online and the need for 10 gig to grow, I'm expecting that we're going to see some growth there. But I'm not ready to say we're going to break seasonality.

And then can you -- Jim, can you just remind us, so we're all on the same page, what typical seasonality would represent for you?

So for Q3 as we talked about in the last the conversation, it's averaged about 11% down in Q3, as much as 15%. Q4 tends to be the strongest quarter and is well within the ranges what we're talking about here in terms of the guidance that we've given.

And then Q1 and Q2? That's fine.

And Q1 tends to be a little bit softer. You get the summertime in Europe and summertime in the U.S. And then Q2 tends to be just the calendar year end, is the fiscal year end for a lot of companies, so there's a lot of sort of budget slashes that go on in the capital equipment space in the December quarter. So it's a pretty typical pattern, not just with Extreme but with a lot of high-tech capital equipment companies.

That's great. And then a couple more questions, if I may. Are you ready to break out exactly how much revenue you're doing in 10 and 40 gig yet?

Not right yet.

And then lastly, the last question is in the process of shareholder value, have you thought about now that we've got -- we've proven that we fixed the model in essence of the operating cost in the infrastructure space, to create profits at kind of levels where before you lost a lot of money. Have you guys thought about using your significant cash balance to do a meaningful stock buyback, or is that something the board is not thinking about at this time?

No, I wouldn't say that's not something that the board is not considering. I think the board considers this and we've heard our investors, over the course of the last few quarters, make commentary to this and even in direct conversations with investors as well. I would not take it completely off the table. We've made no decision on this.

Okay. And then sorry, I just thought one other. You got $1 million in payment for the building. It looks like this quarter we're still looking to get the majority of the rest of the funds by the end of the calendar year, is that correct?

The earliest to a close would be the December time frame, and we're expecting that -- I think it's the 3 months options that they have to delay up to 6 months, so it's within that December to June window that it would close.

Our next question comes from Rohit Chopra from Wedbush.

I just want to get a sense of what you're doing now that you're sort of trying to be a little bit more involved in the sales, what you're doing is as far as quotas or quotas being changed for some of the salespeople. Are there some increased promotions to make sure that you get in on the deal? Maybe you can just tell us what specific changes you've made to the sales force?

Sure. So I'm not a believer in changing quotas. We're almost to the end of our fiscal year, so we're going to ride our quotas out. I don't think that's in the cards right now. Certainly setting appropriate quotas for FY '13, I think, is part of what my processes right now. I want to see quotas that reflect the growth that we're expecting out of the company. I think this would be something everyone would expect. So no surprise there. Regarding specific promotions, we have been running some promotions. We've been running bundled promotions, things of that nature, wireless LAN with campus edge for example, bundling our PoE switches, especially our new PoE switches with the high-performance wireless LAN pieces that we have. And we actually -- we ran some of those in March and we saw some good traction. So with our new channel VP on board now, she has a lot of experience with channels as you can -- if you've read the press release on her, you can see where she comes from and her background is very deep in data communications and the channels associated with that. So I'm expecting that promotion should be a normal part of what a company like us does in order to introduce new products or in order to make sure that we introduce new channels to our mix. So I see promotions as a more normal thing, maybe not for Extreme in the past, but certainly a normal thing going forward.

So nothing unusual. And then I wanted to ask Jim, if you can give us a sense of what you're thinking for fiscal '13? Gross margins seems to have stabilized somewhere in the mid-50s. Should we expect any change there? And can you actually get to double-digit OEMs maybe by the end of next year, is that a fair target?

Yes, so within gross margins, and we talked about this actually in Q2, we think that we're in very good shape in terms of achieving the financial model that we've put out there and our target model to get to double-digit operating income. The gross margin, as we pointed out in our comments, actually crept up a little bit this quarter even on the lower revenue. So yes, we think it's pointed in the right direction and that we can get in that targeted range of 57% to 59% gross margins. And yes, the goal is double-digit operating income without a significant revenue growth. It's the same thing we've been shooting for all long and we think we're pointed in the right direction.

Okay. Lastly, I thought maybe you could just elaborate on some of the partnerships because I assume some of these deals are not always direct, right? Some of these are coming from like Ericsson and Motorola, I think you have an alliance there, Nokia, Siemens. But maybe you can just elaborate on the growth of the partnership channel and maybe how you're getting into some of these deals and where we are.

Okay, let me take that. So when it comes to the E4G product line, absolutely we're -- as I said in my earlier statements, we're expecting the E4G to be primarily sold in an OEM-like fashion, if I could say that way. Some of them will be resales, but they'll be part in the carrying the Extreme brand. And when you carry the Extreme brand, it's Extreme branded product, but it's going in as a part of an overall larger solution, either from mobility or public safety or one of those types of verticals. But whether it's mobility, sitting back haul products that are sitting behind a mobility network, a 3G, 4G LTE network or whether it's sitting behind a microwave infrastructure network that may be a part of mobility infrastructure or public safety infrastructure, either way we're expecting those products to be included as part of a larger solution set and so there's going to be an acceptance criteria for it, lots of testing in the labs so that the partner can be assured that everything works the way they expect the overall solution. I think that's very normal. It's the way we have been conducting a lot of our OEM-type sales. And those of you that know us well, you know that Ericsson has been a 10% customer, Motorola is in there, lots of different of those NEPs are in there, so it's roughly had been about 15% of our business for the mobile backbone piece, if I could say it that way and some of the other OEMs. And I think that we're expecting that to grow, but it's going to be a lumpier sale cycle than normal than other products, I could say, because of the acceptance process and then eventually it will take off and be included in our solution. So I think that, that's going to -- what I'm trying is to do is make sure that investors understand that, that's got a longer tail to the sales cycle, but I think it's still a very viable product, serving a very large market. I want to make sure that, that's well understood. When it comes to other channels, right, so our other channels are -- we're recruiting channels in data center. We're recruiting channels when it comes to coverages as well for geographic coverage, so we continue to drive new channels in our business and we continue to strive to make sure our channels get the best capability possible in terms of flexibility as well as ease of doing business in the industry. And indeed, I just met with our partner advisory council in North America and the feedback that I've gotten is that, by and large, they're very pleased with the way Extreme does business with them and it's a question of doing more business with them.

Our next question comes from Jonathan Kees from Capstone Investments.

Great. Just want to start with a couple of housekeeping questions, if I may. One, my apologies if you -- if I missed this from earlier. What's the segmentation for the verticals, the 3 verticals? The amount?

Go ahead, Jim.

I believe the rolling fourth quarter was 27%, Jonathan. I think that's reported in the script.

Okay, all right. And then 10% customers for the quarter?

I don't know off the top of my head if Ericsson was one this quarter or not. It would have been the only direct one. What might have been -- yes, those all would have been resellers or distributors.

Okay, all right. Let me move on to more general questions here. You're bringing some people, looks like they're joining the team right way. You got Asia Pacific sales head, you got -- some are from India. I would think that they're going to hit the ground running. Just an update in terms of when you think the metrics for Asia Pacific will start turning around now that you've got some people on board?

Yes, it's a good question. Look, we're -- I'm very pleased with the hires in Asia Pacific. Our new head of Asia Pacific is former Cisco and IronPort. So IronPort, you might remember, was acquired by Cisco and I think that he brings the right mix of understanding how to deal with end customers, especially large end customers at the data center level and at the enterprise level. And also at the same time, understanding how to work in a company of our size, so I think that's really important. One of the things I'm trying to look very carefully is making sure that whenever we hire people from the industry, that if you've sold with a brand that easy to carry into an account, it's a different kind of sale than if you're selling with a brand that's trying to break into an account. And I think that I look for people that are good hunters, good salespeople. And I think he certainly brings that. Our head of India that we just brought on board. He is also former Cisco emerging markets type of person and so he understands how to hunt and he's located in the right place in India as well. So I think that puts us in a good position with those folks. Now when they come on board, these folks are very experienced. They can hit the ground running, but they also have take a look at their teams and make sure that their teams are in good shape because these are leaders and so they work through people and they need to make sure that they're executing well. So given that, my expectation is that we're going to see what -- I'm holding our forecast there internally for Asia for Q4, but I'm expecting…

Okay, all right. Fair enough. And that makes sense. So it sounds most of the impact -- they will start making a material impact is fiscal '13. Let me turn around and ask you about EMEA. So you're reorganizing Asia Pacific. You've already reorganized the U.S. You've reorganized Latin America. EMEA is the only region that you haven't really touched from what I recall. And I know Europe is more a macro issue and you got differences between north -- Northern Europe and Southern Europe, but I guess I'm just curious in terms of how you're approaching that or you're just taking a wait-and-see approach in terms of how the macro issues are developing there? Or have you initiated anything similar to what you've done with the other regions in anticipation in terms of any softness there? I mean, there are a lot of companies who are reporting softness in Europe, but they're also some companies who are reporting strength in Europe despite the macro issues. So just give us what you're doing there.

Yes, okay, good question. So I'm not a wait-and-see kind of guy and I'm not in wait-and-see mode, right? I have to take in account that Europe is our largest region. Did have a good last year and so their performance last year was given. So this year, they're facing a few issues, but they are facing, in pockets, some sales execution issues that we'll deal with directly and so I'm expecting to make some changes where necessary especially with their low performers. And by the way, what I would say is low performers across the company in sales. Those were issues that we have to deal with, but also make sure that the high performers are focused on ensuring that they deliver again for FY '13. So we don't have -- we have a sales team that, by and large, is a very good sales team. We have pockets of places that we have go fix a few things. And in Asia specifically, we have to bring some new leadership in place and with -- in the case of channels, we needed to have consistency around the world and I think that, that will drive the business overall and that will float the tide, which will enable everyone to rise as well. So I think we're doing things and taking quick action on the things that need to get done. Of course, I still have the VP of worldwide sales position that's open and I'm looking for the right leader with the right capabilities in terms of being able to get in front of the customers and be able to pull demand through our channels. We honor our channels very much and we think our channels have taken us to market in an excellent way, but we also want to make sure that the customer solidifies for the channel the choice they want, and that way we have an opportunity to influence directly the customer and the choices that they make in terms of cloud infrastructure, mobility infrastructure and so on. So we'll work -- we want to be able to work with our channels, work directly with the customer and have our channels fulfill and win more business with us.

Okay, great. Makes sense there, too. Can you update us in terms of anymore clarity on mobility macro issues. As you recall, that is one of the reasons listed for that miss a couple of weeks ago. And obviously, that's not the majority of -- that wasn't the response of the majority of it, but is mobility still kind of challenged or are any further information on that?

Yes, so let me say this, right? Mobility, the way we participate in mobility is the way a chip vendor participates in the rest of our business, right, is we're a component that goes into a larger mobility solution. As a result of that, things come to us in terms of projects or they come to us in terms of burst [ph] write of orders and things of that nature. We try to do a forecast and the forecast is always based on what we're told by some of our mobility partners, right? So based on that, what we've seen is we saw a bit of a small slowdown in Q2, our Q2 being the end of the calendar year. That progressed into Q3 and then towards the end of Q3, it started to get a little better and we're starting to see -- get a little better in Q4. Again, I don't have ultimate visibility into the CapEx of the end service provider, but I can tell you what I see in terms of the orders flowing our way and the pipeline that we're seeing.

Okay, all right. That sounds encouraging. Lastly, a couple of updates in terms of the sale cycle. I mean we talked a couple weeks ago when we had this call, you talked about the sales cycle was longer than expected and you're still just trying to get your hands around it with the closure of the quarter. Have you guys got your hands around it? Do you have a good idea in terms of the sales cycle, especially with the new products?

Yes. I think we're still -- I'm still looking at the sales cycle for cloud operators and those types of more complex system -- more complex system sales probably in the 6- to 9-month range. My opinion has not changed there and I think that it's bearing out in what I see in our sales teams and what they're going through. A lot of them are RFP based, a lot of them are RFI first and then RFP, and so that had the tendency -- there's a tendency there to add some time to the cycle. At the same time, one of the things that we've been able to do is get into RFPs that are sort of, if I would say, intercepting, right? So things that have already been running, that we may not have been able to respond to before our products were GA, but we can respond to now. So there are some that are shorter in cycles, some longer in cycle. But in essence, I'm still holding to the 6- to 9-month cloud data center sale cycle.

[Operator Instructions] Our next question comes from Jeff Meyers from Cobia Capital.

So I guess that with the amount of deals that slipped as of last quarter, could you just give an update on any deals that might have closed already and how this quarter looks in terms of, I guess, maybe front end loading versus your typical quarter?

Yes, so let me compare it to the last quarter and it'll -- on whole, our April is a much better April than we have in January, right, in terms of actual bookings in the door. So I'm pleased with seeing that. Comparing it to year ago quarter, I don't have those figures in front of me, so I don't want to venture a guess there. But I'm pleased with what I see so far in terms of the momentum and the deals that -- in other words, the deals that should have closed at the end of the quarter, I'm beginning to see those begin to close and booked, so that seems to be okay. And I'm also seeing some other momentum as well.

[Operator Instructions] We have a question from Christian Schwab from Craig-Hallum Capital.

Great. I just had to slip in here, quick, last. Just a follow up on that question. Given the strong start of the quarter, do you expect -- is it strong enough to change what you believe what is historical intra-quarter linearity?

I wouldn't be able to comment on that. I think it's too early to draw a conclusion on that.

Okay, great. But strong start -- I guess, the strong start -- following up on the previous question. The strong start, does that increase your conviction and your work on expectations for the June quarter I guess?

It really -- at this point, my conviction is the same as it was before. And it's good to have good indicators that we think we can do are looking positive.

This ends our Q&A session. I will turn it back to Jim Judson for closing remarks.

Thank you, Patrick. Thanks, everybody, for participating in the call, and look forward to talking to you again at the end of next quarter. Thank you.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.