Good day, ladies and gentlemen, and welcome to the Extreme Networks Q4 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, John Kurtzweil, CFO. Mr. Kurtzweil, you may begin your conference.

Thank you, Michelle. Welcome to the Extreme Networks 2012 Fourth Quarter Conference Call. On the call with me today, from Extreme Networks, is Oscar Rodriguez, President and CEO. This conference call is being broadcast live over the Internet and will be posted on Extreme Networks' website for replay shortly after the conclusion of the call, and will remain available through August 10, 2012, and is being recorded on behalf of the company. The presentations and the recording of this call are copyrighted property of the company, and no other recording or reproduction is permitted unless authorized by the company in writing. This afternoon, Extreme Networks issued a press release announcing the company's financial results for the fourth quarter and total year of fiscal 2012. A copy of the 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 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, spending patterns, and overall trends in the economic conditions in the company's markets. Actual results could differ materially from these projected and 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 technologies and products; customer response to its new technologies and products; the timing of any recovery in the global economy; risks related to pending…

Thank you, John, and I want to thank all our investors for joining this call. Fiscal 2012 has been a significant transformation year for Extreme. We have adjusted our cost structures with the expectations of increasing operating income as we grow revenue, and we have focused our marketing to drive higher levels of customer and market awareness to position Extreme as a leading competitor in specific high-growth market verticals. We've delivered a new award-winning products that we believe are best of breed for the markets that they serve. We believe that the combination -- a combined effects of our refreshed products, increased awareness and reduced cost structure, combined with more recent efforts to retool our sales force to attack new and larger opportunities, will enable Extreme to drive revenue and market share growth and increasing free cash flow. We have now delivered on 5 quarters of non-GAAP operating profitability, with year-over-year growth of approximately 190% in EPS and FY '12. We're now focused on adding new experience and skill to our sales teams worldwide to successfully address larger, more complex data center and cloud opportunities. In support of this, the quarter -- in the quarter, we added new sales leadership in our Asia Pacific team, and we are hiring additional account managers and sales engineers in various locations in the region. We have also established a data center sales team in North America and are in the process of adding a similar team in EMEA. We hired an experienced leader of global channels and have now consolidated our global channel attack to drive better partner intimacy and focus. We have also adjusted our sales commission and compensation structure to drive a clear focus on increasing new customer wins, and we expect this to increase our ability to gain market share.…

Thank you, Oscar. We target our first fiscal quarter of 2013 revenue will be in the range of $75 million to $82 million. This is a sequentially down quarter, and we have taken into account the seasonally weak period, the macroeconomic weakness being seen in the industry, as well as the fact that EMEA is now in the midst of their summer holiday season. We have also taken the conservative view of Asia Pacific given the recent management changes in that expected time for new staff to join and ramp to full productivity. We also target that our GAAP EPS will be breakeven to $0.03 a share and non-GAAP EPS for Q4 will be in the range of $0.01 to $0.05 per share. As a reminder, non-GAAP results exclude stock-based compensation, restructuring charges and litigation settlements. We will now open the call for questions. Michelle, you can start the polling, please.

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

I have a few questions. What should we assume with -- John, I have 2 questions. John, first for you. Typically, CFOs don't make dramatic shifts down in market cap size of companies that they decide to go be the CFO for. Can you kind of walk us through your thoughts on your movement from Cree to Extreme Networks?

Sure. I mean, I was -- I had a lot of fun at Cree, I helped Cree in a transition from being a company about the same size as Extreme, and their revenue projections, I think, this year is going to be over $1 billion, and I had fun doing that. And what I was looking at was looking at doing that again and getting back involved in a more hands-on way in the business. So now Extreme offered that opportunity, and I'm looking forward to it and I've been here slightly over a month now, and I have enjoyed it, and see a lot of opportunity potential.

Great. And then, Oscar, I guess maybe a slightly tougher question. But how do you plan specifically to increase your earnings results over the next 2 to 3 years? And the reason I ask is, we've been sitting here for the last 4 years at a similar revenue range, plus or minus. And so, we can either, the way I see it, aggressively reduce cost from here, which it sounds like we're going to try to get a little bit fatter in the near term, for near-term new product opportunities. We could do a significant stock buyback, given you have ample cash, or we can sell more of these refreshed products. How do you see you driving increased earnings results?

Okay. So since you mentioned stock buyback, I am assuming you're referring to EPS, right? So lowering the denominator might increase EPS.

So, right. Even if we don't grow the business.

That's right. Exactly. I mean, first, let me focus on growing the business and growing the actual earnings line so that, regardless of the denominator, it's growing. So it is the latter, you mentioned 3 options there. It's really the latter. The only -- if our cost structures are going up a bit, it's only because I'm retooling the sales team, and hiring 8 players cost a little bit more than potentially some of the guys that we've had on board. So I understand that incrementally that might go up a little bit, okay? It's typically an investment that pays dividends in the short term because salespeople come on board, they bring Rolodexes, they bring customer knowledge and access and experience. And as a result of that, over the sales cycle, which the sales cycles for our data center products are 6 to 9 months, over 6 to 9 months, we should begin to see some traction coming from the salespeople. So that's one aspect which is bringing in new sales people that can address the specific markets we're working on, and that will -- and taking advantage of the fact that we have had a down Q3 as an example, and we're moving to low performers in favor of those that can bring sales productivity as an important aspect of what we already have been doing. Adding the new skill sets in the new data center sales, overlay sales team that I put in place and they are very targeted with named accounts, so they're going after the ones that we want to go in to make sure that we start driving that traction. The new product portfolio, there's 2 things for us: One is it lowers the cost structure to product sets, so the refreshed X440 product, as…

Great. And I guess the most important question then is, what type of growth rate should we be expecting over the next 3 years? Given the markets that you serve, the growth rates that they have, you now have refreshed and better products. You're upgrading the sales force. What type of top line growth would you expect, and I don’t expect you to give me one answer, but more of a broad range. Do you believe you're developing and building a company that can grow 5%, 5% to 10%, 10% to 20%? What is the type of top line re-acceleration, if you will, that you expect from what you're doing?

So let me say it this way. I believe that we can grow above the market growth rates on the average of all the markets that we serve, and it's because of the retooled products. I think with the retailed sales -- retooled sales team and retooled products, we can grow and we can win and we've already begun to demonstrate that this quarter. So we'll be above the market growth. And case in point, if you look at the technology from -- if you look at the products from a technology sales standpoint, we're growing significantly above the 10 gigabit market growth rates that have been estimated by the analysts. We're growing above the 40 gig, we believe, but we'll see when those numbers actually produced that have been predicted by some of the analysts. So I'm very comfortable saying that we'll grow above the market. Now, what is the market going to grow at? I think we all understand what the macroeconomic environment is. I think we all understand how difficult it is to call the ball on that. So I don't feel comfortable pegging a specific number, but I can tell you, we can grow above the market. So where there will be deals, we'll win more than our fair share.

But just help us out. Everybody has a different expectation of what the different markets are going to grow, and it's hard to peg exactly what your mix is in each one of those areas. Do you believe that the average growth of the industries that you serve is 0% or 5%? I understand it's a difficult macroeconomic environment. Let's put that aside and let's say that sometime, let's all cross our fingers, we get back to some normalized world environment. What do you think the markets, over the next 3 years, what do you think the average growth rate of your targeted market should grow, if things just kind of revert to some semblance of normality?

So you're asking me to speculate a bit, right?

Yes, we're all kind of in that market.

I hate speculation, right? But let me say this. Remember that we basically address 3 different markets, right? So when you address 3 different markets, you're going to have the weighted average effect of that, right?

Right. That's what I'm asking for. You don't have to break out each 3 if you don’t want, but just the blend of the mix that you believe, is it realistic normalized growth rate in the world?

Okay. So let me -- let's just take it one at a time, right? We've got the campus market that's growing at single digits, mid-single digits at best, right? So do I think we can grow above that? Yes. So is it going to be 20 points? No. Is it going to be high-single digits, maybe a little better? Yes, it could be. Right? I've got good confidence in our products and our ability to do that. The mobility marketplace has been growing. I don't know how it's going to continue grow, but has been growing in the 20s, right? So the mobility market is a good market. We have good products. So do we think that that component can grow above the market? Yes, I do believe so. The data center market, depending on what part you're looking at the data center market is growing in the 30s and more, right? So it really depends on where you looking at the cloud or looking at high-performance computing, et cetera. So when I look at all those things, it's a weighted average of all of those things. And I really have not pegged a specific 3-year growth rate because it's so difficult to call, the variabilities of these markets and on top of that, where the macroeconomic environment is going to take us. But if I were to take everything out and say, okay, it's the year 2007, okay, and markets get adopted the way they should, I'd still believe we can grow above the market and that's probably the best that I can say.

What is your relative mix? Remind me, what is your mix between campus mobility and data center today?

Okay. So good question. And I'm going to have to ask you to imagine a Venn diagram, right, because when you sell into an enterprise customer, you're typically selling both the campus and a data center. So a piece of that sale is going to be data center. There are the pure data center customers like some of the ones that I mentioned here, whether they're high-performance computing, Internet exchanges, private data centers or cloud-oriented operators and I've mentioned all 3 of those on the script, all of those are pure data center plays. And so when I look at the data center piece, that is enterprise, plus the data center piece that is the pure play data center guys, it's roughly about 40% of our business is that, right? That's not something we measure because it's hard to measure as you can imagine, but I look at the wins of the verticals and that's why I mentioned that our verticals on a weighted average fourth quarter basis -- or excuse me, on a rolling fourth quarter basis as we've been measuring it are 30% of our business and they continue to grow. And this quarter, they were characterized by heavy education deals, because education is, that's the time, the seasonality of the year that they buy. Other times of the year will be characterized by large data center builds. Other times of the year, they'll be characterized by mobility project deployments by some of our NEPs. So data center, roughly about 40% and growing. Does that answer your question?

Yes. And then just pure campus and pure mobility.

So pure mobility is a little bit easier. So we don't break out all of the pieces of mobility, but if you look at this quarter in Q4, Ericsson was at 10% -- was a greater than 10% customer. Actually, they were roughly 12.9%. And for the year, they were about 12.1%. So that, plus a few other customers like Motorola and some others that we have that are connected with mobility, mobility being either mobile backbone or backhaul, and backhaul could be fiber-based backhaul or microwave-oriented backhaul, rolling all that together, it's less than 20%.

Okay. And then the rest would be campus?

Yes, correct.

Okay. So I just calculate. So in essence, in a normalized market, your business should grow double digits, right? I mean, I don't want to put words in your mouth, but if we just back into the math, it would be pretty darn close.

I think those are your calculations. And again, when I look at the macroeconomic environment, it's tough for me to say that. All I can say is, I think you can grow above the market, whatever that market is.

Great. And then my last question. I apologize for asking so many, in advance is as we look to the migration, if you will, to open flow and software-defined networks, do you believe that that potential transition is a disruptive change or just an evolutionary change?

I actually think it's a significantly disruptive change when it comes to the brands that customers will purchase from. I think that when customers actually implement, they will look for some evolution in their networks, because folks don't like to throw away perfectly good equipment and they like to reuse them as much as they can. So that's why you'll notice that our solutions are actually based on open architectures and open connectivity, and interfacing with lots of ecosystem partners that enable customers to have plenty of choices in how they evolve their networks. But the whole concept of SDN and whether it's an open stack type of solution or open flow type of scenario or those combinations, and other types of SDN combinations are coming about, the truth is, this is a disruptor to the dominant brands that are out there and that's where customers now are going to begin to have real choice.

Do you think that lowers your gross margins or do believe it just accelerates the markets or does it do both?

I actually think that it increases the software component of our capabilities and so it will have a positive effect to gross margins.

Our next question comes from the line of Rohit Chopra with Wedbush.

This is Sanjit Singh for Rohit Chopra. A couple of questions. If I'm looking at the geographies and I'm looking at your performance this quarter, which was a pretty solid quarter, how much of it was kind of a recovery from a weak quarter or some -- and whether [indiscernible] deal that closed, how much of it was improvement in demand? And then relative to the guidance, what are you seeing in the macro, maybe you can walk us through by geographies, where you're seeing specific areas of weakness, what areas are strong?

Okay. This is Oscar. To be fair to John, let me comment on the bounce back or how much of it was bounced back from Q3 since he wasn't here. There was a bit of bounce back from Q3. There were some deals at the end of Q3 that did not close in time and we were able to close them in April. We had a stronger April. We had a less backloaded quarter, I can say it that way, than what we had in Q3. And so, I think we experienced some of that. And now how much in actual dollars? To be honest with you, I'm not sure. But I think that some of it was a little bit of demand that's out there. And the one thing I want to say, and this is put into the looking forward part of this is that customers are being very careful about how they buy and when they buy. And even in Q4, there were some deals that we expected to come in Q4 and instead they came in, they've already come in in Q1. So I think that customers are being careful with their budgets. CFOs are sometimes telling their IT guys, "Well, I might let you spend it but not yet, but I can't tell you till week 12 whether you can spend it or not." And so that has a tendency to backload our quarter as well because customers may not give us the go signal even though they selected us until they're ready to actually spend the budget and the sign the PO. So I think that, that has an effect even moving forward as well. So let me stop there and see if you have any clarifying questions on that.

No, that's perfect. And then, Oscar, for you, in terms of what -- on the executive and management level, I think we have one more executive hire to go. But where do think we are in terms of solidifying the executive management teams?

I've looked at our executive management team from a very careful perspective in terms of skills, ability to play as a team, ability to align to the mission, ability to really bring an additive 1 plus 1 equals 3 all the way around. I'd like to think that I have an executive team that can do that. Now, that doesn't mean that when, as I look at the environment going forward with the changes of environment, we may not have a future change, but I think I've got a pretty solid team, and I like the fact that our team is -- we do not compromise on bringing in A players. Right? We've gone after the folks that can actually produce and really do a great job for the company. I mean, I will say that John is a case in point in that, right? So I know that the prior speaker asked the question, why would you go -- why would you take a step down? Well, it may have been a step down in revenue, but I like to think that it's an equal or better step-up in strategy. Right? So from that standpoint, I think we've got folks that are A players in the industry, looking at us very carefully, to want to join our team. And whether it's in R&D or whether it's in sales, I continue to see folks look at Extreme as a place where they want to come because this is a company that's got great technology. And with the right ingredients, which I think we have, we can grow some market share.

Great. And my last question, it kind of has 2 parts. Is Extreme -- do you feel like the company is getting a seat at the table when it comes to filling these larger deployments, you're making some changes to the sales force compensation. With the new products, do you feel like you're getting a seat at the table with the right customers?

It's increasing, right? It's not -- I'm not going to tell you I have the same seat at the table that Cisco does. I clearly don't. But it's certainly increasing. And as we win some of these wins, people are opening their eyes and saying, whoa, we want Extreme also to come in and give us a bid. We want to see what those folks have. So I've been very pleased with the traction that we've got and getting a seat at the table with customers. And I really -- it comes down to customers making decisions. You can't win every deal. But you also -- if you can win as many deals as you lose, then you're growing share and that's what I want to get to. So I want to get to as many deals as I can get to and win as many as I lose, so win 50% of them, and from that perspective, we should be growing share.

Is there a way to characterize win rates or displacment rates over the recent couple of quarters?

I can tell you that it's better. I don't have any statistics, but I can tell you that it's better. I can tell you that we are displacing incumbents in multiple places in the world, and I mentioned that in my script.

Great. And this is my final question. The new products to be ramping. I don't imagine they're 10% of sales yet. If they are, please call that out. But is there a timeline where you expect this to be a material driver of the business in terms of growth of 10% of revenues or 20% of revenues?

And you're referring specifically to which one? I sorry, I missed the question.

The new products that you've rolled out.

Actually, so let me give you this statistic. Over the course of the last few years, there's a percentage of revenue that we track of how much revenue comes from new customers. And so, that revenue, and I'm going to ask that I give some statistics here. Over 40% of our revenue has come from new customers over the course of the last few years as we bring those products online. So I'm expecting as these new products mature in the marketplace and we get traction, we should see that and perhaps more. So we're a technology company, so we're continuously bringing out new technologies in favor of being able to grow market traction and grow revenue. And so we're expecting our new products to contribute heavily into our revenue stream.

[Operator Instructions] Our next question comes from the line of Jonathan Kees with Capstone Investments.

If I can, I want to start with some clarifications on what you guys presented. First, it was 30% in terms of the verticals revenue, the rolling four quarters, is that correct?

About 35%.

Okay, I heard 30%. Okay. So 35%. Okay. And then, second, I wanted to get some more elaboration in terms of the macroeconomic environment. Even in the press release, you talked about sort of global uncertainty and stuff like that. The reason why is because for the quarter, if I've got [indiscernible] here right, you actually grew quarter-over-quarter and year-over-year in EMEA. And in Americas, which has been relatively stable economically in the headlines, it's chugging along at a slow rate, but at least it's chugging along, you actually decreased. And in Asia Pacific, same thing. I can understand you're still knocking at the sales team, being the account manager there and all that stuff. All right. But EMEA, which is -- traditionally has been -- it's what in your headlines, you actually grew sequentially year-over-year. So just some better elaboration in terms of what you're seeing geographically for the macro headwinds.

Okay. So macro wise, I'm actually -- I feel good about what I'm seeing in the Americas, right, both North and South America -- North and Latin America, I should say, including all of Latin America, we continue to see good traction, we continue to see good pipelines develop. So better confidence there. When I look at EMEA, I think that we understand the environment and we've taken steps to make sure that as we look at our pipelines and as we look at what we think we can derive from that marketplace quarter-by-quarter, I think we've got a pretty good feel. It's not that good as it was 12 or 18 months ago, I think everybody will say the same thing, but I think we've got a pretty good feel for what we're able to call there. Asia Pacific is the place where we're probably retooling the most because we've made some leadership changes. So that one carries a little more risk for us, but it's also one of our smaller regions. So with North America and Europe really being the larger parts of our business, there's some variability in the business, but a lot of the variability really comes from Asia.

Okay. And what happened with North America? It's down year-over-year for the quarter?

So in North America, again, I think that that reflects a little bit of the deals that are out there. We are winning deals in North America. So I'm not displeased with the momentum we've got. And actually, they were ahead of plan for the year. So very pleased with what that team has been able to do. But I understand. It's down year-over-year and the company's down year-over-year. I'm not surprised.

Okay. All right. Okay. So looking at the guidance that you've given here, it's basically same as -- it's in the range of Q1 of fiscal 2012. Year-over-year, good things are being said about your new products. You're gaining a lot of traction there. So does that mean that the sales teams are focused on that, and then what's decreasing, what's bringing down everything would be the legacy products, the non-pre-verticals. And that's still a bulk of your revenues. And so some more reflection of the deal environment possible in Q1?

Yes. So just as a reminder, we typically have quarterly seasonality that comes to bear. And it's been pretty standard over the course of the last several years for the company. So I think what you're seeing in Q1 is really a reflection of -- the coming down from Q4 to Q1 is a reflection of that seasonality. And so if you look at our quarters in general, the even numbered quarters typically fared better than the odd numbered quarters. And some of it has to do with customer behavior, some of it has to do with sales behavior as well. And so at the end of Q4, folks want to bring their number in in order to make sure that they get their accelerators. Those are there that are ahead of the game. And so, there's a tendency to bring deals into Q4, and this summer, well, it has its own hiatus, which is normal. So in Europe, there's a typical hiatus, and this year, we have the added effect of the Olympics. So I don't think that it's unusual. I think it's usual for us to see a Q1 that's down from Q4.

And it sounds like your new products are not exempt from that seasonality.

Yes -- no, because when customers go off on vacation, they go off on vacation regardless of the product you want to sell.

Okay. I guess you're targeting growing faster than market. And if that's the current situation that you're growing faster than the market, then that seasonality or that market also, that also reflects the state of the market too in terms of the market growth.

Yes, that's right.

Okay. All right. One more clarification question, if I can here. You're bringing a lot of sales, account managers, sales engineers, especially in Asia Pacific. So it sounds like sales and marketing is going to go up and you've already obviously completed your cost cutting restructuring program from the past. The -- I guess, are they going to be responsible for selling directly to customers, to direct accounts, are they're going to be working directly with your distributors, in terms of these salespeople that you're bringing on board?

Well, the salespeople, account managers and SEs that we bring on board typically are targeted at the end customer. We do have a channel team, we do have a channel team. We have a global channel leader now that is aligning all of the channel activities so there's a channel team that works with distributors and resellers to ensure that we're acquiring the right resellers, training them appropriately, making sure that they've got all the materials necessary and understand our programs. So there is a part of our sales team that does that, but the parts that we're hiring are really account managers that are focused on the end customer.

So your majorities channel, most of your sales are from distributors, from [indiscernible] and all that stuff? So that means you're going to grow that segment, that minority segment of your revenues in terms of the direct sales?

No, no. I'm sorry, I don’t want to give you that impression. The way our sales team works, which is very similar to the way the other data communication companies work in this industry, is we use our account managers to influence direct touch customers at the end user level. That drives demand and pull-through through the distribution because distribution and value-added resellers will provide localized support, they provide installation, they provide a lot of things that we do not provide. So it is a push-pull, and so we push into the distributors and push our knowledge and our education, and our products gets sold through the distributor, but the demand is generated when our account teams touch the end customer.

Okay. All right. That helped for the clarification. And so my last clarification question, if I can here. You talked about Ericsson. How many 10% customers did you have for the quarter?

10% customers for the quarter were 3.

Three. okay. All right. Now onto a bigger question here. Gross margins are below your long-term operating target here, the range. And I know Oscar, you talked about the 440, X440 and a higher gross margin, and you're going to see some other products that are coming in that our higher gross margin would bring it up. I guess the gross margin's guidance for the next quarters is flat sequentially. When are we going to start seeing some improvement in terms of -- or moving towards the long-term range, your target range for gross margins. And also operating margins, is that 10% goal -- 10% double -- excuse me, the double-digit operating margin still the goal for you guys?

Our model is still the goal. Over the course of -- we won't see the gross margins hitting our target in Q1 based on our guidance. Going forward, we do expect that to improve. In the short term, just to be clear on the impacts of gross margin, so part of it is in Q1, you have lower volume, so less absorption. And then the other thing that we're doing in Q1 is we want to win very specific key lighthouse customer deals with the BDX8. And so we win strategy deals and sometimes it dampens our margin a bit. I see that as investments for future growth, both in volume and in margin.

Okay. So by the end of the fiscal year, this chance, at least, being pretty close to the long-term target range. I know you're not giving guidance, but just in terms of the model...

We are not giving guidance, but we believe that our long-term model is still in effect.

Okay. All right. And then the operating margin target?

The operating margin target is still the model. That's our target long term, yes. I see that as we grow revenue. Yes.

We have a follow-up question from Christian Schwab with Craig-Hallum Capital.

I have just 2 quick questions. One, can you identify the other 2 10% customers and their percentages. And then, second, can you give us an update on the timing of the sale of the corporate headquarters?

Okay. So I'll answer the first one just because I have it in front of me. And so, the other 2 were WestCon, no surprise, it's a distributor. It had 16.8% for the quarter, and they were 18.6% for the year. Scan Source at 12.9% for the quarter, another distributor, and 12.0% for the year.

Awesome. And then the corporate headquarters sale?

So the corporate headquarters sale by contract is, it can happen anywhere between December and June. And there are options that the buyer can take to extend that starting December and so they can extend it monthly through June.

I'm showing no further questions at this time. I would now like to turn the call back over to John Kurtzweil for further remarks.

Thank you, Michelle, and thank you, everybody, for participating in the call today. And we look forward to talking to you again at the end of our next quarter. Thank you very much. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the conference, and you may all disconnect. Thank you and have a great day.