Good day and welcome to the Aerohive Networks’ Fourth Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Sophie Pierson with Investor Relations.

Thank you, operator. Welcome to Aerohive Networks’ fourth quarter and fiscal year 2014 financial results conference call. After the market closed today, Aerohive issued a press release through Business Wire. The release is also available on our website at aerohive.com. This call is being webcast live on the Investor Relations section of the Aerohive website and will be available for 30 days. Today’s call is being hosted by David Flynn, President and Chief Executive Officer and Gordon Brooks, Chief Financial Officer. David Greene, Chief Marketing Officer, will also be available for Q&A. During this conference call, we will make forward-looking statements regarding future events or results of the company and its operations. These forward-looking statements include statements regarding our projected financial results, general demand for mobile and wireless networking in the industry verticals we target, demand for our products and solutions in particular and our ability to take advantage of opportunities in the industry verticals we target, potential drivers of growth in our business, new customer acquisition and continued adoption of our products and solutions by existing customers, future product and service offerings, continued 802.11ac transition and adoption of Aerohive cloud management applications and product offerings, fluctuations in our gross margins, seasonality of our business, changing market conditions, the timing and potential level of our participation in the E-Rate program and our expected benefits and investments related thereto, our plans for future investments, our expectations regarding our level of operating expenses, progress in our sales execution strategy particularly in our underdeveloped territories, risks associated with the deployment and adoption of new products and services, risks associated with our continued growth and competitive pressures from existing and new companies. Actual events or results could differ materially from those discussed in the forward-looking statements. Please refer to the risk factors in our recent Quarterly Report on Form 10-Q filed, which contains important factors that could cause actual results to differ materially from the forward-looking statements. Aerohive disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Today, we will be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures, please see today’s press release available on our website. And now, I will turn the call over to David Flynn, President and CEO of Aerohive.

Thank you, Sophie. Thank you all for joining us today. I am pleased to report that the fourth quarter of 2014 finished as expected, with results within the guidance ranges we said in November. Revenues were $36.2 million, an increase of 19.5% over the same period last year. We added over 1,500 new end customers in the fourth quarter bringing the total number of end customers to more than 19,000 at the end of 2014. Repeat purchases from current customers contributed 66% over the last four quarters. This concluded a year in which we added more than 6,000 new customers, which expanded our customer base by 32% and grew our revenue 28% over 2013. In the fourth quarter, we continued to see significant customer wins across verticals. Let me share a few examples. In education, the Downey School District in Los Angeles County needed to upgrade aging, switching and Wi-Fi infrastructure to support deployment of Chromebooks and iPads for their 32,000 students. They evaluated the significant vendors in this space and chose Aerohive based on ease of setup and deployment, our controller-less architecture with on-premise management and our easy-to-use yet powerful management system. They felt it was a bonus that all these features came at a great price. Wins like this drove our lower education vertical to account for 41% of our business in 2014. Other companies in our space have talked about the impact of E-Rate on their Q4 earnings. We believe there was a modest effect of E-Rate on some of our end of quarter deals. However, we were able to offset this by our diversification into other verticals. Retail is a good example of this diversification. A UK based shoe retailer want to improve store operations, better understand their customers and deliver a connected shopping experience in…

Thank you, Dave and good afternoon. As Dave noted, we delivered revenue performance in line with our guidance for Q4 and we had solid performance against our key financial metrics. I will review our GAAP and non-GAAP P&L, balance sheet and cash flow metrics for Q4 and fiscal year 2014 and provide some related commentary on the business. Lastly, I will close by providing financial guidance for Q1 of fiscal year 2015. Net revenue for Q4 was $36.2 million an increase in 19.5% compared with the same quarter a year ago and an increase of 2% sequentially. Net revenue for the year was $137.3 million, an increase of 28% over 2013. Product revenue for Q4 was $31.1 million an increase of 14% compared with the same year quarter a year ago and an increase of 1% sequentially. Vast majority of our product revenue continues to be driven by our access points and our related management software licenses. Product revenue for the year was $120.5 million, an increase of 24% over 2013. Software subscriptions and service revenue was $5 million for Q4 or 13.9% of revenue, an increase of 67% compared with the same quarter a year ago, an 11% increase sequentially. As our software subscription and service revenue amortizes off of balance sheet, we expect to continue to see sequential quarterly increases in this revenue line over the near-term and do not reflect the same seasonality we expect to see in product revenue. Software subscriptions and service revenue for the year was $16.8 million, an increase of 75% over 2013. On a geographic basis in Q4, net revenue in the Americas was $21.7 million or 60% of total revenue. Americas net revenue increased 17% as compared with the same period a year ago. On an annual basis, net revenue in…

Thank you, Gordy. 2014 was a year of important milestones for the company and will provide a foundation for growth in 2015. We see some key factors that will define how the business evolves over the year. At the macro level, the growth and mobility continues to be the driver of our business as new opportunities in used cases emerge. The wireless industry is healthy and we are encouraged by industry analyst estimates of over 15% growth in 2015. Capitalizing on this growth opportunity requires that we continue to improve our go-to-market execution, particularly in our less-developed territories. This is a top priority for us. And in 2015, we will focus on continuing to add sales capacity, ramping our new hires, and strengthening our channel. Education is the significant vertical for us and we are seeing a high level of customer interest and RFP activity around E-Rate. However, we have seen deals that were planned for Q1 to be delayed until after April 1 to be eligible for retroactive reimbursement. And we have seen other Q1 deals delayed until after July 1 hoping to qualify for direct E-Rate funding. As a result and as others have noticed, we are beginning to experience a significant pause in K-12 spending, which is impacting our guidance for the first quarter. In spite of this pause, we are encouraged by the volume of E-Rate activity and by the strength of our offering in the K-12 market. We also see a very good opportunity for the retail segment in 2015. Many retailers are refreshing old infrastructure and looking to install more intelligent network in order to have a more engaged shopping experience. Our control with infrastructure and added retail engagement solutions that I discussed earlier address their needs. The retail segment of our business has grown significantly over the last year and we expect continued momentum. We are also excited about the opportunities that the transition to 802.11ac poses for the industry and for Aerohive. We have been rounding out our product line with new products like AP1130 and additional products at various price points will rollout and deploy over the next couple of quarters. As we mentioned on the last call with new product introductions, we may see slight margin fluctuations as those products make the way into the market and existing products wind down. Later in the year, we expect Wave 2 products to address high-end opportunities, particularly in education to enterprise with those products priced at a premium to Wave 1ac. In closing, despite the short-term E-Rate pause and our lower guidance for Q1, we are still very excited about the opportunity in front of us for 2015. So, we are not dialing back. We are continuing to invest in our employees and new products and making sure we have the sales capacity and product roadmap to pursue the opportunities in front of us in 2015. And with that, we will take your questions.

Thank you. [Operator Instructions] And at this time, we will take a question from Kent Schofield with Goldman Sachs. Please go ahead.

Great. Thank you. I appreciate it. Following up on the E-Rate discussion, can you talk a little bit about and I understand that’s early but can you talk a little bit about how you see the projects coming across relative to the April 1 starting point and versus the July 1 starting point, I know that you are not guiding for 2Q, but just so as we can kind of think about that going forward? And then I have another question on another topic.

So certainly what we are seeing is that schools that had money and budget and were able to fund projects independently are often saying they want to move ahead with those projects in April – not in April but on the normal pace they would have, but after the April 1 deadline. And so there are a number of projects where they would have liked to deploy it in March and they will wait and procure in April. There are other schools who don’t have funding lined up already, will certainly be waiting till after July 1 deadline to allow for direct reimbursement. In terms of what the mix of those is going to be I think it’s too early to call. We need to get closer with the quarter to have a clear visibility into what falls in Q2 and what waits for Q3 fund direct reimbursement.

Okay. Just one clarification on that topic, when you talk about 41% 2014 and lower add is that include global, so how do we think about that as actual U.S. K-12 exposure what that number means?

Yes. That is the global number and probably the U.S. portion of that campus as Gordy is fluctuates on a quarterly basis, but probably about two-thirds to 75% that number is the U.S. K-12.

Okay, that makes sense. And then on the other vertical on the retail side of things, you cited some opportunities there, is some of your competitors have cited opportunities there as well. So how do you kind of differentiate in that market, how do you compete and ultimately how do you win to try to get more than your fair share?

Yes. The differentiation of that market at the core comes down to our – the foundation is our architectural advantage. The controllers architecture and the cloud managed public cloud or private cloud the optimization for the highly distributed enterprise with the complete survivability, no single point of failure in their remote sites, the easy deployment are all kind of compelling value proposition at the foundational level to give them a very cost effective easy to deploy, easy to operate network infrastructure. Then on top of that is the additional value-add we are adding with capabilities like our social login capability, the retail analytics capability, our personal engagement platform additional applications we brought to bear. We have an application called HivePass that we announced in the tech presence as people walk into the store and we will push send our coupon into the passport on their iPhone allow them to enroll in the Wi-Fi very compelling kind of end-to-end ecosystem to allow marketing demographic capturing analytics. And it’s a combination of those two, the infrastructure level and the value-added business on top of it is the value prop we are bringing.

Thank you, David. Thank you, Gordy.

Great. Thanks Kent.

At this time we will move to Matt Lebo with Piper Jaffray.

Good afternoon. Thanks for taking my question. Just very quickly on your hiring situation, how far along would you say are you getting back to a healthy level and also do you think that your hiring is at a level where you should be able to maintain your market share in education as we approach the increase in E-Rate funding?

We made significant progress in the hiring I think you see it from the headcount growth we did add a number of heads and importantly we added a lot of strong regional sales managers and people that run some of the territories that had struggled back in Q3. So I think we feel good with that progress. We still have additional hiring to do, but we are around a very good trajectory with that in terms of – we really expect to continue to increase sales headcount at a moderate pace going forward. And we expect to be able to capture our fair share of the market on E-Rate. We have done some things to ship some of the resources particularly in our inside sales organization some people that were focused on enterprise business, we have reallocated to the SLED Team across the local and education to make sure we are capitalizing on, jumping on all the 470s and coming back with the E-Rate RPs and try to close the business, so there has been some reallocation to make sure we're optimizing around that E-Rate opportunity.

Thank you. And one quick follow-up, has the attention paid by all the vendors on E-Rate funds, has it caused an increase, an increased pricing pressures in your education vertical?

I think at this point, I think it’s too early to say. I think a lot of Form 470s are going out at this point but in terms of understanding the exact – where people are pricing is not fully transparent at this point. So on the margin perhaps people are being maybe a bit more aggressive but it’s too early to say if that is a pattern or not.

Thank you very much.

At this time we will take a question from Erik Suppiger with JMP Securities.

Yes, congratulations on a solid quarter.

Thanks, Erik.

On the E-Rate, can you just talk a little bit about how you are perceiving that, it does appear that this is being, this is expanding across more schools. How you done any calculations in terms of how broadly this could be across various school districts in the U.S.?

We talk to a lot of E-Rate experts and consultants and the opinions do vary and they vary widely but certainly the expanded 1.5 billion that came in December will definitely push this down into a much broader array of schools. Now those wealthier schools will not be funded at the 80% level. They may be funded at 40% or 20% of fractional funding, so they will still need to fund the rest of the purchases out of their operating budget but those people they want to—some of those guys will say, hey if I can buy after April 1 and get 20% rebate why not? And I've heard comments that from some analyst say almost any school that applies has a very good chance of getting some funding with the expanded pool.

And….

We indicated that was, the change in behavior I think you know previously we had said we were seeing minimal delays from the wealthier schools and I think that expanded pool of funds it definitely change that perspective. We are seeing some of the wealthier schools decide to wait and that is definitely affecting that Q1 guidance.

Okay. Do you have any thoughts on the competitive landscape going after that E-Rate, is it still the standard players Cisco and Aruba and any others or any thoughts on how that might change competition?

Yes, we primarily see it as Cisco and Aruba, probably Cisco Meraki more often in education than Cisco legacy although the biggest district still buy the Cisco legacy stuff. Definitely Aruba, in some of the parts of the country we see Ruckus, it depends on the region and the regional strike, so the normal competitors are there and we compete with those guys for a long time and have won on the value proposition of the cloud management platform control those architecture, our education optimized features capabilities like our Teacher View platform and so we see our position as continuing to be strong against those competitors

Okay. Cisco just reported and they reported 100% growth in Meraki, have you seen any change on the competitive landscape more broadly specifically against Meraki or Cisco more generally?

Yes, our sense is that we are still seeing Cisco same – with the same frequency but more often it is becoming Meraki versus the legacy Aironet business, so I think that they are seeing increasing cannibalization of the Aironet business by the Meraki business unit so the you know the number of Cisco engagements is unchanged but the percent Meraki is increasing.

Okay. Last question, a number of the other vendors have kind of struggled this quarter that some have attributed it to the E-Rate spending. Have you seen anything else in the market that would cause some of the other vendors to come up late?

I think that – so, the answer is no. I think that E-Rate spending pattern, particularly in the later part of Q4 we have started to see some of that impact and definitely much more in Q1, but I have not seen in other changes to purchasing patterns that would be causing the issues.

Okay. And lastly, did you say retail loan was 20% or the combination of retail and healthcare was 20%?

That was retail and healthcare together. They tend to be fairly similar size, but quarter-to-quarter they fluctuate and we weren’t breaking them out quarter-to-quarter, because of some of the volatility, but 20% the two, yes. And then enterprise obviously makes up the rest, so.

Is 20% consistent with where those two have been in the past?

That’s higher year-over-year, but consistent over the last two quarters, we have been in the high-teens and up to 20%.

Okay, very good. Thank you.

Yes. Thanks, Erik.

At this time, we will take a question from Ryan Hutchinson with Pacific Crest Securities.

Okay, great. Thanks. So, one more on E-Rate, just historically you guys have seen pretty healthy sequential increase going into Q2. And I understand you are not giving guidance per se, but just for modeling purposes, you had a 20% bump related to the education vertical and now that you have got this potential tailwind related to retail as well as E-Rate at a high-level, could you give us some color around how we should think about that? And then I have got a couple of follow-ups.

Yes, I think without giving any insight into – outside of our Q1 guidance, we will certainly be cautious in looking out into Q2 and the big step function that we have generally had sequentially. We talked about trying to as we diversify our verticals trying to mitigate the risk of seeing such a big step function going from Q1 to Q2, but at this point in time, we will just continue to be cautious on that outsized sequential increase that we have traditionally seen, because there are enough uncertainties out there that the same patterns we have seen in the past may not repeat in Q2.

Okay. And then on ac Wave 2, I recognize it’s at the higher end of the market, but what impact would that have on the business and related to that what is the expected ASP bump associated with it? And do you foresee a potential pause?

Our expectation is that the Wave 2 has a fairly minimal impact on the business in this year and over time – clearly, it will have a bigger impact over time, but Wave 2 is going to come in as a premium product, high-end product, a premium price point, obviously haven’t set prices yet, but it will, yes, I think expected to be at least 20% more, perhaps potentially a fair amount more, the chipsets and the radios and the antennas is more expensive product to go build. It will take higher levels of power than most access points and few other things that will kind of relegate it to a more specialized environment, so modest penetration, moderate price premium. So, I think it will have a positive impact on ASPs, but I wouldn’t suggest there was a major catalyst for growth in the year. I think the continued adoption of Wave 1 upgrading – and to be clear I don’t expect the Wave 2 pause, I think the more it becomes clear about the price performance benefits of Wave 2, the fact that you need Wave 2 clients to fully take advantage of it. I think we are seeing these customers are saying I am moving ahead with Wave 1 and Wave 2 is going to be a narrower specialty application in the early days.

Okay. And then finally just I know there has been some confusion around this Apple opportunity. Now that it looks like that the rollout is happening, you maybe have some more color around it. What is the potential revenue opportunity there over the long-term?

Yes. I should remind everyone that this is specifically a joint donation of the two companies. And what we said is they are being deployed. I think we conveyed that, because there was some marketing mix. We indicated that we are taking some of the cost of this donation as a marketing expense and I think people were worried or had questions about how much that will impact us, we are absorbing that in the P&L it’s just a routine marketing expense starting those deployments. So that direct program will not have a revenue impact, it’s a donation. The expectation or the hope would be that many people would look at those deployments as a great template for how to be successful in education. And we will look at that as a validation of our technology and our cooperation with Apple will contribute more in an intangible way in terms of brand recognition, credibility and access to other opportunities, but those projects will not directly drive meaningful revenue. We did indicate these are by a school, so if there are other schools in the district some of those might come back and purchase, but I would expect that to not be material.

Okay, great. Thanks guys.

Okay, thanks.

At this time we will take a question from James Faucette with Morgan Stanley.

Thank you very much. I just wanted to ask a couple questions. First question is also trying to gauge E-Rate and the competitive impact there. Can you give us an estimate as to what your share traditionally has been in K-12 in the U.S. as far as you can determine it and looking forward as you say E-Rate funding does become available later this year and these school districts move ahead, how are you thinking about what your share should as that starts to ramp, I mean is this an opportunity for you to take share or are you going to be happy if you can maintain share particularly if others are more focused on?

So, no one breaks out the numbers of this. We have done some estimates actually in conjunction with some people on the phone have taken a cut at it. And we think our estimate on our share is in the low to mid-teens in this market. And we are in a very solid position in this overall market. And our expectation would be at this point primarily to maintain share in this market rather than necessarily expand it there are certainly more people that are looking at this and paying attention because of the E-Rate business and we have got great offering. Over time we believe there is no reason we can’t increase share over time. But we have other people putting increased focus on this segment maintaining share would be successful outcome. Maintain share with the size of growth potential in the market that obviously can create a very nice growth dynamic.

Yes, absolutely. And from what you have see and at least some of the requests RFPs in those kinds of documents that you come across what’s your sense for how much of the E-Rate funding itself do you think ends up going directly to equip total wireless equipment versus how much do you think will be used for things like backhauling the traffic or providing basic service etcetera?

I don’t have a more precise number than I have given previously. We have seen estimates that have varied widely from kind of mid-20% up until the mid-50% range in terms of what might be the Wi-Fi portion of the E-Rate fund. So 25% to 55% is the range I have seen. I am continue to think kind of middle of that range is a reasonable number to think about, but I think it’s too early to say where that’s going to land.

Great, I mean that’s very useful, thanks. And then last question for me is you mentioned that on some of the international bills particularly maybe where the local currencies have been weaker, you had engaged in a little bit of discounting and maybe even seen a little bit of deal shrinking, can you give a little bit more color around that, how much deal shrinks software size or are things shrinking or going forward do you think that you’ve got through a level where people know about what they want to spend and so the deal size is relative at least to the proposals will stabilize and what are you thinking about in terms of what you have to do for pricing going forward? Thanks.

Yes, James this is Gordy. The majority of our international business is the UK, countries in Europe under the Euro as well as Australia and New Zealand we have seen currency shifts as high as 25% shift in Australia and New Zealand. We bill everything in U.S. dollars, so the way that we will see the impact of that currency is that the distributors do come back you know looking for discounting to offset the U.S. dollar strengthening, so I would say that it hasn’t been a pervasive element through our deals, we see it in certain larger deals primarily, you know our distributors stock at a standard discount that stock continues to go out the door, you can see that our stock levels reduced in the quarter but on those larger transactions, we have seen an increased volume of requests for discounting to offset currency, so we're just keeping – keeping track on it right now and building it into one of those elements and guidance to be aware of. So I think it in Q4, we probably saw the biggest currency shift, so I don’t think anybody is expecting a vast increase in the strengthening of the dollar going into 2015, so probably just starting to see those requests coming through from deals that I don’t expect it to rapidly accelerate from this point forward.

That’s great. Thanks.

Yes.

We will move to Rohit Chopra with Buckingham.

Thanks, guys. A couple of questions from me. Back to sales execution, I just want to know what's being done in the channel specifically; I know you talked about what you're doing internally with the hiring but what’s actually being done with the channel. And my second question is similar to James’ but I just, I was looking at some of the Form 470s and I know you mentioned that today Dave but are the size of the deals or education getting bigger whereby it could take a little bit longer to recognize that revenue. Meaning there’s a lot of work to be done for some of these schools, so couple of questions there.

Yes, in terms of kind of strengthening the channel and that’s an ongoing task. We have been working on with our channel company and continuing to work to strengthen that. We are – we’ve done some things that are to align our channel team with the regional leaders, so the people are accountable for success in territories, have more control over some of the channel resources in those territories. We've done lot of work on channel development, improvements to channel training that all – to help step up the productivity and effectiveness of the channel. That’s an ongoing effort and we will continue – we will obviously put more attention to that in these less developed territories. So, then you will see kind of continuing channel improvements from us over the rest of this year, it’s going to be a top priority for the – and then the size of these projects, you see asked about, so we've traditionally seen these education projects are many of them are rollouts that kind of happen over an extended period of time which is one of the reasons we have so much, we're 66% repeat. You win these people – win these projects and they tend to roll out school by school, or a chunk of school by school of them, so the fact that they may be putting in for a broader, a broad rollout project does not necessarily mean this is going to change the normal deployment pattern, they've always deployed in a phased way and I would expect that to continue in a simple, that just the mechanics and logistics of deployment won't change because they're requesting E-rate funding.

Yes. And just to add on to that, Rohit, I don’t think we have seen any significant, anything different from the business we've seen traditionally and that you know that’s what we recognize revenue today on that sell through to the channel on a deployment and a ramping basis. But none of the deal constructs or request that we've seen you know change our view of that.

Okay, thanks guys.

Yes.

And now we will move to Catharine Trebnick with Dougherty & Company.

Hi, guys. This is Kyle on Catharine’s behalf. Thanks for all the details on E-rate. I appreciate that. With retail and healthcare, do you guys breakout win rates at all between those two?

Yes, we have not broken out win rate traditionally. I think we – our position has always been that our challenges at-bats getting into deals much more so than what the win rate is, we feel very, very healthy wins rates and we just need more at-bat in those markets and that continues to be our view in those markets.

Okay, great. And unrelated, with the Wave 2 is that something that would be meaningful in 2016 rather than 2015 for you?

Yes. We certainly expect it to become more and more meaningful and over time we will see Wave to come down to lower more mainstream products over time and become more broadly accepted as the client population increases. All of those things will contribute with the Wave to becoming more meaningful in 2016. And if you recall, Wave 1 went through some similar thing. Wave 1 ramped pretty quickly more quickly than we expect Wave 2 to – it took the first couple quarters. It took a little while for it to maturing for more cost effective products to come out. And it really started accelerating a couple quarters into the transition to Wave 2 is when the knee in the curve was for that transition.

Okay great. Thanks.

And at this time I’ll turn the call back over to David Flynn for closing remarks.

Okay. Well, thank you all for joining us today. And we will be at Goldman Sachs conference tomorrow as well the JMP and Piper conferences next month and look forward to seeing many of you soon. Thank you.

Once again, this does conclude today’s conference call. Thank you for your participation.