Good day and welcome to the Aerohive Networks’ Fourth Quarter 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Melanie Solomon. Please go ahead.

Thank you, Jessica. Welcome to Aerohive Networks’ fourth quarter and fiscal year 2015 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 John Ritchie, Chief Financial Officer. During the course of today’s call, management will make forward-looking statements including statements regarding our projections for fourth quarter and fiscal year 2015 operating results, expectations for future revenue growth, profitability and operating margins, plans for future investments, including a share repurchase program announced today, product development, deployment, adoption and performance, and expectations of customer buying patterns and the growth of the market for our products and business generally. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, and the actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results, including risks and uncertainties included under the captions Risk Factors and Managements Discussion & Analysis of financial conditions and results of operations, in our recent Annual Report on Form 10-K and quarterly report on Form 10-Q. Aerohive’s SEC filings are available on the Investor Relations section of the Company’s website at ir.aerohive.com and on the SEC’s website at sec.gov. All forward-looking statements in this presentation and referenced press release are based on information available to us as of the date hereof and we disclaim any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made except as required by law. Today, we’ll be discussing, both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges and are not intended to be considered in isolation or as a substitute to 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. Now, I’ll turn the call over to David Flynn, President and CEO of Aerohive.

Thank you, Melanie and thank you all for joining us today. Fourth quarter of 2015 was our third consecutive quarter of exceeding expectations on both the top-line and the bottom-line. We delivered another record quarter with revenue of $46.2 million and an 8 percentage-point sequential improvement in non-GAAP operating margins. These results bring us closer to our goal of achieving quarterly non-GAAP operating profitability in 2016. We are engraining in and winning more large projects with a record number of million-dollar deals during the quarter. I’m very pleased with our consistently improving sales execution. Our fourth quarter results reflect strong year-over-year growth of 28% with meaningful contributions from all regions and an excellent balance across vertical markets. We outperformed in retail and distributed enterprise and saw strong performance in the education vertical driven by E-Rate. Overall, we saw a continued trend toward more large deals as we engage with large organizations around the globe. I’ll now highlight a few customer wins in the quarter to span our key verticals and highlight the differentiators of our products. We demonstrated we can punch well above our weight class by winning the largest deal in the Company’s history, a 40,000 AP rollout across a large retailer in Japan. We were selected because of our hardware quality and reliability, and the ease of deployment and management provided by our cloud-based management system. We booked the initial orders in Q4 and expect the project to fully deploy in 2016. We closed the 3,700 AP deployment with a $10 billion European grocery chain. They chose to deploy Aerohive as part of a customer loyalty initiative. We won because our solution could deliver the desired customer enrollment process and analytics without the costly and complex add-on products our competitors require. We received a 4,000 AP order to…

Thank Dave. Good afternoon everybody and thank you for joining us. Before we go through the quarter in detail, I would like to highlight some milestones that Aerohive achieved during the fourth quarter. Q4, as Dave mentioned, was a record revenue quarter for us with product revenue and software subscription and services revenue setting all time records of $38.9 million and $7.3 million respectively. Our deferred revenue balances now total almost $60 million; our DSOs came in at the low end of our previously stated guidance of 45 to 55 days; our non-GAAP operating margins improved sequentially by approximately 820 basis points. And lastly, we generated over $4 million in cash during the quarter for a combined total $7 million over the last two quarters. Moving on to the quarter in more detail, as Dave mentioned, we benefited from improved execution across multiple disciplines in our organization. We’re not done improving yet but we are pleased with the progress we have made to-date. In the fourth quarter, we experienced strong sequential revenue growth with revenues increasing to $46.2 million, which is at the high end of our guidance of $44 million to $47 million. This was an increase of 28% compared to the same quarter a year ago, and an increase of 8% on a sequential basis. Our strong performance was driven by robust results across our retail, distributed enterprise and education verticals. Q4 was a record for the product revenue category, which as I mentioned, came in at $38.9 million or 84% of total revenues, an increase of 25% compared to the same quarter a year ago and an increase of 8% on a sequential basis. Q4 was also a record for the software subscription and services revenue line which came in the $7.3 million or 16% of total…

Thanks John. This was a great quarter for us and puts us in a great position for 2016. We couldn’t have done that without the efforts of our employees helping us through this transformative year. We’d also like to thank our customers and partners who continue to show their confidence to us and reward us with their business. We will now take your questions. Operator?

[Operator Instructions] And we’ll go first to Doug Clark with Goldman Sachs.

Great, thanks for taking my question. My first one is a higher level macro picture. First quarter seasonality is looking generally in line with normal seasonality in terms of the guidance. Wondering if you can comment on linearity throughout the quarter and then secondarily, if kind of the current macro conditions but more specifically the market choppiness is having any impact on enterprise spending or expectations for the first quarter?

Sorry, was the linearity question about Q4 or Q1?

Linearity through 4Q, through the fourth quarter and then if the macro environment is having any adverse effect on first quarter expectations or enterprise spending in general?

Yes. So, it’s John speaking here. It was a fairly linear quarter for us in terms of linearity that you saw even throughout the quarter. I think if you look at our DSOs, they would support that conclusion.

Yes. In terms of the current spending environment, I think the stock market choppiness is -- I would say we have not seen that being reflective in spending patterns of our customers. I think we have normal seasonality that we experience where stronger enterprise spend in Q4 and usually down a bit in Q1 as well as education being lighter and Q1 which is reflected in the guidance. And it’s always been our seasonally weakest quarter but macro trends did have an influence at this point.

Great, thanks for that detail. And my follow-up question is on E-Rate and the education vertical. Can you talk about kind of how it performed in the fourth quarter and this year, seeing any impact or positive boost from E-Rate and then kind of expectations throughout the first quarter on that point as well?

Yes. With regard to E-Rate, the performance in Q4 was in line with our expectations, as we over-performed in some of the other verticals, particularly retail and enterprise which actually reduced our dependence on the education vertical in Q4 versus the prior couple of quarters. But the business was flowing kind of on a steady basis, fairly consistent with how it flowed in Q3. And we’ve at this point taken more than half the E-Rate business off the table but have a plenty of it in front of us for the next few quarters.

We’ll go next to John Lucia of JMP Securities.

Hi, guys. Thanks for taking my questions. Dave, you mentioned a record number of $1 million deals in the quarter. I don’t think you guys have talked about million-dollar deals in the past. How many million-dollar deals did you have in the quarter and how does that compare to your prior record?

We specifically didn’t -- we’re not going to start counting that and reporting that as a regular metric. But it was -- we have certainly closed million-dollar deals in the past, but there was -- tended to be more of exception. We had a nice portfolio of million-dollar deals, if you look at all those deals that I talked about today on the call, I think all of those except for one was north of 1 million and there were others too.

Okay. And then I just kind of wanted to dive in on that a little bit. I just wanted to talk about how you’re able to garner these larger deals. It sounds deal sizes are going up. Is it the better sales execution that you have with commonplace? Is there kind of a general migration towards the cloud among the larger enterprises could, Wi-Fi? And then are you seeing any kind of disruption from HP Aruba, is that allowing you to garner larger deals?

So, I think a lot of it is just kind of normal maturation of the company earning its way maturing the company, maturing the product line, maturing the channels and giving us access to those larger deals; there’s definitely some that is result of the disruption from HP’s acquisition of Aruba that at this point we believe we are the largest independent enterprise class Wi-Fi vendor in the market. Other people that are really focused service provider and hospitality but because of addressing the enterprise market, we are the largest enterprise class vendor. And these enterprises are increasingly recognizing that and inviting us to participate. The innovation on top of the platform analytics, scalability all those things are all significant contributing factors. I think it’s a natural evolution of the company just indicating the progress we’ve made as a team.

Okay. So, the HP Aruba disruption is kind of reaching a tipping point and you’re now garnering business because of that; it’s not just potential business in the future?

Yes. And there certainly are opportunities that we’ve earned because of that disruption whether it was a channel partner coming to us or a customer wanting to move away from that. I would reference that as the predominant driver of it, I think this is more about us maturing and improving our execution as a company and maturing our offerings is the biggest driver of our ability to win these larger deals.

Okay. And then my last question is, can you just give us a sense for the revenue growth rate excluding K-12 education? You mentioned retail and others. What was the growth rate in enterprise excluding K-12 education?

We’re trying to get away from giving specific growth rates on specific verticals. I think what we’re seeing is as our product gets deeper penetration in each of these markets, we’re seeing growth overall. But again, we want to stay away from specific growth rates in specific verticals.

We’ll now take a question from Troy Jensen with Piper Jaffray.

Thanks for taking my question, and this is actually Austin Bohlig on for Troy. And first off, congrats on the good quarter gentlemen.

Thank you.

And just a couple of questions. First question here is, during the quarter our checks indicated that we saw some more pricing pressure, specifically from Cisco. I was wondering, if you guys saw any of that on year-end?

Where you’d see pricing pressure in terms of our results would be in the gross margin line. And we saw sequential improvement in gross margins in the quarter. So, I think that’s not a direct answers to your question, but it indirectly tells you the kind of pricing pressure we’re seeing and how we’re responding to it.

Okay, great. And then second question for Dave. The Dell partnership, how has traction with that been going?

So, we’re pleased with the traction. We have high levels of engagement across multiple parts of the organization across the sales, product group, training up their support group and a lot of other activities. Still investing in the ramped phase of it and we still expect it to become material contributor to our business in 2016.

We’ll now go to Catharine Trebnick with Dougherty & Company.

Thank you for taking my question and good afternoon. Back to the partnership; so, you have some really nice sized deals that you discussed at the begging of the call. Are those related to your Brocade, Juniper/Dell or is that more from the direct sales force?

Yes, those deals -- usually deals of those magnitudes are longer sales cycles that were launched before the Brocade Juniper and Dell relationships were put in place. I think those were just results of ongoing -- previous investments in sales and channel development and business partnerships before those. So, we certainly hope that the maturation of those new relationships will allow us to have even more of those in future quarters.

And then the other question is back to E-Rate. One of the things that I was wondering about is when we did our channel check, there was a lot of fulfillment during the quarter. I had expected maybe a lot of schools would purchase during the Christmas or Thanksgiving holiday and that wasn’t the case. So, did you see the fulfillment with more forms or did you have a lot or equally as many new opportunities? So, we had a lot of people saying that there were still problems with the forms and so it was more fulfillment in the channel than new deals.

Yes. To make sure, I’m understanding, so you…

I’m just trying to quantify, did you have more new deals in the E-Rate or a lot of fulfillment, because the forms were -- there were so many problems with the forms that were released that people had to redo their forms before they could actually fulfill the order?

Okay. So to make sure we are talking about the E-Rate year of the awards that were -- the 471s that were filed in April of last year is what we were out collecting that was roughly $60 million worth. Of those, public information USAC is about 90% of the award letters -- the dollar value of award letters were issued by the end of December, but spending lags behind that because people -- don’t have time to install or the spending will continue on for the next few quarters. I think that’s what we’re seeing. There were issues where some people struggling to get their forms approved and they working through that with USAC. But as I said, 90% of those -- the dollar value of those across the industry were resolved and approved as of the end of December. The other issue is we’re now in the middle of competing for this coming year’s E-Rate awards. And we’re going through the process of bidding on those projects. There were some issues with the forms not being right at the start of that process that have been resolved. But that will be reflected in this coming year 2016 to new E-Rate business that was affected by that.

Alright, thank you. And then the last question is you did talk to your hand a little bit to wave 2 product coming out in Q1 and is there any particular verticals that you think will be more attractive for that new technology?

wave 2 will be a premium product that will be used by the more demanding environments or higher user count and higher traffic load. The education market is actually -- is one of those markets. So, we expect it to be appealing to the education market. We’re already actively quoting that on E-Rate -- products on E-Rate opportunities, so we’re out in front of that. But over time we expect it to spread across all the markets. You tend to see lower education being a little bit earlier adopter on a new Wi-Fi technology though. So, we’re out in front of it; we’re quoting it aggressively today and we’ll be able to garner E-Rate business with that product.

And we’ll now go to James Faucette with Morgan Stanley.

Hi, this is Meta on for James. A quick question just about as you move up to bigger customer sizes, and realizing you’ve just put a fair money into the development of the NG platform, but are there areas of development that you’re focused on, whether it would be analytics or that you feel like well how could you compete as you continue to go further out market?

I think one of the biggest areas where we’re focusing our innovation on is the extensibility of cloud services platform. As we referenced HiveManager NG is the network management application to manage our solution, but it’s build on platform, we called Aerohive cloud services platform and we’re doing a lot of work around that -- the big data aggregation analytics and APIs to encourage development and innovation on top of it, so people can realize business value, not just network operations value. And that’s really resonating with the larger customers; it’s resonating with larger service providers like SURFnet, a lot of these larger retail deals that wanted analytics and they want to use that platform to do more than networking, they want to realize business value. So that’s a huge amount of our investment going forward is building out that cloud platform.

And then just another quick question about -- on the deals that you’re winning, I’m assuming the fair amount of it is no longer Greenfield maybe outside of education. So, on average, how old is the equipment that you are replacing in deals?

Usually when it’s -- if it is an upgrade, it’s typically going to be in the three to five-year old kind of picture. We’re seeing a fair amount of development and upgrades that went in several years ago and are now being upgraded to AC. That’s definitely a contributing factor. But in that range some verticals tend to go, some of the retailers are even older six, seven-year infrastructure.

And it appears there are no further questions at this time. I would like to turn -- I apologize. We’ll go next to John Lucia with JMP Securities.

Hey guys, I had a quick follow-up. This is a second quarter in a row that you’ve posted positive free cash flow. I’m just wondering if you can give us, John, any frame of reference for your expectations for free cash flow in 2016 or any kind of color around that would be nice?

Sure. I’ll give you a little bit of color, but will keep the guidance one quarter a time. We expect to be cash flow negative in the quarter as it is our seasonally down quarter. Interesting enough, if you look in terms of being seasonally down, we’re much -- seasonal decline this year’s considerably less than it was last year. But as we progress through the balance of the year, we expect some total of the last three quarters to be cash flow positive, varying amounts of cash in the quarter, but will be cash flow negative Q1 and will be cash flow positive on a cumulative basis for the last three quarters of the year.

And at this time, there are no more questions. I’d like to turn the conference back to management for any additional or closing remarks.

Thank you all for joining us today. We will be at the Goldman Sachs conference next week as well as Morgan Stanley and JMP conferences next month, and hope to see many of you soon. Good night.

Thank you.

This concludes today’s conference. Thank you for your participation.