Good day and welcome to the Aerohive Networks Third Quarter 2016 Financial Results Conference Call. As a reminder, today’s conference is being recorded. And at this time, I would like to turn the conference over to Melanie Solomon. Please go ahead.

Thank you, Lisa. Welcome to Aerohive Networks’ third quarter 2016 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, operating results, expectations for future revenue growth, operating profitability and operating margin; plans for future investments; 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 management’s discussion and 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 our website at ir.aerohive.com and on the SEC’s website at www.sec.gov. All forward-looking statements in this presentation and the 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 will 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 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, Melanie and thank you all for joining us today. We reported Q3 revenue of $40.4 million and non-GAAP gross margin of 68.5%. These results were slightly above our preannouncement from October 13. Our key takeaway from the quarter is that we haven’t done a good enough job in diversifying our verticals and we continue to be overly revenue dependent on the U.S. education market. We are focused on changing that and I will talk more about that in a bit. As we stated previously, the revenue shortfall in Q3 was largely the result of administrative issues with the E-Rate program that delayed funding approvals, delays in funding approvals, delay orders which contributed to our underperformance versus revenue expectations. The E-Rate program’s administrative challenges have been widely discussed by the E-Rate community as well as on our August call. The value of the E-Rate funded deals, for which we have been selected, hasn’t changed, but the pace of issuance of funding approvals for these projects continues to be slower than we anticipated. Last year, funding approvals accelerated in late Q3, but this year, they decelerated and finished Q3 almost 70% below the pace we saw at the same point in 2015. For reference, we have posted on our IR website a Funds for Learning Chart that shows 2016 E-Rate committed funding of only $578 million as of September 23 as compared to mid-September average of $1.8 billion over the prior 2 years. We do not see this dynamic as an indicator of overall market demand for wireless networking in education and we still believe this is an important market to go after, but we do anticipate these administrative issues to continue over the next several quarters. As a reminder, schools have the year from the funding letter date to…

Thanks, Dave. Good afternoon, everybody and thank you all for joining us today. Before we get through the quarter in detail, I would like to highlight some financial and operational milestones Aerohive achieved in the third quarter despite a difficult revenue environment. Q3 was a record revenue quarter for our software subscription business, growing 30% on a year-over-year basis. Our non-GAAP gross margins set a new company record coming in at 68.5% driven by the record software subscription gross margins. And lastly, we were cash positive in the extremely challenging environment. Despite these achievements, our results highlight our over-dependency on the volatile E-Rate program. As Dave mentioned in his prepared remarks, we plan on redoubling our efforts to lessen this dependency and deepen our penetration in additional verticals. We have accelerated these plans and you will see announcements around these initiatives beginning in early 2017. Now during the balance of my prepared remarks, I will cover our GAAP, non-GAAP P&L and our balance sheet for the third quarter and provide some related commentary on our business. And lastly, I will close by reviewing our financial guidance for the fourth quarter. Now moving into the quarter – moving on to the quarter more detail, total revenues for the quarter was $40.4 million, down 6% on a year-over-year basis and down 15% sequentially. Our Q3 product revenue came in at $31.7 million. We are pleased with the performance of our Wave 2 products that comprised over 21% of access point shipments during the quarter. Despite the difficulties with our overall revenue, we continue to make progress increasing our recurring revenue streams as our software subscription and services deferred revenue balances continue to grow quarter-after-quarter. This recurring revenue brings some amount of visibility and predictability to our model. Q3 was a record for…

Thanks John. Well, we are clearly disappointed with our Q3 revenue. We are using this as a catalyst to accelerate our plans and diversify our revenue. As we seek to diversify, we believe we need to do things differently, including delivering new products and services designed to open doors to increase our at-bats and to better engage the channels that can help drive our growth. We look forward to updating on these efforts as we bring them to market in Q1 2017. I will now take your questions. Operator?

[Operator Instructions] And we will take our first question from Doug Clark with Goldman Sachs.

Hi, thanks for taking my question. I guess, the first one really needs to focus on E-Rate a little bit. It sounds like you are not baking in any recovery in the fourth quarter of ‘16. I mean, can you talk a little bit more about the administrative challenges that are going on and any expectations that they will unwind at some point? And should we still have kind of the notion that the funding available for this year should be in market and in customer’s hands by kind of third quarter 2017, so do we have a pent-up demand situation?

Yes, Doug. Thanks. Clarify that the administrative issues are largely coming through kind of an online portal and tool that they are using to run the process for the submittals being put through and for them to evaluate, assess and grant approvals to issue the funding letters to transact these things and to new system they have been struggling with all year and it’s just bottlenecking their ability to get any approvals issued. And inside the quarter, inside Q2, they have improved about 14% of the funding requests when last year, it was well over 50% of the funding requests had been approved inside of Q3. We are – the guidance assumes no improvement in that rate. We assume they are going to kind of continue to move forward at that sluggish pace, which will meet or the funding approvals out over the next several quarters, because there was no clear indication that it’s going to start to run anymore efficiently, because that tool is something they are struggling with and I don’t believe it will be revamped and improved materially for some time. So, that is going to be immediate rollout. We don’t expect some big wave of funding to come out at any moment. It will be a steady meter rate and then people have kind of a year to spend their money. Although typically they spend their money pretty quickly once they get their funding approval letter. So, it should be – I don’t expect – there is not a big bubble coming at some point, it will be a steady flow of E-Rate approvals and it will continue on and probably be through the process towards the end of Q3 of next year is probably how you just kind of look at that pace and continue it out for a few more quarters, should be mostly done by that timeframe. And at the same time, we are starting the 2017 cycle and there still is a very large pool of money available for the next cycle and that – the bid process for those projects is just starting to kick off and we are going into that. We expect to have some continued administrative challenges. But again, there is a large amount of money available for next year and we will continue to pursue that. Although frankly, we are going to put – increase our emphasis on more of the enterprise activities to increase the diversification.

Okay, that was helpful. And I think these two maybe related, but Wave 2, if I remember correctly, last quarter was about 19% of access point shipments, this quarter 21%. So, it really didn’t see much of a significant sequential step up. Is that related to E-Rate and education in particular? And then secondly and related to that, the new enterprise kind of pivot that you are talking about, can you give us a little bit of a preview by what you mean by kind of products targeting those end verticals and is today’s access point announcement related to those efforts?

Yes, turn to the Wave 2. Yes, the softness in the E-Rate and education had some impact on the Wave 2 ramp. It also ramped very quickly in Q2, because there was some pent-up demand that people have been waiting for that product. So, I think we had some queued up demand that popped into a very quick to start. So kind of maintaining that and building modestly on top of it we thought was a positive outcome. And from what we have seen from other competitors, we think our Wave 2 mix is very favorable and we have seen strong adoption of our Wave 2 products. And then to the enterprise, we have always had a focus on the enterprise business, although it’s been a balance we were continuing to put a lot of resources into caption, the E-Rate money, because it was appeared to be easy money to get. Now, they are making a little harder to get, so some things. We have had many enterprise efforts to put, but some of the priorities – it’s almost competing with priority around some of the education initiatives. We have adjusted priority in accelerating some of these initiatives. In terms of specifically what products, I don’t want to brief that and tell my competitors exactly what I am going to do next quarter, but we are focusing on – there are some new products, the 550 is certainly an enterprise class product and that will help, but there are other new products coming, other service offerings, but a big focus on it is to make sure we are opening up more doors and getting more at-bats to increase our sales efficiency, because right now we – as I said, once we get into an opportunity we do have a high win rate, but it’s the challenge of opening doors and we are focused on solving that problem.

Alright, great. Thanks a lot.

And we will go next to John Lucia with JMP Securities.

Hey, guys. Thanks for taking my questions. Can you give us a sense for the growth of the business excluding K-12? And was there any weakness in U.S. enterprise or was it just E-Rate and maybe some softness in EMEA?

Yes. The rest of the business performed largely as expected although we had expected a very large education quarter, because we had the overlap of the finish in 2015 and the new wave of 2016, the E-Rate is expected when we built the guidance. So, the rest of business did perform largely as expected. We mentioned some softness in Northern Europe. That’s a very heavy enterprise-centric region for us. And so that, that did have an impact on the enterprise business as well as the sequential compare in APAC where we no longer have the benefit of that very large retail deal.

What percent of your business is enterprise at this point?

In the quarter, the education business was in the range of 40%, which is what it often is, but we had expected it to be a much larger business – a much larger portion was the original expectation.

Okay, alright. And I think your Q4 guidance calls for pretty strong sequential growth, yet you are assuming a similar pace of commitments for E-Rate. What gives you the confidence to guide for that 9% sequential growth in Q4? Is it the strength in the enterprise business, a pickup in EMEA, the Dell partnership, any color there would be helpful?

So, this is John here. I think it’s a combination right. We have a deal pipeline. We definitely see some strength in the enterprise business. We are very iridescent to call any improvement in the E-Rate business, but we expect our other verticals to do very well in the fourth quarter.

Okay. And lastly from me, can you just give us a progress update on Dell? I think on the last call you said that partnership would be material by Q4. Are you still expecting that? And then looking forward is there any reason that Dell wouldn’t be material for all of 2017?

So, we do expect Dell to be material in the fourth quarter. I think we said that now for several quarters and there is nothing at this point we are also very pleased with how the relationship is progressing. And not getting into any given quarter in 2017 I think at the end of 2017, looking back, we think Dell should be material as well.

Okay, thank you.

We will now go to Catharine Trebnick with Dougherty & Company.

Hi, thanks for taking my question. On the – going after expanding into additional verticals, one question in from a modeling point of view, how do you expect the R&D line to look going forward if you could give us any advice around that?

Just modest and upwards, to be quite honest with you, we were expecting it to go up this quarter. But we worked hard to bring some variability into the OpEx lines. So, R&D would have been up if we had hit our top line numbers, but as we resumed kind of a growth strategy, we expect R&D to be modestly up.

Okay, thanks. And then another question, any insight or can you discuss some of the other verticals. I know you have traditionally usually say on other calls that you have 20% to 25% of your revenue is healthcare/retail, are there other verticals that you are looking at outside healthcare and retail and can you give us some more color around that? Thank you.

Health care and retail are, of course going to be important verticals for us. A lot of the other business, we lump into general enterprise bucket, which is kind of a verticals, it could be a vertical or horizontal, but that’s the normally our knowledge workers in a corporate environment in security and BYOD. So we are going after that segment a lot. The other kind of new segment we are going after is frankly more of a channel than a vertical, which is managed service provider segment. And we are seeing a lot of – an increasing amount of success with MSPs deploying our solution. I mentioned that large retail project for the analytics. Actually the public WiFi network in Asia was again run by a managed service provider. So that segment, that we think there is lot of growth opportunity. And they will sell into many verticals underneath.

Alright. Thank you very much.

We will go next to Meta Marshall with Morgan Stanley.

Great. Thanks. I just wanted to dive into the SD-WAN opportunity that you mentioned and just see, it sounds like there is product announcements coming, but with that need SD-WAN branch router, like some of – some competitors are offering or would that be kind of a standalone product where you guys would be kind of providing that branch router capability. And then the second question is just turning to the K-12 market, like what percentage of that – of our K-12 dollars this quarter were E-Rate funded versus non-E-Rate funded and what had you expected that percentage to be?

Yes. So let me clarify the SD discussion. I think I may not have enunciated it clearly, so I will start on that SD-WAN – I am sorry SD-LAN, local area network in contrast or parallel to SD-WAN, which is technology many other companies are talking about. And so we are working on making a software definable LAN infrastructure – a network infrastructure with the cloud platform able to give you flexibility to reprogram how your wireless network is working and your policy enforcement and adaptable local area network. So to now I guess to SD-WAN and so that’s not true I was talking about a more programmable local area network. SD-WAN, the wide area networking business is a – it’s a different thing. We do have a branch router product line that is a small portion of our business. We are investing to continue to improve that. But at this point, that is more of a access router VPN product, which is – I wouldn’t characterize under SD-WAN category. And then the E-Rate…?

Yes. In terms of – I think in terms of the E-Rate business as a portion of our overall education business is probably in the 75%-ish range. I mean especially at this time of the year, this is primarily driven by E-Rate. Now keep in mind, we have an education business outside the U.S., which dilutes that down. But I think that’s the approximate range.

Okay. Thanks and Thanks for the clarification on WAN versus LAN. Thanks.

And we will go to Matt Robison with Wunderlich Securities.

Thanks. I got a two-part question, what was the second most disappointing vertical or channel. And then what if any verticals surprised on the upside, even if they were quite small?

It’s an interesting way to ask that question. I would say, don’t mean this to be a non-answer, but the rest of business kind of came in where we thought it would – where we thought it would come in, so I would say with the exception of maybe some enterprise business in Northern Europe that we talked about, the rest of the verticals, healthcare, retail were as expected if they had over performed, I think you would have seen that gap relative to our miss there a little bit. But again, they all came in where we thought they would be. And our shortfall, unfortunately was yet again the E-Rate program.

Thanks.

We will go next to Rohit Chopra with Buckingham Research.

Hey John and Dave, how are you. I have three questions for you, I am going to ask two easy ones upfront, John any targeted date on reaching $50 million and breakeven, that’s the first question?

So that would be occurring sometime I assume in 2017 and we are not going to get to a specific quarter, we haven’t given any guidance. Sorry did not answer directly, but.

No, that’s good enough. And then I wanted to just get a sense of the buyback in the quarter, how much did you do and then how much is left?

Sure. We have been continuing at the same pace. We spent $2.1 million and we bought almost 4,000 shares. So we have got about just under $8 million left to go.

$8 million, okay. And then just a more difficult question and I know Doug asked this at the outset, but I think it deserves a little bit more attention, so can you elaborate a little bit more on the diversification, so you talked about products and when you say that, it kind of means that maybe you didn’t have the right products in the first place, so there is product side, you said there is more coming out, but it seems to me that to get more at that it’s not always about product, it means that you need to get the right channel strategy in place, so does that mean Synnex is not working, does it mean that your West Coast revamp of the sales force didn’t actually work well, does it mean that sales leadership needs to be changed, what needs to be done outside of product. And I think that requires a little bit more attention, because I don’t think you can diversify by just saying you are going to have a few more APs, right. I mean tell me if I am wrong, but you definitely need to have a strategy in place and it seems like this has been ongoing. And now, you are thinking about it now, but a channel strategy should have been in place. And I just want to try to get a sense of what you are doing to get those other than putting out new products?

Yes. So I should be clear. The Synnex relationship is developing and progressing well. They precluded, on-boarded hundreds of new VARs into the mix, I think we feel like we have maybe necessarily accelerated driven as much new business through as we would like to. And we wanted to do – we have some programs, products, a variety of things that we are doing to help get more lift and more leverage out of the channels that we do recruit. Make it easier for them to open new doors with the Aerohive product. But we – in terms of the sales force, I actually feel good about the progress we have made in our sales force. And I think we have got good people in the right seats. And I think that – I don’t think that we need to go make changes in those areas to get things go in the right way. I think there are a few things that – I don’t want to give all the answers to it, but there are some things and it’s not just, hey a new access point, there are some things we can do to make our business higher velocity, easier to transact with. And again, there are some things that open up doors more efficiently that we will be rolling out. But those are designed to give the sales team more tools and frankly, the marketing team more tools, so that we can get the response, get the first meetings. Because once we get into those first meetings, we do very, very well. And it really is about what can you do to more efficiently get them to those first meetings.

Yes. Just a little more on that, I can’t emphasize in that how pleased we are with Synnex is working well. I think one of the keywords that Dave mentioned in his script was, we are accelerating these plans. We knew we had an existing dependency on the E-Rate market. And you shouldn’t view these efforts that we are doing as being reactionary, because we are not reacting to what happened. We are accelerating because we anticipated something like this could happen. We were – unfortunately, we are a little late in terms of getting to the market with these newer ideas, because we didn’t expect such a dramatic shortfall in E-Rate, but we are accelerating plans that we have underway to penetrate deeper into the enterprise market. This isn’t hey, we had a miss and all of a sudden, we are reacting. This was the acceleration of plans that we had in place for quite some time

Thanks. Sorry for the tough question. Okay.

No problem at all.

It appears there are no further questions at this time. I will turn the call back to Mr. David Flynn for any additional or closing remarks.

Yes. Thank you all for joining us today. And we look forward to seeing you on the road later this quarter. I appreciate you taking the time and good night.

Ladies and gentlemen, that does conclude today’s conference call. Thank you for your participation.