Good day and welcome to the Aerohive Networks’ Second Quarter 2017 Financial Results. Today’s conference is being recorded. At this time, I would like to turn the conference over to Melanie Solomon, Investor Relations. Please go ahead.

Thank you, Camille. Welcome to Aerohive Networks’ second quarter 2017 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 and Chief Operating 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 margins, plans for future investments, product development, deployment, adoption of 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 caption, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations, in a 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 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. I will now turn the call over to Dave Flynn, President and CEO of Aerohive.

Thank you, Melanie. Thank you all for joining us today. We are pleased to report that we met our revenue guidance, exceeded our gross margin guidance and achieved non-GAAP profitability delivering EPS at the high end of our guidance range. We also delivered strong growth in our deferred revenue line due to moving the rest of our product line to the Connect to Select model that we introduced of our entry level APs in Q1. As planned, under this model, our business takes on more SaaS-like characteristics decreasing in-period revenue, while increasing our deferred revenue balances. John will talk more about the financial impact of this new model. We made major progress on the product front in Q2. We expanded our new product and pricing model to our entire product line with the aggressively priced Connect offering for conductivity oriented environments and the Select offering which allows us to better monetize the value of our feature-rich subscription services. We received a positive response to the launch of the Connect to Select offering on our entry level APs in Q1. That has provided disruptive entry pricing and a seamless software upgrade to full-featured Select offering. We have seen almost no cannibalization and Connect gives us access to incremental markets like hotspot, hospitality and other mid-market environments, while improving our ability to recruit channels. Our confidence in this new model prompted us to extend the offering to our entire product line at the end of May. Our Connect to Select strategy gives our channel partners a more comprehensive portfolio and was instrumental in enabling us to recruit over 600 new resellers in the first half of the year. We are excited about this progress, but have found it is taking more time and effort than expected to recruit and fully activate this…

Thanks, Dave. Good afternoon, everybody and thank you for joining us here today. Before I go through the quarter in detail, I’d like to highlight some financial and operational milestones Aerohive achieved in the second quarter. We met our goal in Q2 of achieving non-GAAP operating profitability and positive non-GAAP EPS. Q2 also marked the eighth consecutive quarter of gross margin improvements in our subscription and support business increasing significantly on a sequential and on a year-over-year basis. In addition, we met our goal of achieving more than 10 million in subscription and support revenue in the second quarter, while significantly building our deferred revenues which now sit at record levels. We were meaningfully cash generative in the second quarter and also cash generative on a year-to-date basis. During the balance of my prepared remarks, I will cover our GAAP and non-GAAP P&L, our balance sheet for the second quarter and provide some related commentary in our business. Lastly, I will close by reviewing our financial guidance for the third quarter of 2017. Now, moving on to revenue, revenue came in at $42.3 million for the second quarter. This was up 16% sequentially and down 11% on a year-over-year basis. We are pleased that Q2 revenue came in line with our prior guidance. Q2’s significant sequential improvement was even more impressive when combined with a meaningful growth we saw in deferred revenue related to our Connect to Select strategy. I will talk more about this during the balance of my – during the – talked about this in more detail during the balance sheet review. Product revenue was $32 million, up 19% sequentially. Subscription and support contributed a healthy $10.3 million in the quarter. Q2 was a record for subscription and support revenue coming in at 24% of total revenue,…

Thank you, John. While I am disappointed in our Q3 guidance, I am encouraged by the significant progress on our product portfolio and general improvement. I want to let you know we are now focused on capitalizing on the improvements in HiveManager NG and our Connect to Select product strategy. And with these foundations in place plus the activation of over 600 newly recruited VARs, we will be in a better position to regain momentum in the coming quarters. I would like to close by thanking our customers and employees for their continued loyalty and dedication. And I will now take your questions. Operator?

[Operator Instructions] And our first question is from Doug Clark with Goldman Sachs.

Hi, this is Balaji on behalf of Doug. Maybe I will follow-up on that last thought you had there, do you have any level of visibility into when you expect these VARs and the channel ramp do happen, how far out is that, is it a one quarter event for you or longer than that from here?

Yes. We expect to see kind of a continuous improvement although to be honest with you, we have expected to see a little bit more lift from that in Q3 based on the good progress we made in Q2, as we previously commented, education is light in Q3 and we expected the product progress in NG and the VAR recruitment to have kicked in and allowed us to deliver year-over-year growth in the quarter. But it is a continuous progress and I think it will get better every quarter. And we will – see we are not projecting growth in Q3, but we are driving to deliver growth, turn this into growth as quickly as possible.

Got it. Thanks. And then just to follow-up on E-Rate, any metrics you can provide there first of all and then I wanted to follow-up on a comment you made on the last earnings call, where you highlighted the letter from the FCC to USAC and that they needed to fix issues, they had a deadline of in the quarter, so any updates on that front, what are you hearing? Thanks.

Yes. So I think last earnings call, we had commented that E-Rate program continued to be administratively troubled and had – it was leading people to less demand for E-Rate funds because people are getting flipside [ph] up at the program. I think the final results for the year, industry wide results kind of indicate that as we had mentioned E-Rate is a trouble program. The demand for Wi-Fi for the year was down about 30% year-over-year. Obviously, many people are looking to fund with other vehicles because of the execution issues USAC has had with the E-Rate. But that is how the 2017 program ended up. The letter that was sent to the Chair of the USAC did result in the Chair’s resignation. And so there is a new Chair in place and they are working to improve things, but I think it’s too early to say if it’s going to be a materially improve – material improvement this year or not. We are clearly focused on building other parts of the business and reducing the dependence on the E-Rate, that’s a very high priority for us as a company and one of the foundational elements of our efforts on Connect to Select, our attack on the hospitality vertical market and the maturity of NG the new SDWAN initiative all of which are new things driving to reduce the dependence on education going forward.

Great. Thanks.

Our next question comes from [indiscernible] with Dougherty.

Hi, thanks for taking my question. This is [indiscernible] on behalf of Catharine Trebnick. I know that you had touched on it briefly, but I was just wondering if you could provide a little more color on educational vertical this quarter and how it performed?

Yes. Q2 is historically a seasonally strong education quarter and similar to last year overall education business was in the low to mid-40s as a percentage of the business, had some benefit from delayed E-Rate spending from last year, but it was largely in line with historical Q2 patterns.

Alright. Thank you. And just to kind of follow-up on that how would you say that the non-educational verticals performed and did you see any traction with those?

I think as I said Q2 tends to have a slightly higher education rates than other quarters, but we are pleased with the progress in the other verticals that came in as expected. Fairly usual, kind of consistent balance with them healthcare, retail, enterprise, all making up a substantial portion of the business, education normal quarter in total on a little bit below 40% and Q2 normally spikes a little bit above it, so consistent pattern.

Alright. Thank you.

[Operator Instructions] Our next question comes from Orin Hirschman with AIGH Investment Partners.

Hi. AIGH. How are you?

Hi, good, how are you?

Good. Thanks. Can you just go through a little more on the enterprise side, you mentioned some big win against competitive they go off, can you just give some more color there if you are beginning to see a better win percentage, what’s going to make a difference on that business going forward because they are – it is obviously meaningful in terms of the deals?

Yes. I mean I think as you said in the past usually our challenge with the enterprise projects is getting into the opportunity, getting about that and that’s one of the things we are increasingly developing our VAR channel to help get us into more of these opportunities, get more leverage in the go to market model. I think in terms of once we get into these engagements, I think the win rates are fairly consistent. We have I think we have mentioned previously we had seen some elongated sales cycles as we have transitioned to the NG product. I think that affected some projects in the prior quarters. We are seeing the NG product do better and better and it’s in those estimate valuations and are encouraged by that progress and think it will continue with the strong roadmap of monthly releases making that product more competitive. And maybe some of the projects that we have mentioned the innovative the dual 5 gigahertz radio design we had done that’s been a compelling factor in many projects. And it continues to be the best dual 5 gigahertz design in the industry and the maturation of the cloud platform also continues to help improve our position.

[Technical Difficulty]

Well, I think at the highest level Dell, we continue to make progress see we have expansion with them. They were material this quarter and Dell – and from a vertical perspective I think Dell’s verticals lined up very well with ours, Dave would you concur with that?

Yes. We have see they tend to fare a bit better access into some larger enterprise and lot better access, they have much more sales coverage, they help with some of those projects. But we also – they do a fair amount of education and mid-market business to, so the overall composition is not materially different than the core business that we have.

Another indicator we have we can share with you that that relationship is getting better is we are constantly working with Dell in a very cooperative way to ease transaction flow, to kind of make transaction close smoother and more efficient between the organizations and clearly both Aerohive and Dell are investing in that, so we have great hopes for that as we move forward.

And on the last two questions, one is following-up on the prior question and maybe just to highlight seasonality in education in Q4 versus Q3 and combine that with expectations with some level of progress on the strategy overall enterprise and other?

I will take a shot of that and Dave jump in, but we would like to think that we would see improvement heading into Q4. I think we – one of the reasons that we highlighted the 600 channels, 600 channel partners that we added was to give some sort of tangible material evidence that if we are successful in activating these channels, we should get back to the revenue growth. Now I want to be carefully we don’t give Q4 guidance, but all the indications are that is if we execute, we take advantage of the improvements you see in NG. We take advantage of our relationship with Dell and we take advantages of the Connect to Select strategy as it relates to bringing these new channels online we should see improvement in the fourth quarter.

On that same note, is there something that went better in Q2 than you expected versus Q3, I am trying to put it out obviously before it makes a little bit of a difference, but…?

Yes. I think in terms of the sequential compare – clearly the change in deferred the whole quarter impact on deferred is a meaningful part of it. And then the other part is – it is as we had anticipated a bad E-Rate year for 2017 that is more reflected in Q3 and Q4 that you look at Q3 we would anticipate that to be down versus Q2 for education, because Q2 benefited from some of the leftover 2016 education business. So, you have a lower starting point with education and it’s up to us to we are delivering growth – we are focused on growing the other components of the business to offset that.

Q4 traditionally is lower than Q3 on the education are similar?

It has – it’s varied depending on how the execution of the E-Rate program. Typically, it is flattish or there is different years it’s balanced around a little bit. I think last year it was a little bit stronger in Q4 than Q3, but only marginally.

Well, take the next question please.

Our next question is from Tal Liani with Bank of America/Merrill Lynch.

Yes, hey, guys. This is Dan Bartus on behalf of Tal. Just a couple of questions from my end. First is I want to dig into this strategy a little bit more for Connect to Select, it sounds like you are doing it across all products now. So, if you are taking your entire product line and giving it away for potentially a fraction or a discounted price upfront, can you walk me through how do we don’t see more pressure on gross margins if this is increasingly successful over the next few quarters?

Well, this is John speaking. We are – the guidance – if you look at our guidance on gross margins, we will be stepping that guidance down. We stepped it down over the past several quarters. I think what we are seeing and what we are seeing some upward supplies and some more benefit coming out of the subscription and software business which is offsetting the decline that we are seeing in the hardware. On a year-over-year basis, we are up almost 6 full percentage points in terms of the margins on our software subscription business.

Okay.

Important thing is that we mentioned that we lost the strategy, the concern was there is going to be cannibalization in your existing customers. We are going to all opt for the Connect offering and not pay Select, because we kind of at a lower hardware price with the lighter weight free cloud subscription that we raised the prices of the feature-rich Select software. What we have seen is that people are – the customers are overwhelmingly, the existing customers are staying with the Select offering and they are paying that and so you are just seeing a shift from short-term immediate product revenue to deferred revenue, which is a good thing over time that takes on more of a SaaS like characteristic. To the extent, we get incremental – it could be a bunch of incremental business that happens with the Connect as we activate the channels and drive that more aggressively. That business will be at a lower gross margin, but we expect it to be highly efficient business with a leverage channel model that we believe over time will lead to higher operating profit even if it is a slightly lower gross margin for those transactions.

Okay, yes, that’s helpful and makes sense. So clearly little bit of pressure on the product margin line and I mean that does lead into my next question was on the services gross margins really impressive year-over-year growth, but where does that go from here if Connect really takes off, because the way I am thinking about it is you give them a scaled down software version, so you are charging them less, but then you have kind of the same infrastructure and headcount related to that services. So I am just trying to think about what do you need to add incrementally on the services side and could we see any actual pressure on the gross margin for the services side as well?

Well, so keep in mind that the services side and the support side for Connect are relatively light. The customers do have the opportunity of kind of upgrading their service, which would be a margin opportunity for us. But the pressure – the margins are sustainable. I don’t see the mix skewing towards Connect I don’t think would have a meaningful – would put meaningful pressure on those margins.

Yes, obviously we are taking advantage of the scale economies you get from a cloud platform that we can actually with the infrastructure we have and the elastic cloud platform that NG was built to be, we can add devices very efficiently and get this good economics as we scale it. So, the incremental cost at additional device on to that cloud platform is relatively low and we don’t expect it to have any material impact on the SaaS subscription margins.

Okay, great, yes and that’s helpful as well. And then last one for me, I will see the floor. Just quickly, sorry if I missed it, but how is the partnership with Juniper going as well, is there any update there and is there an opportunity for you guys to really beef up that partnership making more like Dell a longer term?

Yes. So, I think we continue the – we have had a collaborative, meet in the channel partnership with Juniper, which is we have common enemy of Cisco and HP and we have some aligned channels and we leveraged that for those relationships. At this point, I don’t see it evolving to Dell is much closer to an OEM deal. The OEM is software, they resell the hardware and their people get paid for selling to Aerohive. We don’t anticipate that Juniper would go to that model. We anticipate it to continue to be a meet in the channel partnership.

Okay. Thanks, guys.

Thank you.

And that does conclude our question-and-answer session. I would like to turn the call back over to David Flynn for closing remarks.

Alright. Thank you all for joining us today. We will be at the upcoming Oppenheimer and Davidson conferences in August. Hope to see many of you there. Thank you.

Once again, that does conclude today’s call we appreciate your participation.