Good day, everyone. Welcome to the Aerohive Fourth Quarter 2017 Earnings Conference. Today's conference is being recorded. And at this time, I would like to turn things over to Ms. Melanie Solomon. Please go ahead, Ma'am.

Thanks Kellen. Welcome to Aerohive Networks' fourth quarter and full year 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 in 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 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 caption, Risk Factors and Management's Discussion and Analysis of Financial Condition 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. I will now turn the call over to David Flynn, President and CEO of Aerohive.

Thank you, Melanie and thank you all for joining us today. We delivered fourth quarter results that were in line with our preannouncement last month. We are pleased that we achieved non-GAAP operating profitability and solid cash generation, despite lower than expected revenue. Following the November 1 change in sales leadership, we identified underlying sales execution issues that became fully apparent in the last month of the quarter. We had experienced typical order linearity in October and November, but as December progressed, orders came in well below forecast and frankly, this was due to poor execution within our sales organization, including in part overoptimistic assessments of closed dates for deals in the pipeline. We have already closed a number of these deals indicating that these were in fact timing issues. And we believe we have taken actions to address these execution issues and to replace underperforming sales team members and are driving more rigorous inspection of the forecast to ensure we'll be more predictable going forward. As the new sales teams ramp up their productivity and as we benefit from our strengthened product offering and exciting near-term product roadmap, we're focused on positioning the company for profitable growth. I'd like to highlight a few positive developments from the fourth quarter of 2017 and the beginning of 2018 that give us confidence in the year ahead. In Q4, we delivered record levels of subscription revenue, demonstrating the SaaS-like characteristics of our new Connect to Select business model, as well as strong execution driving our renewal business. In Q4 we operationalized our Dell OEM partnership, positioning us to more efficiently leverage the scale and reach of Dell. We are also making good progress with our Juniper partnership with increased field, channel and customer engagement related to their recent release of Juniper Sky…

Thanks Dave, and good afternoon, everybody and thanks for taking the time to join us here today. Before I go through the quarter in detail, I'd like to highlight some financial and operational metric achieved by Aerohive in the fourth quarter of 2017. We achieved non-GAAP operating profitability and positive non-GAAP EPS for the second time this year. We realized significant sales efficiencies with non-GAAP sales and marketing costs, coming in at 37% of revenue driving this important metric to under 40% for the quarter and for the full year. We delivered non-GAAP gross margins above our revised guidance range as non-GAAP EPS at the high-end of our guidance range. We were meaningfully cash generative, including cash equivalents and short-term investments in the fourth quarter and on the full 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 fourth quarter and provide some related commentary on our business. I will close by reviewing our financial guidance for Q1 2018. Now looking back at 2017 on a full-year basis, revenues came in at $152.9 million down 10% compared to $169.8 million for fiscal '16. We experienced the decline in our product revenues of 18%, partially offset by strong results from our subscription and support business, which grew 23% on a year-over-year basis. With that context I'll now turn to more details on our Q4 results. Q4 revenues came in at $37.2 million, similar to last quarter and down 11% on a year-over-year basis. Product revenue in the fourth quarter was $26.2 million down 2% sequentially and 20% on a year-over-year basis. Subscription and support contributed a record $11 million of revenue in the quarter coming in at 30% of total revenue and growing 7% sequentially and 25% compared…

Thanks John. Despite revenue challenges in 2017, we improved our product offering and are now of full stack, cloud networking company able to deliver innovative new solutions. We also strengthened our financial foundation with increased recurring revenue, gross margins and cash flow and we are targeting full year non-GAAP operating profitability in 2018. As we look ahead, I have confidence in the team we have assembled as evidenced by their performance so far in Q1. I'd like to thank our customers and employees for their continued loyalty and dedication as we work through this turnaround. I will now take your questions. Operator?

Thank you. [Operator Instruction] We’ll hear first from Mark Kelleher with D.A. Davidson.

Great. Thanks for taking the questions. First just a clarification, could you repeat the guidance for EPS, the non-GAAP EPS for Q1?

Yeah, the non-GAAP EPS guidance is loss of $0.06 to $0.08.

A loss of $0.06 to $0.08. Okay. Thanks. And is there a way you could size what Dell contributed in the quarter?

The only granularity we've given to Dell was Dell's material with the [filing that] as 10%. And Dell has been material throughout all of 2017 and continued to hit that threshold in the fourth quarter. So overall, we're very, very pleased with Dell. And I think we're looking forward to it with this OEM relationship as we move into 2018.

So, with Dell doing so well and the topline not doing so well, is there a channel conflict issue, is there difficulty selling to your other channels if they're competing against the Dell channel?

To be clear Dell's probably consistent with what it had been trending. So, it didn't take a material increase. It didn't take an increase or contribute an increased portion of the quarterly results. There is with any kind of OEM, there is some modest amount of channel conflict. But at this point, we think it's been managed well and there's not a material issue. We only started into the OEM in early November. So, we’ve had just two months of it and I think our transitioning from the prior resell relationship into OEM. So, I wouldn't attribute any of the challenges to that.

How about the new 802.11 AX protocol? You said you've got the new products tied up for that. Could that be causing a slowdown at this part of the year waiting for those new products?

No, we've not seen that yet. We are seeing -- obviously now we just announced in this quarter we're seeing interest in it, curiosity. People are starting to try to get more educated on it, but we've not seen people actually waiting on it. To be clear, they are -- the challenges we had in Q4 really were around just execution of forecasting an execution in the December month and we've taken actions to improve upon those things. We don't think it goes beyond that in terms of the issues and so we view AX as exciting thing that's getting more attention, getting new customers and partners to pay attention to us, excited about the velocity at which we're executing, the fact that we're out and the leading edge when frankly some of the competitors that are behind are now tapped and trying to slow things down because there are some competitors that aren't ready to hit AX as we are in midyear.

Okay. Great. Thanks.

Thank you.

We’ll hear next from Christian Schwab from Craig-Hallum Capital Group.

Thanks for taking my question. Can you remind us, how many people are on the sales force and can you give us an idea of how many you replaced that were underperformers?

I will let Dave get into the size of the sales force. But to be honest, we're not going to get to the level of granularity and who we took out. I will say that, it was probably skewed to more sales leaders than individual contributors so again and Dave, do you want to add to that?

Yeah, I think, not planning on breaking out specific quantities, but it was -- there were several changes in our leadership and a number of changes that we call the regional sales manager level, the people that owned a territory, given usually of a multi-state cluster. So, change in a variety of those, but we've been affecting some of those changes through the year and frankly, but following the disappointing outcome we accelerated and took some action we think was appropriate and think positioned us for success going forward.

Can you remind us how many regional sales managers you have?

So, the worldwide sales force, this includes system engineers and channel inside/outside it’s in the range of about 180 people. Regional guys are in the -- it's probably in the 70 to 80 range would be the number of regional sales managers around the world.

Okay. Kind of given kind of the challenging track record of later maybe even since becoming public, when do you think it's reasonable to just aggressively take a look at the cost structure of the company to drive sustainable profits. Obviously, you've got wonderful products, very few companies have the type of gross margins you have. So, the perceived value of your product is extremely high. And so, given the challenges of the market and the expansion of the distribution channel and the new OEM agreement, it seems if we targeted something in the lower growth category versus double-digit growth with the rightsizing of expenses, the company could be very profitable?

So, there's a lot to answer in that question. But I would say that the rightsizing of the company has occurred all year long right. If you look back -- look at our year-over-year expenses, look at our meaningful sequential decline, we think it's very important to get profitable. I think even with higher estimates the levels of profitability we got to this year on disappointing topline growth, poised to the fact that we view that as a very important metric. So yeah without answering your question directly saying do we need to get to a certain level, yeah, we think we're close to that level. We'd like to see some topline growth to get some leverage in the P&L. But we view profitability is an extremely important metric for us to achieve and maintain and it's not a direct answer, but an important context and something to understand what you're getting at. But one of the important things is we've driven kind of a massive transformation in our product line and our engineering execution over the last year. And we look at the roadmap of the things that we've just announced over the last few months including SD-WAN, the A3 authentications through access platform, the AX roadmap that portfolio we have in front of us is frankly the most exciting that we've had in the company's history. And we want to make sure that we are able to capitalize on what products team has done over the last year and half as we've really accelerated that machine. So clearly, we're going to be watching that. We expect that those actions will all lead to interesting growth. But at the same time, we're going to manage as we said to be -- our target is to -- have non-GAAP operating profitability through the year and we're going to manage that and expect that we get more leverage from topline growth taking advantage of the products we are delivering.

Okay. Great. Thank you.

Thank you.

We’ll hear next from [Zach] with Dougherty.

Thanks Zack on for Catharine Trebnick here. Just a couple of things. So, first I think you mentioned last quarter that through Q3 you had added or maybe it was activated 900 of hours. So, I'm wondering, if they've had any impacts with the weak sales they kind of thought that the channel would be a bigger piece of that. And if you see any impact on that in 2018 and if there were any VARs added in Q4 as well?

Yeah, so we have added a lot of new VARs and you're right we have added them and we continue to add them at a similar pace to be honest. I think want some of our sales execution issues that we took action around where there were some people that weren't enabling and developing those VARs as effectively as we would have liked them to have been to drive growth. We've engaged a lot of VARs and they certainly are contributing but we would have expected them to contribute it, part of that is people have you know people there may be more used to direct - more direct touch. So, we need to change their motion and their behavior to be more channel centric or in some of these cases we needed to bring in people that know how to really develop the VARs more effectively. So that's an ongoing effort. We are seeing more VARs engaging continued progress in that area. But now it's a matter of taking an engagement ramp in terms of revenue contribution.

Got it. And then one of the things, kind of from reminding perspective I know you I said, in Q1 at least for sales and marketing it will increase for Q1 and then decline sequentially. So, I was just wondering how far along these cost reductions are? Are you going to continue to see OpEx as a percentage of revenue declining through ‘18 or ’19? Do you have particular long-term targets for these?

So, to answer your first question I just want to make sure, I was clear. We expect as a percentage of revenue to see an increase in sales and marketing in the first quarter and to step down right through the balance of the year. That's an increase from Q4 to Q1 but it should be a decrease as a percentage of revenue moving forward versus Q1, ‘17. We are improving reducing our OpEx versus Q1, ‘17.

Right, but increasing sequentially. Okay. And then just any sort of long term targets, how long you expect the cost reductions impact the percentage of revenue that OpEx is?

Well I think we expect to get leverage throughout the year on the operating margin line right. So, when you look at obviously depends what revenue number you're starting with. If we expect to get to non-GAAP operating profitability with the exception of Q1, you'll see a natural progression of that improved leverage as the year goes forward.

Got it. Thanks.

We'll move to Doug Clark with Goldman Sachs.

Hey thanks for taking my question. My first one is, I want to understand the sales execution issues a little bit before because it's not really reconciling is the comment that linearity in the first two months of the quarter was kind of as expected and then the issues uncovered in the last month of the quarter. So, can you provide a little bit more detail to kind of what was being over modeled or what the underlying issue was and then exactly how you've addressed that on a go forward basis?

Yeah, I think the primary issue was - we were operating with sales forecast that substantiated the guidance we'd given, we'd see normal linearity and they had a projected close for what was going to happen December and then just fully closed substantially less than what was the projections. So, I think the execution issues were not adequately assessing the realistic close date and the probability of close inside the quarterly window which led to bad forecasting. And so, as I said we have closed a number of those deals since then in the first weeks of the 2018 which is you know that's encouraging, indicate that in fact some of this much of this was timing, but that kind of forecasting accuracy is pretty serious execution problem we have to fix.

Okay that makes sense. And then on the product gross margin side it's stepped up in the quarter and fourth quarter. I'm wondering if there's anything notable there. And then just looking out longer term, I'm wondering if you can give us kind of a perspective on the gross margin trajectory on the product side as you weigh factors like 11 AX to the extent that that's accretive offset by growth in the business from Dell which may be dilutive or any anything else that I may be missing?

Sure. So, on the sequential side, we're actually seeing improvements in our COGS on the hardware, we overachieved if you will in the fourth quarter. In terms of the longer-term model, we think that there will be modest downward pressure as Dell ramps up and becomes more of the mix with some modest downward pressure on the product gross margin line. But that will be offset with stable or growing gross margins on the subscription and support line. So, I think what that all equates to is kind of a modest tapering of gross margins as the year progresses. Nothing particularly material, but just kind of a downward very shallow downward slope to the gross margin line.

Okay. That makes sense. And then final question, I'm curious if you can give it now or will be in the 10K, but I understand that all being a 10% plus customarily be disclosing exactly what size the customer exposure is?

So, we don't because Dell takes their product through their chosen distributor. So, we don't -- you won't see, excess true, actually not the true case on the OEM business. So, you won't see it in the current 10-Q because it's a mix of both their reseller, which goes through their chosen distributor and the OEM business. So, you have to combine those to get over the threshold. So that ultimately won't be disclosed. Once Dell's OEM business on its own crosses that threshold it will be disclosed in the filings.

Okay. Thanks a lot guys.

Thank you.

And at this time, I'd like to turn the conference back to Mr. Flynn for any closing remarks.

All right. Thank you, all for joining us today. We will be at the Goldman Sachs Conference in San Francisco next week and hope to see many of you there. Good night.

Thank you.

That does conclude today's conference again. Thank you all for joining us.