Extreme Networks Inc (EXTR) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks third quarter revenue results conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded today, Thursday, April 26th, 2007.

This afternoon, Extreme Networks issued a press release announcing the company's revenue results for the third quarter of fiscal year 2007.

A copy of this release is available on the company's website at www.extremenetworks.com.

This call is being broadcast live over the Internet and will be posted on the Extreme Networks website for replay shortly after the conclusion of the call.

The company has asked me to remind you that some of the remarks made during this call may contain forward-looking statements about financial and business guidance, and industry trends and market adoptions, product introductions and customer developments among other factors.

These reflect the company's current judgement on those issues.

Because these statements are filled with future events, they are subject to risks and uncertainties that could cause the actual results to differ materially.

In addition, all announced results are preliminary and may be subject to change when the review of the quarter is concluded and our 10-Q is filed for the quarter.

Please note that management attempts to end the Q&A session at approximately 3:00 p.m.

Pacific time today.

I will now turn the call over to Mark Canepa, the President and CEO of Extreme Networks.

Please go ahead, sir.

Thank you, operator.

And thank you to everyone for joining us today.

I am going to take a few minutes to discuss top-level highlights of the quarter and talk to you about some of the areas in which we're making progress.

I believe that a number of these improvements are beginning to show up in our numbers.

I also believe that some will take more time to see fruition.

Then I'll turn the call over to Karen Rogge, our new CFO who has been with the company for about three weeks now.

We welcome her to the Extreme team and look forward to letting you get to know her better in the coming weeks.

This quarter, revenue showed a slight sequential decrease to $85.1 million and were approximately flat year-over-year.

If you look back on the last five quarters, each one was marked by year-over-year revenue decline until this quarter.

Given that, we viewed these results as an early indicator that we have arrested the year-over-year revenue decrease in a seasonably soft quarter.

In addition, we continue to make a lot of important progress in key areas, particularly to organize ourselves into the three product groups, put the right leadership in place at the top of those groups and bring necessary change to reinvigorate our sales and marketing organizations.

Progress shows itself in the following areas: bookings of our XOS-based products continued to increase with sales in excess of 50% of product bookings, up sharply as a percentage from Q2.

Bookings of our Summit X450 family, which brings our ExtremeXOS operating system to the edge of the network, were also up sequentially.

I believe this trend will continue as we introduce even more new XOS-based products this month.

10-Gig ports bookings increased sequentially, as did new bookings for POE ports, were, once again, in excess of 10% of total ports booked.

We expect POE ports to continue to grow based on demand for IP telephony and wireless.

Bookings through our Avaya channels, both direction and through resellers, were again in excess of 10% of total product bookings.

EMEA in Asia Pacific, achieved the highest third-quarter booking and revenue performance in their history.

For EMEA, that comes after the strongest Q2 performance in the company's history.

We're very pleased with the success that we're continuing to have in those geographies.

Gross margin percentage without the adjustment for stock-based compensation continued to increase sequentially for both products and services.

We attribute that to ongoing cost control in our supply chain organization and a midshift towards newer products, which have higher relative margins.

Sales, marketing and G&A expenses, without the adjustment for stock-based compensation, restructuring and stock option investigation, all decreased.

R&D was the one expense area that was up during the quarter as we complete the final development, beta testing and product launch activities of our new products, as well as activities related to the design of the fifth generation of our chip set.

Those were just some of the positives.

On the flip side, our product book-to-bill ratio was approximately 1.

Our backlog decreased slightly, but remains above Q1, as we were not quite able to catch up with the demand generated by some of our newer products.

Services revenue were slightly down, largely because of the product mix shift towards more XOS-based products.

I'll address more of the changes we're making in our services structure further down in the presentation.

In general, as we strive to become more solutions-oriented, I believe that services, especially professional and educational services, will need to become a important part of our strategy and an overall larger part of our revenue stream.

A real trouble spot remains in the Americas revenue picture.

Revenue result in the Americas were below what we would expect.

While I believe we're making the changes to turn this around, we did not show sufficient signs of improvement at this quarter.

We believe that the decline is a leveling-off, but we would have liked to have seen more wins and bookings from this key region.

In the Americas, we continue to aggressively focus on sales force retention and have made some progress.

We have cut voluntary attrition by roughly 1/3 of what it had been in each of the last few quarters.

Much of our success in reducing attrition comes from increased efforts to ensure our sales teams have solid marketing behind them.

At the beginning of April, a new Vice President of Worldwide Sales joined the team.

In his first few weeks, he's already giving full attention to key sales support and marketing initiatives, which lie at the heart of solid sales execution.

Again, I believe we have begun to level things off and we're looking forward to seeing further signs of improvement.

Turning to progress on other key initiatives, you're familiar now with our decision to create three product groups, each of which contains engineering, and the relevant market product management and product marketing teams.

These organizations, each headed by a vice president reporting directly to me are all in operation.

We're also building the measurement systems to understand and drive these groups.

On the last call, I announced the that heads of Scalable Products and Emerging Products were in place.

The head of Volume Products has also been in place since the first part of February.

Looking at our business by market segments, in the Metro Carrier and Service Provider Internet segments, we further expanded our global customer base with what we call our Multi-dimensional Ethernet.

We won business at India's [Gromian] Phone Limited to serve with the bandwidth aggregation switches for a mobile packet backbone network.

This is a multiple-month project that further signals how communications networks are leveraging the scalability and cost-effectiveness of ethernet technology.

Our solutions are also part of two mobile phone companies in India, Ideal Cellular and Barthi Cellular Limited, where we deliver the data transport portion of their networks.

We also continue to support traditional triple-play applications with various new customers across Europe in connection with our partnerships with Ericcson, Nokia and Siemens.

(Inaudible) and [T2] Slovenia are just two examples of that ongoing work.

We also completed the design and entered beta testing of the smaller form factor [BB 12k] to drive our hierarchical quality of service technology closer to the edge of the aggregation layer in Metro Ethernet.

This is part of our strategy to drive more intelligence at the edge, which enables more cost-effective and scalable [Layer 2] networks.

In summary, the expanded [BB 12k] family will allow us to deliver more scalable capabilities to the telecommunication and service provider industry.

As part of our continued focus on the carrier and service provider segment, we're moving ahead with the development of our fifth-generation [ASICS] chip set, which enables even higher functionality networks for the telecommunication, enterprise and data center markets.

The decision to move forward with the new chip set is based on our strategic decision to continue driving a strong presence in the carrier market.

In the enterprise segment, we want a number of significant new customers in our key verticals, in higher education, wins included Kansas State and Villanova Universities and also in Italy's University of Milan Bicocca and in the U.K.'s famed Valley University.

In healthcare, we were selected to bring a wireless solution to the wired network at Toronto's Saint Michael's Hospital, a world-renowned academic science health center with a staff of 5,000.

And in the financial and government sectors, wins include Thornburg Mortgage, a nationwide lender, as well as the London Underground, which elected us to conduct a significant network renovation.

We're also winning more emerging market opportunities, such as in Asia Pacific, where we have won business with the China National Offshore Oil Corporation.

By focusing on these enterprise industry verticals, we can be more solutions-oriented when responding to particular needs and distinguish ourselves from the competition.

We believe the features and capabilities we have developed for these industries can be readily applied to other verticals of interest, such as state and local government, K-12 education and media.

The support our enterprise market focus this week, we introduced the Summit X250, a 10/106 configuration switch, in 24- and 48-port models with POE available in every port.

With this product announcement, we have further driven our XOS operating system capabilities and delivered functionality that you would only expect at the core of the network, all the way out to a cost-effective 10/100 edge platform.

To further show our commitment to provide enterprise-capable products at the edge of the network, we also announced an extension to our wireless product line, with even more scalable capabilities.

The Summit WM200 and 2000 LAN controllers provide an easy way to manage secure and deliver highly-scalable wireless LAN solutions.

Also this week, we announced the release of our XOS operating system, version 12.0, which now supports Summit Stack for unified management of fixed-configuration switches as a single virtual switch.

With VoIP continuing to be a very important application, the ability to provide highly-scalable functionality with rich capabilities such as IPB6, universal port management and full stacking capabilities in a low-cost platform is truly a first for the network industry.

The X250 switch, coupled with XOS, drives rich enterprising carrier features from the core to the network edge.

We're bringing these efforts together under a single marketing launch named "Taming the Chaos at the Edge," reaching out to key press, industry analysts, channel partners and customers in support of our sales force.

Other progress during the quarter include putting in place a Vice President for our Operations and Supply Chain team, reporting directly to me.

In addition, you have heard me talk in the past about how I view the increased importance of support, professional and educational services to the success of the company strategy.

As part of our focus on it, I have decided to make Services its own group under a Vice President who will also report directly to me.

We have already initiated an external search for a VP of Worldwide Services.

Finally, Karen Rogge, the company's new CFO is on board.

I want to thank Mike Palu for his tremendous effort to accomplish both his controller's job, as well as that of the acting CFO while we conducted this very important search for the company.

With Karen on board, our senior finance team is essentially complete and we can begin in earnest a top-down financial analysis of the company, to find areas to improve efficiency and take out cost.

With that I would like to introduce Karen Rogge our new Chief Financial Officer.

Karen.

Thank you, Mark.

I'm delighted to join you and the talented team at Extreme Networks.

In the weeks and months ahead, I look forward to speaking with many of our shareholders and colleagues in the investment community.

Today, I will briefly review our revenue results for the quarter and some of our key balance sheet metrics.

As previously announced, the company's Board of Directors has appointed a special committee of independent directors to conduct a review of the company's historical practices for stock option grants and accounting for stock option grants.

The company has reached a preliminary conclusion that the appropriate measurement dates of certain stock option branch for financial accounting purposes differ from the recorded grant dates of those awards and we expect to restate our prior financial statement.

As a result of the ongoing investigation, and the expected restatement, we are unable to provide detailed GAAP or non-GAAP financial statements.

The special committee has not yet completed its review of historical stock option grant practices.

We intend to file our 2006 10-K, as well as the 2007 10-Qs after the committee has completed its review and we have completed our documentation and external audit of the applicable accounting and tax treatment.

Now, let's take a look at revenue.

Revenue for the quarter was $85.1 million, consisting of $69.6 million in product and $15.5 million in service revenue.

Overall, revenue was down 2% sequentially.

The third quarter is a seasonally down quarter for the company.

Revenue was slightly down in comparison to the year-ago quarter of $85.5 million.

Products revenue was $69.6 million, down 2% sequentially and up slightly from the prior year.

Service revenue was $15.5 million, down 2% sequentially and 5% from the year-ago quarter.

Our product book-to-bill ratio was approximately equal to one and our service book-to-bill ratio was less than one, due to normal seasonality.

Looking at revenues on a geographic basis, in EMEA, including our European operations, the Middle East and Africa, our revenues were $34.1 million in the quarter.

This Is down 6% or $2.3 million sequentially and up 2% or $500,000 from the year ago quarter.

In the U.S., revenues were $30.8 million, down 2% or $700,000 from the December quarter and down 9% or $3.1 million from the year ago quarter.

Revenues in Japan were $5.6 million, an increase of $1 million or 22% from the second quarter.

This is the first quarter of sequential revenue growth in Japan for the last five quarters.

Revenues in Asia outside of Japan were $13.7 million, an increase of 3% from the preceding quarter and 47% from the prior quarter.

Revenues in other geographies, primarily North America outside of the U.S., were approximately $900,000, consistent with the December results and the year ago quarter.

Shipments of modular products represented 45% of sales and stackables 55% of sales, which is consistent with the prior quarter results.

The split of enterprise sales and service provider sales with 75% and 25%.

This is a slight shift toward enterprise sales as compared to the December quarter.

Now, I would like to comment on a couple of trends affecting our costs.

Looking at gross margin trends, excluding the effect of stock-based compensation, we saw overall gross margin improvements this quarter in compared to the prior two quarters.

Product margins improved due to a shift in product mix towards our newer products and lower period costs, such as inventory obsolescence.

Service margins increased sequentially, driven by ongoing cost control initiatives.

My following comments will provide trends on operating expenses.

Note that these comparisons exclude stock-based compensation, costs related to our options investigation and restructuring charges.

Overall, operating expenses were higher in Q3 as compared to Q2, primarily on higher R&D expense.

We made incremental investments in the quarter to support the Q4 product launches described by Mark.

In addition, we are beginning the investment in our next-generation [ASICS] and modular family of products.

We expect R&D costs to continue to trend higher in comparison to the first half of the fiscal year due to continued investment in the next generation [ASICS] and modular products.

Sales and marketing expenses trended down in Q3, as compared to Q2.

Overall G&A remained relatively flat on a sequential basis.

However, our third quarter G&A expenses do include approximately $900,000 more in legal defense costs than recognized in our fiscal Q2 period.

We expect to continue to incur higher legal fees related to intellectual property litigation in the next several quarters.

Regular head count at quarter end stood at 880, up from 874 at the end of the December quarter.

This increase was due to much lower attrition than we had experienced in prior quarters.

In acknowledgement of the lower attrition rates, we have tempered our hiring practices and expect head count to trend lower going forward.

Other income was $2 million in the quarter.

Total shares used to calculate diluted earnings per share in the quarter were 115.3 million, shares used to calculate basic APS were 113.6 million and total shares outstanding at quarter end were 114.1 million.

Now, I will turn to comment on the balance sheet.

Cash and cash equivalent, short-term investments and marketable securities on April 1st totaled $214.7 million, an increase of $10.6 million sequentially.

This increase in cash and investments is a result of positive cash flow from operating activities.

Other items affecting the company's cash flow in Q3 includes capital expenditures were approximately $1 million, depreciation and amortization was approximately $2 million and amortization of the warrant was $1 million.

Net inventory at quarter end stood at $22.2 million, a decrease from the $23.2 million at the end of Q2.

Inventory turns to stood at seven for the quarter.

Accounts receivable was $25.1 million, down from $30.2 million sequentially, primarily due to lower billings compared to the December quarter and improved collections.

DSO at quarter end stood at 27 days, an improvement of four days in comparison to Q2.

Accounts payable was $19.2 million, compared to $16.7 million in Q2, driven by efforts to smooth the timing of inventory purchases over the quarter.

As a reminder, we do not provide specific financial guidance for upcoming quarters.

Investors should note our quarters are back-end loaded with approximately 50% of our business done in the last month of the quarter and it is fair to say that our visibility can be limited.

It is still the case where one or two large deals a quarter can make a difference between sequentially up or sequentially down revenue results.

With that, let me turn the call back over to Mark.

Thank you, Karen.

Before we open up the call to your questions, I want to recap my remarks.

The March quarter was one in which we made progress by bringing on board three additional members of the senior management team, including the Worldwide VP of Sales and the CFO.

We also completed the development of several key new products to reinforce our capabilities to bring significant intelligence and control to the edge of the network.

We began to see more stability in the Americas sales team as an early indicator to potential business improvement in this geography.

While the expected business results are not yet there, we continue to focus on improving the health on this part of the business.

Finally, I want to offer a sincere note of thanks to all of our dedicated employees.

We're working very hard to bring Extreme Networks back to sustained growth and profitability.

I know that my expectations for the success of the company are shared by each one of you.

Thank you.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Our first question comes from Tim Long from Banc of America Securities.

Please go ahead.

(Inaudible) this is Jeff [Luberg] dialing in for Tim.

Couple questions.

First, in the U.S., the weakness there -- to what extent is that a macro-issue versus a company-specific issue?

And then, do you believe some of this weakness is due to the products that you're offering and, I guess, what kind of time doing you expect on the new chip sets?

Lots of questions there.

The first one is, we don't believe that it's a general market issue.

While probably the expectation for the market growth overall worldwide and the market growth in the U.S.

by reading the probably the same reports you can read, are generally showing that the overall industry growth is likely to be a little lower in 2007 than it was in 2006.

We believe that primarily our continued softness in the Americas is one of execution within the company.

It is an issue that we have been working on for the last several quarters.

The reason we say this is that our performance outside of the U.S.

continues to be relatively strong and we use the same product line in most of our geographies.

And as we do compete for business, what we find that while there are some subtle differences in various parts of the world, by and large the telecommunication problems of enterprises and carriers tend to be relatively, relatively consistent.

So we believe that it's an area where we have to focus on our capabilities and just (Inaudible) better.

Regarding the chip set, we, following the last couple of quarters of me being on board, we did an extensive analysis and assessment of the markets we have been in and I have been keeping you apprised the markets we were going to enter and remain in and last time I told you that we had made the decision to remain positively focused on the carrier space.

With that in mind, our fourth generation chip set, which is built into the products that we're currently shipping, is part way through its lifecycle.

And chip sets take a number of years to develop.

So, it was time to begin in earnest the process of getting the next generation going.

It will be some time before you see product to come out of those technologies.

Can you talk about what's left to be done with the filings?

Is it just a procedural issue at this point in time or is there additional due diligence that's going on?

I will let Karen take a stab at that one.

Well, as we previously stated, we reached a preliminary conclusion to the ongoing review.

That conclusion is that the appropriate measurement dates for financial accounting purposes for certain stock option grants differ from the recorded grant dates of those awards.

And while the evaluation of the accounting impact of that is still ongoing, the company and our audit committee have concluded, after consultations with management and independent advisors, that additional non-cash charges for stock-based compensation expense will be required, that will be material with respect to certain fiscal periods.

What I can tell you, Jeff, is that this is my number one priority to get through.

We would all like to have published financials and that is as far as I can comment at this point.

At this point in time is this matter just a folder sitting on the regulators' and the auditors' desk waiting to be reviewed?

Is that how we should think about it?

Jeff, I think we've commented as far as we can.

The special committee is still working the issue and we're working through the process.

That's as far as we can comment at this point.

All right, thank you.

Thank you, our next question comes from Ryan Hutchinson with WR Hambrecht.

Please go ahead.

Good afternoon, can you hear me?

Is this Ryan?

It is, yes.

Hey, Ryan.

How are you doing?

I'm doing well.

Great.

I just want to get a sense of the overall OEM sales in the quarter and what plans you have to develop new relationships there or strengthen existing ones.

So, I talk a little bit about it.

You saw that we announced the WM, the WM200 and 2000.

I preserve -- I think you asked me the same question last time, right?

When you say by OEM, you assume the products, the technologies for which we partnered to bring into the company.

Well, I'm talking just your strategic relationships that you have, Avaya and some of the others.

All right, so it gets asked both ways.

Okay -- (Inaudible) that one.

Our strategic outgoing partner relationships continue to be strong.

To re-emphasize today we have three major strategic partners.

They are Avaya and together with the Avaya business partner community.

They are Siemens.

They are now, they are Ericsson and I guess, now for the first time, we can talk about the part of Siemens that broke off from Siemens and joined Nokia into the joint venture called Nokia-Siemens.

Those are the primary four partners from a strategic nature that we go to market.

Those relationships continue to be very strong.

Revenue continues to be very strong there.

We have key senior sales focus that are focused on those accounts.

I have personally visited with all of those accounts in person here over the last 90 days, and I continue to be very pleased with the amount of common business development that we're able to generate through those go-to-market partnerships.

And just in terms of how we should look about that moving forward, the Avaya relationship seems pretty formal, but talk maybe about it.

Is there going to be a strengthening of the relationship with the existing strategic partners you have in place or is there a strategy to develop new ones moving forward?

Certainly the -- my belief is that the relationship with the partners I have mentioned is going to continue to strengthen.

Certainly, I'm spending a lot of my personal energy and attention visiting them at the highest levels of their respective corporations and then any time I'm in a geography, I make it a point to visit the local partner office and talk to the highest level of management in any one country, so that they know directly from me why this stuff is so important.

That said, with our continued focus on the carrier market, we continue to find ways to either do more here or find other partners.

I can't quite comment on any further partnerships at this point.

What we have done internally to our marketing organization is that we have formalized a Carrier Solutions marketing team and that is specifically focused on driving solutions in the Carrier Metro Ethernet service providers base.

So when that came in place this quarter we're beginning to see the output of that team enable the furthering of these strategic alliances.

We have also created and formalized a Voice Application Solutions team within our marketing organization.

So for those voice-intensive applications, obviously Avaya being the largest, but there are also large elements of Siemens Enterprise that are focused on VoIP.

We mentioned in the past, joint programs with companies like ShoreTel and so on in this space, so we continue to put a lot of energy focused on those markets.

It's fair to say we should expect to hear more on this front over the next several quarters?

Absolutely, we've been pretty consistent in saying that carrier is a huge market for us.

That within the enterprise space, we focused on a number of these verticals, that a common theme across the verticals is the need for sophisticated voice over IP, IP telephony solutions.

So, that is a common theme across our enterprise space.

Okay, and then just a couple followups on the gross margin.

Should we expect them to continue to improve here?

Obviously, we're working very hard on our supply chain.

I have been saying that pretty consistently for the last couple of quarters.

If you have seen one of the changes that I have made to strengthen that, is I separated the services organization from the supply chain organization.

I promoted one of the persons in there to be the Vice President of it, reporting directly to me.

We're shining a massive spotlight on our supply chain.

We believe that there is, over the next several quarters there is continued room to improve there.

I have been telling you about the fact that we moved our 8800 product from a traditional manufacturing methodology to more of an ODM methodology, using an Asian supply chain.

Little by little, we're beginning to see improvements in that area.

We can -- the X450 product that we released back a quarter or so ago is gaining a lot more traction.

As I mentioned to you, that product has pretty good margins and so you're beginning to see that reflected.

Karen is now on board and I am giving her the power to go look under every rock in this company to find efficiencies and cost improvements.

Certainly our supply chain has areas that can stand scrutiny and so we're going to be looking very carefully on that.

Tough to make predictions.

If the product mix shifts certain ways in the short-term, we could see gross margins bounce around a little bit, but secularly, we're working pretty hard to drive the supply chain to improvement.

Okay, and then finally a clarification on the OpEx.

Was it higher this quarter than last quarter?

Yes, Karen mentioned that OpEx this quarter was a little bit higher than last quarter.

I wanted to make sure that we got those three or four projects that we got done done, and out there and in shipping and in the hands of the sales force to give them as much runway as possible with Q4.

So we got that done.

In addition, as I said, we began to spend a little bit of money.

There was kind of a big lull in our silicon development effort over the last several quarters.

While we were enjoying the fruits of the fourth generation and now, it was beginning to kind of pour a few more dollars into getting that fifth generation chip set going.

Okay, and then I guess as we look into next quarter, should we expect that the OpEx trends should start to see some cost-cutting initiatives take place and a benefit from that?

I'm sorry.

Which part of cost-cutting were you referring to?

Next quarter in terms of OpEx trend.

I'm trying to get a sense -- are we going to see OpEx continue to sort of creep a little bit higher overall?

We're working really hard on OpEx.

As Karen said one of the good news that happened over the last 90 days is that for whatever set of reasons, attrition markedly slowed down in a number of areas in the company.

Quite a bit in the sales force in the Americas as I mentioned, but really a lot.

We experienced a lot lower attrition in engineering than we expected.

And with engineering, you've always got a queue and especially for hiring outside of the U.S., that queue can be quite long.

When we noticed a decrease in attrition, clearly we took immediate action on it, but it takes a little bit of time to kind of flush the pipe.

And so we believe we're largely through that, we got our handle on that and we're taking the appropriate action to get the stuff heading in the right direction.

Great, thanks and good luck.

So.

Just questions, kind of one question in the queue at a time.

Other questions?

Thank you, we have one question coming from Matt Shimao, please go ahead, with Bear, Stearns.

Hi, guys.

Karen, welcome aboard.

Thank you -- hi.

Can you hear me?

Maybe a clarification and then a question, if I may.

Okay.

First the clarification.

I think I heard that you said the services revenues were down because of the mix shift towards XOS-based products.

That's not intuitive to me, so if you could clarify that, I would really appreciate it.

Ask the question again, I'm sorry?

I didn't quite catch -- I.

I think I might have misheard.

I think I heard you say in your prepared remarks, Mark, that the services revenues were down because of a mixed shift towards XOS-based products.

Yes, so, there is a number of elements here that are kind of coming together.

Certainly the last set of XOS-based products that we introduced tended to be lower in product, a little closer to the edge, like the X450-based products.

And as the product line revenue shifts around a little bit between more core products or more edge products (and depending on the richness and newness of our product line it kind of wanders around a little bit) when we tend to sell more core-based products, when that part of the product line tends to be -- the mix tends to head a little bit in that direction -- as can you imagine, our customers will tend to buy a richer set of support, professional, educational services around it because it tends to be in the heart of their network and so they -- any network outage or missed architectural design in that part of the space can have pretty sizeable consequences to their network operations.

When they buy a relatively more products a little bit more out toward the edge, those products tend to be a little bit simpler, a little bit better package and so the relative quantity of services that get dragged along with it tend to be a little bit less, right?

They don't require much (Inaudible) as in implementation and the support services tend to be a little simpler and straightforward.

So, those things tend to bounce around a little bit.

That is one area.

The second area in general is our XOS-based products.

And as XOS continues to get better, our CLIs, the ability to program get better, our GUI gets easier to use.

The ability of the customer themselves to perform certain things that in the past they might have had to come and ask for our professional services, help might be might be a little bit less.

And so, in general, we see that, obviously, our XOS operating system does a really good job making things simpler, which is the whole idea of it.

We want to make these implementation as simple as possible, we want to make more customers comfortable with installing and implementing these things.

Kind of a little bit of the flip side is sometimes we sell a little bit less professional services and so on with it.

In general, I want to provide a richer set of services, which, is why I have chosen to hire a full-time Vice President of Services, somebody that can come in here and really plot out a strategy over time to say, okay, how do we get a richer services mix, how do we become a little bit more strategic about the services component as part of the overall solution?

Great, that's helpful.

My question is why are you -- why did you make the decision to not continue to hire?

I guess, is this a near-term decision or is it your plan to go maybe a year without adding significantly to the head count?

Well, it's because of all the variables in play, right.

I want to balance the head count in the organization.

Therefore, the expense of the organization with the the margin and the revenues and the growth that we're able to produce and so on.

And so they're all, several parts that are flying together and are being looked at in their entirety.

As I mentioned in the past, I want to make sure that we have a real tight control in our expenses and, as I mentioned in the past, the area we're subject to the business growing we will continue to feed the head count into the sales force, to a little bit of an extent to the marketing support behind the sales force.

I want to be very judicious at only spending the requirement to support the business.

I believe there are some areas in the company where efficiencies can be significantly improved.

Now that Karen is on board, as I mentioned, we're going to take a top-to-down view.

It's something that probably we might want to have started sooner, but you well know with the ongoing stock option investigation kind of consumed the minds of most of the senior finance staff in the company, and so with the completion now of the senior management team in finance, we can get on to it in earnest.

So, when you're faced with those variables, you want to approach this thing from the cautious side rather than the aggressive side.

Thank you very much, good luck.

So, with that, my understanding is that since there are no more questions in the queue, I want to thank all of you for joining us today.

Karen and I look forward to updating you with our continued progress on our next conference call.

So, thanks again.

Look forward to seeing you soon.

Thank you, ladies and gentlemen, this concludes the Extreme Networks third quarter revenue results conference call.

If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 with a pass code 11087718 followed by the pound key.

Once again, that number is 1-800-405-2236 with a pass code of 11087718 followed by the pound key.

Thank you, you may now disconnect.