Extreme Networks Inc (EXTR) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks 2008 first quarter 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 conference is being recorded today, Wednesday, October 24, 2007.

This afternoon Extreme Networks issued a press release announcing the Company's financial results for the first quarter 2008.

The copy of this release is available on the Company's Web site at extremenetworks.com.

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

The Company has asked me to remind you that this conference contains forward-looking statements that involve risks and uncertainties including statements regarding the Company's expectations as to products, trends and our performance.

There can be no assurances that any forward-looking statements will be achieved and actual results could differ materially from forecasts and estimates.

For factors that may affect the business and financial results please refer to the Company's filings with the Securities and Exchange Commission including without limitation under the captions, "Management's Discussion and Analysis of Financial Condition and Results of Operation and Risk Factors" which is on file with the Securities and Exchange Commission at www.sec.gov.

The Company undertakes no obligation to update the forward-looking information in this conference call.

Throughout this conference call the Company will reference both GAAP and non-GAAP financial results.

The Company has provided a reconciliation table of GAAP to non-GAAP information in the tables that accompany the press release on its Web site.

Please go to the Investor Relations section of the Company's Web site at www.extremenetworks.com.

In addition, all an announced results are preliminary and may be subject to change when the review of the fiscal quarter is completed and/or a Form 10-Q is filed.

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

Please go ahead sir.

Thanks, Vince, and thank you all for joining us.

I will discuss some of the highlights of the quarter, point out the areas where we continue to make progress and describe how we are positioning Extreme for continued long-term success.

Then I'll turn the call over to Karen for details on this quarter's financials.

The majority of metrics demonstrate that this was an excellent quarter, particularly as it comes on the heels of solid performance a quarter ago.

Top line revenue was up both sequentially and year-over-year to the highest it's been in seven quarters.

Yet again, the strength came from product sales which increased 9% over Q1 '07 and 3% sequentially.

In FY '07 we established a revenue baseline from which we would begin stable and predictable business growth.

In Q4 we showed that we were able to deliver year-over-year growth.

This quarter shows further improvement with continued top line revenue growth plus a material improvement in EPS.

This continued performance is due to a number of factors.

The networking industry in general and the Ethernet segment in particular continue to show strong growth.

We have positioned Extreme to participate in a $35 billion market.

New applications such as IP telephony, video, triple play services and security continue to drive the need for more bandwidth and more control over the allocation of that bandwidth.

Ethernet, which has been the logical choice for enterprise connectivity, is now increasingly becoming the logical and cost effective choice for many carrier applications as well.

Within the broad Ethernet market an increasing number of applications requires sophisticated network implementations.

Whether it is a carrier who wants to deliver new triple play services at an affordable price or a customer with an application that requires state of the art latency, bandwidth and multi cast capabilities we have positioned Extreme to focus on enabling and simplifying the infrastructure to address these complex networking requirements.

This has been and will continue to be the central mission for our organization.

Looking at our customers and markets we continue to demonstrate solid traction in both of the enterprise and the metro carrier service providers verticals.

The unique and differentiated features of a single scalable architecture, one operating environment from edge to core, and our ability to deliver state of the art [inside] and control enable better TCO and allow us to win new and larger accounts.

In health care, we were awarded business by several hospitals, including a large deal with Jacobi Medical in New York.

Jacobi is the largest public hospital in the Bronx serving some 1.2 million New Yorkers.

They chose our platform over other vendors because of our high performance capability to support a wide array of wire, wireless and security applications.

In Hong Kong we continue our work with the Hong Kong Hospital Authority.

Extreme has been building out numerous hospitals in the region over a multi-year period.

Our core to edge solutions provided this customer reliable, secure and high-performance networks that support the entire range of medical applications.

In higher education we were awarded business by a number of colleges including Oklahoma State University, Texas Christian and the University of Mexico City.

In addition to the business from colleges, we're also winning business within the secondary education market as represented by Silver Valley Unified School District in California and the Allegheny County Public Schools in Maryland, as well as public school districts in Palm Beach, Florida and Marysville, Ohio.

In the hospitality segment building upon the success of implementing Extreme in their Las Vegas operations, the Wynn Resort Macau has finished the deployment of its new Extreme network.

Wynn has built a new hotel and resort community that features our scalable wired and wireless network infrastructure giving their guests a highly connected experience throughout their stay.

We continue our trend of selective wins in the financial services sector.

The Extreme solution and our differentiated capabilities delivered some major wins within the German financial markets, namely SAB Dresden and WestLB Bank.

We also recorded a number of wins in the government segment.

In France, the INRIA, the French institute specializing in computers and automation research, chose Extreme Networks to deliver their new converge network.

In the United Kingdom, Extreme was selected to provide network upgrades for both the Hampshire and Derwentside city councils.

In India we saw a significant win with the ministry of foreign affairs.

The metro market, or the carrier service provider market, has always been and remains an area of focus for us.

We continue to win large deals worldwide including Brazil's Internet Gratis.

Brazil is one of the most rapidly growing world economies and IG is one of that country's largest Internet service providers and one of the leaders in data hosting and colocation providers that chose Extreme as their strategic platform.

We won business with Millicom International Cellular which has operations in 16 countries in Europe and South America.

They chose Extreme because of the capabilities and functionality of our data transport in conjunction with the Ericsson's GSM GPRS solution, our partner for this business.

Business with our strategic partners Avaya, Ericsson, Nokia Siemens Networks and Siemens Enterprise, continues to be very strong and grew faster than the overall Extreme business.

We continue to foster these partnerships as a major part of our growth strategy.

In particular, this year we're very focused on replicating the U.S.

success of our Avaya partnership in Europe.

Turning to products.

We continue to expand our portfolio.

Two weeks ago we officially unveiled the newest member of the line up, the Summit X150.

This switch was specifically designed to enable the deployment of our successful XOS operating system in a cost effective enterprise edge product at a starting list price of under $1,000.

This product effectively extends our reach to help customers dramatically lower costs while also simplifying network deployment.

With the launch of this product there is no longer a need for a cost conscious enterprise to deploy feature-poor commodity edge product from another vendor within their network.

Extreme can provide the entire solution based upon one operating system with one common set of products which are easier to architect, deploy, optimize and manage.

Sales and marketing team executed well again this quarter.

The Americas was the real standout again with revenue up 18% year-over-year.

Our channel model continues to gain traction in the U.S., the transaction size is increasing, and we continue to hire great people.

Whether it is a system integrator looking for great networking solutions as part of a larger project or an Avaya business partner driving a large IP telephony or convergent project, we are seeing our channel partners as an increasingly strategic part of our growth plan.

Revenue was up faster than the market, the enterprise business is strong, there are more big deals and the team is executing.

In EMEA, we continue this quarter with solid business performance even though at a level somewhat below the last few quarters.

Our ongoing success in EMEA was partly due to a solid expansion strategy in new countries, particularly in Eastern Europe.

Going forward, we will continue to capitalize in the emerging region of Eastern Europe while also increasing our focus on the larger, more traditional Western market.

To this extent, three months ago we brought on board a very seasoned network sales executive to lead our EMEA geography.

We see the opportunities and we're staffing to get them.

Asia-Pacific delivered solid results with revenue up 6% year-over-year and 35% sequentially.

Last quarter we combined Japan with the rest of the APACs sales geography under the leadership of one Vice President.

He is actively engaged in continuing the relationship with NTT and with building enterprise focused channels.

The turnaround with the new Japan management team is promising, but has not yet materialized in terms of results.

In the area of services we brought on line a new offer for subscription based training.

Two of the major wins I previously discussed also had high services content from our PS practice.

Having said that, the maintenance revenue stream from our support contracts declined year-over-year mostly due to the end of life of certain contracts in Japan.

While these factors have negatively impacted our services financials in the short-term, our focus continues to be one of meeting the needs of our customers with new and evolving offers and grow this piece of the business.

In all, chosen verticals are strengthening, costs are under control and profits are growing.

I'll let Karen give you the good news on the product margins which continue to improve nicely as we work very diligently to bring real discipline to our supply chain and as we continue to shift towards newer products.

While the gross margin percentage will continue to bounce around somewhat quarter-to-quarter due to the timing and discounts of particular business, we're paying very close attention to things that in the aggregate really add up.

We still have work to do on our service margins but with our increased attention to the services area we are optimistic that over time we will see those margins come up as well.

With that, I'd like to turn it over to Karen.

She will speak in more detail about our financial results.

Karen.

Thanks, Mark.

We're very pleased with Extreme's financial results demonstrating measured growth as compared to both last quarter and the year ago quarter for revenue, gross margin and earnings per share.

Starting with revenue, total revenue was $89 million, an increase of 6% over the year ago quarter and 2% over last quarter.

Product revenues totaled $74.1 million, up 9% over the year ago quarter.

Our product book-to-bill was slightly above 1 for the quarter.

Service revenues were $14.8 million, down 3% from the prior quarter and down 6% from the year ago quarter.

In comparison to the year ago quarter our maintenance contract revenue stream has trended down as anticipated, due to the completion of extended term contracts amortized over five years and our transition from a mandatory toward an elective support contract renewal.

Over time we look for our professional and educational services to become more integral to the Company's financial success.

Taking a look at sales by the markets we serve, the percentage of enterprise to service provider sales was 79 and 21% respectively.

Trends in service provider sales increased 3 percentage points from the prior quarter.

The average service provider sales was 23% of total sales over the past four quarters.

I will now briefly update you on our product revenue metrics.

This quarter sales of XOS-based products continued to grow and were about 60% of product bookings.

We have substantially completed the transition to XOS-based products and going forward we will no longer report this metric.

The ratio of stackable and modular product sales was 63% and 37%, respectively, and comparable to the prior quarter.

Bookings for POE ports increased sequentially and grew above 37% of total ports booked, up from 33% in the prior quarter.

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

Looking at revenues on a geographic basis.

U.S.

revenue was up 19% year-over-year and flat sequentially to $40.7 million due to increased customer demand for our products.

EMEA revenue, which includes our European operations, the Middle East and Africa, was $30.9 million, down 7% from the prior quarter and 6% from the year ago quarter.

Revenue in Asia Pacific, which includes Japan, was $16.5 million, up 35% from the prior quarter and 6% from the year ago quarter.

Revenues and other geographies, primarily North America outside of the U.S., was $0.9 million for the quarter, $0.7 million for the prior quarter, and $1.1 million in the year ago quarter.

Now I'd like to comment on trends affecting our gross margins excluding the effect of stock-based compensation.

Please note we have included in our press release a reconciliation of GAAP to non-GAAP financials.

Total non-GAAP gross margin as a percent of sales was 55.4%, up slightly from the prior quarter and up 350 basis points from the year ago quarter.

Product non-GAAP gross margin as a percent of revenue was 58%, up 140 basis points from the prior quarter and 450 basis points from the year ago quarter.

The increase in gross margin from the year ago quarter was primarily due to the mix of new higher margin products and reductions in both warranty charges and distribution charges.

The reduction in warranty charges for the quarter is due to product quality improvements in comparison to historical levels.

Non-GAAP service gross margin as a percent of revenue was 42.2%, down from the prior quarter and the year ago quarter due to lower revenue and to proactive service upgrades on a few of our key legacy accounts which are nonrecurring in nature.

Our non-GAAP operating expense, which excludes stock-based compensation and restructuring charges, was $46.7 million, down 5% from the prior quarter and down 1% from the year ago quarter.

The decline in operating expenses from the prior quarter is due to our restructuring actions in Q4, fluctuations in project materials for R&D, seasonality of sales incentive compensation and lower intellectual property litigation charges.

Litigation charges for the quarter were $0.8 million, down $0.5 million from the prior quarter.

Overall we continue to expect our non-GAAP operating expenses, excluding litigation, to be in the range of 45 to $48 million over the fiscal year.

Other income was $2.5 million and primarily includes interest on our investment portfolio.

Non-GAAP net income was $4.7 million, or $0.04 per diluted share and up from a $0.01 loss in the prior year quarter.

This excludes $1 million in stock-based compensation charges.

Total shares used to calculate non-GAAP diluted EPS were 115.2 million and total outstanding shares were 114.7 million.

GAAP net income for the quarter was $3.6 million, or $0.03 per diluted share.

Now moving on to the balance sheet.

Total of cash, cash equivalents and investments were $224.7 million, an increase of $8.9 million compared to the end of Q4.

During the quarter we generated $7.2 million in cash flow from operations and $1.8 million in proceeds from employee stock option exercises.

Day sales outstanding was 27 days at quarter end, an increase of three days sequentially.

Days payable outstanding was 38 for the quarter, down from 49 in the prior quarter.

Total inventory for Q1 was $25.2 million and in line with last quarter.

Inventory turns were 6 for the quarter, down slightly from the prior quarter.

Total deferred revenue was $42.9 million and up from $0.5 million, up $0.5 million from the prior quarter of $42.4 million, and Cap Ex was $0.5 million for the quarter.

In conclusion, we are pleased with the Company's performance for the quarter.

We have continued to improve our revenue, gross margins and earnings per share performance at a measured pace over the past four quarters.

With that, I'll now turn it back over to Mark.

Thank you, Karen.

This concludes our prepared remarks.

We're now ready to take your questions.

Thank you sir.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) One moment please for our first question.

Our first question comes from the line of Ryan Hutchison with WR Hambrecht.

Please go ahead.

Congratulations here on the progress made on the turnaround.

I have a few questions if I may and I'll jump back in the queue.

First of all Mark, just a general sense now that you're well underway into this turnaround, as you look at the market growth rates over the next year do you think that the business here with the changes you made, that you can at least grow in line with the overall market?

That's obviously the $64 question, right?

Obviously, the market continues to be very healthy and the business we're in we've chosen to be in businesses with growth rate is probably in the high single-digit or low double digits depending on whose data you go and look.

You know, we focused on a few segments, we got solid traction in the segments that we provided.

Obviously, you know, as I've mentioned, my intention is to get the Company's growth to be as high as we can make it.

We think without putting a timeframe on it, you know, we think that we can get, to where the market is going to be.

Right now I'm focusing on putting together all of those things from both a product point of view as well as a sales, service, support, marketing to get us going in that direction.

We've now delivered, you know, two solid quarters of year-over-year growth and now the game plan has continued to accelerate that growth as best as we can.

Okay.

And then in terms of strategy moving forward on the partner front, I'm bouncing around from conference call to conference call, but I think I picked up that the partners grew faster than the overall business, and then there was some commentary around expanding the opportunity, I guess, with Avaya overseas.

Is that --

So when we talk about partners and we talk about growing faster than the overall business, it refers to the strategic partners that I mentioned, right?

So we have four partners that we call strategic, those are Avaya, they're Ericsson, they're Nokia Siemens Network and they're Siemens Enterprise.

As you well know, Siemens kind of broke up their business into two pieces there.

And we look at those and, clearly, we continue to see great traction with all four of them, we work very strategically with them and sure enough the revenue growth is showing.

With Avaya, as it pertains to Avaya over the last several years we've built a great revenue growth partnership in the U.S.

and we are learning from that model.

And the big thrust in this fiscal year, and it's not just Extreme's thrust, but it's the thrust jointly between Extreme and Avaya, is to drive that growth rate in EMEA, also.

If you talk to Avaya about it, they need that same kind of networking and data infrastructure partner in EMEA, also.

So I personally attended Avaya's sales off site, it was about two, three weeks ago.

I talked with all of the senior executives, including Mike Thurk, Stuart Wells and Charlie [El] at that conference.

There's general strategic agreement and we got the teams working pretty hard on that.

Okay.

Great.

And then just finally two small ones.

First, legal costs in the quarter and I believe you gave an expectation for the full-year.

And I'm assuming that's in the overall results you provide in the press release.

Just need to look at that maybe one-time in nature coming out of the G&A line item.

And then a tax rate, it was a little bit lower than I anticipated.

So just a tax rate update for fiscal 2008.

In terms of the litigation costs, we did include the litigation charges for the quarter during the call.

So those were $0.8 million for the quarter.

We did not give an expectation of litigation charges going forward, you know, those tend to kind of float around and fluctuate so we're not setting the expectation there.

We did, though, reiterate that our non-GAAP operating expenses excluding litigation charges would be in the range of 45 to $48 million per quarter for the rest of the year.

Which is what we said last time.

Yes, so we reiterated that.

In terms of your question, moving on to the effective tax rate, our tax rate is a little more complicated since we have full valuation on our deferred assets than most companies and we have over $200 million in deferred tax assets.

So the best way to do it is to, you know, take a look at what we've reported in terms of our tax charges for the past couple years and make your assumption on that basis for modeling.

Okay.

Great and good luck.

Thank you.

Thank you.

Our next question comes from the line of Tim Long with Banc of America Securities.

Please go ahead.

Good afternoon.

This is Jeff [Slubert] dialing in for Tim.

Just first question, in terms of the mac, can you comment on the macro trends you're seeing particularly in the U.S.

market?

Clearly, there's been some nice progression here on the top line with the products, is it fair to think that we should see that continue here during the December quarter?

Well, you know, without, obviously, we're not in the business of giving guidance at this point in time.

But, you know, we see that the U.S.

team has been working pretty hard over the last five quarters.

They've gotten things pretty well pretty well together on it and we're going to see about their continued ability to execute.

It's going to be, you know, the deals, the transactions are getting a little larger, so we're getting to participate in larger deals.

The team continues to do some great hires.

There's a lot more stability in the patches with a lot of our salespeople are and so we're beginning to see the results of that, the trick now is being able to continue to kind of keep that effort going.

So, you know, I spend a lot of time out and about in the U.S.

and the signs I see are generally good, we just need to keep driving the available business.

Mark, given this progress, when do we get to the point where you start to feel confident with the infrastructure you have in place and that you begin to add to that in the form of new hires?

You've seen a lot of your competitors aggressively hiring to capture the growth opportunities, it sounds like you've gotten, you know, you've gotten the organization under your control at this point in time.

When should we see you start to increase the hiring effort, particularly in the U.S.?

Yes, so there is no feeling, you know, there's no head count cap that I particularly put on the sales organization.

I gave the sales organization some, sort of some broad cost of revenue ratios, we call it CPRD, that they need to manage to and then I've told them to be as aggressive as they feel they're able to bring people on board and turn them productive so that's sort of the overall dollar ratios work.

So the sales force is being as aggressive as they feel they need to be and as the business opportunities continue to materialize they already have the ability to go size themselves correctly.

So there is some hiring going on now.

Oh, yes, there's hiring going on.

We continue to hire and upgrade the skill sets wherever the sales force believes is required across not just the U.S., but in whatever region feels like they're able to take advantage of it.

And then, Mark, just in terms of the service business when you first came on board, you know, one of your initiatives was to make services a bigger portion of the Extreme story.

It really hasn't happened yet.

When do we start to see that service business start to kind of improve?

Yes, that's a good question.

We've been working on putting the pieces in place to do that.

Last quarter I appointed a Vice President of our services organization reporting directly to me.

This is the first time that that was done within the Company.

It had been tucked down into the organization.

So this is bringing it all the way up to my level.

It takes a little bit of time to do a few things.

One is to really build the new services, which can more than make up for the fact that the new products being much more reliable, as you've heard us talk, to some extent carry a little bit less of the maintenance costs associated with them.

So we're working through all of that, obviously, this got realized very early when I got here, so we've been working on it.

And I'll keep you posted as we go, but it's something that is, that I'm, you know, that has a very high priority with me and we're spending a lot of cycles on it.

Just two more quick ones.

The product gross margin has really improved nicely here particularly with the new products coming out.

Is there any reason to think that that can't continue?

And then, if you've seen any change in the Avaya relationship?

They'll be a private company most likely next week.

How do you foresee their new owners changing, you know, the structure there and how do you see your relationship with them going forward?

Well, you know, they're two very different questions.

Yes.

On the first question, it's really tough to make predictions.

The gross margin, it's going to be a function of the overall industry landscape.

Clearly, things are competitive, so that's one variable so there's not a lot of free just high gross margin business for the having out there, the deals tend to get contested.

Our deal sizes tend to get larger which tend to be more contested rather than less, so there's variables and at the same time we work the supply chain very hard and over time we're moving certain manufacturing from North America manufacturing over to Asia, which tends the help to supply chain.

So there's about, and then on top of that, as you heard Karen talk about, there's quality issues that manifest into warranty, there's distribution charges as you move things around the planet, so there's probably about six or seven variables that are all kind of moving around.

So on a quarter-to-quarter basis it's tough to really figure out where any single one will land.

Clearly, what we're doing is focusing on all of them, trying to drive them in the right direction and hen we'll see where over time we land.

Clearly, when you look at the P&L gross margin percent has a huge impact on the business and so it is at mine and Karen's utmost attention.

Nice quarter guys.

Okay.

Thank you.

Okay.

Ladies and gentlemen, as a reminder, we ask that you limit yourself to one question and one follow-up question and requeue for any additional questions.

Our next question comes from the line of Samuel Wilson with JMP Securities.

Please go ahead.

So I'll do the trick of asking two questions with six parts each.

That's right, Sam.

Thanks.

Mark, can you just give us an update on just sort of the general, I mean, you've sort of commented a little bit, but just the pricing environment in general.

Are you seeing any changes over the last couple of quarters in pricing?

In general, you know, other than I said as the deals kind of get bigger you tend to, you know, you tend to be under more competitive pressure rather than less.

We also see Asia Pacific continue to be very competitive.

There's some low cost competitors out there which clearly don't offer anywhere close to the same functionality, but are out there with some fairly low prices.

So managing in Asia Pacific, particularly certain countries in Asia Pacific, is always an interesting challenge for us to make sure we're able to communicate the value proposition that our superior technology is able to deliver.

And then can you talk just briefly about XOS in general's got sort of this open architecture and the ability, when you first came on board and I think in the first sort of quarter or two you talked a little bit about sort of developers, developer community, sort of the partnerships around XOS and trying to get some activity in that space.

Can you just sort of give us an update?

Sure, absolutely, I believe that that is a very important part of the equation.

As you know, as we continue to work closely with Avaya, Avaya has certain parts of their applications of their telephony management structure that live right inside of our switches, which helps create a very strategic relationship with Avaya.

What we've also done as a way of putting more meat behind this, we actually hired a team within our solutions marketing organizations singularly focused on this.

During our last customer advisory counsel this was a topic of discussion, this happened about a month or so ago, and there was a lot of interest especially in a number of verticals like higher education and some others to do that.

Also, kind of stay tuned, we're working on putting together some announcements for later on in the fiscal year that are directly related to this.

So continue to watch this space.

Thanks.

And then just two quick questions for Karen.

I'm sorry if I missed this, but head count for the quarter.

And also you've been running about $1million of amortization of warrants that you gave Avaya a number of years ago and I think they roll off this year.

Is that true, this fiscal year?

In terms of the Avaya warrants, yes, they roll off this fiscal year, in one month, okay?

And in terms of the head count, we're flat from Q4, from our exit in Q4.

Perfect.

Thank you very much.

Thank you.

Our next question comes from the line of Phil Cusick with Bear Stearns.

Please go ahead.

Mr.

Cusick, are you still on line with us?

Mr.

Cusick must have stepped away from his desk.

Our next question comes from the line of Manny Recarey with Kaufman Brothers.

Please go ahead.

Thanks and good evening.

Two questions.

One, Karen, was there any impact from currency in the quarter on revenue?

You know, Manny I don't have the details on that, but, you know, when you look at it from a dollar basis, we sell everything in dollars.

U.S.

dollars.

Okay.

It's all U.S.

based.

Okay.

And second question is when you came on board one of your, I think, initiatives was to look at the supply chain and try to take as much cost as you could out of that.

You've been there for a couple quarters now, could you give an update on where you stand with that?

Yes, the organization is still working diligently on the supply chain.

So a number of initiatives that we have alluded to over the past, you know, several quarters have been in moving aggressively on our direct material charges and trying to negotiate those downward.

We've transitioned, you know, a fair portion of our manufacturing operations (inaudible) now to Asia.

And, if you look at it, the product gross margins are up 450 basis points year-over-year so you can see there's quite an impact in terms of a number of the supply chain activity.

Okay.

So I mean, obviously that's something that is never completed, but as from when you began till now, I mean, is this year you feel like you kind of like halfway through that or can you give any color on that?

Well, in terms of color, you know, I hate to give guidance at this stage in terms of any number expectations, but in terms of initiatives and activities, what I say is that's ongoing.

So we're continuing to work both our kind of direct material chain, we're continuing to work our distribution and logistics and we're continuing to work in our indirect material areas.

So you can expect that we're going to keep that as a continuous focus for the Company for a while.

Okay.

That's helpful.

Thanks.

Thank you.

Our next question comes from the line of Subu Subrahmanyan with Sanders Morris.

Please go ahead.

Thank you.

I had two questions.

First, can you talk a little bit about seasonality and impact it could have on your geographic mix going into next quarter, especially APAC big increase and is that sustainable versus, you know, U.S.

and Europe, do you expect to see seasonal strengths?

And the other question was just broadly on operating model, you talked about some ranges for op ex for the year.

Can you just give us some feel into, at least an intermediate term operating model in terms of what we should expect for margins?

So let me answer the operating model and then Mark can come back on and talk about the Company's seasonality.

But in terms of the operating model, again, you know, we're looking at this, you know, I hate to kind of give specific guidance in the quarter for individual quarters at this point, but what we've tried to layout is what that looks like for the op ex for the year.

So once again that range for non-GAAP operating expense excluding litigation charges is in the range of 45 to $48 million per quarter for the year and that tends to vary depending upon things like project material for R&D or end of seasonality in terms of sales for incentive compensation for the quarter, et cetera.

So those are some of the fluctuations quarter-to-quarter.

Subu, in terms of seasonality, at sort of the broadest level I don't expect the seasonality this quarter to be any different than it was in past years, okay?

There's nothing that I know of that would cause it to be significantly different than that.

That said, there's one or two deals in any one geography that come in or push out can move the stuff around.

And so on a normal seasonality we see some kind of variation and it's way early in the quarter to be able to kind of make any sense out of those things.

So, for now make your best attempt at modeling, you know, moving forward the next few quarters based on the kind of seasonality patterns you saw us do over the last few years.

Good enough.

And just a follow-up on that op ex comment is, did this quarter have the full benefit of the restructuring that you did in terms of the lower op ex?

Yes, it did.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Andrew Newinski with Piper Jaffray.

Please go ahead.

Hi guys.

Thanks for taking my question.

Nice improvement this quarter.

First, I was just wondering you mentioned services are becoming a more critical piece of your business and I'm just wondering isn't it fair to think as edge products like the 150 and the X150 and the X450 ramp up that we would expect services to decline, you know, when compared to the services needed to implement a core product?

So when we talk about services we need to focus on three different kinds of things.

One, there is the maintenance services and some of the products further out in the edge we offer things like limited lifetime and so the maintenance support comes, kind of comes along with it.

Then at the end of that customers have to make up their mind about it's edge product and if the thing breaks do I simply replace it, do I go upgrade my maintenance contract, and so there's those kind of decisions.

And out at the edge customers make up their own minds on that and we try to make some sense out of it.

The other piece of this puzzle, though, is that as you get a broader portfolio and as you're able to do more edge to core, you get customers that all of a sudden say, you know, I used to go to someone else to go and have my professional services, my implementations, my network configurations, all of that stuff, and we're beginning to see some customers come to us now and say, we want you to just take care of it.

You know, come in and deploy all of these.

And now of a sudden you can start to see if you start to make network deployments into the hundreds of thousands of switches that that could drive a lot more implementation services which in the past we might not just have been able to see.

So there's a lot of different variables again here and then we can, you know, we're going to have to manage them all as we go along.

Okay.

Thanks.

Just one more quick question.

You mentioned the channel partners but you didn't mention anything about ShoreTel.

I'm just wondering how's that channel shaping up because it seems like the market that they target, the small to medium enterprise business, is kind of a sweet spot for you as well so it seems like it would be a good fit.

Excuse me, we didn't get the specific channel that you were talking about.

The ShoreTel channel.

I'm just wondering.

You didn't mention anything about ShoreTel, it just seemed like it was a great fit for a partnership.

So we partner with ShoreTel in various parts of the world, fairly, you know, good business here in the U.S.

and they, we collaborate and we go into the right places with them.

We're able to provide, you know, given that they're complaint with the set of standards and given that we have technology that easily enables different kinds of telephony equipment to self configure, you've heard us talk about our universal port technology and so on, we do that very well.

Obviously, the size of the relationship isn't of the size of the one that we have with Avaya, but it enables that.

And also with the 250 and now the 150, those products are designed to do very well in these smaller implementations.

So we'll have to see how our relationship with ShoreTel keeps going on that.

Okay.

Thanks.

So one, I think we have time for one last question.

Thank you.

Our final question comes from the line of Long Jiang of UBS.

Please go ahead.

Good afternoon, hi.

Two quick questions.

You mentioned during the call product book-to-bill was likely above 1 for the quarter.

Yes.

What about over a book-to -bill?

The product book-to-bill was slightly above 1.

Service book-to-bill was below 1largely due to kind of seasonality with service for the quarter.

And overall we were slightly below 1.

Okay.

All right.

So that's still consistent with (inaudible) pattern here.

Another question.

For service gross margin you mentioned service gross margin was impacted by some nonrecurring factor during the quarter, so should I expect that to reverse itself next quarter?

Yes.

You should expect not to have that event next quarter.

Okay.

That's all my questions.

Thank you.

Thank you.

Thank you.

There are no further questions.

I'll turn it back to management now for any closing remarks.

Thank you, Vince, and thank you all for joining us this afternoon.

I want to thank all of our employees for a successful quarter.

We've made a lot of very good progress at Extreme and we've positioned ourselves for even better things to come.

And we look forward to speaking with you again at our next conference call.

Ladies and gentlemen, this concludes the Extreme Network 2008 first quarter financial results.

You may now disconnect.

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