Extreme Networks Inc (EXTR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks 2008 fourth 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 reminder, this conference is being recorded today Thursday, July 31st, 2008.

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

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

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

The Company has the asked me to remind you that this conference call contains forward-looking statements that involving risks and uncertainties, including statements regarding acceptance of the Company's newer products in the market, and it's expectations regarding those products.

Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors including but not limited to, fluctuations in demand for the Company's products and services, a highly competitive business environment for network-switching equipment, the Company's effectiveness in controlling expenses, the possibility that the Company might experience delays in the development of new technology and products, customer response to the Company's new technology and products, the timing of any recovery and the global economy risks relating to pending or future litigations, and the dependency on third-parties for certain components, and for the manufacturing of the Company's products.

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

More information about potential factors that could affect our business and financial results is included in the Company's filings with the Securities & Exchange Commission, including without limitation under the captions 'Management's discussion and Analysis of financial condition and results of operations, and risk factors,' which is on file with the Securities & Exchange Commission.

Throughout the 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 financial information in the tables that accompany the press release, and on it's website.

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

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

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

Please go ahead, sir.

Thank you, Jamie.

Thank you all for joining us today.

I will discuss some of the highlights of this quarter and the year as a whole, discuss the areas where we continue to make progress, and detail how we continue to position the Company for long-term success.

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

Q4 was a solid quarter with revenues of $98.3 million.

This represents the highest revenue since the second quarter of fiscal 2005.

And the highest fourth quarter revenue since Q4 FY'02.

The fourth quarter is normally a seasonally strong quarter for Extreme.

I believe one of the reasons that made this quarter stronger than normal was the revenue generated by business that had slipped out of Q3, which we were able to close during the fourth quarter.

With FY'08 in the history books, let me review for you some of the accomplishments we made this past year.

Financially, we improved revenue by 6%.

This was the first fiscal year revenue improvement since 2005.

Pro forma net income was up by five-fold, the early signs that the turnaround is in progress are there.

During the year we expanded our enterprise product line at both the edge and the core, with a special emphasis on expanding towards the edge of the network.

Our customers need to build powerful and cost-effective, secured wired and wireless end to end enterprise networks, to run business-critical applications.

They can now turn to Extreme for more of their requirements.

We continue to make significant investments in R&D, which are driving a pipeline of new products, with significant emphasis in the metro carrier space.

The products we have on the drawing boards are designed to allow us to fully participate in this fast-growing market.

We expanded the breadth and depth of our relationship with our strategic partners.

Growth with them continues to be solid, and well above the Company average, driven by the creation and delivery of powerful enterprise and carrier solutions.

We have created and rolled out a new channel incentive program in EMEA and in the Americas.

It has been well received.

It is helping us cement our relationship with our long-time channel partners, and is helping us attract new ones, by enabling them to create and deliver specific solutions for their customer networks.

We have also helped a number of carriers and telecoms build powerful-country-wide networks, which provide a full range of business and residential Triple Play services.

It is ail part of our strategy to create Best-of-Breed products, integrate them into solutions to business-critical applications through an ecosystem of partnerships, and deliver them to our customers in a cost-effective manner.

By way of an indication of the success, popularity, and confidence that customers have in our portfolio, this quarter we shipped our gigabit Summit product line to over 1,000 customers across 30 different countries.

Let's now look forward to fiscal 2009.

Near term macroeconomic conditions aside, the networking industry in general, and the Ethernet segment in particular, we believe will continue to grow.

The need for connectivity continues to go up.

Requirement for the transport of video will make huge demands for bandwidth.

The metro carrier portion of the market has been growing in excess of 20% annually, and is expected to continue to grow 20 to 25% over the foreseeable future.

The enterprise market for switching alone represents a greater than $15 billion opportunity.

Wireless and security products as well as the support and professional services required by our customers to complete the solution add billions more.

Ethernet continues to be the logical, cost-effective choice for both enterprises, as well as many carriers to implement their network-based solutions.

So why Extreme Networks?

How have we chosen to differentiate ourselves, and what does that mean for our customers?

Let me give you a specific example, focused on carriers and telcos.

Carriers have the challenge to deliver every-increasing bandwidth capacity at ever-decreasing prices.

In the past they did this by having three networks, one for data, one for voice, and one for video.

Today, they face the challenge of having to deliver these services over one network.

The traditional way to do this, SONET, MPLS, routers, Layer 3, et cetera, is just too expensive.

We have uniquely focused on building the most scalable, reliable and available Layer 2 networks, which employ technologies like vMANs, VPLS, and PBT, far more cost effective ways to achieve the results our customers need.

T2 of Slovenia, for example, has wired dual gigabit fibers to one-third of the homes in the country, and routinely delivers multiple HDTV channels, voice-over-IP, and data services for just a few euros per month.

Unique differentiation Extreme Networks was best able to deliver.

We fully intend to lead in this transformation in this very high growth part of the market.

Let me give you another example, focused on the data center.

The events which transpired last week made it clear that the data center which for years used both Ethernet as well as fiber channel for their network requirements, is transitioning towards Ethernet, as the logical choice for connectivity and data transport.

For many years designers of data centers faced the dilemma of either using expensive fiber-channel products to connect servers with storage, which were difficult to scale, and had significant interoperability issues, or use Ethernet-based solutions which were not designed with the data center in mind.

With the advent of 10-gigabit, the cost effectiveness, scalability, and standards compliance of Ethernet, coupled with it's tremendous flexibility to support multiple data center protocols, like Fibre channel over Ethernet, iSCSI, NFS, SiS, now allows the data center to unify it's connectivity architecture.

At Extreme we have understood this trend, and have been working on powerful solutions.

For example, in April, we announced the Summit X650, the leading 10-gigabit fixed configuration switch, which dramatically changes the scalability and cost structure of delivering top of rack data center, compute grid, and storage connectivity solutions.

Capable of Layer 2 to 4 networking, and designed to be ready for both 40 and 100-gigabit uplinks, this product family leads the way for the transformation of the data center to 10-gigabit bandwidth requirements.

In addition, the X650 is fully stackable with the rest of the product line.

This unique feature allows us to create the reliability and availability of chassis-based products, at a fraction of the cost, size, and power.

All data center features that our data center customers really like.

We fully intend to lead in this high-growth portion of the ethernet market.

In the Metro carrier vertical, we continue to provide highly scalable, leading-edge Layer 2 solutions, which enable our customers to deploy sophisticated Triple Play solutions to customers and business partners.

Whether it is a large vMAN or VPLS implementation, or whether a carrier is considering the standards around the new PBT protocols and technologies, we have the products to help our carrier customers deploy leading-edge cost-effective solutions.

For example, T-Com of Croatia continues to build it's next generation network that delivers both business services and residential Triple Play services across an Ethernet network.

The network is built using Extreme's Carrier class, an MEF-certified, BlackDiamond metro core switching platform.

WIND Aziende, an innovative telecom carrier and long-standing Extreme customers, uses our BlackDiamond and Summit switching solutions to deliver Triple Play services, and high speed data services to businesses throughout the country.

Our enterprise customers require converged networks which are cost effective to purchase and operate, while able to scale to meet their business needs.

For example, we continue to network build-out for ENEL SPA, Italy's largest power company, and Europe's second largest utility for installed energy capacity.

Extreme was selected to serve their data center and convergence needs, along with one of our strategic alliance partners Nokia Siemens Networks.

School districts rely upon Extreme, and our proven ability to build large distributed networks that support converged high bandwidth applications.

The Baltimore Public School District of Maryland, the Boulder Valley School District in Colorado, and the Clark County School District of Nevada, represents significant wins where Extreme is providing networks to support tens of thousands of K through 12 students and staff, across hundreds of facilities.

During the quarter, we expanded our relationship with technology leader VMware around the globe, by assisting them to build extensive networks, including a metro Ethernet win with our scalable BlackDiamond to 12-K switches, in addition to supporting their land needs for converged enterprise solutions within their development and test laboratories.

We worked with the Hospital Authority of Hong Kong.

This is a fully automated healthcare delivery network, comprised of 43 hospitals within seven regions, that manages all of it's essential clinical and business applications on Extreme networking solutions.

They have experienced 5 9's in network availability for their 54,000 users, who acts as their medical applications on a daily basis.

The largest energy and petrochemical company in Korea, SK Corporation, has migrated from a Cisco to an Extreme network infrastructure, to serve mission critical and performance-sensitive applications throughout their enterprise.

They have deployed our BlackDiamond 8800 and Summit X450 products extensively, and are benefiting from the lower cost of ownership of our solution, and the reduced operational complexity.

With that, I will turn the call over to Karen for additional financial details.

Karen.

Thanks, Mark, and thank you all for joining us this afternoon.

We are generally pleased with our performance this quarter, as we continue to deliver improving financial results.

Overall the results demonstrated solid progress in revenue, gross margin, and net income compared to the year-ago quarter.

The Company has performed well on it's operational goals to increase revenue growth, and optimize the cost structure.

In the area of revenue growth, our strategic alliances have continued to grow at better than twice the Company's average growth rate, and our expanded line of new stackable products aimed at the enterprise market, continues to gain solid customer adoption.

We will continuing to progress in our efforts to optimize the cost model and gain efficiencies by transitioning manufacturing to Asia, and leveraging the distribution channel for greater sales efficiencies.

Now let's turn to the financial results.

The revenue for the fourth quarter was $98.3 million, which represents a 13% increase from the year-ago quarter, and resulted in a 6% increase for the fiscal year.

Typically Q4 is a seasonally strong quarter, and we believe this quarter's results were strengthened by the transactions we had anticipated to close in Q3, which closed in Q4.

In addition this quarter, we realized $2.8 million of product revenue, which had been deferred from prior quarters.

Nonetheless, revenue for the fourth quarter was the highest since the second quarter of fiscal 2005.

Product revenue at $83.4 million increased 16% from the year-ago quarter, with increases across all of our geographies.

Our product book-to-bill ratio was above 1 for the quarter, as we generated solid revenue results while also building backlog.

For the fiscal year, product revenues grew 8%.

Service revenue at $15 million, declined 1.8% from the year-ago quarter as expected.

The decline in service revenue was primarily due to the increased mix of newer stackable switch products, with lower attach rates for service maintenance contracts.

Looking at the markets we address, the percentage of enterprise to service provider sales for the quarter was 72% and 28% respectively.

In-line with our 75/25 historical pattern.

Our new products released in the past 24 months have continued to gain customer acceptance, and contributed about 45% of the Company's revenue for the quarter.

The ratio of stackable and modular product sales was 61% and 39% respectively, which is comparable to the March quarter.

Looking at revenues by geography for the quarter, North America's revenue, which includes the US, Canada, Central America was $45.1 million, an increase of 9% from the year-ago quarter.

We are pleased with the strength we have seen in the Americas, as the demand for our stackable products in particular continues to grow.

For the quarter, product sales in the Americas increased 11%.

And service revenue increased slightly in comparison to the year-ago quarter.

Revenue in EMEA, which includes Europe, the Middle East, Africa, and South America, was $38.8 million, which is 16% increase over the year-ago quarter.

Product sales in EMEA were up 18%, and service revenue increased slightly compared to the year-ago quarter.

Revenue in Asia-Pacific which includes Japan was $14.4 million, which is up 18% from the year-ago quarter.

I will now turn to non-GAAP results, which excludes the effect of stock-based compensation adjustments for prior restructuring events, and charges related to the special investigation into historical option grants.

Note that we have included in our press release, a reconciliation of GAAP to non-GAAP financials.

As a percent of revenue, total non-GAAP gross income was 57.3%, an increase of 2.3 percentage points from the year-ago quarter.

Product non-GAAP gross margin at 59.5% of revenue, increased 2.9 percentage points from the year-ago quarter.

The increase in product gross margin was primarily the result of improved discipline in supply-chain management, resulting in lower excess and obsolescence costs, and continued improvement in product qualify, resulting in lower warranty and repair cost, partially offset by product mix.

Service non-GAAP gross margin at 45.2% of revenue declined 2.6 percentage points compared to the year-ago quarter, primarily due to a decrease in revenue.

Our non-GAAP operating expenses were $54.3 million, an increase of $5.1 million from the year-ago quarter, and down slightly as a percent of revenue.

Excluding litigation charges of $4.4 million in the fourth quarter, and $1.3 million in the year-ago quarter, total operating expenses improved 4.3 percentage points from the year-ago quarter.

Sales and marketing expenses trended up for the quarter, due to increased commissions on higher sales volume, and employee-related charges.

Other income was $1.8 million, and primarily includes interest on our investment portfolio.

Turning to the bottom line, non-GAAP net income was $3 million, or $0.03 per diluted share, which compares to non-GAAP net income of 0.3 million, or $0.00 per diluted share in the year ago quarter.

For the 2008 fiscal year, the diluted earnings per share at $0.12 is a four-fold increase from the prior year's results of $0.03 per share.

Total shares outstanding were 116.3 million.

Turning to the balance sheet, during the quarter we reclassified our balance sheet presentation of various accounts related to sales to distributors.

This is a reclassification of information previously disclosed in our regulatory findings, and does not have any impact on revenue recognition.

Our prior-period balance sheets have been reclassified to confirm to our current presentation, and are included in today's press release.

All balance sheet comparisons referred to in today's discussion, are with reference to the reclassified balance sheets.

Total cash, cash equivalents, and investments are $225.7 million, which is down $5.4 million from the prior quarter, and includes an impairment of our student loan auction-rate securities of $2.5 million.

At the end of the fourth quarter, given the continued uncertainty in the market related to these investments, we determined that it was appropriate to record a temporary impairment charge against the auction investments through equity.

All of our auction rate securities continue to be AAA rated and collateralized by student loans, and primarily guaranteed by the US Government.

We generated cash flow from operations of $1.1 million for the period, which is down from the prior quarter, primarily due to the increase in Accounts Receivable related to timing of shipments in the quarter.

Accounts Receivable was $64.4 million, which compared to $48.7 million in the prior quarter.

Days Sales Outstanding were 59 days, an increase of 6 days from the March quarter.

Deferred product revenue was 1.2 million, compared to 4 million in the March quarter, and is included in deferred revenue net in the balance sheet.

Deferred service revenue, which includes maintenance contracts, professional services and training, was $39.5 million, which compares to $39.3 million at the end of March.

Deferred revenue, net of deferred cost of sales to distributors was $14.1 million, compared to $13 million at the end of March.

Total full-time regular employees were 861.

We are continuing our practice of not providing guidance.

However, we note that the third and fourth quarter revenues were volatile, and we believe neither quarter is necessarily predictive of near-term results.

With that, I will now turn it back to Mark.

Great.

Thank you Karen.

Jamie, we are ready to take questions.

Thank you so much.

Ladies and Gentlemen, at this time we will begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment, please for our first question.

Our first question is from Subu Subrahmanyan with Sanders Morris.

Hi Subu.

How are you doing?

Doing well, Mark.

How are you?

Doing well.

Two questions, actually.

One on operating expenses, a pretty significant sequential increase.

If you could talk about what you expect on the litigation expense side, and what level does it continue at, and what kind of OpEx range in general we should expect?

And then the second one, more of a big-picture question.

Have you tried to quantify how much of the revenue that came in to this quarter was pushed out form last quarter, and I know you are not providing specific guidance, but there seem to be multiple factors which lead to almost a 20% sequential increase, so how should we think about September?

Yes, so if I --

Yes.

--go ahead and take those questions, Subu.

In terms of OpEx, yes OpEx trended up for the quarter, and we mentioned last quarter we had indicated that we expected our litigations to trend up for this quarter.

Okay.

And looking forward, we would expect a fair amount of our litigation to have finished was related to our IP activity at the moment.

In terms of OpEx going forward, what I would refer you to is to take a look at the models that we put out in May, so our long-term models relating to operating expenses, and take a look at those as you build your models going forward, what was the last question you had?

Big picture, Q3 to Q4?

Well the Q3 to Q4, if you could quantify what kind of revenue --

Yes, I'll take that, that is really hard to do.

We do know that, as we talked about last time, the hockey stick kind of flat ended out at the very end, and in the last kind of week and a half for the quarter.

We certainly saw a fairly healthy start to the quarter.

It is tough to know how much of that was business that had slipped versus other kinds of business, though things are almost impossible to kind of completely figure out, but we did have a pretty healthy start to the quarter.

We then had what a number of companies reported, a bit of a trough during the month of May, and then we had a very, very strong finish during the last month of the year.

Beyond that, and we didn't see any, the hockey stick behaved about the way we would have expected it to behave in the last several weeks of Q4.

Beyond that it is tough for us to really understand quantitatively what the elements are.

And just macroenvironment wise, any commentary you want to provide us kind of given all of the concerns out there, what you are seeing from a customer spending perspective?

Well, it's certainly, there are headwinds out there.

Customers are being pressured with their dollars.

That said, they do have projects that they need to do, and when they do need to do those projects judiciously, they do go purchase equipment.

The important part we always find is to be closer to customers, understand their projects, be competitive, provide them high value, and at the end that is how you win their business.

Got it.

Thank you.

Thank you.

Our next question is from Samuel Wilson with JMP Securities.

Hey, Sam.

Good afternoon.

Couple of questions for you, and a little eclectic so I apologize up front.

And I will ask them one at a time to make it a little easier.

Several times you referenced the second quarter of fiscal '05, and this is comparable revenue to what you produced this quarter, very active, in fiscal '05 you had 7.5% operating margins, and this quarter you produced 2% in operating margins.

Can you just rectify the difference as you see it in how you produced much better operating margins in the past?

Sure.

So the quarter and fiscal '05, the December quarter was actually a little bit higher.

We said since the fiscal quarter of 2005.

And this quarter, I didn't go back and look at all of the ins and outs of what happened, what was happening in that quarter of fiscal '05.

Certainly we are gearing up for growth.

Being this Q4, a lot of the end of year sales commissions, were part of the some of the cost structure.

Our litigation in Q4, by itself represented several cents per share, and several points of operating margin, so that was a huge part of the equation.

Got it.

And we are also probably in a somewhat larger product pipeline and development cycle than perhaps we were in December of 2005.

Got it.

As sort of a follow-up to that.

You added 32 employees if my calculations are correct, quarter on quarter.

Can you give us a sense of where you are adding employees, vis-a-vis your stated objective to keep a tight lid on expenses here?

Absolutely.

The primary drivers, one is, and we talked about this thing last quarter, was we made the decision to in-source our distribution center, which previously we were paying an outside entity to do.

So while that showed up in some increase in head count , it was head count of people who package and move information, and move product around.

So that was a decision that in fact helped us save a bunch of money within the Company.

Everything else is just a little bit here, a little bit there.

Obviously we continue to invest in sales.

We continue to invest in engineering.

We want to make sure that we are prepared for when the macroeconomic environment gets more favorable, that we are there with the right product, and the right salespeople, and the right ability

Great.

Mark, I swear just two more questions here.

What did better than expected for you in the quarter?

The behavior of better than expectation was pretty widespread.

Geographically it was a pretty balanced performance.

Asia rebounded from Q3.

That said, I think we still have a fair amount of work to do in Asia left.

We said we got a new Vice President of Sales for the Asia-Pacific and Japan region, and so we are doing a bunch of retooling and changes there, to position ourselves for it.

What I felt went really well is our continued product update.

During the last quarter as I talked about, we continued our product introduction cycle.

We introduced a very powerful 10-gigabit switching platform, which we have really high hopes for.

Certainly, we were pleased that the hockey stick towards the end of the quarter didn't dissipate, so we felt pretty good that we had good command of the business that was out there, and we were able to harvest it.

Karen one question for you, can you just run through the long-term operating model, so that there are no disconnects?

So in our conference in May, as we talked about the long-term operating model for the next 2 fiscal years, we gave a range of gross margins in the range of 58 to 59.

R&D expenses in the range of 16 to 17, sales and marketing expense in the range of 25 to 26.

G&A at 8.

For total operating expenses in the range of 49 to 51, and an operating margin target of 8 to 9%.

Perfect, thank you so much, Karen.

Yes, and remember that that is the point out there a bit, we are going to be getting there in stages.

Definitely.

Thank you very much.

Thanks.

Thank you.

Our next question is from Manny Recarey with Kaufman Brothers.

Hey, Manny.

Hi, Mark, hi Karen.

Congratulations on the good quarter there.

You spoke about at the end of the quarter that there was momentum towards the end of it.

Has that momentum continued, with kind of the uncertainty in the economy has gone to creep back in to the market, have you seen any pullback that you did let's say, similar to the end of the March quarter?

Thank you.

It really is too early to tell.

We are just a few weeks into Q1.

Q1 tends to be, Europe tends to go on vacation about this time of year, and so on.

So it's really too early to tell about making any kind of expectation of what might or might not be happening this quarter.

Okay.

Can you talk about in the June quarter, were there any particular verticals that were strong, you were focusing on I think the four specific verticals, mostly?

Yes, I mean, we haven't torn all of the data apart.

It takes a little while to go dig through all of that.

As Karen mentioned, our carrier business was at 28%, which is pretty good.

We continue to have some good successes with a number of carrier customers.

There are a number of Eastern European customers that have been buying from us quite steadily.

They are doing some new network rollouts, companies like T2 in Slovenia that I mentioned, T-Com of Croatia, Slovak Telecom, they are out there putting modern generation Triple Play networks out there, and they are continuing their ongoing rollout.

So we feel pretty good that our product line, our carrier product line is solving some real problems for a lot of customers out there.

Okay.

Then one last question.

Is the new US channel program that you have implemented, it has been maybe about a quarter maybe just a little bit more.

Is that tracking to expectations, any color you have give us, please?

Yes, it is definitely tracking to expectation.

We have certainly signed up the partners that had been long-standing partners with us.

They really like the program.

It has also helped us attract a number of new partners.

So in general I feel very good about it.

We look at it on an ongoing basis, and right now it seems to be doing what it is supposed to.

Okay.

Thanks.

Okay.

Thank you.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS).

Our next question is from Rohit Chopra with Wedbush Morgan.

Please go ahead.

Hey guys, good quarter.

Karen you mentioned you were still optimizing the operating model.

Where do you think you are in that cycle?

Well, in terms of optimizing the cost model, this is kind of like peeling the onion, so we continue to look for opportunities.

I would stay we are still in progress.

Okay.

Can you give us a sense of Avaya relationship?

Is that bearing any fruit yet with the new product?

Well, our relationship with Avaya has been going on for a long time.

It has been bearing fruit for years, and the overall relationship in spite of whatever management changes, and so on that has been going on in Avaya continue to be strong.

Our relationship and revenue through the Avaya business partner channel continues to increase, and continues to increase at a pretty good clip.

The fact that they have adopted a lot of our products as their Cajun line has kind of come to the end of their life, is still on there.

I routinely speak with a lot of their business partners.

They are pretty excited.

They like our products.

They like the linkage between our switches and the Avaya-based applications.

So right now obviously we continue to look at it carefully, but so far I am pleased with how the relationship continues to go.

Okay.

And it was really nice to see that you closed some deals that did slip, but do you think there were any that slipped from this quarter, or are they now sort of closing?

Well, it is always tough to tell.

When you pore through the data.

That stuff isn't that easy to ferret out.

I am sure there were some deals that slipped out of Q3, and probably also slipped out of Q4.

That is the nature of the ongoing pipeline for customers.

Lots of customers out there, thousands of them, and they change their minds, and they pull things in and they push things out, on pretty much a daily basis.

In aggregate we felt that a fair amount of the business that slipped out of Q3, we captured some of it, during the course of the quarter.

So that is about as detailed as we have the information.

Okay.

With that, I think we have got time for one more question.

Thank you our next question from Tim Long with Banc of America.

Good afternoon, this is actually [Scott Thompson] for Tim.

I have got two quick questions.

First of all, I want to touch on the auction rates.

What should we expect in the coming couple of quarters?

What is the going-forward plan on that?

Secondly, back to the Avaya channel, are we seeing any composition through that channel from other gear manufacturers?

In terms of the auction rates securities, that has been quite topical in the press since about February of this year.

And last quarter, in looking at the auction rate securities, we did reclassify them into a long-term investment.

This quarter in looking at what is going on with the market, we decided to take a temporary impairment, and we will continue to all on the balance sheet, all equity related, and we will continue to monitor the situation going forward, and track it relative to the market, but again, I want to remind you that these securities are all AAA-rated, and backed by the government, and with that I will turn it over to Mark for the second question.

Yes, regarding Avaya, when you say other, I am sure you mean Juniper.

So we certainly continue to have a strong relationship with Avaya, things seem to be going along pretty good.

I talked in my remarks about how we have shipped to 1,000, just our gigabit product line to a 1,000 different customers in 30 countries.

That is a lot of product to a lot of customers.

Is there noise in the system?

With Juniper's couple of product announcements, certainly there is noise in the system.

Have the partners figured out that we have got about 20 or 30 products in the space, where Juniper has got a couple, where our products have been there for years and years, where Extreme XOS is on it's twelfth release, and so on, and so forth.

Customers get that.

They see the scalability, the reliability, the proven success and track record that we have.

So things are continuing pretty normally.

We watch it carefully.

That is one of the reasons we have been proactive with our channel incentive program.

We want to make sure our partners really get and understand the value proposition that we provide to them, and we are always going to be on the lookout.

Okay.

That is helpful.

Thank you.

Okay.

So thank you all for joining us this afternoon.

I want to thank our employees for their hard work this past fiscal year.

It is their dedication that has allowed us to show revenue and income growth this year.

We are getting better operationally.

We continue to enhance our competitive position, and position the Company for long-term success, and I look forward to speaking with you all again at our next conference call.

Thank you.

Thank you, sir.

Ladies and gentlemen, this concludes the Extreme Networks 2008 fourth quarter conference call.

If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or internationally at 303-590-3000, with access number 11116516, followed by the pound sign.

Once again if you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000, with access number 11116516 followed by the pound sign.

We would like to thank you so much for your participation, and wish you a pleasant day.

You may now disconnect.