Extreme Networks Inc (EXTR) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks 2010 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).

On the call today for Extreme Networks are Bob L.

Corey, CFO and acting President and CEO, and Paul Hooper, Chief Marketing Officer.

As a reminder, this conference is being recorded today, October 26th, 2009.

This afternoon, Extreme Networks issued a press release announcing the Company's financial results for the first fiscal quarter of 2010.

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

This call is being recorded, broadcast live over the Internet and posted on Extreme Networks' website for replay shortly after the conclusion of this call.

The Company has asked me to remind you that this conference call contains forward-looking statements that involve risks and uncertainties including statements regarding the Company's expectations regarding the financial performance, strategy, growth of customer, demand, development of new products, customer acceptance of the Company's products, customer spending, economic conditions and the Company's market.

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, supply chain constraints and the ability of third parties to manufacture the Company's products in compliance in a very highly competitive business environment for network switching equipment, its effectiveness in controlling expenses, the possibility the Company might experience delays in in its own technology and products, customer response to its new technology and products.

The timing of any recovery in the global economy and risks relating to pending or potential future litigation.

The Company undertakes no obligation to update information on this conference call.

More information about potential factors that affect our business and financial results is included in the Company's filings with the Securities and 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 information on the table, accompanying the press release on its website.

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

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

I will now turn the call over to Mr.

Bob L.

Corey, CFO and Acting President and CEO of Extreme Networks.

Please go ahead, sir.

Thank you, operator and thank you all for joining us today.

We have Gordon Stitt, our Chairman of the Board here, and I'd like to turn it over to Gordon for some opening comments.

Gordon?

Thanks, Bob and thank you all for joining us today.

I wanted to comment on the recent leadership change that we announced last week.

Mark Canepa, who has been our CEO since August 2006, has decided to resign to pursue other interests.

Board has appointed Bob Corey our Chief Financial Officer as interim President and CEO.

The Board has initiated a search for a permanent CEO.

Bob has been our Chief Financial Officer for about three months, but he's been involved with Extreme for almost six years as a member of our Board of Directors and Head of our Audit Committee.

He knows the Company very well.

We're both pleased and excited that Bob has agreed to assume the role of interim President and CEO.

His leadership and experience will be essential as we continue to drive change within Extreme Networks to position us for continued success and to ensure that we remain focused on delivering innovative solutions to our customers.

With that I'm very pleased to turn the call over to Bob.

Thank you very much, Gordon.

As Gordon just outlined, we've had some significant changes last week with the execution of our reorganization.

We believe the reorganization will streamline operations and accelerate decision making.

I will comment more on the reorganization later in the call.

Regarding Q1, we did not execute according to our expectations this quarter and are taking a number of important steps to address the issues that impacted us.

In particular, our results were hampered by the combination of a reduction in inventory in Q4 and constraints on our supply chain, which kept us from closing transactions and recognizing revenue.

While there are some positive news, such as an increase in backlog going into Q2, as well as a $3 million increase in total cash and investments, our performance this quarter is unacceptable.

We do not believe our performance this quarter is an indication of marketplace demand for our products or our ability to win deals.

I've asked Paul Hooper, our Chief Marketing Officer, to comment on demand drivers we see in the market, discuss some of our recent product releases, and customer wins, and our upcoming launch regarding the data center opportunity.

So I'd like to turn the call over to Paul.

Paul?

Thank you, Bob.

I will start by saying that our confidence remains high that demand for more bandwidth, more services and more cost effective communications infrastructure continues to grow.

We also remain convinced along with a growing percentage of Metro carriers and enterprises that Ethernet is the right choice to meet these demands.

As the economy shows signs of stabilization and early indicators of recovery, it is our belief that there is a pent up demand for infrastructure upgrades to support new and enhanced services for delivery to a broader cross section of residences and enterprises.

We further believe that our investment in our portfolio of Ethernet switches and our single edge to core switch operating system, Extreme XOS has positioned us well to take advantage of this demand.

Across our three core markets, enterprise, carrier, and data center, the pressure of the economic downturn has driven additional considerations into the list of infrastructure investment criteria.

Firstly, a deeper and more vigorous scrutiny of acquisition and ownership costs.

Secondly, closer attention to energy demands and the associated costs of running the infrastructure.

And finally, the need to simplify and reduce operational complexity and as a result, benefit from improved simplicity through open and standards based infrastructure.

These new evaluation and selection criteria play well to our strength in these markets.

We can and do demonstrate that the total cost on an Extreme Networks solution is lower.

Our Ethernet switches are some of the most power efficient in the industry and our uniform approach to software across our complete switch portfolio remains a core differentiator.

I will now discuss our three target markets and cover recent exciting product announcements targeted at those markets.

In the carrier market, the drive towards convergence on an Ethernet based infrastructure continues with carriers around the globe as Ethernet holds the price of greater scale, improved service flexibility and lower cost of ownership.

In addition to the deployment of converged triple play networks within metro carriers, cellular, voice and data networks run by wireless carriers continue to be an area of increasing focus for us.

Working with our large strategic and alliance partners, we help deliver cost effective Ethernet network solutions that meet the requirements and specifications when serving as the backbone and backhaul for converged wireless, voice and data services.

We continue to strengthen our hardware and software offering in this important market.

In October we announced the availability of the Black Diamond 2804, Ethernet transport switch.

The latest addition to our flagship product line, the Black Diamond 20K.

The Black Diamond 2804 model, like the larger 2808, is specifically engineered to handle the growing demands of residential video, business Ethernet and mobile back haul services.

The smaller form factor of the new Black Diamond 2804 offers a flexible solution with a full physical scale of the larger chassis is not required.

Our black diamond 20k family enables carriers to increase their network longevity and scale by greatly expanding support voice and other services while their network, while providing higher availability infrastructure using proactive service management software and protocols at a lower overall cost of ownership.

Additionally, in August we announced the acquisition of the software of Soap Stand Networks.

The Soap Stand software provides a foundation for provisioning new infrastructure and services along with the associated service assurance.

This software enables carrier operators to be able to view, provision and control critical transport protocols including provide a bridging, provide a background bridging PDB, Ethernet access protection switching and virtual private line sessions and services.

With the addition of the Soap Stand software, and the ongoing development of our Extreme XOS operating system, we will be delivering new capabilities and features to support these industry-relevant protocols over the coming quarters.

During the quarter, we continued our work with China Mobile throughout China as they build out their next generation wireline and wireless infrastructure.

Although this is an aggressive market, working with Ericsson in China, we successfully offered the best price performance solution and we look forward to continuing this build-out in China Mobile over the course of the quarters ahead.

Today we have over 100 carrier customers worldwide and we've continued to build and extend carrier deployments around the globe.

Turning to the converged enterprise market.

We have announced the additional management and land cards for our Black Diamond 8-K chassis family.

The new Black Diamond 8500 series modules offer value-based connectivity solutions that provide distinct advantages over the competitive HP and Cisco solutions at the network edge.

The 8500 series modules offer customers feature-rich secure functionality in conjunction with resiliency and higher availability options that our customers have come to expect of their enterprise networks.

The addition of the 8500 series modules following the recent announcement of the 8900 series modules two quarters back offer our customers the ability to scale one chassis from a wiring closet all the way through to the data center.

This simplifies the life of a network engineer and also maximizes the investment protection from the time of the first acquisition.

Within the enterprise market we continue to see the growth and adoption of wireless connectivity.

This growth creates a new set of challenges for the IT organization including the predictability of service level, the performance of the connection, and the secure manageability of the wireless service.

Although our existing wireless network portfolio addresses many of these challenges, we realize that the next generation of wireless services will require fully converged technology.

An environment in which the edge of the network offers wired and wireless services, without increasing management overhead, without reducing or compromising service levels and offering far greater levels of infrastructure and flexibility.

With these drivers in mind, we announced in October a new relationship with the Enterprise Mobility Solutions division of Motorola.

Through which we will deliver a new wireless switching portfolio.

This portfolio, expected to ship in the December quarter, is initially an OEM for Motorola products, but will evolve to a Motorola wireless software, becomes a modular component that can run on the appropriate Extreme Summit switches.

In doing so, we intend to provide the infrastructure flexibility being demanded by IT organizations to converge management of both wired and wireless connectivity and the inherent security with the Motorola wireless technology.

As part of our continuing efforts to reduce the cost of ownership of the enterprise network, we recently unveiled limited lifetime warranty on select Extreme Networks switches.

In combination with this warranty offering, we offer express advanced hardware replacement.

Meaning that the majority of our customers can see a replacement switch in the event of a failure on the next business day.

This differentiates us in the market as our competitors generally do not offer such speed and customer service.

In the federal and local government markets, we just announced more of our Summit series edge switches have received TAA compliance, dramatically smoothing the path to integrators and VARs that work business through long established GSA, governmental and educational contracts.

Following this announcement, the majority of our Summit and Black Diamond 8-K portfolios are TAA compliant.

And now turning to the data center marketplace.

With the arrival of virtualization into the data center and its promise to offer very powerful and enabling flexibility and scale, we firmly believe that while this promise offers greater and compelling value, it's going to be accompanied by increasing complexity and result in operational risk and IT organizational confusion around the data center network.

Over the past quarters we've announced and delivered for the data center market the Summit X650, the first switch to offer copper and fiber 10 gigabit connectivity in a top of rack form factor, the Black Diamond 8900 series modules to allow enterprises to scale their end of row chassis solutions to 120 gigabit per slot and our modular operating system, Extreme XOS, that provides detection and response to migration of virtual machines within data centers.

This is only the start of the technology and the solutions that Extreme will offer our enterprise and carrier customers around the globe, as they seek innovative, effective and scalable solutions as they build and operate next generation data centers.

As we look forward, we have exciting and innovative developments under way that deliver a new approach to addressing the deployment and operational complexity of next generation data centers.

We look forward to talking to you about these projects over the course of the next two quarters.

As one example of a new data center win this quarter, in San Antonio, Texas, City Nap is a Tier 1 access point, an internet hub and a data center that serves as a point of conversion for multiple fiber optic networks.

They selected the Black Diamond's 20K for their fiber connected WAN and the Black Diamond 8900 series switches .

to enable hosting and high performance server connections within the facility.

Citynap provides carrier with natural colocation and Internet exchange services for enterprises, content companies, system integrators and network services providers and in doing so represents the next wave of infrastructure that creates the background of the cloud.

The data center market is growing.

It's an area of excitement, attention and investment within our customer base and we have and will continue to respond with solutions to address their requirements, while also offering the flexibility and scale they expect from their infrastructure and from Extreme Networks.

I'll now hand the call over to Bob to review the quarter's

Thank so much, Paul.

As a reminder, with the exception of revenue and the number of shares outstanding, all of my comments will refer to non-GAAP operating results unless I state otherwise.

Non-GAAP operating results exclude the effect of restructuring charges and stock-based compensation.

Turning to Q1 results.

I wanted to first comment on the change in revenue from Q4.

In Q1 we reported $66 million of total revenue, representing a decrease of around $15 million.

Roughly $14 million of the decrease was related to a decline in product revenue.

I want to be clear, we don't believe the decrease resulted from a drop in demand for our products.

Approximately $9 million of the decrease resulted from our inability to deliver products.

Of this, about $5 million was for orders we booked and couldn't ship, and about $4 million was from orders we lost because we couldn't commit to a ship date within the quarter.

An additional $3 million of the decrease resulted from delays in booking orders that have slipped into Q2.

Of this amount, we booked $2 million this quarter so far.

Beyond this, it's difficult for us to quantify the impact of our inability to ship product, because we can't know how many orders weren't presented to us as it became widely understood in our channel that we were having difficulty in delivering products.

As noted in our prerelease, our inability to ship product during the quarter was related to a change in delivery lead times in our supply chain.

During Q4, in an effort to gauge the affect of the global economic recession, we made decisions to manage inventory down and to closely monitor cash flow.

We overcorrected in Q4, and inventory declined by about $10 million or by 45%.

Our supply chain had been operating at a 10 to 12 week lead time with opportunity to pull in certain materials.

During Q1, our lead times almost doubled to 16 to 20 weeks as our key suppliers reduced their capacity in response to the global economic recession.

The combination of significantly reducing our inventory and our product lead times extending to a firm 16 to 20 weeks created a situation in that it was difficult for us to meet customer delivery requests.

While we did everything we could, expedite materials, rush freight, buying on the broker market, we were not able to procure sufficient products to meet Q1 customer demand.

This is clearly an internal execution issue.

What are we doing to improve the situation and what impact might it have on Q2 revenue?

First, we're increasing our investment in inventory from $12 million in Q4 to approximately $16 million in Q1.

We have not replenished inventory levels on all major products as of the end of Q1.

But we will continue to do so throughout Q2.

Also, we're increasing safety stock of inventory at key supplier locations.

Lastly, we're improving the integration of sales forecasting and materials requirements planning.

While we believe we will be back to normal deliveries by the end of Q2, certain product constraints will continue throughout Q2 and may have a negative impact on Q2 revenue.

Net revenue was down in all geographies, reporting $66.3 million as compared to net revenue of $81.3 million in the June quarter.

Product revenue declined 22% in the June quarter and 32% from Q1 last year, to $50.7 million, primarily for the reasons I just stated.

Service revenue was off 6% for the June quarter, and increased 2% from Q1 last year, as our efforts to bring stability to that part of the business have taken hold.

Service revenue comprised nearly 23% of total revenue this quarter.

Net revenue was down in all geographies due to the combined impact of the constraints and the difficulty in closing deals by quarter end.

As compared to the June quarter, North America revenue was down 23% to $26.9 million.

Revenue in EMEA was down 11% to $28.1 million.

And revenue in Asia-Pac was off 23% to $11.4 million.

Product bookings for Q1 were mostly impacted in North America, as they declined by 25% from the June quarter, with bookings in EMEA declining by 7% while booking in Asia-Pac actually increased 8% as compared to bookings in the June quarter.

Our sales team in China posted the strongest bookings for some time.

Our book-to-bill for Q1 exceeded one.

Sales of new products introduced in the market over the last 24 months was 28% of total revenues, which is down from 31% of total revenues in the June quarter.

We look to ramp our newer products such as the Black Diamond 20K, the Summit X650 and the recently launched Black Diamond 8500 and believe that this ratio will increase over the course of fiscal 2010 as parts of the global economy improve.

The ratio of stackable and modular product revenue in the first quarter was 74% and 26% respectively.

The mix of enterprise and carrier orders for Q1 was 72% and 28% as compared to 76 and 24% in the June quarter respectively.

This primarily reflects the decrease in enterprise revenue, mostly in North America.

Turning to gross margins.

The overall first quarter gross margin percentage declined to 55.7%.

Compared to 56.8% in the June quarter, and reflects the significant decline in product revenues, partially offset by greater mix of service revenue which carries a higher gross margin percentage.

Product gross margin declined to 53.4% from 55.3 in the June quarter.

Product gross margins were impacted of course by the reduction in volume and by charges to warranty of $600,000, and additional E&O charges of $800,000.

Warranty charge related to a date, time chip failure used in our X450 Summit products and the charge to E&O related to the excess component chips of specific products that are approaching end of life.

Service gross margins remain greater than historical averages as we continued to further deplete the use of the previously written off spares inventory which was a $700,000 benefit in the quarter.

We have fully utilized the written off spares inventory and anticipate the service gross margins will normalize and trend between 53 to 55% in future quarters.

Overall, Q1 operating expense was $41.5 million, and as compared to the June quarter, declined by $1.7 million.

But increased as a percent of net revenue to 63% from 53% due to the lower reported net revenue.

Sales and marketing expense declined $1.6 million and $21.3 million, resulting from reduced variable commissions on lower revenue and reductions in marketing events and travel.

Research and development expense was essentially even at $13.2 million as development projects remained constant or consistent between the quarters.

G&A expense remained unchanged at $6.9 million.

As compared to Q1 last year, operating expense declined by $9 million and increased as a percent of revenue to 63% from 56%, again due to the lower reported revenues in Q1 of this year.

Sales and marketing expense declined $4.4 million and 21.3, resulting from reduced variable commissions on lower revenue, and fewer marketing events and travel.

R&D decreased by $3.2 million and 13.2 on reduced variable commission and lower project material costs.

G&A declined $1.4 million to $6.9 million, on lower litigation expense, reduced professional service fees and lower variable compensation.

The net loss for the quarter was $4.9 million or a loss of $0.05 per diluted share compared to income, net income of $2 million or $0.02 per diluted share the first quarter a year ago.

Total shares used in the fully diluted earnings per share were 88.9 million.

Turning to the balance sheet.

Cash and investments were $130.7 million, an increase of $3.3 million from $127.4 million at the end of the June quarter.

Cash flow from operations was $4.1 million positive.

Inventory was $16.2 million, representing an increase of $3.8 million from the June quarter.

As we mentioned on the last call, our normal investment level on inventories going forward is expected to be between 15 and $17 million.

Inventory increased this quarter due to increased safety stock on certain products and forecasting mix of products greater than actual bookings for those specific products shipped in the quarter.

Lastly, deferred revenue increased $2.3 million as a result of increased distributor inventory and support revenue.

We ended the quarter with 788 regular employees, which compares to 786 at the end of the June quarter, and 861 at the end of the June quarter a year ago.

Turning to guidance.

As we previously announced, we have completed reorganization of the Company and reduced headcount by up to 70 people or around 9%.

The goal of the reorganization was to streamline operations, simplify the organization, and accelerate decision making.

As a result, we have lowered our breakeven to below $70 million in revenue, and reduced quarterly operating expenses by about $2.5 million per quarter.

To that end, we have eliminated the business unit structure and adopted a simple organizational structure with centralized marketing and engineering.

Both of these organizations are being headed by the previous general managers of the business units.

A charge for the reorganization will be recorded in Q2 for approximately $4.2 million, consisting of a one-time cash severance.

We remain committed to our channel partners and customers and delivering Ethernet network solutions targeted at the converged enterprise, the data center, the service provider markets.

We're going to give limited guidance for our next fiscal quarter.

Our guidance is on a pro forma basis and excludes stock-based compensation and restructuring expenses.

As we see the signs of economic recovery, it's clear that the recovery will be uneven across geographies.

We believe the US economy is still fragile.

But is showing early signs of recovery.

Demand in EMEA has stabilized in the enterprise sector while we continue to see softness in the Service Provider demand.

Asia-Pac, especially China and Japan, have been performing over the past couple of quarters and don't appear to be as hard hit by the economic weakness impacting other geographies.

With that as a backdrop, we believe the total revenue for Q2 will range between 76 and $78 million.

This range anticipates some impact on revenue as we normalize our supply chain deliveries throughout the quarter.

We believe the total operating expenses will range between $40.5 million, to $41.5 million for Q2.

This does not include the full quarterly benefit of the reorganizations we've just completed.

Cash flow for the quarter is projected to be negative, and will include the impact of the severance costs paid in the period.

We project that the gross margins will be between 55.5 to 56.5%.

After completing the restructuring, we expect that our short-term financial model target on an annualized basis will be as follows.

Gross margin, 57 to 59%.

R&D, 13 to 14%.

Sales and marketing, 25 to 26%.

G&A, 7 to 8%.

Operating income, 11%.

In closing, I'd like to emphasize that we believe our reorganization will streamline operations, simplify the organization and accelerate decision making.

This in turn will make us more competitive and we remain committed to our customers, our channel partners, and laser focused on delivering the leading Ethernet network solutions and global support.

With that, I'll turn it over to the operator to open up for questions.

Operator?

Thank you, sir.

We'll now begin the question-and-answer session.

(Operator Instructions).

First question comes from the line of Steve Salberta with Boenning & Scattergood, please go ahead.

Can you talk about the mix of revenue of rod product relative to what you were thinking going into the quarter many was this a situation where you expected to sell a lot more of the new products and older products was what was in demand?

Yeah, this is Bob, I'll go ahead and take that question.

We had expected that our newer products would be the larger sellers for the quarter and that was where we particularly were hard hit because when we brought down inventory in Q4, it was our high runners that were selling in Q4 and then as the supply chain firmed up in Q1, it was the higher volume products we had difficulty getting to ship.

And what is -- why was there a change there in demand?

Do you have a lot of demo units out there?

Is it a function of decision making by your customers.

Yes.

What we're trying to say is we didn't really see a significant change or drop in demand.

What we saw was continued demand and our inability to deliver the product is what impacted the revenue, right?

So we saw bookings and backlog actually increase by over $6 million going into Q2.

And our supply chain basically extended their lead times as they were trying to assess the economic recession impact like we were in Q4 as well.

So we're trying to be really clear that it's not a decrease in demand for our products.

It really was the combination of Q4 taking the inventory down and the supply chain firmed up on us in Q1.

Can you tell us how much of your revenue guidance or I guess the implied product revenue, how much of that you have covered in backlog at this point?

Yes, we don't disclose the actual backlog but we did comment in our prerelease, because of the demand situation, that the backlog and deferred revenue did increase by over $6 million in the quarter but we don't disclose the total backlog.

Okay.

And then finally, on service revenue, I see that's down sequentially.

Were there maintenance contract catch-up payments in June?

Yes, that's right.

Yes, for the June release, we commented there were some annual catch-up benefits that we recorded in Q4.

So we're continuing to see renewals of service contracts going forward but the down tick you're mentioning it was particularly strong in Q4 and more normalized in Q1.

My last question, guys.

When do you expect to get to the 11%?

Is there a time period in that short-term target?

Yes, I would kid around tongue in cheek, as fast as we can.

The reason we did the restructuring was to position the business so we could really accelerate earnings, right?

And I can't give you a hard time frame here to get to 11% but we're going to be as aggressive as we can to get to the double-digit operating income contribution.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Raj Chopra with Wedbush Securities.

Can I just come back to that new target model, instead of asking the time frame, is there an implied revenue that you want to throw out there for 11%?

No, but what I will throw out there is that a dollar of incremental revenue generates about $0.45 of operating income, additional contribution, so, you guys can work the calculation there.

All right.

Thanks.

And then what specifically was unavailable or what specifically was the item that was where the lead times had actually doubled.

The longest lead times were on the chips.

We use outside assembly plants to actually configure the board and the boxes, et cetera.

So it was mostly on the chips.

All right.

And then I think this is important because some of the -- this has been an issue for a while with Extreme.

Are you also making changes in the channel?

I think we've had this conversation before but is this part of the restructuring, to sort of revamp the channel, try to expand the channel, potentially?

Is there anything going on there?

No, actually, we feel we have great relationships with our channel partners.

As a matter of fact, I just attended the North American channel partner conference last week and we're trying to strengthen our relationship with the channel and because we need them to be successful.

They need us to be successful.

So we are culling channel partners from time to time, right, to drive efficiencies, but there's no change in the basic go to market or channel structure.

And then two last questions.

Any change in your Avaya relationships this quarter?

Is there anything changing there?

No, no, we had a good quarter with Avaya and we continue to have a good strong relationship with them.

And then last question.

Would it be possible to provide us with the total amount of NOLs you actually have right now?

Yeah, I think I can go find that out but it should be in the 10-K for the annual report right in the footnotes.

Probably didn't change that much for Q1.

I appreciate it.

Okay.

I'll make a note and I'll follow up and try and get it to you.

Thanks, Bob.

(Operator Instructions).

Our next question comes from the line of Douglas Ireland with JMP Securities.

Please go ahead.

Hi, this is Doug.

How you doing?

Good.

I have a couple of questions.

First, you talked about streamlining the business and eliminating a lot of the overheads, but headcount hasn't come down quarter-over-quarter.

So I was just wondering if we're going to see a a change there, a further change, or if that's completed?

Oh, sure, yes.

As a part of the restructuring, we're eliminating 70 heads, about 9% of the headcount that we exited Q1 with.

So we're at 788 coming out of Q1.

We'll be down to 718 or we're probably down there right now.

Because we completed the restructuring last week.

Okay.

Great.

And then to go on from that, are you going to be able to continue to support these three areas of focus which, I mean, there's a lot of overlap, but there's a lot of differences between the data center, enterprise and carrier markets.

I'm just wondering if those three, which seem to cover all of switching in my mind, are all going to be equally supported.

Yes, we're going to -- our stated strategy is we provide network solutions for the enterprise, the Service Provider and the data center markets.

We feel we're going to get tremendous efficiencies out of the consolidation of the business unit structure, just a quick example, if you take engineering as a point in case.

We had three business units and they were each doing development at three different locations.

We do engineering development here in Santa Clara, in RTP and in Chennai.

So if you do the math, that's nine different groups working on software and hardware development and trying to interface and connect them and make them work together.

By consolidating the business units, we're going to really a consolidated engineering structure run by Saresh and we think we'll get much greater efficiencies and have sufficient bandwidth to continue to develop and make the investments to support those markets.

Okay.

I was at SuperCon last week and I was thinking how different the demands of the carrier market are from the demands of the enterprise and switching closet versus data center.

Just seems like an awful lot to support and sell as you go forward.

Yes.

Did you want to comment on that?

We have Gordon here.

I understand your question.

I think one way to look at it in terms of our development is we develop a series of platforms and those platforms need to be high availability and on top of those platforms, we build layer two and layer three services and software, something that we do across all of our markets.

So there's a lot of commonality.

When you look, using your example, there's certainly some features that are specific to the Metro Ethernet carrier market.

There are some features that are specific to the hosting market.

There are some features that are specific to the large enterprise market.

But the bulk of the platform engineering and the core high availability XOS layer two and layer three services is literally the same.

Okay.

Yes, I just looked at it, seemed like a lot to support as you trim down but I'm sure that you've got that well planned out.

Just one added comment.

As Bob noted, by bringing our different engineering teams together under one leader, I think we'll be able to drive much higher efficiencies, even with a lower overall corporate headcount.

Great.

The last question I have is in terms of the lifetime warranty and I know that HP was offering that and it was putting some pressure on the other -- on competitors.

Do you see that affecting your margins going forward as you maybe lose the ability to charge for that service and support?

Well, yes, obviously -- I mean, we can't charge for it and we're providing it, there's going to be a margin hit.

We've kind of run the numbers.

We don't anticipate it's going to be a material margin hit.

We think we can expand the other service offerings and hopefully continue to mitigate or offset the margin hit.

Okay.

Great.

Thank you.

Thanks, Doug.

Thank you.

At this time I'm showing no further questions.

I'll turn the call back to management for any closing remarks.

Okay.

Well, I guess that's pretty much all we have for today.

I want to thank everybody for dialing into the call and we're looking forward to giving you an update on January on our fiscal Q2 that ends in December.

Thank you very much.

Thank you, sir.

Ladies and gentlemen, this does conclude the Extreme Networks conference call.

If you would like to listen to a replay of this conference please dial 303-590-3030 or 1-800-406-7325, and enter in the access code 416-6330.

We would like to thank you for your participation.

You may now disconnect.