Extreme Networks Inc (EXTR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Extreme Networks' fiscal Q2 2012 financial results conference call.

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

But later, we will conduct a question and answer session, which instructions will be given at that time.

(Operator Instructions).

And as a reminder, today's conference is being recorded.

And now I would like to introduce your host for today, Jim Judson.

Thank you, John.

Welcome to the Extreme Networks' 2012 second quarter conference call.

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

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

On the call today for Extreme -- Extreme Networks are Oscar Rodriguez, President and CEO, and myself, Jim Judson, the Interim CFO.

As a reminder, this conference is being recorded today, February 2, 2012.

This afternoon Extreme Networks issued a Press Release announcing the Company's (audio difficulties) financial results for the second quarter of fiscal 2012.

A copy of this release and a slide presentation of the supporting financial materials are available in the Investor Relations section of the Company's website at www.extremenetworks.com.

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

Extreme Networks wants to remind you that this conference call contains Forward-looking statements that involve risks and uncertainties, including statements regarding the Company's expectations regarding it's financial performance, strategies, growth of customer demand, development of new products, customer acceptance of the Company's products, customer buying and spending patterns, overall trends and economic conditions in the Company's markets.

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, a challenging macroeconomic environment world-wide, 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 including the Company's cost restructuring efforts, the possibility that the Company might experience delays in the development of new technologies and products, customer response to it's new technology and products, the timing of any recovery in the global economy, risks related to pending or future litigation, 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 this information on the 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 call, the Company will reference both GAAP and non-GAAP financial results.

All of my comments will be non-GAAP, except for revenue and the number of common shares.

Non-GAAP results exclude stock-based compensation, restructuring charges, and litigation settlements.

There is a reconciliation table of GAAP to non-GAAP financial results in the slide presentation, under the Investor Relations tab on our website at www.extremenetworks.com, and accompanying our press release.

I will start the call by doing a review of our Q2 fiscal 2012 results.

I'll then turn the call over to Oscar for some comments on recent market developments, some highlights with new customers and thoughts on the Company's transformation.

After Oscar's comments, I will provide guidance for our fiscal 2012 third quarter and full-year.

We'll then open the call up for Q&A.

I'd like to start my comments today by noting that Q2 marked a transition quarter for Extreme, as we've essentially completed the restructuring of the Company that began in Q3 a year ago.

We have achieved the initial goals we set for right-sizing the Company, and we are continuing to evaluate our cost structure, and our allocation of resources across the Company to maximize results.

With our focused strategy and refreshed product line-up, we have now shifted our stance to growing revenues, and capturing the market opportunity we believe exists.

As we noted at the start of the fiscal year, the first half of fiscal 2012 was focused on transforming the Company, and positioning us for growth in the second half and beyond.

We are pleased with the progress of the transformation.

Second quarter fiscal 2012 revenue totaled $82.8 million.

Total revenue was up 5% sequentially, and product revenue was up a stronger 8% sequentially.

Year-over-year, our revenue for Q2 is down 3%, and was impacted by ongoing economic weakness in EMEA, and some extended sales cycles, and delays in project awards in Asia Pac, which we experienced through the first half of 2012.

Turning to geo performance, the Americas had a third straight strong quarter with revenue of $36.8 million, up 19% from Q2 a year ago, and up 10% sequentially from Q1 2012.

North America continues to execute well, under the flattened management structure we implemented a year ago.

North America had a particularly strong quarter in the education vertical in Q2, and it is the fastest growing region through the first half of the year.

The pipeline of opportunities in North America is increasing, with a greater number of large potential deals.

Latin America has also performed well, in part due to the management consolidation into one cohesive region during the restructuring, and has also shown solid growth, two quarters in a row.

EMEA revenue is up 5% sequentially from Q1 FY '12, which is normal seasonality.

EMEA revenue was $32.4 million, a decline of 13% from Q2 a year ago.

This was mainly attributable to the ongoing economic weakness in many of the larger countries in the region, and our strategic decision to eliminate select Metro Ethernet products from our portfolio, which had a good support within the region.

We do not expect additional weakening in EMEA at this time, but our pipeline of larger deals continues to face lengthening sales cycles.

Asia Pac's revenue was $13.6 million, which is down 21% from Q2 a year ago, and down 7% sequentially from Q1 FY '12.

As we highlighted last quarter, our Asia Pac business tends to be driven by large deals with our reseller partners in the region, and can be lumpy depending on the timing of when deals close.

Overall, we see a stable pipeline of business going forward in most countries, but opportunities continue to be delayed in several countries.

Total gross margin in Q2 increased 0.6 point to 56.1% versus Q1 of 2012.

Product margins improved sequentially 1.3 points, due primarily to cost reductions obtained from our suppliers.

Service margins dropped 2 points, due to lower Q2 service revenues on mostly fixed service costs.

Operating expense in Q2 increased $1.5 million, to $40.7 million from Q1 FY '12 levels.

Three primary factors contributed to the increase in expenses in Q2.

The first was incremental litigation expenses from a successful trial in November, and a new lawsuit.

The second factor was additional audit tax and legal fees for year-end statutory and tax filings in our legal entities.

During fiscal '11, the Company changed our external auditors, and the accounting service providers in most of our entities around the world.

This has led to some one-time duplication of costs with year-end of statutory and tax filings which hit in Q2.

Lastly, we incurred some incremental business development and testing costs during Q2, working with prospective channel partners to expand our channels to market for our new BlackDiamond 8X product.

Second quarter operating income was $5.8 million or 7% of net revenue, representing a 10% improvement, compared to operating income of $5.3 million or 6% of net revenue in the second quarter a year ago.

Operating income in the first quarter of fiscal '12 was $4.6 million or 6% of net revenue, representing a 25% improvement sequentially.

EPS for Q2 was $0.06 per share.

Turning to the balance sheet, total cash and investments for the quarter was up $5.7 million, to $146.4 million.

DSO increased from 33 days in Q1, to 43 days in Q2.

This drove a $10.4 million increase in accounts receivable, primarily due to shipments being more backend loaded in month three than normal.

We saw a slower start to the quarter, than in prior quarters, as we focused the sales team on new product training and sales process certification in early October.

We also experienced some product shortages later in the quarter, due to mix issues as we transitioned our product lines to the newer products.

Offsetting the increase in AR, were lower ending inventory, higher accounts payable more in line with historical levels, and higher deferred revenue associated with higher distributor inventories.

At this point, I'll turn the call over to Oscar for his comments on recent market developments, and accomplishments during the quarter.

I'll be back after his comments, to discuss guidance moving forward.

Oscar?

Thank you, Jim.

And I want to thank all of our investors for joining this call.

As we've discussed in past investor calls, we've been in the process of transforming Extreme over the calendar year 2011.

We have focused on restructuring our business towards the goal of consistently achieving double digit operating income, without the need for significant revenue growth.

We have aligned our resources to deliver high customer value through innovation, and we have focused our marketing to derive revenues from some of the highest growth multi-billion dollar verticals in the communications market.

I'm pleased to report that our major cost restructuring activities are now behind us, and we are delivering, what we believe is a best-of-breed product portfolio, that is designed to position Extreme as the leading competitor in these targeted vertical markets.

We expect to deliver an expanded portfolio of mobility and cloud solution products in this quarter, and we also will begin shipping these products that are designed to more effectively address the competitive campus access market.

With those new product portfolio, we will now focus on driving growth, in both revenue and market share.

Overall, we expect revenue growth to provide increasing leverage to the bottom line, and increasing free cash flow.

We are now focused on driving our vertical market strategy, which is targeted at data center cloud customers, the education market, and mobile carriers.

We continue to see increased revenue and customer traction in these verticals, and we expect to see higher revenue growth for these verticals, as we deliver new product portfolios.

At the end of Q2, we shipped the first BlackDiamond X8 switch products, as part of our open fabric architecture for cloud networks to beta customers in North America, Europe and China.

These beta customers represent a wide diversity of cloud [network] deployments across the enterprise, service provider, high-performance computing, and Internet exchange customer segments.

We are beginning to see increased interest globally for the BDX8, and we received our first order for these products in the quarter.

We expect this product to be generally available for customer shipments during the current quarter.

The BDX8 complements our recently introduced Summit X670 top-of-rack switch, and our Ridgeline management platform, and is based on our modular and fault-tolerant XOS operating system.

The BDX8 is designed to deliver a scalable data center architecture, that is predicated on openness and interoperability, as well as minimizing total cost of ownership.

This cloud scale open fabric architecture is targeted at the hosted cloud vertical, and the existing enterprise data center customers, and leverages the same technology into large adjacent markets, including high-performance computing, and internet exchange customers.

Last quarter, we mentioned of the on-going testing and third-party validation of our open fabric products, conducted by the Lippis Report.

The final report was published in November, highlighting the BlackDiamond X8's best-in-class latency, traffic throughput, power consumption, and port density versus it's peer group.

The Lippis report also included testing of the Summit X670 top-of-rack switch, reaffirming leading performance and total cost of ownership of that platform.

Subsequent to Lippis' testing, and in conjunction with our testing partner Ixia, we conducted the industry's first high-density 40-gig fabric switch test with 192 40-gig ports on a single switch fabric configuration.

These high-density performance tests further validate the BDX8's high-performance at full capacity.

The high port density inherent in the open fabric architecture of the BDX8, allows customers to deploy increased 10-gigabit data center cloud server connectivity with fewer network components.

Networks with fewer components can significantly lower the power consumption, the necessary rack space, and the capital cost of the deploying cloud data centers.

By freeing up more rack space, cloud customers can then leverage the recovered space and power savings, to add more servers that house more virtual machines, and more storage components.

Beyond these benefits of high-density fabrics, our XOS operating systems provides simplicity of operation, enabling higher productivity and network automation, while eliminating some of the complexity of competing data center fabric architectures.

An Extreme-based open fabric data center offers a smaller switching footprint, and can enable greater productivity for private data centers, and help increase the revenue potential capacity for cloud operators.

With these new products, and our more focused marketing efforts, we're beginning to see increased recognition by key technical industry analysts who can provide customer influence and education.

In addition to the positive positioning we have received from Gartner and Info-Tech Research, we further expand our market visibility as Dell'Oro Group released the first data center report.

Dell'Oro ranked Extreme as a top five internet vendor in data center deployments, based on our then existing product portfolio in calendar 2010.

This report measured total revenue and ports, shipped to data centers during the calendar year 2010 for 1-gig, 10 -gig, and 40-gig ethernet technology.

The 10-gig market is expected by industry analysts to grow faster than any other segment of the ethernet switching market.

Between Q1 and Q2, our 10-gig port shipments grew by 37%, exceeding our overall revenue growth, and the expected market growth rates.

As a follow-on to this report, Dell'Oro characterized the nascent 40-gig market, placing Extreme as the number one vendor based on port revenue for modular switches, and second overall, across modular and fixed vendors.

Between Q1 and Q2 of FY '12, Extreme 40=gig port shipments grew by 130%, based on our BlackDiamond X -- 8K, Summit X650, and Summit X670 product lines.

We believe our early investments made in 40-gig ethernet technology, targeted at data center upgrades, will drive added value and revenue for Extreme over time.

In addition to these global reports, we also received local recognition of our cloud portfolio from various publications.

In Q2, the X670 top-of-rack switch received the award from the Digital Times of Korea, naming the X670, the hit network switch in 2011.

And in December, our BDX8 platform also was noted as the best 40-gig core switch by ZDNet in China, and received the 2011 ZDNet Award for Excellence.

In Q2, we saw several significant new data center wins.

In Q2, we won an initial deployment at SK Telecom's cloud data center in Korea.

The SK Telecom network offers both public and cloud -- and private cloud services.

This is our first 40-gig deployment in Korea, and reflects a solid competitive win against most major data center competitors.

In China, we won a high-performance computing deployment at Sinopec Jilin Oil, a wholesale and retail petroleum products company, an European data center wins included iHome, an internet exchange provider in Russia, Sapa, a broadcast provider in Sweden.

In Germany, we began deployment at a major government data center, and in Italy, we began deployment at a top-tier financial institution.

During the quarter, we also announced a significant network expansion at Elisa Corporation, the leading mobility company in Finland, that is also a leading hosted cloud provider, serving Finland, the Nordic countries and Russia.

In the US, we received our first orders from two customers including Solers, a cloud services provider for the US market, and a US utility customer.

We also continue to expansion deployments at a major chip manufacturer based in North America, and a US-based pharmaceutical company.

Turning to the education vertical, K through 12 and university campus customers are increasingly looking for cost effective, high-performance wired and wireless networks, which enable rapid deployment of pad and smart mobile devices.

The rapidly expanding deployments of 802.11n access points with 1-gig Power over Ethernet connectivity are driving a refresh of the wiring closet at switch.

The traditional 10.100 edge is now being replaced by switches with 1-gig down-link's to access points with PoE and 10-gig up-links.

This evolution is driving our focus in 1-gig and 10-gig switching for campus networks.

Beyond simple conductivity, education campus customers expect this new infrastructure to provide control, security, and user recognition.

All of these requirements enable and enhance quality of user experience, while providing the lower power consumption, ease of configuration and lower cost of ownership needed to meet increasingly lower IT budgets and resource constraints.

In October, we launched our mobile student architecture at EDUCAUSE, a major industry trade show in North America for education IT decision-makers.

This architecture, designed in conjunction with our partner Motorola Solutions, utilizes our collective experience in this vertical, and has three key elements.

First, it leverages the Extreme's network switching portfolio, which we believe -- which we believe in a typical Extreme-based converged wire-to-wireless LAN deployment, can over a five-year period offer a significantly lower TCO, when compared to major competitors.

Second, it includes the advanced identity management and network automation features available by combining Extreme XOS, and our rich management platform.

And third, it introduces a single converged wired and wireless LAN data plane, reducing the traffic bottlenecks now being felt at the wireless controller.

A single data plane makes it easier for university IT managers to unify wireless and wired networks at lower costs, and it eliminates the hub and spoke architecture where the wireless LAN controller is a throughput bottleneck for data applications.

This architecture is targeted to enable easier, next-generation wireless upgrades and cost effectively scale the network.

Over the course of calendar 2012, we expect to deliver additional capabilities that further integrate wired and wireless LAN policy management and subscriber control.

In Q2, we signed 22 new notable education customers globally.

New customers in Europe included deployments at Krakow University in Poland, who was expanding their high-performance campus for their Biotechnology, Chemistry, and Physics institutes, and deployments at the Technische Universitat in Darmstadt, Germany.

In Asia, we delivered solutions to the University of Colombo in Sri Lanka, and the Indonesian Defense University as well.

In the United States, we began deployment at the New Mexico Institute of Mining and Technical Engineering, and Columbus Grove schools in Ohio.

During the quarter, we ramped deliveries at Baltimore City Public Schools, one of our largest K through12 deployments to date, and we won an initial deployment at the Universita Ca Dolega at Santa Maria in Peru.

While we are focused on our select verticals, we continue to also see revenue across the wider enterprise markets.

In Q2, other new enterprise customer -- campus customers included a major regional data center in the United States (inaudible) for healthcare, a new deployment at ICA Floor, a leading engineering and construction company in Mexico that is upgrading their project design and applications capability, included associated data center and disaster recovery facilities, and a deployment at the East Hotel in Canberra, Australia, where we leverage our combined wired and wireless portfolio.

Another new customer included Finasa, which is the Brazilian Ministry of Health, and who is deploying a new network encompassing over 40 buildings, and is outfitting an extensive healthcare data center using Extreme products.

We also continued to deploy at the new Seoul City Hall, which is a landmark win in Korea, and will serve to provide a reference for other public deployments.

In addition, we were also deployed in a public safety network in Massachusetts, leveraging our high -- our 10-gig high resiliency capabilities.

In the mobility vertical, we continue to see traction via our network equipment partners, serving Tier 1 mobile operators, and our traditional server providers end user customers.

We also saw wins at new customers, looking to leverage their fiber or their microwave infrastructure for mobility and public safety communications back haul.

Through our NEP channels, Extreme switches are deployed at more than 160 Tier 1 mobile networks around the world, including 19 of the top 20 mobile operators world-wide.

During Q2, new mobile packet core deployments included mobile operators in North America, Latin America, Asia, Europe, and Africa, including a new deployment at Tier 1 mobile operator, Etisalat in Egypt.

In mobile back haul, we expect ramping global smartphone and tablet deployments, coupled with strong service provider investment in LTE services, will drive deployments for next-generation back haul products.

The new E4G Cell Site router family of mobile back haul infrastructure product is currently in beta, with general availability expected this quarter.

In Q2, we received our first orders from one of our mobile network equipment providers for their internal lab deployments.

We have also participated in our first trial deployment in a US municipal public safety customer network, with another of our NEP partners.

Initial customer and partner feedback for the E4G product family is very positive, and we expect revenues from the E4G product family in the second half of FY 2012.

In the mobile operator market, we believe Extreme is well-positioned to be deliver both next-generation mobile backbone, and new mobile back haul solutions.

As carriers upgrade from 3G to 4G LTE, we believe Extreme will help participate in the next generation mobility back haul upgrades, which is an adjacent opportunity to mobile backbone.

We also expect mobile operators and other service providers to embrace hosted cloud solutions, as many work to diversify their revenues.

We expect to leverage our cloud scale products, such as the BDX8 and the Summit X670 open fabric products, along with our expanding NEP channel relationships to enable Extreme to derive revenues from telecommunications companies who diversify into cloud server providers.

In summary, we believe that our focused vertical market strategy is working, and there is increased recognition in the marketplace, for what we believe are the best-of-breed products.

We continued to focus on creating highly differentiated solutions for cloud providers, education customers and mobile operators, and we're expanding our R&D capabilities with experienced resources in our existing lower cost revenue -- lower cost venues.

And as a result of our Company transformation, our financial results are beginning to demonstrate the added leverage that we can derive from our reduced cost structure.

At this point, I'd like to take a moment to again, thank our dedicated employees world-wide for their hard work and commitment to our success at Extreme.

We remain committed to our goal of attaining consistent double digit operating income, and increasing shareholder value.

I look forward to keeping all of you updated as we progress.

And now, I'll turn the call back over to Jim, who will share details regarding our guidance and -- for Q3 and FY '12.

Jim?

Thank you, Oscar.

As I mentioned at the start of the call, we have essentially completed the cost restructuring of the Company that we initiated in Q3 of FY '11.

We'll continue to focus on prudently taking costs out of our operations, and improving efficiencies, as we move forward.

However, our major focus now shifts, to driving increased revenue and expanding market share.

We believe that success of our new products, and our vertical market focus will help the Company further expand margins.

At this time, we believe we have the products beginning to ship in Q3, and the basic cost structure in place for delivering our objective of double digit operating income on a consistent basis.

Fiscal Q3 tends to be a seasonally -- seasonally flat to down quarter, for revenue.

As such, we expect revenue for the third quarter to be in the range of $80 million to $85 million, and EPS in a range of $0.06 to $0.08 per share.

For the full-year, we are maintaining our previous guidance for revenue and EPS.

With that, we'll open the call for questions.

John, please start the polling.

(Operator Instructions).

And we will take our first question coming from Jonathan Kees from Capstone.

Please go ahead, Jonathan.

Great, thanks.

Hi, Oscar, hi, Jim.

Hi, Jonathan.

Hi, Jonathan.

Thanks for taking my questions.

What I would like to do, if it's okay with you, is first start with some simple housekeeping questions, some quick ones there.

And then move onto some higher level questions.

So with the housekeeping questions, if I can ask where the stackable versus chassis, the breakout there?

The percentage of revenue for the rolling four quarters of -- for the verticals, and the book-to-bill?

Okay.

Let me start with the verticals, and we'll look up the stackable versus chassis.

It's not really something we've been tracking, as we had in the past.

Jonathan, I think one of the things that we're trying to do, is start tracking our verticals more, so our verticals with were on a rolling four quarter basis, approximately 28%, just under 30%.

We think that this is ebbing and flowing, until we get our new products online.

And, Jonathan, the percent of stackables was 80%, and chassis were 20%.

Great.

Okay.

And book-to-bill, please?

We haven't been giving a book-to-bill.

Okay.

All right.

And then the number of 10% customers for the quarter?

There was one.

And it was Westcon, right?

Right.

Great.

Thank you for that.

Now to the other set of questions.

The BDX8, that's available now.

The G4E, that's end of the March quarter or I guess -- yes, the March quarter.

You're looking for these new products to become material contributors to revenue by Q4 of fiscal 2012?

Yes, Jonathan, let me clarify.

So both of the E4G family and the BDX8 will be available simultaneously, because they will be coterminous with the release of our 15-1 software load, which enables both of those product families.

So there'll be effectively [GA] at the same time.

We're expecting -- so the BDX8 is not available yet, and the E4G -- both the E4G and the BDX8 will be available this quarter for GA.

Okay?

Just wanted to clarify that.

But, and then to go onto the next part of your question, yes, we do expect revenues for the BDX8 and the E4G in Q4.

We also expect that we may see some of that, a little bit of that in Q3.

And do you anticipate them becoming material contributors by Q4?

Or is it still a little bit too early?

I think it's a little bit early to tell.

We do have a growing pipeline for both.

So how big that will be, I think it's really too early to tell.

But Q4 will be the first quarter that we have a full quarter of those product being available.

Okay.

All right.

That let me ask you about the macro conditions.

You talked about some of the orders being lumpy.

You've talked about the ordering process for like EMEA being extended, but EMEA should be improving for next quarter, excuse me, March quarter.

Are you seeing a change in the macro conditions?

Has it gotten more cautious?

Has it gotten worse?

Or has it stayed the same, since last time we spoke on the earnings call?

So I think we have to take it, sort of customer type by customer type.

Clearly, in the service ladder CapEx space, there's been a lot of other discussions by other vendors as well, where we've seen some of our service provider -- some dampening of the service provider CapEx space.

So hence, we saw some of our mobility product less in Q2, than what we expected to see at the beginning of Q2.

Okay?

And so, in that particular part of the markets that we serve, I think that that's a little more dampened, and it's yet to be seen, how that recovers within Q3 and going into Q4.

So, I think that's something that we're watching very carefully.

When it comes to enterprise space, you can see we've done quite nicely in North America.

And a lot of that is enterprise, and so we're seeing the North America enterprise still continuing to be good for us.

Of course, we've got seasonal adjustments and all those things that go with it, as Jim indicated.

But I think that the enterprise business in North America, and even enterprise business in parts of Asia are still very good.

Europe, we planned for Europe to be down in certain parts.

So as Jim indicated, we don't think we're going to see further softening, because we've planned for it.

So we could always be surprised, macroeconomics are what they are.

It's somewhat unpredictable, so we're watching that very carefully.

Jim, I don't know if there's anything you want to add to that?

No.

I was just going to maybe add that we are seeing a very good pipeline of larger deals, in EMEA in particular.

But they're slow to actually reach a buying decision.

Yes.

I think there's a few other things going on here, especially when we're talking about the cloud type of players.

The cloud players are the kind of folks that have usually larger deal sizes.

When they have larger deal sizes, and it's an early market with a lot of competing opinions as to what fabric is the best fabric, et cetera, they take their time about around testing, investigating et cetera.

And it has a tendency to lengthen the sales cycle early on.

So I'm expecting that that's going to continue for a short while, probably into -- further into calendar 2012, which would be even our fiscal 2013, early fiscal 2013.

But then as the cloud operators and cloud deployers begin to get more confidence in what they're buying, then I think those sales cycles will start to contract a bit.

There is investment going into that area, so we don't see it as an issue of budgets or investment, we really see it as an issue of customer decision-making from a technical standpoint.

Okay, all right.

That helps.

All right, that helps a lot then.

So how about ASPs?

Is it fair to say that they're going down?

You talked about, Oscar, that you sold a lot of ports in the quarter, more ports than -- a higher level of ports.

Does that imply that your competitive pricing is still pretty tough out there, or has it gotten worse?

I don't know if it's gotten worse.

I think it's been like that, where we shipped more ports in the quarter than we -- than the revenue that would have been associated with, let's say, a year ago.

Right?

Because they are -- and you can see this in third-party reports like Dell'Oro, where you see the ASPs do drop.

We don't see it every quarter.

We see it discounting, getting a little more aggressive, depending on what are competitors do, and depending on customer budgets, et cetera.

And so it's somewhat -- I would say the word lumpy, but it's somewhat like a bit of a roller coaster, where it will come down, then it will flatten a bit, and then come down, and flatten a bit.

So it's kind of a bit of a stair step, I guess, I should say.

Jim?

I was going to say, is really is dependent for us, on how many big, strategic deals we may have during the quarter.

So to Oscars point, it does appear to be a little bit of a roller coaster.

I guess, I would say, looking at the numbers, there doesn't appear to be any sort of dramatic change in the pricing environment, similar to what we saw a year ago, in the Q3 timeframe.

Yes, I don't think it's more aggressive.

I think it's just equally aggressive.

Right.

The other thing I'll say is that, as you can see in our margins, we've paid careful attention to products cost reductions.

We're beginning to see some of that, and we should experience some of that more going forward.

Okay.

Great.

All right.

One last question, then I'll cede the podium.

The -- you filed an 8-K a couple days ago, about an option to sell, I guess, the second part of your corporate campus.

And if that option -- if both options are exercised from what I'm telling here, it will bring in about $40 million to $48 million in cash.

You're already have a high cash position, and I understand that you need to have so much cash on your balance sheet.

When you're doing business with the carriers, you want to obviously be -- have a strong balance sheet, and want to be the next Nortel or something like that, so you want to demonstrate that with your balance sheet.

But I would think that you already have, above and beyond that level, I guess, roughly $100 million.

You have a good amount of money above that level of cash on your balance sheet, especially if you get proceeds from those options on your corporate headquarters.

Just wanted to revisit that question, and not so much about if you're going to use it for share buybacks like was asked of you previously, but just are you considering uses for that additional cash that you could be attaining?

And I'm also modeling here some cash generation you will start to be creating organically, contributing to your cash position.

So, you're going to have a lot of cash on your hands.

What do you -- what are you considering doing with it?

Great questions.

Jonathan, let me start by clarifying something.

The option -- if you roll the two building -- let me just give you just a bit of background.

We have a campus in Santa Clara, which is a sizable campus.

We had an option to sell the east side of the campus, and we now have an option to sell the west side of the campus to the same developer.

It provides that developer a lot of efficiency.

And so the price for the price that's on the table for us to close, and they have an option to close, is a total of $48.5 million together.

So just wanted to clarify the number, okay?

And so, regarding the uses of cash, clearly, the cash is not in hand.

Right?

So I don't want to pre-suppose what we would do with cash, that hasn't materialized yet.

They are -- they are paying for the option, so we do -- we are receiving payments for the option.

So, we do have confidence that will come to a successful closure.

But until it does, I don't like to count my chickens before they're hatched.

Right?

I'm sure you can appreciate that, and our investors will as well.

Nonetheless, this -- we expect that this will close on or about December.

If it's closes on or about December, we've got a little bit of time to determine what we want to do with that cash.

So, I don't have an answer for you now.

But clearly, your point is well-taken that is a lot of cash.

And so, we need to think about what is the best use of that cash.

Okay.

So let me understand, it should happen by December of this calendar year?

You're selling the east part, and then another part of your campus -- it's not a -- and it's not a sell the campus, and the lease it back kind of situation.

And then, at some point you'll update us, once you have the chickens in hand, what are you going to do with them?

Exactly.

I think that that's something we owe our investors forthcoming, about what we will do with our cash.

I don't have an answer for you today.

Again, the money's not in hand, but certainly we need to do some planning around that.

The other thing, I just want to clarify is, you're right, it's not a sale lease back, so we would not be staying in the building long-term.

However, we have also negotiated that we don't have to move immediately.

So we can make sure that we prudently take the time we need to find the right-sized campus, and the right location for us as a business.

Okay.

-- so there's time to do that.

That implies that you could be moving your headquarters then, in the next -- by December?

No.

No.

It implies that after December, we have a time period by which we -- the developer would like to develop the property, and like to move heavy equipment in here.

So we would have to move, but that gives us two years of option.

And we have the option to get out before the two years.

But it gives us very favorable market rates for rental expense at the same time that -- while we're looking.

Okay?

So I think actually it's a good deal for us.

Okay.

Great.

Thanks for that.

I'll cede the mic.

Very good.

Okay, thank you.

And we will take our next question from Rohit Chopra from Wedbush Securities.

Please go ahead, sir.

Hi, this is Ryan Flanagan on for Rohit Chopra.

You got to a few of my questions already.

I did have a few follow-ups.

Related to visibility in general and the demand environment, are you seeing any weakness?

You had mentioned some signs of weakness in the Asia geography, but there was pipeline of larger deals there.

Besides those deals, what's giving you a visibility for revenue to ramp here in the second half of the year?

Well, we continue to see a solid pipeline, when it comes to the Americas.

Right?

The Americas has performed well, both North and South America.

I think the reorganization of those teams has reinvigorated that team, flattening of the structure has been good.

We're seeing a lot more deals, we're getting more to the deals, and we're able to participate in more deals.

So as a result of that, I think that gives me better visibility than what I had a year ago.

In Europe, we've done a lot of scrutiny in Europe, in terms of because -- due to the macro environment where we are.

We've done a lot of scrubbing of those pipelines.

So I think we've got very good visibility there, and actually Europe is the team, that has the most amount of tenure and statistics, et cetera, and performance over the time of the Company.

So a very sophisticated view of how we effectively forecast there.

Asia-Pacific is the one that is a little bit -- it's spotty, right?

Select countries have issues in terms of macroeconomics, we also have larger deals there.

But using the word lumpy, I hate using word lumpy, but I'll use it anyway, because that's probably the best way to describe it.

As those big deals, that sometimes come within one side of the quarter -- quarterly boundary or the other side, so they can really fluctuate our revenue, out of Asia.

So I hope -- let me stop there, and see of that gives you the answer you want.

Yes, that helps.

That helps.

Okay.

My last question was, you talked a little bit about ASPs, in terms of competitive environment.

Besides ASPs, are you -- just the general competitive environment, are you seeing any change there domestic versus international, maybe some comments on any discounting in the quarter as well?

From a discounting standpoint, as I mentioned earlier, wasn't significantly different than what we've seen in the past couple quarters.

We did have one very large deal in the US, that put a little bit of pressure on margins and on the overall discounts.

But the underlying trends appear to be pretty constant at this point.

One of the things I'm going to say is that we're being aggressive and trying to grow our share, especially when it comes to 10 Gig and 40 Gig technologies, and in the campus, 1 Gig and 10 Gig technologies.

As a result of that, when we realize that there are strategic deals on the table, we will invest by making sure we get the right initial pricing into those customers, that are going to prove good extended business long-term.

So we want to be aggressive about acquiring market share.

We know we have other competitors out there that are aggressive as well, so we don't want to say no to strategic and important deals.

What we do stay away from, are deals that don't make any sense for us, that are neither strategic nor important, and yet they bring a low-margin.

Those are deals we stay away from.

Okay, thank you.

And we will take our next question from Steve Baughman from Divisar Capital.

Please go ahead, Steve.

Good afternoon.

Thanks for taking the question.

Hi, Steve.

I wonder if you can just start with, probably the most difficult question, and Oscar, you touched on this a little bit before.

But I don't recall you guys in recent history at least -- and so maybe that means the last decade -- getting such a strong product reviews, and getting such recognition from industry analysts.

I just wonder if you can talk a little bit about how that changes the business, and maybe any sort of quantification you can put around about, how many different opportunities you're going to see, and what that does to the pipeline?

Sure.

I'll do the best that I can on that one.

Look, the honest truth is that Extreme has always had great technology.

I think that we have just not really gotten the education out in the marketplace, either the customers, or to a lot of analysts for them to understand, how our technology really adds true value and differentiation to our customer base.

Yet same time, we have got some significant customers that have been on Extreme in the last decade.

As a result of that, they run their businesses, and they swear by Extreme.

So really for us, it's been a question of continuing to invest in technology.

And then getting the word out there, in the appropriate venues to make sure that we can get the word spread as widely as possible.

The end result of that is -- and I'll quote one of my country heads in Europe, his reaction after I talked to him in early January was, Oscar, I'm actually getting calls from customers, as opposed to me having to go and try to push on a rope to get into customers.

So, the end result is that, we suddenly, not only get to see more deals.

But we actually have customers, who are very appropriately looking at RFPs, that they are about to produce and saying, who is -- what are the lists of the vendors that need to be on this RFPs?

Sure, it needs to be X, Y, Z, but it should also include Extreme as well.

And that's really the end result.

So we should begin see more deals, we should begin to see higher pipelines as a result of that, and we won't fit everywhere.

Don't get me wrong, I'm not trying to paint a panacea here.

We're -- the places we fit and we fit well, we should win more deals than we otherwise would have won before.

That's what I think is the end effect.

And that will help grow our revenues, and I'm expecting to see revenue growth, really starting in Q4, and then moving into FY '13.

Great.

Well, that's helpful perspective, and certainly, exciting to have products that customers are excited about.

So I'm looking forward to seeing that developed over the rest of this calendar year.

Just a couple more quick ones.

And touching on the real estate transaction that you discussed a little bit earlier.

Obviously, you have the first part of this deal announced -- I don't remember when that was, maybe 9 months or 12 months ago.

It was my perception that you guys felt not necessarily confident that deal was going to close, given the history of having entered into an options agreement some years past, prior to you joining.

Is it fair to say that you're confident that this is going to close, has gone up significantly, with the second part of the transaction?

Well, I think so, yes.

We've been in deep negotiations with the developers, clearly, the developer -- a lot of things ebb and flow, based on the market for real estate.

And so what they want to do here is convert this campus where we are, and if you know where we are, we're in a bit of a residential area.

They want to convert it into high density residential, and commercial.

So a lot of these types of developments are going up in this part of California.

And so, the past deal issues were really based on, would the city give them all the permits that they need?

Would they really get -- be able to do, and get through all the hurdles that they need to get through?

Now I think they see better line of sight, to get into those hurdles.

Of course, it has to complete the process, so I don't want to pretend as though everything is done.

But the option is there, and we're a lot closer within the 12 months, because we believe that a lot of the hurdles have been crossed for the first part of the campus.

And now, the second part of the campus, adding that to the deal, makes it that much easier.

So we don't see those issues now, as we've seen them in the past.

Okay.

That's great.

Just -- does the developer have any incentive to exercise his option early?

I mean if the approvals from Mountain View or Santa Clara come through, could they decide to exercise the option in the middle of summer, and have a little bit more certainty about that?

We don't believe that the approvals will come through any earlier.

And so we would need to be prepared that the approvals could come through on time or potentially be delayed.

And we're talking about regulatory aspects of things that would have to be completed.

So our belief is that, we seem to be on track, and we're watching it on a daily basis.

But we believe that at this point, it is different than the way it was a couple years ago.

Great.

Thanks.

Last question I have, I guess this is probably for Jim.

Jim, you mentioned litigation expense in the December quarter, as contributing to the increase in operating expenses.

Is it possible to predict litigation expense in the future, or is this a cost of business given the IP litigation landscape?

Or is it more of a one-time item in the December quarter?

Yes, I think it's an ongoing cost of just being in this industry.

I think that the costs that you saw this past quarter, were significantly higher than what a sort of normal run rate would be.

If you look at just the G&A expense of this quarter versus how it's trended over the last three or four, significantly higher.

So I would say the level that we see in the last three or four quarters is more in line with the normal kind of expenses associated with litigation activities, being baked into our expense base.

Okay.

I think you mentioned that it was a successful case in the December quarter.

Does that mean that somebody sued you, and you successfully defended for non-infringement?

Yes, that's true.

Okay.

Great.

Thanks very much.

Thank you.

Thank you.

And we'll take our next question from Dan Wesson from Westcap Management.

Please go ahead, Dan.

Yes, thank you very much.

Thanks for taking the questions.

Most have been answered by now.

But just a quick follow-up on the real estate related assets.

Could you remind us what the total square footage of those two campuses are?

I believe it 275,000 square feet.

It's 16 acres.

I think the more relevant thing is 16 acres, because I think the developer would have very little use of the existing buildings, they will be rebuilding.

Understood.

Okay.

That makes sense.

And can you share with us at all -- I know there was contingencies on the first option, relating to getting the zoning approval for residential.

Can you inform us if that has been approved at this point?

At least on the first piece?

No, that has not been approved yet at this point.

But in terms of just the desires of the city, and what they're looking for on this property going forward, that's well-aligned with what the developer is proposing, in terms of a build out plan.

The other thing I would add here, that I think is important for our investors is that, since I mentioned the 275,000 square feet, our expectation is that as we find a new home within the area, we will not need anywhere near that square footage.

Because of the movements that we made in our transformation as a company, we've made a lot of movement in R&D and R&D labs to the Raleigh, North Carolina area and to [Shanai] India.

As a result of that, we no longer have to replicate the same type of square footage in the Santa Clara area.

That's going to create some efficiency for us going forward.

Good enough.

And just to clarify, the new option holder on the second option, Extreme Depot, that is an entity that's affiliated with Trumark?

Same entity, yes.

Same entity.

Okay, great.

Last one on this note is could you share with us what exactly the option payments are?

And are they quarterly?

There are some milestone payments of which we've collected $1 million to date.

I don't know off the top of my head, what those milestone payments are leading up to the exercise, but there would be similar levels of payments over the next year here.

Okay.

Fair enough.

And like I said, most have been answered.

I guess, one follow up on maintenance.

I didn't see any announcement for your annual meeting in 2011.

Can you give us an update on when you think that may take place?

Sure.

Actually, we have just set a date for the annual meeting.

It will be March 21, Wednesday, March 21, 2012.

And you should see that going out as a part of our Q on Monday.

It's at 2 PM, by the way, so if anyone -- or any of our investors would like to drop by, we'd be happy to host you.

Very good.

That's all I have, and thanks again.

Thank you.

Thank you.

And our next question comes from Jeffrey Meyers from Cobia Capital.

Great, thanks.

I guess most of my questions have been answered too.

But one, two questions, actually, both for balance sheet.

First one is, I guess, there was a movement of your assets from PP&E into assets held for sale.

Is that just the building, or is there something else?

The first half of the property that is considered a pending sale.

We're within the one-year window, and have met all the criteria in terms of the probability of it being sold, that we were able to request that.

Got it.

Got it.

Do you have any estimate, I guess at this point what your rent expense might be, if you do sell build building, you have to find location elsewhere?

Yes.

We have looked at it.

Because the campus here is 4 plus times the size of the per footprint that we will need in a new location, the P&L impact from moving here from another location is minimal.

Okay.

And then last question is just, on the linearity, I guess this past quarter was pretty backend loaded.

Do you have any sense what the current quarter might look like, in terms of linearity?

There's nothing to indicate that it would be out of the ordinary this quarter.

Got it.

Okay.

Thank you.

All right.

Thank you, Jeff.

Okay, thank you.

This does conclude our Q&A session for today.

I'd like to turn the conference back to your host for any concluding remarks.

I would just like to say, thank you to everybody for joining.

If you have follow-up questions, feel free to give us a call.

And we'll talk to you again soon.

Thank you all.

Ladies and gentlemen, this does conclude your conference.

You may now disconnect, and have a great day.