Extreme Networks Inc (EXTR) 2015 Q1 法說會逐字稿

Good day everyone, and welcome to the Extreme Networks first quarter 2015 earnings results conference call. This call is being recorded. With us today from the Company is Chuck Berger, the Chief Executive Officer, Ken Arola, the Chief Financial Officer, and Eric [Boylan] from Investor Relations. At this time I would like to turn the call over to Eric. Please go ahead, sir.

Thank you Nicolas, and welcome to the Extreme Networks first quarter fiscal year 2015 earnings conference call. This conference call is being broadcast live over the internet, and is being recorded on behalf of the Company. Should you wish not to be recorded, please do not ask questions during the Q&A. The recording will be posted on Extreme Networks website, and will be placed shortly after the conclusion of the call. The presentations and recording of the call are copyrighted property of the Company, and no recording or reproduction is permitted unless authorized by the Company in writing. By now you've had a chance to review the Company's earnings press release. For your convenience, a copy of the release and supporting financial materials are available on the Investor Relations section of the Company's website at Extreme networks.com.

I would like to remind you that during today's call, management will be making forward-looking statements within the meaning of the Safe Harbor Provisions of the Federal Securities laws regarding business and financial outlooks. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which would cause our actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the feature. We undertake no obligation to update these statements after this call. For a detailed description of these risks and uncertainties, please refer to our most recent report on Form 10-K filed with the SEC, as well as our most recent Form 10-Q filed with the SEC. In addition to our earnings press release posted just a few minutes ago on our website.

Throughout the conference call, the Company will reference some financial metrics that are derived in accordance with Generally Accepted Accounting Principles, or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the Company's results internally. However non-GAAP results are not in accordance with GAAP, and may not be comparable to non-GAAP information provided by other companies.

Non-GAAP information should be considered a supplement to, and not a substitute for financial statements prepared in accordance with GAAP. Reconciliation of the non-GAAP information and corresponding GAAP measures is in our earnings press release issued today. In preparing non-GAAP information, the Company has excluded where applicable the impact of acquisition and integration costs, purchased accounting adjustments, amortization of acquired intangibles, and share-based compensation. Now I'll turn the call over to Extreme's CEO Chuck Berger for some opening comments.

Thank you Eric. While we faced a number of challenges in our first fiscal quarter, we also took a number of actions that positioned us well for the remainder of the fiscal year and beyond. We completed the bulk of the IT operational and program integrations related to the acquisition of Enterasys. We also completed the executive staff transition with the addition of Jeff White as Chief Revenue Officer. And our reseller partner Lenovo completed the acquisition of the IBM X86 server business. Taken together we continue to be optimistic about the future potential for Extreme Networks. Exceeding our revised guidance non-GAAP revenues were $137.1 million. Non-GAAP earnings per share were a $0.01 loss, the midpoint of the revised range. Our cash position was flat to the prior quarter. Ken will give you the financial details in a few minutes.

With the exception of the Asia-Pacific region, we saw a significant number of deals slip beyond Q1. We believe many of these deals will close in the second fiscal quarter. This was particularly impactful in North America, however we also saw delays as a result of political unrest in Mexico, Brazil, and our eastern Europe and Middle East regions. Additionally, the weakening of the European currencies had a $3 million negative impact on revenues, gross margins, and net income. Given the number of downward revisions in the networking space for the September quarter, it is clear that we are not the only networking company impacted by these issues.

During the quarter, we also selectively reduced our number of distributors focusing on those that can deliver the best value to Extreme and our partners. And increasing our critical mass with the selected distributors. We launched a new partner program and agreement bringing all of our partners under a single set of business terms, that provide stronger incentives for growth, focus on our key strategic goals, and investment in the Extreme product line.

Finally, we launched new service programs across all of our products. The new programs eliminate terms that were unfavorable to Extreme, and are structured to encourage our partners worldwide to focus on increasing service attach and renewal rates. On the IT side, we completed the integration of SAP, the legacy Enterasys ERP into a single instance of Oracle early in the quarter as planned, and two months ahead of the original schedule. This now provides a single interface to our channel, our vendors, our auditors and finance staff, and our employees.

Earlier in the calendar year we completed the integration of our sales and marketing automation systems, providing critical functionality that was nonexistent at Extreme when I joined. Our finance team successfully completed the first year end audit as combined company, and published our 10-K on time. All of these accomplishments paved the way for further cost reductions in Finance and IT that will begin in quarter. On the operations side, we closed our Elgin, Illinois Distribution Center saving the cost of operating the facility. Our remaining three Distribution Centers are all located at major sea ports, allowing us to continue to reduce the amount of product we ship via air, which is nearly seven times more expensive than oversea transportation. We reduced our number of service depots from approximately 180, to less than 140, and eliminated two of the three service logistics centers, resulting in added leverage with the remaining vendor.

Finally, the benefit of reduced component and assembly costs began to have impact in the first quarter, and will continue going forward. While I am very pleased with the execution and timeliness of all of these changes, it is safe to say that virtually every part of our business, and the interface between our partners, customers and Extreme were disrupted in a significant way during the quarter, and contributed to the disappointment on the top line. For the most part, these disruptions are now fully behind us. On the product side, we continue to innovate, we recently released the Extreme X460-G2. This is by far our most powerful and cost-effective Edge switch that is SDN and 802-11ac wave 2 ready.

We also began shipping our IdentiFi 3805 access point, our most affordable AP, delivering identified functionality to cost-sensitive markets, including K12 and higher ed. All of that said, clearly the challenge is on the top line and to return to revenue growth. I cannot tell you enough how excited I am that Jeff White has joined Extreme Networks. Jeff was at Cisco for 17 years where he was clearly a fast rising star. He is a true sales leader and has already will a strong impact in his first few weeks. Jeff fills a gap that has existed for a very long time here at Extreme, and completes the transition of the exec staff I began over one year ago. I expect you'll see results from Jeff in this quarter and growing from there. Jeff will not only focus on top line growth, but on reducing our cost of sales by better sales execution, and gaining far better leverage from our distributors and partners. As I mentioned, our partnership with Lenovo took another step forward when they completed the acquisition of the IBM X86 server business on October 1. There is no longer any doubt that this will happen. We continue to make progress each day towards realizing the potential of this agreement, and reiterate that we expect significant results by the fourth quarter.

As mentioned in the past, E-Rate funding for network infrastructure has been reinstated effective April 1, 2015. We are well ahead of the curve on developing programs to ensure we maximize our business under this program. We also had a dominant presence at Educause, one of the largest events from the K through 12 market during the quarter. While there is nothing new to report with our Ericsson relationship, we continue to believe it has strong potential for substantial growth. It is just difficult to predict the timing at this point.

Strong sales leadership, new partner and service programs, advancing Lenovo relationships, return of E-Rate, and continued new product introductions, give us confidence in our ability to improve our top line performance going forward. Coupled with strong focus on realizing the promised synergies from the acquisition, and ongoing focus on cost reductions across the board, we expect to see substantially improved bottom line performance as well. We stand by our commitment for 10% year-over-year revenue growth by the fourth fiscal quarter, at a 10% operating margin or better.

I will now turn the call over to Ken Arola, our Chief Financial Officer, to provide the details of the first quarter and guidance for the second. Ken.

Thanks Chuck. As I walk through our Q1 fiscal 2015 results today, I would like to remind you that this is the third quarter we are reporting full quarter combined results. When I mention year-over-year comparisons, I am doing so on a pro forma basis, as if the two companies were historically one. With that, let's review our first quarter financial results starting with revenue. In Q1, GAAP revenue was $136.3 million compared to $155.3 million in Q4. Q1 non-GAAP revenue was $137.1 million, and compares to $156.9 million in Q4, and $164.1 million in Q1 of last year. Total revenue was below our expectations due to weakness on the product side, as our service revenue came in at plan. GAAP and non-GAAP product revenue was $102.7 million, compared to $121.8 million in Q4, and $128 million in Q1 last year.

As Chuck just mentioned, in North America product revenues came in below expectations as a significant number of larger deals were delayed and pushed out of the quarter. The Latin America region was impacted by the political climate that caused delays in the public tender process, and ultimately pushed deals out of the quarter. In EMEA, our product revenues were dampened by the weakening of Euro against the dollar, and impact of $3 million to revenue, gross margin, and net income. We also saw orders delayed due to the political situation and economic conditions in eastern Europe, Russia, and the Middle East.

On a positive note, our Asia-Pacific product revenues were on plan in Q1. Although many deals were pushed out of the quarter, they remain in the pipeline, and we are confident in our ability to compete for these deals that were delayed from Q1. As mentioned, service revenue was on track with our expectations for Q1. GAAP service revenue was $33.6 million compared to $33.5 million in Q4. And non-GAAP service revenue for Q1 was $33.4 million, compared to $35.1 million in Q4, and $36.1 million in Q1 last year.

Turning to our geographic splits, America's revenues were 48% of total revenue compared to 54% in Q4. EMEA's revenue were 40% of total revenue, compared to 36% in Q4. Our Asia-Pacific revenues were 12% of total revenue, compared to 10% in Q4.

Moving on to gross margin and operating expenses. In Q1, GAAP gross margin was 51.8% compared to 53.4% in Q4. Non-GAAP gross margin was 55.6%, above our target of 55%, and compares to 56.9% in Q4, and 57.8% in Q1 last year. Gross margins were favorably impacted by several factors. Including our ability to hold price during the quarter, a full quarter's benefit from the reduced product costs resulting from pricing negotiations with our key suppliers, and savings related to the consolidation of distribution warehouses last quarter. However, a number of effects had a negative impact on gross margin, including lower than expected revenues, unfavorable foreign exchange rates, and approximately $1 million in excess and obsolete reserves, primarily for obsolete wireless products.

Q1 GAAP operating expenses were $87.7 million compared to $96.4 million in Q4. Q1 non-GAAP operating expenses were $75 million at the low end of over guidance, and compares to $78.1 million in Q4 2014, and $77.2 million in Q1 2014. Q1 sales and marketing expenses included the impact of holding our European and Asia-PAC partner conferences, and a SPIF designed to drive revenue in the quarter. Q1 G&A included approximately $1 million in costs related to bad debt reserves for aged Enterasys Receivable, and costs related to the first year end audit of the combined companies.

First quarter GAAP operating loss was $17.2 million, compared to a loss of $13.4 million in Q4 2014. First quarter non-GAAP operating income was $1.2 million, or 0.9% of revenues, compared to $11.2 million, or 7% in Q4, and $15.5 million, or 9.4% in Q1 last year. GAAP net loss for Q1 was $19.3 million, or $0.20 per share, compared to a net loss of $16.2 million, or $0.17 per share in Q4. Non-GAAP net loss for the quarter was $900,000, or a negative $0.01 per share, and compares to non-GAAP net income of $8.5 million, or $0.09 per diluted share in Q4, and $14.5 million, or $0.15 per diluted share in Q1 2014.

Now turning to the balance sheet, Q1 cash, cash equivalents, short term investments, and marketable securities were $104.5 million, relatively flat from $105.9 million at the end of last quarter. In the quarter cash flows from operations were $1.6 million, down from $3.8 million the prior quarter, and down slightly from $1.9 million a year ago. Accounts Receivable were $100 million at the end of Q1, down roughly $25 million from last quarter, and DSOs fell to 67 days this quarter, from 72 days last quarter.

To wrap up comments on the balance sheet, inventory was down $1.8 million from last quarter to $55.3 million, as a result of our continued focus on right-sizing of inventories. We are in compliance with all bank covenants at the end of the quarter, and foresee no issues in continuing to be in compliance going forward. Before I move to guidance, I want to remind you that I remain committed to year-over-year revenue growth of 10%, and 10% operating margin in the fourth quarter of 2015. Also as we developed our view of Q2, we gave consideration to the challenging market conditions in the networking industry we are facing today.

With that, let's review our Q2 guidance. GAAP revenue is expected to be in a range of $139 million to $149 million, and non-GAAP revenue in a range of $140 million to $150 million. GAAP gross margin is expected to be 52% to 52.5%, and non-GAAP gross margin to be in a range of 55.5% to $56%. Operating expenses are expected to be in a range of $84 million to $86 million op a GAAP basis, and $73 million to $75 million on a non-GAAP basis. We continue to be highly focused on reducing operating expenses, particularly in G&A now that we have completed the ERP integration, and our first combined company year end audit.

In addition to a strong focus on returning top line growth, Jeff White, our new Chief Revenue Officer, is equally focused on reducing our sales expenses as we go forward. We continue to track to realize the full $30 million to $40 million of synergies expected from the Enterasys acquisition. Our GAAP net loss is expected to be in a range of $9.5 million to $13.5 million, or a negative $0.10 to $0.14 per share. Non-GAAP net income is expected to be in range of $3 million to $7 million, or $0.03 to $0.07 per diluted share. The GAAP and non-GAAP net income ranges are based on an estimated 97.5 million and 100.5 million average shares outstanding respectively. I'll now open the call for questions.

(Operator Instructions). We will give a few moments for questions to queue up. And our first questions comes from the line of Matt Robison with Wunderlich. Your line is now open, please proceed with your question.

Thanks for taking the question. Give us some color, you said you think your deals can close this quarter, the ones that slipped. Can you give some color on what you've been able to close so far, and what the primary, maybe give us a sense of rating the factors that were most impactful, in terms of deal slippage in North America?

Sure. We've already seen although we can't disclose is a specific dollar amount, we've seen a number of large deals close this quarter already, particularly a very large one in Latin America. Where frankly we faced our most challenging situation in the first quarter. As I said in my comments, outside of North America, what we saw mostly was political unrest, particularly frankly in Latin America in the Brazilian marketplace, and to some extent the Mexican marketplace. In Latin America, we are just continuing to see what I've been talking about on almost every call, which is very careful decision making, generally no particular urgency, and we push our customers hard. We give them incentives to close business in the quarter, and while we're not losing these deals, they're just taking longer to get done. I would add to that every deal needs multiple layers of approval. We have one very large deal in North America for nearly $2 million, where they just couldn't get to the final level of approval during the quarter, because that person ended up in the hospital with pneumonia, which wasn't a common problem across our customer base, but issues, mostly issues of getting through the layers of management to get approval, in probably at least half of the situations we face in North America.

So you think with the additional management resources, you can execute a little better just by trying to touch more people in the quarter to get things done? Is that something we could reasonably hope for?

Well, I think it's safe to say under Jeff White's leadership, our skills for enterprise selling will be improved substantially, and strong sales forces find the people who need to get in the approval cycle, and at least try very hard, and often are effective at making sure that they're lined up in the right place and the right time to get the job done.

How impactful was the changes in distribution channel on getting business done?

Outside of Brazil, I would say it was just the reduction in the number of distributors was relatively seamless. Most of our partners deal with multiple distributors anyway. And most of our distributors are very adept at signing up new partners in hours and days, not days and weeks. So any partner that had to go find a new distributor, I don't think had a very challenging time. I would say more disruptive was the fact that every partner had to sign a new partnership agreement, which meant understanding the terms, and whether or not they wanted to sign it, which we found very little resistance to, but also learning how to do business with Extreme a different way. And that frankly affected 100% of our partners, because the partnership agreement was different for both legacy Extreme and legacy Enterasys partners, aggravating that for the legacy Enterasys partners more so on the distribution side as they were dealing with a new ERP system, new interfaces, and that certainly had an impact.

Thank you. I'll yield the floor.

Thanks, Matt.

Thank you. Our next question comes from the line of Simon Leopold with Raymond James. Your line is now open. Please proceed with your question.

Thank you. On the last call, you sounded I thought a bit more upbeat on the wireless LAN business. This call, less commentary on that topic, other than mentioning some obsolescence being written off. Could you give us an update on your views on the wireless LAN business, and I think at last quarter it was over 10% of revenue, if we could get a update of the contribution this quarter?

Sure. It's held at roughly 10% of revenues, so unfortunately we have not seen growth in that segment. A big part of that segment for us is the education market, which this is not the seasonal buying time for them. We do have incentives in place both with our resellers and with our direct sales people to continue to promote wireless, as I mentioned we introduced a lower price access point, which I think will be critical for us in some international marketplaces, as well as the education marketplace. So we still see that as a growth market opportunity that we plan to invest in and growing our business.

And typically what's the normal level for your education market in terms of percent of revenue?

It's typically in the quarter about 25% of revenue, roughly evenly split between higher ed and K12.

Great. And the other day there was some news speculating on Hewlett Packard's switch business possibly being sold in China, the old 3Com business. I'm just trying to figure out whether or not this means anything at all to you, and your position with Lenovo. Are there scenarios that you could think of where this either is a headwind or tailwind for the Extreme/Lenovo relationship?

First of all, I am not sure that I trust the rumors that this is something that HP is actually interested in divesting in, the H3C subsidiary that they have there is viewed as a local supplier, not an American owned supplier, they are the second largest market share in the Ethernet networking space in the Chinese marketplace I believe. And it is hard to imagine that they are really interested in selling that. That said, if they were to, I think if Huawei were to buy it, it could certainly be a logical buyer, it would just give them a larger market share, and Lenovo will continue to be, do everything they can to beat Huawei wherever they can. It is hard for me to imagine at this pint, given where we understand Lenovo to be, in terms of their understanding of the networking business, and their plans for the enterprise business that they would buy it, however if they did, that would obviously not be very good for us, because I think one of our biggest opportunities with Lenovo is in the Chinese marketplace. So we need to see how that unfolds, but at this point I think it is awfully early to tell if it even happens.

And then just one last modeling question. In terms of the cost synergies and the operating expense trends, the guidance you've offered us for the December quarter, should we look at that as the we're all done level, the post synergy level, and from this point on, we should model with normal seasonal patterns?

I can, Simon this is Ken, in the G&A area, I think you'll see some additional cost reductions as we move through the year. The less for the last half of the year then the next quarter or two. As I said on the call with Jeff onboard now, we're really focusing on the sales organization, to see what we can do to streamline in that area as well as drive more efficiencies into the business as well.

Great. Thank you very much.

Thank you. Our next question comes from the line of Christian Schwab with Craig-Hallum. Your line is now open. Please proceed with the question.

Great, thank you. Chuck, as you're looking towards your guidance for the December quarter, what percentage of that growth is deals coming back, versus market growth, versus a recovery in EMEA?

Well, we certainly took all of those into effect, including the fact that from our position, and certainly it would seem to be the case given the number of revised guidances in this industry, including another miss yesterday, that there's a challenging economic environment here. So we have, what we do every quarter is each of our geographies do a bottom-up forecast of the deals they think they can close. We're confident in the range we provided based on that, a portion of that which we won't break out, is deals that we hope for in the first quarter. Any of them right up to the last week of the first quarter. As well as new business particularly some new opportunities we have in the venue business, which by the way during the quarter we closed two smaller deals because the arenas are smaller, with a major NBA franchise, and a major National Hockey League franchise. So a lot of variables in that. Including concerns that some of these economic, or market pressures continue.

Okay. As it relates to your 10%, keeping the 10% operating margin target for June of next year, which would require some additional growth from the level that we're guiding for in December, when we get to that range, in June, your conviction in the June quarter number, is that more driven by E-Rate and success there, or Lenovo?

Yes, frankly Christian, I think you can take any one of three or four things and say by themselves they could come close to making that growth happen. Certainly strengthening substantially our sales leadership, and again Jeff has hit the ground running, and we will hear more from him in the next couple of days literally as he advances his organization, and makes progress in the Company. Secondly E-Rate had about $12 million of revenue out of our fourth quarter this year, $18 million for the total year. That by itself isn't the full 10% we need if we just get that back, but if we can get that back and possibly more back, that alone could do it. And then Lenovo has certainly by then we believe will have double-digit revenue impact, and finally, the effect of these new channel programs, which by the way include a pretty substantial bow on our channels organization to recruit over 100 new highly qualified channel partners by the end of the fiscal year. All of those factors together make us all feel pretty comfortable with that number. And again a couple of them I think alone could make it happen.

Great. No other questions. Thank you.

Thanks, Christian.

Thank you. Our next question comes from the line of Alex Henderson with Needham. Your line is now open. Please proceed with your question -- line's.

Thanks. Couple of questions, first, can you sort of step through the slide 12 on your website, the data center wireless LAN service provider, SDN and high performance computing segments, and talk a little bit about what kind of growth you think you'll got over the next year in those parts of your business, since you're highlighting them as growth opportunities or can you capitalize on those?

I don't have the slide right in front of me, but as we have said in the past, we see the growth opportunity in wireless to be in the 10% range. And the growth percentage in the data center to be just below that. We have not yet attained those growth rates, but we are focusing, virtually our entire strategy, both from a product standpoint and go to market standpoint to get to those levels, particularly in data center, all of the business we do with Lenovo is data center business. Against that $5 billion server revenues that they now have, and the $1 billion of networking equipment that drags along with it. The service provider market we are relatively small in that now. In fact in the US we're almost non-existent. Outside of the US we've got a couple big wins in regional IXPs, like Lynx in London, and SK Telecom in Korea, and a couple in Latin America. It's great to look at the 67% growth in software-defined networking. That is off of an almost non-existent base.

I think we have an incredibly strong SDN story, and I think we can look to maybe half of that number, in terms of the growth rate of NetSight and Purview sales, which are certainly two foundation stones to our overall SDN strategy. And finally the HPC market, first of all, we expect this first quarter to the have a pretty substantial announcement in that space. Our biggest competitor there frankly is Arista, which is where they have focused almost 100% of their energy. So I think that will spill over into what we do in the data center, and cause data center to grow, but I wouldn't say we're going to reach the full 15% that market is forecast to grow at.

So playing off of that, can you talk a little bit about two things. One, where you are in developing a UCS-like product that the you could sell in conjunction with Lenovo into the China market, and two, the progress in X770 top-of-the-rack switch, how has been the response to that product?

Our current relationship as I have say said in the past with Lenovo is selling into the installed base that they have just bought, which is not a UCS architectural-like installed base. It's an intel, highly fungible server business. That said, we've had extensive meetings between the CTO at Lenovo and our CTO, as we've looked forward to finding ways to create differentiation in the market, rather than just preplugged and played converged solutions. So nothing specific there, but we certainly are looking in that direction with them.

So just to follow-up on that before you go onto the Summit question, what would you say the size of the opportunity in China to sell an UCS-like product might look like in terms of scale, if they were to go after that market?

It's hard to say, Alex. For a couple reasons. First of all, the current Lenovo infrastructure in the Chinese marketplace has been very, current Lenovo pre the IBM business was very mid market to small business enterprise sales group. They now have obviously acquired a world class, server salesforce enterprise, large enterprise sales force, absent the political effects probably a good proxy for that would be what percentage of the Chinese marketplace has gone with UCS-like servers, versus plain for lack of a better word commodity X86 servers. So I don't have a good answer for that.

To the extent that Cisco's pretty much blocked from selling anything into that marketplace, it seems like there ought to be a vacuum that needs to be filled there. And there are a lot of Web 2.0 players that would have large scale data center environments that might need that. Can you address the Summit 770 question, what the uptake and what the response from the field has been on that product which has now been out for a while?

Response has been great. People like the performance. Revenues are ramping, but we're still at the early stage of that product life cycle. I think the 460-G2 that we just introduced will not compete with that, because it's more of an Edge switch, but certainly the 770 is getting strong reception. In fact we're looking at a large opportunity at a major university with that right now.

Last question and then I'll cede the floor. When you're talking about in June 10% operating margin target, is there a revenue associated with that, that is necessary to get to that 10%? Or would you then if you didn't come to those revenue targets, or not looking like you were going to get to them, would you then step up cost cutting in order to drive that percentage in lieu of the revenues? How do we think about the give and take between those two, and when we go from that 10%, that's a year end fourth quarter number, should I think of that as an ongoing run rate from there, or is that a seasonal peak that's temporarily achieved and then not sustained? Thanks.

Obviously a couple of parts to that. So first of all, to fulfill our commitment to again to get to 10% revenue growth we would have to hit about $172 million in revenue, gauging that off the fourth quarter FY 2014 results, and our plan is absolutely to do that. That said, we realize that's a seasonally high quarter for us, so in order to hit our third target which is to make that operating margin sustainable, we're going to have to continue to take costs out to accommodate the seasonal lows that we have, usually to a smaller degree in the September quarter, and then certainly in the March quarter. But our goal beyond 2015 as I've said very generally is on a full-year basis be able to sustain that operating margin in FY 2016.

Great. Thank you.

Thank you. Our next question comes from the line of Rohit Chopra with Buckingham. Your line is now open. Please proceed with your question.

Thank you very much. I have three questions if you don't mind. Ken, we talked not long ago about currency. I thought it was hedged, and I just want to get a sense of what is actually hedged, when you mention there's a $3 million currency impact. I'll start with that question, and then move on after that.

Most of our hedging that we do right now is in relation to a lot of the intercompany transactions that we do within the Company, so it doesn't show up on the revenue line itself. So specifically in Europe, we've bill in the Euro or British Pound predominantly, so as exchange rates move around which they did this past quarter from about mid-130s Euro to the dollar to about 120.528 currently, it had about a 4% or 5% impact overall on revenues on a quarter-over-quarter basis with the movement of the euro to the dollar, as it weakened against the dollar. But again we don't do an extensive amount of hedging in relation to our revenues.

Sounds like it's mostly quarter to quarter. That's what is happening?

Correct.

Okay. And then the other question I had was, as far as E-Rate, I don't want to belabor this point, I think everyone's talked about it enough. Have you noticed in any of the education verticals, let's say specifically K through 12 maybe pausing to try to push through projects under the E-Rate fiscal 2015 subsidies, where they will get a little built more dollars or where there are more dollars to be thrown around? I know that there is some seasonality but has there been anything worse than seasonal in the K12, or any pauses?

First of all you have to realize that E-Rate is not the only source of funding for these schools, and some of them just can't wait. That said, it is a highly, highly seasonal business. So it's a little hard to see if there's a trend there. I'm sure there are certainly school districts who are holding off in hopes of getting approval for E-Rate funding, but it's a much larger market than the $1 billion of E-Rate funding that's been tagged for 2015. We saw a very enthusiastic response at Educause back in August, the largest or one of the largest K-12 conventions. I'm not hearing from my field right now that delays hoping for E-Rate funding in April are having a material impact at this time.

Great. And then the other question I had form you, Chuck, is more related to Lenovo, and I know everyone has asked a lot of questions on this, but I wanted to ask specifically about some IBM assets they acquired. And I think you know my question. You've had extensive discussions with Lenovo, and I just wanted to get a sense if you know what they want to do with their now the newly acquired blade network technologies asset. Is that important to them, or is that something that you can work with, or is there any overlap? Maybe just enlighten us on what you think they want to do with that asset?

Sure. And I need to be mindful of non-disclosure here. But 85-plus percent of the BNT revenues are from blade switches or blade servers, which is not a product space that we're in, or that we have ever or plan to compete in. So there's not much overlap there. They do have a one top-of-rack switch that I would say is in our first gen 670 class, certainly not in the 770 class. But there are a number of potential places where we could exchange technology, or help them upgrade technology, and you can assume that all of those are in discussion right now. But I think more than any other part of the business, Lenovo is just figuring out what they have got there.

That makes sense. I appreciate that. Thank you very much.

Thanks Rohit.

Thank you. Our next question comes from the line of Mark Kelleher with DA Davidson.

Thanks for taking the question. Just some clarification just to go back to Lenovo again. That deal closed several weeks ago. Are you selling into the IBM installed base with Lenovo right now?

The deal closed three weeks ago if you want to stretch it, four weeks ago. As you imagine, Lenovo was in a 3-point stand to move as quickly as possible to integrate, but I would say they're still in the early stages of integrating. We are certainly building pipeline on both the IBM side of the business, and the Lenovo side of the business. But the reason we have guided that this is a more material event in the fourth quarter, fourth fiscal quarter, is they've got a pretty big integration job ahead of them. And I'm sure there's a lot of still standing in place at what does my new comp plan look like? What does it mean to be comped on EMC and Extreme, which was not part of the IBM comp plan before. So yes, the deal closed but it's $5 billion business, and it's going to take a while for us to ramp.

Right. That's what I was going to next was the hurdles to that ramp, and you kind of touched on some of those. Would the hurdles be on the Lenovo side, or do you have to educate their sales force? Are there things that you're doing to accelerate that ramp?

Yes a number of things and we have been working at this for well over a year now, we think that we are well-positioned as this integration evolves, you wouldn't think that some of these things would be hard, but Lenovo is a very big company, and getting all of our products, or at least our data center products on their price list, and getting part numbers and getting the ability for Lenovo sales reps to order them through the Lenovo order entry and delivery process has largely been completed globally. Getting internal sales reps that are Extreme employees sitting side-by-side with people in North America and China has been accomplished. Attendance and training at global sales conferences for Lenovo has happened. So there are a number of things that we've done, in addition as I mentioned there's been technology exchange discussions, and we've certainly worked to the extent we're able to a parallel path with some of the IBM assets as well. So everything, we didn't wait for the October 1 start gun to go and begin the race. This is really a race that we put a couple laps on the track over the last 14 or 15 months, but again I think I think there's a lap or two to go before we see meaningful volume.

Okay. Great. Thanks.

Thanks, Mark.

Thank you. And with that I'm not showing any further questions in the queue. I would like to turn the call back over to the speakers for any closing remarks.

Again, thank you everyone for joining the call today. While our top line performance fell short of expectations, we accomplished an enormous amount during the quarter, that we think position us well for this current quarter and beyond that towards our commitments coming towards the into the second half of this year and beyond. Look forward to talking to you again next quarter. Ladies and gentlemen, thank you for participating in today's conference, this does conclude the program. And you may all disconnect. Have a good day everyone.