Extreme Networks Inc (EXTR) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Extreme Networks' second-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 Frank Yoshino, the Vice President of Treasury and Investor Relations.

At this time, I would like to turn the call over to Frank. Please go ahead, sir.

Thank you, Andrew, and welcome to Extreme Networks' second-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 to not be recorded, please do not ask questions during the Q&A. The recording will be posted on Extreme Networks' website for replay shortly after the conclusion of the call.

The presentations and the recording of this call are copyrighted property of the Company, and no other recording or reproduction is permitted unless authorized by the Company in writing.

By now, you have had a chance to review the Company's earnings press release. For your convenience, a copy of the release and the supporting financial materials are available in the Investor Relations section of the Company's website at extremenetworks.com.

I'd like to remind you that during today's call, management will be making forward-looking statements within the meaning of the Safe Harbor provision of the federal securities laws regarding business and financial outlook. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by those statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. 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 release posted 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. A reconciliation of the non-GAAP information to 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, purchase accounting adjustments, amortization of acquired intangibles, and share-based compensation.

Now I will turn the call over to Extreme's CEO, Chuck Berger, for some opening comments.

Thanks, Frank. Good afternoon, and thank you all for joining us for our fiscal Q2 earnings announcement. We made solid progress during the quarter, reporting non-GAAP revenues of $148 million, at the high end of our guidance of $140 million to $150 million, and above consensus. Non-GAAP EPS was $0.05, within the $0.03 to $0.07 guidance we provided, and above consensus of $0.04. Non-GAAP revenues grew 8% over the prior, or first quarter.

We strengthened the balance sheet substantially during the quarter, ending with $109 million in cash, and reducing debt by $32 million, driven mostly by strong receivable collections. Ken Arola, our CFO, will give you the details in a moment, including both GAAP and non-GAAP results.

We experienced quarter-over-quarter revenue growth in the US/Canada market, EMEA, and Latin America. We carried nearly $4 million in bookings that could not be shipped in time to meet the quarter-end deadline into the third quarter. These were all shipped this month.

During the quarter, we added a substantial number of new customers, including an additional two NFL venues, the Packers and Ravens, and another Division I school, University of Maryland. We further expanded our relationship with the NFL as we were named the Official Wi-Fi Solution Provider for the NFL, and the Official Analytics Provider for the soon-to-be-played Super Bowl XLIX.

It should be noted that Extreme has won 8 out of the last 10 NFL venues that have added Wi-Fi to enhance their customers' experience. Three out of the four teams in the division championship round, a little over a week ago, were identified customers, including both winners; and both Gillette and CenturyLink Stadiums are Extreme Wi-Fi venues.

We extended the reach of our venue business, entering into a partnership with IMG, who represents over 90 colleges and universities. IMG and their clients, like the NFL, are focused on enhancing the fan experience and providing easier access to existing and new services made possible by the availability of high-performance, reliable Wi-Fi.

We continued to innovate and deliver great products to the market during the quarter, announcing the Summit 460-G2 gigabit edge switch, our most powerful edge switch, with industry-leading port density and latency. It is also optimized to take advantage of NetSight, our network management solution; the Extreme NAC solution, or network access control solution; and Purview analytics.

We extended our IdentiFi wireless solution with the AP3805, bringing Extreme functionality to the market at a lower price point. Our partnership with Lenovo strengthened during the quarter on many fronts. Most notably, we were selected as their networking partner for their high-performance computing solution that we jointly announced at the Supercomputing Conference in November. We have continued productive discussions at all levels with Lenovo, as our partnership with them continues to evolve.

We further strengthened our leadership team, particularly in sales, as our new Chief Revenue Officer, Jeff White, added Stephen Patak and Bob Gault to his team to head up the US/Canada sales and worldwide channel organizations, respectively. Combined, they have over 30 years of experience in networking. We also added Frank Yoshino as Vice President of Treasury and IR; and David Hume as Chief Information Officer. Finally, Raj Khanna joined the Board, bringing added industry knowledge, and over 30 years experience as a financial executive at Xerox, Sun, and most recently as Head of Internal Audit at Qualcomm.

Our ability to continue to attract very high-caliber executives and Board members from the industry is a testament to their belief in the future prospects for Extreme.

Finally, our leadership position in the industry was reinforced by addition of six companies to our Technology Solutions Partner program, including Microsoft, VMware, and Palo Alto Networks. TSP members, now totaling 60, are committing to support the Extreme open- and standards-based SDN technology announced this past summer. Additionally, Extreme was running fourth in Gartner's critical capabilities for wired and wireless LAN access infrastructure, in five out of six categories.

Ken will give you specific guidance for the third fiscal quarter at the end of his comments. However, I would like to share one comment with you first. In the past, we committed to 10% year-over-year revenue growth, and 10% operating margin in the fourth fiscal quarter of this year. Our commitment was based on the expected lift from improved sales execution, the return of E-Rate, and improved sales and channel execution, and from our relationship with Lenovo.

We strongly believe these forces will begin to come to have an impact throughout the rest of the year and beyond. However, it is now clear that it will take longer for them to have enough impact to deliver 10% year-over-year growth.

Lenovo's acquisition of the IBM x86 business was delayed by nearly 6 months, and the integration of a nearly $5 billion company is a monumental task. While we expect to be able to close E-Rate business in the fourth quarter, funds will actually not be available until after July 1.

Finally, while we are making daily substantial progress on the complete integration and upgrading of our salesforce, it is clear that we still have considerable work to do going forward.

We will give specific guidance for the fourth quarter during our third-quarter earnings announcement; but, at this point, we still expect seasonally consecutive revenue growth and improving profitability. We expect to reach the metrics previously committed to in 2 to 4 quarters beyond the fourth quarter of 2015.

Now I will turn it over to Ken before opening the floor for questions and answers.

Thanks, Chuck. As I walk through our Q2 fiscal results today, I'd like to remind you that while this is the fourth quarter, we are reporting full-quarter combined results. We completed the acquisition of Enterasys on November 1 last year, so our reported fiscal Q2 2014 results only included two months of Enterasys results. Therefore, when I mention year-over-year comparisons, I'm doing so on a pro forma basis, as if the two companies were historically one for the entire second fiscal quarter.

This is the last quarter we will have to make pro forma comparisons. With that, let's review our second-quarter financial results. As Chuck mentioned, we're pleased with our non-GAAP result for the second quarter, with revenues coming in at the high end of our guidance range, and EPS solidly within the range, both exceeding consensus estimates. In addition, we improved the balance sheet substantially. Strong cash collections allowed us to end the quarter with $109 million in cash on hand, while paying down $32 million in debt.

Q2 GAAP revenue was $147.2 million compared to $136.3 million in quarter one. Q2 non-GAAP revenue was $148 million, up 8% compared to $137.1 million in quarter one, and compares to $159.7 million in Q2 last year. GAAP and non-GAAP product revenue was $112.5 million compared to $102.7 million in quarter one. Non-GAAP product revenue was $124.3 million in Q2 last year.

GAAP service revenue was $34.7 million compared to $33.6 million in quarter one. Non-GAAP service revenue for quarter two was $35.4 million compared to $34.4 million in quarter one, and $35.4 million in Q2 of last year. On a sequential basis, North America, Latin America, and EMEA all grew quarter-over-quarter.

Turning to our geographic split, North America revenues were 40% of total revenue compared to 42% in quarter one. EMEA's revenues were 42% of total revenue compared to 41% in quarter one. Asia-Pacific revenues were 9% of total revenue compared to 12% in quarter one. And Latin America revenues were 9% of total revenue compared to 5% in quarter one.

Now moving on to gross margin and operating expenses. In Q2, GAAP gross margin was 51.1% compared to 51.8% in quarter one. Non-GAAP gross margin was 54.6% and compares to 55.6% in quarter one, and 56% in Q2 last year. During the quarter, we continued to realize the benefits of reduced product costs resulting from pricing negotiations with key suppliers and the consolidation of distribution warehouses. These benefits were offset by pricing pressures that resulted in higher levels of discounting on product sales.

In particular, we had a large deal in Latin America that carried an extraordinarily high discount. Additionally, to meet customer commitments, we incurred higher freight costs as we shipped a greater percentage of product by air, versus ocean, due to the back-end loading of orders.

Q2 GAAP operating expenses were $86.2 million compared to $87.7 million in quarter one. Q2 non-GAAP operating expenses were $74.1 million and compares to $75 million in quarter one, and $82.3 million in quarter two, 2014. The sequential reduction in our operating expenses relates to our planned reductions of SG&A spend, post ERP integration, and lower compensation-related expense. These reductions were partially offset by nearly $1 million in one-time legal and accounting expenses.

Second-quarter GAAP operating loss was $11.1 million compared to a loss of $17.2 million in quarter one. Second-quarter non-GAAP operating income was $6.7 million or 4.5% of revenues compared to $1.2 million or 0.9% in quarter one, and $7.1 million or 4.5% in Q2 last year.

GAAP net loss for quarter two was $13.1 million or $0.13 per share compared to a net loss of $19.3 million or $0.20 per share in quarter one. Non-GAAP net income for the quarter was $4.7 million or $0.05 per diluted share, and compares to a non-GAAP net loss of $900,000 or a negative $0.01 per share in quarter one, and $5.3 million or $0.05 per diluted share in quarter two of 2014.

Now turning to the balance sheet. Q2 total cash, cash equivalents, short-term investments, and marketable securities were $109.3 million, compared to $104.5 million at the end of last quarter. In the quarter, cash flow from operations was $39.8 million, up from $1.6 million in the prior quarter, and up from cash flows used in operations of $6.8 million a year ago. Cash flows were favorably impacted by the strong collections we experienced in the quarter. Additionally, with the holiday season, many vendor payments were held, and scheduled to be paid the first week of January.

Accounts receivable were $93.5 million at the end of Q2, down roughly $6 million from last quarter. And DSOs improved to 57 days this quarter from 67 last quarter. Inventory was down about $900,000 from last quarter to $54.4 million. During the quarter, we paid down $31.6 million in debt, including $30 million on outstanding revolvers, and $1.6 million on the term loan. We were in compliance with all bank covenants at the end of the quarter.

Before moving on to guidance for quarter three, I want to remind everybody that the March quarter has typically been slower across the industry. As a result, we have typically seen revenues sequentially down in the low double-digit range.

With that as a backdrop, we expect Q3 GAAP revenue to be in a range of $129 million to $139 million, and non-GAAP revenue to be in a range of $130 million to $140 million. Gross margin is expected to improve sequentially, with GAAP gross margin anticipated to be in a range of 51% to 52%, and non-GAAP gross margin anticipated to be in a range of 55% to 56%. This reflects our anticipation of lower levels of discounting in quarter three, and we have moved back to shipping more by ocean, versus air.

Operating expenses are expected to be down sequentially, as we continue to focus on managing our spending, and be in a range of $83 million to $84.6 million on a GAAP basis, and $72.5 million to $74.5 million on a non-GAAP basis. Our tax expense is expected to be consistent with the Q2 levels.

GAAP net loss is expected to be in a range of $14 million to $19.5 million, or a negative $0.14 to $0.20 per share. Non-GAAP earnings are expected to be in a range of a net loss of $3.1 million to a net income of $1.8 million, or a loss of $0.03 per share to net income of $0.02 per diluted share. The GAAP and non-GAAP average outstanding shares are expected to be 99 million and 101 million, respectively.

Now we'll open the call for questions.

(Operator Instructions). Mark Kelleher, D.A. Davidson.

Let me start with the discounting in the quarter. What was driving that? Why where you discounting, and why do you think it will be less discounting in the next quarter?

Yes, so, across the board, Mark, this past quarter, in all regions, we saw a lot of competitive bidding going on with companies like Cisco, Juniper, et cetera. And in particular, we had one that I mentioned just in the prepared remarks where we had some heavy discounting in one particular deal in Latin America. But across the board, just general competition. But the fact that we had larger deals that we had more deep discounting on, to win the business, had an impact this quarter. We don't anticipate, at this point in time, quarter three to have deals like I mentioned in Latin America, we had to go so deep in discounting during the quarter; and return [more] back to what I would call more normalized discounting for us.

Okay. And then on Lenovo, maybe you could go a little deeper into there. I know we were expecting that to show some progress by the June quarter. It sounds like that's been pushed out a little bit. Are there issues inside Lenovo and the integration with IBM? What are your expectations for when that really gets noticeable on the revenue line?

Well, as I mentioned, Mark, we continue to make progress almost on a daily basis with Lenovo, across the board. The high-performance computing, we actually -- that was mostly won before even the acquisition closed, competing against the captive networking business inside of -- which is now inside of Lenovo. So we're seeing solid progress there. Now, all of our products are on their price list, including wireless.

We just see things taking much longer to move forward, based on the complexity -- first of all, the delay in closure of this deal by nearly 6 months from the original anticipated date. And, secondly, just the magnitude of the effort of a very large Chinese company digesting a $5 billion division of IBM, long-standing division of IBM. I think, as I said in my comments, we're still expecting the kind of results that we have talked about before; we just think they are another 2 to 4 quarters out.

2 to 4 from here, or 2 to 4 from June?

2 to 4 from June, to be conservative.

Okay. Thanks.

I should comment, Mark, that E-Rate, the salesforce acceleration, the impact of channels, will not take nearly that long.

Alex Henderson, Needham.

So, you kind of got to a little bit of the question in the last answer. I was just trying to get some clarity around what exactly you meant by hitting the 10%. You're saying a 10% growth and 10% operating margins, by either the December quarter or by the June quarter. I assume you're not going to hit that in either September or March quarters. Is that the way to think about it?

It would be to certainly reach it by the December -- you're right -- or June quarter. It would be challenging -- well, the 10% year-over-year growth in the March quarter would not be challenging. But given the seasonal downturn that we have had every year of nearly 10% from the December quarter to the March quarter, I think maintaining that operating margin in that quarter may be challenging.

Okay. Can you tell me what in either the December 2015 quarter or the June 2016 quarter is going to deliver that growth? What product lines? What am I using as a metric to track this? Is it a function of Ericsson increasing? Is it of function of Lenovo revenues increasing? Is it a function of the data center growth? Is it wireless growth? How do I build up to a 10% growth rate, given all of the variables that are under pressure in your business? For instance, I would assume that you're not assuming a lot of growth in the traditional campus business.

Last comment, correct. That is a market that, as you know, is at best 1% or 2% growth, and more likely not that good. I think the metrics you need to watch are really two things -- three things: our overall salesforce effectiveness as Jeff White and his much-strengthened team, after this past quarter, get traction, and putting in place far better sales process and pipeline management and talent capabilities than we've had in the past, and training and things like that. Secondly, the continued evolution of the Lenovo relationship. And thirdly, we expect impact throughout the year of the $2 billion of funds committed to E-Rate; frankly, far more than in the past.

In the past, although Enterasys had a pretty good amount of focus on E-Rate, legacy Extreme did not. And now, collectively, a much larger company is highly focused on that, and working virtually every available E-Rate deal in the K-through-12 marketplace out there.

I'll reiterate my comments about Ericsson in the past. Business that we primarily get from Ericsson today we expect to continue to be level to slightly up. There's other opportunities as their cloud business expands for us with Ericsson. It's just hard to predict the timing of that, and which deals we would be included and which ones we might not be.

To your point about from a product standpoint, we showed 25% quarter-over-quarter growth in wireless in the December quarter. We're putting increased emphasis on that. By the time we get into the time range that we're talking about here, 802.11 Wave 2 will be starting to hit the market. And unlike 802.11ac Wave 1, where we were late to market, we expect to be an early market entrant on that conversion. And then, finally, our data center business grew Q1 to Q2, and we continue to focus on that as part of the growth engine. But the three big things are salesforce execution, Lenovo, and E-Rate.

Okay, so the data center can grow 10% or greater, or no?

I believe we can get to the market growth rate, which is, as you know, in the 10% area.

Okay. Thank you. I'll cede the floor.

Matt Robison, Wunderlich Securities.

When you look at -- do you think this E-Rate, if it slips into the September quarter, as seems like some of it will, do you think you can have a little bit less sequential decline than you normally have in the September quarter? And I've got a -- Ken, I was wondering if -- a lot of volatility in accounts payable. Wondered if there's anything in particular behind that, and if we should expect the benefits yet from working capital, in terms of cash flow, to reverse in the current quarter significantly?

Well, I'll talk about E-Rate first, and then let Ken answer the payables question. We believe we can do something approaching $10 million of E-Rate business in the June quarter, based on people committing funding and expect -- committing to business, and expecting to get funding after July 1. I think there's a far greater potential after July 1, when funds will actually be available. We haven't quantified it, but I think you can expect that to have a positive impact on our normal seasonal Q4 to Q1 dip.

And, Ken, you can tackle the AP question.

Sure. So, Matt, as I mentioned on the call, and we actually delayed some payments towards the end of the quarter. Instead of making payments during the holiday season, we pushed them to the first week of January, in essence. And that caused our accounts payable to grow about $15 million quarter-over-quarter. And I would expect that to coming back down to a more normal number now. We've actually had some pretty significant payments in the first part of this quarter here in relation to some supply chain payments, health insurance payments, some professional service payments.

So, that will come down pretty quickly from that number that we'd be looking at on our press release of $45 million, $46 million, down to something probably closer into the $30 million, $35 million range pretty quickly here.

And if -- given the depreciation and -- I didn't quite catch the Americas revenue number, either.

Sure, let me get that out again. So, depreciation and amortization is about $3 million a quarter. And the other question was -- what was the other question, Matt?

I'm sorry to [burden] over this, just the Americas and Canada.

Yes, North American number was 40% of revenues for the quarter. Latin America was 9%. EMEA was 42%, and APAC was 9%.

Thanks a lot.

Christian Schwab, Craig-Hallum Capital.

I have a couple questions. The first one has to do with the euro and European sales. Did you have any lingering effects with the drop in currency?

Not this past quarter. We had a nominal impact in relation to the euro movement for the quarter on revenues and expenses. During the quarter, the euro moved from about around 125 or 126 euros to the dollar down to a little bit below that; 122 or 123. I think you'll see a bigger impact with what's happened in the last month to quarter three.

That's what I'm saying. So some of your guidance is a reflection of that?

It's a reflection of the movement in the exchange rates, yes.

Can you quantify that impact, or do you have any idea?

We have not quantified that for -- we've quantified it internally, but not something we're going to talk about publicly.

All right. I think I did the math myself anyway. So this is a little bit tougher question, okay? What is our ultimate OpEx goal? The reason why I say that is, before you bought Enterasys you were doing $299 million, and making $0.18 of your own. And now we've put the two companies together, and revenues have gone down, and we're going to make less than that, this year. So obviously this has not gone well at all.

And so you guys were running at about a $73 million OpEx, give or take. Enterasys was running a little heavier. At one point -- and I know, Chuck, you were put in a position to fail, or a position of extreme difficulty in this acquisition, since you were told shortly after you joined the Company that you had bought it without having your own team together to take a look at what you had, let alone figure out what you had at Extreme.

But now that you've been there a while, and we've upgraded the salesforce, at what point in the future should we anticipate OpEx in line with realistic quarterly revenue expectations?

That's a broad question, so let me cover it, and get to the answer regarding OpEx. First of all, I absolutely do not believe the acquisition and subsequent integration of Enterasys has, to use your words, failed miserably. We've put two very different companies together, although they look a lot alike from the outside. Last year, we managed to finish the year with just over 2% revenue erosion, and we're right on track with where we expected to be from a synergy basis. We have certainly faced tough market conditions in the first fiscal quarter, as well as the greatest depth of the integration issues that we were facing.

People have asked me the question, would I do the Enterasys merger again? The answer is, absolutely yes. We would not be having even this favorable discussion if we didn't have the scale that we have, and still have, if we didn't have the completeness of product line that we have, and if we didn't have the attention that has been brought to us by things like the NFL, which came through having the IdentiFi product line and relationships that were already started when we bought the company.

We are attacking improved financial results, certainly from two directions: one, we expect to drive revenue up each quarter. You made the comment that now that you've got the salesforce straightened out --Jeff only joined the company in October, Stephen in November, and Bob in December. They barely had time here to figure out what's going on.

That said, they are three dynamos that are going at warp speed, and making a lot of progress. But as I said on my prepared comments, I think there's another quarter or two of effort before we really see the fruits of their labor.

We are constantly looking at OpEx. One of Jeff's beliefs, coming into the Company, was that our cost of sales was too high. We've got work to do over the ensuing weeks and couple of months to be able to quantify that better. But we are very focused on not only the sales effectiveness, but the cost of sales as one metric of that.

I think the top line continues to get driven, just later than we expected, with Lenovo and E-Rate, and possibly other relationships that we have. But we look hard at expenses. We have additional synergy-driven expenses happening this quarter and next, although they are relatively small. We are forcing ourselves on a tighter budget than we would have if we were closer to our plan on the top line.

But we caused panic in the streets at the Needham conference when we said, if we missed revenue, we would look hard at expenses. Any CEO or CFO would say that. At this point, we're driving to get revenue up; and, as always, be as responsible as we can on the expense line.

Okay, I think that's a good answer. So, then, we should assume a conversation a few quarters down the road, if we are showing modest improvement but not a whole bunch of leverage, modest success on the initiatives of growth we've laid out, we're still focused on finding a path or way to create greater leverage, should the business be a $550 million to $600 million business, and kind of grow from there. Is that right, or are we just (multiple speakers)?

Yes, certainly if that was the eventuality of this -- which we don't believe will be the case -- but our focus, as it was, frankly, before I got here, although it was a completely unreasonable goal, at sub $300 million in revenue would be to get to a 10% operating margin. And if we were to do so poorly as to be in the $550 million to $600 million scale, with that scale that is certainly achievable.

All right, thank you.

Simon Leopold, Raymond James.

I wanted to follow up on your comment about the June quarter, in that I believe you said that you expected somewhat normal seasonal patterns in June, albeit off of the lower base you have indicated for March. So I'm just trying to figure out whether or not that implies roughly $155 million or so sales, 15% up sequentially. And if that's correct, in terms of your description of the June seasonality, what would drive that? Given that the Lenovo has been pushed out, and the E-Rate funding issue is what it is, I'm just trying to understand what gives you that seasonal boost in the June quarter, unless maybe I'm not following you.

So, last year, our seasonal lift was about 10%, and the prior year was 20%, so your math isn't horrible. And I think several things will drive that. Lenovo won't be zero. It's just not enough to push us to the 10% year-over-year growth at $172 million; which is, if you do the math, what 10% year-over-year growth is in the fourth quarter.

E-Rate last year was virtually zero. As I said before, I believe -- I think we can do between $5 million and $10 million of E-Rate business this quarter, this fourth quarter, that wasn't there in the prior year, and hopefully more than that.

And as I said, every day we are driving improvement and increased accountability across our salesforce and our channels, and every day I think we'll see steps forward in that direction. So I believe there's more than enough things that we have control over, and that are inside to Extreme Networks.

And on top of that, the fourth quarter -- our fourth quarter, the June quarter -- is a seasonally strong quarter across the entire industry. As long as I have been in technology, March is always a weak quarter after the -- there is kind of a deep breath after the year-end spending flush, the calendar-year-end spending flush, and people adjusting to -- a very large majority of them having new budgets and figuring out what their yearly plan is going to look like.

And by June, there's traction there. And it's an historically high education market, both in higher ed and K-12. We did a fair amount of business, I don't remember the exact number, in education last fourth quarter, even though there was no E-Rate. It was $12 million less than it would've been if we had just on the E-Rate business from 2013.

I don't believe there's enough there to stand by our 10% commitment, which is a pretty big jump from your estimate of $155 million to $172 million. But there is certainly a lot of other factors that will push us in the direction you're talking about.

That's very helpful. And then in light of the E-Rate timing, does that lead you to think that your September quarter might have a more modest seasonal decline than you have in the past, so maybe you end up having a little bit more linear pattern throughout the calendar year than your historic? Or is it simply that schools buy in June; they don't buy in the September quarter, so we shouldn't count on that? How do you think about that?

As I mentioned to a similar question before, I think there will be a lesser seasonal impact in the September quarter. Hard to quantify at this point, but there will be more education spending. People will rush, after July 1, still to try and get major upgrades done while there's summertime left. And if they are forced to drag it into the school year, they will.

And then in this December quarter you just reported, did the wireless LAN business exceed 10% of revenue? And if so, maybe if we can ballpark it.

Very close.

Are you looking more carefully, or is that the final answer?

Simon, it's a little over 10% of product revenues.

Okay. Okay, great. And just one last one. I guess going back to this Lenovo issue that I think is the big instrumental here. So, all along, we've known that it's a big, complicated deal and a lot of moving parts and geographic challenges. So I think what I'm struggling with today is, what's different, or what's changed?

Part of what I'm wondering is, Extreme is a pretty small company, a small part of this. And is it simply that you're not tight enough in the discussions; it is sort of after the fact? Or did something actually change in terms of the integration? Or are there challenges that weren't anticipated? That's what I'm really trying to focus on, is -- what's different from what you knew a few months ago on this integration?

Well, on the positive side, we are exactly where we thought we would be on things like being on the price list, being in their literature, having airtime with the legacy Lenovo salesforce. To the extent anything has changed, I think we overestimated how fast this gigantic, nearly $5 billion business, with a very different cultural background than the rest of the Lenovo business, could be absorbed and could take on some of these partnerships.

And what's your basis, then, for saying it takes 2 to 4 quarters? Is it conservatism, or do you have a sound reason to think that it's beyond, let's say, September?

I'd like to believe it's conservatism. That said, we want to be conservative, because it's hard to predict this. I think anyone I've ever known who has done one of these -- including ourselves over the past year and a half -- numerous things happen slower than you wish they would.

We were fortunate that a bunch of things happened faster, but we also are still wrestling with some issues around IT infrastructure for service and other things. And we although had a big cultural integration issue, I think ours was much smaller than theirs. And I think that's the hardest part of this to predict.

Okay. Well, thank you for taking my questions.

Alex Henderson, Needham.

I was hoping I could go back to the G&A comment. I believe you said that it was $1 million in expenses in the quarter on G&A that would not -- it was a one-time item. So is it reasonable to think that G&A is down $1 million sequentially?

Yes, the G&A would be down. Not necessarily $1 million, because -- and it was not quite $1 million. It was approaching $1 million, Alex. But also the thing to keep in mind for the March quarter is, everybody, yourself included, gets reset as far as your taxes are concerned. There's benefits that get reset and other things. So across the board, you'll have naturally some increase in expense in quarter one. And then as people hit their tax rates or limits, that comes down over the year. So we'll see a jump from the December quarter to the March quarter for those kinds of things.

I see. And going back to the growth question that I asked earlier, if campus is 60% to 65% of the business, I'm just not seeing how I get to 10% growth. Because that means that 30 -- call it 35% of your business needs to generate almost a 30% growth rate to get to 10%.

So, can you help me out with understanding how I do that math? And then second, what is it about the data center business that you expect to cause the acceleration? It's my understanding that the Summit hasn't seen much traction so far, and that the new chassis product also hasn't seen much traction so far. So what gives you confidence in that data center picking up?

Well, to the first question, I would reiterate what I said before. It's not just wireless or just data center. It's across-the-board improved salesforce effectiveness. As a 3% or 4% market share player in the wired campus marketplace, I think we can do much better there, even though the industry itself is not growing. We showed last quarter that the initiatives we're taking on the wireless market can have a significant impact. And we also saw data center grow, neither of them large enough or growing enough to carry a full 10% growth, or we wouldn't be having the discussion about fourth quarter that we're having.

But again, add growth in those segments, add market share -- better salesforce execution, which hopefully -- which we believe will get us market share gains in the wired campus market. Remember, we entered this year, we weren't even on the Gartner wired/wireless LAN Magic Quadrant. Now we're on it, and far up and to the right. We weren't even surveyed in the Gartner wired/wireless access layer fitness report, and now we're fourth out of roughly 10 companies in five of the six categories. And, remarkably, the one we weren't that highly ranked is venues, even though every venue deal we've gone to bat on, virtually, we've won.

So I think there's a lot happening there -- Lenovo; E-Rate; potentially, over time, Ericsson -- to drive that growth.

If I could go back to E-Rate, I think the comment you made was $5 million to $10 million in the June fiscal fourth quarter. Is it reasonable to think that that could be a -- that E-Rate in general, on an annualized basis, from July 1 through July 1, could be in the order of, say, $30 million or $40 million annually? Is at the right way to think about it, that it could produce that kind of annual growth? Or is that something that really only kicks in for a couple of quarters, and then falls back off? How should we think about that curve?

Well, to give you some metrics in 2013, E-Rate was $18 million of business for the pro forma combined company. $12 million of that came in the fourth quarter. Given this July 1 threshold, we may get to that level in the fourth quarter. But we're, again, trying to be conservative, and estimating between $5 million and $10 million.

I think there is at least, in total, across the fiscal year 2016, that $18 million potential and hopefully more, because as I mentioned, first of all, the pot is bigger. It recently got increased from $1 billion to $2 billion. And second of all, we have far greater focus, and are far more in front of this than we were as a company in 2013.

So, it would be reasonable to think that you could do something in excess of $20 million in FY16?

It certainly wouldn't be unreasonable.

Yes, I get it. Thank you.

Simon Leopold, Raymond James.

Just a real quick follow-up. It appears that towards the high end of your guidance, the earnings could be better than the loss of $0.02 to $0.03 that you're forecasting. I'm just wondering if there's anything below the operating level, in terms of either other income or taxes, that we should be aware of in coming up with our earnings estimates. Thanks.

Simon, this is Ken. No, I think our taxes this quarter is $1.3 million. We're pretty much just paying statutory taxes around the world, and this predominantly represents international taxation. And I think that will be the same as we go forward for the next several quarters. We're very close to it.

Other income/expense, again, it just kind of fluctuates around that $1 million mark, give or take a little. We're not seeing anything at this point that would move that needle a whole lot. So from our perspective, it's managing our expenses to the lower end to the range that we gave will help us get better than $0.02. And if we can continue to work on our cost of goods sold, and continue to drive that cost down, and move gross margins up, that has the opportunity to do better than $0.02, as well.

Okay, thank you.

Thank you. That's all the time that we have for questions the day.

I will turn the call over to (technical difficulty) for closing remarks.

Thank you, Andrew. And thank all of you for joining the call today. As I said, I believe we made solid progress in this just-finished second fiscal quarter, with a significant sequential growth in revenue and a tremendous strengthening of our balance sheet.

While we are backing off on the 10% and 10% commitment in the fourth quarter, we do believe we will get that in 2 to 4 quarters beyond that, and show a continual improvement on both lines as we move in that direction. Hopefully, we'll do better.

But we're very encouraged. As I mentioned, the growth drivers of Lenovo; improved sales and channel execution; and E-Rate, we think, just get better as time passes. It will just take a little longer than we thought. So our confidence in the business continues to be high.

And we'll look forward to talking to you again in about three months. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the program, and you may all disconnect your telephone lines. Everyone have a great day.