Extreme Networks Inc (EXTR) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the Extreme Networks first-quarter fiscal 2016 earnings results conference call. This call is being recorded. With this today from the Company is Ed Meyercord, the President and 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, Karen, and welcome to Extreme Networks' first-quarter fiscal year 2016 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.

A recording will be posted on Extreme Networks' website for replay shortly after the conclusion of the call. The presentations and recording of the 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 press release and supporting financial materials are available in the Investor Relations section of the Company's at website ExtremeNetworks.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 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 the 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. Reconciliation of the non-GAAP information in accordance with 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, restructuring charges, share-based compensation and overhead adjustments.

Now I will turn over the call to Extreme's President and CEO, Ed Meyercord, for his opening comments.

Thanks, Frank, and good afternoon, everyone, and thank you for joining us today to discuss our Q1 results. We are out in Las Vegas at our Partners Conference; we are cured with over 450 global partners in what has been a very productive week.

The energy level here is high, excitement surrounding our product roadmap, our solution selling strategy and our growth incentives are on display. This is my first Extreme Partner Conference and I must say I am impressed by the strength of our partner relationship, our partners' commitment to grow their Extreme business and the quality of the dialogue is excellent.

I will kick off the call with commentary on the quarter and then talk about our progress with our solution selling strategy, our operating initiatives and our business outlook. Then Ken will go through the numbers and we will open it up for Q&A.

Let me start off again by saying how pleased I am with the solid execution by our team at Extreme during what has historically been a very soft quarter. I have been in the CEO seat now for six months and I like the way this team is coming together. We have accomplished a lot in a very short period of time.

From an operations perspective, the tough cost-cutting measures we took in Q4 seem like a distant memory with all the growth initiatives we have underway. But from a financial perspective you can certainly see the effects of our cost reductions in our strengthened financial position.

What may have been missed by all the attention on the cost side of the equation is that we reorganized the functional departments at Extreme to establish a customer driven organization structure.

Extreme was an engineering led Company with engineering controlling all products development, product marketing and customer service. We separated these functions; we now have a single sales services organization and independent product development and marketing groups.

To be clear this has not diminished the importance and significance of our engineering team and our investment in new products -- just the opposite. We are providing engineering with much clearer direction and less distraction so they can focus on what they do best.

With our new leadership team we now have alignment with sales, service, marketing, product development, engineering and our supply chain. We have much improved communications, a clear product roadmap and cross functional business initiatives. We are making targeted investments in product development and marketing.

We have the right people leading with the right organizational structure that will allow us to be responsive to our customers and partners and ultimately grow.

At Extreme we have a clear vision of the networking industry and the competitive landscape. With the cost of bandwidth continuing to fall at a rapid rate and the explosion of devices on networks driven by mobility and the Internet of Things, and the proliferation of applications that run on those devices and connect to the cloud, networks are becoming much more valuable and much more complicated for our customers to manage.

Our customers' IT departments can't respond to these new demands by adding staff. They can't afford to triple their IT budgets. We see the complexity of these converged, wired and wireless networks being simplified software. We think it is a big opportunity and this is why 90% of our engineering resources are currently developing software.

Flexible operating systems, feature rich management tools, access controls for edge devices, security application, device level policy, quality of service delivery, gateways to private and public clouds, network analytics -- these will be the drivers of more and more networking decisions.

We have the software and we are tailoring solutions that make it easier to deploy them for our target customers in education, in healthcare, manufacturing, hospitality, government and our mid-level enterprises.

The competitiveness of our solutions portfolio will be strengthened when we add our Wave 2 wireless access point, which are scheduled to be released this quarter, in time for the E-Rate buying cycle. And our plan is to launch our cloud management platform for wireless access in fiscal Q3.

The subsequent release expected in mid-2016 will expand our cloud management capabilities to cover our wired switch portfolio as well. We believe this will provide us with a distinct competitive advantage.

The response to our new strategy has been very positive. The validation by Gartner Group during the first quarter is a big deal for Extreme. Gartner put Extreme in the visionary quadrant for wired and wireless access player switching.

This was the first time we made it into the visionary quadrant, ahead of most of our competitors. By Gartner's definition it means we have unique capabilities and the ability to differentiate our solutions from the rest of our competitors.

This is third-party validation of our solutions approach -- this is important third-party validation, and it will help our sales teams as customers rely on Gartner's assessment as part of the decision making process. Our partners and target customers place a high value on Magic Quadrant, so this is a big deal for us.

Our go-to-market strategy is to lead with selling software driven networking solutions that will pull along our high-quality wired and wireless hardware. Right now we are very focused on the tactical execution of this strategy.

The good news for us is that we already have a large set of reference accounts of solutions customers in each of our customer groups and most of our geographies. So we are focused on intelligence gathering, developing marketing programs, training and educating our field sales partners.

We completed highly successful training programs during the quarter. Historically, in the old engineering led culture Extreme made very little investment in education and training. Sales were driven by speeds and feeds for wired networks.

As we move from point product sales with wired switches to a full portfolio of wired wireless software driven networking solutions we have to invest the training of our field teams. All of our sales executives have been trained in solution selling; this was the highest rated training in Company industry, very well received in the field.

In addition, we are in the process of technical training for our account execs, our sales engineers and support teams to become certified in wireless to better understand our software portfolio. We have training around industry verticals and competitive positioning as well.

Another important initiative along the lines of simplifying how we go to market was our recent rebranding announcement. Our new tagline, Extreme Connect Beyond the Network, conveys the importance of our new customer partner driven strategy. We have excellent relationships at Extreme.

We have unique high touch, high-quality customer service that differentiates us in the market and we want to leverage that. We are also simplifying all of our product names to eliminate some of the confusion of the past.

So, instead of IdentiFi wireless at site management, NAC and Purview, we will have Extreme Wired, Extreme Wireless, Extreme Management, Extreme Control and Extreme Analytics. It is pretty obvious, but this is going to simplify our approach to the market with our solutions portfolio under a common brand.

Turning to our results. Coming off a very strong yearend Q4 our global sales teams put solid bookings on the board in our fiscal Q1 to drive revenue in the midpoint of our guidance range. Our US/Canada team led the way again with solid performance, especially with our education customers, and delivered on plan despite lower than expected the rate revenue.

Other impacts to sales during the quarter that impacted results were shorter selling period post Labor Day, just a factor of the timing of the calendar, and the movement of smaller accounts to inside sales. That didn't happen until late in the quarter. We expect to see a pickup in E-Rate in our fiscal Q2 and see our inside sales recover as well.

We had nice wins in the US, with Skywalker Sound, a Lucasfilm Company, Schneider Electric, Jefferson County Public Schools and the Chicago Cubs. Our EMEA team held to their forecast with strength in government and manufacturing. At this stage we do not expect the effects of the dollar/euro exchange rate to impact sales in EMEA.

In Germany we have the highest percentage of solutions customers than any other region in the world. And interestingly, we had two very large orders with both in Turkish and German governments to handle the increase in public Wi-Fi traffic associated with the influx of immigrants from the Middle East. We also had nice wins with the German tax office, Queens University in Southern Europe and the Italian Highway Toll Authority.

As part of our plan to upgrade our solutions go-to-market strategy globally we hired new regional directors in our APAC and LatAm regions. Both of those regions came in as expected on a reduced forecast and we expect them to build on their successes with growth in future quarters.

We have taken up our revenue guidance for Q2 by $10 million over Q1 given our confidence and the strength of our pipeline with both the volume of deals and the visibility we have. The name of the game for Extreme is growth and we are driving everyone internally and our partners to achieve this.

We have a terrific product portfolio, a great team, strong partners and we are in a huge industry where small share gains will have a big impact on our top line.

As we mentioned on our last call, the path to building the infrastructure and putting the changes in place to generate solution selling growth should happen over the next 18 months. During this time we expect to benefit from four tangible growth initiatives.

First is E-rate. The funding letters from the FCC came in more slowly than we anticipated in Q1, but they've picked up and are expected to grow in Q2. We are also in the midst of selling for the next round of E-Rate funding, where we are continuing our focus to increased share of the available funding programs.

To help enhance our position for next year's E-Rate season, we are expanding quotable solutions to include our cloud managed wireless offering, which will be GA in fiscal Q3.

Second initiative is our channel realignment. Our partner and distribution teams successfully completed our give to get contracts and we expect to deliver new revenue. We still expect these to begin to take hold in our fiscal Q3. We believe this will bring incremental revenue growth, but again, the timing and hard dollars of these give to get programs are difficult for us to forecast at this time.

Our third initiative is to capitalize on the upcoming Wi-Fi upgrade cycle to [AC Wave 2]. We are right in line with the market as far as timing is concerned and on track to deliver new APs with Wave 2 technology and enhanced firmware that includes our core flow technology this quarter.

As I mentioned earlier, our Wave 2 access points are also expected to arrive in time to hit the e-Rate sales cycle this calendar Q4. And we plan to follow this with new 2.5 gig and 5 gig access layer switches after the chipsets become available in fiscal Q4. We will expect to see sales from Wave 2 begin to take hold in our fiscal Q4.

Lastly, we view our high touch customer service model as a competitive advantage. While most of our competitors outsource this function to third parties and direct their customer calls to non-technical sales reps, Extreme customers have a totally different experience where their calls are answered by highly trained technical engineers who immediately begin work to resolve the issue at hand.

And our customers and partners place a high value on this aspect of our relationship. Given this value proposition we see opportunities to capture more services revenue and we have several initiatives underway to better monetize this competitive advantage.

As far as guidance, we see strength in our top line in Q2, steady gross margins and the benefit of the full effect of our lower operating expenses. I will let Ken provide details on this.

On a personal note, my confidence in Extreme continues to grow and it is driven on three fronts: the quality of our products and engineering; our belief that our products and solutions are high-performance and well engineered are confirmed when sophisticated and discerning technology buyers validate the quality. Like Motorola, they are using extreme switches as the backbone of the New York City and LA police and fire department networks.

The second is the quality of our customer relationships. We have a distinct advantage when we sell our full solutions portfolio. When customers use our extreme management to control in analytics capabilities across our wired and wireless networking infrastructure they become very sticky. We have many of these excellent relationships around the world in all of our key customer segments who are our strongest advocates.

I just returned from a meeting in Germany with the largest hospital in Europe, Charite in Berlin. They are a gold standard solutions customer using our solutions platform in very creative ways at the forefront of the healthcare industry. They want to showcase this to their partners at a global healthcare consortium.

Finally, I have confidence in our people. Extreme has a high-caliber team of professional, eight players who make up a strong team and they want to win. And the proof our team's execution capability is evident in what was accomplished in beating our earnings targets in Q1.

Most importantly we are aligned, aligned on our vision, strategy and execution initiatives and committed to winning which means growth. Now let me turn it over to Ken for numbers.

in beating out earnings targets in Q1. Most importantly we are aligned, outlined in our vision, strategy and execution initiatives and committed to winning which means growth. Now but me turn it over to Ken for numbers.

Thanks, Ed. Before I jump into the numbers I want to echo Ed's comments about the team coming together at Extreme. People are excited about the way we have reorganized to become a customer focused Company. And the alignment around our software driven networking solution strategy has created excitement within our Company, our partner community and our customers.

In addition, the coordination and teamwork between our sales organization, our supply chain operations, our distributor network and our finance team has improved markedly over the past two quarters. We are getting much stronger as a Company and our results reflect it.

Now let's review our first-quarter results starting with revenue. Q1 GAAP revenue was $124.6 million compared to 149.9 million in quarter four and $136.3 million in Q1 a year ago. Q1 non-GAAP revenue was $125 million compared to $150.6 million in quarter four and $137 million in Q1 last year.

Q1 GAAP and non-GAAP product revenue was $91.4 million compared to $116.3 million in quarter four and $102.7 million in Q1 last year. Q1 GAAP service revenue was $33.2 million compared to $33.5 million in quarter four and $33.6 million in Q1 of last year. Non-GAAP service revenue for Q1 was $33.6 million compared to $34.3 million in quarter four and $34.4 million in Q1 of last year.

The geographical split of revenue was comparable to last quarter with North America revenues contributing 50% of total revenue, EMEA revenues 37%, Asia-Pacific revenues 9% and Latin America revenues 4%.

Moving on to gross margin and operating expenses. In Q1 GAAP gross margin was 52.3% compared to 50.9% in quarter four and 51.8% in Q1 last year. Non-GAAP gross margin was 55.2% and compares to 54.4% in quarter four and 55.6% in quarter one last year.

The sequential increase in non-GAAP gross margin is mostly attributable to the fact that we had a larger percentage of total revenue coming from services in Q1 versus Q4. With services carrying a higher gross margin percent than product it had a favorable impact on overall gross margins. Additionally, we realized some cost savings as a result of the restructuring taken last quarter.

Q1 GAAP operating expenses were $75.9 million compared to $89.8 million in quarter four and $87.7 million in Q1 last year. Q1 GAAP operating expense includes restructuring charges of $5.6 million related predominately to facilities consolidations following the reduction in workforce in Q4 2015. Recall that GAAP operating expense in Q4 included restructuring charges of $9.8 million.

In Q1 non-GAAP operating expenses were $61.5 million and compares to $69.6 million in quarter four and $75 million in Q1 FY15. Q1 operating expenses reflect 90% of the quarterly cost savings associated with the Q4 restructuring. We anticipate we will realize 100% of the quarterly savings in Q2 FY16. Additionally, lower than planned headcount attributed to the favorable spend in the quarter.

The first quarter GAAP operating loss was $10.8 million compared to a loss of $13.5 million in quarter four and a loss of $17.2 million in Q1 last year. First-quarter non-GAAP operating income was $7.5 million compared to $12.3 million in quarter four and $1.2 million in Q1 last year.

GAAP net loss for Q1 was $11.5 million or $0.11 per share compared to a net loss of $15.7 million or $0.16 per share in quarter four and a net loss of $19.3 million or $0.20 per share in Q1 last year.

Non-GAAP net income for the quarter was $6.7 million or $0.07 per diluted share and compares to net income of $10.1 million or $0.10 per diluted share in quarter four and a net loss of $1 million or $0.01 per share in quarter one 2015.

Turning to the balance sheet, Q1 total cash and cash equivalents were $82 million compared to $76.2 million at the end of last quarter. In the quarter cash flow from operations was $6.5 million compared to $3.9 million in quarter four and $1.6 million a year ago. Q1 free cash flow was $5.9 million compared to $2.3 million in quarter four and a negative $1.2 million in Q1 of last year.

Accounts receivables were $60.3 million at the end of quarter one, down $32.4 million from last quarter with DSOs decreasing to 45 days this quarter from 56 in Q4. The decreases are a result of exceptionally strong collections during the quarter coupled with lower revenues in Q1 as compared to Q4.

Inventory ended at $61.7 million, up $3.7 million from last quarter, and total debt outstanding at the end of quarter one was $65.3 million. We were in compliance with all bank debt covenants at the end of the quarter.

Now let's move on to guidance for Q2. As Ed mentioned earlier, E-Rate funding by the FCC was slow out of the gate. But with funding now substantially complete for school projects, we anticipate E-Rate to contribute more in quarter two than over the next several quarters.

We expect Q2 GAAP revenue to be in a range of $129.6 million to $139.6 million and non-GAAP revenue to be in a range of $130 million to $140 million. GAAP gross margin is anticipated to be in a range of 51% to 52% with non-GAAP gross margins anticipated to be in a range of 54.7% to 55.7%.

Operating expenses are expected to be in a range of $74.5 million to $77 million on a GAAP basis and $62.5 million to $65 million on a non-GAAP basis. On a year-over-year basis this reflects a $10 million quarterly savings. Additionally, it reflects 100% of the quarterly savings expected from the reduction of headcount in quarter four.

We anticipate the sequential increase in non-GAAP operating expenses to result from catching up on targeted headcount additions that we fell behind on during quarter one, an increase in compensation-related expenses including commissions on higher revenues, and NRE expense for product development initiatives.

The savings from our facilities consolidation of approximately $1 million annually will be reinvested into sales, strategic sales and marketing roles. We continue to focus on managing our cost structure and we are on track to realize the $40 million in annualized savings mentioned on our Q4 earnings call.

Our tax expense is expected to be relatively consistent with our Q1 levels. GAAP net loss is expected to be in a range of $7 million to $11 million, or $0.07 to $0.11 per share. Non-GAAP net income is expected to be in a range of $6.5 million to $10.5 million or $0.06 to $0.10 per diluted share.

The average shares outstanding are expected to be 102 million on a GAAP basis and 104 million on a non-GAAP basis. Now I will open the call for questions.

(Operator Instructions). Simon Leopold, Raymond James.

Hi, this is Victor Chiu in for Simon Leopold. Could you give us just a little color around E-Rate spending and your comments around it being a little slow out of the gate? What is the trajectory that we should kind of expect and how has that impacted kind of what you were hoping for?

Yes, hi, Victor, this is Ed. We were -- what we will say about E-Rate for this quarter is it came in in the low-double-digits. We were expecting it to be somewhere between the $10 million and $20 million mark. As everybody knows, with our funding (technical difficulty) out of the FCC we have to -- we are relying on that. And then when schools letters then we follow through in terms of deployment.

So it was a little slower than we had projected. So it is going to be a little closer to the $10 million number than it is to the $20 million number. In the second quarter we are going to expect to see that be closer to the $20 million number, if that is helpful.

As far as inside sales, one of the things that we did is we restructured our field sales organization. What we did is we took out accounts that are less than $65,000 and we created an inside sales team to cover the accounts. What we didn't want to do was have field forces making calls to the smaller size customers where it is not economic.

But what we had (technical difficulty) our databases, create (technical difficulty) create the account list, create the (inaudible), negotiate (technical difficulty) teams. And we went through that process and we got a late start. So we didn't start inside selling really in earnest until the last -- the second half and really the last month of the quarter.

So we missed the selling opportunity to that base of existing accounts. Now we are running and we will have the full three months, so we will (technical difficulty) that recover as well. So, those were the headwinds for the quarter for us. It was a little lighter -- lighter on the E-Rate side and a slow start on inside sales. Other than that things are going great.

Okay, great. One last question. Can you just give us an update on your thoughts for the timeline around the WLAN cycles and how that -- when that -- how that impacts you kind of the timeline (technical difficulty)?

Yes so, AC Wave 2, we mentioned that we are coming out with our new access points this quarter. And this is -- we are right in the heart of the E-Rate selling season for the next cycle. We are really excited about the cloud managed platform and what that is going to enable us to do and our partners to do in wireless. And that is going to come out mid fiscal Q3.

So that is the timing and then following that will be the access layer switching, hardware deployment that will come out in the middle of the next calendar year.

And then we are also going to come out with the next version of the software which is really exciting, where from a cloud management perspective you are going to be able to manage both wired and wireless switches and that is going to be in the middle part of next year as well, probably calendar third quarter of the following year.

That is going to be a differentiator for us. Not a lot of people are going to have that capability. And we have a lot of partners, we have good distribution system here and we have a lot of partners that are really excited about that because the cloud management tool allows them to provide managed services, which is where the partner community is going.

So there is a lot of excitement out here at the Partner Conference around our cloud management capabilities. And we are on track from a development perspective.

Great, thank you.

Matt Robison, Wunderlich.

Thanks, congratulations especially getting it done without the E-Rate so much. Have you got -- put the Wave 2 products into beta yet? Or is that timeframe later this quarter for when you get into beta? Can you differentiate between that and general availability?

Yes, well we are -- we have already -- we are in beta testing and planning on launching that. So we will be putting that out into the field. And it is GA in our fiscal Q3. I am sorry -- it is going to be GA in this quarter.

Okay. And can you comment on what verticals were particularly strong and where -- how are you situated with the legacy customers of Enterasys and how has that changed over the last couple quarters?

Sure. Well, verticals have been steady. E-Rate has really shined a light on K-12 and overall education for the Company. That is an important vertical for us particularly in the US. We also are very focused on healthcare and that is globally. We continue to see strength there.

We have manufacturing, we have government accounts, we have hospitality. We have our stadium and venue business. So when you -- I would say there is not a lot of change in terms of mix in the quarter with these verticals.

What is going on inside the Company that we are excited about is a collection of all the information around these accounts. I mentioned Charite, which is the largest hospital in Europe. They are doing some very innovative things as far as solutions for hospitals.

But it is collecting what our customers are already doing with our technology and our portfolio. Organizing this, having these reference accounts, organizing marketing materials around it, having educational programs to train our field forces, to train our partners so then they can bring the solutions to their customers.

And we have -- Extreme has -- Matt, as you know, this has been somewhat of a decentralized sales and marketing Company. The fact that we are centralizing this means that we are getting a much tighter focus, we are going to have much cleaner execution and it's going to be easier for us to accelerate and to invest in growth both with our direct field forces and our partners.

As far as the Enterasys question, I know you are familiar with the fact that there was a decision to combine EOS and XOS, the operating system at Enterasys and Extreme. We reversed that, we have let the base of Enterasys customers know that EOS is alive and well and we are investing in features for that operating system. That has had a big impact.

We are also doing something in terms of our plans and our roadmap for the Series S modular switch that customers are excited about.

And so, I think with the Enterasys customer base I think the changes that we have just made recently has created renewed excitement that there is a future and they can see the future roadmap. And so, I think the overall comment would be that that has stabilized.

Ken, a couple housekeeping questions. Can you just give the breakout for depreciation and amortization? And then comment if this low level of capital spending is sustainable or what we should expect for the year in that regard?

Yes, depreciation is roughly about $3 million in the quarter; amortization is about $9 million. It shows up in cost of goods sold and operating expense is kind of split about 50-50.

As far as CapEx is concerned, yes, it was a little bit low this quarter at about $600,000. Typically we are spending a little bit more than that. So, I think if you think about it as $1 million or $2 million a quarter is reasonable.

Thanks. And congratulations again.

(Operator Instructions). Christian Schwab, Craig-Hallum.

Congrats, guys, on a great quarter. When you guys look geographically into Q2, would you expect EMEA or Asia Pac to be up on a sequential basis? I know you guys talked about increased visibility into that guidance. And so, we have had some different changes in leadership in those areas. Would you expect that?

Yes. Hi, Christian, this is Ed. Yes, we would. We have got a really strong pipeline in EMEA, a lot of confidence with that team with -- in this quarter.

And we made leadership changes in APAC, so we have a new regional VP out there who is doing great things. He is come in with a lot of industry experience, a lot of ideas. I can't share with you his forecast because he is very optimistic and very aggressive. But let's just say we are expecting good things out of that region.

And also LATAM, we have hired a very strong leader in our LATAM market that is currently being managed through US Canada. It is going to take time, but we have got really solid people on board now and we have got a foundation to build on.

Perfect. And then if we just do some basic math -- you guys won about $90 million in E-Rate. Last quarter you had an unexpected big deal, let's just pretend it was $10 million. And then we got another $10 million this quarter, so that leaves us like $70 million. Some may not get approved and no surprise that the government is behind. So I guess it is fair to say to some degree I would assume E-Rate will linger into Q3?

Yes, that is fair to say. And there has been -- Christian, just to elaborate a little bit, what we have said we are getting better visibility too around how E-Rate cannibalized normal K-12 business, etc.

So as we are piecing together the overall equation what is interesting is the math really hasn't changed from what we told people from the beginning, which is we see incremental revenue -- net incremental revenue between $30 million and $35 million from E-Rate this year.

I can't say we knew exactly the algorithm and how we got there, but it is holding up and it is accurate. So, that is still a good number, an incremental number to think about.

Okay, that is -- that is wonderful. And do we have -- as far as the pipeline it sounds like you added the Cubs, congratulations on that. As far as we've looked stadium work is either in pipeline or potential deals is -- is there any seasonality as we think about your fiscal year where there ends up being more work either in major league baseball or the NFL or college stadiums as we can think about that?

Yes, I think what you are saying is -- your intuition is correct -- there is seasonality in terms of what is going to happen in the off-season. Yes, I am not sure -- we don't really provide specific forecasts around it. We don't disclose that to the Street. But, yes, that is correct, your intuition is right.

Okay, All right, perfect. Congratulations again on the great start to the fiscal year.

Alex Henderson, Needham and Company.

Let me start off with just some housekeeping here. Can you just depict what is in the other expense net line? That was a pretty considerable number in the quarter, swing in the year over year. I am just not sure I know what's caused that.

Yes, Alex, that is where the FX gains and losses show up in our P&L in relation to what we deal with on the balance sheet for intercompany accounts. So you had the dollar strengthen pretty nicely against the Brazilian real in particular and that showed up as a favorable impact in other income and expense. That is the biggest line item that is driving there.

And so, as I am looking forward I should drop that out of that number into the December quarter, is that correct?

Well, I think if the dollar continues to remain strong against the real we will continue to see some maybe favorability there. So it depends which direction the exchange rates go. Right now, like you said, over the last quarter we have seen some favorable impact with the US dollar strengthening.

Right, I generally try to assume -- not try to forecast interest rates or exchange rates. Based on the current level are you expecting another gain in the December quarter? And if so what kind of magnitude are we talking about?

Yes, it is really hard to actually give a number on that, Alex. Like I said, it depends on where exchange rates go. If you assume exchange rates are staying relatively flat from where they are today, then it would be less of an impact on other income and expense and maybe more normalized.

But when you see a big movement like we saw this past quarter with the Brazilian real, we got some pickups in FX gains. So, depending how you want to look at that and model it, if you assume flat rates and nothing is going to change then you can assume that is going to come down to something you have seen in previous quarters.

Yes, they pay analysts to forecast exchange rates more than they pay us, so I am afraid I am going to have to (multiple speakers) (laughter).

The second question I had is I am trying to understand the mechanics around the product gross margin, the service gross margin. Your service gross margin is now at 68% I believe in the quarter and product was 50%, which looks a little bit richer than it had been on service.

Is that a function of the restructuring benefits helping that or streamlining of the cost structure associated with the restructure (multiple speakers)?

(Multiple speakers) realized that in the quarter. But if you think about it, with products generally running in the low 50% on margins, 50% to 52%, and services running like 63% or 64% to 67% depending on the quarter, we dropped out $25 million of product revenue in the quarter at call it a 50% gross margin.

So, you have more of a skewing towards the services revenues in the overall scheme of the business here which drove margins up a bit on a sequential basis.

Yes, I understand the mechanics of the shift between them; I am just trying to look at the individual line items. As I understand it, if I did the math correctly when I was doing the offsets in non-GAAP, I am getting 50% gross margin on product and 68% on services, which seemed a little steeper than it had been running 63%, 64%, 67% even.

And I am trying to determine is that going to stay up at that 68% level or is that going to come back into the 63% to 67% range.

Well, I guess let me explain it this way. Gross margins were in the low 50% for product this quarter. On the services side of the business it was in the mid-60%s, not necessarily in the high 60%s. I think you will see that kind of a range as we go forward in the low 50% in the mid-60% for product and services.

And again, we saw some savings in relation to the restructuring and cost of goods sold this past quarter, we will see a little more next quarter.

Okay, I will take that off-line because obviously I must have put something in incorrectly to be getting 68%. Just to pin down a couple of data points. I think I heard you say that 100% of the restructuring program savings that are going to be showing up in terms of cost savings as opposed to reinvested are now in the model, is that correct?

That is correct. If you recall last quarter we said it was going to be -- we're targeting $40 million annualized savings, about $10 million per quarter, pretty equally through the year with about 10% of that showing up in cost of goods sold and 90% of it showing up in OpEx.

So at this point in time, as we move through Q2, we are expecting that we will realize 100% of that annualized -- or quarterly amount of $10 million in the P&L, and that is reflected in the guidance that we gave.

And then the second piece of it is it sounds like you under hired and you expect therefore some hiring to help rebuild some of the sales, marketing, G&A or whatever, R&D, lines in the OpEx elements. So we should be expecting that to be up sequentially in the December quarter. Will that persist again into the March quarter?

I don't think it will persist into the March quarter. I would think our expenses would be somewhat comparable to what we have guided this quarter for the March quarter. Assuming we get all the heads that we wanted to have hired during the quarter here we've made some good progress to date so far in the quarter. So if we continue with the trajectory we are on we should be on a good pace for that.

I guess the other thing to think about is as we move through the year payroll taxes -- people pay their taxes earlier in the year, as you get to the end of the year you have less payroll taxes, less Company payroll taxes. So we will get a little bit of pick up from that as well.

Okay. And I am a little confused about some of the comments on E-Rate. I just wanted to make sure I had it correct. Did you say you had $10 million of E-Rate in the September quarter, is that correct?

We said -- I gave a -- Alex, I gave a range and I said -- I was going to say low-double-digits. But that creates a pretty wide range for you. So what I tried to do was narrow it to say if you are looking between $10 million and $20 million, which I would just provide that as a range for E-Rate, we came in much closer to the $10 million side of that scale. We can't disclose the numbers.

And then you said I thought that the other side would be closer -- in the December quarter closer to the upper end of that band.

You got it, you got it.

Okay, so I got the math right. So there wasn't any E-Rate in December 2014, correct?

No, pretty nominal.

So, that would imply if I put about $18 million, just to choose a number at the upper end of that band, about a 25% decline in product sales. Is that the right metrics and have we now stabilized that and we are at a growth curve from here?

Your numbers are about right. We did about $121 million in product sales in quarter four of 2014 -- I'm sorry, wrong quarter. About $102 million in quarter one of 2015, we did $90 million -- $91 million --.

Yes, I was just looking at the December quarter and kind of the midpoint of the guide it would imply about $102 million in product sales down from $112 million with $18 million of E-Rate in it.

Yes, that is right.

So, is that -- so, we kind of finished the decline in products associated with the trimming of the lines and so forth and now we should start to grow and then feather in E-Rate from here?

There is a couple of things on here, Alex, which is it is K-12 we are talking about, and so you have existing K-12 business. Schools are going to fund technology investments whether or not the E-Rate program is there or not. But there is a lot more incentive to do it if you can get E-Rate dollars. What's happening (multiple speakers).

And that number is not as big as the gross number, right?

Yes, so there is a few factors moving there. So, in our guidance we also have the seasonality. We look out, there is always the seasonally weak Q3 that we look at in terms of trending.

But we are -- with the solution selling and leading with solution selling we are getting a lot of traction and excitement out in the marketplace that is building the confidence inside of the Company in our selling organizations with our partners. So, just how the positive momentum takes effect and we hit numbers we are going to be guiding on a quarter-by-quarter basis.

But everyone inside this Company believes that we are going to grow. The question is when. And this is -- we have a lot of confidence and this second quarter given the strength of our pipeline, the quality of the opportunities and a big piece of that is going to be what is happening in the E-Rate K-12 segment.

Just one must question and I will cede the floor. clearly a big part of the pressure over the last year has been your European business getting hit by some -- a historically huge swing in the European exchange rates. That I believe is now kind of out of the picture on a year-over-year basis. That should never be much of a factor as we start to go forward.

And so, I would think that your improved economies in Europe would start to be a supporting factor as opposed to a drag the way it has been over the last year. Is that the right way to think about it?

I think that is how you should be thinking about it, that is right.

Yes, I would agree with that, Alex.

Great, then I will cede the floor. Thank you.

And that concludes our question-and-answer session for today. I would like to turn the conference back for any closing comments.

Thank you. Yes, I would like to make a couple closing comments. First, hopefully the -- hopefully you are hearing from the call the confidence from the team in terms of the outlook for the Company and all of the things that are going on. There is a lot of momentum and there is a lot of operating initiatives around our strategy.

And leading with software and selling solutions is -- we have got third-party validation around that. The industry analysts are telling that this is the way to go. Our partners are telling us, our partners are telling us.

And we are making great progress in heading in that direction. So there is a lot going on, there is a lot of excitement around that. And as I said earlier, everyone in the Company is committed to growth.

The other thing that you can see this quarter is we did take tough measures in the fourth quarter and the costs are out. So, now that is showing up and you will see that going forward in the Q over Q comparisons from the cash flow perspective.

So, we thank everyone for participating on the call. And we are looking forward to Q2 and sharing our results in a few months. Thank you very much, we appreciate your time.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.