Extreme Networks Inc (EXTR) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Extreme Networks first-quarter fiscal-year 2017 earnings-results conference call. This call is being recorded.

With us today from the Company is Ed Meyercord, the President and Chief Executive Officer; Drew Davies, the Executive Vice President and 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, Heidi, and welcome to the Extreme Networks first-quarter fiscal-year 2017 earnings conference call. This conference call is being broadcast live over the Internet and is being recorded on behalf of the Company. The recording will be posted on Extreme Networks' website for replay shortly after the conclusion of the call.

By now, you've had a chance to review the Company's earnings press release. 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 federal securities laws.

These forward-looking statements involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. For a detailed description of those risks and uncertainties, please refer to our most recent reports on Form 10-K, 10-Q, and 8-K, filed with the SEC.

You should not place undue reliance on forward-looking statements, which speak only as of today. We undertake no obligation to update these statements after this call.

Throughout this call, we'll be referencing both GAAP and non-GAAP financial results. Non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. Reconciliation of non-GAAP to corresponding GAAP measures is in our earnings press release, issued today. 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 extremenetworks.com.

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

Thank you, Frank, and thank you all for joining us this afternoon.

I'm pleased to announce the closing of our acquisition of the Zebra wireless LAN business over the weekend, along with solid first-quarter results that came in slightly ahead of the midpoint of our non-GAAP earnings guidance, at $0.07 a share.

For the sixth consecutive quarter, we delivered earnings that met or exceeded our guidance. We drove higher gross margins and operating efficiencies that generated higher cash flow with non-GAAP operating income up 18% year over year on a lower revenue number.

The improved cash flow from operations during our fiscal Q1 is evident in our balance sheet, where we've made steady progress increasing our cash and paying down debt.

In addition to delivering on our operating plan to drive higher cash flows, we are executing on our strategy to deliver industry-leading solutions and services to our enterprise customers. We're the only networking company with a strategy solely focused on delivering quality of experience for enterprise campus customers; and we are number one in service.

Our larger competitors play in hyper-scale cloud, hyper-converged networks, tier-1 and tier-2 data centers, service provider, low-latency/high-frequency trading markets. Not Extreme. We said no to playing in all these markets so we could focus where we can win.

Our biggest opportunity for growth is to go after enterprise customers and our targeted verticals with complete solutions. By targeted, we mean enterprise campuses and verticals where we're investing -- universities, schools, hospitals, hotels, stadiums, government buildings, manufacturing and distribution facilities, and retail locations.

By complete, we mean end-to-end, high-quality, high-performance, wired and wireless switching from the access point or access-layer switch at the edge to the private cloud and the emerging hybrid cloud enterprise data center with a thousand physical servers or less.

By solutions, we mean using ExtremeManagement access control and analytic software to improve business outcomes. Our software provides visibility, management, and control of the entire enterprise environment. We provide network automation, orchestration, and security of all users, devices, and applications, provided by granular policy instrumentation and wired and wireless infrastructure to make it easier to manage and secure enterprise campus networks.

While historically the enterprise market has been served by [point] products, an approach that is still taken by our larger competitors, research by McKinsey, IDC, and Gartner indicate that the enterprise campus is moving more and more towards campus-wide solutions with wireless and wired bundling. And wireless is becoming a primary driver of decision-making, given the growth in mobile devices and the emerging Internet of Things.

No other competitor can deliver the same quality of end-to-end, software-driven networking solutions to our targeted enterprise customers as we do. This is where we're focusing our technology investment and our marketing dollars. And no other competitor has 100% insourced, high-touch customer and channel-partner support as Extreme.

Given our focused enterprise strategy, we are pleased to welcome the Zebra wireless LAN team to Extreme and pleased to continue to work with Zebra's handheld device business to support their impressive list of blue-chip customers with large-scale distributed networks.

A few comments as it relates to this transaction. First, we expand our presence and market position in one of the fastest-growing segments in networking, with wireless LAN growing at 6.3% a year versus 1% for the industry overall.

We are now the third-largest wireless-LAN competitor in our targeted industry verticals, after Cisco and HPE. And we will be adding 278 employees from the original Motorola Solutions, who are pioneers in wireless technology; and wireless will now represent 25% of our total revenue.

Second, Extreme now has a very strong position in the retail, hospitality, and the transportation and logistic verticals, where we are ranked number two in market share. This adds over $1.3 billion to our target addressable market, which is now $9.4 billion. This also diversifies our high concentration in primary education and government segments, where there is greater margin pressure.

Third, we are adding valuable channel partners and an impressive base of blue-chip customers, with the likes of Walmart, CVS, Kroger, Lowes, and T.J.Maxx in retail; and FedEx, UPS, and DHL in transportation and logistics; and in our current verticals like hospitality, we're adding Marriott, Hilton, and Sheridan to our strong brand names, like the National Football League. In manufacturing, we're adding DuPont, Colgate, Honda, Panasonic, and Coca-Cola, among many others.

Our customer meetings have been very positive thus far. We're seeing much larger opportunities than we've seen in the past. These customers are bringing us very large network-refresh opportunities for their distributed enterprise campuses and have expressed interest in both our wireless and wired solutions. This could be a gamechanger.

In addition, we had 44 of Zebra's channel partners at our conference last week in Orlando. The excitement for our technology roadmap, our go-to-market strategy, and customer support was very high. We're already seeing growth in our pipelines and some very large opportunities. These partners have the ability to generate significantly larger business volume than our traditional channel partners.

Fourth, today we have an expanded product and service-technology portfolio with new security capabilities like AirDefense, an industry-leading wireless intrusion-presentation system; WiFi forensics; [payment-card] industry; and HIPAA-compliance. We now have easy-to-deploy, ultra-fast installation solutions for retail and a new guest-management platform for hospitality and healthcare. We're now in the managed-services business, with a new recurring revenue stream and tighter integration with our high-end customers.

It's worth noting that much of the enthusiasm from Zebra partners last week came from what Extreme brings to existing Zebra customers. Their enterprise customers typically bundled wireless and wired edge solutions, and this put Zebra wireless LAN at a disadvantage in the past. And they want more complete solutions, too.

With our portfolio of wired switches and what Gartner calls our visionary, single-pane-of-glass network management, control, and analytic software, we can now offer these customers our expanded, end-to-end wireless and wired networking solutions that will provide these campuses with complete visibility and control across their networks.

Fifth, we expect this transaction to be accretive. We have to work through the near-term impact of inventory in Zebra's distributor network before we will begin to recognize revenue. However, we will begin benefiting from the cash flow from the acquired assets right away. During our current second quarter, we expect to see a partial increase to our reported revenue in earnings and expect a full benefit to be realized in the second half of our fiscal year.

For the $46 million in cash we paid Zebra, not including escrowed funds, we are picking up $26 million in high-quality receivables from Zebra customers, and an additional $10 million receivable from a large blue-chip customer. This is in addition to inventory and cash flow from the wireless LAN business.

A few final comments on the Zebra acquisition. We're excited about the talented Zebra team joining us at Extreme. We had a 99% acceptance rate on all of our employee offers. And from a systems perspective, Zebra employees were still running Oracle and Salesforce on the Motorola Solutions platform as part of their transition services agreement, put in place two years ago.

Our teams migrated Oracle and Salesforce data over the weekend, functional business teams signed off on Sunday, and as of yesterday all employees are running on Extreme -- a two-day cut-over which went very smoothly. We still have customer-service and engineering systems to migrate as part of our transition, but we're off to a quick start, which instills confidence with our new employees.

Now, turning back to our Q1 results. We had higher year-over-year cash flow and earnings on revenue that was 1.8% [less] than last year. We came in at $122.8 million in Q1 non-GAAP revenue and delivered $8.8 million in non-GAAP operating income, up 18% from $7.5 million last year.

Overall, we put pressure on sales orders in all of our GOs during the quarter from tighter discounting controls. While we don't want to get into deal-by-deal specifics, since we have over 10,000 orders in a given quarter, we know that new discount-authorization policies and enforcement resulted in us passing on many price-competitive lower-margin deals.

Revenue was positively impacted by growth in our EMEA region, and in particular the DACH region in Germany. We also saw growth in our Western European countries, like Spain, Italy, and France. Wins in education, government, and healthcare manufacturing resulted in positive year-over-year growth.

Our Americas region was down year over year, driven primarily by softness in E-Rates and the slower-than-anticipated release of funding letters from the SEC. We benefitted from diversity in our business, as we were able to offset E-Rate decline by growth in government and healthcare customers, which mitigated our downside exposure.

Going forward, with the integration of Zebra wireless LAN, we will have even more revenue diversification, with the addition of hospitality, retail, manufacturing, and transportation and logistics. Zebra wireless LAN had very little, if any, education or government exposure.

During the quarter, we hired new sales leadership in our Asia-Pacific region, and our new sales VP who took charge hit the ground running. He brings significant experience and an aggressive plan to reverse the declines we've experienced in this region.

We're very focused on driving increased gross margins and improved profitability. We have multiple initiatives that have been underway for several quarters to make this happen from an operational perspective. We've taken actions in how we price, discount end-of-life products, marketing rebates, as well as several distributor and supply-chain initiatives. And from a strategic perspective, we drive higher margins when we sell solutions and lead with software.

We continue to make progress with solution selling, as well. We were pleased to see the 2% increase in our product margins for the quarter, and we remain committed to our long-term objective of driving gross margins to 60% or higher.

Higher gross margins and our disciplined expense controls resulted in higher year-over-year operating income, cash flow, and earnings. Drew will provide commentary and details in his remarks.

Going forward, we are focusing our technology R&D investments on our enterprise customers; and we're investing in go-to-market solutions on a vertical, industry-by-industry basis, to drive sales productivity and growth. I just came off a week with 450 of our channel partners, and the enthusiasm around our technology investment and product roadmap was evident.

Our customer focus is on quality of experience with network users. This is a function of quality of service. This is application availability, network quality, security, and performance, combined with user experience and context. We want to make it easy for CIOs and their network administrators to deliver a high-quality experience for their network users.

We have a technology portfolio that applies to all enterprises -- end-to-end wired and wireless from access edge to the private cloud data center -- and can be customized to create solutions in industry verticals.

As part of our private-cloud offering, we plan on rolling out our spine-leaf multi-rate switches in February and March. Our spine switch has multi-rate port capability with 10-gig through 100-gig speeds. At the edge, we have several new wired and wireless products and feature enhancements. We entered into a strategic agreement with Broadcom to use their FASTPATH operating-system technology to lower costs, significantly increase time to market, and increase our margins.

We expect to see two and a half times the hardware velocity as a result. We are rolling out multi-rate switches at the edge to support 2.5- and 5-gig Wave 2 APs with 10-gig uplinks. And last week, we announced our high-definition video camera Wave 2 access points with infrared capabilities -- we are first to market with this product -- and also our wallplate access points as gateways to Internet of Things devices with beaconing technology. We also rolled out a new line of industrial switches.

We are making it easier to use and deploy our networking solutions with our cloud-management platform; simplified user interfaces; tools like our RF Planner to simplify wireless configuration and deployment; and, importantly, a consolidated appliance flexible licensing model for our ExtremeManagement control and analytic software portfolio. All of our current and future switches will have our cloud [agent] so our customers will be able to manage both wired and wireless environments from our cloud platform.

We are applying all of our technology solutions to specific industry needs in education, retail, hospitality, healthcare, manufacturing, government, transportation and logistics. We are focusing on user experience and context to drive overall quality of experience differentiation in each of our target industries. We are the most focused player in the networking industry that is doing this.

We've hired industry experts, who partner with our technical product teams and our dedicated field sales teams, to leverage our existing customers and solutions to win new business. We think it will move Extreme up the value stack in networking and allow us to take share.

In closing, I'm pleased with the progress our team is making. This team has delivered on our earnings guidance for six quarters in a row, and we have new growth opportunities that lie ahead with our Zebra acquisition and our focused strategy on targeted industry enterprise customers.

With that, I'll turn the call over to Drew to take you through the detailed financial results.

Thanks, Ed.

I would like to start with a few financial highlights from our first fiscal quarter, specifically pointing out the increase in our gross margin and the continued improvement in our balance sheet.

Our non-GAAP gross margin improved 1.5 percentage points quarter over quarter from 54.8% to 56.3% and improved 1.1 percentage points year over year from 55.2%. Our non-GAAP product margin was up 200 basis points quarter over quarter and year over year for Q1. These increases were driven by a more disciplined approach to discounting, positive purchase-price variance, and lower charges for excess and obsolete inventory.

In Q1, we continued to see improvements in the strength of our balance sheet. We ended the quarter with over $102 million in cash, improving our net cash position, or cash and equivalents less debt, by $11 million quarter over quarter and $33 million year over year.

These improvements were driven by our increase in cash earnings, strong cash-collection efforts, pay down of debt, and our diligence in managing inventory. Please refer to our Q1 presentation on our IR website for details. We are pleased that we can report these results, and we are focused on continuing to strengthen our financial position in the future.

Now let's move to the fiscal first-quarter details, starting with revenue.

Q1 non-GAAP revenue was $122.8 million, at the lower end of our guidance range, compared to $140 million in Q4 and $125 million in Q1 a year ago. GAAP revenue for Q1 was $122.6 million, also at the lower end of our guidance, compared to $139.6 million in Q4 and $124.6 million in Q1 a year ago.

Our revenue was impacted by lower-than-expected E-Rate filings in the quarter, a couple of large education deals outside of E-Rate pushing into Q2, and our decision not to take some low-margin opportunities as we focus to improve our levels of discounting.

The geographic split of revenues were as follows. North America contributed 47% to total revenue. EMEA contributed 41%. APAC contributed 8%. And Latin America contributed 4%.

Product revenue for Q1 was $90.1 million, compared to $106 million in Q4 and $91.4 million in Q1 last year. Q1 GAAP service revenue was $32.5 million, compared to $33.6 million in Q4 and $33.2 million in Q1 last year. Q1 non-GAAP service revenue was $32.6 million, compared to $34 million in Q4 and $33.6 million in Q1 last year.

Moving on to gross margin and operating expense. In Q1, GAAP gross margin was 53.2%, compared to 52.1% in Q4 and 52.3% in Q1 last year. Non-GAAP gross margin was 56.3% and compares to 54.8% in Q4 and 55.2% in Q1 last year.

This represents a significant improvement in gross margin despite lower revenues compared to Q4 and Q1 of last year. As previously mentioned, our gross margins increased due to a focused reduction in discounting, positive PPV, and lower expenses for excess and obsolete inventory.

Q1 GAAP operating expenses were $70 million, compared to $73.2 million in Q4 and $75.9 million in Q1 last year. In addition to the ongoing amortization of intangibles and stock-based compensation charges, Q1 GAAP operating expense includes charges of $2.3 million for acquisition and integration costs related to the acquisition of Zebra's wireless LAN business. Q1 non-GAAP operating expenses were $60.3 million, compared to $64.7 million in Q4 and $61.5 million in Q1 of fiscal 2016. The sequential decrease in non-GAAP operating expenses was mainly attributed to lower sales commissions and a reduction in R&D project spending.

First-quarter GAAP operating loss was $4.8 million, compared to a loss of $10.8 million in Q1 last year, and compares to a loss of $480,000 in Q4 of 2016.

First-quarter non-GAAP operating income improved 17.8%, or $8.8 million, compared to operating income of 7.5% in Q1 last year, and compares to operating income of $12.1 million in fiscal Q4 2016.

GAAP net loss for Q1 was $6.5 million, or $0.06 per share, compared to a net loss of $2.3 million, or $0.02 per share, in Q4 and a net loss of $11.5 million, or $0.11 per share in Q1 last year.

Non-GAAP net income for the quarter was $7.1 million, or $0.07 per diluted share, compared to net income of $10.2 million, or $0.10 per share, in Q4 and a net loss of $6.7 million, or $0.07 per share, in Q1 2016.

Turning to the balance sheet, Q1 cash and cash equivalents benefitted from strong collections, and we ended the quarter at $102.3 million, up $8.1 million from last quarter and up $20.2 million from Q1 of FY 2016.

In the quarter, cash flow from operations was $9.6 million, compared to $11.5 million in Q4 and $6.5 million in Q1 last year. Free cash flow was $7.9 million, compared to $8.9 million in Q4 and $5.9 million in Q1 last year.

Accounts receivables were $68.2 million at the end of Q1, down $13.2 million from last quarter and up $7.9 million from Q1 of fiscal 2016. DSO decreased to 51 days this quarter from 53 days in Q4 and increased from 45 days in Q1 of 2016.

Inventory ended at $43.4 million, up $2.4 million from last quarter and down $18.3 million from Q1 of 2016. Total debt outstanding at the end of the quarter was $51.9 million, compared to $55.5 million at the end of Q4 of 2016.

Now let's move into the guidance for Q2. We expect Q2 revenue to be in the range of $148 million to $158 million, representing a 6% to 13% increase compared to Q2 last year. This includes two months of revenue from the acquisition of the wireless LAN business from Zebra, adjusted for the accounting treatment of the inventory in the Zebra distribution channel.

As a reminder, the inventory in the channel at the time of closing was already recognized by Zebra, as they recognize revenue on a [sell-in] basis. On the other hand, Extreme recognizes revenue from distributors on a sell-through basis, which means we defer revenue when it is shipped to the distributor and recognize the revenue when the distributor ships it to the end customer.

Since Zebra has already recognized the revenue from product currently in the channel, we will not begin to recognize revenue from the new business until after the inventory already in the channel at the time of close has shipped to the end customer. We expect the majority of the deferred revenue impact to work through in our fiscal Q2.

GAAP gross margin is anticipated to be in the range of $53.4 million to $55.3 million, and non-GAAP gross margin is anticipated to be in the range of 54.5% to 55.5%.

If you recall from the model we shared when we announced the wireless LAN acquisition, the new business has non-GAAP gross margins in the 45% to 49% range. Our guidance reflects the blending of these margins with our base business. We believe there are opportunities to improve gross margins for the new business and will immediately begin working to apply our existing gross margin initiatives here, as well.

Operating expenses are expected to be in a range of $88.1 million to $90.5 million on a non-GAAP basis and $72.8 million to $76.3 million on a non-GAAP basis. This sequential increase represents two months of operating expenses from the newly acquired wireless LAN business and an expected increase in compensation expenses related to commissions on higher revenues.

We expect total interest expense to be $1.1 million each quarter for the remainder of the fiscal year. Tax expense is expected to be flat to up $400,000 from Q1 levels.

GAAP net loss is expected to be in the range of loss of $6.4 million to $10.1 million, or a loss of $0.06 to $0.09 per diluted share. Non-GAAP net income is expected to be in the range of $5.7 million to $9.4 million, or $0.05 to $0.09 per diluted share. The average shares outstanding are expected to be $109 million on a GAAP basis and $110 million on a non-GAAP basis.

I will now open the call for questions.

(Operator instructions) Mark Kelleher, DA Davidson.

Great. Thanks for taking the questions. Just a clarification first on Zebra. You said there'll be two months of contribution but there really won't be very much revenue recognized. Is that correct, because of the distribution?

We will get a partial quarter there because we've got to work that inventory through the channel. But we will get some revenue. We'll get about two-thirds of the service business, and then on the product-revenue side, we'll be impacted by that inventory working through the distributor channel.

Okay, got it. And can you talk a little bit about E-Rate? What's the problem there? What's going on? What's the delay, or the issues with the government?

Sure, Mark. This is Ed. Last year, we had a slower funding process. As you recall, the overall volumes of E-Rate projects were lower and extreme. We held our market share. A lot of that had to do with complications with a new portal that they put in place to register for E-Rate. And then the system that they put in place as it reflects payments for E-Rate projects and the funding process from the SEC has just been slower.

So we've seen -- we knew there was going to be a reduction in overall volumes, but then the pace of E-Rate projects have been coming out more slowly. So we still have our E-Rate projects in our pipeline and our backlog. It's just a question of when we get the funding letters from the SEC.

Okay, that's it. Thanks.

Simon Leopold, Raymond James.

Hi, guys. This is Victor, in for Simon. Can you speak about where the levers are for gross margin expansion and what your expectations are for the timing around those improvements?

Sure. Let me -- I'll start, and I'll let Drew add.

First of all, when we sell solutions and we talk about leading with our software portfolio, which is our management control and analytics, when we have these kinds of software-driven sales, we tend to have higher gross margins.

And so we're focusing our selling initiatives, our go-to-market strategy with our field forces on leading with solutions and leading with solving business issues of our customers. When we do that, we change the discussion. We're able to move away from price. We're able to sell at higher gross margins. So strategically that's part of the rationale for us leading with our software and software-driven solutions.

But then operationally, there are a lot of tactical initiatives that we've taken to drive gross margins. This is more from the bottom up. And this has to do with how we sell, in terms of our pricing policies, our discount-authorization process. It has to do with our supply chain, in terms of how we end-of-life products and phase out products, efficiency in our distribution networks.

We have over 20 different line items that are projects that we're pursuing, all of which will help us improve that gross margin and then drive improved gross margins. We believe that 60% gross margins are achievable over the next couple of years.

Drew, do you want to add any color?

I think you covered it. The one thing I would add is, with Zebra coming on board, we've got the opportunity for supply chain consolidation and some opportunities to save money there on the cost side.

Okay, great. And can you speak about -- regarding Zebra, can you speak about the degree that W-LAN amplifies campus switch sales and maybe what the potential cross-selling and sell-through opportunities there are?

Sure. When you think about Zebra wireless LAN, you have to think about large customers with distributed campus environments, so very large networking opportunities. It's different from your typical enterprise campus, like let's say a college or university, with thousands and thousands of users in a concentrated space.

Here you might have a thousand Kroger stores spread out, with a smaller number of access points and users in the environment, but it's a distributed environment with lots of locations. And the way an operating system that we pick up -- and the Motorola solution that was sold into Zebra that now that we're acquiring has been designed for these larger-scale products.

Over the past couple of years, the Motorola Solutions team has been handicapped somewhat because they don't have a bundled switch. So there's a very obvious opportunity for us to add our switching portfolio to their wireless LAN portfolio and expand the overall opportunity we have with these larger customers.

And we also pick up new technologies that they bring to bear from a security perspective. AirDefense was and is the leading WiFi security software platform. They have a guest portal that we think is very attractive in all of our verticals, location-based technology.

And then we're getting into the managed-services business, which brings us a recurring revenue stream. Although it has a slightly lower gross margin, we have a higher operating margin from that business that brings us a lot closer to these customers.

The size of opportunity that we're seeing with the Zebra customers is significantly larger than what we've traditionally seen at Extreme and in Enterasys. We're talking about much, much larger deal sizes and opportunities.

We may have timed it right around the refresh cycle, where we're seeing a lot of these big customers contemplating refreshing wireless LAN and upgrading the network in their various locations. So we think our timing is somewhat fortuitous.

But that's what we're really excited about. You could also see it, Victor, with the partners at our partner conference, the kinds of opportunities that they were talking about, their level of excitement, and the size of deals they're bringing is on a different scale than what we've dealt with before. So it could be a gamechanger for us in terms of the kinds of deals that we bring to the table and the impact it'll have on our top line.

Great. That's very helpful. Thank you.

Rohit Chopra, Buckingham Research.

Hi, Ed, and Drew, how are you? A couple questions that I wanted to ask, and then maybe just a clarification on your thought process as the whole of Zebra is sort of into normalized mode.

But the first question is, are you still expecting that $29 million to $35 million in revenue range for Zebra as you looked at it on the close? And then, can you give us the split on product and service within that range? That would be my first question.

So we still expect 29% to 35%, and the service would be about -- just under 20% of that.

Twenty-percent-ish? Okay. And then theoretically, would it be -- so 29% would be their lower point, obviously, from a seasonality perspective, and March is typically a tough seasonal quarter for you guys, as well, just because of the buying patterns. But is it theoretically -- the right way to look at this model is to look at what Extreme was standalone and add $29 million of revenue in the March quarter? Or do you still think there's some ramping that's required as you look out into the second half of the year?

I think that's fair. They've been a lot more linear than we have. Because they've had sales to some huge customers, they've had some big deals, their business has had some lumps because of that in the past. But in general, they haven't had the same seasonality that we've had. So I would think that -- we anticipate that that's fair to have $29 million for that quarter.

Last question is related to something, Ed, you mentioned in your prepared remarks, but Broadcom's been in the news for the last few days. And you mentioned that you are receiving something from Broadcom. I just wanted you to explain that a little bit more, just to try to understand what you're getting from Broadcom and how that helps you go to market, if you don't mind.

Sure. We have an excellent relationship with the senior leadership at Broadcom. They have been increasing price on most vendors in the industry in the technology space, particularly in networking. We negotiated a strategic deal with them, where by leveraging their FASTPATH operating system, we have an opportunity to actually lower our costs.

So we just signed this agreement. They consider us to be a strategic partner. They would like to see us take share, and they really like our focus.

So there's a potential with us with Broadcom. We obviously can't comment or speculate on what they're doing from a strategic perspective. But we know that they consider us a strategic partner, and we know they've only entered into a couple of these kinds of agreements. So any kind of strategic activity could create new opportunities for Extreme.

Ed, thank you very much. I appreciate that.

Matt Robison, Wunderlich.

Thanks for taking my question. I apologize if you guys covered this already, because I had to jump on -- a couple of different calls going on today. It's good to see Europe come back. Can you give a little perspective on what caused EMEA to perform relatively well this time around and why the comps were a little bit more challenging in the other two regions?

Sure. We've seen a rebound with our team in Germany in what we call the DACH region, which is Germany, Austria, and Switzerland. They are our most advanced solution-selling team. And across our verticals, we saw strength. And this is two quarters in a row where we've seen excellent performance.

I will comment that we've had new leadership in EMEA, and we've restructured and refocused our regions. Along with this, we've seen good momentum in other Western European countries.

We've seen great momentum in Spain, with some big wins there -- a large Volkswagen plant in Spain. We won a large university in Italy, in Milan. And big wins in France, too. So we've reenergized our teams in Western Europe.

Our EMEA lead now resides in the UK. The former head used to be in Germany. So the team we have in Germany is very strong, and it's being complimented by a team and new growth in Western Europe. And we see that continuing.

So the year-over-year drop in Americas, is that the E-Rate story?

Yes, it's predominantly E-Rate and offset by growth in government in the US and -- our stadium business had slight growth. Healthcare was a grower this past quarter. But overall, the E-Rate slowdown was the culprit.

(inaudible) dropped pretty significantly.

Yes, and I would say for us, it's [pushed].

Okay. Why do you think that happened?

We commented on this earlier. It's just timing. It's the timing of the SEC letters. We can't predict that, so we're at the mercy each week to watch and see what's getting funded. We know where we've won, and we're at the mercy of these funding letters.

I was talking about APAC.

Oh, APAC. I thought you said E-Rate.

No, sorry.

APAC is a smaller region for us. We're really excited about the new leader, our VP, who has come in, who's got a very clear plan to turn around performance. And we're also excited about the team that we're picking up from Zebra that's already on board.

In fact, our head of sales is in China as we speak. I just had some fantastic meetings and am very excited about the new leadership that we're bringing in in addition to our regional leadership and the opportunities that we have with Zebra customers. So we're expecting to see that market turn around.

Okay, so we can just think that maybe it was a bit disrupted from the change in leadership, and stay tuned -- is that the message?

Yes.

Okay. I'll listen [with the rest of the crowd]. Thanks.

I'm showing no further questions at this time. I would now like to turn the conference back to Ed Meyercord.

Well, we'd like to thank everybody for your time and participation on the call, and our team at Extreme in welcoming the new Zebra employees into the fold.

We're very focused on executing our strategy on a tactical level and delivering results, as well as on a strategic level. And we're very excited about the new growth opportunities that lie ahead.

And with that, I think we'll close the call and look forward to seeing maybe some of you -- we're presenting at the Needham conference tomorrow, and maybe we'll see some of you there. Thanks again for your participation on the call. Have a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.