John T. Kurtzweil - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Charles W. Berger - Chief Executive Officer, President and Director

Mark Kelleher - D.A. Davidson & Co., Research Division Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division Rohit N. Chopra - Wedbush Securities Inc., Research Division

Good day, ladies and gentlemen, and welcome to the Extreme Networks First Quarter Fiscal 2014 Financial Results Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, John Kurtzweil, CFO. Please go ahead. John T. Kurtzweil: Thank you, Mercy. Welcome to the Extreme Networks First Fiscal Quarter of 2014 Conference Call. On the call with me today is Chuck Berger, Extreme Networks' President and CEO. 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 and will remain there for the next 7 days. The presentations and the recordings 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 today's first quarter fiscal 2014 earnings press release. For your convenience, a copy of the release and supporting financial materials are available on the Investor Relations section of the company's website at www.extremenetworks.com. This conference call contains forward-looking statements that involve risk and uncertainties, including statements regarding the company's expectations regarding its financial performance, the impact of the Enterasys Networks acquisition, strategies for growth of customer demand, development of new products, customer acceptance of the company's products, customer buying patterns and spending patterns and overall trends and economic conditions in the company's markets. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including, but not limited to, a challenging macroeconomic environment worldwide, fluctuations in demand for the company's products and services, a highly competitive business environment for network switching equipment, the company's effectiveness in controlling expenses, the possibility that the company might experience delays in the development of new technologies and products, customer response to its new technologies and products, risks related to pending or future litigation, the dependency on other parties for certain components for the manufacturing of the company's products and our ability to receive the anticipated benefit of the acquisition of Enterasys. The company undertakes no obligation to update information on the conference call. For more information about potential factors that affect our business and financial results, we suggest you review the company's filings with the Securities and Exchange Commission. 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 as supplement to, and not as substitute for, financial statements prepared in accordance with GAAP. A reconciliation of the non-GAAP information to the corresponding GAAP measures is in the slide presentation under the Investor Relations tab on our website and accompanying our press release. Non-GAAP results exclude stock-based compensation, acquisition-related costs, restructuring charges and the gain on the sale of facilities. Before I go to -- into a review of our fiscal Q1 financial results, I will turn the call over to Chuck Berger for some opening comments. Charles W. Berger: Thanks, John, and good early morning to everyone on the call. Thanks for joining us. It's an extremely exciting time at Extreme Networks as we completed our first fiscal quarter on September 30 and announced the completion of the acquisition of Enterasys late last week on November 1. First, let's talk about the quarter. This morning, we reported first quarter revenues of $75.9 million, reaching the high end of our guidance, stopping year-over-year revenue declines and meeting our internal annual plan. At $0.06 earnings per share, we are at the high end of guidance on earnings and up $0.02 versus the prior year's first quarter. Our cash balance was $199.4 million at the end of the quarter. We are particularly pleased with these results given the challenges we faced during the quarter. July and August are seasonally slow business months in virtually every region globally. Additionally, we continue to face shortages of our most popular products through the end of August. I am happy to report that by the end of September, our inventories were back at the levels needed to support our revenue run rate going forward. Looking ahead, product shortages will not be an issue. Finally, we announced our planned acquisition of Enterasys in the middle of the last month of the quarter. Fortunately, the announcement did not disrupt our quarter end revenue close. We continue to focus on building partnerships to create leverage and allow us to fight above our weight. In addition to our existing partnerships with Ericsson and the partnership we announced last quarter with Lenovo, we signed partnerships with Aviat and SGI during the quarter. Aviat will be reselling Extreme switches and routers along with their microwave networking solutions, and SGI will be reselling our products along with their high-performance data center solutions, with particular focus on cloud and big data applications. Not only do these partnerships give us strong leverage in the market, they are strong endorsements of Extreme technology and products from an increasing number of leading IT vendors. As I said, we are pleased with the results Extreme Networks reported this morning. That said, the real excitement is the completion of the acquisition of Enterasys. Our December quarter results will include 2 months as a combined company, and the guidance John will give in a few minutes will show the financial leverage from the combination. I encourage you to revisit the call transcript from our September 12 call, when we announced the acquisition for more details. But in summary, the acquisition will double the size of the company in terms of revenues and will be immediately accretive from an earnings standpoint. It gives us the scale to be an even more credible competitor in the Ethernet switching market as the fourth-largest vendor. We now have over 12,000 customers. The combined company will have a complete line of products from the wireless edge of the campus to the core of the data center. Our CoreFlow 2 ASIC technology creates significant differentiation from all of the competition. The CoreFlow 2 architecture, combined with our network management suite, including the NetSight network management application, delivers control, access and ease of configuration at administration that we contend is unsurpassed. Over the next 18 to 24 months, we will merge Extreme OS and Enterasys' EOS into a single operating system that will run seamlessly across our entire portfolio. In addition to added resources for research and development, we will also be able to invest more in marketing and lead generation. Although it will take a quarter or 2 to combine the customer and prospect databases, we now have a state-of-the-art lead generation, lead nurturing and sales force automation infrastructure. We began to focus on the integration of Extreme and Enterasys right after the announcement. We have made significant progress including finalizing the top levels of executive management. I am very pleased to announce that Chris Crowell, formerly the CEO at Enterasys, will continue with the combined company as Chief Operating Officer, with direct responsibility for sales and marketing. One of the keys to success of this combination is to maintain the entire revenue streams of both companies. Chris brings years of experience in the industry, a tremendous track record of success at Enterasys and close customer and partner relationships to the task . I have no doubt he will succeed. Overall, our integration efforts are on track. We have retained Deloitte & Touche as consultants to support us in this process. Their experience and tools, coupled with our commitment to realize the best of both companies and build a successful combined company, are moving the integration efforts forward on schedule. The hallmark Chris and I and the entire team will champion is to put the customer first in every way. We continue to be committed to continuing the product roadmap of both companies to ensure there are no interruptions to our customers' network or operations. We completed a solid quarter on target and finalized the acquisition of Enterasys. It is truly an exciting time for Extreme. Now back to John for the financial details. John T. Kurtzweil: Thank you, Chuck. I will now provide a review of our fiscal Q1 financials and our financial targets for Q2 of fiscal 2014. Revenues for Q1 were $75.9 million, which is at the high end of our guidance of $72 million to $77 million. Sequentially, the first quarter is typically down, and this quarter was no different. Revenues were down $3.5 million from Q4 or 4.5% and essentially flat year-over-year. As was discussed last quarter, we again experienced key component shortages, which were essentially resolved in September. Overall, North America is a tough market right now. APAC is holding their own. Lat Am has line of sight to continuing growth, and EMEA was surprisingly strong, especially the Eastern region. Product revenues were $61 million, a decrease of 5.4% or $3.5 million sequentially, and service revenues at $14.9 million were flat sequentially. Americas revenues were $31.7 million and were down 19% or $7.4 million from Q4 FY '13. North America was a primary contributor to the decrease in revenue, as was expected, due to the product shortages early in the quarter and the timing of summer upgrades for our campus products. The region was also impacted by a large customer's decision to delay capital spending during the quarter and will linger that way through the end of the calendar year. The September quarter is typically our weakest quarter of the year. EMEA revenues were $30.8 million, up 15% or $4 million from Q4 FY '13. Southern Europe, including the Middle East, were the weakest regions, with stronger results in the Eastern region, where several large infrastructure projects broke loose during the quarter. Asia Pacific revenues were $13.4 million, essentially flat sequentially from Q4 FY '13. We had solid performance in both China and Korea. Overall, GAAP and non-GAAP gross margins were 57.6% and 57.8%, respectively, and above the high end of our target range of 55% to 56%. The improvement came from the richer product mix, supply chain cost reductions, and higher factory absorption due to the larger inventory build during the quarter. GAAP operating expenses of $43.3 million increased by $2.3 million from Q4 and were above our target range primarily due to the acquisition-related expenses. Included in the GAAP operating expenses are items that we do not include in our GAAP -- in our non-GAAP expenses. They were $3.7 million of acquisition-related expenses, $1.4 million of stock-based compensation and $0.1 million of restructuring charges. Non-GAAP operating expenses of $38.1 million were up $0.7 million from Q4 and essentially on our targets. Non-GAAP R&D was $9.7 million. Non-GAAP sales and marketing was $22.1 million, and non-GAAP G&A was $6.3 million. First quarter GAAP operating income was $0.4 million, essentially breakeven, and non-GAAP operating income was $5.7 million or 7.5% of revenue. Other expense for the quarter included approximately $0.2 million for a loss related to the sale of investments, which we related to the closing of the Enterasys acquisition. Taxes were essentially flat for the quarter at $0.4 million and were primarily related to our foreign income. GAAP net loss for Q1 was $35,000 or breakeven and $0.00 per diluted share versus the net income of $3.2 million or $0.03 per diluted share in the fourth fiscal quarter of 2013. Non-GAAP net income for the quarter was $5.3 million or $0.06 per diluted share versus net income of $6.7 million or $0.07 per diluted share in the fourth quarter of 2013. The non-GAAP results were at the higher end of our target range of $0.02 to $0.06 per diluted share. Turning to the balance sheet. Total cash and investments for the quarter ended at $199.4 million as compared to $205.6 million at the end of last quarter. Previously, we announced a $7.5 million -- or a $75 million share repurchase plan, and during the quarter, we placed the plan on hold as we were preparing for the close of the Enterasys acquisition. It is currently expected that, over the next several quarters, we will keep this plan on hold as we work the integration plan and focus on driving the free cash flow of the company. Accounts receivable decreased by $8.3 million sequentially, with DSO decreasing by 7 days to 47. Inventory increased by $14.2 million to $30.4 million, with DOI increasing to 99 days. This planned increase was a result of bringing our inventory back to an appropriate level of investment after being too low over the prior 9 months, which limited our ability to respond to our customers. We know this is the highest level over the past 2 years and are keeping a tight focus on ensuring the mix stays in balance to forecast customer demand. Now comes the more interesting part, the forecast for our second quarter fiscal 2014 ending December 31, 2013. We announced the acquisition of the Enterasys Networks on November 1. For this quarter, we'll have a full quarter or 3 months of Extreme Networks plus 2 months of Enterasys Networks. We are looking at the company as 1 entity and not 2. Of course, it will take some time to get there, as Chuck mentioned earlier, but we are moving quickly in that direction. After this quarter, we will no longer be splitting out revenue or costs from the 2 product lines as we are 1 company. We are targeting GAAP revenue in the range of $140 million to $155 million, with non-GAAP revenue of $145 million to $160 million. The difference between the 2 is related to purchase price accounting on deferred service revenue and will be with us for the next several quarters. The revenue split is as follows: Extreme product lines revenue of $76 million to $82 million, Enterasys product line non-GAAP revenue of $69 million -- GAAP revenue of $69 million to $70 million. It is important to note that this includes approximately $5 million of non-GAAP revenue, as mentioned earlier, and is only 2 months during the quarter. GAAP gross margin is targeted to be 47% to 49%. Non-GAAP gross margin is targeted to be 54% to 56%. The gross margins for both product lines are very similar and historically fit in this guidance range. The 3 key deltas between the GAAP and non-GAAP gross margin is purchase price accounting on deferred service revenue of approximately $5 million, the purchase price accounting step-up value on inventory estimated at $8 million and stock-based compensation of $0.2 million. For both GAAP and non-GAAP operating expenses, R&D expenses are targeted to be $20 million to $21 million; sales and marketing expenses are targeted to be $36 million to $37 million; G&A expenses, on a GAAP basis, are targeted to be between $16 million and $22 million, on a non-GAAP basis, are targeted to be between $8 million and $14 million. The items in GAAP that we do not include in non-GAAP operating expenses are stock-based compensation, targeted at $2.4 million; acquisition-related costs, targeted at $5 million; and amortization of acquired intangibles, targeted at $1.5 million. Please note, the purchase price allocation process has just begun and will be completed by the end of December, so these numbers are very likely to change, but not materially. Interest expense and other is targeted to be approximately $0.7 million. This now includes the interest expense related to the debt taken on related to the acquisition. The all-in APR is approximately 3%. Tax expense is targeted to be approximately $1 million. GAAP net loss is targeted at $6 million to $8 million and $0.06 to $0.09 per diluted share. Non-GAAP net income is targeted in the range of $13 million to $16 million or $0.14 to $0.16 per diluted share. The GAAP and non-GAAP net income targets are based on an estimated 96 million, plus or minus, respectively, diluted weighted average shares. Targeted non-GAAP earnings include approximately $5 million related to purchase price accounting of deferred service revenue and excludes expenses related to stock-based comp expense of approximately $2.6 million in total, acquisition-related expense of $5 million, purchase price accounting step-up value on inventory of $8 million and the amortization of acquired intangibles of $1.5 million. Moving on to a bit more detail regarding acquisition. We see scale and reduced incremental operating expenses post close as key financial drivers from this transaction. When we have fully integrated the 2 teams, we plan to reduce product cost and operating expenses between $30 million to $40 million. We expect to realize these synergies over a 12- to 24-month period. The timing of the synergies will be seen in the financials, in a small way, in the third fiscal quarter and will hit full stride in 12 to 15 months from now. We will now open the call for questions. Mercy, can you start the polling.

[Operator Instructions] Our first question is from Mark Kelleher from D.A. Davidson. Mark Kelleher - D.A. Davidson & Co., Research Division: First question on the guidance. The -- you've got an interesting quarter here, where you've only got 2 months of the acquisition. What does the linearity of the revenue and the expenses look like? Are they completely in line or is one shifted to different parts of that quarter? John T. Kurtzweil: This is John. On revenue, it's a light month for the Enterasys product line. There'd be plus or minus about $10 million in the first month of the quarter that we're not including. And then as far as expenses go, on the Enterasys side, they were pretty linear throughout the quarter. Mark Kelleher - D.A. Davidson & Co., Research Division: Okay. And second question is on the component shortages. You mentioned that those have been resolved. What did that do to you in the quarter? Charles W. Berger: Basically, it had the same effect it's had on us, frankly, for 2 prior quarters as well, which was, as we took orders from our customers, we had to delay filling those orders, which often resulted in us drop shipping directly from our distribution centers to customer sites, which increased our overhead due to the shipping costs. Probably far worse than that and really hard to quantify is the fact that the channel also had very low inventory. So run rate business, where customers, our partners, our resellers and the customers that needed the network solution, when they couldn't get it from us, probably fulfilled it with somebody else's product. So it created customer SAT issue with the customers that we were able to close business on during the quarter. And I fear we lost some run rate business as a result of it. With the September buildup of inventories that was done very deliberately, we won't have that problem as we go through this or future quarters. Mark Kelleher - D.A. Davidson & Co., Research Division: Okay. And last question on the merger. You mentioned that you're going to combine the operating systems. Can you just remind me what you said on the timing of that? Charles W. Berger: We believe we can have that done in the next 18 to 24 months.

The next question is from Christian Schwab from Craig-Hallum Capital. Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division: Congratulations on a fantastic quarter and closing a very accretive acquisition. As we look to the new reseller agreements, adding to Lenovo, now SGI and Aviat, how many other reseller agreements are we targeting? And at what point -- I know that there is -- especially in the cloud type of products, that the sales cycle isn't an immediate close. When would be kind of the inflection point for us to measure the success of these reseller agreements, in particular, Lenovo and SGI, which are targeted particularly at the cloud and the data center? Charles W. Berger: Christian, so the Lenovo agreement, which we announced last quarter, will start to go into full swing actually this month. Lenovo plans a fairly significant launch of their service business in North America coming into the middle of this month, November, with the major launch in the Asia Pacific region coming in the first calendar quarter. So I suspect you won't see a lot of business from them in the December quarter, but we should see a pickup coming into the March quarter. We just, a few days ago, signed the SGI agreement. I think that will probably be also more of a March quarter event in terms of creating any significant revenues. We have a number of other discussions in place with other IT vendors across a pretty wide space. But we can't really talk about those until we bring them to fruition as well. Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division: Fabulous. So over the next 2 to 3 quarters, we shouldn't be surprised to see other reseller agreements, I guess. Is that fair? Charles W. Berger: That's absolutely fair. Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division: Excellent. What was the interest rate on the credit facility? John T. Kurtzweil: It's about 3% -- 3.3% is what we expect to be having, and that includes all costs in. Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division: Excellent. And then how soon will -- the OpEx synergies, obviously, are going to take a little bit more time. But how soon should we see some contract manufacturing scale synergies? John T. Kurtzweil: Well, when we looked at it, we just were able to see the bill of materials for the Enterasys product line on Friday, the first day of the close. So we're going through -- we're looking at part by part on their builds, part by part on our build. We expect to get some synergies maybe a little bit this quarter. The full -- not the full set, but we get a lot more synergies from Broadcom and Alpha in the March quarter. So the supply chain is really moving forward. And they're actually -- I was talking with them, and they're actually pretty stoked about having more scale so they can actually go out and do what they see in their job. So this is a shot out to you, Frank. You got to go get that money for us. Now -- and Frank is our Executive Vice President of Operations. On the R&D side, I wouldn't expect to see much, if any, in terms of cost reductions out of R&D over the next 12 months or so, as our -- the 18 months as they are working to consolidate the product lines. And then on the sales side, what we expect is that the sales management is really the area where there is some overlap. Chris Crowell is the new Head of Sales. We only need 1 head of sales, so we're -- we'll get a little bit this quarter, but I would expect to see it into the spring time frame. And on the G&A side, it will really come after we merge our ERPs and get the benefits out of IT and G&A.

[Operator Instructions] Our next question is from Rohit Chopra from Wedbush. Rohit N. Chopra - Wedbush Securities Inc., Research Division: First question, I just wanted to ask, Chuck, you talked about a large customer delaying some purchases. Can you talk a little bit about that? Is that a carrier? Is that just a large enterprise customer? Maybe just expand on that, if you don't mind. Charles W. Berger: Sure. And there was actually a couple of things that impacted our North American results in the first quarter. But specifically, to that point, there is a very large manufacturing customer who has typically bought between $2.5 million and $3 million a quarter from us on a very predictable basis. In the September quarter, they announced, fairly publicly, a reduction in CapEx, driven by a delay in a couple of their new products, and their purchases went almost to 0 during the quarter, which, obviously, puts a pretty big hole in our regional target of $21 million to $22 million. Additionally, North America had an incredibly strong June quarter, with the team pushing very hard to meet year-end accelerators. And I think they cleaned most of the knives out of the drawer and took them around to rebuild their pipeline coming out of an incredibly strong June quarter. So I think, as you look at North America, we saw both of those impacts. Unfortunately, the CapEx reduction of this particular customer, although we've seen a couple of orders already from them in this quarter, probably it won't reach historic levels. So I think we'll still be a little challenged in North America in the December quarter. Rohit N. Chopra - Wedbush Securities Inc., Research Division: Okay. The -- just wanted to touch on about the target model. After you get your synergies or if you want to think about 2 to 3 years out, what does the target model looks like? John T. Kurtzweil: Well, we look at -- we should have gross margins that are a little bit higher than where we're at today, so they're probably in the 56% range. And that -- in the press release, what we did put out, we did put out a target model that have operating income of 10% or greater. And with that, those synergies are there and then when we get there, we get the revenue growth, then we can move the model up from there. But our first target is to get and maintain a 10% target. Rohit N. Chopra - Wedbush Securities Inc., Research Division: Okay. Two other questions. One, on that front, I just want to get a sense on the capabilities that Enterasys had as far as SDN. I know what you guys have. But if you can just talk a little bit about where they are on that front. Why don't we just start there and I'll ask the last one after that. Charles W. Berger: Sure. So we've been emphasizing the virtualization capability that we've always had in Extreme OS, XOS, as beginning of our move towards SDN, as well as support for OpenFlow and OpenStack. Enterasys will benefit from that, as well as their NetSight manager is a huge step towards separating the control plane from the data plane and allowing through software on, essentially, commodity hardware management of the network. Rohit N. Chopra - Wedbush Securities Inc., Research Division: Okay. Now last question was just on products. I know Enterasys had a wireless product and had some security capabilities. Can you talk about maybe the synergies you can achieve with selling of wireless and maybe some combination from a product standpoint? Charles W. Berger: One of the key benefits of the acquisition, frankly, is gaining a complete wireless portfolio. As you know, we have, in the past, OEM-ed our wireless products for Motorola. While they are excellent products and we've had some major wins with those at some of the largest casinos and manufacturing firms in the world, they did not give us great margins, running at roughly half the gross margins of our wired product lines and frankly, as an OEM, didn't give us the ability to do what we think we do best, which is innovate and develop technology that outstrips our competitors in the marketplace. So one of the most exciting things about the acquisition is having now our own wireless product line. That's a complete product line. We'll have AC products out in the first quarter. And we've -- if you see in our press release, we just had a major win for the Lincoln Financial Field, the home of the Philadelphia Eagles, where wireless access for the fans will be across Enterasys' wireless products, joining the Patriots stadium, where we are already doing that. We have a number of other sports venue and venue deals in the pipeline that I think provide us all a testament to how good the wireless product line that we now have as part of Extreme is.

This ends our Q&A session. I would now like to turn the call back to Chuck Berger for closing remarks. Charles W. Berger: Thank you. And again, thanks, everyone, for joining us on the call this morning. We're very excited about the performance that we delivered in the September quarter. I've been here now 6 months, and we've had 2 solid quarters. And we plan to continue that trend, as you can see, from the projections that John gave you. On top of that, we're an entirely different enterprise now with the combination of Enterasys, double in size, with a complete product line and a major force in the Ethernet networking marketplace. So we look forward to talking to you at the end of next quarter with even better results.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.