Laurie Little - The Piacente Group, IR Ed Meyercord - President and CEO Drew Davies - Chief Financial Officer

Alex Henderson - Needham Simon Leopold - Raymond James Mark Kelleher - DA Davidson

Good day, ladies and gentlemen. And welcome to the Extreme Networks Fourth Quarter Fiscal Year 2017 Financial Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Laurie Little from The Piacente Group. Please proceed.

Thank you, Tim. Welcome to the Extreme Networks' fourth quarter and full year fiscal 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'd like to remind you that during today's call, management will be making forward-looking statements within the meaning of the Safe Harbor provision of the federal securities laws. 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. These risks include our ability to successfully close the Broadcom transactions where we will ultimately acquire Brocade assets and to successfully integrate the acquired technology and operations from Avaya and Broadcom into our business and operations, including, but not limited to, the following risks, difficulties we may experience in the retention, assimilation and successful integration of employees and teams, acquired operations, technologies and/or products, unanticipated costs of litigation or other contingent liabilities associated with the acquisitions that could negatively impact our operating results and financial condition, adverse effects on existing business relationships with suppliers and customers, and difficulties we may experience in reaching our aspirational goals related to the acquisitions. For a detailed descriptions of 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 may reference both GAAP and non-GAAP financial metrics. 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 can be found in our earnings press release issued today. For your convenience, a copy of the earnings release and supporting financial materials are available on the Investor Relations section of the company's website at extremenetworks.com. And with that, I will turn the call over to Extreme's President and CEO, Ed Meyercord for his opening comments.

Thank you, Laurie, and thank you all for joining us this afternoon. Today, we're pleased to announce financial results for fiscal Q4, highlighted by 28% growth in total revenue with organic growth within the core Extreme portfolio, and increased profitability and cash flows. We are also pleased to highlight our acquisitions of Zebra Wireless LAN now Extreme WiNG being fully integrated into the core Extreme business and delivering better than expected results, the Avaya Networking business and the expected closing of the Brocade transaction. Extreme is taking market share and our exclusive focus on delivering end-to-end enterprise technology solutions from the wireless edge into the hybrid cloud data center is being well-received in the market. Our Q4 results for fiscal ‘18 highlight the customer demand for our networking technology, the execution of our solutions go-to-market strategy, and the impact of our accretive acquisition of Zebra. We delivered non-GAAP earnings per share of $0.17, growth of 70% compared to the fourth quarter year ago, marking the ninth consecutive quarter Extreme has met or exceeded our earnings guidance. Year-over-year, we grew our cash balance by 39% and for the first time in many years, we deliver positive GAAP earnings. In Q4, we achieved another very important milestone, organic revenue growth, 6%, in our extreme portfolio driven by record quarter in wireless which grew at 11% year-over-year, well above the industry rate of 6%. We also saw growth in software sales at our Fixed Summit Switch portfolio. With Extreme WiNG revenue added, our fiscal Q4 revenue increased 28% year-over-year. We benefited from an increase of large orders in excess of a $1 million, driven by the addition of Fortune 100 wireless accounts. WiNG’s large enterprise customers are vocal about our high quality service, which is opening doors for us to compete in more places than their networks; and in the quarter, we generated more than $3 million in cross-selling revenue synergy, a number that we expect to increase in future quarters. In terms of our Geo performance, we had growth in the Americas, EMEA, and APAC on a sequential and year-over-year basis in Q4. After making significant changes over the past two years, we have the right geo regional and country leadership in place to drive our strategy. We set a new record for revenue in the Americas, which eclipsed the $100 million mark for the first time in our history, and with the addition of WiNG, Avaya, and Brocade assets, we have significantly more cross-selling opportunities and greater exposure to large countries like Canada, Japan, and Australia where product margins are higher. The acquisitions also strengthen our competitive position in key industry verticals, whether it's a very large healthcare system provider in the U.S. from Avaya, a large WiNG retailer in the U.K., a large research institution in Europe from Brocade, or a large manufacturer in Germany who uses technologies from all four vendors, each of our enterprise customers leverages our technology platforms in different ways. They provide valuable industry references as well as proven architectures for us to prescribe to our sales teams when we go to market. With these deals, we are also strengthening our position in the federal government and service provider enterprise verticals. Now with over 30,000 enterprise customers, our expanded product portfolio creates significant cross-selling opportunities. WiNG’s Guest Portal and Location Inc. for retail can be a powerful tool in hospitality and healthcare. Avaya's Fabric Connect cell technology for hospitals can be applied to all enterprises for enhanced security. Extreme’s stadium analytics can be used to drive better business outcomes in retail, manufacturing, and education. And Brocade's workflow composer can automate network functions across any enterprise data center environment. Net-net, we believe we are very competitive in all places of our customer networks, with unique software to help them deliver better business outcomes. With our estimated revenue run rate in excess of $1 billion after we closed Brocade transaction, we now have a critical mass to expand our investments and product in vertical marketing to drive growth. By focusing our technology portfolio on enterprise specific solutions, we can be very prescriptive with our sales teams and our channel partners as we go forward in making it easy for them to position Extreme’s industry-leading solutions. We are the only player in the networking industry solely focused on this strategy. Three weeks ago, we held our sales kickoff meeting for fiscal ’18, we had our global sales organization including Avaya and Brocade teams close to 1,000 strong. The energy level was high and it was clear that our new Extreme team is embracing our vision. The feedback has been very positive with the excitement focused on all cross-selling opportunities that exist with our large, high quality customer base with our expanded solutions portfolio. The benefits of higher quality solution sales are evident in fourth quarter gross margins that jumped 230 basis points year-over-year to 57.1% and increased by 270 basis points in fiscal ’17. Solution selling, when we lead the sales process with our software is being embraced by our field teams and delivering sticky customers with higher gross margins. We also drove more than 20 distinct gross margin improvement initiatives this year, changes in discounting policies, procedures, supply chain improvements, and product lifecycle management were also major drivers. Gross margins expanded every quarter in fiscal ‘17 compared to ‘15 and ’16 and this included the integration of WiNG Wireless revenue, which carried lower gross margins in our core business. If we adjust gross margins for WiNG Wireless, Extreme’s standalone gross margins for Q4 would be in excess of 58%. We are focused on delivering our 60% gross margin target by fiscal Q4. We expect to reduce Avaya's discounting levels that increased during bankruptcy and to extend our gross margin improvement initiatives to the Avaya business, and when the Brocade transaction closes, their higher margin data center business will also help us move toward our 60% target. From an operating expense perspective we will continue to be disciplined. The benefits of operating leverage with WiNG Wireless along with our efficiency initiatives contributed to improved year-over-year operating income of 12.2%, the first time our new team broke the 10% objective we put in place two years ago. We expect to realize the benefit of operating leverage with our Avaya, Brocade acquisitions, as we onboard new customers, drive organic growth in our core business and focus on higher quality, higher margin business, we are confident in our ability to achieve our goal greater than 15% operating income margins by fiscal Q4. Turning to our technology, investment and product development during the quarter, our engineering teams introduced enhancements across our entire solutions portfolio. On the hardware side, we released our high performance X870, X620, X460-G2 multi-rate switches with more flexibility and future proof investment protection. Our 200 Series Street Fighter, our new small form factor wall plate AP targeted specifically at the hospitality market and we are on plan with our converged Extreme and WiNG hardware platforms. As it relates to our software releases, we came out with a new Extreme guest portal for Wi-Fi users, upgraded AirDefense Wireless Security software. We introduced Wireless Location Inc. software, updates to our 8.0 version of Extreme management that includes new analytics dashboard and our cloud management 4.0 with wired and wireless management capability. As I mentioned earlier, our top priority is to ensure a smooth transition for WiNG, Avaya and Brocade customers, and to protect their network investments. The new Extreme engineering and product line management teams have been working on a roadmap for several months and the feedback from thousands of customers and partners that participated in our joint roadmap session has been outstanding. We are building super spec access layer aggregation and core switching platforms to provide a clear path forward for both Extreme and Avaya customers, both companies will benefit from the release of the new tsunami modular switching platform and continued enhancements to Avaya’s popular fabric technology Fabric Connect. Now with the new Extreme targeting large scale enterprises, integrating the SLX platform with a network automation capabilities of workflow composer is a priority, we will continue to invest in SLX, BDX and MLX, and soon to be extreme workflow composer to provide a complete end-to-end solution to our customer base. Enterprise customers have been highly supportive of our strategy. They want an end-to-end vendor with better solutions and better service to provide a competitive alternative to Cisco, in the fourth quarter there were tens and tens of deals won where we heard this feedback from customers. With CTC, a large Canadian retailer, our success in stores like to their first non-Cisco distribution center, IoT enabled wireless with our management and analytics at Montréal, a new airport in Spain from AENA, which manages all 25 major airports. They wanted quality wireless integrated with their wired network with the seamless management system and we beat out Cisco. We beat out Cisco and HP Aruba with the Tampa Bay Buccs, another NFL win due to our performance in Super Bowl 51 and the complete end-to-end solution with wired/wireless unified with our Access Control management and analytics. With a large County School District in Georgia, with 36 schools, a two-week bake-off between Cisco Meraki, HP Aruba, Maroof Fortinet and Extreme, each technology deployed in a different wing of the school. Our Wi-Fi performance was strong but it was Extreme management, our single pane of glass, our access control, our analytics and our cloud management capability that made it an easy decision and steals the win. And finally, I spoke with the senior IT executive responsible for networking at the Fortune 100 scale global manufacturing in Europe that is a customer of Extreme, Avaya and Brocade, and WiNG. Collectively, they spent over $100 million over the past five years with the new Extreme. The message, one, they like our vision and focus on the enterprise; two, they prefer to deal with one vendor instead of four; and three, they want a stronger competitor who can go toe to toe with Cisco in delivering a complete end-to-end solution. We're hearing this more and more as were the new Extreme’s spread with enterprise customers. As far as our recent acquisition announcements, we close Avaya two weeks ended July. We had over 9% acceptance to offer letters and are very excited about the quality and caliber of employees joining the new Extreme. We Are confident in reiterating our expectation that this business will add over $200 million in rate revenue and be accretive to cash flow and earnings for our fiscal 2018. With respect to Brocade, we have over 90% acceptance of offer letter that have been sent out and we expect to close the acquisition within a few business days of Broadcom's acquisition of Brocade. While we would like to close the transaction as quickly as possible, the delay is provided our teams work time to focus our efforts on integrating Avaya and getting ahead of the Brocade integration. Following the close of our Brocade asset purchase we will summon our position as the number three player in the enterprise market for end-to-end wired and wireless networking solutions. This gives us more of fast and brand recognition and the new Extreme will have the important distinction of being the only pure-play enterprise network provider in the industry. As we announced at our Investor Day on June 2nd, we believe we have achieved critical mass from the skill perspective and expect to deliver run rate revenue above a $1 billion for the fiscal year 2018. This will make Extreme one of the fastest growing networking companies in the industry. And with that, I'll turn it over to Drew to review our results and guidance in detail.

Thanks, Ed. I will get started with the few highlights from Q4 and the fiscal year. First, we are very pleased to report that we recorded a GAAP profit of $0.11 per share. This represents our first GAAP quarterly profits since the fourth quarter of fiscal 2013. This profit was driven by a 480 basis point improvement in gross margins, compared to the same quarter a year ago, organic revenue growth of 6% and the additional scale and operating leverage we achieved as a result of the Wireless LAN acquisition during the year. Our focus in 2017 was to improve gross margins and we delivered significantly higher non-GAAP gross margins rising 270 basis points for the full fiscal year. Solution selling, improved discounting, supply chain cost reductions, the consolidation of distribution centers and tighter control of inventory drove margin -- gross margin expansion. In fiscal 2018 we will continue our focus on gross margin improvement and have identified a number of opportunities in our recent acquisitions as well as core business. I would also like to highlight that our growth and profitability drove a 95% increase in our operating cash flows over the course of the year to $58 million, contributing to the $36 million increase in our cash position to a total of $130 million at the end of the fiscal year. I will cover more on the balance sheet in a moment. Now let's review the fourth quarter results starting with revenue. Q4 revenue was $178.7 million, compared to $148.7 million in Q3 and $139.6 million in Q4 a year ago. This highlights the successful integration of the WiNG Wireless business, and importantly, organic growth of 6% in this extreme product portfolio. The geographic split revenues was as follows, the Americas contributed 58% to total revenue, EMEA contributed 32% and APAC contributed 10%. Product revenue for Q4 was $140.8 million, compared to $110.8 million in Q3 and $106 million in Q4 last year. Q4 service revenue was $38 million, compared to $37.9 million in Q3 and $33.6 million in Q4 last year. Moving on to gross margin and operating expenses. In Q4, gross margin -- GAAP gross margin was 56.9%, compared to 55.3% in Q3 and 52.1% in Q4 last year. Non-GAAP gross margin was 57.1%, which compares to 57% in Q3 and 54.8% in Q4 last year. Q4 GAAP operating expenses were $87.1 million, compared to $85.4 million in Q3 and $73.2 million in Q4 last year. Q4 GAAP operating expense includes amortization of intangibles of $1.2 million, stock based compensation charges of $3.1 million, litigation expenses of $200,000, acquisition-related expenses of $3.2 million and a restructuring credit of $700,000. Q4 non-GAAP operating expenses were $80.1 million and compared to $70.8 million in Q3 and $64.7 million in Q4 of 2016. The sequential increase in non-GAAP operating expense was mainly attributable to higher sales and marketing expenses. Fourth quarter GAAP operating income was $14.6 million, compared to a loss of $3.2 million in Q3 and a loss of a $0.5 million in Q4 last year. Fourth quarter non-GAAP operating income was $21.9 million or 12.2% of total revenue, compared to $14 million or 9.4% of total revenue in Q3 and $12.1 million or 8.6% of total revenue in Q4 last year. GAAP net income for Q4 was $12.2 million or $0.11 per share, compared to a loss of $5.6 million or $0.05 per share in Q3 and a loss of $2.3 million or $0.02 per share in Q4 of last year. Non-GAAP net income for the quarter was $19.4 million or $0.17 per diluted share and compares to net income of $11.6 million or $0.10 per share in Q3 and $10.2 million or $0.10 per share in Q4 of 2016. On a full year GAAP basis for fiscal 2017, revenue was $598.1 million, gross margin was 54.3%, operating loss was $700,000 and EPS was a loss of $0.08 per share. On a full year non-GAAP basis for fiscal 2017 revenue was $598.2 million, gross margin was 57%, operating income was $58.6 million and EPS was $0.46 per diluted share. Turning to the balance sheet, Q4 total cash and cash equivalents benefited from strong collections and we ended the quarter at $130.5 million, up $13.2 million from the end of last quarter and up $36.3 million from the end of Q4 2016. During the quarter cash flow from operations was $15.3 million, compared to $24.7 million in Q3 and $11.5 million in Q4 last year. Free cash flow was $12.7 million, compared to $22.5 million in Q3 and $8.9 million in Q4 last year. Accounts receivables were $120.8 million at the end of Q4, up $18.8 million from the end of Q3 on higher sales and up $39.4 million from the end of Q4 of 2016 with the addition of the acquired Wireless LAN business. DSO decreased to 61 days this quarter from 61 days in Q3 and compares to 53 days in Q4 of ’16. Inventory ended at $45.9 million, down $1.8 million from last quarter and up $4.9 million from Q4 of ’16. Total debt outstanding at the end of the quarter was $92.7 million, compared to $55.5 million at the end of Q4 last year. The increase is attributed to the amended term loan for the Wireless LAN acquisition. Now let's move to the guidance for Q1, our first fiscal quarter will include 11 weeks of revenue from Avaya -- from the Avaya Networking assets acquisition. As noted in our earnings release, we expect the acquisition of Brocade Networking assets from bought Broadcom to close in our second fiscal quarter. We will provide further guidance for the remainder of the fiscal year -- fiscal 2018 at that time. We expect Q1 revenue to be in the range of $200 million to $210 million. Q1 GAAP gross profit is anticipated to be in the range of 53.5% to 55.5% and non-GAAP gross margin is estimated to be in the range of 55.5% to 57.5%. Our anticipated near-term decrease in gross margin is driven by the addition of the Avaya Networking business. We expect this to be dilutive to gross margins for few quarters until we see sales discounting return to normal levels and we improve this business with our gross margin initiatives. Q1 operating expenses are expected to be in a range of $105 million to $109 million on a GAAP basis and $96 million to $99 million on a non-GAAP basis. Tax expense is expected to be relatively consistent with Q4 levels. Q1 GAAP net income is expected to be in the range of a $1.2 million loss to net income of $5.5 million or a loss of $0.01 per share to net income of $0.05 per share. Non-GAAP net income is expected to be in the range of $12.7 million to $19.5 million or $0.11 per diluted share to $0.17 per diluted share. The average shares outstanding are expected to be just over 116 million on a GAAP and non-GAAP basis. And with that, we will now open it up for questions.

Thank you. [Operator Instructions] And our first question comes from Alex Henderson from Needham. Your line is open.

Wow. So, nice job. Congratulations.

Thanks.

So, first question I wanted to ask is, pretty wide range on the operating margin guidance for the quarter, and obviously, you have got a lot of work to integrate to get the first quarter numbers, but could you give us a little bit of a sense of what assumptions you're making that would get you down towards the 6% number on the operating margins for the September quarter versus what would get you up closer to the 10% kind of number at the high end of the band in the September quarter, what are the mix elements that go into it?

So, hey, Alex, how are you doing?

Good.

So…

As well as you.

Well, yeah, it was a good quarter. So the -- we – a lot as you said is we are looking at integrating the businesses and getting a feel for the operating expenses in the business, the sales commissions, and so we did have a fairly wide range. We have got the timing of some R&D projects and new programs coming online, and so we have got kind of the range is said to estimate that.

Yeah. Let me and Alex I want to just add what are the things that happened in terms of the Avaya sales teams. While they are in bankruptcy we saw their discounting creep up a little bit, which had a negative impact on gross margin. So this quarter we are picking up sales. They are going to have lower gross margins and this is something that we're going to fix over time, but we are going to have to weather that. So, obviously, that lower gross margin will have an impact this quarter, but it’s something that we will be able to improve over time. And if you recall, in terms of the transition service agreements, we still will be paying Avaya for those agreements from an OpEx perspective, and over time we will be working those off. So initially those will be two of the big ones, and then, as Drew mentioned, we are getting our arms around visibility in terms of the people coming on board, sales commissions, and those kinds of things. So we do recognize, we are giving you a pretty wide range.

So is it more on the gross margin side or is it more on the OpEx side that would be driving it between the -- I am looking for what…?

Yeah. It’s a…

… different at the low end versus the high end as opposed to what the actual number is?

Yeah. It’s mix of both, I think, it’s a mix of both, but lot of it is, is getting our arms around the gross margin and the discounting that Avaya had. As Ed said, coming out of bankruptcy, the discounts were steeper than usual, steeper than their historical discounts had been, and we're starting to tighten that up and it’s a matter of how fast can we take -- can we get control of that in this first quarter that we own the business.

So to assume that these bids and tenders have been put out over the course of a quarter or two and would be closing in the headlights, does that mean it will take you a quarter or two to bring that under control or is it…?

Yeah.

… is your teaching process is well or…?

No. I think it’s fair that we will, I mean, and I think, it will continue to improve throughout the year, but I think we will make significant improvement after this first quarter.

And so the discounting magnitude is on the Avaya piece, is it 300 basis points, 400 basis points, 500 basis points?

Yeah. More than 500 basis points.

Over 500 basis points, so...

From what we originally guided.

So over 500 basis points from what they would normally be selling at?

That’s right.

Right.

Right. Okay. So…

Okay. Okay. We have sales discounting as a piece, and the other thing that we are encouraged by is our teams have been working together for some time and we've identified a lot of tactical initiatives that we can take to chip away the gross margins. We have been very focused as you know on improving our gross margin, and we’ve gone really deep and been very focused there and we are going to bring that focus to Avaya and we have already identified a lot of tactical. So there is a wide range of, what I would say, near-term tactical opportunities that we have, maybe more strategically in terms of how we are dealing with partners and customers, it’s already started in terms of our discounting process and discount authorization processes that are already tightening up. As you mentioned, that doesn't happen overnight, but we will -- we are working on it already and we think you'll see the improvement there in Q2.

Could you give us a spilt on the revenue by product and service for Avaya?

Yeah. It’s about a 80%-20% split. 80% product, 20% service.

And is there any meaningful difference in the margins between those two relative to GAAP?

Yeah. Yeah. Definitely service margins are in the mid 60s.

All right. So the discounting is heavily weighted to product GMs?

Yeah.

Okay. So it’s over 500 on average is probably well over 500 on purchase product?

It’s -- yeah, it’s almost all in the -- well it’s a product [multiple speakers]

One more question then I will cede the floor. You’ve made a comment about large orders of over $1 million, but you didn't offer any metrics for that. Can you give us something to prove that point so that we can talk about it in a more aggressive way?

Yeah. It’s not something that, as we want to be careful about how we disclosed that Alex, in terms of us creating a reporting metric, the thing to highlight is that, with the WiNG customers, we did pick up a lot of Fortune 100 accounts and these are very large enterprise customers and we're seeing a lot of opportunities, and it’s why we are excited about, we come out with our Street Fighter Series Switches which on the edge, our lower price and higher margin it could be very competitive which present an interesting cross-selling opportunity for us. And then as I mentioned, a lot of these customers are surprised at the level of services that they are getting from Extreme and we really do have differentiated service levels with these customers. So they are inviting us in and we are seeing opportunities in aggregation, core switching and even being invited in to talk about data center, which is why we are so excited to be pulling all the pieces together. I am not sure I'm helping you in terms of giving you a metric for modeling purposes, but there are tens and tens of these Fortune 100 customers that we have picked up, where we have cross-selling opportunities.

Did the number of $1 million deals double year-over-year?

I think that's fair, yes.

That’s what I was looking for. Thank you. I will cede the floor. Thanks.

[Operator Instructions] And our next question comes from Simon Leopold from Raymond James. Your line is open.

Great. Thank you. A couple things I want to ask. In terms of the -- this forecast for September, can you help us understand what the assumption is for how much you're getting from Avaya and how much the, I will call it organic business with Zebra as well, but just trying to sort of separate Avaya contribution from the primary business beforehand in that September guidance?

Sure. Simon, we -- what we said about Avaya that we are expecting $200 million in run rate revenue and that's in tax here if we were to put a range on it, we would say that Avaya revenue for this quarter is going to be somewhere in the $50 million to $54 million potentially in that range. In terms of Zebra Wireless, we said they were $29 million to $34 million. This past quarter we were at the high end of that range, but with seasonality we would expect that to come down a bit, but to continue in that range. And then, you can do the math in terms of where Extreme fits in and where the organic growth would come in, Extreme total revenues of $122 million last year in the first quarter and that you'll be able to see the -- see organic growth, which is going to be in the, you call it a 4% to 5% range.

Great. I thought you had said something about the organic growth in prepared remarks, but wasn't quite sure if I caught it correctly?

Yeah. We expect organic growth to continue, we are projecting organic growth in the core business…

You want, yeah.

Great. And you talked about the transition expenses and I'm assuming from a modeling perspective, we should really think about those as being somewhat invisible to us that, while they're buried within your operating expenses now, you'll be picking up those internally, it that the right way to think about it or do we think about expenses trending down over time, help us think about how that evolves?

Yeah. Yeah. It will trend down over time, well, that -- those are expenses that if their operating costs that that are to manage the business we won't really look through those or non-GAAP those out per se. But if there kind of one timers that aren’t -- don't continue every quarter than some of that acquisition related stuff we will non-GAAP add. But that will go down over time and will have some savings in -- after we get off the TSA's.

Okay. And clearly, it's not as if you're acquiring an entire company, so you don't have the kind of expenses of changing out the back office, front office software systems, can you…

No.

… describe some of the milestones…

Yeah. I’ll give you some examples, so they are helping us. So in Avaya’s case, the Avaya transaction is a little more complicated than Zebra one and the Brocade one, because their systems are they are on SAP system, we are on Oracle. Brocade fortunately is on Oracle, so it will be a little bit easier. So the order -- the quoted cash cycles as we call it will be run by them and on their IT systems for a period of time and then also the supply chain management portion of it will be run on their systems. Those are the two biggest ones. We will get some help from them and on some engineering tools, and we have some leases that we will pay where we are subleasing from them for a period of time. Those are kind of the majority of the big expenses and those are all go away over time. We will pick up -- there will be -- so we will save the majority of those expenses over time.

And when do you expect to transition onto your own system?

So we -- we are shooting to be completely off Avaya's systems by the end of March of next year.

Great. And is there any seasonality that we should think about for the Avaya business in that -- I think those who is following Extreme know your seasonality with your strong June quarter, does Avaya have patterns that we should be aware of?

Yeah. It's about the same as what we have. Yeah.

Great.

Those kind of, I think, it’s fair to say…

Q2 and…

… that’s the same they have.

Q2 and Q4 are stronger than. Yeah, although, they had the -- their September quarter was very strong last year, but it was related to one major order that they had, but we -- but really similar to what we've had in the past.

And then just one last one…

I will elaborate.

Sure.

I will elaborate a comment that you made earlier just to reaffirm as it relates to the costs that we're picking up when we are making this acquisitions, one of the benefits of asset acquisitions are that we are hiring the people that we want so. On day one we do have built-in synergies from an operating expense perspective. We will carry the GSA expense and so we work off of that. And because of the timing of the transactions that we are looking at, we had prioritize Brocade over Avaya from a timing perspective. So our plans are to migrate off of Brocade before Avaya and the reason for that just has to do with Oracle to Oracle versus SAP as Drew mentioned.

Sure. And then just one last trending question, our checks were generally positive particularly on the education verticals, as well as the state and local, can you speak to how that particular vertical behavior was performing for you in this June quarter? Thanks.

Sure. Education was up this quarter year-over-year, if you look at it from K-12, as well as higher ed, quarter-over-quarter from a sequential perspective and then year-over-year we were up in K-12 and higher ed and as you know, education is one of our stronger verticals. This is where we're excited about Avaya, Avaya also has a strong presence in education and some of the solutions that they are bringing to the education market that technology is something that we are going to be able to roll out to our customers.

Great. Thank you for taking my questions.

Thanks, Simon.

Thank you.

And our next question comes from Mark Kelleher from DA Davidson. Your line is open.

Great. Thanks for taking the questions and congratulations on the well executed quarter. Can you -- first is the numbers question, can you tell us the wireless as a percentage of revenue in the quarter?

Wireless, if we just look at it from a product perspective was about 30%, a little shy of 30% from a product perspective.

Okay. And then, you touched on this in your comments, but in terms of the go-forward architecture bringing all of these operating systems together, these network operating systems, can you just give us a little bit of tutorial on how you finally do that and what you are telling your customers to keep them engaged and onboard?

Yes. The first think we are telling customers is that that we do plan to carry forward the operating systems of the businesses that we are acquiring and that we will create a path forward for those customers. Our teams have been working over the past several months looking at that. One of the things that that we talked about is over time with this super spec is looking at having a very thin layer operating system software on our hardware platforms and then giving customers the opportunity to pull that operating system features, thinking about it more like a different kind of a feature set in terms of what they want to download, in terms of what they want to run in their environment. In our sales kickoff meeting we actually demonstrated on our X870 Series platform is a multi-rate switch where we could download and pull down the SLX technology from Brocade or at the same time you could download our XLS operating system software. So we're looking at a very flexible model for customers where we want to be very prescriptive for what suits the environment. Another example would be the WiNG operating systems versus the traditional Extreme operating system for wireless, where their system is very good for distributed network environment, think about Lowe’s and CVS and these kinds of multi-location distributed environments versus an NFL stadium. We have very concentrated networking environment, which has been one of our sweet spot in hospitals and schools, et cetera. So what we are going to do, we are doing the same thing on the wireless side is disaggregating the operating system software from the hardware and we are going to give our partners and our customers the choice of how they want to configure this. And then above that we are looking at other services layers that we talked about our guest portal, location capabilities, security capabilities and these kinds of services that will layer on top. So that's really what our teams are really excited about. Our product line management teams, our engineering teams have been working really hard about on developing the future product roadmap and how it all comes together and we share a common vision. There is a lot of excitement about what we are going to be able to do.

And I would imagine that there is significant sales education effort that you need to do that kind of make sure sales can cross sell and everything?

Yeah. Over time, that’s what we are doing in our sales kickoff meeting. It was a full week. Our system engineers came in over the weekend and worked all weekend. There is a lot of cross training and education on different technology platforms and a lot of excitement, because I am not sure that, yeah, the different teams from the different companies really appreciated the power of the technology that the respective companies were bringing and I think that’s lot of the excitement here. And we are all investing in an expanded product line management team and product marketing team and we are going to do a better job of being more prescriptive in terms of how we help the field position, all the different technologies for different situations. It would be an educational facility, enterprise campus, hospital, healthcare facility or is it manufacturing, what size or scale data center we are talking about. So these are all things that are going to be in the mix and our teams are working very hard on this in real time to make it easier for everyone to position and sell the entire portfolio.

Okay. That’s all I got. Thanks.

Thank you.

[Operator Instructions] And we have a follow-up question from Alex Henderson from Needham. Your line is open.

Thanks. So, first question, just kind of get some easy step out of the way. Any thoughts on how the tax line should look as we go out over the next couple of quarters and given your nice increase in cash in the quarter but you're also closing the deal on the quarter, what should we be thinking about in terms of the interest and other income line?

So, yeah, the tax is we are going to see about the same for the next couple of years there, as well as for the next few quarters, we are not going to have this impact, it might be a couple 100 basis difference then what we have this quarter. And then on the interest expense, we are going to be -- will be about $1.8 million post the Avaya deal during this quarter and then they will come up a bit -- can you hear me, okay, Alex, I’d...

I think you said, $1.8 million post the Avaya deal, but that -- and that’s coming up after that on the, okay.

Yeah. Yeah. We take -- yeah, and then we take another $20 million tranche when we close the Brocade deal. So it will come up and it will be close to $2 million per quarter at that time.

I get it. And the comments you made about the transition services agreement and trying to get out of that at the end of March. What is kind of the quarterly run rate in the first quarter that you are absorbing?

$3 million to $4 million.

Per quarter.

Yeah.

Okay. That's very helpful. And within the Avaya business mixes, any variance in the assumptions we should be making for R&D, sales and marketing and G&A percentages, is it heavier or lighter on any of those versus the benchmark?

The -- on the Avaya side, the R&D is a little lighter than we have had and sales is about the same with R&D is a little lighter as a percent of revenue than Extreme.

G&A I assume is a little lower because you did not bring it in?

Yeah. G&A is a lot lower, yeah.

I see. Great. And just in terms of the -- I know this is a touchy question, but in terms of the final transaction here, obviously, you can't really know what’s going to happen with the legislation, with the government and any issues. Any thoughts on whether there has been a change in their thinking about selling Brocade to Avago and can you handicap why that there was a delay in that transaction closing or an extended increased review. Can you talk a little bit about that issue?

Sure. I can do that Alex. I mean, as you know that, Broadcom acquisition of Brocade turn into a very complex acquisition of eight different components and when they made their Cephias filing, it is a 75-day statutory window for that. I think it was underestimate -- the complexity was underestimated by the government and all parties involved and as the clock was running out it was actually the 50th recommended that they withdraw and re-file, because they just didn't have enough time. And so, obviously, it's all hands on deck. There is a lot of care and feeding going on. The new date is October 2nd when the 75-day window rolls out. All expectations from what we are hearing is that the process is going along really well, Cephias is aware now of all the different pieces and the expectation is that that it’s going to happen. So people are feeling positive about the fact that it’s going to happen and if it happens at the very end, it would be October 2nd. And what we have said is that our deal will close shortly thereafter. Given that timing we wouldn’t want to close at the very end of our quarter, so we would want to wait until the beginning of October, a few days after the Broadcom Brocade transaction closed before we closed.

So it’s reason for us to think that you will have it in hand for the vast majority of the December quarter?

Yeah. I mean, I -- if you go with those dates, you could reach that conclusion. Again, we don't -- we are trying not to speculate, because we are not directly involved in the process. But that would make sense.

One more question on components of the income statement, anything changing in the shares outstanding as a result of closing any of the -- all of these deals, I assume that, most of this is not related to that, but there might be some issuance for employee use and things of that sort. Anything we should be doing on that line?

Yeah. So we have got as you heard some few minutes ago that 116 million shares. That’s going to go up to the 4 million shares with the additional grants that we have for the employees coming on board.

So by the end of the December quarter as we go into the first half of ’18?

Yeah. And then that’s gets waited obviously for the year, so it will be -- there will be -- half of that will get -- for the fiscal year we will have half the effect of that.

Right. So we should be thinking about something approaching 120 million shares exiting ’18?

Yeah.

I get it. I will cede the floor.

Maybe a little high, yes, in that range.

Okay. Great. Thanks.

Thanks, Alex.

And at this time, I am showing no further question. I would like to turn the call back to Ed Meyercord for any closing remarks.

Okay. Well, thank you everybody for joining us on the call today and I want to thank all the employees of team Extreme who are listing for a job well done in the quarter. We are proud of the team for delivering nine quarters in a row of meeting or beating earnings guidance and what has been a truly exciting fiscal ‘17 with three transformative acquisitions and non-GAAP EPS that was above the prior two years combined. So we are looking forward to another successful Q1 and fiscal 18 and have a great day.

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