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Ruckus Wireless (NYSE:RKUS)

Q4 2012 Results Earnings Call

February 12, 2013 5:00 p.m. ET

Executives

Nicole Noutsios - IR

Selina Lo - President and CEO

Seamus Hennessy - CFO

Analysts

Simona Jankowski - Goldman Sachs

Ehud Gelblum - Morgan Stanley

Brian Modoff - Deutsche Bank

Rich Valera - Needham & Company

Ittai Kidron - Oppenheimer

Jason Ader - William Blair

Rajesh Ghai - Craig Hallum

Mark Sue - RBC Capital Markets

Operator

Good day ladies and gentlemen, and welcome to the Q4 2012 Ruckus Wireless earnings conference call. [Operator instructions.] I would now like to turn the call over Nicole Noutsios with investor relations. Please proceed.

Nicole Noutsios

Thank you for joining us on today’s conference call to discuss Ruckus Wireless’s fourth quarter and 2012 financial results. This call is also being broadcast live over the web, and can be found on the investor relations section of the IR website.

With me on today’s call are Selina Lo, our president and chief executive officer, and Seamus Hennessy, our chief financial officer. Please note that certain remarks we make on the call will constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to anticipated market conditions, future financial performance, business strategy and plans and objectives of management for future operations, technology development, and other future events.

Risks and uncertainties can cause actual results or the timing of events to differ materially from those anticipated in these forward looking statements. This includes the risks and uncertainties described from time to time under the caption “Risk Factors” and elsewhere in our SEC filings and reports, such as the final prospectus for initial public offering filed with the U.S. Securities and Exchange Commission on November 16, 2012.

In our SEC filings, we identify important factors that could cause actual results to differ materially from those contained in any forward looking statements. Ruckus Wireless does not assume any obligation to update the forward looking statements stated in this call as a result of new information, future events, or changes in its expectations, except as required by law.

Please note that we expect to file our annual report on form 10-K for 2012 shortly. In addition, we’ll be presenting and discussing non-GAAP financial measures in this presentation. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures, please see today’s press release, which is posted on our website at www.ruckuswireless.com.

With that, I’ll turn the call over to Selina.

Selina Lo

Thank you for joining us for our first earnings call as a public company. We at Ruckus are extremely pleased with our performance and financial results in 2012, during which we grew our year over year revenue 51% in the fourth quarter and 79% in fiscal 2012, while dramatically increasing profitability.

What has been the key to our growth? Our technology differentiation and market focus make Ruckus a major beneficiary of the rapid growth in mobile data usage. We have developed unique carrier-class wifi technologies that deliver pervasive wireless performance in the most challenging environments.

Our primary growth market, wifi for service providers, has emerged very rapidly, and is showing extraordinary growth. Infonetics forecasts that the service provider wifi market will grow from approximately $300 million in 2011 to $2.8 billion by 2016, at a 57% CAGR.

Leveraging the same technology advantages, we’re also a leading player, and continue to gain share in, the enterprise wifi market, which is expected to grow from $3.5 billion in 2011 to almost $7 billion by 2016, according to Gartner.

Ruckus Wifi Solutions helps mobile service providers cost-effectively bridge the capacity gap between mobile data demand and macrocellular bandwidth. Fixed line and managed services providers deploy our carrier-class wifi solutions to deliver value-added services and reduce subscriber churn.

Service providers choose Ruckus because our innovative smart wifi technology is uniquely designed to address three critical challenges they face. First, interference caused by the proliferation of wifi networks in and around public venues. Second, scalability at an order of magnitude beyond the design points of conventional enterprise-class wifi solutions. And third, seamless integration of wifi into the operator’s existing back-end systems, in particular the mobile core for 3G and 4G networks.

In the service provider wifi market, customer demand has never been stronger. We added nearly a dozen new service provider customers in Q4. Notable new deployments include Axtel, in Mexico; Oi, in Brazil; and Global Reach in the U.K.

We have similar momentum in our enterprise business. According to the most recent Gartner Enterprise WLAN Equipment Market Shares report, Ruckus is the fast-growing of the top five players, based on vendor revenues, both year over year and quarter-over-quarter, for Q3 2012.

Fueling this growth was adoption of Ruckus smart wifi by mid-market enterprise customers. In Q4, we added over 2,900 new end customers, bringing our total to more than 21,700 worldwide. Some notable new enterprise wins include [Masters] Brewery, with 2,000 restaurants in the U.K.; Waterstones bookstores, with 300 retail stores in the U.K.; a nationwide food service casual dining restaurant chain with over 400 locations in the U.S.; St. Joseph’s University; [unintelligible] University; Sundance Film Festival; and a variety of brand-name hotels and airports around the world.

We see increasing penetration into retail, quick service restaurants, and transportation verticals as the result of growing user demand for public wifi services. On the product front, our SmartCell Gateway continues to resonate with service providers. The Ruckus SmartCell Gateway addresses all types of service providers looking to scale and manage their wifi offering as a mainstream carrier service.

The most scalable and versatile WLAN controller in the market, the SmartCell Gateway is designed to support up to 10,000 access points per instance in a cluster architecture, and it integrates 3GPP gateway functions, enabling mobile operators to combine wifi with their existing mobile core to consolidate operations for their wifi and 3G and 4G networks.

In Q4, we also introduced the industry’s first ultra-high-capacity smart wifi access point that uses a purpose-designed BeamFlex smart antenna system for private environments such as stadiums, conference centers, and urban public hotspots.

Finally, in Q4, Ruckus received a number of accolades in the industry. First, Ruckus was recognized for superior product performance in the industry’s first multifaceted testing of high-speed three-stream wifi access points performed by Syracuse University.

Second, validating the value of our technology, Ruckus debuted this year on the Patent Power Scorecard published by IEEE Spectrum, ranking in the top 10 worldwide in the communications equipment and technology. The IEEE’s Patent Scorecard considers thousands of institutions in the world and values the quality as well as the quantity of their patents.

All these accomplishments validate the strength of our differentiated technology. We feel that we are uniquely positioned to capitalize on the secular growth opportunity for wifi in 2013 and beyond. Now, I will turn the call over Seamus to discuss our financial results for the fourth quarter and the year.

Seamus Hennessy

Thank you, Selina, and thank you all for joining us today. As Selina mentioned, we are very excited about our market opportunity and our position in the industry. We continue to execute on our business and financial milestones, and look forward to reporting on our progress in upcoming earnings calls.

I’d like to mention that, unless specifically noted otherwise, we are discussing all numbers except revenue on a non-GAAP basis, which excludes stock based compensation expense, amortization of intangibles, and revaluation of preferred stock warrants. All share counts provided will be on a diluted weighted average share basis.

In Q4 2012, total revenue came in at $62.2 million, an increase of 51.5% year over year and 6.1% sequentially. Product revenue was $58 million, up 47.9% year over year. Service revenue was $4.2 million, up 129% year over year.

Q4 Americas revenue grew 107.7% year over year, and represented 46% of total revenue. This was driven by growth in both enterprise and service provider end customers. EMEA revenue grew 73.7% year over year, and represented 24.9% of total revenue for Q4, as we expanded our global channels, footprint, and reach.

Asia-Pacific, including Japan, decreased 1.5% year over year, and represented 29.1% of total revenue for Q4. The decrease year over year was primarily the result of a large order by an Asia-Pacific service provider that accounted for approximately 20% of total revenue in the fourth quarter of 2011.

As we have mentioned in the past, our quarterly revenues may be affected from time to time by large orders from service providers, which can be large enough to make our revenue trendline look lumpy, as evidenced in the fourth quarter of 2011.

In Q4 of 2012, we had only one 10% distributor, and no 10% end customer, consistent with the prior third quarter. It is a goal of the company to diversify revenue between our enterprise and service provider businesses. We believe this strategy increases the stability of our top line. As Selina mentioned earlier, we continue to expand our diversify our customer base, which now exceeds 21,700 end customers.

Gross margin in Q4 was 66.2%, up 206 basis points year over year and 41 basis points sequentially. Product gross margin was 66.9%, up 262 basis points year over year and 72 basis points sequentially. Our product gross margin was the highest in our history, and was driven by ZoneFlex product mix and continued roll-off of our legacy low-margin CPE business.

Our service margin was 56.6%, down 450 basis points year over year and 284 basis points sequentially. The services gross margin change is driven by headcount and infrastructure investments in our services organization, and should recover to previous levels once revenue scales to the investment level.

Research and development expense was $12.4 million in Q4, or 20% of revenue, up from $11.5 million in Q3. Sales and marketing expense was $15.8 million, or 25.3% of revenue, up from $14.3 million in Q3. Our research and development and sales and marketing expenses are largely driven by increased headcount, as we continue to invest in R&D and expansion of our global sales presence.

G&A expense was $5 million in Q4, or 8% of revenue, up from $4.3 million in Q3, primarily due to costs associated with being a public company. Total headcount at the end of Q4 was 669, an increase of 63 from the start of the quarter.

Q4 operating expenses were $33.1 million, or 53.3% of revenue. As a percentage of revenue, opex was up 273 basis points year over year, and up 177 basis points sequentially. Our operating profit in Q4 was $8 million, or 12.9% of revenue, a decrease of 67 basis points year over year and 137 basis points sequentially.

We expect our operating profit to be slightly impacted over the coming quarters as we continue to invest in research and development and sales and marketing to capture sizable market opportunities ahead of us. However, we expect our strategic investments to result in attractive, profitable top line growth in the future.

Our tax rate was 22.1% in Q4. Starting in the first quarter of 2013, we expect our tax rate to be approximately 38-40% as a result of the release of the valuation allowance on our net deferred tax assets in 2012. We are currently evaluating certain strategies to reduce the rate. Once tax planning strategies have been implemented, we will provide further guidance on our tax rate.

Net income for the quarter was $6.1 million, or $0.07 per diluted share, compared to $4.9 million, or $0.07 per diluted share in Q4 ’11. The weighted average shares outstanding was 87 million, on a diluted basis, in Q4 2012.

On a GAAP basis, net income for the quarter was $1.9 million, or $0.03 per diluted share, based on net income attributable to common stock holders, compared with Q4 2011 net income of $3.2 million, or $0.02 per diluted share, based on net income attributable to common stock holders. A full reconciliation of GAAP and non-GAAP information is contained in our financial results press release, issued earlier today.

For 2012, we recorded revenue of $214.7 million, up 78.8% from $120 million in 2011. 2012 non-GAAP gross margin improved 439 basis points over 2011 to reach 65.4%. 2012 non-GAAP operating margin grew to 13.2% from 7.7% in 2011.

Non-GAAP net income of $42.9 million, which included a non-GAAP net tax benefit of approximately $15.9 million primarily related to the release of a valuation allowance on our net deferred tax assets, was up 478% over the prior year’s non-GAAP net income of $7.4 million.

Turning to the balance sheet, we finished Q4 with cash and cash equivalents of $133.4 million, an increase of $96.1 million over the prior quarter, and $122.2 million over December 31, 2011. This includes net proceeds of $94.8 million from our initial public offering.

Cash flow from operations in Q4 was $4.7 million, and $28.1 million in 2012. We ended Q4 with $41.3 million of accounts receivable, a sequential increase of $9.5 million and $16.2 million of accounts payable, a sequential decrease of $2.3 million.

Days sales outstanding was 61, an increase from 50 in Q3 ’12. The Q4 DSO was impacted by a delay in collections due to the holidays. We expect DSOs to range between 50 and 55 in the future.

Ruckus inventory totaled $19 million at the end of Q4, a decrease of $0.7 million from the end of Q3.

Now, before I discuss our first quarter 2013 guidance, I’d like to review our long term operating model that we expect to achieve in approximately three-plus years. All of these financial metrics I will outline below are on a non-GAAP basis.

In the long term, we anticipate gross margin to be in the 66-68% range. Some of the drivers of our margin expansion will include continued growth in our ZoneFlex product line, economies of scale, sales from our SmartCell Gateway, and roll-off of our legacy CPE business.

As a percentage of revenue, we anticipate R&D to be 16-18%, sales and marketing to be 25-28%, and G&A to be 5-7%. We anticipate this will lead to long term operating margins between 17% and 20%.

Let me now turn to our first quarter 2013 guidance. We expect revenue to be in the range of $62-64 million year over year. This represents revenue growth of 38-42% compared to Q1 2012. Non-GAAP earnings per share to be approximately $0.03 to $0.04, using 95 million shares on a diluted basis.

With that, I’ll turn the call back over to Selina.

Selina Lo

Before I move to Q&A, I want to thank you once again for participating in our first call as a public company. Fiscal 2012 was a very exciting year for Ruckus. In addition to completing our IPO, we continued to make progress on our financial and business objectives.

Our technology differentiation is a driver of our growth, and there continues to be strong demand from service providers and enterprises for reliable, scalable, and easy-to-use wifi solutions. We look forward to serving that demand for years to come.

Now, we’ll open up for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And your first question comes from the line of Simona Jankowski of Goldman Sachs. Please proceed.

Simona Jankowski - Goldman Sachs

I wanted to ask you first of all about the SmartCell Gateway. I think last you had updated us on that product, you had about 12 trials or so. Can you just give us an update on any commercial deployments, and also the number of trials you’re in at the moment?

Selina Lo

The SmartCell Gateway continues to resonate with our customers. It is in controlled release, and is actually in production networks with some customers.

Simona Jankowski - Goldman Sachs

Are there any numbers you can put around that, whether on the number of trials, the number of production deployments?

Selina Lo

No, we’re not disclosing numbers.

Simona Jankowski - Goldman Sachs

Okay. I noticed on the balance sheet you had a pretty nice and healthy 25% sequential increase in deferred revenue. What was that driven by and what can we expect to see? Is that a large one-time deal in there? Or can you just give a little color on that?

Seamus Hennessy

In regards to deferred revenue, deferred revenue at the end of Q4 included distributor stock of $22.4 million. We recognize distributors on the sell-through method. It can fluctuate quarter to quarter. It actually increased approximately $7 million quarter-over-quarter. That was one of the biggest key drivers.

Simona Jankowski - Goldman Sachs

Got it. So pretty much all distributor-driven as opposed to any kind of a big lumpy customer in there.

Seamus Hennessy

Correct.

Simona Jankowski - Goldman Sachs

And then lastly, on the 2,900 customer additions, which seems like it was a very nice acceleration, both quarter on quarter and especially year on year. What drove that? Was that channel expansion driven? It sounded like you’re getting into a few more verticals, that you highlighted, like restaurants and retail, but can you just kind of comment on what drove that significant acceleration there?

Selina Lo

Yeah, it’s the general strength of the mid-market enterprise, as well as our continued expansion into different regions, as well as expanding of the sales force and footprint.

Operator

Your next question comes from the line of Ehud Gelblum with Morgan Stanley. Please proceed.

Ehud Gelblum - Morgan Stanley

A couple quick housekeeping types of things, and then some larger scope questions. On the housekeeping side, can you give us a sense as to first of all how large that 10-percenter is? I’m guessing you’ll give it in the K, but if you could give us a sense as to how large it was this quarter? And then can you give us a sense also as to the split you had between service provider and enterprise? In the past you talked about giving that every so often, maybe once a year, so I figured now’s a good time to kind of get us up to speed on that.

Seamus Hennessy

For Q4, we had one 10-percent distributor, who was actually in the mid-teens. I think it was 16%. And what was your second question?

Ehud Gelblum - Morgan Stanley

The split between the service provider and enterprise?

Seamus Hennessy

In regards to the split for 2012, between enterprise and service provider, the service provider infrastructure business was approximately a third for all of 2012 and two-thirds enterprise, very consistent in what the year to date was at the end of September. And as we’ve previously disclosed, we’ll only update that on an annual basis.

Ehud Gelblum - Morgan Stanley

Right. So it stayed consistent. And then your guidance, do you expect it to be consistent as well? For Q1?

Seamus Hennessy

Q1 guidance, we’ve guided revenue of $62-64 million.

Ehud Gelblum - Morgan Stanley

And do you expect the split to be relatively consistent? Any reason it would change in one direction or the other?

Seamus Hennessy

We’re not expecting any material change.

Ehud Gelblum - Morgan Stanley

Now, on to something that’s a little bit more big picture. When you went public, and you’re still talking about a big advantage you have on your RF technology in service provider and in public spaces and areas like airports, shopping malls, sports arenas, and things like that. Aruba, either coincidentally or not coincidentally, had a bunch of press releases over the last three or four months where they called out winning an airport, I think it was in the Emirates or somewhere, it may have been in Dubai, and a shopping mall, this company [InCam] or something like that, that has sports arenas. Are you seeing any more pressure from the Arubas and/or Ciscos of the world in some of these core areas that you seem to dominate before? Namely, the public spaces like airports, shopping malls, and sports arenas? I think Cisco as well had some more wins in the sports arena side.

Selina Lo

I think overall in all the high-density environments in high-density public venues, wifi is now a must-have service, and so I think that particular market segment is growing very nicely. And you know, given that wifi is a pretty competitive market, you’re going to see all kinds of players. I think Ruckus wins its share, and we continue to make progress and increase our penetration of these venues.

Ehud Gelblum - Morgan Stanley

So you’re not seeing any change to the competitive environment there?

Selina Lo

No.

Ehud Gelblum - Morgan Stanley

Okay. So let me ask a similar issue on the SmartCell Gateway. Another competitor of yours, Ericsson, is talking about doing some more integrated work between their gateways on the macro side and wifi, sort of mimicking a little bit what you have in your SmartCell Gateway. And Cisco over the last three or four months came out with a newer updated version of their gateway products that can expand to - I’m not sure if it’s exactly 10,000 access points, the way you have it, but it’s pretty close, in the high single-digits thousands. Are you seeing customers being more choosey in terms of comparing back and forth between what you have and Ericsson and what Cisco has on the gateway controller side? Just trying to understand the dynamics there, because that’s been a big point of differentiation.

Selina Lo

Yeah, the SCG continues to be very popular with our service provider customers and prospects. I think what Cisco is doing, and Ericsson is doing, both are validating exactly the sweet spot for service providers. The SCG in particular we’ve put in years of investment to make it a distributed cluster-based architecture such that it can scale beyond 10,000 access points on a single box to a linear type of scalability. And I think that’s a big investment that we made a few years ago, and I think it creates a nice barrier to entry.

Ehud Gelblum - Morgan Stanley

So you still think you have a big point of differentiation?

Selina Lo

Absolutely.

Operator

And your next question comes from the line of Brian Modoff with Deutsche Bank. Please proceed.

Brian Modoff - Deutsche Bank

Just kind of continuing on with Ehud’s questions around SmartCell Gateway, can you give us a little feedback in terms of what customers are saying about your product and then with regard to one of the things that Ericsson’s going to approach, in terms of their gateway, is their ability to handle wifi and cellular under the same controller, and being able to manage the handover between the two architectures. I know you guys are working on that, but can you give us an idea of timing around your ability to do the same and how you’re going about executing that architecture?

Selina Lo

The SmartCell Gateway, we are in the early phase of the product release cycle. We have been getting very useful feedback from our customers. And just like any early product, there are lots of enhancements planned for it. In terms of Ericsson talking about integrating wifi and cellular, I think everybody in the service provider wifi space is going to sing the same tune, because that’s absolutely something that’s critical to mobile operators.

Our wifi controller functions have been proven. We’ve been in the enterprise wifi market as well as service provider wifi market for the last five or six years. And it has been proven by tens of thousands of customers. I don’t know what Ericsson plans to do, but certainly from a technology maturity perspective, we have that over them.

Brian Modoff - Deutsche Bank

And so what are you thinking? I know you’re not going to give us an idea of the revenue at this point, but what’s your view in terms of kind of the timing of revenue? I know you’ve got some controlled releases out there. When do you think this becomes a significant part of your overall revenues? Is it a calendar 2013 event, or is it more next year?

Selina Lo

I’ll let Seamus address the revenue.

Seamus Hennessy

Well, we’re not going to break out specific product guidelines. We’ll start to see some revenue in the second half of 2013. But you have to look at the SCG as an overall platform and part of a product line to sell [unintelligible] access points, and it’s an entry point strategy.

Brian Modoff - Deutsche Bank

And would you expect as we get into next year, this is positive to your gross margins and to you [ramp of] products?

Seamus Hennessy

Absolutely. Predominantly because it’s really a software-based platform.

Brian Modoff - Deutsche Bank

And just a little bit on the receivables. They did move up about $10 million sequentially in the quarter. You can talk a little bit about that in terms of what the driver was for your receivables being higher this quarter from last.

Seamus Hennessy

Actually, we received just over $7 million on the first business day of 2013, so I think the majority of it, which accounted for about 11 of the 61 days. So it was more timing with the holidays than anything.

Operator

And your next question comes from the line of Rich Valera with Needham & Company. Please proceed.

Rich Valera - Needham & Company

Did you say if there was any legacy CPE revenue in the quarter, and if so how much?

Seamus Hennessy

It was minimal. Less than 5%.

Rich Valera - Needham & Company

And you’re forecasting that to continue to decline. Do you have kind of a sense of when you expect that to be pretty much zero?

Seamus Hennessy

It’s rolling off. It’s been declining sequentially quarter on quarter and it continues to decline. So we expect that it will become negligible in 2013.

Rich Valera - Needham & Company

And just one more competitive landscape question. Wondering if you’ve seen any change with regard to Meraki now that they’re owned by Cisco. They seem to be quite strong in kind of the chain type application, you know, restaurant chains, etc. Yet you got some wins in that area in the quarter. So just wondering if you’re seeing any change in that competitive dynamic with their controller-less cloud-based architecture.

Selina Lo

No, in fact we haven’t seen them since the Cisco acquisition.

Rich Valera - Needham & Company

So it’s a margin positive, I guess. Had you seen them more before the acquisition? You’re seeing them less now, or just never really saw them much?

Selina Lo

We never really saw them that much. Meraki tends to focus a lot more on the “S” part of the SMB segment, while we focus in the mid-tier. And so we’ve never really run across them that often. But now, since the Cisco acquisition, I don’t know of deals where we have come across them.

Rich Valera - Needham & Company

And one on opex. It looks like your guidance implies a decent sequential increase in opex, which I presume is mostly in headcount. Just wondering where you stand in your hiring plans for the quarter. I know you added a little over 60 heads in the quarter. Do you expect to add a similar level of heads? And where are you, I guess, in those plans for this quarter?

Seamus Hennessy

In regard to headcount, the two biggest areas for investment are both in R&D and sales and marketing. The 50-60 headcounts per quarter is probably a good cadence to use going forward for 2013.

Operator

And your next question comes from Ittai Kidron with Oppenheimer. Please proceed.

Ittai Kidron - Oppenheimer

I wanted to, Seamus, talk to you a little bit about your visibility. Correct me if I’m wrong, but your bookings are pretty linear, so would it be fair to say that you’re pretty much already 50% booked to your guidance target?

Seamus Hennessy

It’s in line with our expectations for the quarter. We don’t comment on specific bookings, but it’s in line with our internal expectations.

Ittai Kidron - Oppenheimer

And Selina, regarding the RFP activity around the carrier side, can you give us a little more color from a regional standpoint, where you’re seeing the greatest activity right now? And from a timeline standpoint, what regions you think will develop faster than others?

Selina Lo

We see deals that are RFP as well as deals that actually completely bypass that process. We are seeing a lot of activities in South America as well as in Asia. Obviously in North America, the MSOs are continuing to roll out wifi, and AT&T has made statements in terms of deploying wifi in indoor venues. So we see a lot of activity worldwide in all regions.

Ittai Kidron - Oppenheimer

Very good. And lastly, going back to, Seamus, on the gross margin into the next quarter. With the revenue level going up sequentially is it fair to assume that no big change in gross margin is a fair assumption for the March quarter?

Seamus Hennessy

One area where we are making investments is in our services organization. Our long term guidance is 66-68%, but reasonable to assume that it’s generally in line with where we’ve historically been the last few quarters.

Operator

Your next question comes from the line of Jason Ader with William Blair. Please proceed.

Jason Ader - William Blair

I just wanted to ask, on the seasonality for the March quarter, I know you haven’t been dealing with this too much given your size, but do you expect seasonality to be a factor at all, maybe not just this quarter, but also in future March quarters?

Seamus Hennessy

In regards to seasonality, it’s generally in line with what we’ve seen in the past for Q1. Seasonally, Q2 and Q3 are our strongest quarters. So Q1 is generally in line with what we’ve seen in the past.

Jason Ader - William Blair

Okay, Q2 and Q3 are strongest because of education?

Seamus Hennessy

Predominantly, because of the key verticals.

Selina Lo

It’s that plus holidays. For example, in Q1 you have Chinese New Year. In Q4, you have Christmas and New Year, and Thanksgiving. So all these affect the seasonality.

Jason Ader - William Blair

And then Selina, just following up on the large deal pipeline question, do you expect either design wins that you’ve already secured, or design wins that you will secure, that we will see kind of [key DDI]-like lumpiness in terms of size of deals in 2013?

Selina Lo

Our goal, and our forecast, is consistent with trying to build our business to take advantage of the law of big numbers, to make it as predictable as possible. So both for enterprise and for service providers, we are trying to build a run rate business. And we only forecast service providers in deployment stage. So any big wins would be welcome upside.

Jason Ader - William Blair

I understand you’re not baking that into the guidance at this point, but should we expect at least those size deals? Are they out there, I guess, is more the question? Forget about whether you win them or not, or forget about whether they’re in the model right now, but are they out there? Is there a good potential for you guys to be involved in some of those?

Selina Lo

Certainly operators talk about, you know, a big expenditure, but again, like I said, until they are well into the deployment phase, that we can forecast, we don’t just take all these big numbers into account.

Seamus Hennessy

And I think one parting thought on service providers is it’s a long tail to the service provider business.

Selina Lo

I think the net answer is that, you know, a lot of service providers talk about big numbers, but you really can’t take it to the bank until they’re in the roll-out phase. So in our pipeline, obviously, we have service providers of all sizes at all different phases of deployment. And that’s the kind of pipeline we have to build.

Jason Ader - William Blair

Has it been pretty consistent over the last several quarters?

Selina Lo

Yeah.

Operator

And your next question comes from the line of Rajesh Ghai with Craig Hallum. Please proceed.

Rajesh Ghai - Craig Hallum

I just wanted to delve a little deeper on the commentary around the U.S. carriers, particularly AT&T talking up several small cell deployments over the next two years. So my question is, do you foresee other carriers also talking about small cells in the same timeframe? And can you talk of the gating factor, the constraints, [at least] right now in terms of both technology and other factors, that we should be looking out for in terms of tracking the progress of the small cell deployments in the U.S.?

Selina Lo

So not commenting specifically on AT&T, but certainly every mobile network operator is planning on a HetNet architecture, and in fact, many of them look at wifi as the first phase of small cell deployment. So in that sense, we see deployment of small cells across the board everywhere. I do think that you will increasingly see 3G/4G type of small cells also, and as we said on our IPO visits, we see that in places where small cells are deployed, we expect wifi to be deployed in parallel.

Rajesh Ghai - Craig Hallum

And are there any gating factors in terms of technology, [unintelligible] Telefonica, [oodoo] has talked about the lack of maturity in the picocell in terms of sell side. How is that progressing? Do you see that getting resolved over the next few months or is that going to be second half or 2014?

Selina Lo

Certainly there are standalone deployments of small cells in terms of [unplanned] small cells, isolated deployments, deployments for coverage, and also trial deployments now. So the technology gets more and more mature, but I think at this stage, it’s still in trials.

Rajesh Ghai - Craig Hallum

And my last question is, you mentioned mid-market enterprise was fairly strong during the quarter. Can you point out any areas of particular strength, geographies or verticals, during the quarter, as you see it in the pipeline?

Selina Lo

The enterprise business for us is actually very well-distributed across all three regions: Americas, Asia-Pacific, and EMEA. Do you have any particular…?

Seamus Hennessy

No, we’ve definitely seen general strength across all the regions in the mid-tier enterprise. Education and hospitality continue to be strong verticals, but we’re also seeing growth in verticals such as warehousing and logistics as another big vertical that we see an opportunity, because of our BeamFlex technology, to excel in.

Operator

And your next question comes from the line of Mark Sue with RBC Capital Markets. Please proceed.

Mark Sue - RBC Capital Markets

Can I ask a question about the service provider segment and how your discussion is changing from a cost discussion related to offload, and how that’s changing to a strategic discussion, and maybe how your dialog with some of the service providers continues to evolve, and what that means for you on length of visibility? Just a high-level question.

Selina Lo

That is a very good question, Mark. We certainly are seeing that service providers’ attitude on wifi has been changing, in particular in the last few quarters. For a long time, people talked about 3G offload, but now more than ever, we are seeing that there’s a user push also, user demand for public wifi service. And we’re seeing wifi becoming a churn prevention factor. On top of that, we are actually talking to service providers, sure, now looking at using wifi as a value-added service, or the underlying support for new value-added services in terms of managed services for the enterprise, in terms of other services that have to do with locations, analytics, etc.

Mark Sue - RBC Capital Markets

And then maybe perhaps on the enterprise, should we think of it as your view of being opportunistic in terms of the approach via each particular vertical? Does Ruckus go deeper into an existing vertical? Or is there an effort to kind of bolt on new verticals? And does that come with an incremental cost attached?

Selina Lo

We do both. Obviously, in the verticals where we have been strong traditionally, in hospitality and education, we continue to increase our share of those verticals, but we also have seen progress, as I mentioned earlier, in retail, in quick service restaurants, as well as in transportation hubs, and in the whole warehousing and logistics space. I think the whole wifi phenomenon is pretty driven by all the mobile devices. The wifi phenomenon is pretty much horizontal. So there are specific verticals that tend to find our technology offering much more attractive, and those are the verticals that we go after. In terms of investment, one of the things that Ruckus does very well is we partner a lot. And so when we go after verticals, other than trying to invest in more coverage, we also partner with the players within the vertical’s ecosystem.

Operator

I would now like to turn the call over to Selina Lo for closing remarks.

Selina Lo

I want to thank everybody for attending our first earnings call, and I look forward to the next one. Thank you.

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