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Ruckus Wireless, Inc. (NYSE:RKUS)

Q3 2013 Earnings Call

October 30, 2013 5:00 PM ET

Executives

Nicole Noutsios – Founder, NMN Advisors

Selina Lo – President and CEO

Seamus Hennessy – CFO

Analysts

Brian Modoff – Deutsche Bank

Rich Valera – Needham

George Iwanyc – Oppenheimer

Ryan Bergan – Craig-Hallum Capital

Jason Ader – William Blair

Simona Jankowski – Goldman Sachs

Operator

Good afternoon. My name is Launder and I will be your conference operator for today. At this time, I would like to welcome everyone to the Ruckus Wireless Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Ms. Nicole Noutsios. Please go ahead ma’am.

Nicole Noutsios

Thank you for joining us on today’s conference call to discuss Ruckus Wireless’ third quarter 2013 financial results. This call is also being broadcast live over the web and can be found on the IR section of our 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 constitute forward-looking statements. This includes statements related to anticipated marketing conditions, market growth, our market position, future financial results, current and new customer demand, customer deployment and order plans, customer requirements and business plans, geopolitical developments, competitive environment, technology and standards developments, acquired technology integration and other future events.

Risks and uncertainties can cause actual results or 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 filings report to the U.S. Securities and Exchange Commission, such as our Annual Report on Form 10-K filed with the SEC on March 5, 2013 as updated by our subsequent filings with the SEC, in particular our quarterly report on Form 10-Q filed with SEC on August 14, 2013. Our SEC filings are available on the investor relations section of the company’s website and on the SEC’s website.

All forward-looking statements made in this call are based on information available to the company as of today. Ruckus does not assume any obligations 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.

In addition, we will be presenting and discussing certain 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 will turn the call over to Selina.

Selina Lo

Thank you for joining us today. I am pleased to report that Q3 was another solid quarter for Ruckus. Our business momentum continued to strengthen. We grew revenue, expanded our customer base and won key industry recognitions. We reported third quarter revenue of $69 million, an increase of 18% year over year, 8% sequentially and at the top end of our revenue guidance range.

We also reported non-GAAP EPS of $0.01 above our guidance. Seamus will discuss our financials and outlook in more detail after I provide a few highlights on our Q3 accomplishments. In Q3, Ruckus received an industry recognition that I believe is indicative of our strength in the mid-tier enterprise market. We were awarded top honor in the SMB networking hardware category in the 2013 Computer Result News Annual Report Card, long [ph] considered the definitive benchmark for excellence in the IT channel community.

Based on CRN survey of 3600 channel solution providers, Ruckus beat out Cisco, HP and other competitors in every sub-category, including product innovation, channel support and partnership to take the top prize. This is the third year in a row that we have won in the product innovation and partnership sections of the survey, showing that our success in the mid-enterprise market has as much to do with channel loyalty as it has with technology.

On the heels of this CRN award, IDC also named Ruckus one of three leaders in the top right quadrant of their vendor assessment for the enterprise wireless LAN market. According to IDC, this study called IDC MarketScape puts 15 enterprise wireless LAN vendors through a comprehensive scoring methodology that produces an assessment of their current capabilities and strategy for competing in the future. I am proud that Ruckus was honored in both of these prestigious industry studies.

The demand for public Wi-Fi access continues to be robust and service provider interest in Wi-Fi has never been stronger. A pioneer in the public Wi-Fi market with differentiated technology, Ruckus is in a strong position to capitalize on this growth opportunity. In Q3, we added over 20 new service provider customers, bringing our total service provider installed base to over 110. We believe this reflects increased adoption by service providers and is a testament to our competitive advantage.

In Q3, we won a number of new Latin America service providers, such as the consortium of mobile network operators, Claro, Oi, Telefonica, and TIM, which will be supplying Wi-Fi service for three of Brazil’s largest football stadiums, including the famous Maracana Stadium that will host the 2014 World Cup Final. Additionally, we added four tier-1 cable operators in South America, Asia and Europe.

Now I would like to give you a flavor of our enterprise achievement. In Q3, we added nearly 3000 new end customers, bringing our total to more than 30,000 worldwide. We saw a continued momentum in the education, warehousing and logistics, retail and hospitality verticals. Notable projects in Q3 include a new hospitality win in the gaming industry and extended in-store deployment by the second largest electronics retailer in China. We also see resurgence of metro Wi-Fi in high-density urban centers with several new installations in major cities across the U.S.

On the product front, our SmartCell Gateway continues to gain traction in the market. We added new SCG customers, including a tier 1 MNO in Asia Pacific that has migrated from their internally developed Wi-Fi management system to our SCG, as well as a large cable operator in Western Europe. We are also seeing interest in the SCG from our enterprise channel such as managed service providers, with early trials taking place right now.

As one of the initial Wi-Fi equipment suppliers involved in developing Hotspot 2.0 specification, Ruckus continues to demonstrate our commitment to the success of Wi-Fi as the ubiquitous public access technology. In September, we announced that our [indiscernible] access points Zone Director and SmartCell Gateway products have all been Passpoint certified by the Wi-Fi Alliance based on their Hotspot 2.0 specification. Hotspot 2.0 will dramatically improve the user experience of public Wi-Fi services. It is already supported on Apple devices with iOS 7 as well as a number of Android devices, including the Samsung Galaxy. We expect to see growing penetration of this technology on client devices going forward.

In some ways, we made significant progress in the quarter. After a challenging start to the year, the company is back on track. The market remains robust and we see a substantial market opportunity ahead of us.

Now I will turn the call over to Seamus to discuss in more detail our financial results for the third quarter.

Seamus Hennessy

Thank you, Selina and thank you all for joining us today. Unless specifically noted otherwise, we’re discussing all numbers except for revenue on a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles and employers tax in connection with stock compensation exercises and revaluation of preferred stock warrants. All share accounts will be on a diluted weighted average share basis, a full reconciliation of GAAP and non-GAAP information is contained in our financial results press release issued earlier today.

As Selina mentioned, the company is pleased to hit a number of financial milestones in the quarter and report solid results. In Q3, 2013 total revenue came in at $68.9 million, an increase of 17.7% year-over-year and 7.9% sequentially and was at the top end of our revenue guidance of $66 million to $69 million.

Product revenue was $64.4 million ,up 16.6% year-over-year and 8% sequentially. Services revenue was $4.5 million, up 34.9% year-over-year and 6.4% sequentially. In Q3, Americas revenue grew 22.9% year-over-year and 4.8% sequentially and represented 51.6% of total revenue, primarily driven by seasonal strength in enterprise and growth in Central and Latin America.

Our EMEA revenue grew 29.7% year over year and 12.2% sequentially and represented 27% of total revenue for Q3. Asia Pacific, including Japan, decreased 3.5% year over year and increased 10.6% sequentially and represented 21.4% of total for Q3. The sequential increase was primarily driven by growth in business in Japan. China continues to be soft relative to historical levels. Our outlook is improving but we continue to take a conservative approach in this region.

Two of our North American distributors accounted in total for more than 28.3% in revenue in Q3; one accounting for 15.1% and the other accounting for 13.2% and with no end users that accounted for 10% or more in revenue in the quarter.

Gross margin in Q3 was 66.4%, up 61 basis points year-over-year and down 100 basis points sequentially and within our expectation and guidance of gross margins returning to prior historical levels and in line with our long term model of 66% to 68%. Product gross margin was 67.7% up 153 basis points year-over-year and down 120 basis points sequentially.

Product margins can fluctuate quarter-to-quarter and are affected by product mix, regional revenue mix as well as large orders from customers. Our service margin was 47.8%, down 1161 basis points year-over-year and up 158 basis points sequentially. The year-over-year change in service margin was driven by head count and infrastructure investments in the services organization to support expected customer growth.

Q3 operating expenses were $40.6 million, up 58.9% of revenue. As a percentage of revenue, operating expenses were up 739 basis points year-over-year and up 115 basis points sequentially. The sequential increase was related to the costs associated with the YFind acquisition, expansion of sales organization to support continued growth and increased general and administration expenses in connection with higher legal and public company compliance costs.

Our operating profit in Q3 was $5.2 million or 7.5% of revenue, a decrease of 676 basis points year-over-year and down 215 basis points sequentially.

Our non-GAAP tax rate was 12.7% in Q3 and reflect the full year forecast of tax rate of approximately 23%. The full year forecast of tax rate decrease is primarily to increase in qualified research expenditures eligible for the credits.

Non-GAAP net income for the quarter was $4.5 million or $0.05 per diluted share compared to $8.7 million or $0.11 per diluted share in Q3 2012. We had 94.8 million weighted average shares outstanding on a non-GAAP diluted basis in Q3. On a non-GAAP basis net income for the quarter was $0.1 million or $0.00 per diluted share compared to Q3 2012 net income of $5.5 million or $0.04 per diluted share based on net income attributable to common stockholders.

Total headcount at the end of quarter was 806, an increase of 37 from Q2. We have stated previously given our leading position in the market, our plan is to continue to invest our future growth. As such we continue to strategically invest in customer service, research and development and the expansion of our global sales presence.

Turning to the balance sheet, we finished Q3 with cash and cash equivalents, short-term investments and restricted cash totaling $144.7 million, an increase of $14.9 million of the prior quarter and an increase of $11.6 million over December 31, 2012. Cash provided by operations in Q3 was $29.9 million. We ended Q2 with $18.7 million in accounts payable, a sequential increase of $3.7 million and accrued compensation of $11.9 million, a sequential increase of $0.9 million and the $41 million of accounts receivable, a sequential increase of $10.8 million.

The average day sales outstanding was 56, within our target range of 50 to 50 days and down from 75 in the prior quarter.

Let me turn to the fourth quarter 2013 guidance. We expect fourth quarter revenue to be in the range of $70 million and $73 million. We expect non-GAAP earnings to be $0.04 to $0.05 per share using approximately 95 million to 97 million shares on a diluted basis. We expect gross margins to be within the range of our prior historical trends. As we’ve mentioned last quarter, we expect costs in connection with the YFind acquisition and related investments will impact the bottom line and the current quarter by approximately $0.01 and we expect legal expenses and public company compliance costs be in line with the prior quarter, which is reflected in our guidance.

Now, we’ll open up the line for questions. Operator, can you please open up the line?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Ader with William Blair.

Jason Ader – William Blair

I have a couple of questions. First on the enterprise stock of the house [ph], do you think that lack of an initial AC access points and lack of control of those technology in the near term is going to negatively impact the momentum that you have on the enterprise? And then secondly, on the service provider side, could you maybe Selina, could you comment on just visibility in general? Has it been improving? I know you’ve had big customers that maybe have slowed down. I need some comments on the Asian service provider and then Carl, kind of operator activity – any kind of comment on what you’re seeing there as well, the major mobile operators looking at Wi-Fi as a augmentation technology.

Selina Lo

Okay, Jason, thank you for your questions. I will address the first alone, regarding our products and product offerings. And then I will let Seamus address the visibility in the market. So you asked the question about 11ac whether it has impacted our sales. Last quarter, we haven’t seen lost sales because of 11ac. We actually – our 11ac solution is going into beta imminently. So granted, we will probably compare to some of our competitors. We are late by about three months. Ad so far we haven’t seen an impact in the last quarter. We have seen education projects continue to be very healthy. Our enterprise business continued to be robust. I do think that 11ac going to gain in momentum in 2014, and we are very close to releasing our products there.

In terms of controller less architecture, we have said prior when we were asked about this, that the way we will address this issue is to make the SCG, a platform that can be put into private by channel partner. So that they can offer their consumers the controller less service. And as I mentioned, we already have enterprise channels that are very interested in that and there are early trials going forward now. That’s why we are going to address the controller list architecture. And it allows us to kill two birds with one stone. We can address the controller less architecture to small businesses as well as cloud based wireless WAN offering.

And it also allows our channels to mix better margin, we don’t complete with them in service offering. And so it’s all the way better for a record because of our channel focus-enterprise strategy.

Seamus Hennessy

Jason, in regards to visibility and SPs, and mobile operator activity across the board and it’s never – I think activity level and interest W-Fi here never has been higher. We’ve added a significant new amount of operators just in the last couple of quarters. But it does take time for these revenues to build up over time. We are encouraging by the progress we continue to make by adding 20 new operators last year reaching a 110% but globally you can see the interest in Wi-Fi at the highest level we have seen company’s history.

Operator

Your next question comes from the line of Brian Modoff with Deutsche Bank.

Brian Modoff – Deutsche Bank

Continuing on the line of the operators, can you talk a little about – you mentioned it’s time to give investors kind of measure of what timeframe it takes typically from getting all of your minutes to actually scaling the deployments. Can you put 20 in kind of a context, how many operators do you – have you had in each of the last two quarters prior to that?

Seamus Hennessy

Yes, I can take both of those. Last quarter, we added just around 15, we added about 10 in the prior quarter. So it’s been building for us and in regards to activity. Depending on the size of the operator, especially with tier 1 operators, it can take a year for us before it really ramps up significantly because you need to network, operationalize it, planning, acquire the sites, smaller operators sometimes can move a lot faster but what we see is an amount of business that we generate from existing customers as a percentage of the overall business in the quarter is significant. And new revenue from new customers in the quarter is a small percentage but they are leading indicators for us of getting into accounts. So we’re encouraged by what we see – plus we also see opportunities for significant size opportunities sometimes – some of them are actually awfully larger than some of the activities we’ve closed to date. But it takes time. But what we do see is operator interest in deploying Wi-Fi in 2014 and 2015 is at the highest level we have seen in a long time.

Selina Lo

Brian, just to supplement Seamus’ answer, depending on the type of operator, the ramp varies a little bit. For example, cable operators the ram tends to be faster because they already have the site. So they test – they typically would start out with cable mounted APs. And so they already own the poles and the cable infrastructure. Whereas with a mobile operator, lot of times they actually have to acquire the site and in some cases, even provide the back-haul. So the pace is a little different there. And for us, we are seeing a significant amount of activities, a mount cable operators right now worldwide. And for near term, the cable operators are going to be a lot more active. However the mobile operators, I think, long term they are also going to add a very strategic piece to the opportunity.

Brian Modoff – Deutsche Bank

So the four cable operators you added this quarter, you said tier one, do you expect to see revenues in the near term from them?

Selina Lo

Yes.

Seamus Hennessy

Yes, we’ve already seen some revenue from – early [ph] revenue.

Brian Modoff – Deutsche Bank

And then what are operator -- service providers as a percent of revenue? Can you give us an idea of percentage there for revenue?

Seamus Hennessy

We are going to update that, Brian, as we’ve said at the end of the year.

Brian Modoff – Deutsche Bank

Can you talk a little bit more about China? As you said it’s been kind of trending down. What do you think is happening in that market? Is it competitive, is it mainly the operators build out schedule? Can you give us some more color around that? And what should we expect China to do sequentially in the current quarter?

Selina Lo

I don’t think it’s trending down from the previous two quarters. In fact, they have stabilized and have started to climb back up a little bit. However compared to our historical percentages, for example, in 2012, the China business is still not quite at the historical level, anything to add?

Seamus Hennessy

No, we started off with a slowing year and we are in the rebuilding phase and a momentum is starting to come back there.

Selina Lo

I don’t think any particular Wi-Fi providers doing great in China, and I probably would expand that to include also – in general IT and hardware companies. I think there is certainly an economic softness. There is also always that bias towards the Chinese manufacturers. But overall I think the China market is just still somewhat soft.

Brian Modoff – Deutsche Bank

And then last question, SmartCell Gateway, a little update on that, you mentioned you are having a trial. When can we look at – you added one new operator in APAC last quarter. Can you give us an idea as to when we can start seeing more material revenues from that product –

Selina Lo

I will let Seamus address the revenue piece. But I will talk about the ramping of the SmartCell Gateway. So the SmartCell Gateway is shipping right now, as a controller it is shipping. As a Wi-Fi gateway, it is – that option is also shipping. What I referred to when I talked about trials was some of the enterprise channels [indiscernible] and using the SmartCell Gateway as a managed service or cloud based wireless LAN service platform. And that is currently the piece that – they require specific features in order to do that and that’s the piece that’s currently going into early trial.

Seamus Hennessy

And in regard to revenue, we have actually been generating revenue on the SmartCell Gateway since the first quarter and we continue to add revenue and new customers to it. The customer count continues to grow quarter over quarter but the strategic aspect of the SmartCell Gateway is probably SmartCell Gateway plus the additional license. We actually sell a lot of a piece in addition to that platform. So it’s a very strategic platform and we are in the teams in regard to number of customers that are on the platform and have deployed the product to date.

Selina Lo

In production, I think we have more than teens deployed [ph].

Operator

Your next question comes from the line of Rich Valera with Needham.

Rich Valera – Needham

Just wanted to follow up on the idea of your -- some of your partners using the SCG to offer cloud-based services. Have you had some of your partners actually approach you saying they wanted to do this? Do you have any of them lined up to potentially do this at this point?

Selina Lo

Yes, absolutely. They do them in different scales. As I mentioned there are some that are already doing some early trials, even given that not all the features are there. But definitely there is a segment of market out there that has zero IT resources, and that segment really we want to be able to leave all the management and operation of the network to their IT supplier. And so in those scenarios we actually have a number of managed service providers that are using the FPG to offer services for multiple customers. Ultimately when we talk to our channels, the large channels, the ones who are the big revenue producers, they tend to want to offer the service themselves, because they really want all the margins, and they also want the scale. So the smaller guys, I think there will be smaller guys who would offer this for their SMB type of customers, but primarily the ones that are interested are the large managed service providers.

Rich Valera – Needham

Is the development you need to do to enable that for cloud hosting pretty much done or are you working with them as a work in progress?

Selina Lo

It’s work in progress. There is never done in our business. But basically it’s a matter of how simple you make the operation of this – from the guy that’s hosting the controller.

Rich Valera – Needham

Just a quick one on 11ac it sounds like they are in beta now. Do you think they will be shipping in production in the first quarter of next year?

Selina Lo

That’s the prime [ph].

Rich Valera – Needham

And then, Seamus, on gross margin, it sounded like you were describing the sequential decline to mix. I just wanted to clarify that and just if you could give any commentary on the pricing environment? Are you seeing stable pricing? Did you see any pricing pressure that contributed to that gross margin decline?

Seamus Hennessy

No, actually pricing was generally stable across the board. Product mix and revenue mix can slightly vary it and actually on the product side, if I exclude the one-time benefit regarding Q1, product gross margin was the second highest in the company’s history. So we are happy where our gross margins are.

Rich Valera – Needham

There is no reason to shade them towards the lower end of that range if you are thinking longer term?

Seamus Hennessy

Longer term, the model is – the longer term of 66% to 68%, right now we are in that mid-66, so we are comfortable with that range.

Operator

Your next question comes from the line of George Iwanyc with Oppenheimer.

George Iwanyc – Oppenheimer

Selina, can you just give us your take on the competitive environment right now and how you see the overall trends moving towards either enterprise and service provider?

Selina Lo

Okay. Let me talk about service provider first. And in fact, in both places we haven't seen a lot of changes. But let me first address the service provider side. It really is a two horse play between Cisco and Ruckus. I think Ericsson in some accounts we do see them. They tend to be the more of the incumbent accounts. But most of the time it is Cisco and Ruckus. And as I said before, most operators want to have a multi-vendor strategy. And so our competition with Cisco is not only -- it stretches beyond after we win the deal. Basically, we are in a lot of accounts together and we are fighting for the portion of the budget.

In terms of the enterprise side, it is still -- the competitive situation is really very stable, very similar to prior quarters. We see Aruba, we see Cisco of course. Cisco is just part of the environment. We used to see a little more HP and Motorola. I would say not as much. Other than that, the rest is just noise here and there.

George Iwanyc – Oppenheimer

Okay. And just looking at the service provider market again, could you give us a sense of how many of the 110 customers or partners you have there are contributing on any given quarter, are more and as a percentage contributing every quarter?

Seamus Hennessy

So we typically see about a third of those customers contribute on a quarterly basis, some every quarter, some every other quarter but approximately about a third every quarter.

George Iwanyc – Oppenheimer

Is the average sales size staying relatively stable or growing?

Seamus Hennessy

It varies – it varies a lot because a lot of them, for example, when they first deploy – the deployment cycle is the first somewhere between six to 10 quarters, maybe they are pretty good size spending and then after that it will trail down a bit. And then they will come upon an upgrade cycle, or sometimes they would acquire a bunch of new sites. So we have seen that, that type of phenomenon. So it’s kind of – there are peaks and valleys. And so that’s why each particular operator their spending is very lumpy. However with our business – aggregating a large number of these operators allows us to smooth out the lumpiness and that’s always been our strategy.

George Iwanyc – Oppenheimer

And then just looking at the guidance, do you feel more comfortable with the enterprise environment relative to the service provider -- are you being cautious in either area?

Seamus Hennessy

No, I think as we have always said with our forecasting revenue [ph] guidance, we look at service providers that are currently in deployment and we’ve got an enterprise business that’s very predictable. The enterprise business is seasonally strong in the second and third quarter. So we definitely some trail-off in Q4 and Q1, because of our seasonal spend in Q2 and Q3 but our forecasting methodology is in line with how we have executed in the past.

Selina Lo

Yes, we do bottom up forecast for service providers.

George Iwanyc – Oppenheimer

Okay, the last question. Your head count additions have been steadily ticking down a little bit. Do you expect to get to a baseline sometime next year?

Seamus Hennessy

Yes.

Operator

Your next question comes from the line of Ryan Bergan with Craig-Hallum Capital

Ryan Bergan – Craig-Hallum Capital

I want to touch back on the 11AC, we have been hearing that 11AC was going to be perhaps more of a second half of 2014 event. Now it sounds like you're going to start realizing some revenues in the first quarter. Is that a change from your perspective at how you were looking at it or was the second half thought process more of when you expected to really ramp more materially? So I am just trying to get an idea of is it moving up as far as timing that what you were thinking maybe a quarter or two ago?

Selina Lo

Actually the 11AC program has been – the schedule has been very stable. What we started out when a few quarters ago when we looked at 11AC, I think we took a more technology driven view of it where we believe that wave two of 11AC is the wave that will be the replacement wave. That wave one would be more marketing new build installation. And the reason is that wave two has a new technology that [indiscernible] that truly will exploit the capacity of 11AC, whereas wave one is more targeted towards creating a tide. And so we have always looked at wave one as much more suitable for residential usage and wave two as being more suitable for high density high capacity type of environment, like service providers and also high power enterprises.

And so our focus has always been that we believe the bulk of the deployment for 11AC is going to be wave two, not wave one. What we are a little bit I would say surprised by what that actually, there is more curiosity in release 1 of AC than we expected. But I think we are talking about different a quarter to quarter and a half.

Ryan Bergan – Craig-Hallum Capital

And then I want to break down the service provider competitive landscape a little bit. I know you have addressed a little bit and you said it hasn't changed much and of course Cisco is there. Is there any difference in the competitive landscape between carrier customers and cable MSO type of customers? Is there any sort of different dynamics there that you can provide some light on?

Selina Lo

The cable guys are very aggressive and it’s becoming a worldwide – last year if you asked me this question I tell you it’s a North America phenomenon. But right now it’s a global – on a global basis even as far as China, for example. The cable operators are looking at Wi-Fi as their piece of the mobile internet play. And so we see this as a global phenomenon, the cable operator are rolling out Wi-Fi and they are much more aggressive about it, because they already have the cable plan, they already have the back haul, they already have the site. And so for them the rollout is much less complicated. The mobile operators now – they definitely are looking at both indoor and outdoor Wi-Fi. Indoor Wi-Fi they tend to look at much more of a managed services and also 3G offload from inside out.

Outdoor, they are definitely looking at land graph. We have seen a number of mobile operators deploying Wi-Fi as a way to grab some very significant street level furniture so that they can – when they roll out SmartCell, they would roll them out on the same furniture.

Ryan Bergan – Craig-Hallum Capital

And then Seamus, one for you. On the operating expense, you talked about some increased legal and public company costs. Is there anything on the legal piece that has changed from maybe anything going on the legal side of the business that has changed that we should be aware of?

Seamus Hennessy

In regard to legal last quarter, we had legal costs associated with the YFind acquisition but we also had some increased legal in regard to protecting our intellectual property. And legal fees can be spikey in any one quarter.

Ryan Bergan – Craig-Hallum Capital

So that is not necessarily a sustainable expense that could carry over?

Seamus Hennessy

We expect legal fees to be up – probably about the same this quarter as last quarter but we should expect it to trail down.

Operator

Your next question comes from the line of Catherine Charvain [ph] from Northrum [ph].

Unidentified Analyst

Quick question. Mine one is, who do you use for fulfillment to the cable and carrier operators? Is it the same NEPs or different ones for different regions?

Selina Lo

Yes, it differs between the regions. In North America, we do quite a bit of fulfillment through Aras. In other parts of the market, we use Alcatel, we have used MSN. So we use those partners and do we actually do any direct – not at all. We don’t do direct with the cable operators. So it’s our partners, ALU, Aras and MSN.

Unidentified Analyst

And then the other question has to go back to 11AC, seems to be a popular topic. So wave one, I understand that this is coming out in Q1 of 2014, but wave two when we were doing some of our research on this, could you address the fact that in some of the technologies specifications they are talking about the beam forming technology and how that relates to your current BeamFlex technology?

Selina Lo

So our current BeamFlex technology is an additive technology of bean forming. Today most of – even in the days of 11n and certainly with 11AC, the chipset already support beam forming but it’s beam forming at the chip level, basically in a simple way to explain that, at the chip level, beam forming has to do with being able to add signals from on two different streams, act them together to make the signals stronger, and – or to stage the signals to make the noise weaker. And that is a chip level beam forming that most recent products over the last year support including Ruckus.

What we do – with BeamFlex is a whole different level of optimization. Basically our antennas have hundreds to thousands of antenna configurations, each antenna configuration forms a unique antenna pattern that can push a signal a particular way, a way particular direction and the way we select the antenna combination is actually based on constant learning when packets come into the access point, the access point – every packet the access point would evaluate the throughput of that packet relevant – relative to the antenna configuration that was used to repeat it and the standard. So just like a router, it starts building out a database of what each device, the antenna patterns are best for it, second best, third best and so on. So in real time the access point with our BeamFlex antenna will learn and continue to update that table and then it will be – it is able to then use the most optimum antenna pattern for each destination that the traffic has fallen to.

Operator

Your next question comes from the line of Simona Jankowski with Goldman Sachs.

Simona Jankowski – Goldman Sachs

I just wanted to ask you a question back on the enterprise side. Some of your competitors now have converged wire and wireless solutions that are getting some traction in the marketplace, perhaps more the high end. But is that a segment of the market that you think you need to address or is that not really overlapping that much with your target customer base?

Selina Lo

That is complete red herring [ph]. In our customer base we have never had the issue of having a wire and wireless integration requirement and primarily it’s because our channels, all they carry best of class products from different vendors and they are the point of integration. And so I don’t see that as a – it’s never come up as a requirement by us – from our channels. On top of that, I do think that there are different release cycle for Wi-Fi versus Ethernet switching and by pulling them together into the same lock, I think customer either has to take the technology on one or the other and I don’t know that is always that optimum.

Now in the large, very large account, where there is a lot of IT expertise to deal with it, maybe, but certainly in our mid-tier enterprise where the channel is the point of integration we don’t see it as a requirement.

Simona Jankowski – Goldman Sachs

And then, do you have any update on your SmartCell roadmap as far as having your own cellular technology versus integrating your partners’ technology?

Selina Lo

We are not prepared at this stage to announce anything other than working with our partners to provide an integrated solution.

Simona Jankowski – Goldman Sachs

And then lastly, with Nokia selling off its device business to Microsoft, has that changed anything in your relationship or do you see any change in either their strategy or the energy with which they are going to market given that mobile infrastructure is now their number one priority?

Selina Lo

We haven’t seen any substantial change in term of Nokia, MSN as a partner, not a substantial change.

Operator

We have no further questions. I would like to turn it back to Selina for any closing remarks.

Selina Lo

I finally get to say my thank you. I want to thank everyone for your interest in Ruckus and I look forward to speaking with you in the quarter at the various IR events in which we will be participating. Thank you.

Seamus Hennessy

Thank you.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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