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Ruckus Wireless Inc. (NYSE:RKUS)

2013 Credit Suisse Annual Technology Conference Call

December 4, 2013 6:30 PM ET

Executives

Selina Lo – President and Chief Executive Officer

Seamus Hennessy – Chief Financial Officer

Analysts

Matthew N. Cabral – Credit Suisse Securities LLC

Matthew N. Cabral – Credit Suisse Securities LLC

Hi, everyone. I’m Matt Cabral from the IT hardware and comm equipment team at CS. It’s my pleasure to introduce Selina Lo and Seamus Hennessy from Ruckus. So I guess just to start things off, I think for those who may be a little bit less familiar with the story, do you mind just giving us a little bit of an overview, a little bit of the history?

Selina Lo

Okay. So Ruckus is in the business of providing carrier class Wi-Fi solutions to both service providers and enterprise. We – our company was founded in 2004 and we – IPO in 2012 November, just about a year ago, and 2012, our revenue was $215 million, of which, about a third came from service provider Wi-Fi infrastructure and the other two-third coming from Wi-Fi – enterprise Wi-Fi infrastructure, and the service provider business is our high – is a high growth business. It is a business that’s growing at faster than 50% a year. The enterprise Wi-Fi business, even though it has been around for a long time, it is still growing at over 10% – 15% every year. So service provider is much faster growing and that’s why, is a very strategic segment for us. Obviously, it was starting from a smaller base.

Now Ruckus has a strong position in the service provider Wi-Fi space. We are a number two player, just after Cisco, in the service provider Wi-Fi space and the unique technology that we bring to the table for the service provider Wi-Fi market include our proprietary adaptive antenna technology, which allows our Wi-Fi radios to be very resistant to interference, which is a big problem for public Wi-Fi. We also offer a very scalable Wi-Fi controllers solution that we call Wi-Fi – SmartCell Gateway and what it is, is – it is an – it’s – the Gateway is a Wi-Fi controller that is architected to scale linearly, is architected in a cluster type of architecture, where you can manage a number of these as a single system and it provides naturally N+1redundancy and it provides linear scalability, so that we can scale service provider network to hundreds of thousands of access points for example.

So, let us see what else, we have a 110 service provider customers that’s active and we have over 30,000 end-user customers. Ruckus on the service provide side, we use a two-tier distribution model. It’s 100% channel business. On the service provider side, we do direct touch and we fulfill through our partners NSN, ALU, Arris and – did I miss?

Seamus Hennessy

And sometimes direct to the service provider.

Selina Lo

Yes, so that’s a quick overview.

Matthew N. Cabral – Credit Suisse Securities LLC

Sure. Yes, that was very helpful. So I think as we’re beginning to approach 2014, can you talk about the discussions that you are having with customers, as they bringing to set their budgets for next year and what you’re seeing from an end demand perspective both across the enterprise and the service provider space?

Selina Lo

Sure. So service provider first I say, so for our service provider customers, they – there are really three categories. There is the traditional mobile operators, and they are rolling out Wi-Fi as a – they call 3G offload or 4G offload or augmentation, it’s mostly to augment their cellular data network. For those operators, one of the critical things that they are looking for is the ability to install the network and have it be very easy to manage, very reliable, deal with interference problems from the neighbor – from all the neighbor network and ultimately a big requirement for them is that the Wi-Fi has to fit into their overall cellular mobile infrastructure. So our product has to interoperable and complementary to their mobile core and one of the unique offerings that Ruckus has on the table is the ability to integrate our SmartCell Gateway seamlessly into the mobile core, so that the Wi-Fi network becomes part of the overall mobile infrastructure.

Now, another segment of service providers is the cable operators. For the cable operators, they – Wi-Fi to them is very, very strategic. Without Wi-Fi, they are only triple-play. Wi-Fi is their version of quad play and according to one of our key customers in that segment, the churn prevention factor, for them their subscribers that use their Wi-Fi service and the subscribers that don’t use their Wi-Fi service, the churn prevention is at least in the teens of percentage and in some markets actually as high as 30%, okay. So for the cable operators, it is a stickiness issue, it’s also their strategy for participating in the mobile Internet.

The third kind of operator is actually the wholesale Wi-Fi operators, guys like Towerstream, Boingo. These guys are operating a Wi-Fi network that they actually then resell to other service providers. Sky is another one. They bought a company called The Cloud. So Ruckus sells to all of these operators. On the enterprise side, the big discussion is now BYOD; it is also managed services, cloud-based services. One – the unique thing about Ruckus in the enterprise segment is that we focus on the mid tier enterprise. We don’t go after the Fortune 500. We always – we go after the unfortunate 50,000. So what we mean by mid tier enterprise, this hotel is a mid tier enterprise. The whole Starwood is a customer base for us. They are a mid tier – we consider them a mid tier enterprise.

We are number one in hospitality, but we also sell a lot to K-12 education institutions. We also sell to transportation organizations, we tend – we are widely deployed in airports, train stations. That’s the next hot thing. And we do retail public venues, quick service restaurant chains, retail chains and we are starting to – with Motorola losing market share, we’re starting to pick up some of that slack in the logistics and retail space. So we are looking at 2014 with cautious optimism, I think that’s the key word, because on the Wi-Fi side, the whole drive of mobile Internet, especially tablet computing, is really driving the enterprise space to grow very nicely as well as the upgrade to 11ac and the – for the service provider side, we all know, I mean, the whole mobile Internet and cloud computing is driving them to pay attention to Wi-Fi and cellular at the same time.

Matthew N. Cabral – Credit Suisse Securities LLC

And so you touched upon, turning to the competitive landscape, Cisco a little bit on the service provider side, can you just talk broadly about the competitive landscape as a whole and how it differs across both perspectives and where you see opportunity?

Selina Lo

Yes. So the service provider Wi-Fi market is much less competitive than the enterprise Wi-Fi market. there are three main players; it’s Ruckus, Cisco and Ericsson, as they acquired a company called BelAir about a year and a half ago. Ericsson after they acquired BelAir, they actually participate in the – in only a portion of the service provider Wi-Fi market. They tend to get involved when there is a much bigger deal either as part of LTE or as part of a mobile core sale.

I always joke that Ericsson sales guys don’t get out of bed for anything less than a $100 million and pure Wi-Fi projects are one-tenth or actually much less than that. So we don’t really see Ericsson in some of the pure Wi-Fi projects. So in the Wi-Fi project, it’s really a two-horse race; it’s Cisco and Ruckus, and the good thing is most of the Tier 1s and Tier 2 operators want a dual vendor strategy. So we actually end up being in a lot of accounts with Cisco, as both of us as suppliers.

On the enterprise front, it’s a much more competitive market. when we entered the market in 2008, there was already Cisco, Aruba, HP, Motorola, Meru, Trapeze, and now, Meru has kind of fallen off, Trapeze has fallen totally off, and then Motorola, as you know, has been losing market share there. HP has been pretty stable. Ruckus actually came from super nobody in 2008 to now being somewhere around at number three and number four position, depending on the quarter, fighting for the number three position with HP, and we have been outgrowing the market every year. we plan to continue to outgrow the market in the future that we see. We are very vertical focused. The type of verticals that care about Ruckus are the ones that need reliability and consistent performance.

Matthew N. Cabral – Credit Suisse Securities LLC

And on the enterprise side, are you seeing any increased competition from some of the low-end guys, maybe, Ubiquiti or someone like that or don’t really come across them as much?

Selina Lo

We have never seen Ubiquiti in the enterprise. we have seen Meraki in some places, but Meraki tends to address the S part of SMB. we tend to address the M part of SMB. But we have seen Meraki in some K-12 deals. we’ve seen Aerohive in K-12 deals, but other than that, not anywhere else, who else are the little guys. Yes, those are the three little guys.

Matthew N. Cabral – Credit Suisse Securities LLC

Okay. So you touched a little bit upon the SmartCell Gateway. Can you talk about the momentum that you’ve seen with that and how it’s being received by some of the carriers that are – that have deployed it so far?

Selina Lo

Yes. I would say for most of the new wins, they are wins with the SmartCell Gateway for us for service provider wins. We have dozens of them out there. We have at least – we have a dozen customers that have the product in production networks now. It is strategically extremely important to us. It has the highest capacity in the market as a controller for service provider class infrastructure, but it also has the potential to allow the service providers now to host controller-less services for their enterprise customers.

So we have a number of service providers that are hosting the SmartCell Gateway in their data center and they are offering cloud-based Wi-Fi to SMBs, and so the SmatCell Gateway is actually very critical to us.

Matthew N. Cabral – Credit Suisse Securities LLC

Okay. And then speaking on the service provider side, can you talk about what you’re seeing in terms of just overall carrier Wi-Fi adoption, and thinking about the underlying demand drivers or what’s going on. is it device proliferation; is it overcapacity of the existing networks, what’s the biggest drivers we got?

Selina Lo

So I think the mobile Internet and the cloud-based computing are the two things that really is driving service provider, Wi-Fi. There is just not enough capacity. Verizon, just two years ago have been saying that they have tonnes of capacity in their LTE network and is performing amazingly well. now they are starting to run into bottlenecks. The spectrum is expensive and spectrum is limited and licensed spectrum with Wi-Fi offers 700 megahertz of capacity all harmonized across the world and the volume of Wi-Fi Silicon is driving the adoption of Wi-Fi period.

So we think that it is a very long-term phenomenon, even with small cells, operators are talking about integrated small cells, which includes Wi-Fi. and so I think that Wi-Fi has a long future with service providers, with HotSpot 2.0, which is a very important standard for service providers. For the first time, you can – HotSpot 2.0 will enable you to get onto a Wi-Fi network, just like you get onto LTE, which is you just hit the app and it will connect.

And then there are future iterations of HotSpot 2.0 that would actually allow auto roaming between Wi-Fi and cellular network based on the service providers quality of service. So I think that service providers are starting to really look at Wi-Fi in a whole different light. it is no longer, just a tactical hole filler, it’s now for them a strategy.

Matthew N. Cabral – Credit Suisse Securities LLC

Okay. Switching over the enterprise side, are there any upcoming market catalysts that you see that to kind of invigorate growth in that side of the business. And within that, can you talk about the adoption of 802.11ac that you see coming in and the timing of that?

Selina Lo

Okay. In the Enterprise, certainly, I think the use of tablets in a number of applications are driving adoption. So education for example, K-12 schools, they all have a little bit of Wi-Fi in one or two classrooms or something, but now with tablets, with students using tablets in place of textbooks, with teachers using tablets as the teaching aid. They need Wi-Fi coverage everywhere. What we have seen in universities is now going down to K-12. In hotels, hotels are used to go and buy a service for my laptop. now I bring three devices. In fact, in this hotel, I think you get five for paying once. So for hotels, the capacity demand is driving Wi-Fi replacement, Wi-Fi growth.

Other things like logistics retail warehousing. Before retail logistics places, they used to have Wi-Fi just at the dock, but now they actually need Wi-Fi in the warehouse, because their workers need to use the cellphone for business. So we are seeing that across enterprise segments, I think smartphones and tablets are driving the use of Wi-Fi.

Matthew N. Cabral – Credit Suisse Securities LLC

802.11ac

Selina Lo

Oh ac. Well, we have ac to. Our 11ac product is in beta test and we are planning to release it in Q1. I believe that 11ac is not going to be a hockey stick kind of ramp next year. 11ac growth is going to be gradual, because there are two phases of 11ac. There’s Wave 1 and Wave 2 and they are – the hardware is incompatible, meaning they need different chipsets. Wave 1 is what’s available today and what that is, that is a enhancement of Wi-Fi, so that you can get to gigabit speed, okay, theoretical gigabit speed and you can get a throughput of 200, 300 megabits per second.

With Wave 1 is still – the technology is based on single use of MIMO, which is what MIMO has always been, it’s single user on Wi-Fi. the access point transmits to one client at a time. what this means is that, it gives you a big pipe, but only a limited number of users can share that big pipe. With Wave 2, there is a very important innovation called multi-user MIMO, which with Wave 2, the pipe gets bigger, but what’s more important is that it allows an access point to transmit simultaneously to multiple clients at the same time, which means that you can fit a lot more users into that pipe. So Wave 2 is what service providers want, Wave 2 is what high density places like universities and schools want, because what they want is for the access point to support not a big pipe for one user, but a big pipe for many users.

Now Wave 2 requires a different generation of chipset that’s not going to be available until mid next year, which means that Wave 2 products will not be available until like the earliest end of 2014, beginning of 2015, which means that the people who are deploying 11ac, they – not a lot of them will just replace the entire network with Wave 1 11ac. They’re going to implement some and then they’re going to wait for Wave 2 before they do a wholesale migration. So we think that the growth of 11ac is going to be gradual.

Matthew N. Cabral – Credit Suisse Securities LLC

Okay. Are there any questions in the audience? I think up in the – the front up here. Up in the – in the front.

Question-and-Answer Session

Unidentified Analyst

Thanks. I’m just wondering in terms of deployments, are there any particular areas or regions where you’re seeing particularly high growth outside of the U.S., in particular, any recoveries in the Europe or Asia regions?

Selina Lo

We are seeing tremendous growth in Latin America, both across fixed line operators like cable operators as well as mobile operators. We think that that’s because in a lot of places, the infrastructure wasn’t complete anyway. So the operator after he used Wi-Fi rollout as a way to complete the infrastructure, we’re also seeing the last two quarters, actually significant growth in Africa. Again, same thing, I think infrastructure wasn’t there, so Wi-Fi was – became the de facto infrastructure. The biggest growth amount service providers is with mobile – with cable operators, and I think that’s a worldwide phenomenon. We are seeing that across the world not just North America.

Unidentified Analyst

I guess as a follow-up to that, how easy is it in the case of incomplete infrastructures, how easy is it for Ruckus’ solution to come in and basically replace an incumbent solution or come in and replace an existing solution?

Selina Lo

So Wi-Fi is not going to replace cellular. Wi-Fi is not a mobile technology; Wi-Fi is a small cell technology, and so I think that where you see people deploying Wi-Fi is when the users tend to be static or nomadic at best, but if you look at mobile data, 80% of it is generated indoors and 80% of it is generated when the users actually not moving around very quickly. So I think Wi-Fi actually has a very good fit with mobile data usage. Will it ever replace 3G, replace LTE? No. The reason actually is with LTE, operators are moving to a charge by usage model, right. You have a data plan and there is a cap. and with Wi-Fi, the model even if the subscriber pays for it in developing market; it’s always an all-you-can-eat model. and so I think operators, mobile – traditional mobile operators are more comfortable with the cellular – with the LTE model from a monetization standpoint. However, the investment to support each bit across the – an LTE network is 10 times higher than the Wi-Fi network. So because of the balance of both, I think mobile operators are looking at using both technologies.

Unidentified Analyst

When you went through the list of competitors, which was fairly long, do you see the need for consolidation in this industry? Thank you.

Selina Lo

Well, you have already seen some consolidation in the enterprise Wi-Fi space. For example, Trapeze was bought by Juniper. You have seen also Motorola is looking at, they are putting up their Wi-Fi business for sale. So that consolidation is happening – has been happening in that industry. On the service provider side, like I said, the real players is Ruckus and Cisco. BelAir has already been acquired by Ericsson. I don’t think we are going to buy Ericsson.

That’s a joke. Participating, meaning buying somebody or selling also, so in terms of acquisition, Ruckus definitely is not shy about acquisition, we – but instead of buying another Wi-Fi supplier, we actually will look for more complementary technology, talent that can allow us to expand our market reach. So I don’t think that it’s our strategy to buy another Wi-Fi supplier. In terms of being a target of acquisition, well, I can’t control that. I can only control building business. and we don’t need to be acquired. Our business is profitable, we are growing very well.

Unidentified Analyst

Can you talk about QUALCOMM’s recent announcement about…

Selina Lo

Right.

Unidentified Analyst

…LTE on unlicensed spectrum and Wi-Fi?

Selina Lo

Well, I think QUALCOMM announced a bunch of white papers. I think that it smells of ATM versus Ethernet, for those of you that are – that have been – that were around 20 year ago. I think Wi-Fi is very much like Ethernet. It is proven, it has been around for 20 years, it went from just home use to enterprise use to now public access use. It went from one megabit to now gigabit. It grew up from the – from the grass roots rate with Wi-Fi. I think QUALCOMM has its self-interest at heart. LTE – they make a lot of money on LTE. They make a lot more money on LTE. I think that it is to QUALCOMM’s interest to have LTE rule the world.

In North America, I suspect that there is no way they can prove that. It doesn’t interfere with Wi-Fi. So it would be very interesting for us to watch. But I think that that’s really bullshit.

Matthew N. Cabral – Credit Suisse Securities LLC

A question on just your general growth visibility, earlier on, you said that you were cautiously optimistic looking into 2014. so how does that – how should we think of that comment relative to maybe what your visibility was say, six months ago?

Selina Lo

I am more optimistic than I were six months ago. Is that good enough an answer?

Matthew N. Cabral – Credit Suisse Securities LLC

Yes. Can you talk about the magnitude of that increase in confidence?

Selina Lo

So all of last year – from Q1 through Q3, we have continued to acquire more service provider customers, and we have also seen the cadence of adoption, it has – the window has shrunk. We announced for example Sprint managed services partner for Ruckus in Q1. We have seen their business grow quarter-after-quarter even though they are just starting that building that business model. We actually are very encouraged, because we have acquired more and more Tier 1 operators.

So we have seen all of the good signs. Now a lot of you ask me so when will I see some dramatic acceleration. I think that you have to see that Wi-Fi is not like LTE. You don’t have to – people don’t buy billion dollars of it and light up 20 cities before they offer services. In fact, an operator can deploy Wi-Fi in several buildings and begin to offer services and continue to build as they grow. So what you see with Wi-Fi investment is a much more gradual ramp rather than a one-time commitment of millions of dollars or hundreds of millions of dollars. So I think Wi-Fi is a very healthy market, but I think it’s kind of a ramp versus some dramatic hike.

Matthew N. Cabral – Credit Suisse Securities LLC

Thank you. Well, with that, I think we’re out of time. So thank you both very much.

Seamus Hennessy

Thanks, Matt.

Selina Lo

Thank you.

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