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Ruckus Wireless Inc (NYSE:RKUS)

Q4 2013 Earnings Conference Call

February 12, 2014 05:00 PM ET

Executives

Nicole Noutsios - IR

Selina Lo - President and CEO

Seamus Hennessy - CFO

Analysts

Tim Quillin - Stephens Inc

George Iwanyc - Oppenheimer

Rich Valera - Needham & Company

Brian Modoff - Deutsche Bank

Mike Lin - Stifel

John Lucia - JMP Securities

Operator

Good afternoon. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Ruckus Wireless Fourth Quarter and Fiscal 2013 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.

Ms. Nicole, you may begin your conference.

Nicole Noutsios

Thank you for joining us on today’s conference call to discuss Ruckus Wireless’ fourth quarter 2013 financial results. This call is also being broadcast live over the web and can be found on the Investor Relations section of our 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 constitute forward-looking statements. This includes statements related to anticipated or changing marketing conditions, market growth, our market position, penetration of new vertical market, future financial results, current and new customer demand, growth in customer base, customer loyalty, new product introductions, geopolitical developments, competitive environment 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 other filings with SEC, in particular our quarterly report on Form 10-Q filed with SEC on October 31, 2013. Our SEC filings are available on the IR section of the company’s website and on the SEC’s website.

All forward-looking statements made in the 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 the 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 excited to report that Q4 was another record quarter for Ruckus and we continue to see positive momentum in our business. We performed well in all aspects of the business and our financial results reflect our execution and strong position in the market. Our fourth quarter revenue was $73 million, up 17.5% year-over-year, 5.9% sequentially and at the top end of our guidance range. We also delivered non-GAAP EPS of $0.06 which is $0.01 above our guidance and gross margins at the high end of our long term model.

Looking back at 2013, we continue to build a solid foundation for growth for our company. Our 2013 revenue of $263 million highlighted a 26% year-over-year growth in our ZoneFlex and SCG business. In particular our Americans and EMEA regions were both strong performers delivering a combined revenue growth of over 39% year-over-year. Our APAC region was challenged by headwind in the China market as well as lower spending from a service provider customer that accounted for 12% of our 2012 revenue. Having said that, we believe that the China market is showing signs of recovery and I’m pleased to report that our APAC growth has been trending up since the third quarter of 2013.

In 2013, we made important progress in the service provider Wi-Fi market. Excluding the Chinese service providers and the APAC service provider that I just mentioned, we grew our 2013 service provider revenue more than 80% year-over-year. We also executed on our strategy to diversify and expand our service provider install base by doubling our service provider customer count in the year. With 22 new customer wins in Q4, we ended 2013 with an install base of over 140 service provider customers. This gives us a strong foundation for growth. It also helps to diversify our revenue base and begins to smooth out the lumpiness in our service provider revenue.

Our enterprise Wi-Fi business continued to deliver solid performance and strengthen our fundamental market position. In 2013, we increased our enterprise end customer count by over 50% year-over-year. We won approximately 3,100 new end customers in Q4, bringing our total end customer base to over 33,000 worldwide. Our 2013 enterprise revenue grew approximately 27% year-over-year. In addition to our top vertical markets, hospitality and education, we’ve broadened our penetration into new verticals including warehousing logistics, NBUs, retail and large public venues. Our recent win in the warehousing manufacturing vertical Kawasaki Motors selected Ruckus smart Wi-Fi for its 2 million [indiscernible] manufacturing back office and warehousing facility to replace their existing Wi-Fi network from our number one competitor.

The previous Wi-Fi networks saw the continuous disconnections and uneven coverage as the environment became increasingly challenging with unfriendly RF obstacles, electromagnetic interference, RF noise and the mobile. With Ruckus and ChannelFly technologies in place, Kawasaki is experiencing better quality of voice over IP commutations and FIFO (Ph) increased in the amount of products they can scan through their system. The stronger signal from the Ruckus Network also extended the battery life Kawasaki’s hand-held devices. Three other example of important wins in Q4 2013 include; first, a Major League Baseball stadium where we competed against the leading wire and wireless infrastructure equipment supplier and won the Wi-Fi portion of the network and while our competitor would supply the wire infrastructure.

Ruckus was selected by the neutral host operator because of our performance advantage and demonstrated ability to support high density environment. In addition with our Smart Wi-Fi technology it will take 40% Ruckus APs to do the job which translated into significant CapEx and OpEx savings for the customer. Second, a new project from an existing mobile operator customer to supply Wi-Fi radios for their outdoor small-cell network.

Phase 1 of this deployment included thousands of outdoor Ruckus APs, each of which is being installed side by side to an LTE small-cell to supply LTE and Wi-Fi services on City Street. Ruckus APs was selected because of their compact form factor, light weight and proven performance. Third, a deployment by one of South Africa’s largest Internet service provider looking to roll out 15,000 Ruckus APs over the next two years. Leveraging their vast fiber networks throughout South Africa the deployments supports a new wireless broadband -- supports a new wireless broadband network for public access as well as managed services for enterprises and public venues.

We competed against our top two competitors and see some interference management, ease of integration and scalability. Our carrier class Wi-Fi control platform the SCG played a key role in winning this opportunity as it enables the customer to deliver multi-tenancy managed services on the single-platform.

On the product front, the SEG continues to gain momentum, differentiated by its distributor architecture and scalable capacity the SEG has been instrumental to almost all of our new service provider win. We continued to innovate and expand our technology differentiation. We launched a number of new products, including our first stock based offering. First, we launched the industry’s first carrier class network analytics engine called SmartCell Insight. This new product gives service providers the ability to capture a year’s worth of wireless network statistics, with easy customizable analytic reporting mechanisms to help service providers improve customer service and perform network optimization.

Second, our recently announced Ruckus Smart Positioning Technology abbreviated as SPoT offers the industry’s first cloud based Wi-Fi location based services. SPoT provides user positioning and analytics capability that give service providers and enterprises the ability to deliver a wide range of value added services and monetization tools. Compared to similar solutions in the market, Ruckus SPoT offers unique advantages, such as cloud based delivery, low cost of entry, simplicity and higher accuracy. Already in customer testing SPoT will be our first SaaS product offering.

Third, we have begun shipment of our first 802.11ac access points. The new access point integrates our patented BeamFlex smart antenna technology to deliver stronger signals with higher data rates and longer ranges, more reliable plying connections as well as the ability to adapt to constantly changing environmental conditions and device orientations. And fourth, we released ZoneDirector remote control, a mobile application that gives our customers and partners the ability to remotely manage Ruckus Smart Wi-Fi networks from a mobile device, such as an iPad.

With ZD remote control, IT administrators can run day to day network management task including planning, configuring, monitoring and performance testing from wherever they are over a Wi-Fi or cellular connection. As the first to truly mobilize wireless LAN administration, Ruckus continues to be a leader in simplifying network deployment and operations.

As you can see 2013 was the year of growth and foundation building for us in our core market. We delivered solid revenue performance and substantially diversify and expanded our customer base. Our BeamFlex and SCG technologies continue to differentiae us and we have announced a number of new innovative products and services.

Looking forward I am optimistic about 2014, we believe the demand for public Wi-Fi access will continue to increase. In [indiscernible] forecast the market spend for service provider Wi-Fi to grow by 48% between the first half of 2013 and the first half of 2014. Ruckus is a pioneer in service provider Wi-Fi and we continue to strengthen our ability to capitalize on this tremendous growth opportunity. We continue to win in the enterprise because of channel loyalty and our differentiated technology. Our company is on track, the market remains robust and we see substantial business opportunity ahead of us. We have launched number of new products and we have more in the pipeline that I look forward to sharing with you in the future. Now, I will turn the call over to Seamus to discuss in more detail our financial results for the fourth quarter.

Seamus Hennessy

Thank you, Selina and thank you all for joining us today. Unless specifically noted or otherwise, we are discussing all numbers except for revenue on a non-GAAP basis which excludes stock-based compensation, amortization of intangibles, employer tax in connection with stock option exercises, revaluation of preferred stock warrants, non-reoccurring legal settlement and related tax effects of the non-GAAP financial measures. All share counts would 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 achieve a number of financial and business milestones in the quarter to end the year with significant momentum heading into 2014. In Q4 revenue was $73 million, increase of 17.5% year-over-year and 5.9% sequentially and at the top end of our revenue guidance of $70 million to $73 million. Product revenue was $68.5 million, up 18.2% year-over-year and 6.3% sequentially. Services revenue was $4.5 million, up 7.2% year-over-year and 0.8% sequentially. For 2013, we recorded revenue of $263.1 million, up 22.6% from $214.7 million in 2012.

In Q4 Americas revenue grew 26% year-over-year and 1.4% sequentially and represented 49.3% of total revenue. Our EMEA revenue grew 36.6% year-over-year and 13.7% sequentially and represented 29% of total revenue. In 2013, Americas revenue grew 35.4% and EMEA revenue grew 46.1% year-over-year with a combined growth rate of 39% year-over-year. Our year-over-year growth in the Americas and EMEA was primarily driven by sales execution, new service provider win and strong momentum in our enterprise channels. In Q4, our revenue in Asia-Pacific including Japan decreased 12.5% year-over-year but increased 7.2% sequentially and represented 21.7% of total revenue.

For the full year Asia-Pac declined 12.4% year-over-year. The decline was primarily the result of anticipated lower revenue attributable to one large end customer that accounted for approximately 12% of a revenue in 2012 as well as softness in the China market. We are starting to see signs of improvement in China. We will continue to be cautious in regards to outlook in that region. Two of our North American distributors accounted in total for more than 27.6% of revenue in Q4, one accounting for 15.2 and the other accounting for 12.4. We have no end customer that accounted for 10% or more of revenue in the quarter.

The split between our service provider and enterprise business remains approximately the same as the prior year. One-third service provider and two-thirds enterprise. However, Selina mentioned earlier we significantly diversified our service provider base by dozening (Ph) our customer count year-over-year. This diversification laid the solid foundation for service provider revenue growth and helped stabilize our revenue base. Gross margin in Q4 was 67.7%, up a 149 basis points year-over-year and up a 127 basis points sequentially and in line with our long-term model of 66% to 68%.

Product gross margin was 68.9%, up a 197 basis points year-over-year and up a 116 basis points sequentially. Product margins can fluctuate quarter-to-quarter and an effect by product mix, regional revenue mix as well as large orders from specific customers. Our service margin was 49.7%, down 682 basis points year-over-year and up a 199 basis points sequentially. The year-over-year change in service margin was driven by headcount and infrastructure investments in the services organization to support our expected customer growth.

Q4 operating expenses were $42.4 million or 58.1% of revenue, up 4.5% sequentially. The sequential increase was related to cost associated with the YFind acquisition, and increased general and administration expenses in connect with patent litigation. The increase in G&A was primarily related to additional litigation expenses that was an incremental $1.4 million than the prior quarter. We will continue to aggressively defend ourselves from meritless IP claims. As a percentage of revenue, operating expenses were up 480 basis points year-over-year and down 80 basis points sequentially.

Our operating profit in Q4 was $7 million, a 9.6% of revenue, a decrease of 330 basis points year-over-year and up 210 basis points sequentially. The non-GAAP tax rate was 21.4% in Q4 and reflect the full-year tax rate of approximately 21.5%. Non-GAAP net income for the quarter was $5.4 million or $0.06 per diluted share compared to $6.1 million or $0.07 per diluted share in Q4 2012. We have $95.5 million weighted average shares outstanding on a non-GAAP diluted basis in Q4. On a GAAP basis, net income for the quarter was $0.7 million or $0.01 per diluted share compared to Q4 2012 net income of $1.9 million or $0.03 per diluted share on net income attributable to common stockholders.

We had $93.2 million weighted average shares outstanding on a GAAP basis in Q4. Total headcount at the end of the quarter was 824, an increase of 18 from Q3. As we enter 2014 we plan to continue to invest for future growth primarily in research and development and sales and marketing.

2013 non-GAAP gross margin improved to 190 basis points over 2012 to reach 67.3%. 2013 non-GAAP operating margin climbed to 8.5% from 13.2% 2012 primarily related to planned strategic investments in customer service, research and development and expansion of the global sales. Increased cost as a result of being a public company as well as increased patent litigation cost. 2013 non-GAAP net income was $17.4 million compared to prior year’s non-GAAP net income of $42.9, which included in non-GAAP net tax benefit in 2012 of approximately $15.9 million primarily related to the relief of the valuation allowance on our net deferred tax assets.

Turning to the balance sheet, we finished Q4 with cash, cash equivalents and short-term investments and restricted cash totaling $157.2 million, an increase of $12.5 million from the prior quarter and an increase of $23.8 million from December 31, 2012. Cash provided by operations in Q4 was $9.2 million and $28.6 million in 2013. We ended Q4 with $19.1 million in accounts payable, a sequential increase of $0.5 million and accrued compensation of $11.8 million, a sequential increase of $0.1 million and the $44.6 million of accounts receivable, a sequential increase of $2.8 million. The average day sales outstanding was 56 within our target range of 50 to 60 days and flat with the prior quarter.

Now, let me turn to our guidance for the first quarter of 2014. We expect the first quarter 2014 revenue to be in the range of $71 million and $74 million. As a reminder, seasonally our second and third quarters are the strongest quarter primarily driven by the strength of our enterprise business. For the full year, you can expect our annual revenue growth to be generally in line with the prior year. We expect first quarter non-GAAP earnings to be $0.03 to $0.04 per share using approximately $95 million to $97 million weighted average shares outstanding on a diluted basis. We expect gross margins to be within the range of our historical trend. Our 2014 forecast is non-GAAP tax rate is expected to be approximately 32%. We plan to continue to invest for future growth primarily in research and development, sales and marketing, as such we expect operating margins as we exit the year to be in the high single digit.

And I will open up the line for question. Operator, can you please open up the line?

Selina Lo

Thank you for joining us on this call.

Seamus Hennessy

So operator we’ll open up the line.

Question-and-Answer Session

Operator

Yes. Your first question comes from Tim Quillin from Stephens Inc.

Tim Quillin - Stephens Inc

Hi. Good afternoon. Just Seamus on the guidance I think what you said was kind of an in line growth for 2014 versus 2013, which would be 23% I think that the first quarter mid-point would represent more like 26%-27% growth. Is there anything to note there in terms of a stronger 1Q versus the rest of the year?

Seamus Hennessy

We’re coming out of the gate pretty strong. We feel comfortable about the year, general guidance that we’ve given; but we continue to be cautious in China in regards to our guidance and we typically haven’t provided annual guidance but we’re just trying to give a mosaic in regards to where we see the business taking into account being cautious in regards to the China. But Q1 is strong out of the gate.

Tim Quillin - Stephens

Okay. And then Selina I think you said that the first AC product shipped in the quarter. But I’m just wondering what the expectations is for the AC product, what the price point is going to be versus -- and if you really think that it’s more waved to where we’ll see broader adoption there. Thank you.

Selina Lo

Yes. Thank you. The AC product just started shipping and we are very optimistic about that but we don’t break out revenue by product. The product is list price at 1,299 and….

Seamus Hennessy

Slight premium over a high end 11 end product.

Selina Lo

Yes.

Operator

(Operator Instructions) Your next question comes from George Iwanyc from Oppenheimer.

George Iwanyc - Oppenheimer

Thank you for taking my questions. Seamus when you look at OpEx spending in the first quarter, where -- what type of bubbles are you expecting, is this still a primary G&A expense as kind of staying at a higher than expected level?

Seamus Hennessy

G&A will start revert back to publicly where we saw in Q3 we had significant increased litigation in Q1 of approximately $1.4 million but it’s primarily in R&D and sales and marketing where we’re continuing to invest.

George Iwanyc - Oppenheimer

And should we look at headcount additions continuing to moderate slightly from quarter-to-quarter?

Seamus Hennessy

Probably more in the first of the year we’re aggressively continuing to invest and sell the marketing and research and development because of the market opportunity we see and because of the strength we’re seeing in our first quarter.

George Iwanyc - Oppenheimer

Okay. And you continue to add a nice number of service provider customers in every quarter. Can you give us little bit on the makeup of the type of service providers you added over the last quarter?

Selina Lo

Yes. Sure. We are adding MSOs or cable operators from actually outside of North America. We’re starting to see cable operators implementing Wi-Fi using their existing infrastructure as a worldwide phenomenon. We also have won a number of tier 1 operators globally. The tier 1 operators typically take a little longer sales cycle as well as longer deployment cycle. So we’re very encouraged. We also see a new breed operators, the traditional wireless ISPs that offer managed services to enterprises, public venues and MBUs, which starting to see a number of them take on good size project.

George Iwanyc - Oppenheimer

And the following up that. I believe you’ve added 4 cable MSOs in the previous quarter, did you add kind of at a similar rate last quarter?

Seamus Hennessy

We added a number of new cable operators in the current quarter.

George Iwanyc - Oppenheimer

And are you seeing any volatility from an outlook standpoint relative to the type of order patterns you’re seeing in the cable space given potential need of customer consolidation there?

Selina Lo

Well first of all I won’t speculate about the customer consolidation. But our customer base has been pretty strong and there are certainly MSOs that don’t have records today that we’re looking to penetrate. So I’m very optimistic about the MSOs spending. Certainly, today, Time Warner Cable and Bright House have been very strong customers of ours and have significant installed base.

Operator

Your next question comes from Rich Valera from Needham & Company.

Rich Valera - Needham & Company

Thank you. Looks like enterprise grew meaningfully faster than service provider in ’13. I assume you’d expect that to maybe reverse in ’14 just wondering if you could go on and given any color on the relative growth rates of those two segments you’re expecting in ’14?

Selina Lo

I would like to give one bit of color before Seamus takes over this question. So if you look at the service provider revenue, you take away the one single operator that was 12% customer for us in 2012 and you also take away the three China operators that did not purchase much last year. The growth of the rest of service provider business was actually 80%, over 80% year-over-year. So that market did grow but we basically had a big customer concentration and geopolitical issue that we can’t control.

Seamus Hennessy

And your math is right when we get the enterprise breakout in total it grew slightly faster the enterprise, and our enterprise continuous to be very healthy and very strong. On the service provide side we’ve taken into account that our all our other service provides accounted for grew almost 80% year-over-year.

Selina Lo

More than 80%.

Seamus Hennessy

More than 80%, we’re actually encouraged by how well we’re actually doing in the service market given some of the headwinds we saw with the large customer and softness in China.

Rich Valera - Needham & Company

That’s great and just to following up on that, how do you view Asia Pac this year as you head into the year, it’s obviously a big headwind last year to your overall growth rate, do you see it as neutral contributing and how do see Asia Pac as you look into this year?

Selina Lo

As I said, Asia Pac for us has been trending up since Q3.

Rich Valera - Needham & Company

And does that include both the China operators and your big Japanese customer?

Selina Lo

Yes, total Asia Pac.

Seamus Hennessy

Total Asia Pac and we’ve seen China starting to recover starting in Q3 as well. So, we continue to be cautious. We’re actually encouraged by how things are starting to move ahead and I think it will be an easier comp year-over-year.

Rich Valera - Needham & Company

That’s great color. And Seamus you saw a nice jump in deferred revenue in 4Q, anything we should read into that about improved visibility or just kind of timing of payments to the channel?

Seamus Hennessy

Most of our deferred revenue is made up of two components. One is deferred maintenance which again is amortized and deferred distributed (Ph) stock, a larger distributors we actually recognized on sell through versus sell in, but the biggest jump was primarily related to increase in distribution stock.

Rich Valera - Needham & Company

Great that’s helpful. And then I just wanted to clarify where you stood on your litigation. I know you had a jump up in legal expenses in 4Q, do you expect -- where do you expect those expenses to go in 1Q and where are you in your main litigation if you will?

Seamus Hennessy

Our biggest litigation was last quarter which has been resolved and no matter and that have been resolved. But we’re not providing specific guidance on litigation cost. I think you can generally expect that it should start trending down to where we saw in Q3. But like all others in the industry, we continue to see infringement plans from non-practicing entities and we’re going to continue fight those meritless IP things.

Rich Valera - Needham & Company

That’s great. Thanks very much.

Operator

Your next question comes from Brian Modoff.

Brian Modoff - Deutsche Bank

Just wanted to ask a couple of questions. One on the service provider segment; it seems like you’re seeing strength there with cable companies and that’s great; and also ISPs doing some interesting stuff. And I’m just wondering when do believe mobile operators being to solidify their SmartCell strategies and we begin to see deployments really in earnest. And the second question I have is on the enterprise side, and as you see, I know in the past that you said you had not ubiquity in any of the channels or with the customers but as you start to see them go into, like a Ingram Micro and some of the bigger distributors, how do you react to pricing or how do you believe pricing, it will affect pricing and how do you think that customers will respond, thanks.

Selina Lo

So I’ll start with answering the questions on mobile operators since SmartCell and I’ll let Seamus take a stab at the ubiquity question. So you know the M&Ls have started doing files or you know smart deployment on SmartCells, and as I mentioned in the example, in my script, certainly you know in every SmartCell deployment, Wi-Fi is going to be a component and so we are very optimistic about that.

Seamus Hennessy

And I think in regards to your question about ubiquity in emerging markets, our gross margins continue to be very healthy and very strong. The only place that we’ve really seen ubiquity is in some emerging markets where price was the only thing that mattered, and actually in some of those accounts we won it because our core vertical and core markets really appreciate the Ruckus differential and so, we really don’t see them a lot and it really hasn’t had any impact in overall business, gross margins continue to be very healthy.

Operator

Your next question comes from Sanjeev Wadhwani from Stifel.

Mike Lin - Stifel

Hi, this is Mike Lin, I’m speaking on behalf of Sanjeev Wadhwani, I had a question about the tier one deals that you guys have won, can you give us a sense of sort of the duration of those deals and the size of those deals in terms of like what do you expect over like a year or two year periods or however long the deployments last.

Selina Lo

I don’t -- so the example that we had with operator that was a 12% customer, that was a very abnormal situation where they roll out of a lot of APs within period of four-five quarters. Typical tier one operators take a much longer time to deploy. Depending on their deployment strategy it may be huge or it may be just basically ongoing deployment at a secure site, so our strategy has been to build our customer base and continue to diversify, to expand the install base so that we can avoid that kind of lumpiness.

Seamus Hennessy

Yes, and the general trends, the general trends we’ve seen with some of our service providers being customers now for multiples of years so it’s a very long deployment cycle, over a long extended period of time, because if you get all of that in one or two quarters or even four quarters it’s over a multiples of years as they deploy new sites and actually with some of our early customers we’re starting to come back and go through replacement cycles, so it starts becoming good annuity business over time, so continue to expand our customer base is the key thing.

Mike Lin - Stifel

Okay, but excluding that large 12% customer I was just trying to get color on whether the size of the tier one deals have kind of been growing given the popularity of Wi-Fi deployments in sort of the past 12 months, or is it not trackable (Ph), go ahead.

Selina Lo

We certainly see incremental increase quarter-over-quarter, but again you know it takes a number of years to really build up the total business, and I think the tier one roll out is going to be more a steady stream rather than some huge bumps.

Mike Lin - Stifel

But do you see customers as big?

Selina Lo

Yes

Mike Lin - Stifel

Okay

Selina Lo

And a number of them are [indiscernible].

Mike Lin - Stifel

Okay, thank you.

Operator

(Operator instructions) Your next question comes from Tim Quillin from Stephens Inc.

Tim Quillin - Stephens Inc

Thank you for taking my follow up, I still on, kind of pondering the notion of having the same growth rate in 2014 versus 2013, because headwinds are out of the way right now and you seem to think that Asia Pacific can grow and maybe still a little bit of a drag on growth, and service provider as you said grew really fast if you exclude out some of those headwinds, so is it just going into, this point in the year of being cautious about what you might see, or is there a reason you wouldn’t expect an acceleration as you get through some of these headwinds.

Seamus Hennessy

Right now Q1 is strong for us. We’re taking a very cautious approach and giving everybody a mosaic of where we actually see things right now and we’ll continue to update everybody as the quarters go on, but as we exit 2013, we feel strong about our business and where we’re positioned, but with service providers, as you start to win these service providers and continue to understand the roll out, it can take time for them and we’ve known from past that deployments can take a quarter longer or a quarter shorter, but we continue to be cautious. And especially with China, where we’re starting to see things recover we also continued to be cautious with China too as well, but when we look at the first quarter we actually we’re coming out of the gate strong.

Tim Quillin - Stephens Inc

And then the only other question I had was around your new SPoT service, your first SaaS offering. And I am just wondering our customers already asking for that type of solution or is that something you need to go out and push and build awareness and start to slowly build up the revenue stream over time. Thanks.

Selina Lo

So there is certainly a demand that’s built up, and we have a long list of customers who want to be in our testing. I believe that this is a pretty broad appealing product line with location based services. Particularly in some of the verticals that we want to penetrate, retail is definitely huge on it; we also see hospitality being huge on it. And I think transportation and public venues; they want the capability for security reasons and mapping and so on.

Operator

Your next question comes from Rich Valera from Needham & Company.

Rich Valera - Needham & Company

Seamus just one follow up, what was your comment on operating margin exiting ‘14? Did you make a comment on that?

Seamus Hennessy

Yeah we expect by the end of the year operating margins will break the year around the high single-digit and I think generally through the year. So probably fall general in line with what we saw in 2013 but we wanted to get some color that we’re going to continue to invest especially in the first half of the year in research and development and sales and marketing, as we continue to see the big market opportunity ahead of us.

Rich Valera - Needham & Company

Your 1Q guidance seems to imply essentially high single-digit operating margins, so am I to gather we shouldn’t really look for any leverage as we move through the year?

Seamus Hennessy

That’s probably good assumption.

Rich Valera - Needham & Company

And it just seems like to get that lack of leverage you would have to be maybe hiring at a very high rate given kind of the revenue trajectory. Is that the current plant to really be hiring at that kind of pace?

Seamus Hennessy

Yeah those quarters last year where we’re actually hiring close to 40, 50 hirers per quarter. In Q4 a lot of the hires actually accepted offers late in the quarter but we’ll start very early in Q1. So that will actually fall into Q1 and we added net through the year over 150 employees last year, so we have been able to hire that type.

Selina Lo

We see the growth in the future and right now that’s why we’re investing, still continuing to invest in our R&D and also there continues to be markets where we want to have more feet on the streets.

Rich Valera - Needham & Company

Sure, understood that makes sense. And then just with respect to 11ac. I was wondering, I didn’t want to break out any products specifically revenue by product line but just wondering if you give any sense of what kind of demand you are seeing for the 11ac product in the market. Have you actually sold much of it yet? And are you seeing the kind of significant performance improvement that some of your competitors are taking about with 11ac access points using 11 and 10 points and seeing still like 30% to 40% improvements in throughput despite having that mismatch on the end point versus AP.

Selina Lo

So why don’t you talk about the numbers and I can talk about the performance.

Seamus Hennessy

So in regards to 11ac, we are actually bidding 11ac into projects. I think what we’ll see is, it’s going to take time to ramp up and over the year and we’re still in the very early stages. But it didn’t have an impact significant any impact on business last quarter. But as we go through the year we’re bidding, we’re shipping products, we’re taking orders on 11ac, we’re not providing specific breakout of our guidance in regards to how much 11ac, but we now have a full product portfolio just like everybody else.

Selina Lo

And in terms of performance, depending on the test set up we see different levels of performance improvement over 11ac. I don’t know exactly what the competitors said but in general single client performance versus when you have a lot of clients aggregated the performance levels are different, the performance improvement levels. But overall we’re seeing a good step up in performance in 11ac even with 11 [indiscernible].

Operator

Your last question comes from John Lucia from JMP Securities.

John Lucia - JMP Securities

My question was actually on AC I guess I haven’t seen anything on your wealth side; do you have an AC offering that’s generally available or you just shipping into certain customers or how is that working?

Seamus Hennessy

We are shipping into, we are actually shipping into specific customers, we are actually shipping in to distribution. Right now we are taking orders on the books and.

Selina Lo

You get, I mean if it’s not on the website, it will get on the website fairly quickly. I think we’ve already launched this product.

John Lucia - JMP Securities

Okay. So, it is generally available right now for all your customers. Have you seen any effect competitively by not having that AC offering as quickly as your competitors, I know that they have noted they have seen a pretty good uptick with AC I just wanted, was curious to see if you have seen anything there?

Seamus Hennessy

In our core markets and if you look at the strength of our revenue even over the last two quarters our revenue has been healthy. It hasn’t impacted us from a revenue perspective and now we are on an equal footing with everybody else. So, no we haven’t seen this having impact on our verticals of core market.

Selina Lo

I think 11ac is still in the very beginning of its lease cycle and so I think it’s very premature to talk about share of 11ac or having 11ac affect any revenues. I think 11ac will provide a good replacement for some of the existing accounts but by and large customers, other than Greenfield customers I think a lot of people are cautiously looking at whether they want to wait for way 2 of 11ac. So, we don’t see any wholesale replacement of any customer in terms of replacing all their current access points or upgrading all their current access points to AC.

John Lucia - JMP Securities

Okay.

Seamus Hennessy

And the first generation of 11ac is one of the most expensive access points in the industry too as well.

John Lucia - JMP Securities

Okay, it make sense. I have one further question that’s still on the competitive front, we have been hearing that Cisco has been pushing Meraki a little more in last couple of quarters and they are growing nicely at a 100% year-over-year, do you compete with Meraki very often and if you do in what verticals you compete with them and have you seen any evidence of them picking up competitively?

Selina Lo

I think we haven’t really seen Meraki or any change in the competitive environment compared to the past few quarters. Meraki tends to be focused in the F part of the F&B and so we really don’t run into them very much and if we run into them, it typically is in the education segment in K-12. And I wonder if Cisco’s successor (Ph) was Meraki, I heard that their wireless revenue actually went down, I wasn’t on the call.

John Lucia - JMP Securities

Yeah, there wireless number was bad but they grew Meraki 100% in the quarter.

Selina Lo

Maybe it’s growing from their own internal business.

John Lucia - JMP Securities

Yeah, I assume the Meraki business is doing well but the rest of the business is not in terms of wireless piece. I just had that question on the competitive front. That’s it for my questions.

Seamus Hennessy

Thank you.

Selina Lo

Thanks.

John Lucia - JMP Securities

Thanks.

Operator

I will now turn the call back over to Selina Lo.

Selina Lo

Thank you everybody for joining us on this call and I look forward to seeing some of you at Mobile World Congress in Barcelona.

Operator

This now concludes today’s conference call. You may now disconnect.

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