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Ruckus Wireless (NYSE:RKUS)

Q1 2014 Earnings Conference Call

April 30, 2014 05:00 p.m. ET

Executives

Nicole Noutsios – IR

Selina Lo – President and CEO

Seamus Hennessy – CFO

Analysts

Jason Ader- William Blair

Ittai Kidron – Oppenheimer

Sanjiv Wadhwani – Stifel

Richard Valera – Needham

Brian Modoff – Deutsche Bank

Rajesh Ghai – Macquarie Capital

Mark Sue – RBC Capital Markets

Operator

Good afternoon. My name is Sony and I will be your conference operator today. At this time, I would like to welcome everyone to the Ruckus Wireless Quarterly Earnings Conference Call. All (Operator Instructions). Thank you.

Nicole Noutsios, you may begin your conference.

Nicole Noutsios

Thank you for joining us on today’s conference call to discuss Ruckus Wireless’ First Quarter 2014 financial results. This call is also being broadcast live over the web and could 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 or changing market 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 introduction, 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 and 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, 2014 our SEC filings are available on investor relation 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 the reconciliation of these non-GAAP financial measures, 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. Thank you for joining us today. I am excited to report that we achieved a number of business and financial milestones in the first quarter. We exceeded both our revenue and EPS guidance as well as our growth margin expectations. Our first quarter revenue with the record $75.1 million, an increase of 31% year-over-year and above our guidance of $71 million to $74 million.

Gross margin was 68.5% the highest in our history. Non-GAAP EPS of $0.05 per share also of our guidance of $0.03 to $0.04 per share. Seamus will discuss our financials and outlook later in the call.

We are seeing great traction in the service provider Wi-Fi market. In the most recently published Wireless LAN Vendor report the Dell'Oro Group identify Ruckus as the market share leader and service provider Wi-Fi in Q4 with the 25% share.

We believe that this demonstrates our strong technology differentiation and market momentum. Also, according to Infonetics' recently published survey of 25 service providers across the world, Ruckus was voted the most evaluated service provider at Wi-Fi supplier and the second most installed and recognized.

Our service provider business in Q1 was strong driven by expanded deployment by existing customers as well as new wins. We added 13 new service provider customers in Q1, brining our total count to approximately 116, 95% year-over-year growth.

Notable Q1 deployments includes (inaudible) with building communications infrastructure that will cover approximately 300,000 beds in (inaudible) quarters across U.S. military bases worldwide. This will require approximately 35,000 Wi-Fi access points.

(inaudible) selected Ruckus for the project because of the advantages of radio technology provides in coverage and in the ability to manage interference in diverse and dense environment.

A tier one MSO customer in the U.S. chose Ruckus as the supplier for its expanded SMBA managed service offering. Based on the resilient architecture anchored by our SCG, the customer’s network already supports thousands of Ruckus APs and is expected to grow to tens of thousands over the next few years.

This customer selected Ruckus for the scalability, multi-tenancy, ease of use and resiliency of the SCG. And Orange deploy one of the first HotSpot 2.0 network in Europe based on Ruckus technology, while our customer Time Warner Cable, launched HotSpot 2.7 service across their Wi-Fi network which they believe was the largest touch point enabled network in the U.S.

We expect HotSpot 2.0 deployments to accelerate throughout 2014 which will dramatically improves user experience and drives demand for public Wi-Fi service.

Now, let me turn to our enterprise business. We continue to grow market share. According to Dell'Oro Group’s (inaudible) vendor report published in Q1 we captured the number three shared position in the total wireless LAN market excluding SOHO in the previous quarter. We added over 3000 new end customers in Q1 bringing our total to more than 36000 world-wide.

We continued to execute in our core verticals of hospitality and education and extended our penetration into other important verticals. For example (inaudible) electronics in the retail vertical is deploying Ruckus in the stores because of the performance and ease of deployment and management of our solutions.

We also announced that the San Jose earthquake selected Ruckus to provide a wireless infrastructure for their new stadium based on the city of San Jose’s reference regarding their positive experience with our technology.

On the product front, we executed on three important programs; first we debuted our new cloud based anything at your service offering with the introduction of two Ruckus clouds services SPoT and Sam. SPoT are indoor location-based service provide (inaudible) analytics and support for real time mobility apps. It is ideal for retail, hospitality and public venues.

Sam, a cloud-based managed public Wi-Fi service, integrate all the necessary systems and software in the cloud to get public facing enterprises a simple way to provision, manage and monetize their Wi-Fi service. SPoT and Sams are available this quarter.

In addition, we have been enabling our large enterprise channel partners to deliver hosted WLAN services based on the SCG. For example Deep Blue Communications, a national managed service provider host the SCG in their data center to deliver controller-less wireless LAN service to a range of enterprise customers including hotel, shopping malls and other public venues.

The SCG’s capacity, resiliency and multi-tenancy support allow managed service providers to reduce CapEx and OpEx as they scale their service offerings. Second, we began shipment of our 80211ac access point for R700 and announced the first customer deployment by the Sejong Smart School in South Korea.

There is significant interest in market traction with the R700. This new dual band, three stream access point is capable of operating a full functionality using standard 802 Standard 802.3af power over Ethernet. We believe that this is one of our key competitive advantages.

The R700 is able to deliver all the functions of 802.11ac without requiring customers to upgrade their power over Ethernet switches.

The R700 also integrates our integrate our patented BeamFlex adaptive antenna on top of chip-based beamforming technology to deliver a accretive performance benefit giving approximately 30% better by directional performance versus the leading competitor when connected to 50 simultaneous client devices.

Third, we enabled our enterprise channel partners to expand in the S part of the SMB market with a new low end dual band 802.11 and Access Point, purpose built to address price sensitive, small businesses emerging markets and distributed enterprises with the large number of French [Ph] locations.

Combined with the cloud based SCG service the R300 enables us enterprise channel partners to expand their reach to businesses that require a lower cost of entry. The R300 is shipping now.

We believe that enterprise interest in our smart Wi-Fi solutions has never been stronger. Enterprise customers are choosing Ruckus because of Ruckus class Wi-Fi technology. They want the enhanced reliability, consistent high performance and extended coverage enabled by Ruckus smart Wi-Fi.

Also (inaudible) to our success in the enterprise, it’s our ability to retain channel loyalty. And encouraged by the positive feedback we have been receiving from our channel partners on the potential opportunities they see with our new products and service offering.

As you can see, we are busy quarter having executed on both financial and product front. The SCG is on track, we believe that there is a strong demand for our new cloud offerings combined with our expanded AP portfolio we give our service provider customers and enterprise channel partners more business model options and expand that market reach.

We see substantial market opportunities ahead and believes that we are well positioned to take advantage of them. Now I will turn the call over to Seamus to discuss in more detail of financial results for the first 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, employer tax in connection with stock option exercises, nonrecurring legal settlements and related tax effects of these non-GAAP financial measures.

All share accounts will be on the diluted, weighted average share basis. The full reconciliation of GAAP and non-GAAP information is contained in our financial results, press release issued earlier today.

As Selina mentioned, we had a strong quarter exceeding our revenue, gross margin and EPS guidance. Q1 revenue was a record $75.1 million, an increase of 31.1% year-over-year and 2.8% sequentially and our further revenue guidance of $71 million to $74 million. Product revenue was $70.1 million of 31.4% year-over-year and 2.3% sequentially, services revenue with $5 million of 26.6% year-over-year and 10.3% sequentially.

In Q1 America's revenue grew 59.1% year-over-year and 12.4% sequentially and represented 54% of total revenue as demand for our product was strong with both enterprise and service provider and customers.

Our ENBA revenue grew 28.4% year-over-year, decreasing 5.3% sequentially and representing 26.7% of total revenue.

In Q1, our revenue in Asia Pacific including Japan decreased 10.3% year-over-year and 8.3% sequentially and represented 19.3% of total revenue. Excluding Japan, APAC was essentially flat year-over-year and up 12.5% sequentially.

Japan revenue will fluctuate depending on timing and volume of orders from the large-end customers. Three of our North American distributors accounts in total for 39.6% of revenue in Q1 accounting for 14.8%, 12.9% and 11.9% respectively.

We continue to remain diversified and had no end customer accounted for 10% or more of revenue in the quarter. Gross margin in Q1 was 68.5% up 60 basis points year-over-year and up 80 basis points sequentially and slightly above our long term model of 66% to 68%.

Product gross margin was 69.8%, up 20 basis points year-over-year and up 90 basis points sequentially primarily reflecting improved economy of scale from manufacturing and operations.

Our service margin was 49.3%, up 360 basis points year-over-year and down 40 basis points sequentially. We expect gross margin in the coming quarter to be within our longer term model of 66% to 68% as we launched new products and services.

Q1 operating expenses were 44.2 million up 58.8% of revenue up 4% sequentially as a result of continued planned investment in research and development and sales and marketing but offset by lower litigation cost in the quarter.

As a percentage of revenue operating expenses were down 180 basis points year-over-year and up 70 basis points sequentially. Our operating profit in Q1 was $7.2 million or 9.7% of revenue, an increase of 240 basis points year-over-year and up 10 basis points sequentially.

Our non-GAAP tax rate was 37.8% in Q1 and with higher than expected due to the non-renewal of the federal R&D tax credits. While our non-GAAP tax rate is forecast to be approximately 37%, our effective cash tax rates is expected to be less than 5% as we do not expect to pay any federal income tax in 2014 or 2015 due to NOL's resulting from stock compensation.

Non-GAAP net income for the quarter was $ 4.5 million or $0.05 per diluted share compared to $2.9 million or $0.03 per diluted share in Q1 2013. We had $95.5 million weighted average shares outstanding on a non-GAAP diluted basis in Q1. On a GAAP basis, net income for the quarter was $0.03 million or $0.00 per diluted share which was the same as Q1 2013. We had $93.3 million weighted average shares outstanding on a GAAP diluted basis in Q1. Total headcounts at the end of the quarter was 850, an increase of 26 in Q4.

As we enter Q2 2014, we plan to continue to invest for future growth for mostly in research and development, sales and marketing.

Turing to the balance sheet, we finished Q1 with cash and cash equivalents and short-term investments in restricted cash totaling $161 million, an increase of $4.2 million from the prior quarter.

Cash provides by operations in Q1 was $3.6 million. We ended Q1 with $25.3 million in accounts payable and accrued liabilities, a sequential decrease of $0.1 million, and accrued compensation of $13.5 million, a sequential increase of $1.8 million and $49.8 million of cash receivable, the sequential increase of $5.2 million. The average day’s sale outstanding was $60, within the target range of 50 to 60 days.

Now let me turn top our guidance for the second quarter of 2014. We expect the second quarter 2014 revenue to be in the range of $78 million to $80 million given our strong performance in Q1 and Q2 guidance outlook, we expect to deliver stronger growth in the fiscal 2013.

For 2014 we now expect to deliver revenue growth of 24% to 25% year-over-year. We expect second quarter non-GAAP earnings to be $0.04to $0.05 per share using approximately 95 to 97 million weighted average shares outstanding on a non-GAAP diluted basis.

We expect gross margins to be within the range of our long-term model of 66% to 68%, our 2014 forecast of non-GAAP tax rate is now expected to be approximately 37% due to the non-renewal of the federal R&D tax credit.

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

Question-And-Answer Session

Operator

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

Jason Ader – William Blair

Hi, guys. Couple of questions, Seamus I think you had made a comment earlier maybe it was last quarter about the operating margin being high single digits when existing the year end is that something-- am I right on that?

Seamus Hennessy

Yes, we expected end to the year on the high single digits. We will continue to invest specially in the short term in sales and marketing and R&D and continue to what we discussed last quarter earning call.

Jason Ader – William Blair

Okay. So even though you had a nice performance this quarter, you still expect I mean, I guess based on next quarter it's probably going to be a little bit lower operating margin relative to your guidance and then in the second half of the year you think it's going to be kind of in the same range that it was in the first half or do you think it could actually be down from the first half?

Seamus Hennessy

We have over performance especially in Q1. We had positive performance in gross margin and given the fact that we exceeded revenue guidance that enabled us to actually have a positive benefit to operating margin but we are kind of continuing to expect that as the year go on especially in the middle quarters Q2, Q3 we are investing pretty heavily in R&D, in sales and marketing because of the market opportunity ahead of us and by the end of the year we will back to high single digits.

Jason Ader – William Blair

Okay. Great and then what’s your sense on the gross margin, I know for the next quarter you talked about 60 to 68 but where do you think, in particular as you can go through product and service gross margin, service and gross margin I would think over the time is going to go higher progress margin I would think overtime might go little bit lower just because of the way the market is developing and some of the opportunities you have maybe you want to use price a little bit to make sure you can capture some of the larger opportunities but any color on sort of the let’s say next 12 to 20 months on both product and service gross margin.

Seamus Hennessy

I think of the service side, we are launching some new services right now like SPoT and Sam which have upfront cost associated with launching those services but longer term we expect services gross margin to start picking up on the product size just immediate feature. We are launching new products especially our AC product line, the material is slightly higher at the start but as volume built it comes down over time so as we refresh the product line there will be a short term impact on gross margins. So we feel comfortable with our 60% to 68%. As you have seen over the last number of quarters, gross margin has continuously improved then there is one leverage that we focus on the lost but in the short term especially in Q2 we are looking at 60% to 68%.

Jason Ader – William Blair

Okay. The last one from me just on the E-rate program for K-12 schools, one of your competitors talked about some funding being kind of hold up for E-rate around Wi-Fi or any kind of priority to equipment, it could be Wi-Fi – I was wondering if you feel that’s going to have any impact on your business?

Seamus Hennessy

That’s all been taken into our guidance.

Jason Ader – William Blair

Okay. Thanks guys.

Seamus Hennessy

Thanks, Jason.

Operator

Your next question comes from the line of Ittai Kidron from Oppenheimer.

Ittai Kidron – Oppenheimer

It’s Ittai, hello everyone and congratulations on a good quarter.

Seamus Hennessy

Thank you.

Ittai Kidron – Oppenheimer

I guess Selina I wanted to talk about the service provider, you stated in those comments and clearly you were very bullish and nice edition of carrier count this quarter on a year-over-year basis. Can you talk about specifically the cable space, I mean clearly your exposure on Time Warner I mean has made some people nervous but as you look at the cable opportunity as a whole and as you look at the progression of the year and the year ahead, are you becoming more bullish, less bullish aren’t changing your opinion as to potential in that business, in that business area?

Selina Lo

So for few quarters now we have been identifying the cable MSOs as one of the strongest segments within top segments within the service provider business and that continues to be the case. Time Warner Cable has continued to be a strong customer of ours and I think that the opportunity is really positive ahead of us and also the MSO spending on Wi-Fi it's not just limited to North America. We are seeing that across the world in Europe, in Latin America and in some parts of Asia. So we are very bullish on the MSO market.

Ittai Kidron – Oppenheimer

Very good and regarding the potential of the disruption given giving Comcast, are you now feeling more comfortable that your business whether it would be in Time Warner on a large MSOs would be fairly strong for the year?

Selina Lo

Taking a look at the large MSOs in North America we feel very comfortable, very positive.

Ittai Kidron – Oppenheimer

Very good and then on the enterprise side, great addition customer, addition to quarter, can you talk about the competitive environment what you are seeing out there, I mean clearly it didn’t seem to have impacted you this quarter from pricing standpoint but you know where I go in public maybe there is another more notable kind of vendor out there in the space, so what do you seeing there from, the (inaudible) the world from our competitors standpoint right now.

Selina Lo

So the competitive landscape despite all the noise, hasn’t really changed in the enterprise space. We continue to see Cisco and Aruba. We are not– we see Ehrhardt in education and only in education and it has not become stronger or weaker as a result of their IPO. Ubiquity we encountered them in the segments of the market that are just extremely price sensitive, for example in emerging market. But we have been saying the same thing for the last few quarters and the competitive environment hasn’t really materially changed and I think you can look at our gross margins and our revenue growth as two indications that we have been quite competitive in the space.

Ittai Kidron – Oppenheimer

Got it. Very good. Then lastly same as before open up the floor, can you give us a little bit more color from a book to build kind of a standpoint how do you feel kind of heading into the month of April from a booking standpoint, from a business flow perspective?

Seamus Hennessy

Yes, we don't provide book to build. We never have but we feel good about where we are in the quarter and we feel good about the guidance we provided to the team.

Ittai Kidron – Oppenheimer

Okay. Excellent. Good luck guys.

Seamus Hennessy

Thank you.

Selina Lo

Thank you

Operator

Your next question comes from the line of Sanjiv Wadhwani from Stifel.

Sanjiv Wadhwani – Stifel

Thanks so much. Congratulations on a good quarter. Couple of questions just on the 802.11ac product release, that was sort of officially out in the middle of March. Selina can you talk about what kind of momentum you are seeing over there and sort of customers reception in that area and then qualitatively it looks like service provider did really well in the quarter but I was wondering if you could provide some more granularity whether between the service provider and enterprise out of the business which ones are sort of did better on a sequential basis then I have one follow-up question. Thanks.

Selina Lo

Okay. Well first let me talk about 802.11ac. We see a lot of interest build up and we do have good backlog on that product, for the enterprise versus service provider, quarter-to-quarter because of the lumpiness of the service provider space if we just talk about quarter-to-quarter there is always variation but as a long term trend we continue to see a lot of strength in the service provider space and the positive is that actually our enterprise markets momentum has been very-very strong. So as a percentage service provider to enterprise, there is noting that changed from what we gave as an annual guidance.

Seamus Hennessy

Yes we saw strength about both markets in the quarter.

Sanjiv Wadhwani – Stifel

Okay. And then one last question Boingo deployment that you have with the military bases worldwide, how far are you in that deployment our checks had shown that sort of just getting started, is that true and sort of when does that get completed.

Selina Lo

We are in the early phase.

Sanjiv Wadhwani – Stifel

Is that 2014 opportunity mainly or is it sort of spill over and into 2015 also?

Selina Lo

I think it's going to depend on how fast Boingo is going to deploy but so far I have been going according to plan.

Sanjiv Wadhwani – Stifel

Got it okay. That’s helpful. Thanks so much.

Operator

Your next question comes from the line of Richard Valera from Needham company.

Selina Lo

Hi, Rich.

Richard Valera – Needham

One of you could write an update on your SCG, what kind of traction you are seeing there and how that sort of perhaps helping to leverage some of your bigger sales?

Selina Lo

So the SCG has been doing very well. It has been instrumental to every new service provider sale and actually even some of our existing service providers that have been using the zone director are – have been testing the SCG and are moving over to the SCG and as I said in my discussion earlier, we are now also enabling larger enterprise partners to use the SCG as a managed service platform and so we are – the SCG is the very strategic program for us and so far it's been on track.

Richard F. Valera – Needham

Great. And then when you were discussing, I think actually Seamus was discussing gross margin. He mentioned that the 11ac product had a higher biller materials and I think seemed to be implying with that that might cause hasn’t have a lower gross margins. So I was just trying to understand if that was the case or ultimately you will pass through, that high biller materials from higher prices and sort of maintain gross margin 11ac.

Seamus Hennessy

Let me correct it. It's actually when a product is first launched and specially with newer chip set typically as higher biller materials but as a product actually it reaches volume, the biller material typically comes down and so that’s why on the short term we expect gross margin especially in Q2 to trail down between 60% to 68% range. So it's more got to do with the newness of the product versus anything else.

Richard F. Valera – Needham

Okay. that’s helpful clarification. And then with respect to the two new products you mentioned SPoT and Sam, understanding very pre-early stages there but can you give us any sense of when you would expect them to contribute materially revenue?

Seamus Hennessy

Yes, I can address that. So we are actually going to -- those products are going to be available this quarter and they are both subscription based services, so revenue will get amortized over the subscription period anywhere between one and three years depending on what the customer signs up but as an overall, while it's a very important to us and we are not breaking out specific product revenue but we are seeing the traction and interest in that product to be very-very high actually both products to be very-very high at this stage.

Selina Lo

Absolutely. Our channels are very-very excited about both programs.

Richard F. Valera – Needham

That’s great and will that revenue be recognized in the service report line or in the product line?

Seamus Hennessy

We haven’t made a final determination on that yet. But probably product.

Richard F. Valera – Needham

Okay. Very good. Thanks very much for taking the question.

Operator

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

Brian Modoff - Deutsche Bank.

Hi guys. Can you talk about North America? You had very strong year-over-year growth in North America. Can you give us some, little bit more granularity around the drivers of obviously it’s awesome strength among MSL but can you talk about enterprise strengthen and any particular vertical that we are doing roughly in the quarter and just also on carrier side some more granular around the drivers in that. Thanks.

Selina Lo

So I will start and you can jump in. so in the North America market, hospitality continues to be very strong and education is typically gives you in three other strongest quarters for education. We are also definitely seeing momentum in other verticals including warehousing and logistics, public venues like the stadium and also in retail. So I think in general there is a strong momentum in North America and Asia actually is – we are seeing continue recovery of the China business and that has been upward impact on Asia.

Seamus Hennessy

Yes across the board we definitely saw strength, especially in the enterprise side and all the vertical specially our old one and even the new ones that Selina talked about and on the service provider side, service provider was definitely very strong in North America especially among the cable operators in the most recent quarters.

Selina Lo

Yes and service provider business in general, some of geographic standpoint we see the strength in North America, in parts of Latin America as well as in Southeast Asia.

Brian Modoff – Deutsche Bank

Perfect and then can you talk a little bit about do we expect there should be as a (inaudible) shipment this quarter?

Seamus Hennessy

We are not providing specific product, and I cannot break out at this time. But we do expect that ac will be significant this quarter. We are seeing significant interest in the ac product line especially in the education market.

Brian Modoff – Deutsche Bank

Perfect. Thank you.

Operator

Your next question comes from the line of Rajesh Ghai from Macquarie.

Rajesh Ghai – Macquarie Capital

Congratulations from my side too. Selina, I wanted to get some more color on the two new products R300 and Sam that you have announced, how do you positioned them versus your current product set and how do you prevent those production cannibalizing your current direct sale?

Selina Lo

Yes. Good question. So first let me talk about the R 300. The R 300 is defined to purposely design and packed to go after small businesses and emerging markets. So from a feature standpoint it is a design to for that purpose. So we feel comfortable that it's not going to cannibalize our current product line and Sam is a service base offering and in fact it is very positive offering because it addresses some of the – the people who want to start buying base OpEx versus CapEx, Sam is the perfect solution for them. So our channels are seeing it as an additive offering from Ruckus and they don't see it at all as a competitive offering that’s going to have any cannibalization impact. So when that it, by combining the R300 and Sam now we can really go after that low end segment that really want a low cost of entry. So I think that this is the expansion, market expansion.

Rajesh Ghai – Macquarie Capital

That is helpful and turning to China, so we had I think China mobile come out and say that they would expand CapEx by 24% in 2014, my question is how much do you think from your perspective that could be Wi-Fi, how much could of that could actually accrue to US base vendors and how do you handicap your chances of seeing the Chinese business become as important as it was in 2012?

Selina Lo

Well we have said before with the Chinese operators. We don't just broadly go after every Wi-Fi project they have. There are a lot of Wi-Fi projects but they have that, basically at price point that we walk away from. So while they may increase the overall CapEx spending I don't think that it will materially impact the percentage of revenue that we see but we do overall see the free Chinese carries increasing in their spending towards Wi-Fi in our within the Ruckus portfolio.

Rajesh Ghai – Macquarie Capital

Great. And my last question Selina I will follow-up to your commentary around 11ac biller material and gross margins, so we had, I think (inaudible) may reduce prices of the 11 ac access points recently. Do you think there is something that you may you have to follow suit and if that – if you do so, there is – what is the risk of gross margin compression as a result, thank you.

Seamus Hennessy

So, we actually have programs actually going on right now to actually address the competitive nature of 802.11ac.

Selina Lo

So let me supplement what Seamus said. First of all, historically Ruckus has never been the lowest priced vendor in the market. And we believe that we offer the best price performance. So for customers that are not just looking at price, we think that we are absolutely very, very competitive, but particularly in the education space we have had programs for education, for the education market that will address the competitive pricing required for that particular space.

And historically, you know, (inaudible) aren’t the first ones to slash prices on high-end products, and we have been able to manage that very well. So I don’t see any difference.

Rajesh Ghai – Macquarie Capital

Great. Thank you so much.

Operator

Your next question comes from the line of Mark Sue from RBC Capital Markets.

Mark Sue – RBC Capital Markets

Thank you. Good afternoon.

Selina Lo

Hi Mark.

Mark Sue – RBC Capital Markets

Hi, I was wondering, if I look at the history, so Ruckus has had an early lead with your antenna design and integration and some competitors are trying to add that with their directional antennas as well with 802.11 ac, maybe the thoughts to continue differentiation with BeamFlex and how that is resonating and just the other things that you are doing from a technology point of view to continue to gain market share that will be helpful?

Selina Lo

Right. So first of all I think this we should spend a little time on this. With 802.11 ac there is a technology that is part of it that is called transmit beamforming, and that adds to the performance that of 11 ac. That is facing -- that is just signal processor inside the chip and it is available on all the chipsets, and we take advantage of it as much as any other vendor does.

On top of that our smart antenna technology adds a major advantage in multiple areas. One, with 11 ac transmit beamforming essentially people are still using omnidirectional antenna. So even though the signal is – the signal processing can, you know, make a signal stronger or try and do some cancellation of the noise, at the end of the day the transmission is still based on omnidirectional antenna, which wastes a lot of energy and also cause interference, whereas with Ruckus with our BeamFlex technology with all the various antenna configuration, we actually for every packet we configure the antenna to steer our signal towards the direction where the signal should go – should be received at the highest performance.

That is one. Secondly, with BeamFlex we calibrate on every packet we receive, we calibrate the effectiveness of the antenna that is used. So in a dynamic – in a very dynamic environment, we actually can in real-time (inaudible) on the throughput every antenna configuration. And those are things that our competitors don’t offer. But on top of that it is not just the antenna we have a slew of radio-based optimization that we lump under BeamFlex. Things like dual polarized antennas to adapt to the way handsets and mobile devices kept – the orientation kept moving.

Things like, you know, dynamic channel selection that is again based on real time throughout based feedback. So things like that that are all lumped into the BeamFlex umbrella are things that historically have been giving us the performance adder and with 11 ac with our testing, they continue to.

Mark Sue – RBC Capital Markets

Okay, and that is very helpful. and that ties into that, I guess that is for Seamus is that since it is a carrier Telco cable centric, the industry margins are generally lower, but you have actually been able to continue to improve upon your gross margins, I guess the value prop is as it relates to this is it should help over the long term as you get the cost savings to maintain those gross margins?

Seamus Hennessy

Absolutely, and we get commonly the scale because we’re typically selling the same products to border enterprise and the service provider, which can help on both sides.

Mark Sue – RBC Capital Markets

Okay. That is helpful. Thank you and good luck.

Selina Lo

Thanks a lot Mark.

Seamus Hennessy

Thank you.

Operator

And the final question comes from (inaudible).

Unidentified Analyst

Nice quarter. I have a question Selina on the carrier to get your opinion, some of the carriers you have done so well on the MSO side, so on the carrier side do you think the fact that they are so focused on LTE and one of the reasons perhaps, we haven’t seen a ramp or acceleration in the adoption of Wi-Fi and could you probably add some color to that and explain that a little bit better for me?

Selina Lo

Yes. So on the – when you say carrier, I assume that you are talking about the mobile operators, the tier one mobile operators.

Unidentified Analyst

I am, yes.

Selina Lo

Yes. So definitely LTE does have some impact towards the mind share that goes to Wi-Fi. However, we also see for example AT&T has stood up and said, you know, that Wi-Fi is a big part of their long-term strategy. So it varies carrier by carrier as to how they are looking at Wi-Fi. In fact we have one operator that is currently in although asset point right mix to their small-cell on power poles and so I think that overall the focus on small-cell helps us but it depends on the carrier as to where they put their budget.

Unidentified Analyst

Okay. Thank you.

Operator

This concludes today’s conference call, have a great day.

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