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Extreme Networks, Inc. (NASDAQ:EXTR)

F4Q10 (Qtr End 06/27/10) Earnings Call Transcript

August 2, 2010 5:00 pm ET

Executives

Bob Corey – CFO, Acting President and CEO

Mike Seaton – Vice President, Worldwide Sales and Services

Analysts

Douglas Ireland – JMP Securities

Rohit Chopra – Wedbush Morgan

Doug Whitman – Whitman Capital

Ryan Hoy [ph] – William [ph]

Steve Bowman – Lazard Capital

Operator

Welcome back to the Extreme Networks 2010 fourth quarter conference call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given to the question-and-answer session. On the call today from Extreme Networks are Bob Corey, CFO and acting President and CEO and Mike Seaton, VP, Worldwide Sales and Services

.

As a reminder this conference is being recorded today August 2, 2010. This afternoon, Extreme Networks issued a press release announcing the company's financial results for the fourth fiscal quarter of 2010. A copy of this release and slide presentation of the supporting financial materials are available in the investor relations section of the company's website, at www.extremenetworks.com.

This call is being broadcast live over the internet and will be posted on the Extreme Networks' website for replay shortly after conclusion of the call.

The company has asked me to remind you that this conference call contains forward-looking statements that involve risks and uncertainties including statements regarding the company's expectations regarding its financial performance, strategies, growth of customer bandwidth demand, development of new product, customer acceptance of the company's product, customer spending and economic conditions and the company's markets.

Actual results could differ materially from those projected in the forward-looking statements. As a result of certain risk factors including but not limited to a challenging macroeconomic environment both in the United States and overseas.

Fluctuations and demands for the company's products and services in a highly competitive business environment for network switching equipment, the company's effectiveness in controlling expenses and the possibility that the company might experience delays in development of new technology and products, customer response to new technology and products, the timing of any recovery in the global economy, risks related to the pending or future litigation and dependency of third parties for certain components and for the manufacturing of the company's products.

The company undertakes no obligation to update this information on the conference call. More information about potential factors that affect our business and financial results is included in the company's filing with the Securities and Exchange Commission. Throughout the conference call, the company will reference both GAAP and non-GAAP financial results. The company has provided a reconciliation table for the GAAP to non-GAAP and the information in the table that accompanies the press release on its website.

Please go to the investor relations section of the company's website, at www.extremenetworks.com.

In addition, all announced results are preliminary and maybe subject to change when the review of the fiscal quarter is concluded and or form 10-Q is filed.

I would now like to turn the call over to Mr. Bob Corey, CFO and acting president and CEO of Extreme Networks.

Bob Corey

Thank you, operator. Welcome to the Extreme Networks’ Q4, fiscal 2010, earnings conference call. I am joined today by Mike Seaton our new VP of Worldwide sales and Customer Support. I will begin with some brief comments on the quarter followed by more detailed comments by Mike regarding customer wins and market dynamics. Then I will summarize and provide guidance for our Q1 fiscal 2011 quarter, along with our full-year outlook for fiscal 2011. We will then open up for a Q&A.

Our goal is to provide more time for questions and answers and less time for reading our scripts. Additionally, we posted a slide presentation on our website at www.extremenetworks.com under investor relations that I hope you will find useful. As a reminder, all of my comments will be non-GAAP, except for the revenue and a number of common shares.

Non-GAAP results excludes stock-based compensation, restructuring charges, and costs associated with litigation settlements. There is a reconciliation from non-GAAP to GAAP, financial results in the slide presentation under investor relations on our website, that I mentioned previously.

Once again, before I go any further, I want to thank every employee in our organization for their dedicated efforts and commitment which contributed directly to our performance in Q4, and throughout our last fiscal year.

Okay. Based upon strong sales in Europe and North America, we exceeded our initial guidance for the quarter of 82 to 85 million of total net revenue reporting total net revenue of 85.5 million. We also were at the high-end of our earnings guidance, with net income of 6.3 million, or $0.07 earnings per share.

Mike will talk about customer wins and the optimism in our markets later in the call.

During Q4, we continued to perform and improve our operational execution while reporting 85.5 million of total net revenue showing growth of 9% quarter-over-quarter, and 5% year-over-year. With regard to product revenue by geography, the Americas reported 28 million for the current quarter and that's up 17% sequentially and up 11% year-over-year.

The Americas showed increased deal size, especially in the education market and a record sales quarter in our wireless product, as the acceptance of our next generation wireless solution powered by our partnership with Motorola and the (inaudible) was especially well received in the education market.

EMEA product revenue posted $32 million in the current quarter, which is up 22% both sequentially and year-over-year. EMEA saw stronger service provider sales and a return to more normal order linearity in the fourth quarter.

Asia-Pacific posted 10.6 million of product revenue, which is down 18% sequentially, and down 21% year-over-year. Asia-Pac was impacted by lower sales in Korea and India as customers delayed large purchases, some of which we expect to close in the first half of fiscal 2011 and soft demand from a partner in that region. Across the globe we continue to add new customers, and closed 27 new customers with deal sizes above $100,000.

Commenting on the mix of enterprise versus service provider revenue, service provider sales in EMEA ticked up while America was sequentially lower due to large order that we received in Mexico in Q3. Consequently, the mix for the quarter was a slight drop in service provider revenue representing 25% of revenue, down from 28% of revenue sequentially.

Our book-to-bill for the quarter was slightly below one because as planned, we had reduced backlog going into year-end in Europe.

As expected our gross margin percentage for the quarter was 57.4% up about a half a percent from Q3, excluding the benefit of the impact of a nonrecurring $1.1 million credit from a contract manufacturer we recorded in and realized in Q3 and helped by lower material costs as a percent of revenue. Discounting was essentially unchanged quarter-over-quarter.

Operating income was 5.6 million, or 6.6% of revenue, and, again, was the strongest quarterly performance in over three years.

EBITDA for the quarter sequentially increased to 6.9 million, reflected continued improvement in our operating execution and was a significant improvement over the 4.7 million of EBITDA in Q4 last year.

Cash investments increased to 132.4 million, up 4.5 million in the quarter. Again, reflecting continued improvements to operating performance and of course, we still have no debt. Also, after completion of the quarter, we successfully converted the full value of our investments and auction rate securities into cash of approximately 25.3 million.

DSOs and accounts receivable increased slightly to 45 days from 43 days in Q3, and from 42 days in Q4 last year. Inventory was down slightly to just under 22 millions we continued to invest for growth, and see improvements in our supply chain.

EBITDA for the year was 15.6 million, reflecting continued improvement and operational execution in the last three quarters of last fiscal year. Cash flow for the fiscal year excluding 4.6 million of restructuring costs was 13.9 million positive, again, as operating performance continues to improve.

We exited the year with 740 regular fulltime employees compared to 786 a year-ago.

Total deferred revenue was 47.9 million on the balance sheet. That's up from 45.2 million in Q3. This is mainly due to strong shipments into our distribution channels to meet end user customer demand.

With that I will turn the call over to Mike Seaton our new Vice President of Worldwide Sales and Customer Support. As you will recall in mid June we combined worldwide sales and customer support under one senior executive. The objective of the change was to increase the focus on revenue growth and customer success.

Mike is a proven leader and is focused on customer, allows him to do an outstanding job in leading our customer support organization, to where it now makes sense to bring it under a single global sales and customer support umbrella.

Under a combined organization, Mike will set the course to continue our drive to revenue growth, as well as customer success.

I am very pleased to introduce Mike Seaton. Mike?

Mike Seaton

Thanks, Bob. I am delighted to be here to discuss Q4 wins and market dynamics. But before I do, I would like to spend just a few minutes on our combined sales and customer support organization.

As Bob mentioned during the quarter, we teamed up our successful sales team, with our group of outstanding services professionals. The marriage of these two customers and partner facing organizations will enable us to be maniacally focused on our customers, our partners, our stakeholders and our employees. Our mission is to delight customers. Everything else follows.

Our sales team is focusing on real business issues and providing solutions that advance the customers' businesses. The services we provide continue to evolve as we find new ways to satisfy our customers helping them get running, stay running and improving the value of their technology investment.

Together in this new single organization, we will benefit our customers by maintaining our relationship with them throughout their life cycle. I believe we have already seen evidence of this in the results Bob mentioned overall. And I thought I would take just take a few minutes to highlight some particular examples of where customers in each theater of the world, in each of our target markets have voted by awarding Extreme and its partners their business.

Let me start with the 27 new customers that trust in our vision, each investing more than $100,000 in Extreme’s solutions. They span the three geographies and all of our markets. In the education market, we find many customers that understand they cannot rely on the status quo. Tennessee Tech University is an example selected Extreme for its high performance secure and reliable campus network. This is just one example of how our converged campus portfolio is winning in the market as other higher education, higher education and K through 9 customers took advantage of our wired and wireless solutions during the period.

Bob mentioned the uptick in our next generation wireless solutions based on the Motorola technology and partnership and customers truly believe the integration of wired and wireless not just at the switching level but for administrative, simplicity and identity management in the future. They are investing now based on our vision and the investment protection afforded by our portfolio.

This in combination with what we hope constitutes a recovering economy in the US is the basis for our belief and the opportunity here.

We are hopeful for continued growth in the EMEA market even with the economic issues in the South and the UK. As the northern and central countries continue to move projects forward, which we saw a in the results of Q4. Clearly Asia-Pac, Japan did not meet our initial expectations as Bob noted with softness in Korea and India.

However we have and will continue to invest in these critical markets and across the geography with additional sales headcount focused on both our customers and our channels there.

In fact, we have hired sales personnel in each of the regions given the optimism for growth of our sales leadership team.

The environment remains competitive. We see our competitors in deals approaching our partners and our people. No question this market has good players, but customers understand our advantages and the high performance, innovation, resiliency and the true benefits of our singular operating system ExtremeXOS and the investment protection we offer that makes our price performance and overall real cost a leader in the industry.

Our partners also understand we afford them an opportunity to be a true advisor to their customers with our extensible and solid portfolio. And both our tenured and new employees are energized by the focus, drive and support of the entire company. They see it as a great place to work and deliver real value to their customers.

Our announcement at Interop around data center are indicative of our focus on this increasing market for Extreme and our ability to innovative and win. Specifically our unique differentiation in the virtualization space and leading position for 40 gig capability being added to both our stackable and chassis products has captured the imagination of many partners and customers.

In fact, one very large high-tech manufacturer chose us for the proper resolution for the global data centers around the world based not only on the vision but the product available today from Extreme.

The Austrian Ministry of Interior also chose Extreme Networks due to reliability, performance and our green footprint and of course, ease of management. Quoting this customer and I quote, “as we are responsible for the national security in Austria we require that our IT infrastructure and data centers meet the highest requirements addressing reliability, high availability, and performance” end quote. A true testament to the great products, services and the partners we have in this space.

And of course many customers go across solutions to really enhance their businesses with technology. Recommending and delivering solutions that enable businesses to excel is the vision of our sales and customer support organization.

The Limited is an example of a customer that is taking advantage of our technology across the wired and wireless world as well as our data center portfolio to enable access to mission critical applications the way their employees require. Customers in a very dynamic gaming industry are also investing in how Extreme solution, a solution aware of identity, location and presence can support their customer intimacy business model and enhance policy and compliance in their enterprise.

In closing, I would like to come back for a minute to the education market and link our largest sale of the quarter to our maniacal focus on customers by our newly combined sales and customer support organization.

Georgia State University, a long time Extreme customer once again chose Extreme for their data networking needs. They did so for many of the technology reasons I have mentioned already and overall value of our solution. But also, for the consultative account team that has consistently cared for them over the years and the dedication and resolve of our services team as well as that from the entire company. A true testament that our mission of delighting customers is, in fact, the right one.

I am excited about the opportunity ahead and look forward to working with all of our associates across our sales and customer support organization to delight our customers, support our partners and grow our businesses together.

Back to you, Bob.

Bob Corey

Okay. Thank you, Mike. In summary, we continue to execute well in Q4. And see signs of improved sales momentum. We anticipate that expenditures on networking will continue to increase over the remainder of this calendar year and throughout 2011.

Market forecasts indicate that the switch market will grow at about 7% to 8% over the near term and our goal is to grow faster than the market by taking market share. Accordingly, we are increasing our investments in sales teams in geographic areas where we see an opportunity to grow revenue. We have begun the recruiting and we will see many of these new sales teams join us throughout 2011, and many of have actually joined as we begin 2011.

The competitive landscape continues to change and evolve while remaining strong, particularly in the US. We see this as benefiting Extreme, as an opportunity to expand our partnerships, and grow our customer base by providing high performance innovative products and superior services to help ensure our customers' and partners' success.

I will now turn to guidance for Q1 and overview comment for fiscal 2011.

As a result of the signs of improving macroeconomic climate and increased sales momentum, we anticipate Q1 revenue to be between 81 and 84 million reflecting an increase in product revenue of 30% to 36% increase over Q1 of last year and a seasonal decrease of 2% to 6% of Q4. Further, we anticipate the gross margin percentage being between 57 and 59% and operating income in the range of 3.5 to 6 million resulting in earnings per share of $0.04 to $0.06 per share fully diluted.

Again, based upon the continued strengthening of the global economy, and the strength of our current product portfolio, we anticipate that our product revenues could grow in excess of 12% for the fiscal year 2011.

As I said last quarter, we continue to closely manage our operating expenses, while selectively investing for revenue growth to accelerate earnings and cash flow and gain market share. Hiring of the additional sales teams is underway and we're focused on growing revenue as we enter fiscal 2011.

However, we will continue to concentrate on product development, by continuing to invest in bringing new innovative products to market. We are focused on making our customers and partners successful and increasing shareholder value.

With that, I am happy to open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) We have a question from Douglas Ireland from JMP Securities.

Douglas Ireland – JMP Securities

Hey Bob.

Bob Corey

Hey, Doug, how are you doing?

Douglas Ireland – JMP Securities

Terrific thank you. Congratulations on – excuse me, meeting expectations for another quarter.

Bob Corey

Great, thank you.

Douglas Ireland – JMP Securities

I am sorry just a little house keeping number. I missed the stackable versus modular numbers.

Douglas Ireland – JMP Securities

We can look that up real quick. So, that’s in our charts that are on the web page so –

Douglas Ireland – JMP Securities

Yeah, you know, it is a graphic but it doesn't have any numbers.

Bob Corey

Okay.

Mike Seaton

It was 75-25.

Bob Corey

75-25

Mike Seaton

Stackable to chassis.

Bob Corey

Stackable to chassis.

Douglas Ireland – JMP Securities

Okay, great. Thank you. I am sorry little scratch in my throat.

The obvious question here, can you talk a little bit about what is going on with your activist investor?

Bob Corey

You're referring to Rameus [ph], right?

Douglas Ireland – JMP Securities

Yeah.

Bob Corey

Or at least I presume you're referring to Rameus. They made a public filing. And we filed an 8K I guess and did a press release in response to that. And all I'm able to say at this time is that, you know, the Board has received their proposals and the Board will evaluate and consider their proposals, as they would any other shareholder in line with – you know, good corporate governance, and it is – you know, the goal of the Board is to focus on creating and developing stockholder value for all stockholders.

Douglas Ireland – JMP Securities

So, let me ask you if that was – goodness. Was that an escalation of the interaction with Rameus?

Bob Corey

I can't comment whether it is an escalation or not but what I can say is I guess Rameus has been a stockholder for over a year right? And we have had a dialogue with them as we have a dialogue with many of our existing stockholders.

Douglas Ireland – JMP Securities

Okay.

Douglas Ireland – JMP Securities

I have seen Rameus in other accounts and they have had usually a positive impact before. I just – you know, I just wondered what was going on.

Bob Corey

Okay.

Douglas Ireland – JMP Securities

The other question I had was on the AR and day sales outstanding, went up a little faster than revenue. I am just wondering if that was a – an indication of back-end loaded quarter or –?

Bob Corey

No, I don't see anything unusual in there. You know, the linearity in Europe, as I said, mentioned before, took on a normal pattern, versus a Q3 when we had some deals that didn't close in EMEA but we were not aware of any real increase or shift in the back loading or the linearity of the linearity of the quarter.

Douglas Ireland – JMP Securities

Okay and then, I’ll move on your recruiting. Is there anything going on there?

Bob Corey

Recruiting with just general recruiting or –?

Douglas Ireland – JMP Securities

Executive recruiting?

Bob Corey

Are you asking about the CEO?

Douglas Ireland – JMP Securities

Yeah. I just wondered.

Bob Corey

Okay. I will pull it out of you, Doug.

Douglas Ireland – JMP Securities

Okay.

Bob Corey

All right, you know, this has been a number one priority for the Board, right, and I can tell you that you should expect an announcement within a few days.

Douglas Ireland – JMP Securities

Wow okay. Terrific. That's all I have. Thank you.

Bob Corey

Okay great, thanks so much, Doug. Cheers. Hope you feel better.

Douglas Ireland – JMP Securities

Oh, thank you sorry about that.

Operator

Our next question comes from Rohit Chopra from Wedbush Securities

Rohit Chopra – Wedbush Morgan

Hey Bob.

Bob Corey

Hi, Rohit.

Rohit Chopra – Wedbush Morgan

Good. Your favorite analyst. The Europe was really good this quarter and I think there were few companies that reported some great quarters. This is absolutely fantastic. There were some slipped deals you mentioned in Europe as well, just as you're answering Doug's questions, are those slated to close next quarter? I know you talked a little bit about Asia but you just mentioned –

Bob Corey

Yeah we had a couple deals in Europe that didn't get in the boat for the fourth quarter, right, and, you know, we're continuing to work those deals and – you know, they are in the pipeline and we would have expectations of them closing in the first quarter, right but we can't admit they are going to close. Asia-Pac did have did have some deferrals and – I mean, we're looking for those to close in the first couple quarters of the new year.

Rohit Chopra – Wedbush Morgan

Let me just stick with the regions. In Asia, last quarter you mentioned that you had signed a new Japanese partner. I just want to get a sense of has that started to ramp. Was Japan okay? Was it just Korea and India? What actually happened –

Bob Corey

Great question.

Mike Seaton

It really was localized to Japan, I am sorry to Korea and India. Japan I would say pretty much met expectation for quarter performance. And the reseller you mentioned is CTC and you know the organization there is focused on enabling, you know, that reseller to, you know, to be successful and start to resell our products so –

Rohit Chopra – Wedbush Morgan

Okay and then I just want to come back to a line item here. The service revenues, little bit down, revs up. And if you just look at a trend line over the last several quarters I know it is very difficult to do this because we're in a recession and we are sort of bouncing around here but not going up as fast. Is there something going on with service revenues that we should know of?

Bob Corey

Sure. I follow that as well and it is a great question, you know, because if you look at Q4 last year I think the number was 16.5 million, right, of service revenue Q4 a year-ago and that was because of some late catch-up for maintenance deals that got caught up and amortized in the fourth quarter. But what we are looking at is professional service fees are growing. The company doesn't place a huge emphasis on that, right but we do support our customers to help make them successful, right.

The other factor that is impacting the lion’s share of the revenue that is in that service revenue line, which is maintenance, right, is our introduction of the limited lifetime warranty on our lower – lower-end edge-based products, right?

So we're still anticipating that – that maintenance revenues stream will be in that 14.5 to $15 million range pretty much on a quarterly basis. There is always some laggards and some renewals, et cetera, so but that is kind of what we're seeing that line turned out at.

Rohit Chopra – Wedbush Morgan

All right. I will just ask you two more questions real quickly. Any greater than 10% customers? I know that Ericsson and Tech Data and Westcon have been there before I just wanted to get a sense.

Bob Corey

No, not in the fourth quarter.

Rohit Chopra – Wedbush Morgan

Okay. And lastly you mentioned some improvement in the supply chain. Does that mean – I know we saw inventories go down but is there anything materially changing there? Or is this, you know, – what do you see in that supply chain that made you feel a little bit better?

Bob Corey

Yeah, yeah after the experiences we had in Q1 of last fiscal year now, right, we spend a lot of time managing the relationships and the supply chain. And as you know we used ODMs or contract manufacturers to basically build our products and by ASIC chips by and large, and – so we're making sure we're managing safety stock if you will. Our contract manufacturers maintain safety stock for us on their books and we maintain safety stocks on our books as well as our distribution channel partners while maintain inventory on their books, right, and so we're just continuing to stay very focused on supply chain because you hear different stories across the marketplace, some companies are still having troubles with it, others aren't. Right now we feel very stable and in control of our supply chain right now.

Rohit Chopra – Wedbush Morgan

Okay, great. We will talk later, thank you.

Bob Corey

Thank you. Cheers.

Operator

(Operator instructions) Next question comes from Doug Whitman from Whitman Capital.

Doug Whitman – Whitman Capital

Thank you, guys for another good quarter of execution. Mike, maybe you could comment a little bit, you know, you commented about a very competitive market out there. But clearly even in that competitive market you're mildly gaining market share and could you talk a little about products and why you're winning?

Bob Corey

Yeah, I'm going to turn it over to Mike Seaton. First of all, hi, Doug how are you doing?

Doug Whitman – Whitman Capital

Good.

Bob Corey

And Mike, do you want to comment on that?

Mike Seaton

Yeah, You bet. And so I think the introduction of some of our latest products as well as the vision for the future around things like virtualization, and the data center, you know, service capabilities in the service provider market, you know, clearly our edge portfolio and our chassis portfolio is interesting to our customers and, you know, many of our customers are looking for, you know, the next generation of their network. And they want somebody that is going to innovate and provide the performance that they are looking for.

The way we like to talk about it is really around kind of an (inaudible) network one that understands identity location and presence so getting the network more integrated into the application so that, you know, the two entities can speak to each other, if you will. I think is really part of what customers thirsting for and seeing as they purchase our equipment going forward.

So, it is very competitive. No question about that and a lot of great players. But at the end of the day, you know, customers want to have innovation. They believe in our technology and our infrastructure and our company. And, in fact, the – the way we take care of them both from a sales and a support organization standpoint.

So I think those are the things that our customers are thirsting for and why they continue to choose us around the world.

Doug Whitman – Whitman Capital

Well, Bob, I'm keeping my fingers crossed that you will decide to take the permanent CEO role but if not thanks for a great temporary CEO job. And we're also hoping frankly once the decision is made one way or the other you guys will consider obviously half evaluations in cash, so that you will consider going back to a stock repurchase plan. So –

Bob Corey

Thanks very much on a personal level and we're always looking to add stockholder value so thank you.

Doug Whitman – Whitman Capital

And a last quick part of that is going back to Doug's question. Are the accounts receivable dates a little bit higher in Europe than they are in the US? And would that partly also account for the – mild increase in AR?

Bob Corey

Yeah I think maybe just a smudgy, not a lot.

Doug Whitman – Whitman Capital

Okay thank you.

Doug Whitman – Whitman Capital

Okay, all right, thank you.

Operator

Our next question comes from Ryan Hoy [ph] from William [ph].

Bob Corey

Hello.

Ryan Hoy – William

Hi, thanks for taking my question.

Bob Corey

Sure.

Ryan Hoy – William

I wondered if you could maybe elaborate a little bit on the partnership with Motorola, in particular the application that seems to be driving the success in that space.

Bob Corey

Okay great, sure. Mike, do you want to take that question?

Mike Seaton

Yeah. So, I think our partnership with Ericsson is continuing to gain traction. We clearly work frequently with them, right, kind of around the world. I think our integrated blade that works inside of their solution is a good indication that we have – for purpose kinds of technology that that really makes sense for somebody that is as big and robust as Ericsson. So, we look forward to a continued partnership with them and in growing our business together around the world.

Ryan Hoy – William

Okay. And you had mentioned – I thought I heard a partnership related to the educational space, did I hear that right?

Mike Seaton

I actually announced a couple of big wins, right? One with Tennessee Tech University and another one with Georgia State University. So two southeastern schools or I guess mid-south – one mid-south, one southeastern school where they have really looked at our technology and one of them an existing customer that re-upped really their entire – their entire network with us and the other one a net new customer that believes in our ability to deliver best-in-class kind of edge in core solutions to them.

Ryan Hoy – William

Okay. And then you – you also mentioned your differentiation in the virtualization space in the data center. Can you elaborate a little bit on that as well?

Mike Seaton

Yeah. So, we announced two capabilities. One being Extreme XNV, which is our virtualization capability. It’s really understanding the life cycle of virtual machines in the data center. So, think of that as virtual machines move around, the network needs to move with them and it is part of our overall data center strategy. The other is our announcement around 40-gig at interlope. We think that’s – we're some of the first people that have announced it and certainly stake the claim of being able to get it out to the marketplace, and 40-gig obviously going to be an important technology for the data center market. So I think those are just two of the unique innovative ways we're coming to market.

Ryan Hoy – William

Okay. Just a couple of quick follow-ups. Headcount was up I think about 20, 25 heads in the quarter. Can you just talk about where those folks were added and what was driving that increase?

Bob Corey

Yeah, the focus for 2011 going forward is going revenue and taking market share. So, as we publicly stated, we’re looking to add sales reps in areas, geographies where we think we can grow revenue. So, you will be seeing sales reps added throughout Asia, right, and a few in EMEA and some in North America. We will be replacing some positions in engineering, which could be here in the US. As you know, we do engineering development in three geographies around the world, here in Santa Clara and RTP in North Carolina and in Chennai down in India. So – but the primary emphasis and focus is on sales or sales and marketing to grow revenue.

Ryan Hoy – William

And how long a ramp-up period do you expect for those sales reps to get productive generally?

Bob Corey

I will take a shot at it, Mike. If you want to add, fine. Typically, we look at probably six months for a reasonably experienced rep. But if we can get a rep that is more experienced in the geography we're putting them into, right, then you can accelerate or truncate that ramp time. Mike?

Mike Seaton

Yeah, I would agree with that. I mean, clearly some of the areas we're expecting to get some to get some – to start into the market, right, and to cover the market slightly differently, and that is going to take some ramp time and will take some time.

Some of the other areas we're able to plug them in and have them start producing almost immediately. And so we expect kind of a – kind of a marriage between those two things, right? Those that can come in and hit the ground running day one and then those that are going to start to – new patch or attack the market differently and we're very dependent upon our partners, so we need to make sure we get the partners lined up at the same time we get the sales and sales engineers on board.

Ryan Hoy – William

Okay. And lastly, the inventory turns, are they at a level that you kind of consider steady state, or do you think we will see better or more improvement in that stack going forward?

Bob Corey

Yeah, we're looking to try and normalize the inventory, say, around 8 turns. If we can get it to 10 turns a year, then that will be a better steady state for us. 6 is a little low because in Q3, if you were following us at that time, we ramped inventory pretty significantly by about $7 million. I think from what, 16 to $23 million in preparation for a strong Q4. At the same time, we're managing these safety stock levels to ensure that we don't end up with a supply chain issue that I mentioned earlier on. But 8 to 10 turns is kind of what I think would be a normal steady state.

Ryan Hoy – William

Okay. Yeah, I remember the inventory issue. I just wanted to figure out if we had kind of a new normal or whether we're going back to where we had been historically, so–

Bob Corey

Yeah. Okay, thanks a lot, Brian.

Operator

Our next question comes from Steve Bowman with Lazard Capital.

Steve Bowman – Lazard Capital

Good afternoon, guys. Thanks for taking the question. Bob, you gave some comments there on the end – at the end of your script about product growth in the year. And it sounds like you kind of think service revenue is going to be flat or flattish that there is not really an opportunity to grow that.

But if – and I understand you guys probably don't want to give guidance formally, but it seems like you're talking about kind of a high-single digit, maybe even approaching kind of 10% overall revenue growth for fiscal '11. Is that kind of what you're thinking?

Bob Corey

Yeah. I think your insight on the service level or maintenance level revenue is accurate, right? We're trying to communicate with the guidance we're trying to set the street up for, we see sales momentum in our markets, right? We service the three major geographies in the world focusing on product revenue, which we think is the growth engine for the company. We have a switch market that is expected to grow, say, 12 or [ph] 7 to 8% in the near term. And what we're trying to communicate is, hey, we believe we're going to grow much faster than the market, right?

And that translates into taking market share. So, we're trying to characterize it that we think the product revenue growth will be above 12%. And beyond that, we're just not in position to say it’s going to be some other number or what the aggregate revenue growth is going to be.

Steve Bowman – Lazard Capital

I appreciate that. I think that’s people will be pleasantly – as I kind of look back over the last decade, I'm not sure that I see a revenue growth rate that is even equal to kind of that 7 to 8% market growth rate that you're looking for. So, so even if you get to that, it will be a pleasant change for where you guys have been recently.

And then I guess following on that, I don't think you specifically talked about the financial model slide in today's conference call, but it obviously is in the deck, and it seems like growing at that rate, you would get to that financial model within this fiscal year.

Bob Corey

That would be correct. And what I’ve publicly stated before is, generally around 90 million a quarter of revenue is where we would start doing double digit operating income as a percent of revenue. And that financial model is really the short-term model because the first thing we want to do is, one, stabilize the business and manage it successfully quarter-over-quarter and two set a target like we were doing what 2, 3% operating level on a pro forma level. We wanted to get to double digits and then we will see how we can accelerate the revenue (inaudible) drive much beyond that.

Steve Bowman – Lazard Capital

Okay. And you still think you're on target for getting to double digit operating margins at 90 million? Because this quarter doesn't look like you were on that path.

Bob Corey

No, this quarter would not indicate that. But we think around $90 million – but we are adding sales people right, so that’s going to have some impact on it, but still around the 90 million range, we should be getting close or at the double digit range of operating income.

Steve Bowman – Lazard Capital

Great. And then finally for me, obviously the last or I guess it was three quarters ago now component constraints really impacted you guys' ability to fulfill demand. Are those completely behind you now and if you’ve already addressed this and I missed it, I apologize?

Bob Corey

No, no, not a bad questioned, yeah. We feel very good about our relationship with our supply chain partners, and we use ODMs and contract manufacturers. We're carrying safety stock on their books, some on our books and helping manage our channel distributer inventories, right?

We have more normalized our supply chain expectations to fit the – the delivery dates that exist in the supply chain today, so we feel good about what we have achieved, but we remain very focused on it.

Steve Bowman – Lazard Capital

Got you, thanks very much, guys.

Bob Corey

Yeah, thanks so much.

Operator

This concludes our question-and-answer session for today. I would now like to hand the conference back over for closing remarks.

Bob Corey

Okay, great. Well, I thank everybody for attending our release session today and we look forward to releasing earnings sometime in October to report hopefully a successful fiscal Q1 and start our new year. Thanks so much.

Mike Seaton

That completes our comments, operator.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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Source: Extreme Networks, Inc. F4Q10 (Qtr End 06/27/10) Earnings Call Transcript
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