Aerohive Networks' (HIVE) CEO David Flynn on Q2 2014 Results - Earnings Call Transcript

| About: Aerohive Networks, (HIVE)

Aerohive Networks, Inc. (NYSE:HIVE)

Q2 2014 Earnings Conference Call

August 06, 2014, 5:00 PM ET


Melanie Solomon - IR

David Flynn - President & CEO

Gordy Brooks - CFO

David Greene - Chief Marketing Officer


Kent Schofield - Goldman Sachs

Tal Liani - Bank of America

Troy Jensen - Piper Jaffray

Erik Suppiger - JMP Securities

Rohit Chopra - Buckingham


Good day, everyone. Welcome to the Aerohive Networks Second Quarter 2014 Financial Results Conference. Today’s conference is being recorded.

At this time, I’d like to turn the conference over to Ms. Melanie Solomon, Investor Relations. Please go ahead, ma’am.

Melanie Solomon

Thank you, Caroline. Welcome to Aerohive Networks second quarter 2014 financial results conference call. After the market close today, Aerohive issued a press release through Business Wire. The release is also available on our website at This call is being webcast live on the Investor Relations section of the Aerohive website, and will be available for 30 days.

Today's call is being hosted by David Flynn, President and Chief Executive Officer; and Gordon Brooks, Chief Financial Officer. David Greene, Chief Marketing Officer, will also be available for Q&A.

During this conference call, we will make forward-looking statements regarding future events or results of the company and its operations. These forward looking statements include statements regarding our projected financial results, including for the third quarter and 2014, general demand for wireless networking in the industry verticals we target or demand for our products in particular, potential drivers of growth in our business, new customer acquisitions, future product offerings, continued 802.11ac transition and adoption of Aerohive cloud management applications and product offerings, changing market conditions, risks associated with the deployment and adoption of new products and services, risks associated with our continued growth, and competitive pressures from existing and new companies.

Actual events or results could differ materially from those discussed in the forward-looking statements. Please refer to the risk factors in our recent quarterly report on Form 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements.

Aerohive disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise.

Today, we'll be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation, or as a substitute, for results prepared in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures, and a discussion of why we present non-GAAP financial measures, please see today's press release available on our website.

And now, I’ll turn the call over to David Flynn, President and CEO of Aerohive.

David Flynn

Thank you, Melanie, and thank you all for joining us today. I’m very pleased to report the second quarter of 2014, our first full quarter as a public company, was another strong quarter for Aerohive. Our record revenue of $37.6 million, exceeded the top end of our guidance range, and grew 33% sequentially.

We added over 1,600 new end customers in the second quarter, that’s the highest number of new customers acquired in any quarter in our history, bringing the total number of end customers to over 16,000.

We also continued to see strong demand from our existing customers, with repeat business contributing 61% of our business over the last four quarters. Our growth continued to exceed the growth of the Wi-Fi market and of our major competitors, suggesting continued gains in market share.

Overall, our results for the quarter reflect continued strength of our core products in well-established markets, as well as the increasing impact of our emerging growth initiatives.

We saw increasing customer demand for our cloud-managed controller-less solutions, and we saw continued growth in K-12 education, our most established vertical market. At the same time, our increased focus on retail, mobility, applications, and the transition to 802.11ac is driving growth on top of our well-established foundation.

I’ll now go into more detail on each of these growth vectors. As you know, we’ve built Aerohive around a radically different approach to Wi-Fi and enterprise mobility. Simplicity of cloud management and the scalability of Wi-Fi solution without controllers increasingly resonates with customers in the marketplace.

We believe this is the fastest growing segment of the Wi-Fi market, and as the market move towards this solution, competitors are scrambling to catch up and deliver the solutions the market is asking for. We see this as further validation of our architecture, differentiation, and the years of experience that’s reflected in our products.

Our controller-less architecture and cloud capabilities made us a particularly effective solution for education. We continue to see this in our Q2 results. K-12 education has historically been our strongest vertical with the K-12 buying cycles driving our strong sequential growth in Q2, and the education surge this year resulted in Q2 being our biggest education quarter yet.

We transacted with over 1,000 schools, including some of the largest school districts in the country such as Broward County, Palm Beach County, and Baltimore County schools, the sixth, 12th, and 24th largest districts in the United States.

Aerohive solution allows districts like this to efficiently support huge one-to-one education initiatives. And for example, one of these customers has just two people managing a network of 14,000 access points.

Looking ahead, we see prospects for healthy growth in our education business. In the U.S., the ConnectED Initiative and the FCC plan currently call for allocating $1 billion per year of E-Rate money over the next two years to fund Wi-Fi connections in schools.

Our current understanding is that these E-Rate applications will begin to be approved and funded in Q3 2015, though deployments started after April 1, 2015 may still qualify retroactively for E-Rate funding. While this would not affect the next few quarters, we believe our strong presence in education uniquely positions us to benefit significantly from such funding over the next few years.

Outside the U.S., we are also seeing increasing traction in K-12 education, and we think 2015 will be a year of important additional demand in some of our key and fast-growing international markets.

We’re also pleased with the progress we made in our emerging growth strategies. One of our strategies is to increasingly diversify our business to vertical segments outside of education, and we saw this happening during Q2. Even in our seasonally strongest education quarter, half of our business actually came from outside the K-12 segment, reflecting very strong growth in the enterprise.

Retail was a particularly bright spot, up over 300% year-over-year, and representing over 10% of our total business in the second quarter, and we’re pleased that our growth across verticals is contributing to our diversification strategy.

Notable new retail wins include Pier 1 who began with an initial purchase in Q2 that is expanding to a large scale enterprise roll out for their 1,200 stores, a great example of our land-and-expand model. We also won a fast-growing U.S. Mexican restaurant chain with over 1,600 locations, a $10 billion European grocery and retail group, and one of China’s most popular chains of Ramen restaurants.

The success with retail was augmented by several new products announced in June, including PCI 3.0 compliance solutions, Social Login, and a new branch router with embedded LTE, which contribute to our richer consumer data set, increase security and ease of deployment within the network, and our concept of a personalized engagement platform for retailers was also announced during Q2, and is resonating with our retail fastbacks.

Beyond retail, we also saw increasing traction in larger enterprise class accounts, including an enterprise wide win at a Top 10 U.S. bank, and initial deployments of one of the world’s largest logistics companies and a global auto manufacturer.

We also saw traction in the quarter with our mobility suite, our solution for BYOB and access management. A Fortune 500 manufacturer is deploying our products globally. Over 5,000 employees use our product, self-service portal, to create secure credentials to use their own devices at work without burdening IT.

In addition, a global engineering, design and construction company is using our mobility suite to manage onsite connectivity for employees and sub-contractors at more construction projects. These are good examples of where we continue to add enterprise value on top of our core networking solution.

And finally, our bet on customer adoption of 802.11ac showed strong results during Q2. If you remember on our last call, we said that we intended to drive .11ac aggressively since we believe we have the right architecture to win market share in this transition.

A cornerstone of this strategy was the April introduction of the AP230, our 3x3 access point which delivered disruptive price performance in the .11ac market. The rapid adoption of this product drove our .11ac business to grow from 10% of our unit volume in the first quarter to 34% of our unit volume in the second quarter, and this pace of growth is well ahead of what’s been projected by leading industry analysts. We expect to continue to gain share in the .11ac transition with our innovative and disruptive solution.

In summary, with strong core advantages, growth across all verticals, expanded interest in our mobility suite, and progress in the .11ac transition, we delivered a strong second quarter.

I’ll now turn it over to our CFO, Gordy Brooks, to review the financial results for the second quarter in more detail and provide guidance for the third quarter.

Gordy Brooks

Thank you, Dave, and good afternoon, everyone. We’re very pleased with our financial performance in Q2. We planned for, and delivered, significant sequential growth, which drove a corresponding improvement in our operating margin. In addition, our balance sheet metrics are positive and we are pleased with the continuing progress in our operating cash flow.

I’ll review our GAAP and non-GAAP P&L, balance sheet, and cash flow metrics for Q2 and provide some related commentary on the business. Lastly, I will close by providing financial guidance for Q3.

Net revenue for fiscal Q2 was $37.6 million, an increase of 34%, compared with the same quarter a year ago, and an increase of 33% sequentially. The significant sequential increase from Q1, derived primarily from product revenue, is a seasonal pattern from our Q1s into Q2s that we expect to continue, at least for the near term.

Product revenue for fiscal Q2 was $33.7 million, an increase of 30%, compared with the same quarter a year ago, and a 36% increase sequentially. The vast majority of our product revenue continues to be driven by our access points and our related management software licenses.

Software subscription and service revenue was $3.8 million for Q2, or 10% of revenue, an increase of 78%, compared with the same quarter a year ago, and a 14% sequential increase. As our software subscription and service revenue amortizes off of the balance sheet, we expect to continue to see sequential quarterly increases in this revenue line and to not reflect the same seasonality we expect to see with product revenue.

We were pleased with our record revenue performance in Q2. In addition, linearity within the quarter was consistent with prior Q2s with a majority of business closing in June, which contributed to an anticipated sequential increase in accounts receivable and deferred revenue as of the end of the quarter.

On a geographic basis, net revenue in the Americas for Q2 was $24.5 million or 65% of total revenue. Americas net revenue increased 41% sequentially. Net revenue in EMEA was $9 million for Q2 or 24% of total revenue. EMEA net revenue was an increase of 48% compared to the same quarter a year ago. And net revenue in Asia-Pac was $4.1 million for Q2 or 11% of total revenue. Asia-Pac net revenue was an increase of 165%, compared with the same quarter a year ago.

On a non-GAAP basis, gross margin was 67.8% in Q2, flat compared with the same period a year ago, but an increase sequentially from 67.5% in Q1. As Dave mentioned, the introduction of the AP230 has allowed us to be aggressive on .11ac pricing while maintaining healthy gross margins.

Product gross margin was 68.9%, compared with 69% in the same period a year ago. Software subscription and service gross margin was 58.7%, compared with 53.5% in the same quarter a year ago. We are continuing to experience an increase in our software subscription and service margins, but we also expect margin improvements to be tempered by our continued investment in cloud and support infrastructures worldwide.

Non-GAAP operating expenses increased to $29.1 million in Q2 compared with $26 million in the previous quarter and $24.4 million in the same period a year ago. Total employee headcount was 557 as of June 30, 2014, compared with 553 as of March 31, 2014 and 488 as of June 30, 2013.

With regard to non-GAAP functional expenses, sales and marketing increased from $15.9 million, or 56% of revenue, in Q1 to $18.2 million, or 48% of revenue, in Q2. The increase was due primarily to the impact in the quarter of our half-yearly sales compensation plans, as well as seasonal marketing program spend. This compares to $14.3 million, or 51% of revenue, in the same period a year ago.

R&D increased sequentially to $6.3 million, or 17% of revenue, in Q2 compared with $5.8 million, or 20% of revenue, in Q1. R&D expense decreased in Q2 compared with $6.5 million, or 23% of revenue, in the same period a year ago as we had a full quarter of capitalization of development of our next-generation cloud services that began in Q4.

The total amount of R&D capitalized in the quarter was $1.1 million, an increase from $1 million in Q1. On a comparable basis to Q2 a year ago, total R&D, both expensed and capitalized, in Q2 was $7.4 million or 20% of revenue.

Upon completion and shipment of our next-generation cloud services, we will amortize a cumulative capitalized amount through cost of software subscription and service over an estimated useful life, most likely three to five years.

Lastly, G&A increased to $4.6 million, or 12% of revenue, in Q2 compared with $4.3 million, or 15% of revenue, in Q1.

Overall, we saw 48% sequential improvement in our non-GAAP operating loss percentage. Our non-GAAP operating loss percentage improved to 9.7%, compared with 19% in the same period a year ago. The increase in revenue and management of our sales and marketing expenses, even while we continued to invest in sales and marketing, allowed us to continue to improve our operating loss percentage on our track to breakeven.

On a non-GAAP basis, we reported net loss of $4.3 million, compared with a net loss of $7.4 million in Q1 and a net loss of $5.6 million the same quarter in the prior fiscal year.

On a GAAP basis, net loss per share was $0.14, compared with $1.17 in Q1 FY14 and $1.03 in Q2 FY13. On a non-GAAP basis, net loss per share was $0.10, compared to $0.97 last quarter and $0.84 for the same quarter in the prior fiscal year. The net loss per share for Q2 FY14 is based on weighted average common shares outstanding of 44.8 million shares.

Now, turning to the balance sheet. Cash, cash equivalents and restricted cash balances as of June 30 were $104 million, an increase of $70.6 million over the prior quarter. As noted in our Q1 earnings call, net cash received in our public offering, after exercise of the over-allotment, was $80.2 million.

Cash used in operating activities in Q2 was $4.6 million, compared with $1.7 million in the prior quarter and $3.2 million in the same quarter in the prior fiscal year. The majority of the sequential increase in cash used in operations in Q2 was driven by planned increase in inventory levels.

Our trailing 12-month cash used in operations was $6.9 million, improving 64%, compared with $19.1 million in the comparable trailing 12 months a year ago. We are pleased with the progress we have made in managing our working capital to see such a significant improvement in the comparative 12-month period.

Inventory increased $5.7 million to $12.1 million, reflecting both seasonality and the transition to .11ac. Inventory turns against product revenue were still a healthy 2.8.

Accounts receivable increased 49% sequentially to $23.7 million. DSO at the end of Q2 increased slightly to 53 days, compared with 50 days in Q1, and decreased compared to 56 days in the prior year quarter. We believe that DSO will fluctuate each quarter in the range of 45 days to 55 days depending on seasonality and related linearity within the quarter.

Total deferred revenue increased 16% sequentially to $37.5 million at June 30 and increased 56% from $23.9 million at June 30, 2013. Deferred revenue from software subscriptions and service increased 19% sequentially to $33.6 million, and 75% compared with June 30, 2013. Product deferred revenue, primarily channel inventory, decreased $300,000 sequentially to $3.9 million. All of the decrease in deferred product revenue occurred in short-term deferred revenue.

Now, turning to our guidance for fiscal Q3 of 2014. As you are all aware, our Q2 has historically been a seasonally strong sequential revenue quarter, and our fiscal Q3 seasonally increase more modestly as compared with Q2. We expect that pattern to continue at least for the near-term.

We currently anticipate net revenue in the range of $38 million to $40 million. Within this range, we expect software subscription and service revenue to be between $4.2 million and $4.4 million.

On a non-GAAP basis, we expect gross margin to be between 67% and 68% and operating margin to be between negative 11% and negative 8% of revenue. We expect OIE to be an expense of approximately $500,000.

Lastly, we expect non-GAAP EPS to be between negative $0.10 and negative $0.08 on a weighted average common share outstanding of 45.6 million shares. Since we are in a loss position, vested in-the-money stock options are not included in our weighted average shares outstanding number as they are anti-dilutive.

On a GAAP basis, we expect EPS to be between negative $0.16 and negative $0.14 on the same weighted average common shares outstanding. We expect a tax expense of approximately $150,000 for both GAAP and non-GAAP.

This guidance is based on foreign currency rates effective as of this announcement, and any material changes to those rates could impact these projections.

In conclusion, we’re pleased with our financial performance during the second quarter, our first full quarter as a public company, and largest revenue quarter to-date, and we look forward to continuing to grow the business.

Now, I’ll turn the call back over to Dave for his concluding remarks.

David Flynn

Thanks, Gordy. Overall, we're very pleased with our strong performance in Q2. Our core products in well-established education business, combined with our expansion in additional verticals, growing value of our BYOD solutions, and our position in the .11ac transition have all provided a strong foundation for our growth.

With our disruptive technology, costs and go-to-market strategy, we are addressing the challenges of mobility revolution, and look forward to continued growth domestically and internationally.

And with that, we’ll take your questions.

Question-And-Answer Session


(Operator Instructions) We’ll take our first question today from Tal Liani with Bank of America. And Tal, your line is open if you still have a question. I’m hearing no response. We’ll go next to Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs

To follow up on your comments around the ConnectED, FCC’s deployment of $1 billion in ’15 and ’16, just taking your comments there, it sounds like should we be thinking more a second half of ’15 where we might see some impact to your business, and obviously given the big swing in 2Q, so basically just trying to think about the timing of when you think you might see some additional funds, and then of that $1 billion, how should we think about the opportunity for you as a hardware vendor in that $1 billion?

David Flynn

So, in terms of the timing, the dollars will actually start flowing in July 2015. The E-Rate applications will be compiled and submitted between now and - I think early March time is the cut-off. That will be reviewed and then, will be - they will start to grant approvals, as I said, in early Q3. So, that’s when the bulk of the benefit will be seen.

There is an expectation that the program will allow- if a deployment was made in Q2 and then there is subsequently the E-Rate funding is approved in Q3, that E-Rate funding can be used to pay against the deployment made in Q2.

So that would - so co-schools have a high degree of confidence that they will get E-Rate funding or and have the ability to fund for an interim period, a project, could start to see some incremental upside in Q2, but the majority of the upside we expect to be in Q3 and beyond.

Kent Schofield - Goldman Sachs

And then, as far as the $1 billion there for ’15, for example, I mean how much would you think or what percentage of that you think actually goes to hardware? So, for example, your access points as opposed to, say, services for deployment, just so we get a sense for the actual market impact to the Wi-Fi hardware market?

David Flynn

I think a wide range of estimates around what that might actually translate into, and specifically they won’t be clear until individual entities put in their E-Rate applications. It includes Wi-Fi, switches, cabling, installation, managed services, some firewalls, there is a variety of other things. I think that will become clear as we go forward. At this point, it depends on how people put together applications and what they want to decide to have funded.

Kent Schofield - Goldman Sachs

Thanks for some of the detail there. And then, if I jump over to the retail side of things, great to hear that you are getting some good traction there. Can you help us understand why are you winning those deals? It sounds like the mix, as a percentage of your business, has improved quite a bit, maybe on like a year-on-year basis, do you think you’ve gotten to the point where that traction can kind of continue or is this going to be a little bit lumpy going forward?

David Flynn

We put together some significant attack plans a year ago or a little more than a year ago to go after this market. A couple of reasons for - there is some nice dynamics going on with their design to have a connected experience with their customers, looking for more value out of the wireless infrastructure, engage shopping, analytics, a whole lot of other very high value-added things that we can bring to them. So, there is a great dynamic happening in that marketplace, and we wanted to do tablets to transact in the stores and to turn the store around and [indiscernible] front so there is lot of things driving growth.

We decided to go after that market because we saw the overall market growth dynamics. We saw - we have a very compelling solution. The controller-less approach is perfect for a highly distributed retail organization. So, we think we’ve got the right network architecture, the right kind of value and analytics and intelligence on top of it.

And in addition, one of the strongest incumbents in that market, Motorola has been going through a lot of transition and turmoil, which has opened up the market. That has allowed us to enter and land a number of significant accounts.

So, we intend to continue to push into that. We have seen steady growth on that since we put together these initiatives. We just launched a lot of new products in Q2, and are going to continue to push on it. As we mentioned, many of these are land-and-expand accounts, so some of the logos that we are landing today still have significant expansion potential going forward.


We’ll go back to Tal Liani with Bank of America.

Tal Liani - Bank of America

Hi, guys, sorry. I just got disconnected before. Two questions, the first question is the AC cycle, can you speak about, first, the price difference between AC and N, you get any premium -- one versus another? And second, the impact on units, the monthly units, because AC has more throughput, does it mean that for the same deployment, unit demand is smaller? So that’s number one, that’s question number one. Question number two is more about to understand the source for the strength in the quarter. Does some segments this quarter that are seasonal, seasonally strong? Did you see the outperformance coming from these segments such as education or the outperformance came from the other segments? Thanks.

David Flynn

First on AC pricing, I think we talked last time that we were with the AP230, we decided to be aggressive to drive the transition, and we priced the 3x3 AP230 priced product much closer to where other competitors were pricing a 2x2 AC product, and we did that to be disruptive, drive growth.

The price point for that product is $799. It’s a $150 premium to our 2x2 end product, and we actually priced it as a slight discount -- as a discount to our 3x3 end product, and it settled in, in that pricing, which is exactly where we expected it to be, and so it is a price premium over the 2x2 end. It’s actually a slight price discount to the 3x3 end. But because we engineered it very well, we actually have a better cost structure on it. We are able to do that while maintaining the gross margin that you saw in the quarter.

So there is some uplift in the ASPs because some of the 2x2 end customers are trading up to it, offset by some decrease in ASPs with some of the 3x3 end customers are trading down, net effect has been fairly neutral.

In terms of how many APs per deployment, we have not seen any indication of people doing fewer APs per deployment. In terms of -- the retail stores are still looking for the same coverage, it’s not really a throughput problem and the education environment, they are generally going with one AP per classroom regardless of what the technology is in it. So, there is no reduction in unit volume because of the AC transition.

And then finally on the outperformance, I think we indicated obviously strong sequential education growth, but the percentage of the business that was education this quarter was meaningfully less than a year ago quarter, which indicates I think the success - there was a balanced growth with enterprise, retail, and education, all having strong sequential quarters.


And next from Piper, we’ll hear from Troy Jensen.

Troy Jensen - Piper Jaffray

So just to follow up on the AC question, you touched on the revenues. Can you just touch on the product gross margin difference between the AC versus the N?

Gordy Brooks

Yeah, Troy, this is Gordy. If you look at the .11n product or 330, in terms of direct gross margin just on the product COGS is about 5 percentage points higher than the 330. This quarter, because we were managing the transition of product lines, [Aero shipped] [ph] in a lot of products and all, we’ve probably just began to see some of the impact of that to positive gross margins, but again just on a net apples-to-apples basis, about 5 points higher on a product basis.

Troy Jensen - Piper Jaffray

You mentioned briefly on the inventory spike. You said last year in Q2, it was actually down sequentially, so was this all related to just the [indiscernible] 802.11ac?

Gordy Brooks

Yeah, so a couple of items. Last year, we seasonally built inventory again in the education buying cycle a lot of those shipments and purchases move over into July and August. Last year, we had plenty of inventory coming out of Q1 and into Q2, but we actually, because we’re still a private company and be very cash flow conscious, we didn’t carry as much inventory at the end of June and ended up having several weeks of inventory unavailability in July that we want to avoid this year.

So, seasonally we consciously built up inventory to allow to fulfill the July and August continued surge of education for the summer. Then in addition to that, with the .11ac transition, we built up inventory in the variety of products so not just the 230 but the .11n 3x3 because again we were unclear about which way customers would go in this transition, so we made sure to have of all of our products enough inventory so that we can cover the various scenarios in this transition.

All those products are current products. It will be around for a while. So, there is no concern about end of life or getting caught with particular over subscription of inventory.

Troy Jensen - Piper Jaffray

And then, maybe one for David here, just on the retail wins, some of the higher profile ones, were those Motorola replacements, the new deployments, I know Motorola has been leaking share over the past couple of years, but have you seen any acceleration, or is that an opportunity to come?

David Flynn

We certainly have had a number of retail accounts that we’ve won that have been traditional Motorola accounts. Of the specific ones I referenced on the account, there is - I know the Mexican restaurant was actually not a Motorola replacement, that was more new, and Meraki was the competitor in that environment.

I actually would need to go to reconfirm if Pier 1 was a Motorola replacement of not. Then I will say fairly consistently we are engaged with many retailers who have been using Motorola in the past and are looking at using Aerohive going forward.

David Greene

Hey, Troy, this is David Greene. Maybe just to add, we’re also seeing interest in Motorola’s channel in terms of seeing a new opportunity to work with us to engage with retail accounts, and so that also is promising in terms of the opportunity that might come.


We will now go to Erik Suppiger with JMP Securities.

Erik Suppiger - JMP Securities

Just on the E-Rate question, would you anticipate that might create some pause as you get into the first half of next year as customers hold off in anticipation of that?

David Flynn

The expectation, as I said, is that those that are going - that will get E-Rate funding could potentially deploy in April and still get retroactive reimbursement of it. So I think that those who believe they have a high probability of getting the funding, that would not be a good reason for them to hold off on those purchases.

The other thing to consider about this is that even though there is a lot of money flowing for E-Rate, only a small fraction of the schools even have a chance of getting access to this, and many of those are ones that wouldn’t have the money normally to go deploy. The expectation that we have is that E-Rate [indiscernible] what percentage of the students in the environment are on a subsidized lunch program, and our current expectation is that the demark-line will be 80% or 85% of the students in the district need to be on free and subsidized lunch, which is a relatively small percentage of the overall schools in the country.

So the vast majority of schools will actually not benefit from this, and they will go forward and fund their projects as they always have, and I think they will realize they will probably not benefit from it, and then the other schools are likely ones that were really struggling to fund their projects. So it is not clear how much they would pause on because probably the reason they are doing this is to help them fund projects that would otherwise be unfunded.

Erik Suppiger - JMP Securities

So in the past you said that the most E-Rate funding financed projects you had was around 2%. If you look out a year when you start getting the E-Rate, would you expect that to be 5% or what kind of range could that be?

David Flynn

I think it’s little premature to guide so specifically on this. The documents are still circulating for comment and review. The exact threshold of where they going to draw the line, there are many, many moving variables, and I think we need to get a little bit further down before we would speculate like that, but overall it certainly has to be a - certainly expect it to be a significant positive for us.

Erik Suppiger - JMP Securities

Your Asia business had some good growth, have you seen some pick up in the business with your partnership with Lenovo?

David Flynn

I think across Asia, I think we’ve seen good pickup in many regions. We’re seeing China, Korea, Southeast Asia, New Zealand is a particular hotspot for us right now, and I think all those - we saw some good strength in those environments. We did see some additional nice enterprise deployments through the Lenovo relationship. So there is progress there. I wouldn’t attribute the majority of the growth to that, but it was definitely a contributing factor.

Erik Suppiger - JMP Securities

Then lastly, how was the router and switch business in the quarter?

David Flynn

It was fairly consistent with last quarter. I think it’s kind of still under 10%. We did see sequential growth in that business, although Q2 a lot of the education business tends to be obviously much more Wi-Fi. We saw a couple of very nice large retail deals with - excuse me, one of the large retail deals in the quarter was a half switch, half Wi-Fi project, so pleased to see those kind of distributed enterprise unified single branch solution in the retail market taking off well.


We’ll hear now from Rohit Chopra with Buckingham.

Rohit Chopra - Buckingham

Just wanted to ask you a question about the number of customers now in the public cloud, I think you talked about that last quarter. That was my first question. Second one, I just wanted to get a sense of any changes in the competitive market, I think Troy mentioned, and I think everyone knows that Motorola has been having some challenges, but has anyone stepped up to become more aggressive, thinking more of the larger vendors pushing up against you, maybe those two questions that would be helpful.

Gordy Brooks

Hey, Rohit, this is Gordy just to talk about the metrics around the public cloud; we actually had an increase of the customers in the quarter on the public cloud. It discretely turned out to be about 83% of the current quarter customers, and therefore, the total customers have risen to about 72% of our total customers who are on the public cloud, still continues to be about 40% of our units are managed by the public cloud, but the metric is still over 70% of the total customers themselves on the public cloud.

David Flynn

Regarding the competitive environment, we actually did not see any material changes in the competitive environment inside the quarter. I think the normal players are behaving in a normal way.

Rohit Chopra - Buckingham

Gordy, can I just ask a quick follow up. You mentioned something about some work in the data centers that you need to get done, can you just elaborate on that, I know you have your work with Amazon Web Services, but is there anything else that you are planning or what needs to be done as far as expenditures?

Gordy Brooks

Just continued on the software subscription and service gross margin. We’ll continue to expand the support delivery, so with all those new customers we need to make sure to continue to build out support delivery as well as just the cloud infrastructure, but there is no significant material change to that.

It’s just the scaling of the business to incorporate that infrastructure. Although as we are doing our work on the new cloud offerings, there is some infrastructure work we are doing there, but again all in the normal course of business, nothing that’s discretely incremental.


And with no other questions at this time, Mr. Flynn, I’d like to turn things back to you for closing remarks.

David Flynn

Thank you. Thank you all for joining us today and enjoy the rest of your summer, and hope to see you soon.


And now we’ll conclude today’s conference. Again, thank you all for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!