Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Extreme Networks (NASDAQ:EXTR)

Q2 2011 Earnings Call

January 31, 2011 5:00 pm ET

Executives

Bob Corey - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Oscar Rodriguez - Chief Executive Officer, President and Director

Analysts

Rohit Chopra - Wedbush Securities Inc.

Operator

Welcome to Extreme Networks 2011 Second Quarter Conference Call. [Operator Instructions] On the call today from Extreme Networks are Oscar Rodriguez, President and CEO; and Bob L. Corey, CFO. As a reminder this conference is being recorded today, January 31, 2011.

This afternoon, Extreme Networks issued a press release announcing the company's financial results for the second fiscal year of 2011. A copy of this release and the slide presentation of the supporting financial materials are available in the Investors 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 the 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 products, customer acceptance of the company's products, customer buying and spending patterns, overall trends and economic conditions in 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 microeconomic environment worldwide; fluctuations in demand for company products and services; a highly competitive business environment for network switching equipment; the company's effectiveness in controlling expenses; the possibility that the company might experience delays in development of new technology and products; customer response to its new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation; and the dependency on third parties for certain components and for the manufacturing of company 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 filings 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 of GAAP to non-GAAP and information in the tables that accompany 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 may be subject to change when the review of the fiscal quarter is concluded and/or a Form 10-Q is filed.

I would now like to turn the call over to Bob L. Corey, Executive Vice President and CFO of Extreme Networks.

Bob Corey

Thank you, Tyrone, and welcome to the Extreme Networks Q2 Fiscal 2011 Earnings Conference Call. I'm joined today by Oscar Rodriguez, our President and CEO. I'll turn the call over to Oscar for his comments regarding the focus and strategy and market dynamics. After that, I'll follow up with brief comments on the quarter. I'll summarize and provide guidance for Q3 fiscal '11, and then we'll open up the Q&A. So Oscar, I'll turn it over to you now.

Oscar Rodriguez

Thank you, Bob. I've now been with Extreme for just over five months, and I'm pleased to participate on this, my second investor call. In our last call, I introduced my reasons for joining Extreme at this time. I provided an overview of the evolution of Ethernet technology and discussed how Ethernet has become the cost-effective, high-performance, resilient and reliable underlying data infrastructure that has served to transform the infrastructure of the campus, the Data Center and Service Provider markets worldwide. Through this transformation, Ethernet has come to enable the global communications infrastructure for Service Providers and allow Enterprise CIOs to deliver new services that drive high enterprise productivity by enabling mobility for applications, people and machines.

I also briefly described the process we've employed to analyze the core competencies of our company so as to identify and highlight any unrealized potential within the organization. As we discussed last time, I believe that we have the innovative capacity to create leading-edge products and services that can deliver real customer value, that we have a solid team who are focused on serving our customers well and that our people have the passion and skills needed for Extreme to succeed.

As a result of the analysis, we have sharpened our corporate strategy, and we believe that this new strategic focus will enable us to accelerate our ability to deliver double-digit operating income by driving both revenue creation in high-growth target vertical markets and by driving continued improvements in operating costs.

I will discuss some of the aspects of this strategy today. First, I've taken steps to drive additional operating efficiencies by lowering costs and increasing productivity. In mid January, we reduced headcount and initiated programs aimed at driving additional efficiencies throughout the company. We believe these programs will accelerate our ability to target and achieve our target of double-digit operating income.

Going forward, we believe these actions, when fully implemented, will expand our gross margin percentage and lower our operating expense by up to $2 million per quarter or $8 million annually. In addition, we expect further gross margin and cash flow benefits from these changes as we increase revenue. To drive revenue growth, we are sharpening our focus to more completely address high-growth, targeted vertical markets within the larger customer base that we currently serve. While we will continue to serve the wider markets of Enterprises and Service Providers, we will focus on high-growth targeted verticals within these markets to improve our ability to focus our customer segment knowledge and better address the requirements, challenges and opportunities of the selected vertical; to develop deeper industry-specific partnerships and develop the key channels to market that will better leverage the company's geographic and demographic reach for each specific vertical; to also align our investments and leverage our technology to deliver the products and solutions we believe are needed to drive higher customer value for each specific vertical; and finally, to gain share and attain a solution-leadership position in these specific verticals.

We believe that with a renewed strategic focus in specific vertical markets and improved operational effectiveness, Extreme Networks has the potential to deliver enhanced customer value and stronger financial performance. We have selected specific high-growth vertical markets which we believe enable Extreme to leverage its deep competencies in Ethernet technology and new networking software innovations, while delivering unique products and solutions designed for those vertical markets.

Additionally, the attention and focus on specific vertical markets will drive the selection of focus and specific channels to market and with the goal of attaining solution leadership within these verticals. While we believe that Extreme's leading-edge technical prowess and channel reach has broad market applicability, we have chosen to focus on three initial targeted vertical markets where we expect to drive key customer wins and to establish a solution-leadership position.

The first of these vertical markets is the managed cloud service provider vertical, where Extreme delivers essential data center networking technologies that we believe can enable managed cloud service providers to drive new revenue streams, while lowering their total cost of operations and driving increasingly efficient service delivery.

The second vertical focuses on educational institutions, specifically those serving an increasingly mobile student community where integrated network flexibility, awareness and control, automation and total cost of operation are key requirements and where price performance has a high value for both the campus and Data Center applications there.

The third vertical focuses on the growing and necessary application of leading-edge Ethernet technologies for mobile backhaul in 2G, 3G and 4G LTE networks for mobile service providers that can deliver the high bandwidth and control needed to enable the new world of smart devices and mobile applications.

I will review each of these markets briefly now and provide some color on our customer traction in each. At Extreme, we continue to develop powerful Data Center products that are designed to provide leading price performance while delivering the software intelligence, control and power efficiency that enables CIOs to simplify the migration of the Data Center resources from physical to virtual to cloud-based architectures. With the emergence of virtualization, cloud service providers offer CIOs due flexibility to lower their total cost of operations. With increasing growth in the deployment of cloud-based services for Software-as-a-Service, platform as a service and Infrastructure-as-a-Service offerings, new cloud service providers require a network which can flexibly deliver new revenue streams while lowering the cost of operations to enhance their service margins. Extreme Networks' traditional focus on price performance, automation, services scaling and solutions leveraging the efficient economics of Ethernet, we believe will enable the company to deliver the increased value needed to address the requirements of emerging managed cloud and hosting service providers.

While managed services customer environments are similar to large private enterprise data centers, these cloud service providers have a distinct need to optimize, automate and lower the cost of doing business in their infrastructure and thereby deliver highly responsive and highly flexible services through the deployment of best-of-breed solutions.

Building upon our work in Data Center solutions over the past 18 months, we have already won key managed cloud service provider and private data center customers in North America and Europe. We believe that with enhanced Extreme Data Center products, based on our extensible XOS operating software that provides virtualization, automation, awareness and control and enables a lower total cost of operations, we are well positioned to address the critical needs of these cloud service providers.

The global education vertical represents a large and changing market. Students and faculty and administrators are increasingly mobile and have a need to access institutional resources regardless of the platform or location of access and a need to access the content and resources that are specific to their jobs and positions. CIOs in this vertical are confronted by a growing wave of demands to empower and enable the mobile student, mobile researcher and mobile faculty with an automated and intelligent campus and Data Center network that can provide the right bandwidth, priority and quality of experience needed to enhance their productivity. We have substantial experience in this vertical, and we have established regional enterprise channels to address the needs of this changing market.

For example, this quarter, we saw eight notable deals worldwide, including prestigious educational institutions in Japan, North America and Western Europe. In the United Kingdom, as an example, Bolton College, one of the Northwest's largest continuing educational facilities, deployed an Extreme campus infrastructure to enable the convergence of new voice over IP, high-definition TV and closed-circuit TV services onto one reliable high-performance network. By leveraging the capabilities of our XOS operating system, inactive telephone handsets and motion sensor-enabled, closed-circuit TV cameras, automatically power down when not in use to help lower the cost of operations and reduce their carbon footprint. Also within this educational vertical, Sioux City Community Schools of Iowa deployed an Extreme solution to upgrade its district-wide network implementing various Summit X450 switches across hundreds of classrooms and related educational facilities at 25 different schools.

Extreme Networks has provided Ethernet products to the global mobile service provider vertical for the past several years through our Strategic Alliance channel partners. We serve major mobile operators around the world through established relationships with four of the top six mobile network equipment providers in mobility, with Extreme providing key Ethernet products as a part of their overall mobile service provider solutions. This vertical represented approximately 10% of our revenue in fiscal year 2010, and this market is now changing significantly.

With the explosive growth in the use of commercial and consumer mobile devices, mobile carriers are delivering new services to support the data traffic required by the emergence of sophisticated high-bandwidth applications for our smart phones and mobile pad devices. This has created a significant need for mobile service providers to be able to significantly scale the performance and reliability of their mobile backhaul infrastructure and to drive the evolution of 2G to 3G to 4G LTE networks to provide higher bandwidth. The evolution of both mobility and microwave backhaul networks to deliver higher bandwidth data communication services creates a demand for a new generation of Ethernet-based infrastructure products that can deliver higher scale, higher performance and greater reliability and that can provide a smooth transition from TDM networks to pure Ethernet backhaul.

We believe that we can leverage our experience in Ethernet technology, our pioneering position in high reliability packet ring-based architectures, our innovations and pervasive access to awareness and control and our channel access through the large mobile network equipment providers in this market to deliver high customer value in the high-growth mobile service provider market vertical.

These markets represent our initial selected targeted and vertical markets where we believe customers have demonstrated a common need for network solutions providing pervasive awareness and control and that enable a seamless user experience and that drive a consistent and optimized quality of experience for people and machines. To drive success in these market verticals, we are focusing select sales, marketing and engineering resources to address the specific needs of these verticals. With specific customer wins already in hand, we believe this focus will enable us to drive solution leadership positions and to gain market share. As a part of our focus on key vertical markets, we will periodically review opportunities for expansion and investment in adjacent vertical markets where we can leverage our technologies and our expertise.

While we're driving specific vertical investments in these markets, we also continue to serve our customers and engage new customers across the globe. During the quarter, we had new wins outside of these verticals in all of our territories. For example, the infrastructure development finance company in India, an organization specializing in infrastructure finance, selected Extreme Networks products for their internal use. This customer needed to contain IT operating costs while also enhancing IT services and user quality of experience. Utilizing our identity management capability to automatically discover and authenticate its fleet of IP phones and to configure voice network capability and to set Quality of Service parameters for the network, this allowed them to reduce the time and resources required to maintain and support the network while also positively impacting the experience of their users in the network.

In another example of leading-edge innovations that deliver leading price performance, the NASA Goddard Space Flight Center demonstrated a standards-based 40 gigabit network link for the first time using our Summit X650 switches at the supercomputing trade show in New Orleans. We expect 40 gigabit technology, coupled with pervasive identity management, automation, awareness and control to be a key building block for cloud services and mobile service provider networks and their evolution.

In another customer example, Lowell General Hospital of Massachusetts, a customer with a clear focus on enabling higher quality patient care, patient visitor and staff safety and community wellness education underwent a significant network upgrade to enable the hospital to provide new services for real time voice and video communications and to enable a highly reliable infrastructure to serve the hospital's critical clinical care systems. With the implementation of our Identity Manager Solution, the IT team is able to automatically and accurately identify and control connected users as they log on to the network, thereby creating a more secure environment.

We continue to win new Enterprise customers in all of our geographic markets with Campus and Data Center solutions that are optimized for the new world of people and machines and that provide key software technologies that enable pervasive access, awareness and control from the converged enterprise to the edge to the cloud.

In summary, we believe that the markets we serve are strong, and our innovation is providing real value to our customers. We're continuing to focus on driving profitability and cash generation, and our sharpened focus on high-specific vertical markets and high-growth markets served by integrated sales and marketing programs, our expanded channels to market and our focus on building market-leading products, we believe can drive the revenue growth and further increase stockholder value. Our team has already begun to execute on this strategy, and we look forward to having an active and engaged dialogue with all of our investors as we continue to drive increasing value for our stockholders.

And now I'll turn the call back over to Bob, who will share more details regarding the results of this quarter. Bob?

Bob Corey

Okay, great. Thank you, Oscar. As in previous periods, we've posted a slide presentation on our website at extremenetworks.com under Investor Relations that I hope you'll find useful. As a reminder, all of my comments will be non-GAAP except for the revenue and number of common shares. Non-GAAP results exclude stock-based compensation, restructuring charges and 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 Q2.

Based upon solid sales in Europe and Asia Pacific, we're reporting total revenue of $85.1 million for the quarter, which is in the range of previously issued guidance of $85 million to $88 million. At 6% of revenue for the quarter, we're reporting net income of $5.1 million or earnings per share of $0.06, which is in the midpoint of our EPS guidance.

During Q2, we continued to perform and drive operational execution as we reported product revenue of $70.3 million, representing an increase of 9% year-over-year and an increase of 2% sequentially from Q1. With regard to product revenue by geography, the Americas reported $19.8 million, EMEA reported $35.2 million and Asia Pac reported solid performance at $15.3 million. While product revenue for the Americas increased about 8% over Q2 last year, it did not meet our internal targets for performance in the quarter, as the number and size of larger deals in the U.S. were down in the quarter and we experienced softness in the eastern part of the U.S. We just appointed a new Vice President of North American Sales and have reorganized North America to provide for improved customer focus.

EMEA product revenue increased 11% from Q1 as we saw stronger Service Providers sales, as we saw increased revenue from our Alliance partners throughout that region. Asia Pacific product revenue declined 7% sequentially but was up nearly 19% year-over-year. Asia Pac revenue was driven by strong sales in China and India. Across the globe, during the quarter, we closed 18 new customers with deal sizes about $100,000. Linearity in the quarter was back-end loaded as the Americas’ softness in bookings continued to have a negative impact.

Commenting on the mix of Enterprise versus Service Provider revenue. The mix for the quarter was an increase in Service Provider revenue representing 29% compared to 24% in Q1. This was mainly a result of higher sales by our Alliance partners in EMEA and America. Our mix of stackables to chassis remained unchanged at 73% to 27% as the content on deals in Asia had higher chassis content during the quarter. Our book-to-bill for the quarter was above one, resulting primarily from soft bookings in the Americas.

Our reported gross margin percentage for the quarter was 56.4% even with Q1. The current quarter margin was unfavorably impacted by a mix shift to international revenues and select discounting. North America has traditionally posted our strongest gross margin percentages. If you'll recall, we had large orders in Asia last quarter in Q1 that unfavorably impacted the margin percentage. We continue to target our gross margin percentage as between 57% to 59%.

Operating expenses for the quarter were $42.7 million compared with $42.6 million in Q1. An increase in variable sales commission and a merit increase for non-executive employees were partially offset by lower litigation cost. Operating expense as a percent of revenue continued to expand with operating income of $5.3 million or 6.2% of revenue compared to 5.5% in Q1 and 5.4% in Q2 last year. EBITDA was $6.9 million compared to $6.1 million in Q1 and $5.6 million in Q2 of last year. Total cash and investments increased to $141.7 million. That's up $6 million in the quarter, and of course, we have no long-term debt.

Cash and investments were favorably impacted by collections of $3.8 million, cash settlement related to the litigation previously commented on and positive cash flow from operations. Day sales outstanding and accounts receivable increased to 50 days from 43 days in Q1 based on the linearity in the quarter and the increased billings to our Alliance partners, which traditionally carry longer payment terms. Inventory increased to $24.2 million to support new product releases.

Total deferred revenue of $56.9 million was up from $51.4 million in Q1. This is due to an increase in the deferred maintenance revenue as Q2 saw strong maintenance bookings along with higher deferred disti [distributor] revenue in EMEA. Overall full-time headcount increased to 763 at quarter end, an increase of 17 from the prior quarter. Our focus on headcount additions continues to be in sales and service and engineering.

This concludes my comments on Q2 results. I'll now turn to guidance for Q3.

During mid January, we've taken actions to reduce headcount by about 35 employees or approximately 5% worldwide. This action will result in a restructuring charge to expense in Q3 of between $1 million to $1.5 million. Further, we've initiated programs aimed at driving additional efficiencies throughout the company. We believe these programs and the reduction in the number of employees will expand gross margins and accelerate achieving our stated target of double-digit operating income. Going forward, we believe these actions, when fully implemented, will expand our gross margin percentage and lower operating expense by up to $2 million per quarter or $8 million annually.

For Q3, we anticipate net revenue to be between $82 million to $85 million, reflecting a smaller seasonal decrease from Q2 in product revenue and an increase from 5% to 9% from last year. Further, we anticipate earnings per share before a charge related to realignment of our strategy of $0.05 to $0.08 per share, fully diluted. In conjunction with the realignment of our strategy, we anticipate to write off assets of between $4 million to $4.5 million or $0.04 to $0.05 per diluted share. We continue to be focused on making our customers and partners successful and increasing stockholder value.

With that, I'll turn the call back over to the operator for a Q&A session. Tyrone?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Rohit Chopra of Wedbush Securities.

Rohit Chopra - Wedbush Securities Inc.

So let me just ask you on the $8 million, first of all. How would you say that's split between savings and cost of goods versus on the operating expense side? Is it mostly people that you're taking out? So is it mostly going to be in sales and marketing or R&D? What's actually happening in that $8 million?

Bob Corey

So it's up to $2 million in a quarter, $8 million in a year, like we said, and the lion's share of it is in the operating expense line. However, we are target on expanding the gross margin percentage with a variety of programs that we expect to be able to implement throughout Q3 and Q4, right? So hopefully, you'll see an uptick in the gross margin contribution and then some favorability in the operating expense line. As far as some of the actions we've taken, we did not significantly or really reduce any headcount in sales and marketing, except in the back office for channel management and sales, we did eliminate some positions. But primarily, we're going to continue to expand sales & marketing headcount on a geographic basis as we see an opportunity to grow revenue. And in the engineering side, we're looking to increase engineering headcount by about additional 20% over the coming quarters.

Rohit Chopra - Wedbush Securities Inc.

Engineering?

Bob Corey

Yes.

Rohit Chopra - Wedbush Securities Inc.

Let's talk about that plan. Does the plan require new people in those specific verticals? Does it require new products? Does it require new channels? What actually has to be done? I mean, it's one thing to just say I'm going to target these verticals. I just want to know, what do you need to do to get to those verticals or penetrate them a little bit more? Because I know you have education, you do a little bit of work in each one. But what needs to be done here?

Oscar Rodriguez

Rohit, it's Oscar. Let me take those -- it's a multifaceted question, so let me take the pieces one at a time if you don't mind. So first and foremost, when it comes to all of these verticals, the good market attack on some of the verticals is to already have established channels to market. For example, in the network equipment provider space where we're targeting the mobile Service Provider, we sell into that space into global mobile operators around the world and some of the biggest ones around the world, but we sell through large network equipment providers. And I'm not at liberty to mention their names, but they are four of the top six. Those are established channels to market and that particular vertical, what we'll be doing is creating a derivative product from the base technologies that we have in order to address the needs of the evolution from TDM and Ethernet combinations into pure Ethernet. So when that solution gets to be pure Ethernet, we're already there, and we'll be enhancing it with our existing ring technology and standardized capabilities that we clearly know how to do today. But in the process of getting there, there is an evolution path that requires some TDM interfaces and some synchronization to be added to those products. So I would characterize that as a specific development that then can be leveraged into other vertical markets as well. However, that's the first vertical market that will take that part of the development. So that vertical has established channels to market, established teams already in place, and what we're doing is creating a derivative product to address that market. So in the education market, that's clearly a market where we sell our existing products. We have existing regional channels to market, and what we want to do there is really institutionalize the solution sets and how we go to market on a global basis. It has not been as crisp and robust. So the ability for us to replicate the work that we've done in select regions, and the vertical has not been as expansive as it can be. And so therefore, that's really more of a solution set creation or let me say a specific definition of the solution set that goes there and, of course, the ability for us to leverage our reference customers that we have around the world there. So for that particular vertical, we've already hired specific solutions people for the enterprise space. We have a leader of enterprise solutions that's now in place who brings a history of multiple enterprise companies, and so that's part of the focus that we have there. Let me stop there. It sounds like you have another question. And then the last one is the cloud managed service provider. There's a place where we have been working and continue to work to deliver the leading-edge Data Center products, so that is no change to our focus in terms of the technology we'll be delivering. Clearly, those types of service providers like to select best of breed. The network is their cost of goods, and as a result of that, we believe that they're the sweet spot for the types of solution sets that we know how to sell well. So we know how to sell networks that bring great price performance, that lower the power consumption and the heat creation within the Data Center, that enable automation and fewer people to be used in terms of running the network. Those are all things that enable a managed service provider to see us as a great best-of-breed player. They also happen to be the kind of companies that select best of breed because since the network has their cost of goods, they want to have the very best and not necessarily one size fits all.

Rohit Chopra - Wedbush Securities Inc.

And then how do you get there? You're doing that on your own or you're working with partners?

Oscar Rodriguez

So the way to get there -- there's a place where we definitely would be building an expansive partner base that's beyond what we have today. We do have partners there. We already have several wins over the course of the past year. Unfortunately, I don't have the liberty to mention the specific customers at this point, all of them at this point. But we already have some established channels to market, and we need to develop more of them.

Rohit Chopra - Wedbush Securities Inc.

How do you compete with end-to-end players that are out there who may be already in these markets or have broader product sets or they already have the partners in place? So what needs to be done to differentiate Extreme versus everybody else?

Oscar Rodriguez

So specifically, in the cloud service, managed service provider market, is that correct, that vertical?

Rohit Chopra - Wedbush Securities Inc.

Sure, you can pick one. I mean, it's an overall question.

Oscar Rodriguez

Yes, in that particular case, I believe that what we're seeing is an evolution of that marketplace. We're already seeing some consolidations happening where small, initial players are beginning to be consolidated into some of the larger players. We're beginning to see the traditional telecom operators that have been under fire in terms of their margin from over-the-top television services or over-the-top mobile applications now begin to look at managed services and either Infrastructure-as-a-Service, Software-as-a-Service or some derivative. Maybe applications-as-a-service is a good way for them to enhance their revenue streams and enhance their margins. Those are the types of operators, the types of customers that typically, because they've been traditional Service Provider operators, they like to select best of breed. They do their homework. They have deep engineering capabilities. They have the ability to select best of breeds. And traditionally, they have not selected a single vendor to do it all for them because if their network is exactly like their competitor's network and exactly like the one thereafter, then the cost of goods is exactly the same and the price flexibility isn't very much, isn't very high. So you wind up with an environment that's no more competitive or less competitive than someone else but no advantage in the marketplace in terms of flexibility or in terms of new service creation capability or new offerings or effectively even a way to control your cost more effectively. So we believe that those are the types of customers that are going to select individual best-of-breed vendors and as opposed to buying a one-size-fits-all. There may be some that buy one-size-fits-all, don't get me wrong, but I believe that increasingly as the pressure comes from pricing and the need comes to control their cost of goods and be able to have more flexibility in what they offer, I believe that they will increasingly embrace best of breed.

Rohit Chopra - Wedbush Securities Inc.

I’m going to wrap a couple of ideas into one question, and if I'm an investor and there's a lot of people listening to the call, people want to understand what the milestones are, what they can measure from quarter-to-quarter, so if you can provide that? And what's the timeframe that they could look at for a change in the overall business? I mean, that's how we're going to get the stock to work, right? There has to be some kind of deliverables, and that was the one thing missing in the presentation. I just want to get a sense of where do we go from here from quarter-to-quarter, what can we measure and what's the timeframe?

Oscar Rodriguez

So two things. I think that you said it quite well in the recent publication that you created, which is this is not a one- or two-quarter strategy. This is a strategy that will clearly take four to six quarters to really begin to see the traction, and I think that the way you can measure it and the way we'll be measuring it as well, is not only in the customer wins that we report but also in the percentage of revenue that you'll see from each one of these vertical markets as a percentage of our overall revenue.

Rohit Chopra - Wedbush Securities Inc.

Can you tell us what that is now so then we can start working our way through the next few quarters?

Oscar Rodriguez

No. I think at this point, we're not ready to discuss that, but I think we will be ready to discuss that as we go forward.

Operator

The next question or comment is from of Brian Vodman [ph] of Pelagic Capital [ph].

Unidentified Analyst

My question was very much similar to the last caller's closing comments, and that's just to try to get you to quantify the magnitude and timing of this organic growth from these initiatives that we might see. As an investor, it's really difficult to get our arms around it. I mean, it sounds wonderful and very exciting, but without any tangible metrics by which to look at, it's tough in my seat to really understand what's going on.

Oscar Rodriguez

Yes, understood. Again, I believe that the timing is very similar to and the mileage is going to vary here, but I think it's very similar and appropriate to expect the four- to six-quarter type of evolution of the company and for us to be able to demonstrate traction. The real question, I think, that's still open that you're putting out is what is the percentage of revenue that we would assign to each vertical market as we go forward? And how do we see the revenue base transitioning for the company? And again, we're not ready to discuss that today, but I clearly take it as a view of something we have to come back with.

Unidentified Analyst

Is there a timing in which we could expect to hear -- quite frankly, I was expecting to hear some of those things today, and so is there a time in the future in which, I mean maybe it's not a time certain but after something has been accomplished in which we might hear more about that?

Oscar Rodriguez

So yes, I think if you look at, in my seat, I'm looking at the pieces we have to put into place, and as I said, we've already begun to execute on the strategy. You should also expect that as we look at any verticals that we would come to market and come to the investor base with the view of how do we measure it, I think one of the things that we're going to do is get our arms around this and probably within a quarter, you should be able to see more tangible measurements that you can latch onto and you'll be able to follow.

Unidentified Analyst

And then the assets that are going to be written down, is that going to lower the D&A going forward?

Bob Corey

No, what they are, this is Bob -- they're basically discontinuance of a product line as we reemphasize some of these verticals, right? And so we're going to be taking a charge to cost of goods. It will be in the third quarter in conjunction with the realignment of the strategy.

Unidentified Analyst

So is that inventory being written off?

Bob Corey

Yes, it's inventory and associated assets. That's correct.

Unidentified Analyst

And then as it relates to the headcount reduction, it's unclear, where exactly are those? I mean, I know you said that some of them are going to be in the back office and channel management, but I can't imagine 5% of the workforce being there. Where else might those bodies come from? It sounds like you're adding to R&D, you're adding to Sales & Marketing so I guess it's...

Bob Corey

Yes, overall, there's some shift in the location of headcounts, right? In some functions, we're looking for additional headcount in low-cost areas on a global basis, right? So in some cases, we've dialed down some certain positions, and then we'll be replacing those positions in the future. Those replacement positions will be focused principally in sales, marketing and engineering, right? We continue to drive efficiencies in the sales channel, right? That was the back office stuff that I mentioned before, right, plus in the finance and the operations area as well.

Unidentified Analyst

And any new development as it relates to the building sale or the land sale?

Oscar Rodriguez

No. It's still progressing as we've previously discussed and disclosed. It's an option, and there are certain hurdles that -- what’s the name of the company? Trumark? Is that right? Trumark has to achieve, and we expect that moving forward as best as we would anticipate.

Operator

[Operator Instructions] Our next question is from Mike Jon [ph] of Hartland.

Unidentified Analyst

One housekeeping, I just want to make sure the $1 million to $1.5 million restructuring charge is separate from the $4 million to $4.5 million realignment charge.

Bob Corey

It is.

Unidentified Analyst

So it's not included in your guidance, correct?

Bob Corey

That's correct because our guidance relates to pro forma operating income, pro forma guidance and it's excluded.

Unidentified Analyst

On previous calls, you've talked about long-term profitability targets. My question is have they changed and how long until you get back to let's say double-digit operating margin? If the top line's going to take four to six quarters of transformation, how long until the bottom line or the operating margin takes shape?

Bob Corey

Yes, this is Bob. I'll give you some color on that. October, last fall in 2009, when we restructured the company, we thought we reduced the breakeven for the company. And at that time, we said that the quarterly revenue target needed to get to double-digit operating income was around $90 million, okay? And then in fiscal 2011, we implemented some additional spending, things like we did a merit increase, right, for the non-executive employees. We instituted the non-executive bonus accrual. We reinstituted matching of 401(k), some things that we thought were important to do for retention and really to motivate the workforce. That obviously had an impact on pushing up the quarterly target to get to double-digit operating income. With the actions we've just taken, okay, we believe that we're getting closer to like $87 million a quarter now to get to double-digit operating income. So we will continue to keep double-digit operating income in close sight for all the actions we're trying to take to drive the business. So we're thinking after the actions are fully implemented that we're initiating now, we think around $87 million a quarter, we'll be able to do double-digit operating income contribution.

Operator

I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Oscar Rodriguez

All right, very good. So I want to thank everyone who participated on the call, and I encourage all of our investors to continue to dialogue with us. We look forward to having an active dialogue with all of our investors. And Bob and I will hopefully get a chance to meet all of you face to face very soon in the quarter. Thank you very much for joining, and thank you for being an Extreme investor.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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 www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: Extreme Networks' CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts