Ruckus Wireless' (RKUS) Selina Lo on Q4 2015 Results - Earnings Call Transcript

| About: Ruckus Wireless (RKUS)

Ruckus Wireless (NYSE:RKUS)

Q4 2015 Earnings Conference Call

February 09, 2016 5:00 PM ET

Executives

Kim Watkins - Head of IR

Selina Lo - President & CEO

Seamus Hennessy - CFO

Analysts

Ittai Kidron - Oppenheimer

Jess Lubert - Wells Fargo

Doug Clark - Goldman Sachs

Ryan Hutchinson - Guggenheim

Catharine Trebnick - Dougherty

James Faucette - Morgan Stanley

Sanjiv Wadhwani - Stifel

Jason Ader - William Blair

Rajesh Ghai - Macquarie.

John Lucia - JMP Securities.

Vijay Bhagavath - Deutsche Bank.

Rohit Chopra - Buckingham Research

Mitch Steves - RBC Capital Markets

Operator

Welcome to the Ruckus Wireless Fourth Quarter and Fiscal 2015 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Kim Watkins, Head of Investor Relations. Kim, you may begin your conference.

Kim Watkins

Thank you. Thank you for joining us on today's conference call to discuss Ruckus Wireless' fourth quarter 2015 financial results. This call is also being broadcast live over the web and can be found on the Investor Relations section of our website. With me on today's call are Selina Lo, our President and Chief Executive Officer; and Seamus Hennessy, our Chief Financial Officer.

Please note that certain remarks we make on the call constitute forward-looking statements. This includes statements related to financial expectations for the first quarter of 2016 and 2016 as a whole, revenue and earnings growth rates, operating expenses, cash flow, seasonality, strategic priorities, anticipated E-Rate opportunities, anticipated tax rates, new product releases and adoption rates, upgrade cycles, new market opportunities including from partnerships with other companies, market growth, growth in customer base, competitive position and differentiators, future customer demands, trends in technology developments and future product offerings and innovations.

Risks and uncertainties can cause actual results or events to differ materially from those anticipated in these forward-looking statements. This includes risks and uncertainties related to market growth and competitive market position, technological change, the relative success of Ruckus Wireless’ chosen strategic priorities, unpredictable market conditions, changes in E-Rate funding requirements and procedures, product development delays, customer deployment delays, expense management and currency fluctuations.

Additional risks and uncertainties are described from time-to-time under the caption Risk Factors and elsewhere in our filings and reports with the US Securities and Exchange Commission, such as our Annual Report on Form 10-K filed with the SEC on February 25, 2015 and our Quarterly Report on Form 10-Q filed with the SEC on October 30, 2015. Our SEC filings are available on the Investor Relations section of the company's website and on the SEC's website.

All forward-looking statements made in this call are based on information available to the company as of today. Ruckus does not assume any obligation to update the forward-looking statements stated in this call as we built this new information, future events, or changes in expectations except as required by law.

In addition, we will be presenting and discussing certain non-GAAP financial measures in this presentation. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures, please see today's press release, which is posted on our website at www.ruckuswireless.com. Note that all share counts we discuss will be presented on a diluted weighted-average share basis.

With that, I'll turn the call over to Selina.

Selina Lo

Thank you, Kim, and thanks everyone for joining our earnings call today. We reported revenue of $100 million in Q4, within our guidance of $99 million to $104 million. Our revenue was impacted by a forecasted multi-million dollar E-rate opportunity from a service provider that was postponed late in the quarter due to administrative issues and related drag [ph].

The school district involved decided to resubmit its bid in next year’s E-rate program. However, we managed expenses well during the quarter, resulting in non-GAAP operating margin reaching 14%, at the top end of our guidance, and EPS of $0.13, also at the high-end of our guidance. Seamus will provide more details in our Q4 results in a few minutes.

In 2015, we grew revenue by 14%, in line with our guidance for low-to-mid teens annual growth. As you may recall, 2015 got off to a slow start due to E-rate. Nevertheless, we believe we outgrew the market for the eighth year in the row in 2015. Through the first three quarters of 2015, we outgrew the market by nearly 3x based on Dell'Oro’s Q3 Wireless LAN Market Report.

Our goal is to grow revenue faster than the market again in 2016. We are equally focused on driving bottom line growth and expect to grow earnings faster than revenue this year. To accelerate our top line in 2016, we have three strategic priorities. First, driving 802.11ac upgrades. Momentum for offers to market ZoneFlex R710 Wave 2 AP continues. It alone accounted for 11% of our AP revenue in Q4.

We also just introduced the new ZoneFlex R310, our low-priced entry-level - our lowest price entry-level 11ac access points. Probably less than one-third of our ac installed base is 11ac. With these products, we see an opportunity to accelerate 11ac upgrades among our customers. Furthermore, you see us aggressively build out our ways to ac portfolio throughout 2016.

Second, increasing direct touch to reach higher education and larger enterprise opportunities. We had been expanding our enterprise offerings to provide high-value solutions to larger enterprises, universities and municipalities. These include our scalable SmartZone and Virtual SmartZone controllers, Cloudpath onboarding and policy management service, SPoT Location Services and SCI smart analytics software.

In 2016, we are segmenting our sales force and dedicating resources to focus on larger opportunities, in addition to leveraging our partnerships with Brocade, IBM and Juniper. At the same time, we continue to drive core business growth through our optimized channel organization, leveraging SMB focused offerings such as Ruckus Unleashed. Since we began shipping during the middle of our fourth quarter, Unleashed has already exceeded our expectations.

Third, enabling managed services. We believe we have a largely untapped opportunity in enabling service providers to deliver managed services via cloud. Our NFV-based Virtual SmartZone and Virtual Smart platforms enable this transformation. Scalable to 30,000 access points per virtual cluster with built-in multi-tenancy support, Virtual SmartZone allows service providers to scale their managed services business on a pay-as-you-grow model. Virtual SmartZone continues to gain traction. Its install base grew over 40% sequentially to more than 1,200 instances.

In Q4, we also launched our largest virtual spot win for 18,000 existing APs from a managed service provider integrating the Smart Location software as a part of their cloud service. We believe that our technology continues to differentiate us against the competition. In addition to BeamFlex, SmartZone, Virtual SmartZone and Unleashed, we continue to build out our software in the current surface offerings with SPoT, SCI and now Cloudpath.

With specific onboarding and our cloud delivery model, we believe our Cloudpath solution is more secure and scalable than competitive products. Cloudpath enables us to upsize our new Wi-Fi wins and we intend to continue to sell it as a Wi-Fi vendor-agnostic solution. Strengthening our go-to market strategy, our partnerships with Brocade, IBM and Juniper are beginning to bear fruits. Juniper deployed a Ruckus Wave 2 network in the Aspiration Zone on its campus. In conjunction with Brocade, with each one of our largest competitors and one business from the Sacramento Kings to provide an 11ac Wave 2 network with location-based services and Smart analytics for its new arena more than one center and its surrounding development.

In addition, Brocade integrated the ability to monitor Ruckus APs in its recently introduced network Advisor release, extending our initial meet in the channel collaboration.

Now let me give you a few more proof points of our recent success. We won a new 11ac Wave 2 deployment at Western Sydney University, one of the largest universities in Australia, with more than 40,000 students, against our two largest competitors. We also won a Ruckus 11ac deployment at UNINOVE, one of the highest - largest higher education institutions in Brazil across five campuses serving 150,000 students. LinkNYC is bringing free gigabit Wi-Fi to all five boroughs of New York City, powered by an all-new, purpose-built fiber-optic network with Ruckus 11ac Wave 2 access points, that would deliver speeds 100x faster than average public Wi-Fi.

Before I turn the call over to Seamus, I know many of you are eagerly awaiting more insights into the new market opportunity in which we have been investing. Please join us for our conference call on February 19, so we can share our vision with you ahead of Mobile World Congress later this month, and we look forward to meeting with many of you in Barcelona.

In addition, we will be hosting our first Analyst Day in the second half of 2016 in New York City in order to provide you a more detailed view of our vision and longer term strategy.

Now I will turn the call over to Seamus, to discuss in more detail, our financial results for fourth Quarter and guidance for the first quarter.

Seamus Hennessy

Thank you, Selina. Good afternoon, everyone, and thanks for joining us on the call today. Our revenue came in below the midpoint guidance, but we achieved operating margin at the high-end of guidance and EPS above the midpoint of guidance, demonstrating our commitment to balancing investments while improving operating margins.

Q4 revenue was $100.1 million, an increase of 17% year-over-year and 1% sequentially. On a geographic basis, Americas accounted for 52% of total Q4 revenue and increased 17% year-over-year but fell 1% sequentially. But in the Americas, we saw a strength in hospitality and services provider, but education was lower than expected, primarily related to the matters Selina discussed in her opening remarks.

EMEA accounted for 26% of total Q4 revenue and increased 25% year-over-year, but fell 1% sequentially reflecting normal seasonality. Asia-Pacific accounted for 22% of total Q4 revenue and increased 6% year-over-year and 9% sequentially. Within Asia-Pacific, the strong U.S. dollar continued to create some headwinds to our business, but was offset by strength in India in both service provider and enterprise, including the initial upgrades of an existing service provider’s network to 11ac.

For 2015, we recorded revenue of $373.3 million, up 14% year-over-year, consistent with our guidance for low-to-mid-teens growth annually. Our revenue remains diversified between our enterprise and service provider businesses. Our total service provider business grew 16% year-over-year including 58 new service provider customers, 11 of which were added in Q4, along with strong repeat business from existing customers.

Excluding Asia-Pacific where we saw currency related volatility, our service provider revenue improved 26% year-over-year. Our service provider business continues to grow as we add new customers who deploy over multiple of years, creating a stable layering effect to our revenue. For example, in 2015 we had 20 accounts with sales over $1 million with an average of $4 million per account. This compares to $13 million-plus accounts in 2013.

Our enterprise business grew 14% year-over-year and we added over 17,000 new end customers. Service provider continued to be approximately one-third of total revenue and hospitality and education together account for approximately another third of total revenue.

In the quarter, gross margin of 69.4% was at the high end of guidance of 68.5% to 69.5%. Our strong gross margin reflects favorable product mix, economies of scale and normal discounting. We continue to see increasing demand from customers for 11ac products.

In Q4, within 11ac access point sales, Wave 1 accounted for approximately 68% and Wave 2 accounted for approximately 11%, for a combined total of 79% of all access points sales, up from 74% in the third quarter. Please note that we are currently only shipping one Wave 2 access point, and as Selina has discussed in her prepared remarks, we would aggressively build out a Wave 2 portfolio throughout 2016.

Q4 operating expenses were $55.5 million or 55.4% of revenue, compared to 55.8% of revenue in the same quarter of last year, and 55.7% of revenue in the prior quarter. Operating income in Q4 increased 19% year-over-year to a record $14.1 million or 14% of revenue, which was at the high end of our guidance and demonstrates our commitment to improving operating margin while investing for future growth.

Non-GAAP net income for the quarter was $13.4 million, up $0.13 per diluted share, above the midpoint of our guidance of $0.11 to $0.14 per diluted share and compared with $11.5 million or $0.12 per diluted share from Q4 2014. We had 100.5 million weighted average shares outstanding on a non-GAAP diluted basis in Q4.

On a GAAP basis, net income for the quarter was $2.8 million or a profit of $0.03 per diluted share, compared with a $2.9 million net profit or a $0.03 per diluted share in Q4 2014.

We continue to generate strong cash flow from operating activities and we've been cash flow positive since 2011. In Q4, cash provided by operating activities was strong at $14.4 million and total of $35.9 million in 2015.

Turning to the balance sheet. We finished Q4 with cash, cash equivalents, short-term investments and restricted cash totaling $235.5 million, an increase of $9.3 million from the prior quarter, and up $31.7 million of the prior-year. During Q4, we paid $7.2 million in connection with the Cloudpath acquisition.

Deferred revenue decreased $7.2 million sequentially, primarily as a result of a $9.9 million decrease related to the timing of stock and distribution, offset by $2.8 million increase in deferred services in subscription. As a reminder, deferred stock and distribution will fluctuate quarter-to-quarter depending on the timing of shipments into distribution. Average days sales outstanding on adjusted revenue basis was 70, up from 64 last quarter. And based on historical trends, we expect average days sales outstanding on an adjusted revenue basis to be in the range of 60 to 70 days going forward.

Before I provide Q1 guidance, I'd like to share some thoughts on our expected future revenue seasonality. As education has become a larger piece of our business, we anticipate the second and third quarters to be seasonally strongest, in particular, U.S. education as schools deploy during extended school breaks. Our first quarter is seasonally weakest and going forward we expect Q1 to be flat to slightly down sequentially from Q4, reflecting normal seasonal lower spending in U.S. education and normal seasonal softness in Asia-Pacific related to Chinese New Year.

Now, let me turn to our first quarter of 2016 guidance. In providing guidance for Q1, we've taken into account seasonality of education spending in the U.S., normal seasonality in Asia-Pacific and a cautious view of the impact of a strong dollar. As a reminder, all of our sales are denominated in U.S. dollars.

We expect first quarter 2016 to be in the range of $96 million to $101 million - our revenue to be in the range of $96 million to $101 million, an increase of approximately 20% year-over-year at the midpoint. We expect Q1 gross margins to be within 68.5% to 69.5% and operating margin within 8.5% to 11%. We expect EPS on a non-GAAP basis to be $0.08 to 0.10 per share. We are using approximately $100 million to $101 million weighted average shares outstanding on a non-GAAP diluted basis.

Note that our Q1 guidance includes a full quarter of operating expenses in connection with the Cloudpath acquisition. As we mentioned on our last earnings calls, we anticipate Cloudpath would be half-a-penny dilutive to our earnings in the first half of 2016, but accretive to the full-year of 2016. As a reminder, based on currency utilization of our federal and state NOLs and available federal tax credits, we expect our anticipate cash tax rate to remain approximately 5% through the end of 2016. In 2017, we expect to having approximately 20% to 25% effective anticipated cash tax rate.

Before I open up the call for questions, I want to provide some additional color as you build out your models for 2016. On the top line, we anticipate slight acceleration in our revenue growth in 2016 compared to the 14.2% growth we reported in 2015. In addition, we expect to drive improved operating leverage in our business in 2016 and we expect R&D as a percentage of revenue to decrease during the year. We remain committed to achieving our long-term operating margin target of 17%-plus for the fourth quarter of 2016.

Now we will take your questions. Operator, please open up the line.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from the line of Ittai Kidron with Oppenheimer.

Ittai Kidron

Thanks. Hi Selina and Seamus. Selina, maybe you could talk about from a big fisher standpoint, what are you seeing out there. I mean, clearly we look around and it feels very scary, but how bad is it really especially in the emerging markets and are you seeing any change in Europe?

Selina Lo

So first let me talk about Asia-Pacific. As we have mentioned and as we have seen already in Q3, the currency devaluation in certain countries have really affected the - elongated our sales cycle, and particularly the countries are China, Southeast Asia and Australia, New Zealand. These three regions together make up more than 50% of our Asia-Pacific revenue. So we are continuing to see this currency fluctuation and elongated sales cycle carrying on into Q4. And in terms of the rest of the geography, we don't see any weakness in EMEA and we are not seeing any weakness in the U.S., except for that one multi-million dollar deal that I referred to in my opening remarks.

Ittai Kidron

Great. And regarding that specific deal, can you give us a little bit more color why they just didn't get the funding this time around or the level of confidence you have in maintaining that relationship next year when they probably get?

Selina Lo

Yes. So this deal actually came from one of our service providers. It's a multi-million dollar E-rate opportunity. The customer actually received the award letter but there was a change in administration, and due to administrative issues and related to us, the administration decided to resubmit their application in the - its 2016/17 E-rate program. So the deal is no longer in our forecast. However the service provider continues to bid for the deal and we are - we continue to have a strong relationship with the service provider.

Ittai Kidron

Okay. And then lastly on buybacks. Given where the stock is, any thoughts on getting aggressive on that front?

Seamus Hennessy

Yes, I think in regards to that, our Board is always looking at all options to deliver shareholder value and we will continue to discuss with our Board and look at all options.

Ittai Kidron

Very good. Good luck guys.

Seamus Hennessy

Thanks Ittai.

Operator

And your next question comes from the line of Jess Lubert with Wells Fargo.

Jess Lubert

Hi guys thanks for taking my questions. I’ll also have a couple. Maybe just first, you mentioned that you were re-segmenting the sales force to focus on larger enterprise opportunities. So I was hoping to understand some of the puts and takes there, the expense requirements and to what degree these efforts are being driven by customer pull or if this was more of a proactive push. How big of a driver the large enterprise could be in 2016?

Selina Lo

Yes, sure. So we have been, actually over the last few quarters, hiring more and more sales managers with direct touch and larger enterprise experience, and it has been our plan to touch higher enterprises, higher education and larger enterprises. As part of it is that we are seeing those opportunities opening up to us, because we have been evolving our products from just Wi-Fi infrastructure to now high-value solutions with our NFV controllers as well as SPoT and SCI and Cloudpath. And so we know that there are lots of opportunities for us there and we decided this year to focus some of our sales force specifically to provide high touch support in those accounts, and at the same time in our channel organization, we have been optimizing that organization, leveraging channel programs and leveraging other resources we have, so that we can continue to grow our core business, especially since now we have very, very SMB-targeted products such as Unleashed as well as the R310.

Seamus Hennessy

And in addition to that, we will be leveraging the partnerships with Brocade, IBM and Juniper, but we also expect that sales and marketing as a percentage of revenue to continue to operate within our long-term model of 25% to 28%.

Jess Lubert

And then maybe just following up on that, Seamus, you're spending some relatively consistent in the last two quarters but your operating margin guidance seems to assume it is likely to increase sequentially during the March quarter. So I was just hoping to understand some of the Q1 expenses, and how should we should be thinking about the OpEx glide path beyond the March quarter. How do we get to that 17% operating margin our objective to end the year?

Seamus Hennessy

Yes, in regards to Q1, seasonally in Q1 we always see operating expenses increase. We have compliance costs in Q1 related being the public company, employer taxes reset at the start of the year and we also host our annual worldwide sales conference in Q1 and we also have a full quarter of operating expenses associated with the Cloudpath acquisition that we actually closed last quarter. But as we look out towards the rest of the year, we do expect R&D as a percentage of revenue to decline throughout the year. While it will slightly increase in real dollars, we do expect that R&D as a percentage of revenue will decline during the year. We continue to see sales and marketing within our long-term model of 25% to 28% and we've been efficient there, and we expect to continue to drive continued operating efficiency out of our G&A organization, so we are committed to hitting the 17% throughout the year.

And if you looked at the historical results, we've continued to increase operating margins as the years gone on.

Jess Lubert

Thanks guys.

Operator

And your next question comes from the line of Doug Clark with Goldman Sachs.

Selina Lo

Hi Doug.

Doug Clark

Thanks for taking my question. My first one is going back to E-rate. It's almost the time to start thinking about the 2016 ‘17 funding period, and if we think back to last year around this time, you kind of admitted that you were a bit late to the game or just from an execution standpoint could have changed a few things. Wondering if you think that, that is rectified heading into the 2016 funding opportunity, and if that could prove beneficial for you guys towards the back half of the year?

Selina Lo

Yes. So last year, there were some sales inhibitors that we have rectified. For example, last year there were some states we could not sell into. Now we have rectified that, so we can sell into all the states. Also we are now working with strategic switch partners including Juniper and Brocade and we have broadened our sales channel to more channels as well as larger channels. Also from a product perspective, this year we have our 11ac both at the high-end as well as our low R310, and Cloudpath has been very successful with K-to-12 and this year it's now part of our solutions.

Doug Clark

Great. That's helpful detail. And then perhaps a follow-up on that. You mentioned the R310 and there has been a number of new product announcements recently, particularly targeting the low end, so I just want to revisit the idea of kind of cannibalization of the high-end products and also what that could mean from a margin standpoint if those lower end products are indeed more successful?

Selina Lo

So there is not a cannibalization factor. The R310 is specifically targeting the low end of the 11ac, the entry level of 11ac. The next product down would be our 11n product. And I’ll let Seamus talk to the gross margin.

Seamus Hennessy

Yes, in regards to gross margin actually, even though the R310 is addressing lower end of the market, it does have a gross margins in line with our corporate average and you’ve seen that in the past as we've launched new products. All our products seem to have gross margins in line with our corporate average and our gross margins have been pretty stable over an extended period of time.

Doug Clark

Great. And then if I can sneak in one quick one, you mentioned on the horizon or ahead of Mobile World, a new product launch potentially. Is that something that will have an impact to 2016 revenues?

Selina Lo

So first of all, we didn't say a new product launch. We are going to do a webcast and disclose our strategy and our vision to you, and so I hope you will join us.

Seamus Hennessy

To that call. In regards to building out your models, don't expect any revenue from this discussion that we are going to have next week in our Mobile World Congress but we do expect that this should start to contribute to revenue, I’d say, sometime in the second half of 2017. But as Selina discussed, we will have an Analyst Day in the second half of this year and at that stage we will provide updated guidance in regards to the long-term revenue potential of that product line of opportunity.

Doug Clark

Great. Thanks a lot.

Operator

And your next question comes from the line of Ryan Hutchinson with Guggenheim.

Selina Lo

Hi Ryan.

Ryan Hutchinson

It’s just been on the market for almost two full quarters. Can you update us on how fast do you think the shift to controllers is taking place and where you see yourselves relative to the competition there?

Selina Lo

We lost the first part of your questions because somehow the line was cut off. Can you repeat the first half?

Ryan Hutchinson

Sure. So now that you’ve had Unleashed on the market for about two quarters, just wondering how fast do you think the shift to controller list is taking place.

Selina Lo

Okay. So we actually started shipping Unleashed in October, early October. So we have one quarter of shipment of Unleashed. I would say that it has exceeded our expectations but it's probably too early to really paint the picture in terms of its penetration. Unleashed is very specifically targeting the SMB part of our business, and so we don't see some kind of a massive move into controller list.

Ryan Hutchinson

Okay. And then one on E-rate. Any sense on how 471s are stacking up so far for fiscal ‘16 relative to last year just based on what you've seen?

Seamus Hennessy

I think it's too early for us to tell. The reality is that the 471 or the 470s can be filed through approximately end of March and 470 through the end of April. So the timeframe has been extended beyond last year. So I think it's too early for us to offer an opinion on how it’s backing up versus last year, but what we do see in the field is that there is a definitely a significant interest among schools and school districts to actually participate in the program.

Ryan Hutchinson

Okay. Thanks guys.

Operator

And your next question comes from the line of Catharine Trebnick with Dougherty.

Catharine Trebnick

Taking my question. Mine is regarding Wave 2. Do you think you can keep the momentum up with the product, because now we have Aruba discussing their Wave 2 product and Aerohive is expected to announce their product in March? And so I just wanted to get some more detail around what you expect the growth to be, can you keep your market share and the momentum going? Thank you.

Selina Lo

Yes. I expect that we will have a lead over our competitors for a period of time, and that the reason is, first of all we still haven't seen anybody shipping volume. We can’t buy the product in the channels. Secondly, we will be building out full portfolio of Wave 2 products, and don't forget that our Wave 2 product is not just standard chip-based multi-user MIMO. We also integrate our BeamFlex technology with it and all the RF optimization that came from our portfolio of patented technology, and I believe we will have a long-term advantage from a price performance perspective. So from an adoption perspective, today already in Q4, 11% of our AP product revenue came from just that single AP that is Wave 2 AP. And so I believe that the deployment experience and so on is going to account for a period of time.

Seamus Hennessy

The other thing too as well, Catherine, because we've been early to market with Wave 2, it has enabled us - it's an important factor in winning certain opportunities such as the LinkNYC project.

Catharine Trebnick

Okay. Thank you. I’ll come back in the queue later. Thanks.

Selina Lo

Okay.

Seamus Hennessy

Thanks Catharine.

Operator

And your next question comes from James Faucette with Morgan Stanley.

Selina Lo

Hi James.

James Faucette

Thank you very much. Hi. Just a couple of questions for me. First, you mentioned that you are increasing your sales focus on larger customers, but I'm wondering if that increased focus is on hospitality and kind of the upgrade opportunity there, or are you focusing more on some of the other verticals where you’ve had some success in the past? And then the second question is, I guess you have a number of new products that are coming to market. You mentioned new strategy that will start to you think generate revenue in 2017. How much of your new - of your sales realignment is also to get yourself better prepared to take advantage of these new products? Thanks.

Selina Lo

Okay. So let me answer the first part of your question. The direct sales efforts that we are emphasizing is towards developing large opportunities in the enterprise as well as higher education. Actually in terms of hospitality, I believe that our sales strategy has been pretty sound and that's why we have been successful in hospitality. So this sales force focus is to really help us getting to larger opportunities in the enterprise and also in higher education that potentially is now vacated by Aruba.

Seamus Hennessy

Yes, and to answer your other question about the new product initiatives that we are going to discuss on an earnings call next week and discuss more about Mobile World Congress, we've always discussed that this new initiative is all around leveraging the exact same sales force to sell the product and it will become a lot more clear when we talk about those next week.

Selina Lo

I would - just to give you one preview, okay. What we are going to talk about next week we will leverage our entire sales strategy. It will leverage from the channel all the way up to direct sales. James? Can we get our next question please?

James Faucette

Yes, that’s great. Thank you very much.

Seamus Hennessy

Thanks James.

Operator

And your next question comes from the line of Sanjiv Wadhwani with Stifel.

Sanjiv Wadhwani

Thanks. Couple of questions. Selina, any updates on the E-rate? What percentage of funding letters have gone out and what's the disbursement of funds compared to where we were three months ago?

Selina Lo

Okay, I'm going to let Seamus give you all the detailed numbers on E-rate.

Seamus Hennessy

Yes. So what we have seen as of last week, Sanjiv, is that about 76% of the funding dollars have been committed by the FCC of approximately $1.5 billion in request. There is still about 18% of those funding commitment dollars still pending and there is about 6% rejected or accounts sold. This is up from just over 50% last quarter when we talked to you, so there is still some way to go for the FCC to close it out. Schools actually have up until the end of Q3 to actually deploy part of the 2015/2016 program.

Selina Lo

That’s of the - as of Ruckus, how much of the 471 dollars have we continued to sell? We have seen about 40% more orders over the next Q1, Q2 and Q3.

Sanjiv Wadhwani

Got it. That's helpful. Two other questions. One is, any updates on Xclaim? And then second question is service providers seems to be kind of in that one-third of revenue range for the last many years. What gets that moving in terms of a higher percentage of sales? What gets momentum in that sector for you guys? Thanks.

Selina Lo

Okay.

Seamus Hennessy

Yes, in regards to Xclaim, I think we - quick step back. We introduced Xclaim to seal off the lower end of our markets and it's been effective in that endeavor for us, but on a go-forward basis, we've don't expect Xclaim to become a material contributor to our revenue. While it continues to contribute to our revenue, we don't expect it to be material.

Selina Lo

And in terms of service providers, our service provider - we continue to gain service provider customers, and as we have emphasized over the last year that service provider deals are long-tail deals. Basically they continue to produce, for example, now we have 20 accounts with million-dollar accounts that have an average revenue generation of $4 million per account and that's up from $13 million in a couple of years ago. So we continue to grow that and they have a layering effect on our revenue.

Now when we look at going forward, we continue to see the MSOs spending money on Wi-Fi, building out infrastructure because of the whole Wi-Fi first movement. They have been very successful in that and that's certainly helped reduce CapEx and actually increase stickiness of their customers. But we also see a huge opportunity that is with service providers delivering managed services via cloud. All of them want to be able to get more B2B revenue, but they need to do it with a business model that makes sense for them.

And by delivering the managed services through a cloud-based infrastructure, they are able to pay-as-you-grow and so that is a very attractive model. And as we discussed already, we are seeing the Virtual SmartZone and the Virtual SPoT being instrumental in helping some of those service providers move into cloud.

Sanjiv Wadhwani

So just to follow-up, the announcement next week, does that make a difference in the whole service provider market that you have, or is that sort of targeting pretty much a broad-based customer set?

Selina Lo

It's pretty broad-base. I invite you to come and listen. And it does involve service providers. It also involves enterprises.

Sanjiv Wadhwani

All right. Sounds good. Thank you.

Selina Lo

Thank you.

Seamus Hennessy

Thanks Sanjiv.

Operator

And your next question comes from Jason Ader with William Blair.

Jason Ader

Yes, thank you. Let's see. So where to start? On the top line, I know that Selina and Seamus, you guys are hell-bent on not coming in late in 2016 on your revenue especially. So what gives you the confidence to project a slight acceleration in top line growth for 2016?

Seamus Hennessy

I think when we look at our overall business, there is a couple of drivers in the business right now. We see definitely 11ac upgrades cycle and we look out that less than one-third of the AP install base is upgraded from 11n to 11ac. And education spending, we expect to be significantly stronger in 2016 over 2015. In addition to that, we are going to be leveraging our partnerships that we've been building out in 2015 with guys like Brocade, IBM and Juniper. And we've also been enhancing our go-to market strategy both in direct touch and with our core business within the channels with new products such as Unleashed. So we feel based on our forecast going forward and just even on Q1 guidance towards the midpoint of sub-20% year-over-year, we do expect that we should be able to grow revenue slightly faster than what we did in 2015.

Jason Ader

Okay, great. And then just a follow-up maybe for you, Selina. What do you think the Wi-Fi market is actually growing at right now, especially given the fact that the E-rate is probably adding a couple of points of growth, may be it did a little less than expected in 2015, but it certainly looks like it could add a couple of points of growth in 2016. So I guess, if I maybe rephrase. What do you think the non-education part of the Wi-Fi market is growing?

Selina Lo

Okay. So according to Dell'Oro Group, 2016 the enterprise and service provider total Wireless LAN market is going to grow at 11% to 12%. I believe that’s their forecast for the year. Just to give you the contrast there, their Q1 to Q3 actual and Q4 estimated for 2015 was $4.5 billion - I mean, full year-to-year over $4.5 billion and $5.5 billion. And so based on their forecast, they are seeing 2016 to more than double from 2015 in terms of year-over-year growth.

Jason Ader

Okay. And is that mainly because of education you think?

Selina Lo

Well, education is a big piece of it, and also I think the migration to ac is another piece that they see. And I think Wave 1 with they are expecting - not just Ruckus would be shipping this year, and so I think that they see that also as a contributing factor.

Jason Ader

Okay. Thank you.

Selina Lo

Thanks.

Seamus Hennessy

Thanks Jason.

Operator

And your next question comes from the line of Rajesh Ghai with Macquarie.

Rajesh Ghai

Just a question on the macro continues to deteriorate in 2016, how important do you think Wi-Fi is going to be for in terms of spending priority for the enterprise and the service provider markets?

Selina Lo

Yes. So wireless I think is the secular trend. While people will be more careful or they may stretch the purchase into longer sales cycle, I do think that they cannot - not have wireless, and as a result, I think that we are much more insulated than other technologies for IT. And also if you look at the relative CapEx spend of Wi-Fi versus data-center and campus switching and all that, Wi-Fi is a relatively small amount, so I do believe that wireless will be affected less than other IT technologies.

Rajesh Ghai

Okay. And in terms of your partnerships, I think the Brocade and the Juniper partnerships, they are not exclusive. How do you see them kind of positioning you vis-à-vis the other partners and why you think that should help you versus others?

Selina Lo

Yes, so our relationship with Brocade and Juniper are not exclusive, so they of course would partner with other vendors. However I do believe that the real engagement comes in the field and we ourselves organizations are very, very well engaged with both Brocade and Juniper, and I believe - we already announced join wins with Brocade, and in fact Brocade is now moving to integrating Ruckus AP monitoring into their network management software. So I think overall the cushion is there and we’re seeing better and better pipelines over the last couple of quarters.

Rajesh Ghai

All right. Thank you.

Operator

Next question comes from John Lucia with JMP Securities.

John Lucia

Guys, thanks for taking my questions. My first question is, I just wanted to get your perspective on the affect the HP-Aruba acquisition is having on your business. Are you seeing any partner turnover that's benefiting Ruckus as a result of that, and do you think that's given you a better shot at capturing share at the higher end of the market?

Selina Lo

So two parts of the question. First, yes, we have seen Aruba or HP partners actually come and now have become Ruckus partners. I do think that we have taken business away from HP in the hospitality space because of the confusion in the transition. And I also think that, like I said in past quarters, Aruba is going to get distresses from the Wi-Fi space. I think that HP will get Aruba not only into campus switching but also data-center switching, and I think that in that kind of a drive I think that a lot of previous install base for Aruba can be vulnerable over the next period of a year or two. So I think that there is definitely opportunity for us.

John Lucia

Have you seen some transitions in the Aruba install base at this point or is that just to come in 2016?

Selina Lo

We are seeing - well, we are winning the deals from them. We have seen hospitality business move to Ruckus and we think that, that trend will continue.

John Lucia

Okay. And then, I just also wanted to dive deeper into your cloud opportunity. It sounds like the vSCG product has been doing pretty well, performed very well in the quarter. We've also heard that Meraki is performing well. It sounds like the market is starting to shift towards cloud-based deployment models, and I just wanted to get your perspective on that shift if that - if you're seeing that happen in the market?

Selina Lo

So I think in general, if you look at all technologies, cloud as a product delivery mechanism is increasing in popularity but the big question is whether we would offer our cloud service ourselves or whether we are going to enable our partners who are service providers to deliver cloud service. And I think that the Virtual SmartZone where it has been successful is that our partners get to take the best of breed solutions and build their custom cloud service that they deliver to their customers. You mentioned Meraki, I mean, Meraki has a - you have to buy everything from me approach to this, and there are people that are okay with that, but Ruckus tends to sell much more in the space of best of breed. And so in our space, I think our customer base really welcome the Virtual SmartZone which is called - what’s called a Virtual SCG before.

John Lucia

Okay. Thank you.

Selina Lo

Yes.

Operator

And your next question comes from the line of Vijay Bhagavath with Deutsche Bank.

Vijay Bhagavath

Yes, hi Selina. Two questions, if I may. One is with enterprise spending especially here in the U.S. and also overseas trending weak. Any indications you're getting from your customers in terms of pricing, lower pricing, anticipation of weaker demand? And then a quick follow-up would be around Wave 2. Can you help us understand the logistics in what would it be rewiring those cabling that would be involved in the infrastructure rip and replace. We’re trying to better understand the mechanics of the Wave 2 refresh cycle? Thanks.

Selina Lo

Yes, okay. So two parts to your question. First I'll address the enterprise IT spending. Like I said earlier, we expect that - because wireless is so mission-critical now and organizations basically don't have devices that have Ethernet ports anymore, so I think that the adoption of wireless is pretty high on the priority. And because of the relative CapEx of implementing Wi-Fi versus implementing a campus switch upgrade or data-center upgrade, I think that wireless is last thing that's going to fall off from an enterprise priority.

Now the second part of your question said, Wave 2 or how that affects campus switching and cabling. So currently, all the Wave 2 products have two gigabit Ethernet ports, and so they can plug into existing gig E switches, and we expect over time towards the later part of 2016, you may start seeing access points that may have n-based E ports, but indeed what you said is true that enterprise spending is going to be an issue, then I think people will also stick with their gigabit infrastructure - switch infrastructure for a while.

Now Ruckus, uniquely our Wave 2 products doesn't require any upgrade of the switch infrastructure. In fact our standard PoE will be able to support our Wave 2. So it hasn't been an issue for us at all.

Vijay Bhagavath

Okay. Thanks.

Seamus Hennessy

Thanks Vijay.

Operator

And your next question comes from Rohit Chopra with Buckingham Research.

Rohit Chopra

Apologize for the background noise, but had a couple of questions. First one, Selina, just want to get your thoughts on LWA, and if that could help or hurt the business when that finally sort of gets through, let's just call it an approval process? And then the second question really for Seamus. Just want to get your early thoughts on gross margin as you think about 2016, especially with Cloudpath. I know you talked about operating margin and leverage there, but just want to get a sense if there is any gross margin improvement potential with Cloudpath?

Selina Lo

So I'll address the LWA question first. LWA is one of the several mechanisms that can be used to leverage a license spectrum namely five gigahertz to run LTE. The unique thing with LWA is that LTE is basically - LTEs data is basically encapsulated in a tunnel and run transparently over a Wi-Fi infrastructure. So from a Ruckus perspective, it is the least disruptive way of running LTE in unlicensed least disruptive to Wi-Fi. And also it actually is a solution that service providers who have a Wi-Fi infrastructure can benefit from, because now on that Wi-Fi infrastructure they can run Wi-Fi or LTE depending on the network load and they can truly do off-load in dynamic fashion. Ruckus by the way, is working on this with the carrier and with some telecom equipment supplier.

Seamus Hennessy

Yes. And in regards to your question around Cloudpath. Just as a reminder, Cloudpath, we actually recognized revenue on Cloudpath over the term of the contract as the subscription service. It does have gross margins because of being a service and subscription based product higher than our corporate average, but we don't see it as a material top line enabler in 2016 and we see it more of as a strategically enabler to actually penetrate and expand into new market and verticals in 2016 and beyond.

Rohit Chopra

Thanks Seamus and Selina. Thank you.

Seamus Hennessy

Thanks Rohit.

Operator

And your next question comes from Mitch Steves with RBC Capital Markets.

Selina Lo

Hi Mitch.

Mitch Steves

Hey guys. Thanks for taking my question. I just had two quick ones, if I could. Do you guys have an internal target roughly on what market share gains you're expecting on an annual basis in the WAN market? And then secondly, now that the Cloudpath acquisition is complete, can you talk about some of the security updates or what you guys were lacking when you purchased the asset that’s going to give you a competitive advantage particularly in the 11ac market?

Seamus Hennessy

Yes, we don't provide specific market growth targets. What we do provide is…

Selina Lo

Market share.

Seamus Hennessy

Our market share targets and provide quarterly guidance and directional guidance on an annual basis.

Selina Lo

And the question on Cloudpath and security, actually Cloudpath is much more secure than our - than competitive solutions out there. Cloudpath is certificate-based instead of password base, and so it is much more secure, and so far it has been - our feel is really excited about it. We've already made some wins even in just five weeks of selling the product within Ruckus, so we are excited. And going forward, as we get some more larger sample or the statistics, we’ll give you more details.

Mitch Steves

Got it. And then, just as a quick follow-up on that. So does that imply that you could basically attract the financial vertical with the government sector better or is - I mean what vertical would that product really address better since its security-based?

Selina Lo

So Cloudpath today is largely education focus, that was the focus of the company prior to coming - to being merged with the Ruckus, and we will of course keep that education focus. And in fact, Cloudpath has in its install base, hundreds of universities and we definitely plan to use it as a opportunity for Ruckus to go there. There are other verticals that Cloudpath has sold in such as retail, but right now until we get some traction there, I don't want to specifically go into any particular vertical that we are going to focus on. But definitely leveraging Cloudpath’s install base is one strategy.

Mitch Steves

Got it. Thank you.

Seamus Hennessy

Thanks Mitch.

Operator

And your next question comes from Doug Clark with Goldman Sachs.

Selina Lo

Hey Doug, welcome back. Hi Doug?

Kim Watkins

Doug, are you there?

Operator

Doug dropped his line.

Selina Lo

Okay. Next question?

Operator

At this time, there are no further questions. This concludes the question-and-answer session.

Selina Lo

Well thank you for joining our call today. We look forward to speaking to you next week at our webcast, and seeing you all at Mobile World Congress.

Seamus Hennessy

Thank you.

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