Extreme Networks' (EXTR) CEO Ed Meyercord on Q3 2016 Results - Earnings Call Transcript

| About: Extreme Networks, (EXTR)

Extreme Networks Incorporated (NASDAQ:EXTR)

Q3 2016 Earnings Conference Call

April 27, 2016 04:30 PM ET


Frank Yoshino - VP Treasury & IR

Ed Meyercord - President & CEO

Ken Arola - EVP & CFO


Matt Robison - Wunderlich Securities

Victor Chiu - Raymond James

Christian Schwab - Craig-Hallum Capital

Ryan Flanagan - Buckingham Research


Good afternoon. And welcome to the Extreme Networks Third Quarter Fiscal 2016 Earnings Results Conference Call. This call is being recorded. With us today from the company is Ed Meyercord, the President and Chief Executive Officer; Ken Arola, the Chief Financial Officer; and Frank Yoshino, the Vice President of Treasury and Investor Relations.

At this time, I would like to turn the call over to Frank. Please go ahead, sir.

Frank Yoshino

Thank you, Crystal. And welcome to Extreme Networks third quarter fiscal year 2016 earnings conference call. This conference call is being broadcast live over the Internet and is being recorded on behalf of the company. Should you wish to not be recorded, please do not ask questions during the Q&A. The recording will be posted on Extreme Networks’ Web site for a replay shortly after the conclusion of the call. The presentations and the recording of the call are copyrighted property of the company and no other recording or reproduction is permitted unless authorized by the company in writing.

By now, you've had a chance to review the company's earnings press release. For your convenience, a copy of the release and supporting financial materials are available on the Investor Relations section of the company's Web site at extremenetworks.com.

I would like to remind you that during today's call, management will be making forward-looking statements within the meaning of the Safe Harbor provision of the Federal Securities laws regarding business and financial outlook. These forward-looking statements involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. You should not place undue reliance on forward-looking statements which speak only as of the date they are made. We undertake no obligation to update these statements after the call. For a detailed description of these risks and uncertainties, please refer to our most recent reports on Form 10-K, Form 10-Q and Form 8-K filed with the SEC in addition to our earnings release posted a few minutes ago on our Web site.

Throughout the conference call, the company will reference some financial metrics that are derived in accordance with Generally Accepted Accounting Principles or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the company's results internally. However, our non-GAAP results may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. Reconciliation of the non-GAAP information to corresponding GAAP measures is in our earnings press release issued today as well as in the Investor Relations section of our Web site.

In preparing non-GAAP information the company has excluded where applicable the impact of the acquisition and integration costs, purchase accounting adjustments, amortization of acquired intangibles, restructuring charges, overhead adjustments, litigation expenses, executive transition expenses and share-based compensation.

Now, I'll turn the call over to Extreme's President and CEO, Ed Meyercord for some opening comments.

Ed Meyercord

Thank you, Frank, and good afternoon. We appreciate you joining our earnings call today. I am pleased to report solid results, which came in towards the high end of our guidance range for the fourth quarter in a row. Our results were highlighted by organic year-over-year growth, significantly improved profitability and a strengthened balance sheet.

Despite the challenges highlighted by competitors in the enterprise market, we are bullish on the growth opportunity to deliver wireless and wired, software driven networking solutions to our targeted enterprise customers around the world. It was the acquisition of Ruckus announced this quarter we had yet another validation point of our strategy in acquiring Enterasys and expanding our product portfolio to include wireless with management access control and analytic software, the foundation of our solutions strategy.

Our ideal customer profile has a campus of 200 to 1,000 employees and revenue of $150 million to $1 billion. Additionally our target campus customers manage very transient environments. Students in universities, clinicians in hospitals, they have unique security requirements opened high availability with identity and access controls and they manage with a limited or constrained IT staff. We believe we are more focused now than any of our competitors on this target markets. Our focus and our strength in enterprise campus solutions give us confidence in our ability to take market share. We are forecasting revenue growth in calendar 2016 and in our fiscal 2017.

Progress is evident at our strategic initiatives to build five vertical enterprise go to market channels and to market our innovative technology solutions to those five verticals, our education, healthcare, manufacturing, government and hospitality public value customers. At the same time we continue to improve our tactical execution across all functional areas of the business and see improvements every quarter. From a macro level our industry sources which include IDC, Del Oro and Gartner project 1% growth in wired campus networking solutions.

While traditional wire networking and the enterprise datacenter market is flat there are two underlying trends with a large declining legacy market for switching infrastructure being offset by high-teens growth in the emerging market for campus private cloud. Even though we made a decision not to invest in developing high end datacenter and hyper scale cloud solutions Extreme’s switching portfolio is very competitive in these emerging campus hybrid and private cloud environments, where enterprise datacenters typically have a 1,000 servers or less.

The wireless segment of our target market is growing at approximately 6% and we expect the adoption of Wave 2 technology and Wi-Fi network upgrades to drive high single-digit growth over the next several years. When we add software to the mix growing at double-digit pace this gives us a total addressable market of 11 billion for enterprise end-to-end wired and wireless networking solutions growing at a 2% plus or minus cliff. When you zero in on our target verticals we estimate our target addressable market to be just over 8 billion.

We have intangible evidence of our progress in solutions selling. A year ago less than 30% of our account executives have sold wireless. As of today 100% of our AE’s have sold wireless and over half have sold wireless deals in excess of $100,000. As it relates to our software, our suite of management, identify and access control and analytics tools what we call Extreme management, Extreme control and Extreme analytics allow us to deliver unique solutions for our enterprise customers and pull through wireless and wired hardware sales. When we sell solutions we have a much larger ASP and higher gross margin. ASPs tend to be three to five times larger and gross margins are typically 10 points higher.

Here are a couple of recent examples of our success in solutions selling. When we learned that a CIO from a large hospital in our target healthcare vertical was struggling to simply identify comps needed in the operating room for heart transplant procedures it changed the dialogue from simply discussing hardware features to a full evaluation of the benefits of a total solution. Our Extreme management family of software with access control and analytics make it easy to solve these kinds of issues. As our Extreme software portfolio is multi vendor it also makes it easy for us to open the door for proof-of-concept and ultimately a larger sale, this is our land and expand strategy by leading the software.

Another example of the school district that wanted to make sure sufficient bandwidth for students taking standardized test online from select classrooms. When they learn that Extreme can with high confidence provides quality of service levels and required bandwidth at the right time in the right classrooms with our application controls and our analytics we were able to win the purchase order for wireless and wired access layer and infrastructure switching as well. We also have features where teachers can turn on and off QOS levels from a Web page for test times or shutting down access altogether to block access during Election this is Extreme’s SDN in action.

Turning to the third quarter results our non-GAAP revenue came in at 125.3 million that is 2 million above the midpoint of our guidance range this represents organic growth of 4%. This is the first quarter of organic growth for the company since our quarter ended June of 2011 that is almost five years. Our top line growth was driven by solutions selling and the strength of our education and hospitality public venue customers in North America. This year we've already grown the volume of solutions sales by more than 3-x from last year with sales to existing and new companies.

In the EMEA region where we have our highest gross margins put up a solid quarter led by growth in Germany. We are re building our APAC team and expect them to rebound in Q4 and fiscal 2017 with significant opportunities in China and India. We are rebuilding LATAM as well despite macroeconomic issues there our new team is poised for growth with many partnering customer opportunities coming into our pipeline.

Here is a sample wins in our five target vertical enterprise markets during the quarter. In education we received a large order for Columbia County Board of Education and beat out Cisco there. We also won the College of Southern Maryland a full solutions customer beat out Ruckus. In healthcare we won an upgrade for the Charlotte Area Medical Center producing our Wave 2 APs and our Extreme management software to guarantee quality of service and delivering critical voice over Wi-Fi. We also won one left in dental hospitals, good to have another national health system trust hospital in the UK, where we have over 20% market share in healthcare.

In government, we won deals with the Federal Statistics Department at Germany and the ASA a government owned airport operator in Mexico. In manufacturing, we landed a Volkswagen plant in Russia, Tata Motors in India and Samsung Electronics in South Korea. In hospitality, public venue we won the network refresh with New England Patriots. We expanded in the NHO with Buffalo Sabres, and we expanded into majorly baseball and we have won the Chicago Cubs.

By concentrating our initiatives in these five verticals, our goal is to continue to build on o7ur prior success and make it easier for sales teams and our partners to compete and win business. We are encouraged by early signs of success, as highlighted by these examples and these target enterprise customers value our high touch technical support. With our 100% in-source technical assistance center, 94% of issue resolution with first response text support and our online user community existing customers become our best reference accounts.

Going back to our performance, our gross margins for the quarter were 80 basis points higher in the same period last year on a non-GAAP basis it came in at the low end of our guidance range. During the quarter, our team did an excellent job of moving out older products in inventory which had a temporary affect in gross margins in the quarter. We expect gross margin expansion in future quarters.

From an operating expense perspective, you can see our significantly strengthened financial position and the benefits of the cost cutting measures with expenses down over 7 million from Q3 of fiscal '15, when you look at the year-over-year comparisons the growth in revenue, higher gross margins and lower operating expense. Our non-GAAP operating income is up $11 million. And our non-GAAP earnings per shares grew to $0.03 per share from a loss of $0.08 per share last year this is higher than analyst consensus by $0.01 a share.

Turning to our recent and upcoming product and software releases, our technology investment and product roadmap are focused on our target enterprise customers and aligned with our global share organization. At the end of last year, we announced the launch of our new Wave 2 APs and our Extreme cloud management platform. We had a first flow based Wave 2 APs in the market, and supports three time the number of devices and twice the speed with much higher reliability. With our core flow technology, we had unique feasibility into network applications and application performance from the access point edge.

Extreme cloud provides zero touch provisioning which significantly increases the speed and simplicity of enterprise made Wi-Fi deployment. Our official launch announcement for our new Extreme cloud 3.0 is coming next week at Enrock and will highlight zero touch provisioning for our access wired switches as well. We will be the first in the industry to offer cloud managed APs and access switches with a subscription payment model.

Another recent product announcement features our access edge switches that have been well received by our enterprise customers. We built a big pipeline for the 440 G2 a cost effective campus edge switch with multi-rate ports from 1 gig to 10 gig. The X620 is part of our family of 10 gigabit Ethernet edge switches with lower port density. The X620 family will support 2.5 and 5 gigs port speeds targeting September for Wave 2 flagged by deployment. Finally, our Extreme management 7.0 software release will become generally available this quarter and has a new user interface that is intuitive and easy to use, with over 140 feature enhancements in this release.

At Extreme, we are driving more and more focus on delivering new solutions to our targeted enterprise customers. In a world of increasing network complexity given the explosion of mobile devices and the need for security, high availability and quality of service requirements for application, Extreme is well prepared to address our enterprise customer needs. We are highly focused on growth pursuing a go-to-market strategy where Extreme has demonstrated success in the past with strong reference accounts, our solutions selling strategy is working with a higher percentage of sales including our software give the highest level of customer satisfaction, reintroducing new highly competitive solutions that address customers’ key requirements and future strength. And all of this is translating into growth and improved financial performance which we believe will continue to gain momentum in the future.

Now, let me turn it over to Ken for numbers.

Ken Arola

Thanks Ed. Before I get to the numbers, I would like to take a moment to make a few high level comments on our financial performance in particular the leverage we are seeing in the P&L and the strengthening of the balance sheet.

On a year-over-year basis we delivered 4% of revenue growth in quarter three and through continued diligent management of our expenses we delivered Q3 non-GAAP operating income of $5.4 million compared to a loss of $5.6 million in Q3 a year ago, an $11 million improvement year-over-year. Looking at year-to-date results we generated non-GAAP operating income of $23.7 million and EBITDA of $33.1 million in FY16, compared to operating income of $2.3 million and an EBITDA of $11.6 million in FY15 significant improvement in operating leverage.

From the beginning of fiscal 2016 we assume marked of improvement in the balance sheet with strong collection efforts contributing to growing cash by $12.1 million, driving accounts receivable down $30 million with DSOs decreasing to 46 days. We've reduced our inventories by $5.3 million and expect to drive further reductions by the end of fiscal 2016, and we reduced our debt by $8 million. I refer you to a more detailed chart depicting these improvements on the IR Web site deck. To sum it up we are very pleased with our performance over the past four quarters.

Now, let's review the third quarter results starting with revenue. Q3 GAAP revenue was $124.9 million compared to $139.3 million in quarter two and $119.6 million in Q3 a year ago. Q3 non-GAAP revenue was $125.3 million compared to $139.7 million in quarter two and $120.4 million in Q3 of last year. As mentioned the U.S. saw strong growth year-over-year driven by our education and hospitality as last public venue customers.

The geographic splits of revenues were as follows; North America contributed 52% to total revenue, EMEA contributed 35%, APAC contributed 9% and Latin America contributed 4%. Product revenue both GAAP and non-GAAP for quarter three was $92.7 million compared to $105.4 million in quarter two and $86.5 million in Q3 of last year, year-over-year product revenue grew 7.2%. Q3 GAAP service revenue was $32.2 million compared to $34 million in Q2 and $33.1 million in Q3 of last year. Non-GAAP service revenue for Q3 was $32.6 million compared to $34.3 million in quarter two and $33.9 million in Q3 of last year.

Moving on to gross margin and operating expenses. In Q3, GAAP gross margin was 50.2%, compared to 50.4% in quarter two and 48.3% in Q3 of last year. Non-GAAP gross margin was 53.4% and compares to 53.6% in quarter two and 52.6% in Q3 of last year. As we have previously mentioned, the March quarter is a seasonally slower revenue quarter, which historically has had an impact on gross margins given our relatively fixed manufacturing and service cost structures. In addition we were successful in moving all this products from inventory at lower price points which had a temporary effect on gross margin in the quarter.

With seasonally strong revenues in Q4 combined with our focus on inventory management we expect gross margins to improve which is reflected in our Q4 guidance. Q3 GAAP operating expenses were $71.6 million compared to $75.6 million in quarter two and $79 million in Q3 of last year. In addition to the ongoing amortization of intangibles and stock-based compensation charges Q3 GAAP operating expense includes restructuring charges of $1.4 million related predominantly to our facilities consolidation following the reduction in workforce in Q4 2015. Plus executive transition charges of $1.4 million.

Q3 non-GAAP operating expenses were $61.6 million and compares to $64.1 million in quarter two and $68.9 million in Q3 of 2015. The sequential decrease in non-GAAP operating expenses was mainly attributable to R&D expense coming in below expectations on several projects and lower compensation related expenses. Third quarter GAAP operating loss was $8.9 million or negative 7.1% compared to a loss of $5.4 million or a negative 3.8% in Q2 and a loss of $21.3 million or 17.8% in Q3 of last year.

Third quarter non-GAAP operating income was $5.4 million or 4.3% compared to $10.8 million or 7.8% in Q2 and an operating loss of $5.6 million or negative 4.7% in Q3 of last year. GAAP net loss for Q3 was $10.8 million or negative $0.10 per share compared to a net loss of $7.2 million or negative $0.07 per share in quarter two and a net loss of $23.5 million or negative $0.24 per share in Q3 of last year. Non-GAAP net income for the quarter was 3.5 million or $0.03 per diluted share and compares to net income of 9 million or $0.09 per diluted share in Q2 and a net loss of 7.9 million or a negative $0.08 per share in Q3 2015.

Turning to our balance sheet, Q3 cash and cash equivalents benefited from strong collections and we ended the quarter at 88.3 million up 2.5 million from last quarter and up $12.1 million from fiscal Q4 2015. In the quarter, cash flow from operations was 4.9 million compared to 7.4 million in quarter two and a negative 7.9 million in Q3 of last year. Free cash flow was 3.6 million compared to 6.7 million in Q2 and a negative 9.5 million in Q3 of last year.

Accounts receivable were 62.7 million at the end of Q3 down 10.4 million from last quarter and down 30.1 million from Q4 2015. DSOs decreased to 46 days this quarter from 48 days in Q2 and 56 days in Q4 '15. Inventory ended at 52.8 million down $3.8 million from last quarter and $5.3 million from Q4 '15 and down $14.1 million from Q3 of last year. As mentioned we expect to further reduce inventories by the end of fiscal 2016. Total debt outstanding at the end of Q3 was $58.8 million compared to $66.9 million in Q4 of 2015 and we were in compliance with all bank debt covenants at the end of the quarter.

Now let's move on to guidance for quarter four, as already mentioned our view is taking into consideration that Q4 is typically a seasonally stronger revenue quarter than Q3. And the 2016 ERATE submission deadline has been extended to the end of May making it likely that the first time when we orders will be the first quarter of our fiscal 2017. Also keep in mind that last year's Q4 revenue of $150.6 million included an unexpected $7.3 million ERATE order, right at the end of the quarter from a single school district one of the largest orders in the company's history, which affects the year-over-year comparison.

With these considerations, we expect Q4 GAAP revenue to be in the range of 136.6 million to 146.6 million and non-GAAP revenues to be in a range of 137 million to 147 million. At the midpoint this represents a 13.6% sequential growth. GAAP gross margin anticipated to be in a range of 50.5% to 52.3% and non-GAAP gross margin is anticipated to be in a range of 53.5% to 55%. Operating expenses are expected to be in a range of 71.6 million to 73.6 million on a GAAP basis and 63.5 million to 65.5 million on a non-GAAP basis.

The sequential increase is related to compensation expenses including commission on higher revenues. Tax expense is expected to be relatively consistent with quarter three levels. The GAAP net income loss is expected to be in a range of a loss of 4.2 million to net income of 1 million or a loss of $0.04 per share to a profit of $0.01 per diluted share. Non-GAAP net income is expected to be in a range of 8.1 million to 13.3 million or $0.08 to $0.12 per diluted share. The average shares outstanding are expected to be up 105 million on a GAAP basis and 107 million on a non-GAAP basis.

Now I'll open the call for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question comes from Matt Robison from Wunderlich. Your line is now open.

Matt Robison

First quite on these executive transition costs, it looks like you had both sales in marketing and G&A, can you give us a little bit of background of sales and marketing number was pretty significant implying you have changed some management there, is that something new that happened in the quarter or what's the background for that? And I have got a couple other follow ups as well.

Ken Arola

Yes Matt this is Ken. Yes, it is something that occurred during the quarter, we had a transition in our leadership in EMEA and we transitioned our prior leader out he is a VP of the European Operations or EMEA Operations and that is what you see in the sales and marketing line. And then in the G&A line it was a transition in some administrative functions within the company at a VP level.

Matt Robison

Okay. Now it is interesting that you are guidance is pretty solid, despite the absence of ERATE, can you say a little bit about how ERATE contributed at least maybe in a relative term sequentially for the third quarter?

Ken Arola

Yes, when we came into the quarter, we had indicated that we would be on a higher end of the range but ERATE as a $10 million to $20 million range in revenue for the quarter that's exactly where we came in at the high end of the range for quarter three. And then for quarter four as we are thinking about it that $10 million to $20 million range our anticipation at this point in time as we’d be on the lower end of that range for quarter four at this point.

Matt Robison

What verticals you’d expect to make up for it in the fourth quarter?

Ken Arola

While we would expect that education is going to continue to be strong for us it is always a strong vertical for us, manufacturing is a strong vertical for us and then government as well so those are the three major verticals that we see growth in, in the business.

Ed Meyercord

Yes Matt and as we go forward we are going to be looking to drive growth in all of these verticals. So I don’t think you can point to a particular vertical for the quarter.

Matt Robison

Fair enough. Ken housekeeping may be sometimes in the call give us depreciation for the quarter and on the wireless you took some sort of surprising reserves last -- in the -- for the December quarter because the wireless, the new wireless products were ramping and can you talk about what you saw for growth in wireless and I know Ed you touched on it a little bit but give us a little bit more detail on that how it compared?

Ed Meyercord

Yes so, we are seeing growth in our solutions selling and we’re emphasizing wireless we shared on previous calls the amount of training that has going on and we've educated our sales teams to sell wireless now we have 100% of all of our AEs as I mentioned on the phone who have made wireless sales and over 50% making wireless sales over 100,000 so we are expecting to see our wireless sales increase and grow I would say ahead of the industry.

Matt Robison

Okay, I will leave it for now. Thanks.

Ed Meyercord

Matt the question on depreciation, it is about $3 million for the quarter.

Matt Robison

Sorry I didn’t catch that?

Ed Meyercord

I said depreciation was about $3 million for the quarter.


Thank you. And our next question comes from Simon Leopold from Raymond James. Your line is now open.

Victor Chiu

This is Victor Chiu in for Simon Leopold. Can you speak some about the competitive landscape and how Brocade acquiring Ruckus affects you and what your outlook is for that going forward?

Ed Meyercord

Yes, the first thing to point out is that when Brocade announced the acquisition of Ruckus and as I mentioned in my comments to validate our strategy if they clearly feel the need to have wireless. We've heard a lot of different things in the industry about Brocade and Ruckus and the rationale behind the deal it seems to us that Brocade is playing at the higher end of the enterprise market and we’re following on the heels of HP and Cisco really in all the different markets that they are playing in. We do run into Brocade but they are more one off than a regular competitor that we see in the marketplace. We have heard that Brocade is coming out with a higher end switch to go head-to-head with Arista we know they have been in most of their business is in the storage side and with Ruckus we know that they are focusing on service provider and we know that they have been focused in the federal space so these are areas where we don’t play including the higher end datacenter, so it remains to be seen how things will change. As I mentioned before we see them in what in more or less one off situations we are not under estimating the fact that the combination of their wired and wireless portfolio is likely that they are going to show up towards the enterprise as I mentioned earlier we are seeing them focusing on a larger enterprise and less on the medium sized enterprise that we are going after.

Victor Chiu

And I guess I just wanted to ask one question on geography I think I know that EMEA was a bit weaker this quarter I just wanted to get a sense for how much of that is macro and how much is related to the change in the staff in the region?

Ed Meyercord

We actually grew in Germany which is our largest market in EMEA and as I mentioned EMEA has the highest margins than we are, our teams in EMEA are confident in what's going on there as far as of the rebound in the Western European countries but we are bullish on what's going on in the UK and our opportunities there. Also in France, and Italy and Spain, we have been affected -- we do have business in Russia and in Turkey which is in our EMEA region and we have been negatively impacted by some of the geopolitical activities there, but we are confident in the rebound. We also mentioned that we've hired a new lead John Morrison comes in as a very strong leader replacing Tony who has been with Extreme for over 14 years. John is very strong, a great chemistry with the team already he had been at Huawei and at Cisco very knowledgeable of the industry and we are very confident of his leadership and with what's going on in the respective markets that we are going to see growth in EMEA going forward. And as I mentioned the gross margins and the higher volume of solutions selling in that market is also giving us confidence in terms of the rebounding our gross margin forecast.


Thank you. And our next question comes from Christian Schwab from Craig-Hallum Capital. Your line is now open.

Christian Schwab

As we -- just Ken on the inventory quick, are you done with the -- take older product that we kind of shove through on the system with the decline in inventories going into historically very strong quarter? And then I thought you said you would also thought maybe I heard you incorrectly that you would take inventories down even further exiting the June quarter, is that correct?

Ed Meyercord

You did hear that correctly Chris and from where we are now we think we have opportunities to bring it down further by the end of the fiscal year here. As, as far as our inventory situation we have done a good job of selling a lot of the older products. At this point in time we are not anticipating any impacts or unusual items hitting quarter four, which is reflected in our guidance. So the team has done a really good job and in moving some older inventory and taking some actions to make sure that we find home for it.

Christian Schwab

How does the new ERATE sales process when looking with the expansion of salesforce?

Ed Meyercord

I’ll take that Ken.

Ken Arola


Ed Meyercord

We have more and more of our sales teams getting active in ERATE so we are seeing a lot of activity there, we are also more confident in our product portfolio and selling more wireless. So we are expecting to see higher concentration of wireless in this go around. I’ll comment that the competitive process for ERATE is heated up so we are seeing a lot more competitors and more competitive deals. But we are confident in terms of the teams and what will come out of it. Given the timing it's too early for us to handicap how it's going to play out this year, we are expecting to come in at least at the same level from where we did last year, which was the 92 million which netted out between 60 million and 65 million of ERATE revenue for us, as they were projected for this year. So we are guardedly optimistic because of the higher participation rate of our sales teams because of the product mix. But we are also being somewhat cautious because of the level of the competition and the fact that we don’t have visibility at this stage.

Christian Schwab

So with that in mind year being flattish maybe modestly grow rate as people figured it out now that everybody has it that is a good spot to go to. You talked earlier Ed about growth in 2017 -- fiscal year '17 in your prepared comments, when you say that obviously growth is greater than zero, but is there a target range that we should be thinking about? I know previously we had talked about returning the company eventually to a plan of trying to get double digit growth we might be a little bit early given kind of more of a subdued economic environment today. But what should we be thinking about for next year and beyond if you care to comment on that?

Ed Meyercord

Christian, we are not prepared to put a number out there yet. We are still working on our internal plans that we will take through and review with our Board and ultimately come out with guidance for next year, we are not there yet. I am confident with the internal work that we have done in rolling up the different sales teams that we will be projecting growth. We mentioned the growth in solution selling and with a higher ASP associated with solution sales, which will be a driver, our penetration of verticals and also returning strength in EMEA as well as rebound in Asia Pacific and LATAM. So all of these things combined we are very confident that that is going to put growth on the board in terms of the forecast number I gave to you guys.

Christian Schwab

Yes, it sounds great, it sounds like 2% to 5% to me. But as far as -- well my last question if I may. On solution sales, is that extending the sales closing period? Is there any significant changes in the life of the closing period as you move to solution sales or not?

Ed Meyercord

I think that’s fair, it's going to be hard for me to quantify it. I think at least at this point obviously if you are buying a point product versus if you are buying a full-fledged solution and deploying wireless access points software et cetera. It's likely to be a longer sales cycle, so I think it's a good point and I think it is something that we could probably follow up offline, if you want to dial it in and get more specific.


Thank you. [Operator Instructions] And our next question comes from Ryan Flanagan from Buckingham Research. Your line is now open.

Ryan Flanagan

Just on returning to the GM here briefly I know it is the low end of the range I think we understand what's going on they are moving some older products and some fixed cost involved. When do we see or maybe how do we see that get back to the mid 50% to about 55%?

Ed Meyercord

So, that's -- we have a number of initiatives that we are going on internally that drive our gross margins up to the mid 50% range and beyond and we think we have opportunities to do that. We are early in the stages right now but as we go through our planning process what we're doing is identifying certain initiatives, identifying certain people that would be responsible for driving those initiatives and driving those margins to 55% and so I would say over the next fiscal year we should see us starting to move in that direction.

Ken Arola

I think that's fair again Ryan I would say we have -- if this is our strategic initiative which are all round solutions selling I mentioned 10 points of extra gross margin of when we are selling it so it is a complete solution, so it will be a benefit to gross margin longer term as we move on a higher concentration solution sales. And if that's where we are driving the company and then we have a long list of tactical items that we are aggressively going out after to take up the gross margin right up.

Ryan Flanagan

And then just one follow up and look I know you are only guiding one quarter at a time here but with the return to growth on an organic basis speaking to the levels of growth that you see the bottom market I think you said plus or minus 2% is your expectation that you will exceed that in ’17?

Ken Arola

Our expectation is that we will take share, when you look at a macro market there are a lot of different factors and it is supposed to be a -- we are looking at Gartner and IDC, Del Oro where do you draw the line as far as an enterprise with a high end enterprise versus the medium sized enterprise there are a lot of different factors that are going in. To coming up with that industry growth rate we fully expect to take share in this market but I think if you were to look at it 1%-2% industry growth rate and assume that we are going to be taking share then I think you are right that it would be a little higher than that.


Thank you. And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Ed Meyercord for any closing remarks.

Ed Meyercord

Thank you, well. I'd like to thank everybody for your participation in the call. It was a good quarter for us a solid quarter and we are really excited about all the initiatives that we have going on here from our go to market what's happening with our sales organization, a lot of work that's happening in marketing and our field hunt teams in terms of driving product development. We expect a strong show in the next week at Enrock. Our engineering teams both in the software and the hardware side have been putting forward the great effort and we feel very confident about the competitiveness of the solutions that we are putting into the market. Most importantly, we are aligned with the team, and we agree on our vision we are getting very, very, very focused on this market segment and we don’t think any of our competitors are, so we think this is a really good opportunity to drill down, take share in this enterprise segment of the marketplace, it's translating into growth for us and improved financial performance. We think this is going to gain momentum in the quarters to come. So, with that thank you for your participation, for your questions and have a good evening.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.

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