Frank Yoshino - VP Treasury & IR Ed Meyercord - President & CEO Drew Davies - EVP & CFO.

Matt Robison - Wunderlich Securities Simon Leopold - Raymond James Christian Schwab - Craig-Hallum Capital.

Good afternoon. And welcome to the Extreme Networks Fourth 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; Drew Davies, the Executive Vice President and 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..

Thank you, Sally. And welcome to Extreme Networks fourth 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. 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.

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.

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, you should not place undue reliance which speaks only as of today. We undertake no obligation to update these statements after the call.

Throughout the conference call, the company will referencing both GP and non-GP financial results. Non-GP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GP.

Reconciliation of the non-GP information to corresponding GP measures is in our earnings press release issued today for your convenient and some important financial materials are available in the Investor Relations section of the company’s Web site at extremenetworks.com.

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

Thank you, Frank, and thank you all for joining us this afternoon. I am pleased to announce we close fiscal 2016 on a strong note. We reported solid fourth quarter results in line with our guidance $0.10 per share, despite the macro headwinds affecting the networking industry.

The fifth consecutive quarters we delivered earning that met or exceeded our guidance. We drove operating efficiencies that generates significantly higher cash flow and closed out the year with a much stronger balance sheet.

One number that underscores our progress turning around extreme is our full year net income, which was up more than four times our fiscal 2015 number. This year we elevated our position in the enterprise campus market.

We deliver highly competitive software driven networking solutions that address campus mobility, DYOD [ph] the internet are saying that the edge of the network, private clouds in the rapidly emerging hybrid cloud datacenter environments. We deliver multivendor, easy to deploy and cost effective software tools.

That provide complete visibility and control devices and applications that run on networks. Our wired and wireless end to end solutions give us a competitive advantage. Net our team is executing our strategy and executing our operating plan. We're seeing the results of our focus on targeted verticals that make up $8 billion are $34 billion industry.

We're making concentrate investments to drive our field teams and our partner’s success. We have 2.5 times the number of new products and Software releases coming to market this fiscal year.

When you combine this with the strength of the pipeline rolled out from our global sales teams, we are confident in forecasting 2% to 4% % annual revenue growth for fiscal 2017. And we believe this is a good step toward achieving our long term target of 10% plus organic outline growth.

Now I'd like to dive deeper into some of the factors driving our positive outlook. The first is extreme customer intimacy, value proposition that define our brands. The performances of our wired and wireless products, visibility and control through our single through our single -- glass. And our top ranked 100% in source customer service.

Our existing customers are our strongest reference based and our largest source of revenue. The second factor is our focus on the mid-level enterprise campus where we have competitive advantages such as quality, performance, service and price.

Versus larger players such as Cisco and HP who rely on partners to address customer needs in this market segment. Were the only player solely focused on a mid-level enterprise campus it is a big opportunity.

Another success factor is how we are selling;leading with wireless, leading with software, leading with security, policy access, control and analytics. Our investment in training to lead requires licensed software solutions is clearly paying off. In fiscal 2015 30% of our teams sold wireless.

In fiscal 2016 a 100% of our SCs [ph] was certified and 100% of our AE’s sold wireless. In year-over-year comparisons versus fiscal 2015 wireless sales were up 1% in the first half of the year, up 20% in the second half of the year and up 29% in Q$. And in fiscal 2016 we more than double the volume of solutions sales from 5% to 12 % Year-over-year.

We expect this to contribute to our forecast an increase in gross margins. In addition we are building a vertical marketing platform to support sales to enterprise customers in education, government, healthcare, manufacturing and hospitality public venue are five target vertical.

We hired industry expert’s teams in sales and marketing to expand the scope and scale of our solutions offers. We doubled our investments in lead generating sales reps. we launched an exciting new channel program that generously rewards new logo wins, invest in industry incentives.

We just rolled out a game changing E3-60 [ph] our global sales kick off meeting last week, stole the show an exciting new interactive way to share content and information with our global field teams. Finally we are much more nimble and responsive to our customers that are larger competitors.

We launched our cloud management one Datto within six months last January. We release clouds two got Datto just a few weeks ago. It's much easier to configure and deploy as stronger security controls verses our competitors. So much so that our field -- Where customers with names like UNICEF, Technicolor they are on the spot purchases.

We expanded our professional services resources and we introduce managed service offerings. And we're offering CPE as service and a flexible optics consumption model. Now let me take a few minutes to review the financial highlights. We reported revenue of $140 million in fiscal Q4.

Our strongest revenue quarter of the past fiscal year set up 12% sequentially. The year-over-year declines this projected is due to unusually high revenue in Q$ 2015 that created one of the largest orders in company history.

In addition we overcame well publicized macro-economic headwinds, including EU uncertainty with Brisbane [ph] -- and Turkey and a feature in Brazil. These events week in local currencies relative to the dollar in some cases froze spending. We believe we will manage through that.

And the softer erasing that our fiscal Q1 and revenue growth will begin to accelerate in the December quarter on a year-over-year basis. We drove 15% growth in sales productivity last year. And we're beginning fiscal 2017 with the same sale head count.

We will add an additional 5% to our direct sales force throughout the year, and expect that to contribute 1% to 2% growth given the six to nine months ramp required our business.

We also expect another 1% to 2% growth from sales productivity resulting from solutions selling games, Wireless sales, new product introductions and our marketing platform investment. Revenue in Q4 was driven by several large wireless and software driven solutions seals and all of our target industry verticals. Especially education and healthcare.

The largest sequential growth from Q3 came from our North America, Germany and west European markets. We also saw growth in APAC and saw the results in LATAM as our new leadership teams are showing steady progress. Here are some examples of recent enterprise campus customer wins.

In education our largest vertical we won the state of West Virginia K212 Education business opening 60% of their schools and over 55 counties. We took out a robust because the state wanted centralized management and control over each county system stating its standard policies to manage student devices in their view VIOD environment.

And they selected extreme analytics to provide network usage and performance benchmarking across the state. We also won Nassau College in upstate New York. This was an existing a roof for un-former wireless customers with former and -- switches.

They have limited IT resources and we're being challenged by the internet of things and a barrage of student’s devices, with limited network visibility, a perfect candidate to move to a single network vendors with our stream management.

Now they have superior network performance, complete network visibility and control over all devices and applications running on their networks. In healthcare, Charleston area Medical Center wanted -- grade applications to run over Wi-Fi in connection with their electronic medical record systems operates to Cerner, extreme delivered with grade two.

And our Extreme management control and analytics team we saved them huge amount of time detecting and locating equipment in connection with their Cerner operate. This was very similar to a story in the U.K. with St Bartholomew's university hospital and assets part of the NHS trust.

They were going through a major change from a paper based, Patience administrative system, toward a digital healthcare record platform. They needed visibility and control from the patient bed side of the edge to electronic health records at the core of the network.

We replaced HP Aruba with our single pane of class visibility control over the entire network end-to-end. Bartholomew's joints 35 other NHS trust hospitals that rely on extreme solutions. We have 24% share of the NHS acute care facilities in the U.K.

We have similar stories in government like with our recent when it to Karen International Airport Las Vegas where we beat out HP Aruba and the 4 affairs ministry in Germany provides networking for all of their embassies worldwide.

And the same is true in manufacturing with winds around the globe and in our stadium public venue vertical we deploy the first wave to Wi-Fi system in an Arena in the U.S. for the Buffalo Sabers. Following our success at the Buffalo Bills stadium.

But extreme analytics team owners and staff can understand user engagement, improve user experience, optimized application performance and detect malicious application uses. This is why stream is the leader in this vertical as evidenced by our exclusive relationship with the NFL.

Back to the P&L; we are improving our gross margins in Q4 our gross margins came in at 54.8% which was near the high end of our guidance, a full %age point above fiscal in Q3 levels. We will capture higher gross margins by executing on our solution selling strategy and by driving operating improvements.

Most software driven solutions drive larger deals with higher margins. So growth in solution sales will impact those margins in a positive way. Furthermore we have adopted changes and implemented several operating initiatives, to drive those margin improvement over 56% in fiscal Q1 2017.

We have established a discount policies, we change our incentivize are just things in general partners to better align them with our goals. And we've identified savings in our supply chain. When combined with solutions selling we expect to achieve 60% plus gross margins over next year.

On the expense side we've been much disciplined with respect to our operating costs. Operating expenses were down $5 million from Q4 for fiscal 2015 and our operating margin came in at 8.6% the high as Q1 fiscal 2014. Now our operating leaner and more efficiently than ever before. The strength of our cash flow has become evidence on our balance sheet.

Cash increase your-over-your by $80 million while we brought down payables by $9 million payable debt. We were also able to move in the inventories and approved our turns up to over five times during the quarter from three times if you want.

We have a new product line up is creating excitement with our sales scenes in our partner community our EVP of engineering recently called to ramp the new products coming to market a tidal wave. Every story that our software release cycles.

Here are a few of our new product releases, they're multi-rate core at datacenter switches from 10 Gigs to 100 Gigs for speeds, and multi rate edge switched far away to wireless platforms. Our application are in there way to infuse the built in for corporate technology.

So for three times the number of devices and two times for APs at much higher reliability. We're coming out with Walt place APs for IOT will create opportunities for us and higher as healthcare hospitality. In addition we are bringing lower cost way to raise APs for larger scale lower densities deployment.

Our two Datto release an extreme cloud, it supports small scale and enterprise environments. It's so easy to use and even I had deployed it my own. We are the first networking companies to offer unified cloud management across wireless and wired environment.

Sales leaders are kick-off last week said that we've seen this much excitement in our vision, Strategy and technology roadmap in many years or in some cases ever. Our teams are confident in our ability to grow, Top line growth and growth in gross margins.

We have the commitment of the field, visibility in our pipeline and exciting technology roadmap and operating plans to make this happen. At this point I'm very pleased to introduce Drew Davies our newly appointed executive vice president and Chief financial officer.

Drew brings more than 26 years of finance, accounting IT and M&A experience in the company. In addition to his most recent and successful extend at -- mansion he started his career at micron in their contract manufacturing business, and had extreme networks as a customer. He has responsibility for IT and has recruited a strong new CIO.

Drew will be the primary driver of our gross margins pushed over 60%. We are excited that my team and please to see and hit ground running. With that I'll turn the call over to Drew..

Thanks, Ed. Before I get to the numbers I would like to make a few initial comments. This is my first quarter with Extreme and I would like to say how happy I am to be joining the company, At this point in its history. We just completed two weeks of quarterly business reviews and our sales kickoff meaning which teams from around the world.

The energy and enthusiasm of the teams driven by their excitement for new products and services is immeasurable. And I certainly look forward to our future in the opportunity to contribute to Extreme success. We ended fiscal 2016 with a strong year-over-year earnings performance.

In a much improved balance sheet, with a sharp focus on our target vertical markets and greater concentration of solution sales. Combined with firm control of operating expenses the company realized year-over-year non-GP earnings growth of over 400%.

The balance sheet strengthen throughout the year due to the same financial discipline we use to manage expenses year-over-year cash through $18 million well debt decreased over $11 million in inventory reduced by $17 million. I’ll talk more about the balance sheet in a moment. Now let's review the fourth quarter results starting with revenue.

Q4 GP revenue was $139.6 million compared to $124.9 million in Q3 and $149.9 million in Q4 for a year ago. Q4 non-GP revenue was $141 million compare $125.3 million in Q3 and $150.6 million in Q4 last year. The geographical split revenues were as follows. North America contributed 51% to total revenue.

Americas contributed 37 %, APAC contributed 9% and Latin America contributed 3%. Product revenue both GP and non-GP for Q4 was $106 million compared to $92.7 million in Q3 and $116.3 million in Q4 last year. Here for GP service revenue was $33.6 million compared to $32.2 million in Q3 and $33.5 million in Q4 last year.

Non-GP service revenue for Q4 was $34 million compared to $32.6 million in Q3 and 34.3 million in Q4 last year. Moving on to gross margin operating expenses; in Q4 GP gross margin was 52.1% compared to 50.2% in Q3 and 54.9% in Q4 last year. Non-GP gross margin was 54.8% which compares to 53.4% on Q3 And 54.4% in Q4 last year.

This sequential increasing in gross margin was mainly due to seasonally stronger revenues in Q4 combined with our focus on inventory management, Product mix through adoption of our solution selling approach.

For example 3 of our top 10 sales during the quarter were comprehensive solution sales, which carried higher than our average product margins validating the strategy. We expect continued improvement in gross margins in Q1 due to chart controls and discounting entry solution sales were software content.

Q4 GP operating expenses were $73.2 million compared 71.6 million in Q3 an $88 million in Q4 last year. Q4 GP operating expenses includes Amortization intangibles of $4.1 million stock based compensation Chargers of $.2.4 million. Litigation expenses of $200,000.

Restructuring charges of $1 million, Related predominantly to the completion of our facilities consolidation following the reduction. In force – in Q4 2015 plus executives transition charges of a 100k. Q4 non- GP operating expenses were $64.7 million compared to $64.6 million in Q3 and $69 in Q4 2015.

Sequential increase in non GP operating expenses as mainly attributed to higher sales and marketing expenses. Fourth quarter GP operating loss was a $0.5 million compared to a loss of $8.9 million in Q3 and a loss of $13.5 million in Q4 last year.

Fourth quarter non GP operating income was $12.1 million or 8.6% of total revenue compared to $5.4 million or 4.3% of total revenue. In Q3 $12.3 million in few -- or 8.2%of total revenue in Q4 last year.

Now net loss was Q4 was $2.3 million or $0.02s per share compared to a net loss of 10.8 million or $0.10 per share in Q3 and the net loss of $15.7 million or $0.16 per share in Q4 last year. Non GP income for the quarter was $10.2 million or $0.10 per diluted share.

And comparison to net income $3.5 million or $0.03 per diluted share in Q2 and $10.1 million or $0.10 per diluted share in Q4 2015. On a full year GP basis for fiscal 2016 revenue was $528.4 million, gross margin was 51.2%, and operating loss was % 25.6 million. And EPS was net loss of $0.31 per share.

On a full year non GP basis for fiscal 2016 revenue was $529.9 million, gross margin was 54.3%. Operating income was $35.7 million. And EPS was $0.28 per diluted share. Turning to the balance sheet -- benefited from strong collections and we ended the quarter with $94.1 million up $5 million from last quarter and $17.9 million since Q4 2015.

In the quarter cash flow from operations was $15.1 million compared to $4.9 million in Q3 $3.9 million in Q4e last year. Free cash flow was $8.9 million compared to $3.6 million in Q3 and $2.3 million Q4 last year. Accounts receivables were $81.4 million at the end of Q4 up $18.7 million from last quarter on higher sales.

And down $11.3 million from Q FY 15. ESO increases the 53 days this quarter from 46 days in Q and compares to 50 days in Q4 2015. Inventory ended at $41 million down $11.8 million from last quarter and down $17 million from Q4 for FY 15. We expect inventories increase slightly Q1.

Total debt outstanding at the end of Q4 was $55 million compared to $66.9 million at the end of Q4 2015. Now let's move to guidance for Q1. Our first fiscal quarter is seasonally slower entering the summer month coming off a strong year end. Summer from last year -- rate is starting off slower due to delays in the application process last quarter.

So we expect to see significant improvement in our fiscal Q2. Consideration of some of the possible impact of depression fallout and political issues in Turkey and Brazil and reports of softening released through networking channels checks -- Networking market channel check from industry experts.

We expect Q1 revenue to be in the range of a – Q1 GP revenue to be in the range of $120.6 million to 130.6 million and non GP revenue in a range of $121 million to $131 million.

As Ed mentioned for fiscal 2017 we anticipate revenue growth of 2% to 4 %driven by our strategic focus new products coming to market and the expectation from our field sales teams that leading the software solutions will result in increased average transaction size and better margins. Q1 gross margin is anticipated to be in the range of 53.5%. To 55.

And non GP gross margin is estimated to be in the range of 56.7% to 58.1%. Are anticipated improvement address margin is driven by increases in solutions sales, tighter controls on discounting, a revised partner incentive programs and the rewards growth and operational cost reductions.

Q1 operating expenses are expected to be in a range of $70 million to $72.5 million on a GP basis. And $63.5 million to $66 million on a non GP basis. Tax expense is expected to be relatively consistent with Q4 levels. Q1 GP net loss is expected to be in the range of $1.5 million to $6.2 million or a loss of $0.01 or $0.06 per share.

Non GP -- Net income is expected to be in the range of 4.3 million to $9 million or $0.04 to $0.09 per diluted share. The average shares outstanding are expected to be just over $1.6 million on a GP basis, and $1.8 million on a non GP basis. Extreme network experience strong financial growth in FY 2016.

And we look forward to continued improvement in 2017. With that I will now from the call for question..

[Operator Instructions] Your first question comes from the line of [indiscernible]. Your line is open..

Great thanks for taking the questions. Maybe we could start to with Europe – in sequential increase there is in Europe.

So what are the early indications of any slowdown anywhere?.

Hi Mark, it is Ed. I think it's-- interesting we in terms of some of the deals that we saw in Europe. And we had a strong quarter.

We don't feel like as to too much business pushed out, our teams are very confident and as their plan and what they've got in in terms of the pipelines coming out but we do want to be a little bit conservative because of what we -- what we know it happened particularly in the U.K. for example with an exchange rates.

We selling dollars and it's just a lot more expensive to buy our equipment. It's also true for our competitors. So we -- we want to be somewhat conservative in terms of how we forecast if we don't have a lot of specific examples of sales team pushed, our teams are far very confident and in their pipelines and in their commitment..

Alright, just a quick second question is there a way you can size the amount of solution sales that you’re the thing your revenue stream for solution sales..

Yes, so if you are – our sales this year we had 12% of our sales for solutions sales. And last year it -- That number was about 5% solution sales. The definition of that is a sale that occurs with our extreme management software that also includes hardware.

So they sit over 6 month period when a customer at purchases it’s a measure of sales of based on that criteria.

It's -- so we know that we sold a lot more solutions, we invested a lot of training, As we were very pleased to see the raft and the adoption of the our solutions selling we are working on that over 40 methodology that we could use it will be very consistent to help you evaluate solutions sales, we want to look at it by customer basis instead of a sales basis.

The reason being we have customers who are solutions customers but maybe they purchase a hospital and at a new wing and in this case let's say they find a hardware for the one of the access points in that switches. So in that case maybe they all buy software sale with their solutions customers.

So we're of where buildings the frameworks and we can -- we can present consistent reporting of round solutions. And I hope that that that helps you quantify that would more than double solution sales with that definition.

The it and the other thing we can say is that our field it's gotten a lot more comfortable leading with software and leading resolutions..

Okay that is very helpful thank you..

Next question comes from a line of Matt Robison of Wunderlich your lines are open..

Thanks for taking the question, congratulations on the progress you're making is if you take it – if you kind of want another way and you were access points along with switches.

How would – what kind of progress that you got in accomplishing that and Can you talk a little bit stuff about Europe looks like There the unrated decline for year-over-year is decreasing, maybe you can give us a flavor for what you expect to accomplish there..

Sure we're here -- it's interesting because Rio for us is our second largest region.

And despite the macro headwinds that team is probably the most aggressive team, And terms of their outlook we have new leadership in the ask very strong new regional VP was setting up that territory and there's a lot of confidence coming out of and yet at the same time so we're aware of research that we've seen this fast as channel checks and concerned about what's happening at a macro level in terms of purchasing.

So we want to and if we have to temper somebody’s enthusiasm I think we have that. So perhaps our teams that are feeling very confident and in their outlook for me yes. And in terms of our judgment because we want to put a little bit harsh on those pipelines. Selling [ph] our switches our teams have embraced solution thought.

And that is it we're seeing -- it it's really how we're differentiating ourselves in the fields the enterprise campus, a lot of our competitors in fact most of our competitors are selling point products into this market and we're very focused on solutions.

And when we sell a solution we’re leading with wireless where this growth in the marketplace, and we're leading the software. So, it's a way for us to differentiate ourselves in in a large competitive market. And our teams has embraced it.

So, if we had a nice increase of wireless sales 8.3% year on year improvement in wireless cell..

But that’s good to know and I know it when comes for wireless cell not always you know it's the same sign of the switch cell but, it would be interesting to know what %age of your source company customers are buying wireless from you and vice versa probably the former impact there is more significant than the latter and so, that maybe in the future that kind of information you cannot transform.

Okay..

Your next question comes from a line of Simon Leopold with Raymond James. Your line is open..

Great, thank you for taking my question. So just maybe following up on this wireless LAN aspect in the business I'm hoping we can get a little bit better context to understand where it sits within the results so understand solution sales will include both access points and switches but if we can get an idea of the total wireless LAN revenue was %..

Yes it is in the fourth quarter here are our wireless LAN was about 10% a revenue and that's so now from where we were a year ago.

And as I mentioned Simon if we look at our teams in terms of who is selling who's in embracing wireless begin a ton of training in the beginning of this year as the feel that an amazing job of picking up on it and from an 80 perspective as well as from our system engineers in the field where all of them have they're certified wireless certification, and they have embraced wireless and you can see it by the growth in the second half of the year most of the training took place in the first part of the year and then in the second half of the year you see the ramp where literally to Q4 over to Q4.

We were up 29%. The other thing which is going to be an accelerance is a cloud management platform we announced that in in January and we rolled it out in – in and up we just came out with our second version of the cloud manager platform that is being embraced by the field is a lot of excitement by our teams bout.

How easy it is to and the capability umm the capabilities we have relative to our competitors side by side but this is this is a platform that they feel that we can sell and it's obviously that that's going to be a driver of wire road..

And I presume that the wireless business is that is margin creative and I'm also making the assumption that you expect that that business grows faster in fiscal 2017 than the campus switch business or even services. So what do you think your mix looks like in in a year and how much of this makeshift that plays into growth margin changes..

Well on a wire side I don't think we broken out growth margins specifically for wireless that's something that will consider is that and looking at that but, I do know that we do expect the growth rates and wireless to accelerate so, if Given you what we're seeing in terms of the ramp up going into Q4 we only expect that to continue of high cost and growth segment of our industry so, if the natural place to open up new doors and in terms of growing our business and attracting the logo..

And one last thing if I might you referred to the cloud 2.0 Solution as the Moroccan killer that's a pretty bold statement given that the size of Cisco's wireless LAN business relative to extremes can you give us some metrics around what makes your product differentiated how your competitive in and really substantial in concept thanks..

Yes you don't like do so like their invite you and in really anywhere else in the fall to umm to try it out for but if you would take about 10 mins To run through a side by side it's so easy to deploy our cloud solution you literally you get an 18 and you have to sell out for field when you compare it to what you have to do with moracci it is it's a lot more complicated and look moracci it's been around for a long time say a lot more features that we have but it is a lot more complicated to use and we have a very elegant and simple to use solution that is being very well received in the field and it's very easy demonstrate in a way we have a favor we're in a favorable position.

From coming to the market a little bit late and being able to start over with a much simpler user interface so, umm that that you without being able to get it too much details on a call here maybe this is something that we take off line and, we will be happy to take you through to show you that it’s pretty powerful when you see it..

I expect I'll take you up on that appreciate it thanks for taking the questions..

Your next question comes from a line of [indiscernible].Your line is open..

Hey guys, well I would like to see all the quantification you put in the discussion but, I'm not sure I got all the details so I want to go back and do that a couple the data point you throughout umm One of this is a start on the discounting elimination of some of these unnecessary discounts where are we on implementing that program and what do you think the impact is on the top line and on the on the margin from that..

So, We've changed our discounting levels and the thresholds for which special approval is required and we've tighten that up and that has been embraced by the field that is in place and that is that is primary driver of the growth margin job that you're going to see get our fiscal Q1 we've also implemented policies around older products and raising price and restricting discount from some of the older products that we like -- that would contribute to margins and that we're looking at umm Our policies around smaller transaction sizes for example..

Just going to be clear when you say it's been fully implemented was implemented for the full June quarter or was it implemented as the June quarter progress so, the September quarter the first full quarter of it.

It was implemented July 1..

So it's just starting to kick in.

Correct..

Right and the impact on the top line from that elimination of those discounts assuming the same level of sales would be what..

It is hard for us to estimate that we really active we have to make the best guess.

Okay I’ll take a guess, hard yes.

I think that as we look at the effective growth margins we don't have a specific sailed off that number for -- so we would saying that this is going to -- this is going to contribute one to two points of growth margin..

So is a potential one to two points from the top one is well one..

A growth or an impact.

Elimination of revenue negative impact..

We don't that we factor that into our top line is all of this year the changes that we -- having communicated out in the field and it's all being factored into our revenue targets..

Okay then they the second head piece the head count and sales I know you've shifted a lot of people around but. If I look at quarter caring sales people. What is the change in the staffing level between say the end of December and the end of the June quarter..

We if we were flat. And now a lot of change we may have increased their talents slightly but year over year we're in the same positions for as where we were the last year in terms of our self-head count and we are expecting to build on that and I mentioned 5% growth. I'm sure where it does take time.

4 salespeople to ramp and generate revenue so for six to nine months in there. Which is why we said you get that 1% to 2% points of growth from that. And the other one to 2 point of growth will come from sales you increase sales productivity.

From all the things that we have going on in terms of this marketing platform that we're building it verticals umm the regeneration as it we're doubling down on for the field.

Is it the investment are vertical and ecosystems partners and the man creation activities the marketing is doing to facilitate more sales and in addition we've a kind of new products coming to market.

And that are going to kick off in the thanksgiving time frames our fiscal Q2 we're expecting in the field is very excited about the new products were also expecting we guessed within ourselves from a new products that will be coming to market at beginning first quarter 2..

Just come back to the sales as I understood at June to December timeframe. 15 to December 15 of the sales. Had seen fair amount of attrition that will down form the June period to the December period and then if we doubted from the December period is that not correct..

So from the end of our fiscal Q2 which is December Seldom marketing brought up about 11 people, so we did have some increase there.

Percentage wise what is that..

And it’s 11 people.

About 5%..

So 5% since that, that's what I'm looking for. And then the um just a technical question you said your tax rate was given the flat but didn't know what he meant tax dollars your tax rate..

Tax dollars..

Okay that's all I need, thank you..

[Operator Instructions] Your next question comes from the line of Ryan Flanagan with Buckingham Research your line is open..

Hey guys thanks for taking question and I might see GM expansion here particularly on the pricing pressure out there, I did want to ask you about the third revenue I would think it would down sequentially year-on-year what's driving that and the second my question is a looking to service revenue which is kind of balancing around flattish for caught the last six to eight quarters I'm thinking that the increase in solution sales would maybe drive a better bit higher what I'm missing in that line, thanks..

Let me see the service revenue question first, service revenue over all is the negatively affect by this limited lifetime warranty.

this is been attached to a lot of our hard work that we sell, we we're developing new plants that we get attached to the limited lifetime warning which going to help us it provides an increased level of service in terms of hardware replacement time intervals a 24/7 service. So this is this is new plan that we develop it we're going to roll out.

We've also improved our prophecies war renewal and we're taking a renewal process that is out of market we're putting it back in market which we think is going to help us we've also made new hires to focus on growth and we're separating service delivery from service sales the two have been combined but now we've got excellent team to take care about customers from the delivery standpoint and we're going to split them from the sales team is going to be focused on fully commissions on driving services revenue So, these are some of the things that step we're going to keep putting in place I think you're right when you talk about solutions we're investing in professional services and umm this is another area we're making a more investment more investment for more growing those teams when we are deploying a solution.

A lot of our customers would like to buy professional service is ours and it help configure and deploy the full solution the single pane of glass our control and our analytics. So this is another area of opportunity for growth role.

And then there was another question about a technical revenue.

under different revenue so we as we as we work through the years on it with the -- we change the classification apart of the third revenue and there was there was a re-classed of about $2 million from the third revenue up to the current liabilities um we also had about $3 million to $4 million of a decrease in the third revenue as a result of the time in between delivery and Our shipment to the customer and delivery to the distributor.

Okay fair enough and just one quick you may follow up that in the last couple quarters you talked about a range of $10 million to $20 million and the expectation that the quarter you just point at would come to a lower end umm is that why you don't hand it out..

We ended up a little stronger than we expected and the race because we had some deals become a supporter umm overall and we should think about the ranges that the last year we had projected between $10 million to $20 million a quarter as you pointed out I hear that reporters if you average it out it would put us around $16 million for the year we came in a little life relative to that number um Keep in mind this new race is one component of the funding mechanism for overall case from twelve As we roll forward into next year we are expecting a 10% plus or minus declines and the raise revenues in our case through twelve but, one of the nice things about the race for us is bean it's been an opportunity for us to pick up new logo and we have a lot of customers once we bring on a new customer through the race program they will still buy outside.

So we've a lot of potential orders and then around they better outside of the race from customers who played a potentially make up that shortfall so, as we're looking here our education business overall in 2012 here we see it's being in a rough we sat in the downstairs..

I appreciate it..

Yes..

Your next question comes from a line of Christian Schwab with Craig-Hallum Capital.Your line is open..

So my question so the ends growth margins on a go forward basis given some of the changes of what discounting that should remain in this 57% plus or minus range or is it going to add inflow with growth to the next..

Well I think I think will always at inflow of what is going the next this but, the answer is yes then we're targeting the growth margins from here on out there's this there are a lot of initiatives under way and so we're looking at establishing a new base client building a building on the pace line insertion..

okay, well it fabulous so $63.5 million to $66 million hence saving heavy tuning umm is this link of out packs support future growth in other words it's you know it's kind of a run rate to support the 2% to 3% you looking for umm this year and then obviously we want to get to double digit growth as you outlined your prepared comments is that is that type of Apex you know not commission levels there were very strong quarters is that there are sustainable level or is that something that's going to get shot further..

yes I know that's we expected to be right in our range here throughout the year with the exception might be shed off of some that inflow based on you know higher commission sales or higher commissions in in high revenue quarters.

Also we're in we're a little bit heavy this quarter just because we had our sales kickoff meaning this quarter in and we're paying for it in Q1..

Great, well that's fabulous news on growth margins thanks guys..

Thank you..

Your next question comes from a line of [indiscernible] your line is open..

Yes, just to follow of that same line of logically that's exactly what I was thinking of asking to the extent it here now You're now driving a couple of %age points improvement growths margin it seems like the business strategy is to reinvest that primarily in the sales and marketing one is that the right way to think about it.

with a little bit falling down to the bottom line but, using that incremental investment in sales and marketing today in driving acceleration of top one..

That's correct, overall you know we have yet are operating inference or it's being moving into their double digit territory but you were balancing your balancing growth and everyone do fall I think the way you're thinking about it that's true..

So if had a choice between accelerating the top line an extra couple % or dropping another percentage point exceeded to the margin one you would choose which..

That's a really good question if this stage in the game we're driving it both we think we think we have to deliver both..

Okay, great, thanks..

I am showing no further questions.At this time I would like to turn the call back to Ed Meyercord..

Okay thanks sally, we appreciate the questions we appreciate everyone participating in the fall this was you did a lot of exciting things going on a stream and this was a solid quarter for us we are really excited about all the initiatives that we have going on everything other sales organization and our marketing and then with our engineering teams it had all the technology the products that we have and they're bringing to market I will comment that our chiefs in the field are very confident and their ability to deliver there is there's a lot of excitement and it gives us confidence umm confidence is forecasting growth for the year umm we feel really good about as the strategy run and we feel better about our occurring plan will copper to make it happen so, Thank you all for participating and have a great day..

Ladies and gentlemen this concludes today's conference thank you for your participation and have a wonderful day you may all disconnect..