Melanie Solomon - Investor Relations David Flynn - President and Chief Executive Officer Gordon Brooks - Chief Financial Officer Tom Wilburn - Senior Vice President of Worldwide Sales.

Erik Suppiger - JMP Securities Rohit Chopra - Buckingham Research Catherine Trebnick - Dougherty James Faucette - Morgan Stanley John Lucia - JMP Securities.

Good day and welcome to the Aerohive Networks’ Second Quarter 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Melanie Solomon. Please go ahead..

Thank you, Jessica. Welcome to Aerohive Networks’ second quarter 2015 financial results conference call. After the market closed today, Aerohive issued a press release through Business Wire. The release is also available on our website at aerohive.com.

This call is being webcast live on the Investor Relations section of the Aerohive website and will be available for 30 days. Today’s call is being hosted by David Flynn, President and Chief Executive Officer; and Gordon Brooks, Chief Financial Officer. We will also hear from Tom Wilburn, Senior Vice President of Worldwide Sales.

During this conference call, we will make forward-looking statements regarding future events or results of the company and its operations.

These forward-looking statements include statements regarding our projected financial results, general demand for mobile and wireless networking in the industry verticals we target, demand for our products and solutions in particular and our ability to take advantage of opportunities in the industry verticals we target, potential drivers of growth in our business, new customer acquisition and continued adoption of our products and solutions by existing customers, future product and service offerings, continued 802.11ac transition and adoption of Aerohive cloud management applications and product offerings, fluctuations in our gross margins, seasonality of our business, changing market conditions, the timing and potential level of our participation in the E-Rate program and our expected benefits and investments related thereto, our plans of future investments, our expectations regarding our level of operating expenses, progress in our sales execution strategy particularly in our underdeveloped territories.

Risks associated with the deployment and adoption of new products and services. Risks associated with our continued growth and competitive pressures from existing and new companies.

The actual outcomes and results may differ materially from these contemplated by these forward-looking statements as a result of these uncertainties, risks and changes in circumstances that could affect Aerohive financial and operating results including risks and uncertainties included under the caption Risks factors and management discussion and analysis of financial conditions and results of operations, and the company’s recent annual report on Form 10-K and quarterly report on Form 10-Q.

Aerohive’s SEC filings are available on the Investor Relations section of the company’s website at ir.aerohive.com and on the SEC’s website at www.sec.gov.

All forward-looking statements in this press release are based on information available to the company as of the date hereof and Aerohive Networks disclaims any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made except as required by law.

Today, we will be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures, please see today’s press release available on our website. I will now turn the call over to David Flynn, President and CEO of Aerohive..

Thank you, Melanie. Thank you all for joining us today. With second quarter 2015 revenue of $36.8 million, we are pleased to report a strong sequential improvement of 43% growth over our challenging Q1. These results reflect continued growth in our business outside of education, plus a significant recovery in U.S. K-12 spending.

We added over 1,450 new end customers in the second quarter bringing the total number of end customers to over 22,000. We also saw a continued expansion from our existing base with repeat customers contributing 72% of our business over the last four quarters.

Let me now review some of the key results from our second quarter including the important customer wins. Education was a key driver of our business in the second quarter. We saw a solid recovery in education spending relative to Q1 and did more business than we expected. However, relative to our overall business, U.S.

K-12 spending was less robust than prior year’s representing 40% of our business in Q2, 10 points less than in Q2 2014. While we closed the significant amount of K-12 business in Q2 that was unrelated to E-Rate, we continue to see the E-Rate program timing having a direct impact on our seasonality. In Q2, we saw some U.S.

K-12 spending on E-Rate projects from schools that were compared to purchase ahead of their funding letters with the expectation of being reimburse after July 01. Horry County in South Carolina purchased over 2,000 APs using this approach to upgrade much of their infrastructure from 802.11n to 802.11ac during the summer break.

In addition, we did see some schools we expected to purchase in Q3 received funding letters and placed the orders in the latter part of Q2. Tuscaloosa County in Alabama got their funding letter in June which allowed them to move ahead with our 1,000 AP 802.11ac deployment.

Looking forward, we are seeing funding letters continue to be issued on a regular basis as USAC completes the review of schools applications. However, to date just over 20% of category to funding requests have been approved.

Based on this rate of issuance of approvals, last week USAC announced that it will miss the FCC September 01 deadline but it was on track to complete review of all workable funding requests by September 24.

While we still expect to see meaningful E-Rate business in Q3, the current timing of these letters as well as the time it takes customers to deploy their networks leads us to continue to believe the majority of our remaining E-Rate pipeline will be closed beyond Q3 including into 2016.

Looking at other verticals, we made progress and diversification with our non-education business accounting for 10 points more of our overall business than a year ago. We had a particularly strong quarter in healthcare. We are pleased to win Life Care Centers of America, one of the top 5 largest providers of long term care in the U.S.

They needed to replace an aging Cisco controller based Wi-Fi network across more than 250 facilities and 23,000 beds to support higher traffic loads and new medical applications.

They have struggled with the cost complexity and operating headaches of a controller based solution and chose Aerohive over Cisco controllers, Cisco Meraki and Aruba based on our strong reference in the long term care market.

The operating cost advantages of our solution and our unique capability to onboard devices, enforced per user policies with private pre-shared keys. Also in the long term care market, we won one of the largest continuing care of retirement communities in the country.

They needed to replace an aging traps constructor to provide robust Wi-Fi coverage to more than 7,000 beds across 12 communities as well as replace a recently deployed Aruba infrastructure at their headquarters where they were struggling with operating complexity of ClearPass.

Some of other land and expand deployments, we currently expect the initial six figure deployment to expand to seven figures over the life of the project. In retail, we were selected by a $9 billion Fortune 500 industrial supply company to provide Wi-Fi to over 600 warehouse stores.

They were partially deployed using Motorola but decided to move to a cloud approach for a reduced operating cost. They evaluated Aerohive, Aruba, Meraki and Ruckus and chose Aerohive due to the advanced features and the flexibility to deploy in either a public or private cloud approach.

Also in retail, we were selected by the world’s largest designer and retailer of maternity apparel to bring Wi-Fi to over 500 stores. They needed to enable PCI Compliant mobile POS and one of the platform that could enable personalized customer engagement on the stores.

They are deploying our branch router which provides Wi-Fi services while also eliminating a standalone wired router and bringing LTE back up to the stores increasing resilience and simplifying their network.

In distributed enterprise, we won a $3 billion multinational pharmaceutical company that’s deploying Aerohive to replace their Trappi [ph] solution in Europe and Cisco solution in the U.S. as well as extending Wi-Fi to 150 new locations that were recently acquired.

They chose Aerohive because of our ability to address their end-to-end requirements with a single architecture that can address headquarters, campus, manufacturing facilities and remote donation centers. These customer wins are testament to the advances we continue to make in our product portfolio. We are encouraged by our progress on HiveManager NG.

Customers are giving us very positive feedback on the improved ease-of-use with our next generation user interface. We are benefitting from the architecture of HiveManager NG which enables rapid development and release of features. We delivered three significant leases inside of Q2.

We are on track to deliver an on-premise version of HiveManager NG in Q3 that will make this solution available to organizations to prefer an on-premise private cloud solution.

Moving on to 802.11ac, the launch of the AP130 in April completed our .11ac product portfolio and we are excited about our progress and continue momentum as customers upgrade from older to 802.11n technology. With the addition of the AP130 to our product line, 802.11ac access points accounted for 74% of our unit shipments in the quarter.

Looking ahead, we are developing our wave 2.11ac access points to extend our portfolio and address higher performance used cases. We expect our initial wave 2 product to be available on early 2016 versus late 2015 as previously indicated.

We believe this delivery schedule lines well with potential customer demand for these products including 2016 E-Rate projects. We also believe we will deliver a product with key functionality advantages and better price performance to what our competitors have announced.

Overall, we are seeing good momentum in our core business and we continue to address the execution issues that have challenged us. We are broadening our reach in the marketplace with partnerships and our own sales. The Dell relationship that we announced in April is off to a promising start.

Operationally, we are now able to transact and support Dell customers in the Americas and in Europe and we are working on getting APAC online in Q3. We closed our first order with Dell late in Q2 only eight weeks after announcing the relationship.

We continue to work on improving sales execution particularly with the strategic hire of Tom Wilburn as SVP of Worldwide Field Operations. Tom’s experience of running worldwide wireless sales at Cisco is equipped him to have an immediate impact on our execution and hiring.

In Q2, we hired a new VP for the West region and are seeing improved forecasting accuracy overall. I’d now like to give Tom the opportunity to speak about why he joined Aerohive and his experiences so far. Tom..

Thanks Dave. I am pleased to be on the call and wanted to make just the few comments regarding the potential IC for Aerohive. While I was with Cisco we acquired Meraki, and I witnessed firsthand the simplicity and speed of innovation brought by cloud managed networking. I am convinced that cloud managed networks are the future of our industry.

While cloud got its initial traction in the mid-market, at Cisco and here at Aerohive I have increasingly seen large enterprises chose cloud managed solutions over a legacy controller base technology because of the speed of deployment and lower cost of ownership.

I joined Aerohive because we have platform that closed the gaps I saw at Cisco between cloud managed and enterprise class solutions and because I believe the market wants an alternative.

This competitive dynamic positions Aerohive as a market leader and I look forward to growing the capacity and productivity of Aerohive sales force while expanding our reach and footprint worldwide. Since I joined the company in April I have been focusing on strengthening several areas of the sales organization.

Noting that the weakness here are not unique and do not require a major overhaul. First, with the focus on the less developed territories, I made targeted changes in leadership and staffing to make sure we had a proven team in place with the industry expertise and with an improved span of control.

Second, I am reinforcing Aerohive’s discrete inside and outside selling model, which I also saw work well at Meraki. Both of these steps will drive greater accountability and help to improve our execution as we grow.

Third, I am working a team to build on our Dell partnership, which as Dave mentioned is off to a promising start with very positive feedback from Dell. It is a great example of our channel partnering strategy at work.

I am pleased with the team I have and the talent we are able to attract in sales and I am working to reinforce our partnership focus as we leverage our new and important relationships. I love the tailwind that the education business is providing and I am excited about our opportunity.

This is a great marketplace to be in as we transform mobility across verticals and market segments. I will now turn it back to Dave..

Thanks again Tom. I just wanted to say how excited we are to have you as part of the team. I will turn it over to Gordon to go through the financials in detail and provide our guidance for the third quarter..

Thank you, Dave and good afternoon. We are very pleased with our revenue performance in Q2. We experienced our historical pattern of a significant sequential increase in revenue from Q1 to Q2, primarily driven by US K-12 spending.

Though education spending driven by the E-Rate program began to flow in the quarter, the funding letter you processed and related reimbursements had not hit full stride by the end of the quarter. Therefore we were also pleased with contribution from our other key verticals.

We had very good performance against our other key financial metrics and the over performance in revenue positively impacted our bottom line. I will review our GAAP and non-GAAP P&L, balance sheet and cash flow metrics for Q2 and provide some related commentary on the business.

Lastly, I will close by providing financial guidance for Q3 of fiscal year 2015. Net revenue for Q2 was $36.8 million, a decrease of 2% compared with same quarter a year ago, but an increase of 43% sequentially.

This revenue achievement was above our guidance range of $34 million to $36 million, primarily due to slightly more E-Rate based education spending occurring than we anticipated. Product revenue for Q2 is $30.8 million, a decrease of 9% compared with same quarter a year ago, but an increase of 50% sequentially.

The vast majority of our product revenue continues to be driven by our access points and related management software licenses. Software subscription and services revenue was $6.1 million for Q2 or 17% of revenue, an increase of 59% compared with the same quarter a year ago and 14% increase sequentially.

As measured by customer count approximately 75% of our end customers were on our public cloud platform at the end of Q2, while the four quarter rolling average units managed by our public cloud platform remains consistent at approximately 40%.

As our software subscription services revenue amortizes off of the balance sheet, we expect to continue to see sequential quarterly increases in this revenue line over the near term and do not reflect the same seasonality we expect to see with product revenue.

On a geographic basis in Q2 net revenue in the Americas was $24.8 million or 67% of total revenue. Americas net revenue increased 1% as compared with the same period a year ago and increased 76% sequentially.

The main impact to the Americas was due to the normal seasonal spending in US education vertical and the commencement of the flow of E-Rate as then customers began to make purchases under the 2015 E-Rate period. Net revenue in Q2 in EMEA was $9.2 million or 25% of total revenue.

EMEA net revenue increased 2%, compared with same quarter a year ago, and was flat sequentially. We were pleased with our performance in EMEA, but we also continued to see discount pressure in Q2, due to the strength of the US dollar.

Net revenue in the EMEA for the first half of the year increased 8% over the first half of last year even with the currency environment. As a reminder, we bill to all locations from the US and in US dollars. Net revenue in Asia-Pac for Q2 is $2.8 million or 8% of total revenue.

Asia-Pac net revenue increased 10% from Q1, but decreased 30%, compared with same quarter a year ago on a very difficult comparison. We continue to see discount pressure in ANZ in Q2 due to the strength of the US dollar, while the rest of the business in A-Pac continues to remain opportunistic and deal driven.

On a non-GAAP basis, Q2 gross margin was 67.7%, virtually flat compared with 67.8% the same period a year ago. Product gross margin Q2 on a non-GAAP basis was 68.8%, compared with 68.9% in the same period a year ago, but an increase of 190 basis points sequentially.

The sequential increase in product margin was driven primarily by product mix as the unit volume of our AP130, 2 x 2 ac access points rose significantly, as well as the absorption in fixed cost at our higher revenue. As Dave, mentioned approximately 74% of our access points units shipped in the quarter were .11 AC compared with 63% in Q1.

Software subscription and services gross margin on a non-GAAP basis was 62.1% in Q2, compared with 58.7% in the same quarter a year ago, but a decrease from a 68.2% in Q1.

We began to amortize our capitalized cloud development cost in early Q2 with the general availability of our new HiveManager NG cloud services platform and the increase of expense, due to this amortization was $325,000 in the quarter as planned.

Non-GAAP operating expenses increased to $31.6 million in Q2, compared with $28.9 million in the prior quarter. This increase was primarily due to sales compensation expense based on the higher levels of revenue and the longer capitalizing software development cost in engineering associated with our next generation cloud services platform.

However, even with the sequential increase from Q1, our operating expenses were favorable to the guidance we provided in Q2. Total headcount was 589 as of June 30, 2015, as compared with 557 as of June 30, 2014 and 567 as of March 31 of this year.

With regard to non-GAAP functional expenses, sales and marketing in Q2 increased sequentially from $17.3 million or 67% of revenue to $19.1 million or 52% of revenue. This compares to $18.2 million or 49% of revenue in the same period a year ago.

Non-GAAP R&D expense increased sequentially to $7.9 million or 21% of revenue in Q2, compared with $6.5 million or 25% of revenue in Q1. This compares to $6.3 million or 17% of revenue in the same period a year ago.

The sequential increase in R&D expense was due to our seizing to capitalize the software development cost of our next generation cloud services platform, which was released to production in Q2. As noted in our Q1 earnings announcement, we completed and launched our next generation cloud platform on April 11.

The total amount of R&D capitalized in the quarter was less than $100,000, a decrease from $2.5 million in Q1. On a comparable basis, total R&D, both expense and capitalize were $7.9 million or 21% of revenue in Q2, as compared to $7.5 million or 20% of revenue in Q2 a year ago.

We will amortize the cumulative capitalized amount, which stole $6.4 million as of March 31, 2015 on a non-GAAP basis through cost of software subscription services over an estimated useful life of five years.

Lastly, on a non-GAAP basis G&A expense increased to $4.7 million or 13% of revenue in Q2, compared with $4.6 million or 12% of revenue in the same period a year ago, but decreased from $5.1 million or 20% of revenue sequentially.

G&A expense continues to be subject to discretionary changes in expense levels, due to the timing of audit, legal, and other professional fees. Overall we saw a sequential decrease in our non-GAAP operating loss percentage to 18% compared with 45% in Q1 but an increase from 10% in Q2 a year ago.

On a non-GAAP basis, we reported net loss of $6.9 million in Q2 compared with a net loss of $4.3 million in the same quarter a year ago. On a GAAP basis in Q2, net loss per share was $0.24 compared with $0.14 in Q2 a year ago. On a non-GAAP basis, net loss per share in Q2 was $0.15 compared to $0.10 in the same period a year ago.

The net loss per share for Q2 is based on a weighted average common shares outstanding of 46.9 million shares. Now turning to the balance sheet, cash, cash equivalents, and restricted cash balances as of June 30, 2015 totaled $85.4 million, a decrease of $7.3 million from the prior quarter.

Cash used in operating activities in Q2 was $8.7 million compared with $4.6 million in the same quarter in the prior fiscal year. This increase is primarily due to the higher operating expenses in Q2 as compared with Q2 of last year.

Our trailing 12 month cash used in operations as of June 30 is $14 million compared with $7 million in the comparable trailing 12 months a year ago. This increase is primarily due to the increase in average inventory balances over the 12 month period and higher operating expenses in the most recent comparable periods.

Inventory was essentially flat at $11.9 million at June 30 compared to June 30 of 2014 reflecting our seasonal build of inventory entering Q3. Inventory turns against product revenue were 2.6 for Q2. Accounts receivable increased 18% sequentially to $20.8 million as of June 30, 2015.

DSO for Q2 decreased to 49 days compared to 58 days in Q1 and 53 days in the prior year quarter. We believe that our quarterly DSO will typically fluctuate in the range of 45 to 55 days depending on seasonality and related linearity within the quarter.

Our accounts receivable balance and DSO in the quarter reflect measured linearity of the business this quarter. Total deferred revenue increased 7% sequentially to $51 million at June 30, 2015 and increased 36% from $37.5 million at June 30, 2014.

Deferred revenue from software subscription and services increased 8% sequentially to $47.8 million in Q2 and 42% compared with June 30, 2014. Product deferred revenue primarily channel inventory decreased $469,000 sequentially to $3.2 million. The decrease in the quarter and deferred produce revenue occurred primarily in short-term deferred revenue.

Now turning to our guidance for fiscal Q3 of 2015, we currently anticipate net revenue in the range of $40 million to $42 million. Within our revenue range, we expect software subscription services revenue to be between $6.5 million and $6.7 million. This revenue range is driven by several variables.

First of all, we believe that purchases under E-Rate will increase sequentially. Historically, we have seen a modest sequential increase in product revenue in Q3 and we expect a higher sequential increase to normal due to purchases under E-Rate.

However, our revenue guidance is also tempered by the fact that funding letters have currently only been issued for approximately 20% of category to requested funds and the deadline for issuing funding letters has been extended from September 01 to September 24.

Lastly, we continue to build into our guidance expected discounting in our international business due to the strength of the U.S. dollar. I want to remind you that we only guide one quarter at a time and future guidance will depend on the macro environment and how E-Rate continues to play out.

As Dave noted, while we expect to see strong E-Rate business in Q3, we continue to believe that the majority of our remaining E-Rate pipeline will be close beyond Q3 including into calendar 2016. On a non-GAAP basis, we expect gross margin to be between 67% and 68%.

We are increasing the bottom of our range due to the transition and ramp of our AP 130.11ac access point and the continued decrease of our .11n portfolio. Therefore, on a non-GAAP basis, we expect our operating margin percentage to be between negative 18% and negative 13% of revenue.

We expect other income and expense in Q3 to be an expense of approximately $180,000 and we expect a tax expense of approximately $150,000 in the quarter. Lastly, we expect non-GAAP EPS in Q3 to be between negative $0.15 and negative $0.12 on a weighted average common shares outstanding of approximately 48 million shares.

Since we are in a loss position, vested in the money stock options are not included in our weighted average shares outstanding number as they are anti-dilutive. On a GAAP basis, we expect Q3 EPS to be between negative $0.27 and negative $0.24 on the same weighted average common shares outstanding.

As a reminder, our main reconciling item between non-GAAP and GAAP measures is stock compensation. This guidance is based on foreign currency rates effective as of this announcement and any material changes to those rates could impact these projections. Now, I will turn the call back over to Dave for his concluding remarks..

Thanks, Gordy. We believe we are headed in the right direction with the more focused sales effort growing partnership base and continued channel execution, all of which will help to drive future growth of our organization. In addition, we look forward to the return to more normalized spending environment in U.S.

K-12 education and the positive impact we believe it will have on our business. We will now take your questions.

Operator?.

Thank you. [Operator Instructions] We’ll go first to Erik Suppiger with JMP..

Yes. Congratulations on a real solid quarter..

Thanks, Erik..

First off, I just wanted to get a sense on the cash flow, negative $9 million, can you give us a little sense for how you think cash flow might progress next quarter and what we might think going forward?.

Certainly, Erik. This is Gordy. The cash flow this quarter is we are no longer capitalizing R&D.

Those quarterly expenses have now moved into operating cash flow and our seasonal Q3 pattern has been over the last several years have positive cash flow in Q3 and we expect that seasonal pattern to continue here in Q3 due to the ramp up of the revenue and the accounts receivable..

Okay.

What is driving the growth outside of the education? Is there particular market dynamics that are getting the controller-less architecture in a stronger competitive position?.

I think we are seeing customers increasingly desire and embrace both cloud and controller-less and I think we are seeing that consistently as customers are accepting and asking for it which will play to our strength.

In addition, I think we are seeing improvements in execution and some of our channel program and other elements that are contributing to the growth in those markets. And we’ve always seen those core markets of health and retail and the distributor enterprise having significant strong demand drivers and it’s just a continuation of that..

In the past, you had retail in excess of [indiscernible] was that the case this quarter and was healthcare greater than 10%?.

Yeah. Retail and healthcare combined, we don’t break them out separately each quarter but they compose between little under 25% overall for the quarter. So they have grown slightly in combination over the last several quarters..

And then last question, do you see other strategic partners outside of Dell in light of the Aruba acquisition.

Do you see other partners showing interest in partnering with yourself in light of the Aruba acquisition at this point?.

Yes. We have – there is two types of partners, one is channel partners that we have seen some engagement with some of those Aruba channel partners that maybe don’t want to be part of the HP program and then also is the go-to-market partners particularly the switching vendors. And we do have engagement going on with a number of those people.

I think normal formal to announce today, but a lot of active dialogue engagement and co-selling with a number of those people..

Very good. Thank you very much..

Thanks, Erik..

We’ll go next to Rohit Chopra with Buckingham Research..

Thank you very much. Couple of questions from me. I just want to get your updated thoughts Gordy on targets and targets breakeven if you don’t mind.

And then the second question, just want to get a sense on the competitive environment anything changing? And then maybe you could sort of direct that towards APAC as well, is there anything different than we know over there for it to be down?.

Yeah. In terms of any targets, no changes at this point in time. To remind everybody on the call that we’ve talked about a, you know, high 40s to $50 million of revenue per quarter to get to non-GAAP breakeven and we continue to believe that that is a model that we have in place and that we are pointed to..

Yeah, on the competitive environment, we have not seen a significant change in the competitive dynamic, obviously Aruba is rolling into HP, it has had some impact of making some channel partners available.

We’ve seen some probably some turnover in some of the sales force in that organization, but I’ve not yet seen a combined entity I think they’re still operating more independently as Aruba and not yet kind of combined the sales force there and so haven’t seen a material difference in their behavior or in the behavior out of Cisco, who are the two primary competitors we engage with..

[indiscernible].

[indiscernible] you know come off the market, but that was not a material impact in the normal business..

Dave, can I ask you a quick follow-up?.

Sure..

You didn’t mention anything about Apple.

Just, any thoughts around that, and then you talked a little bit about Dell, but is there anything happening with Apple or is it too early?.

Yeah, I think Apple continues to be a kind of a strong referral source and we do a lot of joint work with Apple, particularly in the education marketplace and so I think that you know we expect that, we see that continuing and that is progressing well.

I think we’ve, we already indicated from beginning the Apple reseller relationship, I don’t expect to contribute nearly as much direct revenue as we expect the Dell relationship to be that Apple relationship we think will be a way to transact into certain projects to want to wrap Aerohive product into an Apple lease or do a solution sale or you know expand upon one of the connected projects that we jointly deployed with Apple, but I wouldn’t expect Apple to be driving hard and, you know, pushing their people to sell Aerohive.

It’s more of a transaction efficiency. Dell on the other hand is highly motivated to push and sell a lot of Aerohive product along with their switches..

Thanks guys..

Great. Thank you..

We’ll now take a question from Catherine Trebnick with Dougherty..

Thank you for taking my question. Solid quarter, congratulations.

Could you give us some more on the Dell relationship? Do you - have you split out the revenue - you did say in the call that there were some EMEA contribution, was that also from Dell, clarify that and then also Tom a question for you is, how have you divvied up the internal inside sales versus outside sales and what’s different than it was maybe before you started, thanks..

Hey Catherine, I’ll take the Dell question. So, indicated that the relationship is progressing well, and we’ve got the channel in place and the support infrastructure in place to be able to transact in U.S. and EMEA, APAC is not yet online.

We have to align on the distribution channel and the support vehicle, but we expect to have that done inside this quarter.

And I also indicated that we did close our first orders with Dell in the later part of Q2, but we aren’t providing specific break-out of the Dell revenue and a reminder our previous commentary was we said you know, the relatively expected to close first orders in Q3, we expect them to be small as it’s typical in a land and expand world, start to expand in Q4 and become material in 2016 that’s the expectation.

We closed the first orders a little bit quicker than we expected. We are pleased with that, but I think the general profile of the business ramp is consistent with what we said before..

Okay. Thanks. And then on just on the inside versus outside sales that’s interesting I know a lot of different companies are doing the same thing I really like to hear how the strategy is working..

I’ll take that Dave. Catherine. Aerohive had already established a bright line between inside and outside sales based upon customer size and what I did was to reinforce the focus within each selling team.

They were elements of a team quota that was a small part of compensation and I drove that to two separate teams with different quotas collaborating through a common channel organization and SC community, so really just re-enforcing the bright lines that already existed..

Alright, thank you, I will move out of the queue..

Thank you. We will take our next question from James Faucette with Morgan Stanley..

Thank you very much for taking my question, just a couple on operations and how to think about those going forward.

In the quarter as you mentioned you grew OpEx a little more slowly than you had anticipated originally, is that because you were unable to hire as many people as you would like and we should expect a bounce back over some of your organizational changes you think you can have better efficiency going forward and you don’t need those people first and I guess I also wanted to follow-up on that, services margin on the other hand was a little bit below at least for we had anticipated, can you talk about anything that maybe adversely impacting services..

Yes, I think from a operating expense standpoint, this is Gordy, two things you can see by the quarter headcount we added a net number of significant number of heads, really probably more back end loaded in the quarter, so not a full extent overall in the quarter as much as we expected.

So, I think just the timing of hiring help with providing a little bit more favorability in the quarter. At this point in time, I don’t see that as a go forward efficiency gain as of yet, but really more the timing of our expenses in the quarter.

We also do our programmatic expenses that can be discretionary in and out of each quarter which had some impact as well. So, the key is probably unique favorability to the quarter but not a trend as of yet. In regards to the services gross margin, the main driver there is our amortization of our cloud platform development.

I think if you take that out this quarter and do an apples-to-apples our services margin was probably equal to if not a little bit more favorable than Q1, but the burden they are bringing in that – that amortization of internal used software as we consider our cloud platform development was the impact that we had tried to go ahead and pattern and call out to everybody at the end of Q1 that this would be coming.

.

Thanks. And then just from a product stand point, we have seen way of two products start to hit the market. I am just wondering how that maybe impacting you competitively and what the outlook and – or customer behavior around the availability of Wave 2 and how do you think that will play our for Aerohive over the next few quarters? Thanks a lot..

At this point we are seeing customer curiosity about Wave 2, but we aren’t seeing an aggressive move towards the Wave 2, most of the Wave 2 products that have been announced are significant price premium over Wave 1 has some limitation around functionality on standard and power over Ethernet and there are Wave 2 clients aren’t available yet.

So, we see kind of a minimal impact now. We do anticipate that will increase over time, as we saw with Wave 1, it was a similar a few quarters of fairly slow adoption rate and then acceleration as mover Wave 2 products came to market, cost came down, power budgets came down and we would expect to see a similar impact with the rollout of Wave 2.

So, it is been there, but not a material impact at this point..

Okay, thanks..

Okay..

And we will now take a question from John Lucia with JMP Securities..

Hi guys thanks for taking my questions. First question is on E-Rate, despite the pushed out deadline, if sounds like you are expecting some E-Rate business in Q3.

I just wanted to get a sense for how much E-Rate spending you have backed into the 3Q guide and kind of what’s the opportunity for upside there?.

So, we have, we are not breaking out specifics on the – to what percentage of the mix is E-Rate, but we have looked at the E-Rate guide and have some assumptions about how many people will get funding letters and customers that have told us that they intend to spend immediately upon receiving their funding letter.

Most of those are factored into our guidance.

We have a number of – number of customers have already indicated they are going to face those and rollout their projects in Q4 and into 2016 and so as we indicated the majority of the remaining pipeline, you know we closed some in Q2, but the majority of the remaining pipeline is actually reflected beyond Q3.

So, significant impact but this is, we don’t expect a huge wave of upfront spending, it will be more measured through the period of the E-Rate year..

Yeah John this is Gordy. I think our key is to be cautious so that we track this, you know we are cautious of how we build it into our pipeline and we want to see those deals and get evidence of those deals.

So, we did similar to what we did in Q2, which we scrubbed our pipeline, you know that we had a high probability of closure on anything tide to E-Rate.

I think one of the comments we made here is that we expect again the majority to be outside of Q3 and traditionally or historically we talked about Q3 would be more than 25% of the remainder, you know for the rest of the year, but it wouldn’t be as high as a 50% that’s why we think the majority is pushing out into Q4 and early 2016.

So, we just continue to monitor at and try to cautious until we have as much visibility as possible. .

Okay thank you. And then my second question is on Dell.

I just wanted to see if you guys have any Dell in the guide for Q3, are you forecasting any business at all from Dell in Q3 and I believe Dell is still a partner of Aruba HP on paper, I just wanted to understand kind of how that shift is going and how Dell is positioning Aerohive in lieu of Aruba?.

Yeah. So, I would say they indicated we thought that the Dell business in this quarter would be fairly immaterial, so it is, it is probably in the guide, but I don’t think it is a significant contributor to the guidance.

We think we are still in the process of, we will go out and close some initial orders and get some footprint that we will hopefully turn into much more significant business in the quarters that follow.

In terms of the Dell relationship with us versus this Aruba, I think Dell continues to have a contractual relationship with Aruba and they are definitely continuing to sell the Dell W series product into installed base environment and so I think there will continue to be some of that business going on.

I think the corporate level I they would like to be on the – have that business continue and be healthy while Aerohive grows and really enables the cloud portion of the business, but often what we are seeing is that the sale level where the rubber meets the road of a deal.

The Dell and HP/Aruba reps are pretty rapidly parting ways and we are seeing the Dell reps definitely have our strong preference to bring Aerohive into a project rather than have a HP rep in their project..

Okay, got it. Thank you..

And it appears there are not further questions at this time. I would like to turn it back to you Mr. Flynn for any additional or closing remarks..

Yes. Thank you all for joining us today. We will be at the Oppenheimer conference next week and look forward to seeing some of you there..

This does conclude today’s conference. Thank you for your participation, you may now disconnect..