Melanie Solomon - IR, The Blueshirt Group David Flynn - President and CEO John Ritchie - Chief Financial Officer.

Doug Clark - Goldman Sachs Troy Jensen - Piper John Lucia - JMP Securities Meta Marshall - Morgan Stanley Catharine Trebnick - Dougherty & Company.

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

Thank you, Amber. Welcome to Aerohive Networks’ third 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 John Ritchie, Chief Financial Officer.

During the course of today’s call, management will make forward-looking statements including statements regarding our projections for fourth quarter operating results, expectations for future revenue growth, profitability and operating margins, plans for future investments, product development, deployment, adoption and performance, and expectations of customer buying patterns and the growth of the market for our products and business generally.

These forward-looking statements involve a number of risks and uncertainties, some of which are beyond the control, and the actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results, including risks and uncertainties included under the captions Risk Factors and Managements Discussion & Analysis of financial conditions and results of operations, in our 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 the referenced press release are based on information available us as of the date hereof and we disclaim 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’ll be discussing, both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges and are not intended to be considered in isolation or as a substitute to 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. And now, I’ll turn the call over to David Flynn, President and CEO of Aerohive..

One is that enterprise customers are looking for an alternative to address the lack of innovation and focus they see in our competitors; second is the value of our unified cloud management experience that can accelerate deployments and reduce the cost and complexity of operations.

Our new HiveManager NG platform extends these advantages, further improving the user experience while enabling APIs and Big Data to drive innovation on top of our platform.

First released in Q2 as a public cloud service, HiveManager NG is now also available as a private cloud on-prem version, allowing customers the flexibility to deploy behind their firewall. Now organizations can have the same, simple, secure, and scalable next generation wireless solution from Aerohive with either public or private cloud management.

We have a lot more to say about this offering, so we’re scheduling an investor webcast to talk more about the various features and capabilities of HiveManager NG. Look out for a save the date in the coming weeks.

We continue to broaden our reach in the marketplace by strengthening our strategic partnerships with leading technology companies, cementing our position as the leading independent provider of enterprise-class, cloud networking and Wi-Fi solutions.

We’re pleased with the progress of our Dell partnership, which is developing consistent with our expectations. We are seeing good sales engagement as we develop the pipeline and we look forward to seeing the benefits from this partnership going forward.

In the quarter, we announced with Brocade and Juniper collaborations that allow us to meet in the channel and co-sell a combined wired and wireless solution, expanding our opportunity with customers worldwide. We’re getting our sales teams aligned to identify new opportunities and we are encouraged by the initial activity.

Together, these partnerships with three of the largest players in this space validate our position in the market as the leading independent enterprise/cloud networking solution. Finally, in the third quarter, we were pleased to be joined by John Ritchie as our new CFO. We’re glad to have him onboard.

And I’ll now turn it over to John to go through the financials in detail and provide our guidance for the fourth quarter..

Thanks Dave and good afternoon everybody. Before we begin, I want to reiterate how excited I am to be here at Aerohive. Dave has assembled a world class management team at Aerohive and I am glad to be part of it. Now, before we go through the quarter in detail, I’d like to highlight some milestones that we’ve achieved in the third quarter.

In Q3, we recorded a record revenue of $42.8 million. Our software subscription and services revenue also set an all-time high of $6.7 million. Deferred revenues approached $55 million. DSOs came in at a record low of 32 days and even more impressive number when you look at some of the competitors in our space.

We generated almost $3 million of cash during the quarter as well. During the quarter we continued to benefit from improved sales execution which began a couple of quarters ago under the stewardship of our new sales leader, Tom Wilburn whom we introduced to you a several quarters ago.

In the third quarter, we experienced exceptionally strong growth with revenue increasing 16% from Q2 to Q3 and exceeding the top end of our $40 million to $42 million guidance range. This over-performance was driven by some deals that we expected to close in Q4 but ultimately materialized in Q3.

That was on top of solid performance in the quarter, built on a strong U.S. K-12 business and healthy contribution from our other key verticals. As we’ve discussed, E-Rate is significantly changing our seasonality as compared to prior years.

In 2015, E-Rate amplified the historic sequential decline in product revenue from Q4 to Q1 and shifted some buying from the first half of the year into the second half of the year.

As we look to 2016, we expect our seasonality to be similar to 2015 including a Q4 to Q1 decline in product revenue that we expect the decline to be significantly greater than we saw in Q1 of 2014 but moderated when compared to the sequential decline we saw in Q1 of 2015.

During the balance of my prepared remarks, I will review our GAAP and non-GAAP, P&L balance sheet and cash flow metrics for Q3 and provide some related commentary on the business. And lastly, I’ll close by providing financial guidance for Q4 of 2015.

For the quarter, net revenue was $42.8 million, an increase of 21% compared with the same quarter a year ago at an increase of 16% on a sequential basis. This revenue achievement exceeded the high end of our guidance range of $40 million to $42 million, primarily due to a few deals closing ahead of the schedule, as previously mentioned.

Q3 was a record for product revenue which came in at $36.1 million or 84% of total revenues, an increase of 17% on both the sequential and a year-over-year basis. As a reminder, the vast majority of our product revenue continues to be driven by our access points and related management software licenses.

Q3 was also a record for software subscription and services revenue which came in at $6.7 million or 16% of revenue, an increase of 46% when compared to the same quarter a year ago and an increase of 9% on a sequential basis. This is a proof point to the market adoption of our cloud based solutions.

Over the past four quarters, approximately 75% of our end customers and 40% of our AP customers -- our APs were deployed with our public cloud platform.

As our software subscription services revenue amortizes off of the balance sheet, we expect to continue to see quarterly increases in the revenue line over the near-term but do not reflect the same seasonality that we see with our product revenues. On a geographic basis in Q3 net revenues in the Americas was $29.5 million or 69% of total revenue.

Americas’ net revenues increased 26% as compared with the same period a year ago and increased 19% sequentially. The improvement in the Americas was driven by the continuing flow of E-Rate spending related to the 2015 E-Rate period. Now moving on to EMEA, we saw healthy results with net revenues of $10.4 million or 24% of total revenues.

EMEA net revenue increased 14% compared with the same quarter a year ago, and increased 13% sequentially. The success was in spite of some currency headwinds. In the Asia-PAC region for Q3, we had revenues came in at $2.9 million or 7% of total. Asia-PAC net revenue was even on a sequential and year-over-year basis.

As a reminder, we bill all locations in U.S. dollars and as such, we see pricing pressure during periods in which the U.S. dollar is strong. On a GAAP basis -- on a non-GAAP basis, our overall Q3 gross margin was 67% compared with 68% in the year ago period.

Moving to product non-GAAP gross margin, in Q3 they came in at 67.7% compared with 68.5% in the same period a year ago. The sequential decrease in product margins was driven primarily by an ENO [ph] charge that we took during the quarter. Approximately 80% of our access points shipped in the quarter were 802.11ac compared with 74% in Q2.

We’re pleased with how smoothly and successfully our business has transitioned from 802.11n to 802.11ac. Software subscription and services gross margin on a non-GAAP basis was 63.2% in Q3 compared with 62.1% on a sequential basis, but a decrease from 65% in the same quarter a year ago.

The year-over-year decline related to the amortization of our capitalized cloud development cost for our HiveManager NG cloud services platform. The amortization was $325,000 in the quarter, as planned. Overall, non-GAAP operating expenses increased to $34.1 million in Q3 compared to $31.6 million in the prior quarter.

With regard to non-GAAP functional expenses, non-GAAP R&D increased sequentially to $8.8 million, or 21% of revenue compared with $7.9 million or 21% of revenue in Q2. This compares with $6.8 million or 19% of revenue in the same period a year ago.

Non-GAAP sales and marketing increased sequentially to $20.1 million or 47% of revenue from $19.1 million or 52% of revenue in the sequential quarter. This compares to $17 million or 48% of revenue in the same period a year ago.

Lastly, on a non-GAAP basis, G&A increased sequentially to $5.2 million or 12% of total revenues from $4.7 million or 13% of total revenues in the sequential quarter. This compares to an increase from $4.3 million or 12% of revenues in the same period a year ago.

As we stated in previous quarters, G&A expenses continue to be subject to discretionary changes in the expense level due to the timing of certain payments, primarily related to audit, legal, and other professional service fees.

Overall, we saw a sequential improvement in our non-GAAP operating loss from 13% -- to a loss of 13% from 18% in Q3, and an increase from 13% in Q3 from the year ago period. On a non-GAAP basis, we reported net loss of $5.7 million in Q3 compared with a net loss of $4.5 million in the same quarter a year ago.

On a GAAP basis, in Q3, net loss per share was $0.24 compared to a net loss of $0.16 in Q3 a year ago, and compared to a net loss of $0.24 in the prior quarter. On a non-GAAP basis, net loss per share in Q3 was $0.12 compared to a net loss of $0.10 in the same period a year ago, and a loss of $0.15 in the prior quarter.

The net loss in Q3 is based on a weighted average common share count of 47.7 million shares. Total headcount at the end of Q3 was 625 compared to 554 at the end of Q3 of 2014, and 589 at the end of Q2 2015.

Now, moving on to the balance sheet, cash and cash equivalent balances as of September 30, 2015 totaled $88.2 million, an increase of $2.8 million from the prior quarter. Cash generated from operating activities in the quarter was $4.5 million compared with $4 million in the same quarter in the prior fiscal year.

Inventories increased to $11.8 million as of September 30th compared to $9.5 million in the same year ago period. The primary driver of the increase in inventory is related to the increase in our overall revenues. Accounts receivable decreased 21% to $16.3 million as of September 30th.

DSOs for Q3 decreased to a record low of 32 days compared to 49 days in Q2, and 43 days in the prior year. We believe our quarterly DSOs will typically fluctuate in the range of 45 to 55 days, depending on seasonality and related linearity within the quarter. During Q3, we experienced improved linearity resulting in these exceptionally low DSOs.

We expect to return to our normal range over the upcoming quarters. Total deferred revenues increased 8% sequentially to $54.9 million as of the end of the quarter, and increased 28% from $42.8 million as of September 30, 2014.

Deferred revenue from software subscriptions and services increased 8% sequentially to $51.8 million in Q3 and increased 35% compared to September 30, 2014. Product related deferred revenue, primarily channel inventory, decreased $100,000 sequentially to $3 million.

The decrease in the quarter in deferred product revenue occurred primarily in the short-term revenue category on the balance sheet. Now, turning to our guidance for Q4 of 2015, we currently anticipate net revenues in the range of $44 million to $47 million. On a non-GAAP basis, we expect gross margins between 67% and 68%.

On a non-GAAP basis, we expect operating margins to be between negative 5% and negative 10%. We expect other income and expenses in Q4 to be approximately $200,000, and the tax expense of $200,000 also. Lastly, we expect non-GAAP EPS in Q4 to be between a loss of $0.06 and $0.10 on weighted average common shares outstanding of 48.4 million.

Since we’re in a loss position, vested in the money stock options are not included in our weighted average share outstanding number as they would be anti-dilutive in the calculation of EPS. On a GAAP basis, we expect Q4 EPS to be between negative $0.18 and negative $0.22 on the same weighted average common shares outstanding number.

As a reminder, our main reconciled items between our GAAP and our non-GAAP measures are stock-based compensations. Now with that, I’ll turn it back over to Dave..

We’re pleased with our performance this quarter and the execution of our portfolio. [Ph] With positive trends in the business and the strength of our executive team, we’re well-positioned for the future. We’ll now take your questions.

Operator?.

Thank you. [Operator Instructions] And we will go first to Doug Clark with Goldman Sachs..

Wondering if we can kind of tackle E-Rate first on this case; I know you said it was kind of strong during the quarter, wondering if you can help us kind of quantify the contribution. I think previously you had talked about kind of a $50 million booking opportunity perhaps.

How much of that has been recognized and then the expectation for future recognition throughout kind of the next subsequent three or four quarters?.

Yes. Doug, as we mentioned, the overall education was the 44% of the business, a substantial portion of that not E-Rate really. The commentary regarding how much of our E-Rate awards were booked versus remain to be booked is simply that more than half of the awards still remain to be booked.

We did book some significant E-Rate deals in Q2 as well as in Q3 but more than half is still out there. The schools have through September of 2016 to make those purchases. They have some flexibility to extend that window with -- by filing additional paperwork. So, more than half of it will come over the following, in the next four quarters..

And then maybe also touching on the partnerships, specifically kind of Juniper and Brocade now, you are kind of sharing those relationships with perhaps a few other Wi-Fi equipment vendors, wondering if your perspective on potential mix within them, go-to-market strategies, and just the details on that.

And then kind of a related question, I think recently you announced the effort to enter into the Australia and New Zealand market, just curious on kind of why attacking that at this point..

So, regarding the Brocade and Juniper relationships, so those two companies still, I guess have some leftover relationship with HP -- Aruba, now HP, although they are much more -- their sales team views HP as a direct competitor. And so, all that relationship is there on paper.

Where those things get affected is on the street with sales reps making individual decision whether they partner with. So pragmatically, their partnering with Aerohive and Ruckus and those will be the two companies. So, it’s not many, not really a broad array of partners, it’s primarily those two.

And how that gets broken out, we would expect to be broken out kind of consistent with where the companies are relatively strong. We’re strong in enterprise and cloud, very strong education business. The Ruckus tends to be primarily focused on hospitality and service provider market segments.

So, it will -- the net results will also be a matter of being who does a better job of engaging with the sales reps in the field. And so, we’re working hard to make sure we make those engagements successful. Regarding Australia and New Zealand, yes, we should clarify that that was not a change. We’ve been in Australia and New Zealand for a long time.

The team in New Zealand has been very, very successful over the years as well as we have a number of strong people in Australia but we did put in place a new head of the ANZA region. So that was a change in leadership, not necessarily a new initiative to open up the ANZA region..

And we will next to Troy Jensen with Piper..

I’ve got a quick for you John, 32-day DSO is kind of unheard in the industry.

So, I think curious to know what linearity really looks like and how much business was done in the last month and why did that happen?.

Well, I agree with you 32 is, 32 DSO is phenomenal level. We do expect it to move up from there and it’ll move up from there, between there a range over the next several quarters. Without getting into the specifics of what we booked in which quarter, I think what it really speaks to is the improvement in sales execution.

We do encourage our sales team to help us with linearity. We have incentives out there to promote that. And I think you’re seeing the success of that..

Then maybe for David, maybe a question he can’t answer but just wanted to get your thoughts. Education spending on Wi-Fi, obviously kind of moved around this year with the E-Rate. What do you think a safe number to assume is for edu spending on Wi-Fi in ‘16, what’s the growth rate over ‘15 roughly..

That’s a good question; that’s a crystal ball question, what is that growth rate.

I have seen some projections from Infonetics that have that growth rate very high, up in the mid-20s I think is where they projected; while most of the other vertical market segments were expected to grow 10%-ish was -- and there is a study where they’ve taken a crack at it with most markets growing 10 to low teens, and education growing more mid-20s.

I think that’s probably as good of a guess as anyone. There certainly is expected to be a large, very large pool of unspent E-Rate money that was rolling over from last year. We’re gearing up to drive a much more aggressive E-Rate campaign and expecting to do more business, substantially more business than we did in this last year.

But it’s a little bit of crystal ball work to put a hard number on that..

And we will go next to John Lucia with JMP Securities..

My first question is last quarter I think you guys’ enterprise business ex K-12 education grew over 20%.

Was that the case this quarter?.

I don’t have that. Give me a minute to make sure -- I’d actually do that math this time. Why don’t -- do you want to go on another question while we look that up..

And then, can you give us a sense if you expect E-Rate to increase or decrease sequentially going into 4Q? I mean you still have 50% of the awards left. We get a sense of when you expect those to hit.

When any of that come in 1Q, or as we move into next year where most of the schools wait for the summer months to purchase and install?.

This is John speaking here. We expect the balance of E-Rate to extend into next year. In terms of giving specific growth rates with E-Rate and sub, it’s hard to do that. But again, we expect it to -- the current E-Rate cycle to extend from Q4 into Q1 and a little bit into Q2 of next year..

I think we have previously indicated, we thought Q3 would probably be the most robust quarter of E-Rate spending. There were some delays in those funding letters getting out, as you know. So, it could be -- the level between Q3 and Q4 maybe relatively similar but as a long tail that has gone out until September next year..

Okay, thank you..

And that’s -- if you do a little bit of math on that that other question, so we’ll work and get back in just a minute..

Great, thanks..

And we will go next to James Faucette with Morgan Stanley..

Hi. It’s Meta Marshall for James.

First question on, just what updated timing on when the wave 2 product is planned to come out and then whether not having your wave 2 product out is hurting you in some of the partnerships versus some selling Aruba more roughest in those deals where customers stay along that?.

Yes, so no change in the wave 2 schedule versus what we communicated last quarter. We expect it to be available Q1 and we expect the product that we plan to deliver on that time, we think we’ll have some compelling advantages over the products that our competitors have announced and/or may have shipped.

Obviously Ruckus has made a noise about the wave 2 product. They’ve indicated the other products aren’t in the market yet, or they haven’t at least seen them in the marketplace. I’ll say we have seen very little interest in activity around wave 2 from the customer base.

I think they’re very much in a wait and see mode, not unsure about how an important the value is and definitely less interest in being on the bleeding edge of a new technology when the clients don’t exist. It won’t be out for quite a while. So at this point, we’ve seen no impact from wave 2 affecting our customer engagement.

As we go forward, that may increase but at this point it’s been a non-factor..

[Operator Instructions] We will go next to Catharine Trebnick with Dougherty & Company. Ms. Trebnick your line is open..

Two questions, one on the Dell relationship.

Are you seeing any slowdown in the take rates since they announced the acquisition of EMC?.

No. Obviously there is some distraction you’re going to see inside an organization when that’s happening. But I think all the sales guys still have quotas that they got to go ahead and they’ve got a good footprint on the table and looking to engage and sell.

So to-date, it has not had a noticeable impact on it, we’re still focused on growing the pipeline and engaging, something we are watching closely to make sure it doesn’t cause more distraction but so far we’re not seeing it an issue..

And then what was -- you said strong contribution in the healthcare and retail, what was that? Is it 20%, 25%?.

It was about 25%..

Okay, great..

It was about 25% across those, so that was a record, by far the best we’ve done across those verticals..

And then I hate to go back to this E-Rate but one more question on that, do you still anticipate the FCC’s relief funding in July 26 at the rate of $1.5 billion..

Yes, so the expectation is, these numbers are a little hard to calculate but yes, that planned out another $1.5 billion of committed funding is still in place plus all the rollover funds that were not spent this year.

And so I think the number gets to be about a $3 billion number or something, it’s a big enough number that I don’t bother going in and recalculate it all the time. There’s a huge pile of the E-Rate money and I wouldn’t be surprised if it’s more than could be effectively spend in, spent once again.

So, we’re going to chase it and should expect it to be a bigger year than we saw this year..

And we will take our follow-up question from Doug Clark with Goldman Sachs..

I was just curious on the gross margin point. You had commented on kind of a one-time expense. I was wondering what gross margins would have been on a like for like basis excluding that..

They’ve been towards the higher end of our guidance which was 66% to 68% overall..

And that expense is expected to be non-recurring or could we see that pop back up again?.

I would expect it to be non-recurring at this point..

And then I was just kind as longer term, you previously kind of talked about hitting profitability at the $15 million quarterly revenue run rate, is that still on track in terms of targets and achievable in your view?.

That’s our goal. I mean we said that before and we’re aiming towards it..

That concludes today’s question and answer session, I’d like to turn the call back over to Mr. David Flynn for any additional or closing remarks..

Thank you. I’d like to again thank our employees, customers and partners for contributing to a successful quarter. Thank you all for listening today and good afternoon..

That does conclude today’s conference, thank you for your participation..