Melanie Solomon - IR, The Blueshirt Group David Flynn - President & CEO John Ritchie - CFO.

John Lucia - JMP Securities Catharine Trebnick - Dougherty & Company Rohit Chopra - Buckingham Research Group Eugene Anderson - Morgan Stanley.

Welcome to the Aerohive Networks First Quarter 2016 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, Glen. Welcome to Aerohive Networks first quarter 2016 financial results conference call. After the market closed today Aerohive issued a press release to their 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, operating results, expectations for future revenue growth, operating profitability and operating margin, 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 can generally.

These forward-looking statements involve a number of risks and uncertainties some of which are beyond our control and the actual outcomes and end 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 management's discussion and 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 at ir.aerohive.com and on the SEC's website at sec.gov.

All forward-looking statements in this presentation and the referenced press release are based on information available to 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 will 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 for results prepared in accordance with GAAP.

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

Thank you Melanie and thank you all for joining us today. I'm very pleased with the strong performance our team delivered in Q1, we achieved 55% year-over-year growth with revenue at the high end of our guidance range and we outperformed our EPS guidance. This is our fourth quarter in a row of exceeding street expectations.

The success in the quarter was driven by strong performance in retail and enterprise and solid contribution from the education vertical with K-12 representing 36% of the business in the quarter. We continue to win large deals and improved execution across multiple disciplines in the organization which is evidenced by our financial results.

All of this is driving grow substantially fast in the market. Now I would like to highlight a few interesting wins across verticals. We continue to deployment of a 40,000 AP retail win in Japan resulting in seven-figure business in Q1. This deal demonstrates our ability to win and deploy extremely large CL [ph] deals.

We had a large win international child care provider that is deploying our APs and switches for unified wire and wireless cloud managed solution at over 1000 sites across the country. We won a European Healthcare Organization that run 700 facilities and deliver care to people with intellectual disabilities and mental health problems.

They wanted to deploy a high density Wi-Fi network to enable voice over Wi-Fi and location-based patient services. They use Cisco switches but choose Aerohive Wi-Fi due to our flexible scaling, ease of operation and cost advantages.

We won a large furniture retailer in the northeast that is deploying our full solution of cloud managed APs, switches and branch routers across 130 stores to reduce operating expenses and implement a platform to enable customer engagements.

We continue to make progress with developing managed service partners we’re able to use our technology to win significant accounts. One interesting example of this model is as we partnered with one of the largest service providers in Europe to deliver managed Wi-Fi services across Spain for the largest fast food chains in the world.

And finally I want to highlight the major education win at the Calgary Board of Education. A district with 140,000 students in over 220 schools, they have previously deployed a coverage based network using of Aruba but they needed to refresh the network to a handle the increasing load of more devices, users and traffic.

They chose Aerohive to deploy their new high-capacity network based on the robustness of our WiFi, reduce operating expenses, the flexibility to use our APIs to develop a customized enrollment portal and our unique ability to control device access to the network without the complexity of installing certificates on student devices.

They started with 3000 APs in Q1 and a deployment is expected to scale up to 9000 APs. We continue to increase coverage and efficiency of our channel program, a highlight in Q1 was our engagement with Synnex as our exclusive U.S. distribution partner.

We expected our Synnex partnership will improve our operating efficiency and scalability as well as expand our market reach by better enabling both our existing partners and developing new partners. On the product front we met our commitment of delivering a compelling and highly differentiated ways to access point with the AP250 in the first quarter.

This is a unique offering in that it delivers full wave two radio functionality within the 802.3 AF tower over Ethernet budget allowing it to work with existing switches.

Unlike other vendors we allow our customers to preserve their investment in their existing equipment by not requiring them to purchase new switches to get the full benefit of wave 2. We think this makes the AP250 the industry's first wave 2 everywhere access point.

But more importantly the AP250 is uniquely differentiated with a dual 5 GHz radio design that can deliver up to twice the RF capacity and high density deployments. With typical dual band access points in many high density deployments customers turn off every other 2.4 GHz radio to minimize interference between closely spaced APs.

Our software configurable radio allow us to put that second radio into a 5 GHz mode that can double RF capacity. This advantage makes our AP250 a compelling value proposition even for customers that do not see wave 2 as a priority.

We anticipate that delivering these advantages without requiring costly switch upgrades will leave many customers to decide it's a good investment to pay a 25% less price premium for our AP250 over our AP230.

Additionally we announced a complete refresh of our cloud managed switching product line even as more complete software functionality and a broader product range expanding from eight ports to stackable 48 port switches.

A switch portfolio is a natural extension of our current selling motion and enables us to deliver compelling unified wired and wireless cloud managed solutions resulting in reduce operating costs for our customers.

We continue to enhance our HiveManager NG, our next generation cloud platform which delivers a unified wired and wireless experience in both public and private deployments. We just announced our large-scale private cloud solution that will allow customers to scale up to 20,000 APs on a single management cluster.

Very few deployments are bigger and as we said in the past our technology is built for scale. As our cloud platform matures and we continue to develop our API and big data capabilities, we are partnering with companies who are innovating our platform including making strategic investments in those companies as we did in Q1.

Now, turning to everyone's favorite topic E-Rate. We're still in the thick of the 2016 E-Rate season because this year's deadline for schools to award business was extended to May 26. Six weeks later than last year's April 16 deadline.

This years later filing deadline we expect those school to decide to deploy in Q2 and do so later in the quarter making Q2 a more back end loaded quarter than last year.

Other than this we expected the E-Rate business to follow the same seasonal pattern as last year by the final elite results will not be available until early June we are pleased with our results to date.

On the partnership front we’re progressing with Dell and have been closing deals including wins such as movement mortgage between Margaret School and Walton Art Center and in addition to the Calgary Board of Education to which I mentioned a few minutes ago.

Last week Dell announced the Dell branded version of HiveManager NG with integrated management of their M-Series switches and our access points. This delivers converged wide wireless enterprise class management available in the public or private cloud.

Dell has also expanded its industry-leading pro-support to provide users with a single point of contact for unified network support. Customers can now deploy best of breed wire from Dell and best-of-breed wireless from Aerohive with a single pane of glass unified management and unified support.

Dell and Aerohive together deliver the most unified multi-vendor wired and wireless solution in the industry. We believe this announcement serves as a significant validation of our renovation and technical leadership and we look forward to continue to work with Dell.

At the same time we're also seeing increased levels of activity with Juniper and we're very excited about our opportunity to partner with them to provide joint solutions. Overall we’re very pleased with this great start to the fiscal year and look forward to continued momentum and progress toward profitability in 2016.

I will now turn it over to John to go through the financials in detail and provide our guidance for the second quarter..

Thanks, Dave and good afternoon everybody and thanks for joining us here today. Before we go through the quarter in detail I would like to highlight some financial and operational milestones Aerohive achieved in first quarter.

On a year-over-year basis revenues grew 55% with product revenue increasing 58% and software subscription services revenues growing 44%. We significantly simplified our business model by eliminating inventory at almost all of our European distribution partners. This action provides us more control and visibility over our business.

And as Dave mentioned we further simplified Synnex as our [indiscernible] for U.S. and Canadian business. Over the long term this will allow us to reallocate resources to areas of our business that will drive revenue but a very minimal incremental cost.

Net of our $1.5 million strategic investment in a Wi-Fi applications and analytics company and our $800,000 of share repurchases in the quarter, our trailing 12 month cash burn rate was only $4.2 million. This is the lowest trailing four quarter cash burn rate the company has had excluding proceeds from capital raising activities.

In addition we're very pleased to announce that we have settled our pending class-action lawsuit related to our IPO offering materials and are now in the process of confirming this settlement with the court. We are pleased to end the distraction of this matter and put it behind us.

During the balance of my prepared remarks I will cover our GAAP, our non-GAAP, GAAP P&L and non-GAAP P&L, our balance sheet, cash flow metrics for Q1 and provide some related commentary on our business and lastly I will close by providing financial guidance for Q2 as well as additional commentary regarding our progress towards achieving quarterly profitability in 2016.

Now moving on to the quarter, as our results show we continue to benefit from improved execution across multiple disciplines in our organization, we are very pleased with how far we have come but we know we have a lot to do and there is still a lot of work ahead of us.

In the first quarter, we had a very strong year-over-year revenue performance coming into the top end of our guidance range. Our strong performance was driven by robust results in the retail and health verticals with a strong contribution from education.

Revenue for the first quarter was $40.1 million up 55% on a year-over-year basis and down 13% sequentially which was better than we expected. Our revenue results came in at the high-end of our guidance range of $38.5 million to $45 point million.

Q1 product revenues came in at $32.5 million or 81% of revenue an increase of 58% compared with the same quarter a year ago and a decrease of 17% sequentially. We're pleased that the sequential decline was in-line with our expected seasonality.

We continue to make progress increasing our recurring revenue streams as our software subscription and services deferred revenue balances continued to grow quarter after quarter, these recurring revenues bring visibility and predictability to our model.

Q1 was a record for software subscription services revenues coming in at $7.7 million or 19% of revenue an increase of 44% compared with the same quarter a year ago and a 5% increase sequentially.

We expect to see sequential quarterly increases in this revenue line over the near term and with that the same seasonality we expect from our product revenue. We believe our recurring revenues will increasingly differentiate our business model.

As a proof point to the market adoption of our cloud-based solutions over the past four quarters approximately 75% of our end customers and approximately 40% of our APs were deployed with our public cloud platform.

On a geographic basis in Q1 revenues in the Americas were $24.4 million or 61% of total revenue, Americas revenues increased 73% compared with the same period a year ago and declined on a sequential basis driven by our expected seasonality. On year over year basis Americas benefited from strength in the education enterprise verticals.

Moving on to EMEA we saw health results in that market with revenues up $12 million or 30% of total revenues, EMEA revenue increased 32% compared with the same quarter a year ago that was relatively even on a sequential basis. Moving on to APAC, revenues in the Asia-Pac region for Q1 were 3.7 million are 9% of total revenues.

Asia-Pac revenue increased 45% compared with the same quarter a year ago and decreased 19% sequentially. As a reminder our international business is a material portion of our revenues, it's important to remember that we bill all locations in USD but we may see pricing pressure during periods in which the US dollar is strong.

Moving on to gross margins, on a non-GAAP basis our overall Q1 gross margin was 67.5% compared with 67.2% in the same period a year ago and 67.7% in Q4. Non-GAAP product gross margins for the quarter came in at 68% compared with 66.9% in the same period a year ago and 68.4% in Q4.

Non-GAAP software subscription and services gross margins were 65.5% in Q1 compared with 68.2% in the same quarter a year ago and 64.3% in Q4. The year-over-year decline related to the amortization of our capitalized cloud development costs for our HiveManager NG cloud services platform. The amortization was $325,000 in the quarter as we had planned.

Non-GAAP operating expenses were 33.2 million in the quarter compared to $28.6 million in the same quarter a year ago and $33 million in the prior year period. With regard to non-GAAP functioning expenses R&D increased to $8.9 million or 22% of revenue compared with $6.5 million or 25% of revenue in the same period a year ago.

This compares with $9.1 million or 20% of revenue in Q4. Looking to Q2 we expect to see meaningful uptick in R&D spend levels this increase will be driven by increased headcounts and discretionary spend as we continue to invest in our market-leading technology.

Non-GAAP sales and marketing came in at $19.3 million or 48% of revenue in Q1 compared to $70 million or 66% of revenue in the same period a year ago. This compares with $19.1 million or 41% of revenue in Q4.

One additional note regarding our sales and marketing expenses effective Q1 we began recognizing sales commissions in the period in which the associated revenue is recognized. Previously the commission expense in the period the commission expense was booked in the period and order was booked. Our prior period comparisons reflect this change.

Lastly on a non-GAAP basis G&A was $5 million or 12% of revenue in Q1 compared to $5.1 million or 20% of revenue in the same period a year ago. This compares to $4.8 million or 10% of revenue in the fourth quarter.

Overall our non-GAAP operating loss was negative 15.2% which was an improvement of 28 percentage points from the negative 43.6% in Q1 of last year and compared to negative 3.7% in Q4.

On a non-GAAP basis we reported a net loss of $6.2 million in the first quarter compared with a net loss of $12 million in the same quarter a year ago and compared with a loss of $1.7 million in Q4. On a GAAP basis in Q1 the net loss was $0.25 per share compared with a net loss of $0.34 a year ago and a net loss of $0.15 in the prior quarter.

Our GAAP net loss included stock-based compensation expenses of $4.9 million and class action settlement cost of $1.4 million. On a non-GAAP basis net loss per share in Q1 was $0.13, $0.03 better than the consensus estimates, this compares to a net loss of $0.26 in the same period ago, and a loss of $0.03 in the prior quarter.

The net loss per share for Q1 is based on weighted average common shares outstanding number of 49.1 million shares. Total headcount at the end of the quarter was 617 roughly flat on a sequential basis and up year-over-year from 567 employees at the end of Q1 2015.

Now turning to the balance sheet, cash and short-term investments as of the end of March totaled $86.1 million, a decrease of $6.2 million from our year-end numbers.

Net of our 1.5 million investment in the Wi-Fi application analytics company and the $800,000 we spent on our share repurchase program in the fourth quarter our cash decreased by $3.9 million, a great result given that Q1 is our seasonally weakest quarter.

Inventory levels increased to $11.5 million at the end of the quarter compared to $10.8 million at the end of 2015. Accounts receivable decreased to $20.9 million as of March 31 compared to $22.8 million at the end of the fourth quarter.

DSOs for the quarter were 47 compared to 45 in the prior quarter given the backend loaded nature of our Q2 shipments we believe our DSOs for Q2 will be reap the high end of our typical DSO range of 45 to 55 days.

Deferred revenues increased 2% sequentially to 60.3 million as of the end of March, an increase from 26% increase from $47.8 million at the end of March of last year. Deferred revenue from software and subscription and services increased 4% sequentially to $58.5 million in Q1 and increased 32% compared with $44.2 million at the end of March 2015.

Product deferred revenue primarily channel inventory decreased $1.4 million sequentially to $1.8 million from the $3.2 million recorded at the end of Q4.

The decrease in the quarter for deferred product revenue was a result of our previously mentioned efforts to reduce channel inventory to provide us with more control and visibility to overall business.

Now moving on to guidance for our fiscal Q2 of 2016, we currently anticipate net revenues in the range of $46 million to $48.5 million on a non-GAAP basis we expect gross margins to be in the range of 67% to 68% and on a non-GAAP basis we expect our operating margins to be between minus 8% and minus 4%.

We expect other income and expenses in Q2 to be an expense of approximately $200,000 and we expect a tax expense of approximately $200,000 in the quarter as well. Lastly we expect non-GAAP EPS in Q2 to be between $0.04 and $0.08 on a weighted average common shares ending of $49.9 million.

Since we are in a loss position certain stock based awards are not included in our weighted average shares outstanding numbers as they are anti-dilutive. On a GAAP basis we expect Q2 EPS between negative $0.15 and negative $0.18 per share on $49.9 million weighted common shares outstanding.

Once again we would like to take this opportunity to reiterate our commitment to achieving non-GAAP operating profitability in 2016.

We plan on achieving this goal with revenues in the range of $50 million to $51 million, we expect to meet this objective through a combination of revenue growth and controlled operating expenses with focus investment in areas that we feel will yield the highest returns and secure our long-term success.

Now with that I will turn the call back over to Dave..

Thanks, John. Looking ahead we are pleased with our unique position as both the number one independent networking provider and now the number one independent enterprise Wi-Fi company. We believe this position strengthens our business and partnership opportunities and gives us an increasingly opening playing field.

We’re at the fore front of driving innovation in the market which typically originates from companies like ours and we are excited about taking advantage of new opportunities going forward and overall we see the market trends continue to support our growth. I will now take your questions.

Operator?.

[Operator Instructions]. We will go first to John Lucia with JMP Securities..

So first question, I think John I may have missed the EPS was it an $0.08 to $0.04 loss, was that the guide?.

Correct..

On then on the Dell partnership I just wanted to get a little more color there, how meaningful has that become for you in terms of a revenue generator, any sense on the size would be great there and then on the integration that you announced recently when will that become available, and what kind of catalyst do you think that can be for that install base?.

With regard to Dell we continue to be happy with the level of engagement and activity we’re seeing. We aren't breaking out specific numbers on the Dell revenue that we're driving but we did mention we put in our press release for number of wins.

We have booked including that Calgary win which is a very large deal, we look at 3000 APs referenced typical AP [indiscernible] might be 300 to 500 per AP is kind of a reference point to use. You can see there's a pretty interesting business starting to come in conjunction with Dell.

So making progress, still more to do and it's time to move a giant company like that. We are quite excited about the integration that we have done with them.

We anticipate that will be a catalyst to further accelerate the business, the fact that there is a unified wired and wireless management in the HiveManager really gives them an opportunity to go into their installed base and then bring Aerohive along with it and sell it as unified solution also gives them the power to walk in into a joint deal and sell a solution that is the most integrated available in the industry.

So that’s very good news. It is in -- that software is in late stages of beta scheduled for imminent release certainly within the quarter. They would have to give you -- they've got their own QA cycle they do beyond ours so they will have to communicate the exact date but it is scheduled to happen well within the quarter..

And then my next question is on E-Rate. I think you talked a little bit about that but I just want to drill in on it a little bit. What are you seeing in terms of the Form-470. I know the deadline has been extended but just some more detail there would be great.

And I think you said you were pleased thus far with your position, can you just elaborate on that?.

Yes. So the bigger deadline that was extended is the 471 which is the award decision. The 470 which is the bid request was also extended but that window closed a couple of weeks ago. So all the bids are out, we are responding to bids and chasing them and then customers are making their award decisions.

In terms of activity level on that, it looks to be consistent or slightly the number of 471 is ahead of the trend from where it was last year in terms of what it looked like 30 days or whatever it is 25 days ahead of the deadline. But I should caution you it's a very backend loaded process.

I think we just looked at the 471s last year I think the between 40% and 45% of the dollar value of awards was made on the last day of the E-Rate season. So at this point, the total industry awards are about 25% of the total from last year. But as I said, if you get almost half of the awards on last day 25% so far is relatively good trend line.

So it looks like there is good activity but the last couple of days in May will be when it all becomes more clearer.

In terms of our progress, we have gained in terms of 471 awards to-date, we have gained several points of market share but again I will caution that it's -- only early returns like early returns in an election but we’re up a number of points of market share and most of our key competitors -- we have gained more share than any other competitor from the reports we've seen to-date..

Can you tell from all the Form 470's being in the level of demand as compared to last year or is it too early?.

Hard to tell from the 470s because those don’t have a dollar value on it, they just have a request for some number of APs or -- there is no dollars attached until the bids are turned in and awarded in the 471s.

So in terms of the number of 470s, I think it is similar maybe slightly up from last year but that doesn't say how big the value -- there is a lot of big variables of dollar value of those ones..

We will take our next question from Catharine Trebnick with Dougherty & Company..

You did indicate in the prepared remarks that the retail was very strong. Two questions on this.

If you add the healthcare and retail was greater than 25% in the quarter or not, and the second piece of the question is what is really particularly driving the success in the retail? It's nice to hear that it's taking up, is it the platform approach, is it different set of partners, etcetera. Thank you..

Give me one second to try to look at retail plus health, I don’t have that number right in front of me.

In terms of overall success, this is something we have seen a nice trend of this probably for the last year or year and a half continuing progress in retail and a lot of it was I think it's not a year and a half ago when we started talking about that we had kind of put together a plan to go attack this market because we saw confluence of great things that led to an opportunity which was the market was in need of refresh, the market was in need of a more intelligent platform to have customer engagement to help them battle the Amazon affect or Amazon knows everything about the customer.

They were in need of refresh from old infrastructure put in five to seven years ago, weakening [ph] competitor with Motorola being acquired by Zebra and then the combination of our architecture is so ideally suited to centralize cloud management platform and the distributed control this architecture is so easy to provision and scale and to distribute to retail stores, all those things add up to us for us to have a very compelling solution and the API's and analytics that we can expose on top of our platform for measuring presence and detecting traffic gives us a compelling value composition.

So that’s all played out as we expected and continue to execute and obviously this thing start to feed on yourselves as you win more retail and get better -- more and more reference accounts that they continue to increase your credibility in that space.

We are starting to see -- as I mentioned with the managed service provider win, we treat the quick service market as form of retail and we're seeing managed service providers now start to build more and more service offerings on our product to go after that market. So, all those things are adding up very nicely..

And we will go next to Rohit Chopra with Buckingham Research..

Dave, a question on sales force productivity.

Can you give us an update there on the changes that have been made and what you are seeing, any positive negative changes, how much more do we have to wait to see major improvement there? And then the other question I just wanted to ask you is there a way to get the impact of the amortization of commissions maybe what sales and marketing would have been if you didn’t have or if you didn't amortize?.

So the deferred commission total in the first quarter was a particularly material it was a little over $250,000 and the year-over-year you will be able to draw that conclusion because you will have--.

Yes I saw that one. I just want to double check to see if it had any major impact and then just the sales force productivity and the changes on the western side, I guess was the major issue but I just want to get an update there..

I think if you look at the top level the results and the overall sales and marketing as a percentage of revenue had a huge improvement. It was close to eight, nine points year-over-year, sales and marketing as a percentage of revenue..

We’re getting leverage out of the sales and marketing. Last year, we ended the year at 50%, the first quarter it was about 41%. So we’re definitely getting leverage from that -- that leverage is driven specifically by increased sales productivity..

Can I just ask a real quick follow-up just on E-rate.

I know John was asking that question but when you looked at the unit count which I know you guys have done I think we've all had that discussion, but is the unit count when you looked at the 470 is it better than you saw last year?.

I don't have that number. You think I looked at it. I didn't look at that directly. I would have to go and check with our E-Rate expert, he probably did..

[Operator Instructions]. And we will go next to Meta Marshall with Morgan Stanley.

This is Eugene Anderson on for Meta. I think you mentioned in your prepared remarks aside from the extended deadline you see E-Rate being more or less on schedule like last year.

Does that mean disbursements and spent were similarly sort of bleed into the next year and is that expectation changed compared to what you were expecting going into the year?.

I think for the rest of the year's seasonality we expect to be pretty consistent with what we saw last year.

There's always been variations on depending how quickly USAC responds but I think last year when coming out of Q2 we expected a modest amount of book in Q2 and the overwhelming majority of it book in the following four to five quarters, once the E-Rate funding doesn't actually start flowing until July 1.

But to be pretty spread through the year, I think we indicated when we finished last calendar year, last Q4 I believe we indicated that we had booked more than half so something more than half booked inside the calendar year and then something a little bit less than half rolled over into 2016.

At this point we probably anticipate a fairly similar type of profile --anticipate the flow of E-rate awards, not the awards, the awards are all made now in terms of the flow of the E-rate purchases ..

And if I could get a quick question on the recently announced acquisition by Brocade.

Is there a potential headwind from that considering your existing partnership with them and on the other side of that coin are you seeing activity with your other partnerships changing perhaps picking up in response?.

Yes. So in terms of potential headwinds, we’re seeing minimal headwinds with Brocade. We have partnered with Brocade but I think we always said that that was a meet in the channel loose partnership and we shared that with Ruckus, we partnered with Juniper and Brocade in a loose meet in the channel and they both partner with Aerohive and Ruckus.

So there wasn’t that much that came out of the Brocade relationship. So there wasn’t that much to lose from Ruckus engaging. We are still working with Brocade, and we’re jointly supporting our customers. That’s not like -- we don't hate each other but clearly we know they are going to be competitors going forward.

But the one big upside of it is it's made it crystal clear with Juniper that they now have one primary partner and before they were partnering depending, they were depending on the vertical or letting individual sales rep decided if they want to they wanted to partner with Aerohive or Ruckus and that gives a very diffused message out to the sales force, and I think it's now much clear to them and so we anticipate the net effect will probably be more -- we anticipate it will get more upside because of the more focused partnership with Juniper and a modest downside on the Brocade side.

It's also helped to solidify and make us reassure that Dell partnership that we previously, for example when you're negotiating we can always bring on Ruckus and now Ruckus is out of the mix and that definitely puts us in position to more uniquely solidify that partnership with Dell..

And we will go next to Rohit Chopra with Buckingham Research..

A couple more questions real quickly.

On the switching products, how many customers take switches or maybe what's the attach rate of switches with Wi-Fi and then I just want to get a sense has anyone or any of the education customers, are you seeing any deferments from this year into next if they can't get their projects done? Are you seeing anything like that happen?.

On the switching answer, I think we have always indicated we haven't broken out a specific switching number but it's well under 10% of the product sales. So far the attach rate is relatively low. We are hoping to take it up in a significant way with this new line of switches which we think is much more competitive.

So anticipate seeing a better attach rate going forward but as we said it has been meaningful under 10% of the total product sales in the past. In terms of the E-Rate deferrals, I'm not aware of people, of projects that we have won where people are saying I'm going to wait and defer.

I did see there was one I think Ruckus talked about in the Q4 earnings call where they missed $1 million, there was a big order that didn't happen and that when the customer did decide to cancel that and rebid it. So that one pushed to a year, we’re actually competing for that one now to be determined how it plays out.

We have had one -- I would say there is probably handful of deals that are out where the letters have not been issued where there's always a back-and-forth protesting and battling on some of these things and so there are some deals that might get delayed out or rebid due to protest but that's a relatively small percentage of the total..

And we will go next to Catharine Trebnick with Dougherty & Company..

Just a couple quick questions and some housekeeping. One, we haven't talked a great deal on wave 2, the new product that you released last quarter.

Do you expect the wave 2 take rate to impact any of the current 802.11 AC sales?.

We would expect it to be a fair amount of just kind of substitution some of the people.

We've got a lot of customers that have been buying our wave 1 product AP230 is the flagship and a lot of those customers are looking at and evaluating the 250 because they like the value proposition of the dual 5 GHz first and foremost and the secondarily the future proofing to be wave 2 ready.

There is still no wave 2 clients out there of note but people might want to get ready especially if they can run it with their existing power Ethernet switches like ours can. So we have a high degree of interest in our customer base to evaluate and transition.

Those things don't happen overnight, people have to qualify and evaluate but so far we’re seeing a very good reaction to it. And to the extent that happens, it should be a little bit of an ASP uplift as those customers go from $800 list price to a $1000 list price product..

Okay. And then the other question is typically you guys in the past have given us repeat business, last quarter I know in September it was 73%.

What was it this quarter and then how many new customers did you add in the quarter?.

To be honest we’ve moved away from giving those statistics. On the repeat we are kind of in the same ballpark. There hasn't been much movement in that. In terms of the customer, I think it two quarters ago we stopped giving out that information..

And Catharine, important reason the context for that is I feel that all our customer count gets misleading. If you just look at an 80:20 customer count, if you say, hey I had 3000 customers, 20% of those make up 80% of the revenue so that customer count does not mean that much. What really matters is how you doing with the more significant customers.

We didn't want to get too much focus on, hey do you have a really big number of tiny customers that actually don't drive the business..

And we will take a follow-up from John Lucia with JMP Securities..

Couple of quick follow-ups. It sounds like you're getting some better momentum in the channel.

I just wanted to see if you could touch on that a little more I think some of that consolidation in the WiFi spaces kind of allowing you to pick up some more channel partners that may be want to focus vendor there and then specifically as it relates to Synnex, how meaningful of a driver can that be? How many channel partners can they add qualitatively and can that be a meaningful driver over the next 12 months?.

I think the thing I'm probably most excited about, it's two different threads one is kind of starting to recruit and develop some of the very large system integrators that can do large projects.

That traditionally we have had a lot of those guys and we’re seeing some very nice progress with a few very significant system integrators developing under Aerohive. And so I think that will drive big project business ability to get into larger enterprise with some of these top tier system integrators. So seeing progress there.

I think on Synnex they will definitely help us recruit a number of partners but probably the bigger benefit of Synnex is the operational efficiency and ability for them to handle and develop the channel with less sales resources on our side and also reducing some of our internal operating expenses.

So it's more operating leverage out of Synnex and probably large projects out of recruiting some of these big SIs [ph] that previously were aligned with Aruba.

They will definitely help us -- Synnex will definitely help us build out our broad-based channel to but I view that as more of an operational benefit and operating leverage coming out of Synnex..

And then my final question, service gross margins have increased steadily over the last three quarters John, I was wondering if you can give us some explanation as to why that's happening and also if you expect that to continue to ramp upward or stay where it is now or where do you expect the service gross margins to go from here?.

It's the beauty of that business. There is very little incremental costs associated with incremental revenue, so that business should show modest increases as we progress throughout the year and again it's the beauty of the recurring business model. Your costs are mostly fixed.

I mean there is a little bit of variability but as you add that incremental dollar it's very high margin incremental revenue..

And that concludes our question-and-answer session. I would like to turn things back to David Flynn for closing remarks..

All right. Thank you all for joining us. We've got a couple of conferences and NDR [ph] is coming up and I hope to see many of you soon. Good night..

Good night. Thank you..

Thank you everyone. That does conclude today's conference. We thank you for your participation..