Q1 2020 Earnings Call
Extreme networks quarter, one fiscal year 2020 financial results conference call.
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I would I like to hand Congress your speaker today Stan Kovler. Please go ahead Sir.
Thanks Victor.
Welcome to extreme networks first quarter fiscal 2020 earnings conference call, I'm, saying cooler Vice President corporate strategy and Investor Relations.
With me today, our extreme networks, President and CEO Ed Meyercord.
CFO Remy tomorrow.
We just distributed a press release and file an 8-K detailing extreme networks first quarter fiscal 2020 financial results.
For your convenience a copy of the press release, which includes our GAAP non-GAAP reconciliations in our financial results presentation are both available in the Investor Relations section of our website at extreme networks Dot com.
I would like to remind you that during today's call or discussion may include forward looking statements about extreme networks future business financial and operational results.
Fire technologies products operation pricing changes to our supply chain the impact of tariffs acquisition and integration of Aerohive networks and digital transformation initiatives.
We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements as described in our risk factors in our 10-K reports for the period ending June Thirtyth 29 seem filed with the FCC.
Any forward looking statements made on this call reflect our analysis as of today and we have no plans are duty to update them, except as required by law.
Now I'll turn the call over to extreme networks, President and CEO Ed Meyercord.
Thanks, Dan and that thank you all for joining us this morning.
Today, we announced Q1 non-GAAP results that highlight revenue in line with our expectations higher than expected gross margins there on the verge of hitting our fiscal 20 goal is 60% at 59.9% and earnings it eight cents per share also above the high end of our guidance range on strong.
Operating expense control and cost centered synergies with Aerohive.
Overall Q1 results were driven by strength in our cloud managed wireless Lan business, an edge switching from our extreme portfolio, resulting in 7% year over year growth.
Our acquisition of Aerohive outperformed our guidance as we recognize 25 million a revenue at a 64% gross margin during the quarter, we recognize 230 million from our core extreme business at record gross margins with growth in our edge switching portfolio and its several geos.
The quarter was negatively impacted by macroeconomic weakness in Germany, and a one time delay in spending by a single large U.S. federal datacenter customer that has resumed buying this quarter.
We're more excited today than ever before about our position in the enterprise market with our newly announced extreme cloud I Q platform.
The networking industry is at the beginning of a long term transition to cloud management and what we call cloud driven.
Extreme cloud I Q is built on a micros micro services architecture third generation cloud technology and has the tools that allow us to provide insights and intelligence that are actionable our gateway to the autonomous network.
Extreme cloud I accused supports wireless today and will be available on our wired switching solutions in January .
Given the higher performance ease of use reliability and operating efficiency of running that works from the cloud every enterprise customer has to consider cloud and we'll need to have a strategy as the industry transitions over the next decade.
<unk> out offers speed and continuous delivery of new capabilities and proven and secure environments that can handle the most risk sensitive customers enterprise customers will have access to best of breed technologies in the world running on leading edge infrastructure.
At extreme we have the number one cloud platform will be the first and only cloud driven provider with end to end solutions edge to datacenter.
The only platform that offers customers a choice of public private or local clouds or all of them together on one licensing model.
Cisco its DNA command center solely on premise with a small fraction of paying customers customers that are actually using it or its muraski older generation cloud. It is completely separate and incompatible. We also have the largest highest quality real time, M.L.A. I platform that as I said.
Certified.
Lastly, unlike meraki, we offer diverse consumption licensing models with significant ease of use.
And we'll deliver 30% opex savings for enterprise customers, who choose extreme.
And last week, we also announced an expanded strategic partnership with Broadcom at our partner conference.
Senior leadership of Broadcom was there live in Carlsbad to announce an extreme with their preferred choice for enterprise customers as part of Broadcoms silicon to software strategy as their preferred provider. We are working together to give enterprise customers and channel partners powerful security segmentation.
And resiliency policy telemetry and performance advantages is they pursue cloud driven digital transformation with a simple secure and intelligent campus architecture. This is a big endorsement for extreme.
We're building reference architectures to go through our joint enterprise customer and partner basis as we speak.
Gartner once again positioned us as a leader and its magic quadrant for wired and wireless Lan access infrastructure. This is the second consecutive year extreme has been position as a leader in this annual report. It's another strong endorsement of the quality and vision of our solution and is the most important reference.
We have for enterprise customers.
During Q1, we closed 14 deals of $1 million are more heading into Q2, our pipeline is strengthening our new opportunities across switching wireless cloud and data center. This is driving our sequential quarter over quarter growth.
In Q1, our edge switching solutions drove performance on the extreme side once again highlighted by the success of our product cycle. They will continue to ramp over the next nine to 12 month.
On the core extreme side total edge switching and wireless product revenue grew 9% year over year with edge switching alone up double digits.
Meanwhile, our core wireless revenue declines are moderating.
Specifically, we saw success in E rate and education, along with our new X for 65 switch.
These trends were offset by our core wireless business facing difficult year over year comparisons and revenue declined mid single digits in certain verticals, such as retail transportation logistics, where large scale deployments wrapped up.
We benefited from strength in service provider with the SLS platform and our software application revenue grew for a seventh quarter in a row up 33% year over year.
From a vertical standpoint.
The rate came through 12 business grew double digit other areas of strength were service provider, where bookings grew 11% year over year at sports and entertainment were bookings grew 60% year over year and we won yet another major League baseball stadium during the quarter.
In retail we expect to recover recovery, what's our try radio wireless solutions become available towards the calendar yearend along with lower end switches from our smart hedge portfolio.
We encounter challenges in Germany, Italy, and UK high as well due to Brexit uncertainty. Meanwhile, all of our other major EMEA regions posted good growth.
Asia Pacific revenue grew 15% year over year, and 23% quarter over quarter organically before the inclusion of high.
This comes despite a highly competitive pricing environment as we leverage our value proposition in larger deals.
In North America, we're excited to have a new senior Vice President of Americas sales on board, who came from Cisco. After 13 years of enterprise sales leadership at the company. Most recently as their global leader of their SD Lan business. He brings a wealth of knowledge about the enterprise sales strategy.
And solutions of our top competitors in the industry to help us architect of plan to win enterprise customers.
During Q1, we've reorganized geographic coverage in North America between state local and education, what we call sled and our enterprise sales teams. This allows for greater focus of these unique accounts they require a different selling motion.
Our vertical teams in areas, such as sports and entertainment healthcare retail remain intact and this aligns with our product strategy to refresh stratify Verticalized and cloud of Fi our portfolio. It will also drive better alignment with our channel partners as part of this transformation.
Looking ahead, our outlook for Q2 reflects seasonal growth at core extreme and a full quarter is worth of Aerohive contribution factoring in the sluggish sluggish AMEA via environment.
As customers evaluate our extreme cloud I Q solutions, we continue to expect some revenue dis synergies with our existing wireless business, which we built into our outlook as well with that we remain committed to our low single digit revenue growth, 60% gross margins target.
And the restructuring actions, we took at the end of fiscal 19 strong execution on merger cost synergies put us on track to hire our operating margins in Q2, and achieving our targeted 15% non-GAAP operating margin exiting fiscal 20.
And with that I'll turn the call over to our CFO Remy Toma.
Thanks, Ed.
As noted revenues of $255.5 million grew 7% year over year grew 1% quarter over quarter and came in at the midpoint of guidance.
non-GAAP earnings per share was eight cents.
Above the high end of our range EPS benefited from a gross margin of 59.9% towards the high end of our range and from lower than expected operating expenses.
We completed the acquisition of Aerohive on August nine.
For $267 million, which consisted of 263.6 paid to acquire the outstanding shares of the company and three and a half million for the acceleration of stock Awards.
Net of acquisition cost and net of the cash acquired the enterprise value of the transaction was $210 million.
Aerohive contributed approximately $25 million in revenue and 6 million in operating income to Q1 results on a standalone basis Aerohive revenue would have declined 4% year over year with subscription and hosting revenue up over 30% year over year, partially offsetting a decline in product revenue.
Combined product revenue.
185.1 million grew 4% year over year on declined 2% quarter over quarter.
On a like for like basis core extreme product revenue declined 6% year over year.
Buying product being book to Bill ratio, including Aerohive was about one with product bookings up 2% year over year.
We refreshed over 30% of the core extreme product before year to date.
From approximately 25% last quarter, we expect our product refresh to hit between 40% to 50% about portfolio by the December quarter.
Combined services revenue of $17.4 million grew 13% year over year, and 12% quarter over quarter.
On a like for like basis core extreme services revenues were 2% year over year, reflecting the positive impact of continued growth in multiyear bookings we've seen over the past several quarters out combined services book to bill ratio, including Aerohive, but excluding the impact of the deferred revenue haircut.
Was above one.
Annualized run rate of Aerohive subscription and services revenue, excluding the impact of the deferred revenue haircuts was $57 million in Q1 versus the $53 million Aerohive recognized in its June quarter.
Subscription and services booking for Aerohive grew 5% on a full quarter like for like basis, including the legacy extreme cloud supports our total Rick recurring revenue accounted for nearly 28% about total revenue adjusted for full quarter versus just 24% in Q4.
During the quarter the Americas contributed 55% to total revenue you gave me a 36 and APAC close out the remaining amount.
non-GAAP gross margin was 59.9% compared to 58% in a year ago quarter and 59.2% in Q4.
One show improvements was attributable to a 20 basis point improvement in product gross margin.
40 basis point improvement in services gross margin as well as a higher contribution from services revenue. That's on the core extreme side. In addition, gross margin benefited sequentially from the first time consolidation of Aerohive, which carries a higher gross margin then coordthree.
Finally, we estimate that the net impact of tariffs was a negative 80 basis points to total combined company gross margin in Q1 down from 120 basis point negative impact in Q4, NRG consistent with our guidance.
Q1, non-GAAP operating expenses came in at $137.2 million below the lower end of our guidance and increased from 125.3 million in the year ago quarter and from 136.8 million in Q4 with the consolidation of Aerohive.
Sequential change in non-GAAP operating expenses was mainly due to lower core extreme selling and marketing expenses.
As the impact of our restructuring plans flow through the piano offset by the inclusion of a partial quarter of Aerohive expenses.
We are on track to deliver the run rate cost reduction of $24 million to $27 million previously announced on the legacy extreme side.
I'll sit timber annualized opex run rate for Aerohive was $55 million versus the $93 million reported in Aerohive Standalone June quarter.
This is contributing to the high operating margins, we expect in Q2.
And another substantial step up for the second half of the year.
Free cash flow was a negative 5.4 million down from a positive 18.9 million in Q4, and 26.9 million in the year ago quarter adjusted for cash merger integration cost free cash what would have been a positive $10.6 million.
Our total cash and short term investments balance at the end of Q1 was $161.1 million down from $169.9 million at the end of Q4 net debt of 218.9 million increased by 208 million from the 10.9 million in Q.
For that was reported in Q4 due to the acquisition of Aerohive.
Yes, so a 55 days so eight days from Q4 and from the year ago quarter on a sequential basis, the strong collections drove dsos lower.
Cash conversion cycles to that 73 days compared to 61 days in Q4, but down from 76 days in the year ago quarter.
Our inventory balance of $82.4 million grew sequentially on 12.2 million of additional aerohive inventory and 6 million increase in core extreme inventory.
Core extreme inventory rose on Prebuys ahead of additional terrace, and as we introduced new products.
Now turning to guidance, we expect total Q2 revenue to be in the range of 268 to 278 million, which represents 7% sequential growth and 3.5% growth for core extreme at the midpoint.
Q2, GAAP gross margin is anticipated to be in the range of 55.2% to 57.4% and non-GAAP gross margin in the range of 59.1% to 61.1%.
We estimate that terrorists will have an impact of about 80 basis points on overall gross margin for fiscal Q2 20, given the existing cost of inventory on hand.
Q2 operating expenses are expected to be in the range of $164.2 million to $169.2 million on a GAAP basis.
And 137.32 $142.3 million on the non-GAAP basis, the sequential increase in Opex is primarily related to a full quarter of Aerohive operations.
Offset by the restructuring actions taking at the end of Q4 19.
Q2, GAAP earnings are expected to be in the range of a net loss of $23.2 million to $16.6 million or a loss of 18 cents to 14 cents per share.
non-GAAP net income is expected to be in the range of $13.9 million to $20.5 million or 12 to 16 cents per diluted shares.
In Q2, we expect average shares outstanding to be approximately 121.8 million on a GAAP basis.
And 125 million on a non-GAAP basis, excluding the impact of any shares we may repurchase.
With that I will now turn it over to the operator to begin the question and answer session.
Thank you.
A reminder, actually questioning you into press star one on your telephone to.
To withdraw your question press the pound.
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And our first question will come from the line of Eric.
Superior from JMP Securities you may begin.
Alright airline maybe on mute.
Hi, there can you hear me okay.
Yes.
Sorry about that so on the terrorists can you talk about some of your customer behavior.
Are they trying to I don't know a manage the timing around tariffs.
Maybe delaying any any purchasing until tariffs can come down or is there any.
Any discussion around what there how they're trying to manage that situation.
Eric I think when is weighted when it came into play last year.
And yes, the severity of the tariffs were a lot higher in terms of the percentages. We we did see a lot of customer activity, particularly in Q2. When there was a lot of early by end.
Given upcoming increases on our side since that time, I think people have become somewhat conditioned to what's going on in the marketplace and so we're not really seeing the effect as much and I think.
Our strategy is to use to balance how we pass through the tariff. We're trying to we're trying to hold our margins and then do a good job of mitigating the cost and Thats what were doing and I think.
It it's really kind of muted the noise from the field as it relates to this.
Okay, and if tariffs do get.
Reversed.
Can you comment a little bit about what that would mean from a gross margin perspective might we assume that theres, an 80 basis point benefit or how should we factor that in.
Yes at this point, yes, the discussions around not following through with proposed increases so that that's what we're looking at we haven't really seen kind of the roll back yet with the proposals of a roll back so.
When.
Gee, Jim King and Trump me in November in Chile, the expectation is on our side. It seems to be consensus in Washington is that you knew actions will be frozen.
And then I think it's going to take some time before we digest what could happen with tariffs that have already be it's been in post. So I think it's going to take some time to play out and at this stage. We're we're holding.
We have announced it.
Price increase for November which is can be routine for us.
More or less a nominal price increase that that will consider normal course of business going forward, but other than that.
I don't think we have any other comment.
Okay, and lastly on Aerohive.
Can you talk a little bit about how how it is working with customers in terms of.
Integration of.
Products or our customers.
Looking to transition from traditional.
Extreme products to high products or how are the discussions going since the acquisition closed.
Yes, it looked as excitement on both sides I think we just had a partner conference Aerohive partners are excited about adding that are switching portfolio.
We've taken the Aerohive cloud team brought it in and that team has also taken on our software team. We're cloud applying our portfolio very quickly and the fact that we're going to have our.
Wireless.
The entire wireless portfolio up into the cloud by the end of the year and then in January to have a switch portfolio into the cloud has created a lot of excitement with with our partner as well as our customer community on the extreme side. There's a lot of interest in cloud there is pent up demand for extreme because we didnt add that capability before.
And so.
As we mentioned in our comments.
There were lot of opportunities that we've been looking at where now our customers are taking a step back and they really want to evaluate our extreme cloud I Q and so I would just say there is just as an awful lot of excitement about the the platform that we have the fact that we have the number one cloud we're not the biggest but we have the most advanced capabilities.
And there's a lot of advantages that we bring so.
Yes, I, just I would say that the enthusiasm and excitement from existing partners and customers on both sides of the equation.
It is quite high so we're really optimistic about what this means as we roll into the first half of calendar 20.
Very good thank you.
Thanks.
And our next question will come from the line up Alex Henderson from Needham you may begin.
Thank you.
So I was hoping you could talk little bit about the restructuring.
Motion that sounds like you're a little ahead of target so far.
Can you talk about what you're assuming in terms of the cost savings benefit what portion will be achieved in the December quarter, and how it will progress into the March and June quarters.
Yes so.
I won't Miss you get into detailed dollar amounts, but I would tell you what we're going to see the December quarter is the phase two of project kind, which was the restructuring on the core extreme sides with a reduction in engineering headcount and that is largely taken piece as we speak and.
What we can see in the March quarter is acceleration of synergies on the aerohive sides as transition employees I am pleased that were kept because in finance for example, they are required to help us close the books as we transition from mid suites to Oracle.
Those employees exit the company's so you're going to see.
Thats improvements in our operating expenses reduction.
Indeed December and the March quarter as a results of these actions.
If you were to just say percentage complete.
Of the actions.
How would lay out over the four quarters.
Well what is done so far as a percentage of the process. So I would say 100% of the reduction on the extreme sites will be done by the December quarter.
And I would say that 90% of the reduction on the Aerohive side will be done by the March quarter, and so we'll really see in Q4, which is our June quarter is really the impact of the seasonality, but as I look at the operating expenses in that quarter.
We will not expect.
Reduction in the absolute.
Dollar amounts of Opus.
So in the June quarter, we should be at run rate.
In the June quarter, we should definitely get remember.
Yeah, and then just.
You know I mean aerohive.
When you look at the last quarter that the reported their Opex run rate was 93 million and in my opening comments I stated that as we exited September we already down to 55 million and so we've got another few million should go, but but I would say aerohive is already well well advanced.
Has there been any change in your sell cycles.
As a result of the macro conditions are we seeing lengthening sales cycles.
Hi, I think Thats fair, Alex if when you talk to our field the feedback from our feel is that.
Opportunities are going away, they're just being delayed.
So I think I think Thats, a fair assessment on your part.
And is there any difference in the geographies between those mid is mostly EMEA or are we also seeing it slows lengthening sales cycles in the us.
It's it's primarily in EMEA, where we've seen the impact as you know we have heavy presence in Germany, and there's been a lot of press about the German economy in terms of what's been what's been going on there. We also felt in Spain, and Italy, and then obviously you have Brexit. So these are things that are creating disruption.
What I would say is that we are seeing the pipeline build and we're seeing these were seeing the opportunities as we look out.
We feel confident and.
A rebound for us it's just a function of of the timing as it relates to the Americas. What we did is we restructure we had it at field team that was more or less generalist focused on.
Yes, a lot of different customer categories, and what we decided to do is to take that sled team.
And then have them focus solely on SLAD and then create an enterprise team there would be solely focused on enterprise customers. This is outside the name vertical accounts that we have as far as healthcare retail.
Stadium transportation logistics so those.
Clearly define verticals now we've done is created two teams in the Americas to go after that this past quarter, we completely restructured weve reassigned accounts.
We've hired a lot of new people. So we slowed so now what we're seeing is we're seeing these teams come in.
We're really excited about our new leader that's come in Who's got a lot of experience and some really clever attack vectors on how we go after our competitors, which is going to be great for us and we're seeing these teams start to season, a bit and we're seeing the pipeline build as we go forward so really.
Yes that was a structural change we made in the Americas that slowed things down a bit for us, but it's going to accelerate as we go forward.
One more question if I could see.
Conversation around digital transformations are always interesting your customer perspective, but what about what you're doing can you talk a little bit about what you're doing to move your applications to the cloud moves the extreme data center.
To the cloud or or too.
Sure where are you on office 365, and what are you doing on your security posture.
Relative to a perimeter defense model moving to maybe is trust model or anything of that sort of can you talk about your posture or changes in security and digital transformations fleets extreme is going to be the number one spokesperson for all of our all of our customers and we had our user conference extreme on extreme.
We said that program a while ago, we started doing these acquisitions.
Our teams are mandated and frankly quite excited about.
Our portfolio. So we've deployed all of our portfolio across the company and we will be moving very quickly to migrate to the cloud.
As as our portfolio migrates to the cloud and our number one customer is extreme so.
Well.
Not really talking just about your networking tools really talking about having moved applications to the cloud are using often asked to be five hat alright add those pieces of it.
Absolutely. So we have from an ERP perspective.
We are Oracle cloud.
Officethree hundred 65 cloud.
Yes, when we look at Salesforce et cetera, we're very much at a cloud driven company.
One of the things that we're doing with our Broadcom partnership remember they acquired CA technologies.
Symantec is going to close soon and with this partner what we've talked about doing with them is integrating their solutions their software solutions into our own environment and likewise.
Economy is going to be deploying extreme and their environment. So.
And we're looking to package all of his together can bring it out into our own.
To our own enterprise customers on both sides the equation as well as to our partner community. Remy you want to answer I, just want to add as as far as being able to offer.
And supports the growth that we like in subscription revenue. We're also making investments in our production environments, which consists in a license entitlement platform around Jim Alto and the introduction of a subscription billings platform withdraw aerohive had a in house custom built.
Solution running on that suites, as we migrate from necessary to Oracle, we decided that we're going to deploy zero. So you'll see this year another year of sustaining capex investment less than last year, but but related to these investments that we're making.
Sure. Thanks.
Thanks.
Thank you and our next question will come from online Eric Martinuzzi from Lake Street, you may begin.
Yes, I would like to focus backward looking just for a moment and then get into some forward looking questions, but the outperformance that you saw in the first quarter from the Aerohive business how much of that was due just to conservatism and then how much of it was due to really on its unexpected pipeline.
Conversion.
This was our first quarter when we gave guidance and as you know we had a stub period of 52 days out of nine key so I would say that the guidance that we gave was was the.
Best 50, 50% gets us to de estimates and Aerohive came in substantially higher than what we've seen that 25 versus versus the 16.
But it's also due to divide that that their teams performed really well and that they had very strong bookings. This quarter. So it was a combination of conservatism and very strong execution from the Aerohive salesforce.
But is there or is there an issue here with maybe some business that was going to happen December happened in September quarter or is it do you continue to expect that good.
Good strong pipeline and good strong conversion in December .
Yes, Eric what I would say as following up a Remy said is we I would say, we're probably 50 50 being a little conservative and then outperformance.
Some of that we wanted to keep everybody focused on selling cloud and staying in their swim lanes.
To hit the quarter. This quarter. So we had extra incentives for their team and there's no doubt there is some deals that would get pulled in thats. The nature of our business every quarter deals get pulled and deals get pushed out, but you probably saw a little bit more than normal happen there but.
We are we're as far as their E rate conversion on the extreme side I would say our E rate came in a little below plan Hyve was was kind of right there maybe a little bit better.
A little bit better.
So.
I think in general we feel really good about what we see from a pipeline perspective, and then what we're seeing from.
Yes that partner behavior and activities in the field around that the extreme teams are chomping at the bit to sell this platform and so thats going to see more of that happened now that we've closed out the Q1 and were on to Q2.
That's where I was headed mix you talked about having the integrated product from the cloud management perspective, having that January are you able to sell them now or is the is the channel really looking for more hey look we'll start engaging that once the products available and not going to touch it until.
Well, what we're going to do is so.
We can obviously sell on the on the Aerohive platform.
In January .
Our two from that from a selling perspective, we're going to combine.
Our systems from a sales perspective, so it takes.
It takes a little while for us to do that our teams got to have joint Salesforce. They have it an instance of Salesforce for extreme and instance of Salesforce for Aerohive.
All of that combines in January and then importantly, the licensing and Remy talked about you molto, we're going to have probably the most advanced and flexible licensed licensing platforms in the industry.
Thats going to come online in April .
And that's when you were going to really turn up and we're going to have a real advantage over our competitors don't have that have very cumbersome licensing model. So what we're going to do this strategy is going to be to let the team to sell it effectively we'll be giving a lot of it away.
But billing will kick in April .
And if I can just adds we distributed to all extremes sales people aerohive quota.
And the count go to President's club, unless they've hit that quota I'm, we're deploying specific incentives in the field. So that both extreme and Aerohive salespeople are highly motivated to sell our cloud solutions.
Okay.
And then lastly.
Obviously this is very meaningful.
Broadcom partnership expansion seems to touch all points of the relationship there, but im just wondering incrementality lets the low hanging fruit in that tighter broadcom relationship.
So if you look at where Broadcom has gone now with it.
Okay.
The CA acquisition and.
Remy has had a good position to comment because that's where he came from we recruited him from CA.
And then what's what's going to happen with Symantec there. They are in the enterprise software business and they have all of the top enterprise customers the issue for them as it most of these customers have Cisco and their campus environments, and Cisco is not using broadcom silicon and their strategy of silver.
Look into software they want their silicon and all of these enterprises and add to pick who do we want to pick to go out with two out to make this happened and Dave They picked extreme.
To go after enterprise customers with our product portfolio and I think a library to do with our cloud strategy in driving Broadcoms silicon into these environments. So.
They have an amazing customer list on their side, we have an amazing customer list on our side as it relates to the potential to sell their software. So that that's that's what we're looking at Cisco and HP of use similar types of proprietary silicon and their own basics for some of their solutions.
And your Broadcom, we believe is superior on many fronts and for many reasons.
And we want to tell the story together.
I understand.
Congratulations it was a very busy quarter between the acquisition and the restructuring and rejiggering of verticals. So.
We kept busy and congrats on the.
Yes, so far.
Thanks, Eric.
Thank you Nicholas sale costs in line Christian Schwab from Craig Hallum, You may begin.
Great. Thanks for taking my question clearly.
Tessick start to Rightsizing aerohive and on margins.
But my question has to do with topline growth as we look forward and wondering if you can give us your opinion of what you're most excited about to be a topline growth driver I understand you know world concerns such of tariffs in certain geographies, which we've we've discussed that everybody knows is somewhat chat.
Alleged.
Today, but is there any specific products or maybe the broad car relationship or the cloud you know.
The rate as you as you look for the next week over course of the next year what does the team most excited about to drive topline growth.
So it's funny because Chris you just start answering the question for me I would say Jack Jack Jack ethanol to up on all the things you're mentioning but.
The over the overarching excitement is around cloud and the reality is everyone has to consider if you're an enterprise customer you have to consider cloud now and people going to move at different paces, just because of the flexibility that the cloud offers.
The agility in terms of the speed of new features and with our cloud you don't have to their no software upgrades is continuously upgrading.
In terms of having your data in the cloud it's much more secure as far as data durability.
And then from the cloud you can pull down best of breed technology. So if you're any enterprise customer you you're going to have to have a cloud strategy. It. If you don't have a strategy thats a strategy in of itself. So we're going to you all enterprise customers are going to start paying really paying attention and by the way it's not just extend.
Team have competitors are talking about this and trying to figure. This out when you hear people talking about the autonomous enterprise and arcade. So everyone's got to think about cloud and we've got the number one cloud. So if your enterprise customers. Yet you have to think about extreme with the only one that has the AD solution for the only ones are going to be putting.
That full edge I O T edge through the data center into the cloud and we're doing it at our own environment at extreme, but you're going to see that happen, we'll be faster than anyone else in the industry.
From a from a machine learning AI perspective, we have the largest cloud. So in terms of all the devices that are running at our cloud our cloud learning about device behavior, and then attaching a ani and building operational functions.
And automation functions to that.
We're going to take the lead there too we're the only one with our third generation, we're going on fourth generation cloud to offer choice. So if you're in Baraki are stuck in that old Meraki cloud missed has got a new high but they don't have platform flexibility.
We're the only one that you could do a year ways and enterprise you public private local clouds and then the important thing is on one licensing model the debt the capability that we haven't then finally, we're going to offer big savings if people care about that so I would say people are most excited about that and what's going to be happening with.
The beginning of this wave the other thing is we just hired ahead of America's Americas, We've struggled a bit over the last couple of years in terms of driving that growth.
And we've just brought in Rockstar, who really understands.
That I would say the weakness in our competitors offering and whereas maybe we have not been quite as technical and our attack as far as going after our competitors I think we're going to be much stronger out in the field.
Everyone. In this company is going to know how to demo our software and we're going to drive home our number one position in cloud. So I think our fields going to get excited and our leadership is in a position to drive that so I would say those are the two big thing it doesn't happen overnight, we're talking about a multiyear trend I think you're going to see a lot of momentum in the second half of this.
Year for us our fiscal first half of calendar and then it's only going to build from there.
Great Yes.
Yes, it but did you did you guys give what do you believe as a percentage of cloud related.
Revenue percentage than current business today.
We said that the exit run rates for the September quarter was $57 million for cloud.
Thats just the Hyve solution, we did have a bit of revenue on the extreme side, but it was about a million, let's call. It $58 million and we said that if you add that to office support revenue as well as software.
Support revenue.
Total recurring revenue.
Was 28% on a combined basis, taking aerohive into full quarter, not just the stuff feared and that convert to 24% our recurring revenues now close to 30% which is great use.
Great Fabulous no other questions. Thank you.
Thank you very efficient.
As a reminder that started one quick question Star one.
Our next question will come from the line Paul Silverstein from Cowen you may begin.
Thanks, guys. Appreciate is taking the questions offer some specific have been to general questions. Remy did you soon guidance how much of the specific Taro house.
I did not I did not.
Can you share levels.
So you talking revenue.
Correct.
For Q2, we believe there I will constitute about.
35 million you can calculate that with the three and 5% growth that we gave for core extreme and the 7% growth that we gave for Aerohive.
I appreciate the on second we let me answer too broad questions first loss now those are at the 60% gross margin level.
Our picking up I guess was allison's question, where could you.
Any thoughts on does it peaked out at 62, six weeks or any thoughts on where you could get some from here on whats going from.
Obviously, I'm sorry to go longer term nordea, though so I think the drivers of gross margin if I think about core extreme.
Other product refresh.
We mentioned that were just that 30%.
Against the step improvements in our December quarter with the launch of a new product.
The fourth 65, which is an edge product.
And so we would expect that to continue to drive product gross margin on core extreme.
Another factor Thats going to pay specifically in Q2 is the fact that we're going to consolidate what is a 60% gross margin business over the full quarter instead of the stub period.
And then as you think further out as we continue to put actions in place to mitigate the impact of tariffs being in the form of.
Bedded mix about production between China, and Ta complying countries.
As well as some of the price increases that Ed mentioned.
That should also helped drive margin on the Aerohive side, it's really increasing the cloud revenue, which structured carries on margins in the seventies.
Versus the product gross margins that are in the high fiftys.
Thats going to be driver of gross margin going forward. So at the analyst day about.
10 months ago, now, we said that our mission was to get to 62% we will not be here there in fiscal 20.
Well certainly.
The at or above 60% for the year on average and then I'm expecting that trend continue.
Over the next fiscal year, where we have the ambition to get to 61%.
Yes.
Hi, just chime in with a couple of other things fall. One is we do we mentioned Broadcom earlier, so we have a better buying rate and so high gross margins will benefit from.
Our buying merchant silicon it at better rates and a better discounts that should help us think I mentioned is what's been part of the theme in the past has been on the datacenter side.
Yes, it has taken us longer than we wanted to to migrate our ml ex the routing and the BDX switching platforms.
Your older technologies, we are seeing that ramp to SLS now when we moved SLS.
Any federal is a great example, with service provider deal that we have this year where.
We migrated SLS all of a sudden we're going from margins in the fortys to margins literally in the seventies. So we're seeing strength in that in the datacenter business. We're projecting growth. We've got some really interesting federal opportunities and these are high 60% gross margin business. So new.
Selects is coming January and then another upgrade in April .
We have.
It's taken us longer to get here than we wanted to but it's it's starting to arrive and I would say that's another factor that could add to gross margins.
It to that allows point you man that's reserves, so logs that wouldn't that 30%.
The numbers correctly that person's point benefit to gross margin that pertains to how much revenue.
Yes, I can't put my bigger audit Paul I mean, there's there's a lot of different it's almost anecdotal be telling that deal by deal, but there are a lot of we talked about growth in service provider.
Yes, there is one case, we beat out Juniper and service provider deal as more of a regional service provider where.
Yeah, we've been selling ml extra VDX.
It it deep discounts waiting for this transition to hang on to customers well.
Yes, $1 million $5 deal comes added to 70% gross margin that's that 30% swing that you're talking about.
As SLS matures and we see more adoption of datacenter side.
It's going to it it's good it's going to have an impact and I'm not sure I can quantify that for you right now.
And mathematically wasn't as simple as God X amount of Alex and VDX revenue today, and that's the opportunity plus whatever growth you could drive a virtual best of luck spring a better platform.
Yes.
Yeah, the transition happens over time, and it's and it's it's a lot of its a lot of deals so I guess.
We could look at that and then I guess, we'd have to kind of handicapping guess, how thats going to happen.
Between now and fiscal.
22, when we end of life the other platforms.
Okay.
We'll move on.
Remember the Super since Oregon.
Is that dependent youve tariffs get rolled back.
Is the signature depended upon terms being rolled back or can you just 62.
So assuming that you're not making any assumption that the tower situation gets any worse or any better than it is today.
Again, the 62% isn't ambition and I don't think we'll get there in fiscal 21.
It is 18 to 24 months ambition that we have.
I think we have initial term a clear path to go from 59.92, 61%.
And those are this only driven on the product refresh.
Discipline in the field in terms of of discounting.
The actions that we're taking to mitigate the current tariffs situation.
And and the impact of the growth in clouds, which as I mentioned is carrying gross margin in the seventies.
Understood and so the previous question, though suing earlier question I was asked.
I Trust as a given that it's tours were rolled back in a minimum that makes it easier.
Perhaps that accelerates your path to about 62% at a minimum.
And maybe even by banner could be incremental to that 62, I recognize you're talking and a 24 months not one year. We're just trying to think about what's the opportunity is moving we we've had 120 basis point.
In Q4 80 basis point in Q1, we're anticipating another 80 basis point not not all of that 80 basis points is related to the actual increase in towers that we pay when products are driving that pass with some of it is related to the fact that we move production outside of China to either Taiwan.
Our Mexico for final Assembly, and so and that we revert.
And move production back to China, we will not get the full.
Benefit at the 80 basis points, but I would say would probably get 70 basis point out of the 80 basis points because the majority of the impact is really higher towers. So your point is absolutely correct.
I appreciate the due to one last question Mars don't want us to broad revenue question. You just referenced so may want to come back to it so if I remember several quarters back.
Hi, good reference the fact that youre changing discipline among the sales force from pricing perspective, it sounds like from the surgeon onto a non interest to the disciplines holding for now we recognize it's still early and has a little long time since the problem or roads, but any thoughts that you want to consumer on that.
Yes, so what I would say is that.
Some of the regional directors that manage our salesforce or.
Incentivized on their gross margin achievements and so that was that was the big factor.
And I would say that the second one is as you move to box selling to solution selling.
Where you'd have a combination of software hardware and now cloud.
Obviously, you are selling a different value proposition than just competing on on feeds and speeds and that also helps drive that discipline.
Right.
You asked a broad Roman question Tysons or the previous question that was a film.
This question.
Thank you for Baxalta Aerohive, obviously revenue on a year over year business. It was close enough to flat, but it's still wasn't coming going back to growth yet. So we've done is very well conceived acquisitions.
Over the smell the fourth one of the past I guess for years, we're all very welcome suit and they offer significant opportunity.
I recognize that macro is a challenge and whenever you do an acquisition. There's some disruption of revenue for any organization. So all that being said.
Looking at this past quarter.
In terms of why you haven't yet gone back to revenue growth and tying that into the opportunities which was identified earlier.
Any thoughts that you can share from a high level for what's going on this is simply you've got to get this intelligent closed acquisitions matter blocking tackling it's a matter the macro in Europe , especially the German economy in the Brexit situation. What are the what are the key factors in high or Google importance and getting back to do.
Organic revenue growth.
Yes, so I would say if we just look at Aerohive.
Isolated if you remember before we acquired them. They went through a series of two restructurings and taking down sales. They wanted to focus more on profitability and so before we closed our deal they had been through two rounds of restructurings, which included reductions in their sales.
Teams.
And.
On that line. So I think that probably created an impact there's still a macro issue that we deal with as far as what's happening and.
As we picked up in acquired as a macro issue of of EMEA is still there, but what I would tell you is that from an aerohive perspective, theres a huge amount of excitement around the platform that we have at extreme.
And the portfolio so the Aerohive portfolio is limited.
And now we're going to significantly expand and we're going to bring a lot of a lot more resources behind cloud driven networking and we're.
In terms of air cover from marketing in terms of all the different things that that we're going to be able to do.
I would say the most exciting thing for us is.
The fact that enterprises are going to have to look to cloud. It's there. It's just the way cloud managed cloud driven or cloud managed networking is real and it's going to happen.
And we happen to have the number one cloud from a cloud capabilities perspective.
And.
If you're extreme you're excited because theres been pent up demand for cloud we haven't had it we tried a couple of times and now we've got the industry's best cloud and we compound the table on that.
And then if youre coming from the Aerohive side now that said you're going to have a much more robust cloud in terms of size and scale breadth of offering and then all the weight and resources that were Corey behind it and extreme so.
Yes, Thats, yes, I guess thats at a very high level.
Yes, I would go back to.
Cloud driven industry moving to cloud now have a sudden extremes in the number one position as far as what we can offer enterprise customers. If I can just add.
Specific point about organic every time, we add an acquisition.
What happens to our organic revenue I think the one thing that we're getting better at factoring is revenue dis synergies. So when we acquired zebra and the wing range of products of the see that had an impact on identify which was the wireless solution that were brought with the acquisition the terraces when.
We bought a via and the fabric that had an impact on the switches for the campus that were part of the extreme rage. When we acquired Brocade in data center that had an impact on the extreme datacenter product.
And 100 and today, we're acquiring a industry, leading cloud solution, which obviously is sold with its own access points and that has an impact on the sell about won't access point, so those revenue dissynergies systematically.
Explain what you see in terms of organic decline, but once the portfolio is harmonize and put together to at points that we now have a complete end to end solution, including cloud I think we're in a good position on a go forward basis.
Our first so there was just one example is out edge switching portfolio, which is benefiting from the refresh.
Is it grew 14% year over year.
In Q1.
Great. Thanks goes.
Thanks. Thanks.
I'm not showing any further questions at this time I'd like to turn the call back over to management for closing remarks.
Okay, great well.
I just like to thank everybody participating on the call.
I always what to reach out and shout out to extreme employees, who are listening in.
And thank you for all of your hard work.
And helping us drive the business as we go forward.
Also for investors on administrative note.
There are a series of investor conferences that we're going to be participating in.
We put out a press release, you can see the full schedule of those conferences, but.
Between Remy and I understand.
We're going to be out and we're really looking forward to sharing the cloud story with you.
We also have the cloud architect.
Who is going to be presenting.
About our cloud.
Who is going to be talking about kind of the differentiation of cloud.
At a conference and then what we're also going to do is we're going to host.
Today, we're going to.
Take investors through a demo our cloud solutions and we want to take investors through that as well and Stan will be reaching out on that front. So.
Thank you for participating and.
Yes, we're looking forward to continued dialogue have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.