Earnings Call: Q1 2020

Oct 30, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Extreme Networks Quarter 1 Fiscal Year 2020 Financial Results Conference Call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, Stan Kovler. Please go ahead, sir. Thanks, Victor. Welcome to Extreme Networks first quarter fiscal 2020 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy And Investor Relations. With me today are Extreme Networks' President and CEO, Ed Meyercord and CFO, Remi Thomas. Just distributed a press release and filed 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 to non GAAP reconciliations and our financial results presentation, are both available in the Investor Relations section of our website at extremenetworks.com. I would like to remind you that during today's call, our discussion may include forward looking statements about Extreme Networks' future business, financial and operational results, acquired technologies products, operations, 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 report, for the period ending June 30, 2019, filed with the SEC. Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law. Now, I will turn the call over to Extreme Networks' President and CEO, Ed Meerkord, Thanks, Dan, and 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 that were on the verge of hitting our fiscal 2020 goal of 60% at 59.9 percent and earnings at $0.08 per share, also above the high end of our guidance range, on strong operating expense control and cost synergies with Aerohive. Overall, Q1 results were driven by strength in our cloud managed wireless LAN business and edge switching from our extreme portfolio, resulting in 7% year over year growth. Our acquisition of Aerohive outperformed our guidance as we recognized $25,000,000 of revenue at a 64% gross margin during the quarter. We recognized $230,000,000 from our ForEx stream business at record gross margins with growth in our Edge switching portfolio and at 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 data center 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 IQ platform. The networking industry is at the beginning of a long term transition to cloud management and what we call cloud driven. Extreme cloud IQ is built on a microservices architecture 3rd 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 IQ supports wireless today and will be available on our wire switching solutions in January. Given the higher performance, ease of use, reliability and operating efficiency, of running networks from the cloud, every enterprise customer has to consider cloud and will need to have a strategy as the industry transitions over the next decade. Cloud offers speed and continuous delivery of new capabilities, improvement in 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 1 cloud platform. We'll be the 1st and only cloud driven provider with end to end solutions edge to data center, where the only platform that offers customers a choice of public, private or local clouds or all of them together on one licensing model. It's Cisco, it's DNA command center, solely on premise with a small fraction of paying customers customers that are actually using it or it's Meraki older generation cloud that is completely separate and incompatible. We also have the largest highest quality real time MLai platform that is ISO certified. Lastly, unlike Meraki, we offer diverse consumption licensing models with significant ease of use, and will deliver 30 percent OpEx savings for enterprise customers who choose Extreme. And last week, we also announced an expanded strategic partnership with Broadcom and our partner conference. Senior leadership with Broadcom was there live in Carlsbad to announce that Extreme was their preferred choice for enterprise customers as part of Broadcom's silicon to software strategy. As their preferred provider, we are working together to give enterprise customers and channel partners powerful security, segmentation, resiliency policy, telemetry and performance advantages as they pursue cloud driven digital transformation with a simple, secure and intelligent campus architecture. This is a big endorsement for Extreme. As we speak. Gartner once again positioned us as a leader in its Magic Quadrant for wired and wireless LAN Access infrastructure, This is the 2nd consecutive year Extreme has been positioned 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 $1,000,000 or more heading into Q2. Our pipeline is strengthening on 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 that will continue to ramp over the next 9 to 12 months. On the core Extreme side, total edge switching and wireless product revenue grew 9% year over year, 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 X465 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. Provider with the SLX platform and our software application revenue grew for a 7th quarter in a row, up 33% year over year. From a vertical standpoint, E Rate K through 12 business grew double digit. Other areas of strength were service provider where bookings grew 11% year over year and sports and entertainment where bookings grew 60% year over year. And we won yet another Major League Baseball ADM during the quarter. In retail, we expect a recovery once our Tri Radio wireless solutions become available towards calendar year end. Along with lower end switches from our smart Omni Edge portfolio. We encountered challenges in Germany, Italy and UKI 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 Hive. This comes despite a highly competitive pricing environment as we leverage our value proposition and larger deals. In North America, we are excited to have a new Senior Vice President of America 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 WAN business. Brings a wealth of knowledge about the enterprise sales strategy and solutions of our top competitors in the industry to help us architect a plan to win enterprise customers. During Q1, we 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 that 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, verticalize and cloudify 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 core extreme and a full quarter's worth of Aerohive contribution factoring in the sluggish, sluggish EMEA environment. As customers evaluate our Extreme Cloud IQ solutions, we continue to expect some revenue to 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 2019 strong execution on merger cost synergies put us on track to higher our operating margins in Q2 and achieving our targeted 15% non GAAP operating margin exiting fiscal 2020. And with that, I'll turn the call over to our CFO, Remi Thomas. Thanks Ed. As Ed noted, our revenues $155,500,000 grew 7% year over year, grew 1% quarter over quarter and came in at the midpoint of our guidance. Non GAAP earnings per share was 0 point 0 $8 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 9, for $267,000,000, which consisted of 263.6 paid to acquire the outstanding shares of the company and $3,500,000 for the acceleration of stock awards. Net of acquisition costs and net of the cash acquired the enterprise value of the transaction was $210,000,000. Aerohive contributed approximately $25,000,000 in revenue and $6,000,000 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. Our combined product revenue of $185,100,000 grew 4% year over year and declined 2% quarter over quarter. On a like for like basis, core extreme product revenue declined 6% year over year. Our combined product book to bill ratio including Aerohive was about 1 with product bookings up 2% year over year. We refreshed over 30% of the core extreme product portfolio to date, up from approximately 25% last quarter, We expect our product refresh to hit between 40% to 50% of our portfolio by the December quarter. Combined services revenue of $70,400,000 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 multi year bookings we've seen over the past several quarters. Our combined services book to bill ratio including Aerohive but excluding the impact of the deferred revenue haircut was above 1. Our annualized run rate of Aerohive subscription and services revenue, excluding the impact of the deferred revenue haircut, was $57,000,000 in Q1 versus the $53,000,000 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 recurring revenue accounts for nearly 28% of our total revenue adjusted for full quarter versus just 24 dollars in Q4. During the quarter, the Americas contributed 55% to total revenue, EMEA V836 and APAC close out the remaining amounts. Non GAAP gross margin was 59.9% compared to 58% in the year ago quarter, and 59.2% in Q4. The sequential improvement was attributable to a 20 basis point improvement in product gross margin, a 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 than core extreme. 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 points negative impact in Q4 and largely consistent with our guidance. Q1 non GAAP operating expenses came in at $137,200,000 below the lower end of our guidance and increased from $125,300,000 in the year ago quarter and from 136,800,000 in Q4 with the consolidation of Aerohive. The 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 P and L offset by the inclusion of a partial of $24,000,000 to $27,000,000 previously announced on the legacy Extreme side. Our September annualized OpEx run rate for Aerohive was $55,000,000 versus the $93,000,000 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 $26,900,000 in the year ago quarter. Adjusted for cash merger integration costs free cash flow would have been a positive Q1 was $161,100,000, down from $169,900,000 at the end of Q4. Net debt of $218,900,000 increased by $208,000,000 from the $10,900,000 in Q4 that was reported in Q4 due to the acquisition of Aerohive. DSO of 55 days about 8 days from Q4 and from the year ago quarter. Our cash conversion cycles stood at 73 days compared to 61 days in Q4, but down from 76 days in the year ago quarter. Our inventory balance of increase in core extreme inventory. Core extreme inventory rose on pre buys ahead of additional tariffs and as we introduce to your products. Now turning to guidance. We expect total Q2 revenue to be in the range of 2.68 $278,000,000, 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 percent to 61.1 percent. We estimate that tariffs will have an impact of about 80 basis points on our overall gross margin fiscal Q220 given the existing cost of inventory on hand. Q2 operating expenses are expected to be in the range of $164,200,000 to $169,200,000 on a GAAP basis, and 137.3 to $142,300,000 on a 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 twenty nineteen. Q2 GAAP earnings are expected to be in the range of a net loss of 23.2 to $16,600,000 be in the range of $13,900,000 to $20,500,000 or $0.12 to $0.16 per diluted shares. In Q2, we expect average shares outstanding to be approximately $121,800,000 on a GAAP basis, and $125,000,000 on a non GAAP basis, excluding the impact of any shares we may repurchase. With that, I will now And our first question will come from the line of Eric Superger from JMP Securities. You may begin. Eric, your line may be on mute. Hi there. Can you hear me okay? Yes. All right. Sorry about that. So on the tariffs, can you talk about some of your customer behavior Are they trying to, I don't know, manage the timing around tariffs? Are they maybe delaying any purchasing until tariffs can come down? Or is there any discussion around what they're, how they're trying to manage that situation? Eric, I think when this when it came into play last year and the severity of the tariffs were a lot higher in terms of the percentages. We did see a lot of customer activity, particularly in Q2, but there was a lot of early buy in 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 balance how we pass through the tariff. We're trying to trying to hold our margins and then do a good job of mitigating the cost. And that's what we're doing. And I think the, 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 there's an 80 basis point benefit or how should we factor that in? Yes. At this point, the discussions are around not following through with proposed increases. So that's what we're looking at. We haven't really seen kind of the rollback yet or the proposals of a rollback. So when Xi Jinping and Trump meet in November in Chile, the expectation is on our side, it seems to be consensus in Washington is that new actions will be frozen. And then I think it's going to take some time before we digest what could happen tariffs that have already been imposed. So I think it's going to take some time to play out. And at this stage, we're holding We've announced a price increase for November, which is going to be routine for us, a more less and nominal price increase 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 it is working with customers in terms of integration of products, our customers looking to transition from traditional extreme products to hive products or how are the discussions going since the acquisition closed? Yes. Look, there's excitement on both sides. I think we just had a partner conference. Aerohive partners are excited about adding our switching portfolio. We've taken the Aerohive cloud team brought it in and that team has also taken on our software team We're cloudifying 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 our switch portfolio into the cloud has created a lot of excitement with our partner as well as our customer community. On the Extreme side, there's a lot of interest in cloud there was pent up demand for Extreme because we didn't have that capability before. And so, as we mentioned in our comments, there were a 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 IQ. And so I would just say there's an awful lot of excitement about 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, yeah, I just I would say that the enthusiasm and excitement from existing partners and customers on both sides of the equation is quite high. So we're really optimistic about what this means as we roll into the first half of calendar twenty twenty. Very good. Thank you. Thanks Eric. And our next question will come from the line of Alex Henderson from Needham. You may begin. Thank you. So I was hoping you could talk a little bit about the restructuring, motion. It 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 June quarters? Yes. So, I won't let you get into detailed dollar amounts, but I would tell you what we're going to see in the December quarter is, the phase 2 of project kind, which was the restructuring on the core extreme sites, with a reduction in engineering headcount. And that is largely taking place as we speak. And what we're going to see in the March quarter is acceleration of synergies on the aerohive sites as transition employees, I. E. Employees that were kept because in finance, for example, they're required to help us close the books as we transition from NetSuite to Oracle as those employees exit the companies. So you're going to see step improvement in our operating expenses reduction in the December March quarter as a result of these actions. If you were to just say percentage complete, of the actions how would it lay out over the four quarters? Are you where what has done so far as a percentage of the processing? So I would say 100% of the reduction on the extreme side will be done by the December quarter. And I would say that ninety percent of the reduction 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 OpEx. So in the June quarter, we should be at run rate? In the June quarter, we should definitely get rendered, yes. Right. Yes. And then just as you know, I mean Aerohive when if you look at the last quarter that they reported, their OpEx run rate was $93,000,000. And in my opening comments, I stated that as we exited September, we're already down to $55,000,000. And so we've got another few million to go, but I would say Aerohive is already well advanced. I see. Has there been any change in your sales cycles as a result of the macro conditions, are we seeing lengthening of cell cycles? I think that's fair. Alex. When you talk to our field, the feedback from our field is that opportunities aren't going away. They're just being delayed. So I think that's a fair assessment on your part. And is there any difference in the geographies between those I mean, is it mostly EMEA or are we also seeing a slow lengthening of the cell cycles in the U. S? It's it's primarily in EMEA where we've seen the effect. And 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 going on there. We also felt some pain in Italy and then obviously you have Brexit. So these are things that are creating disruption And what I would say is that we are seeing the pipeline build and we're seeing these we're seeing the opportunities as we look out We feel confident in a rebound for us. It's just a function of the timing. It relates to the Americas, what we did is we restructure. We had a field team that was more or less generalist focused on 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 SLED and then create an enterprise team that would be solely focused on enterprise customers This is outside the name vertical accounts that we have as far as health care, retail, our Stadium Transportation Logistics. So those clearly defined verticals now what we've done is created two teams in the Americas to go after that. This past quarter, we completely restructured, we 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, 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. Conversation around digital transformations are always interesting from 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, move the extreme data center to the cloud or to, Azure, where are you on Office 365? And what are you doing on your security posture? Relative to a perimeter defense model moving to maybe a 0 trust model or anything of that sort. Can you talk about your posture changes in security and digital transformations, please? Extreme is going to be the number one spokesperson for all of our all of our customers. And in our user conference, extreme on extreme, we set that program a while ago and we started doing these acquisitions. Our IT 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 our portfolio migrates the cloud. And our number one customer is Extreme. So we're not really talking just about your networking tools, really talking about, have you moved applications to the cloud? Are you using Office 365? Are you in those pieces of it? Absolutely. So we have from an ERP perspective, we're at Oracle Cloud Office 365 cloud. When we look at Salesforce, etcetera, 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 Savantac 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, Broadcom is going to be deploying Extreme in their environment. So and we're looking to package all of this together and bring it out into our own to our own enterprise customers on both sides of the equation as well as to our partner community. Remi, you want to add something? Yes, I just want to add as far as being able to offer and support the growth environment, which consists in a license entitlement platform around Gemalto and the introduction of a subscription platform with Dror. Aerohive had an in house custom built solution running on NetSuite as we migrate from NetSuite to Oracle we decided that we're going to deploy Zuora. So you'll see this year another year a sustained CapEx investment less than last year but related to these IT investments that we're making. Thank you. And our next question will come from the line of Eric Martinuzzi from Lake Street. You may begin. Yes, I'd 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 how much of it due to really unexpected pipeline conversion? This was our first quarter when we gave guidance and we had a step year of 52 days out of 90. So I would say that the guidance that we gave was best fifty-fifty percent guest as to the estimates and Aerohive came in substantially higher than what we've seen at 25 versus the 15. But it's also due to the fact that their teams have 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 an issue here with maybe some business that was going to happen in December happened in September quarter, or is it you continue to expect that good, good strong pipeline and good strong conversion in December? Yeah. Eric, what I would say is, following up on what Remi said is, we I would say we're probably fifty-fifty 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's some deals that would get pulled in. That's the nature of our business. Every quarter, deals get pulled in, deals get pushed out. But you probably saw a little more than normal happen there. But, we're, as far as their E Ray conversion, on the extreme side, I would say our E rate came in a little below plan. Hive was kind of right there and 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, the partner behavior and activities in the field around that. The Extreme teams are chomping at the bit to sell this platform. And so that's you're going to see more of that happen now that we've closed out Q1 and we're on to Q2. Yes. That's where I was headed next. You talked about having the integrated product from the cloud management perspective. Having that in January. Are you able to sell that now, or is the channel really looking for more, hey, look, we'll start engaging that one the products available. I'm not going to touch it until. Well, what we're going to do is, we can obviously sell on the Aerohive platform. In January, our 2 from a selling perspective, we're going to combine our systems from a sales perspective. So it takes a little while for us to do that. Our teams kind of have joint sales force. They have an instance of sales force for Extreme and an instance of sales force for Aerohive. All of that combined in January. And then importantly, the licensing and Remy talked about Gemalto we're going to have probably the most advanced and flexible licensing platforms in the industry That's going to come online in April. And that's when we're 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 models. So what we're going to do, the strategy is going to be to let the team sell it effectively. We'll be giving a lot of it away. But billing will kick in in April. And if I can just add, we've distributed to all extreme sales people a Aerohive quota and they can't go to President's club unless they've hit that quota and we're deploying specific incentives in the field. So that both Extreme and Aerohive sales people are highly motivated to sell our cloud solutions. Okay. And then lastly, obviously, this is a very meaningful, Broadcom Partnership expansion seems to touch all points of the relationship there. But I'm just wondering, incrementality, what's the low hanging fruit in that tighter Broadcom relationship? So, if you look at where Broadcom has gone now with the CA, the CA acquisition. And Remy is in a good position to comment because that's where he came from. We recruited him from CA. And then what's going to happen with Symantec. They're in the enterprise software business and they have all of the top enterprise customers The issue for them is most of these customers have Cisco in their campus environments. And Cisco is not using Broadcom silicon and their strategy of silicon to software, they want their silicon and all these enterprises. And they had to pick who do we want to pick to go out with to go out and make this happen. And they've picked Extreme, to go after enterprise customers with our product portfolio. And I think a lot of it has to do with our cloud strategy in driving Broadcom 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's what we're looking at. Cisco and HPE have used some proprietary silicon and their own ASICs for some of their solutions. And Broadcom, we believe is superior on many fronts and for many reasons. And we want to tell the story together. Understand. Okay. Well, congratulations. It was a very busy quarter between the acquisition and the restructuring and the rejiggering of the verticals. So, you definitely kept busy and congrats on the progress thus far. Thanks, Eric. Thank you. And our next question will come from the line of Christian Schwab from Craig Hallum. You may begin. Hey, great. Thanks for taking my question. Clearly, a fantastic start to rightsizing Aerohive on margins. But my question has to do with top line growth as we look forward. I'm wondering, Ed, if you can give us, your opinion of what you're most excited about to be a top line growth driver. Understand, world concerns such as tariffs and certain geographies, which we we've discussed that everybody knows is somewhat challenged today. But is there any specific products or maybe the Broadcom relationship or the cloud E rate as you look for the next over course in the next year. What is the team most excited about to drive top line growth? For me. I would say check, check, check, and on all the things you're mentioning. But 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 are 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 there are no software upgrades. It's continuously upgrading. In terms of having your data in the cloud, it's much more cure 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're going to have to have a cloud strategy. And if you don't have a strategy, that's the strategy in and of itself. So we're going to all enterprise customers are going to start paying really paying attention. And by the way, it's not just extreme. Competitors are talking about this and trying to figure this out when you hear people talking about the autonomous enterprise. In our case, so everyone's got to think about cloud And we've got the number one cloud. So if you're enterprise customers, you have to think about Extreme. We're the only one that has the end to end solution. We're the only ones that are going to be putting that full edge IoT edge through the data center into the cloud. And we're doing it in 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 machine learning AI perspective, we have the largest cloud. So in terms of all the devices that are running in our cloud, our cloud learning about device behavior and then attaching AI and building operational function and automation functions to that. We're going to take the lead there too. We're the only one with our 3rd generation, we're going on 4th generation cloud to offer choice. So if you're in Meraki, you're 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 can do it your way as an enterprise. Public, private, local clouds. And then the important thing is on one licensing model. The depth of capability that we have and then finally we're going to offer big savings and 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've just hired ahead of Americas. Americas, we've struggled a bit over the last couple of years in terms of driving that growth. And we've just brought in a rock star who really understands the I would say the weakness in our competitors offering. And Whereas maybe we have not been quite as technical in our attack as far as going after our competitors. I think we are 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 field is going to get excited and our leadership is in a position to drive that. So I would say those are the 2 big things. It doesn't happen overnight. We're talking about a multi year 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. I don't know if I missed it, but did you guys give what you believe as a percentage cloud related revenue percentage in current business today? We said that the exit run rates for the September quarter was $57,000,000 for cloud. That's just the high solution. We did a bit of revenue on the extreme side, but it was about $1,000,000, but let's call it $58,000,000. And we said that if you add that to our support revenue as well as our software, support revenue. The total recurring revenue was 28% on a combined basis, taking Aerohive in the full quarter, not just the stuff here, that converts to 24%. Our recurring revenue is now close to 30%, which is great news. Great. Fabulous. No other questions. Thank you. Thank you. Next question will come from the line of Paul Silverstein from Cowen. You may begin. Thanks guys. I appreciate you taking the questions. First is specific and then 2 general questions. Rimi, did you see the guidance how much of that is specific to OHAF? I did not. I did not. Can you share that with us? So you're talking revenue? Correct. For Q2, we believe there I will contribute about $35,000,000. You can calculate that with the 3.5% growth that we gave for Core Extreme and the 7% growth that we gave for Aerohive. I appreciate that. Secondly, let me ask you 2 broad questions. First off, now that you're at the 60% gross margin level, picking up, I guess it was Alex's question, where could you any thoughts on does it peak out at 62, 63, any thoughts on where you could get to from here and then what timeframe? Obviously, I'm talking about longer term, not. Yes. So I think the drivers of gross margin, if I think about core extreme, out of the product refresh. We mentioned that we're just at 30%. You can see a step improvement in our December quarter with the launch of a new product, the 465, which is an edge product And so we would expect that to continue to drive product gross margin on core extreme. Another factor that's going to play specifically in Q2 is the fact that we're going to consolidate what is a 64% 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, be it in the form of a better mix of our production between China and TAA compliant countries. As well as some of the price increases that Ed mentioned, that should also help drive margin. On the Aerohive side, It's really the increase in the cloud revenue, which structurally carries margins in the 70s. Versus the product gross margins that are in the high 50s, that's going to be a driver of gross margin going forward. So at the Analyst Day about 10 months ago now, we said that our ambition was to get to 62% We will not be here there in fiscal 2020, but we'll certainly be at or above 60% the year on average. And then I'm expecting that trend to continue over the next fiscal year where we have the ambition to get to 61%. I just chime in with a couple of other things, Paul. 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 at better rates and at better discounts, that should help us. The other thing I'll mention what's been part of the theme in the past has been on the data center side, it has taken us longer than we wanted to migrate our MLX with the routing and the VDX switching platforms, older technologies, we are seeing that ramp to SLX. Now when we moved to SLX, and federal is a great example, a service provider deal that we had this year, where, we migrated SLX. All of a sudden, we're going from margins in the 40s to margins literally in the 70s. So we're seeing strength in the data center business. We're projecting growth. We've got some really interesting federal opportunities And these are high 60% gross margin business. So new SLX 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 starting to arrive. And I would say that's another factor that could add to gross margins. And to that last point, you made that transition to SLI that would that 30 if I heard the numbers correctly, that 30 percentage point benefit to gross margin that pertains to how much revenue? Yeah, I can't put my finger on it, Paul. I mean, there's a lot of different it's almost anecdotal me telling that deal by deal, but there are a lot of we talked about growth in service provider. In just one case, we beat out Juniper and a service provider deal. It's a more of a regional service provider where we've been selling MLX or VDx at deep discounts waiting for the transition to hang on to customers. Well, a $1,500,000 deal comes in and it's a 70% gross margin. That's that 30 sense swing that you're talking about as SLX matures and we see more adoption of data center side, it's going to it's going to have an impact. And I'm not sure I can quantify that for you right now. It mathematically wasn't as simple as you've got x amount of MLX in VDx revenue today and that's the opportunity plus whatever growth you could drive by Virtual Vesta Luxe being a better platform? Yes. The transition happens over time and it's a lot of it's a lot of deals. So I guess We can look at that. And then I guess we'd have to kind of handicap and guess how that's going to happen, between now and fiscal 22 when we end of life the other platforms. Okay. Let me move on. That remember, the 62% surrogate Is that dependent if tariffs get rolled back, is the 62 dependent upon tariffs being rolled back or can you get to 62? In the current status, given that change? We're not making any assumption that the tariff situation gets any worse or any better than it is today. Again, the 62% is an ambition and I don't think we'll get there in fiscal 2021. This is a 18 to 24 months ambition that we have. I think we have in the short term a clear path to go from 59.9% to 61%. And those are that's only driven on the product refresh discipline in the field in terms of discounting. The actions that we're taking to mitigate the current tariff situation, and the impact of the growth in clouds which, as I mentioned, is carrying gross margin in the 70s. Understood. And so the previous question to an earlier question that was asked, I trust is it given that if tariffs were rolled back at a minimum that makes it easier and perhaps it accelerates path to that 62% at a minimum and maybe even better it could be incremental to that 62%. I recognize you're talking 18 to 24 months, not 1 year. We're just trying to think about what the opportunity is more. We've had 120 basis points, in Q4, eighty basis point in Q1, we anticipate another 80 basis points. Not not all of that 80 basis points is related to the actual increase in the tariff that we pay when products arrive in El Paso. Some of it is related to the fact that we move production outside of China to either Taiwan or Mexico for final assembly. And so unless we revert and move production back to China, we will not get the full benefit of the 80 basis points, but I would say we'd probably get 70 basis points out of the 80 basis points because the majority of the impact is really higher tariffs. Your point is absolutely correct. I appreciate that detail. One last question on margins, then I want to ask you a broad revenue question. You just referenced something they want to come back to. So if I remember several quarters back, Ed had referenced the fact that you were changing discipline among the sales force from a pricing perspective. It sounds like from the 59.9 you just did that that discipline is holding for now. I recognize still early. It hasn't been a long time since the problem arose. But any thoughts that you and Ed can share on that? Yes. So what I would say is that some of the regional directors that manage our sales force are incentivized on their gross margin achievements. And so that was a big factor And I would say that the second one is as you move to box selling, to solution selling, where you have a combination of software, hardware and now cloud. Obviously, you're selling a different value proposition than just competing on feeds and speeds. And that also helps drive that discipline. Great. If I can ask a broad revenue question, it ties into the previous question that was the previous question. If I back out the Aerohive, obviously revenue on a year over year basis, it was close enough to flat, but it still wasn't you haven't done back to growth yet. So you've done these very well conceived acquisitions. A number of this now, the 4th one in the past I guess 4 years and they're all very well conceived and they offer significant opportunity. And I recognize that macro is a challenge and whenever you do an position. 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 gotten back to revenue growth and tying that into the opportunities you just identified earlier. Any thoughts that you can share from a high level for what's going on? Is this simply you've got to get this now that you've closed the acquisition matter blocking tackling. It's a matter of the macro in Europe, especially the German economy and the Brexit situation. What are the key factors in hierarchical importance in getting back to decent organic revenue growth? Yeah. So I would say if we just look at Aerohive isolated, if you remember, before we acquired them, they went through a series of 2 restructurings and taking down sales. They wanted to focus more on profitability And so before we closed our deal, they had been through 2 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 in, as we picked up acquired. There's a macro issue of EMEA that's still there. But what I would tell you is that from an airline perspective, there's 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 more resources behind cloud driven networking. And we're in terms of air cover for marketing, in terms of all the different things 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 just the way cloud managed net 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 there's been up demand for cloud. We haven't had it. We tried it a couple of times and now we've got the industry's best cloud and we can pound the table on that. And then if you're coming from the Aerohive side, now all of a sudden, 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 we're pouring behind it at Extreme. So that's I guess that's at a very high level. I would go back to cloud driven industry moving to cloud. Now all of a sudden, extremes in the number one position as far as what we can offer enterprise customers. If I can just add to your specific point about organic, every time we add an acquisition, what happens to our organic revenue, I think that's the one thing we're getting better at factoring is revenue dis synergies. So when we acquired Zebra and the wing range of products, obviously that had an impact on identified, which was the wireless solution that were brought with the acquisition and the terraces. When we bought Avaya and the fabric that had an impact on the switches for the campus that were part of the extreme reach. When we acquired Brocade in data center that had an impact on the Extreme Data Center product, like 7100. And today, we're acquiring a industry leading cloud solution, which obviously is solved with its own access points. And that has an impact on the sale of our own access point. So those revenue dis synergies systematically explain, what you see in terms of the organic decline But once the portfolio is harmonized and put together to Ed's point 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. I appreciate the response. And just one example is our edge switching portfolio, which is benefiting from the refresh, is grew 14% year over year in Q1. Great. Thanks, Gus. 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'd just like to thank everybody participating on the call. I always want 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 an 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 and Stan, 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's 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 a day where we're going to take investors through and 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 we're looking forward to continued dialogue. Have a great day. Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.