Good day, ladies and gentlemen, and welcome to the Extreme Networks announcement to acquire Aerohive Networks conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Stan Kovler, Director of Investor Relations and Strategic Development. Sir, you may begin.
Thank you, operator, thank you all for joining us on short notice this morning as we discuss Extreme Networks' entry into a definitive agreement to acquire Aerohive Networks. I'm Stan Kovler, Executive Director, Investor Relations and Strategic Development. With me today are Extreme Networks President and CEO, Ed Meyercord, CFO, Rémi Aerohive's President and CEO, David Flynn. We just distributed a press release detailing the announcement, an 8-K is forthcoming. For your convenience, a copy of the press release and a presentation regarding this announcement 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 and financial results, products, operations, pricing, 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 reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, we have no plans or duty to update them except as required by law. Now, I will turn the call over to Extreme's President and CEO, Ed Meyercord.
Thank you, Stan, thank you all for joining us this morning. We really appreciate having Aerohive CEO, Dave Flynn, joining us from Milpitas on our call this morning as well. Dave and the Aerohive team have been working really hard and working well with our teams to bring this deal to fruition. I'm very pleased to announce that Extreme has entered into a definitive agreement to acquire Aerohive Networks, a pioneer in cloud-managed networking, at a price of $4.45 per share in cash, representing purchase consideration of approximately $272 million, an enterprise value of approximately $210 million. This acquisition will enhance Extreme's technology leadership in cloud-managed Wi-Fi with advanced artificial intelligence and machine learning capabilities, establishes a proven and mature cloud services platform for Extreme's customers.
We're targeting to complete the deal in our fiscal Q1 2020 and expect the deal to be accretive to non-GAAP earnings starting in fiscal 2020. The acquisition accelerates Extreme's path to greater than 60% gross margins and 15% operating margins on a non-GAAP basis, using an exit run rate for fiscal 2020. On a pro forma basis, this combination creates the number three enterprise Wireless LAN vendor as of the end of calendar 2018, using our combined market share data as measured by Dell'Oro Group. Aerohive was also recently named the number two vendor of cloud-managed networking equipment in terms of revenue by IHS Markit.
We also wanted to reiterate that we are confident in our fiscal fourth quarter 2019 guidance. We continue to see strong wins in the market across our product portfolio in cross-selling opportunities and targeted industry verticals in all of our geos, along with improved linearity. Taking a step back, this is an exciting next step on the journey Extreme has been on for the past five years. First, when this current management team took over the company, we focused on rightsizing the business and refocusing on enterprise networking. We focused on differentiating with our single pane of glass management, customer intimacy, and number one-rated customer support.
Since then, we've scaled our business to over a billion dollars in revenue and substantially expanded the breadth of our portfolio to offer wired and wireless data center networking through the value acquisitions of Zebra Wireless LAN, Avaya Campus Fabric, and Brocade data center assets. We have significantly improved our gross margins and invested in our own digital transformation during fiscal 2019 to drive automation of internal processes, instituted an operating system focused on place in the network use cases, standardized distribution and channel, verticalized our go-to-market, and stratified our product portfolio, which is undergoing a major refresh cycle. We're advancing our strategy to transition our business and portfolio to sustainable SaaS-like subscription-oriented cloud-based solutions and change the mix of our revenue to a more recurring basis. We see pent-up demand from our customers for a cloud-native management platform that goes toe-to-toe with any cloud.
Aerohive was one of the first companies to offer controller-less Wi-Fi and cloud management, including cloud-managed Wi-Fi and network access control. Aerohive recently delivered the industry's first Wi-Fi 6 and pluggable enterprise Wi-Fi access points. The company has a global footprint of 30,000 cloud Wireless LAN customers. We will be expanding our base of approximately 6,000 channel partners with 5,600 Aerohive partners, most of which are complementary. We also have meaningful cross-sell opportunities in vertical Extreme doesn't fully participate in, such as retail banking, quick service restaurants, long-term care, and of course, education. This acquisition will bring new automation and intelligence capabilities to Extreme Elements portfolio. It will expand Extreme's technology leadership in Wi-Fi and NAC, adding cloud-managed Wi-Fi and NAC solutions to complement our on-premise technology, driving Extreme deeper into key verticals and presenting numerous opportunities for cross-sell and up-sell within the combined portfolios.
I now want to turn the call over to Aerohive's CEO, Dave Flynn, to make a few remarks.
Thanks, Ed. I'm pleased to be here with Extreme to announce this transaction. First off, excluding the potential impact of today's announcement, I want to note that we expect to achieve our June quarter revenue and non-GAAP EPS guidance provided on our last earnings conference call. Now turning to the transaction. I view Aerohive as an innovation leader in cloud management and wireless. To that point, we released a number of major new products in the last 18 months, including A3, our standalone security offering, our new SD-WAN cloud-managed branch routing solution, Atom, the industry's first enterprise pluggable access point, and our industry first portfolio of 802.11ax capable access points. We also delivered a continuous stream of innovation in our HiveManager cloud platform, including machine learning-based Client 360 and Network 360, as well as Alexa voice integration.
These product enhancements strengthen our overall offering and strengthen our position as an innovator in the space. We bring to Extreme industry-leading cloud management driven by an ISO 27001-certified microservices cloud architecture with native machine learning and AI, and a near-term roadmap that includes machine learning and AI-driven proactive problem resolution and 3D topology view of the access network. Finally, we offer full-stack cloud management at the edge that I believe will be highly complementary to Extreme's switching business and drive cross-sell opportunities. As an independent company, with most of our revenue coming from wireless products and a third of our revenue coming from the education vertical, we sought larger scale and a broader go-to-market platform and sales reach. The combination with Extreme will allow us to build scale and a new partner ecosystem, customer base, and internal team that's ripe to embrace cloud. Ed.
Thanks, Dave. With the acquisition of Aerohive, Extreme will be able to offer customers and partners more choices for cloud and on-premise wired and wireless solutions and an industry-leading solution for cloud-based network management, all from a single vendor and backed by our award-winning in-source services and support team. Post-acquisition, customers and partners will be able to mix and match a broader array of software, hardware, and services to create networks that support their unique needs and that can be managed and automated from end to end, from the enterprise edge to the cloud to advance their digital transformation efforts.
As Dave mentioned, many of you may know Aerohive for its strength in the education market, but the company also has a presence across other verticals such as retail, serving customers such as Abercrombie & Fitch to Pier 1 Imports; quick service restaurant chains such as Chipotle and Chick-fil-A; healthcare, where Aerohive is particularly strong in assisted living and is used by the top four providers and six of the top 10 in the U.S.; and retail banking with customers such as PNC and Regions. All in, we believe there are significant cross-sell opportunities for us to target longer term. Looking at specific verticals where we intersect, we will double our presence in higher education and increase our share of the K-12 market by four times from a standalone basis.
Specifically, when we look at our combined E-Rate filings, we'll firmly be the number 3 networking company in terms of E-Rate for calendar 2019. We also believe our K-12 business is highly complementary, as Extreme's E-Rate opportunities are largely in switching, while Aerohive's are in Wireless LAN. We'll also be able to double our Wireless LAN market share in the healthcare vertical and expand our presence in retail and retail banking. From a technology perspective, we're excited about Aerohive's cloud management capability. We believe the company's HiveManager platform can be extended to other areas than wireless over time, which fits well with our vision of the autonomous enterprise to drive more cloud-based software solutions, and we plan to invest in this platform.
When we look around, many of Aerohive's competitors are still on first-gen or second-gen cloud architectures with limited ability to scale to 1 million devices or 10 million users, like Aerohive's third-gen cloud architecture allows. This platform fits perfectly with our strategy to drive more revenue from software applications. From an engineering standpoint, Aerohive converted their company to a true Agile development model. This will drive significant feature velocity for our customers as well. From an end market standpoint, Aerohive will help Extreme enter the SD-WAN market as well, expanding our total addressable market by a total of $1 billion in a market growing nearly 20% a year. At a time when many of Extreme's customers and partners are turning towards a software-as-a-service subscription model to reduce costs and gain efficiencies, Aerohive will expand Extreme's mix of revenues to approximately 30% from subscription recurring revenue.
To conclude, the combination of Extreme's end-to-end software management capabilities, along with Aerohive's cloud platform, will put us in a better competitive positioning in the market against end-to-end vendors. Now, I'll turn the call over to Extreme's CFO, Rémi Thomas, to review some of the details of the deal.
Thank you, Ed. As you just heard, have seen our press release, we will commence a tender offer to acquire all of the outstanding shares of common stock of Aerohive at a price of $4.45 per share in cash, representing an aggregate purchase price of approximately $272 million. Taking into account Aerohive's net cash balance of $62 million as of the end of first calendar quarter of 2019, this is equivalent to an enterprise value of $210 million. Extreme expects to fund the acquisition from the combination of available cash and committed debt financing. The acquisition is expected to close during Extreme's first fiscal quarter of 2020, and is subject to certain approvals of Aerohive stockholders, regulatory approvals in the U.S. and Germany, and other customary approvals, along with the tender of the majority of the outstanding shares of Aerohive's common stock.
As Ed mentioned, one of the key elements of this deal is to drive to about 30% of revenue from recurring services on a pro forma run rate basis. However, we also want to note that the portfolio of Aerohive's $79 million deferred revenue balance will be affected by purchase accounting with as much as 30% of the deferred revenue balance not being carried over. Since many of Aerohive's customers are on the one-year renewal, we do expect to build this back up over the next fiscal year on a reported basis. We plan to help investors understand how the impact of purchase accounting has affected the services revenue we report through the next fiscal year. We have secured financing for transaction in the form of additional bank debts, and from a balance sheet perspective, we expect consolidated net debt to EBITDA leverage to remain under three following this acquisition.
We expect to generate strong cash flow from our core and acquired businesses during fiscal 2020. On a separate note, we will be filing an 8-K that details the realignment of our cost structure heading into fiscal 2020, as we previously alluded to during our fiscal Q3 earnings conference call, to drive efficiency and improve our cost structure. We're taking out approximately $24 million-$27 million of annualized operating expenses in connection with the plan, to enable us to achieve our targeted mid-teens operating margin exiting fiscal 2020. We believe this plan further validates our commitment to achieving the gross and operating margin targets we have committed to on an organic basis. We expect the acquisition of Aerohive to accelerate our plans to achieve improved financial results.
To that end, we will incur charges in the range of $14 million-$16 million in total, beginning in the fourth quarter of fiscal 2019 through the second quarter of fiscal 2020 inclusive, on a GAAP basis. With that, I will now turn it over to the operator to begin the question and answer session.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Alex Henderson with Needham. Your line is now open.
Thanks. Just a couple of mechanical questions to start, if I could. Could you give us some sense of what the debt financing cost will be roughly, and how we should feather that into our model? The second one is really around the comment about deferred. If the company's forecasts on the street are around $170 million for calendar 2020, should we be taking essentially 30% out of that revenue base, and then feathering it back in over the following year? When you say that you've got to drop that deferred, is that the right calculus? The third question, if I could just throw one more out.
You said this is accretive, I guess I'm a little confused whether it's accretive standalone or whether it's accretive only as a result of the restructuring, which the cost benefits sound like that would be $0.20 to $0.22 a share benefit from that. Is it accretive before the restructuring or accretive inclusive of the restructuring? Thank you.
Thanks, Alex. I think I'll turn over the questions related to debt and deferred, then Rémi, you can add. The transaction for us is accretive. Also, when you make the adjustment for deferred, it becomes even more accretive for us. What's separate is what we're doing on the Extreme side, which is we're driving efficiencies within our own model. There's a standalone Extreme model that is getting a lot more efficient and driving higher profitability. On top of that, we're layering in this acquisition, which is accretive to the model.
Rémi, do you want to jump in?
Yeah. On the financing, we've got full underwriting by bank. The structure that we're looking at is a Term Loan A, the indication we're getting, which is obviously subject to market condition at the time of the close, which will be sometime in our fiscal Q1, are LIBOR plus 325 basis points. As far as your second question on deferred revenue balance is concerned, the 30% that I mentioned refers to the actual deferred revenue balance. If you take $79 million, which was the end of calendar Q1 for Aerohive, 30% of that would be roughly $25 million-$26 million. That's the maximum. As we obviously work with accounting teams, and further look into the details of the profitability of the cloud business, we're hopeful that the deferred revenue haircut will be less than 30%. I think Ed addressed the third question.
If I could just go back to the third question for a second. The Street forecasts have the company essentially breakeven in calendar 2020. I'm hard-pressed to understand how, unless there's additional cost-cutting that's going on beyond the announced cost-cutting, which you, I think are implying is Extreme only cost-cutting, how you get to profitability. Is there additional cost-cutting associated with the larger post-deal that's not included in that restructuring announcement?
Alex, yeah. As you're probably aware, Aerohive had announced their own restructuring, and so they had taken some costs out. With our acquisition, we'll be looking to streamline further expenses, and that's part of our plan.
Okay. Thank you.
Thank you. Our next question comes from Christian Schwab with Craig-Hallum Capital. Your line is now open.
Hey, guys. Congratulations. I think this is a wonderful deal for Extreme. Can you share with us how this deal came together and how long the sales process was, and if anybody else looked at it?
Sure. Christian, we've been in dialogue with Aerohive for probably the last nine months, when we had initial conversations. I don't think it's a surprise. A lot of people in looking at our companies felt like this could be a good fit, we always get questions from people asking us about, are we interested in Aerohive? Would we consider Aerohive? It was conversations that I had with Dave back probably about nine months ago, where we were talking about businesses and the need for scale in our industry, the fact that the company's offerings are complementary, our customers are complementary. We felt like this was a good fit and Extreme was the right home for this next-gen cloud platform that they've built. On the Extreme side, we've built our own cloud.
From a scale perspective, they have the kind of third-generation, latest technology cloud platform that we believe we're going to be able to leverage, and that will accelerate our vision, our technology vision. Conversations have been going back and forth, and they heated up in the spring, and then we were able to reach a deal, and happy to announce that today.
Yeah. Congrats again on that. As the math is relatively simple as I look at our Aerohive model, in order to get to 15% operating margin targets on that business into your business, can you give us an idea of, or do you know yet, what percentage of that synergies would come from corporate cost structure, accounting, finance teams, upper-level management, board, versus what would have to come from reallocation of spending on SG&A and research and development?
Yeah. I think what you're asking is for a breakout of the synergies and kind of where we're expecting to derive costs from?
That'd be great. Thank you.
I think, at this point, we're still working on that model and on that plan. We've done that at a high level, and I'll let Rémi comment. There's been collaboration with the executive leadership team at Aerohive in identifying Extreme assets, Aerohive assets, and the best way for us to bring them together. The one point that I want to make is that we are absolutely going to continue to invest in their cloud management platform. Bringing over the Agile team and a DevOps operation for running that cloud is going to be a critical capability for us in terms of future velocity out in the marketplace. We're clearly going to be investing in this platform as we go forward. Then, there's been an exercise with the teams in understanding where it is that we can pull cost to preserve and maximize value.
Rémi, do you want to add anything to that?
No, the only thing I would add is if you look at our cost structure and you see that as a percentage of revenue, R&D and selling and marketing expense accounts for the majority of operating expense. While I agree with your logic that there's some synergies in support function, HR, finance, real estate, IS/IT, et cetera, that's still a small percentage. I would expect, even though we're not prepared to disclose the split of the synergies, but to get more synergies from sales marketing and R&D than from support functions.
Perfect. That was a baited question for numbers, thank you, Rémi. My last question is, who's going to run it from a sales leadership perspective? Do you know yet?
Well, Bob Gault is our Chief Revenue Officer. He remains in that position. We're evaluating who comes across from the Aerohive side. We're pretty excited about some of the talent that we've identified already. Again, particularly as it relates to this kind of cloud-native business, we want to be really sure that we nurture and we build that cloud-native business inside of Extreme. There's some key individuals that we're looking at bringing over that are going to be critical in helping us drive that business. There's a big cross-sell opportunity. There's pent-up demand with our partners and our customers. There's a pretty big opportunity in terms of our expanded platform to bring out the switching and other software assets to their customers. It's an integrated effort. That's where we are at this point.
If I may, just one last question. Can you give us the rough end customer mix of the Wi-Fi business now, post the combination with Aerohive? What % goes to education in total? I thought I heard something. Other verticals.
Yeah, I think education is the big vertical that we talked about. As we look at it, we would group higher ed along with state and local education, K through 12. That business will be approximately 30% if you look across all of our industry verticals. It will level out from there. What I would say is there's overlap from when we look at healthcare, when we look at retail, which is a really big opportunity here for us. We're strengthening our position in those markets as well. Interestingly, there's not a lot of customer overlap. We see the customer base as being very complementary. We wind up we're picking up a lot of customers. We don't have the same customers. Net, it's additive in creating new cross-sell opportunities.
Great. No other questions. Thanks again.
Thank you. Our next question comes from Paul Silverstein with Cowen. Your line is now open.
Thanks, guys. I've got a couple. Just picking up on the last question, among the education, healthcare, state and local government, and retail verticals that you all identified as the key customer markets for Aerohive, can you give us a little bit more granularity on the split among those businesses? I only ask because my understanding, perhaps misunderstanding, is that the education market, while potentially good in volume, depending upon E-Rate, is that it has much lower margins for all of you folks, not just for Aerohive, but for Extreme, and everybody in the marketplace. I'm curious about the split between education and the other sectors, if we could get some granularity, and if there is meaningful margin differentials in those different customer markets.
Secondly, can you update us, my apologies, I should know this, but can you update us on the E-Rate outlook relative to that education marketplace? I've got a separate question, which I'll hold off on until you all have responded to those. Thanks.
Sure. Yeah, education is about 30% of Aerohive's business, and what's interesting when you combine Extreme and Aerohive, that they have cloud-managed customers, and so they're leveraging their cloud-managed Wireless LAN, whereas we're much more heavily weighted towards switching. This is where we see the complementary nature of the deal. Net, we're looking at adding 24,000 additional customers onto Extreme and onto the platform. As I said before, we don't see a lot of overlap there, and some of that has to do with the kinds of services that we're delivering there. The other thing to keep in mind, Paul, as you know, our 60% gross margin target, which is something that we remain focused on, is going to be helped by this, given the fact that the cloud-managed platform is a mid-60% gross margin platform.
We're picking up a new portfolio with higher margins, within our customers, we haven't had a fully developed cloud platform to roll out. You mentioned E-Rate, you look at where we stand independently and then collectively from an E-Rate perspective, most of our E-Rate filings have been switches, whereas the Aerohive, when we look at their E-Rate wins, it's mostly Wireless LAN. From that standpoint, as we go forward, we are expecting this to be complementary from a customer perspective. The other thing I'd mention is that from a K-12 perspective, the Aerohive margins are not lower in that K-12 industry. That's part of the power of the cloud-managed platform that they have. From a filing perspective, we looked at significant growth.
Dave, I don't know if you want to jump in and just comment on the success you had for E-Rate filings this year. On the Extreme side, we saw a 50% increase in the filings that Extreme won. We have a hunting license that's a lot larger than last year. We're expecting growth in that market segment based on our success in E-Rate. I know that Aerohive had the same, Dave, you're probably in a better position to comment.
Yes, Ed. We had a 55% year-over-year increase in our funding awards. We're very pleased that the value of our awards was about $35 million of the award value linked to Aerohive.
Okay. Well, I appreciate that. Looking forward, is there any reason to believe that that significant increase that both companies have seen, that continues? Or that it changes one way or the other?
I would say yes, Paul, and part of the way that we're going to market, and if you actually look at where we're penetrated from a geo perspective, it's complementary. We're strong in certain areas of the country, and then the Aerohive teams are strong in other areas of the country. We're really not seeing a lot of overlap there. What's clear is we'll be the number three player, and scale does matter. We're going to have more teams out in the field with more ways to win in that marketplace.
All right. Let me ask you-
You asked about the other vertical, which retail for us has been a growing vertical where we've done very well. Again, we have very different deployments in terms of our retail customers, and now we're really excited about what we're going to be able to bring to our existing base. When we talk about 50% of the Fortune 50, a lot of that 50% is these retail customers. Retail is looking at cloud now, and we're going to have a very competitive product portfolio to bring to these customers. At the same time, when we look at the retail customers, and there's some great names that you'll notice from Aerohive, when you see these customers, we're going to have our entire Edge switching platform and other solutions when we look at campus solutions, et cetera, to bring to these customers. There's a pretty interesting cross-sell opportunity.
Retail and what you would consider typical retail, also, we highlighted PNC Bank, Suncoast, Nationwide, Regions, ING, some of these other financial institutions and their branch deployments.
All right. Let me ask you a second question. On paper, the deal looks like it makes eminent sense in terms of the revenue synergies and cost synergies. As we all know, there was one issue or another post-deal that you didn't know about pre-deal that blindsided you for a good four-quarter, five-quarter period and handicapped your ability to execute. How is this different, Ed? What is the risk for you and Rémi? What is the risk associated with this acquisition, which I'm sure there are risks that you don't yet know about that are going to crop up post-deal.
If we think about the last two deals, how is this likely to be different?
First of all, the last deals we did were asset acquisitions. It's fundamentally different than when you're buying the equity of the company, you're buying the whole company. Some of the surprises that we had and some of the other deals that we had was just a complete lack of visibility into the business, where, for example, in the Avaya transaction, they were in bankruptcy for quite some time. We had to enter into a transition services agreement where literally, Avaya was collecting cash for us. We didn't have visibility into a lot of their systems. Along the way, including a team that weren't using our CRM and Salesforce. As far as pipeline is concerned, as far as discounting behaviors are concerned and these kinds of things, we had some challenges there.
Our target objective was $200 million with a business and high 40% gross margins. As we mentioned, that business is running now at $220 million with high 50% gross margins. Yes, there were a couple of execution issues along the way, but these are things that we figured out, and we've got a really strong operating team here at Extreme, who was able to figure that out. With Brocade was a very similar situation where we had a business that was in limbo. When we looked at the Broadcom-Brocade transaction, CFIUS delays, these kinds of things, how are they going to divide up all the assets? Competitors had a lot of time to get in and get in front of these customers, and cause some damage. It was a long, probably was a 14-month process.
In this case, we're anticipating a very fast close, we're not talking about an asset deal. We're acquiring the entire company where we bring over all the systems. As we look at sort of the NetSuite to Oracle migration, as we look at the SFDC to SFDC migration, we're not relying upon third parties, and we're not paying high fees to third parties that don't really have a vested interest. From that standpoint, I would say we're feeling a lot more confident in terms of the business integration and fewer surprises here, Paul. The other thing is that we have great visibility into, and as I said before, we've got Dave on the line here.
We've been working close with Dave, John, Alan, the team, the executive team from Aerohive, we have great visibility into their pipeline and their sales force, and we're very similar in that regard. We're looking at this deal, and we consider the deal to be win-win. We've got good visibility. We mentioned the E-Rate season that they're coming off with a really healthy pipeline. From that standpoint, it's a different animal. We talked about building scale with some of these other acquisitions and getting us to where we need to be. Now here from an investment standpoint, we're picking up sort of the state-of-the-art platform, cloud management platform in the industry. There's a ton of excitement about what that brings to our existing customers and partners, where there's pent-up demand for it.
I hope that answers your question, it's not an asset deal. It's an equity deal. We're picking up and owning all of the systems on day one. It's a fast close cycle. Keep in mind, the margins of this business are in the mid-60s. We're not picking up margins in the low 40s that need a lot of repair, where there's discounting issues in the field. You think about the market transition to Wi-Fi 6, it just strengthens our market position as it relates to that.
Thanks, Paul.
Thank you. Our next question comes from Catharine Trebnick with Dougherty. Your line is now open.
Oh, thanks for taking the question, and congratulations, Dave Flynn and Extreme Networks. In the press release, you all discussed the SD-WAN opportunity, and I'm wondering about now having a NAC and a Cloud NAC, is there any other interest in pursuing other security vendors to broaden out that story? Thank you.
I think that's a very fair question. What we'll say is we're in a stage where we're looking to grow and build on our solutions portfolio. We will consider adjacent technologies that fit within our overall solutions. Our strategy is all about sort of cloud-delivered services and solutions. We came up with our autonomous network and our Extreme Elements portfolio. The whole strategy there is to deliver more software services like security over the cloud, along with AI and ML capabilities and analytics. Cloud NAC here is important. In the case of SD-WAN, we really look at SD-WAN as SD-Branch. So there's a branch router and capability that Aerohive brings to the equation here, which is something where we feel we have pent-up demand.
There's a lot of opportunities where we have not been in a strong competitive position to compete, and now we will be as far as the market transition over to what we would call SD-Branch. We're not really looking at it from a traditional SD-WAN perspective. We're really looking at the branch capabilities and how we're going to be able to deliver on this with our customers. The answer is.
All right. Thank you.
I guess I'd say is we're open to this. The other thing we'll be open to is partnering as we create an ecosystem of partners where we can deliver third-party partner services over our cloud, where we can be an enabler for that. That's something that's part of our strategy. We'll look at, we're building our own solutions, potentially buying and partnering.
All right. Thank you very much. Congratulations.
Thanks, Catharine.
Thank you. Our next question comes from Alex Henderson with Needham. Your line is now open.
Yeah. Just wanted to go back to a broader subject here in that you are announcing the restructuring, which sounds like it's an Extreme-specific restructuring. Excluding the announcement around Aerohive for a second, is it reasonable to do the math of $0.20-$0.22 of per share benefit to earnings and expect the Street to increase their estimates by that amount given this restructuring announcement? Which, again, sounds like it's an Extreme-only announcement.
Alex, let me just make a quick comment, then I'm going to pass it over to Rémi. Last year, as you know, we continued to invest in the business. With our revision around where we were landing from a revenue standpoint, we needed to pull cost out of the business. There will be some mitigating factors to the cost that we're pulling out of the business as it relates to things like employee bonuses and these kinds of things. Rémi, do you want to pick that up?
Yeah, I would just add and insist that this is on a standalone basis. Obviously, if there are synergies with Aerohive, those would be additive to the $24 million-$27 million. To Ed's point, you should not take our operating expense baseline for fiscal 2019 and deduct $24 million-$27 million. There's other factors. On a run rate basis, as we exit Q4, we're definitely taking out roughly $25 million worth of cost out of the business. The bonus that Ed mentioned is one factor that needs to be factored in. The actual savings, annualized, that the company will generate and that will be recurring, is indeed the $24 million-$27 million that we mentioned.
Just to be clear, it sounds like what you're saying is, yes, there's $0.20-$0.22 a share of benefit, but given macro conditions, some weakness in Europe, some other issues within the company, that we should be not including the full range of that benefit over the next fiscal year or even beyond that, because there's some offsets to it that have to be absorbed.
Yeah, that's correct. I would say that you're throwing in there some of the macro condition. It's not so much that. My statement is obviously all other things being equal. It's more the fact that there's other mitigating factors, and Ed alluded to one, which is the bonus, which will, in fiscal 2020, offset part of the $24 million-$27 million. That's why you should not take all of it down to the EPS.
I see. Okay. If I could go back to the acquisition for a second. I'm still having trouble with the math here. Presumably, the restructuring of the Aerohive announced is in the Street forecast since it had been an announced restructuring. The Street forecast, and I recognize there's only a couple of estimates, but the Street forecast is essentially breakeven, and it doesn't look like the operating profits cover the interest costs. I'm still trying to understand, particularly if you're losing $25 million-$26 million in deferred revenue, which will fall out for a year, how that mechanically shows up as accretive, because the math just doesn't seem to work to me.
Yeah. There's three things you need to take into account. We were doing a restructuring, which is going to improve our profitability on the standalone basis. Aerohive announced some cost reduction as well. That's going to improve their profitability on the standalone basis. You combine the two. There's the deferred revenue haircut that I mentioned, and there's operational synergies. With the combination of the two and these operational synergies, you get to an accretion to our EPS.
Okay. That's not what you'd said earlier. I just wanted to clarify this point. The comment that the acquisition is accretive is inclusive of the $0.20-$0.22 benefit from the restructuring, as opposed to accretive standalone, excluding the restructuring. Can we be clear on this? Because this is an important point.
We're doing some restructuring that's going to basically improve our financials. On the standalone basis, you combine Aerohive, and that becomes accretive.
You're not saying that Aerohive, excluding the restructuring, is accretive.
We are, Alex. We're consistent with what we said earlier. The Aerohive transaction is accretive.
Excluding the restructuring benefit of Extreme?
Correct.
Correct.
Okay.
Because of synergies.
Yep.
Okay. It's mainly the synergies on the selling side?
Alex, if we need to kind of get into the weeds on this, we could probably do that offline in a follow-up.
Good talk. Thanks.
Alex, it's in the model. We'll walk you through that.
Thank you. Our next question comes from Cynthia Paul with Lynrock Lake LP. Your line is open.
Hi, guys. Thanks for taking the call. I've actually, in 25 years of being a public investor, I've never asked a question on a call before. Look, I think your companies belong together. I'm really scratching my head at the valuation. I feel like Extreme is stealing Aerohive here. I don't understand why not sprint another good quarter. The stock was just at $5 a few months ago. You have a strong second half. You said you're going to make the quarter. Then maybe you can think about M&A. You have a good organic growth story here. I'd like to understand what the process was and why the board is selling out here at, frankly, way too low a valuation. You're letting Ed steal the company from you.
Wow, Cynthia, it's great to have you on the call.
Thanks, Ed.
I think we'll kind of push this over, Cynthia, I will comment that what we're talking about is a 40% premium to where the stock has been trading, which is a pretty full premium. From our standpoint, what I would say is that it really gets back down to scale. That was the conversation that I think we had with Dave and the board about. When you're competing against the kinds of players that we're competing against on a global scale, you need to have scale. That was a big part of it, as we're all kind of transitioning to Wi-Fi 6. If we look at it from a 90-day perspective, there's still a decent premium that we're paying for the asset. Dave, do you want to comment?
Yeah. Cynthia, obviously, we see a good opportunity in the combination with Extreme and are aware the stock was a higher price before we had a disappointing Q1. We did have a disappointing Q1, and we were needing to rebuild off of that. In part of the fact that we did indicate we have a strong EOH season, that was public knowledge and presumably factored into the share price. Given that we ran a process, given that we were approached by Extreme and did market checks, we and the board deemed that this was an attractive path for the company, relative to where the stock was trading. We're excited about the combination with the two companies.
The market's inability to value your stock appropriately means that long-term shareholders don't get the right value? Look at where Mist just sold, and look at where other assets have sold. It doesn't seem unreasonable to have gotten something more like 2x sales. We can take this conversation offline. I'm a little confused at the decision here.
Cynthia, maybe we could take it offline. I know as David mentioned, there were market checks, the company hired a banker, and they went through a process. I don't think this is the first time the company has been through a process. I think the board followed their fiduciary obligations. Maybe we can take it offline.
Thanks, Cynthia.
Thank you. Our next question comes from Christian Schwab with Craig-Hallum Capital. Your line is now open.
Thanks for my quick follow-up. As the accretiveness of the Aerohive acquisition, do you anticipate that you'll be able to get Aerohive's business to your Extreme standalone target goals on operating margins at 15%? If so, when?
Obviously, there's always some transition cost in year one. We've publicly stated that we believe Extreme standalone with the restructuring actions that we're announcing today can reach an operating margin of 15% on an exit run rate. We've identified operational efficiencies with the combination with Aerohive that obviously will not be generated day one. They will take a period of time. As we look at our fiscal Q4, which is our June 2020 quarter, we believe that Aerohive could contribute an operating margin in excess of 15%, which explains my earlier statements that it would be earnings enhancing on a standalone basis, including the synergies for us. Yes, this will take a period of time, but by the time we get to fiscal Q4, we should get to that 15% plus operating margin for Aerohive.
Fabulous. No other questions. Thanks.
Thank you. Our next question comes from Paul Silverstein with Cowen. Your line is now open.
I was going to pick up on Alex's question regarding how you got to the accretion. I'll take it offline with you all. That's fine.
Okay. Thanks, Paul. Speak to you soon.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to your host for any closing remarks.
Okay. Well, I'd just like to thank everybody for joining us on the call, for your participation. It's obviously an exciting time for Extreme and Aerohive. I also just want to shout out on these calls, we get a lot of employees who join us. The teams on both sides did a lot of work to make this happen and to bring it together. We appreciate all the good work from those teams. The Aerohive teams, as far as working with Extreme teams, I think work very well together. Thanks everybody, appreciate you being on the call again, and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.