M&A Announcement

Jun 26, 2019

Good day, ladies and gentlemen, and welcome to the Extreme Networks Announcement to acquire Aerohive Networks conference call. At this time, 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, and 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, Remy Thomas, Aerohive's president and CEO, David Flynn. We just distributed a press release detailing the announcements and 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 risk 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, and 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, and 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, pioneer in cloud managed networking, at a price of $4.45 per share in cash, representing purchase consideration of approximately 272,000,000 and enterprise value of approximately $210,000,000. This acquisition will enhance Extreme's technology leadership in cloud managed Wi Fi with advanced artificial intelligence and machine learning capabilities and establishes a proven and mature cloud services platform for Extreme's customers. We're targeting to complete the deal in our fiscal Q120 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 form a basis, this combination creates the number 3 enterprise wireless LAN vendor as of the end of calendar 18 using our combined market share data as measured by Deloro Group. Aerohive was also recently named the number 2 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, and we continue to see strong wins in the market across our product portfolio and 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 5 years. First, when his current management team took over the company, we focused on rightsizing the business and refocusing on enterprise networking. We focus on differentiating with our single pane of glass management, customer intimacy, and number one rated customer support. Since then, we scaled our business to over $1,000,000,000 in revenue and substantially expanded the breadth of our portfolio 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 'nineteen to drive automation of internal processes, instituted an operating system focus on placing 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. Now we're advancing our strategy to transition our business and portfolio to sustainable SaaS like subscription oriented cloud based solutions, and changed 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 the 1st one of the first companies to offer controllerless, Wi Fi, and cloud management, including cloud managed Wi Fi and network access control. Aerohive recently delivered the industry's first Wi Fi Six 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 6000 channel partners with 5600 Aerohive partners, most of which are complimentary. 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, 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 Flint 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. To wind down 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've released a number of major new products in the last 18 months, including a 3, our standalone security offering, our new SD WAN, cloud managed branch, routing solution, Adam, the industry's first enterprise pluggable access point and our industry first portfolio of Intel11ax capable access points. We also delivered a continuous stream of innovation our high manager 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 2501 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 3 d pathology view of the Access Network. Finally, we offer full stack cloud management at the Edge, that I believe will be highly complementary to extreme switching business and drive cross sell opportunities. And when you're independent company, most of our revenue coming from wireless products, and a third of our revenue comes from the education vertical. We saw a larger scale on a broader go to market platform, and sales reach. The combination of Extreme will allow us to build scale and a new partner ecosystem, customer base, an internal team that's right to embrace cloud. Ed? Thanks, Dave. And 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 store 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 and Fitch to Pier 1 Imports, quick service restaurant change, chains such as Chipotle and Chick fil A, Healthcare, where Aerohive is particularly strong in assisted living and is used by the top 4 providers and 6 of the top 10, in the US and retail banking with customers such as PNC And Regions. All in, we believe there are significant cross sell opportunities for 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-twelve market by four times from a standalone basis. Specifically, when we look at our combined E Rate filings, will firmly be the number 3 networking company in terms of E Rate for calendar 19. We also believe our K through 12 business is highly complimentary as extreme Z rate opportunities are largely in switching, while Aerohive's are in wireless. We'll also be able to double our wireless land market share the health care vertical and expand our presence in retail And Retail Banking. From a technology perspective, We're excited about Aerohive's cloud management capabilities. We believe the company's Hive manager platform can be extended to other areas and 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 a million devices or 10,000,000 users like Aerohive's 3rd 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 future 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 a $1,000,000,000 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, Remi Thomas, to review some of the details of the deal. Thank you, Ed. As you just heard and 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 $272,000,000. Taking into account Aerohive net cash balance of $62,000,000 as of the end of 1st calendar quarter of 2019. This is equivalent to an enterprise value of $210,000,000. Extreme expects to fund the acquisition from the combination of available cash and committed debt financing. The acquisition is expected to close during the Extreme's 1st 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 is to drive to about We also want to note that the portfolio of Aerohive's $79,000,000 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 a 1 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 is 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 3 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 Eight 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. Were taking out approximately $24,000,000 to $27,000,000 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 operating margin targets we have committed to on an organic basis, and 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 $14,000,000 to $16,000,000 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 questions. 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 how we should further that into our model. And then the second one, is really around the, the comment about deferred. So if the company's forecasts on the street are around $170,000,000 per calendar 20, should we be taking essentially 30 percent out of that revenue base, and then feathering it back in over the following year? How does that, when you think, did you got to drop that deferred? Is that the right, calculus? Then the third question, if I could, just throw one more out. You said this is accretive, but I guess I'm not, I'm a little confused of whether it's accretive stand alone or whether it's accretive only as a result of the, restructuring, which the cost benefit 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 I'll turn it over to questions related to debt and deferred. And then, Remi, you can add the deal, the transaction for us is accretive. Also, when you make, the adjustment for deferred, it becomes even 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. So there's a standalone Extreme model that is getting a lot more efficient and driving higher profitability. And on top of that, we're layering in this acquisition it is on, which is accretive to the model. Remi, do you want to jump in? Yes. So on the financing, we've got full underwriting by bank. And the structure that we're looking at is a term loan A and the indication we're getting, which is obviously subject to market condition the time of the close, which will be sometime in our fiscal Q1, our 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, So if you take $79,000,000, which was the end of calendar Q1 for Aerohive, 30% of that would be roughly $25,000,000 to $26,000,000. 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%. And I think Ed addressed the 3rd question. If I could just go back to the 3rd question per second. So the street forecasts have the company essentially breakeven in calendar 20. 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 merger post deal that not included in that, that restructuring announcement? Alex. Yeah. So it's as you're probably aware, is Arrow I haven't announced their own restructuring. And so they had taken some costs out. And then with our acquisition, we'll be looking to streamline further expenses. And that's part of our plan. Thank you. And 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. Well, Christian, we've we've we've been in dialogue with Aerohive for probably the last 9 months, when we 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. And we always get questions from people asking us about, are we interested in Aerohive if we consider Aerohive And it was conversations that that I had with Dave, you know, back, probably about 9 months ago where we were we were talking about businesses and the need for scale in our industry and the fact that the company's offerings are complimentary. Our customers are complimentary. And so we felt like this was a good fit and Extreme was the right home for this next gen cloud platform that they've built. Now on the Extreme side, we've had, we've built our own cloud, but from a scale perspective, that they have the kind of 3rd 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. So, you know, conversations have been going back and forth. And, you know, that's kind of a it's gotten, you know, they heat it up. In the spring and then we were able to reach a deal and happy to announce that today. Yes, congrats again on that. Is is is the math is relatively simple as I look at the or Aerohive model, in order to get to you know, 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, you know, synergies would would come from, you know, corporate you know, cost structure, accounting, finance teams, upper level management board versus what would have to come from, reallocation of spending on, you know, SG And A And And Research And Development. Yeah. So I think what you're 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. Yes. And I think at this point, we're still working on that model and on that plan. You know, we've done that at a high level, and I'll let Remi comment, but, you know, there's been collaboration with the executive leadership team at Aerohive and identifying extreme assets, Aerohive assets, and the best way for us to bring them together. The one point that I'd want to make is that we are absolutely going to continue to invest in their their cloud management platform. And you're 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. So We're we're clearly going to be investing in this platform as we go forward. And then, you know, there's been an exercise with where the teams and understanding where it is that that that we can pull cost to preserve and maximize value. Randy, do you want to add anything to that? No, the only thing I would add is if you look at our press structure and you see that as a percentage of revenue R and D and selling and marketing expense account for the majority of operating expense. So while I agree with your logic that that there are some synergies in support function, you know, HR finance, real estate, ISIT, etcetera. That's still a small percentage So 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 and D than support functions. Perfect. That that that was a dated question to to for for numbers, but thank you, Remi. Well, my last question is who's gonna run it? From a sales leadership perspective? Yeah. Well, well, Bob Bob Gault is our chief revenue officer, and so he'll, you know, he he remains in that position you know, we're we're evaluating who comes across from the Aerohive side, and and 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 wanna be really sure that we we nurture and we build that cloud native business inside of Extreme. So 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 cross sell, big cross sell opportunity from there's pent up demand with our partners and our customers. And then there's a pretty big opportunity in terms of our expanded platform to bring out the switching and other software assets to their customers. So it's It's an integrated effort. And, yeah, that's that's where we are at this point. And then if I may, just one last question. Can you give us the end customer rough end customer, mix of the Wi Fi business now, post the combination with Aerohive? What percentage goes to education in total? I I thought I heard something, but I didn't get P and O and other verticals. Yes, I think it's yeah, education is the big vertical that we talked about. You know, as we look at it, you know, 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. And then it it will, you know, it it will kind of level out from there. But, you know, there is, you know, what I would say is there's there's overlap from when we look at health care, when we look at retail, which is a really big opportunity here for us, And and, yeah, we're we're strengthening our our position in those markets as well. Interesting. There's not There's not a lot of customer overlap. So we see the customer base as being very complimentary. And so we wind up just being, we're we're we're picking up a lot of customers, but we don't have the same customers. So net net is additive and creating new cross sell opportunities. Thank you. And our next question comes from Paul Silverstein with Cowen. Your line is now open. Thanks, guys. I've got a couple picking up on the last question, among the Education Healthcare State And Local Government And Retail Verticals that all identified is the key customer markets for Aerohive. What is this? Can you give us a little bit more granularity on the split among those businesses. And I only ask because my understanding perhaps misunderstanding is that the education market won't potentially been volume dependent upon E rate is that it has much lower margins for all of you folks. Not just for Aerohive, but for Aerohive Extreme and everybody in the marketplace. And so 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 as you know this, but if you update us on the E rate outlook, E rate outlook, relative to that education marketplace? And then I've got a separate question, which I'll hold off on until you all responded to those. Thanks. Sure. So, yeah, education is about 30% of, Aerohive's business. And, when we look at what's what's interesting when you combine Extreme and Aerohive, if they have cloud managed customers. And so if they they're leveraging cloud managed wireless LAN, whereas we're much more heavily weighted towards switching. And this is where we see the complimentary nature of the deal. Net net, net, we're looking at adding 24,000 additional customers on to Extreme and on to the platform. And as I said before, we we don't see a lot of overlap there, and some of that has to do with the kinds of service, the 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. It's going to be helped by this, given the fact that the cloud managed platform is a mid-sixty percent gross margin platform. So we're picking up a new portfolio with higher margins. And then within our customers, we have you haven't had a fully developed cloud platform to roll out. And you mentioned E Rate and you look at kind of 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, at, at, at, at area rate wins, it's mostly wireless LAN. So from that standpoint, as we go forward, we are expecting that this to be complimentary from a customer perspective. The other thing I'd mentioned is that from a K-twelve perspective, the Aerohive margins are not lower in that K through 12 industry. And so that's part of the power of the cloud managed platform that that they have. From a filing perspective, we looked at a significant growth. And 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 the 50% increase in the, the filings that Extreme won. So we have a hunting license that's a lot larger than last year. So we're we're expecting growth in that market segment based on our success in E Rate. And I know that Aerohive had the same. And, Dave, you're probably in a better positioned to comment? Yes. We had 55% year over year increase in our funding awards. So we're Very pleased, and the value of our awards was, about $35,000,000, of the the award value made to Air Eye. Kate, well, I guess more importantly, I appreciate that, but looking forward, Is there any reason to believe that that's going to be increased if both, Compass is seeing that that continues? Oh, that it changes one way or the other? I I I would say, yes, Paul. And part of the way that that we're going to market. And if you actually look at where we were penetrated from a geo perspective, it's complementary. You know, we are strong in certain areas of the country, and then, you know, the Aerohive teams are strong in other areas of the country. So you know, we're not we're really not seeing a lot of of overlap there. And, you know, what's clear is you will be the number 3 player and scale does matter. We're gonna have more teams out in the field, with more with more ways to win in that marketplace. All right. You asked about the other vertical, which we look, retail for us has been a growing vertical where we've done I'm 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. And when we talk about 15% of the Fortune Fifty, a lot of that 50% is, you know, these retail customers. And retail is looking at cloud now, and we're gonna have a very competitive product portfolio to bring to these customers. At the same time, you know, 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, etcetera, to bring to these customers. So is it pretty interesting cross sell opportunity? Retail and what you would consider typical retail. And then also, you know, we highlighted, you know, PNC Bank, Suncoast, Nationwide, Regions, ING, some of these other financial institutions and their branch deployments. Alright. Let me ask you a second question. On paper, the deal looks like it makes imminent sense in terms of the revenue synergies and and cost synergies. That said, of course, the issue historically, if I look at your track record post the asset acquisitions are located in a body and I appreciate that this is not an asset acquisition. It's a different story, but 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 4 quarter, 5 quarter period in handicap your ability to execute how is this different, Ed? What is the risk for you in in Remi? What is the risk associated with this acquisition? Which I'm sure there are risks that you don't yet know about they're going to crop up plus deal. If we think about the last two deals, how is this likely to be different? So first of all, the last deals we did were asset acquisitions. And it's fundamentally different than when you're buying the equity of the company and you're buying the whole company. And, you know, 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. And so along the way, including, you know, a team that that it it weren't using, you know, our CRM and Salesforce. So as far as pipeline is concerned, as far as discounting behaviors are concerned, and these kinds of things, we had some challenges there. But our target objective was 200,000,000 with a business in high 40% gross margins. And as we mentioned, that business is running now at $220,000,000 with high 50% gross margin. So yes, there were there were a couple of execution issues along the way, but but these are things that we figured out. And we've got a really strong operating team here at Extreme. Was able to figure that out. The Brocade was a very similar situation where we had a business that was was in limbo, you know, when we looked at at the, Broadcom Brocade transaction, CFIUS delays, these kinds of things, how are they gonna divide up all the assets? You know, competitors had a lot of time to get in and get in front of these customers. And, and, you know, caused some damage. And it was, it was a long time with a 14 month process. In this case, we're anticipating a very fast close. And we're not talking about an asset deal. We're firing the entire company where we bring over all the FDC 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. So from that standpoint, you know, 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're 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 Allen, the team, the executive team from Aerohive, and, you know, we have great visibility into their pipeline and their Salesforce, And we're very similar in that regard. So, this is we're looking at this deal, and we consider the deal to be win win. We've we've we've got good visibility. We we mentioned the the E Rate season that they're coming off with with a really healthy pipeline. So it's 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. And now here from an investment standpoint, we're picking up through these state of the art platform, cloud management platform in the industry. And there's a ton of excitement about what that brings to our existing customers and partners where there's pent up demand for it. So I hope that answers your question, but it's not an asset deal. It's an equity deal. We are owning all of the we're picking up and owning all of the systems on day 1. 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. So And when you think about the market transition to Wi Fi Six, it just strengthens our market position as it relates to that. Thanks, Paul. Thank you. And our next question comes from Catherine Trebnick with Dougherty. Your line is now open. Oh, thanks for taking the question. And, congratulations, Dave Flynn, and air and the Extreme Networks. So in the press release, you all discussed the SD WAN opportunity, and I'm wondering about now having a knack and a cloud knack, 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. And, you know, what we'll say is we're we're in a stage where we're looking to grow and build build on our solutions portfolio. And and we're gonna consider we will consider adjacent technologies that fit within our overall solutions. Our strategy is you know, is, is all about sort of cloud delivered services and solutions. We've came up with our autonomous network on our Extreme Elements portfolio. And the whole strategy there is to deliver more software services like security over the cloud, along with AI and ML capabilities and analytics, cloud MAC here is important in the case of SD WAN, we really look at SD WAN as SD branch. And so there's a branch router and capability that, that they've, that Arylon 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 overdue 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 how we're gonna be able to deliver, on this with our with our customers. But the answer is And I guess as it 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 3rd party partner services over our cloud where we can be an enabler for that. That's something that's part of our strategy. So we'll look at we're building our own solutions potentially buying and partnering. Alright. Thank you very much. Congratulations. Thanks, Catherine. Thank you. And our next question comes from Alex Henderson with Needham. Your line is now open. Yes. So I just wanted to go back to a broader subject here in the U. Or announcing the restructuring, which sounds like it's an screen specific restructuring. So excluding the announcement around Aerohive for a second, is it reasonable to do the math of $0.20 to $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's make a quick comment, and then I'm gonna pass it over to Remi. Last year, as you know, we wanted we continue to invest in the business, you know, as with our revision around where we were landing from a revenue standpoint, We needed to pull costs out of the business. There will be some mitigating factors to the costs that we're pulling out of the business as it relates to things like your employee bonuses and these kinds of things. Ramin, do you wanna pick that up? Yeah. I would just, add and insist that this is on a stand alone basis. So, obviously, if there are synergies with Aerohive, those would be additive to the $24,000,000 to $27,000,000. And to add points you should not take our operating expense baseline for fiscal 2019 ended up $24,000,000 to $27,000,000. There's other factors on a run rate basis, as we exit Q4, we're definitely taking out roughly $25,000,000 worth of costs out of the business. But the bonus, that Ed mentioned is one factor that needs to be factored in, but the actual savings annualized that the company will generate and that will be recurring, is is indeed the $24,000,000 to $27,000,000 that we mentioned. So just to be clear, it sounds like what you're saying is, yes, there's $0.20 to $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, that have to be absorbed? Yeah. That's right. And and I would say you're throwing in there some of the market condition. It's it's not so much fat. Mike Sydney is obviously all other things being equal. It's more the fact that, there's other factors, mitigating factors, and Ed alluded to one, which is the bonus, which will, in fiscal 2020, offset part of the $24,000,000 to $27,000,000, that's why you should not take all of it down to the EPS. I see. Okay. And if I could go back to, the acquisition per second, I'm still having trouble with the math here. Presumably, the restructuring of the Aeros hive announced is in the street forecast since it has 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, the interest costs So I'm still trying to understand, particularly if you're losing 25, 26,000,000 in deferred revenue, which will fall out for a year, how that mechanically shows up is accretive? Because the mask just doesn't seem to work for me. Yeah. So there's 3 things you need to take into account. We were doing a restructuring, which is going to improve our profitability on the stand alone day Aerohive announced some cost reduction as well that's going to improve their profitability on the standalone basis. You combine the 2. There's a deferred revenue haircut that I mentioned and there's there's operational synergies. And with the combination of the 2 and these operational synergies, you get to, an accretion to our EPS. Okay. So that's not what you had said earlier. I just wanted to clarify this point. So The comment that the acquisition is accretive is inclusive of the $0.20 to $0.22 benefit from the restructuring as opposed to accretive standalone, excluding the restructuring. So we could clear on this because this is an important point. So we're we're doing some restructuring that it's gonna basically improve our financials. And then on a standalone basis, you combine Aerohive, and that becomes accretive. So you're not saying that Aerohive, excluding the restructuring is accretive? We we we are, Alex. So we're we're we're we're consistent with what we said earlier. The ROI transaction is accretive. So excluding the restructuring benefit of Extreme? Correct. Okay. Because it's synergies. Yes. Okay. So it's needed to make synergies on the selling side? And if we could, Alex, if we need to kind of get into the weeds on this, we could probably do that offline and a follow-up. Thanks. Alex, it's in the model. We'll walk you through this. Thank you. And our next question comes from Cynthia Paul with Lynn Rock Lake. Your line is now 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. So, look, I think your companies along together, I'm really scratching my head at the valuation. I I feel like Extreme is stealing our eyes here. I mean, I don't understand why not print another good quarter? The stock was just at 5 bucks a few months ago. You have a strong second half and said you're gonna make the quarter why not let the stocks get above these levels naturally on its own? And then maybe you can think about M and A, but you have a good organic growth story here. So I'd like to understand what the process was and why the board is selling out here at, frankly, way too low evaluation. You're letting Ed steal the company from you. Wow, Cynthia. It's great to have you on the call. Thank you. I mean, I think, Dave, I think we'll kind of push this over, but it's Cynthia. I will comment that, you know, we're, you know, what we're talking about is a, you know, a 40% premium to where the the stock has been trading, which is a pretty, pretty full premium. And, And, you know, from our standpoint, what I would say is that it really gets back down to scale. And that was the conversation that I think we have with Dave and the board about what is the when you're up when you're competing against the kinds of players that we're competing against on a global scale, you need to have scale. And so that was a big that was a big part of it as we're all kind of transitioning to a Wi Fi Six. And, you know, from a, from a 90, if you look at it from a 90 day perspective, you know, there's still a decent is there still a decent premium that we're paying for the asset? Dave, do you want to comment? Yes, Cynthia, obviously, we we see a good opportunity in the combination with Extreme and aware of the stock was was a higher price before we had a disappointing Q1, but we did have a disappointment in Q1, and we were needing to rebuild off of that. And, in in spite of the fact that, you know, we did indicate we have a strong evening season, public knowledge and presumably factoring into the shield price. So given that we ran a process, or given that, you know, purchase by extreme, contracts. We informed Dean that this was, an attractive path for the company, relative to where the stock was trading and, we're excited about the combination with the 2 companies. So the market's inability to value your stock appropriately means that long term shareholders don't get the right value. I mean, look at where it's just sold. I mean, I and look at where other assets have sold, it doesn't seem unreasonable to have gotten something more like 2 times sales. I mean, I we can take this conversation offline. I just I'm I'm I'm a little confused at the decision here. I think Cynthia, maybe we can take it offline. I know there's been, as David mentioned, there were market checks and, the company hired a banker and, you know, they they they went through a process. And and I and I don't think this is the first time the company has been through a process. So, I think I think the board followed their fiduciary obligations. But maybe we could take it offline. Thanks, Cynthia. Thank you. And our next question comes from Christian Schwab with Craig Hallum. Capital. Your line is now open. Hey, thanks for my quick follow-up. I, as the accretiveness of the Aerohive acquisition, do you do you anticipate that you'll be able to, get Aerohive's business to your extreme standalone target goals and operating margins at 15% and if so, when? So, obviously, there's always some transition costs in year 1. We we've publicly stated that we believe extremely 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 1. They they will take a period of time. But as we look at our fiscal Q4, which is our June 2020 quarter, we believe that Aero has discontinued an operating margin in excess of 15%, which explains my earlier statements that it would be count you with the earnings enhancing on a stand alone basis, including the synergies, for us. So yes, and 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. And our next question comes from Paul Silverstein with Cowen. Your line is now open. I was going to pick up analysis question regarding how you got to the accretion, but I'll take it offline as well. That's fine. Okay, thanks Paul. I'll 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, in Aerohive. I also just wanna shout out on these calls. We get a lot of employees. You join us. The teams on both sides did a lot of work to make this happen and to bring it together. And we appreciate appreciate all the good work from, from those teams. And the, the arrow high teams as far as working, you know, with extreme teams, I think work very well together. So, 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, and you may all disconnect. Everyone, have a wonderful day.