UBS Global Technology Conference 2017

Nov 14, 2017

Why don't we go ahead and get started then? Sure. Hello, Micah. Okay, cool. Thanks, everyone, for being here. I am Tejas Venkatesh from the IT hardware and networking team. We're going move forward with Extreme Networks now with the CEO, Ed Mayercourt. He's been CEO for two point five years, but he's been on the Board for eight years. I think Extreme's probably new to a lot of investors here. So perhaps we could start off by you taking some time to sort of lay the landscape for the So there's the old Extreme and there's the new Extreme. And a lot of people know and remember the old Extreme as a pioneer in Ethernet networking with the company to have a gigabit Ethernet switch and then to 10 gig E public in '99, High Flyer. The market has changed a lot since then. Extreme has evolved. I was on the Board, as we mentioned, for eight years. And a lot happened during that time in the marketplace. And Extreme was playing trying to play in a lot of different areas in the networking market in terms of trying to get into service provider markets or networks, trying to get into hyperscale cloud, trying to play still in the enterprise and campus. And as a company, it was smaller, it was hard to do that. And the company two point five years ago, I stepped in as CEO. We have a new team. We got really focused on where we could win, which was in the enterprise segment of the market. And when we say networking, I know a lot of people are familiar, but we're delivering hardware and software solutions. We say software driven networking solutions to enterprise customers. And enterprise customers can be a large manufacturing company, it could be a hospital, it could be a university. And a large retailer. We have about seven or eight different customer verticals. But what we want to do is we want to make it easy for the person who's responsible for delivering a network at a hotel like we're in or at a hospital to deliver a networking experience. So, what we say is we're wired and wireless. Wireless today is driving a lot of networking at the edge. We're end to end, so we're at the edge of the network all the way through the data center. And we have software driven networking solutions because even though a large percentage of our revenue is hardware, the networking industry today is really about software and it's about making it easy for people to deliver networking and it's about having visibility and control over the network. And when we say end to end, it's visibility with our software, You have complete visibility over every single device that's on the network with one common database. And you have complete visibility into all the different network elements that are the hardware elements that are running in the network. So, have visibility into devices and the applications running on devices in your environment as well as application and application performance, either within your network or how it's performing in the cloud. So, what we're doing is we're trying to change business outcomes for our enterprise customers. We're taking a different approach. Cisco is the large player in our market. HPE is number two, and we're now number three. We've evolved. We've made a few acquisitions over the course of the past year. Extreme was focused on the mid tier enterprise customer segment. We acquired Zebra Technologies to expand our footprint in wireless. That opened up retail for us as a vertical market. It opened up transportation and logistics. And there was overlap in hospitality. With Zebra, we also picked up a lot of Fortune 100 customers, and we have 50% of the Fortune 50, which created a new dynamic for us if we're playing in mid tier enterprise because now we have some large tier customers. We were able to acquire Avaya, which is a business a lot like Extreme, but with very competitive campus technology and fabric technology, which we'll get into in a little bit. And then we were able to pick up the SRA business, which is the switching, routing and analytics business from Brocade. And this solved for the large scale data center solution that we needed in our portfolio. So we say end to end wired wireless software driven networking for the enterprise customer. We now cover all enterprises, the Fortune one Walmart, all the way through to a smaller enterprise with a complete solution. And we're the only company, not Cisco, not HP, that has unified architecture where we can provide a single view of this network wired and wireless from a dense environment to a distributed environment, from cloud management to on prem managed solutions through a single pane of glass. And we have differentiated technology at all the places in the network. And with the acquisitions, we have these great brand names that everyone in the room will recognize when you look at Zebra Technologies, which is Motorola Solutions and AirDefense and Symbol Technologies, when you look at Avaya with Nortel, Bay Networks, when you look at Brocade, you look at Foundry Networks, StackStorm Technologies, the companies that underlie. So, the new Extreme has this heritage of technology of long time, known brands under it. And we also have a base of 30,000 enterprise customers. And we have good relationships with these customers. And usually, we're playing in maybe one place in their network. And the exciting opportunity, if you're an investor or thinking about investing in Extreme, is the opportunity we have to sell in all places of the network. And there's a lot of examples where we are moving either from the data center down to the edge with new solutions or starting off in wireless and then moving upstream to the edge aggregation core and up into the data center of our customers. So, we're some examples, Volkswagen is a great example of a large customer of ours where Extreme has been providing services to Volkswagen. They like our policy. And when I say policy on the edge of a network, we can assign roles to different people or different devices and the network can identify and understand and set rules around where that device can go in the network or what applications that device can access. And it's very easy to do that. You don't need a Cisco certified engineer to type in code in order to provision devices on a network. And that's the power of that software. Volkswagen loves that. Avaya has fabric technology that provides security, it provides ease of moves and changes in a network and it provides what we call hyper segmentation. So, Volkswagen in a manufacturing environment can segment different elements of its manufacturing line, say, and provide a unique network for it without establishing a VLAN, for example. And it's really easy to do it. The tools to make it easy to do and then devices or things coming on the network self provision and it's very easy to create that environment. And then finally, Brocade's technology, which the well known platforms were VDX and MLX, They're converged and that's switching and routing. Now they have a converged infrastructure called SLX. This SLX technology is very competitive, the best solution for the high end data center. It stacks up to Arista, Cisco, better than Juniper and other competitors when you look at density and you look at power consumption, etcetera. But what's unique is the network automation tools that we have with Workflow Composer, with StackSorm technology, with literally visual drag and drop for automating the functions of the network. So, Volkswagen is using all these technologies. And with the new Extreme has spent $100,000,000 over the last four years with these companies and we're in all places of the network. So out of the edge with our policy and now we have wireless opportunities and then into the campus in terms of our campus fabric and then in a large scale data center. And what they would say to us is, you're really the only competitor to Cisco because you're the only one that has these broad solutions, but Cisco is selling piece part products that are really integrated into our single pane of glass. And the other differentiation that we have is that we have 100% in source service. When there's a networking issue in an enterprise, it's a big deal. If a hospital's network goes down, you can imagine the effect, lives are at stake. So the quality of service matters. We're the only player in the industry that has 100% in sourced customer service. So when there's a network issue, 90 over 90% of the time, 94% of the time, our tech who picks up the phone to resolve the customer issue is the one to resolve the problem. With the Tier one large scale enterprise customers that we brought in, that's been the biggest comment that I receive from the likes of FedEx or Kroger when they say, wow, the level of service we're getting from Extreme is really differentiated. The same thing coming from Avaya customers who have come on board and the same thing will happen from Brocade. We have the industry's best service. Gartner has validated this. It's nice to have party validation where, for the last four years, Extreme has moved up towards the leadership quadrant. Of the 16 companies in our space, 14 moved down to the left and two moved up to the right. And if you actually look over the last four years and you chart it, we actually look like a shooting star moving right up to Leadership Quadrant. HP and Cisco are moving down, and they've consistently moved down because they're not as competitive because they're not focused. So, that's the opportunity for us at Extreme is to take a share point. It will be round numbers with all the acquisitions, a 1,200,000,000 business. We're driving we're going to hit 60% gross margins, 15% operating income margins. When you look at a share point of our $16,000,000,000 addressable market, one share point is 15% growth. We are confident in our ability to take share here. So, that's what we're excited about. Organic growth in terms of our business model produces a lot of cash flow. The marginal returns are really high because we have fixed operating expense structure. So, organic growth brings a lot of operating leverage like you'll see in Arista's model that generates really high cash flow margins and cash flow returns, which is what we have the opportunity to do when we start taking share and go into business. So, it's an exciting time to be at Extreme. We are having across the board the employee morale. I had a meeting earlier today and someone was pointing out Glassdoor. They were blown away by our Glassdoor because it's better than anyone else in the industry. I keep picking on Arista, but even more so than Arista. The employees are really fired up to be at Extreme. And they love the vision, they like where we're going and they like the new opportunities. And the same is true with our partners, never been more excited to be with Extreme, more opportunities to make money. Our partners will make more money with Extreme than they will with Cisco. And there are more opportunities with us now in terms of places to play in the network for them to grow and expand their businesses with Extreme. So there's a lot of excitement around that. So between the employees, our customers and our partners, it's going really well. And as far as the technology roadmap, the technologies are complementary. And we have a very clear outlook vision in terms of the roadmap and how they all come together. So, usually, in my experience, when you see companies acquiring other businesses, the rubber meets the road or the tension always gets hot when the engineers get in the room and they try to figure out whose technology wins. And in this case, it's been just the opposite with us where the technology vision and the path forward is very clear and the engineers from all the different companies coming together are actually quite excited about the complementary nature of the different platforms, the different technology coming together. So, we're a really good position. We announced earnings last week. It's our consecutive quarter in a row of meeting or exceeding Street expectations for our earnings. So, we take that very seriously. And we've been the team has been executing really well. We're focused on organic growth, margin expansion, higher quality business. And then we'll also consider being opportunistic if another acquisition opportunity arises. And we've been very successful so far in driving and executing on these deals. Got you. Now that all the acquisitions you described have closed, what are the biggest surprises you run into? Well, the biggest surprise I expected religious warfare. I really thought there was going be a lot of fighting amongst the engineering teams running after like fighting over whose technology wins, etcetera. The vision is to decouple our software with hardware. We're already doing this. We'll see this with 11ax on the wireless side, where we have super spec hardware where you can download and run a variety of operating system software. So, that's been a big surprise. Personally, as CEO, I haven't had to get in and break up major fights, which I expected to have to do more of. So, that's been very positive. The positive surprise has been the customer response and the customer reaction, which has been really I guess, we maybe we should have expected it, but it has been a bigger response than we expected in terms of the difference in the service levels that customers are getting. I'll say on the downside, when customers we acquired the Avaya business out of bankruptcy and we're acquiring the SRA business from Brocade, while they've been in limbo, where Broadcom has been trying to get CFIUS approval or Brocade and Broadcom collectively trying to get CFIUS approval. And so, there's been a lot of uncertainty with customers and with partners in the field. So, that has an effect on the business. And I guess we expected that, but that's something kind of coming over. We look at it as an opportunity, but there are a lot of customers that just went to the sidelines and stopped buying. And we're very confident that we're going to see these customers coming back. So, those are the at a high level. So, investor questions coming in, do you see more targets to acquire out there? And what types of technology you might look at? So, now, our focus has been on networking, and we've been able to acquire other networking companies in the same space that kind of builds on the strategy. So, we're focused on enterprise networking and driving networking solutions. So, if there are opportunities that crop up within that space for us and we have the opportunity to acquire the assets on an accretive basis, We're going to be opportunistic for sure. So, we'll be looking for those opportunities to accelerate our growth in our competitive position. In terms of adjacencies, if they fit within our enterprise customer base and they fit within our go to market, then we may consider them as well. What you're not going to see us do is aggressively go out and try to acquire a new technology or a shiny object and something that's dilutive that requires us to push through or drive a lot of growth in an existing business through our distribution. That's not the way it works in our industry. So, it's hard to push out into the partner and the channel network. You kind of have to set it up and let them pull. Maybe we could double click on a comment you kind of made in passing, your strategy is to decouple hardware from software. We haven't I mean, other vendors have products that do that, but we haven't really seen market adoption. So, I'm just curious if you could talk through what you're doing there? Yes. Think you see the hyperscale players doing that in terms of white box strategies. As I mentioned, 95% of our R and D is in software. And we're writing software to differentiate effectively merchant silicon, which is in our hardware. So, as we combine the companies, the vision is to have our software platforms have a very thin operating system layer and then to be able to pull down and select the features depending on the environment that you're in. So, you have a distributed environment. From a wireless perspective, we're exclusive with the NFL. We have 22 of the 32 NFL teams. Think about that. Think about providing Wi Fi in this bowl of 70,000 users, very concentrated, very unique RF challenges, Wi Fi channel. Well, that's very different than delivering an experience to a distributed environment like CVS, where they have 2,000 stores and they're aggregating a distributed retail environment or Kroger with all the grocery stores, distributed retail environment. So, there's a different operating system solution for different kinds of environments, if you will, or for solving for different kinds of problems. So, we're looking at that across the campus, across our customer profile and then being able to differentiate how we populate our hardware depending on what the customer needs are. And then above the operating system layer, we want to have one operating system, which basically has different flavors in terms of the characteristics of what we're trying to solve for within the enterprise. And then on top of that sits services with our extreme management center software that sits on top of the other technologies. It's the single pane of glass. From that perspective, we are already doing this, but delivering services. So services meaning locationing for retail. You've got the platform, but we have locationing technology or wireless security technology or we're enabling one of our security partners, Palo Alto Networks. All security solutions run over the network, So, we can be an enabler. Unlike Cisco, it's going to sell you their solution, we're going to enable the best in breed for the enterprise. And we're going to make it easy for them to select and to run best in breed solutions. And we're going be partnering with these companies to do that. So, this is our vision of a very thin operating system layer on our hardware with the ability to customize the operating system software that you want to run on your hardware and then creating availability of services that sit on top of that. We're eighteen months away from being there. We are less than six months away from delivering on the super spec hardware with the ability to customize software downloads. So, just to be sure, you're not trying to sell software only? Well, we sell you may see some software sales from Extreme. We do sell our management software that's multi vendor that can sit on top of Cisco equipment or HP equipment. But we are trying to sell the integrated solution. We may consider in certain instances or environments selling software to run data centers. So, that's something else that we're looking at. We have some very large scale data centers that want to customize their networks and they're looking at our software and the technology we have. And so, may consider disaggregating software for some of those kinds of opportunities. That's interesting. I guess, the context in which I asked that question is there have been other vendors out there that have spent years trying to qualify their software with each hardware vendor and that market never took off. Now they're coming back, now they have hardware. Yes. Mean, if you look at what Cisco is doing, I mean, here's another opportunity for Extreme. They're coming out with their nine ks series, you've got to run DNA, you've got to buy the software. It's unclear that any customer wants this, but it's a corporate initiative that's kind of being pushed. As a market leader, I guess, you have the ability to do that. It wouldn't bother us if the market starts buying more for an OpEx model instead of a CapEx model. But there's nothing really integrated in terms of the solution. They're basically assembling software and allowing a customer to buy independent licenses that's embedded in their operating system software, but it's far from easy. It's really complicated. And it's not necessarily what we see the market asking for. We're taking the exact opposite approach, which is a customer driven approach, where our objective is how do we improve the outcome for the hospital, how do we improve the outcome for the manufacturing facility or for the NFL stadium, and then how can they leverage our technology and our software to do that. So, how can we make it easy for them to deliver better outcomes in their environment? So, that's the approach that we're taking, which is our solutions approach, which is a little bit different than what some of the larger players are doing out there. You said you received positive feedback from your partners. But a question here, are component shortages in any area a factor in your business at this point? No. Okay. That's an easy one. I could step back for a moment and comment that we do have a very good relationship with Broadcom. We're the only customer that they have that approach them with a desire to be a strategic partner. And they've embraced that and that's one of the things that created the Brocade opportunity for us. And so, we're continuing to work with them and looking for other solutions in ways and we're leveraging their technology. So, when you're a strategic partner and you get that distinction, you go to the top of the food chain. Okay. I guess you already alluded to this a little bit, but there's criticism out there that historically networking vendors that have expanded out very quickly don't do well. Arista is very focused on the data center, so they do well. But when you took over, you really focused on the campus. But now it sounds like you're sort of branching out a little bit into data centers as well. So how would you? So I would change that. I would say we got really focused on our customers, okay? So we got focused on our enterprise customers. And we have edge solutions all the way. Now, if that customer had 30 servers in their data center or if they had 500 servers in their data center, it didn't really fly up into the hyperscale cloud that you're talking about, Darista, but that was still potentially a campus an enterprise campus data center. That's been our focus. And now, the expanded size of our customers, we still have that end to end solution with data center solutions. We believe in every place in the network, we can sell our most competitive solution over all the competitors. That's we're taking a customer driven approach. I think the technology companies, the combinations that have failed have focused on the technology and the product and forgot about the customer. And so, that's how I would say from this perspective, we're a bit different. Maybe just to double click on that, talk a bit more about your technology differentiation against your larger incumbent customers. Well, so let's talk about like Cisco, DNA, right? How does that work with Meraki? It doesn't. Cisco competes with itself out on the wired edge with enterprise customers. They have two competing technologies that don't work together. That's an example of kind of dysfunction from some of the larger customers. We talk about unified architecture. So, we have cloud managed and on prem managed wireless and edge switching. None of our competitors have that with a single platform. You have to use different operating system software. So think about a hospital for a moment. A large scale hospital, and we have many of these, and I'll just reference Ascension Health, one of the largest health care systems. They love the fabric at Avaya. And they love our edge solutions. Well, if you're running a hospital, you have a large facility with one of the most complicated networks, period, anywhere because of all the different requirements, security requirements, privacy requirements, health care information, etcetera, but you have a dense environment. And then you have doctors, clinics, emergency response centers and then you have a distributed environment. Now, if you want to have one view of the network, how are you managing the network? We're the only provider that provides one network view over your on prem dense environment and that same view for all of your satellite operations. So, you have the same network management tool, the same visibility and control over your headquarters and then your distributed environments. When you're the IT team and there's a doctor in the clinic that's screaming and you're sending two people out to go calm them down, having the software, the visibility, because you don't have to do that. Having our policy at the edge, which is differentiated, you don't need a Cisco certified engineer to command line interface and provision a pump onto the network. We recognize the pump. So when the pump comes on the network, our software acknowledges that, we wall off the pump so it can't access patient health records or patient health information. And it's allowed to do what a pump is allowed to do, to report up into a certain application or a certain system and that's it. Well, you're taking a huge load off the CIO of the hospital where IT resources are scarce and they need to make it easier to deliver network. And what is and the demands have never been more complicated. And so that's what we do. That's what we're doing out there. That's differentiation. There's you having the single pane of glass and the common view over the entire enterprise and the entire you could buy software for that. That's very expensive. Our competitors don't provide that, but we provide that. So, that's the other differentiator. I would say it's the unified architecture for us that's really the big differentiator in terms of wireless and wired, same view, cloud managed versus on prem managed, same view. And this is I would say this is how if you're running a network, there is a big difference. Just to understand the competitive situation a little bit better, it sounds like you run into the Catalyst, Meraki and also HPE at different parts of the market? Okay. Who do you run into more? Cisco is number one. And then you can split up all the different pieces that they're offering and then HP is number two. It's kind of in line with market share. And they're the ones that we run into all the time. I want to get your perspective on how you think the multi gig cycle is going in the campus? Slower than expected? Yes, I think we see the driver being 11ax. Okay. Everyone's probably saying that. We expect 11ac didn't happen? Well, AC, we thought it would happen with AC. The but I think the market didn't really need multi rate certainly out of the campus. I don't think that the especially coming out of an access point, there wasn't a demand to have greater than one gig. The question is, will it happen with AX? If so, that's going to drive, obviously, multi rate campus. Okay. That's but that is event. We didn't place a really big bet on that early. We have the solutions. We are seeing it coming out. We're planning on more growth on AX. The other issue is pricing. I think that people are used to buying at one gig and all of sudden, they're looking at five gig or 2.5 gig pricing. We're seeing 2.5 gig pricing coming down a bit, but the pricing has been the other factor. So as prices come down and then maybe AX drives more bandwidth, we'll see more. Got it. Got it. Your gross margins at 60% are almost there comparable peers, but I guess operating margins are a lot lower. I think you alluded to that a little bit, your fixed operating expenses. I mean, what can take that to closer to 30%? Are there synergies between the various assets that you acquired? Absolutely. And that's part of what you're seeing. And I mean, Extreme historically was low to mid single digit operating income margins. So our goal is our goal is to get to 10%. And we've got to 10% we delivered over the last two quarters. We were 12.8% Q4 last year. 15% is our next target. We're going to get pretty close to that in our March, but we're confident we're to get there by June. And then, it's about organic growth. So, if we look at organic growth and the power of organic growth, we run through numbers, but $1,200,000,000 business, 60% gross margins, 15% operating income margins, this is a steady state business that can produce a lot of earnings. If I look at 5% growth, and what does that do to operating income, that contribution is going to be on revenue, is going to be like 30%, 40% plus contribution margin, 60% operating income. And if I look at 5% growth at $1,200,000,000 $60,000,000 60% gross margins, dollars 36,000,000 gross profit. Well, what's my incremental fixed cost on that business? Sales commissions, some sales expense, here you got $6,000,000 so you're talking about $55,000,000 contribution on $60,000,000 of incremental revenue. So that's the power. And that's what you see with Arista. That's why Arista's model looks so great because they're growing organically and they have great organic growth and the sales productivity is up and then they have you have fixed cost structure. That's what I'm looking forward to is the operating leverage with our organic growth opportunity. That's interesting. One more investor question. What would be examples of an adjacent market or product that you might look to acquire? I guess, network automation be an area that We're already in network automation. So we have network automation tools at the edge, the campus. And StackStorm technology with Workflow Composer is the best network automation tool in the market for the large scale data center. And I'm going to give you a demo. Okay. We're already there. I mean, one of the things when you look at distributed having a distributed enterprise environment, so what about like SD Is there something on the edge of a network that you could use to sort of connect the distributed enterprise, for example? That would be an example, something that's adjacent. Okay. And you mentioned internally things are going pretty smooth after all these acquisitions. Maybe you could double click on that and kind of describe your I mean, nothing is ever smooth when you're buying companies, and you're never going to get it right. So we just hired 1,300 employees, and I guarantee we didn't get it right. I mean, we feel really good about the people we hired and we're but it's always hard to anytime you're mashing people together and systems together, it's Avaya, we don't have good visibility. We're on transition service agreements and exactly Salesforce. We're training the Avaya team on how to use Salesforce, because they were using it before. It seems pretty basic, but we have to drive we have to be very tactical in driving execution. And we do both. We have two strategies. We have a corporate strategy. We've been talking about solution selling, software driven networking, our go to market vertical enterprise. And then our strategy is to be very tactical and drive tacticals and execute every day. So, we're doing both. So, that's everything is everything happens that is not what you expected. So, it's always unexpected. And then you tactically have to move quickly to manage. And we have a great team at Extreme, and they're doing a great job managing all these tacticals. So that's how we're to drive the execution of the can you talk a little about your international business and how you plan to grow that? We have a huge opportunity, international, our international business. And one of the things that we're doing now that we have the new Extreme, we have all these companies together with new capabilities and we have what's called Extreme Now, 55 city, 22 country roadshow. I'm heading off to Asia tomorrow, but the whole team is fanning out across Asia. We have over 1,000 customers in different locations coming together to put the word out. We're doing that around the world. We have really strong we're picking up new customer and partner relationships globally. With the Brocade business, we're picking up significant market concentration in Japan, much higher margin market for us, which we're excited about. That's where I'm headed, two fifty partners and new business opportunity, high concentration in Japan, we're picking up Canada, which is a big large market extreme and wasn't there previously or a very small presence. So, our mix is 55% Americas, 35% plus EMEA and then another 10% in Asia Pacific. And that's the we have opportunities in all these markets. Got you. We're almost at the end of our time, but one last question. How sustainable is the organic growth that you've seen in the last couple of quarters and what's driving that? A piece of the organic growth is coming from this software driven lead with solutions strategy. Leading with solutions mean lead with questions, how do we lead with software to solve your problems to the CIO who's running a technology information delivery system. So that's the strategy in terms of and then tactically, we're doing a lot of things tactically. And we've been from a talent perspective, there's a lot of people that want to come work at Extreme right now. So it's totally changed. And we have a lot of we've been adding a lot of A players to our team, including the new resources we've got from the acquisition. So, no one's happy with the organic growth that we've achieved today. We sort of feel like we've stabilized the businesses in low single digit, 5% organic growth. But we've got our higher growth rates in our crosshairs based on taking share. A point of market share, dollars 16,000,000,000 market, 15% growth. And we're not there yet. We don't have the confidence to project that yet. But that's where we're driving the business. Certainly sounds exciting. Appreciate you being here. Thank you for having me. Thanks very much. Thanks, everyone.