Extreme Networks, Inc. (EXTR) Earnings Call Transcript & Summary

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[Audio Gap] I will say that the timing of COVID, it was particularly hard this past quarter because just the timing of our quarter and linearity of our business. So typically, you might see 20%, month 1; 30%, month 2; 50%, month 3. So with the back-end loaded quarters, and that's just the nature of our industry, frankly, and the nature of our business. But how COVID came on strong in March, a lot of people tapped the brakes and paused with their spending decisions. We saw that across the board, people just not knowing exactly what to do in this environment. And then since that time, we've seen that loosening up a bit. Our largest vertical being in the education space, government, education, when we cluster that together, they're -- they still have budgets, and they're still spending. So in some cases, for example, with schools, both higher ed as well as K-12, people are still trying to make that decision. Do we go back in the fall? Or how do we go back in the fall? But nonetheless, while campus is empty, it's a great time to do a network upgrade. So we're seeing customers moving forward with their capital spends, just to take advantage of the fact that it's an easier time for them to manage a network upgrade, for example. Health care is another vertical, strong 10-plus percent vertical for us. And hospitals, obviously, have been very busy, and they're moving forward with projects. With our press release, we announced state-of-the-art marquee facility that's going up. It was a great win for us in the middle of the quarter, but that would be an example of what we're seeing globally. So health care organizations and hospitals globally, they continue to be busy, and they continue to be running and spending from a capital perspective. For us, sports and entertainment, that's obviously an area that's going to be hit. We saw several purchase orders halted for casinos, stadiums, hotels, et cetera. But here, we're in fluid discussions, and these are just pushed out to the right. So these are customers that are not going to be canceling the networking upgrade that they have because it's critical infrastructure that they'll continue. And in the retail sector, obviously, stores are shuttered, and that has a big impact. A lot of our business -- we call it retail, transportation, logistics, a lot of our business in that space is with the transportation logistics side like the FedExes of the world. And we had a win with one of the largest retailers in the world, a new logo win for us to be part of their fulfillment centers, which is where we have a lot of business. So again, the stores are paused. We saw a lot of orders on hold, waiting for how people are going to return to the new normal from a shopping perspective. That, we don't have a lot of expectation for that to snap back. However, on this fulfillment side, we continue to do well. And then we do have service provider business. That might be, call it, a 10%, depending on the ebbs and flows. That business has been strong, frankly. So service provider networks have been busy in a very different way, but we continue to see orders coming from that. I've mentioned government and SLA, but the federal business is also continuing to move forward. We have a couple of 3-letter agencies that have some pretty interesting projects coming up that we're in the middle of, and we haven't seen that slow down. So to your point, it's somewhat of a mixed environment out there as far as different enterprise vertical segments and how they're impacted with puts and takes. Net-net, it has taken our forecast down, and we want to be conservative with how we're going to guide here.

One of the interesting things that you mentioned yesterday on the call, though, is that April order trends are coming in higher than January, which are comparable because they are both first month of the quarter, which is typically your slower month in terms of order trends. I found that interesting. I mean, what are your thoughts about how sustainable that is? Is that as kind of enterprises figure out what they need to spend towards, is that really driving the increase? Or is this more just pent-up demand from not having spent in March, for example? Like what are your thoughts about the sustainability of that order trend?

I think it's a combination of both. So depending on where you are in the world, people are at different phases of getting back to work. And I will say, overall, the dialogue we're having today is about reentry and how people are coming back. That whole conversation has shifted. So in Germany, for example, where we have overweighted presence from an EMEA and rest-of-world perspective, they started going back to work in manufacturing, which is obviously a really important segment of their economy. Volkswagen, for example, implemented new rules, new policies, and they're going forward. And we saw a continued buying from Volkswagen. We did see purchases that had been paused. It built up some backlog at the end of the quarter that were released in April. So there was some delay. So it's a combination of both, Samik. We definitely -- when all of this happened, this also coincided with me being much more involved with our selling and go-to-market organization. From a leadership perspective, we've just gotten very, very detailed in our inspection of the business, our inspection of the pipeline and our level of engagement. Interestingly, what the virtual environment has given us and it's given executive leadership as far as executive engagement more opportunities to engage with customers. I just mentioned Volkswagen flying out to Wolfsburg in Germany for a meeting, could be a 2-day affair as opposed to a quick Zoom meeting, for example. So the level of engagement -- and I would say, our teams, how close we are to this business and driving it week to week, I think, has given us a lot of confidence in the business. And what I would say is we are seeing a natural linearity trend in the business for this quarter. So -- and our internal forecast, we would expect to see high teens to 20% in that first month. We didn't know exactly what to expect, but we got that. And then we would expect in this May time frame to have a 30% month. And we're in the middle of the month, and we have lots of visibility to our pipeline. We have a tool called Clari that sits on top of Salesforce. It's an AI tool. It monitors activity. It's an activity management, calls, e-mails, meetings that we're having. And then it's looking at the kinds of opportunities and where they are in different stages. And our AI tool is right in line with our field. So historically, that tool has been below the field. So that's also giving us some confidence from that standpoint.

Got it. So let's look at a bit longer term. I think the new normal that everyone is thinking of is as enterprises start to bring employees back, 100% of the employees are not going to come back to the same offices, either it's a work from home -- increase in portion work from home or it's an increase in portion working from more kind of satellite offices, right? So when you look across the portfolio, how are you thinking about the impact on that when you kind of take your core switching versus edge switching, and then you take your wireless business? How are you thinking about kind of the longer-term impact of the new normal on your portfolio?

Samik, we couldn't agree more. Yes. I will say it's going to change the way we do business at Extreme. We found out we can be a lot more flexible. So how we go back to our offices and how that footprint changes is definitely something that's top of mind for us at Extreme. We believe that there is absolutely a new normal, and it's going to be what we would call a distributed enterprise. And our timing -- it makes our timing for the cloud somewhat prescient. The fact that we have this cloud platform with 15% share of the subscription -- cloud subscription for networking. We're behind Meraki. We have a fourth-gen cloud, high quality that has unique capabilities and provides unique flexibility for our customers. So we feel like we're very well positioned in cloud, and the growth in our cloud right now has really taken off. And so at a high level, to answer your question about what does the future of the workplace look like? We agree. There's going to be more remote work, remote learning, et cetera. The question is how secure of a connection do you need to have, and do you want enterprise-grade type connections. And that's what we have, and that's what we have in the cloud with a single-control plane to manage the entire network, on campus from the edge into the core. In June, we're going to bring our core switching. We've already brought our edge switching in. And then also, you can combine remote locations into that same cloud instance. So you have visibility of literally all of your workers and how they're connected, and we can provide different security elements and features and do it in a way that's very cost effective. So -- and we can make it easy to do that. At Extreme, if you look at how we want to differentiate primarily from Cisco and HPE, our biggest competitors, it's about ease of doing business and making it easy for them to deliver that networking experience. Think about this distributed environment where more and more people are working from remote locations. We can provide that connectivity, a secure connectivity. And then most importantly, everybody is focused on data, and networking is becoming more and more about data. And in our cloud, we have capability to provide a huge wealth of data for however the enterprise wants to use the data to understand what's happening to the client experience. And that's something that I think is going to allow us to win more education business, government business. I mean, just across our enterprise portfolio, it's really going to be the cloud and then the data in the cloud. It gives us the opportunity to win new business and provide a superior solution for enterprise customers.

Got it. So let me kind of focus on one segment there. Let's start with WiFi. And kind of coming into this year, there was this expectation that you would see a decent amount of an upgrade cycle into WiFi 6. Now as you're having those discussions with customers, how much of a priority is that anymore? Now definitely, they have some kind of wireless infrastructure. They don't really -- do they see -- still see WiFi 6 as a priority? Or is it more about kind of, as people kind of mentioned, keeping the lights on, making sure that the work employees can work from home, and WiFi 6 kind of pushes out in terms of priority.

WiFi 6 is more of a density solution, and so we have seen the uptake in our stadiums, our public venues where you have high concentrations of lots of people. And so that has been the play for WiFi 6, and I would agree with you. Today, we're seeing more AC business still being transacted. That being said, in the environment, in the campus environment, I think if it hasn't happened already, you'll have even more wireless connectivity than you had in the old normal. So new normal is going to be more wireless. And I think the need for wireless and more density to support more applications is going to be required. And by the way, you'll be using more video conferencing when you're on-prem as well. So if the world has gone more virtual and more video, we believe that will be the case when you're in the enterprise as well, driving more campus bandwidth requirements. So this is where -- from a WiFi 6 perspective, I don't think -- we're not projecting a sharp uptick. I think we would just see a continuation of maybe a slower adoption curve than what the industry was thinking about initially.

Okay. Let me go back to the cloud subscriptions that you mentioned, and you mentioned it yesterday on the earnings call as well. I just wanted to see if you can quantify some of the growth that you're talking about in terms of what you're seeing in terms of magnitude of growth on the cloud-based products. And how fast are you thinking of refreshing your portfolio and kind of cloudifying your portfolio so that it's ready, the entire portfolio is ready for use on cloud based kind of architecture?

Sure. Well, yes, I could say that we are moving more quickly than anyone in the industry to cloudify our portfolio. After we closed Aerohive, and I will say that with 97% of our workers working from home, we never moved off of our target date for closing the final integration of Aerohive, and that happened on April 6. What we've just seen last quarter, I mean, inside of Extreme, everyone is adopting the cloud. So as far as some statistics that I mentioned on the call yesterday, we were looking at the traffic in our cloud and what's happened with the traffic in our cloud. And since the pandemic first started making its move to the rest of the world, we have seen 50% growth in our cloud traffic and 60% from the end of the quarter. So that's literally, we have -- we went from 4 petabytes to 6 petabytes a day in networking traffic from -- being managed from our cloud, which -- it's a pretty huge statistic. It's also a byproduct of what we are doing from a device perspective. You're also seeing ExtremeCloud IQ increase significantly with now over 2 million client devices being managed in our network. And so we are upgrading old Aerohive customers and upgrading them into ExtremeCloud IQ. They have keys and it's compatible. So those customers can migrate very easily into our cloud, so we're seeing that migration. And I have to say, our engineering teams have done an amazing job. They have accelerated the onboarding of new equipment into our cloud. So first -- the first thing that came early was wireless. Our WiNG portfolio was cloudified. And then with April 6, we pulled forward our edge switching. Our Summit switching series got pulled forward and now can be managed in the cloud, and then we pulled forward core switching from October into the June time frame. And so now we truly can go end-to-end from the wireless edge connecting to these IoT devices, like all the way through the core of the network. And you can see absolutely everything from this really easy-to-use interface. So it's not like it's so easy to use. I deployed cloud. My 2 girls got home from college. They weren't thrilled with my Internet connection as it was. I went to the cloud, the access points, they automatically configure from the cloud. So even I just -- I installed 4 APs, and I won't take everybody through it, but I can literally share my screen and jump on and show you my home network, all the applications that are running on all the devices, and even I can do it. So that's how easy it is. And I think it's really the ease of use, how it's being embraced by Extreme, the acceleration of engineering and a product road map that's driving cloud adoption and cloud usage inside of Extreme, and then it's spilling over into our partner communities, into our customer communities. And it's really a way for our teams to uplift the dialogue that they're having with these enterprise customers.

No. That's helpful, and that's nice to hear as well. That, that is that convenient. Just maybe take us through the Aerohive part of the business. What have you seen in terms of growth in that business since the acquisition and also kind of the subscription attach and the implications of the recurring revenue mix that's increasing over time as well through the Aerohive business?

Yes. I mean we're seeing significant growth in year-over-year growth as far as cloud subscription despite everything that's going on in this environment. I would -- Samik, I wouldn't say that we don't divide up the business Aerohive and Extreme anymore. I mean it's -- the final consolidation from a systems perspective happened in April, and then the portfolio -- the old Extreme portfolio is being cloudified. So it's really now just everybody focused on sort of cloud and then the migration of products into the cloud and then subscription selling. We have -- we developed and -- again, our product teams, it was a cross-functional effort. We put together a very simple licensing model with one price for all licenses for the cloud. So regardless of the switch or the AP, there's a single price. And that simplicity, we think, is going to make a difference in the marketplace. As it relates to the old Aerohive platform, they had a very rudimentary and simple -- simplified licensing model that was homegrown. So we've upgraded that. And so as we come out with our copilot, which adds automation in July, we are going to have more sophisticated licensing options, if you will, in terms of how we license software and how we license additional services on top of the basic connection and pilot connection. So I'm not sure that's a very good answer. What I would say is I think it's going incredibly well. The Aerohive leads of cloud are leading our cloud initiative inside of Extreme and taken on software. Our system engineering leads have come from cloud in both the Americas and the international markets. And I'd say this is -- people are embracing that inside of Extreme. So we've truly -- we're truly becoming a cloud-driven company.

Maybe just looking at the other aspect of this. You've acquired some companies and onboarded a lot of products that those companies had. One of the frequent feedback that we get from the channel is that there has to be, and I think you mentioned it as well, a rationalization of the portfolio in terms of simplifying the portfolio over time for the channel as well as customers. Where do you stand today on that front? And if the refresh cycles do get extended from customers because of the disruption that we're seeing now because they push out the replacement, does that then kind of change your time lines of how quickly you can simplify the portfolio?

No. So I think, if anything, we're accelerating the simplification of the portfolio. And I think some of the separation from a product perspective has been somewhat artificial, and I can talk about that and maybe self-induced from an Extreme perspective in terms of how we organized ourselves to deliver on the product road map. And we've made a lot of changes now around that. We -- what we find is that it's our customers and our partners ultimately. They like unique features that may have come from the older via VOS or that came from the data center side or they came from XOS. And what our teams are doing and our OS teams, our lead architects inside the company are looking at open-source tools, effectively providing a shim layer to sit on top of kind of the features from the old personalities. But what we're going to do is eliminate the personalities. So people might, in the field, feel like they're in love with VOS and a certain -- and our fabric capabilities. Well, that's going to continue for customers. But going forward, okay, the VOS won't be called VOS, if you will. And the teams and what we've done from an engineering perspective is tear down the silos of the teams and create a different, what we would call, operational model that's driving efficiencies in our R&D. And that was one of the long-term projects that we accelerated to drive the savings that we generated here in this quarter, but that will carry on into fiscal '21. So all the separate product teams have been taken apart, and we have a switching team, and we have a wireless team with cloud and software included because our software, ultimately, will be coming from the cloud. We still have on-prem options, still very popular. But the bottom line is we've combined and collapsed the different product names within our R&D teams, and we're creating cross-fertilization in teams around a more universal platform that will be -- our gen 4 will be a universal name, but it will carry forward the different personalities we have in the portfolio, if that makes sense. So if anything, I would say, our first universal switch coming out in calendar Q4, the changes that we've made are going to accelerate that, not delay.

Okay, okay. Helpful. Maybe let's just focus on costs for a bit. So 2 aspects to it. One, there were some near-term actions that you highlighted on the call yesterday. And then there's kind of the longer-term plan to also kind of focus on costs and what your operating cost structure looks like. So in terms of the short-term actions you're taking, are -- first of all, if you can just recap where the majority of those cost savings are coming from in the short term. And is any of that just a pull-forward of what you had in terms of your longer-term plans already?

Sure. So I look at it in 2 areas, what are more tactical moves to reduce costs in the near term as well as what our longer term sort of more structural changes that we make to the business to drive efficiency and productivity. So the short terms -- first of all, travel just stopped inside of our company. So literally, a lot of our OpEx savings that were very easy to achieve is just the fact that we don't have travel. So we literally have no trips in our travel system when -- our old normal was a lot of travel, and that will change going forward. We won't go back to the old way of doing business with that level of travel as a company and as far as our policies are concerned, but that literally went to almost 0. And the same thing with entertainment, we canceled events. So a lot of these things bring savings to us that I would call -- these are more tactical. We did a salary reduction. We suspended our 401(k) for the quarter. These were temporary measures that we took, again more tactical, to hit an OpEx target for this quarter. So that's what we drove -- I think our teams -- our leadership team and then all the way through did a great job with that. There were certain employees that were exempted from the salary reduction, and over 50% of them opted into it, just solidarity, team Extreme, the times we live in. It's pretty amazing. So we overachieved certainly on that one. The structural changes are what I was talking about before engineering, streamlining our teams with really a new -- and it's more of a cross-functional approach within engineering. And that's something -- it was a lot of time that was spent. We kicked that off in October. The teams effectively pulled in a plan that we were going to implement in July. So there were a lot of decisions that were made. And there were headcount reductions, meaningful headcount reductions that came as part of that, but it actually is going to speed up our velocity. And that was -- our internal name for it was Project Velocity. And then on the sales side, I stepped into a leadership role. We have a strong lead for the Americas that we've hired. He's doing a great job. We combined EMEA with our APJC markets. We have one international market. That's taken out some structure and some expense with that move. And then we're streamlining. So we're empowering, and we're putting more power into the field. And we've taken some structure down in that organization as well. So as it relates to, for example, having a completely separate partner organization, completely separate distributor organization, completely separate inside sales orders, there's lots of organizations that were created with leadership layers. So we've torn down the leadership layers effectively, and we're combining the teams in the field with common numbers to drive outcomes. And people are excited about it. And ultimately, it's going to allow us to be a lot more productive. It also means we won't have to carry all the fixed expense that went with all the old structures. So that's another -- in our go-to-market and sales and marketing is where we've accelerated. And then finally, we -- everyone always chips in, and we always find ways in Extreme where we need to, to cut costs in other functions. So everybody participated. And then the last thing I'd just say is we hired -- really excited about our hire of a Chief Marketing Officer, Wes Durow, a lot of experience. And I think the connection between marketing and our field, again, tearing down some silos, I think, is going to create more productivity for us going forward.

Ed, thanks for participating. I would have like to go through a lot more topics, but we've run out of time, to keep everyone on the schedule here. So thanks a lot for participating at the virtual conference. Thank you.

Samik, thanks so much for having me. We appreciate it. Sorry we can't be live.

Same here. See you. Okay. Bye.

Okay. Thank you. Be safe.