Extreme Networks Inc (EXTR) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Extreme Networks Q4 Fiscal '18 Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to, Stan Kovler, Executive Director of Investor Relations and Strategic Development of Extreme Networks.

Sir, you may begin.

Thank you, operator.

And welcome to the Extreme Networks Fourth Quarter Fiscal 2018 Earnings Conference Call.

This conference call is being broadcast live over the Internet and is being recorded on behalf of the company.

The recording will be posted on Extreme Networks' website for replay shortly after the conclusion of the call.

By now, you've had a chance to review the company's earnings press release.

I would like to remind you that during today's call, management will be making forward-looking statements within the meaning of the safe harbor provision of the federal securities laws.

These forward-looking statements provisions involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements.

These risks include our ability to successfully integrate the acquired assets, technologies and operations from Avaya and Brocade into our business and operations including, but not limited, to the following risks: Difficulties we may experience in the retention, assimilation and successful integration of employees and teams sales functions acquired operations technologies and/or products; unanticipated cost litigations and other contingent liabilities associated with the acquisitions that could negatively impact our earnings, operating results and financial conditions; adverse effects on existing business relationships with suppliers and customers; and difficulties we may experience in reaching our aspirational goals related to the acquisitions.

For a detailed description of these risks and uncertainties, please refer to our most recent reports on Form 10-K, 10-Q and 8-K filed with the SEC.

You should not place undue reliance on forward-looking statements, which speaks only as of today.

We undertake no obligation to update these statements after this call.

Throughout this call, we may reference both GAAP and non-GAAP financial metrics.

Non-GAAP information should be considered a supplement to and not substitute for financial statements prepared in accordance with GAAP.

Reconciliation of non-GAAP to corresponding GAAP measures can be found in our earnings press release issued today.

For your convenience, a copy of the release and supporting financial materials are available on the Investor Relations section of our website at extremenetworks.com.

Now, I will turn the call over to Extreme's President and CEO, Ed Meyercord for his opening comments.

Thank you, Stan, and thank you all for joining us this morning.

Welcome to Extreme's Q4 earnings call.

Today, we announced Q4 results highlighted by 56% year-over-year growth in total revenue, and 6% quarter-over-quarter growth to $278.3 million.

We $0.20 per share on the bottom line non-GAAP. .

First, I want to highlight a few successes in Q4.

Our Extreme core business grew 5% year-over-year.

This was our fifth consecutive quarter of organic growth on top of a strong quarter and our fiscal Q4 last year.

Stable revenue from our Automated Campus business, with mid-50% gross margins from our disciplined go-to-market and success in cross-selling our fabric solution.

A record quarter in software sales and related services of $11 million as our single pane of glass management, NAC and analytic software has been adopted by the field and is resonating well with customers, particularly in cross-sell opportunities.

Upcoming releases will allow single pane of glass visibility across entire enterprise from edge to the cloud data center and will be the only provider with this capability in one piece of software.

Leader status.

In the Gartner Wired and Wireless Magic Quadrant, as the only player to move up into the right 5 years in a row and now join only Cisco and HP Enterprise in the top right.

And as a challenger in the data center quadrant, the only competitor other than Cisco in the top half of both quadrants.

This is great marketing for us.

High-profile data center wins.

With our next-generation SLX platform and automation software suite, with one of the world's largest enterprise data centers and one of the largest research universities in the U.S. in direct competition with the top players in the industry.

During Q4, we closed 20 large, $1 million-plus deals twice as many as last quarter, we booked $23 million of cross-sell deals in the quarter, and grew over cross-selling pipeline to $98 million, entering fiscal '19, up 67% sequentially from the end of Q3, and we see increasing momentum.

We were surprised by a shortfall of approximately $10 million in our data center bookings during last week of the quarter.

It's clear we didn't handicap the pipeline appropriately.

To address the issue, we changed leadership, and we reduced our expectations by approximately $15 million per quarter in Q1 and Q2 of fiscal 2019.

We expect to return to growth in the second half of fiscal '19, as we refresh our portfolio and rebuild our pipeline.

Going into fiscal Q1 '19, we expect revenue in a range of $230 million to $240 million and non-GAAP EPS of 0 to $0.07 per share.

We are resetting our guidance based on 2 factors.

One, supply chain and distribution optimization.

We have streamlined the manufacturing and supply chain for the entire product portfolio of the acquired entities, and we're actively reducing our number of global distributors from 411, following our 2 acquisitions in fiscal 2018, to 250 today with a goal of shrinking further over the next 2 quarters.

In addition, we are streamlining our product portfolio and have active SKU reduction programs associated with over products and previously announced end-of-life products.

We have evaluated our product mix in the channel and see an opportunity to drive more flexibility, greater efficiency and higher margins.

We expect to realize these benefits, as we begin calendar 2019.

Two, we are resetting the baseline expectations for our data center business.

As I mentioned earlier in Q4, we came up well short of our internal expectations, while winning some highly contested deals.

We see growth opportunities but have to adjust our current pipeline and rebuild our sales opportunities.

We believe the expected annual run rate baseline is $160 million to $170 million.

We are adding resources to our data center sales team and launch sales enablement programs across our global sales organization.

On the product front, towards the end of Q4, we rolled out our Smart OmniEdge portfolio of wired and wireless solutions that will become generally available in calendar Q3, and we expect continued product portfolio refreshes across our automated campus and agile data center solutions, heading into calendar year-end and early calendar '19.

In our core Extreme portfolio, we see continued strength in wireless and software-driven sales that pull through our fixed-switching portfolio.

We expect growth in our OmniEdge solutions to accelerate with the availability of 802.11ax chipsets into early calendar '19 that will drive more of an upgrade cycle for the wireless industry.

It is also where we will combine our WING and Extreme platforms into super-spec hardware.

In fiscal Q2, we are launching our ExtremeCloud and ExtremeCloud Appliance to provide WING customers our entire suite of software solutions and management.

This quarter, we had several exciting wins based on our software suites with our analytics capabilities, assisting important, large enterprises with their digital transformation initiatives.

Some of these highlights include a 100,000 seat NCAA Stadium at the University of Florida.

Our 11th end-to-end NFL stadium deployment, and 25th using ExtremeAnalytics software, a significant IoT-driven project at Texas Tech University and a German Hospital with 5,300 beds and 16,000 employees.

Our teams have been successful in combining our automated campus fabric technology, with Extreme's full suite of software and wireless from a cross-selling perspective.

We expect to approach our $200 million annual run rate target in fiscal '19 at a higher gross margin level than what we saw in fiscal 2018 for the campus fabric business.

Net-net, we believe the campus fabric gross profit dollar contribution is in line with our prior expectations, given the sustained gross margin improvement in the business.

On the data center front, we have already integrated the data center solutions into our management software XMC, and we'll be expanding our portfolio selling with integration of SLX products into our market-leading ExtremeAnalytics solutions.

We are excited about new solutions, such as campus border routing to go along with our core switching portfolio.

We are well underway in making strategic investments in our portfolio and expect to announce new solutions based on next-generation merchant silicon over the next 6 months that will enable us to deliver innovative products faster than we have done in the past.

Our border routing portfolio is expected to be fully flushed out by calendar year-end 2018, and we'll be offering a scale of a router port at a switching port price.

We recently won the Best of Show Silver Award at Interop Japan for our upcoming latest border router SLX product.

Capping it all off, as I said, we moved up to challenger position in Gartner Magic Quadrant for data center switching.

We are also offering new licensing, subscription and leasing models making it easier to sell.

Looking at it, our technology roadmap, our software development will focus on allowing customers to use containers to scale apps and use less resources, layering on machine learning and AI.

Next year, we plan to focus on several of those computing advances for networking and offer prepackaged solution for networking, providing network delivery capabilities that match what hyperscalers create in-house.

We will also make our applications faster and make it easier from analytics, Wi-Fi, IP campus and data centers to deploy them in virtualized environments and offer customers the flexibility to consume in their private clouds or a SaaS cloud model.

I am confident that we have a strong team with proven track record of execution.

We stabilized and transformed the original Enterasys acquisition into a growth asset.

We transformed the Zebra wireless LAN business into what is now a growth asset with significantly higher margins.

We stabilized the Avaya networking assets where we are projecting revenue growth at significantly higher gross margins.

And now, as I said, we are focused on driving growth and higher margins in the data center business we acquired from Brocade.

We have more evidence now than ever before that our end-to-end networking strategy from the wireless edge to the cloud data center will drive overall growth and margin expansion at Extreme.

Net-net, we believe that the reset of the data center business is a timing issue.

We expect to begin calendar '19 with growth in our core Extreme automated campus and [relevelled] data center business with greater profitability and operating efficiency.

With that, I'd like to turn it over to Drew to review our results and guidance.

Thanks, Ed.

Our revenue of $278.3 million in Q4 grew 56% year-over-year and 6% quarter-over-quarter.

Beyond organic growth of 5% in core Extreme year-over-year, the acquired campus fabric revenue was stable around $44 million, while our data center revenue was $47 million.

Recall that we had a $5.1 million postpurchase accounting adjustment this quarter, most of which is related to the data center acquisition.

We earned $0.20 on a bottom line non-GAAP, in line with our previously disclosed outlook for fiscal fourth quarter.

Product revenue for Q4 of '18 was $221.3 million, compared to $203.5 million in Q3 and $140.9 million in Q4 last year, driven by core Extreme and the addition of the campus fabric and the data center businesses we acquired.

On a quarter-over-quarter basis, core Extreme grew sequentially.

Service revenue for Q4 of '18 was $57 million compared to $58.5 million in Q3 and $38 million in Q4 last year.

Our service bookings grew 9% sequentially as we made significant progress on renewals across our expanded portfolio of products and the customer base, and made great progress selling multiyear service agreements.

The Americas contributed 58% of our revenue.

EMEA 33%, and APJC 9%.

Gross margins remained stable for campus fabric products, the third quarter in a row, in the mid-50s.

The data center, however, gross margins declined 280 basis points quarter-over-quarter to the mid-50s.

Core Extreme gross margins remained in the high 50s and overall fourth quarter non-GAAP gross margins grew 10 basis points year-over-year but fell 43 basis points quarter-over-quarter on mix and cost of goods sold overhead.

This makes 9 consecutive quarters where we increased our non-GAAP gross margin on a year-over-year basis.

Fourth quarter non-GAAP operating margin of 9.8% increased 50 basis points year-over-year at the end of Q4.

We took action on operating expenses to improve our cost structure heading into fiscal '19 in order to drive operating expenses in the low $130 million range per quarter going forward.

Recall our prior Q4 '18 guidance called for mid- to high-130 operating expenses.

Moving onto the balance sheet and cash flow highlights.

We finished the quarter with $123 million in cash and investments and had debt of $198 million net of fees.

DSO increased 4 days to 69 days this quarter compared to 65 in Q3 and increased 8 days compared to 61 days in Q4 of '17 on a reported basis.

Our DSO for the last 4 quarters has been impacted by the transition services agreement of the campus fabric and data center acquisitions.

The impact of the TSA on our DSO ended in our fiscal fourth quarter, and we expect to collect all of the remaining TSA accounts receivable from Avaya in Q1 of '19, significantly reducing our DSO.

Inventory of $64 million fell $14 million quarter-over-quarter as a result of consuming inventory we brought on from the acquisition of Brocade and grew $17 million year-on-year on an adjusted basis, reflecting the greater the scale of our business after 2 acquisitions.

Deferred revenue of $175 million grew $18 million quarter-over-quarter.

The significant growth in our deferred revenue reflects our ability to grow our service bookings, given our success in customer renewals and signing up customers for multiyear deals.

We generated $20.8 million in cash flow from operations in Q4, up from $15.3 million in fiscal fourth quarter of '17, and we spent $18.4 million on CapEx during the quarter.

We expect our CapEx to settle into a run rate of $7 million to $8 million per quarter in 2019 as our integration spending is complete.

Going forward, our CapEx will focus on our internal digital transformation to automate our [finance] sales processes and to enhance our supply chain.

We are making it easier for customers to do business with Extreme as we've taken best practices and tools from each of the business units we've acquired.

As I address guidance, I want to make a note on our supply chain.

We are adjusting our forecast in the data center business, we're also adjusting our forecast to reflect continued consolidation of our distributor base from over 400 distributors.

We're also reducing the number of SKUs that we have in our portfolio as we previously announced end of life on certain older products.

This paves the way for refreshing our portfolio with new Smart OmniEdge products and future products in the pipeline.

During the consolidation of our distributors and SKU reduction, we will experience a near-term impact of sales to our distributors during the consolidation.

We expect this impact to be $30 million to $40 million in total over the next 2 quarters.

When the consolidation is complete, we expect to return to a selling level aligned within customer demand.

The consolidation of distributors is enabled by the process of completing our supply chain digital transformation project, which, in addition to the consolidation of distributors, will increase our efficiency and improve our gross margins throughout the year.

Since implementing ASC 606 and changing our revenue recognition to a selling model, we made adjustments to our supply chain and channel, and we believe this is the final step in the process.

To address this need, we recently made key hires to our channel team to further enhance our distribution management and strategy in a continued effort to shorten lead times.

As we look out into the September quarter, we project Q1 '19 revenue in the range of $230 million to $240 million.

Q1 GAAP gross margin is anticipated to be in the range of 56.6% to 58.7%, and non-GAAP gross margin is estimated to be in the range of 58.5% to 60.5%.

Our anticipated increase in gross margin for Q1 is driven by decline in purchase accounting adjustments related to the acquired businesses and improved mix, as higher margin services revenue accounts for greater percentage of total revenue.

Q1 operating expenses are expected to be in the range of $140.8 million to $143.8 million on a GAAP basis and [$130 million] (corrected by company after the call) to $133 million on a non-GAAP basis.

Q1 GAAP net income is expected to be in the range of a net loss of $14.6 million to $16.9 million (sic) [$6.9 million] or $0.12 to $0.06 per share.

Non-GAAP net income is expected to be in the range of $600,000 to $8.3 million or breakeven to $0.07 per diluted share.

We expect average shares outstanding to be approximately $118 million on a GAAP basis and $123 million on a non-GAAP basis for Q1.

Rebuilding the pipeline in the data center business, coupled with a leaner-channel strategy following our internal systems upgrades and move towards vendor-managed inventory with our distributors, adds to the impact of typical seasonality we see heading -- in our business heading into Q1.

Beyond Q1, we expect sequential growth in each of the next 3 quarters throughout fiscal '19.

Despite the step-down in revenue expectations in our data center business, and the distribution channel actions we plan to take in the first half of the fiscal year, we still expect total fiscal '19 revenue to be north of $1 billion.

We've already taken specific cost actions in Q4 to lower our run rate expenses, and we're still targeting a 10% operating income margin during fiscal 2019, and we expect to exceed that level in the back half.

With that, I will now turn it over to the operator to begin the question-and-answer session.

(Operator Instructions) And our first question comes from the line of Mark Kelleher of D.A. Davidson.

Just trying to understand the numbers a little bit more.

So you mentioned 2 issues.

You've got a consolidation of your distribution costing $30 million to $40 million over the next 2 quarters of revenue.

And in addition, $15 million per quarter of weakness in data center.

Are those the same or different?

Mark, this is Ed.

They are 2 separate items.

So consolidation of the data center and then -- sorry, the reset of data center and then the consolidation and efficiency initiative with our supply chain.

Okay.

So with the supply chain efficiencies, would you expect core growth year-over-year to be down year-over-year?

No, we're still expecting Extreme core (inaudible) but we combine those to be growth year-over-year in the 3% to 5% range.

In Q1?

In Q1.

I thought you said for the overall year.

In Q1, flat.

Okay.

Could you talk a little bit more about what you're seeing in the data center?

Why is there weakness there?

What was the issue at the end of the quarter?

Yes.

So at the end of the quarter, we -- as I mentioned in my comments, we were surprised at the end of the quarter.

There were some opportunities in the pipeline that we thought would convert and they didn't.

And we were quite disappointed by that.

It led us to make some changes, I mentioned the management change that we made.

We've got some really good teams out in the field and as we went in and scrubbed with our new teams, the opportunity pipeline, what we realized is that the -- as far as the outlook that we have to rebuild that pipeline.

We've had some really good wins during the quarter.

We see a lot of opportunities there.

We also see opportunities to hire, which we are doing, and we kicked off about a month ago sales enablement programs around the data center for our global sales team.

So we felt that we needed to reset and clearly, we were off.

When we looked at the $230 million number, we set that bar too high, we felt like we were being conservative and obviously, we weren't.

So we're setting this at a level where we're extremely confident at using that as a baseline, and we're very confident in our ability to start here and to grow from here.

Mark, just one thing.

I said we would be flat on the base business.

We're flat to down a bit on the base business in Q1.

Okay.

Were there competitive losses on the data center side?

Is that the issue?

Or were there just deals that really weren't there?

Well, there always -- in every quarter, we have competitive wins and competitive losses that we also -- there's also a timing in terms of opportunities that are either -- that come into the quarter or that get pushed out.

Really where we've seen the biggest impact to the data center business has been on the service provider side.

There's are a lot of the routing customers with the MLX portfolio, where -- as we transition from MLX to SLX, where we don't have feature parity yet, and where we felt that the most has been on the service provider side.

It's also where we see a significant opportunity.

So it -- we did have significant wins, still with service provider customers, particularly with Internet exchange customers where we're very strong and have dominant market share.

But we are taking the action and we're working -- our PLM teams are work closely working with our sales teams in terms of some tactical feature upgrades that we can make in the SLX portfolio to address that shortfall.

So I -- we definitely have losses in the quarter that gets balanced and I think there's more of a pipeline evaluation and the timing of that pipeline more than anything else.

Okay.

And last question.

Is there a way you could quantify your wireless business in the quarter as a percent of revenue?

Yes.

Wireless revenue is in the mid-50s -- between $50 million and $55 million during the quarter.

It was our highest -- second highest quarter in history on wireless revenue.

And our next question comes from the line of Paul Silverstein of Cowen.

Paul, we can't hear you.

You there Paul?

Are you on mute Paul?

We can go to the next...

Why don't we go to the next question and we can come back to Paul.

The next question comes from the line of Christian Schwab of Craig-Hallum Capital.

Could you -- I understand maybe mixed execution on your part on the Brocade data center business.

But the consolidation of the distribution base and the SKU reduction due to end-of-life products should have had something that maybe all of us should have understood well before today, I would assume.

I'm just wondering if you can elaborate on the timeframe of that decision.

Yes, I think we started in December with -- focusing on Avaya and getting it integrated and we did some consolidation there, and then it continued in the Q3 and Q4 with Brocade.

But we've hired some additional channel team experts and really -- that are evaluating the channel and getting their arms around it, and we've come to the conclusion that we're going to be much more efficient and be able to reduce our lead times if we reduce our supply chain further.

So that's why we're doing at it this time.

Okay.

When you guys bought the Brocade asset, if I recall, part of that was also signing up more longer-term supply agreements with Broadcom for chips on other different products is part of that combination.

Is there any way that you can go rebid competitively other competitive chips in the marketplace given the fact that, that this business isn't performing the way they told you it would?

Well, we do have -- on some of our products, we do have other fabric chips designed in.

In the data center products, for example.

We do have alternatives with Marvell-Cavium chips, for example.

But we believe that we can be competitive -- that we've got very competitive pricing with Brocade compared to what our competitors have.

Okay.

And then could you just update us, what exactly -- how big is the Zebra business roughly?

And you guys talked about growth and improved margins.

Can you just give us, generically, kind of a run rate of that business and what gross margins they're currently operating at?

Yes.

When we acquired the business, we said that the revenue would be between a range -- I think it was a couple of years ago, but I think it was $29 million to $32 million or $33 million a quarter.

And we've been in the range -- in that range every quarter that we've owned the business and we're getting now towards the higher end of the range consistently on a quarterly basis.

And those gross margins are moving up into the -- between above $55 million and near the higher 50s.

And we're getting some -- we talked about it at the beginning, but with the blue chip customer base, they have in the -- transportation, logistics and some of the huge retailers, they have -- we talked about some big refresh opportunities in the beginning.

And it took us a year to 18 months for some of those deals to start happening, and we're starting to get some of those big deals now.

When we acquired it, it was roughly $115 million doing 45% to 49% gross margin and now you've got those gross margins up to 55%, correct?

Yes, plus.

Yes.

And then when you bought Avaya, it was $200 million business at 51% to 56% gross margins.

Can you give us the same update on where we are as far as revenue and gross margins there?

When you talked about revenue growth and positive gross margins adjustments there.

Yes, Christian.

We do align at $200 million, which is where we thought, we thought it might be running a little bit higher on that.

Keep in mind Avaya was -- spent a year of bankruptcy before it came over.

And again, when we brought that business over, we saw a lot of business get pushed.

And that's where we also saw a lot of that -- the pricing action in the field that we talked about earlier, where it was heavy discounting.

The sales force at Avaya was primarily focused on voice services, and networking was a piece in the product portfolio that was somewhat neglected and heavily discounted.

So one of the first things we did is we changed discounting behavior, which definitely had an impact on that top line.

We saw, as you recall, in our Q2, revenue dipped down to the $40-million range.

We've seen that come back to the mid-40s.

Gross margins that were in the 45% range are now in the 55% range.

So we've taken those gross margin -- taken that gross margin up by 10 percentage points.

If you look at kind of a mid-40s business running at that higher gross margin with 10 points from a cash flow perspective, we're in line, we're actually doing a little bit better than what we have forecast when we acquired the business.

The other thing I'll say is that a lot of our cross-selling, we talked about that -- the $98 million pipeline cross-sell opportunities.

A lot of that is being generated from the Avaya customers, where they're using our wireless technology as well as they're embracing our software suite and it's driving a lot of revenue in the other portfolio.

So some of the growth that you're seeing in the other portfolios because we're looking at it from a SKU perspective, are coming from those Avaya customers.

I'll also follow-up on Drew's comment as it relates to Zebra.

Keep in mind, we have 50% of the Fortune 50.

These are big customers and we have big opportunities with them.

We talked about the $1 million plus deals that we're getting, but they're also driving cross-sell.

And we are just now opening up our suite of software to those customers who are now going to be through our cloud appliance.

They're going to be able to access our management control, analytics our suite of software and a lot of the cross-sell opportunities we're seeing on the switching platform of the edge.

So with our OmniEdge solutions that are coming out and our validated designs coming out, we see a big opportunity with these customers to cross-sell across the portfolio.

And then my last question, which is more challenging.

Giving -- given what you were telling the investors was the opportunity just 2 or 3 quarters ago, and where we are today is massively different.

And so last time, Extreme did a series of acquisitions that didn't go as planned.

We changed the entire management team.

And so I'm wondering what gives you guys -- or what you could tell us that can give us confidence in your guys' ability to execute from a couple, kind of, disastrous quarters, to be honest.

Well, yes, fair question.

But I would say that this is the team that was part of the solution.

When this team came in, revenues were going down.

Margins were in the low 50s.

We stabilized the business and turned it to growth, organic growth.

When we talk about the Extreme core portfolio, you can't lose sight of that, Christian.

The Zebra business was on a downward trajectory, significant downward trajectory when we set that revenue level.

We stabilized the revenue.

As we said before, we grew the gross margins by 10 points revenues at the higher end of the range.

And if you look across the portfolio, there's significant growth opportunities.

So that's the success based on where we purchased that, that's an accretive deal.

If you look at the Avaya transaction and look at where we purchased that, another accretive deal in terms of what our earnings have done.

So this team has turned around Enterasys, acquired Zebra, an accretive transaction, executing on that deal.

It took us a while on the Avaya because we underestimated again that baseline of the business we were acquiring, but we stabilized that.

We've turned it around.

We see growth opportunities and higher margins there.

And we can do the same thing with the data center.

We're very confident on the data center side in terms of the team that we have in place, what we see in the pipeline, the competitive differentiation.

We're going head to head with the leaders in the Magic Quadrant and the top competitors and we're winning.

We're winning because of our software, the automation suite.

We're winning because of some competitive differentiation we have and high-profile customers.

And those kinds of wins with enterprise data center customers, cloud service providers, these are the things that are giving confidence to the field.

In the data center business, it takes time to build the portfolio.

So it's a timing issue.

Christian, I wouldn't say if we look across the portfolio.

I'd for us it's a timing issue because we obviously didn't set the baseline properly.

In terms of the acquisitions, they've been accretive and we expect them to be accretive going forward.

We lost time.

And our next question comes from the line of Paul Silverstein.

Guys, my apology, because I missed most of the this because they put me into -- apparently into another call.

It was a wonderful music, but it didn't help me in terms of what you guys have had to say.

I mean literally for 30 minutes (inaudible) waiting.

But -- so if you have answered these questions, I apologize.

And I don't know (inaudible).

Using the misfires the past 3 quarters, the simple question would be why should one have confidence in -- or let me ask it differently.

What have you done with respect to guidance this go around that's meaningfully different than the last 3 quarters that would translate into investors having confidence in your guidance this time?

Are you putting a bigger discount into the numbers?

What did you do in terms of this guidance?

Paul, look if -- keep in mind, before we got into our 3 quarters where we've been off on the revenue side.

In 2 of those quarters we met the earnings but it doesn't matter.

The -- we continue to try to, sort of, turn up and hit the original bar that we set, and we've been driving the organization to do that.

You see the field, kind of, people trying to pull deals in, trying to hit numbers and things got very tight.

This time we said, okay, we're going to reset, we're going to level set.

We did make a leadership change, as I mentioned earlier.

The new team going in, scrubbing the pipeline, resetting the baseline.

We hit 10 quarters in a row -- 11 quarters in a row before we had this streak.

And it related to setting the baseline initially on Avaya and setting the baseline on Brocade.

We feel very confident and we're very -- in terms of us being back to the 200 level on the Avaya side, based on all the activity and cross-selling and all everything that we're seeing, and we're really confident on the data center side.

But we do want to be conservative and more conservative than we've been to set the bar at the right level.

And there's a lot going on inside the company to build the pipeline and that's going to take -- it's going to take a little time.

So we thought we could get there in terms of hitting the combined revenue of $430 million run rate, and frankly, we had a surprise at the end of the quarter.

We've made a change and there's a lot going on to address that to take advantage of what is a high-growth segment of the marketplace, where we see a lot of opportunities, we have competitive differentiation.

So what gives us confidence is the team and the people now who we have in place.

It's the pipeline of opportunities that we have and it's the competitive differentiation we have.

At this stage, it's really to focus on the data center.

We've gotten to where we wanted to be in terms of Zebra is doing incredibly well, that piece.

The Avaya business is on a great trajectory and that's doing well and now it's just the data center.

And what the Brocade is doing the quarter, those assets?

The revenue is $47 million.

Drew mentioned that in his comments.

And what are you expecting it to do this quarter?

Yes, what we said is that we're going to take that run rate down by about $15 million in the quarter.

The original run rate not down from 43 -- I mean $47 million.

And what exactly is the issue?

Excuse me?

What exactly is the issue?

Why are the assets not performing the way you expected?

There are a couple of things.

First of all, there was weakness in the service provider segment.

When we acquired Brocade, Brocade is going through a product transition.

When we're talking about high-profile, highly contested wins with major research universities, with one of most differentiated buyers of technology in the industry with a massive data center, where we're up against the big team and we win outright.

Enterprise data center cloud service provider that market, our SLX platform is highly competitive and we're winning.

So from that standpoint, it's a function of us building the pipeline and going after that.

Service provider was 40% plus of the data center business and it was a ton of the MLX routing portfolio, a lot of customer configurations and our ability to upsell SLX often that we needed a feature parity that we didn't have.

And so we've been in a position where we've discounted MLX to keep that product in networks.

But we are developing and adding a lot of the features for our service provider customers and they can allow us to sell SLX at a higher margin.

So we have clear visibility of some of the features that we're adding, and we also know those customers who will consume the product portfolio.

But it was a function of -- primarily, the service provider drop off, a lack of feature parity during a product transition and the lack of our sales team building demand on the data center side.

So that -- that's what happened.

And we're addressing all these things aggressively.

And our next question comes from the line of Erik Suppiger of JMP Securities.

Can you talk about the status of the sales organization for Brocade?

I think you've combined a lot of the sales organizations, but do you have a very seasoned sales effort on the data center side?

How much sure would you say that group is?

Where -- is that part of the rebuilding of the pipeline where you're still building that sales organization up?

Well, it's a combination of both.

The answer is, we have very seasoned, very experienced data center sellers out there.

And we're also enabling Extreme -- keep in mind that from Avaya as well as Extreme, we do have other data center customers and we have data center savvy salespeople within our field of organization, which is now one.

We have a data center -- we have data center teams that are focused on federal with significant experience, kind of, going back to foundry days.

We have an OEM team, and we have a service provider team.

And we have a huge amount of experience.

It's a function of account coverage, and we are adding in our direct data center sales team.

So we're actively recruiting and building that.

The other thing I mentioned is enablement.

We are going after what we believe is a significant opportunity for data -- enterprise data center and cloud service provider market.

And there, there's a huge amount of training that's going on in the field and support from our PLM teams and other teams around driving and building that pipeline.

We just came off of our SKO and we had our entire commission selling team together in one place and the educational programs, the excitement and enthusiasm around our data center portfolio, highlighting these huge wins that we've had against the top players in the data center market, has created a lot of energy and a lot of action inside of our company with that portfolio.

We've talked about border router capability and the new -- some of the new features that we're rolling out, they're going to make us competitive and I think the teams are really excited about that.

Can you be more specific in terms of the type of turnover you've seen from the traditional Brocade sales organization?

Can you give us a sense for how much of that sales organization still have?

And has turnover -- did you have considerable turnover previously?

And is it stabilized now?

Or how are you looking at this...

Erik, you have to keep in mind is that we acquired the SRA business from Brocade, okay?

And Brocade was split into 11 pieces, okay?

There were a lot of different answers that also took place.

And we were one of the last people lined up in terms of who we could hire from Brocade.

And the answer is, we got a variety of resources that we have some very high-quality -- high-performing sales teams that are continuing to execute and perform, particularly in some of the groups that I mentioned.

We have some people who are in more of an overlay role.

We have an incredibly strong PLM organization that we brought over and a very strong engineering team that we brought over.

And we don't see -- the interesting fact is we don't see the turnover from Brocade any different than the turnover at overall Extreme.

And our turnover runs at about half the industry average.

So I think people are really excited about the culture at Extreme and the opportunity at Extreme coming from some of these larger companies where they've been.

So turnover is not an issue.

We did when we hired initially.

We were the last people at the table in terms of being able to bring people over to Extreme and with that comes a lot of training and culturally bringing them into our team.

So at this stage of the game, the data center teams along with the other teams are part of our regional sales organization and then we have specialized data center teams for service provider, federal and our OEM opportunities.

Okay.

And then on the competitive front, in the service providers space, are you seeing Arista more or less than Cisco?

Who do you -- who are you fighting against?

Is it predominantly Cisco?

Or how do you think of the competition there?

I think we would look at -- from a service provider perspective, we see more of -- we'd see more of Cisco.

In the large-scale enterprise, we'd see more Arista.

But I guess you see Cisco everywhere.

So I think it -- but from a service provider perspective, it would be more Cisco than Arista.

And lastly, can you be a little more specific about which products you're end of life-ing?

Is it any of the core data center products, the BDX or MLX that's getting end of life-d any time soon or how are you looking at the data center products?

Yes, it's more of the chassis-based old switching platforms from legacy Extreme and Enterasys.

So you mentioned the BlackDiamond series.

These things previously announced some of the old chassis form factor products that came from the Enterasys acquisition that are now running on 10 or 11 years old.

So these are the big ones.

It's also worth noting that historically Extreme-Enterasys from a product life cycle management that will really retire products.

And so that's the other opportunity that we have because there is a very large SKU count and there's an opportunity for us to drive efficiencies.

When we look at the efficiencies and we look at the effect in the last quarter, the changes we are talking about making now, we see as much as 1.5 to 3 point gross margin opportunity from the efficiencies that we can drive in our supply chain and distribution.

(Operator Instructions) Our next question comes from the line of Alex Henderson of Needham & Company.

This is Dan Park on for Alex.

So I know on our last quarter, you had some integration-related issues relating to discounting from the acquired assets.

I just want to know if you have any updates on that front?

Well, sure.

I mean, when we talked about -- there were couple of things that were going on.

That -- one is in the -- with the Avaya acquisition.

There was heavier discounting for some of those legacy customers that we acquired and that we've cleaned that up and you can see that in the gross margin.

And Avaya was the last to come over.

We've been talking about visibility and getting better visibility into the business since we've gone along and the fourth quarter is when we finally migrated, moved off TSAs and brought the Avaya business onto our platform.

So this gave us much better visibility now to the supply chain that we talked about before, distributors, distributor visibility that we saw before and just overall the business intelligence.

So that was a big one.

The discounting that we saw on the Brocade side, we talked about the fact that this was a business that will be in the mid- to low 60% gross margins and when we brought that business in -- and from a pipeline perspective, we talked about the migration of MLX, SLX, and a lot of that MLX business was heavily discounted, while customers were waiting for the transition up to the SLX portfolio.

And so we saw significant discounting there.

We agreed in our customer interest to pursue some of these deals at lower margin, but as a result we saw that business in the mid- to low 50% gross margin range instead of that mid- to low 60% gross margin range.

That over time -- now over the next 6 months and as we turn to corner, you are going to see a change there because we're adding feature parity, we have a higher gross margin, next-generation product platform that we're able to move customers towards, and we have a field that's going to be driving towards that enterprise data center cloud service provider opportunity that we mentioned earlier.

Okay, great.

And I guess, just -- despite some of the changes you're working through, it seems like cross-selling continues to remain strong.

Just wondering if you could provide some color on, sort of, what's driving the strength in the cross-sells.

That's the strategy behind combining these assets.

It's a -- we focus on the customer, we have 30,000 enterprise customers, and we're really seeing it across the portfolio.

So it's -- the Zebra customers that were only buying wireless now can look at the entire edge.

And now they can look at our software portfolio and cloud management capability for managing the entire edge in-campus and are actually looking at our data center solutions.

These large enterprise customers, we have very competitive data center solution for them.

So that end-to-end strategy, we're seeing them in our pipeline.

Avaya, again, with their fabric customers they didn't have a wireless solution that was competitive and they didn't have any of the software that we would bring to the table.

And at this stage, we're seeing huge cross-sell growth from Avaya customers.

And then vice versa, we have a lot of customers on our side that love the fabric technology.

And the hypersegmentation, the security that brings, so cross-selling has been ramping significantly.

The pipeline more than doubled from the end of Q3 to Q4.

It's now $100 million and we still -- we see that gaining momentum across the portfolio.

And I'm showing no further questions at this time.

I would now like to turn the call back to Ed Meyercord, President and CEO.

Okay.

I'd like to thank everyone who could join the call.

And we appreciate the questions, we appreciate all the questions.

I also want to thank all of the Extreme employees who listen in.

Our team has been doing a phenomenal job integrating these businesses and building the platform for the new Extreme.

We're, obviously, looking forward to improving our execution and building our pipeline as we move into our fiscal '19.

We hope to speak to some of you at the D.A. Davidson Conference tomorrow, and we'll be at the Nomura Cloud Builders Conference on August 14 and the Jefferies Conference on August 20.

Thank you, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect.

Everyone, have a wonderful day.