Extreme Networks Inc (EXTR) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Extreme Networks third quarter fiscal year 2019 financial results conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Stan Kovler.

Sir, you may begin.

Thank you, operator, and welcome to the Extreme Networks third quarter fiscal 2019 earnings conference call.

I'm Stan Kovler, Executive Director of Investor Relations and Strategic Development.

With me today are Extreme Networks' President and CEO, Ed Meyercord; and CFO, Remi Thomas.

We just distributed a press release and filed an 8-K detailing Extreme Networks' third quarter fiscal 2019 financial results.

For your convenience, a copy of the press release, which includes our GAAP-to-non-GAAP reconciliations and our fiscal '19 Q3 financial results presentation, are both available in the Investor Relations section of our website at extremenetworks.com.

I would like to remind you that during today's call, our discussion may include forward-looking statements about Extreme Networks' future business and financial results, products, operations, pricing, and digital transformation initiatives.

We caution you not to put undue reliance on these forward-looking statements, as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements as described in our risk factors in our reports filed with the SEC.

Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law.

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

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

Today, we announced Q3 results towards the midpoint of our expectations.

Revenue is consistent with Q2, despite Q3 being typically a seasonally weak quarter for Extreme.

We landed on revenue of $251 million, versus a guidance of $247 million to $257 million, and had non-GAAP earnings of $0.08 per share.

Our agile data center and automated campus were our best-performing solutions pillars and grew quarter-over-quarter, highlighting our improved execution in our previously acquired assets.

The results and our outlook for fiscal 2020 validate our acquisitions strategy and our team's ability to execute.

While it took us longer than expected to achieve the desired performance metrics with our acquisitions, they are clearly visible today.

Revenue corresponding with our buyer assets within our automated campus pillar were a $220 million run rate, with sequential growth for 2 quarters in a row.

When we acquired these assets, we targeted $200 million, so we're ahead of that plan and we've added 10 gross margin points since the acquisition, which was just shy of our 60% long term target during the quarter.

Customers are embracing our automated campus solution because of how easy it is to segment and secure enterprise networks that can't be [halved] with our Layer 2 fabric.

When combined with our Smart OmniEdge solution, with our XMC single pane of glass software, we deliver our fabric to the edge and provide end-to-end visibility, knack, analytics and security with a single database for all devices connected to the network and all network elements.

In contrast, our competitors' solutions run multiple OS's and third-party management software.

It is very complicated and expensive to deploy.

Our field is embracing it, our partners are embracing it, and our customers are deploying it.

Our teams and partners who achieve their master specializations in our technology solutions are growing significantly.

And in terms of our product roadmap at our automated campus, we have more products for the VOSS roadmap over the next 12 months than we did in the past 3 years.

Customers have confidence in the roadmap, and it's translating into results.

Marrying our automated campus switching with our wireless and software offerings is helping us drive sales.

All in, our software applications revenue grew 19% year-over-year.

Our agile data center business is also performing well.

Products and services from our SRA acquisition are on a $200 million run rate, well above the $160 million to $180 million range that we reset heading into Q1.

Agile data center revenue is the highest in the past 3 quarters.

Our new products are also driving results in this pillar for use cases such as data center interconnect, border routing, and others aided by the SLX 9640 switch.

From a vertical standpoint, we're seeing lots of success in the government and healthcare verticals.

In retail, we're seeing lots of large opportunities going into fiscal '20 that are now focused on switching, validating the strategic rationale of our acquisitions.

Our biggest Zebra customers were wireless only and are now embracing our switching portfolio.

Heading into fiscal '20, we're also expecting to see growth in our education vertical based on strong e-rate wins and higher ed coming through in fiscal '20.

Our e-rate filing dollars grew 50% year-over-year.

Some of those opportunities will flow through in Q4, but we expect to see most of that flow through in fiscal '20.

We continue to win large deals as customers embrace a broader set of our solutions.

During the quarter, we had 17 deals over $1 million representing software products and services across our solutions pillars, similar to Q2.

We're growing our total pipeline of large opportunities for the next 4 quarters.

Asia showed the strongest growth among our geographies, up 21% year-over-year and 5% quarter-over-quarter, with a strong pipeline of large deals.

In the EMEA region, our field and partner adoption of our automated campus solution has gained significant momentum, and we saw a pick-up in our agile data center pillar as well.

However, in Europe, macroeconomic issues are affecting demand, particularly in Germany, where the uncertainty of BREXIT is affecting manufacturing exports.

This began to take effect in Q3 and is leading us to be more conservative in our outlook for the next quarter.

In the Americas, we experienced continued growth in our government vertical year-over-year.

Revenue was impacted by softness in the K-12 vertical, macroeconomic issues in Lat Am, along with tough comps in retail and service provider on a year-over-year basis.

We continue to make progress in our tariff mitigation plans in the U.S. To date, we've moved 40% of our product manufacturing to Taiwan for products that ship into the U.S., to be exempt from tariffs at the end of March.

We're balancing the risks and opportunities of the U.S.-China trade discussions, since our timeline standard costs are 4 to 6 higher than in China.

Our first Wi-Fi 6 products are now commercially available and shipping to customers with important key wins in our stadium vertical.

Customer momentum is building with significant growth in our Wi-Fi 6 pipeline.

We are witnessing partners and customers extending sales cycles as they evaluate this new technology and potential changes to their switching architecture.

Looking ahead for the rest of calendar 2019, we have a significant number of new products coming to market that we believe will drive growth and revenue and margin from our expanded and upgraded product and software portfolio.

As we noted at our Analyst Day, we are refreshing 70% of our portfolio over the next 18 months.

We have 7 different product SKUs that will be GA this quarter.

This is a record for Extreme.

We're very excited to share our vision of our autonomous enterprise at our Connect user conference coming up in 2 weeks.

We will more than double the number of attendees from last year's highly successful event.

Our technical training sessions sold out quickly, and we had to expand the number of sessions and capacity to accommodate demand.

Last year, customers who attended our technical training increased their spend with Extreme by over 60% from the previous 12 months.

This is highlighting the fact that the customers and partners who truly engage with our technology are embracing it and driving significant growth.

This quarter, we had several exciting wins.

At Brigham Young University, we deployed our Smart OmniEdge solution of 1,250 access points to cover the 64,000-seat arena.

BYU is using our analytics tools to measure granular response times down to each application fans are using, and running mobile ticketing and payments on our network as well, to drive a truly interactive game day experience.

The State of Connecticut also deployed our Smart OmniEdge solution and professional services for its new locations in Hartford, as well as Extreme professional services to provide secure, reliable connectivity at one of its new locations in Hartford.

The network will support multiple agencies, offering critical services to state employees and residents.

With this solution, the state consolidated the management of multiple agency topologies under one network, while maintaining security and operations through segmentation.

In conjunction with Ascension Health, we launched the Defender for IoT this quarter as a simple security device and service to protect wired and wireless IoT devices from cyber attacks.

This is a great example of how we partner with our customers to drive innovative solutions.

We were once again named #1 in Gartner Peer Insights Customers' Choice for wired and wireless LAN access, and for data center networking as well.

This highlights our competitive differentiation in delivering service and the value of our 100% in-source model.

We hit a milestone with one of our digital transformation initiatives to take 0-touch orders from customers and partners.

Touchless orders accounted for 13% of our product orders during the quarter.

Our new configure price group rules are driving productivity, with 72% of discount approvals now auto-approved and the remaining 28% taking less than a day to get through, a significant performance improvement from 3 days historically.

This means our sales teams have more time to spend with customers.

In addition, our sales and supply chain operations teams drove operational efficiency in the quarter by eliminating product constraints.

Typically, we expect to see 8% product constraints.

In this quarter, we drove this number to 1%.

We expect to return to the industry benchmark 5% during Q4, which will contribute to building backlog.

Looking ahead, we are adding conservatism to our forecast to account for headwinds that are affecting our usual strong Q4.

First, macroeconomic trends in both Europe, as I mentioned earlier, and, to a lesser extent, in the Lat Am region.

Second, we're experiencing longer sales cycles in wireless as customers evaluate Wi-Fi 6 solutions and potential changes to their switching architecture.

Third, while our e-rate filing performance was substantially better this year, timing of deployments is driving more revenue recognition into early fiscal '20.

Finally, we enter Q4 with a relatively low level of backlog compared to prior quarters and is leading to a lower revenue outlook sequentially.

We expect to finish fiscal 2019 with revenue of approximately $1 billion and up just slightly on a year-over-year basis.

Our outlook for fiscal 2020 is to grow in the 3% to 5% range, to over $1 billion in revenue.

And we continue to target 60% gross margins.

We believe the investments we have made in our digital transformation will pave the way for productivity gains and operating efficiency.

The combination of growth, increased gross margins and operating efficiencies will allow us to target a 15% operating margin exiting fiscal '20.

I also want to note that our balance sheet remains strong with $157 million in gross cash, and we have $45 million remaining on our share buyback authorization.

I am confident in the Extreme team and our ability to improve execution and operational efficiency as we move forward.

With that, I'll turn the call over to our CFO, Remi Thomas.

Thank you, Ed.

As Ed noted, our revenues of $250.9 million declined 4% year-over-year and 1% quarter-over-quarter and were towards the midpoint of our guidance.

Non-GAAP earnings per share was $0.08, towards the low end of our range.

EPS was impacted by low gross margin of 57.6%, impacted by the decline in our services gross margin.

Our product revenue of $190.8 million declined 6% year-over-year and was largely consistent with Q2, up 1% quarter-over-quarter.

Our data center and automated campus pillars performed in line with our expectations, while our Smart OmniEdge business was impacted by challenging year-over-year comparisons in the K-12 and retail verticals, particularly in North America.

Services revenue of $60.1 million grew 3% year-over-year, but declined 5% quarter-over-quarter.

The higher percentage of multi-year deals, as well as lower pull-through from product bookings, impacted our services revenue sequentially.

During the quarter, the Americas contributed 55% to total revenue, EMEA 34%, and APAC closed out the remaining 11%.

APAC was our fastest-growing market, where we see customers embracing our differentiated product portfolio very effectively and leading with software, as Ed mentioned.

Globally, government was once again our top-performing vertical for the fourth consecutive quarter.

This includes both state, local and federal government in the U.S. and internationally.

The next largest verticals were service provider, manufacturing, healthcare and education, to round out the top 5.

Our book-to-bill ratio was slightly below 1 this quarter, which is affecting our Q4 outlook and speaks to the lower backlog we have as we enter Q4.

We do expect, however, for our book-to-bill ratio to go back over 1 next quarter.

Non-GAAP gross margin was 57.6%, compared to 57.9% in the year-ago quarter and 58.2% in Q2.

The sequential decline in the company's total gross margin was mostly attributable to the services gross margin, which dropped 220 basis points from 61.6% to 59.4% on the back of lower revenue, as I just mentioned.

We estimate that tariffs had an adverse impact of 80 basis points to total company gross margin in Q3, consistent with our estimate entering the quarter.

Our non-GAAP product gross margin of 57.1% compares to 57.5% in the year-ago quarter and 57% in Q2.

Our product gross margin was flat sequentially, as a reduction in our standard cost and the favorable product mix this quarter was offset by higher-than-expected discounting.

Q3 non-GAAP operating expenses of $130.7 million were up from $127.5 million in the year-ago quarter and from $126.6 million in Q2.

The sequential increase in non-GAAP operating expenses was mainly due to higher sales and marketing expenses.

On a year-over-year basis, the increase in operating expenses resulted primarily from higher R&D and slightly higher overhead in G&A given our larger footprint.

As a result, our operating margin of 5.6% compares to 9.3% in the year-ago quarter and 8% in Q2.

Free cash flow of $12.7 million compared to use of cash of $24.7 million in the year-ago quarter and $23.6 million in Q2.

Year-to-date, we generated $63.3 million in free cash flow, compared to use of cash of $23.7 million in the same period a year ago, driven by improved collections, improved working capital, lower CapEx, and the non-recurrence of 1-time integration and restructuring costs related to last year's acquisitions.

We do expect the same cash flow generation, despite the lower level of profitability we expect, in Q4.

Our total cash balance at the end of Q3 was $156.8 million, up from $140.6 million at the end of Q2.

We did not repurchase any stock during the quarter.

DSO of 51 days fell 14 days year-over-year and 2 days quarter-over-quarter.

On a sequential basis, the strong collections drove DSO lower.

Our cash conversion cycle stood at 60 days, compared to 51 days a year ago, but down from 78 days in Q2.

We also made significant progress in growing our deferred revenues to $187.7 million, compared to $156.6 million in the year-ago quarter and $186.1 million in Q2, on growth of services bookings and, specifically, multi-year renewal offerings.

My focus since joining the company in November 2018 has been to transition our platforms, processes and systems to become more adept at selling and driving software and account-based revenue for the company.

These initiatives are now under way, as we just went live with our new licensing empowerment platform and are currently designing our lead to cash process for selling software as a service.

Another key initiative is around driving efficiency and taking control of cost actions we need to take to support our business.

We are dedicating more efforts to SP&A to improve our demand planning process; forecast accuracy for bookings, revenue and gross margin; and improve overall operational efficiency.

We're preparing for real changes heading into the fiscal '20 planning cycle with, for example, the introduction of a significantly more differentiated approach to R&D investments in our portfolio based on the product lifecycle.

We expect these actions to position us to achieve a 15% operating margin on an exit run rate by the end of fiscal '20.

Now, turning to guidance, as Ed mentioned, we face several headwinds going into what is a typically seasonally stronger Q4.

As a result, we will be taking actions to improve our operational efficiency.

With that in mind, we expect total Q4 revenue to be in the range of $240 million to $250 million.

Q4 GAAP gross margin is anticipated to be in the range of 52.9% to 55.1%, and non-GAAP gross margin in the range of 57.5% to 59.5%.

We estimate that tariffs will continue to have up to a 100-basis-point impact on our overall gross margin for Q4 '19, including the impact of our transition to Taiwan manufacturing for affected products shipping to the U.S.

Q4 operating expenses are expected to be in the range of $139.8 million to $145 million on a GAAP basis and $130.5 million to $136.1 million on a non-GAAP basis.

The sequential increase in OpEx is primarily related to payroll and variable compensation costs.

Q4 GAAP earnings is expected to be in the range of a net loss of $17.8 million to $12.6 million, or a loss of $0.15 to $0.11 per share.

Non-GAAP net income is expected to be in the range of $2.5 million to $7.7 million, or $0.02 to $0.06 per diluted share.

In Q4, we expect average shares outstanding to be approximately $118.9 million on a GAAP basis and $121.6 million on a non-GAAP basis, excluding the impact of any shares we may repurchase.

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 Mark Kelleher from D.A. Davidson.

Let's start with the June guidance, the weakness there.

You indicated that there was some weakness coming out of EMEA, and there's some weakness from some extended sales cycles.

Can you kind of size it -- one, did I capture that right, are those the 2 issues?

And can you size it between those 2 issues?

And what gives you confidence that those headwinds won't continue further into the year?

Thanks, Mark.

This is Ed.

As we mentioned, there have -- it's pretty well-documented as far as what's happening as far as macroeconomic trends.

In Europe, specifically, one of our strongest markets is Germany.

We have very high market share there, and uncertainty surrounding BREXIT is definitely creating -- we're seeing the impact in terms of particularly manufacturing companies in Germany, where the UK is an important export market for them.

And so, as we mentioned, we backed off on our forecasts.

We want to make sure that we're taking that into consideration as far as what's going on there.

In Q3, we were affected by similar macroeconomic effects in Lat Am.

That had an impact on the Americas number, and we see that carrying through into the next quarter as well.

So that's been a big piece.

Any time you're going through a product transition, in this case Wi-Fi 6 -- this is an adjustment for our customers.

As we mentioned, we had some really nice stadium wins that have come through, but a lot of people are taking their time on Wi-Fi 6. We're seeing the opportunities in the pipeline, and it's building, but we're just not sure of the timing.

We don't know when the orders are going to land and ship, and we want to be conservative with our outlook there.

We talked about e-rate, and e-rate is really a positive note for us, because we were up over 50% in terms of the e-rate filings, which is a real positive for Extreme.

And over the course of fiscal '20, it's going to help us out.

We mentioned K-12 this past quarter being light, and we've had softness.

Really, we've had softness every quarter this year in that part of our education vertical.

From a timing perspective, we're anticipating this to kick in, in fiscal '20.

And, again, we want to be conservative about how aggressive we want to be as far as what gets pulled in on that.

In Remi's comments, you heard him talk about book-to-bill ratio and the fact that that was below 1 in this quarter and the fact that we expect it to be above 1 in Q4.

I talked about operating efficiency and how our team eliminated product constraints, and it effectively eliminates backlog, which is good for us.

We expect that backlog that comes from product constraints to click back up in the quarter, and that has a negative effect on revenue.

So it's really the 4 things that we laid out there.

When you talked about operational -- or Remi mentioned actions to improve operational efficiency.

Was that specifically what you guys were referring to, or are there other actions that you can take, maybe in your sales organization, to get more robust growth?

If you do the math and you look at our model for us to achieve that 15% operating income number, we're going to have to drive -- there's organic growth that we see in the business, there's gross margin improvement that we see in the business, but there still has to be operating efficiencies that we drive in the business, and we are deep in our planning cycle for fiscal '20, and that has to be part of the equation.

And can you break out the percent of revenue that was wireless in the quarter?

That was approximately -- out of 250, about 20%.

I'm rounding.

Our next question comes from Alex Henderson from Needham & Company.

This is Roger Boyd on for Alex.

Just a quick one for me.

You mentioned the higher-than-expected discounting and the higher sales and marketing expense.

Is that related at all to EMEA?

Is that what you're trying to drive to kind of offset that weakness in that way?

And is there anything else you can do to combat the softness in that geo?

We mentioned discounting in our last quarter's call, and I think that some of the increase in the list price was, unfortunately, offset by more discounts in the field.

This is not necessarily what we saw this quarter.

I would say that our efforts to drive higher discipline in the field paid off.

It was just that there was a number of large deals at the end of the quarter where we had to be slightly more aggressive than we would have liked to just to make sure that we were able to secure those orders.

So this was less about the field offsetting the impact of tariffs through greater discount compared to an increased list price.

This quarter was more about us as a company being slightly aggressive to be able to win the deals that we needed.

And as far as the second question, on the increasing selling and marketing spend, that was, for the most part, driven by compensation benefits and, to a lesser extent, by increased sales commission.

Our next question comes from Erik Suppiger from JMP.

I wanted to follow up on the discounting.

Can you discuss the competitive environment?

Did it intensify from a pricing perspective?

And where did you see the discounting more pronounced?

Erik, we -- as Remi mentioned, we saw a discounting improvement in the field overall, I would say in our normal course of business, so the answer to the question would be, no, we're not seeing anything unusual from a pricing perspective in the market.

We did have some large deals towards the end of the quarter that were margin-impacting, that for us are important customers, strategic business.

Maybe we give a little bit more away up front for business that we get in the future at higher margin, and we had to make some strategic decisions, and we decided to go with it.

And where did you see these larger deals at the end of the quarter?

I would say it's across -- it was across vertical, and it was across geo, so there's not -- we can't pinpoint a particular area of the business that drove it.

So it sounds like Germany was weak in light of BREXIT concerns.

Was that incrementally new?

BREXIT has been anticipated for some time.

Did it materialize significantly in the marked quarter?

It was new.

It was new for us, and I think there's -- I think you've seen it in the press in terms of what's happening overall in terms of growth rates for Germany as a whole and then kind of what's happening in the EU.

For us, it showed up for the first time in some of our regions that have been very consistent in the past, had to take down some numbers, and the view is not that these are lost deals.

It's just deals that are, from a timing perspective, on hold.

And that was not an issue in the UK?

This was limited to (inaudible)?

Erik, it's primarily -- it really wasn't, and one of the other things that's hard to put your finger on is exactly -- with the pricing actions that we took in Q2, we know we had to pull into that quarter, and then when we were calling this quarter, the question is how much got pulled back into that second quarter.

We suspect that there was some early buying that was taking place in Q2.

It was tough for us to call, and so we think that was also somewhat of a factor in the German and EMEA region.

(Operator Instructions).

And our next question comes from Christian Schwab from Craig-Hallum.

Are you guys fearful that with refreshing 70% of the products over the next year and a half, that that could cause some delays in purchasing of those products until they're refreshed?

Christian, a lot of the refresh is coming on products in the portfolio that are high runners, and so we think that in terms of what's coming to market, these are kind of next-generation chipsets that are characterized by higher performance, lower power consumption, the opportunity for us to improve on what we're delivering from a value perspective to customers.

So I think what we talked about in the past is that Extreme historically has been a little bit behind the curve from a timing perspective and leveraging new chipsets and new technology as they come out, and we feel really good about what's coming to market and what that's going to mean for our sales teams and our ability to position Extreme.

Last quarter, you guys talked about gross margins and Q4 would be at 60%-plus the one you're just guiding for because 80% of the tariff impacting manufacturing would be out of China, so is all the impacted manufacturing not out of China, or why is that so wrong just a few months later?

So there's a combination of a few things.

Number 1, the plan was to have 80% of the SKUs that account for 80% of our shipment in the U.S. -- have the manufacturing move from China to Taiwan.

We're about halfway through, so right now it's more like -- I wouldn't say 10%, because it's not necessarily half, but SKUs that account for about 40% instead of the 80% have been transferred.

What we've done is to increase the scope so we can have an even higher coverage than the 80%.

The idea is to be closer to 90%, but that effort has been slightly slower than expected, and, therefore, it's going to be done by the end of May.

As a result of this, what we're going to see in Q4 is a combination of the transfer of the manufacturing, which, as Ed mentioned, is 5% to 6% higher, in addition to the fact that on some of the products that we import in the U.S., we'll continue to pay tariffs.

So we're forecasting an impact of up to 1 percentage point, as I mentioned earlier, just from that, whereas a quarter ago, we felt the impact would start to come down.

Secondly, I mentioned the fact that the discounting in Q3 has been higher than expected.

It's hard to say if that's going to continue into Q4, but certainly the weakening that we see in EMEA is impacting us in our product gross margins, because it happens that EMEA tends to be a region where we generate higher gross margin than the average for the company.

And so that's the second thing to factor in, and the third one is what we saw in services.

We did see gross margin drop 220 basis points sequentially.

It was largely driven by the $3 million sequential drop in revenue from services, with costs that kind of stayed the same went slightly up, and that was driven by the fact that we tend to see more and more multi-year deals where we basically secure revenue for a longer period of time.

Though year 1 revenue is lower, that impact could continue to a certain expense.

And then keep in mind also, last but not least, we're guiding towards a lower product revenue if you take the midpoint of our guidance for Q4, and, obviously, having low revenue and product will also, due to the volume impact, negatively impact our product gross margin.

So when you factor all that, offset with the fact that we continue to drive a reduction in our cost of goods sold, so our standard costs have gone down in Q3, will continue to go down in Q4.

That leads us to the guidance we just gave, which is a flat gross margin quarter-over-quarter.

And then in your commentary, large deals and greater discounts at quarter end are nothing new for your business or anybody else who sells enterprise equipment.

So as you guys outlined at your Analyst Day a lot of conviction of getting to 60% to 62% gross margins, do you still really feel confident in your ability to do that?

I mean, the industry is what it is.

There are always going to be large deals at quarter end, whether you want to take them or not, and you've seen some big, large contract manufacturers all talk about weakness in enterprise networking, so that would suggest that maybe we'll hear this from other peers as well, which also typically leads to more discounting in the industry in general.

And then if you're moving to a next-generation chipset, do you feel confident that in your refreshed product lines, that you're actually improving the gross margins of those products at list price or not?

I'll make a couple of comments, and if I leave something out, Remi can jump in.

Our team has done a great job of pulling cost out of product, and so we see that continuing.

One of the things about the new products coming to market that we're excited about, obviously having a higher performance of the new products, but it's higher performance and it's also higher margins.

So as we're coming out with these new products, we're expecting higher margins based on our normal discounting off list prices, and, at the same time, delivering higher value and higher performance to partners and customers out there.

So that will be a driver for us.

And to your comment about being in the enterprise space and having large deals coming in at the end of the quarter, yes, that is something that we're familiar with.

I will say, and it's something that we aren't calling out in our commentary, that we are seeing more big deals than we have historically, and we're seeing larger opportunities, and some of these are kind of break-in opportunities that are different for Extreme in terms of opening the door and getting into an account.

Our strategy there is to be a little more aggressive on the front end, and then once we land, we can expand and achieve our target margins.

If I could just add one more comment, we're driving a number of gross margin initiatives around what we've been mentioning since the start of the call, which is the reduction of costs overall by introducing new cheaper, faster products and components in our products, but we'll also have other initiatives around demand planning, supply chain logistics that we've talked about in the past, that will also bear fruit in fiscal '20.

So, yes, we're actually very confident that we can achieve a 60% gross margin.

And then my last question.

We've seen this in other people who are moving modest scale out of China to Taiwan, that some of them are switching contract manufacturers and then dealing with poor yield issues, and that's either led to lost revenue or disruption and inadequate supply of certain products.

Your transition from China to Taiwan, did you switch contract manufacturers, or are you moving with the same people?

No, we are actually keeping the same people.

And then whatever reason we're not where we wanted to be is that we're -- to your point, we're taking our time to make sure it doesn't create any disruption.

Christian, I'll just add that, as you know, it's a pretty fluid conversation in terms of negotiations between the U.S. and China.

We're a lot more optimistic today than we were last quarter about potential outcomes.

So in terms of -- we have to balance risk and opportunity, so we're tapping on the brake a little bit, because if we wake up in a couple of weeks and find out that there's resolution and the tariff goes away, we're better off in China, and in a meaningful way, as our costs in Taiwan are 4% to 6% higher.

So we feel like we're in a good position as far as risk and opportunity in terms of how we're managing the tariff situation, so it's a bit of a balancing act there.

And along those lines, if the tariffs are removed here in the next few weeks, we have seen the industry raise prices given those tariffs.

Do you think those price increases then have to go away, or do they just end up being discounted away?

No, we think it's status quo, and on our end, we don't see it having an effect.

Thank you.

And I am showing no further questions from our phone lines.

I'd now like to turn the conference back over to Ed Meyercord for any closing remarks.

Thank you, operator, and thank you, everyone who could join us on the call today.

And we always have employees and partners who join in and listen, and I just want to thank everybody for everything that was accomplished during the quarter.

There's a lot going on still inside of Extreme, and we've made a significant amount of progress.

We're looking forward to sharing updates about our investments in these new products that are coming to market, and software.

The Connect conference for us is a big deal.

We had our first user conference last year.

The feedback from that conference was overwhelmingly positive, so we did it again this year, and we doubled down, and we're going to have more than twice the attendance.

And it's going to be a great event, and we're going to create a lot of buzz about our autonomous enterprise and the solutions coming out of that, so stay tuned.

We are also going to be participating in investor conferences coming up -- Christian, the Craig-Hallum conference, Cowan conference, Stifel and others -- during the quarter.

So we look forward to getting in front of you and again, appreciate your time and being on the call.

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.