Extreme Networks Inc (EXTR) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Extreme Networks Q2 Fiscal Year 20 Financial Results call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the call over to Stan Kovler.

Please go ahead.

Thank you, Michelle.

Welcome to the Extreme Networks Earnings Conference -- Second Quarter Fiscal 2020 Earnings Conference Call.

I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations.

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

We just distributed a press release and filed an 8-K detailing Extreme Networks second quarter fiscal 2020 financial results.

For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations and our 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, financial and operational results, growth, expectations and strategies, acquired technologies, products, operations, pricing changes to our supply chain, the impact of tariffs, acquisition and integration of Aerohive networks 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 10-K report for the period ending June 30, 2019, 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 Networks' President and CEO, Ed Meyercord.

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

Today, we announced Q2 non-GAAP results that highlight EPS of $0.13, in line with our expectations.

Gross margins of 60%, the highest in Extreme's history and in line with our fiscal '20 goal, and operating margin of [9%] (corrected by company after the call), up both year-over-year and quarter-over-quarter.

Revenue of $267.5 million was short of our guide and grew 6% year-over-year as a result of the Aerohive acquisition.

Key highlights during the quarter were higher-than-expected growth in our cloud business, significant advances with major industry partners that can drive organic growth in the second half of calendar 2020, the repurchase of 4.2 million shares of our stock, reduction of expenses better than planned and trending lower, delivery of all merger integration targets on schedule with the completion date of April 6 on track, and growth of our cloud IQ application, managing 24% more devices quarter-over-quarter, traffic up 33% quarter-over-quarter and doubled the number of connected devices to the cloud versus last quarter.

Q2 results were once again driven by strength in our cloud-managed wireless LAN business with revenue of $41.8 million, up 9.8% year-over-year and up 11.6% quarter-over-quarter on a pro forma basis.

We also recovered in our EMEA business, where product revenue grew 25% quarter-over-quarter, but still faced a difficult year-over-year comp and [fell] (corrected by company after the call) just 3% year-over-year, including the impact of the Aerohive acquisition.

Headwinds in our DACH region and U.K. have diminished, and we are seeing growth driven by core extreme revenue.

I also want to highlight the progress we made in executing our strategy in key developments going forward.

Our acquisitions and resulting scale have given us brand recognition and build the franchise value in the enterprise sector.

Today, Extreme is better positioned than ever before for new growth opportunities given our end-to-end product portfolio, the most advanced cloud platform in the industry, network automation software from IoT wireless edge to data center, our status as a leader in the Gartner Magic Quadrant, our #1 position in service and our large base of 50,000 customers.

Key customer wins during the quarter included several large-scale cross-sell wins like Palm Beach County schools the tenth largest school district in the country that deployed our switching and management software alongside legacy Aerohive WiFi now rebranded as ExtremeCloud IQ and a major fast food restaurant chain that deployed our switching alongside cloud IQ.

We also had several large-scale sports and entertainment wins during the quarter.

All in all, we had 18 $1 million or greater deals during the quarter, up from 14 in Q1.

Earlier this calendar year, we won a major U.S. stock exchange.

They deployed our wireless LAN solutions for its high-performance network to support one of the largest trading operations in the world.

The requirements were rigorous, and the launch has been very successful.

In our retail vertical, we announced availability of our Retail Select cloud platform, uniquely designed for retail customers and showcased at the National Retail Federation Conference in New York City in January.

In addition to the networking benefits of our cloud platform that leverages machine learning, we developed a unique interface to deliver end-user data, such as dwell times, loyalty information and site flow that supports marketing and sales initiatives to drive better business outcomes.

During Q2, our E-Rate K-12 business more than doubled on a year-over-year basis due to easy comps.

However, delays in E-Rate funding letters pushed several opportunities to the back half of the year.

In the Stadium vertical, our success is highlighted by the following: this weekend, Extreme will drive the most connected event in Stadium history for Super Bowl 54 at Hard Rock Stadium; also, our Stadium & Venue team broke in to a new professional Sports League that has created significant pipeline; and we're seeing our first meaningful pipeline build in international markets.

In data center, we introduced Extreme Fabric Automation software designed to augment enterprise IT teams and reduce human error.

The solution automatically manages the validation, testing and operation of data center fabric networks while providing critically important network reliability and resiliency.

Extreme also announced availability of 2 new high-performance switches embedded with guest VMs, our SLX 9150 leaf and SLX 9250 spine switch that helped drive record SLX sales.

We have additional product launches in SLX planned for the second half of fiscal '20, and we have significant opportunities aimed at the service provider of federal verticals.

In Q2, new product revenue in our edge switching portfolio nearly doubled from Q1 and continues to grow for the third straight quarter as we refresh our portfolio.

In core aggregation switching, our revenue from products introduced in our fiscal Q4 '19 grew nearly 50% quarter-over-quarter on expanded use cases within our customer base.

We are on track to roll out our new state of the art licensing platform in April.

We are targeting July 1 to launch full wireless and wired management capabilities from cloud IQ in addition to our co-pilot automation software suite.

This platform will enable us to simplify licensing for our cloud SaaS solutions and position us for cloud growth in the second half of calendar 2020.

Beyond our traditional enterprise business, we are well-positioned for 5G with significant industry players.

We have a large-scale OEM opportunity for 5G networks, and a service provider opportunity for their assurance platform, either of which can add several percentage points of growth to our top line.

Beyond these new opportunities, we're leveraging our unique solution linking WiFi 6 to 5G networks in public venues and attracting ecosystem partners that will create new opportunities.

Today, we announce leadership changes in our sales and go-to-market organization.

For the third quarter in a row, we have not attained sales targets and taken down our guide.

This morning, we announced in a separate filing that Bob Gault is leaving his role as Chief Revenue Officer.

Bob has been a committed leader who was critical in getting us to over $1 billion in revenue.

We appreciate all of his efforts, and we thank him for his dedication and hard work and wish him the best.

In July 2019, we restructured our sales teams in the Americas region to better cover our enterprise and SLED accounts.

This created disruption that impacted near-term results but with new roles now filled a new sales leadership in the Americas, we are positioned to drive long-term growth and improved productivity.

In addition, we're streamlining the reporting structure of our field teams to better align for customer and partner growth opportunities.

We have consolidated leadership under Pete Doolittle in the Americas, who joined the company last quarter.

We merged the EMEA and APJC regions into the new International sales division under the leadership of John Morrison, and our channel organization now reports to these geo leads.

As we turn the corner in the second half of calendar 2020, we expect this to drive down sales and marketing expense as a percentage of revenue from 27% today.

Extreme has been on a journey over the past 5 years to transform our business.

First, we refocused on enterprise differentiating with software and service.

Then we were successful in scaling to over $1 billion in revenue and substantially expanded the breadth of our solutions.

And now we have a unique opportunity to lead the enterprise migration to cloud networking with our cloud IQ application.

Over this time, we've significantly improved our gross margins and invested in our own digital transformation during fiscal '19 to drive automation of internal processes.

As we advance our strategy to transition our business to subscription-oriented cloud solutions, we will change the mix of our revenue to a more recurring basis.

In summary, with the integration progress, product and engineering efforts underway, and market position that we've established, the go-to-market pivot is the final step in our transformational journey that began at 2015.

The growth of the cloud networking market from $2.6 billion in 2019 to over $7 billion by 2023, according to IHS, creates a unique white space opportunity for us to leverage our capabilities, and gain share in this developing segment of the enterprise networking market.

We feel good about Q4 given historical seasonality, ongoing recovery in EMEA and the way our Q4 pipeline is shaping up both year-over-year and quarter-over-quarter for core Extreme.

There are also additional partnership developments that will be starting up in the next 3 to 6 months with new reseller relationships and large opportunities under development.

We remain committed to our low single-digit organic revenue growth.

We now believe it will happen in the second half of calendar '20, along with our targeted 15% non-GAAP operating margin.

We now expect to exit fiscal '20 with operating margins in the 12% to 13% range.

And with that, I'll turn the call over to our CFO, Rémi Thomas.

Thanks, Ed.

As Ed noted, our revenues of $267.5 million grew 6% year-over-year and 5% quarter-over-quarter, slightly below our guidance range.

Non-GAAP earnings per share was $0.13, in line with our guidance as the gross margin of 60% and the tight control of operating expenses helped offset the revenue shortfall.

Our cloud-managed wireless LAN business accounted for $42 million in revenue up 10% year-over-year and 12% quarter-over-quarter.

However, legacy Extreme only revenue of $226 million, fell 11% year-over-year and 12% quarter-over-quarter on essentially 3 large deals that experienced longer sales cycle related to our expectations.

Our total product revenue of $190.5 million was flat year-over-year and grew 3% quarter-over-quarter.

Our total product book-to-bill ratio, including Aerohive, was over 1. We were 48% complete with our product refresh as of the December quarter, and expect to be over 70% complete by the March quarter with a targeted completion time during the September quarter.

Total services revenue of $77 million grew 22% year-over-year and 9% quarter-over-quarter.

Our total services book-to-bill ratio including cloud wireless LAN was also above 1.

Our annualized run rate of Aerohive subscription and services revenue, excluding the impact of the deferred revenue haircut was $59 million in Q2, up from $57 million in Q1 and the $53 million Aerohive recognized in its June quarter.

Subscription and services bookings for Aerohive grew 14% on a full quarter like-for-like basis.

On a pro forma basis, recurring revenue accounted for 28% of total company revenue in Q2, similar to Q1.

During the quarter, the Americas contributed 51% to total revenue; EMEA, 41%; and APAC closed out the remaining amount.

Non-GAAP gross margin was 60% compared to 58.2% in the year-ago quarter and 59.9% in Q1.

The sequential improvement was attributable to higher contribution from services revenue on the core Extreme side.

In addition, gross margin also benefited from a full quarter's worth of Aerohive revenue which carries a 3 to 4 points higher gross margin contribution versus core Extreme.

Finally, we estimate that the net impact of tariff was a negative 150 basis points, up from 80 basis points last quarter owing to the addition of List 4A 15% tariffs implemented last quarter on Wireless access point and optics.

Q2 non-GAAP operating expenses came in at $136.3 million below the low end of our guidance, a decrease from $137.2 million in Q1 despite a full quarter of Aerohive expenses.

The sequential change in non-GAAP operating expense was mainly due to lower core Extreme R&D and G&A expenses as the impact of our merger integration and restructuring plans flow through the P&L.

This resulted in an operating margin of 9% above the midpoint of our guidance range of 7.8% to 9.9%.

Free cash flow was $23.6 million, recovering from use of cash of $5.4 million in Q1 and free cash flow of $17.9 million in the year-ago quarter.

Our total cash and equivalents balance at the end of Q2 was $140.4 million down from $161.1 million at the end of Q1.

Adjusted for $30 million worth of share buybacks, our cash balance would have grown to $170.4 million.

Net debt of $234.9 million increased from $218.9 million last quarter as a result of buybacks and offset by free cash flow generation.

DSO of 55 days remained flat with Q1 and rose just 2 days from the year-ago quarter.

Our cash conversion cycle stood at 69 days, down from 73 days in Q1 and 78 days in the year-ago quarter.

Our inventory balance of $79.7 million fell $2.7 million from Q1 and increased $21.4 million from the year-ago quarter.

The year-over-year increase in inventory largely reflects advanced purchases ahead of rising tariffs, new products, and to a lesser extent, the addition of Aerohive Networks inventory.

Now turning to guidance.

We expect total Q3 revenue to be in the range of $255 million to $265 million or 4% year-over-year increase and 3% quarter-over-quarter decline at the midpoint.

Besides the normal seasonal pattern of our business in the March quarter.

This outlook reflects limited near-term visibility to U.S. public sector funding, pockets of weakness in the service provider and retail verticals in the U.S. and our outlook in the Asia Pacific region offset by continued recovery in EMEA.

Q4 (sic -- see presentation slides "Q3") gross margin is anticipated to be in the range of 56% to 58% on a GAAP basis and 59.1% to 61.1% on a non-GAAP basis.

We estimate that tariffs will have a slightly lower impact than in Q2 as we begin to replenish access point and optic products at a lower 7.5% tariff later in the quarter.

Q3 operating expenses are expected to be in the range of $147.3 million to $154.1 million on a GAAP basis, and $129.3 million to $135.3 million on a non-GAAP basis.

We expect a sequential increase in non-GAAP operating expense to come from the further tightening of our R&D and sales and marketing expenses, combined with the next phase of Aerohive synergies.

Q3 GAAP earnings are expected to be in the range of a net loss of $12.8 million to $8.6 million or a loss of $0.11 to $0.07 per share.

Non-GAAP net income is expected to be in the range of $13.1 million to $18.3 million or $0.11 to $0.15 per diluted share.

In Q3, we expect average shares outstanding to be approximately $119.4 million on a GAAP basis and $122.6 million on a non-GAAP basis.

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

(Operator Instructions)

Our first question comes from Alex Henderson of Needham.

Great.

So could you talk a little bit about the competitive landscape?

I know Cisco, obviously, weakened quite a bit in their October quarter and they guided to a pretty soft outlook for the January quarter.

Has there been any change in their competitive action in the marketplace so they addressed pricing downwards in any way that would impact you?

And have they changed their targeting in terms of moving downstream to smaller targets at all?

Is there any change in that world?

Alex, it's Ed.

Yes, I think it's -- keep in mind that we're always competing with Cisco.

So they're our largest competitor.

And if you look at where we play, they probably have 60% market share.

So even at the lower end or the medium enterprise, we compete with Cisco every day all around the world.

So that's not a -- I guess, I wouldn't say we've seen anything unusual.

We know that there is some pressure.

Maybe we see a little more aggressive pricing and discounting in certain spots in certain markets.

But for us, I would say it's business as usual.

So no change in behavior out of them is what you're implying?

No, it's a competitive market, and we're always going toe-to-toe with them all around the world.

So it's competitive, but I wouldn't say that we've seen any change worth noting.

So I mean, I think you guys did a pretty good job of telegraphing the weak conditions going into the quarter.

I guess I'm not that surprised by -- there's some softness in the top line, but has there been any change we've exited the year and the trade deal has been enacted, so that confidence may be coming back a little bit in the broader world in a way that might help your pipeline improve?

Any evidence of that happening?

Yes, we commented on EMEA and a lot of it -- what happened between the U.S. and China affected global trade, and it affected customers, particularly like manufacturing customers in the German market, in the DACH region.

And we're seeing that come back.

And our teams there are calling for growth, and they see strength in their markets.

So from that standpoint, I think we feel good about that.

I'll also comment on the fact that internally, I mentioned in my comments, the fact that in July, we restructured our go to market, we split our teams to focus on SLED and enterprise.

It was a pretty big change.

And I would say, the execution of that change wasn't what it should have been.

With the closing of Aerohive in the middle of happening mid-quarter, and then we reset commission plans starting in Q2, I think that caused some disruption.

And I think the issues were more internal to Extreme.

I think we have a lot of these issues behind us now.

We're excited about new leadership in Americas, where we had the most weakness.

And going forward, with the new leadership, with some of the structural changes behind us, and now new initiatives to better align the field, we feel good about where we are.

We had -- in certain markets, we had to fill seats where we weren't covering certain markets and we moved aggressively to do that.

But there was still a gap in coverage.

At this stage of the game, we filled the gaps, and we commented on Q4 pipeline, we're really encouraged about what we're seeing in the pipeline build for Q4 and that's global, that's globally.

One last question and then I'll see the floor.

Rémi, can you just remind us what the sort of quarter-to-quarter-to-quarter, net benefits from cost-cutting will look like from -- as we go from the March quarter to the June quarter, what's that net?

And then I think there's some more in the June quarter that goes into the September quarter, what's the dollar value of that net that we can better analyze the numbers on?

So if you look at the operating expenses in the June quarter, in absolute dollar terms, they should be up sequentially.

That basically is because we do see a season pattern in some of our operating expenses, specifically commissions.

As you know, Q4 is our biggest quarter, and therefore, commissions tend to be a little higher.

So the absolute dollar amount should go up.

However, in Q4 versus Q3, you're going to see the full benefit of the Aerohive synergies.

As you know, we keep some employees from Aerohive for a transition period, as we migrate mainly their IT systems over to ours.

As Ed mentioned, we're on track to reach the April 6 due date.

When that happens, a number of transition employees will exit the business and there should be some sequential savings related to that.

And as a company in general, we continue to have a super-strong focus on operational efficiency.

So I would not be able to give you a precise dollar amounts in terms of the cost savings, but they will definitely be that offset by the impact of the higher commissions so that your overall operating expenses should not be up too much in Q4 versus Q1.

Just one, the last piece of that was, isn't there some in the June quarter as well, so that there's a little bit of a bleed into a benefit into the September quarter?

Correct, correct.

Some employees will exit in our fiscal Q4.

So that the September quarter is really the first quarter we get 100% of the benefit of the Aerohive synergies.

And I think you guys did a good job of telegraphing the soft conditions.

So I just wanted to make that comment.

Our next question comes from Eric Martinuzzi of Lake Street.

Yes, I wanted to drill down on the softness in the quarter, specifically, just the -- connecting the 3 large deals that saw longer sales cycles and trying to tie that back to the press release commentary around softness around U.S. public sector in Asia Pac, either for Ed or Rémi.

Sure.

One of the things that we commented on is that funding letters coming from USAC, which is the government agency around E-Rate opportunities.

We had a very large school district opportunity to the tune of $6 million opportunity that we felt it was going to -- we were going to get the funding letters.

We have the order as far as the customer and our partners are lined up.

But it's not a go until we get the funding letter and the funding letter didn't arrive.

And -- but we this is one that pushed, and it was one that we were counting on.

We talked -- there were a couple of other situations where we had on the Federal side some pretty sizable orders that we thought we were -- they were going to come in.

They didn't materialize, and we're pushed those.

That has since been turned back on.

So we have the confidence of the growth in Federal now.

So that -- I think that will give you a flavor.

And maybe offline, I don't want to go -- get too detailed and going deal-by-deal by deal, but I think it gives you a flavor.

And then I made the comment to Alex, as far as the restructuring of the organization.

And then the reintroduction of new commission plans during the quarter, which I think were somewhat distracting.

And I think it created some gaps in coverage.

The final point is that in APJC, the bookings were strong in APJC, a lot of the projects were construction oriented.

And a lot of times with those construction projects, they're not ready for delivery.

So even though the bookings were there, the shipments were delayed, and therefore, we didn't recognize revenue in the quarter.

So I think APJC, we called out, we called SLED and the government segment, and I think we called out federal, and that's a little color for you, Eric.

Okay.

That's helpful.

You talked about partnerships that are going to help you out in the latter half of the calendar year or the first half of fiscal '21.

Is there any detail you can give us there?

Are you already trialing?

Are these partners good to go on the product?

Are they testing the product and trying to figure out timing of the launch of a bigger commit?

Or is -- are there issues of them just educating their own channel?

Yes.

So I think there's a couple of different opportunities that we would classify.

One is 5G.

Obviously, we're expecting a large wave of spend around the construction and deployment of 5G networks.

We are working hand in glove with a major, very significant provider of deploying 5G solutions.

We have an indication that they want to work with us.

Our teams are working on a specific, they have 5 different use cases for our technology, but we expect the first use case to roll in July.

But it's the kind of opportunity that are 8-figure opportunities, and then they grow.

We're not at liberty to call out the name, but we can tell you that this is something that we'll start and build and could be a $10 million to $20 million to $40 million to $50 million type annual opportunity over the period of the next few years.

So we are aligned.

We have very good relationships, and our teams are working hand in club and glove with their engineering teams.

We have another existing customer that's looking at next-gen 5G in their, what we would call their assurance platform.

This is something, again, that will ramp up significantly with 5G, and we are working -- our teams are working very close with that customer on those solutions.

And again, this is something that I think the customer would prefer that we roll out the solution yesterday.

But it's not ready yet, and it will be ready coming our Q1.

It's another similar size type opportunity.

With Stadiums, we have a unique interconnect between our WiFi 6. Remember, we were the first company to deploy WiFi 6 in Stadium.

That gives us a competitive advantage.

We also have a unique handoff to 5G.

I can comment with Verizon on that because of the Verizon stadiums that we have and that we've done with them.

There are other sports leagues, and there are other opportunities in that venue that have significant pipeline.

These are opportunities that will begin to kick in, in Q4 and the second half of calendar '20.

And then on the resale side, we have some partnerships that could be quite large, where we have a Cisco displacement opportunity, and it's with enterprise sales teams where we are in a position for the enterprise teams at this partner to work with our teams to drive significant business.

If we were to achieve 10% wallet share from this customer, it could be $100 million type opportunity.

So we don't have these, we don't have deals or bookings in the bag, but they are the kind of opportunities that have us very excited about future growth and the growth potential for Extreme.

Okay.

And then last question for me.

On the repurchase, the ASR and then the incremental shares that were purchased, I guess, the program settlement.

I just want to make sure I've got my numbers straight.

So $30 million spent average share price of $709 for 4.2 million shares bought back.

Is that correct?

That's correct on all 3 counts.

Okay.

And then the appetite to further invest in a repurchase plan as we head into the back half of the fiscal year.

Yes, Eric, that's the board philosophy and we socialized this is that we would like to absorb the dilution from our equity plans.

And I would say that at a minimum, we were -- between management and our board, we were in a position to move on this in the fourth quarter and take advantage of the current values of our stock, which we believe is undervalued.

I think that you -- I think it's fair to say that our board will be committed to that returning capital to shareholders.

We do have to govern our share buybacks by leverage and our agreement with our banks.

And so we'll be balancing our cash flow and then what we have available under our lending agreements.

And I would say that we will remain committed to buying back shares.

Our next question comes from Paul Silverstein of Cowen.

I want to ask 3 questions, if I may.

First off, Ed the 15% operating margin statement about getting there in the second half of this year, if I read it correctly, what are the underlying assumptions to get there in terms of revenue, gross margin and OpEx?

So the on the revenue side, we're looking at, I would say, very low single-digit growth on the revenue side.

On the gross margins, we see the gross margins continuing to inch up as we look into the next year, we have a tariff benefit.

We've raised price.

We have some tariffs going away.

We have the product refresh.

And the combination of this, we see adding as we roll into the second half of the year, I would say, at least a point of additional incremental gross margin.

And on the OpEx side, we are driving cost out of the business.

We still have the synergy from the Aerohive transaction we still have, on a go-forward basis, we see engineering efficiencies and streamlining our switching and our wireless portfolios where we are consolidating them.

And then on the sales and marketing side, I highlighted 27%.

And we look at that and think that number is way too high, and we're -- we will be attacking that.

And over the next few quarters, we would see the opportunity to pull a couple of points out of that.

So we see ending the year at this -- we call it 12% to 13%.

There's a lot of confidence in the team in calling that number.

Fiscal Year.

This fiscal year, I'm sorry, the June quarter, and then we'll have benefits in all 3 of those items that you just laid out for the second half of calendar '20.

But if I try to reduce that down to sound by -- it sounds like most to get from what you posted this quarter to 15% in either September, December above.

It sounds like the bulk of that is going to come from Opex?

I'm out of words, I just want to make sure I understand.

Yes.

And I think -- Paul, I think you heard revenue hike, 1.5 points of tariff impact this quarter.

And obviously, if that tariff impact goes away, there's a 1.5 point of gross margin for you.

So I think there are a lot of different ways we can get there, Paul.

Okay.

All right.

Now say, I apologize, but I want -- I know it's been asked a couple of times.

But I want to go back to the shortfall this quarter.

The 3 deals you referenced, you said one of them was $6 million, and that's been pushed out due to the lack of funding commitment, but you're hoping that comes in later in the year.

Do you have visibility?

Is there -- have -- is there any more concrete nature to that coming in?

Or are you just hopeful that will come in later in the year?

Or is there -- the government made clear the E-rate funding will be there.

What's the status of that?

Well, I'll digress.

We don't like to get too specific about specific deals.

In this case, it's a very large school district and particulars around this is that USAC was investigating the different schools.

And they're validating the funding request.

And our understanding is that, that process has been complete.

So our experts who are calling this, have a high degree of confidence that this opportunity comes in.

So, Ed, you're expecting that opportunity in March or you're expecting it to just hit some time in the next several quarters?

Yes, Paul, I don't think we want to get into calling specific deals in specific quarters.

In general, I would say that we feel that deal is more imminent.

Got it.

All right.

Without getting some specifics, the 2 other deals are worth how much collectively?

Yes.

I think if you take -- I think if you combine the 2, it's a double-digit number.

And you said those are delayed, not canceled, you're expecting them to come in and you have visibility at this time or you don't have visibility at the time?

We have -- there's 1 customer that had halted their purchases, and that has been turned back on, and we've already seen orders in January.

So we know that's coming.

The other situation was large construction projects happening in APJC, where we have the order, it's just a function of delivery timing.

So the customer has selected Extreme, we won.

But as happens with a lot of construction projects, they're timing delays, et cetera.

And so we're expecting that -- we're expecting those deals from a shipping perspective to come through towards the back half of this quarter.

Paul, if I can just add something -- sorry to interrupt.

Normally, a company that generates revenue of $270 million, when some deals get pushed out, we should be able to get other deals.

The reason we're pointing out to them is that each of them were multimillion-dollar deals.

And that they were kind of embedded in our expectation and guidance for the December quarter and pushed out.

And given that some of the weakness that we've called out entering the quarter, we were not able to make up for these contracts elsewhere.

And it's important to highlight that 2 out of them are related to U.S. public sector funding, which is coming back.

It's a question of timing.

And that's why we're calling in certain about the timing of the recovery.

And the third one is we got the bookings, it's just when the customer is going to roll out the project.

So that's why we're calling them out.

But again, we don't want to get too specific with these contracts.

They should be -- it should be an offset elsewhere in a normal environment.

Understood.

I appreciate that.

But I guess I'm a little confused given the explanation and that it sounds like in 2 of the 3, if not all 3, you expect to see some degree of revenue if not all the revenue for those special contracts in the March time frame.

And if I understood you correctly, it begs the question, why isn't the March guidance, all other things being equal, much better than it appears to be relative to expectations that I think you all help fashion in the commentary and guidance you provided previously.

I'm not trying to give you all a hard time I'm just trying to understand.

No,no, that makes sense.

So I think the seasonality should be slightly more than the 3%.

We're guiding at the midpoint.

We just announced the departure of our Head of Sales, and we just missed our midpoint for the December quarter by $5 million.

So when you take that in into account, I hope you understand why we're being cautious in our guidance for the March quarter.

No, understood.

So if I drill down, it sounds like all the weakness is on the Extreme, classic Extreme organic.

Or was there any -- I guess, there was some E-rate weakness with respect to Aerohive?

No.

There's a question in there.

No.

Aerohive pretty much, on all of the contracts they had in the pipe for E-rate.

This is -- by the way, the March quarter of Aerohive versus the December quarter is a seasonally down quarter.

But that's the normal seasonality but there was no delay in any rate funding for Aerohive.

And hence, a very strong result we had at $42 million.

So Aerohive performed well.

All the weakness that you're seeing is on the Extreme organic piece of business?

Correct.

Okay.

One last question for me, which you just referenced again, if I go back to the previous quarter, you all had said, now what we've done is created 2 teams in the Americas to go after that.

This past quarter we've completely restructured.

We've reassigned accounts.

We've hired a lot of new people.

So we slowed.

So now that we're -- now, what we're seeing as we're seeing these teams come in, we're really excited about our new leader that's come in.

He's got a lot of experience blah, blah, blah.

I don't mean to rehash, but I'm just trying to understand, I had the impression from what you said the previous quarter, and I get it, we talked about 90-day periods here.

So I don't want to overemphasize 90 days.

But it sounded like from what you said last quarter, you did a restructuring in the Americas, which you all had called out as the bulk of your weakness this quarter, in that you all were seeing progress at that point in time.

The question being, what changed?

Or did I misunderstand your comments from last quarter?

No, it's just that we have leaders that are now 1, 2, 3 quarters into their roles.

And they're getting a very strong grip on the business.

And then we obviously have some of the deals that got delayed coming back.

And so we feel like both in the, what we call the SLED state, local and education business, and the enterprise space, having new leaders in place is going to really help.

Also, remember that we basically organize North America by certain verticals in addition to enterprise that are being addressed by dedicated teams, and these guys are now been in place for a full quarter, and they know their tertiaries, know their accounts.

And so we feel like the impact of the disruption from the reorganization in the U.S. is now behind us, and we're ready to go hunt.

(Operator Instructions) Our next question comes from Christian Schwab of Craig-Hallum.

Great.

Most of my questions have been answered.

I just have 2 quick ones, please.

Could you give us an update on where we are in the product refresh and how many of the products of volume have been refreshed?

And can you give us an update?

I know previously, you were very excited about a relationship with Broadcom.

Can you give us any update there, if there's anything new?

So on the product refresh, out of a total identified product portfolio of 57 product.

The aim was to refresh 40 of them.

As of the December quarter, we had done 19.

So that's the 48% that I mentioned in my comments, and we're going to see an acceleration in the March quarter that would take us to 70% of that 40 number.

It's about 20.

And on the second question, I'll address one aspect of it, which is a procurement relationship.

And I'll let Ed comment on the partnership and the fact that we're their preferred partner.

But basically, we -- given our relationship and the fact that the majority of our chipset are supplied by Broadcom, we have an early access program in place that we've extended.

And that basically give us guaranteed access to new products that are coming out as well as an opportunity to negotiate certain discounts if there's big opportunities out there that we can fulfill with products having Broadcom componentry in them.

And I think the second half of that question is, our teams are working on putting together what is a solution story for Extreme and Broadcom from silicon to software and how to present that.

And we've identified accounts to go after to kick that off.

But the -- our product teams are working on what is the integrated solutions that we can go to these large enterprise customers with.

So I'd say we're still in the, I would call it, product development stage of that and expecting that to come in, in the second half of this calendar year.

Okay.

And then, I guess, just 1 last quick follow-up, if I may.

You guys mentioned it a couple of times that at 27%, sales and marketing expense was way too high.

Have you guys done any work to let us know what is the appropriate number there?

Appropriate percentage revenue number?

We think it should be in the low 20s.

And if you look at peers, and if you look at companies that have larger scale, you can see that number come down.

Customers who are going after different target markets, like if you're going after hyperscalers, that number is much lower.

In our market, currently, we're looking at a low 20% metric.

And that, we believe we can drive with increased sales productivity and then efficiency.

And the changes that we're making today, we think, will help us address this.

We're putting this under a magnifying glass.

We've highlighted some changes that we're making.

And we expect to be making progress on this in the second half of our calendar '20.

So that's a statement about quarterly revenue today, right?

So low 20s, let call it, $255 million, $260 million, $270 million, not a return of , let's say, growth and better execution of the team and et cetera, and quarterly revenues in the $300 million and change level, right?

So you're talking about getting into the low 20s, what has been the kind of quarterly run rate for the last few quarters, plus or minus, is that fair?

I think it would be a challenge for us to be in the low 20s on revenue of $260 million or $265 million.

I think to get to the low 20s, we would need to be above $300 million.

So at the current revenue level, Ed mentioned earlier that we anticipate to gain about 2 points.

Now that would go from 27% to 25%, and then that will be over the next few quarters.

To get to low 20s, we'd need the revenue to be above $300 million a quarter, and we need some of these actions to take place over a longer run because it's a big transformation.

All right.

I just wanted to clarify that it's really top line driven with a little bit of focus and attention on expense.

It's not going to be all-expense driven, which is -- you just answered for me.

I don't have any other questions.

There are no further questions.

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

Thank you, and thanks for everyone for participating on the call today.

We also like to shout out to our employees, a lot of people putting in a lot of effort on the business integration, the development of the cloud and everything that we're doing out in the field in driving our partner and customer engagement.

So a lot of them are listening in, and we appreciate all of your efforts.

We're looking forward to sharing updates about our investments in software products, the integration.

A lot of things that we've highlighted here over the coming months, and it will be at investor conferences.

We have JMP's Technology conference and the ROTH conference this quarter.

So thanks, everybody, and have a great day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.

Everyone, have a great day.