Headquartered in San Jose with 2,800 employees, Extreme Networks provides software-driven networking services for enterprise customers. Its products include wired and wireless network infrastructure equipment and software for network management, policy, analytics, and access controls. It offers high-density Wi-Fi, centralized management, cloud-based network management, and application analytics capabilities. The company serves a number of end-markets including Government & Education (>35% of sales), Healthcare (>10%), Manufacturing (~10%), Retail Logistics / Transportation (~10%), Telco / Service Provider (<10%), and Sports / Entertainment & Hospitality (<5%). Roughly half of the firm’s revenue is generated in the Americas, with the rest coming from Europe, the Middle East, Africa, and Asia-Pacific.
With COVID-19 changing nearly every business, Extreme Networks has new opportunities that could change its trajectory.
Cloud-driven management more impactful due to COVID
Remote and socially distanced employees are pushing more wireless LAN usage and causing companies to spend less on core and more on distributed access. Extreme’s acquisition of Aerohive allows for full network administration and security from remote network employees – the management from the cloud being a key differentiator. With nearly all prospects being remote, cloud-driven brings another advantage; the way prospects can easily try out Extreme’s products without leaving their homes. Sales are typically 20% from new customers, 80% from existing, however, there is an opportunity with marketing improving as remote is levelling the playing field.
New universal product platform makes software better and lowers manufacturing costs
Extreme is finishing up a complete product line refresh. With 36 of 40 products refreshed, out of a total of 57, the company has new equipment in the marketplace. The next step is one of its key opportunities – moving the products to a universal platform. This platform will serve from core to edge.
We expect one universal platform is possible because technology is moving so linespeeds can be maintained with more general hardware – it will be the software that makes the difference. If Extreme can move to a universal platform, its manufacturing lines are expected to be simplified, possibly driving gross margin expansion. Additionally, their software can be run on all its products, reportedly making software development easier and more useful.
New EVP and Head of Sales named in June 2020
Executive management changes are catalysts for change. Particularly, CEOs and heads of sales. Joe Vitalone joined the company as the new Chief Revenue Officer in June. Previously, Joe was at Mitel, ShoreTel, Arrow Systems Integration, and Jemez Technology. We could see new sales and marketing approaches favorably impacting sales, but it could take a few quarters to play out.
Although there are numerous favorable tailwinds, there are also headwinds that must be navigated and overcome. The company has a long operating history but has only been profitable in four individual quarters since 2014. There are a variety of externalities and issues that have been problematic, but nonetheless that is the reality. Some of the highlighted obstacles include the following:
- It is obvious, but external economic factors, elections, geopolitical issues, pandemics, etc. can all negatively impact demand for any product or service and Extreme is no different. Despite the variety of factors helping to sell networking, customers are still sensitive to the global economic conditions, which makes the product sales of the company somewhat cyclical. This is being offset to some degree with the roughly 1/3 of sales that is subscription, but the company needs both product sales and subscriptions to grow to be successful.
- A complete product refresh could boost sales growth, however, new products can have teething issues. The next few quarters should provide some evidence on whether or not the new products are working. The new universal product platform also introduces risk – will it work, will it cause customers to slow purchases while they wait, will it be delayed significantly.
- The new Head of Sales started in June of 2020 and aims to continue making changes – whether those changes have positive or negative impacts is unclear. Consensus expectations are for sequential revenue growth of 5% and 4% the next two quarters, and for YoY revenue growth to return in 2HFY21(+8% in 3FQ21 and+12% in 4FQ21).