Networking Challenger Making Significant ESG Push

Key Points

  • Extreme Networks is widely viewed as being well positioned for the growth of government, education, and 5G drivers to fuel incremental demand for its cloud-based systems
  • Cloud-based management solutions are expected to continue taking market share in both hardware and networking markets. The centralized data allows for better predictions and operations, and the cloud makes it cost effective.
  • Global internet penetration has grown from 25% in 2010 to 62% in 2020 (Internet World Stats) and is projected to grow to 90% by 2030 (Cybersecurity Ventures). However, consensus projections are for 1% growth in industry revenues over the next three years, down from a +5% CAGR over the last decade.
  • Networking market share changes tend to take time as multi-vendor customers are rare. Extreme’s management team believes that taking share from Cisco, Arista, and Juniper will be difficult and that their strategy to focus on cloud-driven differentiation in markets where it has a significant presence is the best approach.
  • The company is moving to a universal hardware platform for its products. The first will be its 5520 high-performance switches, which are due to ship to customers in mid-November. Over the next 14 months, the company expects to have roughly 70% of its ex-enterprise SKUs on the new universal platform. The company expects the universal platform to help keep its gross margin above 60% since product gross margin for the universal platform is expected to be higher than what it replaces.
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Our Insights

The Opportunities

Cloud-driven management is more impactful due to COVID-19.

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.

New universal product platform lowers manufacturing costs.

Extreme is finishing up a complete product line refresh. With 57 products total, Extreme is 90% through updating the 40 products that are due to be updated. The company has new equipment in the marketplace. The opportunities will be moving the products to a universal platform. This platform will serve from core to edge.

The Obstacle

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?