Preliminary 1FQ21 Results and Post-Earnings CEO Fireside Chat

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 cloudbased 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 (by Internet World Stats) and is projected to grow to 90% by 2030 (by Cybersecurity Ventures). However, consensus projections are for 1% growth in industry revenues the next three years, down from a +5% CAGR the last decade.
  • Networking market share changes tend to take time as multi-vendor customers are rare. Taking share from Cisco, Arista, and Juniper will be difficult, thus Extreme’s strategy to focus on cloud-driven differentiation in markets where it has a significant presence is the best approach in management’s opinion.
  • 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 SKUs (ex-enterprise) on the new universal platform. The company expects the universal platform to help keep its gross margin above 60%, as product gross margin for the universal platform is expected to be higher than what it replaces.
  • Read our initiation report HERE

Our Insight On What Happened

The Opportunities

2FQ21 Guidance above consensus

With the universal hardware platform just rolling out this quarter (one SKU in midNovember) any material impacts of the new platform will likely occur later. Extreme’s exposure to Education and Government (>35% of revenues) makes government spending critical. The company said that its Education and Government market saw “strong continued trends in K-12, and higher ed, with solid state / local and federal spending globally.”

The company’s guidance is for revenue of $235-245mn (consensus was $238mn), and non-GAAP EPS of $0.09-0.12 (consensus was $0.09).

Fireside Chat Highlights

In our 40-minute fireside chat with President and CEO Ed Meyercord, we covered a wide swath of topics. Ed highlighted a few items about the just reported September quarter including (1) sequential revenue growth of 9.4% in a normally seasonally down 5% quarter (cloud subscriptions were up 20% sequentially), (2) non-GAAP gross margin over 60% and expectations that will continue, and (3) increased free cash flow of $22mn vs $6mn in the June quarter.

On a higher-level, Ed discussed a state-of-the-art product for 5G that is due in the March quarter that could provide “significant growth in F22.” He indicated that the company has a couple of very large 5G opportunities lined up for this product. Ed does not see 5G displacing WiFi, but rather, expects it to drive more demand overall. He highlighted that Extreme has roughly a 6% market share position, so a single point of share gain could be meaningful, and he views the next few years as purely an execution issue, stating that the company has not been in this strong of a position in the last 10 years.

Register HERE to see the full interview.

The Obstacles

While likely obvious, 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 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-based, 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 the new products are working. The new universal product platform also introduces risks – will it work, will it cause customers to slow purchases while they wait for next-generation products and services, and will product rollouts be delayed significantly?