Ladies and gentlemen thank you for standing by and welcome to the Extreme Networks Q2 Fiscal Year 2020 Financial Results Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [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, Remi 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 chains, 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 reports 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 $0.13 in line with our expectations, gross margins of 60%, the highest in Extreme's history and in line with our fiscal 2020 goal and operating margin of 7% 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 applications managing 24% more devices quarter-over-quarter, traffic up 33% quarter-over-quarter, and double 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 grew just 3% year-over-year including the impact of the Aerohive acquisition. Headwinds in our DACH region and UK 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 and key developments going forward. Our acquisitions and resulting scale have given us brand recognition and built 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 number one 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 Wi-Fi now rebranded as Extreme Cloud 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 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 [ph] times, loyalty information and site flow [ph] 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 LIV at Hard Rock Stadium. Also our stadium venue team broke into 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 of resiliency.

Extreme also announced availability of two new high performance switches embedded with guest VMs, our 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 2020 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 2019 grew nearly 50% quarter-over-quarter on expanded use cases within our customer base.

We are on track to rollout 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 are leveraging our unique solution linking Wi-Fi 6 to 5G networks in public venues and attracting ecosystem partners that will create new opportunities. Today, we announced 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 is 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, and new sales leadership in the Americas, we are positioned to drive long-term growth and improve 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 [ph] 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 five years to transform our business. First, we've refocused on enterprise differentiating the software and service.

Then we were successful in scaling 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 significantly improved our gross margins and invested in our own digital transformation during fiscal 2019 to drive automation of internal processes. As we advance our strategy to transition our business through 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 in 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 wide 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 three to six months with new resell relationships and large opportunities under development.

We remain committed to our low single-digit organic revenue growth, but now believe it will happen in the second half of calendar 2020 along with our targeted 15% non-GAAP operating margin. We now expect to exit fiscal 2020 with operating margins in the 12% to 13% range. And with that, I'll turn the call over to our CFO, Remi 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 were $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 three 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 20% 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 tariffs was a negative 150 basis point up from 80 basis point 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 flowed 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 cycles did a 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 declines 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 regions, offset by continued recovery in EMEA. Q4 gross margin is anticipated to be in the range of 56% to 50% 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% tariffs 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 the sequential decrease 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. Your line is open..

Great, thank you very much for letting me ask a question here. So, could you talk a little about the competitive landscape? I know Cisco obviously weakened quite a bit in their October quarter and they guided to pretty soft outlook for the January quarter.

Has there been any change in their competitive action in the marketplace? They addressed the 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 the world?.

Hey Alex, it's Ed. Yes, I think it's – keep in mind that we are always competing with Cisco, so they are our largest competitor and if you look at where we play they probably have 60% market share. So even if they are 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 then is what your plan?.

No, it is a competitive market and we are always going toe-to-toe with them all around the world. So it is competitive and I wouldn’t say that we've see 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 is some softness in the top line, but has there been any change as 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 if - what happened between the U.S. and China affected global trade and it affected customers, particularly like manufacturing customers in the German market and 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 that 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 at 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 fields [ph] where we weren’t covering certain markets and we moved aggressively to do that, but there was still a gap in coverage. And 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 globally..

One last question and I'll cede the floor.

Remi, could you just remind us what the sort of quarter to quarter to quarter and not benefits from cost cutting will look like from [indiscernible] from the March quarter to the June quarter, what's that not? And then I think there is some more in the June quarter that goes into the September quarter, what's the dollar value of that, not 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 seasonal 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 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 is a little bit of a bleed into - benefit into the September quarter?.

Correct, right. Some employees will exit in our fiscal Q4, so that the September quarter is really the first quarter we get a 100% of the benefit of the Aerohive synergies..

Perfect, thank you very much, I appreciate the commentary. And I think you guys did a good job of telegraphing the soft conditions, so I just wanted to make that comment. Thanks..

Thanks, Alex..

Our next question comes from Eric Martinuzzi of Lake Street. Your line is open..

Yes, I wanted to drill down on the softness in the quarter, specifically just the - connecting the three 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 and Asia-Pac, either for Ed or Remi?.

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 a $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 they 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 going to - that were going to come in, they didn't materialize and were 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 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 of those construction projects they're not ready for delivery. So even though the bookings were there, they - 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, I think we called out Federal and that's a little color for you, Eric..

Okay, that's helpful, thanks. 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 the timing of their launch of a bigger commit or is there - are there issues of them just educating their own channel?.

Yes, so I think yes, there is 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 specific, they have five 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 eight 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 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 work - 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 Wi-Fi 6. Remember we were the first company to deploy Wi-Fi 6 in stadium. That gives us a competitive advantage. We also have a unique hand-off 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 a 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 from 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 $7.09 for 4.2 million shares bought back, is that correct?.

That's correct on all three 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 socialize 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..

Got it. Thanks for taking my questions..

Thanks, Eric..

Our next question comes from Paul Silverstein of Cowen. Your line is open..

Thanks. I want to ask three 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, and as we look into the next year, we have a tariff benefit. We've raised price. We have some tariffs going away.

We have this 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 costs 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 in our wireless portfolios. We are consolidating them. And then on the sales and marketing side, I highlighted 27%.

If we look at that and think that number is way too high and 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 three of those items that you just laid out for the second half of calendar '20..

All right. But Ed, if I try to reduce it down to sound byte, it sounds like most to get from what you posted this quarter to 15% in either September, December, both, it sounds like the bulk of that is going to come from OpEx. I don't want to put words in your mouth, I just want to make sure I understand..

Yes, I think, Paul, I think you heard revenue [indiscernible] 1.5 of tariff impact this quarter. And obviously if that tariff impact goes away, there is 1.5 of gross margin for you. So I think there's a lot of - there's a lot of different ways we can get there, Paul..

Okay, all right. And actually if - I apologize, but I want to, I know it's been asked a couple of times, but I wanted to go back to the shortfall this quarter, the three 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 - is there any more concrete in nature to that coming in or you're just hopeful that will come in later in the year or is there, did the government made clear the 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 the 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, as you're expecting that opportunity is in March, so you're expecting it to just hit sometime 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 into specifics, the two other deals are worth how much, collectively?.

Yes, I think if you take, I think if you combine the two, 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 as with timing or you don't have visibility with the timing?.

We have - there is one 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, there are 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, to interrupt. Normally a company that generates revenue of $270 million, when some deals get pushed out, we should be able to get the deal.

The reason we're pointing out to them is that each of them were multi-million 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 called out, entering the quarter we were not able to make up for these contracts elsewhere.

And it is worth to highlight that two 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 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 – there should be an offset elsewhere in the normal environment..

Understood and I appreciate that.

But I guess I’m a little confused to the explanation and that it sounds like in two of the three, if not all three, you expect to see some degree of revenue if not all the revenue for those special contracts in the March timeframe 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 helped fashion in the commentary and guidance you provided previously.

I'm not trying to give you a hard time, I’m just trying to understand?.

No, no and so – I think the seasonality should be slightly more than the 3%, we're guiding at the mid-point. 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. I 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 [indiscernible] there's a question in there?.

No, pretty much on all of the contracts, they had in the pipe for E-rate..

I mean, I am sorry that..

And just to be clear – 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 the very strong results we had of $42 million..

So Aerohive performed well, all the weakness that you're seeing is on the Extreme organic piece of the business?.

Correct..

Okay look – one last question from me, which you just referenced again. If I go back to the previous quarter, you all had said, no returns credit two-tenths of the Americas go after that. This past quarter we completed restructured, we've reassigned accounts. We've hired a lot of new people.

So we slowed, so now that – so now what we're seeing is we're seeing these teams come in, we're really excited about our new leader that's come in, he has 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 in the previous quarter and I get it, we talked about 90-day periods here. So I don't want to over emphasize 90 days.

But it sounded like from what you said last quarter, you did a restructure 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 one, two, three 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 enterprise space having new leaders in place is going to really help. Also remember that we basically organized 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 territories, 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..

All right, I've got other questions, but out of respect for others on the call, I'll take them offline. Thanks guys..

Thank you, okay..

[Operator Instructions] Our next question comes from Christian Schwab of Craig-Hallum. Your line is open..

Great, most of my questions have been answered. I just have two quick ones, please.

Could you give us an update on where we are in the product refresh and how many of the products or volume have been refreshed? And can you give us an update, I know previously you were very excited about relationship with Broadcom, can you give us any update there, if there is anything new? Thank you..

So on the product refresh out of the total identified product portfolio of 57 products 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 [ph]..

Great, thank you..

And on the second question, I'll address one aspect of it, which is the procurement relationship and I'll let Ed comment on the partnership and the fact that we're their preferred partner.

But basically 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 is big opportunities out there that we can fulfill with products having Broadcom components 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 represent that and we've identified accounts to go after to kick that off.

But – our product teams are working on, what is the integrated solution that we can go to these large enterprise customers with. So I'd say, we're still in the – we're still in the, I would call it product development stage of that and expecting that to come in the second half of this calendar year..

Okay. And then I guess just one last quick follow-up if I may, you guys mentioned a couple times, excuse me, 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 – the appropriate percentage revenue number?.

Yes, 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 2020..

So that's a statement about quarterly revenue today right? So, low 20s I would call it 255, 260, 279 – a return of, let's say growth and better execution of the team and et cetera, and quarterly revenues in the 300 and change level, right. So you're talking about getting into the low 20s.

What has been the kind of the 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 or 265. I think to get to the low 20s we need to be above 300..

Okay..

So at the current revenue level, Ed mentioned earlier that we anticipate to gain about 2 points, so that would go from 27 to 25 and 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. Thank you. I don't have any other questions..

Thank you, Christian..

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 and 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 and software products, the integration, a lot of things that we've highlighted here over the coming months and then we’ll be at investor conferences.

We have JMP 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..