Extreme Networks CEO Meyercord On The Battle Plan For Taking On Cisco And HPE Aruba
Ed Meyercord says Extreme Networks partners have a huge opportunity to realize big margins and rapid growth as cross-sell opportunities emerge from within Extreme's newly expanded portfolio.
With $210 million in acquisitions behind it, Extreme Networks is focused now on making sure those newly acquired businesses -- networking and data center assets from Avaya, Zebra Technologies and Brocade Communications -- are integrated smoothly and generating the kind of revenue the company expected when it went on an all-out acquisitions blitz last year.
Ed Meyercord, CEO of the San Jose, Calif.-based company says that while integrating the three major acquisitions wasn't without difficulties, the challenges were relatively minor and of the "one-time" variety. Now, the company is focused on maintaining its newly-found scale as a $1 billion company and pressing what it sees as its advantage in the market for intelligent edge technologies, automation and cloud as it goes head-to-head with much larger competitors like Cisco Systems and HPE Aruba.
Part of Extreme's advantage, Meyercord said, is its strong history with large customers like Walmart, Chrysler, Samsung and other large organizations in retail, health care and manufacturing.
What Meyercord calls Extreme's "pipeline of opportunity" is rapidly growing, he said, indicating eagerness among perspective customers to take advantage of Extreme's offerings. The company, and its partners, he said, have a huge opportunity to realize sizable margins and rapid growth as cross-sell opportunities emerge from within Extreme's newly expanded portfolio.
What follows is an edited excerpt from Meyercord's conversation with CRN.
How does Extreme overcome advantages larger competitors may have in pricing, or customer loyalty?
Cisco is a marketing machine, and their brand is obviously a very well-known brand. From a margin perspective and a scale perspective, we've hit a critical mass. We're over $1 billion. That was one of our objectives, to get to this size. Now that we're here, we can play on a pretty level playing field in terms of margins, in terms of supply chain and our costs. We're in a very competitive position. As it relates to our brand and how we evolve, it's about our reference accounts and leveraging our customers. When we talk about retailers like Walmart, or Kroeger, these huge retailers, they rely on Extreme. When we talk about health care organizations, Henry Ford Medical Center, and I mentioned Ascension Health, 25 percent of the NHS hospitals in the U.K. When we go through our reference accounts in each of these verticals -- in manufacturing its Volkswagen, Chrysler, Samsung, Intel, Extreme is in their network and in their data center and we're a cloud provider for that caliber of company. That's where we eliminate any kind of FUD that may come from the bigger companies.
What are you seeing in the market broadly that's working in Extreme's favor?
The two trends we see working in Extreme's favor are what's on at the edge of the network, where it's really about the smart edge, which is where we're focused and we have differentiated technology and solutions. On the other side, it's about cloud agility, and having the cloud capabilities and network automation tools that we have. We see ourselves evolving in the faster-growing segments of the market.
How successful have you been across the newly expanded Extreme portfolio in the early days?
We see a pretty big opportunity to cross-sell. We can sell traditional Extreme products into the Zebra accounts that just have wireless, or we can sell our wireless into the Avaya accounts. We can sell our management and analytics, our access control software into that base. With the newly acquired Brocade assets, we can sell campus and core switching into those data center customers. Going into our Q2, we identified an $8 million pipeline of opportunity we have to cross-sell. We got to December and it was a $20 million opportunity. This quarter, that's a $38.5 million pipeline of opportunity. So, we've seen a rapid ramp-up of opportunities, and we've also seen a significant ramp in cross-sell revenue. This quarter was $10.5 million in cross-sell revenue versus $2.5 million in the prior quarter. It's really coming together in terms of our product line management and our product roadmap. I'm really excited about how we're putting together what we call validated designs.
Tell me more about the validated designs.
We're packaging our software and our hardware for very specific solutions, and those solutions are very prescriptive in terms of how to provision the technology and the different components of hardware and software. We're doing this across our portfolio. It's a best practice that we picked up from Brocade and what they have in the data center. Now we're rolling this out in what we call our Smart Edge, our Automated Core and with our Agile Data Center.
From those buckets, will the validated designs focus on specific verticals, or on customers of certain sizes?
You should think about those as the horizontals, and then we drop down into our verticals. A vertical for us might be health care, for example. Ascension Health is one of the largest health care organizations in the country, and they're a great example of a customer that really likes the fabric technology, and they really of the security and hyper-segmentation and agility and ease of deployment. They're protecting sensitive medical assets in their environment from a campus core perspective with the fabric technology. With Smart Edge, now we have new opportunities and they're trialing our wireless capabilities with Smart Edge, given all the software capabilities we have to allow them to control the extension of the fabric out to the edge of the network to include wireless, wired, and software. You have a toolbox of capability and you can tailor that specifically for health care use cases. We'll do the same for use cases in education and manufacturing.
Can you give me an example of a manufacturing use case, and what are some of the other verticals that the validated designs will focus on?
Chrysler is a great example. They said the cut their IT support spend in half by leveraging the fabric technology in their manufacturing environment and expanding that out into Smart Edge. We also have a lot of data center opportunities that we're looking at, as well. So, it's retail, transportation, logistics, education, health care, manufacturing. We'll go across cloud service providers, internet exchanges. Across our portfolio, we have different verticals. We take the horizontal solutions and then apply them with specific use cases, all around achieving business outcomes. You'll hear our teams talk about customer-driven networking, and what we mean by customer-driven is that we are configuring our technology in a way with our validated design that we know we can help them change their outcome.
What are your marching orders for your sales force as far as engaging the channel is concerned?
There's a huge opportunity for our channel. The channel, for us, is an extension of our sales teams, and they have a lot more opportunity with Extreme today to sell in more places in the network. I mentioned Ascension Health, and our business with Ascension Health is driven by the partner. They're the outsourced IT department of that organization, and it's the partner that's excited about the opportunities they have now within our portfolio. All these solutions get stitched together with a single pane of glass. We can take the different places in the network and the different solutions, Smart Edge, Automated Campus and Agile Data Center and provide a common view with XMC Extreme Management. There's a lot of excitement about the ability to sell a much broader portfolio. With the validated design, we want to make it easy for them. It's simpler for us to educate them on the validated design and it's simpler for them to position us with the customer, to support and service this.
Does that mean less friction across the board, from Extreme's sales force through the channel and into the customer? Do you feel like Extreme is easier for partners to deal with than larger competitors like Cisco and HPE Aruba?
There's less friction in the process. It's a more prescriptive sale. What's different for our partner community is that a decent sized partner can have a real influence on Extreme in terms of our product roadmap, in terms of how we're packaging, how we're delivering. That's not true with the bigger players. Partners that want to wrestle with multiple partners on a deal with a Cisco solution or an HPE Aruba solution, they don't have the same kind of responsiveness or impact that they're going to get from Extreme. We think we're the right size company to partner with. We're somewhat flexible in terms of our ability to work with partners on different opportunities out there.
How successful have you been at convincing partners to work with Extreme over Cisco or HPE Aruba?
It's building. We're a partner-driven company, so all of our deals are running through partners. A partner's name is attached to that cross-sell pipeline I just mentioned. The $8 million, to $20 million, to $38 million over the last quarter, these are just opportunities that are coming, that are building in the pipeline and running through partners.
You've made three acquisitions in short order. Do you think the trend toward consolidation in the industry is a double-edged sword? Does it help and hurt? Does it intensify competition?
We haven't seen as many acquisitions on the networking side. We've seen a lot of companies making acquisitions in adjacent markets. We see a lot of competitors that seem to be less focused on networking, and looking at servers and storage and hyper-converged and security. We see networking as strategic. We see opportunities for us to virtualize the network and take a leading role doing that, where we're dealing with competitors that are less focused. Cisco is obviously the largest competitor. They have end-to-end solutions, but they're trying to do a lot of different things. We can be a lot more focused than Cisco on the networking side and delivering unique solutions, leveraging networking to change business outcomes for customers.
What impact has the Brocade acquisition had on your account teams and account coverage?
We left the Brocade account teams intact for covering the Brocade business. Midway through the quarter, we split the teams and pushed half the teams out into the field, our normal geographical structure, and the other half stayed in the account business, focused on the federal space, cloud service providers, the Japan market and the OEM business. During the quarter, when we did that, there was some disruption around account coverage. The other thing was there were several important and large strategic customers where there were opportunities at significant discounts and we had to make a decision: do we want to turn away that business, or do we want to honor that business with important strategic customers. We decided that we would honor that business.
Did the account migrations, and doing business at a discount impact margins during the quarter?
Our gross margins this quarter came in lower than we had projected, and it had to do with the migration of accounts and us taking on a pipeline of opportunities with customers where we didn't really have visibility to it. These are customers who have been somewhat patient with Brocade as they've gone through a year-long transition. As we populated our sales database, which captures our opportunities and our pipeline as we brought deals in, and as different teams took ownership of the opportunities, we uncovered some pretty steep discounting, and that's a one-time deal that has to do with the transfer of the pipeline into the account teams and we have to clean up some of the pipeline. Going forward, we're going forward, we're going to see some nice margin in that business and the pipeline going forward and our revenue are right in line with what we've always said.
Were there any challenges in the Avaya migration that showed up in the company's bottom line?
We migrated the Avaya systems in April. We were using a TSA, a transition services agreement, and the way we book revenue is it's based on what we ship into the channel, into distribution. Avaya, unbeknownst to us, stopped shipping into disty with a couple of weeks to go in the quarter. So a lot of the sales we saw were actually never shipped to disty and that caused us to be lighter than we expected for the quarter. It's a one-time blip. If you add back the $4 million to $5 million of product and equipment that wasn't shipped to disty, it would've put us pretty close to that run rate.
What are the areas you've decided Extreme isn't going to get into?
We're thinking about automation, and networking intelligence, and we're in those markets. From an SD-WAN perspective, there are a lot of different grades for how deep you want to go with your solution. We see SD-WAN as an adjacency that would clearly make a lot of sense for a lot of our customers in terms of a solution offering from Extreme. In terms of Extreme diving into the security market, we see ourselves as a security enabler, and a partner with security companies on that front. You're not going to see us come out with our own firewall technology, or make an acquisition in that space. You'll see us create a model that allows our customers to easily deploy the security solution of their choice, like Fortinet, or Palo Alto, or Checkpoint. Whatever it is, we're going to create programmability from a data center, switching and routing perspective, programmability in terms of supporting the security solution and then mitigating and resolving threats, leveraging the networking capabilities. That's how we see it, and we believe that's how our customers see it.
You're just coming off your fiscal third quarter. Where did you see growth, and how did the former Avaya and Brocade units perform?
As far as the quarter goes, the core Extreme business is doing quite well, and saw 8 percent organic growth year-over-year. Avaya, which we call our Campus Fabric, showed really good progress from the December quarter to the March quarter. The Brocade business came in essentially in line with our forecast to the Street. When we set out to acquire the Avaya networking assets and the Brocade data center assets, we looked at Avaya as a $200 million run rate, and we looked at Brocade as a $230 million run rate. If you clump those two together, you end up with a $430 million revenue number from acquired assets. When you look at the base Extreme, which now includes Zebra revenue, it's about $650 million. You put that together and you have a $1.08 billion baseline run rate business. That's what we've been looking at from a Street perspective.