The story of Extreme Networks is one of the more remarkable turnarounds I’ve seen in technology in years. About two years ago the company had a market cap of under $300 million, and I thought they were a sure-fire acquisition target for someone who wanted some decent technology on the cheap — because it was becoming apparently clear that the once-cool networking company had lost its way like so many others before it.
Many of the brand names we have known in the past — Nortel, 3Com, Cabletron, Lucent, FORE systems and Foundry — all dropped as Cisco got bigger and HP Networking gobbled up the low end. There just didn’t seem to be room for another vendor. If an acquisition happened, it would likely fall on the scrap heap that so many other networking vendors have been tossed on.
Then Ed Meyercord succeeded Chuck Berger as CEO and put a new strategy in place. The plan was to roll up some of the smaller networking vendors and create a bigger, stronger vendor capable of going toe to toe with the big guys.
Yesterday Extreme Networks announced its Q4 Fiscal Year 2017 results, and it’s clear the plan is working and the company is off and rolling. The company’s $178.7 million in revenue was well above the $171.8 million the Street was expecting. This wasn’t a one-time occurrence. Q1 Fiscal Year 2018 guidance was estimated to be $200 million to $210 million, which will include about 11 weeks of Avaya Networking in it.
Investors seem favorable on the news, as the stock is trading up about 10% post earnings after rising 8% following a pre-earnings call. All in all, the stock has more than doubled since the beginning of the year and has a market cap of $1.13 billion, meaning it has gone from a small, niche networking vendor to a major player. Also, for the first time in perhaps two decades, the company delivered positive GAAP earnings.
Acquisition of Zebra key to Extreme’s success
Extreme Networks’ strategy has revolved around its Wi-Fi solution used as the tip of the spear to sell a broader product set. The acquisitions of Avaya and Brocade have captured many of the news headlines, but the one that is generating many of the new opportunities is Zebra. After the dust settles, we may look back at the purchase of the Zebra Wi-Fi assets as the big bang that started the turnaround.
One of the core tenets of my research is that the opportunity to take share happens when markets transition. In the enterprise networking space, one of the big transitions is at the wireless edge because businesses are looking to use their Wi-Fi networks more strategically. Wi-Fi used to be a network of convenience, but now it’s a strategic asset as organizations connect more end-user devices, IoT endpoints and guests to the network and then use the data to make better decisions.
On Extreme’s earnings call, Meyercord announced that Zebra Wireless LAN, now known as Extreme WiNG, has been fully integrated into the core Extreme business. Because of its roots in Motorola with Symbol, Zebra has a big footprint in transportation and retail with companies such as FedEx, Canadian Tire and WalMart. Extreme has an outstanding Wi-Fi portfolio itself, as well as perhaps the best Wi-Fi analytics tool, which has been used in the past three Super Bowls for the NFL to see what’s happening on the network. The marriage of Zebra into Extreme opens the door for a company to sell a broader range of products into these large customers.
Also, Extreme has been very open about its planned roadmap for “ExtrAvAcade,” enabling it to provide a wide range of options so customers can deploy a network any way they want. Modular, chassis-based, layer 2 or layer 3 fabric, etc. — the combined portfolio can meet any criteria.
Meyercord and team learned some lessons from the botched Enterasys/Extreme merger that handled customer transition issues about as badly as possible. Products were end-of-lifed well before their time, and customer service was inconsistent, resulting in a high churn rate. This time, the company is letting each product run its course and not trying to force interoperability. Since then, Extreme has revamped its customer service and has a best-in-class technical assistance center (TAC) — some of the Avaya Networking customers I’ve talked with have raved about the quality of service they are getting today.
While Extreme’s stock price has grown, which has investor and company benefits, the big winner here is the customer base of Extreme, Zebra, Brocade and Avaya Networking. Each of those sets of customers can be assured that the investments they made in the past weren’t for naught. More important, a bigger, more profitable Extreme will have more money to invest in R&D, fueling further innovation. It’s only one quarter, but Extreme seems to be off to a running start.