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Extreme Networks Inc (EXTR 2.38%)
Q1Â 2020 Earnings Call
Oct 30, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen thank you for standing by. And welcome to the Extreme Networks Quarter 1 Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions]
I would now like to hand the conference to your speaker today Stan Kovler. Please go ahead sir.
Stan Kovler -- Senior Director of Investor Relations and Finance
Thanks Victor. Welcome to extreme networks first quarter, fiscal 2020 earnings conference call. I'm Stan Kotler vice president of corporate trade And Investor Relations. With me today are extreme networks president and CEO admire record and CFO Remy Tomas. We just distributed a press release and file an HK detailing extreme networks first quarter fiscal 2020 financial results. For your convenience a copy of the press release, which includes our gaps non gap reconciliations in our financial results presentation are both available in the investor relations section of our website at extreme networks 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, Acquired technologies products operations pricing changes to our supply chain 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 report 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.
Ed Meyercord -- President and Chief Executive Officer
Thanks Stan and thank you all for joining us this morning. Today we announce Q1 non-GAAP results that highlight revenue in line with our expectations higher-than-expected gross margins. We're on the verge of hitting our fiscal '20 goal of 60% at 59.9% and earnings of $0.08 per share also above the high end of our guidance range on strong operating expense control and cost centered synergies with Aerohive. Overall Q1 results were driven by strength in our cloud-managed wireless LAN business and Edge switching from our Extreme portfolio resulting in 7% year-over-year growth. Our acquisition of Aerohive outperformed our guidance as we recognized $25 million of revenue and a 64% gross margin during the quarter. We recognized $230 million from our core Extreme business at record gross margins with growth in our Edge switching portfolio and at several geos. The quarter was negatively impacted by macroeconomic weakness in Germany and a onetime delay in spending by a single large U.S. federal data center customer that has resumed buying this quarter. We're more excited today than ever before about our position in the enterprise market with our newly announced ExtremeCloud IQ platform. The networking industry is at the beginning of a long-term transition to cloud management in what we call cloud driven. Extreme Cloud IQ is built on a micro services architecture third generation cloud technology and has the tools that allow us to provide insights and intelligence that are actionable. Our gateway to the autonomous network ExtremeCloud IQ supports wireless today and will be available on our wired switching solutions in January.
Given the higher performance, ease of use, reliability, and operating efficiency of running networks from the cloud, every enterprise customer has to consider cloud and will need to have a strategy is the industry transitions over the next decade. Cloud offers speed and continuous delivery of new capabilities, and proven and secure environments that can handle the most risk sensitive customers. Enterprise customers will have access to best to breed technologies in the world running on leading edge infrastructure. at extreme, we have the number one Cloud Platform will be the first and only cloud driven provider with end to end solutions edge to data center. We're the only platform that offers customers a choice of public private or local clouds or all of them together on one licensing model. It's Cisco it's DNA Command Center solely on-premise with a small fraction of paying customers that are actually using it or it's Meraki older generation cloud that is completely separate and incompatible. We also have the largest highest quality real-time MLAI platform that is ISO certified. Lastly unlike Meraki we offer diverse consumption licensing models with significant ease of use and we'll deliver 30% opex savings for enterprise customers who choose Extreme. And last week we also announced an expanded strategic partnership with Broadcom at our partner conference. Senior leadership of Broadcom was there live in Carlsbad to announce that Extreme was their preferred choice for enterprise customers as part of Broadcom's silicon-to-software strategy. As their preferred provider we are working together to give enterprise customers and channel partners powerful security segmentation resiliency policy telemetry and performance advantages as they pursue cloud-driven digital transformation with a simple secure and intelligent campus architecture. This is a big endorsement for Extreme. We're building reference architectures to go to our joint enterprise customer and partner bases as we speak. Gartner once again positioned us as a leader in its magic quadrant for wired and wireless LAN access infrastructure. This is the second consecutive year Extreme has been positioned as a leader in this annual report. It's another strong endorsement of the quality and vision of our solution and is the most important reference we have for enterprise customers. During Q1 we closed 14 deals of $1 million or more. Heading into Q2 our pipeline is strengthening new opportunities across switching wireless cloud and data center.
This is driving our sequential quarter-over-quarter growth. In Q1 our Edge switching solutions drove performance on the extreme side once again highlighted by the success of our product cycle that will continue to ramp over the next nine to 12 months. On the core Extreme side total Edge switching and wireless product revenue grew 9% year-over-year with Edge switching loan up double digits. Meanwhile our core wireless revenue declines are moderating. Specifically we saw success in E-Rate and education along with our new X465 switch. These trends were offset by our core wireless business facing difficult year-over-year comparisons and revenue declined mid-single digits in certain verticals such as retail transportation logistics where large-scale deployments wrapped up. We benefited from strength in service provider with the SLX platform and our software application revenue grew for the seventh quarter in a row up 33% year-over-year. From a vertical standpoint E-rate K-12 business grew double digit. Other areas of strength for a service provider where bookings grew 11% year-over-year and sports and entertainment where bookings grew 60% year-over-year and we won yet another major league baseball stadium during the quarter. In retail we expect a recovery once our TRI Radio wireless solutions become available toward calendar year-end along with lower end switches from our smart Omniedge portfolio. We encountered challenges in Germany Italy and U.K. as well due to Brexit uncertainty. Meanwhile all of our other major EMEA regions posted good growth. Asia Pacific revenue grew 15% year-over-year and 23% quarter-over-quarter organically before the inclusion of HIVE.
This comes despite a highly competitive pricing environment as we leverage our value proposition and larger deals. In North America, we are excited to have a new senior vice president of America sales on board, who came from Cisco after 13 years of enterprise sales leadership at the company, most recently as their global leader of their SDN business. It brings a wealth of knowledge about the enterprise sales strategy and solutions of our top competitors in the industry to help us architect a plan to win enterprise customers. During q1, we've reorganized geographic coverage in North America between State, local and education what we call sled and our enterprise sales teams. This allows for greater focus of these unique accounts that require a different selling motion. Our vertical teams in areas such as sports and entertainment healthcare retail remain intact and this aligns with our product strategy to refresh stratify verticalize and cloudify our portfolio. It will also drive better alignment with our channel partners as part of this transformation. Looking ahead our outlook for Q2 reflects seasonal growth in core Extreme and a full quarter's worth of Aerohive contribution factoring in the Sluggish EMEA environment. As customers evaluate our ExtremeCloud IQ solutions we continue to expect some revenue dis-synergies with our existing wireless business which we built into our outlook as well. With that we remain committed to our low single-digit revenue growth 60% gross margins target and the restructuring actions we took at the end of fiscal '19 strong execution on merger cost synergies put us on track to hire our operating margins in Q2 and achieving our targeted 15% non-GAAP operating margin exiting fiscal '20.
And with that I'll turn the call over to our CFO Remi Thomas.
Remi Thomas -- Chief Financial Officer
Thanks Ed. As Ed noted our revenues of $255.5 million grew 7% year-over-year grew 1% quarter-over-quarter and came in at the midpoint of our guidance. Non-GAAP earnings per share was $0.08 above the high end of our range. EPS benefited from a gross margin of 59.9% toward the high end of our range and from lower-than-expected operating expenses. We completed the acquisition of Aerohive on August 9 for $267 million which consisted of $263.6 million paid to acquire the outstanding shares of the company and $3.5 million for the acceleration of stock awards. Net of acquisition costs and net of the cash acquired the enterprise value of the transaction was $210 million. Aerohive contributed approximately $25 million in revenue and $6 million in operating income to Q1 results. On a stand-alone basis Aerohive revenue would have declined 4% year-over-year with subscription and hosting revenue up over 30% year-over-year partially offsetting a decline in product revenue. Our combined product revenue of $185.1 million grew 4% year-over-year and declined 2% quarter-over-quarter. On a like-for-like basis core extreme product revenue declined 6% year-over-year. Our combined product book-to-bill ratio including Aerohive was about one with product bookings up 2% year-over-year. We refreshed over 30% of the core Extreme product portfolio to date up from approximately 25% last quarter. We expect our product refresh to hit between 40% to 50% of our portfolio by the December quarter. Combined services revenue of $70.4 million grew 13% year-over-year and 12% quarter-over-quarter.
On a like-for-like basis core Extreme services revenues were 2% year-over-year reflecting the positive impact of continued growth in multiyear bookings we've seen over the past several quarters. Our combined services book-to-bill ratio including Aerohive but excluding the impact of the deferred revenue haircut was above one. Our annualized run rate of Aerohive's subscription and services revenue excluding the impact of the deferred revenue haircut was $57 million in Q1 versus the $53 million Aerohive recognized in its June quarter. Subscription and services booking for Aerohive grew 5% on a full quarter like-for-like basis including the legacy ExtremeCloud supports our total recurring revenue accounted for nearly 28% of our total revenue adjusted for full quarter versus just 24% in Q4. During the quarter the Americas contributed 55% to total revenue EMEA 35% and APAC closed out the remaining amount. Non-GAAP gross margin was 59.9% compared to 58% in the year-ago quarter and 59.2% in Q4. The sequential improvement was attributable to a 20 basis point improvement in product gross margin a 40 basis point improvement in services gross margin as well as a higher contribution from services revenue that's on the core Extreme side. In addition gross margin benefited sequentially from the first-time consolidation of Aerohive which carries a higher gross margin than core extreme.
Finally we estimate that the net impact of tariffs was a negative 80 basis points to total combined company gross margin in Q1 down from 120 basis points negative impact in Q4 and largely consistent with our guidance. Q1 non-GAAP operating expenses came in at $137.2 million below the lower end of our guidance an increase from $125.3 million in the year-ago quarter and from $136.8 million in Q4 with the consolidation of Aerohive. The sequential change in non-GAAP operating expenses was mainly due to lower core Extreme selling and marketing expenses as the impact of our restructuring plans flow through the P&L offset by the inclusion of a partial quarter of Aerohive expenses. We are on track to deliver the run rate cost reduction of $24 million to $27 million previously announced on the legacy Extreme side. Our September annualized opex run rate for Aerohive was $55 million versus the $93 million reported in Aerohive stand-alone June quarter. This is contributing to the higher operating margins we expect in Q2 and another substantial step-up to the second half of the year. Free cash flow was a negative $5.4 million down from a positive $18.9 million in Q4 and $26.9 million in the year-ago quarter. Adjusted for cash merger integration costs free cash flow would have been a positive $10.6 million. Our total cash and short-term investments balance at the end of Q1 was $161.1 million down from $169.9 million at the end of Q4. Net debt of $218.9 million increased by $208 million from the $10.9 million in Q4 that was reported in Q4 due to the acquisition of Aerohive. DSO of 55 days about 8 days from Q4 and from the year-ago quarter.
On a sequential basis the strong collections drove DSO lower. Our cash conversion cycle stood at 73 days compared to 61 days in Q4 but down from 76 days in the year-ago quarter. Our inventory balance of $82.4 million grew sequentially on $12.2 million of additional Aerohive inventory and a $6 million increase in core Extreme inventory. Core Extreme inventory rose on pre-buys ahead of additional tariffs and as we introduced new products. Now turning to guidance. We expect total Q2 revenue to be in the range of $268 million to $278 million which represents 7% sequential growth and 3.5% growth for core Extreme at the midpoint. Q2 GAAP gross margin is anticipated to be in the range of 55.2% to 57.4% and non-GAAP gross margin in the range of 59.1% to 61.1%. We estimate that tariffs will have an impact of about 80 basis points on our overall gross margin for fiscal Q2 '20 given the existing cost of inventory on hand. Q2 operating expenses are expected to be in the range of $164.2 million to $169.2 million on a GAAP basis and $137.3 million to $142.3 million on a non-GAAP basis. The sequential increase in opex is primarily related to a full quarter of Aerohive operations offset by the restructuring actions taken at the end of Q4 '19. Q2 GAAP earnings are expected to be in the range of a net loss of $23.2 million to $16.6 million or a loss of $0.18 to $0.14 per share. Non-GAAP net income is expected to be in the range of $13.9 million to $20.5 million or $0.12 to $0.16 per diluted shares. In Q2 we expect average shares outstanding to be approximately $121.8 million on a GAAP basis and $125 million on a non-GAAP basis excluding the impact of any shares we may repurchase.
With that I will now turn it over to the operator to begin the question-and-answer session.
Questions and Answers:
Operator
[Operator Instructions] And our first question will come from the line of Erik Suppiger from JMP Securities. Erik are you line maybe on mute?
Erik Suppiger -- JMP Securities -- Analyst
Can you hear me OK? Yes, all right. Sorry about that. So on the tariffs can you talk about some of your customer behavior? Are they trying to I don't know manage the timing around tariffs? Are they maybe delaying any purchasing until tariffs can come down? Or is there any discussion around what they're -- how they're trying to manage that situation?
Ed Meyercord -- President and Chief Executive Officer
Eric I think with this -- when it came into play last year. And the severity of the tariffs were a lot higher in terms of the percentages. We did see a lot of customer activity particularly in Q2 where there was a lot of early buy-in given upcoming increases on our side. Since that time I think people have become somewhat conditioned to what's going on in the marketplace. And so we're not really seeing the effect as much. And I think our strategy is to balance how we pass-through the tariffs. We're trying to hold our margins and then do a good job of mitigating the cost and that's what we're doing. And I think the -- it's really kind of muted the noise from the field as it relates to this.
Erik Suppiger -- JMP Securities -- Analyst
Okay. And if tariffs do get reversed can you comment a little bit about what that would mean from a gross margin perspective? Might we assume that there's an 80 basis point benefit? Or how should we factor that in?
Ed Meyercord -- President and Chief Executive Officer
Yes. At this point the discussions are around not following through with proposed increases. So that's what we're looking at. We haven't really seen kind of the rollback yet or the proposals of a rollback. So when Xi Jim King and Trump meet in November in Chile the expectation is on our side it seems to be consensus in Washington is that new actions will be frozen. And then I think it's going to take some time before we digest what could happen with tariffs that have already been imposed. So I think it's going to take some time to play out. And at this stage we're holding. We've announced a price increase for November which is going to be routine for us a more less a nominal price increase that we'll consider normal course of business going forward. But other than that I don't think we have any other comment.
Erik Suppiger -- JMP Securities -- Analyst
Okay. And lastly on Aerohive. Can you talk a little bit about how it is working with customers in terms of integration of products? Are customers looking to transition from traditional Extreme products to HIVE products? Or how are the discussions going since the acquisition closed?
Ed Meyercord -- President and Chief Executive Officer
Yes. Look there's excitement on both sides. I think we just had a partner conference. Aerohive partners are excited about adding our switching portfolio. We've taken the Aerohive cloud team brought it in and that team has also taken on our software team. We're cloudifying our portfolio very quickly and the fact that we're going to have our wireless the entire wireless portfolio up into the cloud by the end of the year. And then in January to have our switch portfolio into the cloud has created a lot of excitement with our partner as well as our customer community. On the Extreme side there's a lot of interest in cloud. There was pent-up demand for Extreme because we didn't have that capability before. And so as we mentioned in our comments there are a lot of opportunities that we've been looking at where now our customers are taking a step back and they really want to evaluate our ExtremeCloud IQ. And so I would just say there's just -- there's an awful lot of excitement about the platform that we have the fact that we have the #1 cloud. We're not the biggest but we have the most advanced capabilities and there's a lot of advantages that we bring. So yes I just -- I would say that the enthusiasm and excitement from existing partners and customers on both sides of the equation is quite high. So we're really optimistic about what this means as we roll into the first half of calendar '20.
Erik Suppiger -- JMP Securities -- Analyst
Very good. Thank you.
Operator
And our next question will come from the line of Alex Henderson from Needham. You may begin
Alex Henderson -- Needham & Company -- Analyst
Thank you, so I was hoping you could talk a little bit about the restructuring motion. It sounds like you're a little ahead of target so far. Can you talk about what you're assuming in terms of the cost savings benefit? What portion will be achieved in the December quarter? And how it will progress into the March and June quarters?
Ed Meyercord -- President and Chief Executive Officer
Yes. So I won't mention -- get into detailed dollar amounts but I would tell you what we're going to see in the December quarter is the Phase 2 of project project kind, which was the restructuring on the core extreme side with a reduction in engineering headcount and that is largely taking place as we speak. And what we can see in the March quarter is acceleration of synergies on the Aerohive side as transition employees i.e. employees that were kept because in finance for example they're required to help us close the books as we transition from NetSuite to Oracle as those employees exit the company. So you're going to see step improvements in our operating expenses reduction in the December and the March quarter as a result of these actions.
Alex Henderson -- Needham & Company -- Analyst
If you were to just say percentage complete of the actions how would it lay out over the 4 quarters? Are you -- where -- what has done so far as a percentage of the process?
Ed Meyercord -- President and Chief Executive Officer
Well I would say 100% of the reduction on the Extreme side will be done by the December quarter. And I would say that 90% of the reduction on the Aerohive side will be done by the March quarter. And so what we will see in Q4 which is our June quarter is really the impact of the seasonality. But as I look at the operating expenses in that quarter we will not expect a reduction in the absolute of dollar amounts of opex.
Alex Henderson -- Needham & Company -- Analyst
So in the June quarter we should be at run rate?
Ed Meyercord -- President and Chief Executive Officer
In the June quarter we should definitely get un rate yes. -- And then just -- as you know I mean Aerohive when -- if you look at the last quarter that they reported their opex run rate was $93 million. And in my opening comments I stated that as we exited September we're already down to $55 million. And so we've got another few millions to go. But I would say Aerohive is already well advanced.
Alex Henderson -- Needham & Company -- Analyst
I see. Has there been any change in your sales cycles as a result of the macro conditions? Are we seeing the lengthening of sales cycles.
Ed Meyercord -- President and Chief Executive Officer
I think that's fair Alex. When you talk to our field the feedback from our field is that opportunities aren't going away. They're just being delayed. So I think that's a fair assessment on your part.
Alex Henderson -- Needham & Company -- Analyst
And is there any difference in the geographies between those? I mean is it mostly EMEA? Or are we also seeing a lengthening of the sell cycles in the U.S.?
Ed Meyercord -- President and Chief Executive Officer
It's primarily in EMEA where we've seen the effect. And as you know we have heavy presence in Germany and there's been a lot of press about the German economy in terms of what's been going on there. We also felt some pain in Italy. And then obviously you have Brexit. So these are things that are creating disruption. And what I would say is that we are seeing the pipeline build and we're seeing the opportunities as we look out. We feel confident in a rebound for us it's just a function of the timing. As it relates to the Americas what we did is we restructured. We had a field team that was more or less general is focused on a lot of different customer categories. And what we decided to do is to take that SLED team and then have them focus solely on SLED and then create an enterprise team that would be solely focused on enterprise customers this is outside the name vertical accounts that we have as far as healthcare retail our stadium transportation logistics. So those clearly defined verticals. Now what we've done is created 2 teams in the Americas to go after that. This past quarter we completely restructured we've reassigned accounts we've hired a lot of new people. So we slowed. 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 who's got a lot of experience and some really clever attack vectors on how we go after our competitors which is going to be great for us. And we're seeing these teams start to season a bit. And we're seeing the pipeline build as we go forward. So really that was a structural change we made in the Americas that slowed things down a bit for us but it's going to accelerate as we go forward.
Alex Henderson -- Needham & Company -- Analyst
One more question if I could. The conversation around digital transformation zeros interesting from your customer perspective but what about what you're doing? Can you talk a little bit about what you're doing to move your applications to the cloud? Move the Extreme data center to the cloud or to Azure? Where are you on Office 365? And what are you doing on your security posture relative to a perimeter defense model moving to maybe a zero trust model or anything of that sort. Can you talk about your posture changes in security and digital transformations please?
Ed Meyercord -- President and Chief Executive Officer
So Extreme is going to be the #1 spokesperson for all of our customers. And at our user conference extreme on extreme. We set that program a while ago when we started doing these acquisitions. Our IT teams are mandated and frankly quite excited about our portfolio. So we've deployed all of our portfolio across the company and we will be moving very quickly to migrate to the cloud. As our portfolio migrates to the cloud and our #1 customer is Extreme. So we...
Alex Henderson -- Needham & Company -- Analyst
We're not really talking just about your networking tools really talking about have you moved the applications to the cloud? Are you using Office 365 are you -- those pieces of it.
Ed Meyercord -- President and Chief Executive Officer
Absolutely. So we have from an ERP perspective we're Oracle cloud Office 365 cloud. When we look at Salesforce etc we're very much a cloud driven company. One of the things that we're doing with our Broadcom partnership remember they've acquired CA Technologies Symantec is going to close soon. And with this partner what we've talked about doing with them is integrating their solutions their software solutions into our own environment. And likewise Broadcom is going to be deploying Extreme in their environment. So -- and we're looking to package all of this together to bring it out into our own -- to our own enterprise customers on both sides of the equation as well as to our partner community. Remi do you want to add something?
Remi Thomas -- Chief Financial Officer
Yes I just want to add as far as being able to offer and support the growth that we expect in subscription revenue we're also making investments in our production environment which consists in a license entitlement platform around Gemalto and the introduction of a subscription billing platform withdraw. Arrow had a in-house custom-built solution running on NetSuite. As we migrate from NetSuite to Oracle we decided that we're going to deploy Azure. So you'll see this year another year of sustained capex investment less than last year but related to these IT investments that we're making.
Operator
Thank you and our next question will come from the line of Eric Martinuzzi from Lake Street. you may begin
Eric Martinuzzi -- Lake Street -- Analyst
Yes I'd like to focus backward-looking just for a moment and then get into some forward-looking questions. But the outperformance that you saw in the first quarter from the Aerohive business how much of that was due just to conservatism and how much of it was due to really on its unexpected pipeline conversion?
Ed Meyercord -- President and Chief Executive Officer
This was our first quarter when we give guidance. And as you know we had a step year of 52 days out of 90. So I would say that guidance that we gave was the -- our best 50% 50% guess as to the estimates and Aerohive came in substantially higher than what we'd seen at versus the. But it's also due to the fact that their teams have performed really well and that they had very strong bookings this quarter. So it was a combination of conservatism and very strong execution from the Aerohive sales force.
Eric Martinuzzi -- Lake Street -- Analyst
But is there an issue here with maybe some business that was going to happen in December happened in September quarter? Or is it you continue to expect that good strong pipeline and good strong conversion in December?
Ed Meyercord -- President and Chief Executive Officer
Yes Eric what I would say is following up on what Randy said is I would say we're probably 50-50 being a little conservative and then outperformance. Some of that we wanted to keep everybody focused on selling cloud and staying in their swim lanes to hit the quarter this quarter. So we had extra incentives for their team. And there's no doubt there were some deals that would get pulled in. That's the nature of our business. Every quarter deals get pulled in deals get pushed out but you probably saw a little bit more than normal happen there. But we're -- as far as their E-Rate conversion on the Extreme side I would say our E-Rate came in a little below plan. Hive was kind of right there and maybe a little bit better a little bit better. So I think in general we feel really good about what we see from a pipeline perspective and then what we're seeing from the partner behavior and activities in the field around that. The Extreme teams are chomping at the bit to sell this platform. And so that's -- you're going to see more of that happen now that we've closed out in Q1 and we're on to Q2.
Eric Martinuzzi -- Lake Street -- Analyst
Yes that's where I was headed next. You talked about having the integrated product from the cloud management perspective adding that in January. Are you able to sell that now? Or is the channel really looking for more hey look we'll start engaging that once the product is available and not going to touch it until?
Ed Meyercord -- President and Chief Executive Officer
Well what we're going to do is so we can obviously sell on the Aerohive platform. In January our two -- from a selling perspective we're going to combine our systems from a sales perspective. So it takes it takes a little while for us to do that. Our teams kind of have joint sales force. They have an instance of sales force for Extreme and instance of sales force for Aerohive. All of that combines in January. And then importantly the licensing and Remy talked about Gemalto we're going to have probably the most advanced and flexible licensing platforms in the industry. That's going to come online in April. And that's when we're going to really turn up and we're going to have a real advantage over our competitors that don't have -- that have very cumbersome licensing model. So what we're going to do the strategy is going to be to let the team sell it. Effectively we'll be giving a lot of it away but billing will kick in in April.
Remi Thomas -- Chief Financial Officer
And if I can just add we've distributed to all Extreme sales people a Aerohive quota and they can't go to President's Club unless they've hit that quota. And we're deploying specific incentives in the field so that both Extreme and Aeroive sales people are highly motivated to sell our cloud solutions.
Eric Martinuzzi -- Lake Street -- Analyst
Okay. And then lastly obviously this is a very meaningful Broadcom partnership expansion it seems to touch off points of the relationship there. But I'm just wondering incrementality what's the low-hanging fruit in that tighter Broadcom relationship?
Ed Meyercord -- President and Chief Executive Officer
So if you look at where Broadcom has gone now with the CA acquisition. And Remi's in a good position to comment because that's where he came from we recruited him from CA. And then what's going to happen with Symantec. They are in the enterprise software business and they have all of the top enterprise customers. The issue for them is that most of these customers have Cisco in their campus environments and Cisco is not using Broadcom silicon. And their strategy is silicon to software. They want their silicon in all these enterprises and they underpin who do we want to pick to go out with to how to make this happen. And they picked Extreme to go after enterprise customers with our product portfolio. And I think a lot of it has to do with our cloud strategy in driving Broadcom silicon into these environments. So they have an amazing customer list on their side we have an amazing customer list on our side as it relates to the potential to sell their software. So that's what we're looking at. Cisco and HP have used some proprietary silicon and they run ASICs for some of their solutions. And Broadcom we believe is superior on many fronts and for many reasons and we want to tell the story together.
Eric Martinuzzi -- Lake Street -- Analyst
I understand. Okay. Well congratulations. It was a very busy quarter between the acquisition and the restructuring and the rejiggering of the verticals. So you definitely kept busy and you're at on the progress thus far. Thank you
Ed Meyercord -- President and Chief Executive Officer
Thank you, Eric.
Operator
And our next question will come from the Line Christian Schwab from Craig-Hallum. you may begin.
Christian Schwab -- Craig-Hallum -- Analyst
Great, thanks for taking my question. Clearly a fantastic start to rightsizing Aerohive on margins. But my question has to do with top line growth as we look forward. I'm wondering Ed if you can give us your opinion of what you're most excited about to be a top line growth driver. I understand world concerns such as tariffs and certain geographies which we've discussed that everybody knows is somewhat challenged today. But are there any specific products or maybe the Broadcom relationship or the cloud E-Rate? As you look for the next over course of the next year what is the team most excited about to drive top line growth?
Ed Meyercord -- President and Chief Executive Officer
Well so it's funny because Christian you just start answering the question for me. I would say check check check -- on all the things that you're mentioning. But the overarching excitement is around cloud. And the reality is everyone has to consider -- if you're an enterprise customer you have to consider cloud now. And people are going to move at different paces just because of the flexibility that the cloud offers the agility in terms of the speed of new features. And with our cloud you don't have to -- there are no software upgrades it's continuously upgrading. In terms of having your data in the cloud it's much more secure as far as data durability. And then from the cloud you can pull down best-of-breed technology. So if you're any enterprise customer you're going to have to have a cloud strategy. And if you don't have a strategy that's a strategy in and of itself. So we're going to -- all enterprise customers are going to start paying really paying attention. And by the way it's not just Extreme our competitors are talking about this and trying to figure this out. When you hear people talking about the autonomous enterprise. In our case so everyone's got to think about cloud and we've got the #1 cloud. So if you're an enterprise customer you have to think about Extreme. We're the only one that has the end-to-end solution. We're the only ones that are going to be putting that full Edge -- IoT Edge through the data center into the cloud and we're doing it in our own environment at extreme but you're going to see that happen. We'll be faster than anyone else in the industry.
From a machine learning AI perspective we have the largest cloud. So in terms of all the devices that are running in our cloud our cloud learning about device behavior and then attaching AI and building operational functions and automation functions to that. We're going to take the lead there too. We're the only one with our third generation we're going on fourth generation cloud to offer choice. So if you're in Meraki -- you're stuck in that old Meraki cloud Mist has got a new hive but they don't have platform flexibility. We're the only one that you can do it your way as an enterprise public private local clouds. And then the important thing is on one licensing model the depth of capability that we have. And then finally we're going to offer big savings and people care about that. So I would say people are most excited about that and what's going to be happening with the beginning of this wave. The other thing is we just hired a head of Americas. Americas we've struggled a bit over the last couple of years in terms of driving that growth. And we've just brought in a rock star who really understands I would say the weakness in our competitor's offering. And whereas maybe we have not been quite as technical and our attack as far as going after our competitors I think we are going to be much stronger out in the field. Everyone in this company is going to know how to demo our software and we're going to drive home our #1 position in cloud. So I think our field is going to get excited and our leadership is in a position to drive that. So I would say those are the two big things. It doesn't happen overnight. We're talking about a multiyear trend. I think you're going to see a lot of momentum in the second half of this year for us our fiscal first half of calendar and then it's only going to build from there.
Christian Schwab -- Craig-Hallum -- Analyst
Great. I don't know if I missed it but did you guys give what you believe as a percentage of cloud-related revenue percentage in current business today?
Ed Meyercord -- President and Chief Executive Officer
We said that the exit run rate for the September quarter was $57 million for cloud. That's just the hive solution. We did have a bit of revenue on the Extreme side but it was about $1 million. So let's call it $58 million. And we said that if you add that to our support revenue as well as our software support revenue the total recurring revenue was 28% on a combined basis taking Aerohive in the full quarter not just the stuff here. And that converted to 24%. Our recurring revenue is now close to 30% which is great news.
Christian Schwab -- Craig-Hallum -- Analyst
Great, fabulous. No other questions? Thank you.
Ed Meyercord -- President and Chief Executive Officer
Thank you, Christian.
Operator
[Operator Instructions] Our next question will come from the line of Paul Silverstein from Cowen. You may begin
Paul Silverstein -- Cowen -- Analyst
First is specific and then 2 general questions. Remi did you say the guidance how much of that is specific to Aerogive?
Remi Thomas -- Chief Financial Officer
I did not. I did not.
Paul Silverstein -- Cowen -- Analyst
Can you share that with us?
Remi Thomas -- Chief Financial Officer
So you're talking revenue?
Paul Silverstein -- Cowen -- Analyst
Correct.
Remi Thomas -- Chief Financial Officer
For Q2 we believe Aerohive will contribute about $35 million. You can calculate that with the 3.5% growth that we gave for core Extreme and the 7% growth that we gave for Aerohive.
Paul Silverstein -- Cowen -- Analyst
I appreciate that. Secondly let me ask you two broad questions. First off now that you're at the 60% gross margin level. Picking up I guess was Alex's question where you -- any thoughts could on -- does it peak out at 62% 63%? Your thoughts on where you could get to from here? And in what time frame? Obviously, I'm talking about longer term.
Remi Thomas -- Chief Financial Officer
Yes. So I think the drivers of gross margin if I think about core Extreme out of the product refresh we mentioned that we're just at 30%. You can see a step improvement in our December quarter with the launch of a new product the 465 which is an Edge product. And so we would expect that to continue to drive product gross margin on core Extreme. Another factor that's going to play specifically in Q2 is the fact that we're going to consolidate what is a 64% gross margin business over the full quarter instead of a step period. And then as you think further out as we continue to put actions in place to mitigate the impact of tariffs be it in the form of a better mix of our production between China and TAA compliant countries as well as some of the price increases that Ed mentioned that should also help drive margin. On the aero side it's really the increase in the cloud revenue which structurally carries margins in the 70s versus the product gross margins that are in the high 50s. That's going to be a driver of gross margin going forward. So at the Analyst Day about 10 months ago now we said that our ambition was to get to 62%. We will not be here -- there in fiscal '20 but we'll certainly be at or above 60% for the year on average. And then I'm expecting that trend to continue over the next fiscal year where we have the ambition to get to 61%.
Ed Meyercord -- President and Chief Executive Officer
Yes. I'd just chime in with a couple of other things Paul. One is we do -- we mentioned Broadcom earlier so we have a better buying rate and so high gross margins will benefit from our buying merchant silicon at better rates and at better discounts that should help us. The other thing I'll mention is what's been part of the theme in the past has been on the data center side it has taken us longer than we wanted to to migrate our MLX with the routing and the VDX switching platforms older technologies. They are seeing that ramp to SLX. Now when we move to SLX and federal is a great example a service provider deal that we had this year where we migrated SLX all of a sudden we're going from margins in the 40s to margins literally in the 70s. So we're seeing strength in the data center business. We're projecting growth. We've got some really interesting federal opportunities. And these are high 60% gross margin business. So new SLX is coming January and then another upgrade in April. We have -- it's taken us longer to get here than we wanted to but it's starting to arrive. And I would say that's another factor that could add to gross margins.
Paul Silverstein -- Cowen -- Analyst
And to that last point you made that transition to SLX that would -- that 30% -- if I heard the numbers correctly that 30 percentage point benefit to gross margin that pertains to how much revenue?
Remi Thomas -- Chief Financial Officer
Yes I can't put my finger on it Paul. I mean there's a lot of different -- it's almost anecdotal telling that deal by deal but there are a lot of -- we talked about growth in service provider. And there's one case can we beat out Juniper as a service provider deal. It's more of a regional service provider where we've been selling MLX or VDX at deep discounts waiting for this transition to hang on to customers. Well $1.5 billion deal comes in and it's a 70% gross margin that's that 30% swing that you're talking about. As SLX matures and we see more adoption of data center side it's going to have an impact. And I'm not sure I can quantify that for you right now.
Paul Silverstein -- Cowen -- Analyst
And mathematically wasn't as simple as you've got x amount of MLX and VDx revenue today and that's the opportunity plus whatever growth you could drive by virtue of SLX being a better platform?
Remi Thomas -- Chief Financial Officer
Yes. The transition happens over time and it's a lot of deals. So I guess we could look at that. And then I guess we'd have to kind of handicap and guess how that's going to happen between now and fiscal '22 when we end of life the other platforms.
Paul Silverstein -- Cowen -- Analyst
Okay. Let me move on. That -- Remi the 62% target is that dependent -- if tariffs get rolled back -- is the 62% dependent upon shares being rolled back or can you get to 62% in the current -- that you mentioned?
Remi Thomas -- Chief Financial Officer
We're not making any assumption that the tariff situation gets any worse or any better than it is today. Again the 62% is an ambition. And I don't think we'll get there in fiscal '21. This is a 18- to 24 months ambition that we have. I think we have in the short term a clear path to go from 59.9% million to 61%. And those are -- that's only driven on the product refresh discipline in the field in terms of discounting the actions that we're taking to mitigate the current tariff situation and the impact of the growth in cloud which as I mentioned is carrying gross margin in the 70s.
Paul Silverstein -- Cowen -- Analyst
Understood. And to the previous question to an earlier question that was asked. I trust is it given that if tariffs were rolled back at a minimum that makes it easier and perhaps it accelerates your path to that 62% at a minimum and maybe even better it could be incremental to that 62%. I recognize you're talking 18 to 24 months not one year but just trying to think about what the opportunity is for...
Remi Thomas -- Chief Financial Officer
We've had 120 basis points in Q4 80 basis points in Q1. We're anticipating another 80 basis points. Not all of that 80 basis points is related to the actual increase in the tariff that we pay when products arriving in El Paso. So some of it is related to the fact that we moved production outside of China to either Taiwan or Mexico for final assembly. And so unless we revert and move production back to China we will not get the full benefit of the 80 basis points but I would say we'd probably get 70 basis points out of the 80 basis points because the majority of the impact is really higher tariffs. So your point is absolutely correct.
Paul Silverstein -- Cowen -- Analyst
I appreciate that detail. One last question more than wants to ask you a broad revenue question. You just referenced something I want to come back to. So if I remember several quarters back Ed had referenced the fact that you were changing discipline among the sales force from a pricing perspective. It sounds like from the 59.9 % is that discipline is holding for now. I recognize it's still early. It hasn't been a long time since the problem arose but any thoughts that you and ED can share on that?
Remi Thomas -- Chief Financial Officer
Yes. So what I would say is that some of the regional directors that manage our sales force are incentivized on their gross margin achievement. And so that was a big factor. And I would say that the second one is as you move to box selling to solution selling where you have a combination of software hardware and now cloud obviously you're selling a different value proposition than just competing on feeds and speeds. And that also helps drive that discipline.
Paul Silverstein -- Cowen -- Analyst
Great. If I can ask a broad revenue question. It ties into the previous question that was with the previous questioner. If I back out the Aerohive obviously revenue on a year-over-year basis it was close enough to flat but it still wasn't -- you haven't gone back to growth yet. So we've done this very well conceived acquisitions a number that's now the fourth one in the past I guess 4 years. They're all very well conceived and they offer significant opportunity. And I recognize that macro is a challenge and whenever you do an acquisition there's some disruption of revenue for any organization. So all that being said looking at this past quarter in terms of why you haven't yet gone back to revenue growth in tying that into the opportunities you just identified earlier. Any thoughts that you can share from a high level for what's going on? Is this simply you've got to get this -- now that you've closed the acquisition it's a matter of blocking tackling it's a matter of the macro in Europe especially the German economy and the Brexit situation? What are the key factors in hierarchical coimportance in getting back to decent organic revenue growth?
Remi Thomas -- Chief Financial Officer
Yes. So I would say if you just look at Aerohive isolated. If you remember before we acquired them they went through a series of two restructurings and taking down sales. They wanted to focus more on profitability. And so before we closed our deal they had been through 2 rounds of restructurings which included reductions in their sales teams -- and on that line. So I think that probably created an impact. There's still a macro issue that we deal with as far as what's happening and as we picked up and acquired there's a macro issue of India is still there but what I would tell you is that from an AErohive perspective there's a huge amount of excitement around the platform that we have at extreme and the portfolio. So the Aerohive portfolio is limited and now we're going to significantly expand. And we're going to bring a lot more resources behind cloud-driven networking. And we're -- in terms of air cover from marketing in terms of all the different things that we're going to be able to do. I would say the most exciting thing for us is the fact that enterprises are going to have to look to cloud. It's just the way cloud-managed -- cloud-driven or cloud-managed networking is real and it's going to happen. And we happen to have the #1 cloud from a cloud capabilities perspective. And if you're Extreme you're excited because there's been pent-up demand for cloud. We haven't had it. We tried it a couple of times and now we've got the industry's best cloud and we can pound the table on that. And then if you're coming from the Aerohive side now we said you're going to have a much more robust cloud in terms of size and scale breadth of offering and then all the weight and resources that we're curing behind it at Extreme. So that's -- I guess that's at a very high level I would go back to cloud-driven industry moving to cloud now all of a sudden Extreme is in the #1 position as far as what we can offer enterprise customers.
Ed Meyercord -- President and Chief Executive Officer
If I can just add to your specific point about organic. Every time we add an acquisition what happens to our organic revenue I think that the one thing that we're getting better at factoring is revenue dissynergy. So when we acquired Zebra and the WING range of products obviously that had an impact on identified which was the wireless solutions that were brought with the acquisition of Enterasys. When we bought Avaya and the fabric that had an impact on the switches for the campus that were part of the Extreme reach. When we acquired Brocade in data center that had an impact on the Extreme data center products 100. And today we're acquiring an industry-leading cloud solution which obviously is sold with its own access points and that has an impact on the sale of our own access points. So those revenue dis-synergies systematically explain what you see in terms of the organic decline. But once the portfolio is harmonized and put together to add points that we now have a complete end-to-end solution including cloud I think we're in a good position on a go-forward basis.
Remi Thomas -- Chief Financial Officer
And it's just -- one example is our Edge switching portfolio which is benefiting from the refresh is this -- grew 14% year-over-year in Q1.
Paul Silverstein -- Cowen -- Analyst
Thanks, guys. And I'm not showing any further questions at this time. I would like to turn the call back over to management for closing remarks.
Ed Meyercord -- President and Chief Executive Officer
Okay great. Well I'd just like to thank everybody participating on the call. I always want to reach out and shout out to Extreme employees who are listening in and thank you for all of your hard work in helping us drive the business as we go forward. Also for investors an administrative note there's a series of investor conferences that we're going to be participating in. We put out a press release. You can see the full schedule of those conferences. But between Remi my and I and Stan we're going to be out and we're really looking forward to sharing the cloud story with you. We also have the cloud Architect who's going to be presenting about our cloud who is going to be talking about kind of the differentiation of cloud at a conference. And then what we're also going to do is we're going to host a day where we're going to take investors through a demo our cloud solutions and we want to take investors through that as well. And Stan will be reaching out on that front. So thank you for participating. And we're looking forward to continued dialogue. Have a great day.
Operator
[Operator Closing Remarks]
Duration: 61 minutes
Call participants:
Stan Kovler -- Senior Director of Investor Relations and Finance
Ed Meyercord -- President and Chief Executive Officer
Remi Thomas -- Chief Financial Officer
Erik Suppiger -- JMP Securities -- Analyst
Alex Henderson -- Needham & Company -- Analyst
Eric Martinuzzi -- Lake Street -- Analyst
Christian Schwab -- Craig-Hallum -- Analyst
Paul Silverstein -- Cowen -- Analyst
