Image source: The Motley Fool.
Extreme Networks Inc (EXTR 4.02%)
Q3Â 2019 Earnings Conference Call
May. 01, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Extreme Networks Third Quarter Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference, Mr. Stan Kovler. Sir, you may begin.
Stan Kovler -- Executive Director, Investor Relations and Strategic Development
Thank you, operator, and welcome to the Extreme Networks third quarter fiscal 2019 earnings conference call. I'm Stan Kovler, Executive Director of Investor Relations and Strategic Development. 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' third quarter fiscal 2019 financial results. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations and our fiscal 2019 Q3 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 and financial results, products, operations, pricing 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 reports 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's President and CEO, Ed Meyercord.
Ed Meyercord -- President and Chief Executive Officer
Thank you, Stan; and thank you all for joining us this morning. Today we announced Q3 results toward the midpoint of our expectations. Revenue is consistent with Q2 despite Q3 being typically a seasonally weak quarter for Extreme. We landed on revenue of $251 million versus the guidance of $247 million to $257 million and had non-GAAP earnings of $0.08 per share. Our Agile Data Center and Automated Campus were our best-performing solutions pillars and grew quarter-over-quarter, highlighting our improved execution in our previously acquired assets. The results and our outlook for fiscal 2020 validate our acquisition strategy and our team's ability to execute. While it took us longer than expected to achieve the desired performance metrics with our acquisitions, they are clearly visible today.
Revenue corresponding with our Avaya assets within our Automated Campus pillar were at $220 million run rate with sequential growth for two quarters in a row. When we acquired these assets, we targeted $200 million. So we're ahead of that plan and we've added 10 gross margin points since the acquisition, which was just shy of our 60% long-term target during the quarter. Customers are embracing our Automated Campus solution because of how easy it is to segment and secure enterprise networks that can't be hacked with our Layer 2 fabric.
When combined with our Smart OmniEdge solution with our XMC single pane of glass software, we deliver our fabric to the edge and provide end-to-end visibility, NAC, analytics and security with a single database for all devices connected to the network and all network elements. In contrast, our competitors' solutions run multiple OSs and third-party management software. It is very complicated and expensive to deploy. Our field is embracing it, our partners are embracing it and our customers are deploying it. Our teams and partners who achieve their master specializations in our technology solutions are growing significantly.
And in terms of our product roadmap in our Automated Campus, we have more products for the VOSS roadmap over the next 12 months than we did in the past three years. Customers have confidence in the roadmap and it's translating into results. Marrying our Automated Campus switching with our wireless and software offerings is helping us drive sales. All-in, our software applications revenue grew 19% year-over-year.
Our Agile Data Center business is also performing well. Products and services from our SRA acquisition are on a $200 million run rate, well above the $160 million to $180 million range that we reset heading into Q1. Agile Data Center revenue was the highest in the past three quarters. Our new products are also driving results in this pillar for use cases such as data center interconnect, border routing and others aided by the SLX 9640 switch.
From a vertical standpoint, we're seeing lots of success in the government and healthcare verticals. In retail, we're seeing lots of large opportunities going into fiscal 2020 that are now focused on switching, validating the strategic rationale of our acquisitions. Our biggest Zebra customers who were wireless-only and are now embracing our switching portfolio.
Heading into fiscal 2020, we're also expecting to see growth in our education vertical based on strong E-Rate wins and higher ed coming through in fiscal 2020. Our E-Rate filing dollars grew 50% year-over-year. Some of those opportunities will flow through in Q4, but we expect to see most of that flow through in fiscal 2020. We continue to win large deals as customers embrace a broader set of our solutions. During the quarter, we had 17 deals over $1 million, representing software products and services across our solutions pillars; similar to Q2. We're growing our total pipeline of large opportunities for the next four quarters.
Asia showed the strongest growth among our geographies, up 21% year-over-year and 5% quarter-over-quarter with a strong pipeline of large deals. In the EMEA region, our field and partner adoption of our Automated Campus solution has gained significant momentum and we saw a pick-up in our Agile Data Center pillar as well. However, in Europe, macroeconomic issues are affecting demand, particularly in Germany where the uncertainty of Brexit is affecting manufacturing exports. This began to take effect in Q3 and is leading us to be more conservative in our outlook for the next quarter.
In the Americas, we experience continued growth in our government vertical year-over-year. Revenue was impacted by softness in the K-12 vertical, macroeconomic issues in Lat-Am, along with tough comps in retail and service provider on a year-over-year basis. We continue to make progress in our tariff litigation plans in US. To-date we moved 40% of our product manufacturing to Taiwan for products that ship into the US to be exempt from tariffs at the end of March. We're balancing the risks and opportunities of the US-China trade discussion since our Taiwan standard costs are 4% to 6% higher than in China.
Our first Wi-Fi 6 products are now commercially available and shipping to customers with important key wins in our stadium vertical. Customer momentum is building with significant growth in our Wi-Fi 6 pipeline. We are witnessing partners and customers extending sales cycles, as they evaluate this new technology and potential changes to their switching architecture.
Looking ahead for the rest of calendar 2019, we have a significant number of new products coming to market that we believe will drive growth in revenue and margin from our expanded and upgraded product and software portfolio. As we noted at our Analyst Day, we're refreshing 70% of our portfolio over the next 18 months. We have seven different product SKU that will be GA this quarter. This is a record for Extreme.
We're very excited to share our vision of our autonomous enterprise at our Connect user conference coming up in two weeks. We will more than double the number of attendees from last year's highly successful event. Our technical training sessions sold out quickly and we had to expand the number of sessions and capacity to accommodate demand. Last year, customers who attended our technical training increased their spend with Extreme by over 60% from the previous 12 months. This is highlighting the fact that the customers and partners who truly engage with our technology are embracing it and driving significant growth.
This quarter we had several exciting wins. At Brigham Young University, we deployed our Smart OmniEdge of 1,250 access points to cover the 64,000-seat arena. BYU is using our analytics tools to measure granular response times down to each application fans are using and running mobile ticketing and payments on our network as well to drive a truly interactive game day experience.
The State of Connecticut also deployed our Smart OmniEdge solution and Professional Services for its new locations in Hartford, as well as Extreme Professional Services to provide secure reliable connectivity at one of its new locations in Hartford. The network will support multiple agencies, offering critical services to state employees and residents. With this solution, the State consolidated the management of multiple agency topologies onto one network, while maintaining security and operations through segmentation.
In conjunction with expansion in health, we launched the Defender for IoT this quarter as a simple security device and service to protect wired and wireless IoT devices from cyber attacks. This is a great example of how we partner with our customers to drive innovative solutions.
We were once again named Number 1 in Gartner Peer Insights Customers' Choice for Wired and Wireless LAN Access and for Data Center Networking as well. This highlights our competitive differentiation in delivering service and the value of our 100% in-source model.
We hit a milestone with one of our digital transformation initiatives to take zero-touch orders from customers and partners. Touch list orders accounted for 13% of our product orders during the quarter. Our new configure price quote tools are driving productivity with 72% of discount approvals now auto-approved and the remaining 28% taking less than a day to get through, a significant performance improvement from three days historically. This means our sales teams have more time to spend with customers. In addition, our sales and supply chain operations teams drove operational efficiency in the quarter by eliminating product constraints. Typically, we'd expect to see 8% product constraints. In this quarter we drove this number to 1%. We expect to return to the industry benchmark, 5%, during the Q4, which will contribute to building backlog.
Looking ahead, we're adding conservatism to our forecast to account for headwinds that are affecting our usual strong Q4. First, macroeconomic trends in both Europe, as I mentioned earlier, and to a lesser extent, in the Lat-Am region. Second, we're experiencing longer sales cycles in wireless as customers evaluating Wi-Fi 6 solutions and potential changes to their switching architecture. Third, while our E-Rate filing performance was substantially better this year, timing of deployments is driving more revenue recognition into early fiscal 2020. Finally, we enter Q4 with a relatively low level of backlog compared to prior quarters, that is leading to a lower revenue outlook sequentially.
We expect to finish fiscal 2019 with revenue of approximately $1 billion, and up just slightly on a year-over-year basis. Our outlook for fiscal 2020 is to grow in the 3% to 5% range to over $1 billion in revenue, and we continue to target 60% gross margins. We believe the investments we've made in our digital transformation will pave the way for productivity gains and operating efficiency. The combination of growth, increased gross margins and operating efficiencies allow us to target a 15% operating margin exiting fiscal 2020. I also want to note that our balance sheet remains strong with $157 million in gross cash and we have $45 million remaining on our share buyback authorization. I'm confident in the Extreme team and our ability to improve execution and operational efficiency as we move forward.
With that, I'll turn the call over to our CFO, Remi Thomas.
Remi Thomas -- Chief Financial Officer
Thank you, Ed. As Ed noted, our revenues of $250.9 million declined 4% year-over-year and 1% quarter-over-quarter and were toward the midpoint of our guidance. Non-GAAP earnings per share was $0.08, toward the low end of our range. EPS was impacted by low gross margin of 57.6%, impacted by the decline in our services gross margin.
Our product revenue of $190.8 million declined 6% year-over-year and was largely consistent with Q2; up 1% quarter-over-quarter. Our Data Center and Automated Campus pillars performed in line with our expectation, while our Smart OmniEdge business was impacted by challenging year-over-year comparison in the K-12 and retail verticals, particularly in North America.
Services revenue of $60.1 million grew 3% year-over-year, but declined 5% quarter-over-quarter. The higher percentage of multi-year deals, as well as lower pull-through from product bookings impacted our services revenue sequentially.
During the quarter, the Americas contributed 55% to total revenue; EMEA, 34%; and APAC closed out the remaining 11%. APAC was our fastest growing market where we see customers embracing our differentiated product portfolio very effectively and leading with software, as Ed mentioned. Globally, government was once again our top performing vertical for the fourth consecutive quarter. This includes both state, local and federal government in the US and internationally. The next largest verticals were service provider, manufacturing, healthcare and education to round out the top five.
Our book-to-bill ratio was slightly below 1 this quarter, which is affecting our Q4 outlook and speaks to the lower backlog we have as we enter Q4. We do expect, however, for our book-to-bill ratio to go back over 1 next quarter.
Non-GAAP gross margin was 57.6% compared to 57.9% in the year-ago quarter, and 58.2% in Q2. The sequential decline in the Company's total gross margin was mostly attributable to the services gross margin, which dropped 220 basis points from 61.6% to 59.4% on the back of lower revenue, as I just mentioned. We estimate that tariffs had an adverse impact of 80 basis points to total Company gross margin in Q3, consistent with our estimate entering the quarter. Our non-GAAP product gross margin of 57.1% compares to 57.8% in the year-ago quarter and 57% in Q2. Our product gross margin was flat sequentially, as a reduction in our standard cost and a favorable product mix this quarter was offset by higher than expected discounting.
Q3 non-GAAP operating expenses of $130.7 million were up from $127.5 million in the year-ago quarter and from $126.6 million in Q2. The sequential increase in non-GAAP operating expenses was mainly due to higher sales and marketing expenses. On a year-over-year basis, the increase in operating expenses resulted primarily from higher R&D and slightly higher overhead in G&A, given our larger footprint. As a result, our operating margin of 5.6% compares to 9.3% in the year-ago quarter and 8% in Q2.
Free cash flow of $12.7 million compared to use of cash of $24.7 million in the year-ago quarter and $23.6 million in Q2. Year-to-date, we generated $63.3 million in free cash flow compared to use of cash of $23.7 million in the same period a year ago, driven by improved collections, improved working capital, lower CapEx and the non-recurrence of one-time integration and restructuring costs related to last year's acquisitions. We do expect sustained cash flow generation despite the lower level of profitability we expect in Q4.
Our total cash balance at the end of Q3 was $156.8 million, up from $140.6 million at the end of Q2. We did not repurchase any stock during the quarter. DSO of 51 days fell 14 days year-over-year and 2 days quarter-over-quarter. On a sequential basis, the strong collections drove DSO lower. Our cash conversion cycle stood at 60 days compared to 51 days a year ago, but down from 78 days in Q2. We also made significant progress in growing out deferred revenues to $187.7 million compared to $156.6 million in the year-ago quarter and $186.1 million in Q2 on growth of services bookings and specifically multi-year renewal offerings.
My focus since joining the Company in November 2018 has been to transition our platforms, processes and systems to become more depth at selling and driving software and cloud-based revenue for the Company. These initiatives are now under way as we just went live with our new licensing entitlement platform now currently designing our lead-to-cash process for selling software-as-a-service.
Another key initiative is around driving efficiency and taking control of cost actions we need to take to support our business. We're dedicating more efforts in SG&A to improve our demand planning process, forecast accuracy for bookings, revenue and gross margin and improved overall operational efficiency. We're preparing for real changes heading into fiscal 2020 planning cycle with, for example, the introduction of a significantly more differentiated approach to R&D investments in our portfolio based on the product lifecycle. We expect these actions to position us to achieve a 15% operating margin on an exit run rate by the end of fiscal 2020.
Now, turning to guidance, as Ed mentioned, we face several headwinds going into what is a typically seasonally stronger Q4. As a result, we will be taking actions to improve our operational efficiency. With that in mind, we expect total Q4 revenue to be in the range of $240 million to $250 million. Q4 GAAP gross margin is anticipated to be in the range of 52.9% to 55.1% and non-GAAP gross margin in the range of 57.5% to 59.5%. We estimate that tariffs will continue to add up to 100 basis point impact on our overall gross margin for Q4 19, including the impact of our transition to Taiwan manufacturing for effective products shipping to the US.
Q4 operating expenses are expected to be in the range of $139.8 million to $145 million on a GAAP basis and $130.5 million to $136.1 million on a non-GAAP basis. The sequential increase in OpEx is primarily related to payroll and variable compensation costs. Q4 GAAP earnings is expected to be in the range of a net loss of $17.8 million to $12.6 million or a loss of $0.15 to $0.11 a share. Non-GAAP net income is expected to be in the range of $2.5 million to $7.7 million or $0.02 to $0.06 per diluted share. In Q4, we expect average shares outstanding to be approximately 118.9 million on a GAAP basis and 121.6 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.
Operator
Thank you. (Operator Instructions) And our first question comes from Mark Kelleher from DA Davidson. Your line is open.
Mark Kelleher -- DA Davidson & Company -- Analyst
Great. Thanks for taking the questions. Let's start with the June guidance, the weakness there. You indicated that there was some weakness coming out of EMEA and there's some weakness from some extended sales cycles. Can you kind of size it, one, did I capture that right, are those the two issues; and can you size up between those two issues and what gives you confidence that those headwinds won't continue further into the year?
Ed Meyercord -- President and Chief Executive Officer
Yeah. Thanks, Mark. This is Ed. As we mentioned, there have -- it's pretty well-documented as far as what's happening as far as macroeconomic trends in Europe. Specifically, one of our strongest markets is Germany, we have very high market share there. And uncertainty surrounding Brexit is definitely creating -- we're seeing the impact in terms of particularly manufacturing companies in Germany, where the UK is an important export market for them. And so, as we mentioned, we've backed off on our forecast, we want to make sure that we're taking that into consideration as far as what's going on there.
In Q3, we were affected by similar macroeconomic effects in Lat-Am, had an impact on the Americas number and we see that carrying through into the next quarter as well. So that's been a big piece. Any time you're going through a product transition, in this case, Wi-Fi 6, this is an adjustment for our customers. As we mentioned, we had some really nice stadium wins that have come through, but a lot of people are taking their time on Wi-Fi 6. We're seeing the opportunities in the pipeline and it's building, but we're just not sure of the time and we don't know when the orders are going to land and ship, and we want to be conservative with our outlook there.
We talked about E-Rate. And E-Rate is really a positive note for us, because we were up over 50% in terms of the E-Rate filings, which -- it's a real positive for Extreme; and over the course of fiscal 2020, it's going to help us out. We mentioned K-12 this past quarter being light and we've had softness, really we've had softness every quarter this year in that part of our education vertical. We're, from a timing perspective, we're anticipating this to kick-in in fiscal 2020. And again, we want to be conservative about how aggressive we want to be as far as what gets pulled in on that.
In Remi's comments, you heard him talk about book-to-bill ratio and the fact that that was below 1 in this quarter and the fact that we expect it to be above 1 in Q4. I talked about operating efficiency and how our teams eliminated product constraints and that effectively eliminates backlog, which is good for us. We expect that backlog that comes from product constraints to quick back up in the quarter and that has a negative effect on revenue. So it's really the four things that we laid out there.
Mark Kelleher -- DA Davidson & Company -- Analyst
When you talked about operational -- Remi's mentioned actions to improve operational efficiency. Was that specifically what you guys were referring to or are there other actions that you can take maybe in your sales organization to get more robust growth?
Ed Meyercord -- President and Chief Executive Officer
Yeah. If you do the math and you look at our model for us to achieve that 15% operating income number, we're going to have to drive -- there's organic growth that we see in the business, there's gross margin improvement that we see in the business, but there still has to be operating efficiencies that we drive in the business. And we're deep in our planning cycle for fiscal 2020 and that has to be part of the equation.
Mark Kelleher -- DA Davidson & Company -- Analyst
And can you break out the percent of revenue that was wireless in the quarter?
Remi Thomas -- Chief Financial Officer
That was approximately (Technical Difficulty) I'm rounding.
Mark Kelleher -- DA Davidson & Company -- Analyst
Okay. Great. Thanks.
Ed Meyercord -- President and Chief Executive Officer
Thanks, Mark.
Operator
Thank you. Our next question comes from Alex Henderson from Needham & Company. Your line is open.
Roger Boyd -- Needham & Company -- Analyst
Hey. Thanks. This is Roger Boyd on for Alex. Just a quick one from me. You mentioned higher than expected discounting and higher sales and marketing expense. Is that related at all to EMEA? Is that what you're trying to drive kind of offset that weakness in that way? And is there anything else you can do to combat the softness in that geo?
Remi Thomas -- Chief Financial Officer
We mentioned discounting in our last quarter's call and highlighting that some of the increase in the list price were unfortunately offset by more discounts in the field. This is not necessarily what we saw this quarter. I would say that our efforts to drive higher discipline in the field paid off. It was just that there was a number of large deals at the end of the quarter where we had to be slightly more aggressive than we'd have liked to just to make sure that we were able to secure these orders. So this was less about the field offsetting the impact of tariff through greater discount compared to a increased list price. This quarter was more about us as a company being slightly aggressive to be able to win the deals that we needed.
Roger Boyd -- Needham & Company -- Analyst
Okay. That's it from me. Thanks.
Remi Thomas -- Chief Financial Officer
And as far as your -- the second question on the increase in selling and marketing expense, that was, for the most part, driven by compensation benefits and, to a lesser extent, by increased sales commission.
Roger Boyd -- Needham & Company -- Analyst
Got it. Thank you.
Operator
Thank you. Our next question comes from Erik Suppiger from JMP. Your line is open.
Erik Suppiger -- JMP Securities LLC -- Analyst
Yeah. Thanks for taking the question. I want to just follow up on the discounting. Can you discuss the competitive environment? Did it intensify from a pricing perspective and where did you see the discounting more pronounced?
Ed Meyercord -- President and Chief Executive Officer
Yeah. Erik, we, as Remi mentioned, we saw discounting improvement in the field overall, I would say in our normal course of business. So the answer to the question would be, no, we're not seeing anything unusual from a pricing perspective in the market. We did have some large deals toward the end of the quarter that were margin impacting, that for us important customer's strategic business. Maybe we give a little bit away -- more away upfront for business that we get in the future at higher margin and we had to make some strategic decisions and we decided to (inaudible).
Erik Suppiger -- JMP Securities LLC -- Analyst
Okay. And where did you see these larger deals at the end of the quarter?
Ed Meyercord -- President and Chief Executive Officer
And I would say it's across -- it was across vertical and it was across geo. So there's not -- we're not -- we can't pinpoint a particular area of the business that drove it.
Erik Suppiger -- JMP Securities LLC -- Analyst
Okay. Then last question, so it sounds like Germany was weak in light of Brexit concerns. Was that incrementally new or -- Brexit has been anticipated for some time. Did it materialize significantly in the March quarter?
Ed Meyercord -- President and Chief Executive Officer
It was new for us. And I think there's -- I think you've seen it in the press in terms of what's happening overall in terms of growth rates for Germany as a whole and then what's happening in the EU. For us, it showed up for the first time. And some of our regions that have been very consistent in the past, had to take down the numbers and the view is not that these are lost deals, it's just deals that are, from a timing perspective, on hold.
Erik Suppiger -- JMP Securities LLC -- Analyst
And that was not an issue in the UK? This was a...
Ed Meyercord -- President and Chief Executive Officer
Erik, surprisingly, it really wasn't. And one of the other things that's hard to put your finger on is exactly with the pricing actions that we took in Q2 and we know we had pull-in into that quarter. And then, when we were calling this quarter, the question is how much got pulled back into that second quarter. We suspect that there is some early buying that was taking place in Q2; it was tough for us to call. And so, we think that was also somewhat of a factor in the German and EMEA region.
Erik Suppiger -- JMP Securities LLC -- Analyst
All right. Very good. Thank you.
Operator
Thank you. (Operator Instructions) And our next question comes from Christian Schwab from Craig-Hallum. Your line is open.
Christian Schwab -- Craig-Hallum -- Analyst
Hey. Great. Thanks for taking my questions. Are you guys fearful that with refreshing 70% of the products over the next year-and-a-half that that could cause some delays in purchasing of those products until they're refreshed?
Ed Meyercord -- President and Chief Executive Officer
Yeah, a lot of -- Christian, a lot of the refresh is coming on on products in the portfolio that are high runners. So we think that in terms of what's coming to market, these are kind of next-generation chipsets that are characterized by higher performance, lower power consumption, the opportunity for us to improve on what we're delivering from a value perspective to customers. So I think what we talked about in the past is Extreme historically has been a little bit behind the curve from a timing perspective and leveraging new chipsets and new technology as they come out. And we feel really good about what's coming to market and what that's going to mean for our sales teams and our ability to position Extreme.
Christian Schwab -- Craig-Hallum -- Analyst
Okay. Last quarter you guys said that -- yeah, last quarter you guys talked about gross margin in Q4 would be at 60%-plus, the one you're just guiding for, because 80% of the tariff impacted manufacturing would be out of China. So is all the impacted manufacturing not out of China or why is that so wrong just a few months later?
Remi Thomas -- Chief Financial Officer
So that's a combination a few things. Number one, the plan was to have 80% of the SKUs that account for 80% of our shipments in the US have the manufacturing moved from China to Taiwan; we're about halfway through. So right now it's more like, I wouldn't say 10% because it's not that we have, but SKUs that account for about 40% instead of the 80% had been transferred. What we've done is to increase the scope, so we're going to have an even higher coverage than the 80%. The ideas to be closer to 90%, but that effort has been slightly slower than expected, and therefore, it's going to be done by the end of May. As a result of this, what we're going to see in Q4 is a combination of the transfer of the manufacturing, which as Ed mentioned, is 5% to 6% higher in addition to the fact that on some of the products that we import in the US will continue to pay tariff. So we're forecasting an impact of up to 1 percentage point, as I mentioned earlier. Just from that, whereas a quarter ago, we felt the impact would start to come down.
Secondly, I mentioned the fact that the discounting in Q3 has been higher than expected. It's hard to say if that's going to continue into Q4, but certainly the weakening that we see in EMEA is impacting us in our product gross margin, because it happens that EMEA tends to be a region where we generate higher gross margin than the average for the Company, and so that's the second thing to factor in.
And the third one is what we saw in the services. We did see our gross margin drop 220 basis points sequentially, it was largely driven by the $3 million sequential drop in revenue from services with costs that kind of stayed the same, went slightly up and that was driven by the fact that we tend to see more and more multi-year deals where we basically secure revenue for a longer period of time, but year one revenue is lower that impact should continue to a certain extent.
And then, let's keep in mind also, last but not least, we're guiding toward a lower product revenue. If you take our midpoint of our guidance for Q4 and obviously having lower revenue in products will also due to the volume impact negatively impact our product gross margin. So when you factor all that, offset with the fact that we continue to drive a reduction in our cost of goods sold, so our standard cost had gone down in Q3 will continue to go down in Q4. That leads us to the guidance we just gave, which is a flat gross margin quarter-over-quarter.
Christian Schwab -- Craig-Hallum -- Analyst
All right. And then your commentary, large deals in greater discounts at quarter-end are nothing new for your business or anybody else who sells enterprise equipment. So I'm just -- as you guys outlined at your Analyst Day, a lot of conviction of getting to 60% to 62% gross margins, do you still really feel confident in your ability to do that? I mean, the industry is what it is, there's always going to be large deals at quarter-end whether you want to take them or not and you've seen some big large contract manufacturers all talk about weakness in enterprise networking. So that would suggest that maybe we'll hear this from other peers as well, which also typically leads to more discounting in the industry in general. And then, if you're moving to a next-generation chipset, do you feel confident that a new refresh product line that you're actually improving the gross margins of those products at list price or not?
Ed Meyercord -- President and Chief Executive Officer
Yeah. Chris, I'll make a couple of comments and I believe something -- Remi jump in. Yeah, our teams have done a great job of pulling cost out of the product and so we see that continuing. One of the things about the new products coming to market that we're excited about (inaudible) higher performance of the new products, but it's high performance and it's also higher margin. So as we're coming out with these new products, we're expecting higher margins based on our normal discounting off the list prices; and at the same time, delivering higher value and higher performance to partners and customers out there. So that that will be a driver for us.
And to your comment about enterprise -- being in the enterprise space and having large deals coming in at the end of quarter, yeah, that is something that we're familiar with. I will say that something that we are calling out in our commentary that we are seeing more big deals than we have historically. And we're seeing larger opportunities and some of these are kind of break-in opportunities that are different for Extreme in terms of opening the door and getting into an account. Our strategy there is to be a little more aggressive on the front-end, and then once we land, we can expand and achieve our targeted margins.
Christian Schwab -- Craig-Hallum -- Analyst
Okay. Great.
Remi Thomas -- Chief Financial Officer
And then -- if I could just add one more comment, we're driving a number of gross margin initiatives around what we've been mentioning since the start of the call which is the reduction of cost of goods sold by introducing new cheaper and faster products -- components in our products, but we also have other initiatives around demand planning, supply chain, logistics that we've talked about in the past that will also bear fruit in fiscal 2020. So yes, we're actually very confident that we can achieve a 60% gross margin.
Christian Schwab -- Craig-Hallum -- Analyst
And then my last question, I've seen this in other people who are moving modest scale out of China to Taiwan that some of them are switching contract manufacturers and then dealing with poor yield issues and that's either led to lost revenue or disruption, inadequate supply of certain products. Your transition from China to Taiwan, did you switch contract manufacturers or are you moving with the same people?
Remi Thomas -- Chief Financial Officer
No, we're actually keeping the same people. And then (inaudible) we're not where we wanted to be is that we're -- to your point, we're taking our time to make sure it doesn't create any disruption.
Ed Meyercord -- President and Chief Executive Officer
And Christian, just to add, as you know, it's a pretty fluid conversation in terms of negotiations between the US and China. We are a lot more optimistic today than we were last quarter about potential outcomes. So in terms of -- we have to balance risk and opportunity. So we're tapping on the brake a little bit, because if we wake up in a couple of weeks and find out that there's resolution and the tariff goes away, we're better off with China and in a meaningful way as our costs in Taiwan are 4% to 6% higher. So we feel like we're in a good position as far as your risk and opportunity in terms of how we're managing the tariff situation. So it's a bit of a balancing act there.
Christian Schwab -- Craig-Hallum -- Analyst
Right. And along those lines if the tariffs are removed here in the next few weeks, we have seen the industry raise prices given those tariffs. Do you think those price increases then have to go away or they just end up being discounted away?
Ed Meyercord -- President and Chief Executive Officer
No, we think it's status quo and we don't see it having an effect.
Christian Schwab -- Craig-Hallum -- Analyst
Okay. Great. No other questions. Thank you.
Remi Thomas -- Chief Financial Officer
Thank you.
Ed Meyercord -- President and Chief Executive Officer
Thanks, Christian.
Operator
Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Ed Meyercord for any closing remarks.
Ed Meyercord -- President and Chief Executive Officer
Thank you, Operator; and thank you, everyone, who could join us on the call today. And we always have employees who -- and partners who join and listen. I just want to thank everybody for everything that was accomplished during the quarter. There's a lot going on still inside of Extreme and we've made a significant amount of progress. We're looking forward to sharing updates about our investments in these new products that are coming to market and software.
The Connect conference for us is a big deal. We had our first user conference last year. The feedback from that conference was overwhelmingly positive. So we did it again this year and we doubled down and we're going to have more than twice the attendance, and it's going to be a great event. And we're going to create a lot of buzz about our autonomous enterprise and the solutions coming out of that. So stay tuned.
We are also going to be participating in investor conference coming up, Christian, the Craig-Hallum conference; Cowen conference; Stifel and others during the quarter. So we look forward to getting in front of you and again appreciate your time and being on the call. Have a great day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.
Duration: 46 minutes
Call participants:
Stan Kovler -- Executive Director, Investor Relations and Strategic Development
Ed Meyercord -- President and Chief Executive Officer
Remi Thomas -- Chief Financial Officer
Mark Kelleher -- DA Davidson & Company -- Analyst
Roger Boyd -- Needham & Company -- Analyst
Erik Suppiger -- JMP Securities LLC -- Analyst
Christian Schwab -- Craig-Hallum -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
