In the sector of computer networking, Cisco Systems (NASDAQ: CSCO) is the 800-pound gorilla. However, Extreme Networks (NASDAQ: EXTR) is taking a step toward constructing its own scale to task its large opponents.
Last month, Extreme Networks introduced it’d acquire Aerohive Networks (NYSE: HIVE) for $272 million in an all-cash deal. Once completed, this acquisition will mold the mixed enterprise into a top-3 cloud networking business enterprise and significantly boom its basic scale and competitive position.
Adding merchandise in rapid-growing markets
Extreme Networks is a software program corporation that allows organization clients to manipulate networks with a stop-to-give up answer, from the records center to the user access factor. With the proliferation of devices in the administrative center and increasingly more cellular and international body of workers, organization networks have by no means been greater complex and significantly depend on equipment to control and at ease virtual assets.
Extreme Networks already has a robust role in software for managing information facilities and ethernet networks. The addition of Aerohive Networks complements the organization’s talents in wi-fi networking and SD-WAN, which might be of the quickest-developing segments of the networking software industry. The businesses have complementary product strengths:
Network Software Market Total Market Size Estimated Expected Growth, 2019-2022 Notes
Wireless LAN $7.Zero billion 8.9% Aerohive Networks has robust skills.
Data center $14.2 billion 2.Five% Extreme Networks has sturdy competencies.
Ethernet switching & campus LAN $15.Eight billion 1.Five% Extreme Networks has robust skills.
SD-WAN $1.6 billion 18.8% Aerohive Networks has strong capabilities.
Total community software enterprise $38.6 billion 4.Nine% Aerohive and Extreme have complementary network software competencies.
Data source: Extreme Networks investor presentation.
As one of the first organizations to provide controller-much less Wi-Fi and cloud community control software program, Aerohive has lengthy been a pioneer within the industry and is the No. 2 company of cloud-managed wireless networking software program by sales. The software program Aerohive sells is excellent for its incorporation of synthetic intelligence and machine mastering to improve the efficiency of cloud community management. This software program becomes even greater important for organizations as the industry transitions to a brand new networking popular called Wi-Fi 6, which promises to make networks faster and growth the variety of connections a Wi-Fi router can deal with, but increasing the range of connections will make networks even more complicated and promote the cost of using a robust community control software program.
Extreme Networks’ aim is to serve as an end-to-stop software program answer for dealing with corporation networks. Extreme had a presence in cloud networking earlier than the Aerohive acquisition, but Aerohive’s competencies in cloud networking and SD-WAN are a whole lot more potent. Therefore, this acquisition provides to Extreme Networks’ product depth and brings it one step closer to being a turnkey software provider.
Increasing commercial enterprise-scale and profitability
In addition to including product abilities, Aerohive Networks will deliver excessive-margin revenue. In 2018, Aerohive generated $155 million of sales with a gross profit margin of 65.8%. However, the employer produced a internet loss of $18.Three million because of its inability to overcome its fixed prices with its small revenue base. This may be less complicated to attain as part of Extreme Networks.
In assessment, Extreme Networks generated $1.Zero billion of sales within the three hundred and sixty five days finishing on March 31, 2019. Extreme’s gross income margin on this sales become fifty five.8%. Extreme additionally generated a modest internet lack of $14.Four million; but, Extreme Network’s unfastened coins flow become high-quality $sixty five.7 million. Free cash flow is mostly a better degree of a business enterprise’s economic fitness than internet profits because of its emphasis on real commercial enterprise economics in place of accounting regulations.
Extreme Networks’ management believes the Aerohive acquisition will boost up its “course to more than 60% gross margins and 15% working margins on a non-GAAP basis” via the stop of the following economic 12 months. This claim is credible, given Extreme Networks’ music document of efficiently integrating beyond acquisitions. Over the beyond few years, the enterprise has finished 4 acquisitions — of Zebra, Avaya, Brocade, and Heritage Extreme — and it became able to improve its income margin in every case.
Acquiring Aerohive Networks is expected to have the twin effect of developing Extreme Networks’ sales base and improving its profit margin. This is an effective mixture that needs to by way of itself justify the transaction.
Still a small fish in a large pond
Even with the Aerohive Networks acquisition, Extreme Networks will continue to be a small rival to networking giants Cisco and Hewlett Packard Enterprise. To put this into attitude, Cisco boasts over $50 billion in sales and a marketplace capitalization in extra of $two hundred billion, compared with Extreme Networks’ $1 billion in sales and a marketplace capitalization close to $800 million.
There are blessings to Extreme Networks’ small size. The business enterprise is greater nimble and can be able to grow faster through strategic moves, which include the purchase it just announced. However, larger organizations like Cisco have greater assets to compete in phrases of funding innovation through research and development or obtaining customers with advertising.
Competing in opposition to giants like Cisco and HPE puts a strain on smaller players like Extreme Networks to find approaches to scale up. Extreme Networks has had a successful acquisition strategy up to now, and traders ought to count on the employer to retain gobbling up smaller competitors because it builds scale to greater efficiently compete in opposition to its larger peers.