Extreme Networks announced plans to acquire Aerohive, which has most of its revenues in Enterprise WLAN. The deal was a surprise, as evidenced by the 40% price premium paid on on HIVE. After this deal closes, Extreme's WLAN business will be the combination of three WLAN businesses - the traditional WLAN business from Enterasys (Ottawa based team), the Motorola Wireless WLAN business (acquired by Zebra, then sold to Extreme) and Aerohive. Each of these three businesses had strengths, for instance, the Ottawa team had designed a product line that had high performance in crowded venues - Extreme has enjoyed a long relationship with the NFV; the Motorola team had designed systems that were effective in retail and logistics (as a consequence of Motorola's ownership of Symbol Tech, a bar code scanner company); and Aerohive, which was as of 1Q19 the #2 revenue player in cloud-managed WLAN services and with a strong presence in the US K-12 vertical. While there is certainly some risk that Extreme does not integrate the Aerohive business effectively, there are some interesting aspects to this deal.
#1: Aerohive's cloud-managed WLAN services is a significant player in the market. We expect many small and medium businesses will adopt cloud-managed WLAN, and Extreme had a less mature offering here. We see this as the primary benefit of the Aerohive acquisition.
#2: Aerohive's vertical market exposure in US K-12 (education) market and the managed care part of the health care industry are a nice addition to Extreme. These markets are additive.
#3: Aerohive had a SD-WAN product that while not a big revenue generator will be important for Extreme in selling to small and medium sized businesses. We expect the SMEs and branch offices will be upgrading using a SD-Branch approach, where upgrades to WLAN, switching and SD-WAN will be done at once. Extreme had a hole here and Aerohive fills it.
#4: Aerohive had a new product, A3, which we categorized as Enhanced Network Access Control. The front end of this product is very modern. Extreme also had its own NAC product. Our hunch is the company will merge the two, taking the best of both. We see larger enterprises as demanding this type of support. HPE Aruba sells its Clearpass product in a wireless+wired+ENAC bundle to larger sized business, just as Cisco sells its ISE and wireless+wired bundle.
#5: Aerohive has 802.11ax products. We expect that increasingly, as customers adopt 802.11ax, with its expected throughput under high loads exceeding 1 Gb/sec, this will drive an upgrade cycle to switches with MultiGigabit support. Extreme cited "cross selling" in its announcement of this deal, and we agree that customers in the 802.11ax world will be increasingly buying new switches when they adopt new wireless.
This deal was a surprise because Extreme already has WLAN in its portfolio, but if Extreme executes on this business transaction effectively, it can solidify its position in the mid-market by offering cloud services and SD-WAN (through a SD-Branch bundle) and potentially move both up market (with ENAC) and if it choses, downmarket by maintaining a business practice that Aerohive rolled out well over a year ago that can be described as a "freemium" model for its cloud-managed WLAN services.
Today I attended the Extreme Analyst day at the NASDAQ in New York.
Extreme’s 4Q18 switch revenue grew over 10% and in our preliminary view of 4Q18, it took share. The company highlighted over 30,000 customers and over 6,000 partners in a one-Extreme approach that has integrated the acquisitions of Avaya and Brocade.
The company also highlighted that in 4Q18 it saw nearly 20 deals over $1M which is indicative of a rebound in its' business from large enterprises. We believe the company is maintaining a good portion of its' Extreme and Avaya installed based.
Extreme emphasized software as a driver for higher margin sales. We agree, software is the general direction of where campus switching is going with vendors looking to get incremental revenue from software instead of hardware. We have maintained for over two years now that campus switching would be a positive growth market led by software to help manage a more converged (Unified Access) market. We also see IoT and the inclusion of securing and monitoring IoT traffic as an additional growth drive for the campus market.