Ladies and gentlemen, thank you for standing by, and welcome to the Extreme Networks' Q3 FY2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to our speaker today Mr. Stan Kovler. Thank you. Please go ahead, sir.

Thanks, Frederica. Welcome to the Extreme Networks' third quarter fiscal 2020 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. 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 2020 financial results. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations and our 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, financial and operational results, growth, expectations and strategies, 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 and in our most recent 8-K and 10-Q filings. 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.

Thank you, Stan, and thank you all for joining us this evening. Our teams have been working closely with our customers and partners impacted by COVID-19, and the stories and positive outcomes are heartwarming. We are living in unprecedented times, and I want to thank our customers and partners for their resilience and support. I also want to thank our employees for their dedication and continued focus while working from home. We were fortunate to be early adopters of Microsoft teams and the Zoom collaboration platform, enabling 97% of our employees to transition seamlessly to work-from-home environments. The resulting economic fallout of COVID-19 remains an unparalleled headwind. We began to encounter the resulting spending delays from the pandemic in March, extending into April, when most of our largest markets enacted quarantine and social distancing protocols, pushing out deals in our pipeline. Supply constraints along with additional logistics-related challenges in certain countries due to border closures also contributed to the shortfall. Despite the challenges, we are all experiencing with the pandemic, we continue to close large deals. All-in-all, we had 22 customers that spent over $1 million with us during the quarter, similar to Q2. However, it is taking longer to close because of the number of COVID-19 issues. Remi will discuss the quarter in more detail, but we are building on a base of strong recurring revenue and we continue to take actions to further strengthen our balance sheet. We feel that we are well positioned to weather the macroeconomic impact of COVID-19. Key highlights during the quarter were completing the integration of Aerohive on April 6 and migrating all systems and processes to Extreme systems, while operating remotely across most of our locations, executing on a new R&D model to drive feature and solution velocity that has been in the works since we reorganized engineering leadership at the end of Q1. The proof points around this were highlighted by cloudifying the edge switching portfolio ahead of schedule with the launch of ExtremeCloud IQ pilot, offering device agnostic license portability and a simplified licensing and pricing model. By July, our co-pilot automation software suite will be rolled out and management of our fabric portfolio by ExtremeCloud IQ will be added. We made significant progress in our 70% portfolio refresh that is approaching completion. In fact, during Q3, new product revenue remain more stable than revenue from our older products. We upgraded most of our network operations locations for ExtremeCloud IQ to our fourth-gen cloud that has a 100% uptime, no need to [count the 9s for reliability]. Our ExtremeCloud IQ application continues to experience growth and we added over 5,000 new customer accounts on the platform with over 40,000 new devices under management. In April alone, we added over 20,000 new devices under management and daily traffic has grown 50% in our management application since the pandemic began and 60% since last quarter, reducing OpEx with a strategic realignment of both our R&D and our go-to-market organizations and in order to lower our net income breakeven point to $220 million in revenue. Our finance team has moved very quickly to secure preliminary and then longer-term covenant waivers from our bank syndicate through March 31, 2021, thereby avoiding potential dilution and/or higher price subordinated debt. We continue to see that networking remains vital for our customers, despite the virus and demand remains strong. We continue to book very large deals across the product portfolio, including healthcare, government, education, service provider, enterprise and other segments, but they are taking somewhat longer to close. In response to our customer needs, we've rolled out a Rapid Outdoor Connectivity Kit to help hospitals and other organizations swiftly extend secure wireless connectivity to pop-up sites in support of quarantine, testing and patient care. We work closely with our customers to help them to set up remote working and learning environments with Portable Branch Kits and we launched a flexible financing plan to support our customers that are most in need. Our technology allows distributed campuses to be centrally managed from the cloud. As campuses reopened post-COVID-19, we can help customers through that process. Our new normal work and school environment will be a distributed enterprise with requirements for secure tunneling, remote kits for home and ad hoc work locations, automated provisioning, fabric attached capabilities for extending networks and effortless management. In acquiring Aerohive in August, we took the next step in our strategy, and we are seeing the proof points of that with an inflection in the market that customers wanting to move to cloud-based networking. According to a recent Gartner survey, some of the top CIO priorities in today's environment are IoT, cloud and employee workforce enablement. Cloud and security are two areas IDC identified as key areas of sustained crisis response. As customers take a more holistic view of a unified work-from-home wired and wireless environment, the type of networking approach Extreme can offer managed from either the cloud or on-premise will proliferate. Extreme has blended a dynamic fabric attached architecture that delivers simplicity for moves and changes at the edge of the network together with corporate-wide role-based policy. This enables customers to migrate to new cloud-managed switching and WiFi, agnostic of the existing networking or wireless equipment they already have installed. In the end, these customers will see lower CapEx, lower subscription costs, lower cost of ownership, and get higher flexibility along with a more resilient network. This is an example of where COVID-19 offers Extreme future opportunities. Networking is essential technology and while there could be a temporary slowdown in buying, we know that the market will come back. Our customers are experiencing a shift in use cases. Schools are adding APs to their parking lots. Grocery and retail stores will add more in-store pickup capabilities, sports is cyclical and will come back as it is highly experiential. Public spaces and retail will add more IoT for sensors and other factors. Although many carpeted enterprise customers are likely to consider shrinking their real estate footprint and shifting investment to improve their work-from-home and Zoom footprint, campus investments and edge for IoT, edge computing and security are likely to increase and drive growth for networking. Moreover, the post-COVID-19 buying criteria for networking will also change. We believe that it will be less influenced by legacy history considerations and become more influenced by the flexibility for one solution set that can work on the enterprise campus and with a large number of distributed work-from-home workers, all managed from one user interface. Status quo vendors are not offering this solution, but Extreme is uniquely positioned in this regard. In realigning our go-to-market organization, we have taken down silos, and we are fostering teamwork in the field where all commissioned salespeople will have a targeted number and a common goal. We are also automating capabilities of partners and cloud users to manage the network for ordering and licensing, expanding touchless orders that aligns with more of our volume motion, particularly around cloud-based networking. These changes will drive improved sales productivity and we believe this customer-centric approach will also create more run rate business and stable business for Extreme and our partners as well. We are excited to announce we hired Wes Durow as our new Chief Marketing Officer. Wes brings new ideas and will drive a more efficient handoff between marketing and sales with higher quality leads and will introduce new processes to shrink our response time running at cloud speed. Key customer wins during the quarter included The School District of Manatee County in Florida that deployed ExtremeWireless access points in the parking lots of 52 elementary, middle, and high schools to allow students who may not have sufficient internet at home to download remote learning assignments. This is how Extreme is working with its customers in the new normal environment. Several large-scale cross-sell wins includes state, local government when deploying Extreme Fabric at 200 courthouses underpinned by 4,500 switches and soon to be 4,000 APs to add WiFi capacity for lawyers, judges, and the public and supporting AV technologies such as broadcast and multicast. A large medical center is unveiling a state-of-the-art 1.5 million square foot 17-story hospital with 500 private patient rooms and 47 operating suites. This customer will extend and integrate its fabric deployment to this new facility and recently purchased a variety of Extreme Switching Solutions and XMC for this new building. Even as we talk about ExtremeCloud IQ, our XMC on-premise management suite continues to be adopted by customers. A global infrastructure-as-a-service provider offers compute storage and data centers located in the U.S., Europe, Hong Kong and Singapore, continue to invest in Extreme data center products, reducing provisioning times from hours to minutes as well as support OpenStack development and SDN initiatives. Through the first month of Q4, our bookings are tracking slightly above our internal expectations and running at a slightly higher level than the first month of Q3. However, the current market environment is fluid for everyone and Extreme Networks quarterly business is typically backend loaded with June being a key month in our fiscal Q4 2020 forecast. Because of these factors, we are temporarily suspending our Q4 2020 outlook. We will reassess providing quarterly guidance based on the clarity of macroeconomic recovery at the end of the fourth fiscal quarter. I am confident that Extreme will weather this challenge and emerged from this as a stronger and more cohesive company. And with that, I'll turn the call over to our CFO, Remi Thomas.

Thanks, Ed. Revenue of $209.5 million was in line with our pre-announcement. We are building on a base of strong recurring revenue and this component remains relatively stable on a dollar basis, contributing 34% of revenue up from 28% in Q2. Non-GAAP earnings per share was a loss of $0.14 impacted by the revenue shortfall as well as the non-GAAP gross margin of 56.7% low relative to our recent performance only partially offset by tight control of operating expenses. In response to weaker demand owing to the macroeconomic impact of COVID-19, would probably implemented a number of liquidity and cost control measures during Q3, including tightening control on discretionary spending, hiring and working capital, drawing down $55 million of our $75 million revolving credit facility, implementing interest rate swap contracts on slightly more than half of the outstanding Term Loan A debt principal, securing a waiver of the covenants pertaining to our Term Loan A due 2024 through March 31 of 2021, an extension from the previously negotiated July 31, 2020 timeframe, and finally accelerating actions the company was planning to take to improve R&D and sales productivity along with cost reductions in supply chain and operations. This has enabled us to lower our quarterly non-GAAP net income breakeven points to approximately $220 million in revenue as early as fiscal Q4 2020 all while further enhancing our financial flexibility. With $196 million of cash on hand at the end of Q3, we are well-funded and have ample liquidity to work through these challenging times. To help our partners and customers, Extreme introduced LEAP, the Lending Enablement & Assistance Program to provide preferential financial terms for qualified channel partners across the Americas and Europe through September 30, 2020. LEAP offers flexible, low interest financing, deferred payments, and free training, as well as reduced growth rebate targets, extended partner leveling requirements and training. This program is enabled by financial solutions partner, leaving credit risk off Extreme’s balance sheets. Total product revenue in Q3 was $136.5 million and our total product book-to-bill ratio was approximately 1.2. In cloud, new subscription bookings grew 7% year-over-year, but were flat quarter-over-quarter, owing to seasonality and the impact of COVID. We were 70% complete with our product refresh as of the March quarter in line with our expectations. However, due to some of the ongoing cost reduction actions, we now expect this refresh program to be completed during the second quarter instead of the first quarter of fiscal 2021 as previously discussed. Total services revenue of $73 million grew 21% year-over-year, but fell 5% quarter-over-quarter largely on a sequential decrease in maintenance. Our total services book-to-bill ratio was slightly below 1. During the quarter, the Americas contributed 50% to total revenue, EMEA 40%, and APJC close out the remaining 10%. Although revenue decline across our regions, we did experience year-over-year bookings growth in cloud subscription and services in both EMEA and APJC on an apples-to-apples basis. Following Q3, our trends in Northern Asia appear back on track in regions such as Korea and Japan. Yet, harsh lockdowns in India, Philippines and other markets are offsetting factors. In Europe, France, Italy and Spain are over the worst of the impact. Germany is getting back to work and is aided by strong stimulus package and easing a procurement requirements to the public sector. The UK is somewhat behind the curve. In our international markets, lockdowns are easing for schools, construction and manufacturing while non-grocery retail and other verticals have delayed. Finally, we are not participating in both the Japanese and German versions of E-Rate type program for schools and are making good progress. In the U.S., vertical such as stadiums, casinos, non-food retail stores, and large public venue spending paused. This was partially offset by positive momentum in government, education, or what we call overall SLED state, local and education as well as logistics. Several large deals we had expected pushed to the right, as I've mentioned. In Q3, non-GAAP gross margin was 56.7% compared to 57.6% in the year-ago quarter and 60% in Q2. The sequential decrease was attributable to lower volume, higher product overhead and $4.5 million write-down of obsolete inventory. Finally, we estimate that the net impact of tariff was a negative 210 basis point up from 150 basis point last quarter as much of our inventory sold during the quarter was purchased under 15% List 4A tariffs prior to the mid-February reduction to 7.5% on Wireless access point and optics. Q3 non-GAAP operating expenses came in at $129.3 million at the low end of our guidance, a decrease from $136.3 million in Q2 based on the actions we took during the quarter. This resulted in an operating margin loss of 5.1% down from an operating margin of 9% in Q2. Free cash flow was $2 million down from $17.9 million in Q2 and $12.7 million in the year-ago quarter. DSO 42 days fell from 55 days in Q2 and from 51 days in the year-ago quarter. Our cash conversion cycles stood at 59 days, down from 69 days in Q2 and similar to the 60 days in the year-ago quarter. Q3 ending inventory of $66.2 million fell $13.5 million from Q2 and grew $8.6 million from the year-ago quarter. The quarter-over-quarter decrease reflects supply constraints and demand planning considerations. Now turning to guidance. As Ed noted, we are temporarily suspending our Q4 2020 outlook. However, we will reassess providing quarterly guidance based on the clarity of macroeconomic recovery at the end of our fiscal fourth quarter. With that, I will now turn it over to the operator to begin the question-and-answer session.

[Operator Instructions] And your first question comes from the line of Samik Chatterjee with JPMorgan.

Hi. Good afternoon. Thanks for taking my question. Maybe if I can just start-off, you mentioned kind of the strength you're seeing in the Cloud IQ business, which clearly indicates there is still interest from the enterprise customers in pursuing some strategic projects that they had thought of pre-COVID. But if you can just broadly kind of outline what are you seeing across the customer base. Is there still a lot of interest in continuing with these strategic projects? Or is it more about just kind of doing the high priority, kind of keeping the lights on kind of projects and what are you seeing on that front? And I have a follow-up.

Sure. I'll take a shot, and then Remi, I’ll let you – you can come in behind me. But in our IR package, we highlight vertical trends, and the response is different depending on the vertical. So we've still seen strength in our government education business, which – that's our largest vertical. And so from a demand perspective, that hasn't changed. Some people are taking advantage of this environment where they might have empty schools or empty courthouses, like the example that I used to actually undertake a network upgrade because it's a good time to upgrade your network. We have hospitals and healthcare, which is an important vertical. That, too, has been growing, and demand has been strong. There's been a negative impact on the sports and entertainment and hospitality. That's smaller as a percentage of our overall business. But nonetheless, high profile NFL teams, things like that. These kinds of customers have paused to take a look at whether or not they're going to have a season and what that might look like. Manufacturing has been somewhat neutral. We are seeing people return to work and large customers of ours like, Volkswagen, et cetera, are sending people back to factories. And we're seeing people returned to work. And that's happening more outside the U.S. than in the U.S., but it's starting to happen. Retail, transportation, logistics, there it’s been somewhat mixed for us. Obviously, grocers, these kinds of retailers are still strong. The likes of our customers like FedEx, they are doing very well until ordering remain strong. Obviously, I'm looking at the likes of Macy's or Sears those, kinds of retailers. It's a little bit different. And service provider has been strong. So we have lower exposure to the service provider side, but nonetheless, we still have service provider customers and they're seeing growth and expansion in their networks. So that's kind of an overlay of our different verticals and where we're playing from a customer perspective. I hope that's helpful. I don't know if Remi you want to come back in or, Stan, you want to come back in with…

Ed, I would just add on E-Rate specifically, if you look at the past year's attributions, we saw that getting funding or getting the approval from USAC for certain larger project was somewhat getting delayed in some of our districts where we’re strong. We feel like with all of the stimulus package that's been introduced, we might see accelerated funding so that some schools that we're planning on deploying next quarter in our fiscal Q1, which is our September quarter, under the current ease of getting funding approved might end up having to do it – being in a position to do it earlier. So anything that really is related to government funding might be easier as we approached Q4 and Q1 of next year.

All right. And if I can just follow-up, you mentioned you've kind of taken cost actions to lower the breakeven to $220 million. Is the best way to think about that that's kind of where you want to position your business and you see demand coming back to that level at a minimum? Or is that a moving target and you kind of going to evaluate that on a go forward basis and take more actions are required?

No that's specific to Q4. This is what we see based on a combination of some of the temporary measures that were taken as well as the more structural measures, which full benefit will not reach until fiscal Q1 of 2021. So our breakeven in Q4 is $220 million on a net income basis, non-GAAP, and that's not necessary that we aim to be at $220 million. We're not providing guidance for the quarter, but we would need to be at $222 million breakeven. And it would – to your point about moving target that will evolve as we enter in Q1 because we'll get the full benefit of some of the cost reduction actions that we're taking today.

Got it. Thank you.

I would add one point to that, which is we've run a variety of different scenarios. And what we've done is, we've left from a sales perspective and go-to-market perspective. We've left our teams in place where I would say with average productivity as we come back, we would see upside based on a productive sales force in a post-COVID more normal environment.

Okay. Thank you.

Thanks Samik.

And your next question comes from the line of Eric Martinuzzi with Lake Street.

Yes. Just a clarification on the non-guidance business outlook. Is the implication here – you talk about April versus January. I would expect April is typically up versus January, but being up when a lot of people are still shelter-in-place, I would see that as a definite positive. But is that to say that if the trend sustain here in Q4 that we would be up sequentially on the revenue versus Q3?

I'll take this one. If you recall though, the normal seasonal pattern of the way the bookings come in is 20% month one, 30% month two and 50% month three. So as much as I wish I could say, because our April bookings are slightly up versus that January booking. We feel good about this, but it's hard for us to draw a conclusion on the trend, hence, the fact that we're not willing to provide guidance. It's just a data point that we want to show you because bookings were down 20% or up 20%, obviously you guys would be driving to a different conclusion.

Okay. And then on the debt, I know you talked about getting relief on the covenant. Now it's not July 31. It's March 31 of 2021. Is that to say that the existing debt arrangement is no longer being amended? Or are we still kind of midstream on the amendment to the existing agreement?

No, no, it's been amended already. And we came to a successful conclusion last Friday with the unanimous approval from all of the banks in the lending group. And so we will continue to operate under these extended terms, but till the end of March of 2021, as opposed to the prior amendment that took us just to the end of July.

Got you. Okay. And then last question for me on the operating expense, where do we – given the cuts that we've made, and I realize it's a moving target here, but the measures that we've taken, what's a normalized – what's your operating expense expectation for Q4?

So we see ourselves between $115 million to $120 million.

Okay. And is the bulk of that coming from sales and marketing or is that a mix across the three buckets?

We see savings coming from both R&D and sales and marketing that would be the bulk of it. And I will split it 50-50 between the two. And then we do see some savings as well in G&A, but much, much lower.

Got it. Thanks for taking my question.

No problem.

Thanks, Eric.

And your next question comes from the line of Erik Suppiger with JMP.

Yes. Thanks for taking the question. So what is the situation with your supply chain at this point? Are you at capacity now or what is the health of the supply chain?

Yes. Hi, Erik. This is Ed. So when we went into this, we had concerns about China and what was going on over there and it wasn't just our primary OEMs, but it was secondary and tertiary suppliers, and they've come back. So we're encouraged because, as far as China and Taiwan, we are at – back to 100%, and that's a huge part of our supply chain. We did in connection with the tariffs between U.S. and China. We did move production into Mexico, and Mexico is a little later on the curve. And so they're down to 50% to 60% capacity right now, but they're saying they'll come back to a 100% by June.

So is that to say that your June quarter should not be adversely affected by the supply chain?

We think that there maybe some effects, but less than this last quarter, I would say. Remi, do you want to comment?

Yes, much less in terms of our ability to deliver. What I would highlight, Ed is that we are seeing increased freight cost because there is obviously less capacity. We typically leverage commercial airlines to ship goods from our El Paso warehouse to the rest of the world. And the flight availability is much reduced as you can imagine. And so the available capacity is costing us a little more. So that's an impact that we factor in, in our cost of goods sold. But as far as not being able to ship products, we will be limited to those products that are coming out of our factory in Mexico.

Okay. And then you talked about your cloud service, is the vast majority of those devices, is it WiFi access points that you're managing or is there much switches or other devices at this point?

It's primarily access points today, Erik. It's the former Aerohive portfolio and then our teams have been really productive working from home and we moved ahead of schedule. Our wing wireless portfolio into the cloud, that happened. And then we pulled in from July to April our edge switching platforms. So now you have – what we would call excess edge switching that can be managed from the cloud. And then from October, we pulled in VOSS, which is that fabric campus core technology that's been pulled into June as well as co-pilot, which has automation built in. So we now have edge switching in the cloud and then we will have core switching, so we will be able to manage end-to-end from the wireless access points, IoT edge, all the way through the core of a network from our ExtremeCloud IQ. And I could tell you, it's incredibly easy to manage. We're all about effortless and making it easy. We developed a very simple licensing model and it's the simplest in the industry and we think that's going to help us scale and then drive adoption of management in the cloud. So we're moving very quickly, very rapidly in cloudifying our portfolio. So it's happening – within this quarter, we’ll be edged to core from ExtremeCloud IQ.

Okay. And then lastly, I just want to clarify, you are still making cuts during the fourth quarter. Your breakeven is going to be at $220 million if you get to that revenue in the fourth quarter? Or does that $220 million breakeven level, does that apply to the first quarter because that's when you get the full benefit of the cuts?

No. If we generated $220 million in Q4 fiscal 2020, we would be at breakeven on a net income basis on a non-GAAP basis.

Okay. So are you seeing the full benefit of your cuts in the fourth quarter or will there be further…

So the issue with that – question is, is we have a combination of temporary actions and then we have more structural actions. We will get the full benefits of our structural actions in Q1. However, when that is the case, the temporary actions, just has like, right now nobody is traveling. We do expect people to start traveling again. So some of the cost benefits that we're getting on the temporary basis won't happen again in Q1. However, in Q1 of fiscal 2021, we get the full benefits of our cost reduction actions. So that if you think about our operating expenses in Q1, I gave an indication that in Q4 they'd be somewhere between $115 million, $120 million, in Q1 of fiscal 2021, they will be up very moderately from that number. But obviously, we're counting on a pickup in revenue at that point in time.

Okay. Very good. Thank you very much.

[Operator Instructions] Your next question comes from the line of Alex Henderson with Needham.

Great. Thank you very much. I've got a couple of questions. I wanted to ask some clarification as well, if I could. But the first question I wanted to ask is, you guys are on a selling model to your channel. Can you talk a little bit about what they're seeing in terms of their inventory? Are they seeing any backup in their ability to pass through the equipment to customers? And to what extent is the channel also seeing any fallout that might back up into your results that you might not have anticipated?

I can jump in first, Remi and then you can provide comments afterwards. So as far as the channel is concerned, our channel is actually quite healthy and a lot of – we obviously represent the networking space. But as far as their server and their storage businesses have been doing well, security is another one. So they've actually been very robust and so any – as far as any kind of concerns from a health perspective, they've been quite healthy. And we've obviously been in very close contact with our distributors. And we have been in a position for us to shrink our inventory with our distributors. And Remi, I don't know if you want to provide any additional color on that front.

No, I would just add, Alex that historically our distributors tend to anticipate on a future quarter typically at the end of Q3. They would look at Q4, which is supposed to be a stronger seasonal quarter. Because of the impact of COVID-19, they are more basically playing it by year. So that means that you should be expecting our sales-in and sales-out revenues to be tightly correlated, i.e. when [indiscernible] gets an order, they immediately pass it on to us. But probably won't be building any buffer. As far as their financial health is concerned, Ed mentioned that they are doing well in certain specific segments of the market, like PC peripherals, et cetera. And so what we're seeing is that their ability to continue to pay us on a timely basis has remained intact.

Second question, if I could, your product book-to-bill at 1.2, partly to do with, obviously the impact of your supply chain, but if you were able to supply that going forward, it would imply sequential improvement in revenues. Obviously COVID offsetting, but I mean, is it reasonable to think that – now that you're no longer constrained that you should at least be at the current level of revenues or maybe the hair above that in the June quarter? Or is that too much extrapolation of the book-to-bill number?

Yes. I wouldn't deduct from that 1.2 that that we would see a sequential uptick because the 1.2 really relates to what I just said about the lack of willingness about just to build inventory ahead of Q4, and the closer correlation between sales-in and sales-out, so if anything that would support that the business should be sort of stable going forward, but certainly not picking up stronger in Q4.

Okay. Couple of clarifications, the comment you made about the tariff of 210 basis point hit because you were working through older inventory, what would be the sequential hit in the upcoming quarter now that that inventory has been churned through? Is it half of that?

Yes, roughly.

Okay. And then very difficult for us to forecast the interest line – the interest expense line here, $4.4 million expense in the June quarter. You've got a whole bunch of moving pieces here relative to the zero interest rates on cash balances new credit agreements, which have different terms. You pulled down $65 million in cash. I have no idea how to forecast that line. Could you give…

When you get a sense to read out 10-Q, which has just been posted about half an hour ago, you'll see that as part of the amendment we agreed to LIBOR plus 450 basis points. There's no minimal flow. I mean the flow is effectively zero. And then it's really hard and that should be applying to $425 million in gross debts, which is the 370 outstanding on the Term Loan A close to 55 that we drew down. So that's the high level answer. Having said that, you can't really factor in the impact of the swaps that we did, so we're happy in a follow-up call to help out fine tune this number, but LIBOR plus 450 is a good start.

Is it reasonable to think that that number is going to be higher back up to the $6.5 million type level in the June quarter? Is that's kind of ballpark what we should be thinking about?

We see it slightly less than that in a few quarters.

That’s a good number. Great. Thank you. And just one last question, and then I'll see the floor. What's your big brother in the space doing, Cisco changing behavior at all, pricing behavior going down stream into more aggressively into smaller accounts? What are you seeing on the competitive front because you haven't mentioned anything on that front so far?

Yes. Alex, what I can share is that we haven't seen unusual behavior from them. I would say, as far as our competitive landscape, we continue, we go head-to-head with Cisco and HPE and those are two kind of primary competitors that we run into. And I would say nothing unusual or nothing out of the ordinary as far as the competitive landscape from that standpoint. Yes, whatever we have commented on is the fact that we are seeing this move to the cloud and that's the fast growing segment here, predicted to go from $3 billion to $7 billion. But having the flexibility and the versatility of this platform, we think that this is going to drive adoption. And so from our standpoint, we have a much simpler licensing platform and we think we're going to be able to make it easier for people to move to our cloud and then the Meraki cloud.

Great. Thank you.

But nothing usual from a pricing perspective. We are not seeing anything that what I would describe as a normal competitive behavior.

Thanks.

Thanks, Alex.

And your next question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

Hey. Thanks guys. Remi, can you give us – would you be willing to share how much revenue you actually did in the month of March?

First of all, we typically don't disclose revenue on a monthly basis. Second of all, I mentioned earlier that the inventory in the channel was typically not as strong as you would expect at the end of March because of [indiscernible] playing it by ear. And that means that going forward, our sells-in and sells-out are more closely correlated. So based on that the trend for revenue on a sells-in basis is positive. If I look at March versus January, but I'm not willing to highlight much more than that and this is again, on a one-month basis and we need to think about the full quarter and not just the month of April.

Right, right, right. Understood. Just when the pre-release and where revenue came in, I thought some color might be helpful there. Number two, regarding gross margins, can you help us understand either from a mixed standpoint or a revenue standpoint, what it would take for us to be at 60% plus type of gross margins?

If we assume that, as Ed mentioned, we're not seeing any major change in competitive behavior from our competitors. So we don't see accelerated price pressure. We do expect the benefits of reaching the end of our product refresh. It's going to happen a quarter later than what we had assumed. So it's going to happen in December, but that's ongoing benefit. And so really for us to go back to the 60% that we achieved in Q2 of fiscal 2020, we need to get volumes up because that will help us absorb basically the fixed cost that we carry in our cost of goods sold related to the cost of our supply chain, the tariffs, excess in obsolete, et cetera. And so as you build the revenue and that we get closer to $240 million to $250 million a quarter, which are at the historical level, there's absolutely no reason for our gross margin on a non-GAAP basis, not to get back to 60%. So it's really entirely driven by how quickly you will assume in our model a topline recovery.

Fabulous. No other questions. Thank you.

You're welcome.

Thanks, Christian.

And your next question comes from the line of Woo Jin Ho with Bloomberg Intelligence.

Great. Thank you for taking my question. Just a couple of environment or sales environment questions. Now does sales activity for you have to – well, I guess, does business activity have to return for your sales activity to improve? So for example with the NFL or the hospitality does not start wrapping up in the near future, does that correlate yourselves in any way?

Well, yes. The answer is – and we put on the slides where we have our sports and entertainment, we call it hospitality. It's like 5% of revenue number. And obviously, these customers have been hard hit. So we do have a lot of projects, for example, with casinos, for example, that are purchasing decisions that have been put on hold. And they're focusing on how to bring people back into their environment. So I would say there's a lot of pent-up demand that would take place with retail, sports and entertainment, these kinds of customers that we have where they've pause or they've pushed out to the right, if you will, the opportunities. So we do think that we will benefit when it comes back.

Got it. And then in your prepared remarks, you had mentioned something along the lines of potential for a shrinking corporate enterprise still being an opportunity for the campus switching market. I'm assuming it's also a WiFi commentary as well. Could you expand upon that a bit? Because that doesn't make sense to me given that you have a smaller footprint and you find it to be a bigger opportunity going forward?

Well, it depends. I mean, if you listen to – Eric Schmidt was quoted today by saying that the corporate enterprise is going to have to grow for social distancing. You can't put people back in the work environments where they were as maybe a different or an alternative point of view. In our end, what we're looking at is something that – what we talk about is a more distributed workplace and maybe a more flexible environment. I know that's how we're thinking about going back to work in a more flexible way. But you’ll still require networking in your environment and from a distributed point of view, I mean you're going to have workers working from home or working from different locations. And that's where we think that having an enterprise grade network and supporting flexible work and work-from-home is an opportunity for us. And it's a particular opportunity for our cloud because our cloud is very easy to manage and it's a single view of your entire network. So you can have a distributed network in multiple locations that you can manage from our ExtremeCloud IQ. So that's what we're talking about, which is a new kind of enterprise that is more distributed and that we have a platform and we have the software and the platform to support that solution.

Got it. And just to follow-up on that. And this maybe premature, but has the nature of the conversations changed in favor of your enterprise cloud – I’m sorry, your Cloud IQ solution given what maybe the future enterprise?

The answer is, yes. And I gave some examples of that. And we think that this is something that will be an accelerant to migration to cloud. And industry analysts are already calling that migration, but we think that what's going on here has been an accelerant.

Great. Thank you.

Thanks, Woo Jin.

[Operator Instructions] And you have a follow-up with Alex Henderson with Needham.

Great. Thanks. So I was wondering if you – I didn’t see any [indiscernible] that talking to the service provider percentage and enterprise percentage, government percentages…

You’re breaking up Alex. But let me switch to the verticals. I'll just give you at a high level, and I can only give you a range. We've not formally disclosed it, but I would say that education, and higher education together accounted for, let's call it, 16% to 18% of the first nine-month revenue. Governments both Fed and local accounted for 14% to 16% of first nine-month revenue. Healthcare was 10% to 12%. Manufacturing was 9% to 11%. Retail has dropped as a result of some of the trends that I talked about. It's now accounting for 5% to 7% of our total revenue. Service provider has picked up for the first nine-month, it's accounting for 79% of our total revenue. Sports and entertainment is 2% to 4%, and finally transportation and logistic is 4% to 6%. And with that you should be covering the first 10 verticals, which is about 75% of our overall revenue.

Great. That's helpful. Thanks. I was hoping we could just go back to one more question. The $220 million breakeven, what assumption are you making on gross margin with that $220 million number?

Again, you're trying to get me to provide guidance. And the name of the game today was not to be cornered and provide you with guidance. But we do expect the – certainly the non-recurrence of that $4.5 million excess in obsolete inventory write-down to help us. So we finished a quarter at 56.7%. If you were to assume somewhere up from that level, I think you'd be in the right direction. And just to quantify it, I would expect that number to be perhaps up 1.5 points versus that level. But it's just because of the non-recurrence of that impact that we just talked about.

I see. Thank you.

And we have no questions in queue at this time.

Okay. Thank you, operator. Thanks, everybody, who could join us on the call today. And I also want to shout out to Extreme employees, who are listening in for what was an incredible and is an ongoing incredible effort during these times. It's been a challenging time for all of us as individuals, as organizations, as we adapt to the COVID-19 environment, and we figure out and navigate the future of work and what the new normal is going to look like. So as I said earlier, now more than ever, we're here for our customers and we're in a unique position to provide resources, solutions and flexibility to navigate this distributed enterprise environment. So that's it. Thank you very much and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.