Stan Kovler - Executive Director of Investor Relations and Strategic Development Ed Meyercord - President and Chief Executive Officer Drew Davies - Chief Financial Officer

Mark Kelleher - D.A. Davidson Christian Schwab - Craig-Hallum Capital Paul Silverstein - Cowen Erik Suppiger - JMP Securities Alex Henderson - Needham & Company

Good day, ladies and gentlemen and welcome to the Extreme Networks Q4 Fiscal '18 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to introduce your host for today's conference, Stan Kovler, Senior Director of Investor Relations and Finance. Sir, you may begin.

Thank you, operator and welcome to the Extreme Networks fourth quarter fiscal 2018 earnings conference call. This conference call is being broadcast live over the Internet and is being recorded on behalf of the company. The recording will be posted on Extreme Network's website for replay shortly after the conclusion of the call. By now you've had a chance to review the company's earnings press release. I would like to remind you that during today's call, management will be making forward-looking statements within the meaning of the safe harbor provision of federal securities laws. These forward-looking statements involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. These risks includes possible adjustments in tax calculations arising from further assessment of the impact of the recent changes to U.S. tax laws, and our ability to successfully integrate the acquired assets, technologies and operations from Avaya and Brocade into our business and operations, including, but not limited to the following risks. Difficulties we may experience in the retention, assimilation and successful integration of employees and teams, sales functions, acquired operations, technologies and/or products; unanticipated costs, litigation or other contingent liabilities associated with the acquisitions that could negatively impact our operating results and financial condition; adverse effects on existing business relationships with suppliers and customers; and difficulties we may experience in reaching our aspirational goals related to the acquisitions. For a detailed description of risks and uncertainties, please refer to our most recent reports on Form 10-K, 10-Q and 8-K filed with the SEC. You should not place undue reliance on forward-looking statements, which speaks only as of today. We undertake no obligation to update these statements after this call. Throughout this call, we may reference both GAAP and non-GAAP financial metrics. Non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. Reconciliation of non-GAAP to corresponding GAAP measures can be found in our earnings press release issued today. For your convenience, a copy of the release and supporting financial materials are available on the Investor Relations section of our website at extremenetworks.com. Now, I will turn the call over to Extreme's President and CEO, Ed Meyercord, for his opening comments.

Thank you, Stan, and thank you all for joining us this afternoon. Welcome to Extreme's Q4 earnings call. Today we announced Q4 results highlighted by 56% year-over-year growth in total revenue and 6% quarter-over-quarter growth to 278.3 million, we $0.20 per share on the bottom line non-GAAP. First, I want to highlight a few successes in Q4, our extreme core business grew 5% year-over-year. This was our fifth consecutive quarter of organic growth on top of a strong quarter in our fiscal Q4 last year, stable revenue from our automated campus business with mid 50% gross margins from our disciplined go-to-market and success in cross selling our fabric solution. a record quarter in software sales and related services of $11 million, as our single pane of glass management, NAC and analytics software has been adopted by the field and is resonating well with customers particularly in cross sell opportunities. Upcoming releases will allow single pane of glass visibility across the entire enterprise from edge to the cloud data center and will be the only provider with this capability in one piece of software. Leader status in the Gartner wired and wireless Magic Quadrant as the only player to move up into the right five years in a row and now join only Cisco and HP enterprise in the top right. And as a challenger in the data center quadrant the only competitor other than Cisco in the top half of both quadrants this is great marketing for us. High profile data center wins, with our next generation SLX platform an automation software suite with one of the world's largest enterprise data centers and one of the largest research universities in the US in direct competition with the top players in the industry. During Q4 we close 20 large $1 million plus deals twice as many as last quarter, we booked 23 million of cross sell deals in the quarter and grew our cross selling pipeline to $98 million entering fiscal '19, up67% sequentially from the end of Q3 and we see increasing momentum. We were surprised by a shortfall of approximately $10 million in our data center bookings during the last week of the quarter. It's clear we didn't handicap the pipeline appropriately. To address the issue, we changed leadership and we reduced our expectations by approximately 50 million per quarter in Q1 in Q2 of fiscal 2019. We expect to return to growth in the second half of fiscal '19 as we refresh our portfolio and rebuild our pipeline. Going into fiscal Q1 and '19, we expect revenue in the range of 230 million to 240 million and non-GAAP EPS $0.00 to $0.07 per share. We are resetting our guidance based on two factors. One, supply chain and distribution optimization, we have streamlined the manufacturing and supply chain for the entire product portfolio of the acquired entities and we're actively reducing our number of global distributors from 411 following our two acquisitions in fiscal 2018 to 250 today with a goal of shrinking further over the next two quarters. In addition we are streamlining our product portfolio and have active SKU reduction programs associated with older products and previously announced End-of-Life products. We have evaluated our product mix in the channel and see an opportunity to drive more flexibility, greater efficiency and higher margins. We expect to realize these benefits as we begin calendar 2019. Two, we are resetting the baseline expectations for our data center business. As I mentioned earlier, in Q4, we came up well short of our internal expectations while winning some highly contested deals. We see growth opportunities, but have to adjust our current pipeline and rebuild our sales opportunities. We believe the expected annual run rate base fine is $160 million to $170 million. We are adding resources to our data center sales team and launched sales enablement programs across our global sales organization. On a product front towards the end of Q4 we rolled out our Smart OmniEdge portfolio of wired and wireless solutions that will become generally available in calendar Q3 and we expect continued product portfolio refreshes across our automated campus and agile data center solutions heading into calendar year and early calendar '19. In our core extreme portfolio we see continued strength in wireless and software driven sales that pull through our fixed switching portfolio. We expect growth in our OmniEdge solutions to accelerate with the availability of 802.11ax chipset into early calendar '19 that will drive more of an upgrade cycle for the wireless industry. It is also where we will combine our wing and extreme platforms into super spec hardware. In fiscal Q2 we are launching our extreme cloud and extreme appliance to provide wing customers our entire suite of software solutions and management. This quarter we had several exciting wins based on our software suite with our analytics capabilities assisting important large enterprises with their digital transformation initiatives. Some of these highlights include, 100,000 seat NCAA stadium at the University of Florida, our eleventh NFL deployment and twenty fifth using extreme analytics software, the significant Io T driven project at Texas Tech University and a German hospital with 5,300 beds and 16,000 employees. Our teams have been successful in combining our automated campus fabric technology with Extreme's full suite of software and wireless from a cross selling perspective. We expect to approach our 200 million annual run rate target in fiscal '19 at a higher gross margin level than what we saw in fiscal 2018 for the campus fabric business. Net-net, we believe the campus fabric gross profit dollar contribution is in line with our prior expectations given the sustained gross margin improvement in the business. On the data center front we have already integrated the data center solutions into our management software XMC and we will be expanding our portfolio of selling with integration of SLX products into our market leading extreme analytics solutions. We're excited about new solutions such as campus border routing to go along with our core switching portfolio, we are well underway in making strategic investments in our portfolio and expect to announce new solutions based on next generation merchant silicon over the next six months that will enable us to deliver innovative products faster than we have done in the past. Our border routing portfolio is expected to be fully fleshed out by calendar year end 2018 and will be offering the scale of a router port at a switching port price. We recently won the Best of Show silver award at Interop, Japan for our upcoming latest border router SLX product. Capping it all off as I said, we moved up to challenger position in Gartner Magic Quadrant for data center switching. We are also offering new licensing subscription and leasing models making it easier to sell, looking at it our technology roadmap, our software development will focus on allowing customers to use containers to scale apps and use less resources layering on machine learning and AI. Next year we plan to focus on server less computing advances for networking and offer prepackaged solutions for networking, providing network delivery capabilities that match what hyper scalars create in-house. We will also make our applications faster and make it easier from analytics, Wi-Fi, IT campus and data centers to deploy them in virtualized environments and offer customers the flexibility to consume and their private clouds or as the SAS cloud model. I am confident that we have a strong team with a proven track record of execution. We stabilize and transform the original Enterasys acquisition into a growth asset. We transformed the Zebra LAN business into a growth asset with significantly higher margins. We stabilized the Avaya networking assets where we are projecting revenue growth at significantly higher gross margins. And now as I said we're focused on driving growth and higher margins in the data center business we acquired from Brocade. We have war evidence now than ever before that our end-to-end networking strategy from the wireless edge to the cloud data center will drive overall growth and margin expansion at Extreme. Net-net, we believe that the reset of the datacenter business is a timing issue. We expect to begin calendar '19 with growth in our core extreme automated campus and relevel data center business with greater profitability and operating efficiency. With that I'd like to turn it over to Drew to review our results and guidance.

Thanks Ed. Our revenue of 278.3 million in Q4 grew 56% year-over-year and 6% quarter-over-quarter. Beyond organic growth of 5% in core extreme year-over-year the acquired campus fabric revenue was stable around $44 million while our data center revenue was $47 million. Recall that we had a $5.1 million post purchase accounting adjustment this quarter most of which is related to the data center acquisition. We earned $0.20 on the bottom line nine non-GAAP in line with our previously disclosed outlook for fiscal fourth quarter. Product revenue for Q4 of '18 was 221.3 million compared to 203.5 million in Q3 and 140.9 million in Q4 last year, driven by core extreme and the addition of the campus fabric and the data center businesses we acquired. On a quarter-over-quarter basis, core extreme grew sequentially. Service revenue for Q4 of '18 was $57 million compared to 58.5 million in Q3 and 38 million in Q4 last year. Our service bookings grew 9% sequentially as we made significant progress on renewals across our expanded portfolio of products and the customer base and made great progress selling multi-year service agreements. The Americas contributed 58% of our revenue, EMEA 33% and APJC 9%. Gross margins remained stable for campus fabric products the third quarter in a row in the mid 50s, the data center however, gross margins declined 280 basis points quarter-over-quarter to the mid 50s. Core extreme gross margins remained in the high 50s and overall fourth quarter non-GAAP gross margins grew 10 basis points year-over-year, but fell 43 basis points quarter-over-quarter on mix and cost of goods sold overhead. This makes nine consecutive quarters where we increased our non-GAAP gross margin on a year-over-year basis. Fourth quarter non-GAAP operating margin of 9.8%, increased 50 basis points year-over-year at the end of Q4. We took action on operating expenses to improve our cost structure heading into fiscal '19 in order to drive operating expenses in the low 130 million range per quarter going forward. Recall our prior Q4 '18 guidance called for mid to high 130 operating expenses. Moving onto the balance sheet and cash flow highlights. We finished the quarter with $123 million in cash and investments and had debt of $198 million net of fees. DSO increased four days to 69 days this quarter compared to 65 in Q3 and increased eight days compared to 61 days in Q4 of '17 on a reported basis. Our DSO for the last four quarters has been impacted by the transition services agreement of the campus fabric and data center acquisitions. The impact of the TSA on our DSO ended in our fiscal fourth quarter and we expect to collect all of the remaining TSA accounts receivable from Avaya in Q1 of '19, significantly reducing our DSO. Inventory of $64million fell 14 million quarter-over-quarter as a result of consuming inventory we brought on from the acquisition of Brocade and grew 17% year-on-year on an adjusted basis reflecting the greater scale of our business after two acquisitions. Deferred revenue of $175 million grew 18 million quarter-over-quarter. The significant growth in our deferred revenue reflects our ability to grow our service bookings given our success in customer renewals and signing up customers for multi-year deals. We generated $20.8 million in cash flow from operations in Q4 up from 15.3 million in fiscal fourth quarter of '17 and we spent $18.4 million on CapEx during the quarter. We expect our CapEx to settle into a run rate of $7 to $8 million per quarter in 2019 as our integration spending is complete. Going forward our CapEx will focus on our internal digital transformation to automate our front in sales processes and to enhance our supply chain. We are making it easier for customers to do business with Extreme as we've taken best practices and tools from each of the business units we've acquired. As I address guidance, I want to make a note on our supply chain. We are adjusting our forecast in the data center business. We are also adjusting our forecast to reflect continued consolidation of our distributor base from over 400 distributors. We are also reducing the number of SKUs that we have in our portfolio as we previously announced End-of-Life on certain order products. This paves the way for refreshing our portfolio with new smart OmniEdge products and future products in the pipeline. During the consolidation of our distributors and SKU reduction, we will experience a near term impact of sales to our distributors during the consolidation. We expect this impact to be $30 million to $40 million in total over the next two quarters. When the consolidation is complete we expect to return to a selling level aligned with the end customer demand. The consolidation of distributors is enabled by the process of completing our supply chain digital transformation project, which in addition to the consolidation of distributors will increase our efficiency and improve our gross margins throughout the year. Since implementing ASC 606 and changing our revenue recognition to a selling model, we made adjustments to our supply chain and channel and we believe this is the final step in the process. To dress this need we recently made key hires to our channel team to further enhance our distribution management and strategy in a continued effort to shorten lead times. As we look out into the September quarter, we project Q1 '19 revenue in the range of $230 million to $240 million. Q1 GAAP gross margin is anticipated to be in the range of 56.6% to 58.7% and non-GAAP gross margin is estimated to be in the range of 58.5% to 60.5%. Our anticipated increase in gross margin for Q1 is driven by a decline in purchase accounting adjustments related to the acquired businesses and improved mix as higher margin services revenue accounts for a greater percentage of total revenue. Q1 operating expenses are expected to be in the range of 140.8 million to 1403.8 million on a GAAP basis and 130 million to 133 million on a non-GAAP basis. Q1 GAAP net income is expected to be in the range of a net loss of 14.6 million to 16.9 million or $0.12 to $0.06 per share. Non-GAAP net income is expected to be in the range of $600,000 to $8.3 million or breakeven to $0.07 per diluted share. We expect average shares outstanding to be approximately 118 million on a GAAP basis and 123 million on a non-GAAP basis for Q1. Rebuilding a pipeline in the data center business coupled with a leaner channel strategy following our internal systems upgrades and move towards vendor managed inventory with our distributors adds to the impact of typical seasonality we see in our business heading into Q1. Beyond Q1, we expect sequential growth in each of the next three quarters throughout fiscal '19. Despite the step down in revenue expectations in our data center business and the distribution channel actions, we plan to take in the first half of the fiscal year. We still expect total fiscal '19 revenue to be north of $1 billion. We've already taken specific cost actions in Q4 to lower our run rate expenses and we're still targeting a 10% operating income margin during fiscal 2019 and we expect to exceed that level in the back half. With that I will now turn it over to the operator to begin the question-and-answer session.

Thank you. [Operator Instructions] And our first question comes from the line of Mark Kelleher of D.A. Davidson. Your line is now open.

Great, thanks for taking the questions. Just trying to understand the numbers a little bit more, so you mentioned two issues, you've got a consolidation of your distribution costing 30 million to 40 million over the next two quarters of revenue and in addition 15 million per quarter of weakness in data center, are those the same or different?

Hey Mark, this is this is Ed. They're two separate items. So consolidation of the data center and then - sorry, the reset of data center and then the consolidation and efficiency initiative with our supply chain.

Okay, so with the supply chain efficiencies would you expect core growth year-over-year to be down year-over-year?

No, we're still expecting extreme core indeed where we combine those two to be growth year-over-year in the 3% to 5% range.

In Q1?

In Q1, I thought you said for the overall year, in Q1 flat.

Okay, could you talk a little bit more about what you're seeing in the data center? Why is there weakness there? What was the issue at the end of the quarter?

Yeah, so at the end of the quarter we - as I mentioned in my comments we were surprised at the end of the quarter. There were some opportunities in the pipeline that we thought would convert and they didn't and we were quite disappointed by that. It led us to make some changes; I mentioned the management change that we made. We've got some really good teams out in the field and as we went in and scrubbed with our new teams the opportunity pipeline what we've realized is that the - as far as the outlook that we have to rebuild that pipeline. We've had some really good wins during the quarter, we see a lot of opportunities there, we also see opportunities to hire, which we are doing and we kicked off about a month ago sales enablement program around the data center for our global sales team. So with - we felt that we needed to reset and clearly we were off. When we looked at the $230 million number, we set that bar too high, we felt like we were being conservative and obviously we weren't. So we're setting this at a level where we are extremely confident and using that as a baseline and we're very confident in our ability to start here and to grow from here.

Hey, Mark, just one thing, I said we would be flat on the base business we're flat to down a bit on the base business in Q1.

Okay. Were there - were there competitive losses on the data center side, is that the issue or were there just deals that really weren't there?

Well, there are always - in every quarter we have competitive wins and competitive losses. That we also - there was also a timing in terms of opportunities that are either - they come into the quarter or that they did get pushed out. Really where we've seen the biggest impact of the datacenter business has been on the service provider side. There are a lot of the routing customers with the MLX portfolio where as we transition from MLX to SLX, where we don't necessarily have feature parity yet and that - where we felt that the most has been on the service provider side. It's also where we see a significant opportunity, so it - we did have significant wins still with service provider customers particularly with internet exchange customers where we're very strong in a dominant market share. But we're taking the action where we are working, our PLM teams are working closely with our sales teams in terms of some tactical feature upgrades that we can make in the SLX portfolio to address that shortfall. So I - we definitely have losses in a quarter that gets balanced and I think there is more of a pipeline evaluation and the timing of that pipeline and more than anything else.

Okay and last question, is there a way you could quantify your wireless business in the quarter as a percent of revenue?

Yeah, wireless revenue is - yeah, in the mid 50s, yeah, between 50 million and 55 million during the quarter.

It was it was our highest - second highest quarter in history on wireless revenue.

Okay, great. Thanks.

Thanks Mark.

Thank you and our next question comes from the line of Paul Silverstein of Cowen. Your line is now open.

Paul, can you hear?

Are you there Paul? Are you on mute Paul?

One moment gentlemen.

We can go to the next.

Why don't we go to the next question we can come back to Paul.

Alight, the next question comes from the line of Christian Schwab of Craig-Hallum Capital.

Hey, good morning guys.

Good morning Chris.

Good morning guys. Could you - I understand maybe a mix execution on your part on the Brocade data center business, but the consolidation of the distribution base and the SKU reduction due to end of life products should have been something that maybe all of us should have understood well before today I would assume. I'm just wondering if you can elaborate on the timeframe of that decision.

Yeah, I think we started in December with focusing on Avaya and getting it integrated and we did some consolidation there and then it continued in the Q3 and Q4 with Brocade but we've hired some additional channel team experts and really that are evaluating the channel and getting their arms around it and we've come to the conclusion that we are going to be much more efficient and be able to reduce our lead times if we reduce our supply chain further. So that's why we are doing it at this time.

Okay. When you guys brought the Brocade asset, if I recall, part of that was also signing up more longer term supply agreements with Broadcom for chips on other different products as part of that combination. Is there any way that you can go rebid competitively other competitive chips in the marketplace given the fact that that business isn't performing the way they told you or what?

Well, we do have - on some of our products we do have other fabric chips designed in and the datacenter products, for example, we do have alternatives with Marvell and Cavium chips for example. But we believe that we can be competitive that we have got very competitive pricing with Brocade compared to what our competitors have.

Okay and then can you just update us what exactly - how big is the Zebra business roughly? And you guys talked about growth and improved margins. Can you just give us generically kind of a run rate of that business and what gross margins they are currently operating that?

Yeah when we acquired the business, we shared that the revenue would be between the range - I think it's a couple of years ago but I think it was $29 million to $32 million or $33 million a quarter and we've been in the range - in that range every quarter that we've owned the business and we're getting now towards the higher end of the range consistently on a quarterly basis and those gross margins are moving up into the - between above 55 and near the higher 50's. And we are getting some - we talked about it at the beginning. But with the blue chip customer base they have in the transportation and logistics and some of the huge retailers they have, we talked about some big refresh opportunities in the beginning and it took us a year to 18 months for some of those deals to start happening and we are starting to get some of those big deals now.

So when you acquired it, it was roughly a $150 million business doing 45% to 49% gross margins and now you've got those gross margins up to 55%, correct?

Yeah.

Okay. And then when you about Avaya, it was a $200 million business at 51% to 56% gross margins. Can you give me the same update on where we are as far as revenue and gross margins there when you talked about revenue growth and positive gross margin adjustments there?

Yeah, Christian, we drew a line at $200 million which is where we thought, we thought it might be running a little bit higher than that, keeping in mind Avaya was spent a year in bankruptcy before it came over and again when we brought that business over, we saw a lot of business get pushed. And that's where we also saw a lot of the pricing action in the field that we talked about earlier where there was heavy discounting. The sales force at Avaya was primarily focused on voice services and networking was a piece and the product portfolio that was somewhat neglected and heavily discounted. So one of the first things we did is we changed discounting behavior which definitely had an impact on that top line. We saw, as you recall in our Q2 revenue dipped down to the $40 million. We've seen that come back to the mid 40's. Gross margins that were in the 45% range or now in the 55% range, we've taken that gross margin up by 10 percentage points. If you look at kind of a mid-40's business running at that higher gross margin with 10 points from a cash flow perspective, we are in line. We are actually doing a little bit better than what we have forecast when we acquired the business. The other thing I will say is that a lot of our cross-selling, we talked about that the $98 million pipeline of cross-sell opportunities, a lot of that is being generated from the Avaya customers where they are using our wireless technology as well as they are embracing our software suite and it's driving a lot of revenue in the other portfolios. So some of the growth you are seeing in the other portfolios because we are looking at it from the SKU perspective are coming from those Avaya customers. I'll also follow up on Drew's comment as it relates to Zebra. Keep in mind we have 50% of the fortune, 50. These are big customers and we have big opportunities with them. We talked about the million dollar plus fields that we are getting. But they are also driving cross-sell and we are just now opening up our suite of software to those customers who are now going to be our cloud appliance they are going to be able to access your management control, analytics, our suite of software and a lot of the cross-sell opportunities we are seeing on the switching platform in the Edge. So with our OmniEdge solutions that are coming up and our validated designs coming up, we see a big opportunity with these customers to cross-sell and across the portfolio.

And my last question which is more challenging, given what you were telling the investors was the opportunity just two or three quarters ago and where we are today is massively different and so last time explaining that a series of acquisitions that didn't go as planned, we changed the entire management team and so I'm wondering what gives you guys or what you can tell us that can give us confidence in your guys' ability to execute from a couple kind of disastrous quarters to be honest?

Well, yeah, it's a fair question but I would say that this is the team that was part of the solution. When this team came in, revenues were going down. Our margins were in the low 50's. We stabilized the business and turning to growth, organic growth. When we talk about the Extreme core portfolio, you can't lose sight of that, Christian. The Zebra business was on a downward trajectory, significant downward trajectory when we set that revenue level. We stabilized the revenue. As we said before, we improved the gross margins by 10 points. Revenue is at the higher end of the range and if you look across the portfolio, there is significant growth opportunities. So that's a success based on where we purchased that, that's an accretive deal. If you look at the Avaya transaction, if you look at where we purchased that, another accretive deal in terms of what our earnings have done. So this team has turned around Enterasys, acquired Zebra, an accretive transaction, executing on that deal. It took us a while on Avaya because we underestimated again that base line of the business we are acquiring but we stabilized that. We've turned it around. We see growth opportunities and higher margins there. We can do the same thing with datacenter. We are very confident on the datacenter side in terms of the team that we have in place, what we see in the pipeline, the competitive differentiation, we are going head to head with the leaders in the Magic Quadrant and the top competitors and we are winning. We are winning because of our software, the automation suite, we are winning because of some competitive differentiation we have and high profile customers. And those kinds of wins with enterprise, datacenter customers and cloud service providers, these are things that are giving confidence to the field. And the datacenter business it takes time to build the portfolio. So it's a timing issue. Christian, I wouldn't say if we look across the portfolio, I would say for us it's the timing issue because we obviously didn't set the base line properly. In terms of the acquisitions, they've been accretive and we expect them to be accretive going forward. We lost time.

Okay. Great. Thank you.

Thanks.

And our next question comes from the line of Paul Silverstein. Your line is now open.

Guys, my apology because I missed most of this call because they put me into - apparently into another call. It's a wonderful music but it didn't help me in terms of what you guys have had to say, I mean, literally for 30 minutes since [indiscernible]. So if you have answered these questions, I apologize. I don't know how to put this delicately, but given the miss fires in the past three quarters. The simple question is why should one have confidence in - or let me ask it differently. What have you done with respect to guidance basically around [ph] that's meaningfully different than the last three quarters that would translate into investors having confidence in your guidance this time? You are putting a bigger discount into the numbers. What is your concerns at this time?

Keep in mind that before we got into our three quarters where we've been off in the revenue side, in two of those quarters we met the earnings but it doesn't matter. We continued to try to sort of turn up and hit the original bar that we set and we've been driving the organization to do that. You see the deal that people are trying to pull deals in. You are trying to hit numbers and things got very tight. This time we said, okay, if we are going to reset, we are going to level set. We didn't make a leadership change as I mentioned earlier. The new team going in scrubbing the pipeline, resetting the base line, we hit 10 quarters in a row, 11 quarters in a row before we had the streak and its related to setting the base line initially on Avaya and setting the base line on Brocade. We feel very confident and we are very - in terms of us being back to the 200 level on the Avaya side pacing all the activity and the cross-selling and everything that we are seeing and we are really confident on the datacenter side. But we do want to be conservative, even more conservative than we have been to set the bar at the right level and there is a lot going on inside the company to build the pipeline and that's going to take a little time. So we thought we could get there in terms of hitting the combined revenue of 430 run rate and frankly we had a surprise at the end of the quarter. We've made a change and there is a lot going on to address that to take advantage of what is a high growth segment of the marketplace where we see a lot of opportunities. We have competitive differentiation. So what gives us confidence is the team and the people now, we have employees, it's the pipeline of opportunities that we have, and it's the competitive differentiation we have. At this stage it's really the focus on the datacenter. We've gone to where we wanted to be in terms of Zebra is doing incredibly well with that piece. The Avaya business is on a great trajectory and that's doing well and now it's just the datacenter.

What's the brokerage during the quarter for those assets?

The revenue was $47 million. Drew mentioned that in his comments.

And what are you expecting to do this quarter?

Yeah, what we said is that we are going to take that run rate down by about $15 million in the quarter.

The original run rate, not down from 43, it was 47.

And what exactly is the issue?

Excuse me.

What exactly is the issue? Why are the assets not performing the way you are expecting?

There are a couple of things. First of all, there was weakness in the service provider segment. When we acquired Brocade, Brocade was going through a product transition. When we are talking about high profile highly contested wins with major research universities, which one of the most differentiated buyers of technology in the industry with the massive datacenter where we are up against the big team and we win outright. Enterprise, datacenter, cloud service provider that market, our SLX platform is highly competitive and we are winning. So from that standpoint, it's a function of us building the pipeline and going after that. Service provider was 40% plus of the datacenter business and with the ton of MLX routing portfolio, a lot of custom configurations and our ability to upsell SLX, we needed to feature parity that we didn't have. And so we have been in a position where we discounted MLX to keep that product in networks, but we are developing and adding a lot of the features for our service provider customers that can allow us to sell SLX at a higher margin. So we have clear visibility of some of the features that we are adding and we also know those customers who will consume the product portfolio. But it was a function of - primarily the service provider drop off, a lack of feature parity during a product transition and the lack of our sales team building demand on the datacenter side. So that's what happened and we are addressing all of these things aggressively.

Alright, thank you.

Thank you. And our next question comes from the line of Erik Suppiger of JMP Securities. Your line is now open.

Yeah. Thank you for taking the question. Can you talk about the status of the sales organization for Brocade? I think you've combined a lot of the sales organization, but do you have a very seasoned sales effort on the datacenter side? How much sure would you say that grew business or is that part of the rebuilding of the pipeline where you're still building that sales organization up?

Well, it's a combination of both. The answer is we have a very seasoned, very experienced datacenter sellers out there and we are also enabling Extreme, keep in mind that from Avaya as well as Extreme we do have other datacenter customers and we have datacenters savvy salespeople within our field organization, which is now, one, we have a datacenter, we have datacenter teams that are focused on federal with significant experience kind of going back to foundry days. We have an OEM team and we have a service provider team and we have a huge amount of experience as a function of account coverage we are adding in our direct datacenter sales team. So we are actively recruiting and building that. The other thing I mentioned is enablement. We are going after what we believe as a significant opportunity for the data - the enterprise datacenter and cloud service provider market and there is a huge amount of training that's going on in the field and support from our PLM teams and other teams around driving and building that pipeline. We just came off of our SKO and we had our entire commission selling team together in one place and the educational programs, the excitement, enthusiasm around our datacenter portfolio, highlighting these huge wins that we've had against the top players in the datacenter market has created a lot of energy and a lot of action inside of our company with that portfolio. We talked about border router capability and the new - some of the new features that were rolling out that can make us competitive and I think the teams are really excited about that.

Can you be more specific in terms of the type of turnover you are seeing from the traditional Brocade sales organization? Can you give us a sense for how much does that sales organization still have and as turnover, did you have a considerable turnover previously and is it stabilized now or how are you looking at the -

Erik, what you got to keep in mind is that we acquired the SRA business from Brocade, okay, and Brocade was put into 11 pieces, okay. There were a lot of different assets that took place. And we were one of the last people lined up in terms of who we can hire from Brocade and the answer is we've got a variety of resources. We have some very high quality high performing sales teams that are continuing to execute and perform particularly in some of the groups that I mentioned. We have some people who are in more of an overlay role. We have an incredibly strong PLM organization that we brought over and a very strong engineering team that we brought over and we don't see - the interesting fact is we don't see the turnover for Brocade any different than the turnover in overall Extreme and our turnover runs at about half the industry average. So I think people are really excited about the culture at Extreme and the opportunity at Extreme coming from some of these larger companies where they've been. So turnover is not an issue. We did when we hired initially. We are the last people at the table in terms of being able to bring people over to Extreme and with that comes a lot of training and culturally in bringing them into our team. At this stage of the game, the datacenter teams along with the other teams are part of our regional sales organization and then we have specialized datacenter teams for service provider, federal, and our OEM opportunities.

Okay. And then on the competitive fronts in the service provider space, are you seeing Arista more or less than Cisco? Who are you fighting against? Is it predominantly Cisco or how do you think of the competition there?

I think that we would look at from a service provider perspective, we see more of Cisco. In the large scale enterprise we see more Arista. I guess you see Cisco everywhere. So I think - but from a service provider perspective, it would be more Cisco than Arista.

And lastly, can you be a little more specific about which products your end of life - is it any of the code datacenter products, the BDX or MLX that's getting end of life any time soon or how are we looking at the datacenter products?

Yeah, it's more of the chassis-based old switching platforms from legacy Extreme and Enterasys. So you mentioned the Black Diamond series, these things previously announced some of the old chassis form factor products that came from the Enterasys acquisition that are now running on 10 or 11 years old. So these are the big ones. It's also worth noting that historically Extreme Enterasys from a product lifecycle management that were really retired products. And so that's the other opportunity that we have because this very large SKU comp and there is an opportunity for us to drive efficiencies. When we look at the efficiencies and we look at the effect on the last quarter of the changes that we are talking about making now, we see as much as 1.5 to 3 point gross margin opportunity from the efficiencies that we can drive in our supply chain and distribution.

Thank you.

Thank you.

[Operator Instructions]Our next question comes from the line of Alex Henderson of Needham & Company. Your line is now open.

Guys, good morning. This is Dan Park on for Alex. So I know the last quarter you had some integration related issues relating to discounting from the acquired assets. I just want to know if you had any updates on that front.

Well, sure, I mean what we've talked about, there were a couple of things that were going on that - one is in the - with the Avaya acquisition. There was heavier discounting for some of those legacy customers that we acquired and I think we've cleaned that up and you can see that in the gross margin. And Avaya was the last to come over. We've been talking about visibility and getting better visibility into the business as we've gone along and in the fourth quarter when we finally migrated moved up TSAs and brought the Avaya business on to our platform. So this gave us much better visibility now to the supply chain that we've talked about before, distributors, distributor visibility that we saw before and just overall business intelligence. So that was a big one. The discounting that we saw on the Brocade side, we talked about the fact that this was a business that will be in the mid to low 60% gross margins and when we brought that business in and from a pipeline perspective, we talked about the migration of MLX to SLX and a lot of that MLX business was heavily discounted, while customers were waiting for the transition up to the SLX portfolio. So we saw a significant discounting there. We agreed out of customer interest to pursue some of these deals at a lower margin, but as a result we saw that that business in the mid to low 50% gross margin range instead of that mid to low 60% gross margin range. That over time now over the next six months and as we turned the corner, you are going to see a change there because we are adding feature parity. We have a higher gross margin, next-generation product platform that we are able to move customers towards and we have a field that's going to be driving towards that enterprise datacenter cloud service provider opportunity that we mentioned earlier.

Okay, great. And I guess just despite some of the challenges you are working through, it seems like cross-selling continues to remain strong. Just wondering if you could provide some color on sort of what's driving the strength in the cross-sell?

That's the strategy behind combining these assets. We focus on the customer, 30,000 enterprise customers and we are really seeing it across the portfolio. So the Zebra customers they were only buying wireless that now can look at the entire Edge and now they can look at our software portfolio and cloud management capability for managing the entire Edge in campus and are actually looking at our datacenter solutions, these large enterprise customers, we have a very competitive datacenter solution for them. So that end-to-end strategy we are seeing them in our pipeline. Avaya again with their fabric customers, they didn't have a wireless solution that was competitive and they didn't have any of the software that we are bringing to the table and that at the stage we are seeing huge cross-sell growth from Avaya customers and vice versa we have a lot of customers on our side that love the fabric technology and the hyper segmentation, the security that that brings. So cross-selling has been ramping significantly. The pipeline more than doubled from the end of Q3 to Q4. It's now 100 million and we still - we see that gaining momentum across the portfolio.

Okay, great. Thanks for your time.

Okay. Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Ed Meyercord, the President and CEO.

Okay. I'd like to thank everyone who could join the call and we appreciate the questions. We appreciate all the questions. I also want to thank all the Extreme employees who listen in. Our team has been doing a phenomenal job integrating these businesses and building the platform for the new Extreme. We're obviously looking forward to improving our execution and building our pipeline as we move into our fiscal '19. We hope to speak to some of you at the DA Davidson Conference tomorrow and we will be at the Nomura Cloud Builders Conference on August 14 and the Jefferies Conference in August 28. Thank you and have a great day.

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.