Quick Take

Extreme Networks (EXTR) announced it has agreed to acquire all outstanding shares of common stock of Aerohive Networks (NYSE:HIVE) for $272 million.

Aerohive Networks provides enterprise networks that utilize cloud management, Machine Learning, and AI [artificial intelligence].

With the deal, EXTR is gaining a wider array of choices for customers seeking to reduce vendor bloat and an increased recurring subscription revenue base.

Target Company

Sunnyvale, California-based Aerohive was founded in 2006 to develop enterprise networks technology that improves flexibility in the deployment, management, and licensing of cloud-operated wireless, switching, routing and security solutions.

The company has a global footprint of about 30,000 cloud wireless Local Area Network [LAN] customers in verticals such as education, state and local government, healthcare, and retail.

Management is headed by CEO David Flynn, who has been with the firm since 2007 and was previously a Board Member at Mu Dynamics.

Below is an overview video of the Aerohive Connect enterprise cloud networking solution:

Source: Aerohive

Aerohive’s primary offerings include network management, cloud-based network access control, access controls as well as switches and branch routers.

Company partners or major customers include:

  • Synnex Corporation (SNX)
  • MBSI WAV
  • WAV Wireless Outfitters
  • Dell

Investors have invested $105 million in the company and include Big Basin Partners, Apogee Venture Group, Kleiner Perkins, Northern Light Venture Capital, Lightspeed Venture Partners, IVP, Four Rivers Group, and New Enterprise Associates. Source: Crunchbase

Market & Competition

According to a market research report by the International Data Corporation, the global software-defined Wide Area Network [SD-WAN] infrastructure market was valued at $833 million in 2017, representing an 83.3% year-over-year increase, and is projected to reach $4.5 billion by 2022.

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This represents a CAGR of 40.4% between 2017 and 2022.

The main driver for this expected growth is the trend of organizations optimizing and modernizing their Wide Area Networks to enable improved user experience for a range of cloud-enabled applications.

Major competitive vendors that provide SD-WAN include:

  • Cisco Systems (CSCO)
  • VMware (VMW)
  • Silver Peak
  • Riverbed
  • Aryaka
  • Nokia (NOKIA)
  • Versa Networks

Source: Sentieo

Acquisition Terms and Financial

EXTR disclosed the acquisition price and terms as $272 million, or $4.45 per share in an all-cash deal.

Extreme said it believes the deal will be ‘accretive to non-GAAP earnings per share starting in fiscal year 2020.’

Managements frequently cite ‘non-GAAP’ results when they want to portray the deal in a more favorable light than GAAP.

Extreme expects to pay for the deal from existing cash and committed new debt.

A review of the firm’s most recent 10-Q filing indicates that as of March 31, 2019, Extreme had $156.8 million in cash and $585.5 million in total liabilities, of which long-term debt was $181 million and deferred revenue was $187.7 million.

Free cash flow for the nine months ended March 31, 2019, was $63.3 million.

In the past 12 months, Extreme’s stock price has fallen 22.2% vs. the U.S. communications industry’s rise of 19.1% and the broader overall market’s rise of 6.3%, as the chart below indicates:

Source: Sentieo

Earnings surprises have been positive in nine of the last twelve quarters, as shown below:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has dropped markedly from its previously slightly positive level, as the linguistic analysis shows:

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Source: Sentieo

Commentary

Extreme is acquiring Aerohive for its wireless LAN technologies that assist in automating Wi-Fi and cloud network management.

As Extreme stated in the deal announcement,

It [the acquisition] will expand Extreme’s technology leadership in Wi-Fi and NAC, adding cloud-managed Wi-Fi and NAC solutions to complement its on-premises Wi-Fi and NAC technology, driving Extreme deeper into key verticals and presenting numerous opportunities for cross-sell and up-sell within the combined portfolios.

Aerohive will bring software-defined capabilities to Extreme’s product offerings as well as its subscription-based recurring revenue model, which will serve to even out Extreme’s revenue streams by expanding its revenue mix to ‘30% from subscription recurring revenue.’

Also, the deal will enable Extreme’s customers to choose from a wider array of choices for their cloud and on-prem wired/wireless technology requirements as enterprises seek fewer vendors to support a greater variety of deployment configurations.

With HIVE’s trailing-twelve-month revenue of $152 million, EXTR is paying a multiple of approximately 1.78x for the acquisition.

Since the deal announcement, the stock has been pushed up over 8% by investors who apparently like the deal.

I favor the deal as it helps EXTR move up the size rank of market participants while providing customers and prospects with a wider mix of choices.

I research IPOs and technology M&A deals.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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