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NASHVILLE, Tenn. -- Extreme Networks CEO Ed Meyercord has had to raise prices and move manufacturing to Taiwan to lessen the impact of tariffs the Trump administration has imposed on Chinese exports. Nevertheless, Meyercord said the Trump administration is right in taking a hardline stance against China on trade.
"I actually think the president has been very good at negotiating," Meyercord said during an interview at the Extreme Connect customer conference this week. "It's his way of doing business."
Meyercord blamed the current trade impasse on the Chinese, who had backtracked on a tentative agreement with the administration.
"I wouldn't point at the president," he said.
Meyercord's support of the president won't change the price increases Extreme might have to impose on customers if trade talks fail, leaving intact the Trump administration's 25% tariffs on Chinese exports.
"We talked about an incremental 10% price increase," Meyercord said. "However, that will be subject to change based on what the outcomes [of negotiations] are."
Extreme joined other networking companies, including Cisco, in raising prices earlier as a result of the Trump administration's 10% tariff on $200 billion of Chinese exports in September 2018. The import tax only affects Extreme hardware sold in the United States, which accounts for 40% of the company's sales.
This month, the administration ratcheted up the pressure on China by raising the 10% tariff to 25%. The increase does not affect networking hardware in transit from Chinese manufacturers or already in the United States, Meyercord said. That's enough inventory to last three weeks before Extreme would have to start raising prices again.
Last September, Extreme responded to the first tariffs by having its hardware manufacturers move production from China to plants in Taiwan, where manufacturing costs are 6% higher, Meyercord said. By the fall, contract suppliers will build almost all of the company's switches and routers in the island nation. Extreme also uses manufacturers in Mexico.
Extreme refreshing the majority of products
Ed MeyercordCEO, Extreme Networks
Meanwhile, Extreme is in the early stages of upgrading 70% of its product portfolio over the next 18 months. Tech buyers often delay purchases if they know an upgrade is coming, but Meyercord is trying to avoid a significant impact on sales by releasing upgrades throughout the period. The company plans to introduce seven product updates this quarter, with others to follow the rest of the year and next year.
The anticipation of new wireless technology had led customers to delay upgrading their infrastructure. Extreme reported a 4% drop in revenue last fiscal quarter and did not expect an increase in the current fiscal quarter due, in part, to customers evaluating products supporting new Wi-Fi 6
"We see some customers taking their time in evaluating ax," he said. "But we believe, ultimately, everyone will move there."
Also hurting Extreme is the weakening of the economy in Germany, one of the vendor's strongest markets. In April, the German government lowered its economic growth forecast from 1% to 0.5%. Also, Britain's political quagmire over leaving the European Union, called Brexit, has led to the country buying less from German manufacturers, which has also had an impact on Extreme.
Meyercord said he expects Germany to bounce back, eventually.
"Our teams say that these are opportunities that are not going away. People need networking infrastructure," the Extreme Networks CEO said. "So, they're not lost. They're delayed."
Extreme's performance lags Cisco's. The technology bellwether reported a 4% increase in revenue to nearly $13 billion during the quarter ended April 27. Sales of switches, routers and other networking gear increased 5%.
Extreme's response to SD-WAN trend
Extreme's product portfolio is not as extensive as Cisco's. One missing piece for campus networking is the software-defined WAN, one of the fastest-growing networking segments. In 2017, Cisco acquired SD-WAN vendor Viptela and had incorporated its technology within Cisco's campus infrastructure products.
Today, Extreme partners with Silver Peak Systems, an SD-WAN vendor that specializes in WAN optimization. Nevertheless, Extreme won't rule out making an acquisition.
"I would say, right now, we're somewhat open," Meyercord said.
A factor weighing against buying an SD-WAN vendor is the cost. Cisco paid $610 million for Viptela, and Meyercord said the deal inflated the price for other SD-WAN makers.
"There are 40 SD-WAN companies out there, and I'd say 38 of them have an inflated view of their valuation," Meyercord said.