Q3 2024 Extreme Networks Inc Earnings Call

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Operator: Thank you for standing by, and welcome to the Extreme Networks third quarter fiscal year 2024 financial results. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Stan Kovler, Vice President of Corporate Strategy and Investor Relations. Please go ahead, sir.

Yeah.

Speaker Change: Thank you for standing by and welcome to the extreme networks third quarter fiscal year 2024 financial results. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone if your question has been answered.

Speaker Change: Like to remove yourself from the queue simply press Star one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program, Mr. Stephen Colbert, Vice President of corporate strategy and Investor Relations. Please go ahead Sir.

Stanley Kovler: All right.

Stan Kovler: Thank you, operator. Good morning, and welcome to the Extreme Networks third quarter 2024 earnings conference call. I'm Stan Kovler, Vice President of Corporate Development and Investor Relations. With me today are Extreme's President and CEO, Ed Meyercord, and EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an 8K detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release, which includes our gaps and non-gap reconciliations, is available in the Investor Relations section of our website at extremenetworks.com, along with our earnings presentation.

Stanley Kovler: Thank you operator, good morning, and welcome to the extreme networks third quarter 2024 earnings Conference call.

Stanley Kovler: Stakeholder Vice President corporate development and Investor Relations with me today are extremes, President and CEO Edmar tour, and EVP and CFO, Kevin Rhodes, We just distributed a press release and filed an 8-K detailing extreme networks' financial results for the quarter.

Stanley Kovler: Your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliation is available in the Investor Relations section of our web site network.

Stanley Kovler: Along with our earnings presentation.

Stan Kovler: Today's call and our discussion may include certain forward-looking statements based on our current expectations about Extreme's future business, financial, and operational results, growth expectations, and strategies. All financial disclosures on this call will be made on a non-GAAP basis unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements, as they involve risk and uncertainty that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in the 10-K report for the period ending June 30, 2023, and subsequent 10-Q reports filed with the SEC.

Stanley Kovler: Today's call. Our discussion may include certain forward looking statements based on our current expectations about <unk> future business financial and operational results growth expectations and strategies all financial disclosures on this call will be on a non-GAAP basis, unless stated otherwise we caution you not to put undue reliance on these forward looking.

Stanley Kovler: Statements may involve risks and uncertainties.

Stanley Kovler: Actual results could differ materially from those anticipated by these statements.

Stanley Kovler: These risks are described in our risk factors in the 10-K report for the period ended June 32003, and subsequent 10-Q reports filed with the SEC.

Stan Kovler: 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. Following our prepared remarks, we will take questions. Now, I will turn the call over to Xtreme's President and CEO, Ed Meyer.

Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them.

Stanley Kovler: Wired by law.

Stanley Kovler: Following our prepared remarks, we will take questions.

Stanley Kovler: Now I'll turn the call over to exchange President and CEO Edmar.

Edward B. Meyercord: Thank you, Stan, and thank you all for joining us this morning. Our results were in line with, or slightly better than, our third quarter outlook. Highlights from Q3 include net new logo bookings growing double digits globally with particular strength in the US market. Our SaaS ARR grew by 38% year over year, as we continue to deliver on our value proposition of flexibility and simplicity with our one network, one cloud strategy. And we were successful in reducing channel inventory at the high end of our $40 to $50 million range, bringing us closer to channel normalization.

Edmar Tour: Thank you Stan and thank you all for joining us this morning.

Edmar Tour: Our results were inline or slightly better than our third quarter outlook.

Edmar Tour: Lights from Q3 include that.

Edmar Tour: Net new logo bookings grew double digits globally with particular strength in the U S market are.

Edmar Tour: Our SaaS <unk> grew by 38% year over year as we continued to deliver on our value proposition, our flexibility and simplicity with our one network one cloud strategy.

Edmar Tour: And we were successful in reducing channel inventory at the high end of our $40 million to $50 million range, bringing us closer to a channel normalization.

Edward B. Meyercord: As expected, we're calling for meaningful sequential revenue growth heading into our fiscal fourth quarter, but note that industry-wide customer and channel digestion will continue to create a drag on normalized bookings and revenue. However, customers and channel partners continue to work through purchases and orders, and we expect demand normalization during the second half of calendar 24. The expected sequential growth in revenue and bookings will help us return to solid profitability and cash flow generation during the fourth quarter.

As expected, we're calling for meaningful sequential revenue growth heading into our fiscal fourth quarter, but note that industry wide customer and channel digestion will continue to create a drag on normalized bookings and revenue customers and channel partners continue to work through purchases in orders and we expect them.

Edmar Tour: Normalization during the second half of calendar 'twenty four.

The expected sequential growth in revenue and bookings will help us return to solid profitability and cash flow generation during the fourth quarter.

Edward B. Meyercord: Our funnel of opportunities is up from the prior quarter. We anticipate that the upcoming stage of growth will be driven by an increasing number of deals that exceed a million dollars as we continue to move up markets. Last week, we hosted our annual Connect user conference in Fort Worth, Texas. It was oversubscribed and our biggest event yet, with about 19% growth in customer attendees from a year ago. The event focused on the intersection of networking, security, and AI, and we made several announcements related to those topics.

Edmar Tour: Our funnel of opportunities is up from the prior quarter, we anticipate that the upcoming stage of growth will be driven by an increasing number of deals that exceed $1 million as we continue to move up market.

Edmar Tour: Last week, we hosted our annual connect user conference in Fort Worth, Texas. It was oversubscribed at our biggest event yet with about 19% growth in customer attendees from a year ago. The event focused on the intersection of networking security and AI and we made several announcements relative to those.

Edward B. Meyercord: We demonstrated Extreme Cloud Universal ZTNA, the first network security offering to integrate network application and device security within a single solution. By combining CloudNAC and ZTNA into a single, easy-to-use SaaS offering, we help customers ensure unified observability, frictionless user experiences, and a consistent security policy for applications and devices. As the VPN market transitions to ZTNA, the proliferation of individual applications, each with its own policy and dashboard, is adding complexity and expense for enterprise customers.

Edmar Tour: Topics.

Edmar Tour: We demonstrated extreme cloud Universal V T N. A the first network security offering to integrate network application and device security within a single solution.

Edmar Tour: By combining cloud Mac and Z TNA into a single easy to use SaaS offering we help customers ensure unified absorbability frictionless user experiences and a consistent security policy for applications and devices.

Edmar Tour: The BPM market transitions to Z TNA, the proliferation of individual applications each with their own policy, a dashboard is adding complexity and expense for enterprise customers Vice President of one of our multibillion dollar channel partners joined US on the main stage of connect and said the identity focused.

Edward B. Meyercord: Vice President, one of our multi-billion dollar channel partners, joined us on the main stage of Connect and said the identity-focused approach with a common policy engine is a game changer. This was further evidenced by the PAC breakout sessions at Connect, where discussions on Zero Trust drew standing room-only crowds.

Speaker Change: Roche with a common policy engine is a game changer. This was further evidenced by the pack breakout sessions that connect where discussions are zero trust druce standing room only crowds.

Edward B. Meyercord: When added to our unique enterprise fabric, this allows us to present a highly differentiated security value proposition to enterprise customers. We have also increased the scale of our fabric solution to extend fabric over SD-WAN, broadening the reach from the data center to the cloud. Customers love our fabric because it's simple to deploy, highly resilient, and makes it easy to segment the network, which dramatically minimizes the blast radius and exposure of cyber attacks. We expect the broadening of our security offerings to drive significant traction for our business with growth opportunities across our top verticals, such as higher education, healthcare, retail, manufacturing, transportation, logistics, etc.

Speaker Change: When added to our unique enterprise fabric. This allows us to present, a highly differentiated security value proposition to enterprise customers.

Speaker Change: We also increased the scale of our fabric solution to extend fabric over SD Wan broadening the reach from the data center to branch customers love our fabric because it's simple to deploy highly resilient makes it easy to segment, the network, which dramatically minimizing the blast.

Speaker Change: He has an exposure of cyber attacks we.

Speaker Change: We expect the broadening of our security offerings to drive significant traction for our business with growth opportunities.

Speaker Change: Across our top verticals, such as higher education health care retail manufacturing transportation logistics et cetera.

Edward B. Meyercord: Our customers and partners also reacted very favorably to Extreme Labs, a dynamic ecosystem where creativity, collaboration, and cutting-edge technology converge to fuel innovation of early stage technology. We provided a tech preview of AI Expert, a generative AI solution that delivers substantial optimizations and cost savings in the design, deployment, and management of enterprise networking and security. Finally, we announced that we are the first vendor to allow Wi-Fi 6E customers, such as the San Francisco Giants, Cedar Fair, and BYU, to unlock the outdoor 6 GHz spectrum to experience faster speeds, increased range of coverage, and expanded capacity for outdoor connectivity.

Speaker Change: Our customers and partners also reacted very favorably to extreme labs, a dynamic ecosystem, where creativity collaboration cutting edge technology converge to fuel innovation of early stage technologies we.

Speaker Change: We provided a tech preview of AI expert a generative AI solution that delivers substantial optimizations and cost savings and the design deployment and management of enterprise networking and security.

Speaker Change: We announced that we were the first vendor to allow Wi Fi 60 customers such as the San Francisco Giants Cedar Fair BYU to unlock outdoor six gigahertz spectrum to experience factor speeds increased range of coverage and expanded capacity for outdoor connectivity.

Edward B. Meyercord: There was a lot of discussion at Kinect about industry M&A and the disruption that it's causing. We fielded lots of questions about Cisco diversifying away from networking and customers fatigued with the cost, complexity, and lack of flexibility that comes with doing business with them. As it relates to HPE's acquisition of Juniper, most questions focused on risk and how to protect their technology investments.

There was a lot of discussion that connect about industry M&A and the disruption that it's causing we feel that lots of questions about Cisco diversifying away from network and customers fatigue with the cost complexity and lack of flexibility that comes with doing business with them.

Speaker Change: As it relates to Hpe's acquisition of Juniper, most questions focused on risk and how to protect their technology investments.

Edward B. Meyercord: Customers are worried and don't have a clear view of technology roadmaps or the potential negative impact that integration may have down the line. We feel confident Xtreme's pure play focus on a secure network and finding new ways to deliver better outcomes for our customers will remain a competitive advantage. We were named a leader in the Gartner MQ for the sixth consecutive time. However, once again, Cisco moved down in vision and execution, and customers are taking notice.

Customers are worried and don't have a clear view of technology road maps or the potential negative impact the integration they have down the line.

Speaker Change: We feel confident extremes pure play focus on secure network and finding new ways to deliver better outcomes for our customers will remain a competitive advantage.

Speaker Change: We were named as a leader in the Gartner MQ for the sixth consecutive time.

Speaker Change: Once again, Cisco move down in vision and execution and customers are taking notice.

Edward B. Meyercord: Turning to new wins, we had a strong quarter in higher education. We won Washington University in St. Louis, one of the country's top universities, which selected Extreme to modernize its networking infrastructure. Extreme Fabric Solutions will help the university create a simple, scalable, and secure network across the campus. And with Extreme Cloud IQ, WashU will be able to manage its entire network, including third-party applications and third-party devices. In EMEA, spending remains challenging across many of our largest verticals, and revenue is impacted by channeled digestion. However, we have continued our success in winning international sports venues, such as Borussia Dortmund, which is one of the largest football clubs in Germany.

Speaker Change: Turning to new wins, we had a strong quarter in higher education, We won Washington University in St. Louis one of the country's top universities, which selected extreme to modernize its networking infrastructure displacing Cisco extreme fabric solutions will help the university create a simple scalable and secured network.

Speaker Change: Across the campus.

Speaker Change: With extreme cloud IQ wash, you will be able to manage its entire network, including third party applications third party devices.

Speaker Change: In EMEA spending remained challenging across many of our largest verticals are revenue was impacted by channel digestion. However, we continued our success in winning international sports venues.

Such as Borussia Dortmund, which one of the largest football clubs in Germany, they're deploying Wi Fi succeed fabric extreme analytics across the stadium to create nextgen experiences like and seek concessions.

Edward B. Meyercord: They're deploying Wi-Fi 6E, Fabric, and Extreme Analytics across the stadium to create next-gen experiences like in-seat concessions, AR, VR, and biometrics. In Asia Pacific, booking trends have been stable for a number of quarters, and we're seeing success, particularly in the hospitality sector, where we've added multiple new logos across Asia. In the quarter, we also display Cisco with several major customers, including Korean Airlines, a 30-year customer. We're deploying it across 250 of their sites worldwide, including their global headquarters in Seoul.

Speaker Change: We are in biometrics.

Speaker Change: In Asia Pacific booking trends have been stable for a number of quarters and we're seeing success, particularly in the hospitality sector.

Speaker Change: Where we have added multiple new logos across Asia and.

Speaker Change: In the quarter, we also displaced Cisco with several major customers, including Korean Airlines, a 30 year customer, we're deploying across 250 of their sites worldwide, including their global headquarters in Seoul.

Edward B. Meyercord: Our new go-to-market initiatives are helping us grow and gain share as well. We grew our MSP partner base to 23 during the quarter, with many more in queue. The vast majority of MSP revenue is Net New Logo. Our MSP footprint is expanding as partners appreciate the simplicity of one cloud, the flexibility of our unified hardware, and our unique consumption billing model. We make it simple for these service providers to deliver a seamless, high quality networking experience.

Speaker Change: Our new go to market initiatives are helping us grow and gain share as well we grew our MSP partner base to 23 during the quarter with many more in Q2.

Speaker Change: Vast majority of MSP revenue is net new logos, our MSP footprint is expanding as partners. Appreciate the simplicity of one cloud the flexibility of our unified hardware and our unique consumption billing model, we make it simple for the service providers to deliver seamless high quality.

Edward B. Meyercord: As we contemplate our recovery, we're encouraged by our funnel and believe that customers' demand for our solutions will continue to improve, and we expect a resumption of growth to follow into fiscal 25. And with that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance. Kevin, are you there?

Speaker Change: Networking experiences as.

Speaker Change: As we contemplate a recovery we're encouraged by our funnel and believe that customers demand for our solutions will continue to improve and we expect a resumption of growth to follow into fiscal 'twenty five.

Speaker Change: With that I'd like to turn the call over to our CFO, Kevin Rhodes to walk us through the results and guidance.

Speaker Change: Yes.

Speaker Change: Okay.

Kevin Rhodes: Sorry about that. I was on mute.

Speaker Change: Okay.

Kevin Rhodes: Kevin Kevin are you there.

Kevin Rhodes: Sorry about that I was on mute.

Kevin Rhodes: All right. So thanks, Ed. Sorry about that.

Kevin Rhodes: Exactly.

Kevin Rhodes: And let me get into our results. So our results were in line and slightly ahead of our expectations. As we expected, entering the quarter, we worked through a significant amount of channel and customer digestion. The overall channel inventory reduction was at the high end of our $40-$50 million effort. We believe this will position us for a return to normalized growth, which will be better aligned to customer demand. We also took proactive action at the end of the quarter to right-size our costs, which will enable us to generate profitability again while continuing to support our strategic and product initiatives.

Kevin Rhodes: Alright.

Kevin Rhodes: Thanks, Ed sorry about that and let me, let me get into our results. So our results were in line and slightly ahead of our outlook as we expected entering the quarter, we worked through a significant amount of channel and customer digestion.

Kevin Rhodes: <unk> overall channel inventory reduction was at the high end of our $40 million to $50 million estimates.

Kevin Rhodes: We believe this will position us for a return to normalized growth.

Kevin Rhodes: Which will be better aligned to customer demand trends.

Ed: We also took proactive action at the end of the quarter to right size, our costs, which will enable us to generate profitability again.

Ed: While continuing to support our strategic and product initiatives.

Kevin Rhodes: Let me get into some of the numbers. Revenue of $211 million declined sequentially during the quarter, primarily due to the market dynamics impacting our industry and was slightly above our forecast. Product revenue of $106 million reflected the previously mentioned channel digestion along with an elongated sales cycle, which are also impacting the networking industry. These trends are relatively consistent across both switching and wireless products.

Speaker Change: Let me get into some of the numbers.

Speaker Change: Revenue of $211 million declined sequentially during the quarter, primarily due to the market dynamics impacting our industry and was slightly above our forecast.

Speaker Change: Product revenue of $106 million.

Speaker Change: It reflected the previously mentioned channel digestion, along with the <unk> sales cycles, which are also impacting the.

Speaker Change: Networking industry.

Speaker Change: These trends are relatively consistent across both switching and wireless products.

Kevin Rhodes: The pricing discount rates on product orders were largely intact with prior quarters, and our product backlog was once again at a normalized level and within our expected range. Looking back over the last several quarters, our subscription revenue has been a great success story for us. Since the acquisition of Arrowhive in 2019, we've gone from annualized revenue of $40 million to $162 million per year. As our business has shifted to cloud management, it's important to take both product trends and our recurring subscription and support revenue into account, as this is what customers are buying from Extreme. We expect the strong growth of SAS ARR to continue.

Speaker Change: The pricing discount rates on product orders was largely intact with prior quarters and our product backlog was once again at a normalized level and within our expected range.

Speaker Change: Looking back over the last several quarters, our subscription revenue it's been a great success story for us.

Since the acquisition of <unk> in 2019, we've gone from annualized revenue of $40 million to $162 million per year.

Speaker Change: As our business has shifted to cloud management, it's important to take both product trends.

Speaker Change: And our recurring subscription and support revenue into account as this is what customers are buying from extremes, we expect the strong growth of SaaS.

Kevin Rhodes: Overall, bookings, and most notably product bookings, were well above our revenue in the quarter. On a vertical basis, our education business grew double digits year over year, led by higher education, and our K-12 business was in line with our expectations. On a year-over-year basis, healthcare was up double digits, and we saw sequential growth in retail, service provider, and sports and entertainment, all of which grew double digits. Even in this challenging environment, Extreme is still gaining share by attracting and winning new customers.

Speaker Change: To continue.

Speaker Change: Overall bookings and most notably product bookings were well above our revenue in the quarter.

Speaker Change: On a vertical basis, our education business grew double digits year over year led by higher Ed.

Speaker Change: And our K through 12 business was in line with our expectations.

Speaker Change: On a year over year basis health care was up double digits, and we saw sequential growth in retail service provider and sports and entertainment.

Speaker Change: All of which grew double digits.

Speaker Change: Even in this challenging environment extreme is still gaining share by attracting and winning new customers.

Kevin Rhodes: SaaS ARR and recurring revenue was once again a bright spot in the quarter, up 38% year-over-year driven by the strength of our renewals and our activations of previously shipped products. Subscription Deferred Revenue was up 29% year-over-year to $258 million. Total subscription and support revenue was $105 million, up 14% year-over-year. This growth was largely driven by the strength of cloud subscription revenue.

Speaker Change: SaaS and.

Speaker Change: Recurring revenue was once again, a bright spot in the quarter up 38% year over year, driven by the strength of our renewals.

And Activations had previously shipped products <unk>.

Speaker Change: Subscription deferred revenue was up 29% year over year to $258 million.

Speaker Change: Total subscription and support revenue was $105 million.

Speaker Change: Up 14% year over year.

Speaker Change: This growth was largely driven by the strength of cloud subscription revenue base.

Kevin Rhodes: Based on our current outlook, we expect recurring revenue to account for approximately 35% of full year fiscal 2024 revenue. The growth of cloud subscriptions and support drove the total deferred revenue to $558 million, up 20% year-over-year. Gross margin was 57.6%, down 490 basis points from the prior quarter and 150 basis points compared to a year ago. Our fixed overhead costs were impacted by reduced product revenue, and we incurred an additional $7.5 million of excess raw material costs in the quarter.

Speaker Change: Based on our current outlook, we expect recurring revenue to account for approximately 35% our full year fiscal 2020 for revenue.

Speaker Change: The growth of cloud subscriptions and support drove the total deferred revenue to $558 million.

Speaker Change: 20% year over year.

Speaker Change: Gross margin was 57, 6% down 490 basis points from the prior quarter, and 150 basis points compared to a year ago quarter.

Speaker Change: Our fixed overhead costs were impacted by reduced product revenue and we incurred about an additional $75 million of excess raw material costs in the quarter.

Kevin Rhodes: This occurred as we transitioned one of our primary original design manufacturers out of China and into Vietnam. Without this cost, we would have achieved 61.2% margins in the quarter. We currently expect gross margins to recover back above 60% in the fourth quarter. Our third quarter operating expenses were $147 million, up 3% from the year-ago quarter.

Speaker Change: This occurred as we transitioned one of our primary original design manufacturers out of China and into Vietnam.

Speaker Change: Without this cost we would have achieved 61, 2% margins in the quarter. We currently expect gross margins to recover back above 60% in the fourth quarter.

Speaker Change: Our third quarter operating expenses were $147 million.

Speaker Change: Up 3% from the year ago quarter.

Kevin Rhodes: During the quarter, we did take action to optimize our expense structure to the level of revenue we expect to achieve, including getting back to operating profitability in the fourth quarter and into fiscal year 2025. On a run rate basis, we took out approximately $35 to $40 million of annualized expenses, which will help us drive operating leverage as revenue. The operating margin in the third quarter was a loss of 12.2%, down from a profit margin of 14.8% last quarter and from a profit margin of 15.6% in the year-ago quarter.

Speaker Change: During the quarter, we did take action to optimize our expense structure to the level of revenue, we expect to achieve including getting back to operating profitability in the fourth quarter and into fiscal year 2020 size.

Speaker Change: On a run rate basis, we took all of our approximately $35 million to $40 million of annualized expenses.

Speaker Change: Which will help us drive operating leverage as revenue recovers.

Speaker Change: The operating margin in the third quarter was a loss of 12, 2% down.

Speaker Change: Down from a profit margin of 14, 8% last quarter and from a profit margin of 15, 6% and a year ago quarter.

Kevin Rhodes: All in, the third quarter non-gap loss per share was 19 cents and in line with our outlook. This compares to earnings per share of $0.24 in the second quarter and earnings per share of $0.29 a year ago. We ended the quarter with $151 million of cash and net debt of $42 million. The $74 million usage of free cash flow in the quarter was due to lower revenue and the use of working capital for purchases of raw materials and finished goods inventory based on the prior year of purchase. We expect a recovery in cash flow as revenue recovers in the fourth quarter and component purchases become more balanced with normalized sell-through. Now, turning to guidance.

Speaker Change: All in third quarter non-GAAP loss per share was <unk> 19.

Speaker Change: And in line with our outlook.

Speaker Change: This compares to earnings per share of 24 cents in the second quarter and earnings per share of <unk> 29 in the year ago quarter.

We ended the quarter with $151 million of cash and net debt of $42 million.

Speaker Change: $74 million usage of free cash flow in the quarter was due to the lower revenue and use of working capital for purchases of raw materials and finished goods inventory based on prior year purchase commitments.

Speaker Change: We expect a recovery in cash flow as revenue recovers in the fourth quarter and component purchases become more balanced with normalized sell through rates.

Kevin Rhodes: Heading into the fourth quarter, we are expecting improved sequential revenue growth based on our funnel and the seasonality of our business, led by our education burden. We believe that recovery in revenue and earnings will also drive a recovery in cash flow. However, we are taking a cautious tone to guidance at this time.

Speaker Change: Now turning to guidance.

Speaker Change: Going into the fourth quarter, we are expecting improved sequential revenue growth based on our funnel and the seasonality of our business led by our education vertical.

Speaker Change: We believe the recovery in revenue and earnings will also drive a recovery in cash flow.

Speaker Change: We are taking a cautious tone to guidance at this time.

Operator: For the fourth quarter, we expect guidance as follows: revenue to be in a range of $250 million to $260 million; gross margin to be in a range of 61.6 to 63.6%; operating margin to be in a range of 9 to 11 and a half percent; and earnings per share to be in a range of 11 to 15. That's based on a fully diluted share count of around 131 million shares. For the full year 2024, we expect it to be as follows.

Speaker Change: For the fourth quarter, we expect guidance as follows.

Speaker Change: Revenue to be in a range of $250 million to $260 million.

Gross margin to be in a range of $61 six to 63, 6%.

Speaker Change: Operating margin to be in a range of nine to 11, 5%.

Speaker Change: And earnings per share to be in a range of 11 to 15.

Speaker Change: That's based on fully diluted share count to be expected around 131 million shares.

For the full year 2024, we expect as follows.

Operator: Revenue is expected to be in a range of $1,110,500,000 to $1,120,500,000, non-GAAP gross margin to be in a range of 60.9% to 61.4%, operating margin to be in a range of 9.3% to 9.9%, and earnings per share to be in a range of 51 cents to 55 cents. The fully diluted share count is expected to be around 131 to 132 million shares. And with that, I'll now turn it over to the operator for the Q&A.

Speaker Change: Revenue to be in a range of $1 billion $110 $5 million to $1 billion 125 billion.

Speaker Change: non-GAAP gross margin to be in a range of 69% to 61, 4%.

Speaker Change: Operating margin to be in a range of nine 3% to nine 9%.

Speaker Change: And earnings per share to be in a range of 51 to.

Speaker Change: 55 sets the fully diluted share count is expected to be around 131 to 132 million shares and with that I'll now turn it over to the operator to begin the Q&A session.

Alexander Henderson: Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our first question comes from the line of Alex Henderson from Needham. Your question, please.

Certainly and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone our first question comes from the line.

Speaker Change: Of Alex Henderson from Needham Your question. Please.

Edward B. Meyercord: Hey guys, so I was hoping you could talk a little bit about what you think the normalized revenue base for the company is and what the company's longer-term, kind of sustainable growth rate is. And, you know, once you come out of this correction, where you think you can get your margins to, you talked about, 64 to 66% gross margins in the past. Is that still attainable? And Can you give us some guidelines on what a normalized base should look like?

Alexander Henderson: Hey, guys.

Alexander Henderson: I was hoping you could talk a little bit about what you think the normalized.

Alexander Henderson: Revenue base for the company is what the company's longer term kind of a sustainable growth rate is.

Alexander Henderson: Once you've come out of this correction.

Speaker Change: Where you think you can get your.

Speaker Change: Your margins too.

<unk> talked about.

Speaker Change: 64% to 66% gross margins in the past is that still attainable.

Speaker Change: And.

Speaker Change: Can you give us just some some some guidelines on.

Speaker Change: On what a normalized base should look like.

Edward B. Meyercord: Hey Alex. Alex, this is Ed.

Speaker Change: Yeah.

Speaker Change: Hey, Alex Alex This is Ed let me, let me jump in and then Kevin I'll, let you.

Ed: Come in behind me as far as the model is concerned sure.

Ed: Alex Yes, we're still seeing.

Kevin Rhodes: Let me jump in. And then, Kevin, I'll let you come in behind me as far as the model is concerned. Sure. Alex, yeah, we're still seeing sluggishness, macro sluggishness in Europe, and then you'll note that we had a lower volume of large deals this past quarter, at 28, which is a low for us, and we're seeing elongated sales cycles in some of our larger projects. So when this is normalized, and when we look at a level that we feel is achievable in this market with the resources that we have on our team, you know, you're looking at moving up closer to $300 million a quarter in revenue from where we are today.

Sluggishness macro sluggishness sluggishness in Europe.

Ed: And then you'll know that we had a lower volume of large deals this past quarter at 28, which is.

Speaker Change: Our low for us and we're seeing elongated sales cycles in some of our larger projects.

Speaker Change: Hi.

Speaker Change: So when.

Speaker Change: When this is normalized and when we look at.

Speaker Change: A level, where we feel is achievable.

Speaker Change: In this market with the resources that we have on our team.

Speaker Change: Youre looking at moving up closer to $300 million.

Speaker Change: Our quarter end revenue from from where we are.

Speaker Change: Today so.

Speaker Change: Yeah, we see.

Speaker Change: A lot of room for growth.

Kevin Rhodes: So we see a lot of room for growth. The other comment that I'll make is that market conditions, we believe, are going to help us over the next 12 months, given what's going on with the competitive landscape. Right now, there's a lot of chatter and a lot of noise in the partner and channel community, as well as with end users around concerns about the technology decisions that they need to make. And if you're a partner that you want to bank your business on, as a result, we think we're going to start to see more opportunities coming to Xtreme as, in a way, a safe haven for technology decisions that are future-forward.

Speaker Change: The other comment that I'll make is it market conditions. We believe are going to help us over the next 12 months, given what's going on with the competitive landscape.

Speaker Change: Right now Theres, a lot of chatter and Theres a lot of noise.

Speaker Change: In the partner channel community as well as with end users.

Speaker Change: Around concerns about technology decisions that they need to make.

Speaker Change: And if you are a partner that you want to think of your business on.

Speaker Change: As a result, we think we're going to start to see more.

Speaker Change: More opportunities coming to extreme.

Speaker Change: In a way a safe Haven.

Speaker Change: For our technology decisions that our future forward. So this was we.

Kevin Rhodes: So this was, we heard this loud and clear, it will take time for new partners to establish a funnel and establish business with Xtreme and Ramp, and the same thing is true with partners. We will have very specific actions to aggressively go after this against both sets of our larger competitors and think it creates a unique market opportunity. Kevin, do you want to follow up with more specifics in terms of margins and the modeling questions? Yeah.

Speaker Change: This loud and clear it will take time for new partners to establish funnel and established business with extreme and ramp.

Speaker Change: And the same thing is true with partners right now.

Speaker Change: We will have very specific motions to aggressively go after this.

Speaker Change: Against both sets of our larger competitors and take it creates.

Speaker Change: Unique market opportunity.

Speaker Change: Kevin do you want or do you want to follow up with more specifics in terms of margins and the modeling questions.

Kevin Rhodes: Yeah, I mean, I think you're accurate, you know, in terms of what we're seeing as opportunities for growth coming out of, of, what the new normal looks like, right coming out of, I'll call it, you know, the cycle that we're in right now, and absorption, you know, etc. I would think that what we the new normal should be, you know, above $300 million in revenue is what we are shooting for.

Kevin Rhodes: I think you are accurate in terms of what we're seeing as opportunities for growth coming out of <unk>.

What's the new normal look like right coming out of the.

Kevin Rhodes: Got it.

Kevin Rhodes: Yes.

Kevin Rhodes: The cycle that we're in right now.

Kevin Rhodes: Option et cetera.

Kevin Rhodes: I would think that.

Kevin Rhodes: The new normal or should be.

Kevin Rhodes: <unk> $300 million in revenue is what we are shooting for and then obviously growth above and beyond that the market opportunity is there for US we are taking share and you could see with Korean airlines and others that are 30 year customers at Cisco that are moving in coming over to us as we continue to build on our software story here, Alex I think that's going to bode well for us.

Kevin Rhodes: And then obviously growth above and beyond that. The market opportunity is there for us. We are taking share, and you can see with Korean Airlines and others that are 30 year customers of Cisco that are moving and coming over to us as we continue to build on our software story here. You know, Alex, I think that's going to bode well for us, especially as we add in more security, more AI. All of that I think is going to be, and we heard that loud and clear at our Connect conference, that people were excited about our vision for what the product enhancements are going to be in the future.

Kevin Rhodes: Especially as we add in more security more AI all of that I think is going to be and we heard that loud and clear at our connect conference that people were excited about our vision for the product.

Kevin Rhodes: And more and more of these, you know, customers or prospects are saying they want to lean in our way. So we got to get through this cycle with the market, but in general, and in the future, as things come back, we think we're very well positioned for growth.

Kevin Rhodes: Instruments are going to be in the future and more and more of these customers or prospects are saying they want to lean in our way. So we got to get through this cycle with the market, but in general in the.

Kevin Rhodes: Future like as things come back, we think we're very well positioned for growth.

Kevin Rhodes: So, the question was on the gross margin, 64-66 still attainable, and when do you think you'll come out of this cycle?

Kevin Rhodes: So.

Kevin Rhodes: The question was asked on the gross margin.

6400, 66 still attainable.

Kevin Rhodes: When do you think you'll come out of this.

Kevin Rhodes: This cycle.

Kevin Rhodes: Do you think it could happen before that? You know, all the way through the year, the calendar year, or do you think it could happen before that? Yeah, so 64 to 66. When you look at our guidance for Q4, right, we're at 61.6 to 63.6. So we're really touching the high end of our guidance, that 64% range that you just talked about. So, you know, we describe that as a longer kind of three-year vision for where we're going to get the 64 to 66. But yes, we are absolutely still considering that to be our target range for

Kevin Rhodes: Do you think it's.

Kevin Rhodes: All the way through the year calendar year or do you think.

It can happen before that.

Speaker Change: Yes, yes, so 60% to 66 when you look at our guidance for Q4 right. We're at 61 six to $63 six so we're really touching at the high end of our guidance at 64% range that you just talked about so.

Speaker Change: We described that as a longer kind of three year vision for where we're going to get the 64 to 66, but yes, we are absolutely still initiating that to be our target range for gross margins.

Kevin Rhodes: Yeah, Alex, as far as the timing of the recovery is concerned, I think it's going to depend a lot on the spending environment in EMEA and then just the timing and our ability to close the pipeline of opportunities that we already have. I would say we have visibility; we have a very healthy funnel of opportunities. The question on that funnel is the timing, and then we have, I would say, a somewhat gun-shy team in Europe because we've been burned several quarters by expecting that spending cycle to come back, and we just haven't seen it come back as quickly as we thought. It's difficult for us to make that call. We suspect that we'll start to see signs of this this quarter and into next quarter, I would say, with a lot more confidence in December, if that's helpful.

Speaker Change: Yes, Alex it as far as the timing of bad debt recovery is concerned.

Speaker Change: Yes, I think it's going to depend a lot on the spending environment.

Speaker Change: EMEA.

Speaker Change: And then just the timing and our ability to close on on the pipeline of opportunities that we already have I would say we have visibility.

Speaker Change: Have a very healthy funnel of opportunities.

Speaker Change: Question on that funnel is the timing.

Speaker Change: And then we have I would say.

Speaker Change: Somewhat gun shy team in Europe, because we've been we've been burned.

Speaker Change: Quarters by.

Speaker Change: Expecting that spending cycles to come back and we just haven't seen it come back as quickly as we thought so.

Speaker Change: It's difficult for us to make that call.

Speaker Change: We suspect that we'll start to see signs of this this quarter and into next quarter.

I would say with a lot more confidence in December if that's helpful.

Operator: Thank you. And our next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Your question, please.

Speaker Change: Thank you and our next question comes from the line of Eric <unk> from Lake Street Capital markets. Your question. Please.

Eric Martinuzzi: Yeah, I wanted to take a look at the operating expense expectation for Q4. I know you took actions kind of mid-quarter here in Q3. I think I've got the number right, OPEX in Q3 at 147 million. What's the expectation for Q4?

Eric: Yes, I wanted to take a look at the operating expense expectation for Q4, I know you took actions.

Quarter here in Q3, I think I've got the number right Opex in Q3 at $147 million, what's the expectation for Q4.

Kevin Rhodes: Yeah, so right now we're expecting OpEx in Q4. I'm just looking for it here. It's at 133. It's what we're expecting at

Yes, so right now we're expecting Opex in Q4, just looking for.

Speaker Change: Here, It's a 133 is what we're expecting it to be Eric.

Kevin Rhodes: Okay, and I'm assuming the bulk of the kind of restructuring effort there was around sales and marketing. You know, we looked at all the spend, to be honest with you, Erick, and obviously, mostly, we looked at program spend, first and foremost, because, you know, we value all of our employees extremely. You know, you still have to make adjustments across the board, but we really, I would say, looked at it from an organizational design perspective and optimized the company's structure that way, as opposed to just going and taking out certain functions.

Speaker Change: Okay.

Speaker Change: I'm, assuming the bulk of the.

Eric: Okay restructuring effort there was around the sales and marketing is that correct.

Eric: We looked at all spent to be honestly, Eric and obviously, mostly we looked at program spend first and foremost because we value all of our extreme employees.

Eric: You still have to make adjustments across the board, but we really I would say we looked at it from the Org design perspective, and optimize the company structure.

Eric: That way as opposed to just going in.

Kevin Rhodes: We looked at how we, you know, reimagined our go-to-market, but also R&D, focus areas, and across the board, you know, other areas as well. So, I would say we optimized across the entire company to get there.

Eric: And taking out certain functions, we looked at how to how do we re imagine our go to market, but also R&D focus areas.

Eric: And across the board other areas as well so I would say, we optimize across the entire company to take it there.

Kevin Rhodes: And I think it's fair to say, Kevin, in our guide, Erick, we knew that we were going to be taking expenses out of the business, so in our guide, that was part of the original guide.

Speaker Change: Okay, and I think fair to say Kevin.

Kevin Rhodes: Our guide Eric.

Kevin Rhodes: Yes.

Kevin Rhodes: We knew that we were going to be taking expenses out of the business. So in our guide.

Kevin Rhodes: That was that was part of the original guide, yes, yes I understand.

Kevin Rhodes: Yeah, yeah, I understand. The net new logo growth, double digits in Q3, that kind of was a pleasant surprise for me. You know, given the overall macro environment still being challenging, what do you think was the key driver behind the new logo growth? Yeah, Eric, we were

Kevin Rhodes: The net new logo growth.

Kevin Rhodes: Growth double digits in Q3 that was a pleasant surprise for me.

Kevin Rhodes: The overall macro environment still being challenging what do you think was the key driver behind the new logo growth.

Edward B. Meyercord: Yeah, Eric, we were encouraged because what we're seeing, and I mentioned in my comments that we're moving up market, and we see a return to health as we get back to this kind of 35 to 40, you know, plus million dollar plus deals in a quarter. This quarter was unusually low.

Speaker Change: Yes, we were encouraged because what we're seeing and I mentioned in my comments that we're moving up market.

Speaker Change: And we see a return to health as we get back to this kind of.

Edward B. Meyercord: However, we had a handful of really nice wins in the quarter that, you know, including, you know, eight digit and eight digit wins and some, some large seven digit wins that, you know, that created, you know, really nice new logo wins. And, and that's what sort of inflated the new logo amounts in terms of the dollar volume of new logo business. We have a lot of that in our funnel as well, which is what we're excited about. That said, when we're calling Q4, we don't want to rely on large binary deals that could move either way.

Speaker Change: 35% to 40 plus million dollar plus deals in a quarter. This quarter was unusually low however.

Speaker Change: We had a handful of really nice wins in.

Speaker Change: In the quarter that including eight digit digit win.

Speaker Change: And in some some large seven digit wins that debt.

Speaker Change: Yes.

Speaker Change: Created.

Speaker Change: Yes.

Speaker Change: Really nice new logo wins, and Thats, what sort of inflated.

Speaker Change: The new logo amounts in terms of the dollar volume amount of new logo business, we have a lot of that in our funnel as well, which is what we're excited about.

Speaker Change: That said when we're calling Q4, we don't want to rely on large binary deals.

Edward B. Meyercord: We feel like we're in a stronger competitive position with some of the logos we talked about at Connect. We had Kroger up on stage, saying that their experience with Extreme far exceeded expectations. And there are a lot of new business opportunities, obviously with the world's largest grocer, Korean Air, major airlines, after 30 years with Cisco, kind of fed up and ready for a change. They made the trip and flew all the way from Seoul to be there, a big endorsement. That means a lot in those markets. WashU, a prestigious university, is making the move, really intrigued by Fabric and our security story.

Speaker Change: That could move either way.

Speaker Change: We feel like we're in a stronger competitive position with some of the logos we talked about.

Speaker Change: At connect we had kroger up on stage.

That their experience with extreme far exceeded expectations.

Speaker Change: And Theres a lot of new business opportunities, obviously with the world's largest grocer Korean air Major Airlines after 30 years with Cisco kind of set up and ready for a change.

Speaker Change: They made the trip.

Speaker Change: And through all the way from saw to be there.

Speaker Change: Big endorsement that means a lot in those markets a wash U prestigious University.

Speaker Change: The move.

Speaker Change: Really intrigued by fabric and our security story.

Edward B. Meyercord: And so these are just some of the examples of large wins, important logos, important reference accounts that we won this quarter. We don't necessarily have the magnitude of those deals in Q4 to call, which is why when you look at Q3 to Q4, you might be wondering, "OK, why am I not seeing more growth?" We want to be careful about calling the larger deals, but the fact of the matter is we are more competitive, and we are winning them, and success begets success in this market. So that's what's giving us confidence. And with a few more of these things, that should really strengthen our position, our confidence in calling a stronger 25.

Speaker Change: And so these are just some of the examples of of.

Speaker Change: Of large wins important logos important reference accounts.

Speaker Change: We are winning and we won them in the quarter.

Speaker Change: We don't necessarily have the magnitude of those deals in Q4 to call, which is why when you look at the Q3 to Q4 you might be wondering okay.

Speaker Change: Why am I not seeing more growth.

Speaker Change: We want to be careful about calling the larger deals, but the fact of the matter is we are.

Speaker Change: We are more competitive and we are winning them and success to get success in this marketplace. So that's.

Speaker Change: And that's what's giving us confidence.

Speaker Change: And with a few more of these things that should really strengthened.

Speaker Change: Strengthen that.

Speaker Change: Our position our confidence for calling a stronger 25.

Speaker Change: Thank you.

Thank you one moment for our next question.

Operator: Thank you. One moment for our next question, and our next question comes from the line of David Vogt from UBS. Your question, please.

Speaker Change: Yes.

Speaker Change: And our next question comes from the line of David <unk> from UBS. Your question. Please.

Brian: Hey, this is Brian on behalf of David. Thank you for taking my question. So on the balance sheet, inventory that increased quarter over quarter to 185 million from 153 million last quarter. Can you discuss how inventory should get worked down given the somewhat soft human revenue guide relative to 90 days ago?

Speaker Change: Hey, this is Brian in for David anchor taking my question. So.

Brian: On balance sheet inventory that increased quarter over quarter to $185 million from $153 million last quarter can you discuss how inventory should get worked down given the somewhat soft Q1 revenue guide relative to 90 days ago, and then I'll follow up thank you.

Kevin Rhodes: Sure, Brian. I'll take that one, Ed.

Brian: And then I will follow up. Thank you. Chair Brighten.

Speaker Change: Sure Brian.

Speaker Change: I'll take that one Ed.

Did we did have a use of cash in the quarter for building of inventory you.

Speaker Change: You have to realize that first of all all of these inventory purchases that are coming in now.

Speaker Change: We're more than a year ago when those those orders were put in place and actually what we're seeing in the market right. Now is this slowdown is.

Speaker Change: Obviously, exacerbating if you will the inventory built there is a positive on that which is we bought all this inventory. It's all good inventory that we have on our balance sheet. We've worked down the inventory in the distribution side of things, we talked about and we have our inventory that we've now paid for us that's going to be a cash.

Speaker Change: <unk> opportunity for us in the future I would say over the next year all of that inventory is good inventory and should work itself into the market over time, we assessed our inventory balances every quarter.

Speaker Change: As an example, you saw this quarter, we moved one of our Oems out of China and into Vietnam.

Speaker Change: The raw inventory that we had there.

Speaker Change: For the raw materials, we ended up.

Speaker Change: Taking that out and that's just because of the movement of the line and we Werent reestablishing that line.

Kevin Rhodes: So, we did have a use of cash in the quarter for building inventory. But you have to realize that, first of all, all of these inventory purchases that are coming in now were more than a year ago when those orders were put in place. These were materials that we were using for the Chinese market, and so it just didn't make sense because we weren't replacing that line. So, we evaluated every quarter, but right now, yes, we had a build in the inventory, but that's going to generate cash flow.

Speaker Change: As we moved out of China.

Speaker Change: Serials that we're using for the China market and so it just didn't make sense, because we weren't replacing that line. So we evaluate it every quarter, but right now yes, we had a build in the inventory, but that's going to generate cash flow.

Kevin Rhodes: Got it, that's helpful. And then, as a follow-up, can you share with us what would be a normal inventory level when product revenue slash demand normalizes? Is there a good rule of thumb? Can we think of it as like a percentage of quarterly product revenue? Yeah, I mean,

Speaker Change: Got it that's helpful and then as a follow up can you share with us what would be a normal inventory level when product revenue slash demand normalizes.

Speaker Change: A good rule of thumb can be thinking about it as like a percentage of quarterly product revenue.

Kevin Rhodes: Yeah, I mean, we were running, I would say, more like $90 million of inventory in the past, so we're probably double the size that we would like to be at, you know, as a percentage of revenue, 90, and to roughly, you know, $900 million of product revenue would give you about 10% of the total annual product revenue to give you a guidance range. From our perspective, you know, that will work itself out over the next year. And as an aside, I would also say in Q4, we expect inventory levels to come down. That's another thing that we're looking at right now.

Speaker Change: So we were running I would say more like $90 million of inventory in the past. So we're probably double the size that we would like to be.

Speaker Change: As a percentage of revenue 90 into roughly.

Okay.

Speaker Change: $101 million of product revenue would give you about 10% of the total annual.

Speaker Change: Product revenue.

Speaker Change: Just to give you.

Speaker Change: Our guidance range.

Speaker Change: From our perspective.

Speaker Change: That will work that steps down over the next year.

Speaker Change: And as I said I would also say in Q4, we expect inventory levels to come down that's another thing that we're looking at right now.

Speaker Change: Okay.

Speaker Change: Thank you one moment for our next question.

Operator: Thank you. One moment for our next question, and our next question comes from the line of David Kang from B Reilly. Your question, please.

Speaker Change: And our next question comes from the line of David King from B Riley Your question. Please.

Dave Kang: Thank you. Good morning. My first question is on seasonality for fiscal first quarter 25. I know that's typically seasonally weak, but any difference this time?

David King: Thank you good morning.

David King: First question is on the seasonality of our fiscal first quarter 'twenty five.

David King: Typically seasonally weak, but any difference at this time.

Edward B. Meyercord: Yeah, David, I think, you know, given where we are in Q4 and given how we're looking to build from Q3, I don't think we're at a point where we can say that, you know, normal seasonality applies, just because of the unusual nature of demand and the market environment that we're in today. So whereas normally, I think what you're hitting on is the fact that there's this dip in September and then we're up in December, a dip in March, and then up in June. I don't think that traditional seasonality adjustments will work.

David King: Yes, David I think.

Given where we are.

David King: In Q4, and given how we're looking to build.

From Q3.

David King: I don't think we're at a point, where we can say that normal seasonality applies.

David King: Just because of the unusual nature of.

David King: Demand in the market environment that we're in today, so, whereas normally I think what youre hitting on is the fact that this dip in September and then up in December a dip in March and then up in June.

David King: Sure.

David King: I don't think that.

David King: Traditional.

David King: Seasonality adjustments, we'll apply.

Edward B. Meyercord: So you're implying that it could be up or even, or at least flat, maybe for September, from June to September? Yeah, I mean...

David King: So you are implying that it could be up or even.

David King: Or at least flat maybe for September performed June to September.

Edward B. Meyercord: Given where we are today, you know, Kevin mentioned that, well, I mentioned that, you know, we have some large deals that are somewhat binary. And I will say what Kevin said before talking about the guidance that we want to. We want to be more cautious and have a more cautious tone. In Q3, you know, we hit a number. We can argue the bar wasn't that high, but, you know, we're on track for hitting a number, and that's how we want to run the business and how we want to manage expectations where we're going to meet or exceed our guidance.

David King: Given where we are today, Kevin mentioned that.

David King: I mentioned that.

David King: We have some large deals that are somewhat binary and I will say Kevin mentioned before.

David King: Talking about the guidance that we wanted to.

David King: We want to be more cautious and have a more cautious tone.

David King: In Q3, we hit a number we can argue that borrowers isn't that high.

David King: Yes.

David King: We're on track for hitting our number and that's how we want to run the business and how we want to manage expectations, where we're going to meet or exceed our guidance.

Edward B. Meyercord: And, you know, we've set the table, you know, in such a way that way for Q4. You know, I think it's too early to call. I think right now, Kevin will get upset with me if I start calling Q1. But, you know, what I would say is I don't think that, you know, we're not at a point to say we've returned to normalcy and normal seasonality.

David King: And we've set the table in such a way that way from Q4.

Speaker Change: I think it's too early to call I think right now Kevin will get upset with me if I start calling Q1 right.

Speaker Change: What I would say is I don't think.

Speaker Change: Sure.

Speaker Change: We're not in a point to say, we've returned to normalcy and normal seasonality.

Dave Kang: Got it. And my...

Speaker Change: Got it and my.

Speaker Change: Go ahead.

Dave Kang: Okay, my follow-up question was on Brookings. You said Brookingsville was way over one, but I was just wondering if you could comment on how they compare, like maybe sequentially or maybe year over year? On the booking side? Yeah, product bookings.

Speaker Change: Okay.

Speaker Change: Follow up question was on bookings you said book to Bill was way over one but just wondering if you can comment on how they compare like maybe sequentially or maybe year over year.

Speaker Change: On the bookings side product bookings.

Kevin Rhodes: Yeah, we didn't describe how it was. I would say it's still a challenging environment for bookings. I would say our overall bookings product and overall bookings were similar to what we had last quarter. Slightly down from where it was last quarter, but similar to that. I would say that that's good because it gives you some level of stability in what the bookings are going to be quarter to quarter. That being said, we're really looking for us to have, as Ed said, Europe come back in other areas of strength to come back in the second half of next year for us to really start to see significant growth.

Speaker Change: Yes, we didn't we didn't describe how it was I would say it's still a challenged.

Speaker Change: Environment for bookings I would say, our overall bookings product and overall bookings were similar to what we had last quarter.

Speaker Change: Slightly down from where it was last quarter, but similar.

Speaker Change: So I would say that thats good because it gives you some level of.

Speaker Change: Stability in what the bookings are going to be quarter to quarter that being said, we're really looking for us to have as Ed said Europe come back in other areas.

<unk> strengths.

Speaker Change: Come back in the <unk>.

Speaker Change: Second half of next year for us too.

Speaker Change: It really start to.

Edward B. Meyercord: And my last question is, you know, regarding Europe, I mean, what particular verticals are weak? Sounded like education was pretty good, you know; any particular verticals that's still weak in Europe?

Speaker Change: We see significant growth.

Speaker Change: Yes.

Speaker Change: And my last question is.

Regarding Europe, I mean with particular verticals are weak.

Speaker Change: It sounded like education was pretty good.

Speaker Change: Any particular verticals.

Edward B. Meyercord: Yeah, you know, it's mainly the government business. We look at, you know, our category of SLED, which, you know, in Europe, basically, is including state and country governments, and Local Governments, and Education. And we've seen a pause in spending there. And I think this is where we have a lot of business. That 40% mix was a good mix for the entire company. When that will come back, we are confident that it's going to come back.

Speaker Change: Still weak in Europe.

Speaker Change: Yes, it's mainly the government business, we look at.

Speaker Change: Our category of slag.

Speaker Change: Which in Europe basically is including.

State and country governments.

Speaker Change: And local governments and education.

Speaker Change: And we've seen it.

Speaker Change: A pause in spending there and I think this is where we haven't.

Speaker Change: A lot of business that that 40% mix is the mix for the entire company.

Speaker Change: When that will come back.

Edward B. Meyercord: But I think now more than ever before, we're seeing them sweat assets and taking more time to move forward with planned network upgrades. And a lot of these are existing customers. And this is where we, especially in the German market, which we call DAC, which has been very slow for us, when that comes back, and we believe it will come back, it's gonna bring a lot of momentum to our sales. And then I would note that we are

Speaker Change: That it is going to come back.

Speaker Change: I think more now than ever before and we're seeing them.

Speaker Change: Sweating assets and taking more time to move forward with <unk>.

Speaker Change: Planned network upgrades and these are a lot of these are existing customers.

Speaker Change: And this is where we.

Speaker Change: Especially in the German market that recall, Doc, which has been very slow for us.

Speaker Change: That comes back and we believe it will come back.

Speaker Change: It's going to bring.

Speaker Change: A lot of momentum to our sales recovery and then I would note that we are looking at quarter over quarter Q4 versus Q3, an increase in our bookings expectations at this point given given the revenue growth.

Kevin Rhodes: And Ed, I would note that we are looking at quarter over quarter, Q4 versus Q3, an increase in our bookings expectations at this point, given the revenue growth.

Kevin Rhodes: Thank you. One moment for our next question, and our next question comes from the line of Timothy Horan from Oppenheimer. Your question, please.

Speaker Change: Got it thank you.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of Timothy Horan from Oppenheimer. Your question. Please.

Operator: Thanks, just following up on the government side. What percentage of that do you think is in office space versus places like railroad stations and other public venues? Only because I've been in a bunch of government buildings lately, and no one's in the office. I mean, do they really need to upgrade these Wi-Fi networks anytime soon if people aren't coming in all that much?

Timothy Horan: Thanks, just following up on the on the government side.

Timothy Horan: What percentage of that is do you think is in office space versus places like.

Timothy Horan: Railroad stations and other public venues only because.

Timothy Horan: Been in a bunch of government buildings lately like no one's in the office I mean do they really need to upgrade these Wi Fi networks anytime soon if people aren't coming in all that much.

Timothy Horan: Yeah, Tim, I'm not sure we're able to, we're going to be able to pinpoint it. And we have, we have, we have a lot of different government agencies, everything from, you know, in, in, you know, in Germany, the Department of IT, for example, we have many defense ministries in different European countries. And so it's, it's, it's very distributed. The other comment that I'll make is that we also have a very distributed channel.

Speaker Change: Yes, Tim I'm not sure we're able to we're going to be able to pinpoint it yes, we have.

Speaker Change: We have we have a lot of different government agencies.

Speaker Change: Everything from.

No.

Speaker Change: In Germany, the department of it.

Speaker Change: For example, we have many defense ministries.

Speaker Change: In different European countries.

Speaker Change: And so it's.

Speaker Change: It's very distributed.

Speaker Change: The economy.

Timothy Horan: And our channel partners have longstanding and very strong relationships with all these customers. And so it is very much of a cyclical business. And when they, you know, when they decide, when they make the decision to refresh, and then when they release the funds, they go through with it. We're not hearing anything that says, oh, that what we know is that the cycles have been delayed. But we have not heard anything to the effect of, "We're just not going to." We think at some point there will be a return to normalcy, particularly in the government verticals.

Speaker Change: I'll make is that we also have very distributed channel and our channel partners.

Have long standing and very strong relationships with all of these customers and so it is very much of a cyclical business.

Speaker Change: And when they when they when they make the decision to refresh.

Speaker Change: And then when they released the funds they go through with it.

Speaker Change: We're not hearing anything that says Oh.

What was the.

Speaker Change: The cycles have been delayed but.

Speaker Change: But we have not heard anything to the effect of we're just not going to do it.

Speaker Change: And we think at some point that there will be a return to normalcy, particularly in.

Speaker Change: And the government verticals.

Edward B. Meyercord: What is the average upgrade cycle historically, and I know you're saying it's kind of extended out, like how much can they extend it out if they really want to? And I guess related to this, what impact is 60 and 7 having on the market? of those basically life cycles.

Speaker Change: And.

Speaker Change: Yes, maybe just related to this I mean, what is the average upgrade cycle historically in.

Speaker Change: I know, you're saying, it's kind of extended out like how much can be extended obviously, if they really want to and I guess related to this.

Speaker Change: You know what the impact of <unk> seven having on.

Speaker Change: Thanks, Keith life cycles.

Edward B. Meyercord: Yeah, well, so I think normally in, in, in. Yeah, and wireless, you know, we would say wireless, three to five years, switching. Five to seven years would be the normal life cycles, Tim, that we think about. Sometimes there may be an acceleration or a breakthrough. Wi-Fi 6E was important because it adds six gigahertz of spectrum, and it's kind of a game changer in terms of what it does in terms of extending the range of Wi-Fi, lower latency, et cetera.

Keith: Yes, so I think normally.

Keith: In wireless we will.

Keith: Say wireless three to five years switching.

Five to seven years would be the normal lifecycle as Tim.

Keith: That we think about sometimes there may be an acceleration or a breakthrough Wi Fi <unk> was important because it adds six gigahertz spectrum.

Keith: And it's kind of a game changer in terms of what it does and extending the range of Wi Fi.

Edward B. Meyercord: So Wi-Fi 7 will carry that as well, and it also depends on devices that are coming into the network and being able to support the bandwidth. In some cases, you'll see customers Yeah, usually customers will fall into that range. You know, if you're getting to five years on Wi-Fi gear, you're starting to fall behind, and it becomes more and more difficult to support the edge devices that are coming into your environment.

Keith: Latency et cetera, So Wi Fi seven will carry that as well.

Keith: And then it also depends on devices that are coming into the network and being able to support the bandwidth.

Keith: Yes.

Keith: In some cases, yes.

Keith: You'll see customers.

Keith: Yes, usually customers will fall into that range.

Yes, if you're getting five years Wi Fi gear Youre, starting to fall behind and it becomes more and more difficult to support.

Keith: The edge devices that are coming into your environment.

Edward B. Meyercord: And so, and especially when we think about, you know, the stadium environments, etc, that are early adopters and moving quickly into 6e. So, Yeah, I think it's it's fair to go with those ranges, you know, there are rare examples of people that are just, you know, they're still running switches that are 10 years old. But it's not really prudent to do that. Because usually those devices are end of life and a support. And if there's a networking issue, it's it's it's it's hard to recover. If you have the older, the older gear.

And so and especially when we think about the stadium environments et cetera that are early adopters moving quickly into <unk>.

Keith: So.

Speaker Change: Yes, I think it's fair to go with those ranges. There are rare examples of people that are just they are still running switches that are 10 years old.

Speaker Change: But it's not really prudent to do that because usually those devices are end of life end of support.

Speaker Change: And if theres a networking issue.

Speaker Change: It's hard to recover.

Speaker Change: If you have the older.

Edward B. Meyercord: Great, thanks a lot. And just lastly, are you seeing any change in churn at all in your customer base?

Speaker Change: <unk>.

Speaker Change: Great. Thanks, a lot and then just lastly are you seeing any change in churn at all in your customer base.

Edward B. Meyercord: Uh, no, I, yeah, I think our customer base, um, remains very solid. Um, you know, most of our business is with our existing customers. And, you know, we see this in terms of, um, subscription renewals. We see it in terms of service rules and, and, uh, in terms of, you know, competitive wins in the marketplace in terms of projects. I, I, I would chalk up the current phenomenon more to, uh, delays, elongated sales cycles, and spending delays rather than competitive.

Speaker Change: Yes, I think our customer base.

Speaker Change: <unk> remains very solid.

Speaker Change: Most of our business is with our existing customers and we see this in terms of.

Speaker Change: Subscription renewals, we see it in terms of service renewals.

Speaker Change: And in terms of competitive wins out in the marketplace in terms of projects.

Speaker Change: I would chalk up the current phenomenon more too.

Edward B. Meyercord: We, our story in the market today is responding now more than ever before, uh, particularly with the complexity, uh, lack of flexibility, and then the expense of total cost of ownership of dealing with the largest competitor. And, and there's, there's, there's frustration there. There's also that frustration in the channel.

Speaker Change: Delays elongated sales cycles, and spending delays more than than competitive.

Speaker Change: Our story in the market today is resonating now more than ever before.

Speaker Change: Particularly with the complexity.

Speaker Change: Lack of flexibility and then the expense a total cost of ownership of dealing with the largest competitor.

Speaker Change: And there's there's frustration there there is also the frustration of the channel for example in Germany, we've heard that Dave.

Edward B. Meyercord: For example, in Germany, we've heard that they've discontinued some of their gold partners, who are now looking for, uh, a new home, in which case Extreme is the best alternative today. You know, and, and, and so our competitive position, given the differentiation of our technology, given our vision, and the integration of security with networking, and then the modern networking tools that we're bringing to bear, not just with our purpose-built machine learning AI tools for the network but also new generative AI capabilities that we just rolled out.

Speaker Change: The discontinued some of their gold partners, who are now looking for.

Speaker Change: New home in which case extreme is the best alternative today.

Speaker Change: And so.

Speaker Change: With our competitive position.

Speaker Change: Given the differentiation of our technology, given our vision and the integration of <unk>.

Speaker Change: Security with networking and then modern networking tools that we're bringing to bear not just with our purpose built machine learning AI tools for the network, but also new generative AI capabilities that we just rolled out. So I think people are excited about the vision and extremes the only pure play.

Edward B. Meyercord: So I think people are excited about the vision, and Extreme's the only pure play networking company, so as people are contemplating upgrading to the most modern and forward networking infrastructure, we also have the capability, through our cloud, to manage our competitors' equipment. We're the only people that can do that, and we have a very unique value proposition with Fabric. So all of these things coming together, our sellers and our partners can position Extreme in a way that's stronger today than ever before, and there's disruption in the marketplace. So as the market comes back, we're very confident in our position.

Speaker Change: Networking company, so as people are contemplating.

Speaker Change: Upgrading to the most modern and future for networking infrastructure. We also have the capability through our cloud to manage our competitors' equipment. We're the only people that can do that and we have a very unique value proposition with fabric. So all of these things coming together, our sellers and our partners can position extreme.

Speaker Change: The way that is stronger today than ever before.

Speaker Change: And there is disruption in the marketplace. So as the market comes back.

Speaker Change: <unk>.

Speaker Change: We're very confident in our position.

Operator: Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. And our next question comes from the line of Christian Schwab from Craig Holland Capital. Your question, please.

Speaker Change: Thank you.

Speaker Change: Yes.

Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.

Speaker Change: Our next question comes from the line of Christian Schwab from Craig Hallum Capital. Your question. Please.

Christian David Schwab: Great, thanks guys. So I guess my first question regarding the excess inventory, I understand the good news of potentially generating cash as that normalizes back to your goal of 90 million, but you know, given the state of the market, is there any risk that we should assume that you may be more aggressive with pricing strategies to move that inventory a little bit faster?

Christian David Schwab: Great. Thanks, guys. So I guess my first question regarding the excess inventory I understand the good news.

Christian David Schwab: Essentially generating cash as that normalizes back to your goal of $90 million.

Christian David Schwab: Right.

Christian David Schwab: Given the state of.

Christian David Schwab: The market in <unk>.

Christian David Schwab: Is there any risk that.

Christian David Schwab: We should assume that you may be more aggressive with pricing strategies to move that inventory a little bit faster.

Kevin Rhodes: Hey Christian, I'll cover that one. I mean, I would say a couple things.

Speaker Change: Hey, Christian yes, I'll cover that one.

Christian David Schwab: I would say couple of things one.

Speaker Change: I had said in my prepared remarks that so far we are holding price.

Christian David Schwab: As a company, which is good through Q3, we're also hearing and seeing end market that some of our competitors with with excess inventory themselves are starting to get discount more heavily.

Kevin Rhodes: One, I said in my prepared remarks that so far, we are holding prices as a company, which is good, through Q3. We're also hearing and seeing in the marketplace that some of our competitors, with excess inventory themselves, are starting to discount more heavily. And so we have to evaluate that on an ongoing basis as to how we are doing versus them. We're typically 10% to 15% cheaper than Cisco in the first place. So if they do discount more, they need to discount a lot more in order to be at our prices, so that tends to help us be slightly lower than what they are already.

Christian David Schwab: And so we have to evaluate that on an ongoing basis.

How we are doing versus day, where typically 10% to 15% cheaper.

And then Cisco in the first place so they do discount more.

Christian David Schwab: You need to discount a lot more in order to be at our pricing so that tends to help us being slightly lower than what they are already but that being said we.

Kevin Rhodes: But that being said, we evaluate on a quarter-to-quarter basis. The key here is going to be how much Wi-Fi 7 is adopted, 6E. We still have some Wi-Fi 6 in place, but we do believe that we can move that inventory over time. And that's what we evaluate on a quarter-to-quarter basis.

Christian David Schwab: Evaluate on a on a quarter to quarter basis. The key here is going to be like how much is Wi Fi seven adopted six <unk>, we still have some Wi Fi six in place, but we do believe that we can move that inventory over time.

Christian David Schwab: And Thats, what we evaluated on a quarter over quarter basis.

Kevin Rhodes: How much Wi-Fi 6 inventory do you have? Is that a material amount? Do you know?

Christian David Schwab: How much Wi Fi six inventory do you have is that a material amount is that you know.

Kevin Rhodes: 20 million dollars, or is it materially less than that? No, I think it's, I think it's that or less. Um, it's not, I would say it's not a huge amount of the 185 that we have. Okay, perfect. And then, and then the new, I guess, Mr. Henderson's question. I guess the new aspirational, near-term revenue target is 1.2 billion kind of run rate, 300 million a quarter. Did I do that right?

Christian David Schwab: $20 million worth or is it materially less than that.

Christian David Schwab: I think it's a tickets that are less.

Speaker Change: It's not I would say, it's not a huge amount of the 185 that we have.

Christian David Schwab: Yes.

Christian David Schwab: Okay, Perfect and then and then the new I guess.

Kevin Rhodes: So, you know, 25, we're still, you know, moving through the cost of spending, elongated sales cycle, Cisco pricing, competitiveness, blah, blah, blah, blah, channel trying to figure out which products they want to sell. So should we kind of assume, you know, fiscal year 26, is our 1.2 billion plus gold, depending on market conditions? Is that fair?

Christian David Schwab: Two.

Alexander Henderson: Mr. Hendersons question.

Alexander Henderson: I guess, the new aspirational near term.

Alexander Henderson: Our revenue target is $1 2 billion kind of run rate $300 million a quarter.

Alexander Henderson: They do that right so.

Alexander Henderson: <unk> 25, we're still.

Alexander Henderson: Moving through caution spending elongated sales cycle, Cisco pricing competitiveness blah, blah, blah blah blah channel trying to figure out which products. They want to sell so should we should kind of assume fiscal year 'twenty six.

Alexander Henderson: Yes.

Alexander Henderson: Our one 2 billion plus goal depending on market conditions is that fair.

Christian David Schwab: On fiscal 26, I think that's big. Yeah, I mean, obviously, there's a lot of ifs in terms of what is going to happen from a marketplace perspective, and when will it come back, is the big question, right? The channel digestion activity in that cycle, and does that end in this calendar year, and then that generates a bit more positive tailwind for the entire industry, coming into January of 2026 and into our fiscal year.

Alexander Henderson: On fiscal 'twenty, six I think Thats big.

Alexander Henderson: Obviously theres a lot of Ifs in terms of what is going to happen from a market place perspective, and when will it come back.

Alexander Henderson: This is the big question right the channel digestion activity in that cycle and does that end in this calendar year, and then that generates a bit more positive.

Alexander Henderson: <unk> for the entire industry coming into January of 2026.

Alexander Henderson: And into our fiscal year.

Christian David Schwab: I personally think that we're still a couple quarters at least, if not a couple, maybe a few quarters through the end of the year here in order to get back to normal. And then once we get back to normal, we should start to see us getting into the $300 million range as a company at that point. Obviously, at that point, we'll start to get some normalized seasonality from Q1, Q3 being our lower quarters and Q2, Q4 being our higher quarters. And so you'll have a slight contraction and expansion in those quarters once we get back to the new normal, but we think that's going to be a few quarters out.

Alexander Henderson: I personally think that we're still a couple of quarters at least.

Alexander Henderson: A couple maybe a few quarters here through the end of the year here in order to get back to normal and then once we get back to normal we should start to see us getting into the three.

Alexander Henderson: $300 million range.

Alexander Henderson: As a company at that point, obviously at that point, we will start to get some normalized seasonality from.

Alexander Henderson: Q1, Q3, being our lower quarters in Q2, Q4, being our higher quarters, and so you'll have a slight contraction and expansion in this quarters. Once we get back to the new normal, but we think thats going to be.

Kevin Rhodes: And then my last question is, should we assume that 135 million plus or minus OPEX run rate is the appropriate run rate? I forget exactly how Edward did it, but to, you know, support and drive a recovery to 300 million and 1.2 billion in revenue, is that the right OPEX number we should be assuming that when we do get there? Yeah.

Alexander Henderson: A few quarters now.

Speaker Change: Great and then my last question is.

Alexander Henderson: Should we assume that the $135 million plus or minus.

Alexander Henderson: Opex run rate is the appropriate run rate.

Alexander Henderson: I forget exactly how Edwards.

Alexander Henderson: But.

Alexander Henderson: But two to.

Alexander Henderson: Support and drive recovery to $300 million of one 2 billion in revenue is that the right Opex number we should be assuming.

Alexander Henderson: Ed when we do get there you'll still be running at plus or minus yes, I think so I think that what we're looking at in Q4. It right. It's just a pocket in time and there are other quarters that have for instance, the.

Kevin Rhodes: Yeah, I mean, I think, I mean, so I think that what we're looking at in Q4, right, it's just a pocket in time, and there are other quarters that have, for instance, other events in them that will make that OpEx, you know, kind of ebb and flow. We will have, for instance, merit increases coming in at some point in the future, and some other expenses that come in in the future. But for now, I would say that's the expected run rate for the current quarter.

Ed: Other events, and then that will make that opex kind of ebb and flow. We will have for instance, merit increases coming in at some point in the future and some other expenses that come in in the future, but for now I would say that's the expected run rate.

Alexander Henderson: For the current quarter.

Christian David Schwab: Okay, fantastic. Thank you.

Speaker Change: Okay fantastic. Thank you okay.

Edward B. Meyercord: Thank you. This does conclude the question and answer session for today's program. I'd like to hand the program back to Ed Meyercord for any further remarks.

Speaker Change: Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to admire court for any further remarks.

Edward B. Meyercord: Okay, thank you. And we appreciate all the questions. And the time and interest in Xtreme for everybody participating in the call. I also want to shout out to our, we have a lot of employees joining in here, customers, and partners for all of the work and especially the engagement last week and Connect. We're going through a challenging period here. In terms of the rebound, I would say we're excited about the rebound and the return to normalcy in the industry and our position and what we're gonna be able to do. So thank you all. Thank you for, thanks for participating. I look forward to seeing you on the road.

Speaker Change: Yes.

Admirer Court: Okay. Thank you and we appreciate all the questions.

Speaker Change: <unk>.

Stanley Kovler: At the time and interest in extreme for everybody participating in the call.

Speaker Change: I also want to shout out to our.

Speaker Change: Sure.

Speaker Change: We have a lot of employees joining in here customers and partners.

Speaker Change: Four.

Speaker Change: All of the work and especially the engagement last week and connect.

Speaker Change: Where.

Speaker Change: We're going through.

Speaker Change: A challenging period here.

Speaker Change: In terms of the rebound I would say we are excited about.

Speaker Change: Rebounding and.

Speaker Change: And I would say the return to normalcy.

Speaker Change: In the industry and our position and what we're going to be able to do.

Speaker Change: So.

Speaker Change: Thank you all thank you for thanks for participating and.

Speaker Change: We look forward to seeing you on the road.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Speaker Change: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Okay.