Q1 2025 Extreme Networks Inc Earnings Call
and the other one.
Speaker Change: One on your telephone you will then hear an automated message advising your hand this waste to withdraw your question simply press Star. One again, please be advised that today's conference is being recorded I would now like to turn the conference over to the Vice President of corporate development and Investor Relations Stan cough.
Sure.
Stan cough: Thank you Carmen good morning, and welcome to extreme networks first quarter fiscal year 2025 earnings conference call.
Stan cough: With me today are extreme networks', president and CEO admire cord.
Stan cough: <unk> EVP and CFO, Kevin Rhodes, we just distributed a press release and filed an 8-K detailing extremes financial results for the quarter for your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website at extreme Networks' Dot com along.
Stan cough: With our earnings presentation.
Stan cough: Today's call and our discussion may include certain forward looking statements based on our current expectations about extremes future business financial and operational results growth expectations and strategies, our financial disclosures on this call will be on a non-GAAP basis, unless stated otherwise we caution you not to put undue.
Stan cough: Reliance on these forward looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements.
Stan cough: These risks are described in our risk factors in the 10-K report for the period ended June 32024 filed with the SEC.
Any forward looking statements made on this call may reflect our analysis as of today and.
Stan cough: And we have no plans or duty to update them, except as required by law are.
Stan cough: A reconciliation of our GAAP to non-GAAP results can be found in the press release and financial presentation.
Speaker Change: Following our prepared remarks, we will take questions and now I will turn the call over to extremes, president and CEO admire cord.
admire cord: Thank you Stan and thank you all for joining us this morning.
admire cord: Our results for the first quarter. We're ahead of plan and reflect what we believe are the early stages of a broad networking market recovery.
admire cord: We also benefited from higher new logo win rates and a few large projects that closed earlier than anticipated.
This resulted in sequential growth in what is usually a down quarter. We expect the return of market demand to continue in the second quarter as our funnel of opportunities is growing.
admire cord: SaaS AOR grew 23% year over year, demonstrating the value and stickiness of our cloud offering.
admire cord: The differentiation of our enterprise campus solution is the primary driver of our new logo expansion.
admire cord: The combination of our cloud management with integrated AI and security capabilities campus fabric licensing simplicity and number one ranked service.
admire cord: Our significant competitive advantages for extreme.
admire cord: Only enterprise player that brings end to end solution from the campus data center to the edge across the wide area network from one cloud.
admire cord: We significantly de risked enterprise customer migration to modern networking infrastructure and offer unmatched Premier services.
admire cord: Just to ensure customers get the most out of their investment with extreme.
admire cord: We have the most simple resilient and secure enterprise networking solution in the industry. Our end to end zero touch provisioning enabled by our campus network fabric is unrivaled by any of our competitors. We eliminate the time intensive process of configuring virtual lans to deliver services at the edge.
admire cord: The network.
Our network fabric also reduces the risk of cyber attacks by enabling granular micro segmentation, eliminating lateral movement within campus networks and significantly limiting the blast radius of attacks.
admire cord: When customers see the security benefits of our campus fabric our win rate drastically increases.
admire cord: And finally, our campus fabric offers unmatched resiliency and sub second convergence.
admire cord: This means zero downtime during upgrades or maintenance the network is unbreakable because it heals itself, which means end users never experienced an interruption.
admire cord: None of our competitors can match. This in fact sub second convergence convergence with the biggest reason we want a large fortune 100 manufacturing company this quarter, which is slated to be one of the most significant deals in extremes history.
admire cord: This week, we extended our security footprint with the availability of extreme cloud Universal Zero Trust network access, which combines our very mature network access control solution with our zero Trust remote application access in a single easy to.
admire cord: To use SaaS offering.
admire cord: The only networking vendor to offer a single policy engine for our cloud based <unk> and <unk>.
admire cord: This helps boost IC team productivity and reduced troubleshooting time.
admire cord: This quarter, we reinforced our position as an early adopter of the most innovative technology coming from our chipset vendor.
admire cord: We continue to set new standards for innovation and high performance connectivity are the first and only player shipping enterprise grade Wi Fi access points Wi Fi seven deliver substantial benefits, including lower latency enhanced capacity better data throughput and reliability. It has crossed the <unk>.
admire cord: Chasm of mission critical applications.
admire cord: <unk> for <unk> 'twenty is being driven from performance improvements across high density environments and use cases like augmented reality and virtual reality for K and 8-K streaming real time analytics and automation will continue to expand our Wi Fi seven portfolio over the coming.
admire cord: Months.
admire cord: Finally, our co our co pilot Aif solution is critical for large retailers universities manufacturers and health care facilities to identify network issues and detect anomalies before they impact uptime or business continuity. It provides proactive.
admire cord: Recommendations on how to remediate issues, which helps save customers time and money associated with day to day network management.
admire cord: This quarter, we have wins at both the National Institutes for quantum science and technology and the photon Science Innovation Center in Japan.
admire cord: Leveraging extremes universal switches and fabric connect they built large scale research facilities with a network that enables users to easily and securely access highly sensitive data and resources.
admire cord: We recently displaced a large competitor at Texas Tech University, where we upgraded their campus data center and edge network with extremes Universal hardware extreme cloud IQ and campus fabric.
admire cord: University benefits from end to end simplified management and enhanced security, which helps them meet the growing demands for online resources testing and classroom technology.
admire cord: 2007, NFL teams, including new deployments with the La Chargers, Minnesota Vikings Green Bay Packers in Houston Texans are leveraging extremes of Wi Fi six E extreme cloud.
admire cord: And business insights for venues to deliver seamless connectivity across stadiums and practice facilities 2024 marks our <unk> consecutive season as the league's official provider of Wi Fi solutions and Wi Fi analytics.
admire cord: Finally, we just placed our largest competitor and a deal with one of the chief clinical hospitals.
admire cord: In the Netherlands Heartland in <unk> Centrum. This hospital plans to refresh refresh its aging infrastructure to a more modern cloud based network and extend the network to one of the new buildings on its campus and ideal use case for our campus fabric.
admire cord: In addition to our technology innovation, we're starting to get traction and seeing positive momentum with two new commercial models. We've been working on for the past 18 months extreme subscription private offer gives us the flexibility to be more aggressive in supporting service providers and large customers with scalable technology and flex.
admire cord: <unk> pricing models.
admire cord: We closed our first transactions this quarter, which included a major European retailer and a fortune 100 company.
Our managed services platform is also resonating we had 32 MSP partners at the end of the first quarter up from 27% in Q4 and consumption billings doubled sequentially.
admire cord: Partners Love the flexibility of this unique consumption based billing model and portable licensing no one else in the industry offers this level of simplicity and licensing economics.
admire cord: Turning to guidance, we expect continued sequential growth in Q2 based on the size and quality of our funnel.
admire cord: We anticipate further market share gains and revenue growth for the full year.
admire cord: And we expect this growth to be accompanied by increased margins and cash flow with that I'd like to turn the call over to our CFO, Kevin Rhodes to walk us through the results and guidance.
Kevin Rhodes: Thank you Ed.
Kevin Rhodes: So revenue upside in the first quarter, coupled with the sequential improvement in gross margin demonstrated the operating leverage in our model.
Kevin Rhodes: We achieved earnings per share of <unk> 17.
Kevin Rhodes: Which exceeded the midpoint of our initial outlook by five.
Kevin Rhodes: It exceeded the high end of our guidance range.
Speaker Change: Sure demand trends continue to improve gradually as we saw in the quarter.
Speaker Change: First quarter revenue of $269 2 million grew 5% sequentially based on continued recovery in product sales.
Speaker Change: Subscription and support contracts.
Speaker Change: On a geographic basis Americas revenue grew double digit sequentially this quarter with strength across North America.
Speaker Change: APAC also grew sequentially and year over year.
Speaker Change: Protracted recovery in EMEA reflects gradual recovery in government spending which has been the case for several quarters.
Speaker Change: We continue to compete well in the region. However.
Speaker Change: And we are winning our fair share of opportunities.
Speaker Change: Product revenue of $162 3 million.
Speaker Change: <unk> grew 6% sequentially the sequential improvement reflects stronger growth in data center and campus switching and our wireless revenue was consistent with the prior two quarters.
Overall bookings trends were in line with our revenue during the quarter and product backlog was once again within our expected range.
Speaker Change: As we continue to gain share with new customers.
Speaker Change: Seven customers in total spent over $1 million.
Speaker Change: An extreme solutions this quarter.
Speaker Change: Looking at our customer segments, we are seeing a more robust recovery in the middle market, where we continue to see share gains and net new customer additions.
Speaker Change: Total.
Speaker Change: Total subscription and support revenue was $107 million.
Speaker Change: Up 3% sequentially.
Speaker Change: Recurring revenue growth, that's been driven by the strength of our cloud subscription revenue and sequential growth in support and services revenue.
Speaker Change: Total recurring revenue was 38% in the first quarter revenue and is a highly visible and predictable revenue streams for our business.
Speaker Change: Our subscription deferred revenue was up 19% year over year.
Speaker Change: <unk> hundred $82 million.
Speaker Change: And our total deferred revenue was $577 million.
Speaker Change: Up 10% year over year.
We expect subscription and support revenue.
To continue to grow throughout the rest of this fiscal year.
Speaker Change: Gross margin moved up again to 63, 7% up another 20 basis points sequentially.
Speaker Change: A combination of higher product revenue to cover fixed overhead costs.
Speaker Change: More capable product mix drove the better sequential results.
Speaker Change: We expect our gross margin to remain in a similar range or better throughout fiscal 2025.
Speaker Change: First quarter operating expenses were $138 million up $10 million sequentially and down $15 million from the year ago quarter.
Speaker Change: We continue to focus on driving improvement in our operating margin and higher profitability from that for the year.
Speaker Change: We expect operating expenses to increase to a range of $143 million to $147 million per quarter throughout the rest of the year along with the recovery in our business.
Speaker Change: non-GAAP operating profit for the first quarter was $33 5 million.
Speaker Change: Our 12, 4% of revenue in first quarter EPS was <unk> 17.
Speaker Change: All were above our expected ranges.
Speaker Change: We ended the quarter with $159 5 million in cash and net debt of $28 million.
Speaker Change: The $12 million of free cash flow in the quarter reflects higher revenue and solid profitability.
Speaker Change: We expect a continued recovery in cash flow in fiscal 2025, as we grow revenue and improve profitability and sell off the inventory we have on hand.
Speaker Change: Now turning to guidance.
Speaker Change: We are encouraged by the level of it improving customer and new logo activity, we are seeing which should bode well for us heading into the second quarter and the rest of the year.
Speaker Change: So the second quarter, we expect guidance as follows.
Speaker Change: Revenue to be in a range of $273 million to $283 million.
Speaker Change: Gross margin to be in a range of 63% to 64%.
Speaker Change: Operating margin to be in a range of 11, 3% to 13, 4%.
Speaker Change: And earnings per share to be in a range of 16 to 20.
Speaker Change: Our fully diluted share count is expected to be around 133 million shares.
Speaker Change: For the full fiscal year 'twenty five we now expect revenue to be in a range of $1 billion $117 million to $1 billion $137 million.
Speaker Change: And with that I'll now pass.
Speaker Change: Just a call back over to the operator to begin the question and answer session.
Speaker Change: Thank you so much NFL reminder, to ask a question simply press star one one to get into queue and wait for your name to be announced to withdraw your question Press Star One again, one moment for our first question.
Speaker Change: And he comes from the line of Mike Genovese with Rosenblatt Securities. Please proceed.
Okay.
Speaker Change: Great. Thanks very much.
Mike Genovese: Got it can you just.
Mike Genovese: Great Joy of the U S versus EMEA it sounds like the U S.
Mike Genovese: Obviously, driving driving things here, but just kind of lay out.
Mike Genovese: How the U S recovery is progressing and whether the recovery in Europe has started I just wanted to.
Mike Genovese: Get the clear message on what's going on by by geography. Thank you.
Mike Genovese: Thanks. Thanks, Mike This is Ed and I will jump in and then Kevin and Stan feel free to follow up.
Speaker Change: Youre, absolutely right, Mike that you use.
Speaker Change: Is leading the charge in terms of the recovery.
Speaker Change: And we were seeing.
Speaker Change: We're encouraged by what we're seeing in Europe, but we still have some macro trends that are causing project delays.
Speaker Change: And I think that's what gives us caution as we look out in Q2 with our guide.
We're seeing Germany.
It doesn't have an official budget yet and.
Speaker Change: Our coalition.
Speaker Change: With a very narrow majority there we have a new government in the U K.
Speaker Change: Putting together its budget I think they are presenting the budget today as we speak.
Speaker Change: And so.
Speaker Change: With a lot of our business being in the public sector. What it means is that some of our projects, which are going to happen are being delayed.
Speaker Change: So that's that's what we see and we've seen a lot of as we look at our funnel. We're confident in the funnel of opportunities we have but we are seeing a lot of important projects.
Speaker Change: Particularly in EMEA.
Speaker Change: Slide into the second half of our fiscal year.
Speaker Change: And Thats the impact.
Speaker Change: I don't know, Kevin or Steve if you want to add anything else.
I think youre right were seeing some strength in North America, which is good obviously as interest rates come down Thats, starting to help capex spending in North America, and we see some improvement here on it spending in North America, but EMEA is the one that would help us greatly in the second half and we do believe.
Speaker Change: In the second half.
Speaker Change: Great very helpful.
And then my other question.
Speaker Change: Just in terms of.
Speaker Change: Talk to us about share gain versus.
Speaker Change: The Cisco and Juniper the hps the world.
Speaker Change: What metrics are you looking at.
Speaker Change: What are you seeing out there who do you think youre gaining share from right now.
Speaker Change: Just any comments about the competitive environment and share gains would be helpful. Thank you.
Speaker Change: Sure and I think Mike the way to think about share gain it's just the way to think about the distribution of the industry and competitive share. So first and foremost we are taking share from.
Speaker Change: Cisco.
Speaker Change: And then Youll see.
Speaker Change: And then we're also some of the wins, we referenced are from from Juniper and HPE, but I think.
Speaker Change: The way to think about it is commensurate with.
Speaker Change: Share positions with most coming from Cisco I will say that we were anticipating with the closing of the HPE Juniper deal.
They have some tough decisions to make.
Speaker Change: They have tough news to break to the market.
Speaker Change: In terms of.
Speaker Change: They are they are roadmaps, what it means for stranding investments for customers what does it mean for partners in the new landscape.
Speaker Change: And we would expect that disruption to create some opportunities for us, but we don't expect that to truly take place until that transaction closes. The reason why we are winning is we have.
Speaker Change: I mentioned the <unk>.
Speaker Change: <unk> and cloud capability from the campus data center.
Speaker Change: Through aggregation.
Speaker Change: Through the edge out to the wireless edge of the network.
Speaker Change: Across the wide area network on one cloud and Thats one of the differences that we bring is we have the complete visibility of the entire network.
Speaker Change: One cloud.
Speaker Change: The second thing we do is we combine that with our unique campus.
Speaker Change: Fabric technology.
Speaker Change: Every single player, we will say that they have a campus fabric technology, they'll say Oh, you can check the box, but they have very different technology than ours ours is SPV. There is IP based their fabrics are not designed for campus and all the things that go on in the campus. So.
Speaker Change: And one of the I mentioned, the fortune 100 win.
Speaker Change: We were able to two.
Speaker Change: Demonstrate sub second conversions, which is when you make a change to the network or you add a switch or if you take down.
Speaker Change: A link.
Speaker Change: It disrupts the network and in our case, we have a unique convergence capabilities with our fabric that bring unmatched resiliency. This is something that really mattered to that customer and quite frankly, our largest competitors.
Speaker Change: Could not replicate this capability.
Speaker Change: Trying for two weeks on the customer's site.
Speaker Change: So it was it was a big deal and very helpful to us we talk about hyper segmentation and the ability to create networks within our physical network with our fabric.
We can do that very easily.
Speaker Change: And that means a lot to our that means a lot to customers and our competitors can't replicate that capability, but we talk about zero touch provisioning one of the healthcare clients I mentioned is adding a site.
Speaker Change: When you turn up a new site and you start turning up switches and turning up access points and they order they automatically connect to the fabric and the automatic request services.
Speaker Change: It means your teams don't have to build services out to every port on every switch that youre building in the new environment. These are massive savings and time and energy security resiliency and quite frankly, we're the only player that has.
Speaker Change: This campus fabric that brings all of these advantages and so the combination of fabric and cloud.
Speaker Change: Is what's allowing us to win out in the marketplace today and that distribution is consistent as I mentioned before with kind of competitive share and it could change.
Speaker Change: When we see the closing of HP juniper.
Speaker Change: Fantastic. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Eric <unk> with Lake Street Capital markets. Please proceed.
Speaker Change: Yes.
Speaker Change: Took note of your comment regarding.
Speaker Change: Robust demand or better recovery in middle market and just wondering if that is kind of a near term event and does the full year outlook anticipate or recovery in more of the enterprise the larger customer segment.
Speaker Change: Thanks, Eric Thanks for the question and the answer is yes.
Speaker Change: Yes, we are anticipating a return of more larger projects.
Speaker Change: And our.
Speaker Change: Yes.
Speaker Change: Our intelligence around that answer is all based on opportunities we have in the funnel and the competence of the team as we're scrubbing the timing of projects.
Speaker Change: Okay and then.
Speaker Change: So talked about still being seeing challenges in the European market, particularly on the public sector, Germany and U K you mentioned.
Speaker Change: Curious to know what is the I guess, the lag time from having a budget to that trickling down to actually impacting procurement processes that would balance out with the guide that you have.
Speaker Change: Yes, Eric it's not it's not the same across the board not all government agencies are created equal and.
Speaker Change: In some cases.
Speaker Change: I would say in all cases networks.
Speaker Change: They have to modernize their networking technology and they have to bring in.
Speaker Change: Modern networking technology, along with modern security capabilities.
Speaker Change: And a new modern tools like AI tools, they have to make the investments. It's just a question of timing and so.
Speaker Change: In the case of Germany, they have a temporary budget.
Speaker Change: By the end of November they are expected to have.
Speaker Change: Completed their budget, which should release funds, we'll see how that happens and how that plays out.
Speaker Change: The Labour government in the U K is coming out with their budget.
Speaker Change: Their plan their agenda is to spend.
Speaker Change: And that means spending on infrastructure.
Speaker Change: Their new fiscal year starts on March 1st, but we would expect the purse strings to be released prior to that.
Speaker Change: Got it thanks for taking my questions.
Speaker Change: Thank you so much.
Speaker Change: Our next question comes from the line of Dave Kang with B Riley. Please proceed.
Dave Kang: Yes, good morning.
Dave Kang: First question is regarding <unk>.
Dave Kang: Some of your competitors have been touting their.
Capability just wanted to.
Dave Kang: We get an update.
Dave Kang: On your strategy AI strategy.
Speaker Change: Yes, Dave Thanks.
Speaker Change: The the AI that we would call first generation AI.
Speaker Change: Some people would call it precision AI around.
Our ability to harness machine learning to provide intelligent insights.
Speaker Change: Two two customers and a networking environment and.
Speaker Change: We are.
Speaker Change: We are out with our co pilot product I mentioned and so in my remarks, some of the capabilities.
Speaker Change: Looking at anomalous.
Speaker Change: Network traffic unusual behavior in the network predicting network failures, suggesting.
Speaker Change: Suggesting.
Speaker Change: Fixes or remedies or remediation to networking issues. These are the kinds of things that are falling into the category of AI ops.
Speaker Change: And we have our AI ops capabilities.
Speaker Change: There is another one of our larger competitors that has really done well taking share leveraging and marketing AI ops, which we would call first generation AI ops, and then I would say stay tuned we're going to be making some announcements in the future.
Speaker Change: <unk>.
We've talked about platforms and we've talked about generative AI.
AI experts and the idea of building AI into a platform that.
That effectively you interact with it every step of your networking journey, including all the different.
Types of personas that interface with the network.
Speaker Change: At extreme we are using AI internally, we have a lot of different applications in terms of sales assistance in accessing information.
Speaker Change: We're using it in marketing we're using it in service, we've seen a lot of efficiency and service.
It's more internal what youre going to see and stay tuned and what Youll hear about is how we are bringing.
Speaker Change: Generative AI and kind of this next generation AI into our platform that will create a very different experience for users.
Speaker Change: I'm going to hold right here, because I don't want to front run any future announcements, but.
Speaker Change: Suffice it to say that.
Our AI partners, our AWS and Microsoft we have been doing a lot of work with them.
And we have.
Speaker Change: A very innovative solution to provide very accurate.
Speaker Change: Information knowledge around its dream information about your network.
Speaker Change: And enhanced capabilities as far as visibility reporting et cetera. So fundamentally we think it's going to change in networking experience.
Speaker Change: Got it and my follow up is.
Speaker Change: Regarding.
Speaker Change: You have some some.
Speaker Change: You have a table regarding major verticals just wanted to.
Speaker Change: Get an update on your major vertical the health of your major verticals, starting with government education.
Speaker Change: Yes.
Speaker Change: Maybe Ed I'll comment and Theyre very simple there is no major shift.
Speaker Change: And what we've seen.
Speaker Change: This quarter versus last quarter. So we just decided David at this point, it's basically the same percentages that we've showed over the last several quarters.
Speaker Change: So.
Speaker Change: We'll probably update or more annually at this point as opposed to quarterly but just curious.
Speaker Change: Got it thank you sure.
Speaker Change: Thank you one moment for our next question. Please.
Speaker Change: And he is from the line of Timothy Horan with Oppenheimer. Please proceed.
Timothy Horan: Thanks, guys do you have a sense of when the industry gets kind of a normal run rate or what is the correct kind of upgrade rate for the industry. Do you think budgets are still being spent on AI or are they freeing backup the upgrade networks at this point and I guess.
Speaker Change: Related to the <unk>.
Speaker Change: I'm, an enterprise why am I going to upgrade now why not maybe wait a year or two for the AI platforms to be much more robust score <unk>.
Speaker Change: <unk> your seven to be much more mature I guess whats the pit stop right now versus waiting a year or two from now thanks.
Speaker Change: Thanks, Tim.
Speaker Change: Yes.
Speaker Change: Right now what we're seeing in the marketplace is this convergence of networking and security and the presence of both kind of the Gen. One AI tools for AI ops, and managing the network and the new capabilities from AI.
Speaker Change: That are coming out.
Yes underlying security.
Speaker Change: Networking as a baseline for security there is security has so many different elements to it and whether or not youre trying to solve for remote workers, who are trying to solve for campus either way you have to.
Speaker Change: You've got to solve for security so.
Speaker Change: Whether or not that's a single vendor or multi vendor theres not a single vendor that really provides the best in class solutions across the entire security landscape.
Speaker Change: And so we're picking our spots with how we partner with kind of the full security stack if you will.
Speaker Change: And but what the.
Speaker Change: I don't think customers really have a choice today to just decide to wait so we're.
Speaker Change: Other than budgetary constraints, we're seeing people moving forward is it relates to sort of as it relates to future AI and what youre hearing about platforms all of the existing networks and all of the existing customer environments.
Speaker Change: Just become part of the platform and will flow into and be beneficiaries of the platform. So there's not really a <unk>.
Speaker Change: Net working decision.
Speaker Change: Or investment decision and our minds from a networking perspective that has to be made from a timing perspective, because all of your investments today will flow naturally into.
Speaker Change: The new platform that we're talking about.
Speaker Change: Because your platform is backward compatible and will work with <unk>.
Speaker Change: Does anyone else out there have any capability.
Speaker Change: No not a networking now.
Speaker Change: And so when do you think what is the correct run rate for the industry are we below trend above trend.
Speaker Change: Think what people are saying and look I mean, you have to listen to the larger players as well.
Speaker Change: Yes.
Speaker Change: Coming into our fiscal 'twenty five.
Speaker Change: We were expecting the rebound we see a lot of encouragement from what we call run rate business, which is just that our channel.
Speaker Change: Contract doing business, placing orders through distribution.
Speaker Change: These are smaller orders, but we have seen.
Speaker Change: Those volumes start to tick up which is kind of an indication for us of overall activity I mentioned the projects that we've seen we've seen.
We were encouraged by a lot of projects that we saw in the second quarter for this year, we have seen some of these projects slip out into next year. So our.
Speaker Change: Our view on this is that the first half of 'twenty five.
Speaker Change: Is.
As when we will see a more healthy recovery and we're expecting to see kind of budgets returning to some of these governments.
Speaker Change: This is consistent with what larger competitors are saying in the market.
Speaker Change: Thank you.
Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question simply press star one one to get into queue.
Speaker Change: Our next question is from Christian Schwab with Craig Hallum. Please proceed.
Christian Schwab: Hey, Congrats Ed in.
Christian Schwab: And Kevin on good quarter.
Speaker Change: <unk> quarterly performance.
Speaker Change: As we look at it.
Speaker Change: <unk> product positioning and gaining share middle market recovery positive run rate budget resolution and a b.
Speaker Change: Yeah.
Speaker Change: It seems to me that you know as we get into fiscal year 'twenty six someone on the lines of your comment to the last question.
Speaker Change: We should be operating at kind of the 10% to 12% top line CAGR that you think this business in a normalized market should be running that is that fair.
Speaker Change: Yeah, Kevin I'll, let you jump in and take that one.
Kevin Rhodes: Christian I think we will.
Speaker Change: I would say that obviously coming out of that the challenges of 2024 right. We're starting to get back to we're not quite there with <unk> with a full on full scale.
Kevin Rhodes: It spending coming back yet with these budgets.
Kevin Rhodes: And then in the wake and whatnot, but we do believe that when things come back and then when.
Kevin Rhodes: When people are spending normally we do believe that our opportunity here is to hit double digits again from a growth perspective that still are a long term view and we think that the products.
Kevin Rhodes: Sure.
Kevin Rhodes: Gross rate went to probably be in the high single digits, but then we would drive more subscription and support revenue at a higher percentage of growth probably in the low teens that would blend you out to bid.
Kevin Rhodes: Double digit number although that did you.
Kevin Rhodes: That's what we're thinking.
Speaker Change: Great and then on a follow up to that question.
Should the world and the economy hang in here.
Tradable basis from here.
Speaker Change: I guess, it's just math, but.
Speaker Change: You know at a 10% top line growth.
Speaker Change: In fiscal year 2007.
Speaker Change: Seem heroic to us for you to achieve your long term target.
Speaker Change: Approaching 20% operating margins is that fair that's right Christian I mean, I think we will continue to see leverage in our model, we saw little bit of that leverage you're just in the first quarter.
Speaker Change: <unk> identified just the overage on the revenue fell to the bottom line. We think we will continue to see that operating leverage tick up over time.
Speaker Change: And that we could get to an operating margin of around 20%, but we do believe that by the way even by the fourth quarter of this year, we're going to get up.
Speaker Change: Cruise sequentially throughout the year and our fourth quarter, we're not going to quite be at 20%. We're certainly going to continue to drive higher gross operating margins throughout the rest of the year.
Speaker Change: Great and then lastly, I'll just comment that it was hard not to see your logo inside the dugouts World series yesterday, congrats on that as well.
Speaker Change: Great question.
Speaker Change: Thank you my moment for our next question.
Speaker Change: And he is from the line of Ryan Koontz with Needham <unk> Company. Please proceed.
Ryan Koontz: Good morning, gentlemen, thanks for the questions I was hoping you could update us on some of the progress from your go to market motion changes you've made over the past few quarters.
Ryan Koontz: It impacts you're seeing on bookings and pipeline from from any any changes you've made in your sales efforts.
Speaker Change: Thanks Ryan.
Speaker Change: Yes, we have made changes from a year ago, we have.
Speaker Change: Norman Rice as our Chief commercial officer.
Speaker Change: With sales.
Speaker Change: And the sales organization reporting up to him and channel and we have made.
Speaker Change: A lot of changes there.
Speaker Change: Importantly, we've recruited a new chief marketing officer, and we've made a lot of changes.
Speaker Change: Within that organization and I would say we have much better alignment we've gotten a lot more detailed in terms of very specific selling motions.
Speaker Change: About our differentiation as it relates to end to end cloud and fabric.
How we bring that to bear in the marketplace.
Speaker Change: Have some upcoming disruptions.
Speaker Change: The market.
Speaker Change: As it relates to number two and number three of our competitors that are going to create some opportunities that we're going to be going after.
Speaker Change: And I would say, we're going to be very organized and we're doing it and what we're calling.
Speaker Change: Marketing pods, where we have very specific marketing motions and sale.
Speaker Change: Our sales Playbooks, if you will in different parts of the world and now this year, what's different from last year is that our teams have very specific targets.
Speaker Change: For not just this quarter and not just next quarter, but theyre targeting funnel funnel creation in future quarters looking out further than we have before and we feel confident with our plays.
Speaker Change: With our differentiation that we're going to be able to build that funnel. The other element to that is how we convert and I mentioned in my remarks that we're seeing higher conversion rates.
Speaker Change: And that's also giving us confidence so in general I think the changes are leading to our ability to generate higher quality higher volume and higher quality funnel.
Speaker Change: It's a combination of our technology differentiation as well as our go to market motions and.
Speaker Change: And some of the channel incentives that were putting in place.
Speaker Change: And we're seeing higher conversion rates and I think that has a lot to do with the changes that we've made.
Speaker Change: And the sales organization.
Speaker Change: Great. Thank you for that and just a quick follow up.
Speaker Change: Here your competitive differentiation in your gross margins, obviously on a strong trajectory here, but how would you characterize the overall pricing environment right now versus your top tier competitors.
Speaker Change: We've been obviously when you look at our gross margin we've been we've been hanging in there.
Speaker Change: Yes.
Speaker Change: We've been holding the line.
Speaker Change: Yes.
Speaker Change: Our discounting this quarter was actually better.
Speaker Change: We hear from that from our distributors.
Speaker Change: Our inventory in the channel is.
Speaker Change: Maybe in better shape than some of our larger competitors, which says that there is more inventory to move.
It's always been the case in our industry that we've seen certain situations or certain markets where.
Speaker Change: It looks like larger competitors are doing something on economic I think that's just kind of the nature of the Beast.
Speaker Change: But.
Speaker Change: Yes, there is.
Speaker Change: I think I would expect that extreme is maybe a little further out of the woods as far as that inventory issue than maybe some of our competitors based on feedback from distribution.
Speaker Change: As you look at it.
Speaker Change: On the larger Sir you said, they can behave irrationally youre seeing a lot of that with this inventory there I think it's I mean I.
Speaker Change: That's a normal part of the industry dependent depending on the geo depending on the timing depending on the.
Speaker Change: Yeah.
Speaker Change: Depending on strategies.
Speaker Change: If we have some really large wins in certain markets.
Speaker Change: Maybe inventory builds up maybe theres a lot of pressure and maybe they decided they might want to make a statement.
Speaker Change: But given the extreme is a 5% market share 6% market share player.
Speaker Change: We tend to fly below the radar and we don't quite get as much attention.
Speaker Change: As the larger players to going back and forth with each other.
Speaker Change: Super helpful. Thanks for the questions.
Speaker Change: Thank you.
Speaker Change: One moment for our last question. Please.
It comes from the line of David <unk> with UBS. Please proceed.
Speaker Change: Great question. This is Brian on for David.
Speaker Change: So first can you provide detail on the projects that closed earlier can you quantify the revenue and gross margin impact of those projects that closed earlier than expected then I have a follow up thanks.
Speaker Change: Yes.
Speaker Change: You want to take that.
Speaker Change: Yes, I would.
Speaker Change: First of all I would say gross margin profile of anything close to a little earlier than we expected I would say it was very very normal for us I wouldn't say.
Speaker Change: Those projects kicked us up sequentially quarter over quarter and that's the reason why we went up.
Speaker Change: That would be a false narrative.
Speaker Change: To be the case I would say, we just had a couple of deals in our pipeline that we had anticipated closing in Q2 and in fact actually closed in Q1, that's where we got a little bit extra revenue, but the margin profile was very similar to normal.
Speaker Change: In terms of size.
Speaker Change: We had 269, obviously than we were at the midpoint of our range at <unk> 60, and so and at the high point of our range was 265, so call it $4 million to $9 million, a little bit more than we expected.
Yeah.
Speaker Change: Got it that's helpful and then for my follow up.
Speaker Change: I am curious about the balance sheet. So at the end of last year receivables outstanding was highly concentrated at one customer.
Speaker Change: Where would you say the balance is today and what is the outlook for receivables to come down in the coming quarters. Thanks, sure I'd say it from a balance sheet perspective first of all.
Speaker Change: We've got good.
Speaker Change: DSO I think our DSO typically ranges in the 35 to 40 days range. So we are not concerned at all about what we have from a receivables perspective.
Standing right now we did have a little concentration last year to one of our larger distribution partners. Just a reminder, about.
Speaker Change: 80% of our revenue probably comes from about 10 to 15 large distributors. So that's that's not abnormal for us.
Speaker Change: Our quarter over quarter, we had $90 million of receivable last quarter, we had $97 million of receivables this quarter I wouldn't call. It anything different from a normal I think it's I think it's certainly reasonable and we will collect all of that cash.
Speaker Change: On the receivables side, probably within the next 90 days, so we feel great.
Speaker Change: Thank you and I see no further.
Speaker Change: <unk> seen the queue I will turn the call back to admire corn for his closing comments.
Speaker Change: Thank you Carmen and thanks, everybody for participating on the call. We appreciate your interest in extreme.
Speaker Change: We've put up a.
Speaker Change: We put up a strong quarter and as always want to thank.
Speaker Change: Our employees for their hard work and customers and the channel for their partnership.
Speaker Change: And we're really excited about what's to come here in the future.
Speaker Change: This quarter and into 'twenty five.
Speaker Change: And we have some exciting news that I mentioned earlier to stay tuned for on the on.
Speaker Change: On the product front.
Speaker Change: <unk>.
Speaker Change: And.
Speaker Change: Stay tuned for that thanks, everybody and have a good have a great day.
Speaker Change: And thank you for.
Speaker Change: Participating in today's conference and you may now disconnect.
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Speaker Change: We are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during that session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question simply press Star One again, please we advise.
Speaker Change: Today's conference is being recorded I would now like to turn the conference over to the Vice President of corporate development and Investor Relations Stan Koffler.
Stan Koffler: Thank you Carmen good morning, and welcome to extreme networks first quarter fiscal year 2025 earnings conference call.
Stan Koffler: With me today are extreme networks', president and CEO admire cord.
Stan Koffler: <unk> CFO, Kevin Rhodes, we just distributed a press release and filed an 8-K detailing extremes financial results for the quarter for your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website at extreme networks Dot com along with our.
Stan Koffler: Earnings presentation.
Stan Koffler: Today's call and our discussion may include certain forward looking statements based on our current expectations about extremes future business financial and operational results growth expectations and strategies, our financial disclosures on this call will be on a non-GAAP basis, unless stated otherwise we caution you not to put undue.
Stan Koffler: Reliance on these forward looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements.
Stan Koffler: These risks are described in our risk factors in the 10-K report for the period ended June 32024 filed with the SEC.
Stan Koffler: Any forward looking statements made on this call may reflect our analysis as of today and.
Stan Koffler: And we have no plans or duty to update them, except as required by law.
Stan Koffler: A reconciliation of our GAAP to non-GAAP results can be found in the press release and financial presentation.
Stan Koffler: Following our prepared remarks, we will take questions and now I will turn the call over to extremes, president and CEO admire cord.
Speaker Change: Thank you Stan and thank you all for joining us this morning.
Speaker Change: Our results for the first quarter. We're ahead of plan and reflect what we believe are the early stages of a broad networking market recovery.
Speaker Change: We also benefited from higher new logo win rates and a few large projects that closed earlier than anticipated.
Speaker Change: This resulted in sequential growth in what is usually a down quarter. We expect the return of market demand to continue in the second quarter as our funnel of opportunities is growing.
Speaker Change: SaaS AOR grew 23% year over year, demonstrating the value and stickiness of our cloud offering.
Speaker Change: The differentiation of our enterprise campus solution is the primary driver of our new logo expansion.
Speaker Change: The combination of our cloud management with integrated AI and security capabilities campus fabric licensing simplicity and number one ranked service.
Speaker Change: Our significant competitive advantages for extreme where.
Speaker Change: We're the only enterprise player that brings end to end solution from the campus data center to the edge across the wide area network from one cloud.
Speaker Change: We significantly de risk enterprise customer migration to modern networking infrastructure and offer unmatched Premier services.
Speaker Change: To ensure customers get the most out of their investment with extreme.
Speaker Change: We have the most simple resilient and secure enterprise networking solution in the industry. Our end to end zero touch provisioning enabled by our campus network fabric is unrivaled by any of our competitors. We eliminate the time intensive process of configuring virtual lans to deliver services at the edge of that.
Speaker Change: Network.
Speaker Change: Our network fabric also reduces the risk of cyber attacks by enabling granular micro segmentation, eliminating lateral movement within campus networks and significantly limiting the blast radius of attacks.
Speaker Change: When customers see the security benefits of our campus fabric our win rate drastically increases.
Speaker Change: And finally, our campus fabric offers unmatched resiliency and sub second convergence.
Speaker Change: This means zero downtime during upgrades or maintenance the network is unbreakable because it heals itself, which means end users never experienced an interruption.
Speaker Change: None of our competitors can match. This in fact sub second convergence convergence with the biggest reason we want a large fortune 100 manufacturing company this quarter, which is slated to be one of the most significant deals in extremes history.
Speaker Change: This week, we extended our security footprint with the availability of extreme cloud Universal Zero Trust network access, which combines our very mature network access control solution with our zero Trust remote application access in a single easy to.
Speaker Change: To use SaaS offering.
Speaker Change: The only networking vendor to offer a single policy engine for our cloud based <unk> and <unk>.
Speaker Change: This helps boost IC team productivity and reduce troubleshooting time.
Speaker Change: This quarter, we reinforced our position as an early adopter of the most innovative technology coming from our chipset vendor.
We continue to set new standards for innovation and high performance connectivity and are the first and only player shifting enterprise grade Wi Fi access points Wi.
Speaker Change: Wi Fi seven deliver substantial benefits, including lower latency enhanced capacity better data throughput and reliability. It has crossed the chasm of mission critical applications.
Speaker Change: Demand for our <unk> 'twenty is being driven from performance improvements across high density environments and use cases like augmented reality and virtual reality for K and 8-K streaming real time analytics and automation.
Speaker Change: We'll continue to expand our Wi Fi seven portfolio over the coming months.
Speaker Change: Finally, our co our co pilot <unk> solution is critical for large retailers universities manufacturers and health care facilities to identify network issues and detect anomalies before they impact uptime or business continuity. It provides proactive recommendations.
Speaker Change: <unk> on how to remediate issues, which helps save customers time and money associated with day to day network management.
Speaker Change: This quarter, we have wins at both the National Institutes for quantum science and technology and the photon Science Innovation Center in Japan.
Speaker Change: Leveraging extremes universal switches and fabric connect.
Built large scale research facilities with a network that enables users to easily and securely access highly sensitive data and resources.
Speaker Change: We recently displaced the large competitor at Texas Tech University, where we upgraded their campus data center and edge network with extremes Universal hardware extreme cloud IQ and campus fabric.
Speaker Change: The University benefits from end to end simplified management and enhanced security, which helps them meet the growing demands for online resources testing and classroom technology.
Speaker Change: 27, NFL teams, including new deployments with the La Chargers, Minnesota Vikings Green Bay Packers in Houston Texans are leveraging extremes Wi Fi six E extreme cloud.
Speaker Change: And business insights for venues to deliver seamless connectivity across stadiums and practice facilities.
Speaker Change: 24 marks our <unk> consecutive season as the league's official provider of Wi Fi solutions, and Wi Fi analytics.
Speaker Change: Finally, we just placed our largest competitor and a deal with one of the chief clinical hospitals in the Netherlands Heartland in <unk> Centrum. This hospital plans to refresh refresh as to aging infrastructure to a more modern cloud based network and extend the network.
Speaker Change: One of the new buildings on its campus that ideal use case for our campus fabric.
Speaker Change: In addition to our technology innovation, we're starting to get traction and seeing positive momentum with two new commercial models. We've been working on for the past 18 months extreme subscription private offer gives us the flexibility to be more aggressive in supporting service providers and large customers with scalable technology and fled.
Speaker Change: <unk> pricing models.
Speaker Change: We closed our first transactions this quarter, which included a major European retailer and a fortune 100 company.
Speaker Change: Our managed services platform is also resonating we had 32 MSP partners at the end of the first quarter up from 27% in Q4 and consumption billings doubled sequentially.
Speaker Change: Partners Love the flexibility of this unique consumption based billing model and portable licensing no one else in the industry offers this level of simplicity and licensing economics.
Speaker Change: Turning to guidance, we expect continued sequential growth in Q2 based on the size and quality of our funnel.
Speaker Change: We anticipate further market share gains and revenue growth for the full year.
Speaker Change: And we expect this growth to be accompanied by increased margins and cash flow with that I'd like to turn the call over to our CFO, Kevin Rhodes to walk us through the results and guidance.
Kevin Rhodes: Thank you Ed.
Kevin Rhodes: The revenue upside in the first quarter, coupled with the sequential improvement in gross margin demonstrated the operating leverage in our model.
Kevin Rhodes: We achieved earnings per share of <unk> 17.
Kevin Rhodes: Which exceeded the midpoint of our initial outlook by five.
Kevin Rhodes: And exceeded the high end of our guidance range.
Kevin Rhodes: Customer demand trends continue to improve gradually as we saw in the quarter.
Kevin Rhodes: First quarter revenue of $269 $2 million grew 5% sequentially based on continued recovery in product sales and attach subscription and support contracts.
Kevin Rhodes: On a geographic basis Americas revenue grew double digit sequentially this quarter with strength across North America.
Kevin Rhodes: APAC also grew sequentially and year over year.
Kevin Rhodes: The protracted recovery in EMEA.
Kevin Rhodes: <unk> gradual recovery in government spending which has been the case for several quarters.
Kevin Rhodes: We continue to compete well in the region. However.
Kevin Rhodes: And we are winning our fair share of opportunities.
Kevin Rhodes: Product revenue of $162 3 million.
Kevin Rhodes: Grew 6% sequentially the sequential improvement reflects stronger growth in data center and campus switching and our wireless revenue was consistent with the prior two quarters.
Kevin Rhodes: Overall bookings trends were in line with our revenue during the quarter and product backlog was once again within our expected range.
Kevin Rhodes: As we continue to gain share with new customers.
Kevin Rhodes: 27 customers in total spent over $1 million on.
Kevin Rhodes: When extreme solutions this quarter.
Kevin Rhodes: Looking at our customer segments, we are seeing a more robust recovery in the middle market, where we continue to see share gains and net new customer additions.
Kevin Rhodes: Total.
Kevin Rhodes: Total subscription and support revenue was $107 million.
Kevin Rhodes: Up 3% sequentially.
Kevin Rhodes: Reoccurring revenue growth, that's been driven by the strength of our cloud subscription revenue and sequential growth in support and services revenue.
Total recurring revenue was 38% in the first quarter revenue and is a highly visible and predictable revenue stream for our business.
Kevin Rhodes: Our subscription deferred revenue was up 19% year over year.
Kevin Rhodes: <unk> hundred $82 million.
Kevin Rhodes: And our total deferred revenue was $577 million up 10% year over year.
Kevin Rhodes: We expect subscription and support revenue to continue to grow throughout the rest of this fiscal year.
Kevin Rhodes: Gross margin moved up again to 63, 7% up another 20 basis points sequentially.
Kevin Rhodes: Combination of higher product revenue to cover fixed overhead costs and more capable product mix drove the better sequential results.
Kevin Rhodes: We expect our gross margin to remain in a similar range or better throughout fiscal 2025.
Kevin Rhodes: First quarter operating expenses were $138 million up $10 million sequentially and down $15 million from the year ago quarter.
Kevin Rhodes: We continue to focus on driving improvement in our operating margin and higher profitability for the year.
Kevin Rhodes: We expect operating expenses to increase to a range of 143 million to $147 million per quarter throughout the rest of the year along with the recovery in our business.
Kevin Rhodes: non-GAAP operating profit for the first quarter was $33 5 million or.
Kevin Rhodes: Our 12, 4% of revenue in first quarter EPS was <unk> 17.
Kevin Rhodes: All were above our expected range.
Kevin Rhodes: We ended the quarter with $159 $5 million in cash and net debt of $28 million.
Kevin Rhodes: The $12 million of free cash flow in the quarter reflects higher revenue and solid profitability.
Kevin Rhodes: We expect the continued recovery in cash flow in fiscal 2025, as we grow revenue and improve profitability and sell off the inventory we have on hand.
Kevin Rhodes: Now turning to guidance.
Kevin Rhodes: We are encouraged by the level of it improving customer and new logo activity, we are seeing which should bode well for us heading into the second quarter and the rest of the year.
So the second quarter, we expect guidance as follows.
Kevin Rhodes: Revenue to be in a range of $273 million to $283 million.
Kevin Rhodes: Gross margin to be in a range of 63% to 64%.
Kevin Rhodes: Operating margin to be in a range of 11, 3% to 13, 4%.
Kevin Rhodes: And earnings per share to be in a range of 16 to 20.
Kevin Rhodes: Our fully diluted share count is expected to be around 133 million shares.
Kevin Rhodes: For the full fiscal year 'twenty five we now expect revenue to be in a range of $1 billion $117 million to $1 billion $137 million.
Kevin Rhodes: And with that I'll now pass.
Kevin Rhodes: Just a call back over to the operator to begin the question and answer session.
Speaker Change: Thank you so much NFL reminder, to ask a question simply press star one one to get into queue and wait for your name to be announced to withdraw your question Press Star One again, one moment for our first question.
Speaker Change: And he comes from the line of Mike Genovese with Rosenblatt Securities. Please proceed.
Speaker Change: Okay.
Mike Genovese: Great. Thanks very much.
Mike Genovese: Got you.
Mike Genovese: <unk>.
Mike Genovese: Great Joy of the U S versus EMEA it.
Mike Genovese: It sounds like the U S. As you know.
Mike Genovese: Obviously, driving driving things here, but just kind of lay out.
You know how the U S recovery is progressing and whether the recovery in Europe has started I just wanted to.
Mike Genovese: Get the clear message on what's going on by by geography.
Speaker Change: Thanks, Thanks, Mike This is Ed and I'll jump in and then Kevin and Stan feel free to follow up.
Youre, absolutely right, Mike that U S is leading the charge in terms of the recovery.
Speaker Change: And.
Speaker Change: Yes.
We're seeing.
Speaker Change: We're encouraged by what we're seeing in Europe, but we still have some macro trends that are causing project delays. So I think that's what gives us caution as we look out in Q2 with our guide.
Speaker Change: We're seeing Germany.
It doesn't have an official budget yet and.
Speaker Change: Our coalition.
Speaker Change: With a very narrow majority there.
Speaker Change: We have a new government in the UK.
Speaker Change: Putting together its budget I think theyre presenting the budget today as we speak.
Speaker Change: And so.
Speaker Change: With a lot of our business being in the public sector. What it means is that some of our projects, which are going to happen are being delayed and so that's what we see and we've seen a lot of as we look at our funnel. We're confident in the funnel of opportunities we have but we are seeing a lot of <unk>.
Speaker Change: <unk> projects.
Speaker Change: Particularly in EMEA.
Speaker Change: Slide into the second half of our fiscal year.
Speaker Change: And Thats the impact.
Speaker Change: I don't know, Kevin or Steve if you want to add anything else.
Speaker Change: I think you are right.
Speaker Change: We're seeing some strength in North America, which is good obviously as interest rates come down Thats, starting to help capex spending in North America, and we see some improvement here on it spending in North America, but EMEA is the one that would help us greatly in the second half and we do believe in a second.
Speaker Change: Hospitals.
Speaker Change: Great that's very helpful.
Speaker Change: And then my other question.
Speaker Change: Just in terms of.
Speaker Change: Talk to us about share gain versus us.
Speaker Change: The Cisco and Juniper is the hps the world.
Speaker Change: What metrics are you looking at.
What are you seeing out there who do you think youre gaining share from.
Speaker Change: Right now.
Speaker Change: Just any comments about the competitive environment and share gains would be helpful. Thank you.
Speaker Change: Sure and I think Mike the way to think about share gain it's just the way to think about the distribution of the industry and competitive share. So first and foremost we are taking share from.
Speaker Change: Cisco.
Speaker Change: And then Youll see.
Speaker Change: And then we're also some of the wins, we referenced are from from Juniper and HPE, but I think I think the way to think about it is commensurate with.
Speaker Change: Share positions with most coming from Cisco I will say that we were anticipating with the closing of the HPE Juniper deal.
Speaker Change: They have some tough decisions to make.
Speaker Change: Tough news to break to the market.
Speaker Change: In terms of.
Speaker Change: They are they are roadmaps, what it means for stranding investments for customers what does it mean for partners in the new landscape.
Speaker Change: And we would expect there that disruption to create some opportunities for us, but we don't expect that to truly take place until that transaction closes.
Reason why were winning is we have.
Speaker Change: I mentioned the.
Speaker Change: The <unk>.
Speaker Change: <unk> and cloud capability from the campus data center.
Speaker Change: Through aggregation.
Speaker Change: Through the edge.
Speaker Change: Out to the wireless edge of the network.
Speaker Change: Across the wide area network on one cloud and Thats one of the differences that we bring is we have the complete visibility of the entire network.
Speaker Change: In one cloud.
Speaker Change: Second thing we do is we combine that with our unique campus fab.
Speaker Change: <unk> fabric technology.
Every single player, we will say that they have a campus fabric technology, they'll say Oh, you can check the box, but they have very different technology than ours ours is SPV. There is IP based dear fabrics are not designed for campus and all the things that go on in the campus. So.
Speaker Change: And one of the I mentioned, the fortune 100 win.
Speaker Change: We were able to two.
Speaker Change: Demonstrate sub second conversions, which is when you make a change to the network or you add a switch or if you take down.
Speaker Change: A link.
Speaker Change: It disrupts the network and in our case, we have unique convergence capabilities with our fabric that bring unmatched resiliency. This is something that really mattered to that customer and quite frankly, our largest competitors could.
Speaker Change: Could not replicate this capability.
Speaker Change: Trying for two weeks on the customer site.
Speaker Change: So it was it was a big deal and very helpful to us we talk about hyper segmentation and the ability to create networks within our physical network with our fabric.
Speaker Change: We can do that very easily.
Speaker Change: And that means a lot to our that means a lot to customers and.
Speaker Change: Our competitors can't replicate that capability, but we talk about zero touch provisioning one of the healthcare clients I mentioned is adding a site.
Speaker Change: When you turn up a new site and you start turning up switches and turning up access points and they order they automatically connect to the fabric and the automatic request services.
Speaker Change: It means your teams don't have to build services out to every port on every switch that youre building in the new environment. These are massive savings and time and energy security resiliency and quite frankly, we're the only player that has.
Speaker Change: This campus fabric that brings all of these advantages and so the combination of fabric and cloud.
Speaker Change: Is what's allowing us to win out in the marketplace today and that distribution is consistent as I mentioned before with kind of competitive share and it could change.
Speaker Change: We see the closing of HP juniper.
Speaker Change: Fantastic. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Eric Martinez Z with Lake Street Capital markets. Please proceed.
Speaker Change: Yes, your comment I took note of your comment regarding.
Speaker Change #100: Robust demand or better recovery in middle market and just wondering if that is kind of a near term event and does the full year outlook anticipate or recovery in more of the enterprise that have a larger customer segment.
Speaker Change #100: Yeah.
Speaker Change #101: Thanks, Eric Thanks for the question and the answer is yes.
Speaker Change #101: Yes, we are anticipating a return of more larger projects.
Speaker Change #101: And our.
Speaker Change #101: Yes.
Speaker Change #101: Our intelligence around that answer is all based on opportunities we have in the funnel and the competence of the team as we're scrubbing the timing of projects.
Speaker Change #101: Yeah.
Speaker Change #101: Okay and then.
Speaker Change #102: You also talked about <unk> being seeing challenges in the European market, particularly on the public sector, Germany and U K you mentioned just curious to know what is the I guess the lag time from having a budget to that trickling down to actually impacting procurement process.
Speaker Change #102: Is that would would balance out with the guide that you have.
Speaker Change #103: Yes, Eric and it's not it's not the same across the board.
Speaker Change #103: All government agencies are created equal and in.
Speaker Change #103: In some cases.
Speaker Change #103: <unk>.
Speaker Change #103: I would say in all cases networks.
Speaker Change #103: They have to modernize their networking technology and they have to bring.
Speaker Change #103: Modern networking technology along with.
Speaker Change #103: Modern security capabilities.
Speaker Change #103: And new modern tools like AI tools, they have to make the investments. It's just a question of timing and so in.
Speaker Change #103: In the case of Germany, they have a temporary budget.
Speaker Change #103: By the end of November they are expected to have.
Speaker Change #103: Completed their budget, which should release funds, we'll see how that happens and how that plays out.
Speaker Change #103: The Labour government in the U K is coming out with their budget.
Speaker Change #103: Their plan their agenda is to spend.
Speaker Change #103: That means spending on infrastructure.
Speaker Change #103: Their new fiscal year starts on March 1st, but we would expect the purse strings to be released prior to that.
Speaker Change #104: Got it thanks for taking my questions.
Speaker Change #105: Thank you so much.
Speaker Change #106: Our next question comes from the line of Dave Kang with B Riley. Please proceed.
Yes, good morning.
Dave Kang: First question is regarding.
Dave Kang: Some of your competitors have been touting their AI capability just wanted to.
Dave Kang: We get an update on your strategy AI strategy.
Speaker Change #107: Yes, Dave Thanks, I think.
Speaker Change #107: The AI that we would call first generation AI.
Speaker Change #107: Some people would call it precision AI around.
Speaker Change #107: Our ability to harness machine learning to provide intelligent insights.
Speaker Change #107: Two two customers that are networking environment and we are.
Speaker Change #107: We are out with our co pilot product I mentioned in my remarks, some of the capabilities.
Speaker Change #107: Looking at anomalous.
Speaker Change #107: Network traffic unusual behavior in the network.
Speaker Change #107: Predicting network failures, suggesting.
Speaker Change #107: Suggesting.
Speaker Change #107: Fixes or remedies or remediation to networking issues. These are the kinds of things that are falling into the category of AI ops.
And we have our AI ops capabilities.
Speaker Change #107: There is another one of our larger competitors that has really done well taking share leveraging and marketing AI ops, which we would call first generation AI ops, and then I would say stay tuned we're going to be making some announcements in the future.
Speaker Change #107: <unk>.
Speaker Change #107: We've talked about platforms and we've talked about generative AI.
AI experts and the idea of building AI into our platform.
Speaker Change #107: <unk>.
Speaker Change #107: That effectively you interact with it.
Speaker Change #107: At every step of your networking journey, including all the different.
Speaker Change #107: Types of personas that interface with the network.
Speaker Change #107: At extreme we are using AI internally, we have a lot of different applications in terms of sales assistance in accessing information.
Speaker Change #107: We're using it in marketing we're using it in service we've seen a lot of efficiency and service that's more internal what youre going to see and stay tuned and what Youll hear about is how we are bringing.
Speaker Change #107: Generative AI and kind of this next generation AI into our platform that will create a very different experience for users.
Speaker Change #107: I think I'm going to hold right here, because I don't want to front run any future announcements, but.
Suffice it to say that.
Speaker Change #107: Our AI partners, our AWS and Microsoft.
Speaker Change #107: <unk> been doing a lot of work with them and.
Speaker Change #107: And we have.
Speaker Change #107: A very innovative solution to provide very accurate information.
Speaker Change #107: Information knowledge.
Speaker Change #107: Its dream information about your network.
Speaker Change #107: And enhanced capabilities as far as visibility reporting et cetera. So fundamentally we think it's going to change in networking experience.
Speaker Change #108: Got it and my follow up is.
Speaker Change #107: Regarding.
Speaker Change #107: You have some some.
Speaker Change #107: You have a table regarding major verticals just wanted to.
Speaker Change #109: Get an update on your major vertical the health of your major verticals, starting with government and education.
Speaker Change #107: Yes.
Speaker Change #110: Let me add I'll comment and they're very similar there is no major shift.
Speaker Change #110: And what we've seen.
This quarter versus last quarter. So we just decided David at this point, it's basically the same percentages that we've showed over the last several quarters.
Speaker Change #110: So, we'll probably update or more annually at this point as opposed to quarterly but just curious.
Speaker Change #111: Got it thank you sure.
Speaker Change #112: Thank you one moment for our next question. Please.
And he is from the line of Timothy Horan with Oppenheimer. Please proceed.
Timothy Horan: Thanks, guys do you have a sense of when the industry gets kind of a normal run rate or what is the correct kind of.
Timothy Horan: Upgrade rate for the industry do you think budgets are still being spent on AI or are they freeing backup the upgrade networks at this point and I guess.
Timothy Horan: Related to the permanent.
Timothy Horan: I'm, an enterprise why am I going to upgrade now why don't know maybe wait a year or two for the AI platforms to be much more robust score youll 60, or seven to be much much more mature I guess whats the pit stop right now versus waiting a year or two from now.
Timothy Horan: Thanks, Tim.
Timothy Horan: Yes.
Speaker Change #113: Right now what we're seeing in the marketplace is this convergence of networking and security and the presence of both kind of the Gen. One AI tools for AI ops, managing the network and the new capabilities from AI that.
Speaker Change #113: That are coming out.
Speaker Change #113: Yes underlying security.
Speaker Change #113: In networking as a baseline for security there is security has so many different elements to it and whether or not youre trying to solve for remote workers are trying to solve for campus either way you have to you got to solve for securities. So.
Whether or not that's a single vendor or a multi vendor theres not a single vendor that really provides the best in class solutions across the entire security landscape.
Speaker Change #113: And so we're picking our spots with how we partner with kind of the full security stack if you will.
Speaker Change #113: And but what the.
Speaker Change #113: I don't think customers really have a choice today to just decide to wait so we're.
Speaker Change #113: Other than budgetary constraints, we're seeing people moving forward as it relates to sort of as it relates to future AI and what youre hearing about platforms all of the existing networks and all of the existing customer environments.
Speaker Change #113: Just become part of the platform and will flow into MP beneficiaries of the platform. So there's not really a <unk>.
Speaker Change #113: Net working decision.
Speaker Change #113: Or investment decision and our minds from a networking perspective that has to be made from a timing perspective, because all of your investments today will flow naturally into.
Speaker Change #113: The new platform that we're talking about.
Speaker Change #114: Because your platform is backward compatible and will work with <unk>.
Speaker Change #114: Is there anyone else out there how can capability.
Speaker Change #115: No not a networking now.
Speaker Change #116: And so when do you think what is the correct run rate for the industry are we below trend uptrend.
Speaker Change #116: Think what people are saying and look I mean, you have to listen to the larger players as well.
Speaker Change #116: Yes.
Speaker Change #116: Coming into our fiscal 'twenty five.
Speaker Change #116: We were expecting the rebound we see a lot of encouragement from what we call run rate business, which is just that our our channel.
Contract doing business, placing orders through distribution.
Speaker Change #116: These are smaller orders, but we have seen.
Speaker Change #116: Those volumes start to tick up which is kind of an indication for us of overall activity I mentioned the projects that we've seen we've seen.
Speaker Change #116: We were encouraged by a lot of projects that we saw that the second quarter for this year, we have seen some of these projects slip out into next year. So our.
Speaker Change #116: Our view on this is that the first half of 'twenty five.
Speaker Change #116: Is.
Speaker Change #116: As when we will see a more healthy recovery.
Speaker Change #116: And we're expecting to see kind of budgets returning to some of these governments.
Speaker Change #116: This is consistent with what larger competitors are saying in the market.
Speaker Change #116: Thank you.
Speaker Change #117: Thank you and as a reminder, ladies and gentlemen, if you do have a question simply press star one one to get into queue.
Speaker Change #118: Our next question is from Christian Schwab with Craig Hallum. Please proceed.
Christian Schwab: Hey, Congrats Ed in.
Christian Schwab: And Kevin on good good.
Christian Schwab: <unk> quarterly performance.
As we look at it.
Christian Schwab: <unk> product positioning gaining share middle market recovery positive run rate budget resolution in EMEA.
Speaker Change #119: It seems to me that you know as we get into fiscal year 'twenty six somewhere along the lines of your comment to the last question, we should be operating at kind of the 10% to 12% top line CAGR that you think this business in a normalized market should be running that is that fair.
Kevin Rhodes: Yes, Kevin I'll, let you jump in and take that one.
Kevin Rhodes: Christian I think we will.
I would say that obviously coming out of that the challenges of 2024 right. We're starting to get back to we're not quite there with <unk> with a full on full scale.
Kevin Rhodes: It spending coming back yet with these budgets.
Kevin Rhodes: And then in the wake and whatnot, but we do believe that when things come back in and when.
Kevin Rhodes: When people are spending.
Kevin Rhodes: Normally we do believe that our opportunity here is to hit double digits again from a growth perspective that still are a long term view.
Kevin Rhodes: We think that the products.
Kevin Rhodes: Gross rate went to probably be in the high single digits, but then we would drive more subscription and support revenue at a higher percentage of growth probably in the low teens when you out too.
Kevin Rhodes: Yes.
Kevin Rhodes: Double digit number although double digit number and that's what we're thinking.
Speaker Change #120: Great and then on the follow up to that question.
Speaker Change #120: Should the world and the economy hang in here.
Payable basis from here.
I guess, it's just math, but.
Speaker Change #120:
Speaker Change #120: At a 10% top line growth.
Speaker Change #120: In fiscal year 2007.
Speaker Change #121: It doesn't seem hurt ROIC to us for you to achieve your long term target.
Speaker Change #121: Approaching 20% operating margins is that fair.
Speaker Change #122: Christian I mean, I think that we will continue to see leverage in our model, we saw little bit of that leverage you're just in the first quarter as I.
Speaker Change #122: Identified just the overage on the revenue fell to the bottom line. We think we will continue to see that operating leverage tick up over time.
Speaker Change #122: We could get to an operating margin of around 20%, we do believe that by the way even by the fourth quarter of this year, we're going to get up.
Speaker Change #122: Sequentially throughout the year and our fourth quarter, we're not going to quite be at 20%. We're certainly going to continue to drive higher gross operating margins throughout the rest of the year.
Speaker Change #123: Great and then lastly, I'll just comment that it was hard not to see your logo inside the dugouts at the World series yesterday, congrats on that as well.
Speaker Change #124: Thank you.
Great question.
My moment for our next question.
Speaker Change #125: And he is from the line of Ryan Koontz with Needham <unk> Company. Please proceed.
Good morning, gentlemen, thanks for the questions I was hoping you could update us on some of the progress from your go to market motion changes you've made over the past few quarters.
Ryan Koontz: <unk> you are seeing on bookings and pipeline from from any any changes you've made in your sales efforts.
Thanks Ryan.
Speaker Change #126: Yes, we have made changes from a year ago, we have.
Speaker Change #126: Norman Rice as our Chief commercial officer.
Speaker Change #126: With sales.
Speaker Change #126: And the sales organization reporting up to him and channel and we have made.
Speaker Change #126: Lot of changes there.
Speaker Change #126: Importantly, we recruited a new chief marketing officer, and we've made a lot of changes.
Speaker Change #126: On within that organization and I would say we have much better alignment we've gotten a lot more detailed in terms of very specific selling motions.
Speaker Change #126: About our differentiation as it relates to end to end cloud and fabric.
Speaker Change #126: How we bring that to bear in the marketplace, we have some upcoming disruptions in.
Speaker Change #126: In the market.
Speaker Change #126: As it relates to number two and number three of our competitors that are going to create some opportunities that we're going to be going after.
And I would say, we're going be very organized and we're doing it and what we're calling.
Speaker Change #126: Marketing pods, where we have very specific marketing motions and.
Speaker Change #126: Sales Playbooks, if you will in different parts of the world and now this year, what's different from last year is that our teams have very specific targets for not just this quarter and not just next quarter, but theyre targeting funnel funnel creation in future quarters looking out further than that.
Speaker Change #126: We have before and we feel confident with our plays.
Speaker Change #126: And with our differentiation.
Speaker Change #126: We're going to be able to build that funnel. The other element to that is how we convert and I mentioned in my remarks that we're seeing higher conversion rates.
Speaker Change #126: And that's also giving us confidence so.
Speaker Change #126: In general I think the changes are leading to our ability to generate higher quality higher volume and higher quality funnel.
Speaker Change #126: It's combination of our technology differentiation as well as our go to market motions.
Some of the channel incentives that were putting in place and we're seeing higher conversion rates and I think that has a lot to do with the changes that we've made.
Speaker Change #126: Sure.
Speaker Change #126: And the sales organization.
That's really great. So thank you for that and just a quick follow up here your competitive differentiation and your gross margins, obviously on a strong trajectory here, but how would you characterize the overall pricing environment right now versus your top tier competitors.
We've been obviously when you look at our gross margin we've been we've been hanging in there.
Speaker Change #126: Yes.
Speaker Change #126: We've been holding the line but.
Speaker Change #126: Yes.
Speaker Change #127: Our discounting this quarter was actually better.
Speaker Change #127: What we hear from that from our distributors is that yes, our inventory in the channel is.
Speaker Change #127: May be in better shape than some of our larger competitors, which says that there's more inventory to move.
Speaker Change #127: It's always been the case in our industry that we've seen certain situations are certain markets where.
It looks like larger competitors are doing something uneconomic I think that's just kind of the nature of the Beast.
Speaker Change #127: But.
Speaker Change #127: Yes, there is.
Speaker Change #127: Yes.
Speaker Change #127: I would expect that extreme is maybe a little further out of the woods.
Speaker Change #127: As that inventory issue than maybe some of our competitors based on feedback from distribution.
As you look at it.
The larger Sir you said, they can behave irrationally youre seeing a lot of that with this inventory there.
Speaker Change #127: I mean, I think that's a normal part of the industry dependent depending on the geo depending on the timing depending on the.
Speaker Change #127: Yeah.
Speaker Change #127: Depending on strategies.
Speaker Change #127: If we have some really large wins in certain markets.
Speaker Change #127: Inventory builds up maybe there is a lot of pressure and maybe they decided they might want to make a statement.
Speaker Change #127: But given the extreme is a 5% market share 6% market share player.
Speaker Change #127: We tend to fly below the radar and we don't quite get as much attention.
Speaker Change #127: As the larger players do going back and forth with each other.
Speaker Change #128: Super helpful. Thanks for the questions.
Speaker Change #128: Thank you.
Speaker Change #129: One moment for our last question. Please.
Speaker Change #130: And he comes from the line of David <unk> with UBS. Please proceed.
Speaker Change #131: Okay. Good question. This is Brian on for David.
Speaker Change #132: First can you provide detail on the project that close earlier can you quantify the revenue and gross margin impact of those projects that closed earlier than expected then I have a follow up thanks.
Kevin Rhodes: Yes, Kevin.
Kevin Rhodes: You want me to take that.
Kevin Rhodes: Yes, I wouldn't I would first of all I would say gross margin profile of anything close to a little earlier than we expected I would say it was very normal for us I wouldn't say.
Kevin Rhodes: Those projects chipped us up.
Kevin Rhodes: <unk> quarter over quarter and that's the reason why we went up.
Kevin Rhodes: That would be a false narrative.
Kevin Rhodes: It could be the case.
Kevin Rhodes: Say, we just had a couple of deals in our pipeline that we had anticipated closing in Q2 and in fact actually closed in Q1, that's where we got a little bit extra revenue, but the margin profile was very similar.
Kevin Rhodes: In terms of size.
Kevin Rhodes: We had 269, obviously than we were at the midpoint of our range at <unk> 60, and so and at the high point of our range was 265, so call it $4 million to $9 million, a little bit more than we expected.
Kevin Rhodes: Yeah.
Speaker Change #133: Got it that's helpful and then for my follow up.
Speaker Change #134: I am curious about the balance sheet. So at the end of last year receivables outstanding was highly concentrated at one customer.
Speaker Change #135: Where would you say the balance is today and what is the outlook for receivables to come down in the coming quarters.
Speaker Change #135: Sure Yes.
Speaker Change #135: From a balance sheet perspective first of all we've got we've got good.
Speaker Change #137: DSO I think our DSO typically ranges in the 35% to 40 days range. So we are not concerned at all about what we have from a receivables perspective.
Speaker Change #137: Outstanding right now we did have a little concentration last year toward.
Speaker Change #137: Of our larger distribution partners just to reminder, about <unk>.
Speaker Change #137: 80% of our revenue probably comes from about 10 to 15 large distributors. So that's that's not abnormal for us.
Speaker Change #137: Our quarter over quarter, we had $90 million of receivable last quarter, we had $97 million of receivables this quarter I wouldn't call it anything different from a normal I think.
Speaker Change #137: It's certainly reasonable and we will collect all of that cash.
Speaker Change #137: On the receivables side, probably within the next 90 days, so we feel free.
Thank you and I see no further questions in the queue I will turn the call back to Ed <unk> for his closing comments.
Ed: Thank you Carmen and thanks, everybody for participating on the call. We appreciate your interest in extreme.
Ed: We've put up a.
Ed: We put up a strong quarter and as always want to thank.
Ed: Our employees for their hard work and customers and the channel for their partnership.
Ed: And we're really excited about what's to come here in the future.
Ed: This quarter and into 'twenty five.
Ed: And we have some exciting news that I mentioned earlier to stay tuned for on the on.
Ed: On the product front.
Ed: And.
Ed: Stay tuned for that thanks, everybody and have a good have a great day.
Ed: And thank you for.
Speaker Change #139: Participating in today's conference and you may now disconnect.