Q3 2025 Extreme Networks Inc Earnings Call
Thank you for standing by my name is Ian and I will be your conference operator today.
At this time I would like to welcome everyone to the extreme networks Q3, FY 'twenty five financial results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question again press Star one.
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I would like to hand, the call over to Stan Kohlberg Senior Vice President corporate development and Investor Relations. Dan You May begin your conference.
Speaker Change: Thank you Ian good morning, and welcome everyone to the extremes third quarter fiscal 2025 earnings conference call.
Admire Color: With me today are extreme networks', president and CEO admire color and executive Vice President and CFO, Kevin Rhodes.
Admire Color: We just distributed a press release and filed an 8-K detailing extreme networks' financial results for fiscal Q3, a copy of the press release, which includes our GAAP to non-GAAP reconciliations in our earnings presentation are available in the IR section and extreme networks Dot com.
Admire Color: Today's call and Q&A may include certain forward looking statements based on our current expectations about extremes future financial and operational results growth expectations and strategies are.
Admire Color: Our financial disclosures made on this call will be on a non-GAAP basis unless stated otherwise.
Admire Color: We caution you not to put undue reliance on these forward looking statements as they involve risks that can cause actual results to differ materially from those anticipated by these statements.
Admire Color: These risks are described in our risk factors in our 10-K and 10-Q filings and any forward looking statements made on this call.
Admire Color: To reflect our analysis as of today.
Admire Color: We have no plans to update them, except as required by law.
Admire Court: Following our prepared remarks, we will take questions and now I will turn the call over to extremes, President and CEO admire court.
Admire Court: Thank you Stan and thank you all for joining US. This morning revenue in the quarter reached $284 $5 million, representing a 35% increase year over year growing sharply in EMEA and Americas regions with a particularly strong performance in the Americas sequentially up 21%.
Admire Court: And from the prior quarter.
Admire Court: We're seeing robust demand across both our wired and wireless network solutions revenue.
Admire Court: Revenue grew sequentially for the fourth quarter in a row, driven largely by product revenues and we achieved our best quarter of product bookings and six quarters.
Admire Court: We're encouraged by new logo wins and the growth in average deal sizes. This quarter, we had 40 customers generating over $1 billion in bookings up from 36 last quarter.
Admire Court: This highlights our move upmarket with success penetrating larger enterprise customers across all our industry verticals.
Admire Court: Our competitive position continues to strengthen with significant wins against major players in key accounts, such as city of Everett, Washington, West London, NHS Hospital in the United Soccer League in two major government agencies in Japan.
Admire Court: We're seeing customer behavior patterns shift towards larger more comprehensive deployments and looking ahead, we have strong confidence in sustained customer demand based on our Q3 final generation and with continued strong growth in our pipeline.
Admire Court: Our competitive win rates are on the rise across a variety of verticals, we're displacing major players like Cisco HP and juniper largely due to our highly differentiated campus fabric solution. The simplicity of our cloud solution and our flexible licensing when customers see the impact of fabrics unique features like <unk>.
Admire Court: Second convergence, the unmatched security benefits of micro segmentation and the ease of deployment with automated zero touch provisioning extreme becomes an easy choice one higher education customer recently told us with zero touch provisioning automatic configuration and unified network management across 14 locations.
Admire Court: <unk>, they've been able to reduce it workloads by almost 50% if enterprise customers spec our technology competitors cannot match. These features with their limited IP data center fabric and it causes them to drop out of the competitive pitch.
Admire Court: In the quarter customers, such as Faro via Nord and Italian transport company overseeing a 120 regional railway stations covering provinces, such as Beeline Barre assay Nkomo chose extreme cloud and extreme fabric to streamlined network management ensure consistent performance and low latency.
Admire Court: Okay, Great secure network segmentation across eight states.
Admire Court: The city of Everett, the seventh largest city in Washington State upgraded its network and move to a flexible cost effective network infrastructure as a service model from extreme.
Admire Court: During the upgrade they can continue to manage aging third party devices with extreme cloud IQ, while automating and provisioning new devices with extreme fabric, making it fast and easy to upgrade with no downtime.
Admire Court: Also Duquesne University chose extreme fabric and extreme cloud IQ because the streamline way fabric will help minimize some of the it teams most arduous tasks.
Admire Court: <unk> P Hood of large dairy company in the U S recently upgraded to extreme cloud to manage operations across its 20 manufacturing and distribution center.
Admire Court: Extreme seamless integration with zebra devices was a significant factor in winning that deal.
Admire Court: We continue to expand our footprint and a six flags theme parks with new deals and six flags Magic Mountain in Fiesta, Texas, each deployed extreme cloud alongside a new six gigahertz wireless network, which will create real time monitoring and management of rides to reduce downtime deliver more efficiency and park infrastructure.
Admire Court: And reduce operating costs that are also receiving extremes premier white glad professional services for installation.
Admire Court: We also had a nice win with a large law firm in North Carolina, which has 24 offices and more than 450 employees.
Admire Court: They were using legacy HPE infrastructure, which made it very difficult for their team to manage the network across several locations.
Admire Court: With extreme cloud and Universal Z TNA there'll be moving operations to the cloud simplifying the I T and employee experience and increasing security of their network.
Admire Court: Extremes use <unk> SaaS solution is gaining momentum with strong interest from customers in education manufacturing health care and financial services. It combines mature network access control with zero Trust remote application access.
Admire Court: We're also seeing strong momentum with our commercial models, we added 11, new partners to our MSP program this quarter, bringing the total to 48.
Admire Court: We offer the industry's first consumption based billing model, eliminating upfront costs and ensuring cost predictability.
Admire Court: Our unique pool licensing, let's msp's flexibly allocate licenses across devices locations and customers, making it easier than ever to scale.
Admire Court: In the quarter, we made extreme platform one available for MSP is with everything centralized platform. One helps msp's gain a comprehensive view of each client's network health performance in security status. The VP of technology alliances at our partner larger Kelly said with extreme platform. One we can efficiently manage.
Admire Court: All of our clients at a one platform, which will significantly reduce the time and it staff required to maintain operations.
Admire Court: On the innovation front early indications from customers and partners reinforce that extreme platform one will be a game changer. It's the first solution that offers holistic AI for networking.
Admire Court: It drives significant automation by leveraging AI agents that assist in tasks across the entire network lifecycle from planning and deployment to management and remediation, reducing the time to complete complex task from hours to minutes.
Admire Court: As enterprise teams feel pressure from executive leadership and their boards to leverage AI to drive operating efficiencies extreme platform. One will provide the most modern tools to achieve this objective. According to a survey we conducted with 200 C level executives earlier this year 89.
Admire Court: <unk> are ready to invest in our platform for AI networking and security earlier.
Admire Court: Earlier. This month, we made an extreme platform one available to E rate customers to date, we have approximately 100 customers that have subscribed to the platform and we're excited to share more details about extreme platform one at our oversubscribed connect user conference in Paris, which is happening next month.
Admire Court: Our customers are enjoying the best quality products in extremes history, we see this in our data and our financial results as well as service costs, which are running at record lows and customer satisfaction, which runs consistently at high levels.
Speaker Change: We anticipate further market share gains and revenue growth for the full year and continued strength in Q4, we expect this growth to be accompanied by increased margins and cash flow for the full year 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 Rhodes: Thank you Ed.
Kevin Rhodes: This quarter marked the fourth quarter in a row of sequential growth and our strong gross margins coupled with operating expense control demonstrated the significant operating leverage in our model.
Kevin Rhodes: Earnings per share of <unk> 21.
Kevin Rhodes: In line with the prior quarter up significantly year over year as well as exceeding the high end of our guidance range.
Kevin Rhodes: Customer demand trends continue to improve particularly with large customers.
Kevin Rhodes: And I think with our financial results for the third quarter defining normal seasonality and demonstrating continued momentum across our business.
Kevin Rhodes: Total revenue for the third quarter reached $284 5 million.
Kevin Rhodes: Up 2% sequentially and an impressive 35% year over year.
Kevin Rhodes: Revenue increased to $178 1 million up 3% quarter over quarter, and 67% year over year with wireless solutions, showing particular strength.
Kevin Rhodes: <unk>, 12% sequentially.
Kevin Rhodes: Our subscription business continues to grow double digits with SaaS annual recurring revenue, reaching $184 million.
Kevin Rhodes: Up 13, 4% year over year.
Kevin Rhodes: Total deferred recurring revenue grew 7% year over year to $578 million, reflecting the strong momentum in our recurring revenue model.
Kevin Rhodes: Overall recurring revenue was relatively stable at 35% of total revenue in the quarter as a result of riding rising product revenue.
Kevin Rhodes: The strength of our execution is evident in our financial results with particularly strong performance in the Americas region, which grew 19% year over year.
Kevin Rhodes: Media revenue grew 81% year over year.
Kevin Rhodes: Due to improved macro and channel inventory.
Kevin Rhodes: APAC was flat year over year in revenue, however, bookings were up double digits.
Kevin Rhodes: Overall this is the best bookings quarter in the past six quarters product bookings grew high single digits.
Kevin Rhodes: To what we call that our long term range and we see continued strength in our pipeline this year.
Kevin Rhodes: Trends were in line with our revenue during the quarter and then product backlog was once again within our expected range.
Kevin Rhodes: I'm, particularly pleased with our performance in new subscription bookings, which bodes well for an acceleration of SaaS <unk> going forward as new subscription bookings will continue to grow with the adoption of platform one going forward.
Kevin Rhodes: On a product basis bookings were ahead of the previous five quarters.
Kevin Rhodes: Driven by continued strength in wired.
Kevin Rhodes: The industry jargon.
Kevin Rhodes: Transportation and logistics manufacturing and sports and entertainment verticals, all grew strong double digits, both year over year and sequentially.
Kevin Rhodes: Within education, K through 12 bookings, including E rate also grew double digits over both periods.
Kevin Rhodes: In fact, our E rate filings were up double digits from the prior year and we believe we are gaining market share in this segment, even though it accounted for less than 5% of total bookings in the quarter.
Kevin Rhodes: All in we are well diversified across a variety of other verticals.
Kevin Rhodes: Total subscription and support revenue was $106 4 million similar to the second quarter.
Kevin Rhodes: Our recurring revenue growth has been driven by the strength of our cloud subscription revenue in the past.
Kevin Rhodes: Gross margin for the quarter was 62, 3%. While this represents a 110 basis point sequential decrease it is up 470 basis points year over year on a reported basis or 120 basis points on an adjusted basis for Eni.
Kevin Rhodes: Product margin came in at 58% and.
Kevin Rhodes: Subscription and support margin remains strong.
Margins reflect our continued focus on operational efficiency and product mix optimization, along with lower freight costs.
Kevin Rhodes: We're also buying less inventory and have reduced the overall inventory quarter over quarter, yes, we still have ample supply of finished goods and raw materials.
Kevin Rhodes: Mitigate against any potential tariff rates.
Kevin Rhodes: The structural improvements we've made to our portfolio within our universal platform have resulted in improvements in the product quality.
Kevin Rhodes: Lower service costs and lower remediation costs that are also benefiting our customers.
Kevin Rhodes: The combination of higher product revenue versus subscription and support didn't have a small impact on sequential results.
Kevin Rhodes: We also expect our gross margin to be in a range of 61, 8% to 62, 8%.
Kevin Rhodes: In the fourth quarter of fiscal 'twenty five.
Kevin Rhodes: Also owing to higher product revenue mix expectations.
Kevin Rhodes: non-GAAP operating income was $40 million in the quarter, representing a 14, 1% operating margin.
Operating expenses were well managed at $37 3 million.
Kevin Rhodes: This demonstrates our commitment to operational discipline, while continuing to invest in growth initiatives during.
Kevin Rhodes: During the quarter, we maintained our strategic investments in R&D and marketing to support our product innovation and market expansion efforts.
Kevin Rhodes: We expect operating expenses to increase to a range of $143 million to $145 million in the fourth quarter of fiscal 'twenty five.
Kevin Rhodes: Sales productivity and better efficiency from our new commercial models are driving some of this updated outlook.
Kevin Rhodes: We continue we continued our commitment to returning value to shareholders through our share repurchase program as we repurchased $13 million worth of shares during the quarter.
Kevin Rhodes: In addition to our remaining authorization for fiscal 'twenty five the board recently authorized another $200 million of buybacks for the next three years starting in fiscal 'twenty six.
Kevin Rhodes: Turning to our balance sheet and cash flow metrics metrics I am pleased to report significant improvements in our financial position.
Kevin Rhodes: We have successfully transitioned to a net cash position of $3 million.
Kevin Rhodes: As of March 31, a notable improvement from a net debt position of $15 million at the end of the year.
Kevin Rhodes: At the end of December.
Our disciplined financial management and improved our cash conversion cycle by a remarkable 29 days.
Kevin Rhodes: This reduction demonstrates our enhanced operational efficiency and working capital management.
Kevin Rhodes: As a result, we generated robust operating cash flow.
Kevin Rhodes: $30 million during the quarter contributing to our strengthened liquid liquidity position.
Kevin Rhodes: We expect a continued improvement in cash flow in the fourth quarter as we continued to grow revenue again and also improved profitability.
Kevin Rhodes: Combination of strong cash generation improved working capital management, and disciplined cost control positions us well for sustained financial performance and continued investment in growth opportunities.
Kevin Rhodes: Now turning to guidance.
Kevin Rhodes: We are encouraged by the level of customer engagement and growth in the funnel that we are seeing.
Kevin Rhodes: Which should bode well for us heading into the final quarter of this fiscal year.
Kevin Rhodes: As a result of our improved the improved visibility we are increasing our full year guidance and providing a slightly narrow revenue range for the next quarter.
Kevin Rhodes: Our supply chain optimization efforts are paying off the strategic pricing adjustments can be made to mitigate any potential tariff and tax.
Kevin Rhodes: To date, we have not seen any negative impact on the demand side of the equation related to tariffs.
Kevin Rhodes: Therefore, we believe we are well positioned to capitalize on the trends that we're seeing and deliver sustained growth in the coming quarters.
For the fourth quarter, we expect improved guidance as follows.
Kevin Rhodes: Revenue to be in a range of 295 million to $305 million.
Kevin Rhodes: Gross margin to be in a range of 61, 8% to 62, 8%.
Kevin Rhodes: At this point in time, we estimate the impact of tariffs on our Pms P&L will be fairly negligible.
Kevin Rhodes: At approximately $1 5 million in the fourth quarter, a similar amount going forward. This expectation is currently included in our guidance.
Kevin Rhodes: Operating margin is expected to be in a range of $13 three to 15, 3%.
Kevin Rhodes: And earnings per share is expected to be in a range of 21.
Kevin Rhodes: <unk> to 'twenty five.
Kevin Rhodes: Our fully diluted share count is expected to be around $134 2 million shares.
Kevin Rhodes: For the full year of 25, we expect for full year fiscal 'twenty, we expect revenue to be in the range of $1 billion $128 million to $1 billion $138 million.
Kevin Rhodes: I'll now turn the call over to the operator to begin the Q&A session.
Kevin Rhodes: Thank you.
Speaker Change: Minder to ask a question. Please press star followed by the number one on your telephone keypad.
Kevin Rhodes: Pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question comes from the wide up David thought with UBS. Your line is open.
David Thought: Great. Thanks, guys and thanks for taking my question, So Ed and Kevin you mentioned, you're not seeing any weakness or any impact from the tariffs can you maybe walk through some of the feedback that you're getting from customers to date, what theyre thinking how they're thinking about the next six to 12 months and then on the tariffs.
David Thought: In fact that Kevin referenced at $1 5 million in the fourth quarter and going forward. It sounds like that's really the run rate next year.
David Thought: Should we think about that as being sort of a.
David Thought: Just a gross margin headwind as we go into fiscal 'twenty six next year and what are the offsets that you could potentially use to mitigate that incremental $6 million.
Hit the Cogs. Thanks.
David Thought: Yes, let me thanks, David for the question and Kevin I'll kick it off and then I'll, let you pick it up.
David Thought: A bit of an echo here on the line.
David Thought: Yes so.
David Thought: David the tariff situation is very dynamic and I think as everybody knows and can appreciate and it's it's kind of hard to call.
David Thought: Yes, there was concern initially given the magnitude of tariffs keep in mind that our manufacturing on the cost side of the equation, we have Taiwanese ODM switch and historically factories, where in China, we moved out of China to.
Taiwan, Vietnam, Philippines, and Malaysia in partnership with our manufacturers and obviously they were slapped with very large tariffs and look pretty scary.
David Thought: They were put on hold or category was exempt and so.
David Thought: Currently there is minimal impact.
David Thought: To our business.
David Thought: At the same time all of these countries are in active negotiations with the Trump administration and our understanding is that.
David Thought: Theyre going to strike a deal that.
David Thought: And.
David Thought: The indication is that it's going to be somewhat status quo.
David Thought: We won't know for sure until this 90 day window at the beginning of July and and we have finality to that.
David Thought: No.
David Thought: One of the things that we've done as a company as we've come out and we've guaranteed customers.
David Thought: Current pricing through the end of the quarter were the only player in the industry. That's done that but it's it's it's been very well received by our partners and customers. We have seen I would say minor.
David Thought: Early buying for customers that want to get ahead of tariffs and mitigate risk a potential price increases.
David Thought: And.
David Thought: And so it's somewhat of a.
David Thought: Fluid situation there.
David Thought: Got it.
David Thought: Yes.
David Thought: The larger question is will all of the changes globally in trade and tariff policy you have an impact on demand and that's that's hard to call at this point and we're going to hold as far as <unk>.
David Thought: Providing guidance or judgment on that until we have finality.
Kevin Rhodes: Come July Kevin do you want to add to that.
Kevin Rhodes: Yes, sure Ed I think the latter part of the question around the $1 $5 million and any mitigation.
David Thought: <unk>, they're right David.
David Thought: So, yes, we baked that into the fourth quarter guidance as Ed said, where call date on the price increases right now obviously, the most obvious a mitigation strategy there would be as we are.
David Thought: As we get more color and more visibility into whether they might be permanent or not we can always raise price. So that would be a small price to raise debt to offset that with $5 million per quarter right now in the fourth quarter, we kind of took the.
David Thought: The adjustment if you will.
David Thought: In the fourth quarter I would say in general we're feeling good about.
David Thought: Where we are right now and we're not seeing a lot of impact on the demand, which is what we commented on.
David Thought: Obviously, we have plenty of.
David Thought: Levers to pull if we need to in order to pass.
David Thought: And Kevin just to clarify so you didn't get in the fourth quarter gross margins would be basically flat sequentially ex tariffs impact.
David Thought: Yes, that's correct, David Yes, it's about 50 basis points.
David Thought: Impact on the quarter that we've got baked into our guidance.
David Thought: Purposely with EPS being higher than Q3, we're still showing continued improve improved profitability.
Speaker Change: Great. Thanks for the color guys.
Dave: Thanks, Dave.
Speaker Change: Our next question comes from the line up Michael Genovese with Rosenblatt Securities. Your line is opened.
Michael Genovese: Great. Thanks.
Dave: Yes.
Speaker Change: Any more color on sort of competitive trends broken out between.
Speaker Change: Cisco Juniper HP anything evolved in the last quarter that that was different than before.
Mike: Yes, Thanks, Mike.
I can take this Kevin Yeah, I think you've seen.
Mike: HP is I think struggling quite frankly, and I think if we had to provide commentary I would say that they're probably.
Mike: Losing share in the marketplace.
Mike: The fact that their deal is held up the fact that they had to pay such a high price for juniper on an inflated demand curve.
Mike: And.
And I think.
Mike: Now that they are well over a year into the process and have the trial coming up in July.
Mike: <unk> has created some issues for them in the market and in the channels. They still very much want to get the deal done we've seen juniper get it a little more aggressive in pricing.
Mike: And to.
Mike: To win business.
Mike: There is somewhat of the same situations HPE because there is stagnant they can't provide real guidance to the channel our customers as to the future of the product roadmap the technology. The solutions. They just they don't know so that's that's helpful to us.
Mike: We would.
Mike: We would expect.
Mike: That if the deal goes through there to be.
Mike: A lot of changes that take place and either way.
Mike: Is it as a positive for for extreme.
Mike: Cisco has actually been pretty strong.
Mike: And competitive in the marketplace hanging onto their market share.
Mike: And I don't really have a lot to report on that front, except for the fact that.
Mike: With their focus.
Mike: As it relates to Splunk.
Mike: And.
Mike: Driving SaaS revenue observe ability security.
Mike: They seem to be moving away from or less focused on <unk>.
Mike: Enterprise networking and their solutions. There. This is what we hear from from customers and partners. They remain the most complicated.
Mike: The integrated and expensive solution in the marketplace.
Mike: And so the chorus of dissatisfaction from Cisco continues to grow and the larger deals that we're talking about in most cases. These are competitive wins from Cisco and a final comment I'll make is it Cisco has said that they are overhauling their partner program keep in mind, we sell in the.
Mike: <unk> sells through the channel the partner channel to 85% of our business and anytime you go through a massive restructuring of your channel program.
Mike: There are we going to be winners and losers in that.
And any kind of disruption where extreme will be right there to China.
Mike: Around the edges to pick up new partner relationships to drive share gain.
Mike: Great. Thanks, guys Thats a lot of great color.
Mike: Very helpful.
Kevin Rhodes: Hi, Kevin.
Mike: To ask I mean, it's great.
Mike: SaaS IRR is in the double digits, but.
Mike: To see bigger numbers going forward bigger double digit numbers year over year growth in SaaS.
Mike: Potentially in the fourth quarter and going into next year, what should we be looking for.
Mike: To drive that.
Mike: Yes, Mike.
Mike: A couple of things here, one we actually had very good bookings on our SaaS subscription in the quarter of course that will take a little bit of time to work itself into revenue, but that was up 29% year over year. So we were happy about that the second thing is as we've talked about platform one where it is a combination of subscription.
Mike: It's got a higher ASP and also has expected expected higher attach rate to it as well that's going to start to drive more subscription overall and Thats a combined just to remind you that support and subscription along with AI. So all of those features all combined in one subscription.
Mike: Model and so that's going to drive subscription over time too so.
Mike: Optimistic about what that growth rate looks like in the future I know, it's been somewhat flattish.
Mike: <unk> as a revenue line item, but I think it will grow over time.
Mike: Perfect I'll pass it on.
Mike: Nice to see the performance please.
Mike: Please keep it up.
Mike: Thanks, Mike.
Mike: Thanks, Mike.
Speaker Change: Our next question comes from the line of Christian Schwab with Craig Hallum Capital. Your line is open.
Christian Schwab: Alright, great. Thanks for taking my question.
Speaker Change: Great quarter just.
Christian Schwab: Thank you so much for.
Christian Schwab: The additional color on the competitive position of Cisco and HP at Juniper, and how you're positioning there.
Christian Schwab: Just wondering if you could just elaborate one step further.
Christian Schwab: Given your you know stronger success with larger customers.
Christian Schwab: And competitive wins versus three top competitors I Wonder if you could just.
Christian Schwab: Give us some further color on what you believe or what your customers are saying regarding the total cost of operation.
Christian Schwab: Hey.
Christian Schwab: Versus them I imagine.
Christian Schwab: You'd have some color there and why you are seeing success with large customers in particular.
Christian Schwab: Sure Christian.
Christian Schwab: For the question and for joining us.
Christian Schwab: Yes.
Christian Schwab: The big differentiator for US today is our fabric technology, which.
Christian Schwab: Is unique in the industry it's novel.
Christian Schwab: Most fabrics and the networking industry are designed for data centers.
Christian Schwab: And managing all of the traffic flows inside of the walls.
Christian Schwab: Sure datacenter.
Christian Schwab: When we acquired Avaya, which had sort of the nortel technology.
Christian Schwab: They had invested heavily in and since we have invested heavily in our campus fabric.
Christian Schwab: Which is which is very different.
Christian Schwab: And it's designed specifically for these large enterprise campuses. So when we win Washington University, when we when John Deere when.
Christian Schwab: When we win win resorts and casinos when we win these these these larger deals.
Christian Schwab: This fabric gives us the capability to provide significant advantages and automation and deployment that zero touch provisioning the elimination of constructing and building vlans and deployment environments. We're also able to segment that network.
Christian Schwab: To take out a single physical network and you can slice it into literally thousands of networks and in each network can have its own SLA and importantly.
Christian Schwab: Because of the way the technology works.
Christian Schwab: You were with the segmentation capability.
Christian Schwab: We hired IP addresses and effectively you can't.
Christian Schwab: It brings significant security benefits so speed to provisioning.
Christian Schwab: The security benefits and ease of deployment and creating networks within our network, which is so valuable and then finally, the resilience of our fabric, we talk about sub second convergence.
Christian Schwab: Our competitors can't do it.
Christian Schwab: So if we get in and if we can convince customers to spec. The performance just the performance of our fabric technology, we win every time.
Christian Schwab: And customers that buy our fabric.
Christian Schwab: Our very loyal most people don't believe the benefits that we talked about in terms of what we're pitching when they see and they try and they test our technology physically hands on their kind of blown away and then they become very religious about it and so this is this.
Christian Schwab: As a primary differentiator for us when we get into competitive processes. If we can convince customers to try out our fabric, they're kind of blown away and that's what's driving larger deals in higher win rates. The simplicity of our cloud solution is also a big factor and as we look at it.
Christian Schwab: Platform one as you know Christian we were not investing in networking for AI.
Christian Schwab: We strategically.
Christian Schwab: Strategically was not where we've been investing but we have been investing heavily in AI for networking.
Christian Schwab: And today, there is not a single organization, where leadership boards management or not pressuring, saying how are you using AI to drive efficiency in the organization well, we are positioned to be that player to provide the tools and the platform for all of the enterprise customers out there to leverage our tools to.
Christian Schwab: Answer that question and say, yes, we're leveraging AI, we're using extreme and we're going to be that go to provider for AI in networking. So I'd say, it's those two trends is the differentiation of our fabric and by the way that fabric technology will be available to be managed and visualized from extreme platform, one which is also the <unk>.
Christian Schwab: I'm changer, so it's fabric and then AI for networking and our differentiation and what we believe will be a significant leadership position.
Christian Schwab: Head of our competition in enterprise.
Christian Schwab: These are the these are the big drivers right now in the marketplace.
Christian Schwab: Our competitive position, we feel very good about our competitive position.
Speaker Change: Thank you and just one quick.
Speaker Change: Follow up question or a second question is do you have any update on customer adoption and what youre seeing.
Speaker Change: Regarding Wi Fi seven.
Speaker Change: I would say it's.
Speaker Change: It's according to I'd say, it's moving according to plan.
Speaker Change: Yes.
Speaker Change: Wi Fi seven that the advantages of Wi Fi seven are around performance I'd.
Speaker Change: I would say bandwidth and performance.
Speaker Change: Years ago Christian there was a lot of discussion about public private cellular networks.
Speaker Change: And five G. The the performance.
Speaker Change: And the quality of Wi Fi seven is kind of obviated.
Speaker Change: That discussion because the performance is so strong we're seeing enterprises adopt Wi Fi service for mission critical solutions that historically, they might not have been confident using Wi Fi. So.
Kevin Rhodes: I'd say, it's progressing Kevin you can you can jump in if you want to add commentary here, but I think it's.
Speaker Change: Yes.
Speaker Change: The adoption is strong.
Speaker Change: Quality is a lot higher in terms of the user experience.
Speaker Change: Yeah for Us I would say, it's it's according to plan.
Speaker Change: Yes, I agree and tracking in line I would say the adoptions in the teens. So that's good.
Speaker Change: Great.
Speaker Change: Other questions. Thanks, guys.
Speaker Change: Thanks Christian.
Speaker Change: As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Speaker Change: Our next question comes from the line of Ryan <unk> with Needham Your line is opened.
Speaker Change: Great. Thanks for the question and all the great color here post.
Speaker Change: Prepared remarks, maybe.
Speaker Change: Double clicking here on your channels and kind of your view from a regional perspective Europe versus.
Speaker Change: North America inventory and kind of enterprise versus public what kind of feedback you're getting from channels.
Speaker Change: And what kind of demand are you seeing you mentioned a little bit of a pull forward, perhaps in the third quarter.
Speaker Change: Any more color you can give us would be appreciated. Thank you.
Speaker Change: Yes, Thanks Ryan.
Speaker Change: I should reiterate that the pull forward in Q3 was very minor.
Speaker Change: There wasn't a big move there.
Speaker Change: And I would say across all of our Geos.
Speaker Change: But.
Speaker Change: And so.
Speaker Change: Wouldn't say, that's a major factor yet it could be depending on how the tariff situation evolves.
Speaker Change: The macro situation in the industry has improved a year ago the whole industry was in it.
Speaker Change: Correcting an oversupply situation and we had to let product drained out of the channel.
Speaker Change: We feel like we've worked all the way through that now and you can see that in the quarter over the year over year compares quarter.
Speaker Change: Quarter over quarter.
Speaker Change: So that so as that as the as the channel has drained we've seen kind of real demand return back into the marketplace, which has been very helpful and positive to the business.
Speaker Change: Had strength in Americas.
Speaker Change: On the extreme side a lot of this has to do with the quality of our execution as a company and taking share with.
Speaker Change: We've reorganized a year ago, we have new leadership in sales and new processes that we're driving we have enhanced programs that we're going to be rolling out to the channel and significantly improved and enhanced marketing and the alignment between our sales and marketing.
Speaker Change: <unk> is really an execution driven improvement in performance from the extreme perspective.
The macro here.
Speaker Change: It's continued to be solid for networking.
Speaker Change: If you survey CIO as demand for networking and demand for AI is is very high and consistent when you think about it everything runs on the network. So people have to continue to modernize and invest there.
Speaker Change: We believe we're going to have tailwind going forward from Europe.
Speaker Change: We're heavily concentrated in the dock region, which is Germany, Austria, and Switzerland, primarily Germany.
Speaker Change: Germany has been a major headwind over the past year because of their their own issues the government issues there.
Speaker Change: They couldnt form a coalition they dissolve the government they froze government spending.
Speaker Change: They had snap elections.
Speaker Change: They've reform the government they have a coalition they've raised the deficit spending ceiling.
Speaker Change: And they have a budget and so now we're going to see a resumption of spend in that market.
Speaker Change: That is our largest market and it's where we have the highest market share of the world. So we're very encouraged by what we expect to see coming out of Germany, we'd like to see it happen faster, but it is a tailwind that's coming out of Germany. The other thing that we've done is we have some unique wins we highlighted.
Speaker Change: In Japan, the government ministries there.
Speaker Change: Having some of the largest wins in our company history.
Speaker Change: In that market.
Speaker Change: And our unique fabric deployments and the solution that we built for that the government. There is creating some really interesting opportunities and growth opportunities. There. So we've seen a resurgence in Asia Pacific.
Speaker Change: Being led through Japan.
Speaker Change: And we expect to see.
EMEA nice.
Speaker Change: <unk> in Europe in general.
Speaker Change: He also mentioned in the U S.
Speaker Change: The E rate business.
Speaker Change: We had a very strong E rate cycle up double digits in terms of our wins in the funding cycles are are continuing unabated and we just had our largest funding wave.
Speaker Change: In company history last week so.
Speaker Change: We're feeling good about the macro trends here.
Speaker Change: We go into Q4.
Speaker Change: That's great. Thanks for all the color Ed.
Speaker Change: Platform, what are you seeing early traction there or across any particular geos.
I'd say, it's across the board Brian.
Speaker Change: <unk>.
Speaker Change: We made.
Speaker Change: Platform one available for early quoting we had to do that for the E rate cycle.
Speaker Change: And that's giving us an early indication of demand for platform one.
Speaker Change: And there. That's we said you know we have approximately 100 customers that have signed up for that.
Speaker Change: For platform, one and we've opened it up.
Speaker Change: Sure.
Speaker Change: The platform one workspace for MSP.
Speaker Change: And the feedback we're getting there is encouraging.
Speaker Change: Our MSP business is.
Speaker Change: Weighted more heavily in Europe.
Speaker Change: And then.
Speaker Change: So I think it's I'd say, it's across the board from a Geo perspective.
Speaker Change: And where we've rolled out extreme platform one early.
Speaker Change: We've had very favorable response.
Speaker Change: Both again that E rate segment, and as well as Msp's.
Speaker Change: We're targeting our fiscal Q1 for the official launch of the platform.
Speaker Change: Perfect. Thanks for all the color.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Dave Kang with B Riley. Your line is opened.
Speaker Change: Thank you good morning, first a clarification so regarding this.
Speaker Change: Tariff impact of $1 5 million I guess thats about 50 Bips.
Speaker Change: On gross margin I assume thats in.
In your fiscal fourth quarter outlook is that correct.
David Thought: That's correct, David Thats, what Ive said, yes.
Speaker Change: That's included Okay.
Speaker Change: Got it. Thank you and then regarding manufacturing I think.
Speaker Change: Went over it already but just.
Speaker Change: Regarding your contract manufacturers and they have a global footprint.
Speaker Change: And I'm wondering if they have any U S.
Speaker Change: Manufacturing facilities for example, Sanmina said the other day that they are planning to expand their use.
Speaker Change: Footprint, just wondering what your <unk> situations or plans are.
Speaker Change: Yes.
Dave: Good question Dave.
Dave: The answer is no our Oems do not have plans.
Dave: Two two open manufacturing here in the U S.
Dave: I will say our expectation is that from a tariff perspective, we are expecting that they will get resolved with the Trump administration.
Dave: Is the supply chain for our technology and its not just extreme it's the entire industry.
Dave: It's going to be very hard to replicate that supply chain in the U S.
Dave: At at prices and costs that are that are competitive.
Dave: We would expect that to take.
Dave: A long time and would not impact near term results.
Speaker Change: Got it and my last question is regarding the government vertical I know government, you're more of a state and local but do you have any any federal U S.
Dave: U S federal programs.
Speaker Change: Can you provide any update or color.
Dave: Yeah.
Dave: Federal business is we view federal as an opportunity.
Dave: One of the things we didn't highlight on the call is that we've invested in certifications.
Dave: That we qualify for federal government projects.
Dave: And we've completed some of these certifications, which is opening up new opportunities for us in the federal space, but.
Dave: If you look at our results for the quarter and for the last year, our federal business is really immaterial.
Dave: So this for US is more of a growth opportunity, where we're looking at cloud we're looking at our fabric differentiation.
Dave: And with new certifications.
Dave: We're creating new opportunities so for us it's more of a growth vector.
Dave: One of one of our federal.
Dave: We have.
Speaker Change: Partners that we work with and as as the government is looking for new ways to drive better outcomes and to change current practices with with new vendors to drive savings and efficiencies that puts its extreme in a pretty good position. So we're kind of <unk>.
Dave: Cited about that.
Dave: The potential growth that we haven't federal despite what's going on from a macro perspective.
Dave: These would be gross spend perhaps.
Dave: Got it thank you.
Speaker Change: Our next question comes from the line of Eric Martin Mucci with Lake Street Capital markets. Your line is opened.
Speaker Change: Yes, I appreciate the insight.
Speaker Change: Early buying the small amount of early buying by your customers what about your own inventory planning are you buying ahead I realize it might not be something that runs through the P&L in Q4, but might impact cash.
Speaker Change: Yeah, Eric I'll cover this one.
Speaker Change: The good news is right you are starting to see our inventory levels, our own inventory levels come down when we have already normalized at the channel level, but even our own inventory, we're starting to get better working capital optimization there.
Speaker Change: I think I said my prepared remarks, we have kind of curtailed some of the <unk> that we had because we had a lot of finished goods and raw materials that we were still working through but the reality is that that's obviously, our working capital improvement story for us going into the fourth quarter as we continue to work to normalize that.
Speaker Change: I would say, we're still doing well there.
Speaker Change: And we've got plenty of inventory thats non tariffs that we can continue to sell into the market and thats what gives us confidence.
Speaker Change: <unk> raised price in the fourth quarter, and then we'll assess again.
Speaker Change: When things at the tariff level start to normalize and we figure out what where networks in July.
Speaker Change: Okay, and then on the Opex side, you mentioned the $137 million.
Speaker Change: non-GAAP Opex number in Q3, that's gone up to $1 43 to $1 45.
Speaker Change: In Q3 I had yet.
Speaker Change: We're a little bit more than that it was higher than where you guys actually came in is there an expectation that $1 43 to $1 45 that youre going to be investing in R&D personnel. Our sales personnel or is that just all tied to kind of a fiscal year and variable comp.
Speaker Change: There's a couple of things in there right the connect conference, which Ed mentioned the oversubscribed connect conference in Paris, we're going to have 1000 attendees. There that's one of our larger marketing events.
Speaker Change: Customer events for the year, so that's baked into the $1 43 to $1 45 numbers.
Speaker Change: That's a good answer.
Speaker Change: A couple of million dollars to a few million dollars of expense that we have in the fourth quarter and then naturally in our fourth quarter, where we've got higher revenue coming through that we're expecting right now will have higher commissions in the fourth quarter that were also baking into our guidance. There. So those are that's probably the two major reasons for the increase.
Speaker Change: Opex, we are continuing to make growth investments in areas, both sales marketing as well as innovation, but as you know we've been very prudent throughout the year on that to try and drive more and more profitability and I think.
Speaker Change: Happy where we are from ups.
Speaker Change: <unk> contribution to the bottom line and.
Speaker Change: It seemed that the topline kind of contribute to the bottom line because we've kind of maintained however, opex to be fairly flat, even though we're driving more revenue growth and more innovation as a company we've done a good job.
Speaker Change: Got it thank you.
Speaker Change: Sure.
Speaker Change: Our next question comes from the White of Tim Horan with Oppenheimer. Your line is opened.
Speaker Change: Thanks, guys can you give us a sense of how big your data center business is now and kind of how that how that's trending.
Speaker Change: And then secondly on the go to market or are you seeing actual improvements per sales per.
Speaker Change: Per salesperson at this point in terms of.
Speaker Change: Bookings some productivity thanks.
Speaker Change: Yeah, Thanks, Jamie Yeah.
Speaker Change: Yeah, well and if you wanted to get a come from behind.
Speaker Change: Our datacenter business.
Speaker Change: Is.
Speaker Change: Tim It depends on what your definition of a data center is so for enterprise data centers on Prem.
Speaker Change: That's in terms of how we look at that business that's probably.
Kevin Rhodes: And I'm going to provide a range, Kevin and you can back me up, but I'm going to say kind of 10% to 15%.
Speaker Change: Of our overall business.
Speaker Change: As I said before.
Speaker Change: No.
Speaker Change: We're playing more on that on Prem data center for enterprise customers.
Speaker Change: In general for the for the broader market, we have specific applications, we have with Ericsson with horizon.
Speaker Change: We have unique.
Speaker Change: Yes high end and we had our fourth our first 400 gig.
Speaker Change: Sale, which is a very specific use case for Ericsson.
Speaker Change: And what we would consider more of the service provider category.
Speaker Change: Which for US is just a very targeted kind of niche opportunities.
Speaker Change: More broadly we are refocusing on the evolution of the enterprise data Center.
Speaker Change: And the requirements and what we believe.
Speaker Change: How that will evolve.
From a productivity perspective.
Speaker Change: We are expecting as we as we move up market and we sell larger deals.
Speaker Change: Yes that that brings productivity to us.
Speaker Change: As we improve our partner programs and we drive.
Speaker Change: We drive business through the channel and the channel generates business for extreme that drives productivity. So I think.
Speaker Change: We believe that we have an opportunity for productivity gains as we go forward.
Speaker Change: Great and then just any more clarification, Kevin I don't know, Kevin If you would ask Kevin if you want to comment.
Speaker Change: Or provide any more specificity on the datacenter side.
Speaker Change: Ed I think you nailed it.
Speaker Change: That's the range I think youre right.
Speaker Change: Little less than 50%.
Speaker Change: Between 10% to 15%.
Speaker Change: And I guess do you expect that business to grow faster than the overall company as you know it seems like data center space is pretty hot right now.
Speaker Change: Yes.
Speaker Change: For us.
Speaker Change: Sure.
Speaker Change: Our success has really been driven as I mentioned before which in bi.
Speaker Change: Our fabric technology and cloud.
Speaker Change: And that tends to be more campus oriented.
Where it gets a little fuzzy as that campuses have data centers and then the question is what's your definition of a data center. So.
Speaker Change: Clearly, it's not hyperscale.
Speaker Change: And then one of the nice things about our fabric technologies that extends from the enterprise data center and at the core of our network all the way out to the edge and actually for the application that we built for the Japanese government across the wide area network across SD Wan So.
Speaker Change: The fabric is a great campus technology from the data center, all the way out to the edge again, our competitors don't have it gets a little fuzzy when you start trying to define what is that data center.
Speaker Change: Because some can be smaller than some might consider it to be more of a kind of a campus core network, which is a little bit different so.
Speaker Change: We're looking at.
Speaker Change: The campus enterprise and to the extent that the Datacenters on campus that would be included and we're we're we're expecting growth very helpful. Thank you.
Speaker Change: And Ed you might just want to add that.
Speaker Change: Coming out with a 400 gigahertz switch.
Speaker Change: In the summer that that will actually be part of data such a French prices as well.
Speaker Change: Yes, yes.
Speaker Change: And there are no further questions at this time I'd like to hand, the call back over to <unk>, President and CEO for closing remarks.
Speaker Change: And thank you and thanks everybody.
Speaker Change: For attending the call.
Speaker Change: I want to shout out to.
Speaker Change: Our employees customers partners, who may be listening in.
Speaker Change: Our employees, especially for their hard work extreme we fight above our weight class.
Speaker Change: And that's really due to all the hard work of.
Speaker Change: The employees at the company.
Speaker Change: I also mentioned that we will.
Speaker Change: I will encourage people to tune in to connect where less than three weeks away.
Speaker Change: We're in Paris, we have.
Speaker Change: Over 1000 people in attendance. This is by far our largest user conference.
Speaker Change: And it's fueled by interest and extreme platform one.
Speaker Change: As well as fabric, but theres a lot of there's a lot of content there.
Speaker Change: It's going to be a very full session, but we are going to record and broadcast some of the main stage presentation. So I would encourage investors to tune in theres going to be some really interesting reveals as far as our technology innovation as it relates to extreme platform one.
Speaker Change: So with that.
Speaker Change: Thank you for participation and have a great day.
Speaker Change: This concludes today's conference call you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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