Hi, good afternoon, and thanks for joining us at the Rosenblatt Age of AI Tech Conference. I'm Mike Genovese, the cloud and communications equipment analyst here at Rosenblatt, and super happy today to be joined by some members of the executive team from Extreme Networks. We have Kevin Rhodes, the Chief Financial Officer, and then Nabil Bukhari, the Chief Technology Officer and Chief Product Officer, and Stan Kovler, Head of Investor Relations. Hi, everybody, and great to see you all.
Thanks.
And so this is gonna be a Q&A session. We're not gonna do any presentation. We're gonna dive right into the fireside chat format, and I wanna make sure that everyone in the audience has a chance, also to have their questions asked. So if you've been on any of these fireside chats already, as a participant, you'll have a control panel with the opportunity to type in a question for the company, and that will come directly to me. And if you've been watching these at all, you know that I like to ask the questions exactly as written. So if you send me a 12-part, run-on question, I'll ask a 12-part, run-on question.
If you wanna ask me something really surprising, if you wanna ask them something really surprising, you know, whatever you ask them, I'll, you know, I'll pass it along to the company. So let's try to have fun with that. So I'll probably ask more standard questions to you guys. Let's get it kicked off. Kevin, you know, one theme, I mean, I'd say we, we have more service provider than enterprise-focused companies that we've spoken to so far at the conference, you know, at least for myself. But a consistent theme, a consistent question, that's been being asked is this whole idea of, you know, calling the bottom.
You know, having seen sort of which quarter for the companies, you know, would be the lowest quarter for revenues, confidence in sequential growth from here. You know, what's happening with things like demand and inventory? So sort of, you know, confidence in the latest forecasts and confidence that we've sort of called and seen the bottom as we move ahead. Can you start with those questions, please?
Sure. We've been pretty consistent saying that our third quarter, we believe, is the bottom. As a matter of fact, $211 million was our revenue then, and then we guided up in Q4 from that to $250-$260 million, $255 million at the midpoint. That's a pretty meaningful increase, you know, quarter-over-quarter sequentially. So I think from our perspective, that is definitely the bottom. We feel confident saying that that was the bottom at Q3, and that we can start to grow up from there. You know, our view is that we could see some stairsteps happening here over the next several quarters. You know, Q4 over Q3, Q1 to Q4, and then Q2 over Q1. The reason why we have some confidence there is we are still actually having some digestion in Q4.
So the $255 really would've been higher than that, but for the finishing of the channel digestion that we saw at the disty level, and then coming into Q1, you know, the... We are also seeing some demand starting to come back. I wouldn't say it's fully back to what we are expecting probably in the second half of our coming fiscal year. We feel like that demand will be stronger than the first half of this coming year, but we still see some demand coming back in pockets and areas, and we're also seeing some disruption in the marketplace. People are worried. They're worried about, you know, you know, who wins between Cisco and Juniper, and what technology stack is the stack that's going to survive.
And then, obviously, Splunk has made, you know, Cisco a bit distracted with all things AI and all things, you know, you know, monitoring and, you know, and that sort of thing. So I think there's some disruption in the marketplace, too, that could create a halo effect for Extreme.
Yeah, I guess I wanna dig more into the, that, you know, the overall market improvement versus, you know, competitive dynamics that are going on. Because I thought you guys were pretty aggressive, right, in taking down that channel inventory. And so coming in at $311 million in the third quarter, you probably could have had a higher revenue number.
Sure.
Sorry, $211, right? You could have had a higher revenue number, but it would've you know, you wouldn't have cleared out the channel inventory quite as much, with just a little bit left to go in the fourth quarter. So I thought you guys were really aggressive about that and probably ahead of the industry. But, you know, when Cisco reported, and Cisco's Analyst Day, I guess they've kind of echoed some of the things you've said about you know, demand starting to get better, inventory looking like it's coming to the end this quarter. So it seems like even, you know, I wanna talk about competition.
I wanna talk about ways we can take share from Cisco and Juniper and others, but that the turn, the overall turn in the industry does seem to be somewhat echoed by your competitors. Would you agree with that?
Yeah. So one harbinger of the opportunity in the future is this run rate business, right? They come up in a quarter and close in the quarter. We didn't have it in our pipeline starting the quarter, but it comes up, and these tend to be less than $50,000 deals. And we look at and monitor that particular area of our business and see is that growing, and we are even seeing in the fourth quarter, that that particular part of the business is actually improving a bit. So that gives some indication of, "Oh, okay, so the run rate business is coming back a little bit stronger.
That's good." And I think that we are gonna get more at-bats on these million-dollar-plus deals in the future. Because if you're looking at Cisco versus HP or Cisco versus Juniper, it's kind of like Cisco versus question mark.... You gotta have Extreme in there.
You just have to at this point, because you just don't know which of the other technologies are gonna be the surviving technology as they try and get synergies and bring these two companies together, and what's all that look like?
Right. You know, I normally wouldn't ask this question this early in the conversation, but I've just been hearing more about it, so I wanna get it out here. But I've been hearing, you know, related to your MSPP distribution expansion, which I guess I'd like you to talk, you know, more about overall what that is, or MSP, sorry, MSP, you know, distribution expansion. That I've been hearing more about service provider opportunities that more now than in the future. Is there something going on with new, where service provider could be larger than it historically has?
I'm gonna go to Nabil. Nabil is the GM, not only the CTO and CPO of our business, but he's the GM of our subscription business.
He's the one who's defining the products for MSP and for the SP, so I'll let him kinda take that.
Thanks, Kevin. Hey, Mike. So yeah, so those are two new routes to market for us, that we've been kind of working for, on for a little bit, and they're... They've just come online, if you would, in the last couple of quarters, this within this fiscal year, and we do believe that they will play a bigger role as we go to fiscal 2025 and then 2026, and so on and so forth. So MSPs, let's quickly talk about that. So MSPs, I think MSPs have been around for a long period of time, so they're not a new thing.
So everybody gets it, you know, companies, big or small, they offload their stuff, and they say like, "Okay, you MSP, you go run it. This is not our core competency." So the model from MSP out is the same as it used to be, so that has been there for a while. We traditionally never really had a commercial model for these MSPs. A lot of our partners were buying our stuff just like regularly and then building MSP programs on it, and we realized that this is a good opportunity for us, so we started our program, you know, for MSPs. Which you could ask, like: Okay, so what? Everybody else has an MSP program as well. What's unique about yours? The unique part about ours is that our MSP program into our MSPs is actually commercially consumption-based.
So rather than, you know, if you go to, say, our competitors, like Cisco or HPE, sure, you can buy equipment, and you buy licenses, and then you go to manage it, and yada, yada, yada. That gets complicated. Number one, the transactional cost is really high, and the second thing is, as the demand or the install base on the MSP itself goes up and down, that generates a risk for that MSP from a balance sheet point of view, right? So the way our program is set up, since that is consumption-based and the consumption on a monthly basis, so it's an MRR business.
So what it does is it allows them to reduce the transaction cost because our entire portfolio is under one transaction, and it also allows them to not have that much risk on their balance sheet if their, you know, install base goes up and down. And those two things, they seem pretty tiny on the surface of it, but that is on which the MSP model is built in the first place. That entire business is built on that. So we are getting really good feedback on that. It's still early days. We just introduced it in this fiscal year. We're kind of, like, in that early incubation phase this fiscal year, but 2025, we see that kinda coming up a little bit.
And one pane of glass too, right, Nabil? So an MSP can see all their customers on Extreme on one pane of glass, which I think a lot of them really like that.
Yeah, and that's that our portfolio lends itself naturally better to an MSP because if you're doing, let's just say, MSP on Cisco, you have multiple different management systems, multiple different licensing schemes and stuff. So you have to kind of look through all of that, so that adds operational cost. Our portfolio is all single license on the subscription side, as well as, you know, all under the same cloud, so it naturally fits much better to an MSP. Their cost on the operation side is quite a bit lower. Now, the service provider part, I wanna kind of address a little bit. So when you think about service provider, there are really two big businesses. One is sell to, and the other one is sell through. So the opportunities that you are kind of really starting to hear a little bit about are mostly sell-through opportunities.
We obviously have our sell-to business, which is, you know, as it is. So these sell-through opportunities... And what we are seeing, and I won't go into too much of the detail on this, but this is our private offer with some of the largest service providers, and the idea behind that is that we are seeing a lot of margin compression when it comes to large service providers selling into their enterprise customers. And the way our portfolio is, we are able to configure it in such a way, the commercial side, that it actually allows a lot more margin to the service provider, which naturally makes them more inclined to deal with us compared to our competitors. So those are the two new routes to market, which, though in early phase, we do believe that as you go into 2025 and 2026, they will become substantial.
Okay, to be clear, the service provider, it's an enterprise business. It's selling through them as... Okay, got that. Now, is the service provider piece of this similar to the MSP piece, and that's a consumption model, or is it just the MSP piece that's consumption model?
Sure. It is not consumption-based, it is subscription-based, and the reason for that is that the larger sell-through traditional models are not set up for consumption billing to their customers. So they don't really bill them on a consumption basis. Now, you would see there's an overlap between the two. There are certain service providers that are doing consumption billing. So from our side, it becomes very simple. If you are a traditional seller into the enterprise, then the private offer is a really, really good structure for you. If you are selling consumption into your install base, then our MSP program is really, really useful because, remember, they both have the same exact entire portfolio behind it. So these are really routes to market commercial model, you know, innovations.
Yeah.
You can get the entire technology either way. That just makes it super simple and super, you know, focused on the end market opportunity for our, for our partners.
Has the consumption model began rolling out yet, or is that, is that something that gets turned on in front of us?
No, it is. It is. So, we have, and I think Kevin talks about it better than I do. We have, like, about our plan was to kind of sign on, like, about 25 partners this year as a, as like, "Hey, let's just figure this out and make it done." So we have signed all of them. Now, obviously, they don't all ramp up at the same time. But we have, like, about good, you know, five to 10 partners that have ramped up in the sense that they have gone through the entire process, you know, the billing, the technology, you know, the portal for the MSP. So that's all in place. It's all working well, and we plan on kind of increasing it, expanding it from there in fiscal 2025.
So consider this year as more of an introduction incubation phase for this program, and 2025 would be really where we'll be able to scale it.
Yeah, and we said on our Investor Day, we're trying, we're planning to sign up 25 per year, right? So 25 this year, 25 next year, the year after. We think each one of these MSPs that we're targeting can do about $2 million-$5 million a year easily, in kind of a combination of product and subscription and support, you know, bookings in any given year. But incrementally for us, that would be roughly $50 million-$125 million at scale. When each one of them scales, those 25 scales up.
It'll take 'em probably a year to scale, but the reality is, that's a new vector of growth for us that we've never seen before in our business, that we will, you know, start to generate, you know, pretty meaningful improvements in our just overall bookings in the next 2-3 years.
Great. And then just to also be clear, I'll make sure I'm clear with this. You know, if your entire customer base, which—this is not what's happening, right? But if your existing customer base were moving to a consumption model, then that could be good for the long term, but in the beginning, that would... that, that could—that would represent revenue headwind. But this sounds like these are just incremental customers going to this model—
Absolutely
... so it's additive.
Correct.
It doesn't suggest that there's further, you know, to the earlier question, that we have seen the bottom, and a change in the model is not gonna impact that.
Well, to be clear, each one, MSP-
Yeah
... traditional model, they're both buying hardware.
Right.
This is being bought, you know, bought by the MSP. This is being bought by the end customer. Both have subscription and support associated with them, especially when we go to 100% attach.
So to us, we're somewhat agnostic around what is the model that you buy through. It's still a hardware purchase. It's still a subscription and support purchase. So it really is, and we're not seeing cannibalization, if you will, of people moving from traditional CapEx model into the MSP model. We actually see new MSPs, new resellers, coming on board for the company that will be additive to our overall reseller base, which is new for us. And same thing with SPs. We don't have an SP business today. That is a model that we're creating, a go-to-market model that will create incentives for those SPs to come and start reselling through, you know, with Extreme year.
Great. So just more broadly speaking, in the enterprise market, you know, kind of, we've had the, you know, the inventory build, and now we're, you know, we're moving past that. You've got, you know, competitive concerns about some of the larger players. But what from a, you know, a technology perspective is driving upgrades? Like, is Wi-Fi 6E or 7, is that important? Are there other new SaaS technologies or other things that are, you know, you know, causing some spending to be going on?
Yeah, so there, there are a couple of trends, and I can, I can start with that, and then Kevin and Stan can jump in in there. So there are a couple of simultaneous trends that are happening in the market. The one- the bigger one I can talk through is just, again, this continued migration towards the cloud, right? Now, obviously, that's not a new trend, but that trend is now pretty much in the mainstream, right? So, three years ago, it was still like, "Oh, early adopters are ready to, like, do all this networking and security from the cloud," but, you know, there are people that are still, you know, like, a little reluctant.
So we have moved to that mainstream, so that it's not fully done, but it continues to drive a lot of movement in from a technology and architectural point of view. The second thing, if you go within the Wi-Fi part, it's really interesting. The trend that we are seeing is that with the introduction of 6 GHz spectrum, especially in the U.S. and other places where it's ratified, people are now considering Wi-Fi for more mission-critical applications, as well as applications that traditionally were too either bandwidth-hungry or too latency. You know, they were very, prone to latency issues and stuff. Now, what that's doing is that that's driving an upgrade cycle in multiple different technologies. So one is, of course, the APs towards Wi-Fi 6E and Wi-Fi 7 because that brings the 6 GHz.
Alongside it goes the upgrade on the edge switching side, Multi-Gig, because they kind of tend to go together. It also. Another part that's added to is that most of the applications for which you want that extra bandwidth of 6E and stuff, they also run on PoE. So there is that PoE++ 90-watt, you know, so that kind of gets included into this as well. And then the last part is that you've gotta have the cloud that manages all of these things from one single place. So it's really an upgrade cycle that has the components of 6 and 7 AP, Multi-Gig, you know, ports, 90-watt+, you know, power, and then a cloud that stitches it all together. And that, as you can imagine, fits really well with our portfolio.
So we are seeing this combined solution-based upgrade cycle rather than an individual upgrade cycle, which is great for us because anybody can create an AP. That's not that difficult thing to do, but creating the entire solution, obviously, there's only a couple of companies, maybe three companies, that can really do that. So that really lends itself very well to our strategy.
Yeah. Yep.
The last-
And so,
So last trend, because I don't wanna forget that, is this, you know, everybody talks about the security and networking kind of a thing coming together. One of the things where our view is a little bit more expansive than other people is that it's not just security and networking coming together, it's security, networking, and cloud coming together. Security and networking are not coming together on on-prem. Firewalls are not turning into switches, and switches are not turning into firewalls, right? So on-prem, you still have switches, and you still have firewalls. It's when networking stuff and security stuff goes to the cloud, that's where they're really integrating. So it's not about networking companies, you know, having firewalls and firewall companies having switches and APs. That's not the integration trend.
The integration trend is you have that cloud that can bring it together. So that's the third big thing that we are seeing out there, and that's driving, you know, some acquisitions in the traditional SASE players as well. It's driving some consolidation as well. It's also driving, you know, some introduction of new products and stuff. So that's the third biggest trend. I wanted to make sure to point that out because that is important to us as we look towards the next couple of years.
Yeah. Can you talk, Kevin, about... or Nabil, you know, trends in sort of, you know, cloud and software attach rates for wireline switches? I think wireless, it's access points, it's already very high, but how that's increasing. And then on your, you know, is the entire sort of selling motion to, you know, built around yet this good, better, best model? And how is, you know, things like, you know, zero trust security, or AI expert, or what else in particular would be compelling right now to kinda drive more consumption of, you know, and drive people towards, you know, best spending best amounts of money? From good and getting better amounts of money.
Of course, we want them to spend more money, right?
Yeah.
So Mike-
I'll let you cover it, but cover it between the principal-
Yeah
... attached motion we have, and then-
Yeah
... the good, better, best, and what's gonna be in-
Right
... any one of those.
Yeah, exactly. And please feel free to add to it because there was quite a few questions in there, Mike, so I'm gonna try and remember all of them.
Yeah.
So the first one was around attach rate. So as you rightly pointed out on our Wi-Fi, the attach rates to our subscription is very, very high. On the, on the switching side, not so much. If you combine them together or of our entire install base, we are somewhere around the 65% range, if you would. And the idea is that with the newer technologies, some of them that you mentioned, obviously AI and stuff like that, that will actually increase, right? So and we have certain motions behind the scene. We have obviously talked to you about them. Good, better, best is part of that. Principal attach is part of that. All of those motions, the goal is to drive that 65% as close to 100% as possible, right?
Now, the two things, the good, better, best, that motion right now is not out yet. We're planning on essentially going, you know, out with it or implementing it in the start of the next calendar year. So you can think like January, February timeframe. So that's when it goes out.
But it doesn't... That doesn't, and that's where you pointed out the other products as well. So it's not just the change in the licensing model, there's a lot more capabilities that go with it. So at Extreme Connect, we introduced the Extreme AI Expert, which is, which is the front end of a much, much broader AI strategy. It's not just the chatbot, it's the front end to a big, big AI push for that. We also have our Universal ZTNA products , which is really what I was talking about, networking and security coming together inside the cloud. So that product has gone limited availability as well, so that will go GA alongside this as well. So it's a combination of a lot more capabilities and even a further simplified licensing model.
Combine those two together and then apply the principal attach to it, and that's where not only that our attach rate would go up from 65 trending towards 100%, but the ARPU, which is the Average Revenue Per Unit, or ARPA, which is Average Revenue Per Account, that will also increase because of the addition of all of these additional capabilities that we're talking about. So that's really our strategy on the subscription side. On one side, trend the attach rate towards 100%. Second, more capabilities, more widgets, as people like to say, to increase that ARPU and ARPA.
Any more color you can give us on this front end, you know, of the AI strategy? I mean, I think AI Expert, as far as I know, right, that can help you.
... make big decisions about how to run your network, right?
Yeah.
Or, you know, at least, you know, give you input into it and insight into that. What else is behind, coming behind that, you know, just broadly speaking.
Yeah. So I can, I can give you a little bit more view on this. So first, on the use cases part, right? So I'll, I'll talk about two things. First, the use cases, and then the technology behind the scene, right? So from a use case point of view, obviously, there's hundreds of use cases for AI, but we categorize into three big buckets.
The first one is knowledge questions, right? So, oh, I wanna ask, you know, how do you do this, or what does it mean, and stuff. The advantage for that for the end customer, think in terms of onboarding new, you know, member of the teams, training your new sellers or new people, you know, upgrading your networks, you know, getting access to support and stuff. So all of those use cases, they get accelerated. So that's the big advantage, very clear ROI based on the knowledge questions. The second one is what we call as intelligence or operational questions. This is where, hey, how do I optimize my network? You know, looking at my bandwidth, telling me why my Zoom is not working, you know, from the side, and, and what do I do with it? So, auto remediation, auto troubleshooting, auto optimization and stuff.
So those are the use cases that fit into that bucket, and obviously, the ROI is pretty straightforward for that. The last bucket that I feel like in the long term will become the most interesting one, is what we consider as these, planning or what if questions. So think about, you know, retailers. I don't know how big the Black Friday is now, just taking it as an example. You know, now they have data for the last five, you know, events and Black Friday, and now they wanna say it's like, "Hey, take into account all of this, and now give me the right configuration for my entire network for this upcoming Black Friday." Like, people spend a lot of time figuring that out. They have full departments to do that. Healthcare is the same way. Stadiums, venues are the same way.
You know, what do you wanna do on the next, like, World Cup or whatever have you? So all of these use cases, they will be now done by the AI, so that's the third big category. So these are the three big use case categories, and, you know, that's how enterprises will go through it, starting from knowledge, moving over to intelligence, and then finally, planning. Behind the scene from a technology point of view, Mike, look, just having a chatbot is kinda cute, it's kinda nice, but, but that's just the hype cycle. Everybody will have it. That's, that's the super commoditized stuff, and then once the froth settles down, then the real use cases come out. There's three things that any vendor needs to provide for it to be successful.
Number one is technology that is not just LLM-based, so multi-agent, multi-modal AI tech. And I, I won't go into the super detail of it, but the idea is, it's not just generative AI. There is hundreds of different kinds of models that need to be brought together to do more complex use cases on networking. So it's just LLMs, right? So that's the multi-model, multi-agent. So that's number one thing. They gotta have that, and most companies don't. Second one that they have to have is that it needs to be a data ecosystem. Just having data from my devices is nice, but the real value happens when you take data from network and the end devices and combine them together. At our user conference, we had, you know, Microsoft and Intel with us to kinda talk about this data framework.
We have, you know, public relationship with Intel on the NUC side , with Zebra on the handheld side, so on and so forth, and that ecosystem will grow. The last one is you need to have a commercial model that encourages adoption. One of the things that we are doing, which is very unique to us, is that all of our AI capabilities, once we go to good, better, best, are available in the base, which is the standard or the good level. You do not have to go to the advanced level to get these capabilities. Then the question is, "Well, how the hell do we make money?" We make money on consumption.
What we are seeing from our customers is, enterprises are not fully clear what they will use AI for, so they do not have very well-defined ROIs. So they do not wanna lock themselves into these term-based subscriptions. They're like: Give me the capabilities. Let me use it. I'll pay you for what I'm using so I can experiment with it, I can understand it. Lower the barrier to entry, right? So us bringing our AI on a consumption level, even to our regular enterprises, I think that's the big commercial innovation. So PaaS, data ecosystem, commercial, you gotta have these three, and that's really our strategy. So I think it's-
I think the point, Neil-
... it's gonna be-
It's not a separate license that you have to buy for AI.
Yeah.
You're taking away that barrier where people tend to say, "Well, I want a proof of concept. I wanna understand how much I'm paying for this license. Is it based on the amount of seats? Is it based on..." Like, all of that noise gets taken away when it's like, "Guys, it's here.
Yeah.
It's part of our platform. Our platform is given to you. You can test it. You can figure out how good it is, how much it saves you money, and then you can figure out whether you wanna use it more or not." And that's, I think, the trend that we are going into on AI is exactly that, which is ubiquitize it to our customer base. They'll see how good our AI... We believe we're gonna leapfrog, by the way, our competition on the AI, this fiscal '25, and that's a big deal for us. Because some of our competitors, like, sell, you know, based on AI, and we believe that our AI will be even stronger.
Okay, fantastic. Great. You know, I just wanna ask Kevin about, you know, sort of Europe, the macro weakness that's sort of been around for the last couple of quarters.
Yeah.
What's the current view of Europe?
Well, I was saying earlier, that run rate that I was talking about, that's starting to come back a bit more in Europe. So that's what's what gives us a little bit of excitement around, "Geez, is Europe starting to, you know, come back, and is it gonna turn the quarter? Is it gonna start to, you know, the whole economy in Europe, particularly in Germany, is that gonna start to get better?" I won't comment intraquarter on where we are, but I would just say, generally speaking, we feel like there is a stairstep of improvement coming in Europe, and that's what we're excited about. Because that's been an area where that's come down over time, and now we're looking forward to that come back and not, you know, to come back up.
Yeah. What else should we talk about in the competitive environment? I mean, you know, vis-a-vis Cisco and Juniper and HP. I mean, I think we know all the issues with all the M&A that's going on. But, you know, is it just the M&A and the distractions there? I guess we should take it separately, right? There's Cisco, and then there's HP and Juniper. But sort of what is the compet- what is the... You know, what are they doing or not doing, each one of these, that should allow you to get, you know, to get in there with their customers?
Just as a side, Cisco Live just happened. I mean, I don't think the word networking occurred in any of their conversations with their-
Yeah.
It was all about AI, and it was all about monitoring.
Yeah
... and so it's like, geez, feels like they've abandoned their networking business, and it, a little bit, and it feels certainly like it's not on Chuck's mind every single day. And so that's the question, is like, is Cisco actually going to continue on the networking side or not? And then, obviously, with HPE and Juniper, our thought is just there's a lot of indecision. There's a lot of questions about how the roadmap happens, what technology wins, what happens to the resellers. Are the resellers gonna get get commoditized? They have different price points between Aruba and, and Mist. What happens there?
Yeah.
There's different economics for those partners. All of those things have, I'll call it, created a swirl in the industry of indecision, and it just, you know, not knowing what's gonna happen, which, you know, creates opportunities for us to chat with some of these resellers or these customers, who are worried about what's the future look like.
Yeah, and I can add, like, the technology spin on this. Kevin is spot on. You know, those are the big questions. When I got, like, multiple texts where it was like, "Do you think Cisco is gonna divest their networking business?" I was like, "Well, whoa! Let's not jump that far ahead.
Yeah.
But people were kinda surprised on this. But from a technology point of view, if you think about this, Cisco was never able to use cloud to converge all of their separate businesses. Like, even Meraki and Catalyst, they were not able to do that.
Now the message that they are kind of proposing is that they will use Splunk to do that, right? So now that is kinda like, okay, you weren't able to do that with cloud, and now you want Splunk to do that? You know, so there's a big amount of doubt around their ability to execute to that.
You know, I will never write them off, but, you know, it just... There is, there's a certain amount of doubt on there. Now, on the technology side, on Juniper and HPE, I think if you take their portfolios independently, they're very good portfolios. But when you kinda put them together, that 100% overlap, that just makes it extremely risky because there's only two scenarios. One scenario is that one dies, and the other one takes over. Now, that commercially and from a market point of view, will be very good for us, by the way. But that would be one thing. This is what Kevin is pointing out. The second one is what they have kind of indicated, where they've said, like, "Hey, we'll continue to carry both of them." Now, first thing is that nobody can carry both of them.
You know, where are they gonna find that $500 million of synergy from? And the cost of that is too high. So the second option then becomes is that they're gonna try and combine these two things together, and that will translate into a Frankenstein, right? And that's really the big issue that they have on their mind, that if they try to combine them together, it's not gonna work technology-wise. If they kill one versus the other, that's gonna hurt them commercially. So that's... and that's the conversation around that. Nobody knows how exactly they're gonna do it, and right now there's just conversations and doubt. I think this will just get more clear that how much of an impact it's going to be on them, call it, like, another two quarters after their actual close. So I believe that we're in the doubt phase of it.
The actual hurting phase will probably start 2-3 quarters after the close. So that's kind of the way. Actually, the customers and the partners are kind of explaining to us how they're viewing it.
And I think the challenge for us right now is, like, how much of a halo effect do we get-
Yeah
... out of this? We don't know, right?
But at the end of the day, we are gonna be there in the market, focusing on and marketing to all the resellers, all the customers in a meaningful way.
Yeah.
Why wouldn't we? It's a once-in-a-lifetime opportunity for us to go be disruptive on our end, too. So that's our focus.
Yep. This is not a very important question, just something I'm sort of curious about. I mean, you know, for obviously for your cloud operating systems, you're constantly, you know, writing, you know, applications and features and, and capabilities. But for your customers, let's just say Kroger or FedEx, I guess, I guess they can separately write their own applications or, or source their own applications that will just, you know, all run on your system. So if they, if they really wanna specialize for their industry, applications specifically for their industry, I mean, you don't have to be involved in every, every part of that, right? They can just run it on the open cloud. Is that-
So-
... is that right to think about it?
... So yes and no. So yes, in the term, that if they wanna, let's just say, if they wanna write automation or applications that help manage the network, then they can write it on their own. But quite frankly, nobody writes it against the device any longer because that's costly. You have to understand all of these APIs, different devices, and stuff. For good vendors, you write it against their cloud. So that's what they do. So they write these application against our cloud, which can take the data and the, and all the information from our cloud and do their own thing. So 100% they can do that.
But the other part also is that as some of these larger companies start to think about writing applications that have AI in it, what they are realizing is that they don't have that entire infrastructure for AI. Anybody, as I said earlier, anybody can write a chatbot with an LLM. That's not the problematic part. But do you actually wanna do something interesting on the network? There's a lot more other things that are required, and that's, by the way, Mike, will translate into an advantage for us. Because in our AI platform, not only are we building our own applications on it, like AI Expert and stuff, we do have a strategic direction in which that platform itself can be opened up, you know, for very large customers and partners to write their AI applications, which would just massively accelerate them.
So that's, that's the part that I was saying, you, you've gotta have technology more than just a chatbot. So that really plays into the advantage of our AI strategy, and some of our very key customers and partners are actively doing that, writing applications on our AI platform, for things that involve our products and some other products as well.
Right, we may just have a few minutes left. I think my, you know, one of my last areas of questioning here is sort of on the long-term growth rate. So I mean, obviously, I think when you get into, you know, when you're comping to the second half of 2024 or the first half of 2025 fiscal, right? I mean, those should be easier comps, right? And things should feel pretty good in comparison to that as they come back in late 2025 and 2026. But you know, so I can see, for instance, in 2026, how, you know, it might not be... There could be some tailwinds, right, in getting to the 10%-12% sort of long-term growth that you've talked about.
But beyond that, you know, as we get to fiscal 2027, 2028, sort of consistently, you know, achieving 10%-12% revenue growth per year, which you seem, you know, pretty confident on every time I've questioned you on it. Could you sort of break down any components of that? Like, how much is market growth? How much is share gain? How much is sort of things that you have working in your business model that help support growth? I mean, how do you sort of frame how we get to 10%-12%?
There's a couple ways to frame it. One, product growth versus subscription and support growth, right? Just how are we in our company growing, right? The market, the products are growing at 3%-5% in the marketplace, and we see that. But yet our subscription growth, our cloud subscription and support, is growing at faster rates than that. We continue to think that the recurring revenue nature of our business is going to outpace the product growth over time. So we could see product growth growing in the high single digits, but there's a subscription and support growth being double digits over time. So, even if the market is growing at 3%-5%, we think that we're kind of, like, at 2 times that level of growth in general. That's one, that lens to look at.
Another lens to look at is how are we gonna attain that growth? Well, there's the commercial model, which we've always run, there's the MSP model, and then there's the SP model. Those three go-to markets. But two of those are fairly nascent, and I'll even add a third, which is federal, right? So commercial is enterprise, it's our fabric, it's our technology, it's people buying, it's refresh cycles, it's Wi-Fi 7, it's 6E outdoors, et cetera. The MSP is a new one. That's 25 per year. There's the SPs, and then there's the federal business. Those third, those other three, the federal business, the SP, and the MSP, are not inherent in our existing model that we are building, and so those are gonna create new vectors of growth for the business over the next three to five years.
Those are the ways I kind of think about it a little bit. And then the last thing I would say is just this market and market opportunity. We have Americas. We've got a good you know, strong foothold in Americas, led by SLED for us. We will continue to compete well in the Americas market. EMEA, as that comes back, as the spend gets better there, we'll compete even more there. And then we're doing quite well in APAC. Even though it's a smaller part of our business, I feel like there are great market opportunities for us there, and we'll continue to drive. Korean Air was a good example of a Cisco takeaway. We're driving more and more opportunities in Japan, in Korea, in Australia, and other regions in that particular area of the world.
Even though it's smaller for us, I see that to be, you know, growth area for us as well. Nabil, anything on you beyond those three areas?
Yeah, I think those are absolutely right on. I think from a SOM expansion point of view, we've gotta keep an eye on that, you know, security and networking merging into the cloud side. I don't think that will impact, you know, our fiscal 2025 because it's early days. But as you start looking on that, you know, three-year horizon, I think that's a pretty... That, that's a potentially pretty substantial SOM expansion for us.
And the early signs are really good. And then this AI consumption revenue, that's a wild card. Nobody can really put a number on it. But all indications are that this will be a factor when you look at that three-year, you know, horizon. I don't think Kevin and I can give a number on that, what it would be. It's a little too early for that. That's why I call it a wild card.
But the-
Exactly. But it will be a factor. How big of a factor, we don't know, but it will be. So I would add just those two potential areas for us to generate, especially in that subscription part that Kevin was mentioning, because these both play into the subscription side of the business.
Yeah, and Mike, so it's. We think about it as layering on the core business and all these go-to-market opportunities that Kevin referenced, and as you saw back at our Investor Day, taking the new product opportunities that expand our SOM and layering that in. Just a continuation of what we've been talking about since then.
Fantastic. Well, that went by quick, time's up. You know, I found it to be super enjoyable, speaking to you guys. Thanks so much for participating. Thank you to the audience. I hope, you know, you had a great conference, and any meetings that people have left, go very well for you.
Thank you, Mike. Appreciate it.
Thank you, Mike. Good to see you.
Okay. Nice to see you as well. Thanks.