All right, good afternoon. Jim Fish here on the infrastructure team, here at Piper Sandler's Tech Conference. We have the pleasure of having Extreme Networks, and from Extreme, we have Kevin. Thanks for making the trip out.
Sure. Nice, nice to see you guys. Thanks for joining.
I think most here on the webcast, as well as here in person, know about Extreme, so I don't think we necessarily need to go into that. You guys just finished your fiscal year. You know, networking's kind of been in digestion period, I think, is a good way to put it.
Yeah.
But I think a big question people are trying to figure out is: Where are we on sort of this non-AI spend, core workload spend versus AI spend? And you guys have a nice visibility with your large customer base, so I guess what are you guys seeing on sort of that front?
Yeah, it's interesting, so you know, our market is not really the data center market, all right? It's much more associated with the campus, you know, networking environment, and so what we are seeing is a lot of people are right now experimenting with AI, and so a lot of that has to do with, like, you know, creating large language models and trying to figure out from a data center perspective, you're seeing some growth there on the data center side. Where we think this will all shake out is that while it's not perfected yet, and there's a lot of people testing and experimenting right now, over the next three to five years, we do think that there's gonna be a halo effect.
This kind of, you know, improvement and usage within the overall networking industry that's gonna create kind of an interesting kind of wave of technology catalyst, you know, of upgrade cycle as we think about going from Wi-Fi 5- Wi-Fi 6, and then 6E- 6E, and now 7. Really, the reliability's become that much stronger, and obviously, the feeds and speeds are that much faster that the AI workloads that happen to come about over the next three to five years, they're gonna need, you know, the Wi-Fi 7 to be part of that overall, you know, technology solution.
So we think that AI is definitely gonna be a beneficiary of the AI trends as we think about that over time, but it's gonna take some time for that to happen.
Yeah. So, Kevin, I know you're more on the financial side, but you know your product, so-
Sure
... and you just went right into where I wanted to go with Wi-Fi 7.
Mm.
Like, what actually changes in the standard? Why can't I just essentially take software on top of 6E and be just fine?
Yeah, so there's interesting technology changes between them. So Wi-Fi 6, right, had two gigahertz and five gigahertz spectrums, right? And that was a decent technology improvement, but we moved to 6E fairly quickly, which introduced the six gigahertz spectrum. And that was certainly like a three multiple faster, 6E versus 6. Where 7 is, it's got three radios, it's much, much more reliable, and there's a lot of IoT devices that can go over that. And, you know, it's another, you know, three times faster than even 6E, right? 6E's got 9.6 gigahertz or gigabytes per second, and then Wi-Fi 7's got 30, up to 30 gigabits per second. And so there's a lot more throughput on the Wi-Fi 7. So we think that Wi-Fi 7...
We've heard from research analysts that we believe that in mid 2027, that's gonna be about 50% of all Wi-Fi access points are gonna be Wi-Fi 7 at that point, and so there is going to be a shift to Wi-Fi 7 here over the next, you know, year or two.
Yeah, I mean, is the standard change this time around gonna be enough to cause a refresh cycle? Understanding that data point around 50% by 2027, is the Wi-Fi 7 standard enough to sort of push that number potentially even sooner? Do we get a big refresh cycle as we think about calendar 2025 maybe?
Yeah. I mean, when we look at our customer base, right, 'cause about 80% of our bookings come from our customer base, and we look at that for instance, we have 2.8 million units that are connected to our cloud. We have 2.2 million units that are not connected to the cloud, which means that they're before Wi-Fi 6. And so we're thinking about Wi-Fi 4, Wi-Fi 5 type technologies that are out there that will you know, require a refresh cycle. That's gonna be a catalyst for our growth, because when we go and make those switches into Wi-Fi 6E or 7, those are gonna be cloud connected, and we're gonna get the benefit of the cloud and subscription revenue associated with those.
So I would say, you know, it's Wi-Fi 7 is going to, not unto its own, be this massive catalyst, but I think when you look at experiences changing, airports, now you're getting, you know, visualization and you're getting through the security line that much faster because of, you know, that's running through the network. You're getting, like, grab-and-go stores like Amazon or even in different areas where they have the cameras looking at you. You tap your card, and you walk in, you grab everything, and then you leave. All of that's being driven, that customer experience is being driven by the network, right? The network is enabling a lot of that.
And so we see more and more these customers trying to figure out the experiences and figuring out Wi-Fi—I'm sorry, figuring out AI, and as they figure out AI, and that starts to come over the network, they're gonna have to upgrade their networks over the next three to five years. It'll probably land between somewhere of 6E and 7. Seven on the more mission-critical, you know, areas, applications like healthcare, for instance, and 6E in other areas.
Got it. So you guys are unique in the sense in the space of June is your fiscal year end. We have kind of an updated view, talking about essentially an acceleration here about to happen. So I guess, what's driving the confidence behind the re-acceleration possibility?
I mean, as we were thinking about this year, I mean, first of all, last year was an absorption cycle, like you said, and we feel like we got through that. We feel like we really managed the distribution inventory really well and tried to, if you will, rip that band-aid off between Q3 and Q4 with that absorption cycle occurring. We wanted to be clean and clear going into the new fiscal year and get that behind us. And then in the fourth quarter, we also looked at our own inventories and realized that we had some Wi-Fi 6 in there, that we didn't have as much, you know, pipeline for that Wi-Fi 6, and so we made a reserve on that.
But that was, again, to clear up the new fiscal 2025 and be clean and clear there without having any inventory issues, or quite frankly, saddling my sales organization with trying to push Wi-Fi 6 solutions in the market, where our markets are primarily Americas and EMEA, and they don't want Wi-Fi 6. You can probably sell Wi-Fi 6 in other, you know, geographies, India, maybe APAC or LATAM, but when you're looking at the geos that we primarily serve, it's really Wi-Fi 6 and Wi-Fi 7 that our solutions are best, you know, enabled for.
Yeah. So inventory resets. It's part of the nature of the space. But what are you guys doing from an operations perspective to ensure, like, this magnitude doesn't happen again?
Yeah, and just going back to, you know, so what gives us confidence, right?
Yeah.
So, one, I feel confident in our both looking at our inventories and knowing what our inventories are, and that they're Universal Hardware . It's clean, and it's the newest generation of technology that we have, so I'm not worried about that. The disti inventory is fully, you know, rationalized, and that they're at the numbers that they expected to be, so they're good as well. As we think about and look at our pipeline as a company, and we look at the normal, don't have to do backflips or cartwheels to get here, but the normal generation of pipeline through each and every quarter and those conversion rates, we kinda look at the data science behind all of that. That's where we came up with our guidance for the year.
It's not too far of a stretch to get to $300 million by the end of the year. You know, we're pushing a guidance right now about 165 in product and about $100 million on the subscription and support to get to 265 . The reality is, we're looking to try and get to $300 million by the end of the year, our fiscal year. But the subscription and support is gonna grow naturally throughout the year to $120 million. So $100 million-$120 million, that means you only need $180 million on the product side. So you're really going from $165 million-$180 million by the end of the year.
You're needing another $15 million of product sales, and over the next four quarters, I think that's very, very reasonable, especially looking at our pipeline.
Got it, and you even mentioned it in one of your opening remarks, when you think Extreme, you think campus, really, even though you do have, you know, a couple data center products here and there.
Yeah.
But how are you thinking about, as you know, a little bit of the landscape has changed, and you are starting to see again this, do we wanna have sort of one vendor between our data center and our campus environment, within networking? Are you thinking we need to do more on the investment side, either organically or inorganically, in the data center?
I don't think so. I think that the campus environment is where we operate best and where we've got a great niche. You know, when I think about Cisco or HP or Juniper, they've got IP fabrics, which are perfect for the data center world. We've got IP fabric as well, but where we really shine is on the campus side. On the campus, where we find that we have a real niche is in a dynamic environment where there's lots of changes. Think hospitality, think hospital systems, you know, think colleges and universities, think stadiums and venues. Those are dynamic environments where people are always coming in and out, and you constantly have changes happening within the network, and that is where our solutions really shine. We can do data center. We have done data center.
We've got, you know, plenty of opportunities to go data center. It's just not a focus, not a core focus of our technology. When I think about our technology roadmap and where we are investing, we're investing more in a platform, a platform that will enable us to have security, that'll have AI, it'll have networking, cloud management, all wrapped into one, you know, subscription and solution for the market, and it's just really an ease of use of managing your network and having that data come back to you around what's happening within your network, and that's perfect for the campus and enterprise environment, and it's a big market.
Yeah. So, you actually just answered my next question of, you know, why are customers actually on your own transition, wanting to move towards a subscription kind of based model? So you went over some of the benefits that they get there. But what's gone right in the transition, what's gone wrong, and sort of what's your view generally of networking as a service?
Sure. So a couple things. I think this is one of the bright spots about the company and the stock and the opportunity that lies out before us. Today, we have about a 65% attach rate of our hardware to the software and support that we have. We're moving that to a 100% attach here as we go into our platform strategy at the end of this fiscal year, and so we're excited about that. Again, combining AI and subscription and support and security into one bundled solution, the customers are gonna see a lot more benefit with that platform strategy, and we'll continue to give them more benefits over time. Very similar to... I come from a SaaS background. It's the gift that keeps on giving.
Once you get onto the platform, and you're paying for the platform, you just get these natural, you know, improvements in the software over time, and you don't have to purchase a new, you know, product. You just get the benefit of those improvements over time, and so we're excited about that. And we've seen, what, 31% growth rates? on our recurring revenue on the subscription side, and we believe that that's a continued opportunity for us in the future to continue to drive that recurring revenue as part of our business model. It's higher margin, and it's gonna contribute to the bottom line as a result.
Yeah. So Extreme Networks, and we tend to think of just networking, but you guys have moved more and more into this kind of security world-
Yeah
As we've gone, and we've seen this reconvergence of the stack a little bit. I guess, what's Extreme's strategy here on security? Do we expect to see more and more products on the security side? How's the Zero Trust solution that you guys are releasing gonna be differentiated?
Good question. And it's an exciting part of our story, I think, because we see this convergence of networking, AI, and security coming together. So we've cloudified our network asset access technology solution. It was an on-prem, and we've cloudified that. That's gonna be part of our platform story. We've also got Universal ZTNA solutions as well. That's gonna be part of our cloud strategy as well. So these are just a couple of the new security features that we have, and of course, we've got an embedded security feature in just our campus fabric, right? It's a bit like a spiderweb, where the fly gets caught in a particular area and cannot move. It's the same thing with our fabric technology. IP fabrics tend to have layers, and you get into one layer, and you can go across that layer.
With our campus fabric technology, you're a fly stuck in the spiderweb, and you can't go anywhere else. There's a hyper-segmentation element to our networking technology that enables us to have a more minimal blast radius from any cyberattack. So I think a lot of the enterprise customers we talk to love the embedded security that we have within our technology solution. But then, of course, the Universal ZTNA and the Cloud NAC is going to help us over time, and we will continue with our platform strategy, you know, create more features. Part of our acquisition strategy will be looking at SASE opportunities as well. So there's a number, we can, we can build, we can buy, we can partner.
There's a number of different ways that we can go and drive more security, but absolutely, security is going to be... AI, security, networking, we think about as one microcosm of, of an area where we're gonna continue to lean in.
Yeah. So I'm sure Stan's busy on the corp dev side with sort of thinking about some of that security SASE potential.
Sure.
But what part of that potential SASE stack are customers really saying, "Hey, we would like to see this from you still in order to complete the SASE stack?
Yeah, I think, you know, customers are looking for solutions. They don't want point solutions. They would like to have a vendor that can kind of manage it all on one platform, and that's what we're trying to figure out and manage too. But there's a number of different, you know, areas that we're focusing on. Right now, it's NAC and Universal ZTNA, and beyond that, I'll leave it to Stan to chat with you about what the other opportunities are. But again, it's gonna be a build, a buy, a partner, and we'll roll those out over time.
Yeah, and you and I were just chatting off to the side here a little bit about this little merger that's going on with HP and Juniper.
HP.
I guess, let's broaden it out beyond that, but what are you seeing in terms of pipeline off of that merger? What are you hearing from potential customers? And also let's bring in, you know, the big behemoths in the space, and Cisco and Arista, even in terms of what you're seeing from each of them from different angles.
The competitive environment's very interesting right now, right? You get Cisco buying Splunk. They've moved down in the Magic Quadrant over a period of time. People feel like they're very distracted. They've not ever really integrated well the Catalyst and Meraki solutions. We see customers being frustrated by that, and we're winning business off of that. We won, you know, one third-year customer, Korean Air, you know, came to us, you know, with frustrations and said, "That's it. We're going to Extreme Networks." So we see more and more of those opportunities coming through Cisco.
Obviously, they're a big player in the market, so we can take, you know, even more bites at that apple over time, and we believe that we are moving upmarket and have opportunities to go more head-to-head with them, with the companies that we've secured, like Kroger, you know, a very large win, and that was competitive and won that across the Big Four. So that's exciting for us. When we think about HP and Juniper, there's a few things, right? One, it's not. It's been announced, but it hasn't closed.
Right.
And so I would say that the actual real disruption hasn't occurred yet. I think that there's fear, uncertainty, and doubt around what's gonna happen, and so what product roadmaps are gonna be out there and what's gonna survive and what's not gonna survive. I think the resellers are worried about whether they're gonna have a meaningful seat at the table in the future or whether they're gonna get disintermediated, and so that's part of their livelihood. And then there's $500 million of, you know, cost savings that they've said that they need to go and get, and it might even be more than that, given Juniper's, you know, most recent, you know, I'll call it, you know, performance challenges, you know, compared to what the acquisition expectations were.
And so at the end of the day, they may have to go out and get more cost savings as a result of that as well. All of that disruption is to come. Probably, you know, at the end of this year is what the expectation is for it to close, and probably in the calendar year, first and second quarter of this next year is where we think that we'll see a lot more disruption. That's gonna have a halo effect for us. Two reasons why: One, just they're not sure about what the product roadmap is, and so therefore, that, as you're making a five-year buying decision for your network refresh, that just gives you pause.
And two, now there's three vendors, three major vendors that are in the Magic Quadrant, and so we're gonna get more at bats, more opportunities in RFP solicitations to be part of that. And quite frankly, in a campus environment, in an enterprise environment, I'll take that opportunity to have a proof of concept against the Big Three any day of the year.
... in terms of investments there, should we expect any set programs to go attack that potential merger closing?
Yeah, we've got specific sales plays within our marketing group right now that are going after, you know, all of that. So yes, I would say we've got a more refined go-to-market. We've got a new head of sales as of January this year, and a head of marketing as well. So that kind of we tweaked that at the beginning of the year, beginning of the calendar year in January, and that's starting to pay, you know, some dividends now. So we're excited about the management team being solidified and the plays that we're running right now on those two areas.
Got it. And so the wireless LAN market that we think of as really the core market you guys really attack well, called a mid-single digit kind of growth rate.
Yeah.
It's got its ups and downs, but-
Sure
... how do we think about the longer term growth rate of Extreme relative to that mid-single digit growth rate?
The product part, and then there's the recurring revenue.
Mm-hmm.
The recurring revenue is gonna outpace the product part. I think product part is just gonna be a natural kind of, you know, growth rate, but for us, it's gonna be a higher growth rate than the, than the industry standard. Industry standard's gonna be 3%-4% growth rate, and we think that we're gonna be more in the 8%-10%, you know, growth rate as we think about the next three years- five years there. We do believe we can continue to gain market share on the product side, and we've got a couple vectors of growth that are new to us that are going to continue to drive that. Then we've got the recurring revenue side, which is just the cloud subscription and support.
As we move to this principal attach, this platform strategy, we're gonna continue to grow that. On the subscription side, it's growing at 31% per year, and we could see that continuing to grow. It's been growing about, you know, $50 million a year in revenue each and every year, and we think that that's gonna accelerate over time. So we're excited about that part, and as a SaaS CFO, I'm very excited about, you know, that opportunity, 'cause we have 40% of our revenue now is recurring, and very high margins in the high 70s. And if we can continue to push more and more revenue into that category, it's gonna drive our margins, our overall mix of margins higher, and obviously, that's gonna fall to the bottom line.
On the new vectors of growth, just really quickly, we've got a core product in that market, which is a CapEx model. People buy the hardware and the software and support as attached to that. We are enabling MSPs, so these managed service providers more at the lower end of the market, who, like, are just outsourced IT to many people, but they have experienced a real challenge in the market of getting networking gear and having that networking gear matched to their business models. They pay for a five-year license when they only have a customer that's paying month to month. What we are doing is consumption-based billing, so we will match their billing to what their license model against their customer base.
And so if they lose a few customers and you lose some licenses, no problem, we're gonna match the licenses counts that they use, and they don't have to commit to a certain amount and only go up from there. And they'll have one pane of glass to look at all of their customers across Extreme. So that's another, you know, area that we're leaning into on the MSP side. And then we've got this Extreme Subscription Private Offer, which is a new area, again, a new vector of growth for us, which is on the service provider side.
And that is really kind of disaggregating the hardware and software and being able to sell the hardware to the end customer that you know at near cost, but then taking the profit and taking the subscription out of that at a 85% margin and basically almost like a IaaS type subscription and provide that to the customer over a period of time, three years- five years. And that's gaining some traction as well in this first quarter, and we'll have a couple announcements coming out in Q1 on that. So a lot of exciting things going on right now.
Yeah, and, look, you guys have a fairly good head of corp dev, you know, sitting over there. You guys have a history of doing some acquisitions, but how do we think about capital allocation strategy here? What are you guys thinking about in terms of the M&A landscape?
Yeah, I mean, we know how disruptive it can be at the very large level, right? We are very good as a company, as a management team, of doing acquisitions, and we've done them a number of different times, and we've integrated them actually really effectively well. And so at the end of the day, as we think about, you know, capital allocation, first, it will be in the form of like, you know, stock repurchases. So we're planning to continue to do stock repurchases. We have an authorization, and we'll continue to do that. I wanna get our cash balance a little bit stronger than where it is right now, given the Q3, Q4 woes, but once we get, you know, through the end of the year, we'll be buying back stock again.
Then, of course, there's the opportunity for M&A tuck-ins or something along those lines that we'll look at in the SASE space or there's many different areas that we could look at, and we think there's a exciting opportunities for us to go after that. You know, go after opportunities in that market.
Yeah. So, so bringing it all together, I guess as we've turned the page into, in the fiscal 2025, I mean, we, is there a way to think about the rank order of what you're most, most excited about or, or what's gonna drive the business the most in 2025? Is it gonna be the market, cyclicality in terms of the Wi-Fi standards coming into play and, and refreshing that hardware? Is it gonna be the sort of disruption caused by this merger, just continuance from Cisco, new products?
Yeah, if I had to. So I'd say, first and foremost, I think the competitive landscape disruption is gonna be the biggest beneficiary to us because at the end of the day, we're gonna be one of three, and we're gonna be very high in the Magic Quadrant. So I think the halo effect of the acquisitions and whatnot, and just the disruption that's gonna, you know, create, is gonna be probably one of the best beneficiaries that we have. The second is our own technology, and that is we're building this platform with security, with AI, and with cloud networking management, and we're gonna enhance that over time. And moving from a 65% attach rate to the mandatory attach is really gonna move the needle for us on the recurring side.
Now, that will take time to snowball and create more revenue uplift over time, but as I think about the next three years- five years, that's gonna be a major catalyst for growth. And then I'd say the two vectors of MSP and the Extreme Subscription Private Offer are the third that I think are really exciting new vectors of growth for us. In addition to just regular demand coming back more strongly, we've got those two new, you know, opportunities that are gonna drive more revenue growth for us. And so now we've got three growth strategies, you know, with one being traditional demand, and then Espo, and then MSP. So those are the three areas, I'd say.
Got it. That's a perfect spot to end it.
Yeah.
Appreciate you coming down and giving us the latest update on Extreme.
Yeah. Well, thank you. Thank you.
Thank you, everybody.