Good afternoon. Thank you for coming to the conference. I'm Samik Chatterjee. I cover hardware and networking companies at JP Morgan Chase & Co. With me, I have the pleasure of hosting Extreme Networks for the next session. Ed Meyercord, President and CEO of Extreme, and Kevin Rhodes, EVP and CFO. Thank you both for coming to the conference. I'll start you both off with a question that we've been asking all companies we've talked to today, which is largely to get, based on your conversations with customers, what's your thinking, latest thinking in terms of the macro. Really what we're looking for is investors are clearly very concerned about a slowdown in the second half of the year, about potentially going into a recession. Given the visibility you're getting from your customers, how likely do you think that is?
How concerned are you, and particularly when you're planning your business for the second half, are you sort of thinking of those possibilities already?
Yeah, and the macro as it relates to demand is a little trickier to call. To date, we haven't seen an impact. Initially, there was some concern about the reduction in government spend, as it relates to education, in our markets. As an enterprise customer, we're selling to, you know, into the education market, large campuses, et cetera. I think that some of the concerns there were misplaced because a lot of the funding for the K- 12 schools, and those environments, are coming from a Universal Service Fund, which is administered by the FCC, which is out from under the Department of Education. We really haven't seen an impact there, and we don't expect to see one.
In higher education, there's some impact as it relates to spending, more likely on research projects and joint research projects with the federal government and the universities. In our case, you know, we're providing that infrastructure that's so important. We're not seeing an impact. In fact, if you're Extreme and you're a 5% market share player, we're actually seeing significant growth opportunities in higher education because of just taking share. We've been moving up market and winning more. We're seeing an expanding funnel right now. We're somewhat maybe of a contrarian in terms of the second half of the year because we're seeing our funnel growing and we're seeing an expansion of opportunities. We play in 19 different markets around the world.
If you look at each of the markets that we're playing in, they have unique characteristics, unique growth characteristics. At this stage of the game, you know, we probably have more tailwinds than headwinds.
Got it. Okay. Fair.
Kevin, do you wanna add?
No, I think you, I think you nailed it.
Okay.
Yeah.
Moving to tariffs and one, how is that impacting your supply chain? I am more curious to hear how are you managing through this unpredictability of tariffs. Like, I am sure your day looks now very different than what it used to pre-tariffs, right? Maybe help us understand sort of what goes into the planning process and how you are navigating through that.
Yeah. If we go back to the first round of tariffs, several years ago, we had to implement, you know, operationally, a process to reclaim tariffs for goods that come into the United States and out of the United States. I'll tell you at the time we were not prepared for that, but we built out the operating processes. Now we are prepared for that. In the event that tariffs are implemented, we have a way to recover them first and foremost. Depending on how it plays out, if tariffs are implemented, I'd say we are in a much stronger position today than certainly we were years ago in the first Trump administration. The other thing, our supply chain, we have ODMs that are based in Taiwan, and then their factories and manufacturing were primarily in China, but we moved out, working with our partners.
We moved and our factories moved to Taiwan, Vietnam, Philippines, Thailand. All of these countries have been hit with tariffs that have gone away. Our product category was exempt. We do not know if that will remain to be the case. We are also hearing that all these countries are in active negotiations. To date, there has basically been no impact on Extreme and our supply chain to date. You know, we are expecting negotiated settlements with all these countries. We are going to have to wait and see what happens. If in fact there are tariffs, I mentioned the reclamation process that we have put in place. We also can circumvent by shipping direct into Asia to our distributors as well as into Europe.
You know, one of the advantages that we have is our size relative to our competitors, and we're able to move quickly. We have several plans that we're, you know, in parallel process to mitigate the impact of tariffs. The last point I'll make is, as it relates to pricing, as you've seen, some of the larger competitors, especially the industry leader, you know, has always been very responsive in raising price and passing through tariffs. We and the rest of the industry are fast followers when they take those actions. We would expect, as things settle down, if we wind up in a higher tariff environment, that there would likely be price increases and there would be an umbrella that we could raise price under.
Good.
Yeah. One thing I would just add to that is that we did communicate out to our resellers that we're gonna hold price steady through June 30th. That was a positive indication that we made to our reseller community. They were very appreciative of that because they weren't hearing a similar message from the rest of the competitive set. It's really unknown right now what will happen with the rest of the competitors, but we came out with that. We were happy to be able to do that.
Okay. If I can just follow up on that, I mean, a lot of the conversation I've had with some of your peers is them trying to move capacity to countries like Mexico, where there's USMCA compliance that gives you cover. From what I understand in terms of what you're trying to do at this point is wait and see which of the footprint that you have will eventually be under tariff and then potentially take any actions on the manufacturing side. Is that a fair assessment of what your strategy on the supply side is?
Yeah, I think that's, I think it's fair. I would say, you know, where we have the highest concentration is in Taiwan and Philippines. I think as we look at the macro landscape and geopolitical environment between, you know, the United States and China, those are two very important strategic countries for the U.S. and for the Trump administration. We know they're in active negotiations and we would expect resolution to an area that's a tariff level that's reasonable.
Got it. Okay. Great. You reported the best bookings in six quarters. Maybe walk us through from your lens how much of that is a function of customers looking to pull forward some of the demand versus true drivers like real-time deployment from your customers?
We did not see a lot of pull-in action. I'd say, you know, it's less than, for our bookings number, it's something that's less than, I'd say, 3% overall for the quarter. A very small, somewhat immaterial number. I think the growth at Extreme is due to improved execution with the team. We've made a lot of changes in upgrading. In the marketing role, I hired amazing Chief Marketing Officer Monica Kumar. She's come in a year and a half ago and completely rebuilt our marketing function.
We've created, I mentioned 19 markets, but we've created these pods where we have a very targeted, regional director seller combined with a field marketer, combined with a regional channel lead working together to drive funnel, in a very verticalized, localized way, taking into consideration distribution, taking into consideration the channel, and focusing on verticals where we have differentiation and we can work with partners to drive funnel and convert on the funnel. It's been very successful. It's not a macro horizontal strategy. It's a highly targeted, focused strategy on where we're winning and where we're taking share. We've had tremendous wins, for example, and it's really a design win with the Japanese government where now we've been spec'd for GSS contracts for Japanese government agencies, which is creating tremendous growth for us.
It's a very different strategy than, for example, our strategy in the U.K. where we're moving up market with partners in healthcare and higher education where we have, you know, customer wins that we're focusing on, those wins with our channel partners and driving more and more opportunities and growth. We have 19 distinct strategies, where we have our marketing, our sales teams, and our channel teams working together to create funnel and then driving activities to close on the funnel. I give credit to Kevin and the teams in terms of developing all the reporting infrastructure and data that gives us complete visibility into the activities and what's working and what's not, and understanding what's in our funnel of activities. By seeing that and seeing the conversion rates and watching that over time, it's improved.
I got a shout out to our new sales lead and new sales leadership and also channel leadership that we brought in. They've been driving very consistent performance that's predictable. So we've been doing a much better job at Extreme of calling a number and executing on the number and then having this collaboration, this cross-collaboration alignment that's building funnel and driving higher conversion and win rates.
Okay.
I would just add to that, we're also going up market a bit, right? So we're seeing some good success on over $1 million deals.
Yep.
29 last year, 39 this year. And so those million dollar deals allow us to compete against the larger competitor set in a more robust way. You know, it's kind of success begets success as you win a very large logo in a competitive situation that adds more credibility where you can win the next one.
Got it. I'm gonna come back to that in one minute, but based on the strategy that you outlined where you are focusing on these markets individually, do I take that as naturally an implication that you're very close to the customer? Because when I compare this, what's going on right now to the post-COVID timeframe where we did have a supply chain crisis, there was a lot of demand pulled forward, then a digestion after that. Not every company had good visibility into what customer inventory looked like. Given sort of how you're executing now with focus on very sort of very regional level, do you have much better visibility in terms of what the inventory in the channel inventory in the customers looks like? Or how should I interpret sort of visibility today versus what was it post-COVID?
Yeah, it's, we have much better reporting, much better visibility, you know, and metrics that we're using to drive the business. As far as inventory in the channel, you know, we've driven to our target levels. Where we wanted to be, you know, we were in an oversupply situation, and that with distribution, you know, with channel and actually with customers that were buying forward, all of that has been cleaned out. We have the visibility, as we look at our bookings and then we look at the pipeline of opportunities that are sitting there and we look at backlog. Backlog is attributed to the next quarter, all of it. We don't have backlog, and we measure this, but most of our backlog, you know, you can see being attributed, you know, in the near term.
When the orders are coming in, they want it shipped. If you go back to where we were during the constraints, the lead time was much longer. You could see, you look at the bar chart and you look at the quarters of where, you know, the customer request date. You saw a lot of orders that were out, you know, a year.
Three quarters.
Three quarters, two quarters. Now, if you look at it as one color on the bar chart, which is next quarter.
Okay.
Yeah, that's a real distant memory for us now. It's over a year ago that we were, you know, kind of managing through, you know, higher channel inventories. At this point, we've really stacked up four sequential quarters in a row of growth, and we've just, you know, guided for another quarter of sequential growth. I think we're well beyond that.
Okay. No, that's interesting. Thank you for sharing that insight. Coming back to Kevin, what you were mentioning, like the larger deal sizes that you talked about on the call, do you really take that as a function of displacing some of the larger incumbents like Cisco and others? Or are you seeing other drivers within there that's not share related, but your customers just willing to expand more their current footprint that they had with you? Like, just help us think about the drivers and how much of this is the competitive landscape itself.
Yeah, I think the, look, moving up market for us is about taking share and it's absolutely about taking share from the larger players. We have highly differentiated technology, with the enterprise campus market, with our fabric technology. We have unique capabilities that make it much easier to provision and deploy services on a network. We say zero touch provisioning, but when you compare what we can do versus the traditional service provisioning, the old way of doing it is creating VLANs, which are very expensive, that have to be delivered right to the port of a switch to the target service area. You know, with our fabric, you literally can just plug in an edge device, it calls for the service and it gets it.
The ease of provisioning, the automation that we bring in terms of delivering service, the resilience that we have in terms of subsecond convergence, if there is a loop in the network or there is an issue in the network, we can drive performance because of our fabric that none of our competitors can provide. If we are in a, we just won John Deere, for example, major global corporation. In the case of that win, we were the last one in. The big three were there, and there was not high expectations for Extreme Networks. They had questions about the technology. We demonstrated the technology, they used the technology, and then none of our competitors could replicate the performance.
It is the ability to provision, it is the resilience of the network, it is the ability, it is the ability to create a network within a network in terms of segmentation. This is why we won Wynn Resorts for building out a $5 billion project in U.A.E. It is the first casino in the Middle East. Yeah, they are going with Extreme because they love the fabric technology and the differentiation. This is opening up a lot of new opportunities. When we win one of these big customers and then they are able to speak on our behalf, they become the voice and they become a very compelling reference for the rest of the market. When we win Washington University and they are leveraging our fabric technology, well, now it is time for other large universities to refresh and they want to hear from the Washington news of the world.
Our marketing teams are doing a better job of capturing those customers, leveraging kind of the customer relationship to market. That's what's driving an increased funnel and pipeline, and whether or not it's higher ed, you know, in the U.S., whether or not it's hospitality and entertainment in the Middle East, or if it's our stadium business here in the U.S. that's spreading over into Europe with exclusive relationships with the NFL, Major League Baseball, NASCAR, Formula One Racing, you know, these networks are super high quality, high performance. A lot of people might not be as familiar with the Extreme brand, but when they find out about the brand and they see the technology, we win. If we get an environment where there's straight up competition, we're doing really well.
The customers we win will also open up partner relationships because in the case of, for example, a John Deere, they need a global partnering, you know, network, and they want consistent service and support around the world. For Extreme, as we're going into markets, we might go to a partner that is a non-typical partner. It's a much larger partner. If we bring them a customer like John Deere, all of a sudden we're in and now we have an opportunity to share our technology. They train up on our technology, they realize what we have and the differentiated solutions that we bring. Kevin said, success begets success. That's kind of how the chain works.
Got it. Staying with the competitive landscape, help me think about, like, there's obviously with the share against, we're seeing there's going to be questions about how sort of permanent it is in the sense that is it more a function of some of your larger competitors being distracted at this point? When I take like Cisco, HPE, Juniper, like the.
Yes.
All list, right? So talk about sort of how permanent do you see some of these share gains being versus, what, what's the maybe and give us a lay of the land of where you see your competitors being in terms of both technology, but also their focus on this part of the market.
We are incredibly focused on enterprise and the enterprise market. We're particularly strong and competitive on enterprise campuses that are looking for very high quality, high performance networking. Every one of our customers in all these industries, what's the question that they're getting? The question they're getting is, hey, how are you leveraging this thing called AI? How are you, how are you using AI to drive efficiency, to drive performance, to drive better outcomes? It's top of mind for everyone. We decided many years ago that we were not gonna try to be the networking solution for AI. There is a lot of competition for that. The companies have done very well. It's great. Scaling up, scaling out, supporting these large language model sort of deployments. That's great. What we decided, we were gonna be the leader in AI for networking.
We're gonna be in Paris next week. I'm gonna encourage everyone to tune in, at least watch the replay. We're gonna be opening, you know, it's the largest user conference we've had. We're way oversubscribed and we're gonna be rolling out demoing, not PowerPoint slides. We're gonna be demoing new use cases, with the first agentic AI platform for networking in the industry. We've been told by our partners that we're way out in front. We're excited. We were a player in first generation AI, AI Ops for networking and basically AI Ops for Wi-Fi, which is where the industry was. Now we have a service agent that sits on top of the entire platform.
You've got AI that's not just about, you know, AI Ops, but it's also the commercials and the operations of the network licensing, a lot of different personas that we're supporting. We're gonna drive massive efficiency for our customers. For all the people that are sitting out trying to figure out, hey, how am I leveraging AI in my IT teams, we're gonna be providing the most modern, high quality tools for people to take advantage of driving efficiency in the networking space. We're really excited about how we're rolling this out. I mentioned our fabric, the platform is taking the fabric to a new level with complete visibility from Extreme Platform ONE. It's gonna provide visibility not only at the physical layer, logical layer, but also the services layer that no one else in the industry can do.
It's gonna put us way out in front, simplifying networking operations. Net, net, it's about turning, you know, months into weeks and weeks into days and days into hours and hours into minutes, et cetera. We have thousands of examples of how we're gonna do this and how we are doing it with our platform. The platform GAs in the beginning of our first quarter, which is in the month of July. We have 100 customers that are using the platform. We're getting great feedback. All of our system engineers and sellers are using the platform. We're unveiling some of the capabilities for the very first time on Tuesday. We're expecting, you know, a lot of surprise and a lot of interest in our community of customers.
Got it. Got it. How long does it take if one of your competitors does want to replicate what you're doing? How long does it take them?
It depends on if you're trying to merge with another big company or it depends on if you're trying to move away from core networking into other markets. Size also matters. For us putting this platform together, we had to sort of bring together about nine applications that were independent. If you look at our wireless, you look at our wired, if you look at SD-WAN, if you look at ZTNA and network access control, and all of these different services, while we're pulling all that together, what does AI want? AI wants data. We're able to pull all these together so AI has the data and has the data across the entire spectrum. I think it's going to take a long time for our largest competitor to do that. They have a history of not integrating their technologies in their acquisitions.
We'll see, we'll see, but it's gonna take them, I think, 18 months or so, even though AI moves quickly. I think our other two competitors that are trying to figure out if they're gonna get married, they have to focus on integrating and delivering a huge amount of synergy to make their deal work. And that's very distracting if you're trying to do what we've just done.
Got it. Okay. One of the big things we are trying to figure out is when we think about the next sort of campus refresh from enterprise customers, what's going to be the driver for it? What gets the companies to sort of enterprise customers to think that they are ripe for an upgrade at this point? Is it going to be more Wi-Fi led? Is it going to be features on the campus equipment or is it going to be AI? Like when you think about the upcoming cycle, what do you think is the trigger to get enterprises to upgrade?
In the case of Extreme Platform ONE, you know, customers don't necessarily have to upgrade their network from a hardware perspective.
Okay.
Okay. So that's one of the benefits in terms of what we're able to do. I just upgraded, I just got out of the platform, I just changed my login and I was in this incredible user interface, which is, you know, super modern and, you know, huge improvement over the, you know, XIQ Cloud platform that we had before. Upgrading is actually quite easy from that standpoint. I think customers are gonna wanna do that because they're gonna wanna, they're gonna wanna use the tools that are allowing them to drive the efficiency and have enhanced visibility, performance, et cetera, across the network. What's gonna drive a campus refresh? I think it's the things that, that always have is, you know, we have Wi-Fi 7 now, which has significantly enhanced, bandwidth, and performance in terms of reliability.
Now you're seeing in a manufacturing environment, you know, mission critical systems being deployed on Wi-Fi. The same thing would be true in a hospital in an operating room. Historically, Wi-Fi, you know, it's crossed over that chasm. That can drive, you know, more usage and more demand. As you upgrade bandwidth at the very edge of the network, like Wi-Fi, it filters through the network, then your edge switch requires more demand, et cetera. You know, that plays in it. I think if you look at different markets, maybe there are different upgrade cycles. I don't think there's one. A lot of people point to COVID and say people left the office for a couple of years and now they're being forced to return to office. It's that return to office that's driving an upgrade cycle.
It's hard for us to see that per se because we're taking share in the market. You know, we're a smaller network market share player. And because if we're taking share, maybe it distorts the overall market view because, you know, we're seeing growth.
Got it. Okay. Coming back to sort of what you're seeing with your customers and you mentioned the likelihood of price increases by your largest competitor and you're following suit, following on that front, like how do you think about price elasticity of demand at this point for your customers? Like one of the big concerns has been price increases and demand destruction as a result of that. Do you necessarily see the drivers for why enterprises have to upgrade, being resilient enough that price elasticity of demand is very limited?
I mean, our market is strategic. I mean, you think about the network and how important networking infrastructure is to any organization and just daily life. And the requirement for high quality, secure, high performance networks are critical. In terms of people deciding and maybe deciding to, you know, cancel certain projects, maybe you can hold on a networking project for a year or maybe you can hold on a networking project for 18 months. Over the long run, you know, as you're adding new devices, as you're adding new capabilities and applications and with the growth of data in these networks, you think about the growth of AI, networking infrastructure is absolutely critical. It is less likely that it's going to be deprioritized than maybe some other investments that are nice to have and not need to have.
I would just comment in today's world of cybersecurity concerns being probably at the highest at the CIO level, sitting on an old network that you may have to patch and patch and patch and do upgrades to is probably not the best strategy for you to avoid any cybersecurity threats that come to you. At the end of the day, when you've got a fresh network that's got the most latest, you know, technology associated with it, you know, you're not worried about, you know, at some point in the future having a vulnerability there that you didn't see coming.
Okay. Got it. Got it. E-rate programs, I think you made a comment on the last call about seeing more share gains in the E-rate programs. Maybe firstly give us, maybe take a step back and give us sort of the background of how relevant these programs are now to Extreme versus maybe sort of a few years ago. Then secondarily, what's driving the share gain?
Sure. Yeah. E-rate is a funding program that's funding kind of K - 12 schools. It's very popular, with politicians. Giving kind of the state of the art technology for our kids in a learning environment is popular on both sides of the aisle. It's a program that's in place and we expect it to continue to be in place. We're at the fifth year funding cycle of the last cycle and then, you know, a new program will start. And, you know, we, it's a combination of our tech, our cloud. It's a combination of our fabric and it's a combination of, I think, our overall service and engagement in that community. We have every single school in Palm Beach County, Florida runs on Extreme Networks.
and they had our wireless, but then there's an opportunity, they saw our fabric, they didn't believe it, they couldn't believe it. Now, they're rolling out fabric. For us, there's opportunities for us to upsell a wireless customer to switching and then, or a switching customer to the wireless side of the portfolio. Yeah, I think it's the differentiation of our technology. I also think it's the execution of our teams who are doing a great job, positioning Extreme and some of the channel programs that we have to drive E-rate. It's about 7% of our business.
Okay.
Yeah.
Maybe just, for the last couple of questions, Kevin, can you please outline the margin drivers that investors should think about for the company? You're already at 62% gross margin, mid-teens operating, I think. Do you see opportunities on both fronts, or is it really going to be more about operating leverage going forward?
Yeah. Our long range plan would be at 64%-66%. We can do that in a couple of different ways, right? We still see product margin opportunity that we can drive that to like 58% today. We could see that getting to 60%. I think you're gonna see with Platform ONE, as Ed described it, it's gonna be this really, you know, transitional, and, and transformational, quite frankly, platform that we're putting all of our customers on and selling onto. We're gonna get a higher ASP there. We're gonna get a higher attach rate there, and we're gonna get higher, you know, retention rates on Platform ONE in the future. What that's gonna do is drive the revenue, the recurring revenue, which got a higher margin, you know, profile to it as well.
As we drive the mix shift of revenue that's higher margin, that's gonna help to get us into that 64-66% range. I'm thinking, you know, three, you know, years, in that range.
Got it. Okay. Maybe just finishing off here, capital allocation and where does current preference stand between M& A versus buyback?
Yeah. We just authorized, got a new authorization for our $200 million buyback. We pre-purchased about 13 million shares last quarter. We're in market purchasing yet again this quarter. I would say we are very much in the buyback, you know, strategy from a capital allocation perspective.
Okay. Any, any sort of expect in terms of M & A, like is that a constant sort of pipeline that you continue to evaluate?
You know, we evaluate it. I had nine myself, Stan Kovler, our SVP of Finance and Corp Dev. We evaluate all opportunities for Corp Dev. We do not have any money burning a hole in our pocket right now. It would have to be strategic. We have got such good momentum going on in the business right now that it feels like that could take us off track. We look, but at the end of the day, we are very, very focused on executing and continuing to drive the growth that we have today. It would be a high bar in order for us to go do something that would drive.
Yeah, I think that's fair. Today, it's all about the launch of Extreme Platform ONE.
That's right.
The migration of our customers onto the platform drives significant growth in our SaaS, our subscription line, and recurring revenue at the company. We have a lot of growth built into the plan without M & A, but we will always be opportunistic if the right opportunity presents itself. I mean, you talked about higher retention on customers on Platform ONE. Is that just based on the initial feedback you have got, or is there more of a longer timeframe of data that you have collected on that?
What I'm referring to on the retention side is what we sold to customers was on a bespoke basis. You sell the cloud management, then you sell support contracts or SD-WAN. And each one of those is a sales process. And each one of those is a renewal process in of itself, right? Sometimes a customer, based on budget, might say, I do not need the support contract this particular time. It is five years out. I am gonna let that support contract drop. In the Platform ONE world where it is all bundled together, you are gonna get a higher, you know, retention rate because it is all bundled together and you are renewing the Platform ONE with the agentic AI and all the value you are getting. Similar to a SaaS platform, you are creating value over that life cycle as well.
Got it. Okay. I'll wrap it up there, but thank you for coming to the conference. Thank you to the audience as well. Thank you.
Thanks to you.
Thanks, Alan.
Thanks.