I'm gonna read some disclosures that you've heard many times. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. We're delighted to have Extreme Networks here today, Kevin Rhodes, CFO. We also have Stan Kovler in the audience, and then myself, I'm Meta Marshall. I cover networking here at Morgan Stanley. Kevin, thanks so much for being here today.
Good to see you again.
You recently rolled out some impressive targets at your Analyst Day calling for share gains in the market which we'll dive into in a minute. Can you just kind of refresh everybody here on Extreme's value proposition and kind of the key verticals that you serve?
Sure, sure. Happy to. By the way, at the Analyst Day, I would say that was a good day for us.
Yeah
... Roll out for the next several years what we are going to achieve, 10% growth on the revenue side, 20% growth on the bottom line side, and we've been executing pretty well, right?
Yeah.
Q7 in a row of growth as a company. That was a meaningful kind of event for us to talk to investors about what we're trying to do. From a market perspective, as you can probably appreciate, we're on the wired and wireless solutions on networking. We combine software that helps with cloud management. It also helps with security, and we do to enterprise the campus enterprise. Our vertical markets that we focus on are more the complex environments that we see. We see venues and stadiums. We see healthcare facilities, education, hospitality, retailers, manufacturers and the like, and government systems as well.
We've actually had some recent really good, great wins on government entities outside the United States. I'd say, yeah, we've got good momentum going as a company and feeling good about the momentum that we are seeing on the enterprise side. We can talk more about the trends, Wi-Fi 7 enterprise campus refresh over time. Effectively, we are seeing some real good wins in our sales right now.
Got it you've had a lot to deal with over the last year in terms of tariff and memory not so distant, we're talking about supply chain issues what are you seeing in terms of impact to the top and bottom line from kind of tariffs and memory impacts?
Yeah. I mean, more of impact on the stock price, right? Than it is actually on our-
Yeah
... on our ability to execute, to be honest with you. I think, I mean, at the end of the day, we are seeing good, strong demand for enterprise network solutions, is what we see. People are getting worried about supply chain and whether they're gonna be able to get the equipment that they need to support their customers.
I think from our perspective a lot of companies did not do a refresh at post-COVID. If you didn't do one right after COVID, the reality is your network is likely five, six years old at this point, so you really are at a point where you need to do a refresh because you've got AI workloads going over your environment, naturally that's gonna pull more and more requirements for networking resources. I think from our perspective, we see an opportunity, a long-term opportunity for us to get ahead of some of these supply chain issues and be able to supply the enterprise customers, the equipment they need.
Mm-hmm. Got it. Just in terms of your own availability of memory or how you're seeing kind of that elasticity of demand when you're having to contemplate price increases...
Yes
just how are you thinking about that?
Well, one thing that we are doing, and we saw this early on, like last summer, we're getting ahead of this.
Mm-hmm
... DDR4 memory issue, and we've been procuring supply of DDR4, and we've got upwards of two years of DDR4 memory now. I used to not do that.
Yeah.
My ODM used to just buy the DDR4 memory for, the themselves to be able to supply us. But now we're actually jumping ahead of that. We've been jumping ahead. Our supply chains teams have done an amazing job of getting ahead of that. We would like to get, like, three years worth of DDR4 memory we'll use some of our balance sheet to be able to do that from our perspective, I think that's a smart and wise-.
Yeah
Investment for us to get ahead of that. The next wave of probably Wi-Fi 8, which is a good three years away, is really when you're gonna make the move over to DDR5.
Mm-hmm.
DDR4 is still gonna be around for at least another three years on the switching and Wi-Fi access points.
Got it.
from that perspective.
Okay. Just on elasticity of demand.
yeah well, when there's scarcity and there's worry about scarcity, I think demand starts to get pulled in a bit.
Mm-hmm.
We are communicating out. You talked about price increases as well. We put some price increases like the rest of the industry out in November.
Mm-hmm.
I think the industry is considering price increases yet again.
Yeah.
We're still waiting Cisco tends to lead the price increase train, if you will, from that perspective, and so still waiting to hear what's happening there on their end. We anticipate another price increase coming through in the next 3 to 4 months.
Yeah
Would be our thought, because of just the cost of DDR4 memory. You have other components as well, copper, aluminum, other raw materials have gotten more expensive. I think from our perspective, the demand for enterprise equipment is still strong. We think it'll be elastic from a price sensitivity perspective.
Mm-hmm
... With all the AI workloads going on right now, and we're actually seeing some customers thinking about doing like, basically creating their own...
Mm-hmm
... Data centers in addition to hyperscaler because they wanna balance the workloads and where their data sits.
Okay.
Especially sensitive data sitting in an environment that's a, that an enterprise data center versus in the in the, in the hyperscale cloud. We could see kind of some shifts happening there as well.
Okay we're in a very healthy investment cycle for campus kind of currently.
Yeah.
Why do you think we're seeing such a healthy refresh? Maybe , mentioned some people didn't during COVID, and we hear this, like, AI preparedness or AI at the edge. Do you think it is really just pent-up demand, or we're starting to see some of this kind of preparedness come in?
It is certainly AI preparedness, and I would say you're also gonna see more workloads going over the network, right?
Mm-hmm.
That, than we've experienced in the past. If workloads go up and you've got an older network with, say, a Wi-Fi 4 or five network.
Yeah
... You're gonna feel the real pain in that world with more and more adoption of AI. We naturally see adoption of AI being more ubiquitous. People are looking at all the different use cases across sales, across product development, et cetera, and that's just gonna drive more and more use cases there. We think that that is certainly one trend that's there. You've got Wi-Fi 7 right now that's in its early innings-
Mm-hmm
... And it's starting to get adopted more. naturally it's much faster. It's got a 6 GHz band on it, and so it's a cleaner spectrum than the five or the two and a half we think that the Wi-Fi 7 is gonna have another impact around Wi-Fi refreshes, especially on the wireless side of things. I'm trying to think of other catalysts that we're gonna experience here, but, I mean, those... Data sovereignty, I'd say, is probably-
Okay
... The last one on the data, on the enterprise side. Especially in Europe, we're seeing more and more interest as they're thinking about where their data sits.
Right.
If it's in hyperscale, what sits there. Especially in Europe, like Germany, we've actually are building an RDC in Germany.
Yeah.
We've got some government opportunities there that will benefit from that. I think from our perspective, that's also a trend that we're hearing is data sovereignty is important, especially in Europe, and that we're trying to meet that. I would remind everybody that we are cloud agnostic.
Okay.
Our cloud management works in all 3 hyperscale environments, with GCP and Azure and AWS, and then we also allow for on-prem as well. Gartner's like, "Hey, do you realize that you guys are the only ones that can do this?
Right.
That's something that we're starting to lean into from a market messaging perspective.
Yeah, the kind of that hybrid, future.
Yeah.
Can you just remind us kind of on the split of the business between kind of edge and/or campus and data center?
Yeah, I mean, I'd say the data center opportunity is an opportunity for us.
Mm-hmm.
It's smaller. It's less than 10% of our revenue today.
Yeah.
Most of what we're doing is on the campus side of things.
Okay.
What we are introducing. We have a 400 gigabit per second switch that we are doing for a particular client.
Okay.
We're gonna commercialize that 400 gig switch for commercial use, and then we're also working on an 800 gigabit.
Right
... Solution for a campus data center later this year and roll that out later this year. Between 100G, 400G, and 800 Gigabit, you cover almost every .
Yeah
enterprise data use case out there.
Okay.
We feel good about that.
Got it you've most certainly been focused on kind of selling the fabric and Platform ONE for a number of years now. just what kind of differentiation do customers speak about on the product?
Yeah. Platform ONE is the newest, right? We just launched this in July-
Mm-hmm
... Of this year. We are the only networking provider today that provides a Agentic AI solution for networking. We've got others like Mist or others will talk about AI, but it's more on the AIOps side, and we've got an Agentic solution that will proactively.
Mm-hmm
... Go out, monitor your network. Let's say that you've got. I would say the paradigm is this: most of the networking experience today is someone has a problem, they create a trouble ticket, it goes to IT is evaluating log files and everything else to find out why that particular person's having a problem. They find the problem. It's an access point that needs a firmware upgrade. They go and fix the problem. So and so's issue is solved.
Mm-hmm.
What we're doing on the Agentic AI side is these are service agents that are monitoring and managing and looking at your network, they are identifying in advance that that access point's got a firmware need. It will come back to you and say, "We've identified this issue. human in the loop-
Yeah
... Do you want us to go and fix that issue proactively?" Our person could say, "Yes, go fix it," or, "No, don't fix it. I want to fix it myself.
Yeah.
I want to validate this issue." It, if you choose for it to fix it will go and actually fix it for you. It can also, another use case, is say, "Hey, by the way, we see some activity over here that we don't normally see.
Mm-hmm.
Someone's knocking on this door that they shouldn't be. Do you want to go and investigate that? It's got cybersecurity elements to it as well. We're excited about the Agentic AI that we've put into Platform ONE. We see a lot of customer adoption to it. Another, I'll call it financial benefit of our Platform ONE is that we were selling cloud management separately from support contracts-
Mm.
Separately from, like, Universal ZTNA. Those were all sold separately by my salespeople, all their own sales cycles.
Yeah.
et cetera. Now with Platform ONE, it's all one bundled solution. With that, I get higher attach rates because of the Agentic AI.
Mm.
People want this-
Right
.. Solution. We have a higher ASP on it than buying them individually. On the back end, where people tend to not renew support contracts later in life with the equipment because why renew it if the equipment's gonna be past its life? Let's say it's five years old, I'm not gonna spend money.
Yeah
... On that support contract anymore. We're basically bundling it all together, so we're not gonna see that drop-off in the value in the support contracts.
Mm.
From a financial perspective, it's gonna drive our recurring revenue. We just saw this last quarter a 25% ARR growth. As a SaaS CFO.
Yeah
I want that recurring revenue.
Right
... And I want that recurring revenue to stay sticky. From that perspective, I think we're gonna get really those three levers are gonna be beneficial to our financial model. It's high margin.
Yeah.
It's high margin revenue that we retain and that we're able to continue to grow.
Got it. I mean, just on that security piece you have been rolling out kind of more security products around the portfolio. Just are you seeing a combined buyer? Is there a type of buyer who, or a type of customer set who is really embracing kind of that combined network security?
I mean, we're seeing a convergence.
Mm-hmm
... Certainly of network security solutions and actually embedding technology or software into the network itself.
Mm-hmm.
You think about the Zscaler or Cloudflare.
Yeah
... Over the top solutions. You wonder how much AI will be able to solve for some of that knocking at the back door-
Yeah
... Point that I made. Like, at the end of the day, it's all about proactive proactivity and making sure that all the different places in your network are secure, and if they are secure, then you should be fine. It's really being proactive around what is happening within your network. Are people accessing the areas of the network that they should? Are there any actors not supposed to be there, are they there? I think at the end of the day, what we are seeing is we're seeing that convergence, we're seeing that we are continuing to drive more and more security features within our own networking applications, and you will see a bit of a convergence there over time.
Okay there's been a lot of M&A in the space you've had HP Juniper, you've had RUCKUS that's kind of, in the remnants within CommScope just how have you been able to kind of capitalize on some of these dislocations in the market?
Sure. Really competitive landscape. You've got the HP Juniper merger, that they've identified, what? $600 million plus-
Synergy.
Maybe up to $1 billion.
Yeah, yeah.
Of cost savings that need to be made over the next several years we've been the beneficiary, quite frankly, Meta.
Yeah
... Some of that. We picked up the head of European sales-.
Yeah
Out of Juniper. He just started with us about three months ago. He's a rock star. We picked up the global head of the resellers-
Yeah
The partners, Joe Spencer. He's come over. He's also a rock star.
Yeah.
We've picked up other people across the board naturally, sales folks-.
Yeah
SEs others that are coming to join us as well. We're getting the benefit of just some good talent there.
Yeah.
Naturally, those talented individuals also have relationships either with customers or resellers as well, and so there's a bit of a pull-through and a halo effect of some of those folks. What we're hearing from the HP Juniper perspective is just they haven't really solidified their roadmap yet.
Mm-hmm.
That they haven't really communicated to customers what that roadmap's gonna look like. I think that's just what we're hearing. I don't know whether it's true or not, but it seems like that's been the real delay that is kind of causing any sort of concern with customers, and that they don't wanna wait to hear what's gonna happen. They wanna know right now what the roadmap looks like.
Got it.
RUCKUS, .
Yeah.
You mentioned RUCKUS. I mean RUCKUS and Ubiquiti and others at the lower end-
Mm-hmm
I think they might start to feel a little bit more of a pinch.
Yeah
on the cost of the DDR4 RAM issue.
Yeah.
Because they operate at the lower level and more price sensitive markets.
Mm-hmm
... That it's a higher percentage of the BOM for them.
Got it.
As it increases. They would have to raise price a lot more.
Mm
... In order to cover and maintain margin there we'll see. I mean, it's a good company. They've got good vertical markets, et cetera. Time will tell whether that impacts them or not.
Got it. I mean, you've been-
We don't compete against them that much.
Yeah, yeah.
Yeah.
I mean, you've been focused on kind of key verticals for a while. Does some of this dislocation either make you think about expanding your lens, or does it just make it much easier to be effective in kind of your key verticals?
Yeah, I mean, key verticals for sure, but I think the point I made earlier.
Yeah
... Around expanding into the enterprise data center
Right
Is probably the area where we think that there's more expansion opportunity, more TAM expansion.
Mm-hmm
... Above and beyond what we have today. Today, we tend to kind of sit at core to the edge-
Yeah
... And not as much in the data center. Once we commercialize this 400 gig switch, I think that that's.
Yeah
... Gonna allow us to really go after a different market.
Okay. Perfect.
You've mentioned kind of the flexibility in consumption models with customers and kind of some of the encouraging things you're seeing around the recurring revenue. Just what trends have you seen around what customers are looking to kind of lock into as consumption models?
Yeah. We've had some really good success with our consumption models. We've created an MSP program.
Mm-hmm.
That MSP program enables MSPs who wanna buy equipment from us, but they're able to flex up and down as customers flex up and down.
Mm-hmm
... On the licensing that they have, and the support contracts that they have up and down on a consumptive basis over time. If you have 100 customers and 1,000 licenses today, but that drops down to 95 and 950, you don't pay for those 50.
Yeah
... Effectively, we flex down with you. If you flex up to 1,050, no problem, you can go up and down over time. That's been a really successful model for us so far, and we've gotten some good benefit there. We also have created this Extreme subscription private offer, which is a kind of a different model for enterprise customers who wanna buy a large bulk of equipment, but they don't wanna spend a lot of money on the CapEx, and they would rather have a license model. We have the ability to be able to do that, where they buy the equipment through our distributor, not from us, at near cost, and then we put a license model in place for them to buy that way.
The last thing that we're doing right now, Amanda, which you might find interesting, is that we're doing ENaaS, Extreme Networking as a Service.
Mm-hmm.
Think about it as $20 an access point per month.
Yeah
... Or $100 a month for a switch. We are bundling the hardware and the software and the cloud management and the support all together in one monthly, almost rental model.
Mm-hmm
... If you will. There's gonna be a year requirement, as a commitment. Beyond that, you can basically just buy and continue to rent, if you will.
Yeah
the equipment on a monthly basis as long as you're paying.
Are you seeing enough of that to kind of change how we should think about the P&L or any headwinds, tailwinds?
I think this is incremental.
Yeah.
I don't think it's gonna cannibalize what I'm doing today, and I think at the end of the day, this is gonna drive more and more recurring revenue for us as a company. That's what I'm excited about, is how can we drive, how can these new commercial models create new opportunities for the company to expand its TAM and get into new models that enable us to sell more?
Got it. You noted an overhang from professional services on gross margins this last quarter.
Mm-hmm.
Just go into detail on just how you would expect to see resolution there.
Sure. I won't apologize for lower margins and deployments, . I mean, at the end of the day.
Yeah
we said this last quarter, we see product margins continuing to increase into Q3 and Q4.
Mm-hmm
... Which is the most important point.
Yeah
... Is that product margins continue to drive and grow. On the professional services side, we've sold a couple large deployments, which is good, and the lifetime value of that customer is still very healthy. It's got healthy margin at the product level, healthy margin at the subscription level, but then they're more price sensitive to the actual deployment, and they've asked us to do those deployments because these are specialized. We don't have a problem with that, but it's like more like 15% margin-
Yeah
... At that level. It's not gonna be systemic or extend likely beyond Q4. I think from our perspective, we were just highlighting for the street to help them understand why margins, overall mix margins might be a little bit lower in Q3, Q4 because of those lower services margins. At the end of the day product margins remain healthy.
Got it you talked up front about kind of this 10% revenue growth, 20% EPS growth target just what are kind of the key, if you dissect, what are the drivers to get to those targets?
Yeah now the price increases will actually-
Yeah.
I mean, back in November, .
Yeah
Now all of a sudden we're sitting here in March and price increases could actually help that even further.
Yeah
I mean, I think at the end of the day we see the demand environment being strong. We see our pipeline building. We see conversion rates going up. We're excited about what the demand environment's gonna look like over the next 12, 24 months because of that. I think from our perspective we're thinking that the market growth rate generally, if you look at some of the 650 Group or others, are saying that equipment sales could grow 3%.
Mm-hmm.
We think it's gonna grow for us 7%-9%.
Yeah
... That we talked about last, in November. That subscription and support growth would be more in the low to double digits, 12%-14%, I think.
Mm-hmm.
That's going to give us the 10%. I feel pretty confident in our ability to continue to drive that double-digit growth that we've seen, by the way, I would say also for the last Q7 , growing sequentially each quarter and year-over-year on a double-digit basis. I see us continuing to be able to do that at that level. On the operating leverage perspective, right, we've just done a really good job of managing expenses against the revenue growth rate. Even this last year, we had a 20% growth rate, higher than 20% growth rate on operating income against our revenue growth. I think we're pretty focused and dedicated towards continuing to have at least twice the revenue growth rate and profitability.
What are those levers kind of on OpEx that you're still able to-
Yeah, I mean, AI is gonna be helpful there, right?
Yeah.
I mean, instead of hiring more and more engineers, we're using AI to basically add more engineers.
Yeah
On a virtual basis. I think that we can continue to do that. I'm also deploying an AI sales expert.
Mm-hmm
... That is helping our SEs and our RFP teams to answer more RFPs. I can grow-
Yeah
... My business by churning out 10 more or 15 more RFPs per week.
Mm-hmm
... Because I'm using AI to do that as opposed to just trying to have people do as much as they can. I think the efficiencies we'll get through AI is going to enable us to raise and grow our business without having to necessarily add the requisite dollars and people costs to do that.
I mean, you mentioned kind of MSPs earlier, but just how are you thinking about kind of different, or adjustments you can make to go to market to kind of better capture some of these opportunities?
Yeah, on the MSPs or others, I mean, the new commercial models I think are gonna give us that opportunity. When we talk about the competitors, one thing that we didn't talk about on the Cisco side is that they are changing their partner program, and they're changing it to a point system, and that the early indications are that that point system where you get points for selling everything is gonna benefit the larger partners.
Yeah.
It may not benefit, I'll call it, the longer tail of resellers.
Mm-hmm
... That are just network and network only.
Yeah.
We think that there's more of those resellers that might consider, well, if I'm not gonna make as much money there, or if I'm concerned about making money, maybe I should consider Extreme as a potential partner as well to kind of diversify.
Yeah
... myself a little bit more. We're thinking that that could be an avenue for us to continue to drive more growth rate there. Again, not having to add a lot of dollars there.
Yeah.
Just adding more resellers to the base will tend to grow the business more. We're seeing success. I mean, one of the success stories that we have right now is a Cisco takeaway in Japan. We got the government of Japan, and we're getting all the ministries in Japan as well. That was KDDI, and that was NTT East as well.
Mm.
Now that they know who we are, now they know how our technology works.
Yeah
... we feel like we can get leverage with them and better opportunity for them to sell Extreme into that market as well. It's also going upstream with, higher and bigger resellers as well.
Got it. Just, I mean some of that 10% growth that you spoke about versus kind of an industry that's certainly not growing that, just is the share gain opportunity that you're seeing just adding more products to kind of customers, or is it just adding more customers kind of faster? I guess, is it coming from expand or land?
Yeah. I think it's a good question. We will continue to grow the business. I think, A, it's keeping the existing customers that we have happy.
Yeah.
Expanding TAM on the data center side.
Mm-hmm
with those customers. Not having that in the past, but having it now will help us expand. Adding more resellers and more resellers at scale, that give us more opportunity to attract new.
Mm-hmm
.. Customers into the fold who we have not had relationships or experience selling into. More resellers coming in, more proof of concepts, more opportunities, at-bats, I call them.
Yeah
... For us to hit a double, single or a triple or a home run at the end of the day, if we get more at-bats, it's just more opportunities for us to convince other customers that our technology is great, and it sits a little bit below Cisco from a price perspective.
Yeah.
That we can provide really great networking support and service.
Got it. Then maybe just the last question for you, just on capital allocation priorities or just kind of how you're thinking about the balance sheet.
Yeah I mean, first and foremost, I would say this DDR4 RAM issue is,
That's the number one priority.
... The number 1 priority is making sure that we've got that and that we've got plenty of ability to go and land the equipment that our customers need over the next several years. The second thing is buybacks, right? We've been buying back historically, but we are in market right now buying back shares as well. We will continue to prioritize buybacks as well. We've got a little bit of debt on the balance sheet, but not much. I'd say the third order of magnitude there would be just paying down some of that debt over time.
Mm-hmm. All right. Well, Kevin, thanks so much for being here today.
All right. Thank you, Meta.