Extreme Networks at Needham Conference: Strategic Growth and AI Focus

On Friday, 09 May 2025, Extreme Networks (NASDAQ:EXTR) presented at the 20th Annual Needham Technology, Media & Consumer Conference. The company reported robust Q3 results, with revenue exceeding expectations and a strong bookings performance. Extreme Networks is optimistic about its future, driven by strategic initiatives and AI integration, despite potential tariff challenges.

Key Takeaways

• Extreme Networks reported sequential revenue growth and the best bookings performance in six quarters.
• The company aims to achieve $300 million in revenue for Q4, focusing on profitability.
• Strong performance was noted in government and Asia Pacific segments, with European markets showing recovery.
• The introduction of Platform One highlights the company’s AI and security focus.
• No price increases are planned through June 30, 2025, despite potential tariff impacts.

Financial Results

• Q3 revenue exceeded guidance, continuing a trend of sequential growth.
• Bookings performance was the strongest in the past six quarters.
• Cash flow from operations was robust at $30 million, aided by inventory reduction.
• Non-GAAP earnings were reported at $0.21 per share.
• Q4 guidance anticipates $300 million in revenue, with a focus on maintaining profitability.
• The company targets inventory levels around $80 million, with an expected $36 million cash flow benefit from further inventory reductions.

Operational Updates

• The government segment showed strong performance, particularly in Europe and Asia Pacific.
• European markets are recovering, with increased activity noted.
• Tariff exposure is limited to $1.5 million for the fourth quarter, with mitigation strategies in place.
• A new channel chief has been hired to strengthen channel relationships and expand market reach.
• The company added 11 Managed Service Providers (MSPs) last quarter, totaling 48.
• Platform One for MSPs is generally available, with a broader launch planned for early July.

Future Outlook

• Extreme Networks is focusing on AI adoption, particularly with agentic AI agents in Platform One.
• The company targets 75 MSPs by next year, aiming to reaccelerate ARR growth through Platform One, MSP volumes, and subscription private offers.
• Aiming for a gross margin of 64% to 66%, improvements are expected from standard costs, product margins, and a shift towards subscription revenue.
• Platform One combines cloud management, support, security, and AI, with an anticipated ASP uplift of 10% to 15%.

Q&A Highlights

• The E-Rate program for K-12 education is expected to remain stable despite government spending cuts.
• Uncertainty surrounding the HP and Juniper acquisition is benefiting Extreme Networks in the K-12 market.
• Platform One offers a unified solution for managing hardware and software, simplifying licensing for large environments.
• The company anticipates outperforming competitors with its AI-driven solutions.

Readers are encouraged to refer to the full transcript for a detailed account of the conference call.

Full transcript - 20th Annual Needham Technology, Media & Consumer Conference:

Ryan Coontz, Analyst, Needham: Hello. Welcome to Needham’s, technology media and consumer conference. I’m Ryan Coontz. I cover the networking sector here at Needham. I’m really excited to be joined by Extreme Networks.

We’ve got CFO Kevin Rhodes and SVP of finance staying. Kolhar, how are guys doing?

Kevin Rhodes, CFO, Extreme Networks: Hey. Doing well, Ryan. Good to see you.

Stan Kolhar, SVP of Finance, Extreme Networks: Hey, Ryan. Good to be here.

Ryan Coontz, Analyst, Needham: Excellent. Great. Well, let’s get let’s get to the meat and potatoes first. You know, just the recent quarter, look like it came out, you know, pretty darn good and in line with what you had hoped for. Can maybe maybe walk us through those results, Kevin?

You know, maybe talk about some of the different segments in North America and Europe and inventories, and and then we’ll get to the little tariff question.

Kevin Rhodes, CFO, Extreme Networks: Yeah. Sure. No no worries. Yeah. Aside from tariffs, what’s going on?

So, I mean, generally, yes, we had a very good quarter. Right? We had another quarter of sequential revenue growth. We’ve had several quarters in a row. That’s atypical for this particular quarter because, typically, we’re seasonally down in the third quarter versus q two being year end, a little bit more budget flush there.

So we buck that trend and continue to grow through it. And I’d obviously, you know, overachieved our revenue guide and and the profit guides. That was good too. What I was most happy in in the quarter to see was really our bookings performance, right, which was better than any of our last six quarters. And when you think about with seasonality, overachieving any of the prior quarter’s bookings performance means that you’re you’re you’re overachieving even some of the stronger, you know, quarters that that you normally have.

So that was good too. I I was happy to see the cash flow was strong at $30,000,000 Yeah. From operations, you know, as that inventory reduction came through. And profitability remained, you know, healthy at 21¢ in non GAAP earnings. So, you know, I I I think that’s all like, the results of the q three were good.

I think the best part was really, you know, the fourth quarter guidance, right, which is what we’ve been talking about, Ryan, for several quarters, even your predecessor about, you know, getting back to that $300,000,000 mark. Right? And and being able to get back there. We’ve been talking about it for a while, but now we’re projecting in the midpoint of our guidance range to get back to that 300 with with some pretty reasonable profitability associated with it. So we’re seeing more scale in the model, and we’re seeing, you know, just, I call it better better bookings and and better pipeline.

So that’s that’s exciting.

Ryan Coontz, Analyst, Needham: And among your different segments, where where where would you say you had saw the most, outperformance to kind some puts and takes across segments?

Kevin Rhodes, CFO, Extreme Networks: Yeah. You know, we continue to do well government. And when I say government, I mean outside typically The United States government wise. You know, we do very strong in Europe. We’re doing very strong in Asia Pac with a lot of governmental spending.

Yeah. We also do fairly well in The United States with what I call, small government spending, and that is at, you know, the the state and local, you know, level as well. We do we do quite well there too. We don’t have a lot of exposure, the good news, at the federal level. I do have a federal team that they do quite a good job, but the reality is it’s really a nascent, you know, opportunity for us to grow federal spending over time within our business, but we don’t have a lot of exposure in in terms of risk of of of losing, you know, federal business, you know, based on Doge or anything along those lines.

So we feel pretty good there.

Ryan Coontz, Analyst, Needham: That’s great. Nice to hear Europe turning around. I mean, it seems like that’s a that’s a pretty broad pretty broad consensus view that Europe is turning around in spend and hopefully means it’s pretty it’s sustainable, not just isolated.

Kevin Rhodes, CFO, Extreme Networks: Yeah. I mean, geographically, right, Europe did better. We’re still seeing strong activity for us in Asia Pac, even Americas, you know, is is is is is certainly strong and and doing fine. I I I think the opportunities for us in the future are, you know, Germany’s just formed their government. Right?

They’ve got a chancellor now a few days ago. So that’s kind of exciting. And we’re seeing a little bit of this, you know, administration conversation around NATO. Mhmm. And a lot of these countries are realizing that they need to invest in their own militaries.

And so we see opportunities coming to us through individual pockets of of governmental spending to beef up their own military presence, especially with, you know, the war in Ukraine and Russia. We see more people, especially in the border, being concerned about that. As we talked about before, that there’s the geographic pockets, and then there’s there’s manufacturing. We see manufacturing coming back a little bit more on the vertical markets like you talked about. We’re really strong on on the, sports and entertainment side that continues to do well for us.

We saw more in the quarter. You know, health care, we did another, you know, couple of hospital systems in Europe, this last quarter too. So we almost see, like, Europe being a really good strong, you know, area for us with some some tailwind opportunity.

Ryan Coontz, Analyst, Needham: Sure. That’s fantastic. Let’s touch base on, on on tariffs and Yeah. What it it feels like we’ve lived a lifetime already since liberation day, doesn’t it? So watch us through kind of how your expectations have changed for how you thought about them at first, how you think about them now, what your kind of game plan is relative to extreme, and, you know, how you’re gonna deal with the, various outcomes that that could, roll out here over over in the second half, maybe maybe as early as July?

Kevin Rhodes, CFO, Extreme Networks: So first and foremost, tons and tons of mitigation strategies and scenario planning happening on the back end. We have

Ryan Coontz, Analyst, Needham: Yeah.

Kevin Rhodes, CFO, Extreme Networks: Spent a lot of time management team wise looking at what pricing adjustments might we do, what optimization of the supply chain might we need to do, enhancing our logistics efficiencies, exploring different, like, warehousing solutions, and can we directly ship, for instance, from our ODMs into distribution part, centers in Europe so we can bypass all the The US tariff stuff if it happens. You know, it’s still a lot up in the air right now because, obviously, July 8 is a ninety day, you know, a reprieve, if you will, for now, for for most folks, and they’re all in active negotiations. We we we we are prepared to to kinda manage tariffs if they come our way through price increases and these other met you know, methods of of of managing through. But for now, I would say our exposure is pretty darn limited. I I I just communicated this last quarter about million five exposure in the fourth quarter.

We expect that to be similar, you know, next year if things, you know, stay as they are. Yep. We’ve we’ve decided not to price increase in q four. So through June 30, no price increases. Brian, as you know, I’ve got inventory that’s coming down, but even the inventory I have today that’s on my balance sheet is non tariff inventory.

That’s right. So I can go a couple more quarters Yeah. Of selling into the market without having to actually impose any price increases on the existing inventory I have. And so there’s a lot of ways for us to kinda mitigate, you know, that risk, you know, over the next, you know, you know, several quarters.

Ryan Coontz, Analyst, Needham: Yeah. That’s great. Have you seen any action from, your competitors on the pricing front?

Kevin Rhodes, CFO, Extreme Networks: You know, there is some talk about prices going up and list prices starting to go up. We we we’re hearing that Juniper is communicating some price list changes coming up here. I assume we we’re not aware of what the amounts would be of the of the price increases. I did hear at a conference earlier that, you know, for instance, Cisco has got a lot of their switching coming out of Mexico, and that they may have, a hit to a hit to margins of 70 basis points. That’s what I heard.

And that that might yield, you know, some price increases as well. We’re very attuned to the market, and and we will, you know, move prices according to the rest of the market. We wanna be the stand alone guy out there leading with price increase. But if other competitors go out with price increase, I think you rest assured, we’d certainly be behind them.

Ryan Coontz, Analyst, Needham: Gotcha. For sure. Yeah. You know, one of the important markets you guys, sold into and you talked about in the call is is e rate and and and k through 12 where you have a really strong share there. You know, what what are the dynamics that are going on in that market relative to federal on the con you know, all the the Doge efforts and around streamlining federal and well, then that program.

What what what are you what are you seeing now, and what are you thinking about that in the over the coming year?

Kevin Rhodes, CFO, Extreme Networks: Yeah. I mean, for I mean, first and foremost, I’d say it doesn’t appear that, you know, the the the E Rate program or the the the programs that we have for k through 12 are gonna be affected by Doge or the governmental spending reductions that we’re seeing. The E Rate program is a funded program through the Universal Services Fund, And so the grants to schools to basically get themselves off blackboards and into smart boards and to have iPads in the in the in the in the classroom, that that appears still be on track like it has been, by the way, for many, many years. And so it seems like that’s okay. I think from our perspective, we’re seeing stronger bookings level activity there.

I think it’s in part due to the uncertainty surrounding, you know, surrounding HP Juniper acquisition. You know, schools want a sure thing, and they want a good road map. And when they you you blind bid these things and you’re, you know, kinda getting, you know, your best foot forward and and they’re reading through that, you’ve got school boards a little bit more nervous around who are they buying from these days with the uncertainty of that acquisition. So I think that’s helping us. But I think secondly, we’re also, you know, presenting ourselves with our platform one solution into that market, and they really like it.

And they’re really appreciative. And so we’ve had a hundred of those customers, you know, buy that platform one solution. And they like the idea of the AI, you know, as well as the networking and then security built in. So they don’t have to buy a bunch of different security features over the top, you know, of their other school system network that they have the ability to have security built into the network. And our our security and our AI is going to help them be more secure there too.

So that’s helping us as well.

Ryan Coontz, Analyst, Needham: Great. And, and and, Stan, with your, you know, with your with your biz dev hat on and and thinking about products and, your your your core campus market, you know, how do you think the campus market is is changing, like, before our eyes here? You know, where where was it a year ago? Where do you see it going in the next year? What sort of changes are happening in the in the landscape of campus?

Stan Kolhar, SVP of Finance, Extreme Networks: Yeah. Right. I think, you know, I think what we really need to, see as an industry is just the adoption and use of AI. And, what’s really great is that we’re bringing forth a lot of solutions that will help, customers drive more automation and, really make things easier for them to manage their networks. And one of the biggest things that that, we’re espousing is the use of AgenTic AI agents.

So in other words, that you can tell, these agents what you’d like, what services you’d like them to perform, what activities you’d like them to perform, and do, you know, analysis on the network, what if scenarios. And then, that takes a lot of time back that gives a lot of time back, to the IT team because they can automate a lot of these, activities and get reporting out of them much faster than they could in the past. And, know, everyone wants to see the entire network. Right? So visualization is very important of how you visualize all of your network flows, from one place to another.

And it’s become even more important. You have return to office initiatives, but you also have hybrid. And so where people are and and, it it matters a lot. And then, the other thing besides AI is clearly security. Security is is top of mind for everyone.

So, we think about security in a layered approach. You can have your firewalls and your other security products. The network security can get beefed up. So fabric, in our case, campus fabric is is highly secure. Yep.

And then giving people, additional new tools for network access control, up leveling net network access control to a zero trust posture, and then creating a universal zero trust for the devices and the users collectively. You know, that that’s kind of what we’re seeing. So a lot of interest in those types of areas. Yep. And then the normal speeds and feeds upgrade that you would expect, interest in Wi Fi seven, interest in higher throughput switching.

So Yeah. That’s what people are focused on. It’s a lot of those activities.

Ryan Coontz, Analyst, Needham: That’s great. That’s great. You know, relative to to to channels, you know, when you if you can speak to this, but, you know, how are how how’s your channel strategy evolving? You know, where are you leveraging, your distributors and VARs now versus, you know, more direct sales? How how you kind of bifurcate that?

Kevin Rhodes, CFO, Extreme Networks: Stan, you wanna cover that one?

Stan Kolhar, SVP of Finance, Extreme Networks: Yeah. So, you know, I think what we’re doing on that front would be clearly deepening our relationships on the channel front. We just hired a new, channel strategy, channel chief.

Ryan Coontz, Analyst, Needham: Great.

Stan Kolhar, SVP of Finance, Extreme Networks: Hired him away from one of our larger competitors and, was very happy to join us. So, we got good feedback from some of the investors that we saw this morning that know him. Yeah. That, you know, he brings a lot of capabilities and a lot of good relationships to Extreme as our, channel chief, and it’ll help us when we move up market. Because as you know, when you move up market, it’s dealing with the channel partners that sell to the larger customers.

So that’s one aspect of it. I would say that’s the core business. And then the other two things that we’re doing is adding, additional commercial models in into our quiver. And, you know, one is, growing our business with managed service providers. We added another 11 this quarter, so we’re up to 48 managed service providers.

And they actually, were in beta before last quarter because this quarter, we added, the capability for them to use our platform one

Ryan Coontz, Analyst, Needham: Oh, yeah.

Stan Kolhar, SVP of Finance, Extreme Networks: Management console.

Ryan Coontz, Analyst, Needham: Mhmm.

Stan Kolhar, SVP of Finance, Extreme Networks: Now the the managed service providers have consumption billing and the multi tenant capabilities that we gave them with platform one. So they’re actually, using it already in some cases, and, we’re getting good feedback on that. And then the other, commercial model that we’re driving is this, private offer, which is kind of like a disaggregated model. Mhmm. And that is for the largest customers that we have with a certain purchase commitment that they would need to join this, category.

Ryan Coontz, Analyst, Needham: Yeah.

Stan Kolhar, SVP of Finance, Extreme Networks: But, that allows us to, help them procure products, that are compatible products with Extreme, but in a quasi white box kind of, way. Sure. And then, we license our operating system service or support to them and, our our, tech services, and and they can subscribe to our SaaS based applications.

Kevin Rhodes, CFO, Extreme Networks: Yep.

Stan Kolhar, SVP of Finance, Extreme Networks: So those are, really good deals for both because the customer gets the margin benefit on the gear, less of an uplift on hardware. And then we get the benefit of a, steady stream subscription from the customer on that on that front. So those are the three things that I I think we’re driving. And the competitive environment is is becoming more favorable to us in our view. There’s there’s a lot of consternation between the the players beyond, you know, the largest, company in the space.

So, with what’s happening with HPE and Juniper and then with, Cisco still trying to merge some of the capabilities of Meraki and, Catalyst Right. And driving their, channel partners to sell both Cisco security and Cisco networking. So if you have a a VAR or channel partner that has more of a pure play focused, approach on security, that channel partner might actually, want to do more business with Extreme so that they have a best of breed approach for networking and a best of breed approach to security.

Ryan Coontz, Analyst, Needham: Exactly. Yeah. Makes sense. And it sounds like the disaggregated market really opens the door for you to move upmarket then so that you can compete in these bigger Fortune 500 enterprise type opportunities.

Stan Kolhar, SVP of Finance, Extreme Networks: Yeah. Yeah.

Kevin Rhodes, CFO, Extreme Networks: That’s right. Yeah. And and and that’s one one of the larger deals that we got. John Deere, was a competitive, you know, win. You know?

I mean, first and foremost, it’s technology differentiation. Right? And then beyond that, it’s it’s it’s your commercial model. Right? Are you easy to do business with?

You know, how is your support contracts, you know, you know, in in your support, you know, services and experience? And then what’s your licensing model? And I think that we you know, despite the the technology differentiation that we have on on on campus networking, I think we really, really overachieve on a lot of the other soft elements of doing business with us. So that’s because we’re just easy to do business with.

Ryan Coontz, Analyst, Needham: That’s great. And and, Stan, you mentioned some of the MSPs are in a beta on platform one, so they get the advantage of kind of managing multiple customers then from a single pane, for them?

Stan Kolhar, SVP of Finance, Extreme Networks: Exactly. So their their version of platform one, there’s gonna be platform one that comes out for end customers that allows them to do all these things on their own. Platform one for managed service providers adds the element of multitenancy

Ryan Coontz, Analyst, Needham: to their

Stan Kolhar, SVP of Finance, Extreme Networks: platform so that they can get all of this great information, data, and use AI, but they can use it across multiple customers.

Kevin Rhodes, CFO, Extreme Networks: And to be clear, we’re GA for plat for for platform one for MSPs. We’re GA there. We’re going GA with platform one for all customers in in early July. So that’s the exciting part. Excellent.

Ryan Coontz, Analyst, Needham: Great. That’s great. And in terms of, Kevin, Kevin, your your inventories, they they came down in the quarter, you know, solid cash flow there. You know, where you where you aiming to get your inventory level to relative, you know, to to where you’ve been here?

Kevin Rhodes, CFO, Extreme Networks: Yeah. Agreed. I mean, I was happy to see the $16,000,000 improvement of the inventory and then we cash flow that out. I think the good news is, you know, we we have more room to go. Right?

And so I think that we’ll we’ll we’ll benefit with probably, I’d say, another $36,000,000 of cash flow to go before we normalize at around $80,000,000 of of of, inventory levels for us. There’s a mix there of raw material as well as finished goods, and we always wanna have, you know, a good mix of both. So it’s not a % all finished, some of it’s long.

Ryan Coontz, Analyst, Needham: So And I I can imagine, the tariff uncertainty too might have you, hedge your bets a little bit there, just get navigating this transition.

Kevin Rhodes, CFO, Extreme Networks: Yeah. Yeah. Obviously, there is probably I I have talked to my operations team around, you know, do we wanna buy some inventories, you know, before tariffs could come in? And so there’s a there’s a delicate balance there, but I would say so I’m not I’m not putting a time frame on it on the 80,000,000, but I’m just saying they will normalize to 80,000,000. But it’s probably the next couple few quarters that we will definitely get there.

And and then the other thing I will say, Ryan, that was always, you know, inventory can be an amorphous is it channel inventory? Is it our inventory? Right? On the channel side, that’s fully normalized, there’s no, you know, increase, you know, inventory there anymore. And then we have our own inventories that we should get that $36,000,000 additional benefit from in the future.

Ryan Coontz, Analyst, Needham: Yeah. Great. And so, Stan, what’s what’s competitive landscape look like here? We kinda touched on it, but, you know, where do you really feel like your differentiation here is with platform one arriving? And it’s not it seemed it really feels like a step function up in terms of your sophistication of your, your software offering.

Stan Kolhar, SVP of Finance, Extreme Networks: Yeah. Brian, that’s exactly it. Right? That, when we think about the capabilities that we have, you know, we’ve always had a very, very high quality networking solution, and we’ve differentiated with the capabilities that we have in Mhmm. Campus Fabric.

And Campus Fabric is the the, resiliency of Campus Fabric is one of the main differentiators. Right? You can’t really break the network. You can’t take down the network. Yeah.

If it does go down, it lights back up in, you know, milliseconds. And that, allows us to get, a lot of interest in in high performance applications, like, for example, video Mhmm. HD video, four k, eight k video, right, when you’re getting that superior, capability for for network connectivity. And then

Kevin Rhodes, CFO, Extreme Networks: Wynn Casino is a good example of that. Right? Mhmm. Yeah. Good customer of ours.

Ryan Coontz, Analyst, Needham: Yeah.

Stan Kolhar, SVP of Finance, Extreme Networks: Yeah. Always bring you know, as as you know, I I my favorite example of that is the, you know, the Ocean’s 11. Right?

Kevin Rhodes, CFO, Extreme Networks: Right. Cameras cut

Stan Kolhar, SVP of Finance, Extreme Networks: down for thirty seconds. You can you you can’t do that to an extreme network. Right?

Ryan Coontz, Analyst, Needham: Right.

Stan Kolhar, SVP of Finance, Extreme Networks: So we you can’t you can’t have that heist, in in an extreme casino. And, so the other thing is security. Right? Security is is huge in that element. And then all of these attributes that we’ve had in the ease of use of cloud.

Now when you take platform one on top of that, and we talked about the AI and the agentic agents of AI, if we go back to some of the leading industry conferences right now, we’re seeing, some of the key, industry analysts talk about this and how the use of AgenTik AI for networking, and that’s what we’re all about. Not necessarily, you know, the networking for AI. Yeah. We’re bringing AI to networking. Sure.

And it’s it’s bleeding edge to bring AgenTic AI to, networking capabilities. This is beyond first generation AI for networking, which was more machine learning, alerts, and those types of things that some of our competitors have or even document search. Mhmm. So, you know, ChatGPT, you can get document search. But this is actual service agents with AI built in.

So, yes, you can have a chatbot. That’s fine. We can give you a chatbot. We actually have tested a lot of that internally. Our tech support people have tested it out.

Our systems engineers have all tested that out. So we’ve taught the system a lot of these things through the cases. Yeah. Now it’s it’s just bringing that level of automation, to the IT community. And I was on a customer call a couple of weeks ago, a new potential customer, in the financial services industry, And they said, okay.

We want automation. We’re tired of reprogramming every hop from the, you know, from one VLAN to another. And, that’s that’s what we’re bringing forth. You know? So it’s kind of like when we hear these stories, it’s unfortunate that a lot of customers still have to deal with that and running, you know, seven year old, ten year old networks.

Ryan Coontz, Analyst, Needham: But there

Stan Kolhar, SVP of Finance, Extreme Networks: are enough of them out there, and, a lot of them are running the gear of our competitors. So Yeah. We you know, it’s it’s an easier displacement discussion. So to your point about competitive, you know, bringing that forth, having that vision and the capabilities that we’ve had, the competitive landscape is, has become favorable to us. And I think some of the dynamics in the industry have have helped us as well.

The political environment has helped us, and I think, you know, where we used to compete more with Huawei in Europe and and other places, like, more of the, western markets Mhmm. Not seeing them as much. Still see them in price competitive markets, maybe like Asia, Latin America. Yeah. But, that’s really helped us, narrow the field in terms of where we’re seeing competition.

And we we had a lot of takeouts. I mean, we we spoke on on earnings, right, various takeouts in all sorts of industries, of competitors across the board. So it it’s an it’s a it’s nice to see. We’re seeing numbers come in from some of our competitors, and some of them had a down quarter from December to March, specifically in the narrow area where we see them and compete. Yeah.

So, defying seasonality in March was a really good sign in the context of this environment.

Ryan Coontz, Analyst, Needham: Totally. Yeah. I mean, you know, Cisco’s obviously the one that has probably the most at risk here. Why do you think Meraki is in a tougher spot to to follow your or to to keep pace?

Kevin Rhodes, CFO, Extreme Networks: Yeah. I mean, Cisco tends to lead with breadth. Right? Breadth and depth of those solutions they have.

Ryan Coontz, Analyst, Needham: Portfolio. Yeah.

Kevin Rhodes, CFO, Extreme Networks: The portfolio. Right? But when we compete with them best of breed, like, solutions, they they actually tend to fall out fairly quickly. Right? Because of the campus fabric, because of the differentiation we have, we find that they actually can’t compete as well as we can in a head to head network wireless wired, you know, competition.

Competition. Right? They’ve got some aggressive channel tactics at times, right, to keep to give them market presence and that sort of thing. But in generally, I would say what they’ve not done very well with, but that we oftentimes see as a reason to come to us very difficult licensing and very complex licensing that creates Cisco fatigue, then the lack of integration of their solutions together. Right?

They’ve owned Meraki for for ten years, and they’re they’re still on a path of integrating Meraki with Catalyst, you know, switches that they have, and they just have never done a good job of that. Now they’ve got Splunk, and they’re almost, like, distracted from networking and focusing more, you know, on the Splunk acquisition and trying to drive more subscription revenue there. So I think a lot of people who are buyers of networking equipment are like, are they still there? Are they not? Are they gonna integrate?

What’s the roadmap look like? I think they’re just worried about being a number versus with us, you’re a name. Right? And and for for me, that’s an important element of the Extreme story is all of our customers. We deeply care about their success and making sure that, you know, they’ve got the best networking solution they can possibly have with us.

Yeah.

Ryan Coontz, Analyst, Needham: That’s great. And and the other big, two players, HP and Juniper, are trying to merge. That’s I merged. Saga, quite saga here. I mean, it’s very clear that HP made clear that they’re hurting in Wi Fi, and they need Juniper to try to shore up their position.

You know, how how is that playing out for you guys right now?

Kevin Rhodes, CFO, Extreme Networks: You know, I I I think fairly well. I mean, you look at the HP Juniper. Right? HP is about 15% of the market, Juniper. And the enterprise market, I would say, is more like 6% close to us.

Mhmm. You know, obviously, they’ve got the the the data center side as well. I don’t consider that, right, you know, when I when I think about, you know, the the the size. I think we’re about the same size as Juniper on the enterprise size. What I I still think about Juniper as a very formidable competitor.

Right? When we go head to head against the four, right, it’s typically kinda Juniper at the end. I’m excited about the AI that we’re gonna come out with. We think, you know, Mist is a very good AI solution that they had, but we think we are gonna leapfrog it, as Stan said, with this agentic, you know, agent driven AI solution. So Yeah.

So that’s exciting to us. And then on the HP side, I think they’re a wounded, you know, animal. As we’ve described them a little bit, like, not dead, but certainly, you know, struggling with momentum. They lost a lot of the, you know, management team from the prior company that, you know and and I I think that a lot of people are just like, where’s your road maps? Where are you on the reseller side?

I think a lot of people are very worried.

Ryan Coontz, Analyst, Needham: Our hands are tied right now.

Kevin Rhodes, CFO, Extreme Networks: I’m fine with them. Yeah.

Ryan Coontz, Analyst, Needham: Yeah. So I the the lack of clarity probably plays in pretty close to the end game there, which is that a HP’s roadmap is gonna go away. Right? Get just get replaced with Mist over time. But it’s just Yeah.

And that It it seems like extending the the the, the misery for them.

Kevin Rhodes, CFO, Extreme Networks: HP. I I would imagine they’ve had a really difficult time innovating over the last year and a half thinking that Juniper will be the platform that they’re jumping onto. And so, you know, have things stalled from a road map perspective? They haven’t certainly been able to to communicate to customers what that road map looks like. But then on the innovation side, have they really stalled out on that side?

And we don’t see any, you know, real AI coming out through there or secure. So I think that there’s a real, you know, challenge and opportunity, quite frankly, for for us and and Juniper. If if the deal doesn’t go through, I think it’s still a benefit to us to go into that place.

Ryan Coontz, Analyst, Needham: Yeah. They already invalidated their own product line, essentially.

Kevin Rhodes, CFO, Extreme Networks: A little bit. I mean, I mean, mean, probably not totally because Aruba is still a good, you know, solution on the wireless side, but I think that they will really struggle with having a cohesive wired wireless solution with AI. All all of the feature sets that we’ll have in Juniper have, I I think struggle on a on a head to head competition there.

Ryan Coontz, Analyst, Needham: Yeah. Interesting. Well, Kevin, on the on the SaaS side, we’ve seen a little bit of slowing on the the ARR. You know, what what’s been behind the slowing there? And, you know, what are you doing to get back to that 20% level that you have growth you have a target on?

Kevin Rhodes, CFO, Extreme Networks: Yeah. A little bit of slope on the ARR side, 13% growth versus the 20% we were experiencing in the past. We really have a a three pronged approach there, and I’ll I’ll describe it this way. Right? So so first, we’re leading with platform work.

Right? It incorporates cloud management. It incorporates our support, our security features, and then this agentic AI. There’s a bit of a ASP uplift there, about 10 to 15% that we’ll experience as a higher uplift on the ASP for that particular solution. But I think also a stickiness factor there as well, Ryan.

Right? So so as you bundle all these things together, similar to, like, Microsoft with their e five subscription that includes Teams, that includes Office, and that includes also Microsoft Defender, You can’t rip apart any part of that platform. Right. It’s all included. And so I think we’re gonna get better, right, attach rates on that.

We’re gonna get better, you know, retention rates on that in the future. And that’ll continue to drive our ARR, you know, metrics there too. As Stan said earlier, we’re doing pretty well with the MSP volumes. We got 48 added 11 more. Like, we’re on track for to get to our 75 number we wanna get to by by this next year year end.

So and that has a a good subscription support, you know, component to it under platform one. So that’s gonna drive. And then third, kind of that that that that that market share gain that we get out of that subscription private offer. Right? That enables those service providers of Fortune 100 companies to purchase hardware, you know, nearly disaggregated model, nearly at cost.

Mhmm. But then we wrap our operating system, the cloud management, the platform one, all in, a term based license model. That’s gonna drive subscription revenue as well. So those three things and I I would just comment that also when you think back a year ago where we had lower product bookings, right, because we were working through the channel management. Yeah.

Well, that that’s working its way through the model right now. Right? Because the product is what you get from a subscription perspective. And so when you sell the product, you get a subscription attached. When you have less product like q three of last year, it works its way through the model, a little bit lagging.

And so that’s where we’ve seen a little slowdown there. But as we’ve seen, product bookings come back over the last several quarters and we’ve had, you know, subscription attached to those, we’ll start to see an acceleration there again. And you’ll even see it in q four.

Ryan Coontz, Analyst, Needham: I think I think maintenance has been a little soft too, so that’s driving the bundling.

Kevin Rhodes, CFO, Extreme Networks: Yeah. The bundling is gonna help on the maintenance and support side. Right? So as we bundle subscription and maintenance and support, which are all sold separately today Yeah. When we bundle it all together and add the AI to it and the security features to it as well, I think, you know, customers are gonna see a tremendous benefit from that, you know, larger platform one, you know Okay.

Ryan Coontz, Analyst, Needham: Strategy. Right. And, you know, as you get ARR reaccelerating here, what’s that gonna do to gross margins? You know, you could what what’s your kind of timeline to get to your your your target levels in mid sixties?

Kevin Rhodes, CFO, Extreme Networks: Yeah. So, you know, our target is still 64 to 66% gross margin. We’re not backing off that. We’ve been a little bit lower because the 1 and a half million dollars of of, I’ll call it, tariff impact in the in the fourth quarter. You know, we’ll we’ll we’ll temporarily, you know, pull us back from that.

But it’s a combination of, you know, we’ll continue to make improvements in standard costs, as we get more and more universal hardware and and and just, you know, lower, if you will, RMAs on that hardware. We’ll continue to drive gross margins on the product side. We’re about 58% right now. I could see that getting to 60. Okay?

And then when you think about the mix of recurring and subscription, you know, the the recurring you know, that that is, in the 70 to 73% range. And I could see the mix shift happening over time where we’re more like 55, 40 five of product to to subscription as I think about the next several years. And that’s where you’re gonna get to that 64 to 66% range.

Ryan Coontz, Analyst, Needham: Yeah. Great. Maybe shifting gears again. Stan, talking about platform one in the background. Can you kinda walk us through a little bit of history here in terms of your consolidation of a unified platform and then now the rollout of of platform one over that?

And Sure. What what what the power is of that to the end customer?

Stan Kolhar, SVP of Finance, Extreme Networks: Yeah, Ryan. So, you know, I’d say, it’s been many years since we’ve last done, any any significant acquisitions. So most of our use of cash, the earlier question, has been on buybacks and and that sort of thing. But, you know, if you go back to the strategy, like, ten years ago that, when our current CEO, Ed Meierkor, took over, it was really a scale up strategy, to build out in both in terms of scale and and a little bit of product breadth across networking. So, we added, back in 2013, merged with a company called Enterasis.

That gave us the early, management capabilities that we have now and also helped us, get into the early days of the, you know, arena Wi Fi, the sports entertainment business that gives us the tip of the spear high end capability on on wireless and analytics. And then, what we also did was, we then acquired Motorola’s, Wi Fi business that was more for distributed Wi Fi, but it wasn’t yet cloud. And we got great customers out of that deal with, you know, FedEx and the like. And then, we also acquired Avaya’s, Fabric networking business. The Campus Fabric came out of the Avaya acquisition.

They were in a difficult position Yeah. Going through another restructuring that they’ve done a couple of times. Yeah. And, so we were lucky to get that asset. That asset, actually, you’ll appreciate it.

It goes all the way back to Nortel. Yeah. And it’s the single path bridging technology.

Ryan Coontz, Analyst, Needham: Mhmm.

Stan Kolhar, SVP of Finance, Extreme Networks: And then, we did the Brocade data center acquisition. So that gave us the relationship now that we have. We we built out that technology that we received from Brocade, and updated it many times over. So customers like Verizon and Ericsson that we have, really like that technology. And when Kevin talked about the product portfolio, so now what we have, new, switches coming out, like 400 gigs coming out soon, things like that, that’s you know, we got the people and the talent and the and the tech Yeah.

For that years ago from that deal. And then we moved on to, I would say, more of our growthier areas, which is, we bought Aerohive to get into cloud networking. And, you know, that business has really taken off. I think, it really had a catalyst with COVID, proving out that we could scale up and do cloud in the public cloud domain. And then, you know, we’ve we’ve integrated that technology into the rest of our portfolio.

And then another deal that we did for some, WAN up SD WAN assets, Epanema in 2021. So we have, to your point, where we had all of these different, companies that we had acquired over the years, but the strategy was always to bring the technology in and immediately integrate it with the rest of the portfolio. So the platform, strategy on hardware was the first iteration of that where we took and platformized all of the hardware. Yeah. So you can see where we’re going with the software now and, you know, why we’re doing this in the software layer.

This is just an evolution of what we did with hardware. So the hardware has multiple personalities. So you can run it in the single path bridging campus fabric mode, or you can run it in the traditional, networking mode. And the same thing is true for all the access points. Right?

So that allows us to give customers flexibility, investment protection because they know that, you know, we’re not turning off, certain parts of the portfolio and sort of what we talked about with Cisco. Right? Like, Catalyst elements or Meraki elements are going away, and there’s consolidation. So you have customers that are left behind. Or in a deal like the HP Juniper deal, customers would have to choose the product road map.

The surviving entity would have to choose the product road map. So one of the things that we differentiate on, you know, in that respect is there’s certainty and investment protection that we offer because it’s one portfolio. And by the way, what it’s done is because we’ve modernized everything with the cloud native OS and, you know, modern capabilities on the hardware, the customers that we have are experiencing, at least in our, experience, record lows, you know, repair or maintenance requirements, and the product quality is the best that we’ve had. So the product quality is one of the other things that, you know, when you talk about differentiation, that matters to customers. It’s the longevity of the product, the quality of the solution, all that matters both in the hardware and the software.

Yep. And so that now taking that platform strategy and applying it to the software that we bring, all the different software elements, being able to see all that, manage that from one place with the additional capabilities that we bring, and simplifying the licensing is also important. So there’s a lot of asset management that goes on with a lot of our competitors because the timing of licenses when they buy a certain batch of licenses Right. Can’t be, you know, strung together into one common time frame. And so you’re constantly rolling forward and and managing licensing of, you know, I’ve got this batch that’s up for renewal, and that batch

Ryan Coontz, Analyst, Needham: is up for renewal. Reducing complexity there. Right. Right. So when

Stan Kolhar, SVP of Finance, Extreme Networks: you get into thousands of devices for large, environments Yeah. It becomes very complex. Yep. And with platform one, they’ll be able to see all of that all in one shot. And the simplicity of the support and the, subscription, it’s all one license thing.

Kevin Rhodes, CFO, Extreme Networks: Yes. Well,

Ryan Coontz, Analyst, Needham: I really look forward to learn more about that, week after next.

Kevin Rhodes, CFO, Extreme Networks: Yeah. Good stuff.

Ryan Coontz, Analyst, Needham: Yeah. Great stuff. Kevin, anything you wanna say in wrapping up here in terms of kinda outgoing message for investors?

Kevin Rhodes, CFO, Extreme Networks: Yeah. I mean, I I think outgoing message would be, I think we’re doing well. We’re on track to what we said we were gonna do, like, over the last several quarters, you know, consistent sequential growth. I’m excited about, you know, fourth quarter and and landing that like we just talked about, you know, with our guidance, you know, getting to the $300,000,000 at the midpoint of our guidance, but also, you know, continuing to show continued improvement and and and profitability and and and growing our gross margins as a result of that and and continuing to see platform one kinda come out into the marketplace and and what’s that opportunity for us Yeah. You know, as a company as we bring that to market because there’s a lot of, excitement here internally about the new, you know, cloud offering that we have here for for the marketplace.

And we think it’ll, you know, leap leapfrog us, you know, above and beyond the competition. So, you know, that’s just another competitive differentiator. As we know, software is what differentiates in this marketplace, not as much on the hardware side, but software does. So the Injective AI is gonna be exciting.

Ryan Coontz, Analyst, Needham: Well, great. Kevin and Stan, thanks so much for joining. We really appreciate it. Thanks so much. Have a good weekend.

Kevin Rhodes, CFO, Extreme Networks: Thank you. You too.

Stan Kolhar, SVP of Finance, Extreme Networks: See you in Paris.

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