Extreme Networks (EXTR) Q1 2027 earnings call transcript

Thank you, Jade. Good morning and welcome to Extreme Network's first quarter fiscal year 2027 earnings conference call. I'm Stan Kobler, vice president of finance and corporate development with me today. Our Extreme Network's president and CEO, Ed Meyer Court, an executive vice president and CFO, Kevin Rhodes. We just distributed a press release and filed an 8k detailing extreme networks financial results for the first quarter. The copy of the press release, which includes our gap to non gap recommendations and our earnings presentation is available in the IR section at extremenetworks. com. Today's call and Q&A may include certain forward looking statements based on current expectations about extremes, future financial and operational results, growth expectations, new product introduction, supply chain dynamics and management strategies.

All financial disclosures made on this call will be on a non gap basis unless stated otherwise. We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in our 10k and 10k filings, any forward looking statements made on this call reflect our analysis as of today and we have no plans to update them except as required by law. Following our prepared remarks, we will see you at my record.

Thank you, Stan, and thank you all for joining us this morning. Revenue grew 10% year over year marking extremes, seventh consecutive quarter of double digit revenue and product revenue growth. Non gap EPS increased 50% year over year as we continue to translate strong top line performance into even faster earnings growth. SaaR accelerated to 22% year of year growth and reached approximately $265 million. Based on the combination of our performance, visibility into customer demand, strong funnel growth, continued share gains and accelerating adoption of extreme platform one. We're raising our expectations to 10% growth for both the second quarter and full year of fiscal 2027. We expect our SaaR growth to exceed 20% for the rest of the year as well.

We continue to outgrow the market, expand within larger enterprises, win competitive opportunities and strengthen our position as customers increasingly standardized on our AI powered integrated networking platform. Customer demand remains strong. Our open funnel grew at double a double digit rate with strength in all regions. Our regional pod strategy with a strong focus on specific verticals is helping us win more of the opportunities we pursue.

Our discipline execution and supply chain strategy give us ample product availability to convert that demand into revenue. There are three key pillars driving our growth. First, we're moving at over a million dollars this quarter up from 36 a year ago, largely due to our technology differentiation. Our campus fabric takes complexity out of the network with zero touch provisioning, sub-second recovery and built in segmentation that helps prevent lateral attacks. Our Wi-Fi is built to perform in complex high-density environments, keeping users connected and applications running reliably. That differentiation along with our simplicity and lower total cost of ownership is helping open new doors and win bigger deals.

Second, platform one adoption is accelerating as a result of continued innovation and now accounts for over half of our subscription bookings. Customers want a single AI powered platform that integrates security and networking to help reduce complexity, simplify operations and manage their wired and wireless environments in one place.

Third, market conditions are working in our favor, competitive or refresh cycles, Wi-Fi upgrades and the disruption from the HPE and Juniper integration are creating a multi-year opportunity. Supply is also a differentiator. Our components are secured through calendar 27 while our competitors are quoting extended lead times. These advantages matter most when customers are making large high stakes decisions and our recent wins show it. One of the largest integrated healthcare networks in the United States shows extreme for a campus transformation spanning 21 hospitals and roughly 600 care locations where network availability directly affects patient care, campus fabric delivered the automation, resiliency and segmentation the customer needed. Within the first month, support tickets dropped over 90%.

When customers evaluate fabric through a proof of concept, the differences become clear and our win rate is excellent. Wi-Fi refreshes is another important driver of our success. Hard Rock Stadium in Miami selected extreme to replace its aging Wi-Fi 5 environment with Wi-Fi 7 supported by a full switching upgrade. In addition to dolphins games, the network will support events like the Formula 1 Miami Grand Prix and the Miami Open, providing the capacity and lower latency required to support tens of thousands of fans, simultaneously streaming, sharing content, making mobile transactions and using digital services.

This deployment demonstrates how these Wi-Fi refresh wins create an opportunity to then sell our entire infrastructure portfolio. Platform 1 is a key growth engine that strengthens our recurring revenue. Customers value the simplicity of managing their wired and wireless on a single AI-powered platform. We have a number of Platform 1 customers across verticals, including Cambridge Shire and Peterborough, NHS Trust Foundation in the UK, where Platform 1 will manage the extreme wired and wireless network delivering enterprise security and operational resilience across the healthcare organization's clinical sites. Regio IT, the largest municipal IT service provider in North Rhine, Westphalia, Germany, will leverage Platform 1 to manage its extreme Wi-Fi 7 networks across hundreds of sites, helping municipalities, schools, and utilities deliver digital services with less IT overhead.

One of Austria's largest banks chose extreme over a long-time competitor to refresh its wired and wireless networks across more than 70 branches, all managed through Platform 1. With its cloud-first strategy, Platform 1 will give the bank's network team centralized cloud-based management at scale.

Last week, we held our second annual AI Summit in Amsterdam, bringing together senior IT leaders to discuss industry trends and share our longer-term vision. We showcased early-agent 1 momentum and preview the industry's first-on-prem enterprise AI infrastructure for networking. Extreme AI understands each customer's network topology, history, and operating context, turning that insight into practical recommendations and measurable productivity. Agent 1 co-worker, our next-generation AI agent, reached all Platform 1 customers in early September and drove a 10x adoption rate over the first generation. Its signature feature is Nudge.

Unlike conversational AI, which waits for someone to ask the right question, the Nudge feature proactively surfaces timely contextual recommendations inside the workflow and 98% of critical nudges got a response. 58% of cases open through Agent 1 co-worker arrive with everything our engineers need to begin troubleshooting so work starts sooner.

At Hill College in Texas, the CIO said his team solved a wireless outage in minutes with Agent 1, a task that would have taken a full warning. It also helped the team respond to advice on the mining software by tracing the device through the access points, narratives location, and resolve a security issue that could easily have gone unnoticed, all within minutes.

In calendar 27, we will make Agent 1 operator mode available to customers. It will execute tasks independently within defined governance boundaries, respond to events in real time, and run scheduled workflows, learning from each outcome to become more effective over time, creating autonomous AI. We also previewed extreme exchange zones, expected in the first half of calendar 27. Exchange zones bring enterprise AI on-premise, letting customers run the same applications locally or in the cloud with full control over data residency. This will allow customers to comply with data sovereignty requirements, which have become increasingly important in international markets. Exchange zones will also pool, spare, compute across their extreme access points and switches. None of our direct competitors offer this.

Our MSP program is also gaining traction, closing the quarter with 85 active MSPs up from 74 last quarter. Consumption Billings grew 21% quarter over quarter and 131% year over year. Platform 1 is already contributing to that growth. Our funnel remains strong. We are expanding with larger customers. Industry disruption continues to create share gain opportunities. We have the supply availability to meet customer demand and the differentiation of Platform 1 and Agent 1 are strengthening our recurring revenue growth and strategic relevance with customers.

Now, let me turn the call over to Kevin to discuss our financial results and guidance.

Thanks, Ed. I'm pleased to report strong first quarter financial results. Starting with revenue, total revenue of $341 million, exceeded consensus and the high end of our guidance range, representing 10% year over year growth. Product revenue of $218 million grew 12% year over year, indicating strength of customer demand above our typical seasonality. We are continuing to see growth in both wireless revenue, especially with Wi-Fi 7 based products and in wired switching as well. This marked our seventh consecutive quarter of double-digit year over year growth and product revenue, demonstrating strong demand and our continued strong go-to-market execution. The industry pricing environment continues to be fluid and we expect this dynamic to continue based on a combination of product cycles, mix and demand as we pass through component cost increases.

Recurring revenue of $119 million grew 7% year over year, aided by SAS ARR growth of 22%. As we've previously stated, fiscal year 27 is the transition year where legacy support contracts are subsumed into platform one contracts the fastest. We expect a sharp re-acceleration in recurring revenue growth in fiscal 28, coming off expected continued improvement in free cash flow in margins.

Turning to the first quarter margins, gross margin of 62.6% was up 130 basis points year over year and above the midpoint of our guidance. We're pleased that we were able to preserve our price advantage over our competitors while passing on component cost increases. We've also solved from memory needs by executing on our supply change strategy, providing us with ample supply to meet demand and good visibility into gross margins.

Earnings per share of 33 cents accelerated to 50% year over year growth and above the high end of our guidance range. Geographically, we had strong revenue growth in the Americas and Amia. In Asia pack, while revenue fell due to elevated prior year comparisons, we continue to win large deals in the region and our funnel remains strong there. We continue to expect growth across all regions in fiscal 27. I've already margin expanded to 17.4% in the quarter, up 410 basis points from the prior year quarter and 170 basis points sequentially and well above the high end of our guidance range.

We also generated $66 million of adjusted EBITDA up 47% year over year and our adjusted EBITDA margin of 19.2% was up 480 basis points year over year as well. If you look back two years ago, we have nearly doubled our profitability as a company. We continue to achieve operating leverage through healthy growth as well as prudent cost management, thus outperforming in the first quarter and the second quarter, while we plan for seasonally higher expenses due to sales and marketing expense, such as our annual sales kickoff, AI Summit and advisory council events, just to name a few.

We continue to expect our profitability to maintain its current course. Over the long term, we continue to drive operating leverage as we scale. In terms of cash flow, we generated $39 million of free cash flow and ended the quarter with $245 million of cash, our highest cash balance since fiscal 21, and a healthy $45 million of net cash. This was during a quarter in which we repurchased $25 million worth of shares and made strategic memory purchases, on which we now have $36 million of memory on our balance sheet. We are effectively generating cash and using it strategically while returning cash to shareholders and maintaining a healthy balance sheet. On a vertical basis, we experienced broad-based strength, with particular standout booking growth in education, manufacturing, healthcare, and sports and entertainment.

We mentioned a few of these wins and these customers earlier. Looking at the second quarter and the rest of the year, we're increasingly confident in our ability to achieve double-digit revenue growth. In the second quarter of fiscal 27, we expect revenue to be in a range of $345.8 million to $350.8 million, gross margin to be in a range of 62.2% to 62.7%. Operating margin to be in a range of 16.4% to 17.4% and earnings per share to be in a range of 32 cents to 34 cents per share. For the fiscal year 27, we are increasing our guidance as follows.

We expect revenue to be in a range of $1,402 million to $1,412 million, up 10% year over year at the range of 62.3% to 62.8%. Operating margin to be in a range of 17.2% to 17.6% and earnings per share to be in a range of $1,35 to $1,39 per share. We expect our fiscal 27, nine gap tax rate to be 21.8% for the year.

With that, let's now turn the call over to the operator to begin the question and answer session.

Thanks Ryan. Our teams got on this early and what we've tried to do is flip what is a negative in terms of constrained supply into a positive because we have plenty of memory. You know, you will see the cost pressure in our gross margin number because you'll see the higher cost of memory embedded in what we just announced. But the bottom line is that we've got full supply out well into fiscal 28. And for us, what we see is an opportunity to provide shorter lead times than what's out there for the industry. So we continue to remain in a strong position on that. And the higher cost of memory is built into the gross margin that we just reported and our guide.

Guide and the pricing environment allows you to essentially raise price to offset that.

That's right. We've been a little more conservative than our larger competitors in raising price. We hear this from distributors, partners, and customers that the bigger players have been raising price more aggressively. So I would say we still have room there, but we've been able to deliver the margins with what we've done so far. That's really great. Thank you. I'll get back in the queue. Appreciate it. Thanks Ryan.

Yeah. Let me cover the first part. Kevin, I'll let you jump in on the new logo number if we're sharing that. But Mike, by the end of this year, we expect half of our customers to be on the platform, which it's the fastest move and migration that we've ever seen. But we've at the end of this past year, we had 10% of our customers on the platform. And we would expect that number to grow to over 50% of our customers on platform one at the end of this fiscal year. And then that number growing to approximately 80% the following year. So the adoption has been very high. Our teams commercially have done a great job positioning and selling platform one.

I think you can see demand for the most modern industry tools and also the different differentiation that we bring. It does from a new logo perspective, the market is interested in how to leverage AI and how to leverage your modern networking tools, the most modern networking tools, as they consider investments into the future. So it's giving extreme more at bats and more opportunities. Kevin, I don't know if we're sharing exact percentages in terms of new logo, but I would expect new logo adoption to be closer to 100%.

I would agree. Yeah, that's what I was going to say is like, when we're going to market right now, Mike, we're going to market with platform one. And that is all new logo activity. That's where we're kind of center staging, focusing that technology for that new logo. And then of course, you've got the movement of the migration of all the customers into platform one as well. And that happens more episodically as they come up for renewal. But we are seeing tremendous success and existing customers moving over into platform one. And it's not a big lift for them to move from X IQ into platform one. We saw even one customer hospital system do it in 40 some odd minutes.

So you get the benefit of the AI, and you get the benefit of all the new technology that we're building there. And so people were eager to go and move. So we don't have percentages there that we're sharing, but I would say it's really strong across the board.

Sure. And they're different. So we came out with co-worker in September, which was our second generation AI platform, if you will. And that's where we made the move from what we would call conversational based AI, which is where the industry is. Simply put, you have to prompt AI in order to get an answer. So it's almost chat bodish where people are having to converse if they want to use AI. In this case, co-worker is conversational. It's included in the subscription. So all of our customers have it. And that's what we're excited about. And we mentioned 10x the usage, because it's always on. It's context aware of your network. It's always on. It's ambient. It's proactive.

And it's watching what you're doing. And if it feels that it can support you, or if it can highlight, let's say, a network issue, or a solution, or suggest a workflow, etc. , it's going to do that. And so that's that nudge we're talking about. So now that's built into the platform. And what we're seeing is the customer adoption engagement with our platform, which is our set. We're already on our second, is far greater than what we have with what was our old AI expert. When we move into operator mode, which does contain the governance element of our agents. So that element of operator is already out there. But we're introducing new features and new capabilities, like what we said in terms of localization of data as it relates to data sovereignty.

Some people wanting to keep workloads in the enterprise on campus without going out to the cloud, survivability from a security standpoint. If you don't want to get disconnected from the cloud and you want to hold the workloads local, that's what's coming out in operator mode. And the big change for extreme from a revenue perspective will be in token economics for extreme.

We're calling tokens agent actions and these agent actions will bring in a new stream of revenue for extreme. And this is where we're talking about unlocking data and the network for other use cases outside of traditional network management. So the idea that we can work with stadium customers and enhancing the fan experience or the patient experience or supporting caregivers in a healthcare environment or retail outcomes from a supply chain standpoint or from a consumer standpoint. The list goes on and on. And there's a lot of different ways when you think about the network being literally in the middle of everything, the network being strategic and all the data and the network, this is where we're excited in the second half of of calendar 27.

I'm sorry, in the first half of calendar 27, the second half of our fiscal to bring operator mode to bear for customers. And we're already working with what we're calling our Foundry customers on applications and ways to leverage data from the network in this new platform.

Eric, it's actually up a bit. So I think you would see that that number would be over 20%. Depending on the period that you're looking at because our funnel obviously we slice and we're looking at it by quarter for the rest of the fiscal year. So we see these opportunities continuing to grow and that percentage in the funnel growing beyond the mid teens number that we discussed.

Again, well, one of the, I mean, in that case, this was a win against one of the largest players in the industry, I should mention. So it was less about them leaving, it was more about them coming to extreme. We talk about Cisco fatigue and the marketplace and that ebbs and flows.

When we look at our solution set, we're bringing simplicity and we're bringing a focus on end-to-end networking solutions all in one platform with a highly differentiated fabric technology for campus and a very competitive wireless solution. So I think when all this gets packaged up, we wind up being, I think more compelling from a technology perspective and I think from a commercial perspective a lot more attractive as people evaluate total cost of ownership. We have some large wins, we've had in virtually all of our GOs where we're getting in the door with some very large opportunities and we're having success converting those. We mentioned a $10 million win with a very significant healthcare company in the US this past quarter that is essentially a new logo win for extreme and a displacement of a large customer.

And again, it's that fabric technology that people like, it's the combination of our Wi-Fi and our ability to support highly complex environments and then it's putting it all together end-to-end, wired wireless, the whole portfolio is in a platform and our competitors have software that sits on top of other software. So they still keep the distinct user interfaces of all those software platforms running and really you're just left with an over the top software. We actually have a legitimate platform where there's one interface for all the technology and having everything in one place and then having these new AI tools is very compelling for customers.

Thanks, Sarah.

But Tomer, you hit the nail in the head. It's both. So we're ahead of plan in terms on the recurring revenue side in terms of the adoption of platform one, which has been the big driver of growth. We look at the year-over-year comparison of being in the call it low single digits a year ago into the mid-20s a year later in terms of adoption of platform one subscription. So that has been driving a higher recurring revenue number than maybe we had earlier. And so we have the confidence we see that continuing going forward. The other is 12% product growth and that's driven by the opportunities we have in the funnel. Eric asked about some of these larger opportunities in terms of these million dollar plus opportunities and what does that growth look like?

It's a very healthy outlook in terms of the funnel of opportunities we have. If you recall, we now have we have 20 different pods. We're forecasting and driving growth for each one of those in terms of funnel creation. And we're carefully evaluating how we're converting on these funnels. And so we're extremely tactical and how we're managing this and have visibility. So from the bottoms up, the call is coming from confidence at the pod level of the funnel creation and funnel conversion and our confidence in delivering the higher number.

Yeah, I think the opportunity is as good as it's been. We're seeing as it relates to, they're as about self-driving network and their ad is very far away from the truth of what they're actually delivering to customers. And that's not lost on customers. And there's a discrepancy between wired and wireless and cloud and non-cloud and, you know, missed has had a very strong competitive position and they've fallen back. And then there's a question about how the aruba portfolio and how that will even fit. They've said those two product portfolios won't come together. So if you're an enterprise customer making a long-term decision, it introduces a fair amount of risk depending on where your technology sits today.

Cisco is focused on a lot of other things besides networking and they're the most aggressive and raising price. And so if you're looking for the most complicated bundle of solutions and the most expensive, it's Cisco. And a lot of customers don't want to have everything together. They'll look and say, I'd like the best and breed Cisco compared to, let's say, extreme in Palo Alto. There's much better value and capability going with the, you know, the extreme Palo solution and having best to breed as opposed to paying a lot more and having a lesser solution from this larger entity. So it just, these, they create disruption and share opportunities. That's at the customer level, but also within the channel and at the channel level.

And Cisco is, they are asking customers right now, they're meeting in Vancouver. They're asking their channel partners to do a lot more and try to sell the entire portfolio. And that's not necessarily what people want in the networking world, where buying cycles are different, buyers are different, and there's not necessarily this synergistic fit between what they're trying to mash together. So that creates some frustration and it creates opportunities for us, where people view their ability to make more money from the channel, where they can make more money with extreme and the network inside.

Dave, I'll take it at a high level. Starting with the question about, you know, supply chain, we don't feel our numbers are constrained. So I would say we, and going forward, we continue to market this with our distributors and with channel partners to make sure the word is out that extreme has supply. There is every quarter, there's always some level of product constraint that might happen at the end of the quarter, where maybe products don't ship out. But it's at normal levels for us, not at unusual levels.

In terms of the gross margin, we see a step function in our recurring revenue, and our recurring revenue margins will contribute. As you know, we're putting together service and subscription in the platform one bundle. And that creates some technical issues. And that's a technical drag on revenue in the years of heavy migration that we're in right now. And that recurring revenue growth rate that we called in the need to now, you know, hire a single digit range, we'll step into the teens and we'll step into the 20% range overall for recurring revenue. And given the margins of recurring revenue, that will be a big driver.

Kevin, do you want to comment maybe with a little more granularity? I think you're right there, Ed. That's what we're expecting is we're expecting this acceleration, especially in SaaS deferred revenues, we sell more and more platform one subscriptions, you know, you'll get the rule of 78 benefit, where you see more revenue coming in contributing next year of what we sell this year in the same with the year after. And so you're going to see more higher value, higher contribution revenue come into the model over the next couple of years, and that's going to lift us. The other concept here, Ed, as well as that, we do expect some of these memory costs and other component costs to come down over time.

But we're in an environment where, you know, prices have never gone backwards. And so we should be able to see some improvement and product margins over time as well. A, from a scale perspective, but also just component cost reductions over time to where we maintain, you know, our pricing. So I think we've got a couple of levers here to drive improved gross margins over time on that front.

Thanks, Dave.

Okay. Well, thank you all for joining us this morning. It was a strong quarter. And yeah, as we're calling, we see the continued momentum in the business. We have just a shout out to our employees who are listening in. We appreciate all of the hard work and all of the effort to deliver on the outcomes. Thanks, everybody. And have a great day.