Extreme Networks Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2024

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Extreme Networks' 2nd Quarter Fiscal Year 20 24 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Stan Kovler, Vice President of Kovler Strategy and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Olivia, and good morning, everyone. Welcome to Extreme Networks' Q2 2024 Earnings Conference Call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Networks' President and CEO, Ed Meyercord and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8 ks detailing Extreme Networks financial results for the quarter.

Speaker 1

For your convenience, a copy of the press release, which includes our GAAP to non GAAP reconciliations is available in the Investor Relations section of our website extremenetworks.com along with our earnings presentation. Today's call and our discussion may include forward looking statements Based on our current expectations about Extreme's future business, financial and operational results, growth expectations and strategies. All financial disclosures on this call will be made on a non GAAP 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 the 10 ks report for the period ended June 30, 2023 and subsequent 10 Q reports filed with the SEC.

Speaker 1

Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them except as required by law. Following our remarks, we will take your questions. Now I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Speaker 2

Thank you, Stan, and thank you all for joining us this morning. Our Q2 results were in line with our previously announced revised Q2 outlook. We did have some highlights in the quarter. SaaS ARR grew 37%, which reinforces the value of our differentiated cloud platform. We have 44 customers who spend over $1,000,000 on Extreme Solutions, demonstrating both customer retention and our ability to take new logos from larger competitors.

Speaker 2

And gross profit is 62.5%, showing continued improvements and the benefit of a higher mix of high margin recurring revenue. At a high level, the networking industry is exiting the final stage of the COVID induced era of supply chain constraints, which has significantly impacted our business. We made the conscious decision to put channel digestion behind us in the March quarter. Our distributors and partners have lowered inventory purchases, which we expect to accelerate in the 3rd quarter. We expect to emerge in the 4th quarter at a much more normalized level of revenue and earnings.

Speaker 2

Our bookings trends and funnel of new opportunities are strong indicators of customer demand. While larger deals are still experiencing elongated sales cycles, Particularly in North America, we continue to win against the competition on a bookings basis with an uptick in new logos. Our EMEA business has stabilized and grew from the prior year and APAC bookings continued to grow over the prior year. In addition to sequential and year on year funnel growth, we grew the number of transacting partners, accounts and deal volume during the quarter. These trends and the expanded go to market opportunities give us confidence that we are positioned for a return to meaningful growth in fiscal 2025.

Speaker 2

We've attracted a growing list of 14 managed service provider partners exiting the 2nd quarter with 7 already driving transactions. We're positioned to expand our MSP footprint as partners are drawn to the simplicity of 1 cloud, the flexibility of our unified hardware and our unique consumption billing model. We make it simple for these service providers to deliver seamless high quality networking experience to their customers. We've also made inroads establishing a private subscription offer through a highly targeted list of large service providers. As noted at our November Investor Day, this market segment opens a $5,000,000,000 addressable market.

Speaker 2

In November, we introduced Extreme Cloud Universal's ZTNA, the first network security offering to integrate network application and device access within a single solution. This helps move organizations to a 0 Trust policy for all devices across the network. This combined with our industry leading campus fabric solution extends our value proposition in helping customers both manage and secure their networks. Yesterday, we launched new Wi Fi 7 access points and the 4,000 series universal switches designed to help highly distributed enterprise organizations create improved network connectivity, security and application performance. Both of these new cloud managed platforms leverage AI ops and machine learning to deliver faster remediation and enhanced network visibility.

Speaker 2

These new products also integrate well with Extreme Cloud Universal ZTNA to enhance network security posture. The integration of AI, security and analytics into a single platform is a key differentiator for Extreme as it allows us to bring greater simplicity and flexibility for customers. This is why we continue to win large deals with manufacturers like LG Energy Solutions, leading healthcare facilities like NHS Trust Hospitals in the UK, educational institutions like London South Bank University, Leeds Beckett and Kingston Universities and large venues like Wells Fargo Centre and Canada Life Centre. I've made previously announced leadership changes to streamline and strengthen our go to market capabilities. Earlier this month, Norman Rice was appointed as our Chief Commercial Officer and is now focused on driving revenue growth and leading the company's sales, partner and services organizations.

Speaker 2

He successfully built our go to market sales motions in stadiums and venues, Driving large opportunities with Verizon and Kroger and has been at the forefront of driving our new commercial opportunities with large service providers. He has valuable experience managing revenue operations with deep knowledge of our complex supply chain environment. Our Chief Product and Technology Officer, Naveel Buhari is focused on increasing our SaaS revenue in his newly mentioned role as our GM of our subscription business. We've also deepened our bench of SaaS expertise on the executive team over the past 6 months with the additions of our new Chief Marketing Officer, Monica Kumar in December and CFO, Kevin Rhodes last May. The alignment of the team is crucial to helping accelerate growth and capture more share.

Speaker 2

The Extreme brand continues to get elevated in the marketplace through our customer wins and differentiated technology that creates more simplicity and flexibility across complex networking environments. Our promise of 1 network, 1 cloud remains a competitive differentiator. One Network is underpinned by our universal hardware highlighted by Campus Fabric, which has unparalleled campus security benefits It allows users to segment networks 10 times faster than any competitor. OneCloud offers customers Modern networking tools with built in AI ops and we're unique because we're the only provider to offer cloud choice whether that's public, private, hybrid or edge. We're winning deals based on helping customers find new ways to deliver better outcomes, such as increased IT productivity, reduced OpEx or securing their business.

Speaker 2

The simplicity and flexibility of One Network, One Cloud remains A competitive differentiator, particularly at a time when major competitors have created complexity with disjointed solutions and uncertainty in their long term rationalization of products and solutions. We remain the only pure play networking company with a differentiated and integrated portfolio and a clear roadmap. We believe our exposure to the fastest growing areas of the networking market, Share gains and new go to market partnerships provide ample growth opportunities to drive double digit growth in the long term. We're forecasting market share gains with targeted partners leveraging the strength of our unique solutions for the enterprise. And with that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.

Speaker 3

Thanks, Ed. Despite lower revenue in the Q2, we improved our gross margin sequentially and optimized our operating expenses to maintain a healthy operating margin profile. Our EPS was therefore impacted less than our revenue shortfall in the quarter. In the Q2, we took proactive action that enabled us to protect our profitability, while continuing to invest in our strategic initiatives. We will continue to focus on aligning our cost structure accordingly as we navigate the second half of our fiscal year.

Speaker 3

Let me get into the numbers. 2nd quarter revenue of $296,400,000 fell 7% year over year and was in line with our revised outlook. Product revenue of $186,600,000 fell 16.5% year over year, reflecting continued channel digestion and elongated sales cycles that are impacting the networking industry. These trends are consistent across both switching and wireless products. Our product backlog has normalized this quarter, earlier than we initially anticipated, and our bookings approximated our product revenue for the first time in 4 quarters.

Speaker 3

In fact, our bookings trends were positive in both EMEA and APAC, where each grew double digits year over year. From a vertical perspective, while total bookings fell slightly both quarter over quarter and from the prior year, Our healthcare, education, manufacturing and transportationlogistics vertical markets grew from the prior year. We are encouraged by this level of customer activity, which informs our view that we will be able to get channel digestion SaaS ARR and recurring revenue was a bright spot in our quarter. SaaS ARR grew 37% year over year to $158,000,000 driven by the strength of our renewals and activations of previously shipped products. Subscription deferred revenue was up 32% year over year to $246,000,000 As we ship product from backlog, it's generating a tailwind for SaaS growth.

Speaker 3

Total subscription and support revenue was $110,000,000 up 16% year over year. This growth was largely driven by the strength of our cloud subscription revenue, up 39% year over year. Recurring revenue continues to be a positive at Extreme. Total recurring revenue of $101,000,000 grew 14% year over year and 6% sequentially to now 34% of total revenue. Based on our current outlook, we expect recurring revenue to account for approximately 35% of the full fiscal 2024 year revenue.

Speaker 3

The growth of cloud subscriptions and maintenance drove the total deferred revenue to $549,000,000 up 23% year over year and 5% sequentially. Gross margin was 62.5%, up 140 basis points from the prior quarter and up 400 basis points compared to the prior year ago quarter. This is the 3rd quarter in a row that we've achieved 60 plus percent gross margin, which has proven to be an achievable level for Extreme at normalized scale. We attribute this to improvements in mix due to the higher contribution of subscription and support revenue and an improvement in supply chain and distribution related costs. Our 2nd quarter operating expenses were $141,000,000 down $12,000,000 from $153,000,000 in the 1st quarter and up slightly from $139,000,000 in the year ago quarter.

Speaker 3

We plan to take additional actions to further optimize our operating expenses to the level of revenue we expect to achieve and the second half of fiscal twenty twenty four in order to preserve our margin structure in the Q4 and into fiscal 2025. Operating margin for the 2nd quarter was 14.8%, down from 17.7% and similar to 14.9% in the prior year quarter. This is the 6th quarter in a row of double digit operating margins, also an achievable level for the company at normalized scale. All in, 2nd quarter non GAAP earnings per share was $0.24 down from $0.25 in the Q1 and $0.27 in the year ago quarter. We finished the quarter with $221,000,000 in cash and net cash of $26,000,000 After repurchasing another $25,000,000 of our shares, we have repurchased $153,000,000 worth of our shares over the past 5 quarters.

Speaker 3

The $28,600,000 of free cash flow we generated in the quarter was impacted by lower revenue and the use of working capital for purchases of raw materials and inventory based on our prior year purchase commitments. We expect a recovery in cash flow as revenue recovers and component purchases become more balanced with normalized sell through rates. Now turning to guidance. This quarter, we expect sell through to be significantly higher than sell in, which we believe will have a meaningful impact on our operating results. To quantify this impact, we expect a $40,000,000 to $50,000,000 reduction and channel inventory in the 3rd quarter, which will allow us to cover to a more normalized level of revenue in the 4th quarter.

Speaker 3

As a result, we plan to take further cost actions to drive the recovery in earnings per share and cash flow. Heading into the Q4, we are expecting improved sequential revenue growth based on our funnel and the seasonality of our business led by our education vertical. We believe our proactive approach to managing through this industry challenge will enable us to deliver improved growth and profitability in fiscal year 2025. For the Q3, we expect as follows: Revenue to be in a range of $200,000,000 to $210,000,000 gross margin to be in a range of 59.5% to 61.5 percent Operating loss to be in a range of 12.4 percent to 8.8 percent and loss per basic share in the range of $0.22 to 0 point 17 dollars A basic share count is expected to be around 129,000,000 shares. Looking further ahead Into our Q4, we expect revenue to be in a range of $265,000,000 to $275,000,000 Gross margins to be flat to slightly up from the 3rd quarter, non GAAP operating margin to be in a range of 10% to 13%, GAAP operating margin to be 1% to 4% and fully diluted share count of 131,000,000 to 132,000,000 shares.

Speaker 3

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

Operator

Thank you. And our first question coming from the line of Eric Martinuzzi from Lake Street Capital Markets. Your line is open. Yes.

Speaker 4

I wanted to address the leadership change here and How we're going to be approaching the channel differently than we were before. If you could talk a little bit about what Norman Rice is Going to be doing I guess, we sort of lost touch with the channel demand. Those are my words, not yours. But What are we doing to help improve that channel monitoring? What processes are is Norman putting in place?

Speaker 2

Yes. Thanks, Eric. One of the first things That Norman has done and with our leadership teams is to stratify Our customer base and to split out what is more run rate business In terms of business, it's less than $50,000 in order and what that business looks like, which is going to be more channel driven and can be impacted more through distributors and marketing activities and to provide more clarity to the project based business and stratifying that project based business. And I'd say that's a big change that Norman is bringing to the equation. The other thing that I mentioned is that Norman and Kevin were the architects behind Our private subscription offer, which is a channel led initiative that we believe will be disruptive.

Speaker 2

There's a lot of demand with some of the larger service providers that we're working with. That's building up. And I think you'll start to see and we'll be in a position to announce meaningful deals in the second half of this year. And I also mentioned earlier in my comments about the managed services Provider partners that we have who are signing up and it's there's the portfolio benefits and our technology benefits along with The unique capability that people are very interested in, which is our consumption billing model, which provides for a lot of efficiency for that go to market motion. So It's a stratification of the opportunities and I'd say a more highly targeted approach to the channel to the core business along with these targeted new commercial models that we're going to market with.

Speaker 2

And Norman is very well He is the best qualified person to lead us on that front.

Speaker 4

Okay. And then looking at the guidance here, just a really dramatic reset, I'm wondering was there a the prior year outlook because We had a guidance reset coming out of Q1 and now we've had even more dramatic reset coming out of Q2, what's the confidence level here? We've got 1 month under our belts for Q3. Are we seeing any evidence to say things are getting better as far as the sequential step up in Q4?

Speaker 2

Yes. Eric, I mean, we commented on the funnel and opportunities specifically commenting on Progress that we've seen in EMEA, in Asia Pacific. And Kevin also touched on the fact that We're heading into E Rate season and this looks to be a pretty strong E Rate season for us. The declines came as we were looking into Q2, our outlook for Q2 and our plans to take down channel inventory. The reality is we couldn't take inventory down Nearly as much as that we had intended.

Speaker 2

And I would say with the elongated sales cycles and with bookings pushing out the way they did, It only deepened our position in the channel. And we had to make a decision as to whether or not we want to manage this out over time or Take it all in one fell swoop and our view and our perspective is to get it cleaned up and get normalized as we head into Q4 and turn the quarter on 2025. So we are and that's how we've made the decisions that we're making. Demand is obviously going to be masked by inventory flowing out of the channel and that's $40,000,000 to $50,000,000 number that you heard Kevin talk about. And then as we go into Q4, we do have seasonality and we are expecting more normal seasonality As we go into that quarter, we have the E Rate business and we have a significantly larger funnel.

Speaker 2

And that's what gives us confidence. So we're very focused on the cleanup here this quarter and then Delivering and exceeding our outlook for the June quarter.

Speaker 4

Thanks for taking my questions.

Speaker 2

Thanks, Ayesha.

Operator

Thank you. And our next question coming from the line of Timothy Herron with Oppenheimer. Your line is open.

Speaker 5

Thanks guys. Can you just talk about maybe the end user demand? Are customers maybe waiting for WiFi 7 or CBRS or further upgrades To cloud, just any color what's going on because the step down next quarter's guidance versus what you were thinking 6 months ago was incredibly dramatic. The channel numbers that you just gave, it seems only tell part of the story. Thanks.

Speaker 2

Yes, Tim, I think that's you're seeing a much more conservative outlook as it relates to demand. Yes. In some cases in the WiFi market, there will be some people that are holding off for WiFi 7. We've talked about elongated sales cycles, which has been very real in the U. S.

Speaker 2

Where we've had verbal commitments for Pretty exciting wins for Extreme, but the deals themselves have been pushed out. And when we look at deals In our funnel that get to the commit level, we closed on those deals. It's more of a function of time. We're looking at this as timing. If you look at and this is why we're providing guidance for Q4, We're confident in the guide and how we're going to come out of this in Q4, but we are setting that base level at a more conservative level than we had in the past.

Speaker 2

And I'd say, Tim, to your point, I think we're feeling a little bit burned in terms of We are expecting to close in the funnel and we've gone back and taken a fresh view of that. And our view is to put it behind us And reset here with a clean path to going forward. As we look into fiscal 2025, There will be some tough comps if we look at the Q1 and Q2, but as we get into calendar 2025, We see ourselves on a really nice and a very strong footing for driving double digit growth and resuming where we left off.

Speaker 5

And so Wi Fi 7, can you maybe just talk about how much of an improvement it is for the customers or your benefits? And maybe How does the pricing of the product look like, your ability to supply it? And then just lastly on WiFi 7. And is You know what the competitive environment looks like. And do you think this is one of the things kind of driving the elongated sales cycles?

Speaker 5

Are customers waiting for this? I

Speaker 2

mean, I think it's fair to say that there are going to be some customers in the marketplace that are waiting on this. The benefit that you have in WiFi 7 is you have the different frequency bands and you have, in our case, Higher bandwidth, which is important. And then we're also bringing Dual bands in terms of speeds, and so there's a lot more flexibility in the solution. So Yes. Every time you have these upgrades, there's higher quality in terms of connectivity.

Speaker 2

In this case, there's more bandwidth. There's more flexibility in terms of end user devices that we pick up on different frequencies. And then we have the Dual bandwidth capabilities in terms of how we connect to the network. The Wi Fi 7 for us is cloud managed In addition to our 4,000 series switch, which is purely cloud managed, and in this we're bringing some unique capabilities They provide a lot of advantages in terms of how to deploy and run networks relative to the traditional CLI model, where provisioning and network deployments can be done in a much more efficient fashion and in more automated way. So yes, there are a lot of benefits in what's coming out in our most recent releases.

Speaker 2

And Yes, in terms of opportunities, it could have an impact.

Speaker 5

And when does it start shipping at scale?

Speaker 2

We are GA at this point. So I think you would expect to see Shipping from WiFi 7 begin in Q3 and really ramp up and begin to ramp in Q4. Thank

Speaker 5

you. Thank you.

Speaker 2

And our

Operator

next question coming from the line of David Buck with UBS. Your line is open.

Speaker 6

Great. Thanks guys for taking my questions. Maybe just start on the competitive landscape and that dynamic. Think you guys spent a lot of time talking about taking sort of the inventory destocking, pain short term, You also talked about normal seasonality in Q4 and talking about gaining share over the long term. Can you maybe just kind of talk about what you're seeing competitively in the market today That gives you confidence that we can get back to share gains over the intermediate and longer term.

Speaker 6

And then I have a follow-up question as well.

Speaker 2

Yes, Dave, thanks. So I'll comment on that. What gives us confidence is what we see happening In the market every day and we've talked about the largest competitor in the space that has a very different Cloud solution and we continue to see the industry moving to cloud and we have a leadership position in cloud. So the largest player in the marketplace has got a very different cloud solution from the traditional Enterprise Solutions, in addition to that, they continue to invest in other markets. And so The level of complexity that we're feeling in the marketplace surrounding the largest competitor is very real and opens up a lot of opportunities.

Speaker 2

We've talked about some of the larger deals that we're getting into. We continue to move up market and you'll see us continuing to do this with some of the announcements that will come out of Extreme, where in these highly competitive and highly contested Processes, we're coming out on top. And so you're seeing the likes of Cisco and HPE and Juniper getting pushed back and Extreme winning. And that's part of how we're up leveling our brand. So that's one of the ways that we have confidence Relative to the largest player, everyone is very top of mind.

Speaker 2

The HP acquisition of Juniper, What will that mean? In our case, it means that one of our competitors will be going away. We see a lot of opportunities certainly over the next couple of years as they're looking to rationalize their product portfolios. This is going to create opportunities. In fact, it already has where we're already getting calls from customers, direct customers and end users in the field as well as partners who are concerned and very unsure about what does that product roadmap look like and what is it going to look like.

Speaker 2

And this gives us these just create they create more opportunities for us.

Speaker 6

Great. That's helpful. And maybe just a follow-up. You talked about a strong e rate season coming up and getting back to hopefully some degree of normal seasonality by the June quarter. Recognizing that obviously the first half of fiscal twenty twenty five is Difficult comps on a year over year basis.

Speaker 6

Are you planning for what I would consider to be more normal seasonal behavior on a quarter over quarter basis as we get through June going forward? Or is there still some digestion from whether it's order growth intake, underlying demand Sort of channel digestion that we should expect as we go through the second half of this calendar year into 2025. And then just maybe one final one for Kevin, if I could slip it in there. You mentioned, obviously, double digit margins at normalized scale, I think the phrase was. I would just love to get some more color on how we're thinking about it because I know at the Analyst Day, obviously, you guys have talked about margins above, let's call it, fiscal 22 levels back into mid teens, but just wanted to get more color on what scale do you need to get to, to get back to margins that are more robust than let's say fiscal 2020?

Speaker 2

And I'll cover the first part of the question and then Kevin I'll let you jump in and cover the second part. We're looking, I think, at yes, more traditional seasonality as you look at the shifts going from Q1, Q4 into Q1 to Q2, etcetera, I think in the core business, The outlier here is going to be some of the new commercial motions that we have that are not likely to be in the same seasonal patterns. So some of the larger deals that traditionally we would not have access to in terms of our private Subscription offer, for example, are not necessarily going to fall into that the traditional seasonal flow of the core business. And I'd say the same thing is true with our MSP business is that ramps, that's just going to be more of a steady incline than it will be Could it traditional seasonal business? Gavin, do you want to comment on the second part of the question?

Speaker 3

Sure. Sure, absolutely happy to. Our current the reason why we gave the 4th quarter outlook is to actually show what we believe will be a more normalized. We do believe we will grow off of Q4. So we're not thinking that that is like the new number forever because we have these opportunities with MSP and Espoo that will continue to mature and provide further growth in the future.

Speaker 3

But with Q4 being 10% to 13%, we believe that's a good jumping off point, but we will maintain operating margins in the double digits Throughout this Q4 and throughout next year is our plan. In terms of like how much we can scale From where we were in 2023 or 2024 in the future, we really have to go and spend a little bit more time looking at Where our 25% to 26% contributions are going to be to get into that the higher realms of mid teens to high teens Even to 20% scale beyond that, but we do think it's possible. I mean, we are already showing the discipline That if we need to, we could take costs out of the business to drive and keep our margins at that double digit level. And what we need to do is and we're focused on that is continue to scale and grow the business and generate more profitability over time. And that's exactly what Ed and I are intending to do is to continue to scale the operating margins over time.

Speaker 7

Great. Thanks guys.

Operator

Thank you. And our next question coming from the line of Christian Schwab with Craig Hallum Capital. Your line is open.

Speaker 8

Hey, good morning guys. So Ed, now that it's become evident of over earning during supply chain issues, etcetera, etcetera, and Competitors not having products. When we look at your business and we baseline modest growth before we entered this period I kind of come up with a number of about $1,100,000,000 plus or minus. Is that kind of what you believe the business We're a little bit below that run rate March, a little bit above that or kind of in that line in June. Is that kind of our starting point from your top line growth initiatives.

Speaker 8

Is that fair or is that not the way you think about it at all?

Speaker 2

I think it's fair. We're going to build out of this. And yes, what we've said is and Christian, we used the language kind of more normalized to comment on the June quarter. And when you kind of run the math on some growth on that kind of baseline business, you get to the 1.1. So I think that's a fair assessment.

Speaker 2

Kevin, I don't know if you want to add to that or comment.

Speaker 3

No, I think you're right, Ed. I mean, with Q4 being at that And then a jumping off point there, with it being the new normal, we do believe that we will continue to grow the business. We'll have a better growth Sorry, in the second half of our fiscal year 'twenty five than the first half. But in general, yes, in terms of range, $1,000,000,000 is the new normal is about right.

Speaker 9

Ed,

Speaker 8

Is Norman's work doing anything about moving to selling product as a service Across the board and putting a mechanism in place to be more aggressive in that or is that You're going to watch some of the other people in the industry do to see if there's tremendous customer interest?

Speaker 2

I think you're going to see us be a lot more aggressive. And we've I mentioned that the triumvirate of Norman stepping in and taking the lead as Chief Commercial Officer. Nabeel is our Chief Technology and Chief Product Officer, but he's also You're running a cross functional team on SaaS and subscription. And one of the things that you're seeing is really nice growth on the subscription line and really healthy margins on that subscription business. And so we as we think about growth, We have plans to continue that growth in the subscription line.

Speaker 2

Also, we have the benefit of gross margins on that. Finally, we made a key hire, Monica Kumar, who's come and joined us. I think she's going to be the glue between Our product orgs and our selling orgs, and I think we'll we have an opportunity to be much more Targeted and I would say much more aggressive in direct outreach to the market more broadly as well as more targeted with the channel and we have some really interesting growth opportunities in the channel. So I think this represents a unique opportunity for Extreme to really step up in the marketplace and that's how we see it.

Speaker 8

Great. And then my last question to do with the recent consolidation in the space. You did a big Consolidation years ago and extremely confused your customer base, about which products you were going to support And which products you were not going to support. So I think with that as a backdrop should set you up to be well positioned To take advantage of what could be potential confusion in the marketplace, do you think that that Will help be a competitive advantage for you to gain share?

Speaker 3

We

Speaker 2

It looks like from the announcement, it looks like the HP was very interested in the AI Platform that Juniper brings to the equation and that Juniper leadership will be heading the networking side. What does that mean to the massive installed base of Aruba and Aruba Technology? It raises a lot of questions. And for customers, it raises an awful lot of questions. And keep in mind, Juniper It's coming enterprise really from a service provider position.

Speaker 2

And so in terms of the breadth of their portfolio, they are still miss was very much kind of driving the efforts. And in terms of the full end to end enterprise solution, it's not as robust. And so How that incorporates and how that gets built into the Aruba Enterprise solution set, There are a lot of questions out there and I think that's going to create opportunities for us. And we're very focused on a very Clean and simple and flexible solution in terms of our universal hardware, in terms of interfacing with 1 cloud. This presents a very fresh alternative and a very clean alternative for customers that are out there.

Speaker 2

The other thing that you're aware of, Christian, from our prior M and A activities is that They've baked a lot of synergy into their into the formula. And when you look at $430,000,000 $450,000,000 of coming out of the business, you're talking about thousands of people coming out of that business and where they come from and how that plays out, Again, we'll create disruption. And as I mentioned earlier, we've gotten calls from we're already getting calls from employees and And new growth opportunities for us.

Speaker 8

Great. No other questions. Thank you.

Speaker 5

Yes. Thank you.

Operator

Thank you. And our next question coming from the line of Dave Kang with B. Riley. Your line is open.

Speaker 7

Thank you. Good morning. My first question is regarding bookings. You reported that Asia and Europe were up double digits year over year. Just wondering if you can provide Any color on North America bookings?

Speaker 3

I mean, the color is I'd say that's the area where we've been challenged, Dave. In terms of the bookings, we were close to a book to bill ratio of 1 in the quarter. So that was a positive news, But North America was down year over year.

Speaker 7

Got it. And then so sounds like fiscal Q3, Most of the excess inventories will be flushed out. So can we expect fiscal 4th Sort of like a clean channel inventory?

Speaker 3

Yes. That's exactly our intent is to get that clean And to have get normalized in the Q4 and beyond.

Operator

So it

Speaker 7

sounds like based on your

Speaker 2

I would just add, we look at Obviously, normalized backlog has happened quickly and more quickly than originally anticipated. And As we look at entering Q4, we look at normalized backlog and normalized channel inventory. So Somewhat of a clean slate as we head into Q4 and turn the quarter into fiscal 2025.

Speaker 7

And based on your fiscal 4th quarter guide, Revenue guide, you're implying that orders will be up significantly sequentially from 3rd to 4th quarter, correct?

Speaker 3

Yes, we got the E Rate season there. We mentioned that earlier. So we will we are expecting sequential growth. A, our 2 strongest quarters in a year Or the Q4 and the sorry, the second and Q4 of our fiscal year. So as we think about the June quarter, you got the E Rate season there.

Speaker 3

We've got a stronger pipeline than we have in the Q3 here and we've got strong e rate season coming at us. So we are expecting sequential growth

Speaker 7

And my last question is, Ed, you mentioned that fiscal 2025, you're expecting meaningful growth. Just wondering if you can kind of provide additional color, should we expect like double digit? Would that be meaningful?

Speaker 2

That's correct and that's how we're thinking about it, David. So we looked at There is going to be a tough comp in the Q1, given that we landed at $353,000,000 last year for this for Q1 of this year. Then I think you get to The second half as we turn the corner into calendar 2025, obviously, we'll have a very much easier comp in Q3. But we expect that our marketing initiatives, our go to market initiatives in terms of the core business and then the realization of These new commercial models that are growing, but they haven't really had an impact on our financials yet, By the time we get to that calendar 2025 timeframe, you'll start to see a much more meaningful impact of those initiatives coming into play and adding to growth over just what we would consider to be kind of core market growth.

Speaker 7

Got it. Thank you.

Operator

Thank you. And our next question coming from the line of Alex Henderson with Needham, your line is open.

Speaker 9

So your commentary about $1,100,000,000 being the run rate The revenue number and the guide for the Q4 of the fiscal year at 265 to 275 Is more normalized is a little bit troubling considering In the Q4 of 2019, you did $252,000,000 and for the full year 2019, You did roughly $1,000,000,000 at $995,800,000 and that's 2019. That would put a growth rate to your normalized $1,100,000,000 of around 2.5% over that timeframe. And certainly you would not say that that's a reasonable growth rate. So the question I have for you is, What is the real normalized number if you were to adjust these numbers to fully normalize The baseline, you say $1,100,000,000 is normalized, but I don't think you believe you're a 2.5% growth company. So Can you please adjust that language a little bit for us in terms of understanding how much The Q4 is still un normalized as opposed to more normalized.

Speaker 9

And what would be the run rate of revenue

Speaker 2

Yes, Alex. So let me, Kevin,

Speaker 8

just

Speaker 2

hit the just hit a high level and then I'll let you come in and fill in. But Alex, we're obviously, it's a pretty massive reset here In our Q3, with a lot of cleanup involved, We have new teams and we have a new approach that are coming in and looking to sort of build off of a base and resetting the foundation. Whether or not it would be normal seasonality going into Q1 or is there still conservatism in That Q4 number where you could still see some growth, sequential growth coming out of that, we wanted to provide the outlook For the our fiscal Q4 to provide again what we're calling more normalized, Will we be will that be a fully normalized bookings number? Yes. There, I think we need some work on that and we'll definitely be coming back to you with a more refined outlook on how we see the evolution of booking, especially considering these other commercial models, which quite frankly we have not included in our outlook.

Speaker 3

I think that's the key, Ed. I think that the MST model is very nascent, very early, the Espo model we have as well as Private subscription offer is also very early in its stages. This is based on the run rate of the existing business And products that we've got ZTNA coming on board, we've got Wi Fi 7 coming on board, we've got new products, innovations coming out That will continue to give us a tailwind in the future. Right now, we're just not prepared to go and guide for 2025 or beyond, but wanted to give at least the normalized Q4.

Speaker 2

And Alex, the other comment to make is that we have seen earlier we saw Asia Pacific Recovering more quickly. And then we've seen EMEA come with year over year growth that Kevin mentioned. And we just we haven't seen it yet in the Americas. And so the timing of that Americas recovery to the normal buying cycle And how all of that kicks in from a timing perspective, and we have a lot of large deals That are in the hopper for us, really exciting from a brand perspective in terms of where we are in these competitive processes. But they're very lumpy and it's I think it's a little challenging for the team right now to stick their necks out and call some of these larger deals.

Speaker 9

That's not my problem. My problem is the guide commentary that normalized full year revenue Run rate would be at $1,100,000,000 which is obviously still incorporating a significant amount of Backlog adjustment and the comment that more normalized implies that it's almost normal and it's Certainly not in the Q4. So what is the nut that you're assuming for the Q4? What would be fully normalized 4th quarter? Can you give us some sense of what more normalized means in terms of the scaling of it?

Speaker 2

Yes. I mean, I'm not sure we're there. I'm not sure we're there yet. I mean, if we look at a $275,000,000 number yes, if we look at a $275,000,000 number in Q4 and obviously there's the math to get to $1,100,000,000 when you just roll that over. So there's not I guess you would say there's not a lot of growth built into that for a normalized fiscal 2025, Alex?

Speaker 2

Well, I

Speaker 9

mean, you did $253,000,000 in Q4 of 2019, And now you're telling me $275,000,000 is close to normalized?

Speaker 3

Well, I mean, Alex

Speaker 9

It's difficult trying to direct Those two numbers are not even close to normalized in that context. So how big is the nut? Are we So absorbing $30,000,000 $40,000,000 in the June quarter of inventory absorption.

Speaker 3

Yes, Alex, I mean, the thing that you're missing, I think, is the North America is still recovering. It was down year over year.

Speaker 9

I'm not missing anything. I'm asking what the nut is that you're assuming when you give us the guidance for the Q4 in terms of the absorption In the recovery in the environment, how

Speaker 3

big is that nut? We're assuming no incremental amount, As you say, not in the Q4. We assume absorption will occur in the Q3 with no more absorption needed in the Q4. What we need to see is we need to see the market, the entire market is down right now. This is not just an extreme issue.

Speaker 3

This is an exogenous issue that's across all IT and all networking. And so where we see and what we hope is that the market starts to come back And that we will see the North American market come back and appreciate your points, but like we've got to get the whole market to come back And spend across the board to help.

Speaker 8

Great. Thanks.

Speaker 3

Okay.

Operator

Thank you. And I will now turn the call back over to Mr. Ed Mykor for any closing remarks.

Speaker 2

Okay. Thank you. Thank you everybody for participating on the call. And obviously, we'll have callbacks with many of you And we appreciate all the good questions.

Speaker 7

I also

Speaker 2

want to take time to thank our employees and customers and partners who are participating here and for all the work as we're transitioning through This cycle and putting ourselves on more normalized footing as we've been talking about, Yes, we are absolutely looking forward to putting this chapter behind us. And we're committed to innovating in the And continuing to deliver new solutions and we're committed to these strategic initiatives that we will that will drive long term growth for us at Extreme. So, thanks everybody and have a good day.

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Key Takeaways

  • Extreme delivered Q2 results in line with its revised outlook, with SaaS ARR up 37%, gross margin at 62.5%, and recurring revenue representing 34% of total revenue.
  • The company is executing a channel inventory reset, expecting a $40–50 million reduction in Q3 and normalized sell-through levels by Q4, when sequential revenue growth is forecasted.
  • New offerings include Extreme Cloud Universal ZTNA, Wi-Fi 7 access points and 4000-series universal switches, all leveraging AI/ML-driven cloud management and integrated security.
  • Leadership changes—Norman Rice as Chief Commercial Officer and a bolstered SaaS executive team—support expansion of managed service provider partnerships and a new private subscription channel targeting a $5 billion market.
  • Bookings in EMEA stabilized with year-over-year growth and APAC saw double-digit growth; despite elongated North American sales cycles, the strong funnel and new logo wins underpin confidence in returning to meaningful double-digit growth in FY 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Extreme Networks Q2 2024
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