Extreme Networks Q2 2025 Earnings Call Transcript

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Provided by Quartr
January 29, 2025
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Operator

Good day. Thank you for standing by, and welcome to Extreme Networks Second Quarter Fiscal Year twenty twenty five Financial Results Call. At this time, all participants are in a listen only mode. After the speaker's 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 Coven.

Operator

Please go ahead.

Stan Kovler
Stan Kovler
SVP of Corporate Development & Investor Relations at Extreme Networks

Thank you, Olivia. Good morning, and welcome to Extreme Networks' second quarter fiscal year twenty twenty five earnings conference call. I'm Stan Kovler, Senior Vice President of Corporate Development and Investor Relations. With me today are Extreme Networks' President and CEO, Ed Meyercord and EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an 8 K detailing Extreme Networks' financial results for the quarter.

Stan Kovler
Stan Kovler
SVP of Corporate Development & Investor Relations at Extreme Networks

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 at extremenetworks.com, along with our earnings presentation. Today's call and our discussion may include certain forward looking statements based on our current expectations about Extreme's future business, financial and operational results, growth expectations and strategies. All financial disclosures made on this call will be 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 K report for the period ended June 30, 2024, and the 10 Q report for the period ended Sept.

Stan Kovler
Stan Kovler
SVP of Corporate Development & Investor Relations at Extreme Networks

30, 2024, filed with the SEC. 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. A reconciliation of our non GAAP results can be found in the press release and financial presentation. Following our prepared remarks, we will take questions. And now, I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Thank you, Stan, and thank you all for joining us this morning. Our results in the were highlighted by a continued and broad based recovery in the networking market. We grew revenue sequentially for the in a row, led by product revenues and achieved our best quarter product bookings in 5 quarters. Our competitive win rates continue to improve, especially with larger enterprise customers. In the quarter, 36 customers last quarter.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

We're seeing a promising recovery with larger customers, which is creating meaningful share gains across a variety of verticals, including healthcare, manufacturing and IRS. Our EMEA business grew significantly both sequentially and year over year. In The Americas, we continued our strong execution in the enterprise vertical. Americas sequential growth was impacted by seasonality in the K-twelve vertical. From what we see, we believe our customers love the simplicity and feature differentiation of our cloud networking platform.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

We're the only enterprise player that can deliver end to end networking solutions from the campus data center to the edge and across the wide area network from 1 cloud. In addition, our industry leading enterprise campus fabric continues to be a significant factor in winning new deals because it offers 0 touch provisioning, provides the most resilience with sub second convergence, significantly minimizing or eliminating downtime and minimizes the potential blast radius of lateral cyber attacks on the network. Our competitors simply cannot match these features with their IP fabrics designed for data centers. This quarter, customers such as Mooch and Clinic, the largest hospital network in Munich Philadelphia International Airport the city of Temple, Texas invested in Extreme Fabric for its ability to deliver seamless connectivity, reliability and rapid recovery, ensuring uninterrupted operations across their high demand environments. Our competitive displacements span a variety of verticals.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

We recently secured a multimillion dollar new logo win with the Pittsburgh Steelers to enhance their fan experience and optimize retail point of sale systems for greater stadium wide efficiency. Taylor Westing, a large law firm in EMEA with 28 offices, 1200 employees wanted to untangle themselves from the complex licensing structure of our largest competitor to simplify their operations. They chose Extreme for the ease of use and scalability of Extreme CloudIQ and our industry leading Premier Services. We're encouraged by the early traction of our newer commercial models. Bookings for our MSP pilot program have doubled quarter over quarter and we currently have 37 MSP partners.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

These MSPs love the flexibility of the consumption based billing program because it lowers their operational overhead and allows their own customers to scale at their own pace. This makes our offer sticky with upsell opportunities. We're also expanding our funnel with major customers with our private subscription targeted at large service providers. Last quarter, we secured several large global wins with long term agreements that will drive high margin recurring revenue for Extreme in the coming quarters. Extreme Cloud Universal 0 Trust Network Access, uZTNA, is also gaining momentum.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

This SaaS solution integrates our mature network access control with 0 trust remote application access. This quarter, a new aerospace customer upgraded their wired and wireless infrastructure with Extreme and adopted UZTNA for enhanced security. They value the single policy engine and unified management of application and network access for both on-site and remote workers. Four years ago, we were the first in the industry to announce a universal platform for our unified wired wireless portfolio. We combined the power of cloud management with next generation switches and access points that simplifies the deployment experience for customers, increases flexibility and allows customers to gradually adopt new technologies or change their desired use case by changing their OS or management system without a hardware upgrade.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

In Dec. 0, we announced our vision for Extreme Platform 1, an innovative technology platform that integrates Extreme's networking and security solutions by unifying all our applications into a single interface. The core of the platform includes AI models that will drive impactful advances in automation to the networking experience. We previewed the platform as several of our partners and customers and their response was overwhelmingly positive. They all highlighted the significant time savings their teams would experience by having everything integrated into a single platform powered by AI and with the support of our AI expert.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Platform 1 will drive significant productivity gains for IT teams and network design, deployment, management, commercial operations by reducing complex tasks from days to hours and hours to minutes. Shortly after our launch in Dec. 0, Magazine named Platform One one of the 10 hottest networking products of 2024. We have a lot of exciting plans to expand upon our Platform 1 story and capabilities, which we'll demonstrate at Connect, our annual user conference taking place in May 0 in Paris before it goes GA in our We anticipate further market share gains and revenue growth for the full year at a better than seasonal We expect this growth to be accompanied by increased margins and cash flow for the full year. And with that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Thank you, Ed. Our marked the third quarter in a row of sequential growth, and our strong gross margin performance and operating expense control demonstrated the strong operating leverage in our model. We achieved earnings per share of $0,.21 up 24% from the previous quarter and just above the high end of our guidance range. Customer demand trends continue to improve gradually, particularly with large customers. Revenue of $27,940,000,0.0 grew 4% sequentially based on 6% growth in product sales and attached subscription and support contracts.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Professional services was down slightly year over year. On a geographic basis, our EMEA business grew quarter over quarter and year over year based on share gains and diversifying our business to enterprise verticals. Americas revenue declined sequentially owing to difficult comparisons of significant deals that we closed earlier than expected in the We do expect Americas to grow sequentially in the and our APAC region grew 5% sequentially. Overall, this was the best bookings quarter in the last five quarters. Trends were in line with our revenue during the quarter and the product backlog was once again within our expected range.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Channel inventory continued to improve to pre pandemic levels and sell out was higher than sell in. On a product basis, bookings were ahead of the prior four quarters with sequential strength in data center and double digit growth in wireless. Total subscription and support revenue was $10,710,000,0.0 consistent with the Our recurring revenue growth has been driven by the strength of our cloud subscription revenue. Total recurring revenue was 37% on higher product revenue and a predictable revenue stream for our business. Our subscription deferred revenue was up 18% year over year to two ninety million dollars and our total deferred revenue was $5.89,000,000 dollars up 7.5% year over year.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

We expect subscription and support revenue to grow sequentially in the second half of the year. This reflects the difficult comparisons to the low product growth we experienced in the Gross margin of 63.4% was relatively stable, down 30 basis points sequentially, largely due to product and subscription mix, but it was up 90 basis points year over year on improvement in standard costs. The combination of higher product revenue versus subscription and support drove the sequential results. We expect our gross margin to be in the range of 62% to 63% in the also owing to mix. Operating expenses were $136,000,000 down $2,000,000 sequentially and down $5,000,000 from the year ago quarter.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

We continue to focus on driving improvement in operating margin and higher profitability for the year. We expect our operating expenses to increase to a range of $140,000,000 to $146,000,000 in the second half of the year, slightly better than our previous expectations despite a consistently positive revenue outlook. Sales productivity and better efficiency from our new commercial models is driving this updated outlook. Operating profit for the was $4,120,000,0.0 for 14.7% margin, up from $3,350,000,0.0 or 12.4% of revenue in the prior quarter. Earnings per share was $0,.21 and grew from $0,.17 last quarter, all above our guidance range.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

We ended the quarter with $17,030,000,0.0 in cash and net debt of $15,000,000 Our inventory position also improved by $11,000,000 sequentially and we continue to target an inventory balance closer to $100,000,000 on hand by year end. $16,000,000 in free cash flow in the quarter reflects higher revenue and solid profitability. We expect a continued recovery in cash flow for the as we grow revenue and improve profitability. Now turning to guidance. We are encouraged by the level of customer engagement and growth in the funnel we are seeing, which should bode well for us heading into the second half of the year.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

As a result of our improved visibility, we are increasing our full year guidance and providing a slightly narrower revenue range for the next quarter. For the we expect guidance as follows: revenue to be in a range of $2.76,000,000 dollars to $2.84,000,000 dollars gross margin to be in a range of 62% to 63 operating margin to be in a range of 12% to 13.7% and earnings per share to be in a range of $0,.16 to $0.2 Our fully diluted share count is expected to be around 134700000.0 shares. The improving cash generation and profitability we are achieving this year will allow us to restart our practice of offsetting dilution from stock based compensation. For the full fiscal year 2025, we expect revenue to be in a range of $11.20,000,000 dollars to $11.38,000,000 dollars And with that, I'll now turn the call

Operator

back to the operator to begin the question and answer session. Thank you. Our first question coming from the line of Ryan Coons with Needham. Your line is

Operator

open.

Ryan Koontz
Senior Analyst at Needham & Company

Great. Thanks for the questions. Really nice quarter guys. With U.

Ryan Koontz
Senior Analyst at Needham & Company

S. Being down, you attributed that to K-twelve and then EMEA being up, any particular verticals you point to there? Can you expand maybe on those trends in the geographies? Thanks.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Kevin, I'll jump in and then you can come behind. Yes. A K-twelve revenue, Ryan, is usually impacted by E rate and then just the general building cycle where K-twelve schools, they don't want to build while kids and their class is in session. And so I think it's a normal seasonality as it relates to K-twelve and E rate and that's where we felt it. We did see a recovery and I would say in broader Europe.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

I will highlight, however, that we are still being negatively impacted by a lack of government in Germany. As many people may be aware, we have a lot of business there. A large percentage of our EMEA business is concentrated in the German market. And a lot of those government customers and a lot of those frame contracts are on hold while the government sorts itself out. So, when that happens, there is we expect pent up demand to release from that market.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

So, yes, it's an encouraging step in the right direction overall in EMEA, but there's more to come there. And then as it relates to K-twelve back in The U. S, I think you'll see that recover as well.

Ryan Koontz
Senior Analyst at Needham & Company

Got it. And so, sorry, reading to that UK maybe seeing a little better?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Yes, that's right.

Ryan Koontz
Senior Analyst at Needham & Company

Got it. And in terms of FX, any impacts from FX you guys hedge? Can you remind us?

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

We do hedge, Brian. And what we're trying to do is just to offset any currency fluctuations, really minor adjustments from 1 quarter to another. We don't report anything on a FX adjusted basis just because we do hedge and we keep it pretty solid, pretty even.

Ryan Koontz
Senior Analyst at Needham & Company

Got it. And just in closing up, any thoughts about the latest gyrations in HP Juniper and regulatory approval there?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

I mean, look, I think our view, Ryan, is that that combination is that we would be a net beneficiary of those 2 companies coming together. And our expectation would be long term that it would happen. Delays just creates more risk around the transaction. And quite frankly, if you're a partner or you're a customer out there making a buying decision in the enterprise space, you've got to be cautious about the potential risk. And so we think delays probably help us somewhat.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

We had heard that the deal was going to close in March 0. Previously, we had heard the deal was going to close in Dec. 0. And now it looks like there's a fresh round of news throwing doubt on the deal. We think both HP and Juniper want to proceed.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

There's a pretty hefty breakup fee that we know HP doesn't want to pay. And we'll see, we're also not exactly sure how a change in administration could affect this.

Operator

Thank you. Our next question coming from the line of Christian Slaus with Craig Hallum Capital. Your line is now open.

Christian Schwab
Senior Research Analyst at Craig-Hallum Capital Group LLC

Great. Fantastic quarter, guys. My question has to do with WiFi 7. Can you give us an update when you think that has the opportunity to have a more meaningful positive impact on your business?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Well, let me jump in, Christian, and thanks for the question. And then I'll let Kevin, I'll let you chime in and talk about more specifics than what we're saying. It, your WiFi 7 for us is starting to ramp. I think, Christian, you're well aware that your WiFi 7 brings a lot of benefits in terms of it's faster, it's more bandwidth. And in particular, it's about enhanced reliability and the fact that a lot of enterprise customers today who may not have thought about Wi Fi for certain applications, mission critical applications now are feeling more comfortable given the performance of Wi Fi 7.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

So, we are expecting strong adoption of Wi Fi 7. Extreme was 1 of the first to market with WiFi 7 and we would expect continued ramp also as we build out our portfolio of WiFi 7 products. Kevin, do you want to add any more specifics or is there anything else to say?

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

I think

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

the only thing

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

I would add, Ed, is that Gartner says that nearly half of the APs being sold in 2027 are expected to be WiFi 7, right? And then we're seeing some adoption here at about 12% of our access points that we're selling right now are in the WiFi 7 category.

Christian Schwab
Senior Research Analyst at Craig-Hallum Capital Group LLC

Great. No other questions. Thanks guys.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Thanks, Frasier.

Operator

Thank you. Our next question coming from the line of Timothy Harren with Oppenheimer. Your line is now open.

Timothy Horan
Managing Director at Oppenheimer & Co. Inc.

Hey guys, Ed, can you

Timothy Horan
Managing Director at Oppenheimer & Co. Inc.

I know you've been elaborate at your customer event, but can you elaborate just a little bit more on Platform 1? Just maybe a little more color how differentiated it is in the market? How much of an improvement is it versus what you had previously? And just what do you think it means for the business model? Do you think this will start to drive better share gains as maybe how do you think about the TAM or average contract size and ultimately what to do for margins?

Timothy Horan
Managing Director at Oppenheimer & Co. Inc.

I know that's a long question.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

It's okay, Tim. It's top of mind for a lot of people. We came out in Dec. 0 really with our vision for Platform 1 and there's a huge amount of work going on inside of Extreme right now in developing Platform 1. But if you think about the applications that we run supporting our business, everything from wireless and wired, we have something called Site Engine, which gives us the multi domain capability to manage our competitor gears.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

We have SD WAN, we have UZ TNA. So, if you package all of Extreme solutions, you can access them through XiQ through the cloud, but effectively you're going into a different application. So, the big task that's being undertaken here is that we're unifying and consolidating all the applications into a single user interface that we call Workspace. And so, I think for the field and for our partners, the big game changer there is going to be the fact that our fabric, which is our hottest technology because it's so differentiated and none of our competitors have it for the campus, you're going to be able to observe from a visibility standpoint, manage and orchestrate fabric from the platform in the cloud. And that's been a huge ask from our field and for our partners.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

So, there will be this unified solution with common user interfaces, common services, ultimately common data. And in addition, we're also building in the capability for commercial. So, you'll be able from the same platform to manage licensing and service, etcetera. And so, it's a comprehensive platform that is truly unique in networking and it's broader than just this network management. The other important thing to mention is that we built AI into the core of the platform, so that you're going to be able to query you're going to be able to interface with Platform 1 in a way that really hasn't been done before.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

And it's everything from starting off with querying, if you're looking for configuration information both inside the network and you're looking for client performance or are we meeting all of our SLAs, you're going to be able to interface with the platform for some of these basic functions. And it's going to make it a lot easier to do that. As we move along, the idea is to add automation and build automation into this. So as we find certain network issues that happen all the time, we can recommend a mitigation and over time you can just automate that function. And so, these are some of the things that we're building into the platform that we feel are fundamentally going to change how people are interfacing with the network.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

So, this is we talked about limited availability this quarter and then GA happening in our We would expect over the next three years that we will migrate all of our base onto this Extreme Platform 1 and that all new customers would be signing up and joining the platform. If you take our cloud management platform, which is very popular, if you take that and then you look at what you get from Extreme Platform 1, everyone is in our cloud is going to want to make that move. And ultimately, what we will see is that there's greater value and with greater value we would expect to have the combination of our service and subscription revenue grow at a higher rate than where we are today, both in terms of new as well as renewal rates for subscription license. At the end of the day, we want to make it incredibly simple for people to go on this journey and to fundamentally change their networking experience. Kevin, you want to add

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Ed, I think you covered it all very well. I mean, to us, right, this is a platform that kind of leapfrogs what we're seeing in the marketplace today. And like you said, a lot of customers are very eager to jump on it. And then the AI is going to bring us to another level that we haven't seen. It's not just AI ops, but it's also it really enables them to see better into their network and all the activity that's happening within their network.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

And it combines some security as well. So I think all the above is what you said.

Timothy Horan
Managing Director at Oppenheimer & Co. Inc.

And will customers will this cost them more initially or is it more the increase in revenue kind of comes from them adding more and more products and services that's already on the platform?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Yes. I think the value is going to come from the new capabilities of the platform and people wanting to people getting more value and wanting to trade up for the value. So, it's not a big step, but we would expect incremental revenue from the combined offering of Platform 1, which would include service compared to the standard X IQ license and service today.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Thank you.

Operator

Thank you. Our next question coming from the line of Dave Chan with B. Riley. Your line is now open.

Dave Kang
Senior Analyst at B Riley Financial

Thank you. Good morning. First question is, just wondering if you can talk about opportunities with your service providers like Verizon. Can we get an update there?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Yes. Dave, as you know, we have very targeted opportunities with Verizon, Ericsson. These are our largest service provider customers. What we've talked about with new commercial models is a private subscription offer and the opportunity to work with them more like an MSP or in that capacity to leverage the MSP platform that we're building. The MSP platform that we're building was designed in something we call Workspace, which is ultimately the platform that Extreme Platform will be built on and is being built on.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

And so, we see an opportunity to expand our relationships with these larger service providers that are in they have relationships with networking providers that the businesses are not very profitable. We think we can unlock profitability with our new platform and the new commercial model with a private subscription offer. And we believe the economics are meaningful enough to want to pick off and get some of them to move. So, it's a much longer term sales process. We are in the middle of that having productive conversations.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

That's the I would say that's the latest. We've had some large wins that we mentioned that will come into and you'll start to see them feather into our results as we close out our and turn into Anything else, Kevin?

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Yes. No, I think you hit it, Ed.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

That's the update.

Dave Kang
Senior Analyst at B Riley Financial

Okay. Just wondering if you can kind of make a projection, how should we think about the trajectory like maybe 10% of revenue? I mean, maybe not this fiscal year, but can we see that like towards the end of the calendar year or more like next calendar year? Any thoughts there?

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Yes, David, I wouldn't want to get into a projection at this point for '26 or beyond around what that looks like. It's obviously in our pipeline and as we look at opportunities coming through, we can give updated guidance on what we think revenue mixes will look like in 2026 and beyond once we get a little bit closer to year end.

Dave Kang
Senior Analyst at B Riley Financial

Got it. And Mayav, second question is, you mentioned on data center, how big is it? Are you working with any hyperscalers or is it

Dave Kang
Senior Analyst at B Riley Financial

more of a smaller data center operators? And what's driving this trend?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Well, Dave, we have very specific use cases for Ericsson and their platform that supports wireless players. So, think about that as almost like an OEM relationship. And then in the case of Verizon, we're supporting their services platform in their back office as well as a direct customer.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

So, those are very specific use cases and that's where we're focused. As you know, we have not been active in investing in these hyperscale data center solutions. The margins in that segment have been getting squeezed. There's a lot of larger players that are aggressively going after that as well as white box players that are going after that market. We do think with some of the announcements that have recently been made, for us, we view them favorably because it's encouraging with the idea that some of these AI workspace workloads and use cases can be built and be applied to smaller enterprise customers in a way that's affordable.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

And this is something obviously it's early innings here, but we had already begun looking at how do we support our customers to the extent that some of these AI workloads come back on prem that are more suitable to our solution. So it's early innings on that. You'll hear more about that later, but it's a response to the broader question.

Dave Kang
Senior Analyst at B Riley Financial

Got it. Thank you.

Operator

Thank you. And our next question coming from the line of David Bose with UBS. Your line is now open.

David Vogt
David Vogt
Managing Director at UBS Group

Great. Thanks guys for taking my questions. Maybe the first one for you. Can you maybe speak to kind of the type of exposure or how you're thinking about sort of the way The U. S.

David Vogt
David Vogt
Managing Director at UBS Group

Is going about, at least on the federal government side, funding the federal government and what it might mean for states and local municipalities and how that might be sort of filtering into your business over the next couple of quarters just to kind of get a sense for how we should think about it? And then maybe 1 for Kevin, I'll give you both upfront. Kevin, when I think about your services and subscription business, particularly on the recurring side, if we adjust for the product, if we subtract out the professional services, that business has been around $100,000,000 business. How do we think about that from an attach rate going forward as product revenue growth should continue to grow going forward? So you're kind of a good algorithm that we should think about going forward or it's a little bit more complicated than that?

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Okay. Thank you. Yes.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

I'll let Ed answer the first question.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Yes. So, most of it, David, most of our spend on the government side is in the state and local domain as well as in the education domain. And at this stage of the game, it is early innings, but we're not really in we're not aware of any impact to the budgets that we're supporting in terms of the networking building for schools, K-twelve and higher ed schools and also our state and local government customers. Our federal spend customers are very well established government entities. And here again, we don't expect at this stage, we're not anticipating any impact on the projects that we have underway or that are in our funnel.

David Vogt
David Vogt
Managing Director at UBS Group

Great. Thanks.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

And just to answer the second part of your question with regard to subscription and support and the outlook for that, right? There's really I'd call it 4 factors that are really going to help that. 1, just increase in product sales as we've recovered, right, from and where we had lower product revenue coming into this year. Remember, subscription and support is kind of lagging indicator against those product sales. You sell the product, you get the attach and then you've got the growth rate coming behind that.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

So there's a little bit of lag right now and we're kind of feeling a little bit of the pain from and last year in the growth rate here. It's still 14%. It's still where we're expecting to be in the kind of mid teens growth on the subscription side, but nevertheless, still a little bit lower than what we experienced. But platform so higher growth in product is going to help us, which we're calling in the second half of the year. The second part of that would be Platform 1 and Platform 1 Attach.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

It's a little bit higher ASP, but also we're going to get more and more of the customers to renew in Platform 1 and we'll get not only XiQ, but also we'll add other features to that, including the support to it and we'll get all of that to renew at the same time with enterprise agreements with these customers. So that's going to be new as well. 3, we've got that Extreme Subscription private offer, which we just talked about earlier with the service providers. The service providers are really Fortune 100 companies that continues to do well and we believe that we will get more and more subscription revenue associated with that. And then the last 1 is MSP and driving these MSPs, which again 100% attach for every deal that closes within an MSP.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

And so it's a combination of a better attach rate, but it's more product sales and it's these new go to market motions that we have that both have 100% attach rate as well on the MSP side and the Aspen side.

David Vogt
David Vogt
Managing Director at UBS Group

Helpful. And can I touch up 1 more in Ed, I think I heard you say would be better seasonality this year? Can you maybe talk about kind of what's driving that? Is it what markets, what products, just general improvement in the networking backdrop? Just kind of get a sense of what's going on there.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Yes, that's right. So, what we have is, normally what you would see in our seasonality patterns and trends is a dip in March 0 and then a nice step in the June 0 quarter. And what we're calling here is a flat March 0 quarter and then a nice step in June 0. So, normally instead of seeing you would see a downtick and the strength in the market and our outlook and the opportunities that we have in our funnel and what we're seeing is that we're confident in calling a flat quarter. So that's why it's a seasonally stronger quarter because we're expecting we're not expecting the dip in March 0 that we would normally get.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

And yes, it's the broader market recovery. It's our commercial models that are adding and gaining momentum. We think that the competitive positioning, our competitive positioning continues to favor us and will continue to create opportunities for Extreme. And as I mentioned, some of our markets in specific like in Germany, in Europe, we continue to be negatively impacted by a lack of spend in that particular market. And we are expecting to have a new government and we're expecting to have budgets.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

And when that happens, we think spending will be unlocked and that would be a tailwind for us.

David Vogt
David Vogt
Managing Director at UBS Group

Great. Thank you.

Operator

Thank you. And our next question coming from the line of Erik Martinuzzi with Lextra Capital Markets. Your line is now open.

Eric Martinuzzi
Senior Research Analyst at Lake Street Capital

Yes. I'm trying to get a feel for industry growth rates, given your own action over the last, call it, twelve months or so. It's been hard to get a feel for just the overall industry growth rate. But is this an industry that you see kind of a high single digits growth rate, mid single digits because you've got the puts and takes with the competitive landscape, your own product launches and then the channel issues from a year ago?

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Yes. Eric, I think our view of the industry is that it's a mid single digit grower and that we are in a share gain position. And when you think about Extreme long term, you think about Extreme in the high single digits trending to the double digit territory. Kevin, I'll open the door for you here.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Yes. No, I think you're right, Ed. I mean, that's exactly what we would say. And actually, the larger companies like Cisco might even in their networking business have loaded to double single digits. But I think that's what we're positioning ourselves for from a long range expectation.

Eric Martinuzzi
Senior Research Analyst at Lake Street Capital

Okay. And then I just wanted to go a layer deeper on the slight step down in the gross margin outlook to versus You finished out at 63.4% on the non GAAP gross margin for and the midpoint for actually for the back half is 62.5%. So I understand that it's based on mix, but in particular, what product is pulling that mix down or pulling that margin down?

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Yes. It's just a function of the actual product gross margin is lower than subscription and support gross margin, right? And so the growth that we see coming back here in the second half of the year is primarily going to be on the product side. And so that's the mix shift that we're owing to the slightly lower margin at the end of the day. There's a little bit of we also have taxes being reset here in Jan.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

0. And so we've got some COGS expenses as well as operating expenses that will be affected by the FICO limits being reset. And so that's a little bit of a drag on gross margins as well. We still feel comfortable, I would say, Eric, in terms of the 64 percent to 66% kind of long term range for gross margin. And obviously, we'll try and overachieve that as we continue to drive here for the second half of

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

the year with the 62%

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

to 63% range. But I would say it's certainly that's what it is. It's primarily just product in general being a higher mix of revenue in the

Eric Martinuzzi
Senior Research Analyst at Lake Street Capital

Got it. Thanks for the clarification.

Operator

Thank you. And I see there are no further questions in the queue at this time. I will now turn the call back over to Mr. Ed Mykorkor for any closing remarks.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

Okay, Lydia. Thank you very much. Thanks everybody for joining the call today. We appreciate your support and we have a lot of exciting things going on at Extreme. Certainly, as we go through this quarter and head to May 0 for our user conference with Connect, I want to thank our employees, customers, partners who are dialed in.

Ed Meyercord
Ed Meyercord
President & CEO at Extreme Networks

We are excited about the opportunities that lie ahead. I know we've also opened the door to investors to come to Paris where we're showcasing our new technology and we look forward to seeing you there. Thanks everybody and have a great day.

Kevin Rhodes
Kevin Rhodes
Chief Financial Officer at Extreme Networks

Thank you.

Operator

This concludes today's conference. Thank you for your participation and you may now disconnect.

Executives
    • Stan Kovler
      Stan Kovler
      SVP of Corporate Development & Investor Relations
    • Ed Meyercord
      Ed Meyercord
      President & CEO
    • Kevin Rhodes
      Kevin Rhodes
      Chief Financial Officer
Analysts
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Earnings Conference Call
Extreme Networks Q2 2025
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