Extreme Networks Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 11 speakers on the call.

Operator

Morning, ladies and gentlemen. Thank you for standing by. Welcome to Extreme Networks' 4th Quarter Fiscal Year 2023 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 session.

Operator

Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Mr. Stan Kovler, Head of Investor Relations. Please go ahead.

Speaker 1

Thank Thank you, operator. Good morning, everybody, and welcome to Extreme Networks' 4th Quarter and Fiscal Year End 2023 Earnings Conference Call. I'm Stan Kovler, Vice President Corporate Strategy and Investor Relations. With me today are Extreme Networks' President and CEO, Ed Meyercord 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 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 forward looking statements based on our current expectations about Extreme's future business, financial and operational results, growth expectations and strategies. Our financial disclosures 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 our 10 ks for the period ended June 30, 2022 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 prepared remarks, we will take your questions. And now, I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Speaker 2

With revenue growth accelerating to 31% in the 4th quarter and 18% overall for the year. This is the 2nd consecutive year of double digit organic growth. We also delivered $1.09 a share in EPS, up 42% year over year, and we expect the bottom line trends to continue with earnings growing faster than revenues. Our free cash flow doubled in fiscal 2023 and we ended the year with a net cash position even after paying down $80,000,000 in debt and buying back $100,000,000 of our stock. We outperformed our original top line outlook for fiscal 2023 and based on industry analyst estimates outgrew the market by 2 times.

Speaker 2

This combined with the increase in volume of larger deals and new logos is a clear indication that we're taking share from our largest competitors. Customers recognize that Extreme offers the simplest and easiest to manage and to end enterprise networking platform in the industry. Our 1 network, 1 cloud, 1 extreme solution enhanced with our AIOps capabilities excels relative to the complex and high total cost of ownership solutions of our competitors. With this differentiation, new growth vectors and higher level of our team's execution, I am confident in our continued growth outlook. With today's modern network as a connected tissue and enterprise digital transformations, the demand for our advanced cloud driven solutions remains strong.

Speaker 2

We continue to elevate both our competitive position and the awareness of the Xstream brand in the market resulting in funnel growth. Increasingly, customers are recognizing our value proposition and placing their trust in Extreme to deliver better outcomes for their mission critical network deployments. Given our market share position, we're benefiting from being in such a large and growing market where small share gains have a big impact on Extreme's financial results. In our 4th quarter, bookings grew mid single digits sequentially and we're in line with normal seasonality. We expect normal seasonal trends going forward as industry lead times return to normal.

Speaker 2

Our U. S. Business was particularly strong in Q4, partially offset by Germany and the APAC region. With this backdrop, we expect revenue growth to remain strong in fiscal 2024 and to start the year with mid teens growth in Q1. Our competitive differentiation and continued success is being driven by our 1 network, 1 cloud, 1 extreme solution.

Speaker 2

At the core of our One Network promise is our universal hardware portfolio. This is the most flexible, Highest performing end to end networking hardware in the industry. And with Extreme's unique and highly differentiated fabric, we make it simple to orchestrate applications and policy across the entire campus from the core to the wireless edge and across the wide area network. We bring enhanced security, the ability to segment networks and 0 touch provisioning, eliminating confusion, complexity and the need for additional IT staff. This is in stark contrast to our competitors' fabric solutions, which were designed for service provider and data center networks and not meant for campus.

Speaker 2

With one cloud, we're the only provider to offer choice in how customers manage their networks public, private, Edge or hybrid cloud through a single interface, and we're the only vendor that can manage both Extreme and third party hardware, providing enhanced visibility, flexibility and the ability to seamlessly upgrade to an extreme network at your own pace. Finally, our CoPilot AIOps capabilities provide proactive insights and analytics to improve network availability and management. And with One Extreme, we deliver the industry's most simple commercial terms for licensing with one price for all devices. Our licenses are portable and poolable, providing unmatched value and simplicity. Again, this is in stark contrast with our competitors who have complex tiered licensing models that are notorious for hidden costs.

Speaker 2

Customers increasingly view their network as a strategic asset to streamline operations, power and scale new services and reduce business risk. Our AIOps solutions are getting traction with customers as they look for new ways to leverage the network to drive better business outcomes. This is evidenced by the 182 customers that spent over $1,000,000 with Extreme in fiscal 2023. Some highlights from our 4th quarter include wins with the University of Mount Union. They upgraded their network with our end to end wired and wireless solution.

Speaker 2

The new network provides seamless AI and fabric powered automation and optimization across the campus, which improves IT productivity. Northampton NHS Trust, a leading hospital in the UK needed to upgrade its network to keep pace with increasing bandwidth demands generated by IoT medical devices, AI and medical applications and Wi Fi in patient rooms. With a new Wi Fi 6E network, they are simplifying IT operations and improving patient care. 1 of the world's largest ski mountain conglomerates With 50 resorts across 15 states and 3 countries chose Extreme after deep frustration with 1 of our largest competitors. Our value proposition of creating 1 network managed by 1 cloud was essential to the customer in order to conduct a seamless migration with visibility and management capability to both the legacy and new network environments from our cloud, eliminating the risk of rip and replace.

Speaker 2

We extended success in retail with a key win with a leading grocery chain in Mexico. With nearly 900 locations, The company is upgrading its network with analytics and cloud management capabilities to support a better retail experience. They're also leaning into AIOps with our CoPilot solution to help augment their IT staff. And lastly, we expanded our footprint within MLB and the NHL winning new deals with the Arizona Diamondbacks, Philadelphia Phillies and Philadelphia Flyers, cementing our leadership position in sports and entertainment venue. Extreme was once again recognized by Gartner Peer Insights as the customer's choice for enterprise networking for the 6th consecutive year.

Speaker 2

We're recognized for our strength in product innovation, ease of deployment and outstanding customer support. We're also named one of the best places to work based on our FlexFirst remote work policy, our culture of inclusivity and employee satisfaction. This quarter, we were able to bring our product lead times down again as our supply chain environment continues to improve. We have the benefit of a healthy backlog of customer orders with request dates that spread fairly evenly through the end of our fiscal year. End customer orders remain firm and distributor orders have normalized, giving us confidence in our outlook for this fiscal year.

Speaker 2

We continue to expect our backlog to settle in a range of $75,000,000 to $100,000,000 in Q1 2025. Our exposure to the fastest growing areas of the networking market, share gains, new go to market partnerships provide ample growth opportunities to drive double digit growth long term. We are forecasting market share gains with channel partners leveraging the strength of our unique solutions in the enterprise market. We also have an opportunity to expand our subscription business to our entire hardware portfolio 24. And we introduced a disruptive managed services platform that will expand our go to market footprint and add a new growth vector for Extreme as we progress through the year.

Speaker 2

I'm looking forward to our Investor Day currently scheduled for November 7 at the NHL headquarters in New York City. We will And with that, I'd like to welcome our new CFO, Kevin Rhodes, and ask him to cover the financials and his inaugural earnings call with Extreme. Kevin?

Speaker 3

Thanks, Ed.

Speaker 4

Let me say it's been a pleasure for me to join Extreme at a time when its financial position has never been stronger. I'm encouraged not only by our financial performance, but also our competitive differentiation in this large market with great opportunities to take share. In my first couple of months on the job, I'm impressed with the company's culture and the level of talent we have in this organization. At all levels in our company, I see strong sense of urgency, ownership, curiosity and commitment and a real desire to win. During fiscal 'twenty three, we once again demonstrated the level of execution this management team expects, and we are committed to continuing that in the future.

Speaker 4

Let me get into the numbers. First, I'll start with the Q4. Revenue was $363,900,000 and grew 31% year over year and 9% quarter over quarter, exceeding the high end of our expectations entering the quarter. Product revenue accelerated to $261,700,000 or 40% growth year over year and 9% sequentially, reflecting continued improvement and our supply chain environment. We achieved strong double digit growth in both campus switching and wireless LAN, partially offset by a decline in data center revenue.

Speaker 4

Our SaaS ARR grew 25% year over year to $129,000,000 up from $103,000,000 in the year ago quarter. Driven by the strength of our renewals, subscription deferred revenue was up 38% year over year to $217,000,000 Total services and subscription revenue was $102,200,000 up 12% year over year. This growth was largely driven by the strength of our cloud subscription revenue, which was up 27% year over year. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $501,000,000 up 25% year over year and 8% sequentially. Our gross margin came in at 60.2%, up 110 basis points sequentially and 3 20 basis points from the year ago quarter.

Speaker 4

We attribute this to improvements in product gross margin due to higher revenue and an improvement in the supply chain and distribution costs as well as product mix. 4th quarter operating expenses were $156,000,000 up from $132,000,000 and the year ago quarter and up from $144,000,000 in the Q3 of 'twenty three, reflecting higher investment in R and D and sales and marketing expenses to support our higher revenue growth. Our strong revenue growth, gross margin expansion and operating leverage contributed to another record quarter for operating margin at 17.4%, up from 9.6% in the year ago quarter and up from 15.6% in the prior quarter. To that end, 4th quarter earnings per share were $0.33 at the high end of our guidance entering the quarter. For the full year fiscal 2023, revenue of $1,300,000,000 grew 18% from the prior year on product revenue growth of 22%.

Speaker 4

During fiscal year 2024, We expect continued strong product revenue growth given the growing interest in our solutions by customers and the ongoing normalization of our backlog. Wireless product revenue grew at over twice the rate of our switching product revenue during the year. Recurring revenue is another positive story here at Extreme. We generated $380,000,000 of subscription, maintenance and a small amount of professional services revenue. This is highly predictable and visible revenue for our company and we continue to drive more recurring revenue over time.

Speaker 4

As we ship products from backlog, it is generating a tailwind for SaaS growth. Gross margin for fiscal 2023 ended the year at 58.9%, up 50 basis points year over year based upon improvements in supply chain related costs, price increases and cost absorption owing to higher revenue and larger scale. Operating margin of 15.2 percent grew 2.90 basis points from a year ago and operating expenses as a percentage of revenue improved to 43.7%, which is better than our Investor Day guidance. GAAP EPS grew 76% from a year ago and non GAAP EPS of $1.09 per share grew 42%, representing the significant operating leverage we have in our model. We also strengthened our balance sheet with strong cash generation and the refinancing of our debt.

Speaker 4

We ended the quarter the end of the year with net cash position of $10,000,000 after repurchasing $25,000,000 worth of our shares at the average price of $17.32 per share. The $235,000,000 of free cash flow we generated during the year represents an 18% free cash flow margin at the high end of our long term model. Of this amount, dollars 75,500,000 was generated in the 4th quarter, driven by higher gross margins and EBITDA. Lastly, at the end of fiscal 'twenty three, we refinanced our long term facility with a $200,000,000 term loan and $150,000,000 of available revolving credit. The interest rate is currently just over 7% annually.

Speaker 4

Our balance sheet remains in excellent condition with a leverage ratio well below half a turn. Now turning to guidance. We remain optimistic about the enterprise networking spending environment and our ability to take share. Customer spending trends are reverting back to normal seasonal patterns given the improvements in our networking supply chain. As a reminder, the 4th quarter tends to be a seasonally higher quarter than the Q1.

Speaker 4

Our gross margin outlook is also benefiting from an improved supply chain as expedite fees and shipping costs continue to improve. For the Q1, we expect the following: Revenue to be in a range of $342,000,000 to $352,000,000 gross margin to be in a range of 59.5 percent to 61.5 percent, operating margin to be in a range of 15.3% to 17.6 percent and earnings to be in a range of $0.28 to $0.33 per diluted share. All in, I see tremendous opportunity for Extreme to grow our business, accelerate our revenue contribution from SaaS and improve our margins and cash flow. I look forward to laying out some of our plans at our Investor Day later this year. And with that, I'll now turn it over to the operator to begin the question and answer session.

Operator

Thank you. Please standby while we come to Kenny Bostor. Now first question coming from the line of Alex Henderson with Needham, your line is open.

Speaker 5

Great. Thanks so much. Nice print and thanks for The good performance for the year. I was hoping you could give us some sense of what your expectation As we look out at the full year, you had talked about 15% plus growth over the 3 year period, I think earlier, obviously, you've You outperformed that in 2023. Is it reasonable to think that you're still on track given the backlog for another 15 And just operationally, can you give us a little bit of guidance on The interest and tax line for the FY 2024 period.

Speaker 5

Thanks.

Speaker 2

Thanks, Alex. Kevin, as far as outlook for the year, do you want to take that one?

Speaker 4

Yes, I'm happy to. I would say, Alex, we're very much on track with what we laid out already from fiscal 'twenty three to 'twenty five outlook. We feel good about that. And I would say, yes, we feel that we are still going to be in the mid teens growth for the full year.

Speaker 2

And then on the interest

Speaker 4

rate? Yes. On the interest rate, let me just pull that up and we can certainly talk through that. We believe that we're feeling comfortable. So taxes for the year, We believe we're going to be somewhere again looking for the full year, about 22% full year tax rate.

Speaker 4

And then non GAAP? Non GAAP, yes. And then when we think yes, that's what I'm talking about, non GAAP. And then when we're thinking about interest, we have $200,000,000 Outstanding, we've got about 7% cost of debt, but then we've got about 5%, I'd say, percent Generation against that, so a 2% spread, but not all $200,000,000 of debt all the debts outstanding. And then we I'd say we generally think that we'll probably have about $150,000,000 to $200,000,000 of investment income off that 5%.

Speaker 4

So I think they're going to somewhat breakeven or at least slightly interest expense, but not a tremendous amount.

Speaker 5

So last year in 2023, you did $12,700,000 in interest expense and other income. Is it reasonable to think that that will come down very slightly?

Speaker 4

Yes, I think it will. I think it will come down.

Speaker 5

Okay. Thank you.

Operator

Thank you. And our next question coming from the line of Timothy Herren with Oppenheimer, your line is open.

Speaker 6

Thanks guys. Two questions if you don't mind. And I'm getting a lot of same questions, but why are you doing so well with bookings at this point with very large customers? Why the success in large deals? And can you talk about your new Extreme Cloud Edge product?

Speaker 6

Has that been launched? Maybe some of the learnings from that? Thank you.

Speaker 2

Thanks, Tim. And yes, I think what's happened, We talked about it in my comments, I talked about the volume of large deals. I get deals that are over $1,000,000 growing. And I think this is really about the up leveling of Extreme in the marketplace. We've been in the leadership quadrant at Gartner now for 5 years running and our position only strengthened.

Speaker 2

It was last year that we actually went in front of Cisco. And as enterprise customers are looking to upgrade their networks, They're considering Extreme now more than ever before. And people are surprised to learn that the kinds of customer relationships that we have. So when we win Kroger, which is the world's largest grocer, and we're building out the world's largest cloud managed network. That was a hotly contested piece of business.

Speaker 2

All the major competitors were there And Extreme won out. When we win one of the world's largest cruise lines where Each ship is $4,000,000 or $5,000,000 and we win the 1st ship in a fleet of 43 and the customer is thrilled with the difference in experience in dealing with Extreme versus dealing with 1 of the largest competitors. That just opens up the door for more. And then we can take these reference accounts and enterprise customers are surprised to learn that Every time you get a FedEx package, it's run through an Extreme network, or every time you fly in the U. S.

Speaker 2

Airspace that you're flying on an Extreme network technically because the FAA runs on Extreme. And these kinds of stories are becoming more and more known out in the industry. And so our reputation has gone up and what it's doing is it's giving us more opportunities. And then when we come in with our 1 network, 1 cloud, 1 extreme solution, which is really about the seamless end to end hardware, Super flexible high performance hardware, all managed within one cloud end to end, our competitors don't have that. And when you look at the commercial terms and the simplicity of our licensing, the quality of our service and especially the performance of our fabric, which is truly the only campus grade fabric in the industry, it really turns heads.

Speaker 2

And so it's just it's creating a lot more opportunities. So here it's about success to getting success. I mentioned Kroger, they're in the middle of a large acquisition. That initial deal was for wireless. We have a larger switching opportunity there and then when they close that acquisition, they've standardized on our technology.

Speaker 2

So just some examples of What's happening in the market? Our competitive position is truly differentiated. And then our brand we've up leveled our brand. So that's really helping us get the attention. And by the way, that also plays into the channel community because Partners realize that they see that we're winning these larger deals and it allows us to gain more mind share within the channel.

Speaker 2

So that's been a big part of it. In terms of CloudEdge, Tim, we know you were over in Berlin at our user conference. This is a big deal, especially where sovereign data becomes more and more important. And we have begun to sell our cloud edge, not surprisingly to European customers. One of the things I mentioned in our notes is that we're building and we've just come out with our managed services platform, which is a brand new growth vector for Extreme.

Speaker 2

More on this later to come. But here again, this is where Having an Edge cloud that could be part of an MSP service offering can be very powerful. So I'd say early innings on CloudEdge, we have a lot of interest. And then it's going to be an important part of our platform and managed services going forward.

Speaker 6

And just on CloudEdge, could you are you getting much interest in doing AI inferencing or even some maybe Training on this infrastructure.

Speaker 2

Tim, I think it's early innings and it's a little too soon to call. I think right now The major interest is around the cloud sovereignty and keeping data End market, if you will. Obviously, with European countries, that's really important. And so there's a lot of examination going on right now. And Our teams are actively working a lot of opportunities.

Speaker 2

In markets, Japan is another market where Maintaining the data end market becomes really important. And I'd say that's the primary interest today, but I think more to come on that.

Speaker 7

Thank you.

Operator

Thank you. One moment for our next question. And our next question coming from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is open.

Speaker 3

Yes, I'm looking for a little bit more detail. You talked about, I think it was weakness in Germany and APAC. Is that something that you expect to get resolved in the relatively near term?

Speaker 2

Hi, Eric. Yes, we do. And actually, We're seeing it happen now. Germany went into a recession and it was the first time that The country went into recession since World War II. And so it definitely created a bit of a shock.

Speaker 2

It slowed down some of the buying cycles. And that has impacted us for the last 6 months or so. But we've seen encouraging signs. We've seen the funnel pick up. We've seen larger deals come back into the funnel and we see that strengthening.

Speaker 2

The other Key driver is what we call our run rate business. This is really coming from the channel. That the run rate business dried up with supply chain constraints and we're seeing that come back. And that also plays a big role in EMEA and in German markets where we have A very deep channel and partner community where we see a lot of that run rate business. So the signs are encouraging for us.

Speaker 2

We feel like we bottomed out there, but we're coming back.

Speaker 5

Okay. And then

Speaker 2

And with Asia Pacific, I would say the same thing. In last quarter, we saw the Your run rate business as well as some of the larger project deals go away and now we're seeing them come back with strength. So Asia Pacific is usually one of the first markets to come back and we're seeing that happen and we're also seeing it happened in Germany. Interestingly, in EMEA and the rest of the markets, they remain very strong and The demand in the U. S.

Speaker 2

Market remains very strong.

Speaker 3

Got it. You've talked about share gains and I'm wondering if you're doing anything different this fiscal year with regard to channel partner engagement Or incentive to really capitalize on what you characterize as your rising reputation to continue to expand those games.

Speaker 2

Absolutely, Eric. So what we've done is we've put in place, We've got named partners which are just over 200 partners that are our target and more strategic partners where we put in place Specific business plans with them with quarterly business reviews. And I can tell you the growth targets there are significantly higher than what we're calling for the company. And the interest level is quite high. I think with the supply constrained environments and some of the macro challenges, They've been pinched by some of the larger players and they're excited about the opportunity to work with Extreme and for us it's a big opportunity to expand wallet share.

Speaker 2

So there's our name partners. There are new partner opportunities that we're looking at. I mentioned the MSP platform that we're building. We will attract new partners, higher volume partners with our platform. And finally, with non named partners or the larger base of what we call authorized partners, when the run rate business comes back With supply chain loosening, we'll see more volumes out of those partners as well.

Speaker 2

So the answer is yes, we see a huge opportunity in the channel. There is clearly channel fatigue with some of the larger players and some of the issues with their solutions in the marketplace and then some of the issues with their commercial practices.

Speaker 3

Understand. Congrats on the quarter and good luck in FY 2024.

Speaker 2

Thanks, Eric.

Speaker 3

Thank you.

Operator

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

Speaker 8

Hey, good morning. Thanks for taking my question. So Ed, I'm just wondering if you could go through the puts and takes of Upside or potential risk to the 50% guidance for this year. We have supply chain normalizing. We kind of have a mixed geographical situation.

Speaker 8

We have a tremendous shown success in market share gains. We kind of have a mixed geographical outlook for the year by people other than myself. So I'm just wondering as we have a conversation this time next year, what are the 1 or 2 things that would make that 15%, 20% and what would be the 1 or 2 things that maybe put it at risk?

Speaker 2

Sure. Thanks, Christian. And Yes, there I mentioned if I go through you mentioned geos, we have considerable strength in Americas. The growth was very strong throughout the year in Americas and in Q4, and we see that continuing. And I made the comment on the call earlier and you're familiar with this.

Speaker 2

But again, given our relative market size as a call it 6%, 7% share player In the industry, there are these large crumbs, small share gains for us have a big impact on our financial statements. So it doesn't take a lot of market share for us to grow our top line and hit that target that we've laid out there. In terms of geos, EMEA is our 2nd largest geo market and it is very healthy. The challenge for us was specifically in Germany there. And as I mentioned earlier, we're seeing them start to come out and we're seeing strengthening in the funnel in the forecast with Germany.

Speaker 2

And then importantly, there's this run rate business. And I'll come back to that in a second. Finally, APAC, we have new leadership and strengthened relationships with Distribution as well as channel there. And again, I think if I look at the health of our funnel Globally, relative to what we're calling, I'd say we have the strongest funnel in that region today. And so that's changed pretty quickly.

Speaker 2

So we're very bullish on Asia Pacific and a sharp rebound, I'd say at a higher growth rate. I'd say with EMEA, We think the other markets are going to pick up the slack in Germany and then we'll see that recover and then we see continued strength in The U. S. Market, one of the things we're doing is we're doubling down on our certification investment. We are opening up Fairly large opportunities that we haven't had in the past in the federal space and also our commitment to certifications are helping out What's happening in SLED with state and local governments as they look more and more to federal cert.

Speaker 2

So This is providing some wind in our sales and opening up some new opportunities. The run rate business is important to mention because If we look at run rate at its peak generating, call it, between $15,000,000 to $20,000,000 a quarter, we saw that cut in half or more with the slowdown in supply chain. So as that returns to normal, that's going to provide us with some tailwinds. And then we do have, I mentioned some new growth vectors. With commercial terms, MSP is really us packaging our existing portfolio and creating a very simple platform and it's really about commercial simplicity and then the strength of our 1 network, 1 cloud, 1 extreme that is generated a lot of interest out there with Some of our existing partners as well as some new partners that are a lot larger than the traditional profile of an Extreme partner.

Speaker 2

So We're guardedly optimistic. We've just launched the platform and that will ramp throughout the year as we turn the corner to 25. I mentioned that We're enabling the entire portfolio at Extreme to be run and managed from the cloud and this is going to open up growth in subscription. This will happen at the beginning of our calendar year and you'll see us build momentum there. And then we also have some other initiatives that we believe will be disruptive and create high growth with some very large partners, like Verizon, for example, very excited to run with Extreme.

Speaker 2

And so we're being added to their selling list. So I mean, these are the upside opportunities. Obviously, from a macro perspective, there are always macroeconomic risks. And I think we've seen that, we've heard about that. There's always something unforeseen that kind of comes around the corner.

Speaker 2

But Yes, with this stage of the game, I've just been we've just gone through regional director reviews going around the world examining and scrubbing pipeline and funnel. And at this stage of the game, we feel very confident in the demand outlook.

Speaker 1

That's great. No other questions. Thanks, Ed.

Speaker 2

Thanks, Christian.

Operator

Thank you. One moment for our next question. 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 your competitive landscape. Just wondering if you're seeing much of a Juniper in various Enterprise segment seems like they've been very vocal about their success in Enterprise segments.

Speaker 2

Yes, Dave, thanks. And good question. And I would say if we had to pick a competitor where we go toe to toe that is it is Most competitive out there, it's probably Juniper and their Enterprise solution today, Juniper and Extreme are about the same size in the enterprise space. We don't see them as much as we see Cisco and HPE It's 60% 15%. So 75% of the market that we run into is with Cisco and HPE and then to a much lesser extent Juniper, but they're out in the market.

Speaker 2

So we are seeing them more and I think They're experiencing some of the same success that we are. And we do have competitive differentiation with Juniper, as you know and the market knows, Juniper has been a service provider company first. They acquired Mist, which is WiFi was a WiFi only, a cloud WiFi only company. And now they're trying to migrate They're switching solutions and they're trying to push that into the Mist framework. It's more complicated than extreme.

Speaker 2

We have advantages with respect to our cloud and one cloud where versus a multi cloud environment. We have advantages around Cloud Choice, and we also have advantages with our network and our universal hardware platform that's end to end. And I'd say the big differentiator for us in the market today is our fabric. So it's cloud differentiation and fabric. We are the only player that has a truly differentiated campus fabric.

Speaker 2

Juniper has an IP fabric designed for data center. It just doesn't work well in a campus environment. When customers see our fabric and if we do a comparison Head to head, we're really blowing away our competitors. And that's kind of a secret sauce for us right now. As people learn about The ease of provisioning network, the ease of deploying policy into a fabric that automatically updates The entire campus environment, most of the data center fabrics are static by definition.

Speaker 2

Ours is dynamic and flexible and customers really don't believe it when it's pitched in PowerPoint, but when they see it and then they experience it, they're blown away. So this has been a huge factor for us winning. And it's one of our For us, it's a big competitive advantage for us against

Speaker 7

Thank you. But I guess my follow-up question is, they've been very vocal about their AI capability. What is your strategy AI strategy going forward?

Speaker 2

Yes, I mean, look, Extreme and Juniper are the leaders in the space in terms of AIOps. And so we have different capabilities, but this is I go to Kroger, right? I mean, We won Kroger and obviously they want to build the grocery store of the future and that hinges on AI capabilities and AI ops. They're looking to automate their environments. They're looking for unique insights, actionable insights.

Speaker 2

When we look at our differentiation versus Juniper, I'd say it's about the quality of actionable insights from our at AIML tool. But yes, this is where we're focused, Dave. And I would say Juniper is very good at marketing their capabilities here.

Speaker 7

Thank you.

Operator

Thank you. And our next question is coming from the line of Greg Misniak with Westpark Capital. Your line is open.

Speaker 3

Thank you. Thank you

Speaker 9

for taking my question. Ed, just a high level question for you. If just for argument's sake, one of your strategic goals were to come true in its entirety and your entire subscription base transition to a subscription model, How would that impact product revenue and revenue growth and the timing of revenues? Thanks.

Speaker 2

Thanks, Greg. It's a good question. If you look at today, if you look at our portfolio and what we can Managed from the cloud, it's about it's less than 50% of our installed base. But in terms of what we're selling, is probably in the 60% range. So the idea that we could increase the volume from 60% to 100% is obviously a big deal for us.

Speaker 2

There will also be an opportunity for migrations of our existing base, which would accelerate the subscription revenue as well. And our solutions, the current solutions that we're offering today, where we have our subscriptions being tied to hardware. Some of the new growth initiatives we have, We are untethering the hardware in a way where we'll be able to sell Subscription, cloud subscriptions and software subscriptions that are untethered to our hardware and that obviously will create a unique growth opportunity.

Speaker 9

Thanks. But as you as the sales mix Continues to transition to software and subscription, would the impact on hardware revenue be in any way impacted negatively?

Speaker 2

Well, for us, it's you still need hardware and a network. And so I think it's our subscription differentiation, our cloud differentiation, our fabric capabilities that When we win because of our cloud story and our AI ops tools and our AI ops stories, it pulls through the hardware. So as people are looking at building the network of the future and modernizing their infrastructure and they consider Our capabilities as it relates to software and what we can do with our cloud, it helps us take share and it helps us and winning that business that pulls through hardware. So I would say no, this is really about us picking up share. We can lead with our software capabilities, our cloud capabilities, AIOps and then when we win, we pull through the hardware.

Speaker 9

Great. Thank you.

Operator

Thank you. And our next question coming from the line of Mike Genovese with Rosenblatt Securities, your line is open.

Speaker 10

Thank you very much. Can we get just an update on the backlog? Last quarter, you said 5 times normal. Do we have a metric for this quarter?

Speaker 4

Mike, we said last quarter that we were not going to give we were going to move away from giving a specific backlog number Each and every quarter, I think what Ed said in his prepared remarks is that our backlog is now we feel like it will start to normalize Throughout 2024 and into Q1 of 2025, we feel good about the level of backlog we have. For instance, it's primarily, I'd say, 90 plus percent is all end customer orders at this point. And so the distribution orders that we had in the past have basically worked themselves through the system, especially with supply chain getting better. And so we feel good about those end customer orders and the timing of when those orders need to be shipped to those customers based on their own, I'll call it like upgrade cycle and whatnot, we feel like it will come down fairly evenly throughout the year and into Q1 of 2025. So feeling good about the level of backlog that we have and the timing of that coming out.

Speaker 10

Okay, that's helpful. What about an expectation, since we're 3 months later here, just an expectation for when orders might Turn positive year over year. Do you have a view there?

Speaker 4

So orders turning positive year over year. I mean, we expect that as a growing company, we expect orders to continue to grow throughout the year in 2024. So I would say, Each quarter we are expecting continued improvement in growth year over year.

Speaker 2

And I think, Mike, for pointing to the if you recall Last September quarter, we had a price an October 1 price increase that we put in place And that pulled in a huge amount of order volume literally in the last 2 weeks of the quarter to create somewhat of a lopsided quarter, a record quarter, if you will, for bookings last year in September. We do not have a price increase on the Board for this year. But we have as Kevin said, as we look out at the year, We are looking at bookings growth throughout the year.

Speaker 10

Okay, fantastic. And then last question for me. I mean, you guys have just reiterated, I think, 2024 and 2025 sort of at least mid teens Revenue growth. So, I mean, and you obviously have a ton of competitive and product momentum There. I'm kind of wondering, in 'twenty six, 'twenty seven, even 'twenty eight, do you think that the basis Competition in the industry is going to be sort of the same as it is now or is there more work To be done in the corporate development and product development areas, my question really is what do you have to do now to ensure that the momentum continues in 2026, 2027, 2028.

Speaker 2

Yes. And That really goes back to some of the investments that we're making. I mentioned that we are doing a lot of work and with some of our growth with some of our new growth vectors. Managed services, the industry is moving more towards managed services And we are building, I mentioned in my comments, very disruptive platform. And it's disruptive in the simplicity of how it operates commercially.

Speaker 2

The fact that you can have the entire network that you can have complete visibility through a cloud and that you can orchestrate services from the cloud and that you have a workspace that you can use to manage that it makes it very easy for you to deliver managed service. And it's the managed service model falls down because of The complexity of the commercial terms and then the execution and the operation of delivering all of these services in a way that can be managed. And so what we're providing will be by far the industry's most simplest platform for delivering this. And we see a massive growth opportunity here. It's early innings.

Speaker 2

We're not calling a forecast there, but That is clearly a growth vector. We're also branching out into new large more it's More of a service provider type relationship with large customers that have potential to spend significant volumes relative to our traditional partner base. And we're creating a very a private offer that will be very compelling that we believe will be an opportunity for us to take share And it provides significant value to these large players relative to the current arrangements they currently have with some of the largest players in the industry. So there is share shift. We have some big ideas about being disruptive and share shift there.

Speaker 2

The final thing I'll mention is our federal investment. We have been under invested in federal. Our investment now is really proving to be timely some of the large opportunities that we have. And so with the search that we're investing in, it will truly open up other investments. There's also the convergence of networking with cloud and security.

Speaker 2

We bring a lot of security elements. If you look at Technology that we have that's very mature. We will also be introducing access security Technologies in the future that will be announced in the future that can also be somewhat disruptive.

Speaker 10

All right. Well, you have a

Speaker 3

lot going on, so I better

Speaker 10

let you get back to work. We are, Trevor. We're

Speaker 2

busy, but our teams, We have a lot of growth opportunities.

Speaker 4

Thanks, Mike.

Operator

Thanks, Mike. Thank you. And I'm not showing any further questions in the queue at this I would now like to turn the call back over to Mr. Ed Meyercord for any closing remarks.

Speaker 2

Thanks, Olivia, and thanks everybody for your participation On the call, obviously, for the investors that joined in today and also we have our employees Dial in and we have partners and distributors who listen in as well and maybe some customers. So we appreciate that. I'd say, I reiterate, there's never been a better time to be at Extreme. Kevin mentioned it in his remarks. We're in an incredibly strong financial position And we have very interesting and unique growth opportunities that we believe will sustain this the growth levels that we mentioned.

Speaker 2

So I would encourage investors to please attend the upcoming investor conference over the next several months coming up in New York, details to follow and we hope to see you there. Thanks everybody and have a great day.

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Earnings Conference Call
Extreme Networks Q4 2023
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