Extreme Networks Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 10 speakers on the call.

Operator

Thank you

Speaker 1

for standing by, and welcome to the Extreme Networks Third Quarter Fiscal Year 20 24 Financial Results. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Stan Kovler, Vice President of Corporate Strategy and Investor Relations.

Speaker 1

Please go ahead, sir.

Speaker 2

Thank you, operator. Good morning, and welcome to the Extreme Networks' 3rd quarter 2024 earnings conference call. I'm Stan Kovler, Vice President of Corporate Development and Investor Relations. With me today are Extreme's President and CEO, Ed Meyercord and EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an 8 ks detailing Extreme Networks' financial results for the quarter.

Speaker 2

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 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 could 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 2

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 questions. And now I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Speaker 3

Thank you, Stan, and thank you all for joining us this morning. Our results were in line to slightly better than our Q3 outlook. Highlights from Q3 include net new logo bookings grew double digits globally with particular strength in the U. S. Market.

Speaker 3

Our SaaS ARR grew by 38% year over year as we continue to deliver on our value proposition of flexibility and simplicity with our 1 network, 1 cloud strategy. And we were successful in reducing channel inventory at the high end of our $40,000,000 to $50,000,000 range, bringing us closer to channel normalization. As expected, we're calling for meaningful sequential revenue growth heading into our fiscal Q4, but note that industry wide customer and channel digestion will continue to create a drag on normalized bookings and revenue. Customers and channel partners continue to work through purchases and orders and we expect demand normalization during the second half of calendar twenty twenty four. The expected sequential growth in revenue and bookings will help us return to solid profitability and cash flow generation during the Q4.

Speaker 3

Our funnel of opportunities is up from the prior quarter. We anticipate that the upcoming stage of growth will be driven by an increasing number of deals that exceed $1,000,000 as we continue to move up market. Last week, we hosted our annual Connect user conference in Fort Worth, Texas. It was oversubscribed and our biggest event yet with about 19% growth in customer attendees from a year ago. The event focused on the intersection of networking, security and AI and we made several announcements relative to those topics.

Speaker 3

We demonstrated Extreme Cloud Universal ZTNA, the first network security offering to integrate network application and device security within a single solution. By combining Cloud NAC and ZTNA into a single easy to use SaaS offering, we help customers ensure unified observability, frictionless user experiences and a consistent security policy for applications and devices. As the VPN market transitions to ZTNA, the proliferation of individual applications, each with their own policy and dashboard is adding complexity and expense for enterprise customers. A Vice President of 1 of our multibillion dollar channel partners joined us on the main stage at Connect and said, the identity focused approach with a common policy engine is a game changer. This was further evidenced by the PAC breakout sessions at Connect, where discussions on 0 Trust drew standing room only crowds.

Speaker 3

When added to our unique enterprise fabric, this allows us to present a highly differentiated security value proposition to enterprise customers. We also increased the scale of our fabric solution to extend fabric over SD WAN, broadening the reach from the data center to branch. Customers love our fabric because it's simple to deploy, highly resilient, makes it easy to segment the network, which dramatically minimizes the blast radius and exposure of cyber attacks. We expect the broadening of our security offerings to drive significant traction for our business with growth opportunities across our top verticals such as higher education, healthcare, retail, manufacturing, transportation logistics, etcetera. Our customers and partners also reacted very favorably to Extreme Labs, a dynamic ecosystem where creativity, collaboration, cutting edge technology converge to fuel innovation of early stage technologies.

Speaker 3

We provided a tech preview of AI Expert, a generative AI solution that delivers substantial optimizations and cost savings in the design, deployment and management of enterprise networking and security. Finally, we announced that we are the 1st vendor to allow WiFi 6E customers such as the San Francisco Giants, Cedar Fair and BYU to unlock outdoor 6 gigahertz spectrum to experience faster speeds, increased range of coverage and expanded capacity for outdoor connectivity. There was a lot of discussion at Connect about industry M and A and the disruption that it's causing. We feel that lots of questions about Cisco diversifying away from network and customers' fatigue with the cost, complexity and lack of flexibility that comes with doing business with them. As it relates to HPE's acquisition of Juniper, most questions focused on risk and how to protect their technology investments.

Speaker 3

Customers are worried and don't have a clear view of technology roadmaps or the potential negative impact the integration they have down the line. We feel confident Extreme's pure play focus on secure network and finding new ways to deliver better outcomes for our customers will remain a competitive advantage. We were named as a leader the Gartner AmQ for the 6th consecutive time. Once again, Cisco moved down in vision and execution and customers are taking notice. Turning to new wins.

Speaker 3

We had a strong quarter in higher education. We won Washington University in St. Louis, one of the country's top universities, which selected Extreme to modernize its networking infrastructure displacing Cisco. Extreme's fabric solutions will help the university create a simple, scalable and secure network across the campus. And with Extreme Cloud IQ, WashU will be able to manage its entire network, including 3rd party applications, 3rd party devices.

Speaker 3

In EMEA, spending remained challenging across many of our largest verticals and revenue is impacted by channel digestion. However, we continued our success in winning international sports venues such as Borussia Dortmund, which is one of the largest football clubs in Germany. They're deploying Wi Fi 6E, fabric, extreme analytics across the stadium to create next gen experiences like in seat concessions, ARVR and biometrics. In Asia Pacific, booking trends have been stable for a number of quarters and we're seeing success, particularly in the hospitality sector, where we've added multiple new logos across Asia. In the quarter, we also displaced Cisco with several major customers, including Korean Airlines, a 30 year customer.

Speaker 3

We're deploying across 250 of their sites worldwide, including their global headquarters in Seoul. Our new go to market initiatives are helping us grow and gain share as well. We grew our MSP partner base to 23 during the quarter with many more in queue. The vast majority of MSP revenue is net new logos. Our MSP footprint is expanding as partners appreciate the simplicity of 1 cloud, the flexibility of our unified hardware and our unique consumption billing model.

Speaker 3

We make it simple for these service providers to deliver seamless high quality networking experiences. As we contemplate our recovery, we're encouraged by our funnel and believe that customers demand for our solutions will continue to improve and we expect a resumption of growth to follow into fiscal 2025. 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, are you there?

Operator

Sorry about that. I was on mute. All right. So thanks, Ed. Sorry about that.

Operator

And let me get into our results. So our results were in line and slightly ahead of our outlook. As we expected entering the quarter, we worked through a significant amount of channel and customer digestion. The overall channel inventory reduction was at the high end of our $40,000,000 to $50,000,000 estimates. We believe this will position us for a return to normalized growth, which will be better aligned to customer demand trends.

Operator

We also took proactive action at the end of the quarter to right size our costs, which will enable us to generate profitability again, while continuing to support our strategic and product initiatives.

Speaker 4

Let me get into some

Operator

of the numbers. Revenue of $211,000,000 declined sequentially during the quarter, primarily due to the market dynamics impacting our industry and was slightly above our forecast. Product revenue of $106,000,000 reflected the previously mentioned channel digestion along with elongated sales cycles, which are also impacting the networking industry. These trends are relatively consistent across both switching and wireless products. The pricing discount rates on product orders was largely intact with prior quarters and our product backlog was once again at a normalized level and within our expected range.

Operator

Looking back over the last several quarters, our subscription revenue has been a great success story for us. Since the acquisition of Aerohive in 2019, we've gone from annualized revenue of $40,000,000 to $162,000,000 per year. As our business has shifted to cloud management, it's important to take both product trends and our recurring subscription and support revenue into account as this is what customers are buying from Extreme. We expect the strong growth of SaaS ARR to continue. Overall, bookings and most notably product bookings were well above our revenue in the quarter.

Operator

On a vertical basis, our education business grew double digits year over year led by Higher Ed and our K-twelve business was in line with our expectations. On a year over year basis, healthcare was up double digits and we saw sequential growth in retail, service provider and sports and entertainment, all of which grew double digits. Even in this challenging environment, Extreme is still gaining share by attracting and winning new customers. SaaS ARR and recurring revenue was once again a bright spot in the quarter, up 38% year over year, driven by the strength of our renewals and activations of previously shipped products. Subscription deferred revenue was up 29% year over year to $258,000,000 Total subscription and support revenue was $105,000,000 up 14% year over year.

Operator

This growth was largely driven by the strength of cloud subscription revenue. Based on our current outlook, we expect recurring revenue to account for approximately 35% of full year fiscal 2024 revenue. The growth of cloud subscriptions and support drove the total deferred revenue to $558,000,000 up 20% year over year. Gross margin was 57.6%, down 490 basis points from the prior quarter 150 basis points compared to a year ago quarter. Our fixed overhead costs were impacted by reduced product revenue and we incurred about an additional $7,500,000 of excess raw material costs in the quarter.

Operator

This occurred as we transitioned one of our primary original design manufacturers out of China and into Vietnam. Without this cost, we would have achieved 61.2% margins in the quarter. We currently expect gross margins to recover back above 60% in the 4th quarter. Our 3rd quarter operating expenses were $147,000,000 up 3% from the year ago quarter. During the quarter, we did take action to optimize our expense structure to the level of revenue we expect to achieve, including getting back to operating profitability in the Q4 and into fiscal year 2025.

Operator

On a run rate basis, we took out approximately $35,000,000 to $40,000,000 of annualized expenses, which will help us drive operating leverage as revenue recovers. The operating margin in the 3rd quarter was a loss of 12.2%, down from a profit margin of 14.8% last quarter and from a profit margin of 15.6% in the year ago quarter. All in, 3rd quarter non GAAP loss per share was $0.19 and in line with our outlook. This compares to earnings per share of $0.24 in the 2nd quarter and earnings per share of $0.29 in the year ago quarter. We ended the quarter with $151,000,000 of cash and net debt of $42,000,000 The $74,000,000 usage of free cash flow in the quarter was due to the lower revenue and use of working capital for purchases of raw materials and finished goods inventory based on prior year purchase commitments.

Operator

We expect a recovery in cash flow as revenue recovers in the 4th quarter and component purchases become more balanced with normalized sell through rates. Now turning to guidance. 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 the recovery in revenue and earnings will also drive a recovery in cash flow. However, we are taking a cautious tone to guidance at this time.

Operator

For the Q4, we expect guidance as follows: revenue to be in a range of $250,000,000 to $260,000,000 gross margin to be in a range of 61.6 percent to 63.6 percent operating margin to be in a range of 9% to 11.5 percent and earnings per share to be in a range of $0.11 to $0.15 That's based on fully diluted share count to be expected around 131,000,000 shares. For the full year 2024, we expect as follows: revenue to be in a range of $1,110,500,000 to $1,120,500,000,000 non GAAP gross margin to be in a range of 60.9 percent to 61.4 percent operating margin to be in a range of 9.3% to 9.9% and earnings per share to be in a range of $0.51 to $0.55 The fully diluted share count is expected to be around 131,000,000 to 132,000,000 shares. And with that, I'll now turn it over to the operator to begin the Q and A

Speaker 1

Certainly. Our first question comes from the line of Alex Henderson from Needham. Your question please.

Speaker 5

Hey guys. So I was hoping you could talk a

Speaker 1

little bit about what you think the normalized

Speaker 5

revenue base for the company is, what the company's longer term kind of sustainable growth rate is? And once you've come out of this correction, where you think you can get your margins to? You talked about 64% to 66% gross margins in the past. Is that still attainable? And can you give us just some guidelines on what a normalized base should look like?

Speaker 3

Hey, Alex. Yes, Alex, this is Ed. Let me jump in and then Kevin, I'll let you come in behind me as far as the model is concerned.

Operator

Sure.

Speaker 3

Alex, yes, we're still seeing sluggishness, macro sluggishness in Europe. And then you'll note that we had a lower volume of large deals this past quarter at 28%, which is a low for us and we're seeing elongated sales cycles in some of our larger projects. So when this is normalized and when we look at a level where we feel is achievable in this market with the resources that we have on our team, you're looking at moving up closer to 300,000,000 dollars a quarter in revenue from where we are today. So we see a lot of room for growth. The other the comment that I'll make is that market conditions we believe are going to help us over the next 12 months given what's going on with the competitive landscape.

Speaker 3

Right now, there's a lot of chatter and there's a lot of noise in the partner and the channel community, as well as with end users around concerns about technology decisions that they need to make. And if you're a partner that you want to bank your business on, As a result, we think we're going to start to see more opportunities coming to Extreme as in a way a safe haven for technology decisions that are future forward. So this was we heard this loud and clear. It will take time for new partners to establish funnel and establish business with Extreme and Ramp. And the same thing is true with partners.

Speaker 3

But we will have very specific motions to aggressively go after this against both sets of our larger competitors and think it creates a unique market opportunity. Kevin, do you want to follow-up with more specifics in terms of margins and the modeling questions?

Operator

Yes. I mean, I think you're accurate. In terms of what we're seeing as opportunities for growth coming out of the what's the new normal look like, right, coming out of the I'll call it the cycle that we're in right now and absorption, etcetera. I would think that what we the new normal should be above $300,000,000 in revenue is what we are shooting for and then obviously growth above and beyond that. The market opportunity is there for us.

Operator

We are taking share and you could see it with Korean Airlines and others that are 30 year customers at Cisco that are moving and coming over to us. As we continue to build on our software story here, Alex, I think that's going to bode well for us, especially as we add in more security, more AI. All of that, I think, is going to be and we heard that loud and clear at our Connect conference that people were excited about our vision for what the product enhancements are going to be in the future and more and more of these customers or prospects are saying they want to lean in our way. So we got to get through this cycle with the market, but in general in the future like as things come back, we think we're very well positioned for growth.

Speaker 5

So the question was asking on the gross margin, is that 64%, 66% still attainable? And when do you think you'll come out of this cycle? Do you think it's all the way through the year, calendar year? Or do you think it can happen before that? Thanks.

Operator

Yes, yes. So 64% to 66%, when you look at our guidance for Q4, right, we're at 61.6% to 63.6%. So we're really touching at the high end of our guidance at 64% range that you just talked about. So we described that as a longer kind of 3 year vision for where we're going to get the 64% to 66%. But yes, we are absolutely still envisioning that to be our target range for gross margins.

Speaker 3

Yes, Alex, as far as the timing of the recovery is concerned, I think it's going to depend a lot on the spending environment in EMEA. And then just the timing and our ability to close on the pipeline of opportunities that we already have. I would say we have visibility. We have a very healthy funnel of opportunities. The question on that funnel is the timing.

Speaker 3

And then we have, I would say, somewhat gun shy team in Europe, because we've been burned several quarters by expecting that spending cycle to come back, and we just haven't seen it come back as quickly as we thought. So net net, it's difficult for us to make that call. We suspect that we'll start to see signs of this, this quarter and into next quarter, I would say, with a lot more confidence in December, if that's helpful.

Speaker 1

Thank you. And our next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Your question please.

Speaker 6

Yes. I wanted to take a look at the operating expense expectation for Q4. I know you took actions kind of mid quarter here in Q3. I think I've got the number right, OpEx in Q3 is $147,000,000 What's the expectation for Q4?

Operator

Yes. So right now, we're expecting OpEx in Q4. I'm just looking for it here. It's 133 is what we're expecting it to be, Eric.

Speaker 6

Okay. And that I'm assuming the bulk of the kind of restructuring effort there was around the sales and marketing. Is that correct?

Operator

We look at all spend, to be honest with you, Eric. And obviously, mostly we looked at program spend 1st and foremost because we value all of our Extreme employees. You still have to make adjustments across the board, but we really I would say we looked at it from an org design perspective and optimize the company's structure that way as opposed to just going and taking out certain functions. We looked at how do we reimagine our go to market, but also R and D focus areas and across the board other areas as well. So I would say we optimize across the entire company to get there.

Speaker 6

Okay. And I think it's fair

Speaker 3

to say, Kevin, in our guide, Eric, we knew that we were going to be taking expenses out of the business. So in our guide, that was part of the original guide.

Operator

Yes, yes, understand.

Speaker 6

The net new logo growth double digits in Q3, that kind of was a pleasant surprise for me, given the overall macro environment still being challenging. What do you think was the key driver behind the new logo growth?

Speaker 3

Yes, Eric, we were encouraged because what we're seeing and I mentioned in my comments that we're moving up market and we see a return to health as we get back to this kind of, call it, $35,000,000 to $40,000,000 plus deals in a quarter. This quarter was unusually low. However, we had a handful of really nice wins in the quarter that including an 8 digit win and some large 7 digit wins that created really nice new logo wins. And that's what sort of inflated the new logo amounts in terms of the dollar volume amount of new logo business. We have a lot of that in our funnel as well, which is what we're excited about.

Speaker 3

That said, when we're calling Q4, we don't want to rely on large binary deals that could move either way. We feel like we're in a stronger competitive position with some of the logos we talked about. At Connect, we had Kroger up on stage saying that their experience with Extreme far exceeded expectations. And there's a lot of new business opportunities, obviously, with the world's largest grocer, Korean Air, major airlines, after 30 years with Cisco kind of fed up and ready for a change. They made the trip and flew all the way from Seoul to be there, big endorsement.

Speaker 3

That means a lot in those markets. WashU, prestigious university, making the move, really intrigued by fabric and our security story. And so these are just some of the examples of large wins, important logos, important reference accounts that we're winning and we won them in the quarter. We don't necessarily have the magnitude of those deals in Q4 to call, which is why when you look at the Q3 to Q4, you might be wondering, okay, why am I not seeing more growth? We want to be careful about calling the larger deals.

Speaker 3

But the fact of the matter is we are more competitive and we are winning them and success to get success in this marketplace. So that's what's giving us confidence. And with a few more of these things that should really strengthen our position, our confidence for calling a stronger 25.

Speaker 1

Thank you. Thank you. One moment for our next question. And our next question comes from the line of David Vogt from UBS. Your question please.

Speaker 7

Hey, this is Brian in for David. Thank you for taking my question. So on balance sheet inventory, that increased quarter over quarter to $185,000,000 from $153,000,000 last quarter. Can you discuss how inventory should get worked down given the somewhat soft human revenue guide relative to 90 days ago? And then I will follow-up.

Speaker 7

Thank

Operator

you. Sure, Brian. I'll take that one. So we did have a use of cash in the quarter for building of inventory. You have to realize that first of all, all of these inventory purchases that are coming in now were more than a year ago when market right now is the slowdown is obviously exacerbating, if you will, the inventory build.

Operator

There's a positive on that, which is we bought all this inventory. It's all good inventory that we have on our balance sheet. We've worked down the inventory, the distribution side of things that we talked about. And we have our inventory that we've now paid for. So that's going to be a cash generation opportunity for us in the future.

Operator

I would say over the next year, all that inventory is good inventory and should work itself into the market over time. We assess our inventory balances every quarter. As an example, you saw this quarter, we moved one of our ODMs out of China and into Vietnam. The raw inventory that we had there for the raw materials, we ended up taking that out and that's just because of the movement of the line and we were reestablishing that line in Vietnam as we moved out of China. These were materials that we were using for the China market.

Operator

And so it just didn't make sense because we weren't replacing that line. So we evaluated every quarter, but right now, yes, we had a build in the inventory, but that's going to generate cash flow.

Speaker 7

Got it. That's helpful. And then as a follow-up, can you share with us what would be a normal inventory level when product revenudemand normalizes? Is there a good rule of thumb? Can we think about it as like a percentage of quarterly product revenue?

Speaker 3

Yes.

Operator

I mean, so we were running, I would say, more like $90,000,000 of inventory in the past. So we're probably double the size that we would like to be at as a percentage of revenue $90,000,000 into roughly $900,000,000 of product revenue would give you about 10%

Speaker 6

of the

Operator

total annual product revenue is to give you a guidance range. From our perspective, that will work itself down over the next year. And as I said, I would also say in Q4, we expect inventory levels to come down. That's another thing that we're looking at right now.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of David Kang from B. Riley. Your question please.

Speaker 8

Thank you. Good morning. First question is on seasonality for fiscal Q1 2025. I know that's typically seasonally weak, but any difference at this time?

Speaker 3

Yes. David, I think given where we are in Q4 and given how we're looking to build from Q3, I don't think we're at a point where we can say that normal seasonality applies just because of the unusual nature of demand and the market environment that we're in today. So whereas normally, I think what you're hitting on is the fact that there's this dip in September and then we're up in December, dip in March and then up in June. I don't think that the traditional seasonality adjustments will apply.

Speaker 8

So you're implying that it could be up or even or at least flat maybe for September from June to September?

Speaker 3

Yes. I mean given where we are today, Kevin mentioned that well, I mentioned that we have some large deals that are somewhat binary. And I will say Kevin mentioned before talking about the guidance that we want to be more cautious and have a more cautious tone. In Q3, we hit a number. We can argue the bar wasn't that high, But we're on track for hitting a number and that's how we want to run the business and how we want to manage expectations where we're going to meet or exceed our guidance.

Speaker 3

And we've set the table in such a way that way for Q4. I think it's too early to call. I think right now, Kevin will get upset with me if I start calling Q1. But what I would say is I don't think that we're not in a point to say we've returned to normalcy and normal seasonality.

Speaker 8

Got it. And my okay. My follow-up question was on bookings. You said book to bill was way over 1. But just wondering if you can comment on how they compare like maybe sequentially or maybe year over year?

Operator

On the bookings side?

Speaker 8

Yes, product bookings.

Operator

Yes, we didn't describe how it was. I would say it's still a challenged environment for bookings, I would say. Our overall bookings product and overall bookings was similar to what we had last quarter, slightly down from where it was last quarter, but similar from that. So I would say that that's good because it gives you some level of stability in what the bookings are going to be quarter to quarter. That being said, we're really looking for us to have, as Ed said, Europe come back in other areas of strength to come back in the second half of next year for us to really start to see significant growth.

Speaker 8

And my last question is regarding Europe, I mean, which particular verticals are weak? It sounded like education was pretty good. Any particular verticals that's still weak in Europe?

Speaker 3

Yes. It's mainly the government business. We look at our category of SLED, which in Europe basically is including state and country governments and local governments and education. And we've seen a pause in spending there. And I think this is where we have a lot of business that 40% mix was a mix for the entire company.

Speaker 3

When that will come back, we are confident that it's going to come back. But I think more now than ever before, we're seeing them sweating assets and taking more time to move forward with planned network upgrades. And these are a lot of these are existing customers. And that this is where we especially in the German market that we call dock, which has been very slow for us. When that comes back and we believe it will come back, it's going to bring a lot of momentum to our sales recovery.

Operator

And Ed, I would note that we are looking at quarter over quarter Q4 versus Q3, an increase in our bookings expectations at this point given the revenue growth.

Speaker 3

Got it. Thank you.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Timothy Herron from Oppenheimer. Your question please.

Speaker 9

Thanks. Just following up on the government side. What percentage of that is do you think is in office space versus places like railroad stations and other public venues only because I've been in a bunch of government buildings lately and like no one's in the office. I mean do they really need to upgrade these Wi Fi networks anytime soon if people aren't coming in all that much?

Speaker 3

Yes, Tim, I'm not sure we're able that we're going to be able to pinpoint it. We have a lot of different government agencies, everything from in Germany, the Department of IT, for example, we have many defense ministries in different European countries. And so it's very distributed. The other the comment that I'll make is that we also have very distributed channel and our channel partners have long standing and very strong relationships with all these customers. And so it is very much of a cyclical business.

Speaker 3

And when they make the decision to refresh and then when they release the funds, they go through with it. We're not hearing anything that says, oh, that what we know is that the cycles have been delayed, but we have not heard anything to the effect of we're just not going to do it. And we think at some point that there will be a return to normalcy, particularly in the government verticals.

Speaker 9

And maybe just related to this, I mean, what is the average upgrade cycle historically? And I know you're saying it's kind of extended out like how much can they extend it out if they really want to? And I guess related to this, what impact is 6eenseven having on those basically life cycles?

Speaker 3

Yes. So I think normally in wireless, we would say wireless 3 to 5 years switching 5 to 7 years would be the normal life cycles, Tim, that we think about. Sometimes there may be an acceleration or a breakthrough. WiFi 6E was important because it adds 6 gigahertz spectrum and it's kind of a game changer in terms of what it does in extending the range of WiFi, lower latency, etcetera. So WiFi 7 will carry that as well.

Speaker 3

And then it also depends on devices that are coming into the network and being able to support the bandwidth. In some cases, you'll see customers usually customers will fall into that range. If you're getting to 5 years on Wi Fi gear, you're starting to fall behind and it becomes more and more difficult to support the edge devices that are coming into your environment. And so and especially when we think about the stadium environments, etcetera, that are early adopters and moving quickly into 6E. So I think it's fair to go with those ranges.

Speaker 3

There are rare examples of people that are they're still running switches that are 10 years old. But it's not really prudent to do that because usually those devices are end of life, end of support. And if there's a networking issue, it's hard to recover, if you have the older gear.

Speaker 9

Great. Thanks a lot. And just lastly, are you seeing any change in churn at all in your customer base?

Speaker 3

No, I think our customer base remains very solid. Most of our business is with our existing customers and we see this in terms of subscription renewals, we see it in terms of service renewals and in terms of competitive wins out in the marketplace in terms of projects. I would chalk up the current phenomenon more to delays, elongated sales cycles and spending delays more than competitive. We our story in the market today is resonating now more than ever before, particularly with the complexity, lack of flexibility and then the expense of total cost of ownership of dealing with the largest competitor. And there's frustration there.

Speaker 3

There's also that frustration in the channel. For example, in Germany, we've heard that they've discontinued some of their gold partners who are now looking for a new home, in which case Extreme is the best alternative today. And so our competitive position given the differentiation of our technology, given our vision and the integration of security with networking and then the modern networking tools that we're bringing to bear, not just with our purpose built machine learning, AI tools for the network, but also new generative AI capabilities that we just rolled out. So I think people are excited about the vision and Extreme is the only pure play networking company. So as people are contemplating upgrading to the most modern and future forward networking infrastructure, we also have the capability through our cloud to manage our competitors' equipment.

Speaker 3

We're the only people that can do that and we have a very unique value proposition with fabric. So all of these things coming together, our sellers and our partners can position Extreme in a way that's stronger today than ever before. There's disruption in the marketplace. So as the market comes back, we are very confident in our position.

Speaker 1

Thank you. Thank you. And our next question comes from the line of Christian Schwab from Craig Hallum Capital. Your question please.

Speaker 4

Great. Thanks guys. So I guess my first question regarding the excess inventory, I understand the good news of potentially generating cash as that normalizes back to your goal of $90,000,000 But given the state of the market and is there any risk that we should assume that you may be more aggressive with pricing strategies to move that inventory a little bit faster?

Operator

Hey, Christian. Yes, I'll cover that one. I mean, I would say a couple of things. One, I had said in my prepared remarks that so far we are holding price as a company, which is good through Q3. We are also hearing and seeing end market that some of our competitors with excess inventory themselves are starting to get discount more heavily.

Operator

And so we have to evaluate that on an ongoing basis as to how we are doing versus they. We're typically 10% to 15% cheaper than Cisco in the 1st place. So if they do discount more, it needed to discount a lot more in order to be at our pricing. So that tends to help us being slightly lower than what they are already. But that being said, we evaluate on a quarter to quarter basis.

Operator

The key here is going to be like how much is Wi Fi 7 adopted, 6E, we still have some Wi Fi 6 in place, but we do believe that we can move that inventory over time And that's what we evaluate on a quarter over quarter basis.

Speaker 4

How much WiFi 6 inventory do you have? Is that a material amount? Is that $20,000,000 worth or is it materially less than that?

Operator

No, I think it's that or less. It's not I would say it's not a huge amount of the 185 that we have.

Speaker 4

Okay, perfect. And then the new, I guess, to

Operator

Mr. Henderson's question,

Speaker 4

I guess the new aspirational near term revenue target is $1,200,000,000 kind of run rate, dollars 300,000,000 a quarter. Did I do that right? So $25,000,000 we're still moving through cautious spending elongated sales cycle, Cisco pricing competitiveness, blah, blah, blah, blah, blah. Channel trying to figure out which products they want to sell. So should we kind of assume fiscal year 'twenty six is our $1,200,000,000 plus gold depending on market conditions.

Speaker 4

Is that fair?

Operator

On fiscal 'twenty six, I think that's big yes, I mean, obviously, there's a lot of ifs in terms of what is going to happen from a market place perspective and when will it come back is the big question, right? The channel digestion activity in that cycle and does that end in this calendar year and then that generates a bit more positive tailwind for the entire industry coming into January of 2026 and into our fiscal year. I personally think that there were still a couple of quarters at least, if not, yes, a couple maybe a few quarters through the end of the year here in order to get back to normal. And then once we get back to normal, we should start to see us getting into the $300,000,000 range as a company at that point. Obviously, at that point, we'll start to get some normalized seasonality from Q1, Q3 being our lower quarters and Q2, Q4 being our higher quarters.

Operator

And so you'll have a slight contraction and expansion in those quarters once we get back to the new normal. But we think that's going to be a few quarters out. Great.

Speaker 4

And then my last question is, should we assume that the $135,000,000 plus or minus OpEx run rate is the appropriate run rate? I forget exactly how Edward did, but to support and drive a recovery to $300,000,000 $1,200,000,000 in revenue, is that the right OpEx number we should be assuming that when we do get there, you'll still be running that plus or minus?

Operator

Yes. I mean, so I think that what we're looking at in Q4, right, it's just a pocket in time and there are other quarters that have, for instance, the other events in them that will make that OpEx kind of ebb and flow. We will have, for instance, merit increases coming in at some point in the future and some other expenses that come into the future. But for now, I would say that's the expected run rate for the current quarter.

Speaker 4

Okay, fantastic. Thank you. Okay.

Speaker 1

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Ed Meyercord for any further remarks.

Speaker 3

Okay. Thank you and we appreciate all the questions and the time and interest in Extreme for everybody participating in the call. I also want to shout out to our we have a lot of employees joining in here, customers and partners, for all of the work and especially the engagement last week and Connect. We're going through a challenging period here. In terms of the rebound, I would say we're excited about rebounding and I would say the return to normalcy in the industry and our position and what we're going to be able to do.

Speaker 3

So thank you all. Thank you for thanks for participating and look forward to seeing you on the road.

Speaker 1

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Extreme Networks Q3 2024
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