Extreme Networks , Inc. (NASDAQ:EXTR) announced its first-quarter fiscal year 2025 earnings, surpassing expectations with a revenue of $269.2 million and earnings per share of $0.17. The company experienced a 5% sequential increase in revenue, driven by robust product sales and subscription contracts.
A significant 23% year-over-year growth in SaaS Annual Recurring Revenue (ARR) was also reported, alongside an optimistic outlook for continued growth throughout FY 2025.
Key Takeaways
- Extreme Networks' Q1 FY 2025 revenue reached $269.2 million, a 5% increase from the previous quarter.
- Earnings per share (EPS) exceeded expectations at $0.17.
- SaaS ARR grew by 23% year-over-year, attributed to new logo acquisitions and early project completions.
- Gross margin improved to 63.7%, and total deferred revenue rose by 10% year-over-year.
- Guidance for Q2 includes revenue expectations of $273 million to $283 million.
- The company anticipates a revenue range of $1,117 million to $1,137 million for the full fiscal year 2025.
- Extreme Networks is gaining market share from competitors like Cisco (NASDAQ:CSCO), Juniper, and HPE.
- Partnerships with AWS and Microsoft (NASDAQ:MSFT) are enhancing AI capabilities on the platform.
Company Outlook
- The company expects continued growth in FY 2025, with Q2 revenue projected between $273 million and $283 million.
- Gross margin is forecasted to be between 63% and 64%, with operating margins between 11.3% and 13.4%.
- For the full fiscal year 2025, revenue is anticipated to be between $1,117 million and $1,137 million.
- CEO Ed Meyercord is optimistic about a rebound in activity, especially in smaller orders and project volumes.
- CFO Kevin Rhodes expressed confidence in achieving a 10% to 12% compound annual growth rate (CAGR) in a normalized market.
Bearish Highlights
- Project delays in EMEA, particularly in Germany and the U.K., are ongoing due to macroeconomic factors and budget approvals.
- The competitive pricing environment remains challenging, although Extreme Networks maintains a healthy gross margin.
Bullish Highlights
- The U.S. market leads recovery efforts, with the company gaining market share from key competitors.
- The launch of ExtremeCloud Universal and enterprise-grade Wi-Fi 7 Access Points positions the company at the forefront of technology.
- Partnerships with major universities and NFL teams, as well as a hospital network upgrade in the Netherlands, highlight significant deal wins.
Misses
- There were no significant misses reported in the earnings call.
Q&A Highlights
- Meyercord and Rhodes addressed the financial health of the company, indicating no concerns regarding receivables.
- The company acknowledged early project closures that contributed an additional $4 million to $9 million in revenue, with a normal gross margin profile.
- Approximately 80% of revenue comes from 10 to 15 large distributors, which is considered a normal concentration of receivables.
Extreme Networks has demonstrated resilience in the face of a competitive market, achieving significant growth in both revenue and earnings per share. The company's strategic focus on cloud management, AI integration, and security features, along with key partnerships and technological advancements, are driving its success. With a positive outlook for the future, Extreme Networks remains committed to delivering innovative solutions and capturing market share in the evolving tech landscape.
InvestingPro Insights
Extreme Networks' recent earnings report showcases the company's resilience and growth potential in a competitive market. To complement this analysis, InvestingPro provides additional insights that paint a more comprehensive picture of the company's financial health and market position.
According to InvestingPro data, Extreme Networks has a market capitalization of $2.11 billion, reflecting its significant presence in the networking industry. The company's revenue for the last twelve months as of Q4 2024 stood at $1.117 billion, aligning closely with the guidance provided for fiscal year 2025.
One of the InvestingPro Tips highlights that management has been aggressively buying back shares. This strategy often signals confidence in the company's future prospects and can potentially increase shareholder value. Additionally, analysts predict that the company will be profitable this year, which is consistent with the positive outlook presented in the earnings report.
The company's stock has shown a significant return over the last week, with a 1-week price total return of 8.23%. This recent uptick aligns with the positive reception of the Q1 FY 2025 earnings results. Moreover, the 6-month price total return of 42.14% indicates strong medium-term performance, potentially reflecting investor confidence in Extreme Networks' strategic initiatives and market positioning.
It's worth noting that Extreme Networks operates with a moderate level of debt, which could provide financial flexibility for future investments in technology and market expansion. This is particularly relevant given the company's focus on AI integration and cloud management solutions mentioned in the earnings report.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and metrics that can provide deeper insights into Extreme Networks' financial health and market potential. There are 12 additional InvestingPro Tips available for Extreme Networks, offering a broader perspective on the company's investment profile.
Full transcript - Extreme Networks Inc (EXTR) Q1 2025:
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Extreme Networks’ First Quarter Fiscal Year 2025 Financial Results. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to the Vice President of Corporate Development and Investor Relations, Stan Kovler.
Stan Kovler: Thank you, Carmen. Good morning. And welcome to Extreme Networks’ first quarter fiscal year 2025 earnings conference call. 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’s financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP and 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. 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 the 10-K report for the period ended June 30, 2024, filed with the SEC. Any forward-looking statements made on this call may 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 GAAP to 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: Thank you, Stan, and thank you all for joining us this morning. Our results in the first quarter were ahead of plan and reflect what we believe are the early stages of a broad networking market recovery. We also benefited from higher new logo win rates and a few large projects that closed earlier than anticipated. This resulted in sequential growth in what is usually a down quarter. We expect the return of market demand to continue in the second quarter as our funnel of opportunities is growing. SaaS ARR grew 23% year-over-year, demonstrating the value and stickiness of our cloud offering. The differentiation of our enterprise campus solution is the primary driver of our new logo expansion. The combination of our cloud management with integrated AI and security capabilities, campus fabric, licensing simplicity and number one ranked service are significant competitive advantages for Extreme. We’re the only enterprise player that brings end-to-end solutions from the campus data center to the edge across the wide area network from one cloud. We significantly de-risk enterprise customer migration to modern networking infrastructure and offer unmatched premier services to ensure customers get the most out of their investment with Extreme. We have the most simple, resilient and secure enterprise networking solution in the industry. Our end-to-end zero touch provisioning enabled by our campus network fabric is unrivaled by any of our competitors. We eliminate the time-intensive process of configuring virtual LANs to deliver services at the edge of the network. Our network fabric also reduces the risk of cyberattacks by enabling granular micro segmentation, eliminating lateral movement within campus networks and significantly limiting the blast radius of attacks. When customers see the security benefits of our campus fabric, our win rate drastically increases. And finally, our campus fabric offers unmatched resiliency and sub-second convergence. This means zero downtime during upgrades or maintenance. The network is unbreakable because it heals itself, which means end-users never experience an interruption. None of our competitors can match this. In fact, sub-second convergence was the biggest reason we won a large Fortune 100 Manufacturing Company this quarter, which is slated to be one of the most significant deals in Extreme’s history. This week, we extended our security footprint with the availability of ExtremeCloud Universal zero trust network access, which combines our very mature network access control solution with our zero trust remote application access in a single, easy-to-use SaaS offering. We’re the only networking vendor to offer a single policy engine for cloud-based NAC and ZTNA. This helps boost IT team productivity and reduce troubleshooting time. This quarter, we reinforced our position as an early adopter of the most innovative technology coming from our chipset vendor. We continue to set new standards for innovation and high-performance connectivity and are the first and only player shipping enterprise-grade Wi-Fi 7 Access Points. Wi-Fi 7 delivers substantial benefits, including lower latency, enhanced capacity, better data throughput and reliability. It has crossed the chasm of mission-critical applications. Demand for our AP5020 is being driven from performance improvements across high-density environments and use cases like augmented reality and virtual reality, 4K and 8K streaming, real-time analytics and automation. We’ll continue to expand our Wi-Fi 7 portfolio over the coming months. Finally, our co-pilot AIOps solution is critical for large retailers, universities, manufacturers and healthcare facilities to identify network issues and detect anomalies before they impact uptime or business continuity. It provides proactive recommendations on how to remediate issues, which helps save customers time and money associated with day-to-day network management. This quarter, we have wins at both the National Institutes for Quantum (NASDAQ:QMCO) Science and Technology and the Photon Science Innovation Center in Japan. Leveraging Extreme’s Universal switches and Fabric Connect, they’ve built large-scale research facilities with a network that enables users to easily and securely access highly sensitive data and resources. We recently displaced a large competitor at Texas Tech University, where we upgraded their campus data center and edge network with Extreme’s Universal hardware, ExtremeCloud IQ and campus fabric. The university benefits from end-to-end simplified management and enhanced security, which helps them meet the growing demands for online resources, testing and classroom technology. 27 NFL teams, including new deployments with the LA Chargers, Minnesota Vikings, Green Bay Packers and Houston Texans, are leveraging Extreme’s Wi-Fi 6E, ExtremeCloud and Business Insights for venues to deliver seamless connectivity across stadiums and practice facilities. 2024 marks our 12th consecutive season as the league’s official provider of Wi-Fi solutions and Wi-Fi analytics. Finally, we displaced our largest competitor in a deal with one of the chief clinical hospitals in the Netherlands, Hofland Atrium Medisch Centrum. This hospital plans to refresh its aging infrastructure to a more modern cloud-based network and extend the network to one of the new buildings on its campus, an ideal use case for our campus fabric. In addition to our technology innovation, we’re starting to get traction and seeing positive momentum with two new commercial models we’ve been working on for the past 18 months. Extreme subscription private offer gives us the flexibility to be more aggressive in supporting service providers and large customers with scalable technology and flexible pricing models. We closed our first transaction this quarter which included a major European retailer and a Fortune 100 company. Our managed services platform is also resonating. We had 32 MSP partners at the end of the first quarter up from 27 in Q4 and consumption billings doubled sequentially. Partners love the flexibility of this unique consumption-based billing model and poolable licensing. No one else in the industry offers this level of simplicity and licensing economics. Turning to guidance, we expect continued sequential growth in Q2 based on the size and quality of our funnel. We anticipate further market share gains and revenue growth for the full year and we expect this growth to be accompanied by increased margins and cash flow. 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: Thank you, Ed. The revenue upside in the first quarter, coupled with the sequential improvement in gross margin, demonstrated the operating leverage in our model. We achieved earnings per share of $0.17, which exceeded the bid point of our initial outlook by $0.05 and exceeded the high end of our guidance range. Customer demand trends continue to improve gradually as we saw in the quarter. First quarter revenue of $269.2 million grew 5% sequentially based on continued recovery and product sales and attached subscription and support contracts. On a geographic basis, America’s revenue grew double digits sequentially this quarter with strength across North America. APAC also grew sequentially and year over year. The protracted recovery in EMEA reflects gradual recovery and government spending, which has been the case for several quarters. We continue to compete well in the region, however, and we are winning our fair share of opportunities. Product revenue of $162.3 million grew 6% sequentially. The sequential improvement reflects stronger growth in data center and campus switching, and our wireless revenue was consistent with the prior two quarters. Overall bookings trends were in line with our revenue during the quarter and product backlog was once again within our expected range. As we continue to gain share with new customers, 27 customers in total spent over $1 million on extreme solutions this quarter. Looking at our customer segments, we’re seeing a more robust recovery in the middle market where we continue to see share gains and net new customer additions. Total subscription and support revenue was $107 million, up 3% sequentially. Our recurring revenue growth has been driven by the strength of our cloud subscription revenue and sequential growth in support and services revenue. Total recurring revenue was 38% of first quarter revenue and it’s a highly visible and predictable revenue stream for our business. Our subscription deferred revenue was up 19% year-over-year to $282 million and our total deferred revenue was $577 million, up 10% year-over-year. We expect subscription and support revenue to continue to grow throughout the rest of this fiscal year. Gross margin moved up again to 63.7%, up another 20 basis points sequentially. The combination of higher product revenue to cover fixed overhead costs and more favorable product mix drove the better sequential results. We expect our gross margin to remain in a similar range or better throughout fiscal 2025. First quarter operating expenses were $138 million, up $10 million sequentially and down $15 million from the year-ago quarter. We continue to focus on driving improvement in our operating margin and higher profitability for the year. We expect operating expenses to increase to a range of $143 million to $147 million per quarter throughout the rest of the year, along with the recovery in our business. Non-GAAP operating profit for the first quarter was $33.5 million or 12.4% of revenue, and first quarter EPS was $0.17. All were above our expected ranges. We ended the quarter with $159.5 million in cash, a net debt of $28 million. The $12 million of free cash flow in the quarter reflects higher revenue and solid profitability. We expect a continued recovery in cash flow in fiscal 2025 as we grow revenue, improve profitability and sell out the inventory we have on hand. Now turning to guidance. We are encouraged by the level of improving customer and new logo activity we are seeing, which should bode well for us heading into the second quarter and the rest of the year. So the second quarter, we expect guidance as follows. Revenue to be in a range of $273 million to $283 million. Gross margin to be in a range of 63% to 64%. Operating margin to be in a range of 11.3% to 13.4%. And earnings per share to be in a range of $0.16 to $0.20. Our fully diluted share count is expected to be around 133 million shares. For the full fiscal year 2025, we now expect revenue to be in a range of $1,117 million to $1,137 million. And with that, I’ll now pass the call back over to the Operator to begin the question-and-answer session.
Operator: Thank you so much. [Operator Instructions] And it comes from the line of Mike Genovese with Rosenblatt Securities. Please proceed.
Mike Genovese: Great. Thanks. Thanks very much. Guys, can you just agreed in the U.S. versus EMEA? It sounds like the U.S. is, obviously, driving things here. But just kind of lay out how the U.S. recovery is progressing and whether the recovery in Europe has started. I just want to get the clear message on what’s going on by geography? Thank you.
Ed Meyercord: Thanks. Thanks, Mike. This is Ed, and I’ll jump in, and then Kevin and Stan, feel free to follow up. Yeah. You’re absolutely right, Mike, that the U.S. is leading the charge in terms of the recovery and we’re seeing -- we’re encouraged by what we’re seeing in Europe, but we still have some macro trends that are causing project delays. So -- and I think that’s what gives us caution, as we look out at Q2 with our guide. We’re seeing Germany that doesn’t have an official budget yet and a coalition with a very narrow majority there. We have a new government in the U.K. putting together its budget. I think they’re presenting the budget today as we speak. And so, with a lot of our business being in the public sector, what it means is that, some of our projects, which are going to happen, are being delayed. And so, that’s what we see and we’ve seen a lot of, as we look at our funnel, we’re confident in the funnel of opportunities we have, but we are seeing a EMEA slide into the second half of our fiscal year and that’s the impact. I don’t know, Kevin or Stan, if you want to add anything else.
Kevin Rhodes: I think you’re right, Ed. We’re seeing some strength in North America, which is good, obviously, as interest rates come down. That’s starting to help CapEx spending in North America and we see some improvement here on IT spending in North America, but EMEA is the one that would help us greatly in the second half and we do believe in the second half it will start to come back.
Mike Genovese: Great. That was very helpful. And then my other question, just in terms of, talk to us about share gain versus the Ciscos, the Junipers, the HPs of the world. What metrics are you looking at? What are you seeing out there? Who do you think you’re gaining share from right now? Just any comments about the competitive environment and share gain would be helpful.
Ed Meyercord: Thank you. Sure. And I think, Mike, the way to think about share gain is just the way to think about the distribution of the industry and competitive share. So, first and foremost, we are taking share from Cisco and then you’ll see -- and then we’re also, some of the wins we referenced are from Juniper and HPE, but I think the way to think about it is commensurate with shared positions with most coming from Cisco. I will say that we are anticipating with the closing of the HPE-Juniper deal. They have some tough decisions to make. They have tough news to break to the market in terms of their roadmaps, what it means for stranding investments for customers, what does it mean for partners in the new landscape and we would expect that disruption to create some opportunities for us, but we don’t expect that to truly take place until that transaction closes. The reason why we’re winning is we have, I mentioned the end-to-end cloud capability from the campus data center through aggregation, through the edge, out to the wireless edge of the network, across the wide area network on one cloud and that’s one of the differences that we bring is we have the complete visibility of the entire network in one cloud. The second thing we do is we combine that with our unique campus fabric technology. Every single player will say that they have campus fabric technology. They’ll say, oh, you can check the box, but they have very different technology than ours. Ours is SPB, theirs is IP-based. Their fabrics are not designed for campus and all the things that go on in the campus. So in one of the, I mentioned the Fortune 100 win, we were able to demonstrate sub-second convergence, which is when you make a change to the network or you add a switch, or if you take down a link, it disrupts the network. And in our case, we have unique convergence capabilities with our fabric that bring unmatched resiliency. This is something that really mattered to that customer. And quite frankly, our largest competitors could not replicate this capability, trying for two weeks on the customer’s site. So it was a big deal and very helpful to us. We talk about hyper-segmentation and the ability to create networks within a physical network with our fabric. We can do that very easily. And that means a lot to our -- that means a lot to customers and our competitors can’t replicate that capability. We talk about zero touch provisioning. One of the healthcare clients I mentioned is adding a site. When you turn up a new site and you start turning up switches and turning up access points, and they automatically connect to the fabric and they automatic request services, it means your teams don’t have to build services out to every port on every switch that you’re building in the new environment. These are massive savings in time and energy, security, resiliency. And quite frankly, we’re the only player that has this campus fabric that brings all these advantages. And so the combination of fabric and cloud is what’s allowing us to win out in the marketplace today and that distribution is consistent, as I mentioned before, with competitive share and it could change when we see the closing of HP-Juniper.
Mike Genovese: Fantastic. Thanks so much.
Operator: Thank you. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed.
Eric Martinuzzi: Yeah. Your comment -- I took note of your comment regarding robust demand or a better recovery in middle market. And just wondering if that is kind of a near-term event and does the full year outlook anticipate a recovery in more of the enterprise or the larger customer segment?
Ed Meyercord: Thanks, Eric. Thanks for the question. And the answer is yes. Yeah. We are anticipating a return of more larger projects. And our intelligence around that answer is all based on opportunities we have in the funnel and the other competence of the team as we’re scrubbing the timing of projects.
Eric Martinuzzi: Okay. And then you also talked about still being seeing challenges in the European market, particularly on the public sector, Germany and U.K., you mentioned. Just curious to know, like what is the, I guess, the lag time from having a budget to that trickling down to actually impacting procurement processes that would balance out with the guide that you have?
Ed Meyercord: Yeah. Eric, and it’s not the same across the Board. Not all government agencies are created equal. And in some cases, I would say, in all cases, networks, they have to modernize their networking technology and they have to bring modern tech -- networking technology along with modern security capabilities and new modern tools like AI tools. They have to make the investments. It’s just a question of timing. And so, in the case of Germany, they have a temporary budget. By the end of November, they’re expected to have completed their budget, which should release funds. We’ll see how that happens and how that plays out. The Labor Government in the U.K. is coming out with their budget. Their plan, their agenda is to spend and that means spending on infrastructure. Their new fiscal year starts on March 1st, but we would expect the purse strings to be released prior to that.
Eric Martinuzzi: Got it. Thanks for taking my question.
Operator: Thank you so much. Our next question comes from the line of Dave Kang with B. Riley. Please proceed.
Dave Kang: Yeah. Good morning.
Ed Meyercord: Hi, Dave.
Dave Kang: First question is regarding AI. Some of your competitors have been touting their AI capability. Just wanted to get an update on your strategy -- AI strategy?
Ed Meyercord: Yeah. Dave, thanks. I think that the AI that, what we would call first generation AI, some people would call it precision AI around our ability to harness machine learning to provide intelligent insights to customers in a networking environment. And we are out with our co-pilot product. I mentioned in some of my remarks, some of the capabilities looking at anomalous networking traffic, unusual behavior in the network, predicting network failures, suggesting fixes or remedies or remediations to networking issues. These are the kinds of things that are falling into the category of AIOps and we have our AIOps capabilities. There’s another one of our larger competitors that is really done well, taking share, leveraging and marketing AIOps, which we would call first-generation AIOps. And then I would say, stay tuned. We’re going to be making some announcements in the future about, we’ve talked about platforms and we’ve talked about generative AI, AI experts and the idea of building AI into a platform that effectively you interact with at every step of your networking journey, including all the different types of personas that interface with the network. At Extreme, we’re using AI internally. We have a lot of different applications in terms of sales assistance and accessing information. We’re using it in marketing. We’re using it in service. We’ve seen a lot of efficiency in service. That’s more internal. What you’re going to see and stay tuned and what you’ll hear about is how we’re bringing generative AI and kind of this next-generation AI into our platform that will create a very different experience for users. I think I’m going to hold right here because I don’t want to front run any future announcements, but suffice it to say that, our AI partners are AWS and Microsoft. We have been doing a lot of work with them and we have a very innovative solution to provide very accurate information, knowledge around Extreme, information about your network and enhanced capabilities as far as visibility, reporting, et cetera. So, fundamentally, we think it’s going to change the networking experience.
Dave Kang: Got it. And my follow-up is regarding you have some, you have a table regarding major verticals. Just wanted to get an update on your major vertical, the health of your major verticals, starting with government education?
Kevin Rhodes: Yeah. Let me, Ed, I’ll comment. They’re very similar. There’s no major shift. And what we’ve seen this quarter versus last quarter. So we just decided David at this point, it’s basically the same percentages that we’ve shown over the last several quarters and so that will probably updated more annually at this point as opposed to quarterly, but it’s very.
Dave Kang: Got it. Thank you.
Ed Meyercord: Sure.
Operator: Thank you. One moment for our next question, please. And it’s from the line of Timothy Horan with Oppenheimer. Please proceed.
Timothy Horan: Thanks guys. Do you have a sense of when the industry gets kind of a normal run rate or what is the correct kind of upgrade rate for the industry? Do you think budgets are still being spent on AI or are they freeing back up to upgrade networks at this point? And I guess, kind of related to the, if I’m an enterprise, why am I going to upgrade now, why don’t I maybe wait a year or two for the AI platforms to be much more robust or 60 or 70 [ph] to be much more mature, I guess. So, what’s the pitch up right now versus waiting a year or two from now? Thanks.
Ed Meyercord: Thanks, Tim. Yeah. I mean, right now what we’re seeing in the marketplace is this convergence of networking and security and the presence of both kind of the Gen-1 AI tools for AIOps and managing the network and then new capabilities from AI that are coming out. Yeah, underlying security and networking is a baseline for security. There’s security has so many different elements to it and whether or not you’re trying to solve for remote workers or you’re trying to solve for campus. Either way, you have to -- you’ve got to solve for security. So whether or not that’s a single vendor or multi-vendor, there’s not a single vendor that really provides the best-in-class solutions across the entire security landscape. And so we’re picking our spots with how we partner with kind of the full security stack, if you will. And but -- the -- what the I don’t think customers really have a choice today to just decide to wait. So, we’re -- other than budgetary constraints, we’re seeing people moving forward. Is it relates to sort of is it relates to future AI and what you’re hearing about platforms? All of the existing networks and all of the existing customer environments will just become part of the platform and will flow into and be beneficiaries of the platform. So there’s not really a networking decision or investment decision in our minds from a networking perspective. It has to be made from a timing perspective, because all of your investments today will flow naturally into the new platform that we’re talking about.
Timothy Horan: Because your platform is backward compatible and it will work with other network.
Ed Meyercord: Exactly. Exactly.
Timothy Horan: Does anyone else out there have that capability?
Ed Meyercord: No. Not in networking. No.
Timothy Horan: And so when do you think -- what is the correct run rate for the industry? Like, are we below trend or above trend?
Ed Meyercord: I think what people are saying and look, I mean, you have to listen to the larger players as well. We -- coming into our fiscal 2025, we were expecting the rebound. We see a lot of encouragement from what we call run rate business, which is just that, our channel contract of doing business, placing orders through distribution. These are smaller orders, but we’ve seen those volumes start to take up, which is kind of an indication for us of overall activity. I mentioned the projects that we’ve seen. We were encouraged by a lot of projects that we saw that the second quarter for this year. We have seen some of these projects flip out into next year. So our view on this is that, the first half of 2025 is when we’ll see a more healthy recovery and we’re expecting to see kind of budgets returning to some of these governments. This is consistent with what larger competitors are saying in the market.
Timothy Horan: Thank you.
Operator: Thank you. [Operator Instructions] Our next question is from Christian Schwab with Craig-Hallum. Please proceed.
Christian Schwab: Hey. Congrats, Ed and Kevin on good quarterly performance. As we look at it your competitive product positioning, gaining share, middle market recovery, positive run rate, budget resolution in EMEA. It seems to me that as we get into fiscal year 2026, someone on the lines of your comment to the last question, we should be operating at kind of the 10% to 12% topline CAGR that you think this business in a normalized market should be running at. Is that fair?
Ed Meyercord: Kevin, I’m going to let you jump in and take that one.
Kevin Rhodes: Yeah. I mean, Christian, I think we will, I would say that, obviously, coming out of the challenges of 2024, right, we’re starting to get back to, we’re not quite there with, like, EMEA with the full on -- full scale IT spending coming back yet with these budgets in the wake and whatnot. But we do believe that when things come back and then they -- and when people are spending normally, we do believe that, our opportunity here is to hit double digits again from a growth perspective. That’s still our long-term view. We would think that the product -- growth rate would probably be in the high single digits, but then we would drive more subscription and support revenue at a higher percentage of growth, probably in the low-teens that would blend you out to a mid a double-digit number, a low double-digit number and that’s what we’re thinking.
Christian Schwab: Great. And then on the follow-up to that question, should the world and the economy hang in here on a sustainable basis from here? I guess it’s just math, but at a 10% topline growth then in fiscal year 2027, it doesn’t seem heroic to us for you to achieve your long-term target of approaching 20% operating margins. Is that fair?
Kevin Rhodes: That’s right, Christian. I mean, I think that, we will continue to see leverage in our model. I mean, we saw a little bit of that leverage here just in the first quarter, as I identified, just the overage on the revenue fell to the bottomline. We think we will continue to see that operating leverage tick up over time and that we could get to an operating margin around 20%. We do believe that by the way, even by the fourth quarter of this year, we’re going to get up and improve sequentially throughout the year. And in our fourth quarter, we’re not going to quite be at 20%, but we’re certainly going to continue to drive higher gross operating margins throughout the rest of the year.
Christian Schwab: Great. And then lastly, I’ll just comment that it was hard not to see your logo inside the dugouts at the World Series yesterday. Congrats on that as well. That’s it.
Kevin Rhodes: Thank you.
Ed Meyercord: Thanks, Christian.
Operator: Thank you. One moment for our next question. And it’s from the line of Ryan Koontz with Needham & Company. Please proceed.
Ryan Koontz: Good morning, gentlemen. Thanks for the questions. I was hoping you could update us on some of the progress from your go-to-market motion changes you’ve made over the past few quarters and what impacts you’re seeing on bookings and pipeline from any changes you’ve made in your sales efforts? Thanks.
Ed Meyercord: Thanks, Ryan. And yeah, we have made changes from a year ago. We have Norman Rice is our Chief Commercial Officer with sales and the sales organization reporting up to him and channel and we have made a lot of changes there. Importantly, we’ve recruited a new Chief Marketing Officer and we’ve made a lot of changes on -- within that organization and I’d say we have much better alignment. We’ve gotten a lot more detailed in terms of very specific selling motions, about our differentiation as it relates to end-to-end cloud and fabric, how we bring that to bear in the marketplace. We have some upcoming disruptions in the market as it relates to number two and number three of our competitors that are going to create some opportunities that we’re going to be going after. And I’d say we’re going to be very organized and we’re doing it in what we’re calling marketing pods, where we have very specific marketing motions and sales playbooks, if you will, in different parts of the world. And now, this year, what’s different from last year is that our teams have very specific targets for not just this quarter and not just next quarter, but they’re targeting funnel creation in future quarters, looking out further than we have before. And we feel confident with our plays and with our differentiation that we’re going to be able to build that funnel. The other element to that is how we convert. And I mentioned in my remarks that we’re seeing higher conversion rates and that’s also giving us confidence. So, in general, I think the changes are leading to our ability to generate higher quality -- higher volume and higher quality funnel. It’s a combination of our technology differentiation, as well as our go-to-market motions and some of the channel incentives that we’re putting in place and we’re seeing higher conversion rates and I think that has a lot to do with the changes that we’ve made in the sales organization.
Ryan Koontz: That’s really great. Thank you for that. And just a quick follow-up, I hear your competitive differentiation and your gross margins obviously on a strong trajectory here, but how would you characterize the overall pricing environment right now versus your top tier competitors?
Ed Meyercord: Well, we have been -- obviously when you look at our gross margin, we’ve been hanging in there. We’ve been holding the line, but our discounting this quarter was actually better. What we hear from our distributors is that our inventory in the channel is maybe in better shape than some of our larger competitors, which says that there’s more inventory to move. It’s always been the case in our industry that we’ve seen certain situations or certain markets where it looks like larger competitors are doing something uneconomic. I think that’s just kind of the nature of the beast. But, yeah, there is -- I think, I would expect that Extreme is maybe a little further out of the woods as far as that inventory issue than maybe some of our competitors based on feedback from distribution. As you look at…
Ryan Koontz: And on the largers there, you said they can behave irrationally. You’ve seen a lot of that with this inventory there?
Ed Meyercord: I think it’s -- I mean, I think that’s a normal part of the industry…
Ryan Koontz: Yeah.
Ed Meyercord: … depending on the geo, depending on the timing, depending on strategies.
Ryan Koontz: Yeah.
Ed Meyercord: If we have some really large wins in certain markets, maybe inventory builds up, maybe there’s a lot of pressure and maybe they decide they might want to make a statement. But given that Extreme is a 5% market share, 6% market share player, we tend to fly below the radar and we don’t quite get as much attention as the larger players do going back and forth with each other.
Ryan Koontz: Got it. No problem. Thanks for the questions.
Operator: Thank you. One moment for our last question, please. And it comes from the line of David Vogt with UBS. Please proceed.
Brian Hull: Thanks for the question. This is Brian on for David. So first, can you provide detail on the project that closed earlier? Can you quantify the revenue and gross margin impact of those projects that closed earlier than expected? Then I’ll have a follow-up. Thanks.
Kevin Rhodes: Yeah.
Ed Meyercord: You want to take that? Yeah.
Kevin Rhodes: Yeah. I wouldn’t -- I would, first of all, I’d say, gross margin profile of anything that closed a little earlier than we expected, I would say it was very, very normal for us. I wouldn’t say those projects tipped us up sequentially quarter-over-quarter and that’s the reason why we went up. That would be a false narrative if that were to be the case. I would say we just had a couple of deals in our pipeline that we had anticipated closing in Q2 that in fact actually closed in Q1. That’s where we got a little bit extra revenue, but the margin profile was very similar to normal. In terms of size, we had 269, obviously, and we were at the midpoint of our range at 260, and so the high point of our range was 265. So call it $4 million to $9 million, a little bit more than we expected.
Brian Hull: Got it. That’s helpful. And then for my follow-up, I’m curious about the balance sheet. So at the end of last year, receivables outstanding was highly concentrated at one customer. Where would you say the balance is today and what is the outlook for receivables to come down in the coming quarters? Thanks.
Kevin Rhodes: Sure. Yeah. I’d say from a balance sheet perspective, first of all, we’ve got good DSO. I think our DSO typically ranges in the 35 days to 40 days range. So we are not concerned at all about what we have from a receivables perspective outstanding right now. We did have a little concentration last year for one of our larger distribution partners just a reminder about 80% of our revenue probably comes from about 10 to 15 large distributors. So that’s not abnormal for us. Our quarter-over-quarter we had $90 million of receivable last quarter, we had $97 million of receivables this quarter. I wouldn’t call it anything different from normal. I think it’s certainly reasonable and we will collect all of that cash on the receivable side probably within the next 90 days. So we feel pretty good.
Operator: Thank you. And as I see no further questions in the queue, I will turn the call back to Ed Meyercord for his closing comments.
Ed Meyercord: Thank you, Carmen, and thanks everybody for participating on the call. We appreciate your interest in Extreme. We put up a strong quarter and as always, we want to thank our employees for their hard work and customers, and the channel for their partnership, and we’re really excited about what’s to come here in the future this quarter and into 2025. And we have some exciting news that I mentioned earlier to stay tuned for on the product front and stay tuned for that. Thanks everybody and have a good -- have a great day.
Operator: And thank you all for participating in today’s conference. You may now disconnect.
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