Extreme Networks Q1 FY27 Financial Results - EXTREME NETWORKS INC

Hello, everyone. Thank you for joining us and welcome to Xtreme Network's first quarter 2027 fiscal year financial results conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Stan Kovler, Senior Vice President, Finance and Corporate Development. Please go ahead. Thank you, Jade. Good morning and welcome to Extreme Network's first quarter fiscal year 2027 earnings conference call. I'm State Codler, Vice President of Finance and Corporate Development. With me today are Extreme Networks President and CEO Ed Myercord and Executive Vice President and CFO Kevin Rhodes. We just distributed a press release and filed an 8k detailing Extreme Network financial results for the first quarter, a copy of the press release which includes our gap to non-gap reconciliations and our earnings presentation is available in the IR section at extremenetworks.com. Today's call and Q&A may include certain forward-looking statements based on current expectations about extremes, future financial and operational results, growth expectations, new product introductions, supply chain dynamics, and management strategies. All financial disclosures made on this call will be on a non-gaap basis unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements, as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in our 10-K and 10-Q filings. Any forward- looking statements made on this call reflect our analysis as of today, and we have no plans 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 Xtreme's President and CEO, Ed Myercord. Thank you, Stan, and thank you all for joining us this morning. Revenue grew 10% year-over-year, marking XtreME's seventh consecutive quarter of double-digit revenue and product revenue growth. Non-GAAP EPS increased 50% year over year as we continue to translate strong top-line performance into even faster earnings growth. SAS ARR accelerated to 22% year-over-year growth and reached approximately $265 million. Based on the combination of our performance, visibility into customer demand, strong funnel growth, continued share gains, and accelerating adoption of Xtreme Platform 1, we're raising our expectations to 10% growth for both the second quarter and full year of fiscal 2027. We expect our SaaS ARR growth to exceed 20% for the rest of the year as well. We continue to outgrow the market, expand within larger enterprises, win competitive opportunities, and strengthen our position as customers increasingly standardize on our AI-powered integrated networking platform. Customer demand remains strong. Our open funnel grew at a double-digit rate with strength in all regions. Our regional pod strategy with a strong focus on specific verticals is helping us win more of the opportunities we pursue. Our discipline execution and supply chain strategy give us ample product availability to convert that demand into revenue. There are three key pillars driving our growth. First, we're moving up market. We booked 44 customers at over a million dollars this quarter, up from 36 a year ago, largely due to our technology differentiation. Our campus fabric takes complexity out of the network with zero-touch provisioning, sub-second recovery, and built-in segmentation that helps prevent lateral attacks. Our Wi-Fi is built to perform in complex, high-density environments, keeping users connected, and applications running reliably. That differentiation, along with our simplicity and lower total cost of ownership, is helping open new doors and win bigger deals. Second, Platform 1 adoption is accelerating as a result of continued innovation and now accounts for over half of our subscription bookings. Customers want a single AI-powered platform that integrates security and networking to help reduce complexity, simplify operations, and manage their wired and wireless environments in one place. Third, market conditions are working in our favor. Competitor refresh cycles, Wi-Fi upgrades, and the disruption from the HPE and Juniper integration are creating a multi-year opportunity. Supply is also a differentiator. Our components are secured through calendar 27, while our competitors are quoting extended lead times. These advantages matter most when customers are making large, high-stakes decisions, and our recent wins show it. One of the largest integrated healthcare networks in the United States chose Xtreme for a campus transformation spanning 21 hospitals and roughly 600 care locations. Where network availability directly affects patient care, Campus Fabric delivered the automation, resiliency, and segmentation the customer needed. Within the first month, support tickets dropped over 90%. When customers evaluate Fabric through a proof of concept, the differences become clear and our win rate is excellent. Wi-Fi refreshes is another important driver of our success. success. Hard Rock Stadium in Miami selected Xtreme to replace its aging Wi-Fi 5 environment with Wi-FI 7, supported by a full switching upgrade. In addition to Dolphins games, the network will support events like the Formula One Miami Grand Prix and the Miami Open, providing the capacity and lower latency required to support tens of thousands of fans simultaneously streaming, sharing content, making mobile transactions, and using digital services. This deployment demonstrates how these Wi-Fi refresh wins create an opportunity to then sell our entire infrastructure portfolio. Platform one is a key growth engine that strengthens our recurring revenue. Customers value the simplicity of managing their wired and wireless on a single ai powered platform we have a number of platform one customers across verticals including cambridge shire and peterborough nhs trust foundation in the uk where platform one will manage the extreme wired and wireless network delivering enterprise security and operational resilience across the healthcare organization's clinical sites regio it the largest municipal i.t service provider in north rhine westphalia germany will leverage platform one to manage its extreme wi-fi 7 networks across hundreds of sites helping municipalities schools and utilities deliver digital services with less i.t overhead one of austria's largest banks chose extreme over a long time competitor to refresh its wired and wireless networks across more than 70 branches all managed through Platform One. With its cloud-first strategy, Platform One will give the bank's network team centralized cloud-based management at scale. Last week, we held our second annual AI Summit in Amsterdam, bringing together senior IT leaders to discuss industry trends and share our longer-term vision. We showcased early Agent One momentum and preview the industry's first on-prem enterprise AI infrastructure for networking. Extremes AI understands each customer's network topology, history, and operating context, turning that insight into practical recommendations and measurable productivity. Agent One coworker, our next generation AI agent, reached all Platform One customers in early September, and drove a 10x adoption rate over the first generation. Its signature feature is nudge. Unlike conversational AI, which waits for someone to ask the right question, the nudge feature proactively surfaces timely contextual recommendations inside the workflow, and 98% of critical nudges got a response. 58% of cases opened through Agent 1 co-worker arrived with everything our engineers need to begin troubleshooting so work starts sooner. At Hill College in Texas, the CIO said his team solved a wireless outage in minutes with Agent 1, a task that would have taken a full morning. It also helped the team respond to advice on the guest network running crypto mining software by tracing the device through the access points, narrowed its location, and resolved a security issue that could easily have gone unnoticed, all within minutes. In calendar 27, we will make Agent 1 operator mode available to customers. It will execute tasks independently within defined governance boundaries, respond to events in real time and run scheduled workflows, learning from each outcome to become more effective over time, creating autonomous AI. We also previewed extreme exchange zones expected in the first half of calendar 27. Exchange zones bring enterprise AI on-premise, letting customers run the same applications locally or in the cloud with full control over data residency. This will allow customers to comply with data sovereignty requirements, which have become increasingly important in international markets. Exchange zones will also pool spare compute across their extreme access points and switches. None of our direct competitors offer this. Our MSP program is also gaining traction, closing the quarter with 85 active MSPs up from 74 last quarter. Consumption billings grew 21% quarter over quarter and 131% year over year. Platform 1 is already contributing to that growth. Our funnel remains strong. We're expanding with larger customers. Industry disruption continues to create share gain opportunities. We have the supply availability to meet customer demand. And the differentiation of Platform 1 and Agent 1 are strengthening our recurring revenue growth and strategic relevance with customers. Now let me turn the call over to Kevin to discuss our financial results and guidance. Thanks, Ed. I'm pleased to report strong first quarter financial results. Starting with revenue, total revenue of $341 million exceeded consensus and the high end of our guidance range, representing 10% year-over-year growth. Product revenue of$218 million grew 12% year over year, indicating strength of customer demand above our typical seasonality. We are continuing to see growth in both wireless revenue, especially with Wi-Fi 7-based products, and in wired switching as well. This marked our seventh consecutive quarter of double-digit year-over-year growth in product revenue, demonstrating strong demand and our continued strong go-to-market execution. The industry pricing environment continues to be fluid, and we expect this dynamic to continue based on a combination of product cycles, mix, and demand as we pass through component cost increases. Recurring revenue of $119 million grew 7% year-over-year, aided by SaaS ARR growth of 22%. As we've previously stated, fiscal year 27 is the transition year where legacy support contracts are subsumed into platform one contracts the fastest. We expect a sharp reacceleration in recurring revenue growth in fiscal 28 coming off our balance sheet as SaaS deferred revenue ramps this year. Through the transition, we expect continued improvement in free cash flow and margins. Turning to the first quarter margins, gross margin of 62.6% was up 130 basis points year over year and above the midpoint of our guidance. We're pleased that we were able to preserve our price advantage over our competitors while passing on component cost increases. We've also solved for memory needs by executing on our supply chain strategy, providing us with ample supply to meet demand and good visibility into gross margins. Earnings per share of 33 cents accelerated to 50% year-over-year growth and above the high end of our guidance range. Geographically, we had strong revenue growth in the Americas and EMEA. In Asia-Pac, while revenue fell due to elevated prior year comparisons, we continue to win large deals in the region and our funnel remains strong there. We continue to expect growth across all regions in fiscal 27. Operating margin expanded to 17.4% in the quarter, up 410 basis points from the prior year quarter, and 170 basis points sequentially, and well above the high end of our guidance range. We also generated $66 million of adjusted EBITDA, up 47% year-over-year, and our adjusted EBITda margin of 19.2% was up 480 basis points year-ever-year as well. If you look back two years ago, we have nearly doubled our profitability as a company. We continue to achieve operating leverage through healthy growth as well as prudent cost management thus outperforming in the first quarter and the second quarter while we plan for seasonally higher expenses due to sales and marketing expense such as our annual sales kickoff ai summit and advisory council events just to name a few we continue to expect our profitability to maintain its current course over the long term we continue to drive operating leverage as we scale in terms of cash flow we generated 39 million dollars of free cash flow and ended the quarter with 245 million dollars of cash our highest cash balance since fiscal 21 and a healthy 45 million dollars in net cash this was during a quarter in which we repurchased 25 million dollars worth of shares and made strategic memory purchases of which we now have 36 million dollars of memory on our balance sheet we are effectively generating cash and using it strategically while returning cash to shareholders and maintaining a healthy balance sheet on a vertical basis we experience broad based strength with particular standout bookings growth in education manufacturing healthcare and sports and entertainment we mentioned a few of these wins and these customers earlier looking at the second quarter and the rest of the year we're increasingly confident in our ability to achieve double-digit revenue growth in the second quarter of fiscal 27 we expect revenue to be in a range of 345.8 million dollars to 350.8 million dollars, gross margin to be in a range of 62.2% to 62.7%, operating margin to be in the range of 16.4% to 17.4%, and earnings per share to be in a range of 32 cents to 34 cents per share. For the fiscal year 27, we are increasing our guidance as follows. We expect revenue to be in a range of $1,402,000,000 to $1.412,000 up 10% year over year at the midpoint. Gross margin we're expecting to be in a range of 62.3% to 62.8%. Operating margin to be in a range of 17.2% to 17.6%. And earnings per share to be in a range of $1.35 to $1,39 per share. We expect our fiscal 27 non-GAAP tax rate to be 21.8 percent for the year. And with that, let's now turn the call over to the operator to begin the question and answer session. Thank you. We will now begin the question and answer sessions. Please limit yourself to one question. If you would like to ask a question please press star 1 to raise your hand to withdraw your question press star 1 again we ask that you pick up your handset when asking a question to allow for optimum sound quality and if you are muted locally please remember to unmute your device please stand by while we compile the q a roster your first question comes from the line of ryan kunz from Niedermann Co. Please go ahead. Great, good morning and nice results and Guy, nice to hear the business is humming here. With regards to gross margin and supply and memory specifically, any particular things you'd point out with regards to availability in terms of your strategy, how it's playing out and how we should expect you know gross margins to defer going forward it's nice you guys have supply but you know i think we've all been investors been worried about costs here so maybe you can shed some more more light on that nice job though yeah thanks ryan and and and um yeah our teams got on this early and what we've tried to do is flip you know what is a negative in terms of constrained supply into a positive because we have plenty of memory. You know, you will see the cost pressure in our gross margin number because you'll see the higher cost of memory embedded in what we just announced. But the bottom line is that we've got, you know, full supply, you know, out well into fiscal 28. And, you know, for us, what we see is an opportunity to provide shorter lead times than what's out there for the industry. So, you know, we continue to remain in a strong position on that. And the higher cost of memory is built into the gross margin that we just reported and our guide. Got it. And the pricing environment allows you to essentially raise price to offset that? That's right. We've been a little more conservative than our larger competitors in raising price. We hear this from distributors, partners and customers that the bigger players have been raising price more aggressively. So I would say we still have room there, but we've been able to deliver the margins with what we've done so far. That's really great. Thank you. I'll get back in the queue. Appreciate it. Thanks, Ryan. Your next question comes from the line of Mike Genovese from Rosenblatt Securities. Please go ahead. great thanks um so platform one bookings are over 50 of subscriptions um up five times from last year um can you just what are you saying now uh you might have said on the call but if you repeat it about um where you're going to be at the end of of fiscal 27 um and how much is new logos versus conversion of existing customers yeah and let me cover the first part and kevin i'll let you jump been on the new logo number, if we're sharing that. But Mike, by the end of this year, we expect half of our customers to be on the platform, which it's the fastest move and migration that we've ever seen. But at the endof this past year,we had 10% of our customers on theplatform and we would expect that number to grow to over 50% of our customers on platform one at the end of this fiscal year. And then that number growing to approximately 80% the following year. So the adoption has been very high. Our teams commercially have done a great job positioning and selling platform one. I think you can see demand for the most modern industry tools and also the differentiation that we bring. It does, from a new logo perspective, the market is interested in how to leverage AI and how to leverage modern networking tools, the most modern networking tool, as they consider investments into the future. So it's giving Xtreme more at-bats and more opportunities. Kevin, I don't know if we're sharing exact percentages in terms of new logo, but I would expect new logo adoption to be closer to 100%. I would agree. That's what I was going to say. It's like, you know, when we're going to market right now, Mike, we're going to mark it with platform one, and that is all new logo activity. That is where we're kind of center staging, focusing that technology for that new logo. And then, of course, you've got the movement of the migration of all the customers into platform one as well. And that happens more episodically as they come up for renewal. But we are seeing you know tremendous success and existing customers moving over into platform and it's not a big lift for them to move from x iq into platform one we saw even one customer hospital system do it in in 40 some odd minutes so uh it it is it you get the benefit of the ai and you get the benefit all the new technology that we're building there uh and so people were eager to go and move um so we we don't have percentages there that we're sharing uh but i would say it's it's really strong across the board great great and then just for my follow-up um on the just the monetization of agent one co-worker and then also exchange zones you know is this um is this monetized through the subscription through you know utilization does it pull through hardware like how do we think about monetizing these things sure i and yeah and and they're different so we came out with co-worker in september which was our second generation um yeah ai ai platform if you will and and that's where we made the move from you know what we would call conversational based ai which is where the industry is simply put you know you you have to prompt ai in order to get an answer so it's it's sort of it's almost chat botish where people are are having to converse if they want to use ai in this case co-worker is conversational it's included in the subscription so all of our customers have it and that's what we're excited about and we mentioned you know 10x the usage because it's always on it's context aware of your network it's always on it's ambient it's it's proactive and it's watching what you're doing and and if it feels that it can support you or if it if it can highlight let's say a network issue or or a solution or suggest a workflow etc it's going to do that and so that's that nudge we're talking about so now that's built into the platform and what we're seeing is is the customer adoption engagement with our platform, which we're already on our second, is far greater than what we have with what was our old AI expert. When we move into operator mode, which does contain the governance element of our agents, so that element of operator is already out there, but we're introducing new features and new capabilities, like what we said in terms of localization of data as it relates to data sovereignty. Some people wanting to keep workloads in the enterprise on campus without going out to the cloud. Survivability, from a security standpoint, if you don't want to get disconnected from the cloud and you want to hold the workloads local, that's what's coming out in operator mode. And the big change for Xtreme from a revenue perspective will be in token economics for Xtreme. We're calling tokens agent actions. And these agent actions will bring in a new stream of revenue for Xtrme. And this is where we're talking about unlocking data and the network for other use cases outside of traditional network management. So the idea that we can work with stadium customers and enhancing the fan experience or the patient experience or supporting caregivers in a healthcare environment or retail outcomes from a supply chain standpoint or from a consumer standpoint, the list goes on and on. And there's a lot of different ways when you think about the network being literally in the middle of everything, the network beings strategic and all the data in the network, this is where we're excited in the second half of calendar 27. I'm sorry, in the first half of calendar, 27, the second of our fiscal to bring operator mode to bear for customers. And we're already working with what we're calling our Foundry customers on applications and ways to leverage data from the network in this new platform. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Please go ahead. Yeah, Ed, you commented on your three key pillars to the growth story. I wanted to focus in on the upmarket move. I think when you exited FY26, you guys were talking about the million-dollar-plus opportunities in the funnel up by mid-teens, kind of year over year. Where does that stand today? Obviously, you had good success in Q1, but where are we with the nine months to go in fiscal year eric it's it's actually up a bit uh so i think you you would see that you know that that number uh would be uh you know over 20 percent um depending on the period that you're looking at because our funnel obviously we slice and we're looking at it you know by quarter for the next you know for the for the rest of the fiscal year so we we see these opportunities continuing to grow and that percentage in the funnel growing beyond the mid-teens number that we discussed. Terrific. And then I'm always curious about competitive displacements, but the Austrian bank win back that you described, first of all, sort of why did they leave? And And second of all, why did they come back? Again, well, one of the, I mean, in that case, this was a win against one of the largest players in the industry, I should mention. So it was less about them leaving. It was more about them coming to extreme. We talk about Cisco fatigue in the marketplace. And that ebbs and flows. Because when we look at our solution set, we're bringing simplicity and we're bringing a focus on end-to-end networking solutions all in one platform with a highly differentiated fabric technology for campus and a very competitive wireless solution. So I think when all this gets packaged up, we wind up being, I think, more compelling from a technology perspective and I think from a commercial perspective, a lot more attractive as people evaluate total cost of ownership. We have some large wins. we've had in virtually all of our geos where we're we're getting in the door with some very large opportunities and we're having success converting those we mentioned a 10 million dollar win with a very significant health care company in the u.s this past quarter that is is essentially a new logo win for extreme and a displacement of a large customer and again it's that fabric technology that people like it's the the combination of our wi-fi and our ability to support highly complex environments and then it's putting it all together end-to-end wired wireless the whole portfolio is in a platform and our competitors have software that sits on top of other software so they still keep the distinct user interfaces of all those software platforms running and really you're just left with an over-the-top software we actually have a legitimate platform where there's one interface for all the technology and having everything in one place and then having these new ai tools is very compelling for customers okay congrats on the quarter and outlook thanks eric your next question comes from the line of tomer zilberman from bank of america please go ahead hey guys can you hear me we can yeah we got you tomer great um two questions for you guys maybe to start off with the uh guidance raise right you went from eight percent uh guide previously now you're you know going back to ten percent which is more in line with your uh long-term framework that you set out for us last year i just want to ask effectively what what changed right um is it is it a quicker transition through the subscription to the platform one that you previously said that would be a transition year this year Is it better demand on the product front? Is it kind of a byproduct of maybe pricing increases given the supply constraints we're seeing? Where is the additional growth coming from? Tomer, you hit the nail on the head. It's both. We're ahead of plan on the recurring revenue side in terms of the adoption of platform one, which has been the big driver of growth. You know, we look at the year over year comparison of being at, you know, in the call it low single digits a year ago into the into the mid 20s a year later in terms of adoption of platform one subscription. So that has been driving a higher recurring revenue number than maybe we had earlier. And so we have the confidence we see that continuing going forward. The other is 12% product growth, and that's driven by the opportunities we have in the funnel. Eric asked about some of these larger opportunities in terms of these million-dollar-plus opportunities and what does that growth look like. It's a very healthy outlook in terms of the funnel of opportunities we have. If you recall, we now have 20 different pods. We're forecasting and driving growth for each one of those in terms of funnel creation, and we're carefully evaluating how we're converting on these funnels. And so we're extremely tactical in how we are managing this and have visibility. So from the bottoms up, the call is coming from confidence at the pod level of the funnel creation and funnel conversion and our confidence in delivering the higher number. Got it. Maybe as a follow-up then, talking about the pipeline opportunity i just want to understand where are we in this competitive displacement cycle meaning you know we've talked for some time now about the opportunity to displace uh the top two incumbents one you know cisco because of uh channel disruption and two you know generate juniper and hpe and their integration challenges do you see the same level of displacement opportunity that you may have seen a year ago? Or are these companies, you know, is the integration between the two, you knows, tightening and getting better? And, you know, maybe channel disruption is not as big of an opportunity as it was, say, a couple of quarters ago. Yeah, I think the opportunity is, yeah, as good as it's been. You know, we're seeing as it relates to, I'll just hit HPE Juniper first. People may have seen their ads about self-driving network and their ad is very far away from the truth of what they're actually delivering to customers. And that's not lost on customers. Um, and, and there's a discrepancy between wired and wireless and cloud and non-cloud and, um, you know, missed is had a very strong competitive position and they've fallen back. And then there's a question about how the Aruba portfolio and how that will even fit. They've said those two product portfolios won't come together. So if you're an enterprise customer making a long-term decision, it introduces a fair amount of risk depending on where your technology sits today. Cisco is focused on a lot of other things besides networking, and they're the most aggressive and raising price. And so if you're looking for the most complicated bundle of solutions and the most expensive, it's Cisco. And a lot of customers don't want to have everything together. They'll look and say, I'd like the best in breed, Cisco compared to, let's say, Xtreme and Palo Alto. there's much better value and capability going with the you know the extreme palo solution and having best of breed as opposed to paying a lot more and having a lesser solution from this this this larger entity so it just you these they they create disruption and share opportunities that's at the customer level but also you know within the channel and at the channel level And Cisco is, they are asking customers right now, they're meeting in Vancouver. They're asking their channel partners to do a lot more and try to sell the entire portfolio. And that's not necessarily what people want in the networking world where buying cycles are different. Buyers are different and there's not necessary this synergistic fit between what they're trying to mash together. So that creates some frustration and it creates opportunities for us where people view their ability to make more money from the channel where they can make more money with Xtreme and the networking side. Got it. Thank you. Your next question comes from the line of Dave Kang from B. Riley. Please go ahead. Thank you. Good morning. My first question is regarding the supply chain situation. Just wondering if any revenue was left on the table. And my follow-up is on gross margin. Just wondering if your long-term target is still mid-30s, which is about, what, 200 bps away. Just wondering what the catalyst will be uh to get you know to get to that mid 30s yeah dave i'll take it yeah at a high level um start starting with the question about you know supply chain uh we we we don't feel our numbers are constrained so i would say we and going forward we continue to market this with our distributors and with channel partners to make sure the word is out that Xtreme has supply. Every quarter, there's always some level of product constraint that might happen at the end of the quarter where maybe products don't ship out. But it's at normal levels for us, not at unusual levels. In terms of the gross margin, we see a step function in our recurring revenue, and our recurring revenue margins will contribute. As you know, we're putting together service and subscription in the Platform 1 bundle, and that creates some technical issues, and it's a technical drag on revenue and the years of heavy migration that we're in right now. And that recurring revenue growth rate that he called in the mid to now higher single digit range will step into the teens and will step Into the 20% range overall for recurring revenue. And given the margins of recurring revenue, that will be a big driver. Kevin, do you want to comment maybe with a little more granularity? I think you're right there, Ed. That's what we're expecting is we're expecting this acceleration, especially in SaaS deferred revenues. We sell more and more platform one subscriptions. You'll get the rule of 78 benefit where you see more revenue coming in contributing next year of what we sell this year and the same with the year after. And so you're going to see more higher value, higher contribution revenue come into the model over the next couple of years. And that's going to lift us. The other concept here, Ed, as well as that we do expect some of these memory costs and other component costs to come down over time. But we're in an environment where prices have never gone backwards. And so we should be able to see some improvement in product margins over time as well, A, from a scale perspective, but also just component costs reductions over time to where we maintain you know our our pricing uh so i i think we've got a couple of levers here to drive improved gross margins over time uh on that on that front thank you thanks dave at this time there are no further questions i would now like to turn the call back to ed myercord ceo for closing remarks okay well thank you all for uh for joining us this morning uh it was a it was strong quarter uh and yeah as as we're calling we we see the the continued momentum in in the business uh we have uh just a a shout out to our employees who are listening in We appreciate all of the hard work and all the effort to deliver on the outcomes. Thanks, everybody, and have a great day. This concludes today's call. Thank you all for attending. You may now disconnect.