Extreme Networks, Inc. ($EXTR)

Welcome, everyone. Thank you for your patience. For the next fireside chat, we have Extreme Networks, and we have the pleasure of hosting Ed Meyercord, CEO of Extreme. Ed, thank you for being here, and thank you to the audience as well. A lot has changed since we spoke last time this -- at this conference, you've had 5 straight quarters of double-digit growth. Platform 1 has fully launched. Agent 1 has been unveiled as well. I mean just maybe outline for investors where you are in terms of the transformation or the evolution of the company? And how much more to go in terms of transforming in the platform that you're trying to build?

Yes. And Samik, thank you for having us. full schedule here. We appreciate that. We just -- 2 weeks ago, we had a user conference in Orlando. We had -- we have customers. We also have our partners. We have some industry analysts there. And we announced our second-generation AI platform. Keep in mind, we came out with the first platform in July. So I guess I say it because it's moving fast. And what we announced is the evolution of our platform to include Agent 1, which is highlights the Gentex platform and the capabilities that it has as a coworker to an IT team in networking. And then we also announced this operator mode, which is a an agent exchange, which got a lot of attention and a lot of attention for enterprise customers because effectively, what it does is it creates a platform, and it allows our customers to innovate with us. So for example, I had Jim Clendenin on stage with me. He's the CIO of Kroger. This is a pretty big IT organization, 6,000 people. And 2,800 stores, 36% of what they sell, they manufacture. So people don't realize a big manufacturing operation and a big supply chain distribution. Well, they chose Extreme. Part of what we'll talk about is Extreme moving up market with these kinds of customers. It's one of the most complex networks on the planet and in the United States. But they do a lot of their own development. So when we build our networking platforms, they have a lot of workflows that they want to build on their own that integrate with our network, and the excitement with Kroger and the excitement of 3 in airlines and the excitement with a lot of customers who were there is the fact that we're building a platform that allows them to build their tools with us. And so I would say that's really the big part of the evolution for Extreme is not only building the capabilities to have a coworker that can do things like troubleshooting and firmware upgrades. And I would say, mundane tasks as well as complicated tasks that networking teams can offload, and then they could do this always a their control in a very safe environment so that they have complete visibility to what's going on with agents and they have a complete audit trail and they can move at their own pace. But then the idea on top of that, that our partner community and the channel as well as our customers that are a little more advanced in terms of their IT teams can codevelop with us with this agent exchange was a big deal. And I think that's the evolution. This is something that will GA in the October time frame. Our coworker with Agent One will be released in July. So we're not too far away. And we're rapidly moving customers on to Platform 1. A year ago, at our user conference, there was a lot of skepticism about AI. There was a lot of doubt about AI and a lot of questions. It was almost like people were questioning whether AI would come in and have an impact on networking. And one year later, there was no questions about weather. There was no questions about if it was a question about how quickly we're moving, how quickly can deploy use cases. All of our customers are at a different point in their journey. But I think that's why people like to choose Extreme right now because we'll meet you wherever you are in the journey. We have the best tools, and we can make it easy for you to take this to go on the AI journey and to explore new use cases that have real ROI. So that's kind of that in terms of our evolution, we've made a lot of progress. It's moving very quickly. And where it's going is into a place where we're sort of codeveloping with our customers and with our partners as opposed to just a license tethered to a networking device as part of network management.

So maybe just taking a step back like in the past, networking was talked about more as a, you could do a customer, they want to refresh the network, you go to impress...

Samik, you're trying to be polite.

Clearly, the conversation looks like it's shifted. When -- what are you seeing in terms of the refresh activities attached to the AI conversation like you're obviously developing platforms, letting your customers co-innovate with you towards the underlying fresh activity associated with that move to the next-generation platform.

Yes. So I'll hit on a couple of points as it relates to the activity and networking overall in the industry. First of all, we have a fairly large competitor that acts as a good proxy in industry bellwether for us in Cisco. And they've announced a multiyear $43 billion network refresh. Is there Catalyst platform goes end of life and customers have to upgrade their networks. . A lot of customers are just going to go with what they've had or where they have relationships. And a lot of customers get the opportunity to look and see what's in the industry and potentially evaluate other competitors as they consider this kind of investment. And so at a high level, that's very helpful to us. So that creates opportunities we might not have had otherwise and will give us more at best. The other competitors consolidated and became one and have created a lot of risk in terms of the industry. There's a lot of uncertainty and risk in terms of customers and partners wanting to invest just there's a lot of unknowns. I'll put it that way. And so this is creating a lot of opportunities for us. As it relates to new workloads happening on the enterprise campus, in terms of agent traffic. I mean people are talking about this. The reasoning models and the frontier models all exist in hyperscale cloud, that's going to continue. But all the agent traffic is going to happen on the enterprise. And so we do think it's hard to quantify what that's going to be. I don't think we're there yet in terms of watching or seeing enterprise customers pull the trigger and making that investment today, but we all know it's coming. I would say the enterprise customers today are actively and aggressively exploring use cases for AI -- Agentic AI, and I don't think that they have an understanding today exactly what that means for the enterprise network and enterprise traffic. But we know the traffic is going one way. We just don't know how much in one direction.

Yes. No, that's helpful. And that's exactly where it's going is I think that -- it should .

The pendulum is fully on the hyperscale cloud environment for -- in our industry and networking, but it will swing back to investment in the enterprise. .

Got it. Do you see that, particularly as you look through your lens into enterprise customers who have both campus networks and enterprise data centers as well, do you see that changing the refreshed fees on both campus and data centers? Or do you see, one follows the other.

I think it will happen coincidentally, I don't think it's one versus the other. I mean we'd be logical that it would happen to the data center first and then you would have pressure on the campus network. Yes. .

You've outlined growth I think targets of 10% revenue CAGR through fiscal '29. When you look at the pipeline today, the market opportunities that you're targeting, investors seem to be under appreciating the durability of this growth they agree that their growth is their near term. They don't really think it's as long a cycle probably in some cases, like what gives you that visibility that you can forecast demand in fiscal '29 and there's enough pipeline to support it or visibility to support it fiscal '29.

Yes. It's a great question. And it really has to do with the evolution of extreme as we move up market and the kinds of customers that we're winning. An example is the Government of Japan, massive project, the biggest project that we've ever had in Asia Pacific. So starting off with $40 million. And then by the time it's all said and done, probably closer to $80 million in network investment. And this is just a couple of the government agencies. So it will continue to grow in terms of bookings. But the point there is that we came in as a fourth entrant into the conversation and that became a finalist with a large company that we've been talking about. And then we won on a variety of fronts, but it has to do with our technology, a unique fabric technology that we have for the campus and the campus enterprise, and then a unique use of that fabric technology across the wide area network. And then our flexible cloud capabilities in terms of providing a private cloud instance where data sovereignty was very important to the Japanese government. And the security benefits of our fabric and being able to segment networks, again, a capability that our larger competitors don't have. So when we actually got in and we -- when where the rubber meets the road is when you put your technology to work, and we put our technology to work, we win, we win and heads up competition. And so we're moving upmarket in a meaningful way. Initially, our first bid in Japan, we lost, we got outflanked because it was a Cisco worked the channel in a way that sort of boxed us out. We were a lot smarter the next go around and for the bigger opportunity. And it's one thing to win a customer like that, which success gets success with that kind of reference customer. It's another thing to get the channel. So NTT East now has become a partner of Extreme, okay? That's a really important partner to have in Japan as well as KDDI as well as Net1 Systems. Historically, we've struggled to break into some of these larger ecosystem partners that are really important because they deploy the technology and they work with the customers. So I'd say the bigger win was not necessarily the government itself, although that is -- the end user is very important. But I would say it's the partners who are now bringing other opportunities to extreme of that size and scale, and they know Extreme can execute on these very large important projects. I mentioned Kroger, the same thing happened. I mentioned Korean Airlines that was also up on stage. The same thing has happened there. We've had some really large wins in the U.K. where we've attracted much larger partners. The same is true here in the U.S. We're very far down the road on potentially one of our largest customers ever, a very large government contractor same situation where with that kind of win, it could open up a massive channel opportunity for us. So these are long-term projects. These are not a -- networking project is is something that's going to take several years. In the case of Korean Airlines, their network transformation project is a 9-year transformation. So I think with the success we're having with these customers, how it spills into the channel and the multiplier effect of the channel, that this is what is giving us confidence.

In terms of the competitive wins you have, clearly, your platform is resonating. So that's one part of it. But let me maybe help me think about what are the -- how are the other drivers helping one being your customers -- your competitors clearly are making changes -- are somewhat sort of change more, right? Like Cisco is tweaking is their Meraki portfolio, HP Juniper, undergoing the integration, and then the other thing you've talked about is the memory supply advantage that you have. You've talked about having visibility into supply. How are those 2 drivers playing out with customers? And how do you sort of delineate between how much the platform is resonating versus the other two?

Yes. Well, I mean hats off to the team at Extreme. We take an existential threat to our business and flipped it into a positive and now it's going to generate demand for the company. So really proud of the team for everything that has been done there. we can be very nimble. I'd say we have 20 different initiatives. I shout out to Broadcom and the executive leadership of Broadcom, they consider Extreme to be a strategic partner. So when the memory shortage cropped up, they were very helpful to our teams and then to me, personally in establishing relationships. We bought exclusively for Micron. And I got to introduce the CEO of Micron and then his executive leadership team, and we've got a very good relationship. Micron did not know Extreme was a customer. So we buy through our design manufacturers in Taiwan. They buy from distribution. Distribution, there's no allocation for Extreme. They're just buying from the Micron is us selling into the distribution channel where knowledge -- where the product goes. So when I was talking to senior leadership at Micron, they were like, can you prove to me that you're a customer and you're not just trading chips, which is kind of interesting. We've reorganized that relationship. We saw -- we have an agreement with Avnet, a large distribution in the U.S. We're buying direct. We have an allocation for Micron through Avnet in the United States, and then we'll supply. That's the same way that we buy Broadcom. We've done a lot of other things. We found other vendors, again, through Broadcom, thank you. And they're a very strategic partner for Broadcom and Broadcom said, put these guys in front of the list and take care of them. So they're going to come online at the end of '27. That will be another important source of supply. Samsung runs on Extreme. Their global headquarters runs on Extreme. And we have excellent relationships with them. Our country manager. This is a unique one. You worked the executive leadership there, and Broadcom came in and qualified Samsung chips. And so we were able to get very low priced Samsung chips, that are approved for our platforms. So that was a big move. The other one is just kind of people will be in craft. I think this is what we can do at extreme that our competitors aren't doing because of their size or whatever. But again, we worked and we found that there were chips destined for other industrial segments like automotive, where their memory chips actually would work with our systems, and we got Broadcom to qualify the chips. And a lot of these chips were sort of sitting in inventory because demand was not what they expected. So they had a lot of extra chips. So we were able to move very nimbly and buy up a bunch of chips that were destined for another industry. So these are just there's about 10 other things that we're doing, but we solved for supply through calendar '27. And we have new sources of supply coming in the market, and we have a new allocations coming from Micron. So we don't have an issue. So we're confident in meeting demand. And as I said before, this could shift into an opportunity for us as competitors stretch out lead times, that's where we'll see it. We'll see lead times get stretched. And if people have important projects that they need to move on, and it could create an opportunity. We haven't predicted this. We haven't put this in our numbers, but it could create an opportunity for us.

Got it. WiFi 7, that's ramping fast nearly half of your wireless booking dollar is coming from WiFi 7 now. Can you just talk about what's driving enterprises to adopt WiFi 7 this quickly? And when you think about overall, the portfolio that you have today is WiFi 7 a trigger for customers to, again, go through their network refreshes a lot sooner than you expected?

I don't know that it's WiFi 7 that will cause people to upgrade their networks sooner than expected. But just to reiterate, networking is mission-critical. Every enterprise on the planet needs to have a high-quality, high-performance secure network that's up to date. And then to support all the devices that are on networks, the bandwidth continues to grow. Applications continue to flourish in terms of the numbers. So there is a continuous pressure to upgrade. Extreme was the first company with -- to come out with WiFi 7. So we were actually in '23, the very end, in December '23, we came out with WiFi 7, and there are meaningful benefits. With WiFi 7, the industry realized that you could actually run mission-critical applications across WiFi 7. I think it's the first time that people felt confident with WiFi and its ability to run mission-critical and that was well documented, well supported. If you remember, there's a time where people are looking at private cellular as being kind of more reliable and we can count on that for industrial applications. WiFi 7 obviated that discussion. And so now I think people have come to accept that with this generation of WiFi, you can run mission critical. So I think that's -- that will be part of this. And then we just signed up by University of Florida, The Swamp, that stadium will be the first college stadium with WiFi 7 it's a function of just sort of the quality of connectivity and what you're running inside your environment. But it's WiFi 7 is here is 50%, and I think this will definitely be the year of WiFi 7. And when Cisco comes out and says it, it has an impact.

Noted. Maybe let's move to the recurring side of the business. Recurring revenue, I think, is now 36% of the total revenue in the latest quarter. How does the business look in terms of recurring revenue mix a few years from now, let's take like 3 years from now, how you're envisioning the mix looks for the company?

Yes. Well, yes, our subscription revenue, driven by adoption of Platform 1 was up 29% year-over-year. There's an offset on the services side of the business. We're combining service and subscription and Platform 1. But you'll see that kick into gear in our fiscal '27, especially in '28, the dynamics. We are combining service and subscription together from a financial modeling benefit, there's a lot of benefits to the attach rate change on the services side, as well as the renewal rate and the fact that service plus subscription plus 10% is how people are adopting Platform 1. So there's a benefit. So 36% is going to go over 40% over the next few years, just naturally because of the high growth rate of Platform on subscriptions. And everyone is going to be moving on to platform one. Our product revenue growth has been double digit for 2 consecutive quarters, and we expect that to continue. What could provide upside that subscription recurring number is -- that agent exchange that I mentioned before. We haven't modeled that yet. We haven't included that into our outlook.

Okay. So Platform 1, where does the adoption stand today? What are the attach rates? And how should we think about how much of the installed base is migrating already versus how much is left to migrate.

Yes. So we came out with Platform 1 early in July. And as I mentioned, we just came out with the second generation. We have several thousand customers who have moved on to Platform 1. Platform 1 is -- will be fully featured so that I'd say 80% of our customers can live in Platform 1 within a few months. So there's still -- we combine 9 systems into 1, and so there's still features and capabilities that are important to customers that are being built in. So as we add them, literally in real time with the May release and the June release, there's going to be a significant -- we're going to cover a significant number of customers who can move and live in Platform 1. The way we went about this is to create a license that allowed customers to live in the old world and then to move into the new world at their own speed. And so that's been very popular with our customers. And we expect the move to accelerate. By the end of next year, I think it's fair to say 70% of our customers, we would expect to be fully in platform one.

And then when you think about customers adopting this sort of next-generation Platform 1 or Platform 1 2.0 that you've launched. When you look on a like-for-like basis, are those customers -- are you able to drive ASP uplift from those customers? Or is it more about focusing on expanding the deal sizes with those customers, like you mentioned like you're moving upscale. Is it more focused on just the overall deployments increasing? Or are you able to get ASP uplift as well on a like-for-like basis?

I'd say it's a combination of both. But it's -- if you take out of the service revenue and you combine it with the subscription revenue, it's about a 10% to 15% uplift on both.

And maybe last one for you. I mean we've talked about all the tailwinds that you have, but if you sort of now start to think about the next 3 to 5 years, where are the sort of areas that you feel like you have to focus a lot more on what are the execution risks you would highlight that you need to monitor or you want to be more focused upon making sure that there's the demand is strong, you execute to those opportunities.

Yes. I mean, the challenge for us is moving upmarket in the channel and getting the attention. Cisco is a very strong competitor with their channel relationships is what they're known for, excellent marketing. If you look on paper, if you look at what we have with Platform One, a key differentiator is that we're actually demonstrating the technology, and we're on our second generation. People ask how we compare with the larger player, and we haven't seen a live version yet. So there's nothing that's GA that's out there, but they have terrific marketing. And so they tell a great story. They have a lot of capital. They buy a lot of technology, and they tell a great story. So I think we -- for Extreme, it's getting the brand recognition, getting the app at, and moving up market, particularly with larger channel partners. That's a challenge.

Great. I'll wrap it up there. Thank you. Thanks for coming to the conference. Thank you to the audience as well.

Yes. Thank you.