Earnings Call Transcript - EXTR Q4 2025

Stanley Kovler, Senior Vice President, Finance and Investor Relations

Thank you, Rob. Good morning, and welcome to Extreme Networks' Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. I'm Stan Kovler, Senior Vice President of Finance and Corporate Development. With me today are Extreme Networks' President and CEO, Ed Meyercord; and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for fiscal Q4 and full year fiscal '25. A copy of the press release, which includes our GAAP to non-GAAP reconciliations and our earnings presentation is available in the Investor Relations section at extremenetworks.com. Today's call and Q&A may include forward-looking statements based on current expectations about Extreme's future financial and operational results, growth expectations, new product introductions and 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, and any forward-looking statements made on this call reflect our analysis as of today. We have no plans to update them, except as required by law. Following our prepared remarks, we will take your questions. And now I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Edward B. Meyercord, President and CEO

Thank you, Stan, and thank you all for joining us this morning. I'm pleased to report that Q4 marked our fifth consecutive quarter of sequential revenue growth. Revenue reached $307 million, representing a 20% increase year-over-year with particularly strong performances in APAC and EMEA regions. We continue to move upmarket and see robust demand across both our wired and wireless network solutions in all our industry verticals. This helped drive an acceleration in SaaS ARR revenue to $208 million, up 24% year-over-year. Large deal momentum is picking up with product bookings at an 8-quarter high. Our competitive win rates remain strong as we move upmarket and displace larger players due to our highly differentiated campus fabric, the flexibility and simplicity of our cloud management platform, the industry's most simple licensing and now the release of our innovative AI-powered Extreme Platform One solution. Enterprise interest in Extreme has increased across all verticals. This momentum was clear at Extreme Connect in Paris in May, where nearly 1,000 customers, partners, analysts and press joined us for hands-on training, dynamic main-stage keynotes and networking with peers. Many of the attendees have seen PowerPoints and canned demos of future AI platforms from other vendors, but the fact that the entire event was run on a live version of Extreme Platform 1 generated a lot of excitement and momentum. The overwhelmingly positive feedback on the event and our technology highlights rising enthusiasm for Extreme. In Q4, we expanded our footprint in the Japanese government with two multimillion dollar wins displacing a major competitor and gaining large and important strategic partners in the process. The 8-digit project win for the entire Japanese judiciary, including the Supreme Court, marked the largest win in the APAC region in company history. Both will deploy a unique Extreme Fabric solution from core to branch powered by our SD-WAN and managed through ExtremeCloud IQ, giving users secure, seamless access across the country with our flexible and highly secure private cloud option. We continue to add to our leadership position in high-density public and entertainment venues in the quarter. MetLife Stadium, the home field of the New York Giants and Jets as well as host for the 2026 World Cup Finals selected Extreme to deliver modern WiFi 6E infrastructure to power better fan experiences and streamline operations across the stadium. We also added Pinnacle Bank Arena and Hendrick Motorsports, as highlighted in our press release. Global hospitality and casino customers, including the very first high-end luxury resort casino in the Middle East are standardizing on our fabric. When customers see the impact of Fabric's unique features like subsecond convergence, the unmatched security benefits of micro-segmentation, and the ease of deployment with automated zero-touch provisioning, Extreme becomes the easy choice. One very large enterprise in the midst of several proof of concepts said, what takes Cisco 6 hours takes Extreme 6 minutes. In fact, we've challenged each of the large players in the networking industry head-to-head in enterprise customer environments and none come close to meeting our performance. Extreme is also becoming the top choice for mission-critical environments, delivering unmatched reliability and performance. Bera, Europe's fourth largest air navigation provider, deployed Extreme to ensure secure, scalable communication and management of airspace over Spain and over 2 million flights annually. In the U.K., Sur and Sussex Healthcare NHS Trust, which provides healthcare services to over 740,000 people upgraded its WiFi network and will use ExtremeCloud IQ and Fabric for flexible, centralized and secure network management to help deliver best-in-class patient care. Finally, Qatar Energy, a leader in oil and gas production, chose Extreme wired solutions to enable secure high-performance connectivity across its complex and remote operations for its new liquefied petroleum gas bottling plant. In Q4, we hit a major milestone with Extreme Platform 1, becoming the first and only networking vendor to offer a conversational multimodal, agentic AI-powered networking platform generally available to customers today. Early feedback has been positive. West Suffolk NHS in the U.K. migrated to Extreme Platform 1 in just 47 minutes. They said the platform gives them a helicopter view of the network, and they expect our AI agents to be new members of their IT staff. Bath and Northeast Somerset Council in the U.K. said they love how AI has helped them quickly resolve technical queries without having to pour through hours of documentation. Extreme Platform 1 breaks down silos between networking and security, automates tasks through integrated AI agents and offers the industry's simplest licensing. It also provides the industry's only composable workspace where you can leverage our platform's multimodal capabilities and customized dashboards with the help of our AI agent. Customers can see everything from global networks down to individual devices, application performance and more. This helps simplify planning, procurement, deployment, management, troubleshooting and keeps downtime to a minimum. Industry analysts have recognized the significance of Extreme Platform 1. According to Enterprise Strategy Group, the solution is "at the leading edge of the market in terms of completeness and sophistication of AI for networking.” Enterprise Management Associates says, "There is a growing interest in AI-driven network management capabilities since IT teams are running leaner with heavier workloads”. And there is less skepticism today towards AI than there was a few years ago, especially considering Extreme's human-in-the-loop approach. Extreme Platform 1 brings AI, automation and simplicity together at one powerful cloud. For our customers, it means faster outcomes, higher productivity and significant ROI. We believe we’re in the right place at the right time with the highest quality platform and the most modern tools for all enterprise networking customers. And finally, we continue to make progress with our diverse commercial models with our MSP program doubling to 53 partners year-over-year. We offer the industry's first consumption-based billing, eliminating upfront costs and ensuring predictable expenses. Our poolable licensing allows our MSPs to flexibly allocate licenses across devices, locations and customers, making it simple to scale. Looking ahead, we have strong confidence in sustained customer demand based on our Q1 funnel generation and with continued strong growth in our overall pipeline. We expect growth in fiscal '26 to accelerate. We have tremendous opportunities with large customers. Our competitive positioning has never been stronger, and we're accelerating investments in our business to drive automation, differentiation and commercial success. I look forward to sharing more of our plans and outlook with all of you at our recently announced Investor Day in November.

Kevin Rhodes, Executive Vice President and CFO

Thanks, Ed. I'm very pleased to report strong fourth quarter results with revenue exceeding the high end of our guidance range. We also delivered strong operating margins and free cash flow. We achieved earnings per share of $0.25 at the high end of our guidance range and exceeding the consensus of $0.23, up 32% from $0.19 in the prior year quarter on an adjusted basis. Total revenue of $307 million in the quarter grew 20% year-over-year and 8% sequentially. This marks our fifth consecutive quarter of growth. We also accelerated SaaS ARR growth to 24% year-over-year, driven by recent wins, continued growth in our wireless business with strong Wi-Fi 7 adoption and early adoption of Extreme Platform 1. Overall, we achieved our best bookings quarter in the past two years, reflecting strong customer demand across our portfolio, which gives us confidence in our growth trajectory heading into fiscal 2026. In the fourth quarter, new subscription bookings accelerated, which is a testament to the new large customer wins in Asia Pacific, our recent rollout at John Deere and the commercial models we launched over the past year. Product revenue of $192 million grew 26% year-over-year and 8% sequentially, driven by continued recovery and strong demand for Extreme's solutions as we continue to move upmarket. Wi-Fi 7 mix grew meaningfully, representing 30% of all wireless units and driving a second straight quarter of revenue growth in wireless products. Geographically, we saw a particularly strong performance in APAC with major new customer wins. This was our largest bookings quarter ever in Asia Pacific. We continue to gain traction in the region as a strategic alternative to the incumbents that are there, particularly in the public sector. EMEA, also a bright spot, revenue grew 21% year-over-year, the highest level of revenue in the region since the early 2024 era as strong execution in the market boosted our business there. Americas revenue grew 4% year-over-year, and we're encouraged by both the momentum and strong pipeline we're seeing in the Americas for both the first quarter and fiscal 2026. In the fourth quarter, 34 customers spent over $1 million with Extreme, bringing our fiscal '25 total to 168 customers. Total subscription and support revenue was $115 million, up 11% year-over-year. Total recurring revenue grew 8% year-over-year and represented 36% of total revenue. As a result of our growth in SaaS ARR, SaaS deferred revenue jumped 15% year-over-year to $308 million and recurring revenue growth pushed total deferred revenue above $600 million. This growing base of contracted future revenue provides strong visibility into our recurring revenue and should continue to drive strong cash flow generation. Non-GAAP gross margin was 62.3% in the fourth quarter and was in line with our guidance. Our fourth quarter operating expenses were $144 million, also in line with our guidance. Operating margin was 15.2% and up from 13.5% in the prior year on an adjusted basis, demonstrating the leverage we have in our model from top line growth and prudent expense management. We generated $75 million in free cash flow in the quarter, our highest quarterly level since 2023 and $50 million in EBITDA, our highest level in the last seven quarters. We returned value to shareholders through a repurchase of 1.5 million shares for a total of $25 million. Cash flow was aided by significant improvement in our cash conversion cycle to 81 days, down from 112 days in the third quarter, driven primarily by lower days of inventory. We ended the quarter with $232 million in cash, and achieved a net cash position of $52 million, up $49 million from net cash at the end of the third quarter. For the full fiscal year, revenue of $1.140 billion grew 2% year-over-year, with non-GAAP EPS of $0.84 compared to $0.70 on an adjusted basis from the prior year. We achieved significant margin expansion with non-GAAP operating margin of 14.2% compared to 11.9% on an adjusted basis in fiscal 2024. As we enter fiscal 2026, we're well positioned to build on our success. Customer demand exceeded revenue in the fourth quarter, and we have strong visibility for growth based on our funnel, backlog and future customer demand. We expect a reacceleration of overall revenue on a full-year basis that should translate to higher earnings and cash flow generation. For the first quarter of fiscal 2026, we expect guidance as follows: revenue to be in a range of $292 million to $300 million; gross margin to be in the range of 61.9% to 62.3%; operating margin to be in a range of 12.7% to 14.5%; and earnings per share to be in a range of $0.20 to $0.23. Our fully diluted share count is expected to be around 135 million shares. For the fiscal year 2026, we expect revenue to be in a range of $1.228 billion to $1.238 billion.

Operator, Operator

Your first question today comes from Eric Martinuzzi from Lake Street Capital Markets.

Eric Martinuzzi, Analyst

Congratulations on a great quarter and strong outlook. I wanted to explore the success you are experiencing in EMEA and APAC. Clearly, this was beneficial for Q4. I'm curious about the follow-through. Was this an isolated spike in Q4, or do you believe it will be sustainable in the early part of the first half of FY '26?

Edward B. Meyercord, President and CEO

Thanks for the question, Eric. We've observed a gradual recovery in EMEA, which has built up throughout the year. It was slower than we anticipated, but with the government stabilized and the political environment improving, we expect the momentum to continue. We also have unique opportunities with the German government and new security regulations we plan to invest in for fiscal '26. We're enthusiastic about our market share there and the macro environment, as well as specific new growth opportunities. In Asia Pacific, we've experienced significant growth due to major wins and a unique solution we developed for the Japanese government. What's crucial is that we are not only well-positioned with one branch of the Japanese government but also for further opportunities there. This has positively impacted the partner community, including system integrators and partners, and we've gained access to some of the largest entities in the region. They are excited about our solutions and the possibility of collaborating with Extreme. We anticipate continued momentum in both of these markets.

Eric Martinuzzi, Analyst

Ed, one of the things that you guys talked about on the Q4 outlook was you were going to be keeping pricing stable despite the uncertainty around tariffs. Do you feel like there was any maybe a benefit to pull forward orders that happened in Q4 due to that, that maybe isn't there after Q4?

Edward B. Meyercord, President and CEO

Yes, we observed very little impact, Eric, largely because our product categories were exempt. We received advance notice that the expectation is for them to remain exempt, although we can’t be certain until it’s confirmed. When the new tariffs were announced, that remained the case. The Commerce Department has been quite clear about the list of exemptions and that it’s still valid. That could always change, but we have communicated this to our customers. I believe this is how the market is approaching the situation. So to answer your question, while there may have been some customers who came in, it was minimal, nowhere near what we experienced in the past.

Operator, Operator

Your next question comes from the line of Ryan Koontz from Needham & Company.

Ryan Koontz, Analyst

Terrific quarter, guys. I wonder how much Platform One contributed in the quarter? I know you had limited availability in the June quarter. Was it meaningful to your ARR bookings? And then how should we think about the timing of the balance of your customer base renewals phasing in over the second half for Platform One?

Edward B. Meyercord, President and CEO

Sure. Let me jump in and then Kevin, you can come in behind. At this stage, we literally just GA the platform. As you know, we announced Platform One back in December. We had early availability. We opened up the books for E-Rate bidding. So we can see Platform One opportunities in our funnel. But what we're expecting is for this to come into play in the second half of the year before you see a meaningful impact on the business. Right now, what we're guiding is that it's going to help fuel customers' decisions to go with Extreme, knowing that they can upgrade to Platform One. Customers that want to trial Platform One today, it doesn't carry risk because they still have access to all the applications as they go forward. So we're expecting customers to trial, test, play around with the platform, and then we're expecting kind of serious migrations to happen as we turn the corner on the calendar year. Kevin, do you want to add anything?

Kevin Rhodes, Executive Vice President and CFO

No, I think you're exactly right, Ed. It was really related to new subscription bookings, right, that accelerated in the fourth quarter. That was led somewhat by some of these larger customer wins that we had in Asia Pacific, plus the rollout at John Deere was another addition to that. And then the new commercial models on MSP, very limited around Platform One, but the benefit of the future that sits in front of us is that we see a lot of excitement for Platform One, which continues to sustain. We're expecting to sustain that 20% plus growth rate on the ARR side.

Ryan Koontz, Analyst

Great. That's great to hear that. And just to follow up on your comment there around MSPs and you're up to 53 now. I mean, can you maybe characterize where those MSPs are in their growth cycle with you with customer wins? And any kind of details you can share on that rollout of this 50 wins you have now?

Edward B. Meyercord, President and CEO

Yes, I would say we are still in the early stages. Last year, we had around 14 or 15 MSP customers while we were in the process of developing the platform. Recently, in the last quarter, we completed full automation of the billing cycles, which is crucial for MSPs. Now, we have a fully automated platform that is very user-friendly. We also have the advantage of Extreme Platform One. I think it's still very early in this journey. Kevin has mentioned MSPs achieving $1 million to $2 million; we already have some MSPs exceeding that. It's about how we connect with new potential clients and nurture those already using the platform. The feedback on the fully automated billing and our consumption model, which allows for license pooling, along with our new platform, is very encouraging. We anticipate momentum to build throughout the year. Kevin, feel free to add anything.

Kevin Rhodes, Executive Vice President and CFO

No, I think that's all right.

Ryan Koontz, Analyst

Great stuff. Maybe one last one, if I could. As you look upmarket, we see the HP Juniper deal done now. How are you thinking about your opportunities in Fortune 500 and the competitive environment in this new landscape?

Edward B. Meyercord, President and CEO

You’ve heard me mention that we are moving upmarket. We discussed the Japanese government and John Deere, and we achieved a significant win in the Middle East with a major hospitality player that presents numerous business opportunities. Our sales funnel currently contains more large opportunities than ever before. Success leads to further success; once we secure these customers, they become reference accounts that we leverage to attract other large clients. The key for us is gaining entry. I highlighted our fabric technology, and we are actively competing for one of the largest opportunities in our company’s history. Many engineers and IT leaders are unfamiliar with our technology. Skepticism often accompanies our PowerPoint presentations, but when customers experience our technology in action, they are frequently impressed by our capabilities. This is not about hyperscale data centers; we offer a unique advantage with our enterprise fabric. We've faced competition from all sides, and a significant customer noted that what takes Cisco six hours takes us just six minutes. We embrace the opportunity to compete against any rival to showcase the value of our fabric, particularly its subsecond convergence, zero-touch provisioning, and the innovative ways edge devices can request services. The platform's resilience, segmentation features, and the security of valuable services that customers need to send and manage across their networks are crucial. Ultimately, this is about enhancing our brand and seizing these opportunities. I believe that as we encounter more opportunities, our success will grow, and that is where we are focusing our efforts.

Operator, Operator

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital.

Christian Schwab, Analyst

Great quarter, great expectations. Ed, just to follow up on that, just to be clear, it sounds like the continued strong product bookings, you would say it has more to do with just having better products than taking market share from, say, HP, Juniper, or even Cisco. Or would you say it's a combination of both? I guess that wasn't clear to me.

Edward B. Meyercord, President and CEO

Yes. Look, I mean, Christian, as you know, the industry has moved from being point product-based to solutions. What we're selling is a solution where the product is just a piece. Much of the product, meaning hardware in the industry has become commoditized. Most of us are buying from the same vendor, and it's a question of the software that we develop around it, how we develop our solutions, and the management platforms we build around it. Today, I'd say it's more about the solutions and the features and the capabilities we're bringing to market that are really differentiating us. I'll say there’s a lot of buzz around Extreme Platform 1 that just went GA and the idea that we have this conversational, multimodal agentic AI platform that is more holistic than the predecessors in the industry, and it’s live. Customers can actually go in and experience the platform, discovering what the new networking experience could look like. This curiosity is pushing interest in Extreme. Regarding HP Juniper, that's a deal we wanted to see happen. We think it will cause a lot of disruption. Their synergy number increased by 50% in terms of what's required. They need to remove a lot of costs from that business, which implies changes and there will be repercussions for existing projects and customers as well as partner programs. We've already benefited from key hires we've made because of that deal and the opportunities that arose from it. From a competitive standpoint, it’s creating opportunities for us.

Operator, Operator

Your next question comes from the line of Timothy Horn from Oppenheimer.

Timothy Horn, Analyst

So Ed, to be clear, I mean, is the pipeline improving, do you think because of the HPE Juniper merger? Are you getting more inbounds from customers because they're worried about all the things you're describing, one? And then secondly, on the MSP side, do you include large incumbent telecom carriers in that? I know they've been frustrated with Cisco over the years. Are you capturing any mind share or share there?

Edward B. Meyercord, President and CEO

So if I start in reverse order, Tim, I'd say not today. We don't have any of the larger players today on the MSP front, but we think that's an opportunity. We've been investing in teams that have very good relationships. This could be one of the ways that we can truly break out due to the differentiation of our product portfolio and this platform with unique benefits. When we attract one of these larger players and we're targeting that, we think it will be a significant advantage for us. As for the HPE Juniper merger, yes, for us, it would be a net positive. We have seen opportunities, and some partners are bringing opportunities our way. At this stage, I'm not in a position to quantify how meaningful that is since we compete with both firms every day. Overall, it would be a net-positive development. They haven't yet made significant changes, and once they start pulling synergies, we think it will act as a catalyst. Another catalyst is Cisco is changing their partner program, and we expect this to incentivize the partner and channel to move away from traditional networking, benefiting us in the partner community.

Operator, Operator

Your next question comes from the line of David Vogt from UBS.

David Vogt, Analyst

This is Brian on for David. On gross margin, given the product gross margin of around 58% in the quarter with the full year at a similar clip and the competitive landscape with product offerings, do you think this is a reasonable go-forward product margin? And then I have a follow-up.

Kevin Rhodes, Executive Vice President and CFO

Yes, yes, sure. We've been pretty consistent with our product margins if you look back over the last four quarters at that 58% range. We do think that there will be an opportunity, for instance with Wi-Fi 7, where we have a higher margin profile. We just talked about that being 30% of our wireless units in the quarter. That's going to affect our product gross margins in the future as it becomes a larger percentage of our mix. Some costs we've had over the last, I'd say, 12 months around shipping and the switch from air freight to sea freight, we believe we can eliminate some of those costs in the future as well. We think on the product margin side, we can continue to grow that. I would say that 58% in the future, we could see that shifting up to 60%. That would be my target range, around 58% to 60%.

David Vogt, Analyst

Got it. That's helpful. And then just on the verticals, can you share underlying demand trends by vertical, specifically government given the importance?

Edward B. Meyercord, President and CEO

Sure. We categorize it broadly, flat by state, local, and education, accounting for about 40% of our total revenue. We have another breakdown in the investor deck that you can see, with other vertical markets in that 10% range. Those vary between retail, manufacturing, and healthcare. We see hospitality and venues being at 10% as well. Retail transportation is also at 10%. So that's what we see across 5 or 6 verticals, with government and education being the largest at around 40%.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the call back over to Ed Meyercord, President and CEO, for closing remarks.

Edward B. Meyercord, President and CEO

All right, Rob. Thanks for hosting us today. Thanks, everybody, for joining the call. Strong quarter for Extreme. We've got a good outlook. We're obviously very excited about these big customer wins, the technology differentiation, and the launch and GA of Extreme Platform 1, which is generating a lot of interest in Extreme. I encourage everyone to come see us in November. We're having an investor conference, and we will be in a position to dive into more detail and showcase all the technology and give you a flavor of some of the comparisons for Extreme versus our competitors and why people are taking notice of Extreme. Thanks, everybody, and have a great day.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.