Good morning, everybody. Tim Moran. I am the digital infrastructure and communications analyst here at Oppenheimer. My pleasure to be hosting Stan Kovler from Xtreme Networks. He is the senior vice president of finance and, importantly, corporate development. So we're going to be able to ask him all sorts of really, really interesting questions. As always, an exciting time in the industry and never lack of volatility in the stock, Stan. Thanks for that. keeps us all busy.

Yeah, it's small cap tech. So, you know, that's kind of the world that we live in.

That is the world that we live in. But, you know, the most important thing that matters just, you know, what's the what's the long term growth rate and what's the long term free cash flow, right, which we're going to get into.

But before we get into that, you know, what's the biggest trends going on for enterprise, you know, networking at a really, really, you know, high level yeah so tim um obviously you know it's been an exciting place to be uh recently a lot of our customers are upgrading to all sorts of next generation technology on the wireless side you've got companies that are transitioning to next generation wireless wi-fi 7 and that's bringing forth a lot more bandwidth a lot more power more deterministic connectivity for users and we're taking that to the next level. We've got some really interesting, unique antenna technology that we've developed and are introducing to some of our largest customers. And our large venue customers are really loving some of these capabilities that are producing really great results for them at the stadiums. And the switching side, it's preparing a lot of our customers for next generation technology and over the next three to five years they'll see a lot more traffic flow on their networks from not just users and the prevalence of additional devices that come on the network that's been the driver for us historically but it's this notion of the agent-to-agent workflow that is that is on the come in our industry and that will be another driver of growth and complexity. And as networks become more complex, that drives the need for a lot of our automation, software, technology, and AI-based platform solutions that we're delivering to customers now. As you're well aware, we have a platform called Platform One that we developed and launched last year, and we keep upgrading this. There's another upgrade coming later this month where it'll create even more automation and more introductions later in the year where, you know, it's not just focusing on devices anymore, but it's really focusing on making the network engineer's life easier and allowing agents to connect and work together and solve these problems more autonomously. So that's a lot of what's happening in the network right now, we're mainly benefiting from driving AI for networking. So it's not networking for the AI build out, but it's allowing our users and customers to use AI to make their life easier in a very complex network world.

So AI, well, we have a lot of things going on. We have fundamental major improvements in networks, just from Wi-Fi 7 and switching, we can talk about, then we have lots of new, hopefully, potential use cases for the networks with AI, whether the enterprise is one of them or not, because it seems like we're going from, you know, people-to-people communications to machine-to-machine, which could be orders of magnitude more traffic. And then we need ways to basically manage all this in a much, much, much better way, which your AI platform is kind of doing and maybe we can just discuss each one of them um uh you know uh take that those one of the time uh you what what are you seeing in terms of just uh improvements from wi-fi 7 in terms of amount of capacity latency features and use cases and i think the same and if you can discuss some of the same thing on on your switching side what type of fundamental improvements are you seeing yeah on the wi-fi 7 side um again what we're seeing is just being able to deliver higher bandwidth applications to users.

And in some cases where it was not tenable, Wi-Fi is just getting more predictable, it's getting more reliable, and it's getting to a much higher level of reliability and throughput for a lot of our customers. And that's what's driving the upgrade. A lot of our customers, they never went to Wi-Fi 6 or Wi-Fi 6E. These are customers that upgrading from Wi-Fi 4, Wi-Fi 5, and making that leap all the way to Wi-Fi 7 now as the next generation is developing some of these capabilities. Now, the technology itself is interesting because for a long time, Wi-Fi operated at two bands, two and a half and five gigahertz bands. As you get into 6E and 7, now we have a completely new, almost like HOV lane, If you want to think about it that way with six gigahertz and that opens things up for other use cases and new technologies, new capabilities where you can run things on a clean spectrum. And so this is it's all unlicensed spectrum, obviously, because you operate in both your coverage is licensed and unlicensed companies. But it really opens things up where you can use that.

I mean, so I mean, I think we've almost doubled the amount of spectrum that Wi-Fi can operate on. And obviously, the processing power is getting better and better. And some of the other underlying technologies. I mean, with Wi-Fi 7, are people seeing a quadrupling of, you think, actual useful capacity or any way to measure that?

Yeah, I mean, it just allows them, allows the users to do more video. A lot of what we're seeing from our stadium customers is that people are live streaming, they're recording video and sending video and sharing where they are, and it just supports the users in those types of experiences where you can be at an event and then share the event back home to people that are not with you and then multiply that across. You're at the Florida Swamp. You've got 90,000 fans that need concurrent access. the other trend that we're seeing is that in the past not everyone was connected at the stadium and you might have like 20 30 percent of the people that have been connected at the stadium now pretty much everyone is on wi-fi at a lot of these events and so you need that to support the users that's at the user experience level there's also um you know if you go to the events or i go to events everything is getting more expensive and i think there's a lot of pressure on venue operators to make things more interesting, delivering additional experiences, or driving more automation. And it can be something simple as like ordering food or concessions to, you know, just multimedia activities, and also facial recognition. When you're entering a stadium for security reasons, for access, video is becoming more important. Security is becoming more important. And in order to support 4K video, then you're going over to the other side of our business that you started talking about, which is the switching part. That's driving a lot of the upgrades as well. So speeds and feeds are very much relevant in high bandwidth video. And you need to be able to deliver that. We're also seeing networking in a lot of places where it's never been. Every time you go through the supermarket checkout, you're on a network because the computer is networked back to the warehouse and the processing and all of these different systems have to be connected. When you go through the airport and you have the facial recognition taking a snapshot of you and recognizing you as a passenger that's allowed to board the plane.

Well, Stan, just back in the stadiums while you're there. So how is the user, like if you upgrade a brand new stadium we'll upgrade a stadium let's say florida with wi-fi seven how many hot spots are you putting in and it can thousands and is there enough capacity for the for everyone attending to use it in a reasonable manner that that's exactly right and what's happening is that um a lot of us are at the event and we have our cell phones this is um wi-fi is still a lot cheaper to deploy than 5G.

And in most cases, we are partnering with a telecom operator and they are sharing the cost of that deployment because for the operator, it means being able to deliver the service, which by the way, they can even white label as 5G, but on the back end, it's running as Wi-Fi because of the savings in terms of the deployment of a hotspot relative to you know, a cell site. And that's really the benefit that Wi-Fi still has. It's just going to be, you know, even at the cheapest small cell, Wi-Fi could be three or four times cheaper to deploy at these venues. And as you know, it's not consistent usage because you have an event and it could be happening at seven o'clock at night from 6 a.m. until 6 p.m.

There's virtually no usage and so why deploy a lot of this expensive 5g technology at some of these sites that's what a lot of the wi-fi use cases are doing for the customer you bring up a good point like you know the like the swamp right they probably only have maybe 10 major events a year where if you go to you know metlife stadium it might be like you know 80 major events a year you know so very expensive to deploy all that 5g equipment with such a low utilization and wi-fi to your point is a fraction of the cost in many ways right exactly exactly i know we touched on the use cases which was the second part of all this but are you starting to see or what do you guys kind of expect what ai i guess facial recognition is obviously one example of it and you know now you have automated um concession stands where you don't basically they look at your face on the charge you basically you know take off the shelf right um but are you seeing other like use cases, maybe machine-to-machine or AI-based that are changing the usage on the networks?

Yeah, I mean, the usage on the network, it's also happening in manufacturing, right? Everything is connected and there's a lot of automation on the factory floor. A lot of that requires upgraded networking capability. And sometimes you also need a network upgrade, not just because of the speeds and feeds, but also because of security. And our fabric technology, which is our flagship technology security is paramount where you want to make sure that every product line could have its own virtual network essentially so that you can't cross and um worst case scenario if you do get hacked that the pack is contained in a particular area and it can't go any further that's become very important um and uh you know with all the geopolitical uh things that are happening, security and network security is becoming very important as well. That's an important use case. And there's also the notion from a use case perspective of for regulated industries and for governments, both domestic and foreign related to sovereign cloud, where your cloud deployments are not on public cloud infrastructure, but you're doing your network management and running your operations on protected environments. And those types of deployments are also driving a lot of upgrades and driving a lot of demand, again, for regulatory data and security reasons as well.

There have been a lot of, well, the carriers kind of say you have to be on 5G standalone in these manufacturing facilities or stadiums because as its higher quality, better security, lower latency. I guess if you compare the Wi-Fi experience versus a 5G experience, you know, is that I mean, it depends on the customer, but a lot of it is also just physically wired.

So it's not necessarily wireless. It's really wired capabilities as well that play into it. And having everything managed from one console that gives you these capabilities when it comes to troubleshooting and automation and creating virtual networks or the network within a network, you need that cohesive solution that combines wired, wireless, and the management platform where it's not just a discrete solution as let's just put, you know, some 5G SIM cards into. and run it that way that's that's a really really great point and frankly with wi-fi right though especially in these venues you're probably only going like 100 200 feet where it's wireless

and it hits a wire right away that hits your switching platform and then it's your cloud platform management system platform one which is about to be i think agent one is there going to be another add-on on top of platform one are you are you going to call it just agent one or or are you going to keep calling it?

Not to get caught up in the alphabet suit of the solution. The whole platform is called platform one. And agent one is just kind of our way of calling the next gen solution. So we had a gen one solution that was platform one. It was more knowledge-based and people doing searches, just kind of like how you and I probably use Gemini or Claude just to look something up and get a little bit deeper information on that, like knowledge worker or how-to. And by the way, that was the first foray into giving people that additional comfort level of moving on from competitive solutions because one of the gating factors for us as a relatively smaller player is that there are larger, more established players that network engineers know how to use. And with AI, you are lowering the barrier to entry because now you're able to use AI to make changes on the network and help you where you don't feel locked in to one provider as much as you used to. And that's one of the things that's actually helping us in the market. Now, if I go back to your question about platform one, think about it in terms of branding as the next phase will be coworker mode, where coworker will add more automation and capabilities to you. You can schedule tasks and you can start to do some fun automation things on the network. There's another solution that will come later in the year that will get introduced in October, which is called the operator mode. That starts to get into more of the agentic-to-agentic flow and automation of agent-to-agent workflows. And it will also help and be licensed at the network engineer or at the enterprise level. And that is no longer tied to a particular device and a device license for doing things. This is an add-on.

What's the name of the add-on again, Stan?

That'll be operator mode. Operator mode, got it. agent yeah platform one operator so um so the agent one is going to be pretty big upgrade to platform one it will yeah because it you know it's like when we first did some some basic um ai features and then we all started to use uh claude uh for our everyday use case uh that's now tied to let's say all of your microsoft um solutions that would be the analogy is that now how you can do things and really dig in on a much deeper level and start to automate a lot of your processes. And when, when's agent one getting rolled out? It should be later this month. So that that's.

Congratulations. Yeah. I hadn't really thought about the fact that your platform is also backward compatible with all your competitors. And it makes it much, much easier now for people to deploy and use and use it and make it backward compatible. And what do you think will be some of the, the low-hanging fruit, what would be some of the major productivity improvements they're going to see as a network operator?

The biggest thing is going to be the troubleshooting and the speed with which you can reduce the mean time to resolution. That's kind of the industry standard when we try to think about taking care of any network issue that comes up. It has taken a while when you do more of a manual troubleshooting process to look at the logs and see what events happened, what triggered some problems on the network, and to have AI do that and do those searches in an automated way, that will really improve the end user experience if your networking team can resolve these issues very quickly.

And so just stepping back a little bit, the overall industry, I mean, do you think we're, it's a very cyclical industry, obviously. I mean, do you think AI is going to drive just major enterprise network upgrades for a few years to take advantage of it. And I guess related to this on AI, we talked about some of the use cases like manufacturing, obviously, stadiums. I mean, do you think they'll also look to bring a little bit more compute back on a localized basis?

That's a big part of it. And that, I think, is a combination of what happens with campus and why the campus upgrade cycle will carry forward. I also think in addition to AI, many of our competitors had multiple product lines, and they're still digesting multiple product lines. When customers qualify vendors, they typically qualify certain product lines. And this is very true in the government and regulated space, where you have to go through public tender or request for proposals. And as those competitors of ours try to get their other product lines qualified by these government entities and a lot of these regulated customers, they will run into having to open up these contracts for bid. And when those contracts get opened up for bid, that gives us a nice shot on goal with us and with our partner expansion plans and working more closely with the partner community. This is going to open up more and more opportunities for us.

That's on the campus side.

And your point about the data center side is also well taken. On that end, we're actually making investments this year. And some people, you know, especially after earnings have asked us, what are you guys spending on when it comes to your operating expenses? Obviously, we're spending a lot of money to develop platform one. We're also developing a lot of our data center solutions to take it to the next level, where, you know, whether it's 400, 800, and then so on and so forth, over the next several years, we do feel like that trend of bringing compute and AI workloads on-prem will drive enterprises to invest more. And where we are well positioned is that the management, like you said, not just our campus capabilities, but platform one can be used to manage the data center switches that will develop. And so now it becomes a single point where you don't have to swivel chair to multiple applications and multiple management consoles. It will be a de facto solution for you to manage your campus network, and then you can manage your data center network as well. And by the way, several years from now, when a lot of this is more in motion, will have operator mode that you can host on-prem. And it'll be a very cohesive solution where you take the AI capabilities and then you can host it on hardware that you'll buy on-prem from us and part of that solution.

So do you think you're in a position now to really accelerate share gains and who can you win share from and why, I guess?

Yeah, we think so. I mean, that's what underpins our confidence this year. Again, another year we expect double-digit product revenue growth. We still have a ton of share from a lot of our incumbents. We're a relatively small player, and we have some of our competitors that own half the market and then others that own 15% to 20% of the market. And we feel like we're in a very strong position as the market opens up in the manner I described. And in general, as a lot of customers have products that simply age out, end of life, end of support that our competitors are frankly helping us with and unlocking the market in that fashion, that's what we're going to be going after.

And you've had some improvements to go to market. I know some new products that are targeted at some new channels. Can you describe some of those new products and packages and how they're doing? Yeah.

In packages, platform one is basically a packaging of our support and our AI-driven subscription management capabilities. That bundle, which came out last year, accounted for 30% of our subscription bookings in fiscal 26. In Q4, it was all the way up to 50% of our subscription bookings. What's happening in that line, and you'll see an acceleration as we go through 27, you'll see, Tim, that SAS ARR will re-accelerate. But the offset is as we're combining these product lines on the subscription support, that discrete support line basically goes away. And so FY27 is a bit of a transition year for us as we get these customers booked. And there's a nice buildup of the deferred revenue balance that you saw in Q4, and that will continue forward this year. And we also show in some of our disclosures that the mix of our deferred revenue is really shifting towards subscription. 57% of our deferred revenue last quarter was already from subscriptions. So as the customer base transitions to platform one, and that'll go from about 10% at the end of 26, we're driving towards half our base flipped over to platform one by the end of fiscal 27. And by fiscal 28, we're kind of done with the transition of flipping the customer base over. Then you'll get that benefit of driving subscription support revenue off the balance sheet. And the growth rate could potentially double from where we are in 27 because the implied growth rate for this year in our guidance is about mid-single-digit growth of subscription support. support that will re-accelerate as we can recognize revenue off the balance sheet. So we're going through a classic transition that many companies have gone through from support to SaaS, and some of that is what people are seeing in our results in Outlook today, and that's what we're trying to just- And so when's that inflection point hit, do you think, where the growth will accelerate in that line item? Yeah, I think that towards the end of this year, you'll start to see that inflection.

And you've had some price increases lately because the product has improved dramatically, but also some of your memory costs have gone up quite a bit. Can you talk about what you've done and maybe have they stuck the price increases? And do you think you have more pricing power?

Yeah, we feel like the pricing power is there. We're trying to be smart about pricing. Right now, we have a nice expanded advantage over some of our competitors that increase price three or four times. We've only done it twice over the course of the last year. We're also guaranteeing price to customers that register their interest and register their deals with Xtreme through October and November. So I think that kind of gives you a clue of our near-term positioning. And then after that, we'll explore what we do with pricing relative to the component pricing and component costs and freight costs and things like that that we're seeing out on the market. But we're staying very close to all of those trends right now. It's a pretty dynamic environment when it comes to pricing. But having the supply, securing our supply chain, especially for memory, for the long term. And also knowing where our pricing is for memory this year, that allows us to be very smart and tactical about how we think about pricing.

Great, great color. So the last round, I think about two months ago, that pretty much stuck. That wasn't a problem.

Yeah, we've seen pretty stable discounts. And for FY27, we have some incentive plans for our channel and salespeople to hold on to discounts and make sure that the pricing that we are increasing is sticking. We are at the industry level, an industry that discounts very, very heavily, as you know. So what the list price is, you know, it's not like buying a car. MSRP is $50,000 and you're buying it for $49,000. This is more like MSRP is, you know, $50,000 and someone is going to be paying $20,000 for a product. And so it's a very heavily discounted product. It's just the nature of how our industry is constructed. And the industry leader essentially set that construct because the channel is a multi-tier channel. We have a distribution channel, we have a partner channel, so that allows the channel in that two-tier construct to price up to the customer.

Um, absolutely. Um, makes, makes perfect sense. Uh, the other big trend in the industry, I think is kind of bundling a lot more services together. Um, I mean, how do the customers feel about that? And, um, you know, it was just, is that another form of a price increase on customers?

Yeah, it's, it's a great point. And the bundling can be, you know, kind of what we're doing in terms of support subscription at the network layer. We find that some of our competitors are also trying to bundle unrelated things together. So we serve a very particular market need and everything that we do is focused on networking. When you start to bundle things in that are more like security oriented pieces, but unrelated to the network, then customers have to make a choice because they have to choose either best-of-breed or bundled solutions. We know that customers choose a lot of bundled solutions because obviously, you know, we've got companies with large share in our space, so it works for some customers. But when you try to bundle too many unrelated things, then it'll drive the customer towards more pure play, best-of-breed solutions. And that's where we can come in and partner with some of the other security companies or other hardware companies, and our channel partners can construct a package for customers that meets their needs.

And very helpful, thank you. You hit also on, you guys have the memory supply. Do you think some of your competitors maybe are short inventory?

In some of their product lines, in some of the cases, they are. And so we're taking full advantage of that by having better lead times. So some of our competitors have challenges in their lead times getting certain products. And that's certainly helping us in terms of additional share gains.

And with memory prices going up and prices going up, what do you think can happen to the buying dynamics? Or people saying, look, I'll hold off and buy, you know, I'll upgrade the networks in a year or two when prices come back down. or are they worried price is going to keep going up and maybe they're accelerating their upgrades now instead of waiting? What do you think is the dynamic?

Well, the dynamic that we wanted to create with this price guarantee is to allow customers to plan on a more natural cycle. So we don't want a feeding frenzy where everyone buys over the next month and then we don't have any demand over the next year. It's also not great from a supply chain planning standpoint, right, We can't supply everybody tomorrow. There is a certain lead time to building products and making sure we can meet customers' needs. So we think that the guarantee helps from a planning perspective, and we also remember the lessons from the previous supply chain-driven cycle where backlog just went to untenable levels, and then it was just an unrealistic amount of backlog that customers put in orders that they didn't really need. So we're trying to manage a lot of these things and use the lessons of the past to guide us going forward. We usually put backlog numbers into our 10K. So as our 10K comes out later this month, you'll see that backlog is at very reasonable levels. And, yeah, you know, it's improving somewhat, but it's no more near the levels of what you've seen in the past. So we feel pretty good that buying is more at a steady pace and that we're seeing measured growth, which is just how we like it.

I mean, just on the backlog point, do you force customers to put down any kind of deposit when they order? Like, you know, it turns out the backlog was pretty meaningless, right, three years ago. Yeah, it was a way to make the backlog more real.

I mean, if you just put in an order, right, it's like, you know, yeah, they put in their orders. um and so that's that's why we want to make sure that this this gets controlled um and a lot of it happens like i said through two-tier distribution channel so uh we're not seeing like for example um this is not a deposit on a new car you know where you put down a thousand dollars or a hundred dollars on the r2 rivian and you're going to get it in six months um so we just you know we want to meet the demand where it is today. We're not letting customers give us a small deposit and then take delivery in March of 27. That's not the customer behavior we want to drive.

Got it. Fair, fair point. A lot of enterprises have been blown through their IT budgets because of AI token maxing, I guess. Do you think that's also maybe impacting enterprise upgrades?

I know It's a great question. It's a great question. And I can I can put my finance hat on for a second and tell you that it comes from two different parts, usually, because when I pay for cloud usage for our employees, that comes from our OPEX budget. And it's the direct manageable spend that I manage from OPEX. And then if my hardware team and says, listen, I need a new network switch, I'm doing an upgrade or we need some equipment for our labs, then that becomes CAPEX. And those are two somewhat different budgets. I'm watching my direct manageable spend in OPEX a lot more closely than I am CAPEX because it's different dynamics, different useful life, different depreciation, and how I think about my P&L. So I think the difference here is that when you're buying a lot of this hardware and networking hardware and tapping into that CAPEX budget has a slightly different effect than the OPEX budget.

You know, that's a really, really, really, really good color. And, you know, it's a chicken and the egg, right? Without the network, you're not going to be able to use AI and kind of – and vice versa. So what you just described on the CapEx versus OpEx, you think that's a real thing for companies as you go in and talk to companies?

I think so. And, again, we see it in our own operations. So, you know, we can see it like as a guidepost for how others are thinking about it as well. There's, you know, your CapEx budget for hardware, and then there's your OpEx budget for day-to-day use and equipment.

So, you know, everything you can kind of tell in this cycle here. Obviously, we went through a bit of a COVID cycle, had a bit of a lull. I mean, you know, the industry has been cyclical historically, but, you know, AI seems to be a very, very different animal in a lot of ways. We can just basically automate and, you know, we can have robots all over the place. Those stadiums will have robots in all sorts of different forms, manufacturing, self-driving cars, you name it. I mean, where do you think we are in this cycle and how much longer can it last?

Yeah, I think the use cases keep growing. And so to us, it feels like a long-term cycle, both in terms of the hardware, but then also, like you said, we'll need a lot of automation. and so it drives the need for the hardware investment and the hardware is going to live for some time but also how you run the hardware and automate a lot of the processes is becoming important as well so a lot of install base will need to get flipped over and then there's the greenfield growth that you talk about as well so it feels like a pretty nice cycle to go into and gives us a lot of confidence you know we had our investor day last year in november and we talked about 7% to 9% product revenue growth. We're exceeding that. Even if you think about 2027, we're operating above that. We told the market. So it feels like a little bit of that super cycle to us. And again, for us, it's a function of how subscription support transitions from 26 to 27, 28, but it does feel like a nice long-term cycle of growth. And the top line is translating to 20% plus growth for us. So we get some nice operating leverage on top of that.

And do you think the subscription and support, like it's improved so dramatically that, you know, I'm going to make it up. Maybe I can cut my network personnel in half. Right. And maybe there's a lot of cost avoidance.

Yeah. I know that you'll cut a lot of people on day one, but as you grow and as your needs grow, it's, it's that cost avoidance story where you don't need to add personnel as your business and your network expands.

And you think that's meaningful enough that you can get a lot more pricing power on the SaaS side of things?

Yeah, because you're saving relative to a full-time employee that you might need to add. And the incremental cost of paying for the AI is a fraction of what it would be to make these human capital investments.

Yeah. I mean, oftentimes we hear from many companies that for every dollar they're spending on AI, the customers can save like $10 in labor or other costs. You think it's in that type of range?

Yeah. I think that's pretty reasonable.

Well, Stan, I always love talking to you. Exciting, exciting times. I really appreciate the time. Anything you want to mention in the last minute here that we didn't talk about or just the last pitch on the stock yet?

I just, we feel really good about, you know, where we are as a company, feel great about our outlook. And so just thank you for hosting us. Really appreciate having you and the strong interest that we're seeing in our story.

And thanks for all your help, Stan. Good luck.

Thank you. Take care, Tim.