Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ARR from software subscriptions increased by 29% year over year, indicating strong demand for Extreme Networks Inc (EXTR, Financial)'s software solutions.
- The company has been recognized as the second largest player in cloud networking, rapidly approaching the 3 million mark for devices managed in their cloud.
- Gross margin achieved a high watermark of 63.5%, up 230 basis points from the prior quarter and up 330 basis points compared to a year ago.
- Extreme Networks Inc (EXTR) displaced several major competitors, including Cisco, HP, and Juniper, at significant customer sites.
- The company is investing in generative AI solutions, which are expected to improve productivity, lower total cost of ownership, and simplify networking.
Negative Points
- The fourth quarter results were impacted by an extraordinary provision for excess and obsolete inventory, amounting to $46.5 million.
- Operating expenses for the fourth quarter were $128 million, reflecting stringent cost controls but also indicating potential future increases due to higher incentive compensation.
- Despite the positive outlook, the company still faces challenges related to the normalization of channel inventory and supply chain constraints.
- The company’s operating margin for the fourth quarter was 13.5%, down from a profit margin of 17.4% in the prior year quarter.
- The company’s guidance for the first quarter of fiscal 2025 indicates a cautious outlook with expected revenue in the range of $255 million to $265 million, reflecting ongoing market uncertainties.
Q & A Highlights
Q: Curious on the guidance for FY25, what kind of macro assumptions do you have built in, maybe not on a quarter-by-quarter basis, but let's take it sort of first half versus second half, but we are anticipating a recovery, and if so, when?
A: We are expecting a gradual recovery in the first quarter and then we're expecting it to accelerate in Q4. This is based on the visibility that we have with current opportunities in our funnel. We expect this acceleration to carry through into calendar '25. (Edward Meyercord, President, Chief Executive Officer, Director)
Q: Congratulations on the competitive displacements. Is there one or two product capabilities that you would point to as to why these displacements are happening?
A: There are three different elements: 1) Our technology allows us to manage competitor equipment, providing a seamless migration and transition. 2) Our modern enterprise Fabric offers unique capabilities like zero-touch provisioning and micro-segmentation, which our competitors do not have. 3) Our cloud platform is the most flexible in terms of cloud options, deployment models, and security. (Edward Meyercord, President, Chief Executive Officer, Director)
Q: Some of your competitors have been really talking up their AI functionality. Can you go over your AI functionality and how it stacks up against some of your competitors?
A: The AI in the networking industry is primarily around AI Ops. Extreme is a leader here with our copilot application. The next generation of AI is generative AI, which we are investing in with our AI Expert. This will fundamentally change how you interface with the networks, providing insights that improve productivity and lower total cost of ownership. (Edward Meyercord, President, Chief Executive Officer, Director)
Q: When should we expect that next generation generative AI to be available?
A: We have opened this up in our AI labs to all of our sellers. We plan to gradually open this up to partners in October and November, with a full rollout expected in early calendar '25. (Edward Meyercord, President, Chief Executive Officer, Director)
Q: What do you see as your long-term top line growth objective?
A: We see ourselves as a double-digit grower long term. We are confident in achieving 10%-12% growth as we move into fiscal '26, driven by our technology differentiation and the competitive environment. (Edward Meyercord, President, Chief Executive Officer, Director)
Q: Where do you think the greatest market share opportunity geographically in the channel is for you given the competitive dislocation potential?
A: In the US, we see a big opportunity and are poised to execute on that. In Europe, we are moving up market to larger partners. Our new commercial models will open up more doors and provide significant opportunities. (Edward Meyercord, President, Chief Executive Officer, Director)
Q: Can you help us understand what transpired in the quarter regarding the obsolescence charge and how to think about inventory going forward?
A: Throughout the year, we evaluated our inventory levels and realized we had some inventory that was going to end of life in 2025. We decided to increase inventory reserves for these products to reflect their net realizable value. The remaining inventory is fresh new universal hardware, which we are confident in selling out. (Kevin Rhodes, Chief Financial Officer)
Q: What gives you confidence that you can grow revenue in the back half of fiscal '25?
A: Our technology differentiation is strong, and we have made significant changes to our sales and marketing organizations. We have better visibility into our funnel of opportunities and momentum in funnel generation. Additionally, the competitive environment and industry conditions are favorable for us. (Edward Meyercord, President, Chief Executive Officer, Director)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
