Extreme Networks 2027 Q1 Earnings Call

Good morning, and welcome to Extreme Networks' first quarter fiscal year 2027 earnings conference call. I'm Stan Kovler, 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 the first quarter. A copy of the press release, which includes our GAAP and non-GAAP 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 Extreme's 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 Extreme's President and CEO, Ed Meyercord.

Thank you, Stan, and thank you all for joining us this morning. Revenue grew 10% year-over-year, marking Extreme'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. SaaS 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 Extreme Platform ONE, 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 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 disciplined 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 $1 million 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 viral 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 ONE 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 multiyear opportunity. Supply is also a differentiator. Our components are secured through calendar 2027, 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 U.S. chose Extreme 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. Hard Rock Stadium in Miami selected Extreme 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 Cambridgeshire and Peterborough NHS Foundation Trust in the U.K., 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 IT 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 IT overhead.

One of Austria's largest banks chose Extreme over a longtime 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 previewed the industry's first on-prem enterprise AI infrastructure for networking. Extreme's 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 ONE Coworker arrive 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 ONE, a task that would have taken a full morning. It also helped the team respond to a device 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 2027, we will make Agent ONE 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 2027. 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 ONE is already contributing to that growth.

Our funnel remains strong. We are 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 ONE and Agent ONE 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 am 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 in 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 marks 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 previously stated, fiscal year 2027 is the transition year where legacy support contracts are subsumed into Platform ONE contracts the fastest. We expect a sharp re-acceleration in recurring revenue growth in fiscal year 2028, 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 are pleased that we were able to preserve our price advantage over our competitors while passing on component cost increases. We have 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 $0.33 accelerated to 50% year-over-year growth and above the high end of our guidance range.