Chris Schwab

Chris Schwab requested further clarity on Extreme Networks' targeted gross margins beyond the current fiscal year (FY26) into FY27 and FY28, considering the increased adoption of Extreme Platform One and growth in services and subscriptions. He also asked for additional insights into the drivers of the 10% top-line growth, specifically if factors beyond federal markets, Europe, Platform One, services, and solutions, such as total cost of ownership or product quality, were contributing.

Answer

Executive Vice President and CFO Kevin Rhodes indicated that the long-term gross margin target of 64-66% remains unchanged, with more details to be provided at the upcoming Analyst Day. President and CEO Edward B. Meyercord reiterated that current gross margin impacts are near-term tactical issues, and the significant ramp of Extreme Platform One and new services will drive margin benefits in FY27 and FY28. Mr. Meyercord explained that the 10% top-line growth is driven by Extreme's differentiated Fabric technology (automation, security, resiliency), Extreme Platform One's enhanced visibility and multi-vendor capabilities, Wi-Fi 7, new commercial models, and certifications. He also highlighted market disruption from HPE/Juniper's merger and Cisco's partner program overhaul, which creates opportunities for Extreme Networks, coupled with the company's strong customer support and technology differentiation.

Chris Schwab asked about Extreme Networks' targeted gross margins for the next fiscal year and beyond, considering the expected growth of Extreme Platform ONE and increased services and subscription revenue. He also inquired if there were additional factors, beyond those already discussed, driving the company's 10% top-line growth, such as total cost of ownership benefits or product differentiation.

Answer

EVP and CFO Kevin Rhodes indicated that the long-term gross margin model, expected to be discussed at the upcoming analyst day, remains in the 64%-66% range, with current impacts being near-term component cost issues. He expressed optimism about subscription revenue driving future margins. President and CEO Ed Meyercord reiterated that the long-term outlook for gross margins hasn't changed, with significant ramp in Extreme Platform ONE and new services expected to provide margin benefits in fiscal 2027 and 2028. Meyercord affirmed that the 10% top-line growth is primarily driven by previously discussed factors, including Extreme's differentiated Fabric technology, unique automation and security benefits, Wi-Fi 7 leadership, new commercial models, federal certifications, and competitive disruption from HPE/Juniper and Cisco's partner program changes. He emphasized Extreme's strong technology differentiation, high customer support, and customer intimacy.