Extreme Networks, Inc. (NASDAQ:EXTR) Q4 2023 Earnings Call Transcript
Extreme Networks, Inc. (NASDAQ:EXTR) Q4 2023 Earnings Call Transcript August 2, 2023
Extreme Networks, Inc. misses on earnings expectations. Reported EPS is $0.08 EPS, expectations were $0.31.
Operator: Good morning, ladies and gentlemen thank you for standing by. Welcome to the Extreme Networks’ Fourth Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. I will now hand the conference over to your speaker host, Mr. Stan Kovler, Head of Investor Relations. Please go ahead.
Stan Kovler: Thank you, operator. Good morning, everybody, and welcome to the Extreme Networks fourth quarter and fiscal year end 2023 earnings conference call. I’m, Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Networks’ President and CEO, Ed Meyercord, and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks’ financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website at extremenetworks.com along with our earnings presentation. Today’s call, our discussion may include forward-looking statements based on our current expectations about Extreme’s future business, financial and operational results, growth expectations and strategies.
Our financial disclosures 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 report for the period ended June 30, 2022 [ph], and subsequent 10-Q reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty 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.
Ed Meyercord: [Technical Difficulty] performance with revenue growth accelerating to 31% in the fourth quarter and 18% overall for the year. This is the second consecutive year of double-digit organic growth. We also delivered a $1.09 a share, an EPS of 42% year-over-year, and we expect the bottom line trends to continue with earnings growing faster than revenues. Our free cash flow doubled in fiscal 2023, and we ended the year with a net cash position even after paying down $80 million in debt and buying back a $100 million of our stock. We outperformed our original top-line outlook for fiscal 2023, and based on industry analysts, estimates outgrew the market by two times. This combined with the increase in volume of larger deals and new logos is a clear indication that we’re taking share from our largest competitors.
Customers recognize that Extreme offers the simplest and easiest to manage end-to-end enterprise networking platform in the industry. Our One Network, One Cloud, One Extreme solution enhanced with our AIOps capabilities, excels relative to the complex and high total cost of ownership solutions of our competitors. With this differentiation, new growth vectors and higher level of our team’s execution, I’m confident in our continued growth outlook. With today’s modern network, as the connective tissue and enterprise digital transformations, the demand for our advanced cloud-driven solutions remain strong. We continue to elevate both our competitive position and the awareness of the Extreme brand in the market resulting in funnel growth. Increasingly, customers are recognizing our value proposition and placing their trust in Extreme to deliver better outcomes for their mission critical network deployments.
Given our market share position, we’re benefiting from being in such a large and growing market where small share gains have a big impact on Extreme’s, financial results. In our fourth quarter, bookings grew mid single digits sequentially, and we’re in line with normal seasonality. We expect normal seasonal trends going forward is industry-lead times return to normal. Our U.S. business was particularly strong in Q4, partially offset by Germany and the APAC region. With this backdrop, we expect revenue growth to remain strong in fiscal 2024 and to start the year with mid-teens growth in Q1. Our competitive differentiation and continued success is being driven by our One Network, One Cloud, One Extreme solution. At the core of our One Network promise is our universal hardware portfolio.
This is the most flexible, highest performing end-to-end networking hardware in the industry. And with Extreme’s unique and highly differentiated fabric, we make it simple to orchestrate applications and policy across the entire campus from the core to the wireless edge and across the wide area network. We bring enhanced security, the ability to segment networks and zero touch provisioning, eliminating confusion, complexity, and the need for additional IT staff. This is in stark contrast to our competitors Fabric Solutions, which were designed for service provider and data center networks and not meant for campus. With One Cloud, we’re the only provider to offer choice in how customers manage their networks, public, private, edge, or hybrid cloud through a single interface.
And we’re the only vendor that can manage both Extreme and third-party hardware, providing enhanced visibility, flexibility, and the ability to seamlessly upgrade to an Extreme network at your own pace. Finally, our CoPilot AIOps capabilities provide proactive insights and analytics to improve network availability and management. And with One Extreme, we deliver the industry’s most simple commercial terms for licensing with one price for all devices. Our licenses are portable and poolable [ph] providing unmatched value and simplicity. Again, this is in stark contrast with our competitors who have complex tiered licensing models that are notorious for hidden costs. Customers increasingly view their network as a strategic asset to streamline operations, power and scale new services and reduce business risk.
Our AIOps Solutions are getting traction with customers as they look for new ways to leverage the network to drive better business outcomes. This is evidenced by the 182 customers that spent over $1 million with Extreme in fiscal 2023. Some highlights from our fourth quarter include wins with the University of Mount Union. They upgraded their network with our end-to-end wired and wireless solution. The new network provides seamless, AI and Fabric powered automation and optimization across campus, which improves IT productivity. Northampton NHS Trust, a leading hospital in the UK needed to upgrade its network to keep pace with increasing bandwidth demands generated by IoT medical devices, AI and medical applications and Wi-Fi in patient rooms with a new Wi-Fi 6E network, they are simplifying IT operations and improving patient care.
One of the world’s largest Ski Mountain Conglomerates with 50 resorts across 15 states and three countries chose Extreme after deep frustration with one of our largest competitors. Our value proposition of creating One Network managed by One Cloud was essential to the customer in order to conduct a seamless migration with visibility and management capability to both the legacy and new network environments from our cloud, eliminating the risks of ripped and replace. We extended success in retail with a key win with a leading grocery chain in Mexico with nearly 900 locations the company is upgrading its network with analytics and cloud management capabilities to support a better retail experience. They’re also leaning into AIOps with our CoPilot Solution to help augment their IT staff.
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And lastly, we expanded our footprint within MLB and the NHL winning new deals with the Arizona Diamondbacks, Philadelphia Phillies and Philadelphia Flyers cementing our leadership position in sports and entertainment venue. Extreme was once again recognized by Gartner Peer Insights as the customer’s choice for enterprise networking for the sixth consecutive year. We’re recognized for our strength in product innovation, ease of deployment and outstanding customer support. We’re also named one of the best places to work based on our Flex First remote work policy, our culture of inclusivity and employee satisfaction. This quarter, we are able to bring our product lead times down again as our supply chain environment continues to improve.
We have the benefit of a healthy backlog of customer orders with request dates that spread fairly evenly through the end of our fiscal year. End customer orders remain firm and distributor orders have normalized giving us confidence and our outlook for this fiscal year. We continue to expect our backlog to settle in a range of 75 million to 100 million in Q1 2025. Our exposure to the fastest growing areas of the networking market, share gains, new go-to-market partnerships provide ample growth opportunities to drive double-digit growth long-term. We are forecasting market share gains with channel partners, leveraging the strength of our unique solutions in the enterprise market. We also have an opportunity to expand our subscription business to our entire hardware portfolio in fiscal 2024.
And we introduced a disruptive managed services platform that will expand our go-to-market footprint and add a new growth vector for Extreme as we progress through the year. I’m looking forward to our Investor Day currently scheduled for November 7th at the NHL Headquarters in New York City. We will provide details soon and we hope to see you there. And with that I’d like to welcome our new CFO, Kevin Rhodes and ask him to cover the financials in his inaugural earnings call with Extreme. Kevin?
Kevin Rhodes: Thanks Ed. Let me say it’s been a pleasure for me to join Extreme and a time when its financial position has never been stronger. I’m encouraged not only by our financial performance but also our competitive differentiation in this large market with great opportunities to take share. In my first couple of months on the job, I’m impressed with the company’s culture and the level of talent we have in this organization. At all levels in our company, I see strong sense of urgency, ownership, curiosity and commitment, and a real desire to win. During fiscal 2023, we once again demonstrated the level of execution this management team expects, and we are committed to continuing that in the future. Let me get into the numbers.
First, I’ll start with the fourth quarter. Revenue was $363.9 million and grew 31% year-over-year and 9% quarter-over-quarter exceeding the high-end of our expectations entering the quarter. Product revenue accelerated to $261.7 million or 40% growth year-over-year, and 9% sequentially, reflecting continued improvement in our supply chain environment. We achieved strong double-digit growth in both campus switching and wireless LAN partially offset by a decline in data center revenue. Our SaaS ARR grew 25% year-over-year to $129 million up from $103 million in a year ago quarter. Driven by the strength of our renewals, subscription deferred revenue was up 38% year-over-year to $217 million. Total services and subscription revenue was $102.2 million up 12% year-over-year.
This growth was largely driven by the strength of our cloud subscription revenue, which was up 27% year-over-year. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $501 million up 25% year-over-year and 8% sequentially. Our gross margin came in at 60.2%, up 110 basis points sequentially and 320 basis points from the year ago quarter. We attribute this to improvements in product gross margin due to higher revenue and an improvement in the supply chain and distribution costs as well as product mix. Fourth quarter operating expenses were $156 million up from $132 million in the year ago quarter, and up from $144 million in the third quarter of 2023, reflecting higher investment and R&D and sales and marketing expenses to support our higher revenue growth.
Our strong revenue growth, gross margin expansion and operating leverage contributed to another record quarter for operating margin at 17.4%, up from 9.6% in the year ago quarter, and up from 15.6% in the prior quarter. To that end, fourth quarter earnings per share were $0.33 at the high end of our guidance, entering the quarter. For the full year, fiscal 2023 revenue of $1.3 billion grew 18% from the prior year on product revenue growth of 22%. During fiscal year 2024, we expect continued strong product revenue growth given the growing interest in our solutions by customers and the ongoing normalization of our backlog. Wireless product revenue grew at over twice the rate of our switching product revenue during the year. Recurring revenue is another positive story here at Extreme.
We generated $380 million of subscription, maintenance, and a small amount of professional services revenue. This is highly predictable and visible revenue for our company, and we continue to drive more recurring revenue over time. As we ship product from backlog, it is generating a tailwind for SaaS growth. Gross margin for fiscal 2023 ended the year at 58.9%, up 50 basis points year-over-year based upon improvements in supply chain related costs, price increases and cost absorption owing to higher revenue and larger scale. Operating margin of 15.2% grew 290 basis points from a year ago and operate expenses as a percentage of revenue improved to 43.7%, which is better than our Investor Day guidance. GAAP EPS grew 76% from a year ago, and non-GAAP EPS of a $1.09 per share grew 42% representing the significant operating leverage we have in our model.
We also strengthened our balance sheet with strong cash generation and the refinancing of our debt. We ended the quarter – ended the year with net cash position of $10 million after repurchasing $25 million worth of our shares at the average price of $17.32 per share. The $235 million of free cash flow we generated during the year represents an 18% free cash flow margin at the high end of our long-term model, of this amount, $75.5 million was generated in the fourth quarter drive driven by higher gross margins and EBITDA. Lastly, at the end of fiscal 2023, we refinanced our long-term facility with a $200 million term loan and $150 million of available revolving credit. The interest rate is currently just over 7% annually. Our balance sheet remains in excellent condition with a leverage ratio well below half a turn.
Now, turning to guidance. We remain optimistic about the enterprise networking spending environment and our ability to take share. Customer spending trends are reverting back to normal seasonal patterns given the improvements in our networking supply chain. As a reminder, the fourth quarter tends to be a seasonally higher quarter than the first quarter. Our gross margin outlook is also benefiting from an improved supply chain as expedite fees and shipping costs continue to improve. For the first quarter, we expect the following. Revenue to be in a range of $342 million to $352 million. Gross margin to be in a range of 59.5% to 61.5%. Operating margin to be in a range of 15.3% to 17.6%, and earnings to be in a range of $0.28 to $0.33 per diluted share.
All in, I see tremendous opportunity for Extreme to grow our business, accelerate our revenue contribution from SaaS and improve our margins and cash flow. I look forward to laying out some of our plans at our Investor Day later this year. And with that, I’ll now turn it over to the operator to begin the question-and-answer session.
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