Extreme Networks Inc (EXTR) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Extreme Networks Q1 Financial Year '19 financial results.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Stan Kovler, Executive Director, Relations Strategic Development.

Sir, you may begin.

Thank you, operator, and welcome to the Extreme Networks First Quarter Fiscal 2019 Earnings Conference Call.

This conference call is being broadcast live over the internet and is being recorded on behalf of the company.

The recording will be posted on Extreme Networks' website for replay shortly after the conclusion of the call.

For your convenience, a copy of the press release and supporting financial materials are available on the Investor Relations section of our website, at extremenetworks.com.

I would like to remind you that during today's call, management will be making forward-looking statements within the meaning of the safe harbor provision of federal securities laws.

These forward-looking statements involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements.

For a detailed description of risks and uncertainties, please refer to our most recent reports on Form 10-K, 10-Q, 8-K filed with the SEC.

You should not place undue reliance on forward-looking statements, which speaks only as of today.

We take no obligation to update these statements after this call.

Throughout this call, we may refer to both GAAP and non-GAAP financial metrics.

Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP.

Reconciliation of non-GAAP to corresponding GAAP measures can be found in our earnings press release issued today.

And now I will turn the call over to Extreme's President and CEO, Ed Meyercord, for his opening comments.

Thank you, Stan, and thank you all for joining us this morning.

Welcome to our Fiscal Q1 earnings call.

Today we announced Q1 results that were better than expected, highlighted by 13% year-over-year growth in total revenue, to $239.9 million and non-GAAP earnings of $0.08 per share.

We improved our non-GAAP gross margin on a year-over-year basis for the 10th quarter in a row.

Our cross-sell pipeline grew to $166 million at the end of Q1.

Our product line management and engineering teams have done an excellent job converging 4 significant product portfolios from our acquisitions into 3 distinct solutions pillars: our Smart OmniEdge, Automated Campus and Agile Data Center.

And our field is beginning to embrace them.

We posted another quarter of record service bookings, with improvement in our attach rate and growing contribution of multiyear agreements.

And we had record cash collections of $300 million in the quarter, strengthening our balance sheet.

Customers embraced our new Smart OmniEdge portfolio, given the level of intelligence, adaptability and security in our solution.

We know from customers and partners alike that our solution is much easier to deploy, with faster uptime than our competitors.

Our teams can address the top concerns of our enterprise customers: the explosion of devices with the Internet of Things, the need for pervasive and consistent WiFi across campus, the need for protection from increased attacks, the need for increased performance expectations and the requirement to lower expenses.

We're really excited about the product innovations we have coming throughout Fiscal '19 associated with Smart OmniEdge.

We have strong customer interest in our IoT Defender product with CloudManage and ExtremeCloud software along with Extreme location upgrades coming in Calendar Q4.

And we have robust wireless and wired hardware refreshes in connection with the ramp of WiFi 6, the name for 802.11ax, the next generation of wireless technology.

At our global partner summit last week in Prague, with 500 partners and distributors in attendance, sentiment was strong in favor of the direction of our Smart OmniEdge portfolio as we build on our status as a wired and wireless leader in the July 2018 Gartner Magic Quadrant.

Our partner feedback reaffirmed Gartner's sentiment that Extreme is the premier alternative to Cisco for enterprises, with superior software-driven solutions with lower total cost of ownership and higher quality.

Our Automated Campus Fabric business continued to strengthen, particularly with our VSP and Summit product lines growing year-over-year on rising adoption in EMEA, in particular.

Our success with Fabric relates to the simplicity of deployment, the inherent security and the intelligence from our software suite delivering visibility and analytics running on our single pane of glass.

Meanwhile, our data center business performed in line with expectations for Q1, and we introduced 1 of the 3 key use cases we expect to deliver by calendar year-end targeting the internet exchange market.

This was reinforced by strong data center wins in EMEA and APAC.

The strength of our data center solution is grounded in our automation tools, embedded network visibility and highly adaptive platforms.

On the enterprise side, our customers are operating in diverse Cloud environments.

Automation, visibility and adaptability are critical, and we have unique solutions to address these critical customer’s needs.

On the sales front, we have made key hires across our service provider and federal businesses to improve our coverage model for these key verticals within data center.

With U.S. import tariffs on goods produced in China, we experienced Q1 ordering ahead of expected price increases that added strength to our top line.

We anticipate Q2 revenue to be in the range of $239 million to $249 million.

As Matt will elaborate, our Q2 EPS outlook of $0.06 to $0.13 assumes a negative impact of 1% on gross margin due to U.S. tariffs.

Overall, our first half revenue and EPS outlook remains in line with the expectations we laid out at the beginning of the fiscal year.

We expect to continue to grow sequentially throughout Fiscal '19 to over $1 billion in revenue.

Our investment in sales enablement and digital transformation will make it easier for our customers and partners to do business with Extreme.

We've rolled out a new partner portal.

We released training tools.

We're implementing faster turnaround for pricing authorizations and targeted incentives for our channel and distribution partners.

There was a lot of excitement about this at our partner conference.

These initiatives are underway and will continue over the next 18 months, but we are already seeing some benefits.

Our software sales were up 29% year-over-year, as our sales teams continue to lead with software that is resulting in solutions-based selling across our 3 pillars, which helps us improve deal sizes and become a more strategic partner for our customers, most of whom are going through their own digital transformation.

In Fiscal Q1, we were recognized by end users as a 2018 Gartner Peer Insights Customer's Choice for data center networking.

As of today, our customer satisfaction remains among one of the highest in the industry, both for data center networking and wired and wireless edge, supporting our position as the premier alternative to Cisco.

This quarter we had several exciting wins.

Our Smart OmniEdge portfolio was on display with a major university in Asia Pac serving 14,000 students and 1,000 staff across 70 locations.

Extreme was selected for a campus simplification upgrade project where we went head to head with all of our large competitors, including Cisco and HPE.

Our team led with the XMC management software for an end-to-end network deployment.

The simplicity of our solution was so obvious and compelling that our local team was able to break through with the IT team with just a simple laptop demonstration over coffee.

According to a customer, Cisco had to run 7 different applications to replicate the features and functionality in our XMC single pane of glass.

In our retail vertical we won a substantial wireless refresh from one of the top grocers in the nation who is an existing wireless customer and will be using our technology inside of all of its stores.

Our retail customers are very receptive to our Smart OmniEdge vision.

We are also working closely with this customer to deploy our data center solutions, which has the potential to be a significant cross-selling opportunity for us in the next 1 to 2 quarters.

We won a multimillion-dollar, next-generation data center refresh with a large public sector research institute in the U.S. focused on cancer research.

This is just Phase 1 of our engagement at this customer.

We won the data center and core network with a combination of our Automated Campus Fabric and data center [least find] products.

The solution also integrates with our existing XMC deployment with this customer.

We beat out Cisco, who was the incumbent here and captured a 5-year services agreement.

An existing customer who has been using our data center products in its global internet backbone to provide IP services to over 185 major exchange points in 40 countries has deployed our new SLX 9640 to enable continued expansion into new markets using this data center routing platform in a small form factor, dramatically reducing space and power requirements.

We recently notified our customers that we are raising our list prices by 7% in the U.S. and rest of world by 5% as of November 1 due to component costs and tariffs, as it relates to the U.S. Our list prices have remained the same for 4 years as we absorbed prior cost increases such as rising memory cost in 2017 without passing it along to our customers.

Our price increase remains below that of our largest competitor, and we still deliver greater value to our customers from a total cost of ownership perspective.

For U.S. products, the process of moving manufacturing from China is underway.

Our high-volume SKUs will be moved out of China by the end of March, and the rest will move by September.

Through our pricing and mitigation actions, we expect the tariffs to have a neutral impact to our EPS for Fiscal '19.

Finally, with the full support of our board in Extreme's strategy and outlook, today we announced a $60 million share repurchase program.

We believe this will drive EPS accretion to our long-term stockholders and reiterate our expectation to deliver on our goals.

We started off Fiscal 2019 with strong cash collections, and coupled with the strength of our existing balance sheet this stock buyback program will help us enhance our ongoing commitment to shareholder value and our commitment to prudent fiscal planning.

With that, I will turn the call over to our interim CFO, Matt Cleaver.

Thanks, Ed.

As Ed noted, our revenues of $239.9 million is up 13% year-over-year, generating $0.08 of earnings per share, both above the high end of our guidance range.

EPS benefited from strong revenue and both quarter-over-quarter and year-over-year margin performance.

Our product revenue of $177.7 million grew 8% year-over-year while addressing the distributor consolidation actions and data center business outlook we provided during the quarter and typical seasonality.

To that end, we reduced the number of distributors by 20% in Q1 and will continue to execute on our consolidation plan as we outlined last quarter.

We grew our services business by 32% year-over-year and 9.6% quarter-over-quarter.

Our services renewals team is focused on increasing our new attach and maintenance renewal rates.

Our success has been enhanced by multiyear offerings, where we are seeing an increase.

Earlier this week we rolled out incremental premier services offerings to provide customers a white glove service and drive standalone value.

During the quarter the Americas contributed 53% to total revenue; EMEA, 38%; and APAC closed out the remaining 9%.

We continued to see particular strength in EMEA, where we improved on discount discipline.

EMEA revenue grew 1% quarter-over-quarter, outperforming typical seasonality, and outpaced overall revenue growth, at 16% year-over-year.

Globally, government was our top performing vertical for the second consecutive quarter, followed by education, healthcare, manufacturing and retail to finish out the top 5.

Non-GAAP gross margin was 58%, compared to 57.6% in Q418 and 56.7% in Q1 last year.

Our gross margins increased for the 10th consecutive quarter, despite headwinds from one-time warehouse consolidation expenses and tariffs resulting in an approximately 1% impact to total gross margin in Q1.

Our non-GAAP product gross margin of 56.8% increased from 55.9% year-over-year.

Q1 non-GAAP operating expenses were $124.7 million and compared to $132.9 million in Q418 and $97.5 million in Q118.

The sequential decrease in non-GAAP operating expenses was mainly due to lower sales and marketing expenses tied to lower revenues and accrued compensation expenses.

On a year-over-year basis, our operating expenses increased, resulting from the addition of the full quarter cost structure of our previous acquisitions that were not present in Q118.

Cash flow from operations was $33 million, up from $21 million in Q4 and $19 million in Q1 last year.

Our total cash, cash equivalents and investment balance at the end of the September quarter was $140.2 million, up from $121 million at the end of Q4.

We took advantage of the strongest single quarter of collections in the company's history, approximately $300 million during Fiscal Q1, to strengthen our overall financial position and pay down $10 million of our revolver.

DSO decreased by 6 days, to 63, compared to 69 in Q418.

Our DSO and cash collections benefited from the final collections following the completion of our transition service agreement with Avaya related to our acquisition of the Campus Fabric business.

We also made significant progress on increasing deferred revenues, to $183.6 million, an increase of approximately $10 million from Q418 and $64 million over Q118, on greater scale and growth of our service bookings, including multiyear renewal offerings.

As Ed referenced, with respect to changes in our pricing, we have not raised prices in 4 years, except for 40 SKUs, most of which relate to our end of life programs.

Heading into this fiscal year, our intent was to raise prices, owing to increasing component costs that we have previously absorbed on behalf of our customers.

As a result, on November 1 we raised prices outside of the U.S. by an average of 5% and in the U.S. by an average of 7% to recover import tariffs.

Our channel partners are excited about new incentive programs for Calendar 2019.

Our BlackDiamond program for our highest-performing partners is focused on master-level certifications in technical training for each of our 3 solution pillars: Smart OmniEdge, Automated Campus and Agile Data Center.

This program will create specific goals for our partners designed to drive growth and results, particularly as we introduce new products and enter Calendar 2019.

We are the #1 market alternative to Cisco, delivering higher value and better total cost of ownership, and we believe our channel will be a force multiplier for Fiscal 19.

Now turning to guidance, we expect total Q2 revenue to be in the range of $239 million to $249 million.

Q2 GAAP gross margin is anticipated to be in the range of 55.1% to 57.1%, and non-GAAP gross margin is estimated to be in the range of 57.5% to 59.5%.

We estimate that the tariffs will have up to 100 basis point impact on our overall gross margin for Q2 '19.

Overall, we expect our pricing actions will be neutral to accretive relative to the slightly lower gross margin outlook we provided.

Q2 operating expenses are expected to be in the range of $134.7 million to $137.7 million on a GAAP basis and $125 million to $128 million on a non-GAAP basis.

Q2 GAAP net loss is expected to be in the range of $7.7 million to $0.1 million or a loss of $0.06 per share to breakeven.

Non-GAAP net income is expected to be in the range of $7.8 million to $15.4 million or $0.06 to $0.13 per diluted share.

In Q2, we expect average shares outstanding to be approximately 119.1 million on a GAAP basis and 121.6 million on a non-GAAP basis, excluding the impact of any shares we may repurchase.

With that, I will now turn it over to the operator to begin the question-and-answer session.

(Operator Instructions) Our first question comes from Mark Kelleher with D.A. Davidson.

Nice work on the balance sheet.

That's really good.

Could you talk a little bit about the core products, the Brocade acquisition, versus the -- your core revenue?

I know you struggled last quarter with that particular piece of the puzzle.

Can you just give us an update on how that's working its way out?

Sure.

Thanks, Mark.

And yes, we -- there's a lot of work going on, on the data center side.

We've made some changes there, and in the quarter, we saw some nice customer wins.

We see the stabilization of that business.

And as we mentioned, we've done some hiring in some key segments like service provider and federal that are large pieces of that data center business.

And we're really excited about the talent that we've brought on and how quickly they're ramping up.

So we're already seeing some of these opportunities in the pipeline.

From -- next week, you're going to see an announcement from us regarding our data center launch, if you will, our third pillar.

We're calling it our Agile Data Center.

And we have some real advantages in terms of our cross-domain automation, some of the flexibility.

We've tied this to Extreme Management Center.

And it's really the adaptability and the agility of these platforms that gives us an advantage.

We've had some really nice wins with the internet exchange customers, and our field is starting to embrace the opportunities for enterprise customers.

I'll be honest and say it's taken longer than we'd like.

I think that's always the prerogative of someone in my seat.

But the field is adopting and picking it up, and we're seeing momentum.

So we think we've -- data center was right in line with our expectations, and from here we're going to -- well, we expect to see growth.

All right.

And how about an update on your distributor reduction program?

You said you were down 20%.

So by my math, you went from 250 to 200 maybe, somewhere in that neighborhood.

Can you just tell us where you're headed there?

Yes.

That's about right.

We've made a lot of progress there.

Our distribution team has done an excellent job, supported by our supply chain team and our field.

Yes, 20% is about the right number, 40 in terms of the reduction.

The other thing is we've also found some opportunities for -- stocking opportunities in markets like Asia Pacific where we haven't had that in the past.

We had about 100 of our distributors present in Prague at our partner conference, and about the top 10 of our distributors today are running about 85% of our business.

Remember that about 70% of our business runs through distributors and 30% is direct so -- on the product side.

So we've -- we're making a lot of progress there.

The team is doing well.

The rationalization, I would say, is right on plan.

Our next question comes from Alex Hernandez with Needham & Company.

This is Dan Park on for Alex.

So I was just wondering if you could provide some color on what you're seeing in terms of competition on the data center side.

Have you seen any meaningful changes throughout the quarter?

Not really.

Keep in mind that one of the things that -- and one of the reasons why we were excited about the acquisition was just the huge base of customers that we have.

So a big opportunity that we have is to go back into our base of customers and to sell to our existing base, in addition to cross-selling to existing customers that have our deployments in other places in the network.

Yes, I would say, by and large, that the likely and most obvious competitor that we've run into is Cisco.

That hasn't changed.

People often ask us about Arista.

We don't see Arista as much, and I think some of that has to do with the verticals where they're strong and where they play versus where we're strong.

We have dominant market share in the internet exchange market.

That business continues to be healthy.

And we are -- there's a lot of work -- good work being done by our engineering teams and our PLM teams in terms of advancing the capabilities of our new SLX platform.

So I guess, I would just say that nothing has really changed.

The likely suspects are who we're running into, and the opportunity for us will continue to be this big base of customers that we have to sell into.

Okay, great.

And so just a follow-up.

I know your government vertical was sort of called out on the call.

Can you just clarify for us what's sort of driving the growth there and customer adoption?

Again, we have really a large base of government customers.

And what I would say is it's the combination of our Smart OmniEdge and our Automated Campus.

What's happening in our field is people are embracing the fabric.

The simplicity and the ease of deployment of that fabric technology is really catching on with our customers globally with particular strength in EMEA.

So the combination of our policy, our Extreme Management Center and the efficiencies that we can drive and then the ease of deployment and the security and the hypersegmentation of our fabric.

The company between our field and our partner is really beginning to embrace and understand how these technologies come together.

They're -- they have been rolling that out, and they've been rolling that out successfully.

So we have a large base of government customers.

Keep in mind, government can overlap with education.

And I guess, I would just say that it's really a by-product of this large base of customers that we have and the strength of the product portfolio coming together.

(Operator Instructions) Our next question comes from Erik Suppiger with JMP.

Two questions.

One, why are you raising the prices for customers outside of the U.S.?

My understanding is that the tariffs are just going to be on the U.S. customers.

And then secondly, you had repeated a couple of times that you view yourself as the #1 alternative to Cisco.

How does HP -- how are you viewing their position in the market when you say that?

Sure.

Well, one of the things that we commented on is that, as it relates to the pricing issue, is that Extreme and really all of the companies that have come together in the new Extreme hadn't raised list price in a very long time in over 4 years, and we have been incurring cost increase.

We talked about memory prices rising and other elements of our cost structure rising.

And it was our intention to raise list price this year.

And the tariffs kind of created this forcing function because we had to do it in the U.S. So we took the opportunity then to raise our list price globally.

So it's really about our component costs going up and the fact that this is something that we've been eating altogether and we need to share some of that with our customers.

So that's what's going on outside.

As we look into January and the prospect of a 25% tariff, that -- pricing actions from that point forward would relate only to U.S. customers.

Hope that answers that question.

Yes.

Quick one on that one.

Do you have any thoughts as to how much you might absorb versus how much you might pass along, particularly given that it sounds like you're moving fairly quickly to move manufacturing outside of China?

Sure.

So we're -- we have a lot of different mitigation initiatives underway.

And at the end of the day, we're trying to minimize the impact to our customers and our field and our partners.

That's -- it's a top objective.

At the same time, we're also thinking about our investors and preserving our gross margin.

So we're balancing that, and we're balancing that to be gross margin neutral.

The good news for us is that our larger competitors, particularly Cisco, has announced that they're raising prices and they're raising prices more than we are, and the fact that our total cost of ownership is already below Cisco.

So they're giving us an umbrella to operate under which is a positive for us.

And we also believe that we'll be able to move more quickly because we're more nimble in moving that manufacturing out of China so that we'll be able to mitigate that cost sooner.

So from that standpoint, we think our pricing advantage will only be greater.

So I hope that's helpful.

From a competitive perspective, it's kind of interesting.

If you look at the Gartner Magic Quadrant, you can see the move that we've made over the last 5 years, each year the only player moving up and to the right, while Cisco and HP, being the only 2 in the leadership quadrant, have been moving down, actually.

And so we moved up into the leadership quadrant for the very first time.

If you look at the top half of Gartner's MQ, we are a challenger in the data center market.

So as it relates to HP, they're not a great end-to-end story.

They have an edge story through Aruba that's quite compelling, but they've talked about reselling Arista.

Those kind of relationships always struggle in go to market, and they don't really have an end-to-end solution.

So -- and we think that's powerful, and that's resonating well with our partners and customers.

So we're the only other player in the top of the MQ next to Cisco.

And when you talk to Gartner, they'll say, “Look, your solutions, your networking solutions, are just as good.

From a hardware perspective, you go toe to toe.

Your software is more elegant.

Your single pane of glass is superior.

Your total cost of ownership is lower.

You're delivering higher value, and your service is superior.

So you're the premier alternate to Cisco in the marketplace.”

And this is something that we're embracing.

We're hearing it from partners, and I think this is something that we're hoping to get leverage from our partners as this message kind of galvanizes and resonates.

It's not just Extreme pounding the table saying this; it's third parties saying this.

Our next question comes from Christian Schwab with Craig-Hallum Capital Group.

So as we -- can you tell us where you're going to move the volume to in March when you take it out of China?

Taiwan.

Okay.

When we look at the non-GAAP gross margins, guidance of 57.5% to 59.5%, we're raising prices and now we kind of expect neutral effects going forward.

Is that kind of the -- should we kind of assume non-GAAP gross margins for the remainder of the year stay in that type of range?

Or are there any puts and takes that could increase gross margins over time this year to have a 6-handle at front?

Our goal, we haven't given up on the 60% target, Christian.

This quarter, the timing of the tariffs caught us a bit.

We have to give 30 days notice.

The effective date of the tariffs was September 24.

We took a little bit of a hit this quarter.

And then from a timing perspective, our customers and partners are pretty smart.

We're seeing great linearity this quarter because people are pulling in orders into the first month of the quarter to benefit from the lower prices, if you will, which is how we have good visibility to the quarter based on the linearity that we're seeing.

So this is somewhat of a onetime impact for this quarter.

And then in terms of our pricing strategy, we're managing our mitigation efforts to be neutral.

So as we go into Q3, as we said earlier, we expect gross margins to step up each quarter of the year.

That hasn't changed.

So we are expecting a step from Q1 to Q2 and then to Q3 into Q4, and we believe in Q4, we're going to be over that 60% target.

Okay, fabulous.

And as far as operating margin structure, I know you spent some time previously talking about driving to a double-digit or a 10% operating margin kind of objective.

Is that still -- are you still hoping to operate in that type of business model towards the end of this year?

And is there any opportunity to operate that on a yearly basis?

The answer is yes.

That's where we're going.

That hasn't changed.

As you know, we've been talking about this for a while.

It's taken us a little bit longer.

And with the reset, we've started over again, and we'll build.

We'll be guiding there for Q4 of this year, our fiscal Q4.

So in June, our plan is for a 60% gross margin and that double-digit operating income margin.

Okay.

Fabulous.

And then my last question has to do with E-Rate.

3 years ago you guys had a very successful run in education, as did the industry in the first year of that program.

There's been some structural changes at the top that may or may not make it easier for schools to get money.

But that being said, there's a 3-year window, I understand, where schools who take money can't take money.

And all of those prosperous schools, if you will, who took money 3 years ago will be able to come back in this window and ask for funding again.

And with the transition to a next-generation WiFi architecture and that being the #1 priority of most K-12 schools, are you beginning to see any positive impacts or outlook or dialogue in the education market for a recovery in the United States in that market?

And as you're highlighting, this was a tough quarter, and it's been a tough year for us in education.

And given the strength of prior year, it's given us some headwinds and some tough quarterly comparisons that we've had to overcome.

This is the last year of the funding program, and there are a lot of dollars that are left over.

And our teams are expecting, they're expecting E-Rate to come back quite a bit in the second half of this year.

We don't expect to see it in Q2, but in Q3 and Q4 we're expecting a pretty significant return of education customers and spending from that program.

And our next question comes John Marchetti with Stifel.

Curious as you talked a little bit about how you pulled some orders in or some customers are trying to get ahead of some of this tariff actions, if there's any risk there as we look out a couple of quarters that you run into a bit of an air pocket, if you will, on the demand side with some of that stuff being pulled in currently and kind of what your visibility looks like there so you can mitigate that as move forward.

John, it's a great question and it makes a lot of sense.

What we've seen so far, we saw a little bit of that last quarter, which helped our top line.

This quarter we're seeing stronger linearity which relates to the global price increase we put in place and people may be trying to get in front of that.

So we're seeing this unprecedented linearity as far as Q2 is concerned.

We haven't assumed that we're pulling anything in from Q3 at this stage.

Really what's been going on, and I talked about $166 million of cross-sell pipeline, last quarter we talked about $100 million of cross-sell pipeline.

That's what's giving us the confidence in the second half of the year.

And if you talk to our geo sales leads and you look at the pipeline and the quality of opportunities that we have in the pipeline as we turn the quarter and go into Calendar '19, we're feeling confident right now with what we're seeing.

So I would say it's really pipeline-driven, and at this point our guides we haven't assumed that there's a big pull-in in Q2.

Great.

And then, just back on the price raise question a little bit, you had mentioned that that had actually been in the works for a little bit and with the tariff stuff it sort of gave you the excuse to go ahead and pull the trigger or maybe do that a little bit more broadly.

Had that been sort of telegraphed to customers ahead of time?

How are -- I'm just curious.

Some seem to be reacting fine in the work that we've done.

Others seem to be pushing back on these increases.

And I'm just curious if we do sort of see the next tranche and things start to climb even higher how you think that may sort of impact purchasing decisions and demand, at least in the sort of intermediate term, as they have to grapple with sort of their network demands and some significant tariff increases if they go that high.

Let me take a shot, and then I'll let Matt jump in behind me.

First of all, I think everybody understands that when we talk about what's driving our customers at the edge with the Internet of Things, with new WiFi capabilities, with what's going on in terms of the requirement for automation, the software tools, what's happening in data centers in terms of these complex, multi-Cloud environments, that's not changing.

Networking traffic isn't changing.

The need for networking is very strong.

So in terms of market demand, I think we all realize that's not going to stop and turn around.

It's going to continue to grow.

It's a relative analysis because you have to look at if people have to make purchases, who do they go to?

And keep in mind, we've been the beneficiary, but Cisco has been out raising price.

So if we continue to price below Cisco and on a relative basis our increases are below theirs and we can move more quickly to mitigate expenses, then that only increases our advantage in the marketplace.

The other thing I would say is that 85% of our revenue comes from our installed base, and these are somewhat captive customers and they're sticky.

We've been selling more software.

And so to the extent that we are able to continue to drive our solutions, the 3 pillars we talk about, the pricing impact becomes less meaningful.

Matt, do you want to add anything to that?

Thanks, Ed.

So just a couple of other things to add to that.

Associated with our forecast and expectation around the price changes occurring in the October/November time frame, the past 2 years from a services perspective we have implemented price changes associated with services only, not hardware at all related.

And so the timing was to line up with that.

When we identified the change in the tariff, we wanted to make sure we were aligned from a cost structure perspective to identify the overall pricing and make one change at the same time associated with both our expected underlying cost structure change as well as the tariff impact that it was going to have.

The concern around the January time frame from our customers is probably the most notable item.

And from an international perspective, we expect that the price changes will only impact the U.S. resulting from the Q3, our Fiscal Q3, the January time frame, price change.

And I think the key here is to note that we're below Cisco before and we continue to be below Cisco, so driving our total cost of ownership at a lower rate.

This concludes today's Q&A session.

I would now like to turn the call back over to Ed Meyercord, President and CEO, for closing remarks.

Well, thanks, everybody who could join us on the call today.

I also want to thank all of our Extreme employees who are listening in for a job well done.

I think everybody knows that this is a team that was 11 for 11, running hard.

We did something that was very complicated, in terms of buying 3 companies over an 18-month period.

Everything is on the Extreme platform today, and we are now looking at running and optimizing.

During the integration process, we hit some bumps in the road, but we're back.

We're 1 for 1 now, back up on the board and looking forward to executing again on this next quarter.

We hope to speak with you at the Needham conference on November 13, as well as Barclays and Cowen conferences in December.

Thanks again for your time, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone, have a great day.