Q3 2020 Earnings Call
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Ladies and gentlemen, this is the conference operator your conference is scheduled to begin momentarily until that time realizable once again be placed on music cold. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the extreme that whereas Q3.
Q3 F. Why 20 financial results conference call at this time, all participants will and they listen only mode. After the speakers presentation. There will be a question answer session to ask a question doing the session you need to press star one on your telephone.
We used to be it buys that todays conference is being recorded if you acquire any photos assistance. Please press star zero.
Oh, no like Santa conference over to Us because today Mr. Stephen Colbert.
Thank you. Please go ahead Sir.
Thanks Frederic.
Welcome to the extreme networks third quarter fiscal 2020 earnings conference call I'm, staying Kobler, Vice President of corporate strategy in Investor Relations with me today, our extreme networks, President and CEO, Ed Meyercord and CFO Remy Tomorrow, we just distributed a press releases filed an 8-K detailing extreme networks third quarter fiscal 2020 finance.
Our results for your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliations and our financial results presentation are both available in the Investor Relations section of our web site at extreme networks Dot com.
I would like to remind you that during today's call. Our discussion may include forward looking statements about extreme networks future business financial and operational results growth expectations and strategies acquired technologies product operations pricing changes to our supply chain the impact of tariffs acquisition and integration of Aerohive networks and.
Digital transformation initiatives, 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 as described in our risk factors in our 10-K report for the period ending June Thirtyth 2019.
Filed with the FCC and in our most recent 8-K and 10-Q filings 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.
Now I will turn the call over to extreme networks, President and CEO Ed Meyercord.
Thank you Stan Thank you all for joining us this evening.
Our teams have been working closely with our customers and partners impacted by covert 19 and.
Stories and positive outcomes or heart warming.
We're living in unprecedented times and I want to thank our customers and partners for their resilience and support.
I just want to thank our employees for their dedication and continued focus while working from hall, we were fortunate to be early adopters of Microsoft teams into zoom collaboration platform, enabling 97% of our employees to transition seamlessly to work from home environments.
The resulting economic fall out of Cobot night team remains an unparalleled headwind.
We began to encounter the resulting spending delays from the pandemic in March extending into April when most of our largest markets. It actually core team and social distancing protocols pushing out deals in our pipeline.
So Paul supply constraints, along with additional logistics related challenges in certain countries due to border closures also contributed to the shortfall.
Despite the challenges we're all experiencing with a pandemic we continue to close large deals all in all we had 22 customers it's been over a million dollars with us during the quarter similar to Q2.
However, it is taking longer to close because of a number of covert 19 issues.
Remi will discuss the quarter in more detail, but we are building on the face strong recurring revenue and we continue to take actions to further strengthen our balance sheet. We feel that we are well positioned to weather the macro act economic impact of covert 19.
Key highlights during the quarter were completing the integration of Aerohive on April six.
And migrating all systems and processes to extreme systems, while operating remotely across most of our locations executing on a new R&D model to drive feature and solution velocity that has been other worse since we reorganized engineering leadership at the end of Q1.
A proof points around this were highlighted by cloud of finally I just switching portfolio ahead of schedule with the launch of extreme cloud I Q pilot.
Offering device agnostic license license portability, and a simplified licensing and pricing model by July our co pilot automation software suite will be rolled out and management of our fabric portfolio by extreme cloud I Q will be added.
We made significant progress and our 70% portfolio refresh that is approaching completion in fact during Q3, new product revenue remain more stable than revenue from our older products.
We upgraded most of our network operations locations for extreme cloud I Q2, our fourth Gen cloud that as 100% uptime no need to count the nine for reliability.
Our extreme cloud like you application continues to experience growth and we added over 5000, new customer accounts on the platform with over 40000, new devices under management.
In April alone, we added over 20000, new devices under management. It daily traffic has grown 50% at our management application since the pandemic began and 60% since last quarter.
Reducing opex with a strategic realignment, both our R&D in our go to market organizations and in order to lower our net income break even point to 220 million in revenue.
Our finance team has moved very quickly to secure preliminary and then longer term covenant waivers from our bank syndicate through March 31, 2021, thereby avoiding potential dilution and or higher price subordinated debt.
We continue to see that networking remain vital for customers. Despite the virus and demand remains strong we continue to book very large deals across the product portfolio, including healthcare government education service provider enterprise and other segments, but they are taking somewhat longer to close.
In response to our customer needs, we've rolled out a rapid outdoor conductivity kit to help hospitals and other organizations swiftly extend secure wireless connectivity to pop up sites in support of quarantine testing and patient care.
We work closely with our customers to help them set up remote working and learning environments with portable branch kits and we launched a flexible financing plan to support our customers that are most in need.
Our technology allows distributed campuses to be centrally managed from the cloud as campuses reopened post cobot 19, we can help customers through that process, our new normal work in school environment will be a distributed enterprise with requirements for secure tunneling remote kits for home and add.
Hock work locations automated provisioning fabric attach capabilities for extending networks and effortless management.
And acquiring Aerohive in August we took the next step and our strategy and we're seeing the proof points that with an inflection in the market of customers wanting to move to cloud based networking. According to a recent Gartner survey some of the top CIO priorities in today's environment, our I O G cloud and employee.
The workforce enablement cloud and security or two areas I do see identified as key areas of sustained crisis response.
As customers take a more holistic view of a unified work from home wired and wireless environment. The type of networking approach extreme can offer matched provided the cloud or on premise will proliferate extreme as blended a dynamic fabric attached architecture that deliver simplicity for move.
And changes at the edge of the network together with corporate wide Rollbase policy. This enables customers to migrate to new cloud managed switching in Wi Fi agnostic.
Listing networking or wireless equipment, they already have installed.
In the yen these customers will see lower capex lower subscription cost lower cost of ownership and get higher flexibility along with a more resilient network. This is an example of where cobot 19 offers extreme future opportunities.
Networking is essential technology.
Wow, there could be a temporary slowdown in fine we know that the market will come back our customers are experiencing a shift and use cases schools are adding a piece of their parking lots grocery and retail stores will add more in store pickup capabilities sports is cyclical and we'll come back as it is highly experience.
Actual public spaces in retail will add more aiotv for sensors and other factors.
Although many carpeted enterprise customers are likely to consider shrinking their real estate footprint and shifting investment to improve their work from home and zoom footprint campus investments and edge for Aiotv edge computing and security are likely to increase and drive growth for networking.
Moreover, the post cobot 19 buying criteria for networking will also change.
We believe that it will be less influenced by legacy history considerations and become more influenced by the flexibility for one solution set that can work on the enterprise campus and with a large number of distributed work from home workers. All managed from one user interface status quo vendors are not offering this solution.
But extreme is uniquely positioned in this regard.
And realigning our go to market organization, we have taken down silos and we are fostering team work in the field. We're all commission salespeople will have a targeted number at a common goal. We're also automating capabilities of partners in cloud users to manage the network for ordering and licensing expanding touchless orders battle.
Alliance with more of our volume motion, particularly around cloud based networking.
These changes will drive improved sales productivity and we believe this customer centric approach will also create more run rate business and stable business for extreme and our partners as well.
We're excited to announce we hired West ROE is our new Chief marketing Officer, West brings new ideas and will drive a more efficient handoff between marketing and sales with higher quality leads and we'll introduce new processes to shrink our response time running a cloud speed.
Key customer wins during the quarter included the school district of Manatee County in Florida that deployed extreme wireless access points in the parking lots of 52 elementary middle and high schools to allow students who may not have sufficient internet at home to download remote learning assignments. This is how extreme is work.
King with its customers and the new normal environment. Several large scale cross sale wins includes state local government when deploying extreme fabric at 200 courthouses underpinned by 4500 switches and soon to be 4000, a piece to add Wi Fi capacity for lawyers judges in the public and supporting.
<unk> technologies, such as broadcast and multicast.
A large medical centers unveiling a state of the Ark 1.5 million square foot 17 story hospital with 500 private patient rooms at 47 up operating suites. This customer will extend and integrate it's fabric deployment to this new facility and recently purchased a variety of extreme switching so.
Aleutians and X.M.C. for this new building, even as we talk about extreme cloud I Q, our X.M.C. on premise management suite continues to be adopted by customers.
A global infrastructure as a service provider offers compute storage and data centers located in the U.S. Europe, Hong Kong and Singapore continue to invest in extreme datacenter products, reducing provisioning times from hours to minutes as well as support Openstack development and SDN initiatives.
Through the first month of Q4, our bookings are tracking slightly above our internal expectations and are running at a slightly higher level than the first month of Q3.
However, the current market environment is fluid for everyone and extreme networks quarterly business is typically backend loaded with June being a key month in our fiscal Q4 2020 forecast because of these factors. We are temporarily suspending our Q4 2020 outlook, we will reassess provided quarterly.
Since base, so that clarity of macroeconomic recovery at the end of the fourth fiscal quarter.
I am confident that extreme weather this challenge in emerge from this as a stronger and more cohesive company and with that I'll turn the call over to our CFO Remy Tomas.
Thanks, Ed.
Then you $209.5 million was in line with our pre announcement, we're building on a base of strong recurring revenue and this component remain relatively stable on a dollar basis.
She beauty, 34% of revenue up 28% you Q2.
Non-GAAP earnings per share was a loss of 14 cents impacted by the revenue shortfall.
Well the non-GAAP gross margin of 56.7% low relative to our recent performance only partially offset by tight control of operating expenses.
In response to weaker demand only to the macroeconomic impacted Cobiz 19 would probably implemented a number of liquidity and cost control measures during Q3, including.
Tightening control on discretionary spending hiring and working capital drawing down $5 million about 75 million revolving credit facility.
The money interest rate swap contracts on slightly more than half of the outstanding term loan a debt principal securing a waiver of the covenants pertaining to our term Mooney twentytwenty pool through March 31st of 2020 to one.
An extension from the previously negotiated July 31st 2020 timeframe.
And finally accelerating action the company was planning to take to prove R&D and sales productivity, along with cost reductions in supply chain and operations.
This is enable us to lower our quarterly non-GAAP net income breakeven points to approximately $220 million in revenue as early as fiscal Q4, Twentytwenty all while further enhancing financial flexibility.
With $196 million its cash on hand at the end of Q3, well funded and have ample liquidity to work through these challenging times.
So how partners and customers extreme into you see.
Lending enablement and assistant program to provide preparing to financial terms for qualified channel partners across the Americas in Europe through September Thirtyth 2020.
Leap offers flexible low interest financing deferred payments and free training.
As well as reduced growth would be targets extended partner leveling requirements and train.
This program is enabled by financial solutions partner living credit risk off extremes balance sheets.
Total product revenue in Q3 was $136.5 million and I'll total product book to Bill ratio was approximately 1.2.
In cloud new subscription bookings grew 7% year over year, but were flat quarter over quarter, well, we just seasonality and the impact of Colby.
We were 70% compete without product refresh as if the March quarter in mind with our expectations. However.
Due to some of the ongoing cost reduction actions. We now expect this refresh program to be completed during the second quarter instead of the first quarter fiscal 2021.
As previously discussed.
Total services revenue of $73 million grew 21% year over year, but fell 5% quarter over quarter largely on a sequential decrease in maintenance.
Total services book to be a ratio was slightly below one.
Turning the corner the Americas contributed 50% to total revenue you gave me a 40% and EPG chico's out the remaining 10%.
Although revenues declined across our regions. We did experience you ever your bookings growth you count subscription and services in both the <unk> any P.J.C. on an apples to apples basis.
Following Q3, all trends the Nolden Asia, a pure back on track in regions that just Korea and Japan.
Yet harsh lockdowns in India, Philippines, and other markets are offsetting factors.
In Europe.
France, Italy, and Spain, Oh, well over the worst of the impact Germany is getting back to work and is aided by strong stimulus package and easing of procurement requirements the public sector.
The UK is somewhat behind the curve.
In our international markets a lot downs are using for schools construction in the manufacturing well known grocery retail and other verticals are delayed.
Finally, we're not participating in both the Japanese and German versions of you raise type program for schools and I'll, making good progress.
In the U.S. verticals that just stadiums casinos non food retail stores and large public venue spending pause.
This was partially upset by present a positive momentum in government education.
What we call overall sled state local and education as well as logistics.
Several large deals we had expected push to the right as Ed mentioned.
In Q3, non-GAAP gross margin was 56.7% compared to 57.6% into your go quarter and 60% in Q2.
The sequential decrease was attributable to lower volume higher product to the head and a four and a half million dollars write down of obsolete ventured.
Finally, we estimate that the net impact of tariff was a negative 210 basis points up from 150 basis point next quarter.
As much of our inventory sold during the quarter were purchased under 15% leased for a cares prior to the mid February reduction to seven a half on wireless access points and optics.
Q3, non-GAAP operating expenses came in at 129.3 $9 at the low end about guidance a decrease from 136.3 million in Q2 based on the actions. We took during the quarter. This resulted in operating margin loss of 1% down from an operating margin of 9%.
In Q2.
Free cash flow was $2 million down from 17.9 million in Q2, and 12.7 million into your go quarter.
Yes, So 42 days down from 55 days in Q2 and from 51 days into your go quarter, our cash conversion cycle stood at 59 days down from 69 days in Q2 and similar to the 60 days in the year ago quarter.
Q3, ending inventory of Cc $66.2 million fell 13, and a half million from Q2 and grew eight point sixmillion from the year ago quarter.
The quarter over quarter decrease reflects supply constraints and demand planning considerations.
Now turning to guidance as Ed noted were temporarily suspending our Q4 Twentytwenty outlook. However, we will reassess providing quarterly guidance based on the clarity of macroeconomic recovery at the end about fiscal fourth quarter with that I'll now turn it over to the operator to begin the question answer session.
[noise] at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone and your first question comes from a line of send me.
Chatterji with JP Morgan.
Hi, good thanks for taking my question, maybe if I can just start off you mentioned kind of this trend you're seeing the cloud Cubist this which clearly indicates there is still interest from the enterprise customers in both.
We're seeing some strategic projects that they had total recall, but if you can just broadly kind of outlined what do you see gross decreased one basis. That's been an orphan kristen contain would be strategic projects. So is it just kind of doing be high priority kind of keeping the lights on kind of projects.
What do you see on that front and I have a photo.
Sure I I I'll take a shot and then Remy I'll, let you right. You can you can come in behind me, but.
In our IR package, we we highlight vertical trends Ed and yet the response is different depending on the vertical so yeah, we still seeing strength and our government education business with which that's our large largest vertical and so.
From a demand perspective that that hasn't changed some people are taking advantage of this environment, where they might have empty schools or empty courthouses like the example that I used to actually undertake a network upgrade because it's a good time to upgrade your network.
We have hospitals and health care, which is an important vertical that too. It's been it's been growing a demand has been strong there's been a negative impact on sports and entertainment and hospitality, that's smaller as a percentage our of our overall business, but nonetheless, you know high profile NFL teams.
Things like that I you know these kinds of customers you know our have have a pause to take a look at whether or not they're going to have a season and what that might look like manufacturing has been somewhat neutral. We are seeing people returned to work and large customers of ours like you know Volkswagen et cetera.
Or sending people back to factories and we're seeing we're seeing people return to work and that's happening more outside the U.S. and then in the U.S., but it it's starting to happen.
Retail transportation logistics, there, it's been somewhat mixed for us.
Obviously, you know grocers these kinds of of retailers I still strong.
The likes of our customers like Fedex.
They are doing.
Very well into ordering remains strong.
Obviously I'm looking at the likes of you know.
At Macy's or seres, those kinds of retailers.
It's a little bit different and service provider has been strong. So we have lower lower exposure to the service provider side, but nonetheless, we still have service provider customers and they're seeing growth and expansion in their networks. So that's kind of.
And overlay of our different verticals of where we're playing from a from a customer perspective.
Yeah I hope that's helpful. I don't know if Remy you want to come back in our stand you want to come back into it.
No I would just add on Oh, you rates specifically you know in if you look at the past years distribution. We saw that getting funding are getting the approval from USAC for certain larger project.
Was somewhat getting delayed and in some about districts where were strong.
We feel like with all of the stimulus package that's been introduce we might see accelerated funding so that some schools that we're planning on deploying.
Next quarter, you know fiscal Q1, which is all September quarter.
And with the the current ease of getting funding approved might end up having to do it and be in position to do it earlier. So anything that really is related to government funding might be <unk> easier as we as we approach for in Q1 of next year.
Got it.
And just follow up you mentioned to you.
Cost actions to do what the breakeven to.
220 million is that is the best way to think about that but that's kind of where you want to position your business and you see demand coming back to that level at a minimum oh. It is that a moving target and you kind of going then yeah.
Good I don't know what would be citizens deep and what actions.
No no. That's that's it's specific to Twoq pool. Since this is what we see based on a combination of some of the temporary measures that we were taken as well as the more structural measures, which benefits will well not you reach until fiscal Q1 of Twentytwenty one so.
Breakeven in.
In Q4 is is 220 million on a net income basis non-GAAP.
And that's not necessary that we aim to be at a 20, we're not providing guidance for the quarter, but we would need to be up to 22 breakeven.
Okay, and they would do your point about moving target that will evolve as we enter in Q1, because we'll get the full benefit some of the cost reduction actions that were taken today.
Got it. Thank you I would just I would add one point to that which is.
We've run a variety of different scenarios.
And.
What we've done as we we've left from a sales perspective and go to market perspective.
Well, we've left our teams in place, where I would say with with average productivity as we come back.
We would we would see upside based on a productive sales force and I suppose Cove it more normal environment.
Okay. Thank you.
Exactly.
Your next question comes from the line of Eric Martinuzzi with Lake Street.
Yeah, just a clarification on me.
The non guidance business outlook.
Implication here you know you're talking about April versus January I would expect April it's typically versus January but being up when a lot of people are still children's place I would see that as a definite positive but is that the city that if the trend sustain here in Q4 that we would be up sequentially on the revenue.
Versus Q3.
I'll take this one.
<unk>.
If you recall, though the normal seasonal pattern the way the bookings come in is it 20% month, 130% month, 250% month, three so as much as I wish I could say because you know our April bookings are slightly up versus that John Rebooking, we feel good about this but it but it's hard for us onto to draw can.
And on the trend hands and.
The fact that we're not willing to provide guidance. It's just a data point that we want to show you because you know bookings were down 20% are up 20% obviously.
You guys would be driving to a different conclusion.
Okay, and then on that that you talked about getting relief on the covenants now it's not July 31st at March 31st or 2021 is that to say that the existing debt arrangement is no longer being amended are we still kind of mid stream on the amendment to the existing agreement.
Okay and then last question for me on the operating expense where do we.
Given the cuts that we may.
I realize it's a moving target here, but the.
Measures that we've taken what's a normalized.
What's your operating expense expectation for Q4.
So we see ourselves between $115 million to $120 million.
Okay and is the bulk of that coming from.
Sales and marketing or the mix across the three buckets.
We see savings coming from both R&D and sales and marketing that would be the the bulk of it and I was just 50 50 between the two and then we do see some savings as well in a in DNA, but it's much much lower.
Got it thanks for taking my question.
No problem.
Thanks her Unix.
Thank you next question comes from the line of Erik Suppiger with JMP.
Yeah. Thanks for taking the question.
So what is the situation with their supply chain at this point or are you at capacity now or what is the health of the supply chain.
Yeah, I Hi, Eric This is Ed so when we went into this.
We had concerns about that China, and what was going on over there and it wasn't just our primary OTI Atms, but it was secondary and tertiary suppliers and up the.
They've come back so we're encouraged because.
As far as a China and Taiwan.
Yeah, we are at back to honor percent ER and that's.
A huge part of our supply chain, we did in connection with the tariffs between U.S. and China, We did move.
Production into Mexico, and Mexico is a little later on the curve and so they're down to 50% to 60% capacity right now, but they're saying they will come back to 100% by June.
So is that to say that Youre June quarter should not be adversely affected by the supply chain.
Oh, we think that there maybe some effect but.
Less than.
Less than this last quarter I would say revenue do you want to comment.
Yeah, yeah, but much less in terms about ability to deliver what I would highlight added that we were seeing increased freight cost because there is obviously less capacity, we typically leverage commercial airlines to ship goods from Mount El Paso warehouse to the right.
The world.
And the fly to build believe he is much reduce as you can imagine and so the available capacity is costing us a little more so that's that's an impact that we factor in and out cost of goods sold but as far as you know not being able to ship products. We will be limited to those products that are coming out about factory.
In Mexico.
Okay, and then you talked about your cloud service is is it the vast majority of those devices is that what life I access points that you're managing or.
There is a much switches or or other devices at this point.
It's it's primarily access points today, Eric its the former Aerohive portfolio and then our teams have been really productive working from home and we moved ahead of schedule.
Our wing wireless portfolio into the cloud.
That that happened and then we pulled in from July to April our edge switching.
Platform. So now you have what we would call ex us edge switching that can be managed from the cloud and that from October we pulled in boss, which is that fabric campus core technology, that's been pulled into.
June as well as co pilot, which has a automation built it so.
Since we now have edge switching into cloud and that we will have core switching so we will be able to manage and and from your wireless access points Aiotv edge all the way through the core of a network from our extreme outright you.
And I could tell you it's incredibly easy to manage a we're all about effortless and making it easy.
We developed a very simple licensing model at.
The simplest in the industry.
We think that's going to help us scale, and then drive adoption of management in the cloud so.
We're moving very quickly very rapidly in cloud of flying our portfolio.
So it's happening okay, yeah within this quarter will be edge to core.
From extreme cloud I too.
Okay, and then lastly, I just wanted to clarify.
You are still.
During the fourth quarter. Your breakeven is gonna be at 220 million. If you get to that if you get to that revenue in the fourth quarter or where does that to 20 breakeven level does that apply to the first quarter because that's when you get the full benefit of the cuts no. If if we generated $220 million in Q4.
Fiscal Twentytwenty, we would be at breakeven on a net income basis on a non-GAAP basis.
Okay. So are you are using the full benefit of your cuts in the fourth quarter or will there be further so so that the issue with with that question is is we have the combination of temporary.
Actions and then we have more structural actions, we will get the full benefits about structural actions in Q1. However, when that is the case the temporary reactions or says like right. Now nobody is driving we do expect you know people to start dropping him. So some of the of the of the cost benefits that.
We're getting on the temporary basis wont happen again in Q1 however.
In Q1 fiscal 2021, we get the full benefits of our cost reduction actions. So that if you think about operating expenses in Q1.
No I gave an indication that in Q4 they'd be somewhere between 115 and 120 million.
In Q1, a fiscal 2001, they will be up very modestly from that number.
But obviously, we're counting on a pickup in revenue at that point in time.
Okay. Thank you very much.
And again to ask a question. Please press Star then another one on your telephone keypad that star one to ask a question.
Your next question comes from the line of Alex Henderson.
With Needham.
Great. Thank you very much.
I've got a couple of questions wanted to ask some clarification as well if I could.
The first question I wanted to ask is you know you guys are on a selling model or to your channel and can you talk a little bit about you know what they're seeing in terms of a their inventory or they are they seeing any backup in their no ability to pass through the equipment to customers.
And you know to what extent you noticed the channel also seeing any fallout that might a backup into your results that you might not have anticipated.
I can that jump in first Remy and then you can.
Provide comments afterwards, so as far as the channel is concerned.
Our channel is actually quite healthy and a lot of it we obviously irreparably represent the networking space, but yes, there as far as their server and their storage businesses have been doing well security is another one so they they've actually been.
Very robust and so.
Any as far as any kind of concerns from a health perspective.
They've been quite healthy and we've obviously been very close contact with.
With our with our distributors and yeah, we have been in a position for us to.
Shrink.
Our inventory you know with our distributors.
Yeah, Rami I don't know if you want to provide any additional color on that front.
No I would just add.
Alex that you know historically I'll distributors tend to anticipate on on a future quarter typically at the end of Q3 that we look at Q4, which is supposed to be a stronger seasonal quarter because of the impact of who bid 19, the or more basic keeping it by year. So that means that you should be expect.
Thing I'll sell them and sell that revenue to be tightly correlated I, even one night Disti gets an order that you need to keep pass it onto us, but but probably won't be building in buffer.
As far as their financial health is concerned I had mentioned that they're doing well in certain specific segments of the market like PC peripherals et cetera.
And so what we're seeing is that their ability to continue to pay us on a timely basis and so [noise].
But remain intact.
Second question, if I could your product book to Bill at 1.2, partly due to do with.
Obviously, the impact of a your supply chain, but if you were able to supply that going forward it would imply sequential.
Improvement in revenues obviously.
Covered the offsetting but I mean is it reasonable to think that now that you're no longer constrained. The <unk> you should at least be at the current level of revenues or or maybe the hair up above that in the June quarter or is that too much a extrapolation off the book to Bill number.
Yeah I would.
Deduct from from that one thing to that that we would see a sequential uptick because one going to really relates to what I. Just said about you know the lack of willingness of all this keys to build inventory ahead of acute pool.
And the closer correlation between cells in themselves out. So so if anything you know that that would support that the business should be sort of stable going forward, but certainly not picking up strong into cool.
A couple of clarifications. The comment you made about the tariff a of 210 basis point it.
Because you were working through older inventory.
What would be the sequential hit in the upcoming quarter now that that inventories have been.
Churned through is it a half of that.
Yes, roughly.
Okay and then.
Very difficult for us to forecast the interest line.
And the interest expense line here 4.4 million dollar expense in the June quarter, you've got a whole bunch of moving pieces here relative to the.
Zero interest rates on cash balances.
New credit agreements, which have different terms, you pull down 65 million in cash.
I have no idea how to forecast that like yeah.
Hi, gentlemen.
When you get a sense to read all 10-Q, which it's just been posted about half an hour ago, you'll see that that's part of the.
Amendment, we agreed to LIBOR, plus 450 basis points, there's no minimal floor I mean, the floor effectively zero and then it's really hard and that is should be applying to 425 million in gross debt, which is the threeseventy outstanding on the terminal when they.
Was 55 that we drew down so that's the high level answer having said that your point you can't really factor in.
The impact of the swaps that we did so we're happy in a follow up calls to to help out fine tune this number but LIBOR plus 450.
It is a good start.
Is it reasonable to think that that number is gonna be higher backup to the six and a half million dollar type level in the June quarters is that's just kind of ballpark worth thinking about.
We see it slightly less than that.
I think that's because in order to ballpark.
Great. Thank you and just one last question and then I'll cede the floor, what's your big brother Ah you know in.
A in the space doing a you know Cisco changing behavior at all pricing behavior.
Down stream into more aggressively into smaller accounts.
What are you seeing on the competitive front because you have mentioned anything on on that front so far.
Yeah, Alex I get what I can share that yeah, we haven't.
Yeah, we haven't seen a we haven't seen unusual behavior from them I would say as far as our competitive landscape. We continue we go head to head with Cisco and H E and you know.
Those are two kind of primary competitors that we run into and.
I would say nothing nothing unusual or nothing out of the ordinary.
As far as.
Yeah, the competitive landscape from that standpoint.
Yeah, whatever we have commented on is the fact that we are seeing has moved to the cloud and that's the fast growing segment. Here you are predicted to go from three to 7 billion, but having the flexibility in the versatility of this.
This this platform we think that.
This is going to drive adoption and.
So from our standpoint, we have a much simpler licensing platform and we think we're gonna be able to make it easier for people to move to our cloud and then the rocky cloud.
But great.
You got unusual from a pricing perspective, we're not seeing anything.
Or anything that what I would describe as a normal competitive.
Behavior.
Thanks, Alex.
Your next question comes from the line of Christian two way with Craig Hallum Capital Group.
Hey, Thanks, guys.
All right me can you give us a would you be willing to share much revenue you actually did in the month of March.
You know first of all we typically don't disclose revenue on a monthly basis.
Second of all.
I mentioned earlier that.
The inventory in the channel was typically not as strong as you would expect that in the March.
Because of this displaying it by year and that means that going forwards.
Wow cells in and sells out or more closely correlated I'm. So based on that you know.
The trend for revenue on a seldom basis is positive if I look at March versus January, but I'm not willing to.
Hi lot much more Minot and this is this is again on the one month basis, and we need to think about the fourth quarter and not just the month of April.
Right right right.
Understood I it would just when you know the pre releasing.
Where revenue came in I thought some color might be helpful. There number two regarding gross margins can you help us understand either from a mix standpoint, or a revenue standpoint.
What it would take for us to to be you do it 60% plus type of gross margin.
[noise] current environment really if we assume that.
Now as Ed mentioned, we're not seeing any major changing competitive behavior from our competitors. So we don't see accelerated price pressure, we do expect the benefits of breaching.
You know the end about product refresh it's going to happen a quarter later than what we had assumes that it's going to happen in December but that's that's ongoing benefit.
So really for us to go back to the 60% that we achieved in Q2 fiscal 2020, we need to get volumes up because that will help us absorbed.
Basically the fixed cost that we carry you know cost of goods sold related to the cost of bell supply chain the tariffs.
Excess in obsolete et cetera, and so as you build the revenue and that we get closer to 242 250 million a quarter, which are the historical level. There's absolutely no reason for all gross margin on a non-GAAP basis.
Not to get back to 60%. So it's really entirely driven by how quickly you will assume you know model a topline recovery.
[noise] Fabulous no other questions. Thank you.
You're welcome.
Thanks Christian.
Your next question comes from I know what was in Hollywood Bloomberg Intelligence.
Great. Thank you for taking my questions on.
I just just a couple of a environment or sales Obama questions. No. No. This selectivity for you have to well I guess, there's this is I simply have to return for your sales activity to improve.
So for example, if the NFL order how hospitality a there's not start ramping up in the near future. The you know does that correlates yourselves in anyway.
Well yeah. There was so yeah. The answer is at every put on to slide where we have.
Our sports and entertainment, we got hospitality, it's I guess or a 5% of revenue number.
And obviously you.
Yeah that these customers have been hard hit so we do have a lot of projects for example, with casinos for example that are.
Purchasing decisions that have been put on hold and they're focusing on how to bring people back.
Engine into their environments. So.
Yeah, there's just so I would say, there's a lot of pent up demand that would take place with retail sports and entertainment. These kinds of customers that we have where they've pause or they pushed out to the right. If you will see opportunities. So we do think that that we will benefit.
When it when it comes back.
Got it and then in your prepared remarks.
You had mentioned something along the lines of potential for a shrinking corporate is enterprise still.
Being an opportunity for campus switching market I'm, assuming it's also a wife I a commentary as well could you expand upon that a bit because that doesn't make sense to me given that you have a smaller footprint and you find is it to be a bigger opportunity going forward.
Well it depends I mean, if you if.
If you listen to Yeah, Eric Schmidt was quoted today by saying that the.
Easy Vik, the corporate enterprise gonna have to grow for social distance and you can't put people back in the work environments, where they were a as maybe it different or an alternative point of view you know what are and what we're looking at is something that what we talk about is more distributed workplace and maybe a more flexible environment.
I know, that's how we're thinking about going back to work in a more flexible way, but you still you'll still require networking in your environment and feel from it distributed point of view I mean, you're gonna have workers working from home or working for from different locations and that's where we think.
That having an enterprise grade network and supporting flexible work at work from home is an opportunity for us in a separate particular opportunity for our cloud because our cloud is very easy to manage and it's a single view of your entire network. So you can have a distributed network and.
Patients that you can manage from our extreme cloud I Q. So you know that that's that's that's what we're talking about which is a new kind of enterprise that is more distributed and that we have a platform and we have the software in the platform to support that.
Solution.
Got it and then they just a follow up on that and this may be premature but has the nature of the.
The conversations changed in favor of you like front as well.
Oh, I'm, sorry, yes, you're clearly Q solution, given what may be the future enterprise.
Hi, Yes, the answer is yes, and I gave some examples of that and.
Your.
We think that this is something that will.
Be an accelerant to migration to cloud.
And industry analysts are already calling that migration, but we think that what's going on here has been an accelerant.
Great. Thank you.
Thanks, Susan.
Again this star one to ask a question and you have a follow up with kind of mix Henderson Needham.
Great. Thanks.
Good morning.
In the.
Material.
Service provider.
Percentage.
[noise] [noise] [noise] [noise], you were breaking up Alex, but let me.
Switch to [noise].
[noise] verticals.
I'll just give you at a high level.
I can only give your range, we've not from really disclose it but I would say that.
Indication.
And higher education together.
There are counted for let's call it 16% to 18%.
Of the first nine month revenue.
Governments both bad.
And local accounted for 14% to 16% of Ah first nine months revenue health care was 10% to 12%.
Manufacturing was 9% to 11%.
Retail has dropped as a result with some of the turns at talked about it's now accounting for 5% to 7% about total revenue.
Service provider.
As has picked up for the first nine month, it's accounting for 79% about total revenue.
Sports and entertainment its borders I'm, sorry, I'm, 2% to 4% that's funny transportation just stick is 46%.
And would that you should be covering the first 10.
Verticals, which is about 75% about overall revenue.
Great. That's that's helpful. Thanks.
I was hoping we could you just go back to a one more question the.
The 220 million breakeven what assumption are you, making on gross margin with that do 20 number [noise].
[noise].
Again, you are trying to get me to provide guidance.
And the name of the game today was not to be corner and provide you.
We we guidance, but we do expect.
You know the but certainly the non recurrence of that four and a half million excess and obsolete inventory write down.
To help us.
So we finished the quarter at 56.7% you know.
I see where it just seems somewhere you know.
Up.
From that level, I think you'd you'd be in the right direction and just to quantify I would expect that number to be perhaps up one and a half points versus that level.
But.
You know, it's just because of the nonrecurrence about him at the that impact that we just talked about.
Hi, Thank you.
[laughter].
We have no questions in queue at this time.
[noise] [noise], okay. Thank you operator thanks.
Thanks, everybody, who could join us on the call today.
And I also.
I want to shout out to extreme employees.
Who are listening in four or what was an incredible and is an ongoing incredible effort.
During these times.
It's been a challenging time for all of us.
As individuals a as organizations as we adapt to the coded and 19 environment.
And we figure out and navigate the future of work and what the new normal is going to look like so again as I said earlier now more than ever were here for customers and where to unique position to provide resources solutions and flexibility.
To navigate this distributed enterprise environment.
So that's it thank you very much it and have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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