Q1 2021 Extreme Networks Inc Earnings Call
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Good luck to the extreme networks Q1 for 21 financial results Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press Star then zero I would now like to your children.
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Thank you operator, and good morning, everyone. Welcome to the extreme networks first fiscal quarter 2021 earnings conference call I'm stakeholder, Vice President of corporate strategy and Investor Relations and with me today are extreme networks, President and CEO, Ed Meyercord and CFO Remy Tomorrow, we just distributed a press release and.
Filed an 8-K detailing extreme networks financial results for the quarter.
You 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 website at extreme networks dotcom.
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.
Impact of Cobot, 19, pandemic acquired technologies products and new product introductions.
Operations pricing changes to our supply chain the impact of tariff 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 could 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 2025 with the FCC.
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.
I also wanted to make you aware that beginning with our first quarter of fiscal 2021, we are changing how we calculate our non-GAAP provision for income taxes in accordance with the FCC guidance on non-GAAP financial measures compliance and disclosure interpretation.
We have adjusted the fiscal 2020 non-GAAP tax provision.
And the impact on EPS for all four quarters of fiscal 2020 is.
As provided in our Investor relations deck on our website on page 18.
There was no impact to the cash flow of the company.
And with that I will now turn the call over to extreme networks, President and CEO Ed Meyercord.
Thank you Stan and thank you all for joining us this morning.
Our Q1 results Mark the second straight quarter of sequential growth reflects continued improvements in customer demand and our team's execution.
As we noted in our Preannouncement, we outperformed our initial expectations of revenue and earnings growth.
Grew operating profit on a quarter over quarter and year over year basis, and paid down 20 million of our revolving credit facility given the strength of our cash flow in the quarter.
And as announced today, we paid down another 20 million last week, given the strong start to Q2.
After returning to sequential growth in June on our business in Q1 grew 9% sequentially across all our geographies.
Most notably in the Americas in a P.J.C., where revenue grew double digits from the prior quarter.
We achieved this despite Q1 typically being a seasonally weaker quarter.
We also achieved 14% product revenue growth and 20% quarter over quarter growth of new cloud subscriptions.
We're seeing customers accelerate their migration to extreme cloud like you did number of managed devices grew 19% on top of strong growth last quarter. We now manage 1.4 billion devices on the fastest growing cloud platform in the industry.
Daily traffic in our cloud grew from three terabyte per day in Q4 to five satellites per day in Q1.
Momentum continues to build as evidenced by the numbers.
It's the strength of our customer relationships has allowed us to weather cold at night gene.
People are always surprised to learn that its extremes network that supports the critical infrastructure are vital to the fabric of our daily lives and this was the driving force behind our ability to overcome the challenges.
When we compete for new logos, it's very powerful when we share a customer names such as Federal Express Volkswagen Samsung University of North Carolina, Kroger Schneider electric W., well bore the manufacturer Gore Tex.
Ontario power generation. They use is extreme edge to cloud solutions and its nuclear power plants Sherry today, the largest hospital in Europe, and one third of the NHS Trust hospitals in the UK, So New York stock exchange retailers, such as El coordinating Blaine Canadian tire Macys lows.
And the list goes on these customers all rely on extreme for their mission critical infrastructure.
And we recently won major League baseball, a big win against our largest competitor.
I'm sure. Many of you may have noticed extremes banner on the right out field wall and maybe our eight keys in the dugout or the world series in the Nlcs.
This is the beginning of a long term relationship with MLP, where you will begin to notice extreme in all ballparks in the future.
You can put a stamp on the fact that extreme is clearly playing in the major leagues.
We also took important actions to streamline our go to market organization to better support both large strategic customer accounts as well as our smaller enterprise customers working with newly formed field teams tightly aligned with partners.
At the same time, we've streamlined our engineering organization to drive feature velocity and deliver our what we call our universal experience.
Both of these actions are allowing us to drive greater efficiencies and higher productivity.
It's an exciting time to be a networking if there's anything we've learned over the past seven months. It's a networking has never been more critical or strategic.
And were the dawn of a new area, New era, where data is king and this bodes well for extreme.
Today's networks are much more complex with multiple applications running across hybrid environments and data being stored and multi cloud environments. The proliferation of edge devices that distributed architectures, it's about intelligence and insights into customers employees connected devices networking.
Application performance today more than ever before it's about data data from the network that can be used to drive improved business outcomes and ways that were never contemplated when extreme developed the very first gigabit Ethernet switch nearly 25 years ago.
So here we are in another one of those inflection points in the networking industry that creates a significant new opportunity for all players and extreme we're committed to winning with what we're calling effortless networking in.
And this is about bringing simplicity to complexity.
Enabling our customers to do more with less by leveraging data and automation.
And how are we doing this there are three main tenets of effortless.
The user experience the buying experience and the selling and go to market experience our strategy and our operating plan is to make all of these easy.
As far as user experience, we're aggressively investing in end to end innovative solutions from our core fabric technology to our wired and wireless edge applications, all running on universal hardware that can be managed from a single cloud.
And from the cloud, we bring simplicity complete visibility the entire network and the intelligence and insight did come with unlimited data machine learning and cloud choice.
As for the buying experience, our universal hardware platforms will become available in the middle of this quarter.
These platforms provide simpler configurations that support choice of our use cases and multiple wess.
Fewer skews to manage any allow customers have maximum flexibility to change their network configuration.
As for the selling and go to market experience, our universal platforms will come with extreme cloud I two licenses for connectivity to cloud management out of the box.
Our customers can still leverage the power of Rx PSMC on Prem software and add additional capabilities in the cloud innovation, we bring.
Our cloud strategy is not about rip and replace.
And it brings total cost of ownership savings to customers with this one enterprise one network one cloud approach.
We're operating more applications in cloud I Q than any other provider in the industry with machine learning and artificial intelligence tools analytics Air Defense Security Locationing following one license.
It is an unmatched number of applications into our extreme cloud IP license at no additional cost.
So this too will significantly reduce the total cost of ownership for our customers and provide us with a competitive advantage by exposing hitting cost of our competitor solutions and our licensing model is truly unique in the industry. As we are the only one to offer easy to use callable and transfer.
Trouble license and a single price for all networking elements, whether it's an access point workforce switch.
Through our lead program, we're offering flexible payment structures, where customers can buy with traditional capex or opex models.
Leap usage by our customers was up 50% sequentially in Q1, and we see continued growth in our funnel.
And from our own digital transformation perspective, our newly launched channel self service platform got off to an excellent start in momentum is accelerating 14% of the quotes generated during Q1 went through channel self service, which is now up to 41% at this point in Q2.
This program offers volume based promotions to enable zero touch discounts to our distributors and partners.
It's making it easier to drive our long tail business is giving time back to our field to build pipeline and develop new opportunities.
As we head into our 25th year, there is yet again, another inflection point in networking.
The age of data, it's creating new opportunities for all of us and there's never been a better time to take advantage of being an extreme customer.
We continue to expect a gradual recovery from coated to progress throughout fiscal 21, and see good growth in our funnel of opportunities.
Extreme is emerging from all of this as a stronger and a much more competitive company.
With that I'll turn the call over to our CFO Remy Toma.
Thanks, Ed.
Total revenue of $235.8 million, 9% quarter over quarter, mainly driven by product revenue up 14%, while services revenue I, just 1% quarter over quarter, our recurring revenue contributed 31% of revenue compared to 34% of revenue in the previous quarter.
Product revenue grew faster than service revenue.
Non-GAAP earnings per share was nine cents up from three cents last quarter and up from seven cents in the year ago quarter, the strong quarter over quarter recovering our bottom line was once again the result of higher revenue combined with continued control over our cost and expenses.
Total product revenue was $161.4 million and our total product book to Bill ratio was approximately 1.5.
Revenue associated with newly introduced products grew quarter over quarter, while orders for universal hardware platforms scheduled to ship in mid calendar Q4 continued to ramp.
Demand is currently outstripping supply for the universal platforms.
Wired revenue grew over 20% sequentially led by strength in edge and campus switching while our wireless revenue was slightly down from the prior quarter.
Total services revenue reached $74.4 million up 6% year over year, and 1% quarter to quarter, largely driven by cloud subscriptions I'll total services book to Bill ratio was 1.1 as customers continued to grade and support their existing network requirements you.
New cloud subscription bookings grew 20% sequentially and based on our Q1 bookings our total cloud managed subscription business reached over $70 million in annualized run rates.
During the quarter the Americas contributed 55.3% to total revenue you gave me a 34.4.
JC close out the remaining 10.3% from a vertical perspective, we saw sustained demand in government and education, particularly in higher Ed a strong recovery in manufacturing both on a year over year and quarter over quarter basis, and finally, a sequential recovery in retail and transportation and logistics.
Demand remained muted in health care and service provider in communications in Q1, while sports and entertainment revenue remained low consistent with the past two quarters. The prospect of fans returning two stadiums and our recent win with MLB Mic is optimistic about a recovery for this vertical in the second half.
A fiscal year 21.
Non-GAAP gross margin was 60.3% up from 59.9% in the year ago quarter and compared to 59.4% in Q4.
The sequential increase was largely attributable to a four and a half point jump in product gross margin boosted by four factors higher volume.
Great a mix of high margin, new products, lower excess and obsolete inventory and lower freight entire cost.
Q1, non-GAAP operating expense of $122.6 million increase from $160.8 million in the prior quarter, but decreased 10.6% almost $15 million from $137.2 million in the year ago quarter as anticipated the sequential increase in operating expense.
Due to the reversal of temporary.
Cost control measures such as employee pay cuts that were introduced at the start of Q1 Q fours are to preserve liquidity.
With topline growth faster than cost and expenses, we generated a non-GAAP operating margin of 8.3%.
From 5.2% in Q4, and 6.2% in the year ago quarter. As a result on a dollar basis operating profit of 19.7 million grew from 11.2 million last quarter.
But also from $50.9 million in the year ago quarter.
The recovery in operating profit combined with a good management of operating working capital resulted in free cash flow of $21.7 million up from 6.2 million in Q4 and from use of cash of $5.4 million in the year ago quarter.
We're focused on strengthening our balance sheet and after paying down $20 million about 55 million revolver. We ended Q1 with a 193 million in cash and equivalents compared to $194 million at the end of Q4.
Given our expectations of another strong quarter of cash flow in fiscal Q2, we paid down another 20 million about revolver balance on October 23rd and it just 15 million remaining to pay down.
We expect ending gross cash in Q2 to be roughly in line with ending gross cash in Q1.
Our cash conversion cycle improved 44 days down from 70 days in Q4, and 74 days in the year ago quarter. The decrease was driven mostly by reduction in Dsos and a sharp improvement in our days of inventory with much higher days payable that we believe will revert to more normalized.
Levels overtime.
We made sequential progress in reducing our inventory levels to $56 million down from 63 million as of the end of Q4, we still have room for improvement and the launch of our universal platform for switching and access points with the resulting reduction in the number of skews carried out before you should help us achieve.
Structural reduction in venture now.
Now turning to guidance, we expect Q2 revenue to be in the range of $235 million to $245 million following a better than seasonal quarter in Q1.
Q2, GAAP gross margin is anticipated to be in the range of 56.8% to 57.5% and non-GAAP gross margin in the range of 60% to 60.6%.
Q2, GAAP operating expense are expected to be in the range of 134.5 to 137.5 million and non-GAAP Opex in the range of 122.1 to 125 $1 million the slight increase in opex of 1% at the midpoint is primarily related.
Hi sales commissions, we anticipate.
And to a lesser extent expected rise in spend and travel and entertainment in comparison to the minimal level each year in Q1.
Q2, GAAP earnings are expected to be a net loss in the range of $4.3 million to $9.2 million or a loss of three to seven cents per share non-GAAP net income is expected to be in the range of $10.6 million to $15.5 million or nine to 12 cents per diluted share in Q2.
We expect average shares outstanding to be approximately $123.4 million on a GAAP basis, and 124.3 million on a non-GAAP basis.
With that I will now turn it over to the operator to begin the question and answer session.
Ladies and gentlemen question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered the question with yourself from the queue. Please press the pound key.
Our first question comes from submits chatter with JP Morgan.
Yeah, Hi, Thanks for taking my question. This is but thats on a Sunday. So the first question that I had was on what other demand trends that you're seeing on a geographic basis. I mean last time I think you highlighted some weakness in regions such as phones, but you can make within the EMEA region.
And how is that starting to pick up now and then with particularly with the resurgence of colder than like seven regions globally is dinner is set on that you're starting to see probably impacting your order trends as you look.
End of the.
And if that is starting to come up in the customer conversations. Thanks.
Thanks.
Thanks, Matt and I'll jump in and Remy Please.
How many behind me here, if I do something out but.
But you're right there has been a resurgence of.
Of Kobe, and and France, Italy, Spain, you that what we call southern cone has been hit particularly hard on.
And so we have seen softness in those markets, although it has been offset by strength.
And what we've seen for example in Asia in our Northern Asia markets.
Germany remains very resilient and demand is strong and that's our largest market.
In EMEA.
And then you know our eastern Nordics region, and our Middle East region.
Region have also remained strong and resilient so what we're what we're seeing it really depends on where you are profit.
Where we have weakness we were also seeing that counter counterbalanced by resiliency.
If that's helpful. The other thing we would say is that if demand remains strong in.
The Americas marketplace, and we highlighted.
The growth is strong sequential growth in Americas, and we're seeing we're seeing that continue to build based on the opportunities that we're seeing.
Being created in our funnel.
Randy any any color to what I've, just what I've just said yes.
Yes in fact, she's got to think that the first one is that when we put together our guidance we factored in the fact that we called the southern corn, which includes France, Portugal, Italy, and Spain, with seeing resurgence and koby cases, and so we built a bit of conservatives around that secondly.
My question, if I could be example of spar instead I happened to be familiar with is that to announce some measures night, we feel like a lot of it will relate around.
It's.
Having to attend school remotely.
Home working.
For most of our customers has been the norm for the last seven months most of our customers have now gone back in the office and so if there are strict rules as to the ability of employees to go to the office, we don't really necessarily think it would affect.
Our business more than it already does today, it's just that the recovery that we've been expecting in the southern cone in general in France. In particular is just going to take a longer than expected, but to an extent is largely affected it.
Okay got it thanks for that and then.
As a follow up I mean looking at some of the trends by what has had some effects on your income in Kentucky that trend in service the way to what Glen you said the demand that means we will take that so I mean female up until everything being equal supply is also like a slowdown in the second half of 2020. So just can you.
Walk us through make what are you expectations.
In Q from that what the blend but thank you.
Sure as I think.
Sumit its some of the service provider customers that you might think of in the traditional sense.
We we actually had strength, we mentioned hurricane electric.
Yes, but this is an internet service provider based in California.
Yes, and yes.
Companies like service Dot com.
Amsterdam, and Netherlands, we have a very targeted and niche solution and and I would say that's it's been somewhat flattish is what is how we see that business. We also have I would say non network.
Service provider customers. One example, there would be like a horizon, where they act more like an enterprise customer even though they are a service provider.
And.
Your business there remains strong and I would say that between some of our larger service providers, who are aggressively moving into fiveg and have fiveg requirements, whether that is in their internal networks or supporting their external networks and we have some.
Very very significant opportunities that we see happening in the second half of our fiscal year or first half of calendar and really building for a strong fiscal 22.
And here these are very targeted.
Applications that I would say relate more directly to extreme and relationships and some very large customers as opposed to general trends in service provider Remy any any any additional color.
No I would just that one thing is we're depending on on one large service provider and one large took what equipment maker and this quarter was little softer for that service provider, but already the trends that we see in terms of product bookings.
Highlights what you just said that.
That's the expectation for service provider incomes are fairly positive for the second half of fiscal 2001.
Okay. Thank you so much.
Our next question comes from Alex Henderson with Needham.
Great. Thank you very much I wanted to talk a little bit about the universal product launch and the implications and timing of its ramp you made some comments relative to the.
[noise] availability being constrained that orders were coming in ahead of your availability.
I assume that the.
The margins on this product are going to be better as their initial decremental margins as you start term initially ship these products because.
The low initial volumes and startup costs and then.
Does it ramp sequentially into the March quarter in terms of availability, causing an offset to seasonality and once it's gotten to pull volumes, what's the differential between current product line and it on margins gross at the gross level.
So let me jump in again, Remy I'll follow up.
Yes, the margins will be better on the Universal platform and if you think about what we're doing.
Alex you take the old boss portfolio in excess portfolio and then all the different skews associated with different operating systems.
Legacy technology from all the acquisitions Weve made this brings it all together now okay. So we have one platform and you can run both flavors of personalities are operating systems.
The single piece of hardware and this is also we're rolling it out with our access points.
The 50 520 is the first switched its coming out.
And a couple of weeks at this.
It will be followed by.
Another two high runners switches for us coming out in the spring and.
What I would say that this hasn't been a lower volume we've announced GA in the middle of November and this this is by far I will be the most successful product launch we've had largely we've had more demand prior to GA than any other switching product and what we're seeing in the funnel.
Is significant in terms of growth.
And then the fact that we have embedded.
Extreme cloud like you licenses will be incredibly easy.
Just to dial up.
And dial into our cloud platform, so and that's part of the reason for the demand.
So as far as how we volume weight the gross margin of the new product introduction.
Relative to the overall business.
Im not sure we we have that guidance quite yet and I'll, let me follow up on that.
I would just say Alex that the.
The way, we allocate I'll fix cost the fixed part of our cost of goods sold is over the entire production and so the comment of you're going to have low volume. Therefore, low gross margin margin. It's it's actually not how it works. The way. It works is you look at the bill of material that product and that this price and the like.
Level of discounting that you have to do given the fact that demand is pretty strong we're not really in the business the discounting that product and given the fact that it's a new product which ensued.
By definition lower bill of material, we would expect the gross margin on a variable basis.
Two behind that contributing to the overall value the company will enable us to continue to absorb those fixed costs that I referred to earlier. So this should not be any negative impact to gross margin at the launch.
So can you go back to the other elements of the question, which is the availability and the impact on seasonality going into a seasonally weaker first quarter calendar year third quarter fiscal does that.
Lack of availability and the timing of that launch and the strong demand for it.
Cause the first quarter to be.
More seasonally robust than traditional seasonality.
It's too early to say.
Go ahead.
Yeah, I was going to say I wouldn't we have planned for.
A significant.
So a significant volume in our second quarter and so we're not seeing we're not seeing shortages to that and we plan for what we've seen demand building.
Our funnel and that's only grown and so our supply chain team, which has done an amazing job navigating the revised environment here in KOVA is Todd.
A great job and they're planning on high volumes for this quarter and we believe we're going to be able to support those volumes and then that will carry over into Q3. So we're not I wouldn't I wouldn't call us looking at constraints I would think it I would think about it more as you know.
For us the most successful product launch we've had since I've joined the company.
Well, let me ask the question one more time, because it still trying to get at the issue does it cause a change in the seasonal pattern between the December and March quarters, because it sounds like with the November mid November launch strong demand and ramping orders that that might result in better than normal season.
Banality.
And my answer it's too early to say, it's a bit too early to say, there's multiple factors that will drive our.
Business in the March quarter.
And that is one amongst many.
Okay, great. Thank you very much I'll cede the floor.
Thank you.
Our next question comes from Dave Kang with B. Riley.
Thank you good morning.
First question is regarding your sick.
Second quarter outlook.
Approximately $240 million can you breakout between.
Services expect services versus existing customers versus a new logo I thought that was very helpful Dream.
We are.
Rami can you take that one.
Sure.
We just looking.
At the mix between product and services.
We would expect.
Basically all products business to hedge up.
He.
I think the midpoint of the guidance to 40.
The 161.4 that we reported and.
Services, plus subscription business to grow slightly faster than.
Then product this quarter, which is kind of the opposite of what we saw.
In Q1, and the reason for.
A more conservative guidance around product is because we had such a strong quarter in Q1, which is not the normal seasonal pattern that we we have seen in the past and the conservative around certain regions such as the southern course that we already addressed in a prior question.
And how much do you think.
On new logo business.
I need to be to make kind of hit your midpoint.
We think it should be between 15, and 20%, which is which is the typical range that we see every quarter and.
And we don't see it materially different this quarter.
Got it and then second question.
Regarding.
SD when now that Juniper is acquiring 128 does this put more pressure on you to go out and acquire as it went techno as to when technology or perhaps.
Invest more to strengthen your SQN capability.
Yeah, I think that's it that's a very fair asking but I think that.
The answer that question is yes, and when we look at it build versus buy versus partner and we have our own SD Wan solution and we have teams that are looking at.
Yes, our what we will call our SD branch capabilities, but yes. The short answer is yes. We are looking at this and we are investing at this.
And we do see opportunities to be very competitive overall and a very high level. What we're seeing is that some of the traditional solutions, maybe less meaningful and that the new world where.
The lines between when.
Land are.
Are disappearing and we look at is one network, you'll hear us talk about.
No.
When enterprise one network one cloud.
And so I think we're we're thinking forward on that.
So and I would say from a security perspective, we have our fabric connect technology, which has been incredibly popular with enterprise customers.
And that that technology, we are extending out to the edge of the network and Weve extended out to two wireless so.
We are seeing that evolution, but it's it's evolving in a way that's different than the traditional SD Wan technology.
So he is got it has an air okay. It is an area of investment for us.
Sure and my last question is on what were some of the key factors that enabled you to unseat.
Incumbent MLB.
Well I think it was it's what we're talking about it's it's our solution.
In terms of.
Being end to end.
Yes. It is it is our cloud.
And it is our analytics and ultimately I think it's the ease of doing business.
With extreme versus a larger competitor and sort of quality.
Of of relationship that that we can bring.
I think it's a lot of factors, but as they look at our solutions and this is happening with a lot of customers and they look at just the end to end the simplicity of.
Our our hardware and and they look at the simplicity of our cloud.
Look at data that we can deliver and then some new analytics solutions that will be bringing to market.
I think when they look at that whole package.
I think it was it was a is a hands down decision.
Where are you.
One thing that we'll talk about it the total cost of ownership.
Customers, who move to extreme can save a lot of money from a total cost of ownership perspective, when you look at the unified hardware platform with Universal hardware and then when you look at this cloud where we're putting all of our software into the cloud and we're including more applications than anyone else So software licensing.
And can get very expensive and what we find is a lot of customers out there not using what they have already bought from our competitors and when.
They look at our option, we can bring significant savings to them.
By this one enterprise one network one cloud with lot of software in a lot of applications included.
Got it thank you.
Our next question comes from Ryan matters with Lake Street capital.
Hi, guys. Thanks for taking my questions first one for me. So you called out stronger sales execution in each geography that drove the strong performance during the quarter. Just wondering if you can give us some more color on that.
Yes, so what.
What we did back in that in the May timeframe and it really.
Follow through into the first quarter is we reorganized our field and we reorganized our field in a way.
Have teams.
Teams focusing on strategic accounts. These are larger strategic accounts. An example of that would be gores they supply the material material for Gore Tex.
Global this was a very large order that requires global support the global support network in a word needed effort. So when you have.
Customer this like a 10 million dollar global customer in this case it requires a different selling motion than than what we might have.
For our traditional business, let's say.
Ray Elementary school system here in the U.S. and so.
What we what we did is we created a team that was very focused on that strategic motion globally, we separated our team and then we created carrots.
Territory models, where we have field teams. They are very closely aligned with this huge partner network that we have so now it's a function of having teams dedicated to partners that are in the field that are focused on the territory model and also supporting run rate business. There and then teams that are.
Exclusively focused on the Volkswagen the Samsungs on these kind of very large accounts. So we can deliver better more competitive.
Solutions in service to that that has been that has been very effective has been very well received.
Okay. That's helpful. And then last one for me. This is more towards Remy. So you guys had a strong operating margin. This quarter Eightpointthree you guided eight to nine and a half should we see this 8% to 9% range kind of the new normal.
I would certainly hope so as I look at the rest of the year, though.
Although we're not providing guidance, but but we should go back to the normal seasonal pattern.
In the March quarter, which should be weaker so you may see a bit of a drop there.
And then obviously the high points should be should be Q4, but we're really not in the business of having operating margin.
And if anything we'd like to get to 10% as soon as possible.
Okay. That's helpful. Thanks, guys.
Thank you.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone.
Our next question comes from Paul Silverstein with Cowen.
Yeah first of all a pause as soon as anybody else that has already been asked and answered would have been dropping the colts was influenced want a message.
First of all.
Government education is 40% of your revenue My question is how much of the current strength.
Specific to this vertical and how how's your visibility with respect to government and education, obviously government budgets play a big role here in merchandise that's hard to predict any insight you can offer be group.
Yes, so Paul our visibility our visibility comes from.
Our.
Obviously, our funnel of opportunities I, just talked about the way that we reorganized our field.
And that's been very helpful as well.
Most of our education customers are going to fall into this territory model.
And there they can provide.
Our attention and then also work more closely with our partners to drive that business, it's a little bit different in the us in the US we have dedicated what we call slide teams and so we have dedicated enterprise dedicated led us to have this territory and strategic approach.
And within the US we've had a very successful E rate season, we're starting a new E rate process.
Our new funding cycle, if you will and our teams are incredibly bullish about what we're going to be able to do with now universal hardware cloud out and.
And the software tools that we are going to be able to provide.
There's an E rate component there are key through 12 schools that by outside of E rate and then there is higher education and then there is government and I would say these teams are doing relatively well right now in the international markets. It's more of the territory accounts that are focusing on education.
And we continue to see strength and we see the strength flowing through this year and.
We are it's a little early but we're already optimistic about fiscal 22 based on what we're seeing in terms of the 470 process and filings around E rate just how we're much better organized to go after that business with a much more competitive offerings.
And how much of it is the new organization versus Kirkwood mall, but.
Obviously were most so we're.
Other major league baseball whatever the sport removed Phantom stadiums your traditional plastic extrusion wireless Lan business out to bid commitments are very modest levels when will the other general Huggenberger, Paul did 50 plus percent as much as 60% of the revenue.
From the education vertical loan I assume that's a big part of the strength. The question being I also assume that a lot of your strength.
Is from simply you rate been strong domestic question how much of the strength is a function of strong funding and is dependent upon ongoing strong new routes funding is part of that question.
The education piece.
What percentage of problems that there's a portion of your government education that kills reported personal revenue to fall.
Thank you.
Yeah, I think I mean, yes.
As it relates to E rate.
Yes. This this was.
Strong.
Ending cycle and we saw funding come earlier, we had.
Significant E rate business that came in earlier than expected into Q4.
And were you continue to see strength in that business I think the solutions. If you look at who's winning the E rate business and you look at our largest competitors there their traditional business and then there is the cloud business and they do.
Huge amount of business from the cloud so the cloud solution.
This is a very popular solution with new rates prior to this coming year. We haven't had an end to end cloud based story.
Tell and now we have an exhibit very compelling story to tell and we're fully integrated so we have the benefit of cloud we had the benefit of wireless edge into the core of the network.
And so our value added proposition our competitive position is much stronger. So way. We're organized is much better and we have more resources behind it there are funding programs happening in Germany and funding programs happening in Japan that we've gotten organized around where there is increased.
No government funding. So we're much better organized to go after that business.
And again that our solution is more is more competitive so.
When we look at the benefit of our fabric, which is secure it's easy to deploy its very popular with state and local governments and and.
The school systems, and then you look at how we're extending that fabric.
And the benefits of fabric out to the edge in the fact that all of this can be managed from a single cloud no. One else can do that so we havent we have a competitive advantage, we think plays very well with with our government customers.
As well as with our education customers and we're obviously going to run hard after it.
And the percentage of revenue from the government and education vertical that comes from June through 12 or from the route for both.
So let me do it.
Yes, Paul Education was very very strong this quarter as a percentage of our total revenue total bookings it was.
Between 26, and 28% I don't want to get too precise range I would see that E rate was slightly less than the third higher Ed was slightly more than a third and Keith.
Okay through 12 outside of the rate was about a third of that 26% to 28%. So we're fairly diversified Indian education segment, now and overall that segments.
As has dairy strong book in Q4 and in Q1, we expect it to continue to be strong as we hit Q2.
I appreciate the bridge on February one follow up if I may on gross margin Remy any sense for looking at the full fiscal year end.
Since for what a reasonable best case would look like.
Or reasonable worst is for that.
We're shooting.
One of the centers.
We feel we should be north of 60% and it will be a combination of pricing discipline on the product side. The introduction of new product. We're almost at a 100% of our program by December of 2021, we intend to launch a new refresh with the universal platform and we.
Aiming to refresh or about 70% of the mainstream platforms that we have.
Both wired and wireless.
And then the third one is obviously going to be the change in the mix.
The strength in bookings for subscription does not have an immediate impact on revenue because a typical subscription.
Subscription contracts are spread over three years, so tick up a $100 today would recognize a 36 of that the first the first month, but as that revenue for subscription builds up from the current 13 14 million to quarter two more obviously thats going to help drive stronger margins for the company overall so.
We've got to be over 60% of this fiscal 21.
Thanks, Paul.
Kevin lets move on thank Paul.
Our next question comes from Christian Throb with Craig Hallum Capital.
Hey, guys congratulations.
On execution, the challenging environment all of my questions had to relate to Paul's regarding government education sector and they've been answered. So I don't have a question for you. Thank you.
Thank you.
Our next question comes from John Roy with water to our research.
Great Hey, Ed I had a question about universal hardware.
Remi you were saying that you are planning to have a 70% refresh of Banca skews by the December 2021 is that kind of what you were saying.
That's kind of what I would think it would just specifically you mentioned that data center.
Is not included in my comments.
We will have some specific products in the data center space like the nine you went 50 to 90 to 50 that will be part of a refresh but a bit center product typically built for specific use case.
For for the key customers that we support there and so applying a year or so hardware platform to data center would.
Would not necessarily be.
Be that the best thing to do however for compass on both core and edge and access points that sometime.
Great and then as a follow on to that.
Obviously, we're going to be trying to push more software content in the universal hardware platform do you plan on at some point in the future maybe breaking out.
How much is universal maybe even how much of software in terms of revenues.
Well, we don't intend to build separately so louis versus the hardware itself use that we sell you switch and you can choose to have automated.
Campus software, which is.
Boston, Boston or you can choose to have small on the edge software, which is which is AXOS on that same hardware, but we don't say switch cost 100 Bucks is that X amount of dollars for the U. S and X amount of dollars for the hardware itself together, where we do however is to sell you a subscription on top.
That enter the 50 520.
The year, one for that subscription will be embedded in the price.
Gross profit redbrick engine will be able to carve out the value of the switch that we sold you and the value of that first year subscription and the idea is to get customers excited about the subscription and have them revenue after year.
Great and maybe one follow up on the verticals not not education. This is more of a health care question, obviously, they're very busy with a lot of other things do you think that at some point, you're going to see a recovery in health care and just cobot kind of need to be done before that you expect that to happen.
Yes.
Yes, I'll take this we have started to see the recovery and health care I think when cobot hit.
Most of our healthcare customers were environments, where they.
They postponed elective surgery and it put them in a difficult position on what we've seen.
And.
This quarter and Q1 is.
The beginning of what we see as the recovery and then as far as our funnel heading into the next quarter is it we're seeing growth so from our lands were seeing it coming back.
Right.
Thank you so much.
Okay.
Thanks.
Our next question comes from Richard Hilgert Bloomberg Intelligence.
Great. Thank you for taking my question can you just talk a little bit more about the pipeline and the funnel I mean, how does it compare today relative to pretend that many times and it can you just add a little bit more detail as it relates to deal sizes and the campus switching as well as the.
The wireless opportunity in terms of the funnel itself.
Sure what's happening.
As it relates to deal sizes were seeing deal sizes going up.
As we look at the overall funnel, we're seeing our funnel grow so quarter over quarter, we saw funnel growth going into Q1, we have follow growth going into Q2. So we're looking at this seasonally we're still below the funnel that we had a year ago Q2.
I would say that the quality of our funnel is a lot higher and the level of scrutiny that we've applied to the funnel and the tools that we're using now are giving us a lot more confidence and the predictability of our forecast.
It has to do with it improved quality of our teams and the quality of the forecast being driven from the bottoms up as well as an AI tool that we use that sits on top of Salesforce. The calls a number and it provides us with an added layer of inspection, where we see display.
Parties with our field teams and a third leg of the stool is now we're getting forecasts from our distributors.
70% of our business flows through distributors and they work directly with partners and now they're giving us their forecast. So we triangulate all of these.
Help us get better visibility so.
Certainly.
We're seeing the funnel grow quarter over quarter over quarter.
It's still off a bit from from last year's funnel, but the quality of what we have in the funnel is better and we have more confidence in how we're calling the conversion of the funnel into bookings.
Great and I was.
Little I.
I wouldn't be surprised but.
Interesting on the campus switching dynamic versus the wireless dynamic in the quarter, especially given that you have a product refresh coming up I would think that there would be some delays on campus switching.
Could you just talk a little bit more about what happened to campus switching in the quarter and I'm, assuming the campus switching on momentum is still going to be robust given the universal type of that.
You are rolling out.
Yes, we are we are expecting that contain.
Continued strength in our switching.
Especially our new platforms.
Our highest running platforms are coming out in the spring time from.
So we continue to see strength there.
On the wireless side interestingly, our our units were up but it was more pricing pressure.
And our ASP came down and offset unit growth for the quarter. So.
Yes, we are still seeing strong wireless demand.
I would also comment on the strength.
Which tends to be more wireless oriented in Q4.
I would also comment that our stadium business, which also is is wireless.
Yes, I had a very slow September quarter. So I think it was the combination of the movement of those two verticals.
As well as.
The difference in.
The ASP is.
For for wireless Rami do you want to add anything.
Yes, we saw great strength in some of our high runners on the wired side the full for TG to the full 35, which has.
Built in cloud wireless fabric and health care, although health care, which was not a super strong quarter, but the fabric sold really well in health care and higher Ed. So the export 65, 35, and B to B 4900.
Had a great quarter I would add Ed that the pickup that we saw in the run rate that we've been calling out throughout the quarter quarter, all that pent up demand.
That really is driven by our installed base and their historical extreme install base of extreme enterasys products.
That really help more of the wired business than the wireless business I would say.
And to your point while it.
We could begin stadiums and we didn't have much of that business.
Okay, I know, we're coming up to time may squeeze another.
Yes.
So so.
Given that you've been focused on growing does subscription based.
I'm going to take a different angle on the seasonality question, how should we think about the seasonality of the business over the long term.
[music].
You mean quarter I mean looking at the full quarters, yes.
Yes, nothing near term I'm, just thinking about it from a long term longer term perspective, I mean did this you're not a bit strange because of covidien, but I would say.
Q1 is typically a weak quarter Q2, because of December where we see a lot of budget.
We're on budget Flushing, especially in EMEA is the stronger quarters, we should be expecting that to be up anywhere between five and 8% depending on the year then.
Then we dropped back in the March quarter.
Because because it's.
Not a whole lot is happening both in the Americas and the EMEA and then we always finished strongly in the June quarter, because thats through year end, and Thats, where people hit their quotas and accelerators.
But not going to.
Gross.
Yes, I would answer that and just say I don't I don't think at this stage.
Given the evolution of our business I'm not sure. We can say we are going to go back to the way that we were.
And they're ready mentioned strong.
Strong strong quarters in international markets, where they close out the calendar year, and we see a lot of spending there and then.
Yeah, then that leads to a weaker march quarter, our slag vertical there's a lot that happens in our September quarter, and a lot that happens in it.
The December quarter, and then March is typically a weaker quarter. There however, with new wins and stadium for example, and.
We see.
Major League baseball and NFL.
That comes back I think you'll see some offsetting trends with booking.
Bookings that would naturally happen in that first quarter.
The mix of our verticals continues to evolve and to change obviously, we're still in this Kobe World and I think it's a little bit.
I think it might be.
A little bit premature to call.
The long term seasonality cycles that we've had.
Great. Thank you.
Yes.
Our next question, but the follow up question from Alex Henderson Needham.
Yes.
Thank you very much a couple of questions that came up an awful the commentary.
You mentioned pricing pressure in wireless could you talk a little bit about why that's occurring is that a function of.
Your competitiveness being putting pressure on your competition, they're reacting to it or what's what's causing that.
Do you want me to I'm, sorry to cover this one.
Go ahead.
I know, we talked about SP I would not necessarily.
Consider that acceleration price pressure, we do see one competitor being slightly more aggressive this quarter, but it.
That's what we are seeing and it's more anecdotal.
And then then hopefully a long term trend, it's just that the mix of what we sold this quarter was more towards entry range product at this stage as you know the NFL typically would use Wi Fi six.
Higher end product and so because education was the main driver for this quarter performance not nets are just E rate, but a key through 12 in general and those products more interchange that expensive dropping this be more than an accelerated price pressure outside of this one customer does this one competitor.
Hi, Thanks, and then the second question I just wanted to go through the Universal product line timeline in terms of what percentage of the product.
Is converted to the Universal line.
In the current quarter in the March quarter.
Or is it 100% in the November excluding data center.
No no no no. It was just one product being launched the 50 520.
Which which happens to replace two products that were in now and to refresh and then it's going to rental but time, we have not yet built we mentioned 70%.
Already which is the targets by December 2021, we have not built sort of quarter by quarter bridge that we're willing to communicate at this stage, but as soon as we ready we'll provide that schedule, but but from Q1, it's very small and the product is going to be launch around mid November. So we will have an impact on yields.
Six weeks out of the quarter.
So what portion of the product line does the current version the you're launching this quarter actually represent it sounds like that.
So.
Something in the 25% this entity.
No it's less than that it's designed to replace the full 15, the full 65, but both products will continue to be sold and we expect the crossover between the 50 520 on these four products in its replacing two happens sometimes in the second half of fiscal 2021.
Just to be clear I'm, saying it represents.
Again, I mean, clearly you're not displacing those products and those other products are going away.
It takes time to happen, but the portion of the line that it represents those products that are being replaced and it would be what.
But having to 5%.
I don't want them active.
Uh huh.
Yes, I think we have to follow up on the.
Hi, our highest runners are coming in that are coming in the spring Alex.
I think so so we should assume a fairly low run upfront for the universal impact and then larger impact coming off the spring launches and then full gear.
Getting to 70% by the December timeframe is the is the trajectory overtime to the slide.
Yes, and then just a 70% just to be Crystal clear was not related to actual volume, but it's actually the the product that we have by main by millions. So the fact that we have.
70 does not have the product doesn't mean that it will be 70% of the volume because.
The other products, just replacing what ramp down over time.
Totally totally get that that's a.
Falls my problem. Thank you.
Thank you.
And I'm not showing any further questions to start and I'll, let turn the call back over admire forward.
Kevin Thank you and.
Thanks, everybody for joining us on the call today.
As always I want to thank extreme employees.
Working in a challenging environment.
We're making.
A lot of progress and I think.
You'll continue to see strength in the business of all other over the coming quarters. So thanks, everybody and have a great day.
Ladies and gentlemen concludes today's presentation you may now disconnect and have a wonderful decks.