Q2 2021 Extreme Networks Inc Earnings Call
[music].
Yeah.
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the extreme networks Q2 fiscal year 'twenty 'twenty one financing results conference call at this time, all participants on a listen only mode.
After the speaker's presentation, there will be a question and answer the asked the question at that time. Please press Star then one when you touch tone telephone.
The amount of day, Thomas holidays being reported.
I'll turn the conference a few of house the pain Copeland, Sir you may begin.
Thank you operator, and welcome to the extreme networks second fiscal quarter of 'twenty 'twenty, One earnings conference call I'm, staying kobler, Vice president of corporate strategy and Investor Relations.
With me today are extreme networks, president and CEO admire cord and CFO Remi Thomas.
We just distributed a press release and filed an 8-K detailing extreme networks preliminary financial results for the quarter for.
For your convenience the copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website 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.
The financial and operational results growth expectations and strategies the impact of the COVID-19 pandemic the potential impact of any adjustments to the company's distributor of rebate reserve.
Changes, resulting from the completion of the quarter end review process.
New product introductions operations and the impact of tariffs.
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 the statements as described in our risk factors in our 10-K report for the period ending June 30th 2020 filed with the FTC.
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 and my report.
Yeah.
Thank you Stan and thank you all for joining us this evening I.
I want to recognize and acknowledge the efforts of extreme employees and their families are extended the community of partners customers and our investors the.
The duration of the pandemic continues to pose challenges for everyone Mitch.
The remarkable the efforts that people would put forward their commitment to extreme to help us to emerge stronger than ever before as the company.
Our preliminary Q2 results Mark the third consecutive quarter of sequential growth and reflects increased customer demand and continued improvement of our team's execution across the board.
I'll, let Randy address the potential onetime non cash accounting adjustment to our financial statements.
In my comments I will refer to financial results has normalized to address the fact that our accounting adjustments have no impact on our business or our outlook.
We outperformed our initial expectations for revenue and earnings achieved record gross margin and operating profit and hit the double digit operating margins two quarters ahead of our expectations for fiscal 'twenty one.
These results drove strong cash flow, which we used to pay down $40 million of our debt and reduce our leverage.
Focusing on our results.
<unk> has emerged as a critical lifeline for our customers' digital transformation efforts, which are accelerated by COVID-19 scoop.
The schools governments health care organizations and enterprises are all managing increasingly distributed networks users of activities.
Students learning from home delivery of remote health care and flexible work from home models are all here to stay.
These trends driving our new cloud subscription bookings, which grew 140% year over year in Q2.
We believe the evolution of networking will continue to become more and more distributed and what we call the Internet enterprises.
We are developing innovative next generation technologies to lead this next market transition.
Our competitive differentiation is becoming more pronounced as we are gaining more share than our competitors and cloud based networking. We currently manage nearly one 5 million networking elements on our extreme cloud IQ platform, making six straight quarters of sequential growth the number of customer accounts managed.
License.
Digital transformation and more specifically network transformation is driving our customers' ability to execute in the current environment.
In addition, historically the network has been an untapped resource when it comes to meaningful data that can influence it positively improved business and customer outcomes.
One of the strongest differentiators of our platform is the access to unlimited customer data for business and technical users the optimized network performance and deliver contextual user experiences.
These data insights can be leveraged in real time and usage trends can be evaluated over the prior periods to empower strategic decision making.
We remain the only networking vendor to provide unlimited data to our cloud management subscribers, delivering AI, driven networking and science required to compete and advance.
Enterprises without a clear and realistic plan to support the evolving types of technology used devices and apps and people who connect with the networks will fall behind.
We provide our customers the tools and resources they will need to move on from high cost and complex infrastructure with our simple secure cloud driven networking solution, we make it easier for them to take the next steps in their digital transformation journeys.
Extreme stands alone in providing unprecedented choice to manage edge to edge data center networks privately on prem or in any major public cloud.
Enterprise customers are all embracing of hybrid cloud environment with different applications running of different public clouds, private clouds or on Prem our ability to support network connections and the manage seamlessly and all cloud environments provides unmatched flexibility and effortless experiences.
We continually reinvent ourselves to challenge the complexity and convention in our quest to make the customer experience effortless.
We do business.
Why we also provide industry, leading customer support and flexible as the service subscription options are simplified portable cloud licensing of universal hardware platforms can adapt to new use cases, and the push of a button, providing much needed flexibility and investment protection.
Our sales growth is being driven by our go to market transformation.
Our new sales leadership is driving results, you'll be more opportunities through the channel.
By making our channel strategy the main engine for growth, which.
Which increases customer focus and opportunity management and by quantifying refreshing of our portfolio. We have transformed our business we created more feet on the street with our channel partners and put more training sellers on the ground.
The flip the script on funnel creation with cloud channel contributing over two and a half times more pipeline leads creation then in fiscal 'twenty.
This is a fundamental and structural change in our business that we believe will make our growth more sustainable.
Our strategic pillars of that's more focused on larger and more strategic opportunities driving business with new and existing customers 39 customers that over a million with extreme in Q2 about twice the usual number.
We expect this growth the spillover into Q3, as we expect better the unusual seasonality in the March quarter.
The automation of our business has helped us drive sales productivity with initiatives like channel self service.
We can add channel partners, who track transact with the seamlessly and we are rapidly growing the number of transactions done through self service.
Our distributors and partners are embracing our ability to improve business velocity and deliver everyone was the experience.
The next steps and are proud of evolution will be the focus on customer success and drive user adoption and the number of devices on our extreme cloud IQ platform.
The journey of cloud networking for many of our existing customers started with wireless Lan, but with our universal platform for switching the evolution of our management tools and in the future of our ability to manage third party devices, we will fill out our vision of the infinite enterprise.
In summary, pivoting to investing in innovation and in effortless experience for employees and customers is now paying dividends and we will continue to drive growth going forward.
We were especially pleased with the strong sequential growth Byron our EMEA business this quarter.
Bookings basis, both of our Americas and international segments are now back to fiscal 'twenty levels in Q2, and we expect growth to accelerate into the second half of our fiscal year.
Q2 also marks the return to sequential growth in wireless on 14% quarter over quarter unit shipment growth we expect.
Wireless to once again fuel our growth in the second half of fiscal 'twenty, one as sports venue and retail verticals begin to recover further over the next several quarters.
Our new wired products are seeing increased demand in the marketplace with strong new product revenue of recently released switches such as the $55 20 of Universal platform.
Our new products for both more competitive and deliver a higher gross margin to the extreme.
We have a wide range of new product introductions set for the next calendar year to expand our universal product platform with cloud native management from switches of truly unified cloud platform.
We also saw early ordering from some of our largest customers that are global leaders in the service provider ecosystem for five G.
<unk> is a substantial growth opportunity for extreme because of the highly focused investments we have made.
First we're in the early stages of rolling out of next generation packet broker solution for one of the world's largest service providers.
We're co developing and embedded technology entered the full stack of of five G and F. The EIS solution with one of the largest telecom equipment vendors.
We expect to see growth begin to ramp in the second half of fiscal 'twenty one.
We've created a global go to market sales and services team as well as a focused R&D team of engineers to specifically address this massive <unk> opportunity.
In addition to our existing customers. We will also bring our solutions to other large service providers around the world.
Heading into the second half of fiscal 'twenty, one we're on plan to achieve double digit year over year revenue growth record gross margins and double digit operating margins. Our funnel remains strong and our visibility continues to improve as we emerge as a stronger more competitive company and take share.
With that I'll turn the call over of our CFO.
The tomorrow.
Thanks, Ed is.
As Ed noted, we had a very solid quarter and executed well across the board as you are aware upon completing our quarter end procedures.
Identified a potential understatement of the reserve for or distribute the rebate program.
The review is ongoing which is why we're providing a preliminary outlook for our Q2 results. We may make a nonrecurring adjustment to contra revenue in our financial statements, which would not impact our reported cash balance as of December 31.
We expect to file of financial statements on time and will provide an update if necessary.
Based on our preliminary Q2 performance our results exceeded outlook across all of our financial metrics for the third consecutive quarter.
Our updated range for Q2 of $238 million to $248 million is above our prior guidance of $235 million to $245 million.
Also anticipate sequential improvements in gross margin for the third consecutive quarter.
The new non-GAAP earnings per share outlook of 11 to 17 cents is above the previous range of 9% to 12, the strong quarter over quarter recovery in our bottom line was a function of higher updated gross margin outlook of 67% to 62, 1% versus our prior range of 60 to 60.
6%.
The combination of higher anticipated gross margins and tight expense control, resulting in operating margin range between nine 5% to 12, 2% of revenue up from the range of eight to nine 5% implied in our initial guidance.
The significant cash flow generation, we achieved allowed us to pay down $40 million in debt and strengthen our balance sheet further.
Yeah.
Can you cloud subscription grew 40% sequentially and 140 per cent from the year ago period.
Just on on Q2 bookings out of total cloud managed subscription business reach over $80 million in annualized run rates the growth of cloud subscription and service renewals resulted in deferred revenue of $391 million.
4%.
Sequentially.
And a quarter over quarter the growth of deferred revenue should sustain our recurring revenue and subscription revenue growth from a bookings perspective. The America region grew 2% year over year on higher volume and larger deal cells, while continuing.
At the lead the way with above corporate average new cloud subscription growth our international business grew 3% year over year and bookings across product services and subscription we anticipate year over year growth through accelerated during the second half of fiscal 'twenty one from.
The verticals perspective.
All of our May eight major verticals were up quarter over quarter, we saw sustained the men in government and education spending a rebound in the health care business on both the year over year and quarter over quarter basis strong sequential growth in service provider.
And then other modest sequential recovery in retail and transportation and logistics.
Segments of our business such as sports and entertainment are set to recover in the second half of fiscal 'twenty one based on recent new win.
Updated non-GAAP gross margin outlook reflects expectations of an improvement in product gross margin driven by higher volume.
The mix of higher margin, new products, and lower freight and tariff costs.
As anticipated the modest sequential increase in operating expense was due to higher commissions related to growth the revenue offset by more efficiency in our R&D spending.
The expected recovery of the operating profit combined with a pretty management of operating working capital resulted in higher cash generation and enabled us to strengthen our balance sheet.
After paying down $35 million to complete the repayment of about $55 million revolving debt the making of principal payment of $4 8 million on our term loan. We ended Q2 with 100 need for millions of cash and equivalents compared to $193 million at the end of Q1.
This resulted in the net balance of $172 3 million down from net debt balance down from $202 9 million in Q1, and $234 9 million in the year ago quarter.
Yes.
We made sequential progress in reducing our inventory levels to $49 9 million down from $55 $8 million at the end of Q1, the year over year and quarter over quarter decreases in the inventory largely reflects improved demand planning SKU rationalization and higher inventory turnover now.
Now turning to guidance, we expect Q3 revenue to be in the range of 240 to $259 of better than seasonal quarter.
Q3, GAAP gross margin is anticipated to be in the range of 58 for 259, 5% and non-GAAP gross margin in the range of 61, 5% to 62, 5%.
Q3, GAAP operating expenses are expected to be in the range of $137 six to $139 6 million and non-GAAP opex in the range of $126 million to $128 million.
The sequential increase in Opex is primarily related to higher sales Commission, we anticipate and higher salary accruals.
As well as the FICA accrual reset.
Q3, GAAP earnings are expected to be in the net loss our net loss in the range of five 5 million two of net income of one for 1 million or a loss of four cents to earnings of one penny per share.
Non-GAAP net income is expected to be in the range of $13 5 million to $20 1 million for 11 to <unk> 60 per diluted share in Q3, we expect average shares outstanding to be approximately $124 7 million on the GAAP basis, and $126 6 million on a non-GAAP basis with that.
I will now turn it over to the operator to begin the question and answer session.
Thank you again, ladies and kind of maybe like the ask a question.
And then one when you touch tone telephone.
One moment please.
Our first question comes from Paul Silverstein.
Of course Cowen Your line is open.
But it does the pursuit of taking the questions off of.
Just a couple from the first off revenue.
What are the primary drivers of the improving gross margin.
And so this this quarter was for.
Primarily driven by product gross margin. We continue as you know to introduce new products that carry a lower bill of material. So that's that's helpful. We also had a positive shift in the mix amongst amongst the product a lot of ACP drove higher gross margin because the products that the recovered.
And George stronger gross margin and we also enjoyed this quarter the benefits of a sequential drop in freight cost.
You know, it's not quite back at the pre COVID-19 level, but theyre trending down as well as lower tariff costs and so the combination of all of these three factors explain why the product gross margin was strong this quarter.
Before I ask you a note about visibility of revenue or gross margin of trust the.
There is not much of any risk of gross margins back slightly below that 60% level you guys from now nicely above that.
It sounds like you've already crossed the bridge, but.
I want to ask the other question is there any risk of backsliding.
No no if anything we expect the gross margin to continue to improve the trends out of this described specifically for tariffs.
Are going to get better in Q3, and overall you saw the recurring revenue this quarter was 30% and it's kind of compared to two quarters of go down a bit because of product has been picking up sequentially, but overtime with the $309 million of deferred revenue that I talked about you should be expecting our subscription and <unk>.
Support revenue to increase as a percentage and structurally those two activities carry a higher gross margin so that should be driving our gross margin up so we're pretty optimistic about the gross margin trends.
Yeah, that's what I figured the person you anticipated my question, which is is it possible to quantify at this point.
You crossed the 60% of bridge and Directionally things are improving as the possible quantify over the next year or two.
What a reasonable best case gross margin profile.
You get it soon.
If things go right.
We feel comfortable.
Comfortable about the ability for us to maintain it in the 61, 5% to 62 and a half for the next couple of quarters as we see the recurring revenue trending higher.
The number could go up but for the next day. The next few quarters, you should be thinking of us as being of 61, 5% of 62, 5% gross margin company.
Alright, one last question for me if I'm the on visibility I think last quarter you would add.
<unk> the business trends relative to global macroeconomic walked sale that you were seeing constant improvement on a quarterly monthly weekly almost daily basis is that continuing if we think of monthly and weekly progression or are you continuing to see business activity pick up.
As a general proposition, if not perfectly linear but on an ongoing basis.
The cause of that.
For the strength.
The government education tied to EBITDA rate.
The part of it how much of the strength of its tied to the incremental.
The statements Scott that's a great question. So I would make two comments. The first one is on what we've discussed with you Paul already which is what we call the run rate business and sometimes referred to as repeat business, which is those orders less than $50000 that are really being generated by the installed base and in the last three months of of.
2020, we saw a pickup in the business, which we feel was related to the yearend spending as well as the accumulation of sort of pent up demand from from the month of March to May when not much happened and so that trends, we really saw across the board as we now enter January and going into.
To the March quarter, obviously, we don't benefit from the year end seasonality, but we do see this run rate business continued to be healthy.
That's that's the overall and then if I look at the verticals education and government were clearly the strongest verticals. If you think about Q4 fiscal 'twenty in Q1 of the fiscal 'twenty one what we've seen in the last quarter is other segments, which had been subdued and I'm thinking specifically of health care.
As well as service provider and communications equipment, starting to pick up as early as Q2.
Which bodes well for us the net.
Next debt, we expect to pick up which has not yet would be sports and entertainment, which is stuck at less than 2% of bookings right now but.
But we do have those new wins, specifically with MLB.
That should should allow this vertical to be the sort of the final one two of them to pick up in the quarters to come.
Ed Arabia.
No.
Got it comes from.
I was just going to say ramping I think revenue did a great job answering that question and IV. The one thing that I think it shouldnt be lost all of it does relate to the gross margin question as that debt that we implemented what we call channel self serve which now our partners and I think we have to shout out to the partners of extreme.
Yes, we are.
Seeing a lot of activity and growth with partners in the channel of it really want to work with extreme they are embracing our cloud so our partners of driving growth and then what we're doing as far as the all of our lead gen activities where per.
Pushing that out through partners and then we're supporting our partner teams.
In a different way than we did before and then we're allowing us as we referenced.
Sellers to really get out and sell larger customers. So I would say that as it relates to COVID-19.
We're seeing the return of some verticals like sports venue and then also retail coming back.
And then I think as everybody understands from the economic news last week.
The economy remains strong and.
From that standpoint, we continue to see strength and.
The extreme is the smaller player relative to some of the larger players in the industry and we're taking share so for extreme large very very small incremental share gains. It means a lot of our topline into growth for extreme and and we are clearly taking share here.
Thank you.
Our next question comes from Christian Schwab, Craig how long line of both of them.
Great. Thank you my only question has to do with the five G opportunity and I know you guys Ed you've used the word substantial and then you use the word massive should we be thinking about debt is kind of the I guess of the $1 billion plus potential run rate kind of you think should we be thinking of others like a fifth.
The 100 million dollar revenue opportunity.
Yeah, it depends over what period of time for Christian.
Over the long term, it's much bigger.
No.
Yes.
Talking about two different growth vectors, one is with a specific nextgen packet broker, where we see ourselves being a full hour.
Call. It 12 18 months ahead of any other competitor in the industry. We have a very large customer that is is the longstanding cash customer and our application is dialed in and pretty unique to them. However, the technology could be applied to other service providers around the globe.
And the technology differentiation is real and the.
The second case, we have one of the worlds largest telecom infrastructure providers.
As yeah.
We're built into their solution and then they are going out of service providers for five G. So.
We have an opportunity leveraging that relationship to go out to all of the service providers around the world.
And that could.
Based on their competitive position in the market, we see that taking up in addition to that one opportunity in that one growth factor within that company.
There are other growth factors that are available and we have one of the highest vendor ratings of any of their vendors.
And they.
They will open doors for us for new opportunities. So I think youre, a little short in terms of how youre thinking about the market potential for extreme.
We're taking a long term approach here and what this could be obviously, we don't provide.
We're not providing guidance on a longer term and I think I.
I think you'd probably have to take it up a bit.
Okay and then in.
What would you expect that the majority of that to be shipped you know you talked about it ramping in the second half of this fiscal year or is that something that's going to you know be sold for for many years or a significant portion of that will be sold within the next year or two would you imagine.
It would be many years it would be many of US I mean, five this five G dips.
The deployment.
The the largest investment in telecom infrastructure in history.
And this is something that we see going on for years.
At least 15 years.
And because of the differences in <unk> and then what does it mean for last mile connections and.
It's it's a very different technology and we're just excited to have some pretty amazing partners to be going out into the market with and then different ways to win that our new growth factors.
Haven't habit for extreme has never had this kind of a growth opportunity.
Right. So the these are you know.
Understand the remember the packet broker business of brocade and how they were.
I think they were sole sourced at both three and for G.
So it sounds like you think that might be the case at five as well.
We do we do okay.
Okay, Great I don't have any other questions. Thanks, guys.
Thanks Christian.
Thank you.
Next question comes from Alex on the kind of Needham Your line is open.
Just wanted to go back to that last.
Answer when you say, it's significantly larger than the $50 million to $100 million of the Christian throughout.
I think youre referring to over.
An extended period of time I think his question was really reflecting is it potentially $50 million to $100 million of an annual revenue opportunity as opposed to over a long period of time multi year opportunity can you just clarify that debt response relative to the scaling.
As an annual run rate.
Yes, and that's what I was referring to.
I answered the question the way Youre thinking about it Alex.
We haven't.
But it's over a long period than not over no no. The end do you think of that could be of 50 to 100 million annually.
Correct.
Yes, okay.
And the question the go ahead.
Yeah, I was going to say I think I was just mentioning we have an investor day coming up.
And the deal Bukhari, who.
He is our.
The Chief Technology officer, as well as our Chief product Officer and runs engineering.
You'll have an opportunity for your hand go into great detail and that will also share all of the new growth vectors that we have that relate around <unk> and what it means.
We've hired a new SVP, who is going to be running this and taking what is if you frame of $50 million to $100 million opportunity on an annualized basis.
And if you go out a couple of years and have that kind of of target.
We're talking about expanding the addressable market to other service providers or hiring teams specifically to go focus on this new growth vector.
Given the the.
The technology differentiation and the innovation that we're bringing.
The question of what really wanted to ask as opposed to getting the clarification on the part of the questions was around the total wins hacker I.
I assume that you guys were not impacted by it.
The would've heard would assume we'd heard of about that.
But.
Have you had conversations with the C suite.
The related people see sows the CIO.
<unk> about what's the impact of the solar wind spend.
For Hawk was on the spending intentions of particularly.
On the.
The other security related products or on network and the.
Related budgets.
You see the impact spending.
Yes, I would just say first of all from the solar wings perspective.
No impact of extreme.
We yeah, we dodged that and did not have any issues.
We do not see any impact to the downside of networking spend it back.
As networks become more distributed and as well.
What we would say the enterprise becoming more of the.
The more focused on the edge and delivering the edge and the investment being on delivering the user.
Experienced that normally and enterprise.
Employee might have on prem or on campus from branch now they're going to have it more distributed way if anything we only see of fueling more investment networking and shining a light on the fact that networking is becoming more strategic today than ever before so I think people are more aware of that now.
Al.
And what's happened with the pandemic of Covid has only accelerated that and solar wind and the only shines the light on how important security is.
And I think we.
I will comment and shout out that we have the most secure cloud any of our competitors in the industry. We're the only ones that have all of the security certifications and so as far as customer data being protected I do think that's also having an impact as to why we are taking share in cloud because of.
Of the assurance of security within networking data that resides in the extreme cloud IQ.
Okay. So just to be clear you havent heard anything specific from the C suite about increasing it budgets.
Change in budget mix or anything of that sort of since that's occurred.
I mean, we're seeing on our side, we're very focused on networking as you know.
We're seeing very healthy demand for networking.
And we have seen an acceleration of the digital transformation of networking with our customers across all of our enterprise customers.
But if I could shift gears could you just give us an update on when you expect.
Aim to expand the universal product line and the B.
The complete on that launch I think the last time, we talked you said.
The December quarter would be when the Universal line would be fully implemented until the deployed is that still the schedule and once the next set of products come out.
Fill that out.
So we've we've come out.
On the we've come out with the $55 20.
And I would say that the very it's a very healthy the very healthy switch.
But what we're coming out with in the.
Yes.
I would tell you in the April timeframe.
Is a I would say the next.
The universal switch.
And the Universal switch family, which is the high runner and then and then later in our AD in the calendar third quarter, and we expect kind of the next family of switches coming out and the Universal family.
We have.
They're on the wireless side as well, so I think you'd continue to see.
For wireless products that are coming out of the universal.
And then.
Early Q4, I think you'd see.
And impact from the next family of Universal switches coming out.
If I could just follow up one last the extension of the question and then I'll see the floor.
The ready to the extent of your margins of already moved up towards the 62%.
Level before you get those universal products out.
How much uplift do you see from those products finally get into pole.
For the pull of adoption and pull of of availability from the whole line. So that if we look out beyond the that lunch or is that another couple of hundred basis points of our 100 basis points or so.
What is the benefit of that still do accrue from.
Integrating all of your products for the similar.
The set of functionality parts of components and all of that sort of good stuff visits total.
I wish.
Introducing a new product range would have an impact of more than the 100 basis point, but typically the impact that we see because some of that obviously is giving back to the customers and partners in the form of discounts remained competitive.
Typically tens of basis points of impact and I would expect that to play out over the next.
I would say for.
For quarters.
To <unk> point, the majority of the range.
As an aggregation would've been launch by the end of this calendar year. So you should be seeing some benefit of that in the first half of fiscal 'twenty two for us.
Thank you very much.
Thank you. Our next question comes from day.
Hang of the rally your line is open.
Thank you good afternoon nice quarter gentlemen.
First question is actually a clarification I may have missed it subscriptions bookings. It was the 100, 140% year over year did you gave a sequential number.
Yeah.
Let me see if I can find it real quick cash future remember.
100%, but I'm just share it was 40% share.
The only kind of a 40% sequential growth.
Got it and then yeah, I feel sorry for the power.
Yes.
Yeah.
Yes.
Our field teams of all embraced the cloud and customers.
Customers know that they have to consider cloud.
And.
And if you are considering cloud you need to consider extreme so we're seeing we're getting a lot more of bass and our field has embraced the cloud. We are also putting more and more technology and of the cloud. Most recently our management software X M C.
We've made available to the cloud ex.
<unk> is a lot of devices. So we're expecting the the migration of <unk> into the cloud to drive even further growth of cloud subscription because of all of the devices that are managed.
Under that management platform.
Got it and then regarding on the recurring revenue when do you think that that will reach your target of 40% is that something that can happen maybe next calendar year and once it does where does your gross margin go maybe perhaps a mid sixties.
Yeah. So we'll provide more color on that at the analyst day.
Dave.
Take care of longer than calendar.
'twenty two.
I think were probably two years out before we reached the high thirties, but hopefully with the deferred revenue balance that I mentioned the of $309 million and continuing to grow.
More than 100% on a year over year basis, we see we see capacity of getting there, but we won't be there for for calendar 'twenty two.
Okay. So maybe Kelly on the 23, when you get close to that.
Where does your gross margin go.
So look at the overall services on subscription gross margin today.
Today.
Which is in the mid Sixty's and think about the fact that the subscription margin itself.
It is higher than the services margin and so as.
Cloud subscription grow that 65% should be should be increasing so I don't want to provide specific guidance ahead of the analyst day, but I just wanted to provide.
Some metrics for you to get an idea of where it should be headed.
Sure just a couple of more questions regarding.
The 23, maybe packet brokers so it sounds like it ships in the December quarter and are.
It's starting to ramp.
Heading into the calendar year.
Is that what's happening.
So we're expecting packet broker.
Is that that product is more of a.
Q4 fiscal 'twenty one.
The event.
As far as impacting.
Bookings and revenue.
I see okay.
So actually I think the other it's the other it's the other five G opportunity that's got traction and is beginning to beginning to ramp in a more meaningful way.
Oh I thought that was more of like a september quarter, but it sounds like couple of isn't done huh.
Yeah, I'm not sure.
That was that was guided previously but that has been on a very.
Continuous path.
And.
What this how this evolves is that yes.
Yes.
Our customer is selling into the large service providers and as they start to embrace of the solution.
That starts to that starts to ramp.
And I would say we're at the very early stages of adoption of the solution.
The very large service provider so.
It's being successful and we're starting to see that ramp.
And then packets of improve we see coming into the.
Our fiscal Q4, and then fill.
Fiscal Q1 of.
'twenty two.
Got it just the clearer on the the first one that you talked about the one day currently of ramping I assume thats the European network equipment.
Of the vendor and as the Alex I was talking about that you are talking about 50 to 100 million annually just to be clear.
Yeah, we're packaging five G.
All of our <unk> opportunities in that bucket.
But for the 50 800 million annually, though right.
Yes.
Okay just the.
One final question actually a couple of more regarding the European customer you know the.
So how would the demand dynamics change in the.
In the old ran open ran environment well they still go with your.
The solution or will actually Derek customer dictate which switched to us.
Thanks, David we'll have to move on it for this one.
Yeah.
Yeah, I'm not sure I am not sure I heard the question Dave sorry.
You know the old rent or open ran where.
All of open architecture will they still.
Go with your solution of oil.
Could that change.
No I mean, we are at the very early stages, David it's very very early and.
Yeah, I would say there is.
We're at the very early stages of it.
The large addressable market for this particular solution.
And I think what's going on with random might only.
It might only.
Enhance the requirement for the solution that we're the.
Full stack solution, we're part of.
Thanks, operator can we move on to the next questions.
Our next question comes from Mark Museum of Lake Street.
On the telephone.
Yes, maybe I missed it but what is the deadline for getting the the December quarter button just okay.
When do you expect them to have that done by them, what's the deadline. So that the the deadline falling is February 9th.
And we obviously expect to compete out reviews and <unk> tonnage.
Okay, and then just understanding the pretty robust guidance.
Certainly it was ahead of me is certainly ahead of consensus, but as I look for that I was anticipating Q1, sorry.
Sorry.
Q3 to be down sequentially.
Behind that.
<unk> growth that Youre seeing here if you could just.
Put it into a particular product bucket, obviously, you've got the pipeline to support debt $245 million guide at the midpoint.
Particularly a layer deeper please.
So so the fact that we're because we haven't completed our review.
Of the potential adjustments, we're providing a wide range on the revenue because we assuming that they might be.
And in fact, an adjustment that would need to be made and so that's why you should take the the midpoint of the range that we're providing and you take the midpoint of the guidance you're seeing a slight increase.
But I would say that parts of this adjustments from what I've seen the slight decrease so I'm going to specify that for sort of on secondly, as I mentioned in my.
The first answer earlier, there are specific verticals that had not recovered as of December and I mentioned, specifically sports entertainments.
We are seeing also healthcare enjoying a recovery. It started this past quarter is going to continue and so those are helping us sort of mitigate the normal impact on of the.
The seasonality that you would typically expect in March.
Gotcha.
And just a little more detail on that we've seen.
Yes.
The pent up demand for one major League baseball, it's a huge win a lot of stadiums in the major League baseball we have the league it's not a hunting license to go after.
Each club so.
You'll see a lot of bills happening and that they want to get that done.
Before the spring training et cetera. So.
We will see that come back as well as the NFL standard NASCAR spend.
Where we have significant presence and opportunities.
So you see that.
We're seeing service provider opportunities pick up.
As we mentioned before.
And in.
In general what we're seeing is the fact that yes.
We're getting a lot of interest in our cloud platform from traditional enterprise perspective.
And that cloud adoption and people being more interested in extreme.
Wanting to hear as people look to cloud to solving the distributed enterprise of more and more people want to understand our solution.
Our differentiation and it's just opening up more opportunities and we're seeing it in our funnel.
Thank you.
Thank you. Our next question comes from Eric.
The good.
Good day.
Okay.
Yeah, Thanks for taking the the question.
First off of.
On the cloud IQ can you talk about.
How the mix of products, we can help them.
The profile is changing.
Is it predominantly the Wi Fi products and is the are the other wireline product starting to become a bigger piece of that.
Yes, I would say today on the 90.
Yeah, the high 90% number would be.
We'd be wireless products.
Just came in we came out with the $55 20, that's got an embedded.
Cloud IQ license and so we started selling those in and as I mentioned in my comments, Eric Yeah. We're really focused on adoption. So we sold the switches that have got embedded licenses are now.
We're starting to see the.
The.
Yes.
I would say the on the very initial adoption and then we're expecting that to ramp very quickly.
I also mentioned the.
Our ex <unk>, which is our extreme management center platform and that was the perpetual license on premise software and we've made that part of our cloud offerings. So I think youre going to see a lot of switches coming into our cloud associated with the migration of traditional perpetual software to subscription software.
From the cloud with.
With the migration of a lot of customers and that's happening globally.
Do you think of switches could reach 5% in the next few quarters.
We haven't really come out with that but you know what I would say is.
That's something we should address on.
The Investor day coming up.
The great topic for Investor day.
Okay fair enough.
The can you talk a little bit about.
Your supply chain are there any component issues or is the has the supply chain pretty much eased up at this point.
Yeah, I think at this stage.
For the semiconductor industry.
It's feeling a lot of demand across multiple industries and so we compete for our chips.
But we have an excellent relationship with Broadcom, we consider them to be strategic partners.
And they've worked with us very closely so we haven't really seen supply supply chain constraints.
I think because of the strength of those relationships, but we do understand that it is tight out there.
And certain product lead times of.
You have increased but.
It's for US it's not an issue.
But there are there are some of some related the chips that are still a pretty long lead times.
Yes.
That's the nature of our business sort of I would say there's nothing it's.
Yes.
I would say theres more pressure now than there has been before but I think because of the partnership and the relationship you have.
We just have to be smarter about how we buy.
Do you think that some of your competitors are getting hurt by.
Some of the the constraints other.
We wouldn't be surprised.
But I don't think we have enough.
The knowledge to comment.
Okay, and lastly can we assume.
Tariffs are not a factor for for you in light of having moved your supply chain.
Out of the New administration I'm, just wondering if that will make any difference from a tariff perspective.
Actually it did turn.
I was going to say is that the tariff as I mentioned in my preliminary comments of I've been.
Benefit to gross margin in Q2, and we expect it to continue to be the case not because they have been removed.
Not because we have relocated our supply chain, which we still have the mix of China, Taiwan, and Mexico, but that mix has not changed but more because we have implemented.
The new method in terms of the way, we claw back of those tariffs.
And that has been of benefit to us in terms of of the.
The cost of the tariffs that's been embedded in our cost of goods sold.
Is is that going to improve if the if they get away from tariffs.
It would actually improve we're going to see the benefit of what I. Just described in fiscal Q3 and fiscal Q4.
If for any reason the new administration of word of removed tariffs altogether.
Then we would get.
That improvement to be sustained over time.
Okay very good thank you.
Yeah.
Thank you.
Okay.
Of water.
Your line is open.
Great. Thank you very much so Ed you were talking about enterprise as being interested in your cloud maybe you could give us a little color on the larger client in the enterprise business last quarter, and what you project might be interesting going forward.
Yes, just to say.
And I just I missed the front end of the question about.
You were saying on a prior price and we're interested in your cloud business.
Yes.
And I was interested in how the large clients are looking at you guys. These days.
I mean I can give you an example of it very large customer.
And.
Very large potential customer where we were in a.
We just placed.
Yes.
I would say the two largest competitors in our industry.
One of the benefits that we have has been our largest competitor.
It's got structural impediments limitations to what they can offer via cloud.
And when.
When they compete for enterprise customers, it's almost like they're two separate companies and they have very limited capabilities in terms of what they can do as far as this ubiquitous and cloud management platform. That's what we bring so we have more breadth in terms of <unk> and cloud from the edge into the core of the network.
Our debt.
The of our than any competitor in the industry. The second thing that we offer.
Is very differentiated from anyone else in the industry is cloud choice.
The enterprise customers.
The hybrid environments and so your multi cloud just because the end applications that are running in multiple different public clouds.
The applications running from cloud service providers and private clouds.
And then they all have their own certain applications that will run in their own hosted cloud.
Our environment, we offer all three solutions and we offer the capability to manage all of those environments from extreme cloud IQ no. One else can do that especially the two largest competitors that we have so if youre looking for flexibility in cloud of choice.
Here you have <unk>.
One solution that provides you with the flexibility that no one else can Jim can provide and that that's a meaningful differentiator.
And that's something that it matters data is another thing that we talked about.
Networking is the last place to unleash the.
Data, if you will and if you think about all the intelligence you have from of network I E. All edge devices that are connected all users that are connecting.
And and and then the applications that they're using when are they using them and theres a lot of insights that can be gained from the networks and the idea that you can have a centralized network. The gathers all of those insights any of one place to go to change business outcomes again, we're offering unlimited data.
And why Wouldnt you collect that data of our competitors are not finally security we have the most secure cloud we of ISO certification sock certification. So if you're worried about security and I think everyone. In the enterprise Arena is worried about security then I think you want to make sure that the data from your network is secure.
We're the only ones that can provide the level of securities. So these are all serious differentiators and it is clearly opened doors for us and we're winning in competitive situations because of them.
Great. Thanks, Ed.
Thank you our next question comes from.
The Bloomberg intelligence your line is open.
Oh, great. Thanks for squeezing me in so can.
Can you just talk about the nature of the Rfps today.
Are we starting to get to a point, where rfps are starting to look more like the pre pandemic era or are we still leveraging existing customers and.
Customers are still looking around for us.
The upgrades to existing products.
We see of changing we see the industry evolving.
And we're at the right place at the right time, frankly, we've never been in a stronger competitive position because of our cloud.
Because.
The year I think the traditional networking providers.
And where they have market share I think as people are evolving their networks.
Now more than ever as people consider the new normal the next normal I think people want to get a different perspective of a different view and so I think thats part of whats opening up doors for us at extreme.
So does that imply the euro as well you know we do not see we don't see the industry going back to the traditional model.
Got it Okay and then the technology question, if I may so it looks like a Wi Fi six is around the corner and I know that we're still early in the Wi Fi six upgrade cycle.
This does that technology node presented new opportunity to gain share in the.
And Wi Fi as well as the drive more extreme cloud IQ business in the future.
I think it's pretty much I think it's premature to make a make a call on Wi Fi six.
That said, we will be right out there early and it will be on the early end of the wave as far as the market's concerned.
Great. Thanks, a lot.
Thank you.
I'd like to turn the call back over some of that.
For for any closing remarks.
Okay. Thank you operator, and I want to thank everybody for participating in the call.
<unk>.
We have a extreme is at an inflection point.
Where.
For many years, we've made acquisitions, we built up scale and we've been investing in consolidating the technology of the teams the cultures and everything into the extreme at this point we are one extreme.
With the University of hardware platform with everything moving into the cloud.
We are now in a position to invest in innovation, which is an exciting time for us of extreme and.
We say theres never been a better time to be of partner of extreme or to be an employee of the extreme so I'll just step back and thank everybody.
For joining us on the call I want to recognize our employees partners and customers.
For your engagement and commitment.
Our employees for a job well done in these times.
Registering for investment day.
I think theres going to be a huge amount of information that will be valuable we're going to dive deep into the technology.
And the opportunity that we've got.
So.
Registration information will be coming shortly stay tuned thanks, everybody and have a good evening.
Thank you, ladies and gentlemen does that conclude.
Today's conference. Thank you for participating you may all disconnect.
Have a great day.
Oh.
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