Q3 2021 Extreme Networks Inc Earnings Call
Thank you for standing by and welcome to the extreme networks Q3 fiscal year 2021 financial results call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
To ask a question. During this session you will need to press Star then one on your telephone please be advised that today's call is being recorded.
If you require additional systems press Star then zero to reach an operator.
I'd now like to hand, the call over sustained Kepler. Please go ahead.
Thank you operator, and good morning, good afternoon, and welcome to the extreme networks third fiscal quarter 2021 earnings conference call I'm, staying kofler, Vice President of corporate strategy and Investor Relations with me today are extreme networks, President and CEO and my report and CFO Remi Thomas.
We just distributed a press release and filed an 8-K detailing extreme networks financial results for the quarter for your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website at extreme networks Dot com.
Like to remind you that during today's call. Our discussion may include forward looking statements about extreme net okay.
Sure.
Financial and operational results growth expectations and strategies the impact of the COVID-19 pandemic challenges in our supply chain the impact of tariffs and digital transformation initiatives. We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that can cause actual results to differ materially.
From those anticipated by these statements as described in our risk factors in our 10-K report for the period ending June 30th Twenty-twenty filed with the SEC and any additional risk factors and subsequent 10-Q filings.
Any forward looking statements made on this call may 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 extremes, President and CEO admire court.
Yeah.
I'd go ahead.
I was on mute. Thank you Stan and thank you all for joining us this morning.
Q3 marks a full year since the world and extreme began to feel the significant effects of COVID-19 I want to recognize and acknowledge the truly remarkable efforts of extreme employees and their families and our extended community of partners customers investors and getting through the past year.
And we're very focused on our teams in countries currently being hard hit by the virus, especially India, where we have many of our employees.
Fortunately extreme has emerged in a stronger competitive position with higher gross and operating margins in two substantial growth factors, a cloud driven enterprise business by G network infrastructure opportunities, which are gaining momentum.
In addition, as a company we have increased our focus on corporate social responsibility with Mark progress in diversity and inclusion sustainability and our philanthropic initiatives to bridge the digital divide our.
Our employees have fully embraced and taken the lead on important initiatives such as the rapid expansion and success of our diverse employee communities. The growth of our highly successful extreme Academy educational platform at our upcoming global day of giving on May six.
The strength of our Q3 results as highlighted by our fourth consecutive quarter of sequential growth defying the traditional seasonality of our business.
And we also delivered 21% year over year growth driven by increased customer demand and continued improvement of our team's execution.
To that end 26 customers spend over $1 million with extreme in Q3.
Coming out of COVID-19, we are seeing significant government stimulus spending initiatives for projects around the globe that will fuel growth at extreme with over a third of our business focused on state local government education, we expect to benefit from new programs such as the American rescue plan in the U S digital packed in Germany, Giggled schools and <unk>.
Japan among others. This quarter also marked the completion of the E rate season in the U S, where our filings were up 35% year over year, and we crossed the 100 million Mark for the first time ever.
Enterprise customers around the world are planning for a more flexible work environment and what that means for supporting their customers and employees.
Universally accepted that the new edge of the enterprise networks will become permanently more distributed what we call the infinite enterprise.
As customers contemplate the increased complexity of delivering secure.
Just didn't user experiences across a vastly distributed enterprise cloud is the logical platform to challenge complexity.
As networks to re imagined extreme is more relevant today than ever before we have true technology differentiation and this creates more at bats for us Andrew.
And we're advancing further and further and winning more opportunities given the strength of our competitive solutions.
We are building a fast growing cloud native software subscription business at extreme with our high growth high margin extreme cloud IQ platform, what we call ex IQ.
We have a unique opportunity to rapidly expand the number of devices managed in our cloud as well as increasing the number of cloud Native services, we introduced through ex IQ and this is our enterprise cloud strategy ex.
<unk> is the only cloud networking platform, our cloud choice unlimited data and ISO certified security.
In addition, we've made significant progress in developing our next generation AI capabilities and ex IQ that we referred to as explainable AI simply put we explain our alerts.
Current solutions in the market generate unnecessary alarms and are creating alarm fatigue with enterprise customers, our alerts will be both explainable and 99, 9% false alarm free.
It has been in select customer environments for a year and will soon be launched under our co pilot license for ex IQ, along with enhancements for AI and ml insights for our entire portfolio.
This technology will go into public beta in June and will be available to every extreme user.
Uptake of our cloud subscription services remained strong new cloud subscription bookings grew 122% year over year in Q3, marking the third consecutive quarter, new cloud bookings more than doubled year over year.
As the second largest cloud based networking vendor, we currently manage $1 6 million devices on ex IQ.
This marks seven straight quarters of rapid growth in customer accounts and manage devices.
In early Q4, we made key leadership hires and our new cloud success team and reorganized our services capabilities to drive user adoption and continue the rapid growth in the number of devices on ex IQ.
Yeah.
This deed of our cloud innovation is accelerating in addition to co pilot, we are making inroads into three key areas in the near term.
First we offer the simplest licensing construct in the industry are pilot license for ex IQ includes management location gas portal wireless security personal appreciate Ts and Iot applications for one price all devices.
Now we are unifying our network access control knack product portfolio with the same approach whether customers consume Mac in the cloud or on Prem. They can buy under one simple license. This is the best value solution on the market per night.
Second we have upgraded 20% of our portfolio to universal hardware and we're on the path to refresh 90% of our portfolio by December the launch of our 50 520 Universal switch was the most successful launch we've had in recent history in this quarter, we are introducing our 54.
For 'twenty Universal platform focused on the volume tier of the market. So we are seeing an even higher unit volume launch the Universal series brings native cloud management through ex IQ and our latest generation chipset from Broadcom with a brand new ASIC and the highest power P O reports.
To run Iot devices.
Our universal hardware puts us in a leading position to support the growth in Iot with a simple plug and play connection.
And finally, it's no longer just enough to have an open API in today's connected world.
P is need to be high fidelity and operate in real time to that end our latest generation open API framework will enable high fidelity translation and near real time ecosystem integration from extreme products and tools.
Our framework is seven to 10 times faster than our competitors traditional restful API is currently in the market.
The automation of our business continues to help us drive sales productivity with initiatives such as channel self service touchless quoting and provisioning.
Sales automation has become a force multiplier it is helping us onboard new partners grow our customer base and increased transaction volume.
And our service provider business, our expertise in cloud technologies.
Puts us in a great position to innovate with our cloud native infrastructure solutions for by G. Next.
Next generation networks are being developed on a more distributed architecture using principles, we've developed and our cloud native enterprise business.
G providers are aggressively moving in this direction.
This gives us increased confidence in our growth plan. Our solution is being actively tested by large service providers around the world and we have clear visibility to the ramp in sales.
We're also hitting all of their milestones in our five G product development related to our packet broker technology, we have an exciting product launch coming up this summer built on our latest generation Barefoot Intel technology.
We'll talk more about it at our connect user conference in May where we will reveal important industry, leading technology advancements.
Finally, we continue to deliver the highest quality customer and partner experience in the industry in Q3, we hit record all time customer satisfaction scores.
Customers like working with extreme because of our focus level of engagement, our partnering approach and the fact that we don't outsource we remain committed to this higher tier service delivery differentiation.
Heading into Q4, we're on plan to achieve double digit year over year revenue growth over 60% gross margins and rising double digit operating margins our funnel of opportunities remains strong and our visibility continues to improve as we emerge as a stronger and more competitive company.
Take share.
Importantly, we have all the right players in place to drive future growth and execute our operating plans, we expect our momentum to continue beyond fiscal 'twenty, one and realize a level of organic growth, we have not witnessed for many years and with that I'll turn the call over to our CFO Remi Thomas.
Thanks, Ed.
As Ed noted, we had a very strong quarter and executed well across the board total revenue of $253 $4 million grew 21% year over year, and 5% quarter over quarter. The success of our ex IQ solution fueled a shop, increasing cloud native platforms and drove 29% year over year.
And 6% quarter over quarter product revenue growth.
Services revenue grew 6% year over year, and 1% quarter per quarter to an all time high of $77 million, our cloud business once again exceeding our expectations new cloud subscription bookings grew 122% year over year far exceeding plan.
Our total cloud managed subscription business, including renewals was a proxy approximately $80 million on an annualized bookings run rate and over $60 million on an annualized revenue run rates exiting Q3.
Our recurring revenue, which includes hardware and software support managed services and subscriptions was flat sequentially at $74 million, but accounted for 29% of total revenue versus 31% in Q2 due to the sequential uptick in product revenue.
Non-GAAP earnings per share was 60 cents.
The loss of nine cents in the year ago quarter and up from 13 last quarter. The strong improvement in our bottom line, both compared to the year ago period, and two Q2 was once again the result of higher revenue combined with tight control over our costs and expenses.
Total product revenue was $176 $3 million and our product book to Bill ratio was approximately one O six wide revenue grew 26% from the year ago, and 8% sequentially led by strength in edge and campus switching while less revenue continued to recover.
<unk> highlighted by growth of 37% from a year ago quarter, and 3% quarter per quarter.
Total services revenue reached a record $77 1 million up 6% from the year ago quarter, and 1% sequentially largely driven by cloud subscriptions.
Our total services book to be a ratio was 114 14 fueled by the favorable seasonality of service renewals this quarter.
The growth of cloud subscription and services renewal resulted in deferred revenue of $318 $4 million up 17% from $271 7 million in the year ago quarter and up 3% from 309 1 million in Q2. This will help sustain our recurring services.
And subscription revenue growth going forward.
From a vertical standpoint, the highest sequential growth came as expected from sports and entertainment, which recovered to a more normalized 5% to 7% of total bookings this quarter boosted by the kickoff of our MLB Stadium business retail also recovered to over five per cent of bookings.
And was up in excess of 20% both on a year over year and sequential basis.
Finally, the momentum in the service provider business continues to improve with solid year over year and sequential increases in bookings.
Areas that had recovered earlier, such as manufacturing health care transportation logistics experienced normal March quarter seasonality.
Our non-GAAP gross margin continued to improve both year over year and sequentially to 61, 5% largely attributable to our product gross margin up 90 basis points, whereas our services gross margin edged up 10 basis points.
Factors of improved product gross margin were higher volume a.
A greater mix of new product carrying higher margins lower excess and obsolete charges, resulting from the reduction in inventories of both finished goods and raw materials and finally lower tariff cost.
These drivers were partially offset by an increase in freight and component cost.
Q3, non-GAAP operating expenses were $127 $3 million up from $122 9 million EQ to due to higher sales and marketing related costs, while R&D and G&A cost remained steady.
The net result of faster top line growth compared to costs and expenses was a non-GAAP Q3 operating margin of 11, 3% up 16.3 percentage points from the year ago quarter, and 90 basis points sequentially.
The recovery in our operating profit combined with a good management of operating working capital resulted in Q3 operating cash flow of $24 7 million and free cash flow of 20.4 million. We ended Q3 with $203 million in cash and equivalents compared to $184 million.
At the end of Q2, our net debt decreased to $148 million down from $172 million in Q2, the combination of improved operating performance and deleveraging activity put us in compliance with our debt covenants based on our leverage and fixed cost ratios as of March 30.
The first one quarter ahead of expectations, we expect our interest expense decreased by 175 basis points or one and a half million dollars per quarter going forward with a $1 million benefit expected in Q4 fiscal 'twenty one.
Our cash conversion cycle reached historically low levels of 31 days down 13 days versus Q2, and 28 days versus the year ago quarter, mostly driven by a substantial decrease in our days of inventory.
Now turning to guidance.
You mentioned that demand is currently outstripping supply for certain products, such as our new Universal platform as we grapple with product constraints in our supply chain, resulting from chipsets and other industry wide component shortages were actively managing through these challenges and our strategic relationship with Broadcom is helping us.
In this regard.
With that in mind, we still expect strong Q4 seasonality and expect revenue to be in the range of $260 million to $270 million following a better than seasonal quarter in Q3.
Q4, GAAP gross margin is anticipated to be in the range of 57.8 to 58, 9% and non-GAAP gross margin in the range of 65 to 61, 5%. Our non-GAAP gross margin outlook reflects increased volumes and a greater mix of higher margin new products offset by.
Supply chain product constraints that are resulting in increased components and transportation costs.
Q4, GAAP operating expenses are expected to be in the range of $141 million to $143 million and non-GAAP opex in the range of $131 million to $133 million.
Sequential increase in Opex is primarily related to higher sales commissions and other sales and marketing initiatives and events tied to a higher growth initiatives.
Q4, GAAP earnings are expected to be in the range of 2.6 to $9 $2 million or 227 cents per share non-GAAP net income is expected to be in the range of 21 to $26 $2 million or 16 to 20 cents per diluted share in Q4, we expect average shares outstanding.
Lending to be approximately $131 1 million on both a GAAP and a non-GAAP basis with that I will now turn it over to the operator to begin the question and answer session.
Yes.
Okay.
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Our first question comes from to meet challenging with J P. Morgan Your line is open.
Oh, great. Thank you. Thanks for taking the question I guess I just wanted to start with though.
To your question about.
The recovery, you're seeing with your customers income so spending because I think with the guidance that you have for revenue in June which is 2016 was $2 70, you almost you would add back could be somewhat green 19 revenue levels.
We had seen deepened that makes so how should we think about.
When does the market when your revenue back on sort of non below normal seasonality from here on I know you talked about very strong organic growth outlook that you haven't seen in the more recent deals.
As most of the pent up demand we've got some spending done in non go more than normal seasonal pattern from here on out.
Is there more to come in comes on line.
And as well as the traction of the portfolio that helps you with seasonal patterns.
Back on this from here on it I have a follow up as well. Thank you.
Why don't I start off and then Remi you can jump in.
Yeah as you know we've had a sequential increase and a lot of that has been a factor of us.
Coming out of COVID-19, where we were.
It was it was a year ago when.
We have the <unk>.
<unk> impact to our quarter.
Yeah, I think that.
What we're seeing as far as cloud and cloud growth, we're seeing the momentum continue and I'd say that the.
The growth of our cloud and that is a catalyst for revenue overall revenue growth because cloud does pool product with it.
And I feel that that would be less seasonal than what we've had in the traditional business.
But as far as you know our industry verticals in the expense cycles, and then their spend cycles for different theaters.
E International with heavy spending in the December quarter.
America's heavy spend with our fiscal year in Americas.
We expect to see some of that seasonality I presume.
We've had it.
We mentioned throughout the pandemic, we've had very strong government state local education spending that's continuing and with stimulus spending we see that increasing so.
How that how that spending is unlocked and the timing of those dollars and then.
How they get.
How they get consumed and then put to work.
It may have an impact on seasonality as well.
Had a very strong E rate season.
And with cloud, we have a very compelling value proposition for that segment of the market.
We see growth in tailwind there for the next couple of years plus.
Anything to add.
But I'm not sure I'd say that on the product side. We are now back with with all cylinders running the two areas that had not picked up or RBC sports and entertainment and <unk>.
In retail and as I mentioned in my prepared remarks, they're picking up so so going forward as we enter fiscal 'twenty. Two you would expect the product revenue to show patterns that are close to what we've seen in the past with a weaker Q1 week of Q3 and strong Q2 and Q4, however to your point, Ed and as I mentioned.
During the call, we've got $318 million worth of deferred revenue and we're building more and more as as our subscription bookings continued to grow in excess of 100% and so the timing of the recognition of that revenue coming from cloud subscription may may mean that the overall revenue of the company.
We'll show patterns that are slightly different from the one that you saw pre COVID-19.
Okay got it and then I guess put my Polo brand me. It was more for you gross margins improve.
Substantially year over year.
I think you came in towards the lower end, what you guided for margin guidance, if I'm right.
Oh deceleration from the March to the June quarter.
Is that entirely being driven by the elevated freight cost or is there any mix impact day.
Driven by free cash should we assume that you can get back to this 60 to Boston.
61, 62 listen I, just wanted to see freight costs moderate.
So it's a combination of freight costs to meet but also increased component costs as a result of the shortage of components and so the semiconductor suppliers.
All four of the ones that we use or no.
Raising their prices, we expect that we will go back to normal, but we think it's going to take about nine to 12 months to basically figure out the component shortages and so you should be seeing.
This this impact on our gross margin for the next maybe three quarters.
And well, obviously continue to try and offset it with the change in the mix with with more cloud revenue and with the introduction of new products that carry higher margins.
Great. Thank you thanks for taking my questions.
As a reminder, we ask that you limit yourself to one question and one follow up our next question comes from Eric Martin Newsy with Lake Street. Your line is open.
Yeah, just curious on the.
If you're seeing anything different in the education vertical regarding the procurement cycle, we're coming up on their in their new fiscal year, they align their fiscal year with your own.
Seeing anything different there and the behaviors.
Appetite in education.
Eric we are not I mean, the big.
There is.
There's a lot of funding that's available for us.
And I mentioned digital packed in Germany.
Kagan schools in Japan and.
And obviously E rate and now new funding initiatives stimulus spending.
As far as COVID-19 response is concerned so.
Yes.
On our end.
We're seeing strength in that business and we see tailwind from these initiatives.
Coming into play over the next few years and I think that maybe the traditional way of thinking about seasonality.
For education is probably going to change a bit as people take advantage of the funding that's available to them. So we've seen just consistent spend.
And in all four quarters.
Okay and then on the.
Just the overall growth rate looking at the Q3 print in the Q4 guide we're coming in at about a 5% growth rate now most people would have anticipated in fiscal 'twenty. One for you guys would be.
You get essentially easy comps because of COVID-19, but I understand that.
Still got it.
We still got to execute but as we look out to FY 'twenty, two and beyond does that growth rate does that is there.
The potential for that to accelerate into FY 'twenty. Two is it do you expect it to moderate what should we think about in the out year.
Yeah, Eric we talked about overall, if you look at the market.
And if you look at spending.
What happened when COVID-19 hit.
Spending on peripherals.
Notebooks spending screens.
Hardware to support remote learning if you will.
Everyone went remote.
Now, we're seeing an increase in that infrastructure on the networking side. So.
Analysts are calling for overall enterprise networks spending to.
To be higher than normal.
And to push up kind of over that 5% level, we're taking share and we're also in the high growth cloud segment of the market. So we are expecting to grow.
Higher than that.
No that in our Investor day, we pointed to high single digit.
Growth rates.
And we believe that those those growth rates are sustainable.
Beyond the end of fiscal 'twenty, one and that Hasnt changed.
I understand congrats on the quarter and the outlook. Thanks for taking my question. Thanks, Eric.
Our next question comes from Dave Kang with B Riley Your line is open.
Yes. Good morning. My first question is regarding the chip situation. So how much are you are leaving our revenue on to take my money on the table because of the CIT situation for the fourth fiscal fourth quarter.
Well.
Cable we've done as.
We have seen an increase in product constraints.
And we factored that into our outlook.
So it is it is having an impact we're seeing higher than normal, but what I would say is yes.
Our teams have done an excellent job aggressively managing through this.
Yes.
Per two other vendors that are out there, we've nurtured and developed a very strategic relationship with Broadcom.
They have been working with us.
To support the business and so I think the level of product constraints that may be prevalent out there in the industry.
<unk>, a little less for us.
Given that given the relationship that we have on that key component.
I E. The new Broadcom chips.
As well as our teams working very aggressively to manage around.
The constraints that we're seeing so we've got growth built into Q4, we're still showing solid.
Double digit year over year growth that Q4 quarter.
We think that product constraints will ease for us going into our fiscal first quarter and I would say Q4, we built it into our forecast and we would expect product constraints to be tightest in that quarter relative to quarters beyond that.
Got it. Thank you my next question is.
Regarding five G M.
Still looking at 20 million for fiscal 'twenty, two and any new customers in the pipeline.
So yes at this point, we're not changing our.
Our outlook for five G.
We see <unk> really kicking in.
In our fiscal 'twenty two.
We've had many encouraging developments on that front, so we're working with.
A service provider vendor a global service provider vendor and we're part of their full solution stack.
They have seen the adoption of cloud native infrastructure services, which is the platform that we're supporting.
Off and move well ahead of schedule. So from that standpoint, we're seeing a larger number of service providers adopting this platform than than was expected and that that's giving us a lot of confidence in.
In that number in terms of the actual ramp in bottoms up ramp by service provider and how that plays out over the course of fiscal 'twenty. Two I know at the end of the year, we will provide a better guidance to that.
G E R solution or packet broker this quarter, it's happening towards the very end of the quarter and we're expecting that to ramp up.
In fiscal 'twenty, two as well so I'd say, we feel extremely confident in the 20 million number.
Based on everything that we're seeing.
Yes.
And the cloud native infrastructure side as well as packet broker.
Sure.
The demand and I would say the timing of demand has been shifting to our favor.
Got it thank you.
Our next question comes from Alex Henderson with Needham Your line is open.
Thank you.
I was hoping you could talk about the supply constraints in the context of.
The guide.
If you are supply constrained on components can is it possible for you to beat the high end of the guide.
Or because the.
The the constraints essentially gate are any upside so that the high end is is configured based off of.
The degree to which your components allow you to generate revenues.
Or alternatively is there a mechanics around mix that would allow you to see an upside to that the high end of the guide.
If the demand comes in and say software line things of that sort.
Can you just talk to the sensitivity to.
The components constraints relative to the guidance band.
Why don't I when I start off and then Remi you can chime in thanks for the question Alex.
Yes so.
It's a very dynamic situation, Alex and as I mentioned before Broadcom has been a great partner.
Working with us.
And working through expediting water as their timeline got shifted out and so they then that then requires us to expedite.
Orders and then they work with us to try to get as much as they can into the quarter and they've been a great partner so depending on.
How that works out.
We will have an impact on what will be shippable.
I would say.
Our range.
I think we're constrained on the high end of our range here because of product constraints.
That is and has been built into our guide but.
Yes, there is I would say, it's not a ceiling to your question, it's not a hard ceiling.
The way that the way that it plays out is that as we have to expedite orders and we're trying to get in front of the line that means it's more expensive. So we have to pay fees and as Remi mentioned, we also it means that as components come in we don't have as much time.
Much lead time as we would normally have.
We have from a freight perspective increased transportation expenses, because most of our product will be coming by air versus the combination of air and sea.
Jamie do you want to add anything to that.
No I think you described it really well I would just say that it is possible at.
All stars aligned for us to ship more but what that would mean is is the mix between product and services would be different.
And therefore, you should be seeing a different profile to the gross margin. If we're able to ship more than $2 70 by definition it will be coming from product.
And so that will have an influence on gross margin to ed's point about.
Shipments via air et cetera.
Let's see.
Can you go back to the recurring revenue being flat.
A little puzzled by that.
Given the service book to Bill with product book to Bill book.
The strength in cloud.
Borders, which I would think would be subscription oriented and shrink from software, which subscription oriented. So what why is the recurring flat again.
I'm not sure I understand the mechanics behind it.
If you recall, Alex I'll take this one.
When pre pre pandemic recurring revenue, which again included support for hardware and software on Prem software as well as managed services and the bit of subscription that that we did when we first consolidated our high volume in Q1 that fiscal 'twenty that was 25%.
It shot way up to 32% because our product revenue fell the most in.
In the March of fiscal 'twenty quarter, as an impact as the impact of COVID-19. So we saw literally a seven point increase in our recurring revenue because that that recurring revenue by definition did not get impacted by COVID-19 and our product revenue went way down.
Today, we're seeing every quarter the waterfall on that deferred revenue that I talked about that 300, <unk> million, which is a combination of hardware and hardware and software support and a growing part of that is subscription now that waterfall means that you will see that recurring revenue, which is currently at <unk>.
$74 million increase quarter after quarter after quarter.
Based on the timing of the revenue recognition, but as far as Q3 was concern you know the timing of recognition meant that that revenue was $74 million and because we saw this is.
Recovery in product revenue, which by definition, we don't consider to be recurring.
That explains why we went back from from 31% to 29%, we still feel very confident looking at our three to five year outlook that that recurring revenue will go up in time to get to <unk> 35 per cent, but in the short term what's driving this is really the strong recovery of product, which is stronger than what.
We had expected a few quarters back.
Alright, so it's effectively it's a trailing indicator because of the.
What happened in the prior two or three or four quarters.
Which is why in my prepared remarks, I'd really point out to the deferred revenue at $318 million on the balance sheet. That's the highest deferred revenue that in the history of the company.
Okay I understand thank you very much.
As a reminder to ask a question. Please press Star then one.
Our next question comes from Eric temperature with JMP. Your line is open.
Yeah. Thanks for taking the question.
On the components.
Curious.
The shortages during the third quarter compared to the second quarter.
Was there.
Net tighter because it does sound like it's getting tighter in the fourth quarter hasn't been progressively getting worse.
Hi, Eric and thank you for the question.
Yeah, I would say that the.
The tightest quarter for us would be.
Quarter that we're in now our fiscal Q4, so we didn't really see we saw some constraints building in Q2, I would say those constraints definitely increased into Q3 and our projection for constraints.
Is highest in Q4 and as I mentioned before.
We our teams have been very aggressive we've also gotten more aggressive and ordering early as far as buffer stock.
To mitigate the effects and so we believe we'll start to see relief in our fiscal first quarter. So.
To answer your question I would say its tightest this quarter.
We factored that into our revenue guide and then we've taken that into consideration for gross margin.
And then we would expect to see this loosen as we go forward as Remi mentioned, we do see that.
Net.
The supply chain constraints carrying for nine to 12 months, especially as far as our primary chip vendors and chipsets are concerned.
But we've been very aggressive getting in front of it.
Okay and then.
How sustainable is the growth that you have in your cloud bookings, it's been growing triple digits for a bit here.
Is that going to change quickly or do you think you can sustain that kind of growth for the period.
There are a few a few things at play Eric.
First of all I'll, just say as we roll into the fourth quarter.
We see the sustained growth rate so as we are.
<unk> up the month of April we continue to see a very strong cloud bookings.
And then as far as our renewal rates in cloud.
Seeing improvements.
And movement, there, which should be helpful for us the other thing that we talked about is.
Is that we've got opportunities for <unk>.
Our existing base to move and we talked about our knack product.
We also previously talked about extreme management center and if you look at our existing base of customers. We have a lot of customers who are using our network management software on premise and what we're doing is making it very easy to.
To migrate into the cloud into sell cloud subscriptions, and we're giving them a lot of value for doing that if you look at what we include in our ex IQ cloud license. So.
We have a large opportunity over the next 12 18 months to migrate a significant number of devices into ex IQ.
From our existing customer base.
And then we have other migrations on the wireless side, where we have non cloud cloud wireless customers didn't want to move into the cloud so.
There are for the next 12 to 18 months.
We have unusual growth catalysts in our cloud because of our ability to migrate these customers I mentioned.
Our ex emcee management now, we're rolling out and we're making it seamless for Nash, we're going to be a lot of that Mack a solution and then this time next year. We start we will start billing for that co pilot software solution as well, which could provide another catalyst for us.
We mentioned multi domain cloud and the fact that we are working with other companies with the potential to.
Hosting and manage if you will.
Other other company devices in our cloud.
I would expect this time next year that will have several announcements.
That will provide a new growth vector for cloud and devices and cloud as we look at multi domain and the ability to add non extreme devices into the cloud.
Very good thank you.
Thanks, Eric.
Our next question comes from Liz Pate with Cowen <unk> Company. Your line is open.
Is it possible to quantify today.
I'm, sorry is it possible to quantify the sort.
Apply constraints are impacting your <unk> outlook and how much revenue you think you are leaving on the table or.
What pushed out to later quarters.
Thanks, Thanks, Liz I would say there's it there's a.
Does the revenue impact.
There is a revenue impact and then there's a gross margin impact.
And I think that.
Remi you can you can chime in but what I would say is.
From a revenue perspective.
You've seen our.
Yes.
Our book to Bill number.
Greater than one and I think you could expect to see that in this quarter as well.
And then.
As far as the impact on gross margin I think we would have been we would attribute.
The Delta from our guide.
From our guide too.
Wow.
Where the street was guiding to where we're guiding today I think we would point that to a higher component costs and transportation costs.
Hi.
Rami do you want to add anything to that yeah, I don't want to give a specific number but I would say that if I look at how we handicap a quarter typically with product constraint in customer constraint or are your customers, telling us we want to place a po with you, but we don't want them.
The day reverse, particularly this quarter the handicap that we put on product revenue is twice what it would normally be so it's it's it's material we're not looking at a few million dollars here.
It's twice the normal level of constraints that we have in any given quarter.
And if this were expecting net.
With our forecast with our forecast we are expecting to build build backlog in this quarter.
Yes, I guess the other question would be is there a concern of double ordering.
As people worry about them.
Getting what they need.
Okay.
Not with us non resi is that way.
Yeah.
On our side lives, what we're doing with our supply chain is that we are building buffer and our teams started.
Early in the year.
Filling that buffer and that's why we believe we will have relief in our fiscal first quarter, but no. Our customers you wouldn't see that kind of behavior with our customers.
Great. Thanks.
At this time.
Our next question comes from Alex Henderson with Needham Your line is open.
Thank you very much.
Actually I wanted to follow up on the supply constraint question again.
But from a different perspective.
True to what extent do you think.
There is a comparable amount of supply constraints.
Competitors.
To what extent do you think that theres risk that you could be leaving deal.
You might have gotten a tad availability on the table.
As a result of not being able to deliver in a timely fashion against what might be hot infrastructure.
And then the second piece of that is.
As we think about the.
Yes.
The exodus from campus reversing and bids for Ya.
Our employees.
Coming back onto campus.
There's a dialogue around that that is G doesn't that price.
Demand for campus.
Investment, but I would argue that we're not likely to see.
<unk> hundred per cent of the people, who left coming back, but rather a much more dispersed environment, which then changes the nature of what they are buying to a more application centric.
User centric viewpoint I would think that that would play very nicely into your cloud architecture. So if you could talk about those two issues are there I'd appreciate it.
Sure Alex.
As it relates to.
Competition and.
I would say taking deals off the street, where we.
We're encouraging our sellers to sell and I think.
You will see people trying to get in front of supply chain constraints that they have time urgency to their projects.
But as far as how we are incentivizing our sales teams.
Our sales teams are still incentivized to go get those bookings so that's happening.
We hear from our distributors is that we're actually fearing.
As well or better than our competitors, so as we get data from.
From the market through our distributors that work with all vendors what we're hearing is that.
What we're proposing is in terms of constraints or lead times is actually.
Stacking up very favorable to our competition, so that's where I give hats off to our supply chain teams and then.
The way that we've nurtured that relationship with Broadcom.
As it relates to campus is spot on I mean, Alex this is what's going on around the world where.
People are reevaluating their workplace environment, and it's going to be more distributed and all of the enterprise customers that we talk to they've all indicated it's not going to be the same and then that what people have learned is that they can be very productive working from home or working in a distributed environment.
And so theres going to be more of a hybrid when we go back to work and they're going to have to support that so how they think about the user experience. That's remote how they think about how people work and come back on the campus cloud cloud is a perfect platform for that and if you're if you're an enterprise customer.
And you're rethinking Youre rethinking your networks. So youre also rethinking some of the traditional network players and cloud is a perfect platform.
You want to consider the cloud vendors and because of how differentiated our technology truly is and the fact that we're the number two cloud provider.
People want to hear from extreme today more than ever before and as I mentioned in my comments people are learning a lot about extreme and they are surprised to learn of our capabilities and then our competitive strengths relative to the other players in the market and we're moving further and further down the competitive process and we're winning more and more at <unk>.
Higher percentage of deals because of this competitive strength relative to the other players out there. So this is playing into our hand.
And we are all in on cloud and you're seeing this in terms of how we're investing and so we expect the growth in cloud to pull through product revenue increased and higher growth rates in product revenue.
As well as the services attached and go with that.
On top of growth of cloud subscription revenue.
If I could has there been any.
James.
The competitive landscape relative to Cisco responding to I think what is obviously a highly differentiable pop.
From the cloud both you and juniper are relative to our to.
The Meraki product line, which clearly is very long in tooth. So is there any change in.
And their portfolio that the true.
Uh huh.
Some of the cash.
I would take <unk>.
<unk> has been probably the biggest loser of market share.
And probably most vulnerable or a lot of changes that are going on over there as they try to to figure out the difference between kind of on Prem Enterprise solutions all at DNA <unk>.
Versus what is the Meraki solution and it's going to take some time for them to re architect and develop a consistent story.
I think that has created openings and then.
The Meraki cloud.
It has.
We can go after them from a competitive position as well as the simplicity of licensing and what we're bringing to market. So theres some compelling differentiators that we bring relative to both Cisco as well as his juniper I would I would comment that HPE Aruba is probably being most aggressive in price out there.
And then selling a discounting hardware and.
And selling their <unk> solution.
And we see them going pretty hard after Cisco as well.
Yes.
I would say that's.
Right now, we think Theres, a great time for us and our competitive position relative to all the competitors, where we can show true differentiation and deliver higher value to enterprise customers and the key is for us to get the at bats in and we're starting to see more at bats for larger opportunities and we're better positioned to go after them.
Great. Thank you very much super answers.
Thanks Al.
Okay.
Our next question comes from Dave Kang with B Riley Your line is open.
Yes, just a couple more follow up speaking of competitors can you talk about Huawei, what's going on there and any kind of opportunities for you to gain.
Gain market share.
And my follow up is for Remy.
Guided to 130 $132 million and Opex can you how should we think about opex going forward.
So rami you want to tackle.
Opex and I'll come back to Huawei.
Yeah. So obviously, we've been talking a lot about operating leverage in the name of the game is to recover the top line to pre COVID-19 level and not recover opex to pre COVID-19 level. The one thing that I did warn a couple of quarters back is obviously based on the momentum that we see in bookings and therefore revenue.
We may end up having to pay more sales commission.
One other factor to consider is merit, we do our merit increase on.
On January 1st every year employees have worked really hard and deserve to get a salary increase and finally travel. If you think about Q3, there was little to no travel at all and as things reopen with people getting vaccinated you should be expecting that so when you factored that into your accounts.
I was very vocal and the fact that we should see opex in the range of $1 20 to 125 in the first few quarters of fiscal 'twenty. One you see that we are already exiting Q.
Q3, getting above that 120 to 125 were 127 Q4, Youll see more sales Commission.
We're going to try and contain costs going forward, but I would say its reasonable to expect that the range is probably going to be around 130, if I think about the average first three quarters of fiscal 'twenty to anywhere between one 127 and $1 31, we'll try and keep it that way, but the level of 120 to $1 25.
We had at the bottom of the COVID-19 crisis was obviously not sustainable.
Yeah, and as it relates to Huawei, there's two sides here as far as our business enterprise five G on the enterprise side.
Yes.
He has always been a threat because they've been the cheap hardware vendor and.
They have not been strong in software and a day or they are weak and cloud so.
Yes.
We do not see Huawei in the Americas, particularly in the United States, Canada.
The response to Huawei has been mixed in the European Theater.
But I would say there is greater pause and that has opened up more opportunities for us competitive opportunities for us U K for example, and and even in Germany.
They remain very competitive in eastern Europe.
Eastern Europe markets.
Middle East Africa, Obviously Asia Pacific.
Typically when they come in with very low pricing for hardware.
<unk>.
They are non competitive on the cloud front.
As it relates to five G.
Whats going on in that theater, it's created opportunities for our primary partner to win more fiber infrastructure business as people have security concerns with Huawei.
And so that I think has been.
Net net positive for us as our partner has gotten and is winning more business from <unk> infrastructure.
Got it thank you.
Thank you at this time I'd like to turn the call back over to Ed My of court for closing remarks.
Thank you and thanks, everybody for.
Participating on the call today once again I've got a shout out to extreme employees for just a very strong quarter and very strong execution as I mentioned before we have the strongest team that they have.
We've.
Ever had since since I've been at the company.
We have very clear vision, a very clear operating plans to execute and I feel like this team is doing a great job.
Feel like we have a team in place to execute and drive on these plans.
We wish everybody a continued health, especially.
Outside the U S. As we look at India, and all of our employees there and what's going on we know we're not out we're not out of the woods yet on COVID-19, but we've obviously made a lot of progress in several global markets, particularly in the U S.
As we see more and more.
Communities.
And our customers and stakeholders and partners et cetera get vaccinated, we are going to.
We will be considering how we get back together again this.
This year, our extreme connect event is going virtual.
This is open to all investors. So I would encourage everyone to checkout extreme connect we have some really interesting technology reveals and more color and insights as to the solutions that we're bringing out to both enterprise and <unk> markets and thats going to be on May 26th and 27th we hope to see you there.
Sure.
Thank you all and have a great day.
Well, ladies and gentlemen, this does conclude the conference call you may now disconnect.
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