Q4 2021 Extreme Networks Inc Earnings Call
[music].
Okay.
Good day, and thank you for standing by welcome to the extreme networks fourth quarter fiscal year 2021 financial results Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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You will need to press star 1 on your telephone.
Please be advised that today's conference is being recorded if you're acquiring further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Stan Koehler, Vice President of corporate strategy and Investor Relations. Please go ahead.
Thank you operator welcome everyone from the extreme networks.
Session fourth quarter 2021, and year end 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, Ed <unk> and CFO Remi Thomas We just distributed a press release and filed an 8-K detailing extreme networks financial.
<unk> results for the quarter for your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliation is available at 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 extremes future business financial and operational results.
Results growth expectations and strategies the impact of the Covid pandemic challenges in our supply chain, specifically as they relate to chip shortages the impact of tariffs digital transformation initiatives as.
As well, we caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that.
And 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 32020 filed with the SEC.
And any additional risk factors and subsequent 10-Q filings.
Any forward looking statements made on this call may.
Our analysis as of today, and we have no plans or duty to update them, except as required by law.
And now I will turn the call over to extremes, president and CEO admire cord.
Thank you Stan and thank you all for joining us this morning.
Q4 capped off a record year.
And our 25 year history as we crossed over the $1 billion revenue Mark for the very first time. This is an important milestone and it was a long term goal of ours and importantly, the momentum we built throughout the year with 36% overall year over year bookings growth that drove a 29% revenue growth in the fourth quarter.
It reflects has carried into fiscal 'twenty, 2 and the strength of our year end results are understated given the fact that we tripled our backlog to over $100 million over the course of the year.
Our execution has never been sharper that as a result of extreme is in the strongest competitive position it's ever been and this is evident in our industry leadership.
Leadership and significant growth opportunities and 2 of the fastest growth segments in our industry.
Cloud driven enterprise networking and <unk> network infrastructure services.
Demand for our solutions and the volume of new opportunities are unprecedented and we're taking share.
This is evident in our funnel, our current and projected top line growth forecast, our highest ever full year gross and operating margins and a record free cash flow generation.
The momentum of our cloud driven business bookings continues to grow market share data from $6.50 group of firm that extreme.
<unk> remains the second largest in cloud networking with 11% share last year, we're outpacing the market with our fourth consecutive quarter of triple digit growth in new subscriptions bookings at 111% bookings growth during Q4, our total cloud services business is now on an annualized.
Run rate of over $100 million in bookings at over $70 million in revenue.
As the second largest cloud based networking vendor. We currently manage $1.7 million devices on X IQ, which marks 8 straight quarters of rapid growth in customer accounts and managed devices.
We continue to innovate with.
Our networking capabilities.
Making our co pilot tool available to all users in June it delivers what we call explainable AI for a growing list of use cases in the in the form of next level analytics and automation and importantly, we brought our network management software that includes.
<unk> third party party devices with our <unk> IQ site engine, offering which opens a seamless path to bring millions of devices managed by our popular and widely deployed <unk> on Prem software to the cloud.
The industry is noticing our momentum.
CRM named <unk>.
Our cloud through the year and co pilot was named the coolest new offering of the year, we continue to be a leader in the Gartner Magic quadrant, and we consistently carry the top rankings for customer service and garners peer reviews for the last 4 years.
To date, we have upgraded approximately.
Probably 40% of our portfolio to Universal hardware, which is the latest generation of chipset chipsets from Broadcom with embedded <unk> licenses.
This is on track with our plan, we laid out at the beginning of the year.
Q3, we noted that the $55.20 was the most.
Most successful introduction.
Product introduction ever but we broke this record in Q4 with the introduction of the $54.20.
The $54.20 brings higher margins to our value tier with 80 gig stacking <unk> ready encryption and new multi rail capabilities.
<unk> 2.5 gigabit speeds, along with up to 90 watts.
Bo.
We also launched our 90.920 Nextgen packet broker this quarter.
Product was delivered in record time with a product cycle of 1 year on our new hardware platform. This was an amazing feat by our engineering and product.
Up to games that is unprecedented.
On the wireless side, we enabled routing capabilities.
302 W..2 expand our SD Wan capabilities and as we announced earlier. This week, we were the first enterprise networking company in the industry to ship Wi Fi 6 access points to our customers.
<unk> 4000.
Wi Fi 6 <unk> brings an unprecedented amount of clean spectrum at the 6 gigahertz band that enables new apps and use cases.
The first time in more than a decade that a new frequency band has been added to Wi Fi. This band enables super high multi gig speeds.
And the AP can run on <unk>, 4.5 and 6 gigahertz frequencies simultaneously with enhanced security on top.
Our target customers are on the front end of an investment cycle and the momentum of large deals and project based business continues to grow as our large.
Large deal funnel is up 50% heading into fiscal 'twenty 2.
Customers are accelerating their return to work environments that are more flexible and hybrid nature supporting our infinite enterprise vision.
The networking industry is set to experienced the highest growth in years, given this new normal and.
Global stimulus spending is also fueling growth as we come out of the historic pandemic.
As Randy will discuss the next wave of recovery in spending is coming from the hospitality sector, and we experienced particular strength with casino and hospitality customers this quarter, such as Wynn resorts shooting star.
Casino, turning stone casino hard rock Amsterdam Hotel.
Others in the sports and Entertainment segment, notable new wins, where Stanford University Stadium, where we displaced Cisco in the heart of Silicon Valley.
Government stimulus is also funding part of the recovery with programs across.
Around the globe in the education space, such as the FCC's Emergency connectivity fund, providing 7 billion to address the homework gap Korea has announced $250 million direct investment and Covid related education initiatives. The U K, 1.4 billion Sterling catch up program.
These.
Programs complement existing programs like digital pack of Germany, Giga schools in Japan.
With extremes exposure to the education market, we stand to benefit from all these investments globally over the next several years.
So what is extreme doing to capitalize on this unique opportunity.
Having proven.
Proven out our success with essentially Onemain SaaS application and <unk> Iq.
We're making investments in our business to monetize the secular trend towards more software services with a complete migration to cloud.
We are investing in talent and new programs to drive SaaS customer success. This required.
Any new sales and services expertise that we have brought in house, but also focused investments to enable a more enhanced app experience.
We intend to make the customer experience a core competency and investing in new platforms to deliver these capabilities will be a keen focus for extreme over the next fiscal year.
And on a senior leadership front, we have made new hires from the likes of service now and other SaaS native companies.
And our service provider business, we recognized initial bookings in revenue of our <unk> growth opportunities and we remain well on our way to over $20 million of <unk> business in fiscal 'twenty 2.
Not only in line with our expectations.
Both of our <unk> solutions. The 90.920 platform for services assurance and the cloud native infrastructure solutions, we sell through our OEM partner are gaining steam in the marketplace. We remain confident in our growth plan for C&I as as the list of service.
<unk> providers around the world testing. This solution continues to grow and we have clear visibility to the ramp in sales.
The funnel of opportunities remained strong across the broad range of verticals and market segments that we serve the record backlog with which we entered fiscal 'twenty 2 gives us confidence in our ability.
To capitalize on our growth objectives.
We expect to grow our market share and realize the 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.
That noted we finished fiscal 'twenty 1 on a very strong note.
And executed well across the board.
Q4, total revenue of $278.1 million grew 29% year over year, and 10% quarter per quarter.
Strong demand for our wired and wireless portfolio drove 38% year over year, and 11% quarter over quarter product revenue growth services.
<unk> revenue grew 11% year over year.
And 7% quarter over quarter.
For the fourth quarter in a row, our cloud business exceeded our expectations, new cloud subscription bookings grew 111% year over year, our total cloud managed subscription business, including renewals exceeded $100 million.
In annualized bookings and grew to over $17 million in annualized revenue in Q4.
Our recurring revenue, which includes support for both hardware and software managed services and subscriptions grew 6% both sequentially and year over year to $78 million.
And accounted for 28% of total revenue.
Non-GAAP earnings per share was <unk> 19.
Up from up from 3 <unk> in the year ago quarter and from 16 last quarter once again, reflecting faster growth in our revenue sending out cost and expenses.
For fiscal 'twenty 1.
Non.
GAAP EPS grew to 57.
From 12 in fiscal 'twenty, driven by the combination of top line recovery and improvements in gross margin and a reduction in expenses total product revenue was $195.8 million and our product book to Bill ratio was 118.
Wired revenue grew 55% from a year ago, and 21% sequentially led by record edge switching revenue along with solid performance in campus switching and data center.
Although wireless bookings reached an all time high while less revenue was impacted by supply constraints and grew 1% year over year.
And fell 12% quarter over quarter.
Total services revenue reached a record $82.3 million up 11% from the year ago quarter, and 7% sequentially largely driven by the strength of cloud subscriptions. Our total services book to Bill ratio was 134.
Fueled by growth.
<unk> bookings.
The growth of cloud subscription and service renewals resulted in total deferred revenue of $346 million up 8% from $294 million in the year ago quarter and up 3% from $318 million in Q3.
Deferred revenue related to our class.
Subscription was well in excess of $100 million exiting fiscal 'twenty 1.
Will help sustain our recurring services and subscription revenue growth going forward.
From a vertical standpoint, the highest sequential growth came from education on the strength of both K through 12 and higher education businesses.
The areas of strength.
And some service provider, where we began to see initial demand for our <unk> solutions take off 1 quarter ahead of our expectations manufacturing state and federal governments, and transportation and logistics, our sports and entertainment business was up triple digits year over year as venue and hospitality business continued to build.
Whereas in fact, nearly all verticals were up strong double digits or better from a year ago.
Our non-GAAP gross margin of 65% improved 110 basis points from a year ago quarter, but declined from 61, 5% in Q3.
The year over year increase in the company's gross margin.
And was driven for the most part byproduct whether there is a significant increase in volume drove a much higher absorption of the fixed cost components of our Cogs.
This more than offset the year over year decline in our services gross margin the sequential drop of 1 percentage point in the company's total gross margin was due on.
Sales of side by an increasing component and freight cost against the current backdrop of severe shortage of components and on the services side by higher mix of professional services revenue associated with MLB deployments.
Q4, non-GAAP operating expenses were $139 million.
And the problem $116.8 million in the year ago quarter and up from $127.3 million in Q3, essentially reflecting higher sales and marketing cost.
The net result of faster top line growth compared to costs and expenses was a non-GAAP Q4 operating margin of 13, 4% a company record.
Kurt up from just 5.2% in the year ago quarter, and 11, 3% in Q3.
On an annual basis operating margin of 10, 9% marks the first time in company history that extreme finished the year at double digit double digit non-GAAP operating margins.
The non-GAAP earnings.
Earnings per share of <unk> 19 included a tax adjustment of <unk>, primarily due to 1 time catch up modification of the non-GAAP effective tax rate to reflect a greater revenue contribution of the U S entity to the company's overall non-GAAP pre tax profit.
The non-GAAP tax adjustments, which would.
We had been attributed to this quarter was 1 cent.
And would have resulted in a non-GAAP EPS of <unk> 22.
Going forward, we anticipate the non-GAAP effective tax rate will be approximately 16% for fiscal 'twenty 2.
The recovery in our operating profit combined with a good management of operating.
<unk> working capital resulted in the highest ever quarterly cash flow from operations of $57 million in Q4, and free cash flow of $52.2 million.
In fact for all of fiscal 'twenty, 1 cash flow from operation was a record $144.5 million and free cash flow was.
Was $127.4 million.
Our cash conversion cycle reached historically low levels of 22 days compared to an already low 31 days in Q3, mostly driven by a substantial decrease in our days of inventory.
We ended Q4 with $247 million in cash and equivalents compared to 200.
At the end of Q3, our net debt decreased to just shy of 100 million.
Down from $148 million in Q3, as a result, our leverage ratio fell to 2 and starting in early August the interest cost carried on our term loan a depth will drop by another 50 basis points from an all in.
Third 3 of $3.19 to $2, 69%.
Now turning to guidance.
As I noted entering Q4 demand is outstripping supply for certain products, which led to record backlog for products entering fiscal 'twenty, 2 such as our universal platforms. The supply constraints are leading.
Ray further rising component and freight cost as we entered Q1.
We continue to proactively manage the supply chain and our strategic relationship with Broadcom is helping us in this regard.
Importantly, we have secured vendor commitments that will allow us to accelerate product delivery and bring down backlog as of Q.
Q2 and beyond.
As a result, the combination of our strong results and execution gives us greater confidence in our fiscal 'twenty to outlook, we expect fiscal 'twenty 2 revenue towards the high end about 5% to 9% long term growth target with double digit operating income margins and significant free cash flow growth.
2 for Q1, we expect year over year growth to be in line with our full year outlook and expect revenue in the range of $250 million to $265 million.
Q1, non-GAAP gross margin is anticipated to be in the range of 58% to 60%.
Q1, non-GAAP operating expenses.
<unk> are expected to be in the range of 121, 5 to $123.5 million.
The sequential decrease in Opex is primarily related to lower sales commissions and other sales and marketing cost associated with seasonality and relatively similar R&D and G&A costs compared to Q4 'twenty 1.
Q1, non-GAAP earnings are expected to be in the range of $16.7 to $26.7 million or 13% to 20.
Per diluted share in Q1, we expect average shares outstanding to be $133.2 million on a non-GAAP basis with that I'll now turn it over to the.
To begin the question and answer session.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone.
Draw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Eric Martin Newsy with Lake Street. Your line is open.
From a real strong finish to FY 'twenty, 1 that's terrific.
As well I'm curious to know regarding demand environment.
Definitely with your enterprise customers I know a lot of them at least on the larger side. There is a return to the office there was a return.
We operate to the campus just curious to know.
Priorities, they've got because <unk> got a lot of people that have been growing for a while so I'm just wondering about where you guys were networking gear and wireless access stands in the pecking order of it.
Priorities, whether from a budgeting perspective or from a manpower.
Return.
Thanks, Eric.
Yeah, Great question, I mean, it's pretty interesting what's going on in the environment out there.
You know when the pandemic first hit Yeah. There was a lot of spend and network peripherals. They had to arms students that were going back to their homes and workers going back to their homes.
Our per se.
Health care workers et cetera et cetera.
And and now what we're seeing is the <unk>.
<unk> of the workplace. So the work environment, where enterprise customers are thinking thinking about more of a flexible work environment in a hybrid work environment.
And this is why you hear us talk about the distributed enterprise.
Apprise or the <unk> enterprise because what it means is that the enterprises are taking responsibility for the new edge of the network and the new edge of the network is going to be that individual Eric. It's you wherever you are whatever device you're on.
As opposed to being in a branch office and that's why.
Why that's why the cloud cloud enabled networking is the fastest growing segment in the networking industry and we have the industry's highest quality cloud.
And because of our cloud native infrastructure, we're in a position to deliver more services than anyone else and so our vision.
It's.
Catching enterprise customers by surprise as people rethink.
Their environments networking has become a higher priority cloud has become more important.
It brings a lot of complexity in terms of a distributed networks and cloud simplifies that so all of a sudden from an extreme.
It's really perspective, and that's why we're seeing so much demand enterprise customers are contemplating cloud and then if there is cisco customer they say well I'd like to get another opinion from another competitor and.
I should hear from extreme because they are the number 2 in terms of size, but our architecture is fundamentally.
Scream better equipped to provide a cohesive services edge platform than Cisco for sure and then all the other competitors. So now customers are surprised when they are hearing from extreme extreme is moving much further down competitive processes.
Our hit rate in terms of batting average is off the charts.
Okay. So you are saying that given this shift in.
Wherever you are operating from wherever you are that favors you guys that is a priority for your your enterprise and education accounts, Oh, absolutely I mean, it's driving cloud. It makes sense right you want to add a centralized platform, where you have complete visibility to.
All of the devices that you're managing in the network, but also to have all the insights to the edge devices that are being supported in that channel.
That's what our cloud does better than any other cloud the industry and so.
It's that and then it's also future forward in terms of what are the services that are going to come in the future. We have the most cohesive.
The vision and the industry.
Okay. Okay. Thanks for taking my question and good luck in Q1, Thanks, Eric.
Our next question comes from Alex <unk> with Needham Your line is open.
Thank you very much I was hoping you could talk about your your.
Approach in the industry.
Approach to pricing given what's going on to what extent you anticipate some increase in prices when you might be increasing and what youre seeing from your competitors on that subject clear.
Clearly, there's going to be some pass throughs here.
Sure.
Alex.
We are seeing and yet we are aware of competitor price increases.
Probably the most important move for extreme is the migration to the universal platforms that Youre aware of we talked about a 40% migration, but for us it's the new technology and we caught up so we're on the latest wave.
Broadcom technology in terms of the latest generation chipsets.
And as you just saw with our Wi Fi 6 the announcement, we're first to market. So.
I would say that for us you're going to see that portfolio completely migrate.
For us it simplifies, our skus and simplifies our supply chain.
So in effect, we're going to get a nice gross margin benefit from what is a higher margin.
Our migration to this higher margin universal platform.
As it relates to.
And thats happening and you're going to see that migration happen over the course of this fiscal year. So.
Change that should bring nice margin benefits for us in growth benefits.
Especially in the second half of the year.
As far as as far as the pass through of cost is concerned.
The fortunate thing for US we do have near term increases in costs, but yes, we are.
Our teams have established a great relationship with Broadcom and we don't just consider them a vendor we consider them to be a strategic partner and they work really well and our teams work really well together and so the good news for US is that we have secured commitments.
And so our fiscal Q2 now we feel.
Investing lock that up.
And then with the 1 year lead times.
And that started a year ago.
That really eases and we're going to start on <unk>.
<unk> backlog in Q2, and then we feel confident about our allocations in wafer allocations for Q3 and beyond so.
Yes.
Feel like.
We have to be smart about it we're looking at.
Potential.
More tactical tactical price increases may be for certain products.
At this stage, we don't have a formal plan Florida.
So you have an increased any prices to date.
Uh huh.
Yes.
We're always looking at our portfolio Alex so.
I would say, we're always youll always see changes in that.
Us.
Elevated prices, particularly on older products older generation products, it's kind of a normal course of business.
Okay.
Sorry, the other way to characterize.
The other way the other way we manage it is true.
Discounting controls so.
That's the other way.
We manage the margin.
If you were to look at it from the perspective of.
On average your competitors not having a newer product line not having the ability.
Ability to benefit from the Universal integration.
<unk> can.
Can you quantify or.
Or just generally speak to is it 2% is it 5% is it 8% what kind of price increases are you seeing from Cisco and Hewlett Packard and others.
I think it's safe to say, 5% to 10%.
Thank you.
Thank you. Our next question comes from <unk> Kang with B Riley Your line is open.
Yes, good morning first of all just from.
Going back to the supply chain channel.
Challenges do.
Do you think.
Current quarter fiscal first quarter will be the bottom.
Gross margin how should we think about gross margin going forward.
Yeah, I'll start off and that revenue pick it up but the answer is yes.
For us the September quarter, we had the most pressure on this quarter.
And I think that the same is true of the rest of the industry.
As I mentioned as I mentioned earlier, we've gotten.
Secure shipment dates for what we need in Q2.
Just given the strength of our team is working with.
And the strategic nature of the relationship.
Chip that we've got with Broadcom, So we see the lessening.
Happening and that means that we have commitments.
The costs that we incur have to do with expedite fees and trying to pull in.
Product and then it's also the timing of how product arrives at our Oems and then.
With which we have to turn around in the product and direct ship. So there is a.
A lot of contributing factors so.
Across multiple factors, we expect to see the easing.
Start to take place in our Q2, and it's really this quarter.
Bear the brunt of it Randy I don't know if you want to add to that that if you take the midpoint.
The speed of our guidance for Q1 day, you see that it's 59% compare that to where we landed in Q4 was 65%. So we're looking at a 1.5 percentage point impact if you take the midpoint and if you apply the math to the revenue that we're calling out that really.
Hugh.
An idea of the size of the impact and it's really driven by 2 things..1 is the higher cost of components that we're having to pay to secure deliveries and the second 1 is higher freight cost.
We used to be in an environment, where we were able to ship anywhere between 25% to 35%.
About shipments.
From our Oems to our hub in from <unk> to <unk>.
And right now we're pretty much at $95 to 100% by air just to accelerate because every time. So these 2 components add up to that 1.5 percentage point difference that you see between Q4.
Give us 1 we think it's probably.
The highest that we will see and things will start to improve as of Q2 and onward.
<unk>.
And then at that point, we'll get also.
Mix of Universal hardware platforms.
Going forwards, which which increasingly care.
2 higher gross margin than our Gen 2 products.
Got it and then my second question is regarding your fiscal 'twenty 2.
Outlook of high end of 5% to 9% can you just share some key assumptions such as like a 5 year I think you already talked about 20 million.
Could there be some upside to that in wireless Wi Fi other other verticals.
Yes.
Yes.
We have the benefit of having a.
Funnel.
A lot of opportunities we have better visibility.
And so we.
We're seeing this.
And I was answering Eric's question before we're just seeing higher velocity as we as we roll into fiscal 'twenty 2.
The strength that we're seeing in July the momentum that we felt in June is still right over into July which is normally a softer month for us.
And I think it has to do with our position in cloud.
<unk> cloud.
Cloud really is the fastest growing segment of the industry.
People are rethinking and considering cloud most of the cloud has been wireless.
But people are starting to think more broadly about.
Edge switching and.
And migrating other platforms.
Orange to cloud.
And we're in a we're in a very strong probably the most competitive position.
All the players in the industry.
Certainly the strongest position we've been in and as I said before our teams are.
Our teams are out winning in the market and I think there is.
There's more.
<unk> differentiation that extreme today.
Certainly since I've been involved with the company for over a day.
So yeah.
Yeah.
Demand for our solutions is at an all time high.
It's being driven by.
The competitiveness of our solutions the inner.
Division that were bringing the consistency of our vision and messaging.
We have a smaller market share in the industry relative to a cisco or an H P. So when customers are looking at us maybe they haven't looked at extreme in a long time and they're they're surprised to find out.
The quality of the solutions.
<unk> that we can bring in.
And the vision that we have as a potential partner to go forward.
I mean this is how we you know we won.
Major League Baseball a Great example, you know some of these casinos. Great example, I mentioned stay at Stanford University.
Yeah, right and Palo Alto they go extreme.
Dream.
We have a lot of big marquee wins, and then that really stimulates our field.
<unk> gives them confidence to all of our sellers in the field.
Got it and my last question is actually going back to the supply chain issues talk about the margin impact what about.
Top line impact on how much revenues.
I'll be leaving on the table because of the component shortages.
Hum.
If you remember the prepared remark from Ed we talked about a backlog entering Q1 that was 100 million that's about.
Times the level that it was entering Q1 of fiscal 'twenty..1 so that gives you an idea of the magnitude of how the backlog is built so I would say that if it weren't for product constraints, but we don't like to make those comments, because we have product constraints, but if it warrants our revenue both for Q4 and Q1 would have been tens of millions.
$3 higher.
Got it thank you very much.
Nice quarter.
Thank you.
Thank you. Our next question comes from Dan Schwab with Craig Hallum. Your line is open line.
Hey, guys congratulations on the great quarter and.
<unk>.
Wow, a whole list of litany of wonderful things going for you.
I just wanted to get to gross margins versus the top line growth drivers that you guys have highlighted.
With a supply chain issue.
Kind of.
Becoming less of a headwind it appears in the second.
Got all of your fiscal year.
And by that time, I would imagine just about every.
Every product you'll be shipped you know would be on the refreshed Universal platform and then if we can get some moderation.
And expedited freight costs and.
<unk> had in that supply chain, a phrase kind of normalizes.
How good could gross margins be.
Exiting the year at those type of events were to occur.
So if you think about the drivers of gross margin.
The downside right now, which is going to impact Q1 and 2.
And then Q2, you have those higher component cost to secure deliveries and then you have the free cost.
And on the Upsides you have the introduction of a universal hardware.
Our ability to selectively raise price on certain products and more importantly control discounting.
To a lesser if we're doing very effectively and you have to mix I talk.
In my prepared comments about deferred revenue and the fact that we now have $340 million plus of deferred revenue.
So you're going to see the percentage of support and subscription revenue as a percentage of total.
Pick up over the coming quarters and from the current level of 28%. So when you factor all of that we should be exiting Q4 fiscal 'twenty 2.
North of 60%, obviously, and we feel confident about the long term targets that we've established at the analyst day.
We should call we gave a range of 63 to 65 per cent.
We're still on that trajectory, even though we have this short term impact of the 2 items that I mentioned earlier.
And then you ended then you you add into the fact that you have.
Probably what looks to be the most competitive.
If your product line up.
For customers.
He just said it I missed it.
Yes, I would tell you agree with that statement, but he came from you.
Yes.
Yeah, you can quote me on it alright, I don't have any other questions.
Thank you so much Christian.
Thank you as a reminder.
Reminder, to ask a question need to press Star 1 and you touched on telephone. Our next question comes from Paul Silva with Cowen Your line is open.
Thanks, guys for taking my questions a couple from me.
First of all Remy did I don't think I heard you give and I understand why you would but did you give us some number.
<unk>.
<unk> to gross margin from all in fiscal 'twenty, 2 or is there given the b.
Free costs higher component costs at this point is it just too hard.
Yes.
I didn't but.
The goal is to be north of 60% for the full year. So we will obviously exit.
At a higher rate, we're thinking it could be north of 61% by Q4, and when you take the average for the year and taking into account the mix of revenue between the various quarters, we feel like we should be above 60% on average for the full year.
Alright, and then the higher freight cost to you and everybody else in cig.
Is there any concern the freight costs continue to go up if I heard you correctly, you already shipping 95% per year. So.
It sounds like the <unk>.
Mix of both.
Let's see the error that can't get any higher but is there any concern that freight cost will continue to go up.
<unk> proven headwind.
So there's 2 factors.
The first 1 is the 1 you just mentioned which is that right now we're almost 100% air and the second 1 is the actual cost per carrying a ton of product.
The specific and then over the Atlantic so to bring products from China to El Paso, and then ship it out EBIT to the U S to the rest of the world.
We tend to use commercial airlines.
To carry our products and because.
Capacity has been limited for the past 15 months since Covid started.
The rates are up as.
<unk> traffic starts to pick up and you can see that airports are getting busier and busier.
We expect airlines to add capacity and the unit price they are carrying for carrying a ton of product to go down so to your point it doesn't get any worse than it currently is as a matter of fact, when I look at the actual number that we're forecasting for that part of our cost of goods sold in Q1 versus Q4, it's actually.
Down slightly sequentially.
But it's the component costs that are rising.
That's it from me to be clear.
It makes perfect sense.
We're aligned to add capacity.
What else should see price is going down but to be clear you're already seeing that.
Or that's just yes.
Yes the.
So on certain routes are already starting to ease a bit.
But it's more than offset by the rising component costs, we see from Q4 to Q1.
And then on that second point about rising component costs is there any visibility as to incremental increases throughout the year or you already have prices locked in.
Right now, we basically to the point I may have a long term relationship with Rob from the NGL the supplies that we use and so we're in constant dialogue.
To secure commitments for deliveries in Q2 and onwards, and we have good visibility as to how much that will cost us.
Alright, and then all of the demand.
Okay.
What's your historical experience with respect to customer cancellations of orders and backlog.
Thats rare.
Yes.
Yes, Paul that's a pretty rare.
That's a pretty rare occurrence and I would say that yes.
Yes, we are.
I've seen a couple of small kind of 1 off situations, where there is an urgent projects where an urgent demand.
But what's interesting for us is that what we are hearing from our distributors is that we are actually we've asked them to force rank to the vendors and.
We've got really high ranking so we're getting.
I think.
Right now extreme as kind of an interesting position of potentially being a go to.
Because of how we manage the supply chain.
Ed.
Everybody all that we're doing.
We'll be on networking silver 1 if the pandemic has been customers providing.
Extended visibility far beyond the normal book and ship as per barrel from many years now Inc.
What's giving you and your peers far greater visibility into the future. The most of the case what has been the case historically that said.
Trust investing community, so where is that theres some degree perhaps meaningful.
Over ordering.
Is it what is your visibility as to true demand and the risk that they're in.
Z healthy amount.
And hope you, obviously would be the wrong word but.
But there is a meaningful amount per Boe for ordering going on.
The truth man is far less than what Youre nominal order book and and other demand metrics would indicate.
Yes, it's a great question Paul.
Yes.
I think you've got to think about extreme in our business mix and I think.
I would see from somebody like you might see more of that from like larger.
So providers.
Maybe like the large fortune 50 type accounts et cetera.
But we don't see it as much I mean, we might see some some stocking orders from <unk> coming in where we know that theyre trying to get ahead of us.
But in terms of our backlog, it's a pretty small percentage.
Service.
When you think about a school district going through getting E rate funding and and.
Yes.
Adding to that the networks are upgrading their networks.
They're not as sophisticated or trying to get ahead of like you have a global supply chain clients. So we we.
We.
<unk> should see that as much if you look at our customer profile.
Most of average are ordering what they need for projects, we have run rate business, where they're just ordering and then Theres project business.
But.
In the case of Stanford.
University Stadium, yes, they have the worst Wi Fi in their league okay.
That's embarrassing for a company that is right in the Tech Center.
They need to upgrade well guess, what they've gone to extreme big opportunity for US we won that in a competitive but theyre not preordering to get in front of supply chain, they're ordering because they have a problem with the quality of Wi Fi and I'd say that is true width.
Most all.
All of the ordering that we're seeing from from from our.
<unk> revenue do you want to add yes, I was going to say Paul remember, we operate under 2 tiered distribution model, where we recognize revenue on a sell in basis 2 deceased and then this provides.
Our products to business partners, who sell into end customers.
Customers hypothetically, if a non customer changed their mind.
And cancel their order first of all most of the business partners don't take cancel the borders but hypothetically if that happens what the disease would do is just reallocate those goods.
They're short of everything right now to another.
As a partner who would end up selling it to another customer. So we measure the risk of return through stock rotations, which has an allowance that we give out this is for the ability to rotate products and stock rotations right now at an all time low because everything they have in their warehouse and they need to be able to deliver.
Or to the various business partners that are seeing the strong uptick in demand.
Let me ask 1 more question on this line playing Devil's advocate.
Correct me, if I'm wrong, but I think the lost volume.
We saw meaningful over order and crisis, if you will and you'd have to go back to the.
Telecom Internet bubble.
I'll hop back in the late nineties, maybe there was maybe I'm forgetting where 2 other times, but I think you'd have to go back 20 plus years.
Given how long it's been and this is obviously not unique to extreme.
But if that is what's going on towards soon though today.
Revenue.
Notwithstanding your comments and again this original license from up unique extreme issue I'm, just trying to gauge the risk.
Everything you just said would that matter I mean, we'd see if it is something you can't believe this won't.
Won't there be a collapse across the board from.
<unk> centered so your point about reallocation.
We're moving customers to another in stocks being very low and that gives you comfort and protection.
Want to just go away if it if it is to some degree of late Ninety's scenario, but I'm not saying it is or isn't.
But.
That's absolutely true.
Got it.
Bob.
Yeah I was there with you in the late nineties.
And this.
This is very I mean.
It's a very weird I can tell you we are not in a weird and no way in a in a bubble.
As far as.
And spending it spend where we're at.
Just the opposite.
We are on the very front end of this investment in <unk> infrastructure that has nothing to do I mean.
What we are going to get.
Is it we're at the very very beginning of deployment of the largest infrastructure investment.
In our lifetimes.
And yes.
And it's very mature so there.
There could be some near term and again I think.
The preordering concerns that Youre worried about I think that's more of a service provider phenomenon for larger carriers trying to get ahead, but as.
I actually as enterprise customers upgrading their networks in terms of.
The idea that we now have this new spectrum brand band.
Wi Fi.
And the 6 gigahertz space.
And what that means for customers and the capabilities for customers the edge of the network.
It's going to be changing from.
The closet in a branch office with a lot of boxes into the cloud, which is driving a greater need for networking.
All of these secular trends.
You are going to be around for years and years to come so.
<unk>.
We.
We can see we have no visibility to a bubble at this stage of the game.
Thank you and this concludes the question and answer session I would now like to turn the call back over to admire korte for closing remarks.
Okay.
Thank you everybody for tuning.
I can tell you we just had all of our global teams together for our sales kickoff meeting.
And our employees together.
I think <unk>.
Census on the inside of extreme is that there's never been a better time to be at extreme and to be an extreme seller.
We are seeing.
Great.
Demand.
Our technology innovation is really coming into the forefront.
With the strength of our product and engineering teams.
And.
Things are things that things are looking good we have great momentum going into this quarter.
So thank all of you for joining us thank all the extreme.
Stakeholders employees.
And our partners and customers who are tuning in as well have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Thank you.
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