Q1 2022 Extreme Networks Inc Earnings Call
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All participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session ask a question. During the session you will need to press star one on your telephone as a reminder, this conference is being recorded.
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Thank you Norma and welcome everyone to the extreme networks first quarter 2022 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.
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 and extreme networks Dot com.
I would like to remind you that during today's call. Our discussion may include forward looking statements about <unk> future business financial and operational results growth expectations and strategies the impact of the Covid pandemic and challenges in our supply chain as it relates to chip shortages and otherwise we caution you not to put undue rely.
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 32021 filed with the SEC.
And any additional risk factors and subsequent 10-Q filings any forward looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them, except as required by law.
Now I will turn the call over to extremes, president and CEO admire courts.
Thank you Stan and thank you all for joining us this morning, our Q.
Q1 was characterized by unprecedented bookings growth and continued double digit year over year revenue growth.
Q1 bookings accelerated to 45%.
Year over year growth, even higher than the 36% achieved in Q4. This continued strength and demand was evidenced by a record 43 customers that booked over $1 million in business with extreme in Q1 up from 32 in Q4, and our backlog doubled to over $200 million.
This marks the third consecutive quarter of double digit bookings and revenue growth, including the third consecutive quarter of double digit product revenue growth.
Given the demand trends at hand in our backlog, which we expect to grow once again in Q2, we now expect double digit organic revenue growth in fiscal 'twenty two.
We further improved our competitive position and according to industry research firms 650 group gained a point of share in each of the prior two quarters and the campus enterprise networking market in.
In cloud managed networking the fastest growing segment of our industry, we strengthen our competitive position and our 13% market share is larger than the number three and number four vendor share combined.
Customers are accelerating their investments in digital transformation related to return to work environments that are more flexible in hybrid in nature supporting our infinite enterprise vision there.
The networking industry is experiencing the highest growth in years and our growth is accelerated by the fact that we are taking share in this environment.
The combination of our leading cloud management solution, Universal Wired and wireless platforms, our automated campus fabric and simple licensing model provides customers with unparalleled value for their networking needs.
We are focused on supporting our customers increasingly distributed networks and what we call the infinite enterprise, where cloud becomes the connective tissue.
Given the heightened awareness of our brand the strength of our competitive position with channel partners and enterprise customers and the technology differentiation of our solutions. We see continued momentum building the value of opportunities in our pipeline.
And we are closing a larger percentage of deals with an increase in our funnel conversion rate.
This quarter, we doubled down on our impotent enterprise vision with the acquisition of it. The NEMA. We now have important new capabilities to support the infinite enterprise such as session based application performance management policy enforcement firewall as a service Wan edge routing all delivered from.
The cloud our new Wan edge capabilities will be delivered as a service and become an important driver of our software subscription recurring revenue.
Since we closed the acquisition on September 15, our business integration and product development plans are tracking ahead of plan.
We expect to turn up our new SaaS back office operating systems are new customer success, and lifecycle management platform and complete the system integration in early fiscal Q3.
This will support the rollout of our extreme branded Wan edge solutions globally. Since we announced the acquisition. We have received positive feedback and reverse inquiry from customers and partners showing significant interest in our new capabilities.
Meanwhile, product cycles in the infrastructure business are getting shorter with new innovations coming out that require cloud to drive them.
We grew fast subscription bookings by 71% year over year, and our growth would have been even higher in fast if we were able to meet customer demand since new subscription bookings of X IQ pilot our base cloud management license are currently attached to new product sales.
Our total cloud services business is now on an annualized run rate of nearly $130 million in bookings as remi will discuss in greater detail. We have begun to report SaaS annual recurring revenue, which was 78 million this quarter up 54% year over year and 15% quarter over quarter.
And our service provider business, we continued to execute towards our goal of attaining $20 million of five G business in fiscal 'twenty two in line with our expectations both of our <unk> solutions. The 90, 920 packet broker visibility solution and the cloud native infrastructure solution.
As for IP fabric automation performed well and we expect growth to accelerate into the first half of calendar 'twenty two.
And our core network infrastructure business, we delivered several key innovations during the quarter, we announced that Nevada health was the first commercial Wi Fi six E customer and the industry extreme solution allows users to take advantage of a full 1200 megahertz of new spectrum and enables.
Enhanced care experience to patients such as new communication tools and telehealth at peak network performance the.
The combination of new AP 4000 hardware with extreme cloud IQ, which is the only ISO certified cloud network management platform in the industry provides an unrivalled data security posture for Nevada.
On the wired side of our portfolio, we have a strong slate of universal products coming out in the first half of calendar 'twenty two to further expand our previous mid range upgrades with a 54 $2055 20, with a lower tier and a higher density offering.
Both product lines are targeted at the product refresh of our existing portfolio and new use cases, such as software Upgradable multi rail capabilities.
We are creating new API capabilities for customers to enable our wireless Mac and analytics capabilities to directly integrate extremes management functions with third party systems, we can extend our functionality with custom applications and are set to offer a standard Python based software development.
Kit with integrated sample code.
Despite all the accelerated innovation happening at extreme we remain committed to driving simplicity in networking we are employing a mobile first philosophy and we will further enhance our mobile app the more intuitive user experience and shorten our new release cadence to enable users to manage their switching.
<unk> environment, along with wireless.
We now enabled features such as Onboarding wired devices capture and upload images device performance visibility and the overall network scorecard.
With our co pilot artificial intelligence and machine learning engine, we provide our customers with new explainable insight that can optimize network performance.
Identify potential security risks anomalous threats network vulnerable vulnerabilities and enable operating efficiencies.
These differentiated and enhanced capabilities strengthen our profile as a leading innovator in cloud networking.
We are adding new over the top cloud capabilities that will accelerate our cloud transformation with multi domain cloud licenses. This allows us to sell software for devices that are not tethered to extremes networking infrastructure.
The first use case solution of our multi domain cloud is our new partnership with Zebra technologies to add enhanced network visibility to zebra handheld devices managed UX Iq.
This allows a networking administrator to help users get much better troubleshooting support to our intuitive insights engine. This unmatched visibility will dramatically reduce time to resolution for these business critical devices.
The funnel of opportunities remained strong across the broad range of verticals and market segments. We serve a record backlog with which we entered Q2 gives us confidence in our ability to capitalize on our growth objectives.
We continue to grow our market share and realize the level of organic growth, we have not witnessed for many many years and with that I will turn the call over to our CFO Remi Thomas.
Thanks, Ed as Ed noted, we started off fiscal 'twenty two on a very strong note and executed well across the board Q1 total revenue of $267 $7 million grew 14% year over year strong demand for our wired and wireless portfolio drove year over year growth.
15% per product revenue and 11% with services and subscription revenue now.
Overall bookings grew 45% year over year led by 52% for product, 18% for services and 71% for SaaS subscription.
This quarter, we began to report SaaS annual recurring revenue or SaaS.
<unk> of $78 million 50.
At 4% year over year, and 15% quarter over quarter. The historical <unk> data can be found on page 18 of our Q1 earnings deck posted on our website.
Also reported that ending deferred revenue of $122 million up 45% year over year, and 9% quarter over quarter, our total cloud managed subscription business, including renewals approached $130 million during the quarter.
$416 million in Q4.
Non-GAAP earnings per share was 21 up from nine in the year ago quarter and from 19 last quarter.
<unk> services revenue reached a record $82 $5 million up 11% from the year ago quarter and was flat sequentially largely driven by the strength of cloud subscriptions.
The growth of cloud subscription and services renewals resulted in total deferred revenue of $356 million up 20% from 298 million in the year ago quarter and up 3% from $346 million in Q4.
On a geographic basis.
Product bookings in the Americas, EMEA and APAC were all up strong double digits from the year ago quarter and from a vertical standpoint, the highest year over year growth came from service provider, followed by government health care and education.
Non-GAAP gross margin of 63% was above the high end of our guidance range and was flat from a year ago quarter and down just 20 basis points from 65% in Q4.
Year over year increase in the company's gross margin was driven for the most part by product, which benefited from the higher absorption of the fixed components of our Cogs through increased volume and a better mix.
Q1, non-GAAP operating expenses were $124 $5 million up from $122 6 million in the year ago quarter and down from $130 9 million in Q4, reflecting the variable sales and marketing costs associated with our revenue volume.
We set a second consecutive record for operating margin at 13, 8% up from 13, 4% in Q4, and just eight 3% in the year ago quarter, our cash conversion cycle reached historically low level of just nine days following an already low 22 days last quarter.
And 44 days last year.
The sequential reduction was primarily driven by a decrease in days sales outstanding and an increase in days payable outstanding.
Net debt increased to just shy of $139 million up from $100 million in Q4 due to the acquisition of eat the NEMA for $71 million.
Covenant leverage ratio fell to one six and starting in early November interest costs carried on our term loan a that will drop by another 50 basis points from an all in rates of two seven to two 2%.
Now turning to guidance the strength of bookings against the backdrop of continued supply chain constraints will lead to a further increase in backlog in Q2, we expect revenue to be in the range of $265 million to $280 million up 13% year over year at the midpoint.
Q2, non-GAAP gross margin is anticipated to be in the range of 57% to 59% as we expect elevated expedite and freight costs to peak this quarter.
Q2, non-GAAP operating expenses are expected to be in the range of 125 eight to $127 4 million. The sequential increase in Opex is primarily related to higher yourselves commissions and higher R&D expenses, reflecting a full quarter of <unk> expenses Q.
Q2, non-GAAP earnings are anticipated to be in the range of $18 four to $28 $9 million of 14 to 21 cents per diluted share.
We do we expect product availability to improve entering Q3, leading to accelerated revenue growth, thus raising our revenue outlook for the full fiscal 'twenty, two double digit growth compared to our prior guidance of 5% to 9%.
We anticipate that the reduction in expedited shipping fees combined with the full impact of our recent pricing actions will lead to a gross margin recovery in the second half of fiscal 'twenty. Two as a result, we have increased confidence in our ability to deliver an operating margin of between 10 and 15%.
22 with that I will now turn it over to the operator to begin the question and answer session.
Thank you.
A reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
And our first question comes from Alex Henderson with Needham Your line is open.
Thank you very much.
Certainly.
Outstanding quarter I was wondering if you could give us.
A little bit more.
Detail on what Youre seeing in terms of your price hikes.
Impact on product sales associated with those price hikes.
You know what.
I think both Cisco and Arista and probably HP, although I'm not positive what they've done.
The increase in prices can you talk about what the competitive price hikes look like.
And then on the supply chain side of it I get the idea that it's a peak here in the current period are you expecting that we're going to work down the backlog in the guide or are you expecting that the backlog will stay at current levels through the end of the fiscal year.
In the guide up 10% growth.
Thanks, Alex This is Ed.
Why don't I jump in upfront and then I'll, let you come in.
So as far as the pricing environment, yes, we've seen competitors.
The industry raising price.
What you've seen is a range of about.
On average about 10% to 15%.
We're right in line with what we've done we took action early.
And our price increase went into effect on October one.
And so.
Cause of the backlog and the way we account.
We won't see the benefit of that price increase for us.
While the second half of our fiscal in Q3 and Q4.
As we mentioned in the comments as Remi mentioned this quarter.
Are taking up our revenue guide, but we expect to build backlog a lot of that has to do with the strength of demand.
We are seeing bookings levels that we haven't seen.
Previously as I mentioned earlier, we're seeing more and more opportunities and we're converting on those opportunities which is driving.
Higher than expected demand and bookings growth and so that that is contributing along with supply chain constraints to us building backlog again in Q2, Rami do you want to add to that.
The only thing I would add is in the past when we've had price increases.
In November of 2018 related to the tariffs.
We saw some of that being being discounted.
Because the field wanted to maintain our competitive position given that this is something that we see all our competitors as well.
And we basically.
Make sure there is a strong discipline so far we've seen basically all discounting.
Being held up and actually in Q1, we saw an actual reduction in our discounting behavior in the field. So the price hikes are holding up and they were translated into now.
Higher ASB and hopefully higher revenue number once we are able to work through our existing backlog.
So if I could just to be clear you said youre getting because backlog I think he made that comment relative to the December quarter are you, saying you're expecting to increase backlog again in March and June.
Or are you expecting backlog to hold at the December level to the end of the year or work it down.
Alex we are expecting yes, we're expecting to work it down starting in the March quarter.
Okay, and a little confused by the guide then because if the price increase is 10% to 15% kicking in in the March and June quarter, and we hold the services line fairly flat that would imply only 6% to 8% type growth in product sales in the back half of the year to get to 15%.
The first two quarters so.
Double digits is a nice number it's a nice increase but.
It doesn't seem to kind of address.
Our work down in backlog and the price hike.
Yeah.
We don't expect to work down all of the backlog that we expect to start chipping away at the backlog Alex I think that's how I would describe it and then when we say double digits.
I don't think.
Double digit is a pretty big range. So.
I don't think we're thinking 10% I think we're definitely thinking higher than that in terms of the back half of the year.
Okay. That's what I was looking for thanks, yes, so I would say over 10% growth yes.
Thank you.
Thank you. Our next question comes from Eric market Newsy with Lake Street. Your line is open.
So just to be clear that goes from 10% up to 99% is that the case for the double.
A very good very good.
Okay.
I'll go to the lower end of that.
So.
Dive down drilling a little bit deeper you talked about an increase in your funnel conversion rate is that the same thing as an improvement in your win rate.
Yes.
What they are.
Few things that are driving it.
We talked about the overall up leveling of extreme our brand.
As more and more people are turning to cloud your extreme is showing up on our radar as a cloud leader with number two market share in one of the fastest growing players and cloud so as people are considering cloud.
Cloud networking alternatives. They are looking to extreme so were getting more looks and as I said before we are getting more at bats.
And then what's happening is that we are seeing a higher conversion rate on those opportunities. So we're winning more than competitive.
In competitive situations for larger projects, you can see that with the deals over $1 million that we commented on.
The other thing that's happening is that the way we're structured to go to market is that we have a partner program for our channel partners that has gained a lot of momentum and we provided a lot more focus on our partners and supporting partners with automation tools, making it easy.
Z or for partners to position extreme and then once again as partners or hearing about cloud partners are turning to extreme and then we're getting greater wallet share from partners given the strength of our cloud offering. The fact that we are end to end. The fact that we have this unique.
Cloud Native architecture, which is different from the largest player in the market that gives us a lot of advantage and then as people are looking more and more to data as the new currency in cloud we have unique capabilities as it relates to.
Providing and retaining data for key insights and so there is there is real technology differentiation and here as well so both in competitive projects, where extreme is being invited and we're winning more and then also in the channel where the channel is waking up and realizing hey, this is a great time to position <unk>.
Dream and extreme is winning here.
I'm going to make the bet with extreme.
Okay, I wanted to better understand the second quarter guidance with regard to the impact from <unk>, but before we get to that was there what was the revenue impact in the first quarter from the name I know you've closed that very close to the end of Q1, but what was the revenue lift.
Thanks.
Rami you want to pick that up.
Yes. It was it was immaterial Eric call. It a few hundred thousand dollars. We only consolidated two weeks of revenue and then we have a deferred revenue haircut that was applied to that.
Okay and then the guidance for Q2, you are talking about a revenue range of 265 million to $280 million how much of that is <unk> and then how is it being treated.
It.
For the.
Do we have a purchase accounting adjustment here or is that a non-GAAP.
Do Unfortunately, so we expect the contribution of pre differed revenue haircut to be slightly less than $5 million, but by the time you probably the deferred revenue haircut youre looking at a couple of million dollars.
Got you, okay, congrats on the quarter and the outlook. Thanks.
Thanks, Eric.
Our next question comes from Dave Kang of B Riley Your line is open.
Yes, good morning, nice quarter I guess, the first question is regarding on the supply chain constraints, how much of your revenue in fiscal first quarter was impacted by supply chain or component shortages and how much are you baking into your fiscal second quarter Guide.
It's Dave Remi I'll start up with Dave I think that the tell tale sign is that we built $100 million of incremental backlog in the quarter. So.
Moving from just over 100 million to just over 200, I think shows the magnitude of the bookings strength.
On the demand side of the equation and then also.
The constraints in the supply chain side, so with that kind of a backlog again going into this quarter. We're seeing the strength of demand continue so that's driving higher than expected bookings and then we remain backlog constraint what I will.
Supply chain constraint, what I will say.
Is that.
It was a year ago that our key chipset vendor stretch lead times to a year and so it created a window for us.
Where we had to.
<unk> worked very aggressively and tactically with suppliers and specifically with Broadcom.
To lineup secure ship dates for this quarter specifically.
<unk> mentioned that this is the peak in terms of expedite fees.
What we see is higher shipping expenses et cetera.
And we believe that to be the case.
So we believe that with the revenue guidance, we have that we are still building backlog.
But then we see that easing as we go into the March and June quarters as it relates to March and June at this point, we're back to that.
The annual ordering cycle. This is where we were when we placed orders a year ago, and we have much better visibility to the delivery from the Broadcom perspective, Broadcom then becomes for us.
The important anchor in driving the supply chain.
And now we're actually working with secondary and tertiary vendors.
Supplying other components and parts working with our Oems.
To bring that supply to help on the production line.
Randy any other specifics.
Anything you want to add.
I think you have.
Highlighted the key point, which is the backlog increased to $100 million. Obviously, we always have product in street and customer constraint in every quarter. So under even normal circumstance would never be able to ship about $100 million, but thats. The order of magnitude of the impact of supply chain constraints on our revenue.
Got it.
You're calling fiscal second quarter bottom in terms of the supply chain impact.
<unk> lead times stopped stretching and chip prices.
Stop raising them are rising is that why youre thinking fiscal second quarter could be the bottom and then regarding physical second half should we.
With you guys raising prices start to kick in.
We expect gross margin to be back to you know.
60% level or how should we think about second half gross margin.
Yes, Gabe Dave So we yes, we do expect to snap back on the gross margin side in the second half of the year.
And it's the confluence of what you mentioned supply chain.
This is the quarter where.
All of our products are being expedited and we're paying very high fees to expedite.
Supplies. The other thing is we're going right into the holiday season and.
And shipping has been constrained everything.
Being shipped by air we expect that to start to loosen and to add more competitive options as we go through the holiday season into March so on the cost side of the equation will have the benefit of.
Reduced expedite fees as well as reduced shipping and transportation fees.
That kick in end March and carry through into June.
And then the same thing is true on the pricing side of the equation with pricing we have to run through backlog and then we start to realize the benefit of the price increase we start realizing that price increased benefit in March. So you have the effect of higher pricing and you have the effect of lower cost it start coming into play in that.
March quarter.
And then we will have the full effect of that as we move through the June and September quarters.
Got it thank you.
Thank you.
Our next question comes from Christian Schwab with Craig Hallum Group. Your line is open.
Hey.
Thanks for taking the question and congrats on the solid execution in the quarter can you give us an update maybe I missed it but can you give us an update on where you sit from product availability and backlog outlook.
For Wi Fi six and your current thoughts on the migration.
To it.
Yes, I think I mean.
Christian Thank you.
Yes, yes.
Yes.
The Wi Fi six becomes in those chipsets are part of our constraint.
One of the things that I would say that we have done and we get credit from our distributors for doing it well setting very realistic expectations for customers and for orders.
Our supply chain teams were very close and tactically with our field specifically on opportunities and so depending on what the opportunity is we will prioritize.
A large important strategic account.
The reception to Wi Fi six we see Wi Fi six as being a game changer in terms of what it does in terms of.
Opening up spectrum, and providing new capabilities, if you ask our Wi Fi product team and <unk> team.
They will say in the last 10 to 15 years that this is truly a cycle. This is a game changing differentiator and as we mentioned we were first to market. There. So we think demand will.
<unk> will pick up very quickly.
And then.
Wifi six is constrained I would say similar to the rest of our portfolio, but we will expect to see that.
Ramp up significantly in the second half of the year.
Okay, great no other questions. Thank you guys.
Thanks patient.
Thank you.
And our next question comes from the line of Paul Silverstein with Cowen Your line is open.
So I appreciate you taking the questions.
I apologize if I missed it but youll see anything about the new wireless products contribution and what you're expecting for the room, giving us enough to.
The contribution in terms of bookings.
As being strong Paul however on wireless.
Somewhat more constrained than wired so the contribution to our revenue this quarter.
In the low to mid Twenty's as opposed to high <unk> in past quarters as far as bookings are concerned.
Alice and wired or on the same growth trajectory of in excess of 50% as I highlighted in my year over year in my introductory comments.
Shame on me I think I used core language was actually referring to the.
New platforms Waterworks, you got a relationship with one of the Big U S carriers.
Or what you are selling and so nowhere near.
You're talking about is not a service provider.
Thank you Phil apologies I don't know where my mind. Thank you.
No problem at all so I would say that actually did see this was one of this would be stronger growth I mean, there's one vertical that it would be better in terms of your of your growth.
And that would be our sports and entertainment, but that was from a favorable.
Parison basis, because it was minimal year ago service provider business was up 68%.
On a year over year basis in terms of bookings and accounted for.
Slightly more than around 6% of total bookings this quarter. So.
Strong contribution which was driven by the combination.
Of the two things you mentioned.
Paul which is the relationship we have with a large U S service provider and a large telco equipment maker based in Europe.
And revenue.
If I can add Paul just to provide a little bit more color. So the deployment on the packet broker side, which is our visibility manager.
That has been largely in test mode.
And.
That is that deployment schedule begins.
In earnest in the first calendar quarter, and then we expect that to ramp throughout calendar 'twenty two.
And then as it relates to.
Our.
OEM.
The partner and the growth.
Of our <unk> solution.
What's interesting a few things have happened there.
There were two different alternatives for.
Telecom service providers that they support.
FBI solution and then they had a cloud native infrastructure solution.
Really two alternatives for telecom service providers to choose from.
In the case of the cloud native solution. We are the single sole source vendor and what has happened during the quarter is that they have now shifted so all have they moved away from MSCI.
As a competitive solution and everyone is embracing that cloud native infrastructure solution, which bodes well for us considering that.
That's a 100% extreme so what we're seeing now is we've had good news you'll hear more coming from us, but with some very large carriers and starting to begin deployments there.
And we're expecting again this to ramp as well as we've called out in calendar 'twenty. Two so there is a shift to cloud native.
And really that's where we shine.
In terms of our fabric automation and then what we're able to do.
Yes.
The infrastructure services side for them.
He really it froze more alert, perhaps I could do the math myself, but I'm, hoping you'll make it easy for me also so I don't make a mistake what was it what was service provider as a percentage of bookings in the preceding quarter instead of 6% this quarter what was the quarter before.
It was 8% in Q4.
This is now in that business.
And it was 5% a year ago.
Perfect.
Trust.
Trust me the answer is nothing but let me ask the question, which is other than supply chain, which doesn't appear to be.
All of that impact for us in fact, perhaps one would've thought.
What are the risks what are you worried about what could go wrong or the next 12 months from here.
Yeah, Paul I think it.
The big one for US really is supply chain. This is where fortunately we have a strategic relationship with broadcom.
They work.
Work with us and they have been very very supportive to us and as I mentioned earlier, we're now engaging with.
Tier two and tier three suppliers normally we wouldnt, we wouldnt engage with so.
It's a very tactical exercise with us working supply and supply chain and I would say for US that's that's number one.
Second thing for US is that we're rolling out.
New software services. So we mentioned the growth and what is our pilot license ex IQ pilot.
We are moving quickly and the.
First half of fiscal 'twenty, two we're going to be rolling out our first extreme branded.
SD Wan and SD branch solutions.
And.
We're really excited about that but we are standing up a brand new back office.
For SaaS.
Standing up.
A customer success.
And lifecycle management platform. These things are new to manage the full customer experience and I would say. This is this is where there's a huge amount of investment and focus at extreme because we see an opportunity to drive software subscription revenue from services in the first services. This SD Wan service that will be rolling.
We're a bit ahead of schedule in terms of how how we're progressing from the rollout we're starting in Europe, we're turning up our Dcs in the U S.
And then we will be launching globally.
The first half of calendar 'twenty, two extreme branded SD Wan capabilities that I talked about I would say right now.
This is a new growth factor for us we're excited about it and there is a lot of energy so theres a lot of attention.
Inside of extreme being focused on.
Software and then adding new software licenses.
On top of our base core ex IQ pilot licenses and so this is this is ware.
I would say these are things that keep us up at night, because were really focused and excited about driving this new growth opportunity.
Driving increased recurring revenue and extreme.
Would you all mind puts grouping through more apologize to you and others on the call.
Two other quick questions I was hoping to ask.
Yes.
I think Stan.
It stands letting at all.
I greatly appreciate it guys.
First off and again I apologize if you already said was put how much of the incremental growth is a function of new customer additions.
How much is a function of penetration of existing customer base.
Yes.
It's a combination of both what I would say is this quarter, we have seen an uptick in.
<unk>.
What we would call new customer logos.
And I'd say, that's being driven by.
The channel for one we are attracting new channel partners and we are I think getting more wallet share with people in the channel realizing I can position extreme and win with extreme here.
So I think thats one of the big drivers of new logos for us.
And then.
In competitive situations as I mentioned before the brand awareness of extreme has gone up and so people are more aware because it's it's known in the industry that were clearly the number two in cloud networking.
That's a secular trend in our industry, where more and more people are going to be moving.
As you look at.
Networking and the confluence of networking and cloud.
And then more security and more services being delivered at the edge of the network all of a sudden extreme is in a leadership position in.
In a strong place so.
We are getting more inquiry.
And so it's a combination of I think that the brand recognition.
Our stronger competitive position in the industry, specifically with cloud.
As one and then what's happening in the channel which is driving.
The higher than normal new logo activity at extreme.
All right last one for me.
I appreciate that the price increases are obviously going to help.
Will your peers.
I'm curious what given that.
The commentary hasn't been uniform, but quite a number of your peers have referenced.
Deteriorating.
Plugged in environment.
The breadth of the products inputs, including sooner is expanding and the degree.
Price tags, and expedite fees and freight costs haven't stepped up dramatically.
I'm curious what underlies your belief that this quarter will be the peak.
Why youre not also seeing things get worse.
Okay.
Paul we operate very closely to our large suppliers and even the broadcom and we get good visibility in terms of the appeals that we placed with them their commitment dates and the cost of the expedite fees associated with these pillows and so when we look at what's expected.
For Q2, and then Q3 and Q4, we do anticipate.
That we will see a decline and at the same time.
Going to get more of the benefit from the price actions that we just took.
Ed mentioned earlier.
For the backlog, which was booked at the prior pricing to wash through and.
Once that's the case.
Selling in.
New price and Youll see the full benefit of that in Q3 and Q4, there's going be some impact in Q2, but not big enough to offset the impacts of expedite season and freight cost, whereas Q3. It gets better in Q4 gets gets even better. So it's really the timing of the actions we're taking.
And if go impact versus the timing of those expedite fees that we're paying and actually the peak of the expedite fees is expected to be in Q2.
I appreciate the time the responses I'll take the rest offline. Thanks guys.
Thanks, Paul.
Thank you.
And our next follow up is from Alex Henderson with Needham Your line is open.
Thank you very much.
I actually wanted to talk a little bit about teaming with Paul just brought up but.
And slightly different context.
Clearly with a price hike kicking in on October one.
Customers are incentive to buy before the price hike kicks in so I guess part of the question is to what extent do you think that that happened.
The second are you expecting to build a similar amount of backlog in the December quarter, given that's the peak of the supply constraints.
You did this quarter.
And then.
I've got a follow up on that relative to duration of orders is there any sense of.
How much of this is.
Just extending the timeline.
That the orders are stretching out across.
Sure Alex We watch this very closely we've got.
It's interesting because we have an analytics tool, it's called <unk>. It sits on top of Salesforce.
And we have incredible analytics today.
Around around the pipeline and around funnel. So we can see opportunities that get created in quarter opportunities to get that slip and move out.
And we're all over this every week. So we've got very good visibility to the opportunities as they come in there is no doubt that when we raise price.
That they are going to be people that would pull it in order.
In order to take advantage of a lower price.
That's for sure and in this environment, maybe demand would come earlier than usual because people are aware of what's going on with supply chain and so they would see David want to establish pole position. If you will to try to get in front.
All of that said, we have done a fair amount of price increases if you look at tariffs along the way et cetera.
Yes, I would say as far as that's concern we would we would say have normal behavior.
The one thing that we the one thing that we look at is the health of the next quarter anytime if business is getting pulled and you worry about is there going to be a dip in bookings in the following subsequent quarter.
And what I can say is that our funnel and.
The funnel of opportunities remains very strong for the December quarter, and Thats, where.
That's what gives us the confidence.
We don't have an exact measurement of what percentage.
Got pulled in.
That said, we look to the next quarter December at the opportunities and also what our bottoms up field teams are calling us to AE level, the R&D level, the VP level et cetera.
The calls remain very firm and the funnel is there.
No.
Yes.
From our perspective.
We don't see this as kind of a one and done phenomenon this quarter.
So the question.
Do you think that you will also continue to build backlog at a similar rate during the fourth quarter calendar second quarter.
I don't think we expect to build backlog by $100 million.
And I would say that that was unique to this quarter, but.
But we do expect to build backlog, we will be net net higher.
Net net.
Book to Bill over one.
And any comment about the duration of the orders that are going into the backlog.
As an example, juniper talked about.
Hey.
$1 billion increase in backlog.
The percentage, but.
I think it was 30% increase in backlog and but only 15% increase in backlog if adjusted for duration or.
Are you seeing a similar situation where you are.
Seeing orders further into the future and therefore, there's a duration stretch.
Yes.
We measure.
Customer constraints as well as product constraints.
And we don't see it yet we do not see a meaningful.
We don't see a meaningful change in our customer constraint in other words, a customer displacing an order for future delivery outside of the quarter. So.
Our duration is a lot shorter maybe.
Maybe then junipers or other customers.
And so we would rarely CN.
An order thats out there longer.
Then six months.
One last question, then I'll cede the floor.
The top four verticals.
The government healthcare education comprised the year focused.
Much more on enterprise campus now all we've talked the enterprise would've been stronger can you talk a little bit about enterprises in aggregate as opposed to the service provider government.
And education market.
Well when we say government, we are referring to enterprise Alex So.
That's.
Government customers are kind of campus enterprise customers for us.
And so that was the big one there we're not talking about.
We're not we're not zeroing in on federal government for example.
Well the service again could you just talk about the enterprise environment, Excluding government service provider in health care.
In education.
Aggregate is that consistent with the increase.
Yes, that's what we're seeing and it's consistent with what we're seeing as enterprise customers are.
Everybody continues to think about.
What is the new environment and people are enterprise customers are looking to support a more distributed environment, where they can support a more flexible workforce I think it's fair to say people have learned from COVID-19 people, our customers realize that they could be.
More effective than they thought in an environment where workers are remote.
And more and more of our customers are looking at supporting.
And users in a hybrid fashion.
Wherever they are if they are at home or they're in the office.
Wherever they are and Thats.
It's how we talk about the infinite enterprise because the edge of the network is moving away from the corporate office.
But they still want to deliver a consistent user experience wherever the user is and that's the that's of significance.
The <unk> acquisition for us in terms of being able to deliver.
Cloud based application performance management routing security et cetera, et cetera, and so.
No.
That's what's happening on the infrastructure side, we've seen.
Strong investment.
And we've seen this acceleration of digital transformation that youll hear about.
All the time.
As people are considering kind of the new normal here.
Great and if I can just add.
Sorry, Alex.
We typically are not a huge player in the carpeted enterprise it if thats, what youre alluding to Alex but it's captured in.
In two segments enterprise outside of our verticals like healthcare retail et cetera, it's captured in manufacturing, which is up high single digits.
Year over year.
And accounts for slightly less than 10% of revenue and what we call other industrial verticals and that was up 33% year over year and represented about 18% of total bookings so to <unk> point. It was it was a healthy trend.
But as you know thats not necessary a focus when it comes to verticals.
Well, yes, but on that side of that coin.
We have opportunity to penetrate that creates that.
Thank you.
What I was looking for.
And thank you.
I'm currently showing no further questions in the queue at this time I'd like to hand, the conference back over to Mr. Myers for any closing comments.
Thank you Norma and we're up on the hour.
So thank you to everybody who could join us on the call today.
We want to shout out to extreme employees for an incredible effort during a difficult quarter.
For delivering excellent results, we also want to shout out to our.
Channel partners.
And.
And our customers out there.
We wish everyone good health.
In this environment, we will remind everyone that we will be attending the Needham credit Suisse and Cowen conferences, this upcoming quarter and we hope to see you. There thanks, everybody and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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