Q4 2022 Extreme Networks Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day, and thank you for standing by and welcome to the extreme networks fourth quarter fiscal year 2022 financial results. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star.
One one on your telephone please be advised that today's conference is being recorded.
Now I'd like to hand, the conference over to Stan Kofler, Vice President Investor Relations and corporate strategy. Please go ahead.
Thank you Katherine and welcome to the extreme networks fourth fiscal quarter and year end 2022 earnings conference call I'm, staying Kohler, Vice president of corporate strategy and Investor Relations.
With me today are extreme networks', president and CEO admire cord and CFO Remi Tomorrow, 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 reconciliation is available in the Investor Relations section of our website at extreme Networks' Dot com.
I would like to remind you that during today's call. Our discussion may include forward looking statements.
How about extremes future business financial and operational results growth expectations and strategies. 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 .
32021 filed with the SEC.
Any forward looking statements made on this call reflect our analysis as of today, 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 Edmar cord.
Thank you Stan and thank you all for joining US. This morning, we had a strong quarter and year end.
I'm pleased with the progress our teams are making.
Results for fiscal 'twenty to highlight unprecedented demand for exchange solutions.
Vibrant and healthy market for networking era.
We had record bookings growth of 24%, which is a clear indication that we're taking and winning in the market.
And our forward looking funnel for fiscal 'twenty three is up double digits year over year. This is a leading indicator of future bookings growth.
The differentiation of our fabric and cloud solutions for enterprise customers and our targeted solutions for very large service provider customers.
Buying with the high performance of our global sales and channel team gives us the confidence in our outlook for continued growth in demand.
Our technology solutions are critical to infrastructure initiatives underpinning digital transformation for all of our customers around the world.
We believe its important projects will continue to remain a priority irrespective of the changing macroeconomic environment.
For the year, our double digit revenue growth led to an all time high revenue of $1 1 billion yen was understated by the 400 million of incremental backlog, we built during the year.
Total Q4, ending backlog was 513 million thanks to the current supply chain environment.
Despite margin practitioners. We were also pleased to generate a record 60 million of free cash flow during the quarter, bringing our net debt to EBITDA below one.
Continued improvement in our operating model allowed us to achieve record non-GAAP EPS of <unk> 70 cents per share for the year up 35% year over year. We expect these bottom line earnings growth trends to continue.
A record 208 customers that more than $1 million with extreme during fiscal 'twenty, two up 28% from a year ago. We attribute this success to our strategy of leveraging channel partners as a vehicle for growth in the enterprise market.
Our direct sellers on larger projects are.
Our sales productivity is at an all time high as a result, we have more teams over quota than any time in our history, there's never been a better time to be an extreme as demonstrated by our sellers in the field.
In addition, our competitive position the industry has never been stronger.
Small share gains of a large impact on extreme about the financial industry recognition perspective.
Our distributors' channel partners and our customers have taken notice at the industry accolades, we're receiving for our solutions and service for the first time, we eclipsed the largest industry player in the Gartner Magic quadrant, where we are an established leader for four years after the fifth.
Year in a row extreme was named gardeners choice for wired and wireless Lan access infrastructure.
This recognition carry its weight with our target enterprise customers.
Our differentiated cloud solutions drove subscription bookings growth of 58% and we achieved annualized cloud SaaS bookings of 170 million exited in Q4.
And for our innovative SaaS solutions is also driving demand for our products and we believe the level of organic subscription growth you're seeing today.
Stable.
<unk> reached $103 million in Q4 up 47% year over year, and 8% quarter over quarter.
We continue to build on our vision of the Internet enterprise with the launch of extreme cloud SD Wan solutions, extending our cloud edge services across wide area networks.
<unk> solutions, along with our AI ops development around digital twin and co pilot will provide the next wave of growth and subscription business and support our long term subscription revenue outlook of 35% to 45%.
We've received tremendous feedback from our annual connect user conference that we held live for the first time in several years.
Associated content sessions were viewed more than 4000 times over one and a half days.
We also showcased our ecosystem of over 100, plus technology integrations and partnerships on display at the event.
Next week, we're oversubscribed for our sales kickoff event for our direct sellers and channel partners, where we expect over a thousand live up in Boston.
We exceeded our stated goal of generating an incremental $20 million in fiscal 'twenty two sales of our <unk> solutions to service providers.
We're starting to experience pull through business. Thanks to a significant ramp in next generation Global Telco network deployments.
And we're working on expanded use cases with our OEM partner for additional cloud Native solutions, where we are the preferred vendor.
Today, our teams are more competent in navigating a challenging supply chain environment. Thanks to a combination of strategic relationships, new processes and more consistency with secondary and tertiary component suppliers.
Success in the broker market for components.
In addition, our teams have been successful in reengineering products to improve lead times with customers.
This allowed us to release nearly $20 million of backlog during the quarter.
These efforts were enabled by a number of our cross functional teams working with key Oems and suppliers.
To create new product Skus and certified and in record time, our customers recognize this agility and it's creating new business opportunities for us.
As we noted during our Investor day in May we expect to continue to build backlog for the next several quarters given our outlook for continued bookings growth and the gradual recovery in supply chain.
Per the guidance, we provided we expect sequential improvements in our ability to deliver product to customers throughout fiscal 'twenty three.
Based on our lead times and commitments, we expect backlog will begin to shrink by Q4 of fiscal 2003.
We have complete visibility into our product backlog and have received negligible cancellations to date of less than 1% of bookings or backlog primarily consists of our latest generation of universal products. So we began to ship product. We will also see an improvement in subscription and services bookings.
That are attached to our wired and wireless products.
At extreme we are focused on finding new ways to enable better outcomes for our customers.
This quarter extreme helped mini Cooper NPA.
High end grocer with over 100 locations and over 2 billion in annual turnover.
Next generation retail experiences to its customers.
Dream Cloud SD Wan solution.
And costs, simplifying management and providing ease of deployment.
At North Carolina, A&P, the nation's largest HCC you serving more than 13000 students.
Stream fabric solutions are being used to expand the campus network and improve the digital learning experience for students while enhancing security.
Architected environment was created with the help of our award winning services team.
This quarter, we booked the largest network infrastructure as a service deal and extremes history with the U S federal customer.
$10 million campus switching deal over five years.
Leveraged our capital solutions group to deliver a new opex based consumption model for this federal customer.
Again, our ability to be flexible with our enterprise customers is an important differentiator for us.
In Q4, we continued to expand our universal portfolio with the introduction of the $57 20, Universal switch designed to support data heavy applications, such as Wi Fi six.
We also continued to innovate on best in class Wi Fi <unk> and ultra Wideband Aps.
<unk> first to market move and Wi Fi six is leading us to win in the market transition.
Adoption of <unk> wireless will also drive multi gig switching demand in the future we nearly doubled our Wi Fi six <unk> revenue during the quarter sequentially as we've improved our ability to deliver access points to customers 60 is now over 25% of our wire wireless AC revenue.
Net net I'm incredibly excited to see our team executed at such a high level across the organization from our product team delivering incredible innovation for our sales and marketing team is driving demand our supply chain and ops teams delivering product in a challenging environment and the cross functional support from all the other organization.
<unk> are putting extreme at a physician for unprecedented growth in top line cash flow and earnings.
Future quarters and years to come with that I'll turn the call over to our CFO Remi Thomas.
Thanks, Ed.
I've described we had solid execution in fiscal 'twenty, two with record bookings and backlog generation double digit revenue growth and overall improving margins in spite of the supply chain environment strong demand for our portfolio of products services and subscription drove year over year bookings growth of 24% in fiscal 'twenty two.
And 8% in Q4 with a product book to Bill ratio of 129 for the year and $1 23 for the quarter, we exited the year with $513 million in backlog at more than $400 million year over year and close to $19 million sequentially.
Only three full quarters of product revenue.
We achieved double digit revenue growth for the year to surpass the $1 $1 billion Mark.
Fourth quarter revenue of $278 $2 million came in came above the high end of our expectations entering the quarter, reflecting the ability of our supply teams you either saw small components or quantify alpha native ones.
We grew our SaaS subscription bookings by 68% in fiscal 'twenty, two and 51% in Q4 were making a change to how we report our SaaS they are.
We're now basing it on an annualized view of our quarterly subscription revenue as opposed to the annualized contract value.
<unk> data can be found on page 15 of the Q4 earnings deck posted on our website.
Based on this methodology, our AAR reached $103 million in Q4 at 47% year over year and 8%.
Quarter over quarter SaaS deferred revenue was $157 million at the end of Q4 up 40% year over year, and 10% quarter over quarter for the year, we achieved record EPS of <unk> 77.
<unk> 57, a year ago Q4, non-GAAP earnings per share was 15 in.
In line with our expectations entering the quarter on a geographic basis and looking at revenue our top performing region was EMEA, which delivered revenue growth of 23% for the year and 10% for Q4, the Americas grew 3% for the year, but decline in Q4 impacted by fewer stadium.
Deployments this quarter.
Finally, although APAC revenue declined slightly for the year. It enjoyed a very strong recovery of 48% in Q4, resulting from improved execution across the board.
From a vertical standpoint, and this time looking at total company bookings the highest year over year growth in fiscal 'twenty. Two came from sports and entertainment followed by government and healthcare for Q4, specifically the highest rote came from government followed by health care and service provider.
Product category standpoint, our wired product bookings grew 28% for the year, but were down slightly in Q4 due to a very demanding comparison in the campus segments, while less product bookings grew 25% for the year and maintain a healthy growth rate of 6% in Q4.
Total wide revenue grew at a high single digit rate for the year, but decline in Q4 due to supply chain constraints, our wireless revenue on the other hand grew at a double digit rate for the year and in the mid twenties for Q4, as we were able to release a meaningful part of our backlog.
Services and subscription revenue of 91 $1 million in Q4 was up 11% year over year, taking the total for the year to $356 million up 13%. This growth was largely driven by the strength of cloud subscriptions for which revenue grew 34% in Q4 and 37%.
For the year.
Q4, recurring revenue, including maintenance managed services and subscription rose to $87 3 million or 31% of total company revenue up from 28% last quarter for the full year, our recurring revenue was 30% of total.
The growth of cloud subscription and service renewals drove the total deferred revenue sitting on our balance sheet to $402 million.
Up 16% from the year ago quarter.
And 8% sequentially.
non-GAAP gross margin came in at 57% down one percentage points sequentially and three five percentage point year over year, driven by lower product gross margin.
In addition to high expedite fees and freight cost our product gross margin was impacted by an unfavorable mix for the full year total company gross margin would have been at least 600 basis point higher if not for these elevated expedite fees and freight cost on the other end services and subscription non-GAAP .
Gross margin improved to 77% in Q4 up from 60%, 64% in the year ago quarter, and 65, 1% sequentially driven by higher mix of subscription and maintenance and lower professional services revenue based on the timing of certain high touch stadium.
Deployments.
Q4, non-GAAP operating expenses were $132 million up from $131 million in the year ago quarter and from $130 million in Q3, reflecting lower R&D expenses, but higher sales and marketing expenses Opex as a percentage of revenue was 47, 3% for the full year opportunities.
Prices dropped to 46, 1% of revenue at the lower end of the long term range of 46% to 49%. We had provided at our analyst day in early 2021, all in all operating margin was nine 6% for the quarter and 12, 2% for fiscal 'twenty two.
Highest on record.
Net debt was reduced by $35 million sequentially to $114 million as a result of a record operating cash flow up $60 million. This quarter. This was driven by strong collections as well as an acceleration in the pace of caris duty drawbacks.
During Q4, we repurchased a total of $2 5 million shares of our common stock for $20 million with an average price of $9 74 per share for the full year, we repurchased $45 million worth of stock. We currently have $200 million remaining in our new buyback authorization.
As of July one now.
Now turning to guidance for Q1, we expect revenue to be in the range of $279 million to $289 million Q1, non-GAAP gross margin is anticipated to be in the range of 57% to 59%.
Q1, non-GAAP operating expenses are expected to be in the range of 137 to $134 2 million.
Q1, non-GAAP earnings are anticipated to be in the range of $19 nine to $26 5 million or.
We're 15% to 20 per diluted share, we anticipate that the reduction in expedites and shipping fees combined with the full impact of our recent pricing actions will lead to a progressive recovery in gross margin throughout fiscal year 'twenty, three with Q4 expected to be above 60% for the year.
We expect 10% to 50% revenue growth with an operating margin in the 10% to 50% range with that I will now turn it over to the operator to begin the question and answer session.
Okay.
Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from Alex Henderson.
With Needham <unk> Company your line is open.
Thank you very much.
Great job guys in a tough environment.
Wanted to get a better handle on the bookings in <unk> and the outlook commentary going into the first half of fiscal 'twenty three.
It sounds like.
Clearly you're expected to stay supply constrained true most of the.
The fiscal year, but do you see any improvement in.
And supply in your expectations.
And the <unk>.
First half of the year and then second.
What's going on in that pipeline.
As youre looking at that first half.
Outlook.
Particularly if you look at the bookings numbers in the.
Fourth quarter, how did that play on.
Geography.
And how do you think that looks going into the upcoming quarter, particularly in EMEA.
Okay.
Thanks, Alex and Remy.
Why don't you let me jump in and then you can you can fill in.
And so Alex you rightfully pointing out kind of this.
How we're looking at bookings, which is really our measure of true demand.
Then versus revenue.
Our revenue outlook is really a function of supply chain and product that we're able to release given the massive that backlog that we built up.
And the continued strength of bookings so.
I'll just start off with with supply chain.
Asked about that what we see is a gradual improvement throughout the year, So think of a step function.
Where we are we'll be stepping a revenue quarter by quarter throughout the year.
On our outlook of supply chain, and we do have more confidence.
As we've mentioned before our strong relationships with the likes of Broadcom and we are not constrained it's more about secondary tertiary component vendors, where we've established direct relationships normal processes and have consistency now and our expectations around delivery.
And then some of the creative things that our teams are doing around reengineering et cetera, and then more products showing up in the spot market. So our teams as I mentioned in my comments are more confident today.
They may have been.
In our ability to step function.
Our supply of product to our customers partners. So what does that mean.
That is how we built the revenue forecast.
For fiscal 'twenty, three which is that step function.
With sharper improvement in the second half of the fiscal as it relates to demand our demand has been strong as we've talked about it for the year of 24% for us that is record breaking performance.
However, the seasonality for bookings is very different.
<unk>, where people know that there are long lead times.
When there are pricing actions like they were last year in response in response to increased expenses.
We had a couple of price raises.
And in that in that case people wanted to get ahead. So we saw extraordinary bookings growth.
Very end of the September quarter last year.
The March quarter as far as bookings. So it was a lot of pull ins from the other periods. So normally you would see.
The peak in June and then the slowdown.
In September .
Peak in December and then slowdown in March in this case, what you saw with <unk> and.
An explosion in September last year.
A slowdown from that level in December an explosion in March and then a slight slowdown in terms of our internal plans, we hit our internal targets, which is why we continue to grow bookings, but relative to where we were in the march quarter with the pricing action.
It was different as we look out at the first half of fiscal 'twenty three.
We see bookings growth continue.
And that is a function of several factors first of all we rely on our teams and our bottoms up roll up from direct sellers in the field rolling up geographically.
There's a lot of confidence from our field teams and the numbers that they're actually calling I would say stronger than in years past.
Second thing, we look at that funnel and we run our own metrics.
And looked at.
The commit levels and the confidence levels.
With our algorithms and our Formula is there and.
And they are up as we mentioned if you look at our funnel year over year.
We are up over double digits in terms of the opportunities and over the course of last year with competitiveness at extreme.
Our conversion rates on that funnel it.
It approved so we're more confident about the quality of the funnel and our ability to win and we still see growth. There. Finally, we haven't yes, we have an AI tool we call. It the number based on all the CRM activity and looking at the opportunities.
It's up and then our partners channel partners and our distributors they have an outlook and a view and they're calling in and of itself. When we look at all of those different data points eight points to.
Increase in demand.
I would tell you is that for the first quarter, we definitely expect to be over a book to bill of one <unk>.
And.
The normal seasonal trends in bookings and comparisons will likely be different because of the pricing actions.
So EMEA.
Randy do you want to comment.
No I think you gave a very detailed view yeah.
Alex as it relates to EMEA, we continue to see strength, so we're not seeing.
I know that this is something that you are paying close attention to and if you are concerned about.
We can't provide that data point for you.
We're not seeing it.
We continue to see strength and the question is whether or not that's because we're taking market share I guess.
Macro or if if our if our data point is a valid macro data points.
It's a good result for you either way thanks, so much for the detail.
Thank you.
One moment.
Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.
Alright, thanks very much.
Good to be on the call.
I guess a little bit of.
Asking that.
Part of the last question a slightly different way.
I think you said that by the fourth quarter of the fiscal year.
Do you think book to Bill will be below one and I guess my question. There is that more of a function of.
Less confidence in demand when you look that far out or.
More confidence in the supply chain.
Allowing you to to eat into the backlog a report extraordinary revenue growth that we see in the back half of the year.
Hi.
Yes, Hi, Mike Good question, its all supply chain.
So as I mentioned, we continue to see strength in demand going out for the year.
And growth, but on the supply chain side, where we're most constrained that we've talked about in our components and these are tier two tier three components, where we need every component to make the switch or to make an access point and so without it.
Without it.
We can't ship, we can't produce we can't ship so.
Some of our suppliers have apps that are coming online in the first part of the calendar year and the fact of the matter is we have a schedule we have visibility to how our components will come online and then we will see a greater supply of those components are the ones that are OLED fab.
Right.
I guess, if I got it.
Yes.
I guess, because I'm new to this.
I just need some clarification between definitions and were talking about fiscal years.
Versus calendar years. So when you are talking about improvement in every quarter of 'twenty three is that a fiscal year comment or a calendar year comment and can you talk about any kind of green shoots.
Color on Green shoots that you may be seeing or not seeing in the actual calendar second half of 'twenty two.
Yes, I think that I think our comments for the <unk>.
Fiscal apply to calendar <unk>.
I think the calendar yes.
Our view of the calendar 'twenty three if the second half of calendar 'twenty three you'll see even a greater inflow of product you can charge taken down backlog any keep in mind, what we've been talking about so it gets re.
Leveling our revenue to real demand, which is resetting this book to Bill and then on top of it we're talking about building backlog where.
We will have hundreds and hundreds of millions of backlogs are released and so that is again that will continue and that will always gained velocity in the second half of the calendar.
Alright.
Good practice.
Sorry to I don't know if you already beating a dead horse, but can.
Can you give us any.
Think about fiscal <unk> the December quarter gross margin.
Normally guide to quarters.
But do you have any color on how we should think about the supply chain or versus pricing versus other factors for.
The sequential gross margin into December .
Based on our view of expedite fees freight costs that are starting to come down as more capacity is being built between Taiwan and Shanghai and now.
Pass through where we have our main hub.
We feel confident that we can improve the gross margin sequentially by close to one percentage points.
So that we now see ourselves in Q2 at around 59%.
Great well I have more questions, but I think I'll pass it on to be fair to other people. So thank you. Thank you very much.
Welcome.
Our next question comes from Eric Martin Newsy with Lake Street Capital markets. Your line is open.
Yes, I wanted to address the FX impact of the strong dollar.
A concern that you guys might be.
Backing away from the 10% to 15% of growth.
FY 'twenty three based on the strength of the dollar versus the pound and the euro could you address that.
Sure there's two aspects.
Eric The first one is the competitiveness of our product unless some of our customers are willing to go with Huawei.
Alcatel Lucent enterprise, which is a very small player.
If we're dealing with juniper.
Cisco HP Aruba that has not proven to be a problem and believe me I'm asking the questions every Monday will now sell skol to our head of EMEA sales.
But so far.
Customers basically are absorbing the impact of.
Higher product in their local currency, specifically if they are in the eurozone.
Because all of our competitors use the dollar as a functional currency with the exception of the two that I mentioned second aspect is we have a significant cost base now so much in terms of R&D, but obviously in sales and marketing with a significant presence in Europe and as we account for that.
Basically has a favorable impacts on our opex as a prudent CFO with a very prudent treasurer, we're hedging ourselves against the euro and the Indian rupee to locking some of these rates.
So.
The impact that Youll see on P&L it depends on how smart we have been in terms of our hedging but that second aspect is favorable to the P&L.
Okay, and then you talked about Q4 relief.
And the supply chain.
Alright, I guess.
The release of the backlog is that consistent with your comments in may at the Investor Day, Iqos or you were talking about Q3 relief.
Yeah.
Go ahead, yes, I was going to say it is consistent.
And I think not to be confused with how.
Or how.
How our suppliers began turning up product and then how that product effects of our supply chain. So.
I think in New Orleans commentary he was talking about.
Suppliers, where we're constrained turning up in opening up new Fabs, and then turning up production lines to start releasing products and so.
There is an evolution that is happening in the first quarter.
And they are on schedule that's happening into Q4.
In calendar Q1.
But then those components have to make it into our supply chain and so our timetable for that is we're seeing a significant step in our Q4 of those much needed components that we can add turnaround and chip products.
Okay. So it was really more of an upstream comment.
And then.
The impact of this Q4, okay. Thanks, Anita I think keep in mind. We are yes, we are forecasting a significant step.
And each quarter going forward, so normally there'll be seasonality in the September quarter revenue.
We are guiding to a step up.
We're guiding to a step up in December a step up in March a step up in June so we're.
We are seeing this gradual release with some pretty larger steps happening in March and then especially in the June timeframe.
Yes, definitely unusual times Yep Yep.
Okay. Thanks for taking my questions.
Thank you and as a reminder to ask a question press Star one one.
One moment.
Yes.
We have a follow up from Alex Henderson with Needham <unk> Company. Your line is open.
Hey, good double dip alright.
So.
I wanted to just clarify on the.
The FX and international.
International sales.
So do you have any receivables that you have exposure on.
Relative to the FX that could.
Could be impacted by.
The strong dollar weak currencies.
The international markets, particularly Europe .
Yeah.
They are either own hedged or.
Would be impacted by.
Further strength in the dollar.
Hi.
The functional currency that we use without disease, where we basically collect 85% of our receivable happens to be the dollar.
So that means that whatever bill within dollar they have to come up with the right amounts to meet that deal. So no exposure there.
And relative to the functional currency internationally.
And particularly in EMEA what percentage of your.
Revenues are in dollars versus.
Local currency I assume that there are some.
<unk> some that are in local currencies could you just clarify what that.
Percentage since this is such a large factor these days.
The exact percentage, but I would assume it's <unk>.
95% unless we have guaranteed.
Net pricing in local currency, which to my knowledge, we don't do we sometimes will guarantee a net price. So some customers are immune from the price increase we've done until the frame agreement, we have with them expires, but in any incident that prices always set in dollars to my knowledge.
So, it's lower or higher than I thought it was thanks for the clarification.
Okay.
Going back to the environment.
It's hard to believe that the Europeans.
Are not seeing some pressure in the pipeline.
Can you talk a little bit more about the pipeline relative to Europe .
You haven't seen any slowdown or any increase.
The increase in the number of signatures.
Stretching of lead times anything on those type of metrics.
It seems hard to believe that given.
Massive hit that that economy is taking.
That.
But there hasn't been any change at all on conditions.
I would add.
Couple of things to that Alex one is it's something that we're looking at very closely.
And we're watching very closely and the answer is no. We really haven't rebuilt you haven't seen that as I mentioned before.
Is that is that a function of us taking share we're seeing.
With our with our position in cloud and with our position in fabric and the quality of our story and then the quality of the actual the implementations.
We're getting more at bats, and so is this a function that work.
Sure.
We're seeing more opportunities from a share gain perspective that could be part of it.
The other thing I would say on an overarching basis is that networking infrastructure is critical probably more strategic today than it's been.
And if youre looking at digital transformation, the connective tissue is the network and the connected tissue as the cloud and.
These are these are really important complicated projects that we just we're not seeing these projects being prioritized and we would look at sort of a difference that that that new networks can make in terms of driving customer outcomes and business outcomes.
These are not the first projects to go so if things are getting cut.
And it's why I made the comment about the anti recessionary nature of critically important networking projects.
I would reinforce we're not we're not seeing it yet.
Thats Fabulous okay.
One more question just one on the internal side of things.
Have you changed your behavior relative to them.
Hiring what are you seeing in terms of wage inflation what are you seeing in terms of.
Staffing churn.
Any any thoughts on those elements of the drive Opex and when does your annual merit increases.
So that we can put them in our model.
So annual merit increases for us in the second half of the fiscal so they would come into play in January February timeframe. So in the March quarter.
The for US what I would tell you is that our turnover remains unusually low and I think that has some of that has to do with our success in the marketplace and the kind of talent that we're attracting right now at extreme.
So from that standpoint.
We are.
We are out in the market and we are out hiring.
We are being very disciplined in our spend and our investments.
Because real demand is a lot higher than the market and we're driving a much higher demand than what we're spending for because our revenue is lower.
But we've been making some key strategic hires in the channel.
And in our sales leadership.
I think we're better organized now to support the channel and we see a real channel growth opportunity.
And I would say we're hiring so right now we're in investment mode, but we're constrained because we're governing investment by our revenue.
And our revenue is artificially low because.
It's not a reflection of real demand because of supply chain if that makes sense.
So would you then as supply chain improves accelerate the hiring.
To take advantage of your accelerating revenue growth and it sounds like the answer to that question.
We would blend.
Turns to investment in the business and growth with returns to current returns to shareholders.
Makes sense.
Wanted to just get a little bit more clarity on the.
<unk> embedded.
Backlog in the systems backlog.
The stuff that's.
Relevant to service to stop controller into subscriptions for software that are tied to actual shipments.
If we were to take a ratio of the.
Sales to $100 million worth of systems.
The equivalent portion of software and.
Services B that are embedded in that.
<unk> revenue for systems is it 25% to 30% is it 50%.
We think about it.
I don't know that we have that kind of.
Metric because because in that 100, you have to see what what is.
Campus portfolio as opposed to our wireless portfolio.
I could answer that typically the attach rate that we're now seeing around our wireless portfolio for cloud is around 60%.
So every time you sell.
100 switches and 60% of the case the customers will take.
<unk> Q2 to manage that.
And then the dollar amounts related to that is a lower number of that.
Which we haven't really been disclosed.
So I am not sure we can answer that question Alex.
Well the services should be pretty straightforward greater service services attach or thinking about Kevin. So you saw a $100 worth of a switch or access points, you typically get $7, but as far as exec used concern.
Alex.
So decent critical back we can circle back with you on this one okay. Great. Thank you very much I'll cede the floor.
Yes.
We have a question from.
Dave Kang with B Riley your line is open.
Hi, guys. Good morning, nice quarter first on clarification, I think you talked about.
Gross margin would have been 600 bps higher I'm, assuming that was for fiscal fourth quarter.
No that was for the full year.
Okay, and what was helpful for fiscal fourth quarter can you kind of get that number it was about the same.
Okay, Yes.
And then regarding <unk>.
Yes.
A lot of that has to the expedite fees I mean.
Have we seen the peak of that or when do we see that peaking because gross margin obviously.
Climbed one percentage point.
Frankly, I'm, assuming that was a function of that.
Actually the expedite fees and freight costs in Q4 versus.
Q3 and versus what we expected didn't really come as a surprise what really drove that.
1% gross margin impact was was it mix, we had a significantly stronger quarter for wireless and our gross margin on wireless are lower than for our wired.
Products.
Question about have we seen the peak the answer is yes, as we look at the expected what we call PPV purchase price variance, which is really what we pay in addition to the normal invoices to secure supplies from Broadcom and other vendors.
I actually see a slight improvements.
In Q1 and same for freight costs I mentioned earlier.
There is now more capacity.
Being added backed by commercial airlines between Asia, and the United States.
And we're basically using leveraging that commercial land capacity to carry our products. So that the bill that we expect to pay this quarter is actually going to be down sequentially, which is why we're suggesting a one percentage point improvement sequentially.
Got it and then just sticking with wireless what is the mix between wired versus wireless for for product revenue.
So this quarter. It went back up you had been.
Depressed because we were delivering more.
On the on the wired side at this quarter, we went back up to 28% wireless 70 chips on wired.
Got it.
And then.
Regarding your backlog I think last quarter, you talked about backlog of maybe 500, maybe slightly higher but clearly you've already exceeded that and youre, implying that we will continue to go up so how should we think about the <unk>.
Are we talking about maybe 600, even higher and then after peaking can you maybe talk about that.
Uh huh.
They collect the rate of decline.
Quint.
Assuming that's going to be more of a fiscal 'twenty four.
Ed do you want to comment.
So.
I'll go Dave and as you can feel free to add.
Yes, I wanted to clarify on that.
<unk> sure about the question of the rate of decline.
To date, we are at a backlog decline.
The backlog, yes, so we would expect to see backlog decline.
Sure.
What we mentioned is that we would level out and start chipping away at that in our Q4.
Sure.
We're not expecting a meaningful impact, but it's really in the second half of calendar.
'twenty three that Youll start to see us take more meaningful chunks out of that backlog and again it will all be based on supply of components and the increased volume so I think that through.
Our fiscal year, the second half of our fiscal year, you'll see a step up and then throughout fiscal 'twenty, four and probably into fiscal 'twenty five youll see us.
<unk> size.
Our backlog.
Sure.
Do you think it will take around six to 600.
I'm not sure we've provided.
We saw that but I think that would be if that would be a.
I think thats a fairly.
I think that's a fairly conservative number.
Got it.
I would say that's a safe number based on the strength of bookings that we've got.
Relative to supply, especially if you look at the trend over the last several quarters.
Okay.
Got it just a couple more can we get.
The latest update on SD Wan and <unk>.
That's progressing.
Sure.
Yeah.
We had our connect conference.
And we announced that we were launching extreme cloud SD Wan. Our teams came in ahead of schedule as far as putting the SD Wan solution in our cloud. So one of the things Youll hear US talk about is that we have one cloud orchestrate services and we're the only provider in the industry that has.
Single cloud delivering cloud management on campus as well as wide area network cloud management.
<unk>.
This is how we are.
This is Hal.
We are differentiated and we're looking at bringing new Wan edge services.
That we can orchestrate across our cloud we are building.
This is a six to 12 month selling cycle as we've just launched what we're seeing is we're seeing that.
One I'll start building of opportunities and we've already seen I mentioned recoup for that we have.
We have our sales kick off meeting with partners and SD Wan is going to be a big part of that launch next week.
And our teams will have commitments on those numbers. So we're expecting a significant growth throughout the course of the year and then youll see that youll see the funnel build and then youll see the bookings come predominantly in the second half of the year.
Got it and my last question is on <unk>.
Clearly you exceeded $20 million and then I think.
Before you were expecting 50 to 100 million. So I was just wondering if that's the case, it's still the case for fiscal 'twenty, three and then any new customers in the funnel and the pipeline.
The answer is yes, yes, and yes. So we are seeing new opportunities with one of our.
A large global telecom suppliers that we've spoken about.
They went from zero to over 22 proof of concepts and now the proof of concepts are going into production. So we're going to see significant ramp as major telcos start deploying this cloud native infrastructure solution, but we are the sole source vendor for networking.
Around major service provider <unk> networks around the globe. So.
We are.
We are seeing it happen in real time, and so we're very confident in that forecast.
We are also a part of the <unk> solution and I know, we mentioned Verizon by name.
Have a.
A significant business opportunity.
We are we are being certified in Verizon in real time, so they have a life and sellers in the enterprise space can position and they can make a commission and sell extreme this is an exciting new opportunity for us.
Also expands across the broader portfolio and then we do.
We are adding new customers because of the work that we've done for these large service providers there.
There are use cases in very targeted use cases that apply to other service providers and they are starting to see the final Bill where we open up.
Where we open up that portfolio to other service providers I would also say we've also been investing in that team. So this is an area, where we see significant growth.
Got it thank you.
And Alex if you're still on line, we do have an answer to your earlier question. We did some back of the envelope math, but typically when you have a $100 worth of backlog that you are not able to deliver between the services and subscription assuming attach rate for service and assuming different attach rate for subscription you should assume.
<unk>.
Around 15%.
At $500 million.
Backlog gets released.
Potentially $75 million worth of subscription and services business that that can be generated over time.
Our next question is a follow up from me.
Mike Genovese with Rosenblatt Securities. Your line is open.
Great.
Currently long list of follow ups, but then they mostly just got asked in the last two questions.
So.
I'm just going to end with for me co pilot.
I know, it's early days, but.
Do you have revenues there yet what's the pipeline like that looking for.
How how do you sell that product and what's customer acceptance like thank you.
Yes, Mike It's a great question and something we're really excited about and we've talked about the next generation.
The next generation of sort of new growth vectors for subscription and clearly yes.
SD Wan, we've gotten a lot of attention around digital twin.
<unk> is a unique capability.
And then and then co.
Copilot with AI ops in automation and some of the operational savings better we're going to break.
The launch is really this week.
The upcoming week in Boston, So we are there.
There is a huge amount of training and enablement.
And.
An official launch with our own internal sellers.
With marketing programs.
And incentives as well as for our partners.
More to come on that.
We're very excited about.
The capability and the differentiation of what that can do.
So still it's still early innings, there, but stay tuned.
Okay, I guess, if we think very long term years down the road.
And we kind of Dimensionalize the co pilot opportunity versus the.
The core.
No.
<unk> Iq opportunity.
What percentage.
Would it be.
We haven't guided we haven't guided there yet Mike and I think.
Is that something that we can come back.
If we look at customer when we look at their software subscription subscription span and so obviously the core as a pilot license and then when you start layering services on top of that and so we look at.
You could call it.
It's an additive strategy, what we're looking at adding services on top of that pilot.
And I think for us to give you a meaningful answer there we need to do some modeling for you to try to be responsive and kind of understand what youre trying to build on that.
I think it's premature for us to give you an answer on the call today.
Mike already today, you should sorry might you should think of this as an opportunity for us to improve on that retention rate. So if our gross retention rate is in the high eighty's low ninety's. When we go back to the customer and renew would typically upsell them with this type of product and get an additional few percentage points.
An increase on that retention rate.
Fantastic. Thank you very much.
Thank you and that's all the time, we have for questions I would like to turn the call back to management for closing remarks.
Okay. Thank you well, we appreciate everyone joining us today.
And we appreciate the engagement with the analysts great questions.
Yes, we're very excited as we turned the corner into our fiscal 'twenty three.
The bookings growth.
And the demand for extreme and the market is is unprecedented and I would just say personally I'm very proud of the team I know we have a lot of yes, we have a lot of our customers partners.
<unk>.
On the call and I would congratulate everyone.
Job.
Well done.
Tremendous momentum and we've got turning the corner again across the board from the product team with sales and marketing teams are our services team supply chain ops teams and then everyone supporting.
The efforts that extreme.
We're just in a very unique position for topline growth.
And cash flow and earnings growth not just the next couple of futures, but the next several years. So we're excited about it but thank you again for joining us and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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