Q1 2023 Extreme Networks Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and walked through the extreme networks Q1, FY 'twenty financial results Conference call. 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 need to press star one on your Touchtone telephone.
I'd now like to turn the call over to your host Dan you may begin.
Thank you, Kevin and welcome to extreme networks first quarter.
2023 earnings conference call.
<unk>, our vice President of corporate strategy and Investor Relations with me today are extreme networks', president and CEO admire cord and CFO Remi Thomas We just distributed a press release and filed an 8-K detailing extreme networks' 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.
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.
Our financial disclosures on this call will be on a non-GAAP basis unless stated otherwise.
We caution you not to do it online.
<unk> 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 ended June 32022.
As filed with the SEC.
Any forward looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them as required except as required by law.
Now I will turn the call over to extremes, President and CEO Edmar Court.
Sure.
Thank you Stan and thank you all for joining US. This morning, we had a record quarter as demand for cloud driven networking and for extreme solutions has never been stronger again, our share gains are evidenced by double digit revenue growth record revenue and continued growth of backlog, which now sits at 555 million.
The sequential increase in revenue and margins led to continued improvement in our operating model and we achieved EPS of <unk> 20 cents in Q1 up from 15% in Q4.
We expect these bottom line, earning trends to continue.
The combination of our fabric and cloud solutions are driving significant differentiation for extreme our.
Our fabric technology deployed in over 7500 campus networks globally.
<unk> network automation, hyper segmentation and unmatched security today.
Today, our fabric provides simplicity and ease of use the local area network deployments from the campus core to the wireless edge and.
In calendar Q1, we're extending our fabric across the wide area network, bringing new features and security to our enhanced SD Wan solution.
With extreme cloud IQ, our customers have complete visibility and management of network devices and connected clients throughout the entire enterprise end to end across local and wide area networks. The.
The intelligence and automation tools, we bring and our co pilot license such as digital twin and AI ops are game changers, highlighting the value of our co pilot solution. One of our customers is on record, saying with co pilot I'm finding problems in the network that I didn't know existed and now I have readily available solution.
Is that I didn't have without the tool.
Both our fabric and cloud solutions stole the show at our oversubscribed sales kickoff of that for direct sellers and channel partners, where we hosted over 1000 people in Boston at August .
At extreme we have a unique focus and finding new ways for our customers to deliver better outcomes leveraging the most advanced cloud fabric technology.
During the quarter at 37 customers spent more than $1 million of extreme some of our top wins for the quarter include household names.
Such as the third largest cruise line in the World, where we beat out a large incumbent and we will be deploying our wired wireless cloud IQ and fabric solution.
4000 room luxury hotel going up in Las Vegas that will showcase our fabric along with our cloud IQ side engine.
Third largest bank in South Korea is deploying our data center switching and fabric to protect sensitive customer information and ensure uninterrupted operations.
And the worlds third largest energy company based in Europe , a global leader in Smart grid technology that added more than 2000 extreme access points are switching solutions and cloud Iq.
Our sales productivity continues to run at historically high levels and this will only increase.
Over the next few years, given the right sizing of book to Bill and the release of backlog. There has never been a better time to be a salesperson at extreme.
And our competitive position has never been stronger.
And such a large industry small share gains had a large impact on extremes topline, making us the fastest growing networking company.
Third party analysts industry press and partner community has taken notice demonstrated by accolades and awards for our solutions and service. For example is the fifth year in a row that extreme was named garners choice for wired and wireless Lan access infrastructure based on peer insight.
We achieved subscription bookings growth of 60% and annualized cloud SaaS bookings of close to $190 million exiting Q1.
Strong demand for our innovative cloud solutions is also pulling through product sales and we believe the level of organic subscription growth. We're seeing today is sustainable in.
In addition, the improvement in supply chain and our ability to deliver products, most notably wireless Lan this quarter supported a strong pull through a software subscription.
On the supply chain side, we continue to be laser focus on tactical execution to meet our customers' needs our.
Our distributors give us the highest rank in the networking industry for delivering on our commit dates. This is driving demand and has become a source of new customer logos and partners for extreme.
This quarter alone, we qualified and additional 50 component suppliers and reduced our parts shortages. Our success in reengineering products has also helped ease constraints.
Based on all the actions, we've taken with our supply chain over the past year, we now have better visibility and confidence in the ramp of our product deliveries.
With a strong outlook for bookings growth and the gradual improvement in supply we expect to build backlog through the end of the fiscal year.
We anticipate neutral book to bill or release of backlog in our fiscal Q1 of 'twenty four.
Whats backlog begins to release it will unlock an accelerated wave of product shipments and revenue growth over multiple quarters.
We have complete visibility into our product backlog the vast majority of which is comprised of orders with current delivery request dates.
Our orders are part of essential products projects that have been carefully designed and plan for customer environments, such as stadiums college campuses hospitals and manufacturing facilities.
This is why cancellations remain negligible at a fraction of 1%.
About half of our backlog consists of the latest generation universal products that pull through subscription and services. So when our backlog shifts. It will also unleashed subscription and maintenance services revenue.
Our recently introduced Universal switch $57 20 designed to support products with higher data throughput such as our Wi Fi six access points, we will be launching later this year. We also launched new outdoor Aps building on our first to market status and Wi Fi succeed.
The transition to Universal products continues with nearly 60% of our bookings now on universal platforms for wired and wireless products.
Our sales funnel, our AI tools and our field forecast all point to healthy bookings trends for the next 12 months.
This is a combination of extreme taking market share and the resiliency of cloud based networking in this environment.
I'm excited about the strength and favorable outlook of the networking industry, our growing market share gains from larger competitors.
Cloud driven networking has never been more important and our competitive position with the highest quality cloud the industry combined with unique simplicity and security of our extreme fabric has never been more impactful.
We're poised for accelerated top line growth and margin increases that will drive unprecedented cash flow and earnings growth in future quarters and years to come with that I'll turn the call over to our CFO Remi Thomas.
Thanks, Ed.
One results highlight the strength of execution of our go to market and supply chain teams, our direct sellers and channel partners achieved near record bookings for both products and cloud subscriptions.
Global operations team delivered strong shipments that resulted in record revenue and.
And we reached a new milestone for SaaS.
At the same time, we improved our margin sequentially and continued to generate strong cash flow.
First quarter revenue of 297 $7 million grew 11% year over year.
And 7% quarter over quarter, which was once again above the high end of our expectations entering the quarter.
With a product which would be a ratio of one three for the quarter, we added $42 million to backlog from the prior quarter. We now have nearly three full quarters of product revenue in backlog.
Wireless Lan revenue grew sharply on a quarter over quarter and year over year basis, and now accounts for 30% of product revenue due.
Due to the loosening supply of access points in the quarter, we grew our SaaS subscription bookings by 60% in Q1 accelerating from the prior quarter's growth rate of 51%. This was fueled by the sequential recovery in our wireless Lan business, which has an extremely high attach rate of cloud services.
Our SaaS AAR grew to $111 million up from $103 million in Q4, but growth of 41% year over year and 8% quarter over quarter.
We remain confident in our long term subscription revenue growth outlook of $35 to 45%.
SaaS deferred revenue was $171 million up 40% year over year, and 9% quarter over quarter Q.
Q1 earnings per share was <unk> 20.
At the high end of our guidance entering the quarter.
Revenue on a geographic basis has been impacted by the timing of product shipments to our distributors with that in mind. The difference in performance between the Americas compared to EMEA and APAC is not a good indicator of demands bookings by geography is a better representation of end user demand to that point the <unk>.
<unk> reflected the highest growth up over 20% year over year.
<unk> grew mid single digits year over year, which is a solid performance considering that last year EMEA had an over 70% growth rates versus the prior year.
Finally, APAC bookings also grew mid single digits also a good performance considering the strength of last year's bookings.
The APAC region was also impacted by currency devaluations, which are making us dollar denominated products more expensive in region, particularly in Japan.
Product bookings grew mid to high single digits from the previous year with similar performance in our wired and wireless products campus switching growth outpaced overall product bookings growth for the quarter.
From a vertical standpoint.
Mix did not change meaningfully during the quarter with government and education accounting for roughly 40% of the total manufacturing at about 10% healthcare at about 10% and retail transportation and logistics also at about 10% services and subscription revenue of $91 4 million in Q1 was up.
11% year over year. This was largely driven by the strength of cloud subscriptions up 39% year over year total Q1 recurring revenue, including maintenance managed services and subscription was at $86 8 million or 29% of total company revenue on the strength of product revenue.
The growth of cloud subscription and service renewals drove the total deferred revenue to $424 million up 19% from the year ago quarter and 6% sequentially.
Our gross margin came in at 67, 6% up 60 basis points sequentially and down two eight percentage points from the year ago quarter, driven by lower product gross margin on a sequential.
Actual basis improvement in gross margin is attributed to an improvement in supply chain and freight costs and offset slightly by changes in the mix of products and services.
Services and subscription gross margin of 67, 5% grew three eight percentage points from the year ago quarter on higher subscription mix, but fell three two percentage points sequentially driven by higher professional services revenue and slight decline in maintenance <unk>.
Q1, operating expenses were $135 million up from $125 million in the year ago quarter.
$132 million in Q4, 22, reflecting higher R&D expenses and year over year increase in sales and marketing to support higher revenue growth.
The year over year increase in sales and marketing spend relates to the reintroduction of in person corporate events, we hosted in Q1.
Total operating expenses as a percentage of revenue overall dropped to 45, 4% all in all our operating margin was 12, 1% down from 13, 8% in the year ago quarter and up from nine 6% in Q4 of 'twenty two.
Net debt was reduced by $41 million sequentially to $73 2 million driven by the strong increase EBITDA as well as a reduction in operating working capital, resulting for the most part from strong collections.
Our cash conversion cycle dropped by eight days sequentially and now sits at 19 days.
<unk>, we made a principal repayment of $37 million to our term loan a.
Enabling us to reduce our covenant leverage ratio to less than 125 and in turn reduce the carrying interest rate on the low end by 50 basis points.
At the current three month LIBOR rates, the annual carrying interest rate on our debt will be approximately 5% to five 5% effective November 9th now turning to guidance our confidence in our outlook is further solidify by $555 million worth of product backlog exiting Q1 for <unk>.
Two we expect revenue to be in the range of $299 million to $309 million Q2 gross margin is anticipated to be in the range of 57 five to nine 5% Q2 operation operating expenses are expected to be in the range of $133 million to $138 million.
Q2 earnings are anticipated to be in the range of $28 million to $35 million or 21% to 26 cents per diluted share. We continue to expect that the reduction in expedited shipping fees combined with the full impact of our recent pricing actions will lead to a progressive recovery in gross margin throughout <unk>.
Full year 'twenty three.
For the year, we expect 10% to 15% revenue growth for the second half, we expect to cross the 60% gross margin threshold and achieve an operating margin in the mid teens with that I will now turn it over to the operator to begin the question and answer session.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your touched we ask that you limit yourself Im sorry.
Sorry, one question and one follow up feel free to get back in the queue. We will pause for a moment, while we compile the Q&A roster.
Our first question comes from Alex Henderson with Needham Your line is open.
Thanks, I'm going to break that a little bit because I wanted to get some clarification on some of the numbers, which are just pretty straightforward can you give us some guide on the interest line. Since you obviously have a lot of things moving around in there did you say the book to Bill was one three I'm.
I am getting 123, what I calculated.
Product looks to be on the one three Alex.
It was one three okay, but then the interest margin was one four so so the average is slightly higher.
I see I see.
And the interest line.
Hold on let me just bring that up it keeps moving with one month LIBOR rate.
You should you should assume about $5 million a quarter.
Does it.
Unlike where rate going up 75 basis points. This morning.
Hey, guys.
ECB did we.
We do the reset on a monthly basis. So so today's rate may not necessarily be the one that will happen. After November 9th but currently it would be $3 30, plus.
125 would be $455, we use the last one month LIBOR reset that we have.
Okay, if I could ask.
Couple of questions.
We're just technical details. The first one is I didn't hear any mention of pricing and I know pricing has gone up in the industry. I know you guys have increased price.
Can you talk about where you are in terms of actually getting the price in the numbers this quarter as well as where you expect.
Pricing to look like and one other clarification. You said you wanted your backlog would increase by year end.
Do you mean increase from the start of the fiscal year or do you mean increase from the $5 55.
Yes.
I'll jump in and then you can back me up here.
Alex we expect backlog to increase.
Each quarter throughout.
The remainder of our fiscal year. So we're expecting we're expecting increases in December March and June .
Perfect.
As it relates to pricing we.
We had a very modest and targeted price increase effective October one.
On the bookings side, we did see some some pull ins.
But it was much more muted than what we had last year. If you recall last year, we had a 12% price increase as of October one.
And that drove significant bookings remy referenced that over 70% growth in product bookings in EMEA, which.
We were really excited to see that we were able to grow organically on top of that kind of comparable.
So in general we.
We are in a we feel like we're in a strong position.
<unk> has announced price increases we remain under their umbrella.
And then we've seen our other competitors follow suit so.
We we like where we are in terms of seeing the price increase in numbers Youll.
Youll see the most recent price increase.
A small impact this quarter and then a larger impact in the following quarter Randy I don't know if you want to add anything to that no I was just going to add that with the exceptions of certain country, where currency devaluations have impacted all.
Ability for our customers to meet their budgets a price increase of holding Ed. So we're not we're not having to raise discounts to offset the price increase and so they are really translating into an improvement in the overall net selling price of the company.
So just to be clear in the quarter. The price benefit was low single digits and you expect it to be what by the fourth quarter of fiscal year.
There was no I mean, there was an impact this quarter of the price increase that we made on April one however, the impact of the October one price increase was not felt in the September quarter.
Clearly, but my point my question is what was the real impact of price increases in the quarter was at <unk>.
Low single digits contribution to your revenue growth or some other number low single low single digit coming from prior price increases is correct and you expect by the June quarter It will be.
5%, 6%, 8%, 1%.
What are your expectations for the realization of that when you talk about building backlog through the end of the year and alike.
Page count trends don't change it would be.
Low to mid single digit.
Low to mid single digit thank you.
Thanks, Alex.
One of them are far next question.
Our next question comes from Eric Martin Newsy with Lake Street Capital. Your line is open.
I'm going to assume that to me its Eric from Lake Street capital markets.
Just wanted to follow up on the geographic commentary that you gave you talked about bookings by Geo with the Americas being up 20% and then mid single digits for EMEA and APAC against a tough comp.
Where should we think about that for fiscal year 'twenty three given the revenue got it 10%, 15% how do you see the bookings growth across geographies for us by 2030.
Total bookings growth across all geographies and products services and subscription is expected to be in the high single digits.
Okay, and then combined with what's coming off the backlog, that's how we get to the revenue number.
Okay.
And then.
I would say, Eric we're not we're not expecting.
We're expecting to grow back backlog during the year. So in terms of how we get to our fiscal.
Our fiscal year growth.
Yes.
The expectation is that we are not reducing backlog, but we're growing.
Backlog.
I just wanted I just wanted to clarify that.
Yeah, Okay, and then as far as the relief and the gross margins.
We are seeing relief you've qualified more component suppliers, you've got a little bit of breathing room on the expedite fees, but what's really the.
I'm looking for what's the biggest contributor to the gross margin expansion as we go quarter by quarter.
Eric that would be the reduction in expedite fees.
Based on what we pay to our key suppliers of of semiconductors and components as well as a reduction of freight cost, which is still elevated today because most of the products that are produced out of China and Taiwan.
Shipped by air directly.
El Paso, which is our main hub. So the reduction of these two that are currently hurting gross margin is really what's going to drive the improvements overtime.
Got it thanks for taking my questions.
One of them one of them before our next question.
Our next question comes from Paul Silverstein with Cowen Your line is open.
Thanks, guys two questions.
One on macro.
So as these challenges from the numbers in your commentary, but I've got to ask Les.
The other day, we had.
Five in June approved with two very different messages and applause kits.
There was about cancellations delays, Joan so as to increase budget scrutiny.
Especially overseas in particular overseas are you not seeing any of that especially in light of FX and energy prices in Europe et cetera.
Or is something that we obviously, it's something that we keep a very close eye on and.
Yes.
Not seeing it.
We have a lot of different variables that we look at specifically as we look forward.
We look at.
Opportunities that we have in the funnel.
We're scrubbing those regularly.
We have feedback from our direct sellers and field and what they are rolling up and calling and.
As you are aware, we have an AI tool that sits on top of Salesforce. It comes up with a call. So we kind of have kind of three legs to our outlook.
And we're just not seeing it there's two things that are in play here.
One is is the resiliency of networking one way to offset inflation as productivity in <unk>.
And what's what's driving productivity our.
Improvements in.
And technology and all the digital transformation projects that you see today.
The glue to everything.
As the network and so we're not seeing networking initiatives being prioritized and in our backlog.
Sure.
Fact that we have a backlog of complicated networking systems.
Not commodity products.
We're not seeing we're not seeing the books and so thats why we say, it's a fraction of 1% because it truly is so weak.
If.
Enterprise customers are having to cut back spend.
We're not we're not seeing them prioritize networking, we're seeing other other items in the budget being being cut in front of networking. So that's one thing. The other thing is our relative size and we mentioned that we're taking share. The fact the matter is we are taking share against much larger players.
These small share gains for us in cloud what may be happening in the larger market. So.
Our ability to continue to drive bookings even in these these challenged markets like in the EMEA market or currency challenged markets in APAC.
We still see.
Healthy growth in bookings.
And some of that is going to be from market share gains.
And and the others as I mentioned is just the resiliency of these networking projects, which in our mind to become more strategic for enterprise customers.
It's hard to just push youre, not even saying we won't do to sales cycles.
No.
No no we're not I would say it's actually.
It's actually the opposite Paul we're seeing.
If anything and this goes back to supply chain. If anything we may see people that are anticipating lead times.
Okay, and and ordering early.
So that they can establish their position as it relates to supply chain.
So we're not we're not seeing it.
In our case, we're asking the questions we're all over it.
Obviously, given everything that's going on in the world and the news.
Expectations, So we're very sensitive to it.
I would say is we're just we're not seeing it we're not seeing it.
Is that fair.
Just a question.
Okay.
I assume the answer is no.
Has there been any communications view or anything that would <unk>.
<unk> got the supply chain constraints or keeping customers in line.
And that may be why you and others know.
Haven't seen any weakness relative to the macro again I assume.
Paul I think it's fair that that could be a factor.
So in the case of extreme theirs is the overall significance of.
Networking initiatives.
For our enterprise customers, which underlie.
All of their digital transformation and productivity and sort of.
It's all about how they're driving their business.
And so we're just we're not seeing that get the prioritize I think there is a supply chain element that you mentioned there is also an element of our story hangs together with our fabric.
Our cloud.
With our end to end enterprise solution and.
The recognition that extreme is getting in the marketplace. Today, we're getting we're seeing more opportunities and I think some of our larger competitors.
Are creating these opportunities.
Was that a disjointed vision of how to leverage cloud how to have the single pane of glass that single view of all your network elements end to end across the enterprise.
The orchestration of services from one cloud.
Future Proofing your investment and with the latest technology. We have we have the cleanest story out in the marketplace today, when you combine that with our fabric technology and and it's resonating and so we are.
We're taking share and we do have a different story and were getting more looks and I think some of that is.
We're the beneficiary of some of the issues out in the market with some of our larger competitors.
One last question on this.
Correct me, if I'm wrong historically.
When there were downturns, especially significant there on terms.
Customer behavior in that environment.
Sure David would be incumbent.
To switch vendors OEM.
Only in better environments, when there were more than willing buyer away from wherever they're going from what was HP Cisco forever.
I have that right.
Aye.
I'm not sure.
Yes, I'm not sure I can validate that for you Paul.
I think I think in this environment, what we're seeing is may be the opposite.
Their supply chain strategies and some of the larger players to pursue that are creating opportunities as I mentioned for us.
Especially our enterprise customers.
And then.
There is a lack of a cohesive solution for.
For our customers, where it's very expensive for them. So it's almost more expensive for them.
To stay with some of the legacy larger vendors.
And.
In a sense more risky because of the.
The lack of a cohesive end to end strategy, especially as it relates to cloud.
And.
That's something that's creating more opportunities for us rather than less so.
And that may be different than maybe what you saw in the traditional.
Recessionary type.
Or downturn scenario in the market.
Thanks, Tom.
One moment for our next question.
Yeah.
Our next question comes from Mike Chinn, especially with Rosenblatt Securities. Your line is open.
Great. Thanks.
So our guys really good report I mean, I don't see anything.
Not great here, except for I guess the gross.
James Bell being up sequentially.
Margins in the quarter and the guide, we're just very slightly less.
What we're looking for and I guess my question is is that more a function of the supply chain and expedite fees or is that more of a function of the mix shift to wireless and.
What do we think that thats going to look like in future quarters, particularly in the back half of the year.
Do we expect the mix shift.
Away from wireless or all of that.
The ground for a while.
I would say the latter because because the amount of expedite fees and the freight costs that we paid in the quarter were in line with our expectation that the shift to wireless was more pronounced than we expected entering the quarter and thats really what drives the difference between the 57 six.
We reported in the 58 that we were getting for at the start of the quarter.
And do we think the mix will change or.
Yes, I think that happened last quarter or two so is this kind of a two cornell.
The loosening of supply chain combined with.
The historical very high level of backlog for wireless products means that the 30 70, 30%, while as 70% wired is going to stay for the next few quarters. However.
Reason, we mentioned in our introductory comments that we feel confident we can cross the 60% gross margin Mark is that we now have visibility as to the reduction of expedite fees and freight costs. So although that mix is not going to change we do see progressive reduction in expedite fees and freight costs that will drive a higher gross margin.
Especially in the second half when we expected higher volumes.
Of shipments that lead to a better absorption of the fixed costs that are in our cost of goods sold.
And Rami Remi I can add one other variable here, which is.
If you recall a year ago, we did not have these direct relationships with secondary and tertiary component vendors and today, we do we meet regularly and we have confidence in what they are delivering.
Because they are delivering on what they say, they're going to deliver and they've given us.
Of the ramp.
When we don't have the direct commitment and we're not getting the shipments. We also have to go out in the secondary markets to find product and so that also leads to increased prices.
When we're having to go out and buy components in the secondary market.
So as we as we have and we see the commit from the secondary and tertiary component vendors step up this is what's giving us the confidence in the forecast at the same time it will reduce our reliance on secondary markets where were paying up.
The expedite fees that Remy is talking about as well as the freight components.
Okay great.
Hey.
I guess back on the macro you guys gave a very direct with a clear answer on particularly around Europe .
We're not seeing macro weakness.
I did mention in the prepared remarks about some I guess currency related weakness in Asia Pacific.
I guess is that.
At a macro effect that youre seeing and.
What do you think I mean, the solution to that is is this customer's willingness to pay or.
Expectations of the currency will change or is there any any thought of repricing any of the backlog if it gets worse.
Just your thoughts.
On those issues. Please.
Yes, I would say, Mike I would say, it's less of an issue with backlog, it's more of an issue with new bookings.
And in a timing issue on these important projects.
I'll reiterate that networking projects underpinning.
Really important initiatives and.
There's not really another alternative for them other than.
Other than a timing decision.
And in that market I will say, we have upgraded our team significantly we're excited about.
The team and new channel relationships that we have.
More than any other market.
In the World we have.
Our smallest markets there in that market so the opportunity.
To take share.
A small share base in that market can help us offset.
The reticence of certain buyers, particularly in Japan for example, where they see in a currency devaluation of 40% so.
Yes.
At a high level of Remy I don't know if you want to add anything to that.
No I just wanted to say that for deals that we deem to be strategic if the customer is struggling.
Basically to meet their budget given the currency devaluation. So a question for US we want to lead that deal or go ahead and grab it and so in certain specific deals that are strategic to us we're willing to be slightly more aggressive.
To meet the customer's budget requirements and take the deal off the street.
Okay Fantastic last last last question I know I'm going to ask the same members everybody else but.
Fiscal 'twenty four I guess, where we're still looking I just want to confirm first of all that we're still looking for acceleration in 2014% to 17% revenue growth but.
I guess, we would expect the book to bill to be below one that year because were released from so much backlog, but I don't know if you can see this far out but kind of sequentially year over year 24 orders versus 23 orders do you think that they could be flat to up or do you think that they'll be down if you didnt have any view there.
It's early on that.
Well, Mike I'll jump out first here.
Yes.
As I was mentioning before.
<unk>.
We have a.
A very strong focus on our funnel and we look bottoms up.
At each of the opportunities we do it by Geo, we do it by our regional directors.
And the regional directors.
And the details down to the account executive level.
We also have a separate partners forecast as.
As part of our quarterly business reviews with our partners. So all this comes together in all of this feed the opportunities that we see for the next 12 months that's really.
If you look at it and we're seeing very healthy demand organic bookings demand for.
For the next 12 months year over year based on what we see.
In our funnel.
So we see this continuing we don't see.
Yes.
Pulling back currently.
So as we.
Contemplate rolling into our fiscal 'twenty four.
You would expect we are expecting to see.
<unk> growth.
Demand in bookings.
Then the re leveling of book to Bill keep in mind.
We're not showing all of our revenue because were still building backlog. This year. So we're going to have the benefit of just re leveling of book to Bill to the current demand levels and then the release of backlog, which today is three quarters worth of backlog, but we think that will grow and so thats, what youre going to see.
C going into fiscal 'twenty, one that's our best guess today.
And so our expectation would be that you would see.
Book to Bill dropped below one, but thats going to be a significant driver of revenue growth.
And our current working assumption.
Mike is that top line will grow between 15 and 17% next year.
Alright.
Well congratulations on the results and the momentum it gave us a great work.
Thank you.
One moment for our next question.
Our next question comes from Dave Kang with B Riley Your line is open.
Hi, yes. Thank you good morning.
Just wanted to can you repeat the.
The backlog mix between wired versus wireless.
We have not split the backlog between wired and wireless Dave.
The comment I made the 30 70 was for revenue this quarter and just to give you an idea a year ago was $21 79, so on a year over year basis, there's been a dramatic shift in the wired to wireless revenue ratio, but we are not communicating disputes I did mentioned that the signet.
<unk> amount of backlog for <unk>.
But I didn't give a percentage.
Got it.
And then in your presentation I noticed that.
Regarding the verticals.
There are no plus minus science can you kind of go over those key verticals.
You are seeing and whether it's the pledge.
Just or somewhat equal.
Equal or.
Negative.
Yes, we havent seen and that's why I made the comment that I made about the split as a percentage of.
Total bookings as we haven't seen any dramatic shift so in other words, the large to the top four segments, which are governments education healthcare manufacturing retail transportation logistics still account for roughly the same percentage points, we did see a sequential improvement in our bookings in sport.
Entertainments and that really came off of the fact that we had a low quarter in Q4. So that we saw a significant recovery in there, but we're not seeing any any major trend the funding in education and government remains very healthy.
Healthcare business remains pretty healthy manufacturing, where you would see you would expect to see signs of a slowdown.
Because of the macro environment is actually behaved quite well on the <unk>.
Year over year increase in bookings in manufacturing was with double digits.
And then retail transportation logistics, which also could be sensitive to change in the macro environment.
It is also enjoying healthy trends.
Got it and then I may have missed this but did you talk about the supply chain impact on your margins I think.
Last quarter. It was about a 600 bps what was it this quarter.
So the comment I made about 600 bps is as I was comparing the purchase price variance that we pay which really year expedite fees and us going out to the secondary market as Ed mentioned and I was adding that with with the freight costs and comparing it to fiscal 'twenty one.
We're not really.
Breaking it down by quarter, but just to give you an indication purchase price variance, which really reflects those expedite fees.
<unk> reached an elevated amount of about $15 million per quarter.
We're back to 11, so there is a $4 million improvement there as far as freight costs are concerned.
Just roughly are expected to improve by $1 million in Q2 versus Q1. So if you think at the improvement that we're seeing today, it's about $5 million.
Overall versus the peak that we that we reach at one point in time, and then you can divide that $5 million by the revenue this quarter, a 297 seven to get a feel for the improvement that we're seeing in gross margin as a percentage of revenue.
Got it and my last question is on seasonality I mean.
I think in the past fiscal first quarter is seasonally weak versus the second quarter and yet you grew about 7% sequentially in the first quarter and you're only guiding to about 2% sequential growth in second quarter.
Just wondering how much of that is conservatism versus is there something else that we should.
We are missing.
And thats purely driven by supply chain.
We can read from my supply chain team does to what they are able to ship this quarter.
The services and subscription revenue as you can imagine is largely coming off the balance sheet from deferred revenue, that's sitting there and that 2% sequential growth that we're guiding for is based on these two factors and.
And we don't feel like we have been particularly conservative we're trying to be as accurate as possible.
Got it thank you.
One moment for our next question.
Our next question comes from Christian Schwab with Craig Hallum. Your line is open.
Hey, congrats on the great results so.
As we think about backlog.
When.
So is that going to normalize or or.
I know there are certain components.
Yes.
A different ones of the switch.
So just because one areas.
Silicon might be opening up others still or not.
Or are we going to run with a.
A bigger backlog.
<unk> business War.
Much more.
When do you I guess, what I'm really asking is what is backlog did normalize when does it go back to historical levels or do you believe.
Until we have full access to.
Or oversupply of semiconductor components.
That's not likely.
I appreciate it I'll, let Ed chime in as well because we're both very close to the topic, but we believe it's going to be.
26, when you really go back to normal and we would expect that backlog to be anywhere between $50 million to $100 million at that point in time, but based on what we see in the semiconductor industry with obviously new capacity being added but at the same time.
Some of the large semiconductor makers revising the plans. We're also see demand dropping in other industry segments that are heavy consumers of chipsets and competed with us and now see slower demand. The combination of these two factors tell us that it's going to be while before things fully go back to normal so.
Based on our delivery.
Delivery pads, we think it's really it takes two fiscal Europe .
Fiscal 'twenty three what's left at fiscal 2000 for fiscal 'twenty five and then maybe at the start of fiscal 2006, we dropped back to below $100 million Thats our current scenario.
Fantastic No. Other question. Thank you.
One moment for our next question.
Our next question is a follow up from Alex Henderson with Needham Your line is open.
Great. Thanks.
So in looking at the mix assumptions through through to the fourth quarter.
And thinking about your gross margins can you talk a little bit about the impact.
On gross margins of one in the fall of expedite fees and.
Costs associated with the <unk>.
The procurement.
To the mix to universal.
And the impact that that has versus your historical products, where I think the margins are quite a bit better and then third.
What kind of.
Improvements you're getting off of the redesign process.
How do we allocate between those.
Various factors the improvement in margins.
I'm not sure I want to get into that level level of.
Detail, but I'd say the combination of the factors that you mentioned, Alex should be driving an improvement in gross margins sequentially for products of.
About one to one five percentage points in Q2 versus Q1, and then Q3 versus Q2 again. These three factors combined together will drive an improvement of about two percentage points.
And then Q4 versus Q1, we're looking at roughly one percentage 0.1 factor that you have not mentioned.
We're also looking at because it did impact our gross margin in the quarter was the mix of professional services versus subscription.
The classic services by Classic service I mean maintenance in Q1 that drove our services gross margin down to 67 five versus 17, 7% in Q4 fiscal.
'twenty two we do expect the services and subscription gross margin to go back to.
268, 5% by Q4.
We will not see the same way to professional services and those were essentially related to MLB deployments.
So that actually was the second question I wanted to ask so I'm looking at the revenue growth rate guidance for FY 'twenty three can you.
Clearly as you're working some of these larger.
<unk> sales that does drive adoption of services and subscriptions. So can you break out a little bit.
Between the implied.
The implied growth.
And the product line versus the services line and that guidance assumption.
Yes, So we would expect as you saw both crew and I'm, combining services and subscriptions into one bucket, but both grew at around 11% I would expect that in Q2, we will see a higher growth for products and we will be closer to 10% than services and.
<unk>, which will be in the mid to high single digits.
And then in Q3.
We actually expect based on our current delivery plans the growth in services.
To be higher services and subscription should be higher than product and then Q4 is when we really see.
A step function improvements in supply chain, and then you're going to see a very strong growth in product, whereas our services and subscription growth will be close to 10%.
That's very helpful. And then so I guess in as we move out into 2000 and for the product would continue to be much higher based off of the fact that youre getting.
<unk> meaningful improvement and supply availability.
Alright logic, that's correct and then services and subscription continues to grow at a steady rate of.
Anywhere between 8% and 10% depending on the quarters.
Okay.
What are you factoring in in terms of Broadcom price increases I've heard that they're going to increase pricing in the January timeframe does that.
So up in.
In that quarter or does that show up.
With some delay how does how do we think about their price increases we're basically today, placing orders with broadcom a year in advance in order for us to secure the current pricing.
Okay. So you would be.
<unk> four <unk>.
<unk> amount of time than.
Because of that procure and advanced procurement, yes, okay, Thats really interesting I wouldn't have expected that.
The other question the other thing to mention is that.
In addition to list price and price increases there are expedite fees and.
One of the things that we see happening with Broadcom and some of this has to do with our relationship with them.
Some of the price increases will be mitigated by a reduction in expedite fees.
Alright, great.
The other question I had is.
Decommit comments, you made it sounded like decommit or declining, but still happening is that accurate.
<unk> have the Decommit basically stopped at this point.
Alex Deaconess or just.
It would be.
<unk>.
A normal part of the business.
These are one offs and I can tell you right now because of our scrutiny around this.
Each each and every day commit to the extent there is one guests guests a lot of scrutiny from us and there is there is no theres no consistency around it. So the example, I might give would be.
A government agency that has budget.
Can't get supply by the end of the year, it's use it or lose it.
They want to re prioritize and other spend so they might cancel and.
In order.
Sure.
And maybe that comes into the budget for the following year.
Based on that dynamic, but these are things that are not really supply chain I guess, you could say that supply chain related but.
Yes.
These are more one offs.
And so we're not really seeing a change in the one offs and they remain at a fraction of 1%.
Thanks.
Question on <unk> is related to customers or suppliers.
Im actually left the queue.
Okay.
Okay, and then move on to our last question is a follow up from.
One moment.
So a follow up question from Paul Silverstein with Cowen Your line is open.
And remember I apologize if I missed it but can you give us an update.
There are some relationship.
What youre seeing with respect to future revenue outlook incur revenue contribution from that product.
I will actually let Ed comment on that.
Yes.
Paul we have an excellent relationship.
With them.
With senior leadership.
And.
In Stockholm.
Yes.
We're in a very good position with that account.
<unk>.
In addition to C&I.
Which is really a function of <unk> rollouts from carriers and each of the carriers is kind of at their own stage of life cycle. So we are seeing.
We are seeing.
A couple of the larger carriers.
Move from proof of concept into deployment modes.
So thats were excited because were the sole source vendor for that application, which we expect to rollout.
Over the next five plus years.
We we are looking at other opportunities with Ericsson that I would say our longer term in nature.
<unk>.
We have new growth opportunities within that account.
The budget product in general.
I'll leave you referenced another relationship previously.
Directly with the specific carrier.
What's the current revenue run rate from that.
Potential going forward.
Aye.
I don't know, what we've disclosed Randy I'm going to rely on you for what we've what we've disclosed or communicated.
Around service provider.
And we have.
Two very significant relationships, but Paul that you're referencing.
And then we have other service provider customers.
I would say are less strategic but nonetheless fall into that service provider bucket.
We see it.
In terms of the others the direct service provider customer account.
We see a significant opportunity.
Not just with sell to and supporting.
What I would call their <unk> and <unk> back office as well as the carpeted enterprise and sell too we also partner.
With them and stadium deployments and we sell with them, but now we've just been approved.
For their enterprise teams to sell extreme retire quota.
Get paid commission.
And we have sellers on our side that are actively working with their sellers, which is a new.
New growth vector with that account so from the SP side, we see new opportunities with the with the Swedish company.
As well as new growth opportunities inside the large carrier in the U S.
Ed, we havent really communicated but we.
We did mentioned that in both of them were several tens of millions.
Bookings and I can say that the combination of these two is between 50 and $100 million in annual bookings.
Okay.
Thanks, guys.
Thanks, Paul.
And I'd like to turn the call back over to Ed for any closing remarks.
Yes.
Great questions. We appreciate <unk> participation in the call and.
The engagement.
With the analysts and people who are participating on the call. It was it was.
Obviously, a strong quarter for us at extreme.
We are.
It's been a cross functional effort across the board.
And really proud of.
The caliber of execution of all of our teams at extreme across the board as well as the partnership we have with our channel community. We've got a lot of momentum as we've said we're taking share.
And it's really a function today of us.
Releasing supply chain and we've got better visibility to that as we step through the year. So I'd say, we have more and more confidence in our outlook as we go forward. So as we say this there's never been a better time to be an extreme and that's true for our.
Our employees partners customers and I think it is also true for investors.
We encourage everybody to we have upcoming investor conferences, we encourage people to participate.
With DRAM Raymond James Oppenheimer in Cowen.
So we look forward to being with you lives and having the opportunity to share the story in more detail. Thanks, everybody and have a great day.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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