Extreme Networks, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Xtreme Network Q2 fiscal year 2021 financial results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touch-tone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Ms. Dan Kobler, so you may begin.

Thank you, Operator, and welcome to the Xtreme Network's second fiscal quarter 2021 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Xtreme Network's President and CEO, Ed Myercord, and CFO, Remy Thomas. We just distributed a press release and filed an 8K detailing Xtreme Network's preliminary financial results for the quarter. For your convenience, a copy of the press release, which includes our gap to non-gap reconciliations, is available in the investor relations section of our website at extremenetworks.com. I would like to remind you that during today's call, our discussion may include forward-looking statements about Xtreme Network's future, business, financial and operational results, growth expectations and strategies, the impact of the COVID-19 pandemic, the potential impact of any adjustments to the company's distributor rebate reserve, changes resulting from the completion of the quarter-end review process, new product introductions, operations, and the impact of tariffs. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements, as described in our risk factors in our 10-K report for the period ending June 30th, 2020, 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 except as required by law. Now, I will turn the call over to Xtreme Network's President and CEO, Ed Meyerpord.

Thank you, Stan, and thank you all for joining us this evening. I want to recognize and acknowledge the efforts of Xtreme employees and their families, our extended community of partners, customers, and our investors. The duration of the pandemic continues to impose challenges for everyone. It's remarkable the efforts that people have put forward and their commitment to Xtreme to help us emerge stronger than ever before as a company. Our preliminary Q2 results marked the third consecutive quarter of sequential growth and reflects increased customer demand and continued improvement of our team's execution across the board. I will let Remy address the potential one-time non-cash accounting adjustment to our financial statements. In my comments, I will refer to financial results as normalized to address the fact that our accounting adjustments have no impact on our business or our outlook. We outperformed our initial expectations for revenue and earnings, achieved record gross margin and operating profit, and hit double-digit operating margins two quarters ahead of our expectations for fiscal 21. These results drove strong cash flow, which we used to pay down $40 million of our debt and reduce our leverage. Focusing on our results, cloud has emerged as a critical lifeline for our customers' digital transformation efforts. which are accelerated by COVID-19. Schools, governments, healthcare organizations, and enterprises are all managing increasingly distributed networks, users, and activities. Students learning from home, the delivery of remote healthcare, and flexible work from home models are all here to stay. These trends are driving our new cloud subscription bookings, which grew 140% year over year in Q2. We believe the evolution of networking will continue to become more and more distributed in what we call the infinite enterprise. We are developing innovative next generation technologies to lead this next market transition. Our competitive differentiation is becoming more pronounced as we are gaining more share than our competitors in cloud-based networking. We currently manage nearly 1.5 million networking elements on our extreme cloud IQ platform making six straight quarters of sequential growth the number of customer accounts and managed devices. Digital transformation, and more specifically, network transformation, is driving our customers' ability to execute in the current environment. In addition, historically, the network has been an untapped resource when it comes to meaningful data that can influence and positively improve business and customer outcomes. One of the strongest differentiators of our platform is access to unlimited customer data for business and technical users to optimize network performance and deliver contextual user experiences. These data insights can be leveraged in real time and usage trends can be evaluated over prior periods to empower strategic decision making. We remain the only networking vendor to provide unlimited data to our cloud management subscribers delivering AI-driven networking insights required to compete in advance. Enterprises without a clear and realistic plan to support the evolving types of technologies, devices, and apps and people who connect to the network will fall behind. We provide our customers the tools and resources they will need to move on from high-cost and complex infrastructure. With our simple, secure, cloud-driven networking solution, We make it easier for them to take the next steps in their digital transformation journeys. Xtreme stands alone in providing unprecedented choice to manage edge-to-edge data center networks privately, on-prem, or in any major public cloud. Enterprise customers are all embracing a hybrid cloud environment with different applications running in different public clouds, private clouds, or on-prem. Our ability to support network connections and to manage seamlessly in all cloud environments provides unmatched flexibility and effortless experiences. We continually reinvent ourselves to challenge complexity and convention in our quest to make the customer experience effortless. It's how we do business. That's why we also provide industry-leading customer support and flexible as-a-service subscription options. Our simplified portable cloud licensing and universal hardware platforms can adapt to new use cases in the push of a button, providing much needed flexibility and investment protection. Our sales growth is being driven by our go-to-market transformation. Our new sales leadership is driving results, yielding more opportunities through the channel. By making our channel strategy the main engine for growth, which increases customer focus and opportunity management, and by cloudifying refreshing our portfolio, we have transformed our business. We created more feet on the street with our channel partners and put more trained sellers on the ground. We flipped the script on funnel creation with cloud channel contributing over two and a half times more pipeline leads creation than in fiscal 20. This is a fundamental and structural change in our business that we believe will make our growth more sustainable. Our strategic sellers are thus more focused on larger and more strategic opportunities driving business with new and existing customers. Thirty-nine customers spent over a million with Xtreme in Q2, about twice the usual number. We expect this growth to spill over into Q3 as we expect better than usual seasonality in the March quarter. The automation of our business has helped us drive sales productivity with initiatives like channel self-service. We can add channel partners who transact with us seamlessly, and we are rapidly growing the number of transactions done through self-service. Our distributors and partners are embracing our ability to improve business velocity and deliver effortless experience. The next steps in our cloud evolution will be to focus on customer success and drive user adoption and the number of devices on our extreme cloud IQ platform. The journey of cloud networking for many of our existing customers started with wireless LAN, but with our universal platform for switching, the evolution of our management tools, and in the future, our ability to manage third-party devices, we will fill out our vision of the infinite enterprise. In summary, pivoting to investing in innovation and an effortless experience for employees and customers is now paying dividends and will continue to drive growth going forward. We were especially pleased with the strong sequential growth by our MIA business this quarter. On a bookings basis, both our Americas and international segments are now back to fiscal 20 levels in Q2, and we expect growth to accelerate into the second half of our fiscal year. Q2 also marks the return to sequential growth in wireless on 14% quarter-over-quarter unit shipment growth. We expect wireless to once again fuel our growth in the second half of fiscal 21 as sports venue and retail verticals begin to recover further over the next several quarters. Our new wired products are seeing increased demand in the marketplace with strong new product revenue of recently released switches such as the 5520 universal platform. Our new products are both more competitive and deliver a higher gross margin to extremes. We have a wide range of new product introductions set for the next calendar year to expand our universal product platform with cloud native management for switches on a truly unified cloud platform. We also saw early ordering from some of our largest customers that are global leaders in a service provider ecosystem for 5G. 5G is a substantial growth opportunity for Xtreme because of the highly focused investments we have made. First, we're in the early stages of rolling out a next generation packet broker solution for one of the world's largest service providers. Second, we're co-developing an embedded technology into the full stack of a 5G NFDI solution with one of the largest telecom equipment vendors. We expect to see growth begin to ramp in the second half of fiscal 21. We've created a global go-to-market sales and services team as well as a focused R&D team of engineers to specifically address this massive 5G opportunity. In addition to our existing customers, we will also bring our solutions to other large service providers around the world. Heading into the second half of fiscal 21, we're on plan to achieve double-digit year-over-year revenue growth, record gross margins, and double-digit operating margins. Our funnel remains strong, and our visibility continues to improve as we emerge as a stronger, more competitive company and take share. With that, I'll turn the call over to our CFO, Remy Thomas. Remy Thomas Thanks, Ed.