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spk10: Thank you for standing by, and welcome to the Xtreme Network's Q3 fiscal year 2021 financial results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, press star then 0 to reach an operator. I'm now going to hand the call over to Stan Kubler. Please go ahead.
spk03: Thank you, Operator, and good morning, good afternoon, and welcome to the Xtreme Network's third 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 financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations, is available in the investor relations section of our website at extremenetworks.com. I'd like to remind you that during today's call, our discussion may include forward-looking statements about Extreme Networks, financial and operational results, growth expectations and strategies, the impact of the COVID pandemic, challenges in our supply chain, the impact of tariffs, and digital transformation initiatives. 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, and any additional risk factors in subsequent 10-Q filings. Any forward-looking statements made on this call may 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's President and CEO, Ed Myercord. Ed, go ahead.
spk05: I was on mute. Thank you, Stan, and thank you all for joining us this morning. Q3 marks a full year since the world and Xtreme began to feel the significant effects of COVID. I want to recognize and acknowledge the truly remarkable efforts of Xtreme employees and their families and our extended community of partners, customers, and investors in getting through the past year. And we're very focused on our teams and countries currently being hard hit by the virus, especially India, where we have many of our employees. Fortunately, Xtreme has emerged in a stronger competitive position with higher gross and operating margins and two substantial growth factors. our cloud-driven enterprise business, and 5G network infrastructure opportunities, which are gaining momentum. In addition, as a company, we have increased our focus on corporate social responsibility with marked progress in diversity and inclusion, sustainability, and our philanthropic initiatives to bridge the digital divide. Our employees have fully embraced and taken the lead on important initiatives, such as the rapid expansion and success of our diverse employee communities the growth of our highly successful Extreme Academy educational platform, and our upcoming Global Day of Giving on May 6th. The strength of our Q3 results is highlighted by a fourth consecutive quarter of sequential growth, defying the traditional seasonality of our business. And we also delivered 21% year-over-year growth, driven by increased customer demand and continued improvement of our team's execution. To that end, 26 customers spent over a million dollars with Xtreme in Q3. Coming out of COVID, we are seeing significant government stimulus spending initiatives for projects around the globe that will fuel growth at Xtreme. With over a third of our business focused on state, local government education, we expect to benefit from new programs such as the American Rescue Plan in the U.S., Digital Pact in Germany, Giga Schools in Japan, among others. This quarter also marked the completion of the E-rate season in the U.S., where our filings were up 35% year-over-year, and we crossed the 100 million mark for the first time ever. Enterprise customers around the world are planning for a more flexible work environment and what that means for supporting their customers and employees. It's universally accepted that the new edge of enterprise networks will become permanently more distributed and what we call the infinite enterprise. As customers contemplate the increased complexity of delivering secure and consistent user experiences across a vastly distributed enterprise, cloud is the logical platform to challenge complexity. As networks are reimagined, Xtreme is more relevant today than ever before. We have true technology differentiation, and this creates more at-bats for us. and we're advancing further and further and winning more opportunities given the strength of our competitive solutions. We are building a fast-growing cloud-native software subscription business at Xtreme with our high-growth, high-margin Xtreme Cloud IQ platform, what we call XIQ. We have a unique opportunity to rapidly expand the number of devices managed in our cloud as well as increasing the number of cloud-native services we introduce through XIQ, and this is our enterprise cloud strategy. XIQ is the only cloud networking platform with cloud choice, unlimited data, and ISO-certified security. In addition, we've made significant progress in developing our next-generation AI capabilities in XIQ that we refer to as explainable AI. Simply put, we explain our alerts. Current solutions in the market generate unnecessary alarms and are creating alarm fatigue with enterprise customers. Our alerts will be both explainable and 99.9% false alarm free. It has been in select customer environments for a year and will soon be launched under our co-pilot license for XIQ, along with enhancements for AI and ML Insights for our entire portfolio. This technology will go into public beta in June and will be available to every extreme user. Uptake of our cloud subscription services remains strong. New cloud subscription bookings grew 122% year-over-year in Q3, marking the third consecutive quarter new cloud bookings more than doubled year-over-year. As the second largest cloud-based networking vendor, we currently manage 1.6 million devices on XIQ. This marks seven straight quarters of rapid growth in customer accounts and managed devices. In early Q4, we made key leadership hires in our new cloud success team and reorganized our services capabilities to drive user adoption and continue the rapid growth in the number of devices on XIQ. The speed of our cloud innovation is accelerating. In addition to co-pilot, we are making inroads into three key areas in the near term. First, we offer the simplest licensing construct in the industry. Our pilot license for XIQ includes management, location, guest portal, wireless security, personal pre-shared keys, and IoT applications for one price for all devices. Now we are unifying our network access control, or NAC, product portfolio with the same approach. Whether customers consume NAC in the cloud or on-prem, they can buy under one simple license. This is the best value solution on the market for NAC. Second, we have upgraded 20% of our portfolio to universal hardware, and we're on the path to refresh 90% of our portfolio by December. The launch of our 5520 universal switch was the most successful launch we've had in recent history. In this quarter, we are introducing our 5420 universal platform focused on the volume tier of the market. So we are seeing an even higher unit volume launch. The universal series brings native cloud management through XIQ and the latest generation chipset from Broadcom with a brand new ASIC and the highest power output PoE ports to run IoT devices. Our universal hardware puts us in a leading position to support the growth in IoT with a simple plug and play connection. And finally, it's no longer just enough to have an open API in today's connected world. APIs need to be high fidelity and operate in real time. To that end, our latest generation open API framework will enable high fidelity translation and near real-time ecosystem integration from extreme products and tools. Our framework is seven to ten times faster than our competitors' traditional RESTful APIs currently in the market. The automation of our business continues to help us drive sales productivity with initiatives such as channel self-service, touchless quoting, and provisioning. Sales automation has become a force multiplier and is helping us onboard new partners, grow our customer base, and increase transaction volume. In our service provider business, our expertise in cloud technologies puts us in a great position to innovate with our cloud-native infrastructure solutions for 5G. Next-generation networks are being developed on a more distributed architecture using principles we've developed and our cloud-native enterprise business. 5G providers are aggressively moving in this direction. This gives us increased confidence in our growth plan. Our solution is being actively tested by large service providers around the world, and we have clear visibility to the ramp in sales. We're also hitting all other milestones in our 5G product development related to our packet broker technology. We have an exciting product launch coming up this summer, built on the latest generation barefoot Intel technology. We'll talk more about it at our Connect user conference in May, where we'll reveal important industry-leading technology advancements. Finally, we continue to deliver the highest quality customer and partner experience in the industry. In Q3, we hit record all-time customer satisfaction scores. Customers like working with Xtreme because of our focus, level of engagement, our partnering approach, and the fact that we don't outsource. We remain committed to this higher-tier service delivery differentiation. Heading into Q4, we're on plan to achieve double-digit year-over-year revenue growth, over 60 percent gross margins, and rising double-digit operating margins. Our funnel of opportunities remains strong, and our visibility continues to improve as we emerge as a stronger and more competitive company and take share. Importantly, we have all the right players in place to drive future growth and execute our operating plans. We expect our momentum to continue beyond fiscal 21 and realize a level of organic growth we have not witnessed for many years. And with that, I'll turn the call over to our CFO, Remy Thomas.
spk04: Thanks, Ed. As Ed noted, we had a very strong quarter and executed well across the board. Total revenue of $253.4 million grew 21% year-over-year and 5% quarter-over-quarter. The success of our XIQ solution fueled a sharp increase in cloud native platforms and drove 29% year-over-year and 6% quarter-over-quarter product revenue growth. Services revenue grew 6% year-over-year and 1% quarter-over-quarter to an all-time high of $77 million. Our cloud business once again exceeded our expectations. New cloud subscription bookings grew 122% year-over-year, far exceeding plan. Our total cloud managed subscription business, including renewals, was approximately $80 million on an annualized bookings run rate and over $60 million on an annualized revenue run rate exiting Q3. Our recurring revenue, which includes hardware and software support, managed services, and subscriptions, was flat sequentially at $74 million, but accounted for 29% of total revenue versus 31% in Q2 due to the sequential uptick in product revenue. Non-GAAP earnings per share was $0.16, up from a loss of $0.09 in the year-ago quarter and up from $0.13 last quarter. The strong improvement in our bottom line, both compared to the year-ago period and to Q2, was once again the result of higher revenue combined with tight control over our costs and expenses. Total product revenue was $176.3 million, and our product book-to-bill ratio was approximately 106. Wide revenue grew 26% from the year ago and 8% sequentially last. led by strength in edge and campus switching, while less revenue continued to recover, highlighted by growth of 37% from a year-ago quarter and 3% quarter-over-quarter. Total services revenue reached a record $77.1 million, up 6% from the year-ago quarter and 1% sequentially, largely driven by cloud subscriptions. Our total services book-to-bill ratio was 114, fueled by the favorable seasonality of service renewals this quarter. The growth of cloud subscription and services renewals resulted in deferred revenue of $318.4 million, up 17% from $271.7 million in the year-ago quarter, and up 3% from $309.1 million in Q2. This will help sustain our recurring services and subscription revenue growth going forward. From a vertical standpoint, the highest sequential growth came, as expected, from sports and entertainment, which recovered to a more normalized 5% to 7% of total bookings this quarter, boosted by the kickoff of our MLB Stadium business. Retail also recovered to over 5% of bookings and was up in excess of 20%. both on a year-over-year and sequential basis. Finally, the momentum in the service provider business continues to improve with solid year-over-year and sequential increases in bookings. Areas that had recovered earlier, such as manufacturing, healthcare, transportation, logistics, experienced normal March quarter seasonality. Our non-GAAP gross margin continued to improve both year-over-year and sequentially to 61.5%, largely attributable to our product gross margin, up 90 basis points, whereas our services gross margin edged up 10 basis points. Factors of improved product gross margin were higher volume, a greater mix of new products carrying higher margins, lower excess and obsolete charges resulting from the reduction in inventories of both finished goods and raw materials, and finally, lower tariff costs. These drivers were partially upset by an increase in freight and component costs. Q3 non-GAAP operating expenses were $127.3 million, up from $122.9 million in Q2, due to higher sales and marketing-related costs, while R&D and G&A costs remained steady. The net result of faster top-line growth compared to cost and expenses was a non-GAAP Q3 operating margin of 11.3%, up 16.3 percentage points from the year-ago quarter, and 90 basis points sequentially. The recovery in operating profits, combined with the good management of operating working capital, resulted in Q3 operating cash flow of $24.7 million and free cash flow of $20.4 million. We ended Q3 with $203 million in cash and equivalents compared to $184 million at the end of Q2. Our net debt decreased to $148 million down from $172 million in Q2. The combination of improved operating performance and deleveraging activity put us in compliance with our debt covenants based on our leverage and fixed cost ratios as of March 31st. one quarter ahead of expectations. We expect our interest expense to decrease by 175 basis points, or $1.5 million per quarter going forward, with a $1 million benefit expected in Q4 fiscal 21. Our cash conversion cycle reached historically low levels of 31 days, down 13 days versus Q2, and 28 days versus a year-ago quarter, mostly driven by a substantial decrease in our days of inventory. Now turning to guidance, I'd like to mention that demand is currently outstripping supply for certain products such as our new universal platform as we grapple with product constraints in our supply chain resulting from chipsets and other industry-wide component shortages. We're actively managing through these challenges and our strategic relationship with Broadcom is helping us in this regard. With that in mind, we still expect strong Q4 seasonality and expect revenue to be in the range of $260 to $217 million, following a better-than-seasonal quarter in Q3. Q4 GAAP gross margin is anticipated to be in the range of 57.8 to 58.9%, and non-GAAP gross margin in the range of 60.5 to 61.5%. Our non-GAAP gross margin outlook reflects increased volumes and a greater mix of higher-margin new products, offset by supply chain product constraints that are resulting in increased components and transportation costs. Q4 GAAP operating expenses are expected to be in the range of $141 to $143 million and non-GAAP OPEX in the range of $131 to $133 million. The sequential increase in OPEX is primarily related to higher sales commissions and other sales and marketing initiatives and events tied to our higher growth initiatives. Q4 GAAP earnings are expected to be in the range of $2.6 to $9.2 million, or $0.02 to $0.07 per share. Non-GAAP net income is expected to be in the range of $21 to $26.2 million, or $0.16 to $0.20 per diluted share. In Q4, we expect average shares outstanding to be approximately $131.1 million on both a GAAP and a non-GAAP basis. With that, I will now turn it over to the operator to begin the question and answer session.
spk10: As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Again, that's star 1 to ask a question. Our first question comes from Sameek Chatterjee with JPMorgan. Your line is open.
spk02: Oh, great. Thank you. Thanks for taking the question. I guess I just wanted to start with a broader question here about the recovery you're seeing with your customers in terms of spending, because I think with the guide that you have for revenue in June, which is 262 to 270, you're back at the December 2019 revenue levels that we had seen pre-pandemic. So how should we think about when does the market or when do your revenue patterns return to normal seasonality from here on? I know you talked about very strong organic growth outlook that you haven't seen in the more recent years, but is most of the pent-up demand or catch-up spending done and we return to a most normal seasonal pattern from here on, or Is there more to come in terms of pent-up demand as well as the traction of the portfolio that helps you remain above seasonal level patterns from here on? And I have a follow-up as well. Thank you.
spk05: Why don't I start off and then, Remy, you can jump in. As you know, we've had a sequential increase, and a lot of that has been a factor of us coming out of COVID where we were – it was a year ago when – You know, we had the first impact to a quarter. Yeah, I think that, you know, what we're seeing is so far as cloud and cloud growth, we're seeing the momentum continue. And I'd say that the, you know, the growth of our cloud and that is a catalyst for revenue, overall revenue growth, because cloud does pull product with it. I feel that that would be less seasonal than what we've had in the traditional business. But as far as our industry verticals and the spend cycles, and then the spend cycles for different theaters, i.e. international with heavy spending in the December quarter, America's heavy spend with our fiscal year in Americas, I would expect to see some of that seasonality resume. We mentioned throughout the pandemic we've had very strong government, state, local, Education spending, that's continuing. And with stimulus spending, we see that increasing. So how that spending is unlocked and the timing of those dollars and then how they get consumed and then put to work may have an impact on seasonality as well. We've had a very strong E-rate season. And with cloud, we have a very compelling value proposition for that segment of the market. And, you know, we see growth and tailwinds there for the next couple of years plus. Anything to add, Remy?
spk04: Not yet. I'd say that on the product side, we're now back with all cylinders running. The two areas that had not picked up were obviously sports and entertainment and sports. and retail. And as I mentioned in my prepared remarks, they're picking up. So going forward, as we enter fiscal 22, you would expect the product revenue to show patterns that are close to what we've seen in the past with a weaker Q1, weaker Q3, and strong Q2 and Q4. However, to your point, Ed, and as I mentioned during the call, we've got $318 million worth of deferred revenue and we're building more and more as our subscription bookings continue to grow in excess of 100%. And so the timing of the recognition of that revenue coming from cloud subscription may mean that the overall revenue of the company will show patterns that are slightly different from the one that you saw pre-COVID.
spk02: Okay, got it. And then I guess for my follow-up, Rami, it was more for you. Gross margins, you've improved substantially year over year, but I think you came in towards the lower end, what you guided for March, and you're guiding, if I'm right, to a modest deceleration from the March levels to the June quarter. Is that entirely being driven by the elevated freight cost, or is there any mixed impact there? If it's driven by freight cost, should we assume that you can get back to this 62%, high 61%, 62% as soon as the freight cost moderates?
spk04: So it's a combination of freight costs, but also increased component costs as a result of the shortage of components. And so the semiconductor suppliers, all four of the ones that we use are raising their prices. We expect that we'll go back to normal, but we think it's going to take about nine to 12 months. to basically clear out the component shortages. And so you should be seeing this impact on our gross margin for the next maybe three quarters. And we'll obviously continue to try and offset it with a change in the mix, with more cloud revenue, and with the introduction of new products that carry higher margins. Great. Thank you.
spk02: Thanks for taking my questions.
spk10: As a reminder, we ask that you limit yourself to one question and one follow-up. Our next question comes from Eric Martin Newsy with Lake Street. Your line is open.
spk07: Just curious, if you're seeing anything different in the education vertical regarding the procurement cycle, we're coming up on their new fiscal year. They align their fiscal year with your own. Seeing anything different there in the behaviors, the appetite in education?
spk05: Uh, Eric, you know, you know, we're not, I mean, the big, the, the, there's, um, there's a lot of funding that's available for us. Um, and I mentioned digital pact in Germany, uh, giga schools in Japan and, um, and, and obviously, you know, E-rate and now, um, new funding initiatives, stimulus spending, uh, as far as COVID response is concerned. So, um, On our end, we're seeing strength in that business, and we see tailwinds from these initiatives coming into play over the next few years. And I think that maybe the traditional way of thinking about seasonality for education is probably going to change a bit as people take advantage of the funding that's available to them. So we've seen just consistent spend you know, in all four quarters.
spk07: Okay. And then on the, just the overall growth rate, looking at the Q3 print and the Q4 guide, we're coming in at about a 5% growth rate. Now, most people would have anticipated fiscal 21 for you guys would be, you know, you got essentially easy comps because of COVID, but I understand that you still got a So got to execute. But as we look out to FY22 and beyond, does that growth rate, is there the potential for that to accelerate in FY22? Do you expect it to moderate? What should we think about in the out year?
spk05: Yeah, Eric, we talked about, you know, overall, if you look at the market, you know, and if you look at spending, you know, what happened, you know, when COVID hit, the spending on peripherals, you notebook spending, screens, hardware to support remote learning, if you will, as everyone went remote, now we're seeing an increase in that infrastructure on the networking side. So analysts are calling for overall enterprise network spending to be higher than normal and to push up kind of over that 5% level. We're taking share, and we're also in the high-growth cloud segment of the market, so we're expecting to grow higher than that. And I know that in our investor day, we pointed to high single-digit growth rates, and we believe that those growth rates are sustainable going beyond the end of fiscal 21, and that hasn't changed.
spk07: I understand. Congrats on the quarter and the outlook. Thanks for taking my question.
spk05: Thanks, Eric.
spk10: Our next question comes from Dave Kang with B Raleigh. Your line is open.
spk06: Yes, good morning. My first question is regarding the chip situation. So how much are you leaving money on the table because of the chip situation for the fiscal fourth quarter?
spk05: Well, Dave, what we've done is we have seen an increase in product constraints, and we factored that into our outlook. So it is having an impact we're seeing higher than normal, but what I would say is our teams have done an excellent job aggressively managing through this compared to other vendors that are out there. We've nurtured and developed a very strategic relationship with Broadcom, and they have been working with us to support the business. And so I think the level of product constraints that may be prevalent out there in the industry are probably a little less for us, given the relationship that we have on that key component, i.e. the Broadcom chips, as well as our teams working very aggressively to manage around the constraints that we're seeing. So We've got growth built into Q4. We're still showing solid double-digit year-over-year growth that Q4 quarter. We think that product constraints will ease for us going into our fiscal first quarter. And I would say Q4, we built it into our forecast, and we would expect the product constraints to be tightest in that quarter relative to quarters beyond that.
spk06: Got it. Thank you. My next question is regarding 5G. Are we still looking at $20 million for fiscal 22 and any new customers in the pipeline?
spk05: So, yes. At this point, you know, we're not changing our outlook for 5G. We see 5G really kicking in, you know, in our fiscal 22 pipeline. we've had many encouraging developments on that front. So we're working with a service provider vendor, a global service provider vendor, and we're part of their full solution stack. They have seen the adoption of cloud-native infrastructure services, which is the platform that we're supporting, take off and move well ahead of schedule. So from that standpoint, we're seeing a larger number of service providers adopting this platform than was expected, and that's giving us a lot of confidence in that number. In terms of the actual ramp and bottoms-up ramp by service provider and how that plays out over the course of fiscal 22, I know at the end of the year we'll provide better guidance to that. We're GAing our solution for packet broker this quarter. It's happening towards the very end of the quarter. and we're expecting that to ramp up in fiscal 22 as well. So I'd say we feel extremely confident in the $20 million number based on everything that we're seeing on the cloud-native infrastructure side as well as packet broker, where the demand and I would say the timing of demand has been shifting to our favor. Got it. Thank you.
spk10: Our next question comes from Alex Henderson with Needham. Your line is open.
spk08: Thank you. I was hoping you could talk about the supply constraints in the context of the guide. If you are supply constrained on components, is it possible for you to beat the high end of the guide, or does the – the constraints essentially gate any upside so that the high end is configured based off of the degree to which your components allow you to generate revenues? Or alternatively, is there a mechanic around mix that would allow you to see an upside to the high end of the guide if the demand comes in in, say, software or things of that sort? Can you just talk to the sensitivity to the components constraints relative to the guidance band?
spk05: Why don't I start off and then, Remy, you can chime in. Thanks for the question, Alex. Yeah, so it's a very dynamic situation, Alex. And as I mentioned before, Broadcom has been a great partner working with us and working through expediting orders, their timeline got shifted out. And so they then, that then requires us to expedite orders, and then they work with us to try to get as much as they can, you know, into the quarter, and they've been a great partner. So depending on how that works out, you know, we'll have an impact on what will be shippable. You know, I would say, you know, with our range, you know, I don't think we're constrained on the high end of our range here because of product constraints. It has been built into our guide, but I would say it's not a ceiling. To your question, it's not a hard ceiling. The way that it plays out is that as we have to expedite orders and we're trying to get in front of the line, that means it's more expensive, so we have to pay fees. And as Remy mentioned, it means that as components come in, we don't have as much time as much lead time as we would normally have. So we have, from a freight perspective, increased transportation expenses because most of our product will be coming via air versus a combination of air and sea. Remy, do you want to add anything to that?
spk04: No, I think you described it really well. I would just say that it is possible if all stars aligned for us to ship more, but what that would mean is the mix between product and services would be different, Alex, and therefore you should be seeing a different profile to the gross margin if we're able to ship more than 270. By definition, it will be coming from product, and so that will have an influence on gross margin, to Ed's point about shipments via air, et cetera.
spk08: I think... Could you go back to the recurring revenue being flat? I'm a little puzzled by that, given the service book to build, the product book to build, both above one and strength and cloud orders, which I would think would be subscription-oriented, and strength and software, which is subscription-oriented. So why is the recurring flat again? I'm not sure I understand the mechanics behind it.
spk04: If you recall, Alex, I'll take this one. When pre-pandemic recurring revenue, which again included support for hardware and software, on-prem software, as well as managed services and the bit of subscription that we did when we first consolidated Arrowhive in Q1 of fiscal 20, that was 25%. It shot way up to 32% because our product revenue increased. fell the most in the March of fiscal 20 quarter as the impact of COVID. So we saw literally a seven-point increase in our recurring revenue because that recurring revenue, by definition, did not get impacted by COVID, and our product revenue went way down. Today, we're seeing every quarter the waterfall on that deferred revenue that I talked about, that $318 million, which is a combination of hardware and software support and a growing part of that is subscription now, that waterfall means that you will see that recurring revenue, which is currently at $74 million, increase quarter after quarter after quarter based on the timing of the revenue recognition. But as far as Q3 was concerned, You know, the timing of recognition meant that that revenue was $74 million. And because we saw this significant recovery in product revenue, which by definition we don't consider to be recurring, that explains why we went back from 31% to 29%. We still feel very confident looking at our three- to five-year outlook. that that recurring revenue will go up in time to get to 35%. But in the short term, what's driving this is really the strong recovery of product, which is stronger than what we had expected a few quarters back.
spk08: So effectively, it's a trailing indicator because of what happened in the prior two, three, four quarters.
spk04: Yeah. Which is why in my prepared remarks, I really point out to the deferred revenue at $318 million on the balance sheet. That's the highest deferred revenue in the history of the company.
spk08: I get it. I understand. Thank you very much.
spk10: As a reminder, to ask a question, please press star then 1. Our next question comes from Eric Seppager with J&P. Your line is open.
spk01: Yeah, thanks for taking the question. On the components, I'm curious, how was the shortages during the third quarter compared to the second quarter? Did they get tighter? Because it does sound like it's getting tighter in the fourth quarter. Has it been progressively getting worse?
spk05: Hi, Eric, and thank you for the question. Yeah, I would say that the – The tightest quarter for us would be the quarter that we're in now, our fiscal Q4. So we didn't really see. We saw some constraints building in Q2. I'd say those constraints definitely increased into Q3, and our projection for constraints is highest in Q4. And as I mentioned before, our teams have been very aggressive. We've also gotten more aggressive in ordering early as far as buffer stock. to mitigate, you know, the effects. And so, we believe we'll start to see relief in our fiscal first quarter. So, you know, to answer your question, I would say it's tightest this quarter. We've factored that into our revenue guide, and then we've taken that into consideration for gross margin. And then we would expect to see this loosen as we go forward. As Remy mentioned, we do see the the supply chain constraints, you know, carrying for nine to 12 months, especially as far as our primary chip vendors and chip sets are concerned. Um, but we've been very aggressive getting in front of it.
spk01: Okay. And then, um, How sustainable is the growth that you have in your cloud bookings? It's been growing to triple digits for a bit here. Is that going to change quickly, or do you think that you can sustain that kind of growth for a period here?
spk05: There are a few things at play, Eric. First of all, I'll just say, as we roll into the fourth quarter, we see the sustained growth rate. So as we are wrapping up the month of April, we continue to see very strong cloud bookings. And then as far as our renewal rates in cloud, we're seeing improvements and movement there, which would be helpful for us. The other thing that we talked about is that we've got opportunities for our existing base to move over. And we talked about our NAC product, and we also previously talked about Extreme Management Center. And if you look at our existing base of customers, we have a lot of customers who are using our network management software on premise. And what we're doing is making it very easy to migrate into the cloud and to sell cloud subscriptions. And we're giving them a lot of value for doing that if you look at what we include in our XIQ cloud license. So we have a large opportunity over the next 12, 18 months to migrate a significant number of devices into XIQ from our existing customer base. And then we have other migrations on the wireless side where we have non-cloud wireless customers that want to move into the cloud. So there are, for the next 12 to 18 months, we have unusual growth catalysts in our cloud because of our ability to migrate these customers. I mentioned our XMC management. Now we're rolling out and we're making it seamless for NAC. We're going to be able to offer that NAC solution. And then this time next year, we'll start billing for that co-pilot software solution as well, which could provide another catalyst for us. We mentioned multi-domain cloud and the fact that we are working with other companies with the potential to host and manage, if you will, other company devices in our cloud. I would expect this time next year that we'll have several announcements that would provide a new growth vector for cloud and devices in cloud as we look at multi-domain and the ability to add non-extreme devices into the cloud.
spk01: Very good. Thank you. Thanks, Eric.
spk10: Our next question comes from Liz Pate with Cohen and Company. Your line is open.
spk09: Is it possible to quantify how the supply constraints are impacting your 4Q outlook and how much revenue you think you're leaving on the table or pushed out to later quarters?
spk05: Thanks, Liz. I would say there's a revenue impact, and then there's a gross margin impact. And I think that, Remy, you can chime in, but what I would say is from a revenue perspective, you've seen our book-to-bill number greater than one, and I think you could expect to see that in this quarter as well. And then as far as the impact on gross margin, I think we would attribute the delta from our guide to where the street was guiding to where we're guiding today. I think we would point that to the higher component costs and transportation costs. Remy, do you want to add anything to that?
spk04: Yeah, no, I don't want to give a specific number, but I would say that if I look at how we handicap our quarter typically with product constraint and customer constraint, i.e., customers telling us we want to place a PO with you, but we don't want the derivatives to take place this quarter, the handicap that we put on product revenue is twice that. what it would normally be, so it's material. We're not looking at a few million dollars here. It's twice the normal level of constraints that we have in any given quarter.
spk05: With our forecast, we're expecting to build backlog in this quarter.
spk09: Yeah, I guess the other question would be, is there a concern of double ordering as people worry about getting what they need.
spk05: Not on our side. Yeah. On our side, Liz, what we're doing with our supply chain is that we are building buffer, and our team started early in the year building that buffer, and that's why we believe we'll have relief at our fiscal first quarter. But, no, our customers, you wouldn't see that kind of behavior with our customers.
spk09: Great. Thanks.
spk10: At this time, our next question comes from Alex Henderson with Needham. Your line is open.
spk08: Thank you very much. I actually wanted to follow up on the supply constraint question again, but from a different perspective. To what extent do you think that there is a comparable amount of supply constraints at your competitors, and to what extent do you think that there's risk? that you could be leaving deals that you might have gotten that had availability on the table as a result of not being able to deliver in a timely fashion against what might be hot infrastructure. And then the second piece of that is, as we think about the exodus from campus reversing and the dysphoria of employees coming back onto campus, There's a dialogue around that that is, gee, doesn't that drive increased demand for campus investment? But I would argue that we're not likely to see the 100% of the people who left coming back, but rather a much more dispersed environment, which then changes the nature of what they're buying to a more application-centric environment. user-centric viewpoint. And I would think that that would play very nicely into your cloud architecture. So if you could talk about those two issues, I'd appreciate it.
spk05: Sure, Alex. You know, as it relates to, you know, competition and I would say taking deals off the street, you know, we're encouraging our sellers to sell. And I think, you know, you will see people trying to get in front of supply chain constraints if they have time urgency to their projects. You know, but as far as, you know, how we're incentivizing our sales teams, you know, our sales teams are still incentivized to go get those bookings. So that's happening. What we hear from our distributors is that we're actually faring as well or better than our competitors. So as we get data from, you know, from the market through our distributors that work with all vendors, what we're hearing is that what we're proposing is in terms of constraints or lead times is actually stacking up very favorable to our competition. So that's where I give hats off to our supply chain teams and then the way that we've nurtured that relationship with Broadcom. As it relates to campus investment, it's spot on. I mean, Alex, this is what's going on around the world where people are reevaluating their workplace environment and it's going to be more distributed. And all of the enterprise customers that we talked to, they've all indicated that it's not going to be the same. And that what people have learned is that they can be very productive working from home or working in a distributed environment. And so there's going to be more of a hybrid when we go back to work, and they're going to have to support that. So how they think about the user experience that's remote, how they think about how people work and come back on the campus Cloud is a perfect platform for that. And if you're an enterprise customer and you're rethinking your network, so you're also rethinking some of the traditional network players, and cloud is a perfect platform, and you want to consider the cloud vendors. And because of how differentiated our technology truly is and the fact that we're the number two cloud provider, people want to hear from Xtreme today more than ever before. And as I mentioned in my comments, people are learning a lot about Xtreme and they're surprised to learn of our capabilities and then our competitive strengths relative to the other players in the market. And we're moving further and further down the competitive process and we're winning more and more and a higher percentage of deals because of this competitive strength relative to the other players out there. So this is playing into our hand, um, And we are all in on cloud, and you're seeing this in terms of how we're investing. And so we expect the growth in cloud to pull through product revenue, increased and higher growth rates in product revenue, as well as the services attached that go with that on top of growth of cloud subscription revenue.
spk08: If I could, has there been any change in the competitive landscape relative to Cisco responding to, I think, what is obviously a highly differentiated attack from the cloud in both you and Juniper relative to the Meraki product line, which clearly is very long in tooth. So is there any change in their portfolio that tries to close some of the gap?
spk05: Yes. I would say Cisco has been probably the biggest loser of market share and probably most vulnerable. There are a lot of changes that are going on over there as they try to figure out the difference between on-prem enterprise solutions a la DNA versus what is the Meraki solution. And it's going to take some time for them to re-architect and develop a consistent story. I think that has created And then the Meraki cloud has – we can go after them from a competitive position as well as the simplicity of licensing and what we're bringing to market. So there's some compelling differentiators that we bring relative to both Cisco as well as Juniper. I would comment that HPE, Aruba is probably being most aggressive in price out there. And then, you know, selling – discounting hardware and selling their NAC solution. And we see them going pretty hard after Cisco as well. So, yeah, I would say that's, you know, right now we think there's a great time for us in our competitive position relative to all the competitors where we can show true differentiation and deliver higher value to enterprise customers. And, you know, the key is for us to get the at-bats, and we're starting to see more at-bats for larger opportunities, and we're better positioned to go after them.
spk08: Great. Thank you very much. Super answers.
spk05: Thanks, Alex.
spk10: Our next question comes from Dave King with B. Riley. Your line is open.
spk06: Yes, just a couple more follow-up. Speaking of competitors, can you talk about Huawei, what's going on there, and any kind of opportunities for you to gain market share And my follow-up is for Remy. You guided to $131 million, $132 million in OpEx. How should we think about OpEx going forward?
spk05: So, Remy, you want to tackle OpEx, and I'll come back to Huawei?
spk04: Yeah, so... Obviously, we've been talking a lot about operating leverage and the name of the game is to recover the top line to pre-COVID level and not recover OpEx to pre-COVID level. The one thing that I did warn a couple of quarters back is obviously based on the momentum that we see in bookings and therefore revenue, we may end up having to pay more sales commission. One other factor to consider is merit. We do our merit increase, you know, On January 1st, every year, employees have worked really hard and deserve to get a salary increase. And finally, travel. If you think about Q3, there was little to no travel at all. And as things reopen with people getting vaccinated, you should be expecting that. So when you factored that into account, I was very vocal in the fact that we should see OPEX, you know, In the range of 120 to 125 in the first few quarters of fiscal 21, you see that we are already exiting Q3, getting above that 120 to 125. We're at 127. Q4, you'll see more sales commission. We're going to try and contain costs going forward. But I would say it's reasonable to expect that the range is probably going to be around 130 if I think about the average first three quarters of fiscal 22, anywhere between 127 and 131. We'll try and keep it that way. But the level of 120 to 125 that we had at the bottom of the COVID crisis was obviously not sustainable.
spk05: Yeah, and as it relates to Huawei, there's two sides here as far as our business, enterprise, 5G. On the enterprise side, Huawei has always been a threat because they've been the cheap hardware vendor, and they have not been strong in software, and they are weak in cloud. So we do not see Huawei in Americas, particularly in the United States, Canada, The response to Huawei has been mixed in the European theater, but I would say there is greater pause, and that has opened up more opportunities for us, competitive opportunities for us, UK, for example, and even in Germany. They remain very competitive in Eastern Europe markets, Middle East, Africa, obviously Asia-Pacific, You know, typically when they come in with very low pricing for hardware, they are not competitive on the cloud front. As it relates to 5G, you know, what's going on in that theater, it's created opportunities for our primary partner to win more 5G infrastructure business as people have security concerns with Huawei. And so that, I think, has been, you know, a net positive for us. as our partner has gotten and is winning more business for 5G infrastructure. Got it.
spk06: Thank you.
spk10: Thank you. At this time, I'd like to turn the call back over to Ed Myercourt for closing remarks.
spk05: Thank you, and thanks, everybody, for participating on the call today. Once again, I've got to shout out to Xtreme employees for Just a very strong quarter and very strong execution. As I mentioned before, we have the strongest team that we've ever had since I've been at the company. And we have very clear vision and very clear operating plans to execute. And I feel like this team is doing a great job. And I feel like we have the team in place to execute and drive on these plans. You know, we wish everybody continued health, especially... Outside the U.S., as we look at India and all of our employees there and what's going on, we know we're not out of the woods yet on COVID, but we've obviously made a lot of progress in several global markets, particularly in the U.S. As we see more and more communities and our customers and stakeholders and partners, et cetera, get vaccinated, we will be considering how we get back together again This year, our Extreme Connect event is going virtual. This is open to all investors, so I would encourage everyone to check out Extreme Connect. We have some really interesting technology reveals and more color and insights as to the solutions that we're bringing out to both enterprise and 5G markets. And that's going to be on May 26th and 27th. We hope to see you there. Thank you all and have a great day.
spk10: Well, ladies and gentlemen, this does conclude the conference call. You may now disconnect.
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