This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, and thank you for standing by. Welcome to the Xtreme Network's second quarter fiscal year 2022 financial results. 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 this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stan Kovler, Vice President of Corporate Strategy and Investor Relations. Please go ahead.
spk02: Thank you, Operator, and welcome to the Xtreme Network's second fiscal quarter 2022 earnings conference call. I'm Stan Kobler, Vice President of Corporate Strategy and Investor Relations. With me today are Xtreme Network's President and CEO, Admire Cord, CFO, Rami Talma, and Chief Technology and Product Officer, Nabil Bukhari. 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 would like to remind you that during today's call, our discussion may include forward-looking statements about Xtreme's future business, financial operational results, growth expectations and strategies, go-to-market planning related to our acquisition of Ipanema, the impact of the COVID pandemic, and continued challenges of our supply chain as they relate to chip shortages and other materials. 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, 2021, 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's President and CEO, Ed Myercord.
spk06: Thank you, Stan, and thank you all for joining us this morning. Q2 was characterized by double-digit bookings and revenue growth that led to an all-time high quarterly record revenue and net income. We achieved these record results despite the challenging environment and built an incremental $90 million in backlog, which now sits at approximately 300 million in total. We see strong demand as we turn the corner into calendar 22 for both our enterprise and 5G solutions. This marks the fourth consecutive quarter of double-digit bookings and revenue growth, including the fourth consecutive quarter of double-digit product revenue growth led by wireless adoption since our first market introduction of Wi-Fi 6E and the highly successful launches of our universal hardware switching platforms. In this calendar year, we continue to expect double-digit organic revenue growth, given the strength of demand and the size of our backlog. SAS annual recurring revenue is $88 million this quarter, up 55% year-over-year and 11% quarter-over-quarter, driven by significant interest in our cloud technology, which is also reflected in our 13% market share and number two position in cloud networking. We're larger than number three and four competitors combined. We believe this puts Xtreme in a very strong position as the secular trend toward cloud networking continues to gain momentum with enterprise customers. This is the second quarter we're disclosing the ARR for our subscription business. We will be reporting on ARR as we diversify our business by adding new software subscriptions. I've asked Nabeel Buhari to join us on the call today to provide an update on the highly successful adoption of our cloud management platform and the introduction of our new cloud-based WANedge subscription services. For the fourth year in a row, we were named a leader in the Gartner Magic Quadrant for wired and wireless networking. We surpassed the largest competitor in the industry in both execution and vision and strengthened our relative position to the rest of the field. This is meaningful third-party validation from the number one enterprise IT industry analyst firm. In our service provider business, we're in the early stages of 5G network deployments, and this is just the beginning of a multi-year investment cycle. We're on pace to exceed our goal of attaining 20 million of incremental business in 5G for fiscal 22 in line with our expectations. Both of our 5G solutions, Packet Broker and Cloud Native Infrastructure, create attractive new growth opportunities for Xtreme. Nabil will provide more color on this growth opportunity as well. The consistency of our execution, the growth opportunities that we have, the level of innovation we produce, and the record results are enabling us to attract the highest levels of talent in the industry. At the same time, our employee retention continues, to be among the best in the industry. Net-net, we're leveling up our game, and it's also evident in the quality and the magnitude of our customer engagement. I'm also proud to say we completed the systems integration of Ipanema ahead of schedule, and we integrated Ipanema technology into our product portfolio in record time, within a quarter. We're on pace to introduce our extreme cloud-branded SD-WAN solutions this quarter. We view these very strong quarterly results in the context of the Infinite Enterprise. And what do we mean by the Infinite Enterprise? It's the future for our enterprise customers in a post-pandemic world. The Infinite Enterprise delivers three main outcomes for our customers. Infinite distribution, consumer or user centricity, and unlimited scale as we operate through the cloud. We deliver this through our portfolio that brings all our enterprise networking and WAN edge products and services into a single framework. Data is becoming increasingly critical for our customers in delivering better business outcomes across all our verticals. For example, retailers connecting supermarkets, warehouses, corporate offices are relying on cloud analytics to deliver contextual insights that drive operational efficiencies, inform sales strategies, and drive business growth. Our government customers are creating smart roads and highways to deploy advanced transportation technology, digital speed signs that improve motorist safety. And there's no better example of the value of our data analytics than in our sports and entertainment vertical. As we announced today, we've just added Manchester United and the NHL to our list of valued customers who've named Xtreme their exclusive Wi-Fi data analytics provider. We already have this designation in Major League Baseball, NASCAR, and the NFL, and we'll power the analytics for the ninth consecutive Super Bowl in a few weeks. Our analytics solution provides real-time visibility into network data, giving customers instant business intelligence and insights regarding fan preferences, foot traffic flow, mobile sports betting trends, application usage, and network security. These are but a few examples of how our customers are leveraging our intuitive insights from networking data to drive better business outcomes. And with that, I'll turn the call over to our Chief Technology and Product Officer, Nabeel Buhari, to elaborate on our vision on the innovations in our cloud, our infrastructure, WAN edge, and 5G.
spk07: Thank you, Ed, and good morning, everyone. We continue to execute on our vision of the infinite enterprise. Extreme Cloud IQ, our cloud management platform, is the cornerstone of this vision, delivering on our commitment to reduce operational complexity, decrease risk, and increase reliability for our customers, of course, at cloud speed. In Q2, we introduced instant stacking, which enables automated deployment, management, and troubleshooting of stack switching from Extreme Cloud IQ. This differentiated single-click feature brings much needed simplicity and reliability compared to our competitors' solution, saving our customers time and effort. Customers' experience and their trust in our technology is central to our vision of enterprise networking. IT teams are increasingly using mobile devices to operate their networks. In Q2, we further enriched that experience now users can view topology onboard any wired or wireless device right from their xaq mobile app greatly simplifying rollout of network devices across the entire enterprise we are integrating extreme cloud co-pilot our explainable ai platform into the mobile app as well so valuable and up-to-date ai ml driven insights are instantly available to enterprise it teams no matter where they are trust is a central theme in cloud networking. We announced the completion of SOC 2 Type 2 and SOC 2 Type 3 certifications for Xtreme Cloud IQ, which puts us years ahead of our competition and reduces security risk for our customers. Digital transformation is accelerating and every customer is defining their unique journey. We at Xtreme differentiate ourselves by providing choice and flexibility to these customers. In Q2, we added an additional deployment option for our Extreme Cloud IQ customers. Extreme Cloud IQ Site Engine can now be deployed in an air gap environment, which enables customers to use XIQ without tapping into a public cloud environment, providing an additional way to satisfy specific security mandates, for example, in healthcare and government workflows. Similarly, we enhanced our API framework with additional SDKs for Java, Go, Python, JavaScript, so our customers and technology partners can easily integrate Exchange Cloud IQ into the broader ecosystem of their choice. We continue to refresh our infrastructure portfolio, both wired and wireless, with universal platforms. As part of this universal platform strategy, we were first to market with Wi-Fi 6E solutions in Q1. In Q2, we expanded this Wi-Fi 6E portfolio with new mid-range universal AP 4000 series. With the introduction of 5500, 5400, and upcoming 5300 series switching platforms, we will complete the refresh cycle of our edge switching portfolio this fiscal year, from the entry level all the way to the premium tier. Customers in healthcare, education, and other verticals are embracing our universal portfolio of Wi-Fi 6E APs. The universal switches with their software-upgradable features like high-density multi-rate ports and high-powered PoE are a perfect complement to the Wi-Fi 6E Wireless. These universal platforms, both wired and wireless, are fully managed from Xtreme Cloud IQ, making this an attractive, all-inclusive solution for our customers as they start to upgrade the edge of their networks. Earlier, Ed provided an update on the integration of Ipanema. We have integrated the Ipanema technology into our portfolio in record time. We are on track to launch Extreme Cloud SD-WAN this quarter. This combines the industry-leading capabilities of Extreme Cloud IQ and the feature-rich SD-WAN from Ipanema into a single subscription. This is another proof point of our strategy to have our entire portfolio, now inclusive of SD-WAN, fully managed from XIQ. This continues to differentiate us from our competitors. Extreme Cloud SD-WAN will provide simplified licensing, deployment flexibilities, and advanced features to address the needs of a vast variety of customers across multiple verticals and markets. Existing Extreme customers will find it operationally easy and financially attractive to add Extreme Cloud SD-WAN to their existing SAQ deployments. With the introduction of Extreme Cloud SD-WAN, our subscription offerings continue to expand and now include enterprise-wide cloud management, AI and ML-driven insight, and SD-WAN. We expect these services and offerings to enhance our subscription growth profile going into fiscal 23. Finally, I would like to provide an update about our solutions for 5G use cases, network packet broker, and cloud-native infrastructure. These solutions combine cutting-edge programmable platforms, carrier-grade orchestration, and advanced features like trusted delivery. We have seen better-than-expected market interest in these solutions as our initial customers move from proof of concepts to successful deployments in production, marking a major milestone for us. Given the strength of our relationship with our partner in this space, we are seeing new opportunities beyond our initial use cases. With that, I will turn the call back over to you, Ed.
spk06: Thanks, Nabil. On top of the strong demand in the first half of our fiscal year, our business momentum is increasing. The funnel of opportunities is strengthening, both from a new bookings perspective and a substantial backlog of business we've built. We're attracting new customers at an unprecedented pace, and this gives us confidence in our ability to capitalize on our growth objectives. We expect to grow our market share and drive record double-digit organic growth rates into the foreseeable future. And with that, I will turn the call over to our CFO, Remy Thomas.
spk03: Thanks, Ed. As Ed noted, fiscal 22 continues to be a strong year for Xtreme and we're executing well across the board. Q2 total revenue of $281 million grew 16% year over year. Strong demand for our wired and wireless portfolio drove year over year revenue growth of 15% for product and 18% for services and subscription. We saw another quarter of double digit year over year growth in total bookings driven by 47% growth in SAS subscription bookings. SAS annual recurring revenue, or SAS ARR, reached $88 million of 55% year-over-year and 11% quarter-over-quarter. The historical ARR data can be found on page 16 of the Q2 earnings deck posted on our website. We also reported SAS deferred revenue of $136 million, up 49% year-over-year, and 11% quarter-over-quarter. Non-GAAP earnings per share was 21 cents, up from 13 cents in the year-ago quarter, and flat from last quarter. On a geographic basis, and looking at total company revenue, the Americas enjoyed the strongest year-over-year growth in revenue, followed by APAC and EMEA. From a vertical standpoint, and looking at total company bookings, The highest year-over-year growth came from sports and entertainment, followed by transportation and logistics, retail, e-rates, and higher education. Turning to product trends, wireless enjoyed a strong recovery both year-over-year and sequentially and accounted for close to a third of total product revenue this quarter. Wired maintained healthy double-digit year-over-year growth in both bookings and revenue. Services and subscription revenue reached a new high at $89.8 million, up 18% from the year-ago quarter and 9% sequentially, largely driven by the strength of cloud subscriptions. Total Q2 recurring revenue, including maintenance, managed services, and subscription, rose to $85.2 million, or 30% of total company revenue, and that was up from 29% last quarter. The growth of cloud subscription and service renewals drove the total deferred revenue sitting on our balance sheet to $373 million, up 20% year-over-year and 5% sequentially. Our non-GAAP gross margin came in at 58.2% in line with our guidance. The year-over-year and sequential decline in the company's gross margin was driven for the most part by higher supply chain and freight costs, partially upset by the price increases we implemented in October. Q1 non-GAAP operating expenses were $126.8 million, up from $122.9 million in the year-ago quarter and from $124.5 million in Q1, reflecting higher R&D expenses and sales and marketing spending from the acquisition of Ipanema. OPEX, as a percentage of revenue, was 45.2% well ahead of the long-term target range of 46% to 49% we set at our investor day last year. All in all, we delivered an operating margin of 13.1%, up 2.9 percentage points from 10.2% in the year-ago quarter, and down slightly from 13.8% in Q1. Our cash conversion cycle of 22 days was down substantially from 44 days in the year-ago quarter, but up from a historically low level of just nine days in Q1. That was driven by reduction in payables to support timely delivery of component supplies. This quarter, we executed a $25 million share repurchase program for 1.8 million shares at an average price of $13.65. This was part of our previously authorized $100 million share buyback program with $30 million remaining. Our net debt increased to $149 million, up from $139 million to $1 million, largely driven by the share buyback. Had we not done the buyback, our adjusted net debt would have seen a $14 million reduction. Now, turning to guidance, as we enter the second half of fiscal 22, we expect our product book-to-bill ratio to move closer to 1 and our backlog to stabilize. We reiterate our outlook for fiscal 2022 of a double-digit revenue growth and a 10% to 15% operating margin. For Q3, we expect revenue to be in the range of $276 to $206 million, up 11% year-over-year at the midpoint. Q3 non-GAAP gross margin is anticipated to be in the range of 57.3% to 59.3%. as we expect elevated expedite fees and freight costs to continue to impact our business. Q3 non-GAAP operating expenses are expected to be in the range of $129.3 to $133.3 million. Q3 non-GAAP earnings are anticipated to be in the range of $21.3 to $28.7 million, or $0.16 to $0.21 per diluted share. We anticipate that the reduction in expedite and shipping fees, combined with the full impact of our recent pricing actions, will lead to some gross margin recovery in Q4, with further improvement expected in fiscal year 23. With that, I will now turn it over to the operator to begin the question and answer session.
spk01: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Alex Henderson with Needham. Your line is open.
spk04: Hey, guys. Nice print. It's gratifying to see the progress you're making. I wanted to talk about first of the logistics costs. It should be coming down pretty steeply. I recall that back in the summer it was as much as 50% of the supply chain cost pressures Obviously, the parts pressures have increased, but it looks like those have been falling pretty steadily across the industry. Can you talk about how much the ratio of component cost to supply cost at this point?
spk06: Yeah, Alex, I'll make a high-level comment and then let Remy jump in maybe with some more detail. But we have seen In terms of the supply chain, incremental expense from supply chain, we saw that step up meaningfully in the second quarter, and we do expect that to persist through this quarter in Q3 and then to loosen a bit in the fourth quarter. In terms of specifics around the parts of that, Remy, I don't know if you want to add any color for Alex.
spk03: I would just say, Alex, that if I think of how we went from the Q1 gross margin to the Q2 gross margin, there was sequentially a negative impact from both expedite fees, which is what we have to pay to our component suppliers to secure deliveries of key components, and freight costs. In combination, these two were four and a half points of gross margin. So, you take that four and a half times our revenue and that gives you a dollar impact. We see a stabilization of freight costs as we enter the third quarter. Unfortunately, we continue to see the expedite fees increasing slightly this quarter. They will be largely offsets by the impact of the price increase, which will continue to deliver some benefits in Q3. But unfortunately, when we mix the two together, they kind of neutralize each other, which is the reason we're providing this guidance for Q3.
spk04: The other night, F5 Networks reported and they stated that they had seen a very significant erosion in supply chain availability of components, particularly chipsets that are supporting chipsets in the networking portion of the systems business. It's resulted in them bringing down their forecaster systems quite dramatically for the large quarter sequentially. Did you see, they said that that step down happened in the last month or so, have you seen anything comparable to that, or is that something that's less evident in your experience?
spk06: I would say, Alex, yeah, I would jump here, Remy, and just say that as it relates to chipsets, we're not seeing that. I think some of that has to do, we always talk about our relationship with Broadcom. Our supply chain teams have worked aggressively to move and establish relationships with the secondary and tertiary component providers, and they've done a nice job building, I'd say, quality relationships. So we have very healthy working relationships, but it's less on the chipset side where we're constrained and more on the smaller component parts that typically we wouldn't be out chasing. It would be our ODMs who are chasing that. So we don't see constraints on the chipset side of the equation. It's more on the smaller component parts that we're working to secure. Remy, do you want to add?
spk03: Yeah, I was just going to add that this comes at a cost. So we're able to find these smaller components, Alex, but you've got to go and find them, and they come at a premium today. And so that's what was just built in my prior comments of the fact that we will see an increase in what we call purchase price variance, which is basically the cost of our components versus our initial expectation in the March quarter to make sure we get our hands on these components.
spk04: It's interesting. They said that the spot market completely dried up. The second question is I've heard Cisco has pushed through another price increase. here in January. Gathering, it's like they're on their almost fourth price increase over the last year. A, are you seeing that in the field? And B, we're hearing that it's creating people looking at Cisco like you're really just screwing us at this point to the point that some people are exasperated enough to say, I'm done, I want out of Cisco, and I'm looking for alternatives. Have you seen either of those dynamics in the field?
spk06: We have, Alex. And we did put in place our own price increase on effective October 1st, but it's not surprising, given the cost that Remy is describing, it's not surprising to see others raising price And, you know, especially from Cisco. When Cisco does that, it is a benefit to us because it gives us an umbrella, gives us more flexibility if we want to contemplate our own price increase. But to your point, we are taking share in this environment. You can see it from our growth and from our bookings. And I would say I think it's more about our cloud and the value add that we're bringing as opposed to just you know, a commodity price transaction, but we are seeing more people and we're seeing the channel community, importantly, looking for an alternative. The last comment I will make, and you did raise the supply chain issue, we're getting really good marks from our distributors and how we're managing through this environment and putting commit dates that we're honoring And as a result, we have seen some business come our way because of the confidence in our delivery and supply chain.
spk04: Nice. One last question, then I'll cede the floor. As we start to lap the significant increase in orders as you get into the June and back half of calendar 22, industry-wide orders jumped 30%, 35%, 40% year over year. every company in the space saw similar kind of big stretch in orders and duration. Should we start to anticipate a decline in orders in the June quarter against that top or decline in orders in the back half of the year, book to bill going below one? We could have the oddity of beating raise on top line and bottom line as supply chain improves, but the duration coming in causing orders to decline. How do we think about those mechanics? Thank you.
spk06: You know, it's interesting, Alex. You know, in my comments, I noted that we're actually seeing the momentum build. And we had the same reaction as we were thinking about the magnitude of the first half of our fiscal year and the second half of fiscal 21. We're not seeing it. On our end, we're seeing a build of momentum and growth, especially when we look to that June quarter, the visibility that we have in our funnel of opportunities in the pipeline. I also mentioned we're up-leveling our team. We've made some incredible hires throughout the organization, but a lot of strengthening in terms of the teams and our go-to-market organization. And, you know, we're seeing unprecedented levels of demand. And that, we see no abatement there at Xtreme.
spk00: Okay, thank you.
spk01: Thank you. Our next question comes from Dave King with B. Riley. Your line is open.
spk08: Hi, yes, good morning. I guess I may have missed it, but did you give out the book to build for product and services? Remy, do you want to pick that up?
spk03: Yeah, we're very happy to give it to you. The book-to-bill for product was 112, and for services was 116. Total company book-to-bill was 114.
spk08: Got it. And then I just wanted to clarify on the supply chain situation. So I think, Remy, you said margin impact was about 4.5%. What about on the revenue side? How much revenue was impacted by component shortages?
spk03: Well, we increased our backlog by $19 million this quarter. So had we been able to deliver everything, revenue would have been, it's very theoretical, but would have been an extra $19 million. But that's the extent of the constraints that we saw this quarter.
spk08: Okay. Okay. That's pretty significant. On 5G, I guess, did I hear you correctly that you expect fiscal 2022 5G revenue to exceed $20 million? Did I hear that correct, Ed?
spk06: Yes. Dave, what you heard is incremental revenue from our service provider business to grow by $20 million. And we are on track for that. And what about... You heard Nabil comment that we had a lot of, you know, we have two very large customers and one of those large customers is at the early stage. There's a lot of proof of concepts that are out in the field. And what we're seeing now is that we're going into production. So some of these very large carriers that are out there are starting to move from testing phase of cloud native infrastructure into production phase. And this is, very early stages of ramps. So we'll start to see other service providers move and transition from sort of test phase to production phase. And we're at the very beginning of a ramp cycle there. We have Nabil, your line. I don't know if you want to add any color to what I've just said.
spk07: No, I think you're spot on, Dave. What we're seeing is that as this 5G movement, the cycle kind of just starts going on. And this is a global trend. We are seeing two kind of trends that counter each other. One is that with the whole supply chain is not just in networking. It's like everything. So we are seeing that larger customers that entered into proof of concepts that call it like a couple of years ago, they are now slowly kind of ramping up their productions. But at the same time, we are actually seeing that the interest in the cloud-native infrastructure, as opposed to the virtual infrastructure, has actually expanded tremendously, way beyond our expectations. So when you kind of bring them together, that gives the confidence that Ed is talking about. Another part that we are also seeing is, for us specifically, that we are in a very specific use case for 5G, a specific solution or portion of the 5G network But now we are starting to see opportunities to kind of broaden that into other areas of 5G deployment as well. So it's overall a pretty good story for us.
spk08: Got it. Just a couple more on that 5G. So given that momentum in 5G, should we be thinking about maybe towards the high end of 50 to 100 million for fiscal 23, or is it still too early?
spk06: I think, you know, Dave, we haven't updated our guidance yet. I would defer to Remy in terms of what's out on the street. But, you know, one of the things we'll talk about is that we are going to have an analyst day in late spring. And, you know, we're expecting to dive in, you know, do a deep dive here. And I think that's probably a time where we'll revise numbers. But Remy, do you want to add anything to that? question?
spk03: No, for now, the 50 to 100 million stands, Dave. We're just given the ramp up that we have, the fact that we have networks that are running live with our solution and the opportunities that the 5G market represents, we feel confident about this 50 to 100 million range that we provided last year.
spk08: Got it. Any new customers in the pipeline?
spk06: I Yeah, that question, it's interesting because we have, in the case of our cloud-native infrastructure solutions, we have a force multiplier because our partner, they're selling to service providers. And so the answer there is yes. There are a lot of new customers that are adopting the cloud native solution that, that Nabil was, was talking about. So from that standpoint, you know, we, we are able to leverage, you know, our partners global selling team that's selling into major service providers and they're winning new business. And I would say their demand has been greater as Nabil mentioned for cloud native than, than they had expected. So from that standpoint, yes, The other comment, and then Nabil, I will ask you to chime in here. The technologies that we are building for our very large customers are also applicable to the broader service provider market. And so the quality of the solutions that we're building, the carrier-grade resiliency, if you will, is spurring growth. with our other service provider customers. And Nabil, I invite you into this conversation here.
spk07: Yeah, thank you, Ed. No, absolutely. I'll answer it, or I'll make two comments. One is obviously around the 5G. I think, as I mentioned in the last answer, that the opportunity, the interest in cloud-native infrastructure is actually growing, which means a lot of newer customers, and by customers I mean service providers, are kind of entering that foray. Now, of course, remember that things happen a little bit at a different pace in service providers. So these newer customers will go through their early stages, their POCs, and then, you know, early deployment. But generally, we are definitely seeing a lot more interest along with our partner. Now, to the second comment, these technologies that we are building specifically for 5G, they're also very relevant for, you know, cloud service, but not the mega ones, but, you know, broader cloud-ish kind of service providers. And just to kind of give an example, one of our European service provider customers actually picked up that solution or portions of that solution that is being used in 5G and are actually deploying it pretty widely in their environment. So we do see this cross-usage of technology between the 5G side and the broader data center market as well. And that's true for our packet broker solutions as well. which right now are very, very aimed at these massive requirements of the 5G rollout. But at the same time, they're equally, you know, valuable to other service providers and perhaps some larger enterprises as well. So we see this technology kind of broadening its influence beyond 5G as the quarters rollout.
spk08: Got it. Thank you.
spk01: Thank you. Our next question comes from Eric. Martin Uzi with Lake Street. Your line is open.
spk05: Yeah, I wanted to focus on the SAS part of the business. I understand the ARR number, very healthy, $88 million up 55%, but I wanted to go into the script bookings, the subscription bookings at 47%, a terrific number, but it is down. I think Q1's number was 71% on the bookings, and I think previously you guys had been in the running in the 100% range. Are you seeing a change in the appetite for the subscription form factor? Or maybe if I could ask it a different way, what is your expectation for subscription bookings in Q3, Q4?
spk06: Yeah, why don't I, I think we'll have a few of us that chime in here, Eric. You know, when we turned up Extreme Cloud IQ, we have an opportunity to migrate and move a lot of customers over into the platform. So some of what you saw earlier in some of the higher growth rates was the benefit that we had of customer migration. And so from there, I think that's why you would see, as far as XIQ license growth, some of the comparisons are not quite as favorable in the year-over-year comparisons because we had such a huge surge in XIQ subscriptions. So we continue throughout the rest of this year, we continue to see nice growth in new subscriptions. We do have a lot of our XIQ subscriptions tied up in backlog. So if the product is constrained in backlog, then the license would be constrained as well. So as we go towards the end of this year, we expect to begin unlocking some of that subscription bookings on the new side. Renewals, as we think about renewals, we expect larger renewal growth to occur out in the sort of call it fiscal 24 timeframe. Remy, do you want to, Add to that, you know, one other thing I would mention, Eric, is that with SD-WAN and new WAN edge services, we're really expecting a lot of growth there to be driving cloud subscription. And I will let Remy, if you want to chime in on specific numbers for Eric or how he should think about it, and then to Bill, if you want to provide some commentary around some of this evolution of XIQ subscriptions going forward. which we would see to be maybe a longer-term 30% growth range, and then as we contemplate new WAN Edge services, which will have a much higher growth rate starting from a lower base.
spk03: No, Ed, I would say the initial phase of our growth in the subscription business was really driven by us acquiring new subscribers onto our platform, migrating some of the existing customers that had an on-premise solution to a cloud-based solution. And now that this business is growing, what we're seeing this quarter is a significant contribution from renewals of customers that adopted our solution two to three years ago, sometimes when they were Arrowhive customers. So now we're seeing a more balanced contribution to the 47% growth that I mentioned in my comments. from new customers adopting the subscription model as well as renewal of existing customers. And basically that will grow going forward as we introduce SD-WAN and hence us feeling very comfortable in some of the growth rate that we highlighted a year ago. At the time, if you recall, we talked about 25% to 30% growth in bookings and 25% to 35% growth in revenue, you know, for the next three to five years. Today, we feel comfortable that both bookings and revenue will grow slightly more than 30% over the period.
spk07: Yeah, and I can add, as you said, I can add a little bit more color to it. So the way to think about our subscription business is really that the subscription number that we disclosed, that is made up of various different cohorts, right? So that's the migration, that was one of the cohorts. And then our wireless business, the cloud wireless business, that has been driving a lot of our XIQ, that's another cohort, and then switching in XIQ, that's a third cohort, and so on and so forth. So all of these cohorts kind of like they have their own trajectory, they have their own trend. And when you combine them together, that's the growth number that Remy is pointing out. What I would address from a product, from a technology point of view, that we have two really axes for growth in the subscription business overall. One is more and more devices that become part of our cloud to essentially increase the subscriber. And the other part is that how do you increase the ARPU, which is the average revenue per unit, how much money you make off of every unit. And that increases as we roll out newer services and newer licenses on top of our Xtreme Cloud platforms. I think we've been talking about Copilot for a while, which is our AI and ML platform, which is still in public data, but we expect in fiscal 23 that will become GA and that will help start to raise our coup. And then we are adding another cohort on top of all of this, which is the SDVAN part, which we acquired from Ipanema, and we're just about to launch that this quarter. Well, now we'll add another revenue cohort or another subscription stream on top of what XIQ is delivering us. So our strategy is pretty simple. It is like all of these cohorts, we want them to stack on top of each other. They're obviously staggered from each other when they are introduced and when they peak out and then taper off. But NetNet, when you add them, We are very confident, as Randy mentioned, in the growth numbers that we have projected well into multiple years from now.
spk05: Thanks for taking my question, and congratulations on the quarter.
spk06: Thanks, Eric. And I think we're going to wrap up at this point. I'd like to thank everyone who could join us today. And we will be reaching out. We're going to be firming up a date for an analyst and investor meeting in the late springtime timeframe. So be on the lookout for that. I also want to reach out. I want to congratulate all of our extreme employees as well as our partners for record results in the past quarter and all of the hard work that's gone into executing and delivering at Xtreme. So I hope everybody stays in good health, and we look forward to catching up soon. Take care and have a nice day.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer