Good morning and thank you for standing by. Welcome to the Extreme Networks Second Quarter Fiscal Year 2022 Financial Results. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] 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.

Thank you, operator and welcome to the Extreme Networks Second Fiscal Quarter 2022 Earnings Conference Call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Networks' President and CEO, Ed Meyercord; CFO, Remi Thomas and Chief Technology and Product Officer, Nabil Bukhari. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release which includes our GAAP to non-GAAP 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 Extreme'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 Extreme's President and CEO, Ed Meyercord.

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-to-market introduction of WiFi 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. SaaS annual recurring revenue was $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 number four competitors combined. We believe this puts Extreme 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 are 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 Navil 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 WAN-X [ph] subscription services. For the fourth year in a row, we were named a leader in the Gartner Magic…

Thank you, Ed and good morning, everyone. We continue to execute on our vision of the Infinite Enterprise, ExtremeCloud 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 ExtremeCloud 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 XIQ mobile app, greatly simplifying rollout of network devices across the entire enterprise. We are integrating ExtremeCloud CoPilot, 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 ExtremeCloud 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 Extreme differentiate ourselves by providing choice and flexibility to these customers. In Q2, we added an additional deployment option for our ExtremeCloud IQ customers. ExtremeCloud 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…

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 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, Remi Thomas.

Thanks, Ed. As Ed noted, fiscal '22 continues to be a strong year for Extreme 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% per 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 SaaS subscription bookings. SaaS annual recurring revenue or SaaS ARR reached $88 million, up 55% year-over-year and a 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 SaaS deferred revenue of $136 million, up 49% year-over-year and 11% quarter-over-quarter. Non-GAAP earnings per share was $0.21, up from $0.13 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…

Thank you. [Operator Instructions] Our first question comes from Alex Henderson with Needham. Your line is open.

Hey, guys, nice print. It's gratifying to see the progress you're making. I wanted to talk about first of the logistics cost. 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 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?

Yes, Alex, I'll make a high-level comment and then let Remi 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, Remi, I don't know if you want to add any color for Alex.

I would just say, Alex, that if I think of how we went from like 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 4.5 points of gross margin. So if you take that 4.5x our revenue and that gives you a dollar impact. We see a stabilization of freight cost as we enter the third quarter. Unfortunately, we continue to see the expedite fees increasing slightly this quarter. They will be largely offset 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.

The other night F5 Networks reported and they stated that they have 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 forecast for systems quite dramatically for the large quarter sequentially. Did you see -- they said that, that step down happened in the last month or so. Do you -- have you seen anything comparable to that? Or is that something that's less evident in your experience?

I would say, Alex, yes, I would jump here, Remy, 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. Remi, do you want to add?

No, 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.

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. I -- 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, went out of Cisco and I'm looking for alternatives. Have you seen any either of those dynamics in the field?

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 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 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.

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 1. We could have the oddity of beat and 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?

It's interesting, Alex. In my comments, I noted that we're actually seeing the momentum build and we have the same reaction as we were thinking about the magnitude of the first half of our fiscal year in 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 pipeline. I also mentioned we're up-leveling our team. We made some incredible hires throughout the organization but a lot of strengthening in terms of the teams and our go-to-market organization and we're seeing unprecedented levels of demand. And that -- we see no abatement there at Extreme.

Okay, thank you.

Thank you. Our next question comes from Dave Kang with B. Riley. Your line is open.

Yes, good morning. I guess I may have missed it but did you give out the book-to-bill for product and services?

Remi, do you want to pick that up?

Yes, we're very happy to give it to you, the book-to-bill for product was 1.12 and for services was 1.16, total company book-to-bill was 1.14.

Got it. And then just wanted to clarify on the supply chain situation. So I think Remi, you said margin impact was about 4.5 points. What about on the revenue side, how much of revenue was impacted by component shortages?

Well, we increased our backlog by $19 million this quarter. So, we've been able to deliver everything revenue would have been in. It's very theoretical but it would have been an extra $19 million but that's the extent of the constraints that we saw this quarter.

Okay, that's pretty significant. On 5G, I guess, did I hear you correctly that you expect fiscal '22 5G revenue to exceed $20 million. Did I hear that correct, Ed?

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 you heard the deal comment that we had a lot of -- 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 ramp. 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, I don't know if you want to add any color to what I've just said?

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 and budget in networking, it's like everything. So we are seeing that larger customers that entered into proof-of-concepts like 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 like bring them together, that brings -- 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 a 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.

Got it. Just couple more on the 5G. So given that momentum in 5G, should we be thinking about maybe towards the high end of $50 million to $100 million for fiscal '23? Or is it still too early?

I think, Dave, we haven't updated our guidance yet. I would defer to Remi in terms of what's out on the Street. But one of the things we'll talk about is that we are going to have an Analyst Day in late Spring and we're expecting to dive in -- do a deep dive here. And I think that's probably a time where we'll revise numbers. But Remi, do you want to add anything to that question?

No, for now, the $50 million 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 represent, we feel confident about this $50 million to $100 million range that we provided last year.

Got it. And any new customers in the pipeline?

Yes, that question, it's interesting because we have -- we have in the case of our cloud-native infrastructure solutions, we have a force multiplier because our partner is a -- 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 Nabil was talking about. So from that standpoint, we are able to leverage 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 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 spurning growth with our other service provider customers. And Nabil, I invite you into this the conversation here.

Yes, thank you, Ed and absolutely. It's -- 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, so 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 happened a little bit at a different pace in service providers. So these newer customers will go through their early stages, their parks and then early deployments. 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 cloud service but not the mega ones but broader cloud-ish kind of service providers. And just to kind of give you 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 valuable to other service providers and perhaps some larger enterprises as well. So we see this technology kind of broadening it's influence beyond 5G as the quarters roll out.

Got it. Thank you.

Thank you. Our next question comes from Eric Martinuzzi with Lake Street. Your line is open.

Yes. I wanted to focus on the SaaS 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 have been in the -- running in the 100% range. Are you seeing a change in 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?

Yes, why don't I -- I think we'll have a few of us that chime in here, Eric. When we turned up ExtremeCloud 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, the -- 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 those -- 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 time frame. Remi, do you want to add to that? 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 Remi, if you want to chime in on specific numbers for Eric or how we should think about it. And then Nabil, if you want to provide some commentary around kind of this evolution of XIT subscriptions going forward. which we would see to be kind of 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.

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-prem 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 Aerohive 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 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.

Yes 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 cohort and then the hard 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 Remi is pointing out. What I would address from a product, from a technology point of view that we have -- we have two really access for growth in the subscription business overall. One is more and more devices that become part of our cloud, so 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 your licenses on top of our ExtremeCloud platform. 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 ARPU. And then we are adding another cohort on top of all of this which is SD-WAN part which we acquired from Ipanema and we're just about to launch that this quarter. Well, that will 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 net-net, when you add them, we are very confident, as Remi mentioned in the growth numbers that we have projected well into multiple years from now.

Got it. Thanks for taking my question and congratulations on the quarter.

Thanks, Eric. And I think we're going to wrap up at this point. I just -- I'd like to thank all of -- 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 Spring 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 the hard work that's gone into executing and delivering at Extreme. So, I hope everybody stays in good health and we look forward to be catching up soon. Take care and have a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect.