Good day and thank you for standing by. Welcome to the Extreme Networks Third Quarter Fiscal Year 2022 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. [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. Welcome to the Extreme Networks Third Quarter Fiscal '22 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 and CFO Remi Thomas. We just distributed a press release and filed an 8-K detailing Extreme Networks financial results for the quarter. For your convenience, a copy of the press release which includes our GAAP and 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 and operational results, growth expectations and strategies. 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 by our risk factors in our 10-K report for the period ended 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, Edward Meyercord.

Thank you, Stan, and thank you all for joining us this morning. Q3 was characterized by strong double-digit bookings and the fifth consecutive quarter of double-digit revenue growth that led to record quarterly bookings and revenue. We achieved these results despite industry-wide supply chain challenges. We built an incremental 130 million product backlog which now sits at over $425 million. We see strong demand as we turn the corner into Q4 and fiscal '23 for both our Enterprise and 5G solutions. A record 45 customers placed orders of more than a $1 million and our product book-to-bill was over 1.4 as demand continues to exceed supply. Our competitive position in the industry has never been stronger and we're taking share. Small share gains equate to a large impact on Extreme's top line. Q3 marks the fifth consecutive quarter of double-digit product revenue growth led by the strength of Cloud, sales of our universal switching hardware platforms and adoption of our WiFi 6E access points. We expect this level of organic growth to continue. SaaS ARR was $97 million this quarter up 54% year-over-year, 10%, quarter-over-quarter, driven by strong execution. Keep in mind this was approximately $40 million when we acquired Aerohive 2.5 years ago. Today, we have 13% share and hold a number two position in cloud networking, and we continue to gain momentum, thanks to new bookings and strong renewals. As we look for new ways to drive better outcomes for our customers and build on our vision of the Infinite Enterprise. We have extended beyond the campus to support a distributed environment at the WAN edge. This will provide the next wave of growth in our subscription business and support our long-term subscription growth outlook of 25% to 35%. In our service provider business, we're on pace to…

Thanks, Ed. As Ed noted, Fiscal ‘22 continues to be an exceptional year for Extreme and we're executing well across the board. Q3, total revenue of $286 million grew 13% year-over-year. Strong demand for our wired and wireless portfolio drove year-over-year revenue growth of 12% for product and 13% for services and subscription. Product book-to-bill was at 143 and the $425 million of backlog we are currently carrying is over 2 times larger than our product revenue this quarter. Services book-to-bill was also high at 121, as we show on Page 5, of our quarterly earnings deck. We saw another strong quarter of SaaS subscription bookings with year-over-year growth of 85%. SaaS annual recurring revenue or SaaS ARR, reached $97 million of 54% year-over-year and 10% quarter-over-quarter. The historical ARR data can be found on Page 15 of the Q3 earnings deck posted on our website. SaaS deferred revenue was a $143 million at the end of Q3, up 44% year-over-year, and 5% quarter-over-quarter. Non-GAAP earnings per share was $0.21, up from $0.16 in the year-over-quarter and flat from last quarter. On a geographic basis and looking at total company revenue, EMEA enjoyed the strongest year-over-year growth in revenue, followed by Americas. APAC revenue was most constrained by supply chain. From a vertical standpoint and looking at total company bookings, the highest year-over-year growth came from sports and entertainment, manufacturing, government, and healthcare, all of which grew strong double digits year-over-year. Turning to product trends. Wireless bookings were exceptional, book year-over-year, and sequentially, but revenue was constrained by supply chain challenges. A wide business maintained very strong and consistent double-digit growth in bookings and revenue for the fifth quarter in a row. Services and subscription revenue reached a new high at $87.1 million up 13% from the year-ago quarter and…

Thank you. As reminder to ask a question you will need to [Operators Instructions]. The first question comes from Alex Henderson with Needham. Your line is open.

Great. Thank you very much, and all I can say is wow, that's a big acceleration. Congratulations. So, I am a little concerned about what's going on in China right now with massive lockdowns in large portions of the country, over 400 million people currently locked in their apartments that I believe that that's going to have some impact on supply chain, but not yet. I would think it would take a couple of quarters for that to fully manifest out to people. Can you talk to your exposure to China, whether it be in parts or whether it be in chips, or any other elements? And to what extent you factored that supply chain challenge into the outlook?

Sure. Thanks, Alex. This is Ed. The answer is we have factored that into our outlook and we are very much aware as you know, this is something that given the fact that our top-line is being driven by supply it will be really throughout fiscal '23, it's all hands-on deck 24/7 as far as how we’re managing the supply chain. But I mentioned that the big change for us, first of all, say that as it relates to Broadcom and that chip set, and we've shared this before we are not constrained and we're confident in our outlook. The issue has been the secondary and tertiary component part providers. Historically, we relied on ODMs and in the fourth quarter, we moved aggressively to establish direct relationships with these providers and so now we're in the process of securing ship dates and quantities out into the future and I would say that's the main driver of our confidence. We are very much aware of what's going on over in China and the lockdowns there and we rely on our suppliers to provide us with that feedback in terms of how they feel, their confidence levels. So -- and that's how we -- that's how we built our forecast. Obviously in the near-term, we're confident around Q4 and what we're guiding there, as we mentioned, we think it's the low watermark, and we have confidence in stepping through this in fiscal '23. So, yes, we're mindful of it. We're aware of it, it's top of mind for everyone throughout our entire supply chain. It's something that we've considered in our outlook.

As you look out to that FY '23 guide, I assume then that it really is very heavily back-half loaded in. It's more of the March and June quarters of FY '23 that -- providing the growth. Is that a fair assessment in terms of the slope of the year?

We're assuming that we're stepping out of it. I'll let Remi come in, but it is as I mentioned, it's very supply chain oriented, so we have visibility to a quarterly step. And then based on a few of our largest Tier 2 and 3 component providers, we see relief in our -- in the second half of our fiscal. And I called out in my comments, June as when we expect to be in a position to begin to release backlog.

And just one last question then I'll cede the floor. On the pricing side of the equation, it looks like Cisco has increased prices somewhere in the 10% to 15% vicinity in the campus and as much as 20% plus in the data center. And it does also look like they're subsidizing an attack into the Cloud from the enterprise and making their parts or their supply availability skewed towards their largest customers which does seem to me to open a significant opportunity for you guys. Are, first of all, the data points that I just threw out consistent with what you're seeing and do you think that there is increased share gain because of the orientation to competing with Arista combined with focusing on the largest accounts, creating an opportunity for share gains? Can you talk to that issue?

I think that's a contributing factor, Alex. And I think I would agree with your numbers. Obviously, there's not a precise science behind it, but 10% to 15% for Enterprise in terms of what we see, makes sense we tend to price just below the Cisco umbrella and we've been able to raise price as well, which has helped us offset the increased cost to supply chain. But to your point, the prioritization of larger customers and also larger partners out in the channel has been opening up interesting opportunities for us with direct end-user projects, as well as taking share out on the channel community. So, I think your assessment is on, I can't really comment on whether or not there's a subsidy in the enterprise to fund data center, we're not really playing up in that data center space. So that's hard for me to comment on, but I can tell you that we're clearly taking share from Cisco, it was the largest player in our space. They have been raising price and they are supply chain constrained, and I think to the extent that we're able to benefit despite our own constraints, I think it's a very fair assessment.

Congratulations on a really great execution. You guys really have stepped it up. Thanks.

Thanks, Alex.

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

Yes, I wanted to focus on the outlook for Q4. Looking here at the midpoint that 270 million on the top line, that would be down year-on-year versus Q4. You're at 278 million a year ago. And just wondering, given the outlook for 2023, what sort of -- I know you're going to comment more on it at your Analyst Day, but what does that say about the first half of FY ‘23?

I'll comment and Remi let you follow me, but as I just mentioned to Alex, it's all driven by supply chain. So, this is all the work that our teams have been doing on many fronts. I highlighted the -- our shift in strategy to go direct to the Tier 2 and Tier 3, there has been a lot of work establishing those connections, relationships. And as I mentioned, importantly, the secure ship dates and desired quantities working directly with them are getting at. That has been very helpful to our teams, they're getting much more savvy in terms of how to get that supply. And that's the main driver. The other thing that we do is, we look at re-engineering, how do we swap out components and parts? Normally we would do that more from a cost perspective and trying to drive margins. Here, I'd say we have 10X the volume of our supply chain operations teams working with our engineering teams to swap out components to find parts where we need them in and it's a very tactical exercise but the teams have been doing a great job on that. So, it's the combination of a lot of different tactical initiatives that are giving us confidence in calling the number which is supply chain driven. As we mentioned, we're still looking and we expect to build backlog obviously in this quarter and then throughout fiscal '23 but the change in the book-to-bill, we do see that beginning to come down. So, this year, as you look out and you look at all of the backlog we built this year, we expect that backlog number to be lower next year and then therefore, that along with even if you assume the flat bookings number, then -- and we're taking share and we're growing in terms of the bookings line, just that change in book-to-bill and the change in the backlog outlook create significant growth for Extreme. So that's what we're gearing up for and then when you move further out, you contemplate the release of backlog, that's where the growth numbers really take up. So that -- near-term is all very much supply chain oriented, I mentioned some of the initiatives, and then longer-term there's other factors that come into play not to mention this growth in subscription and we expect that -- those growth rates to continue. Remi, do you want to add anything to what I said?

Yeah, sure just to put a little color behind what Ed just said. So Q4 is really the only quarter where because of the supply chain constraints we see a slight year-over-year decline at 270 and then when you think about entering fiscal '23, I'd say Q1 should be in the mid-single digit year-over-year growth. Q2, you will see a mid-to-high single digit growth. Q3 will be comfortably above $300 million and with an almost double-digit growth. And then you're going to see an acceleration in Q4, and supply chain constraints really finally complete these up and you should see strong, very strong double-digit growth in that fiscal Q4 next year. So, this is the ramp, as we see it with the $300 million mark being crossed around Q2.

Okay. And then just looking back for its here on the March quarter, you talked a little bit about the AR spike, the DSO increase there. What can you believe was behind the linearity that you saw versus a year ago?

Yes, it's usually we have a split which I haven't really communicated in our revenue from products in the quarter. There's a normal ramp, but we do have shipments in January and February. And based on our payment terms, quite off and we'll be able to collect on those shipments. We had very, very low shipments in the first couple of months in the year. A lot of the shipments were in the third month. And so, where we're not able to have a pool of receivable as high as we normally do, which is why you saw that increase of about $30 million.

Okay. Thank you for taking my questions.

Thanks, Eric.

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

Thank you, and good morning. My first question is regarding the supply chain situation as far as the intensity of the situation, is the June quarter the peak?

Yes, I call it the low watermark for revenue, but for us, it's the peak constraints. And some of that also has to do with we had a lot of projects with some of our low running supply in the March quarter that we were able to unlock. But our outlook now is that it is the -- we're peaking here as we established and we look to build the secondary and component parts.

And you're guiding gross margin to 58%, so it sounds like 58% is the bottom, and then we should see some kind of modest increase, improvement beyond June quarter?

That's right and I'll let Remi if you want to add any other color commentary.

Yeah because of the historical strength of our backlog, some of the orders that we have yet to deliver were booked prior to certain price increase. So, it takes a while as we release the backlog to get the full benefit of the price increase, and so you're going to see that coming through the next couple of quarters. In the meantime, however, we still have a high level of expedite fees and freight costs.

Got it. And then Ed, you talked about for 5G, you've mentioned about new use cases. Can you provide more color where we talked about your customers or?

No, it is the existing -- we have always talked about two large customers as it relates to our Cloud-Native infrastructure service, which is the biggest opportunity we have that growth factor with that large Swedish Manufacturer. And that is -- we have done very well at them and in their annual vendor review, we were named as one of their top 3. I can also tell you from a supply chain perspective, that's part of our portfolio that is less constrained. And so, we've been able to fill demand and we've been able to take share from some of the larger competitors that we go up against insight of that account. So that's put us in a really good stead and it's very much of a partnership. And yes, they've opened the door to us to some very large new opportunities. We believe that based on our overall market share within the account, we're still a very small players, call it sub-10% players. They had opened up some new opportunities for us and we use cases for us. And we'll be investing in them. And we think that will only help build on the, on the growth that we're experiencing right now. A lot of their customers are moving from proof-of-concept, so if you look at our funnel and you see this big growth for proof-of-concept and then you see through that, you see now people starting to roll out and you see deployments and now at this phase where there's early proof-of-concepts are starting to deploy and so we're starting to see that ramp. I'm not at liberty to comment yet on the other use cases that we're working with them on but we're excited that they've chosen us to work with them on them and we're excited about what it means for us for future growth and then to build on the momentum that we have with CNIS.

And my final question is, are you on -- as far as 5G revenue is concerned, are you still on track to do $20 million this fiscal year and then $50 million to a $100 million next fiscal year?

Yeah. I don't know what we've said about next fiscal year but we are absolutely on track to exceed the $20 million increase that we guided to for this year. So, for our 5G SP, we are on track, that's very healthy and then I believe we've said $50 million to a $100 million over time and we feel very confident of that. I'm not -- I don't know if we gave that 100 number for fiscal '23 but out in the future, that is clearly a high-growth vector for us inside of Extreme.

Thank you.

Thank you. Our next question comes from Christian Schwab with Craig - Hallum. Your line is open.

Great, thanks for taking my questions. Really strong outlook. Remi can you explain your very optimistic top-line growth expectations? I can understand as we go throughout this year as supply chain loosens up and then we begin to work through backlog, but can you talk about the verticals that you believe are going to be driving such strong top-line growth expectations following fiscal year '23?

Yeah, that's a great question Christian. Thanks for asking. So, we see strength in terms of bookings across all verticals. We feel some of it may be driven by your customers getting in line because of the longer lead times and -- sometimes getting ahead of the -- of the price increase. But if I look at education, government, healthcare, manufacturing, sports, entertainments, we've been really enjoying unabated strong growth in bookings over the past few quarters. So that's the first driver of this and based on the pipe in the funnel that we see for next year, we don't really see any slowdown. The other side of the equation is -- is the backlog. I mean, three years ago we would start the quarter, Christian, with anywhere between $20 million to $30 million to $40 million in product backlog, which was basically 10% to 20% of the product revenue we would generate in that quarter. Right now, we're [Indiscernible] of $425 million which is more than two quarters of product revenue. So, when you continue to see the trend in bookings, and obviously the year-over-year growth for bookings will no doubt decline. But you combine that with our ability, which really accelerate as a fiscal '23 and specifically in Q4 to release that backlog the combination of both is what drives to mid-teens growth.

Remi what your lead times when you had $20 to $40 million in backlog and what are your currently quarterly lead times?

The lead time at the time were measured in weeks today they're measured in months. And it really depends on the skews, but that's how you should be thinking about this. [Indiscernible] not two months. It's main many cases, several months.

And then my last question is just a follow-up on what you said a few minutes ago. You talked about customer order patterns given lead times and price increases. Have you guys let the channel or your leading customers know that -- in an organized fashion or way, that another price increase is coming their way?

We did, yeah. We typically notify our distributors and now large business partners about a month ahead of any price increase.

Great. Alright, perfect. No other questions. Thanks, guys.

[Operator Instructions] and looks like we have a follow-up from Alex Henderson with Needham. Your line is open.

Great. Thanks, [Indiscernible]. I wanted to focus in on the June quarter, not so much in terms of revenue, but rather in terms of the expectations around the book-to-bill and whether you'll be building backlog again in the June quarter, it sounds like even though you're finally lapping the very strong order growth from last year that you might actually have booking or orders up again. I would assume that at a minimum year book-to-bill will be above one, but we'll orders actually be up?

I'll jump in Remi then you'll follow but the answer is yes. I mean, book-to-bill will definitely be over one in the quarter from a booking’s perspective. We had an incredible March quarter, some of that due to a price increase and then some of that due to just what's going on in supply chain and demand and then a lot of that is just how we're executing in the marketplace. And that is continuing. So, we see the strength in the bookings continue to build this quarter and as we look forward in our funnel of opportunities, that continues to grow at a really nice clip as well. So, the outlook for bookings remains very strong. We will absolutely build backlog in the June quarter based on the supply chain constraints. So, I think Alex, as you're looking out, they're over 425 today and we'll definitely continue to expand not only in the June quarter but we expect for the next several quarters to go forward based on strength of demand and bookings.

Just to be clear here, so there's difference between the book-to-bill and the year-over-year order rate because your book-to-bill could be above one in the annual orders decline year-over-year. Are you saying that you believe that your orders will actually be up year-over-year against that one, I think it was what, 30% order growth last year if I remember correctly?

I was told bookings are expected to be slightly up, including services and subscription on a year-over-year basis in Q4? Yes.

While [Indiscernible] that's great. Then the year-over-year start to flatten out in decline on against the comps in the back-half of the calendar year, is that with the book-to-bill still solidly above one?

I think the book-to-bill will be above one for the first half of fiscal '23, although the year-over-year compare in some quarters will be tough to be.

Right. Okay. That makes good sense. Come back to the pricing stuff. You say that you've notify your dealers a month in advance, have you notified your dealers some additional price increase?

We've notified obviously of the most recent price increase, but we haven't really officially said when it took place and the extent. But Ed earlier mentioned that we keep ourselves below Cisco, so it's not the 10% to 15% that you quoted Alex, it's a lower price increase, but we just did one.

I'm just a little confused. So, you did one in the March quarter that we know about, right? That that's already done? Have you announced another one that hasn't actually been implemented yet?

We announced one in the March quarter, but it was just effective in April. And we have not announced anything else. We're trying to stay competitive in the marketplace.

Perfect. That's the clarification I was looking for. Going back into the verticals for a second, can you just remind us what's going on with E-rate? Frankly, it's hard to keep track of it.

The 2022 season was just completed and Extreme Networks actively participated in that season and we won our fair share. And the overall filings are looking like they will be growth on a year-over-year basis in terms of what the total spend for E-rate is going to be.

All right. And then one last question, if I could -- if I ever mentioned on their call that starting in February that there was a slowdown in the number of deals that were closed, even though their pipeline was quite strong and then it got a little bit worse in the March timeframe. Have you seen any change in EMEA is results of the war in terms of ordering rates? Not so much in terms of the pipeline, but rather the closure rates?

In our case, we haven't, if anything, we saw higher conversion rates. In other words, the close one ratio on our pipe was higher in March because of what I just mentioned earlier. This season customers wanting to get ahead of a price increase. And outside of the small business that we do in Russia and Ukraine, we haven't seen any sign of slowdown because of the situation in Eastern Europe. If anything, things accelerated for us in March.

Perfect. Thank you.

Thank you. And I'm showing no other questions in the queue. I'd like to turn the call back to Ed Meyercord for closing remarks.

Okay. Thank you, Catherine. Thanks, everybody for joining us today. So, I want to shout out to our Extreme employees just an incredible quarter on the execution front, both on the demand side as well as delivering on supply and a challenging environment. For all investors, we're hoping to see you at Investor Day. We'll be in New York City, Major League Baseball headquarters. Very fun venue. And importantly we have a lot of confidence in the demand side and demand gen side of the equation as far as bookings in terms of growth, this higher growth software, subscription, services and solutions that we're building on as far as WAN edge and how we're building on that. We will go into deep detail and provide lots of color on supply chain. And finally, we have details and a long-term model that Remi still -- that we want to share with everyone. So hopefully you will be able to clear the calendar to join us there and also in other investor conferences. So again, thank you for your time, we appreciate your participation, have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.