EXTR - NASDAQ

Ladies and gentlemen, thank you for standing by and welcome to the Extreme Networks Q1 FY '23 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Stan Kovler, you may begin.

Thank you, Kevin. Welcome to Extreme Networks first quarter in 2023 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, Rémi 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 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 and operational results, growth expectations and strategies. All financial disclosures on this call will be on a non-GAAP basis, unless stated otherwise. We caution you not put [indiscernible] 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 of described in our risk factors in our 10-K report for the period ended June 30, 2022, as 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 as required except as required by law. Now, I will turn the call over to Extreme’s President and Chief Executive Officer, Ed Meyercord.

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

Thanks. I’m going to break that a little bit because I wanted to get some clarification on some of the numbers which are just pretty straightforward. Can you give us some guide on the interest line since you obviously have a lot of things moving around in there? And did you say the book-to-bill was 1.3, I’m getting 1.23 when I calculate it.

Product looks to be a little at 1.3, Alex.

It was 1.3%, okay.

Yes, it was 1.4%. So the average is slightly higher.

I see, I see. And the interest line?

Hold on, let me just bring that up. It keeps moving with 1-month LIBOR rate. You should assume about $5 million a quarter.

The LIBOR rate going up 75 basis points this morning impacted you guys or ECB did?

We do the reset on a monthly basis. So today's rate may not necessarily be the one that we'll have after November 9. But currently, it would be 330 plus 125 would be 455 [ph] if we use the last 1 month LIBOR reset that we have.

Okay. If I could ask a couple of questions. Just -- those were just technical details. The first one is, I didn’t hear any mention of pricing. And I know pricing has gone up in the industry. I know you guys have increased price. Can you talk about where you are in terms of actually getting the price in the numbers this quarter as well as where you expect the pricing to look like? And one other clarification, you said you wanted to -- you thought your backlog would increase by year end. Do you mean increase from the start of the fiscal year? Or do you mean increase from the 555 [ph]?

Alex, I'll jump in and then, Rémi, you can back me up here. Alex, we expect backlog to increase each quarter throughout the remainder of our fiscal year. So we're expecting increases in December, March and June.

Perfect.

So just to be clear, in the quarter, the price benefit was low single digits and you expect it to be what by the fourth quarter or fiscal year?

There was -- I mean, there was an impact this quarter of the price increase that we made on April 1. However, the impact of the October 1 price increase was not felt in the September quarter.

Clearly. But my point -- my question is what was the real impact of price increases in the quarter? Was it low single digit contribution to your revenue growth or some other number?

Yes, low single digit coming from prior price increases, correct.

And you expect by the June quarter it will be 5%, 6%, 8%, 1%? What are your expectations for the realization of that when you talk about building backlog through the end of the year and the like?

[Indiscernible] discount trends don't change, it would be low to mid-single digits.

Low to mid-single digits. Thank you.

Thanks, Alex.

One moment for our next question. Our next question comes from Eric Martinuzzi with Lake Street Capital. Your line is open.

I’m going to assume that to me. It’s Eric from Lake Street Capital Markets. Just wanted to follow-up on the geographic commentary that you gave. You talked about bookings by geo with the Americas being up 20% and then mid-single digits for EMEA and APAC against a tough comp. Where should we think about that for fiscal year ‘23, given the revenue guide of 10% to 15%. How do you see the bookings growth across geographies for FY ‘23?

Okay.

I would say, Eric, we're not expecting -- we're expecting to grow backlog during the year. So in terms of how we get to our fiscal year growth, the expectation is that we are not reducing backlog but we're growing backlog. I just want to clarify that.

Yes. Okay. And then as far as the release in the gross margins, we’re seeing relief, you’ve qualified more component suppliers, you’ve got a little bit of breathing room on the expedite fee. But what’s really the -- it’s -- I’m looking for what’s the biggest contributor to the gross margin expansion as we go quarter-by-quarter.

Eric, that would be the reduction in expedite fees based on what we paid to our key suppliers of semiconductors and components as well as the reduction of freight cost which is still elevated today because most of the products that are produced out of China and Taiwan are shipped by air directly to El Paso which is our main hub. So the reduction of these two that are currently hurting gross margin is really what's going to drive the improvement over time.

Got it. Thanks for taking my questions.

One moment for our next question. Our next question comes from Paul Silverstein with Cowen. Your line is open.

Thanks, guys. Two questions, if I may. One, on macro, it sure doesn’t sounded from the numbers in your commentary but I’ve got to ask. Last -- the other day we had F5 in Juniper with 2 very different messages. In F5s case, there was about cancellations, delays, downsizing increased budget scrutiny, especially overseas, in particular overseas. Are you not seeing any of that, especially in light of FX and energy prices in Europe, etcetera?

Paul, it's something that we -- obviously, is something that we keep a very close eye on. And we're not seeing it. We have a lot of different variables that we look at, specifically as we look forward, we look at opportunities that we have in the funnel that are -- and we're scrubbing those regularly. We have feedback from our direct sellers in field and what they're rolling up and calling. And as you're aware, we have an AI tool that sits on top of Salesforce that comes up with a call. So we kind of have kind of 3 legs to our outlook and we're just not seeing it. There's 2 things that are in play here. One is the resiliency of networking. One way to offset inflation is productivity and -- and what's driving productivity are improvements in technology and all the digital transformation projects that you see today, the glue to everything is the network. And so we're not seeing networking initiatives being deprioritized. And in our backlog, the fact that we have a backlog of complicated networking systems, not commodity products, we're not seeing -- we're not seeing the books. And so that's why we say it's a fraction of 1% because it truly is. So if enterprise customers are having to cut back spend, we're not seeing them prioritize networking. We're seeing other items in the budget being cut in front of networking. So that's one thing. The other thing is our relative size and we mentioned that we're taking share. The fact of the matter is we are taking share against much larger players. So these small share gains for us can cloud what may be happening in the larger market. So the -- our ability to continue to drive bookings even in these challenged markets like in the EMEA market or currency challenged markets in APAC, we still see healthy growth in bookings and some of that is going to be from market share gains. And the other is, as I mentioned, is just the resiliency of these networking projects which in our mind to become more strategic for enterprise customers.

And I just thought you just pushed through, you’re not even seeing elongated sales cycles.

No, we're not. I would say it's actually the opposite, Paul, we're seeing. If anything and this goes back to supply chain, if anything, we may see people that are anticipating lead times and ordering early so that they can establish their position as it relates to supply chain. So we're not seeing it. And in our case, we're asking the questions. We're all over it. Obviously, given everything that's going on in the world and the news, there's this expectation. So we're very sensitive to it. What I would say is we're just -- we're not seeing it.

That pegs the question. Do you -- I assume the answer is no but has there been any communication view or anything that would argue that the supply chain constraints are keeping customers in line and that may be why you and others haven’t seen any weakness yet relative to macro. Again, I assume for when…

Paul, I think it's fair that, that could be a factor. So in the case of Extreme, there's the overall significance of networking initiatives for our enterprise customers which underlie all of their digital transformation and productivity and sort of -- it's all about how they're driving their business and so we're just -- we're not seeing that get deprioritized. I think there is a supply chain element that you mentioned. There's also an element. Our story hangs together with our fabric and with our cloud, with our end-to-end enterprise solution and the recognition that Extreme is getting in the marketplace today. We are getting -- we're seeing more opportunities. And I think some of our larger competitors are creating these opportunities because of a disjointed vision of how to leverage cloud, how to have this single pane of glass, a single view of all your network elements end-to-end across the enterprise, the orchestration of services from one cloud, future proof in your investment and with the latest technology, we have the cleanest story out in the marketplace today when you combine that with our fabric technology. And it's resonating. And so we're taking share and we do have a different story and we're getting more looks. And I think some of that is -- we're the beneficiary of some of the issues out in the market with some of our larger competitors.

One last question on this. Ed, correct me if I’m wrong. Historically, when there were downturns, especially significant downturns, the typical customer behavior in that environment had been to stay with the incumbent and not to switch vendors. It was only in better environments when they were more willing by away from whoever their increment was HP, Cisco level. Do I have that right?

I'm not sure -- I'm not sure I can validate that for you, Paul. I think in this environment what we're seeing is maybe the opposite. Their supply chain strategies in some of the larger players have pursued that are creating opportunities, as I mentioned, for us, especially our enterprise customers. And then there's a lack of a cohesive solution for customers where it's very expensive for them. So it's almost more expensive for them to stay with some of the legacy larger vendors in a sense more risky because of the lack of a cohesive end-to-end strategy, especially as it relates to cloud. And that's something that's creating more opportunities for us rather than less. And that may be different than maybe what you saw in the traditional recessionary type or a downturn scenario in the market.

One moment for our next question. Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.

Great. Thanks. So, guys, really good report. I mean, I don’t see anything not great here except for, I guess, the gross margins your building up sequentially, the gross margin was in the quarter and the guide were just very slightly less than what we were looking for. And I guess my question is, is that more a function of the supply chain and expedite fees? Or is that more of a function of the mix shift to wireless? And where do we think that’s going to look like in future quarters, particularly in the back half of the year? Do we expect a mix shift away from wireless? Or will that ground for a while?

I would say that the latter because the amount of expedite fees and the freight costs that we paid in the quarter were in line with our expectations. The shift to wireless was more pronounced than we expected entering the quarter. And that's really what drive the difference between the 57.6 [ph] that we reported and the 58 [ph] that we were getting for at the start of the quarter.

Rémi, I can add one other variable here which is if you recall a year ago, we did not have these direct relationships with secondary and tertiary component vendors. And today we do, we meet regularly and we have confidence in what they're delivering because they are delivering on what they say they're going to deliver. And they've given us the commitment of the ramp. When we don't have the direct commitment and we're not getting the shipments, we also have to go out in the secondary markets to find product. And so that also leads to increased prices when we're having to go out and buy components in the secondary market. So as we have and we see the commit from the secondary and tertiary component vendors step up, this is what's giving us the confidence in the forecast. At the same time, it will reduce our reliance on secondary markets where we're paying up, also the expedite fees that Rémi is talking about as well as the freight components.

Okay. Great. Perfect. I guess, back on the macro, you guys gave a very direct, I thought clear answer on particularly around Europe, you are not seeing macro weakness. You did mention in the prepared remarks though, about some, I guess, currency-related weakness in Asia Pacific. So I guess, is that the macro effect that you’re seeing? And what do you think the -- I mean, the solution to that is. Is this customers’ willingness to pay? Or expectations of the currency will change? Or is there any thought of repricing any of the backlog if it gets worse? Just your thoughts on those issues, please.

Okay. Fantastic. Last question. I know I’m going to ask the same, I guess, numbers everybody asked. But fiscal ‘24, I guess, where we’re still looking, I just want to confirm, first of all, that we’re still looking for acceleration in the 13% to 17% revenue growth. But I guess we would expect the book-to-bill to be below 1 that year because we releasing so much backlog but I don’t know if you can see this far out. But kind of sequentially year-over-year, ‘24 orders versus ‘23 orders, do you think that they could be flat to up? Or do you think that they’ll be down? If you can have any view this early on that?

Great. Well, congratulations on the results and the momentum and keep up the great work.

Thank you.

One moment for our next question. Our next question comes from Dave Kang with B. Riley. Your line is open.

Got it. Thank you.

One moment for our next question. Our next question comes from Christian Schwab with Craig-Hallum. Your line is open.

Fantastic. No other questions. Thank you.

One moment for our next question. Our next question is the follow-up from Alex Henderson with Needham. Your line is open.

Alex, was your question on decommits related to customers or suppliers?

His line -- actually left the queue.

Okay.

So we're going to move on to our last question as a follow-up from, one moment. So a follow-up question from Paul Silverstein with Cowen. Your line is open.

Paul, we have an excellent relationship with them. We just met with senior leadership in Stockholm. I -- we are in a very good position with that account. And in addition to C&IS which is really a function of 5G rollouts from carriers and each of the carriers is kind of at their own stage of life cycle. So we're seeing we're seeing a couple of the larger carriers move from proof of concept into deployment modes. So that's -- we're excited because we're the sole source vendor for that application which we expect to roll out over the next 5-plus years. The -- we are looking at other opportunities with Ericsson that I would say are longer term in nature. But we have new growth opportunities within that account.

Ed, on the 5G products in general, because I believe you’ve referenced another relationship previously won directly with a specific carrier. What’s the current revenue run rate from that and what’s the potential going forward?

Okay. Thanks, guys.

Thank, Paul.

And I'd like to turn the call back over to Ed for any closing remarks.

Yes. Well, thank you. Great questions. We appreciate participation in the call and the engagement with the analysts and people who are participating on the call. It was obviously a strong quarter for us at Extreme. We’re -- it’s been a cross-functional effort across the board and really proud of the caliber of execution of all of our teams at Extreme across the board as well as the partnership we have with our channel community. We’ve got a lot of momentum. As we’ve said, we’re taking share. And it’s really a function today of us releasing supply chain and we’ve got better visibility to that as we step through the year. So I’d say we have more and more confidence in our outlook as we go forward. So as we say this, there’s never been a better time to be at Extreme and that’s true for our employees, partners, customers and I think it’s also true for investors. We encourage everybody that we have upcoming investor conferences. We encourage people to participate. I know with Needham, Raymond James, Oppenheimer and Cowen. So, we look forward to being with you live and have any opportunity to share the story in more detail. Thanks, everybody and have a great day.