Extreme Networks Inc (EXTR) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Extreme Networks Q2 Fiscal Year 2021 Financial Results Conference Call.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I will now turn the conference over to your host, Mr. Stan Kovler. Sir, you may begin.

Thank you, operator, and welcome to the Extreme Networks Second Fiscal Quarter 2021 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' preliminary 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 Networks' future business, financial and operational results, growth expectations and strategies, the impact of the COVID-19 pandemic, the potential impact of any adjustments to the company's distributor rebate reserve, changes resulting from the completion of the quarter end review process, new product introductions, operations and the impact of tariffs. 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 30, 2020, 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 Networks' President and CEO, Ed Meyercord.

Thank you, Stan, and thank you all for joining us this evening. I want to recognize and acknowledge the efforts of Extreme employees and their families, our extended community of partners, customers and our investors. The duration of the pandemic continues to impose challenges for everyone, and it's remarkable, the efforts that people have put forward and their commitment to Extreme to help us emerge stronger than ever before as a company.

Our preliminary Q2 results marked the third consecutive quarter of sequential growth and reflects increased customer demand and continued improvement of our team's execution across the board. I will let Remi address the potential onetime noncash accounting adjustment to our financial statements. In my comments, I will refer to financial results as normalized to address the fact that our accounting adjustments have no impact on our business or our outlook.

We outperformed our initial expectations for revenue and earnings, achieved record gross margin and operating profit and hit double-digit operating margins 2 quarters ahead of our expectations for fiscal '21. These results drove strong cash flow, which we used to pay down $40 million of our debt and reduced our leverage.

Focusing on our results. Cloud has emerged as a critical lifeline for our customers' digital transformation efforts, which are accelerated by COVID-19. Schools, governments, health care organizations and enterprises are all managing increasingly distributed networks, users and activities. Students learning from home, the delivery of remote health care and flexible work-from-home models are all here to stay. These trends are driving our new cloud subscription bookings, which grew 140% year-over-year in Q2. We believe the evolution of networking will continue to become more and more distributed and what we call the infinite enterprise. We are developing innovative next-generation technologies to lead this next market transition. Our competitive differentiation is becoming more pronounced as we are gaining more share than our competitors in cloud-based networking. We currently manage nearly 1.5 million networking elements on our ExtremeCloud IQ platform, making 6 straight quarters of sequential growth the number of customer accounts and managed devices.

Digital transformation and more specifically network transformation is driving our customers' ability to execute in the current environment. In addition, historically, the network has been an untapped resource when it comes to meaningful data that can influence and positively improve business and customer outcomes. One of the strongest differentiators of our platform is access to unlimited customer data for business and technical users to optimize network performance and deliver contextual user experiences. These data insights can be leveraged in real-time, and usage trends can be evaluated over prior periods to empower strategic decision-making. We remain the only networking vendor to provide unlimited data to our cloud management subscribers, delivering AI-driven networking insights required to compete in advance.

Enterprises without a clear and realistic plan to support the evolving types of technologies, devices and apps and people who connect to the network will fall behind. We provide our customers the tools and resources they will need to move on from high-cost and complex infrastructure. With our simple, secure cloud driven networking solution, we make it easier for them to take the next steps in their digital transformation journeys.

Extreme stands alone in providing unprecedented choice to manage edge-to-edge data center networks privately, on-prem or in any major public cloud. Enterprise customers are all embracing a hybrid cloud environment with different applications running in different public clouds, private clouds or on-prem. Our ability to support network connections and to manage seamlessly in all cloud environments provides unmatched flexibility and effortless experiences.

We continually reinvent ourselves to challenge complexity and convention in our quest to make the customer experience effortless. It's how we do business. That's why we also provide industry-leading customer support and flexible-as-a-service subscription options. Our simplified portable cloud licensing and universal hardware platforms can adapt to new use cases in the push of a button, providing much needed flexibility and investment protection.

Our sales growth is being driven by our go-to-market transformation. Our new sales leadership is driving results, yielding more opportunities through the channel. By making our channel strategy the main engine for growth, which increases customer focus and opportunity management. And by cloudifying, refreshing our portfolio, we have transformed our business. We created more feet on the street with our channel partners and put more trained sellers on the ground. We flipped the script on funnel creation with cloud channel contributing over 2.5x more pipeline and leads creation than in fiscal '20. This is a fundamental and structural change in our business that we believe will make our growth more sustainable.

Our strategic sellers are more focused on larger and more strategic opportunities, driving business with new and existing customers. 39 customers spent over $1 million with Extreme in Q2, about twice the usual number. We expect this growth to spill over into Q3 as we expect better than usual seasonality in the March quarter.

The automation of our business has helped us drive sales productivities with initiatives like channel self-service. We can add channel partners who transact with us seamlessly, and we are rapidly growing the number of transactions done through self-service. Our distributors and partners are embracing our ability to improve business velocity and deliver effortless experience.

The next steps in our cloud evolution will be to focus on customer success and drive user adoption and the number of devices on our ExtremeCloud IQ platform. The journey of cloud networking for many of our existing customers started with wireless LAN. But with our universal platform for switching, the evolution of our management tools, and in the future, our ability to manage third-party devices, we will fill out our vision of the infinite enterprise.

In summary, pivoting to investing in innovation and an effortless experience for employees and customers is now paying dividends and will continue to drive growth going forward. We were especially pleased with the strong sequential growth by our EMEA business this quarter. On a bookings basis, both our Americas and international segments are now back to fiscal '20 levels in Q2, and we expect growth to accelerate into the second half of our fiscal year. Q2 also marks the return to sequential growth in wireless on 14% quarter-over-quarter unit shipment growth. We expect wireless to once again fuel our growth in the second half of fiscal '21 as sports venue and retail verticals begin to recover further over the next several quarters.

Our new wired products are seeing increased demand in the marketplace with strong new product revenue of recently released switches such as the 5520 universal platform. Our new products are both more competitive and deliver a higher gross margin to Extreme. We have a wide range of new product introductions set for the next calendar year to expand our universal products platform with cloud-native management for switches on a truly unified cloud platform.

We also saw early ordering from some of our largest customers that are global leaders in a service provider ecosystem for 5G. 5G is a substantial growth opportunity for Extreme because of the highly focused investments we have made. First, we are in the early stages of rolling out a next-generation packet broker solution for one of the world's largest service providers. And second, we're co-developing an embedded technology into the full stack of a 5G NFVI solution with one of the largest telecom equipment vendors. We expect to see growth begin to ramp in the second half of fiscal '21.

We've created a global go-to-market sales and services team as well as a focused R&D team of engineers to specifically address this massive 5G opportunity. In addition to our existing customers, we will also bring our solutions to other large service providers around the world.

Heading into the second half of fiscal '21, we're on plan to achieve double-digit year-over-year revenue growth, record gross margins and double-digit operating margins. Our funnel remains strong and our visibility continues to improve as we emerge as a stronger, more competitive company and take share.

With that, I'll turn the call over to our CFO, Remi Thomas.

Thanks, Ed. As Ed noted, we had a very solid quarter and executed well across the board. As you're aware, upon completing our quarter end procedures, we identified a potential understatement of the reserve for our distributor rebate program. The review is ongoing, which is why we're providing a preliminary outlook for our Q2 results. We may make a nonrecurring adjustment to contra revenue in our financial statements, which would not impact our reported cash balance as of December 31. We expect to file our financial statements on time, and we'll provide an update if necessary.

Based on our preliminary Q2 performance, our results exceeded outlook across all our financial metrics for the third consecutive quarter. Our updated range for Q2 of $238 million to $248 million is above our prior guidance of $235 million to $245 million. We also anticipate sequential improvements in gross margin for the third consecutive quarter. Our new non-GAAP earnings per share outlook of $0.11 to $0.17 is above the previous range of $0.09 to $0.12. The strong quarter-over-quarter recovery in our bottom line was a function of higher updated gross margin outlook of 60.7% to 62.1% versus our prior range of 60% to 60.6%. The combination of higher anticipated gross margins and tight expense control result in an operating margin range between 9.5% to 12.2% of revenue, up from a range of 8% to 9.5% implied in our initial guidance. The significant cash flow generation we achieved allowed us to pay down $40 million in debt and strengthened our balance sheet further.

New cloud subscription grew 40% sequentially and 140% from the year ago period. Based on our Q2 bookings, our total cloud-managed subscription business reached over $80 million in annualized run rate. The growth of cloud subscription and service renewals resulted in deferred revenue of $309.1 million, up 4% sequentially and quarter-over-quarter. The growth of deferred revenue should sustain our recurring revenue and subscription revenue growth.

From a bookings perspective, the Americas region grew 2% year-over-year on higher volume and larger deal sales, while continuing to lead the way with above corporate average new cloud subscription growth. Our international business grew 3% year-over-year in bookings across products, services and subscription. We anticipate year-over-year growth to accelerate during the second half of fiscal '21.

From a verticals perspective, 6 out of our 8 major verticals were up quarter-over-quarter. We saw sustained demand in government and education spending, a rebound in health care business on both a year-over-year and quarter-over-quarter basis, strong sequential growth in service provider and another modest sequential recovery in retail and transportation and logistics. Segments of our business, such as sports and entertainment, are set to recover in the second half of fiscal '21 based on recent new win.

Our updated non-GAAP gross margin outlook reflects expectation of an improvement in product gross margin driven by higher volume, a greater mix of higher-margin new products and lower freight and tariff costs. As anticipated, the modest sequential increase in operating expense was due to higher commissions related to growth in revenue, offset by more efficiency in our R&D spending.

The expected recovery in our operating profit, combined with the prudent management of operating working capital, resulted in higher cash generation and enabled us to strengthen our balance sheet. After paying down $35 million to complete the repayment of our $55 million in revolving debt and making a principal payment of $4.8 million on our term loan, we ended Q2 with $184 million in cash and equivalents compared to $193 million at the end of Q1. This resulted in a net balance of $172.3 million, down from -- net debt balance, down from $202.9 million in Q1 and $234.9 million in the year ago quarter.

We made sequential progress in reducing our inventory levels to $49.9 million, down from $55.8 million at the end of Q1. The year-over-year and quarter-over-quarter decreases in inventory largely reflects improved demand planning, SKU rationalization and higher inventory turnover.

Now turning to guidance. We expect Q3 revenue to be in the range of $240 million to $250 million, a better than seasonal quarter. Q3 GAAP gross margin is anticipated to be in the range of 58.4% to 59.5% and non-GAAP gross margin in the range of 61.5% to 62.5%. Q3 GAAP operating expenses are expected to be in the range of $137.6 million to $139.6 million and non-GAAP OpEx in the range of $126 million to $128 million. The sequential increase in OpEx is primarily related to higher sales commission we anticipate and higher salary accruals as well as the FICA accrual reset.

Q3 GAAP earnings are expected to be in a net loss -- a net loss in the range of $5.5 million to a net income of $1.1 million or a loss of $0.04 to earnings of $0.01 per share. Non-GAAP net income is expected to be in the range of $13.5 million to $20.1 million or $0.11 to $0.16 per diluted share. In Q3, we expect average shares outstanding to be approximately 124.7 million on a GAAP basis and 126.6 million on a non-GAAP basis.

With that, I will now turn it over to the operator to begin the question-and-answer session.

(Operator Instructions) Our first questions comes from Paul Silverstein of Cowen.

Just a couple for me. First off, Remi, what are the primary drivers of the improving gross margin?

So this quarter was primarily driven by product gross margin. We continue, as you know, to introduce new products that carry a lower bill of material. So that's helpful. We also had a positive shift in the mix amongst our products. That basically drove higher gross margin because the products that recovered enjoyed stronger gross margin. And we also enjoyed this quarter the benefit of a sequential drop in freight cost. It's not quite back at the pre-COVID level, but they're trending down as well as lower tariff costs. And so the combination of all these 3 factors explain why the product gross margin was strong this quarter.

Before I ask you about visibility on revenue, on gross margin, I trust there's not much of any risk of gross margins backsliding below that 60% level. You guys are now nicely above that. It sounds like you've already crossed that bridge. But I want to ask you as a question, is there any risk of back sliding?

No, no. If anything, we expect the gross margin to continue to improve. The trends that I just described specifically for tariffs are going to get better in Q3. And overall, you saw that recurring revenue this quarter was 30%. And it's kind of compared to 2 quarters ago down a bit because product has been picking up sequentially. But over time, with the $309 million of deferred revenue that I talked about, we should be expecting our subscription and support revenue to increase as a percentage. And structurally, those 2 activities carry higher gross margins. So that should be driving our gross margin up. So we're pretty optimistic about the gross margin trends.

Yes, that's what I figured. And I appreciate you anticipated my question, which is, is it possible to quantify at this point now that you crossed the 60% bridge and directionally things are improving, is it possible to quantify over the next year or 2 what a reasonable best-case gross margin profile, what you could have seen, if things go right?

We feel comfortable about the ability for us to maintain in the 61.5% to 62.5% for the next couple of quarters. As we see the recurring revenue trending higher, that number could go up. But for the, let's say, the next few quarters, you should be thinking of us as being a 61.5% to 62.5% gross margin company.

All right. One last question for me, if I may. On visibility, I think last quarter, you and Ed had commented that business trends relative to global macroeconomic lockdown, that you're seeing constant improvement on a quarterly, monthly, weekly, almost daily basis. Is that continuing? If we think of monthly and weekly progression, are you continuing to see business activity pick up as a general proposition, if not perfectly linear, but on an ongoing basis?

And tied to that, how much of the strength is government and education tied to E-Rate? Is that -- I assume that's part of it. But how much of the strength is tied to that? And then I'll pass it on.

That's a great question. So I will make 2 comments. The first 1 is on what we've discussed with you, Paul already, which is what we call the run rate business, sometimes referred to as repeat business, which is those orders less than $50,000 that are really being generated by the installed base. And in the last 3 months of 2020, we saw a pickup in that business, which we feel was related to year-end spending as well as the accumulation of sort of pent-up demand from the month of March to May when not much happened. And so that trends we really saw across the board.

As we now enter January and going into the March quarter, obviously, we don't benefit from the year-end seasonality, but we do see this run rate business continue to be healthy. That's the overall.

And then if I look at the verticals, education and government were clearly the strongest verticals. If you think about Q4 fiscal '20 and Q1 of fiscal '21, what we've seen in the last quarter is other segments, which have been subdued and I'm thinking specifically of health care as well as service provider and communications equipment, starting to pick up as early as Q2, which bodes well for us.

The next that we expect to pick up, which has not yet would be sports and entertainment, which is stuck at less than 2% of bookings right now but we do have those new wins, specifically with MLB. That should allow this vertical to be the sort of the final one to pick up in the quarters to come.

Go ahead. I'm sorry.

I was just going to say, Remi, I think Remi did a great job answering that question. And the one thing that shouldn't be lost, Paul, and it does relate to the gross margin question is that we implemented what we call channel self-serve, which now our partners -- and I think we have to shout out to the partners of Extreme. We're seeing a lot of activity and growth with partners in the channel that really want to work with Extreme. They're embracing our cloud. So our partners are driving growth.

And then what we're doing as far as all of our lead-gen activities, we're pushing that out through partners. And then we're supporting our partner teams in a different way than we did before. And then we're allowing, as we referenced, sellers to really get out and sell larger customers.

So I would say that as it relates to COVID, we're seeing a return of some verticals like sports venue and then also retail coming back. And then I think as everybody understands from the economic news last week, the economy remains strong. And from that standpoint, we continue to see strength. And Extreme is a smaller player relative to some of the larger players in the industry, and we're taking share. So for Extreme, large -- very small incremental share gains means a lot to our top line and to growth for Extreme, and we're clearly taking share here.

Our next question comes from Christian Schwab of Craig-Hallum.

My only question has to do with the 5G opportunity. And I know you guys -- Ed, you've used the word substantial and then you used the word massive. Should we be thinking about that as kind of, I guess, at $1 billion-plus potential run rate kind of you think -- should we be thinking about that as like a $50 million to $100 million revenue opportunity?

Yes. It depends over what period of time, Christian. Over the long term, it's much bigger. So we talk about 2 different growth vectors. One is with a specific next-gen packet broker where we see ourselves being full, I'll call, 12, 18 months ahead of any other competitor in the industry. We have a very large customer that is a longstanding customer. And our application is dialed in and pretty unique to them. However, the technology could be applied to other service providers around the globe. And the technology differentiation is real.

In the second case, we have one of the world's largest telecom infrastructure providers as -- we're built into their solution. And then they're going out to service providers for 5G. So we have an opportunity leveraging that relationship to go out to all of the service providers around the world. And that could -- based on their competitive position in the market, we see that taking off.

In addition to that one opportunity and that one growth vector within that company, there are other growth vectors that are available. And we have one of the highest vendor ratings of any of their vendors. And they will open doors for us for new opportunities.

So I think you're a little short in terms of how you're thinking about the market potential for Extreme. We're taking a long-term approach here in what this could be. Obviously, we don't provide -- we're not providing guidance on a longer term, but I think you'd probably have to take it up a bit.

Okay. And then would you expect that the majority of that to be shipped? You talked about it ramping in the second half of this fiscal year. Is that something that's going to be sold for many years or a significant portion of that will be sold within the next year or 2, would you imagine?

No. It would be many years. It would be many years. I think this 5G deployment will be the largest investment in telecom infrastructure in history. And this is something that we see going on for at least 15 years and because of the differences in 5G and then what does it mean for last-mile connections. And it's a very different technology, and we're just excited to have some pretty amazing partners to be going out into the market with and then different ways to win that are new growth vectors that we haven't had before. Extreme has never had this kind of a growth opportunity.

Right. So these are -- I understand -- remember the packet broker business of Brocade and how they were -- I think they were sole-sourced at both 3G and 4G. So it sounds like you think that might be the case at 5G as well?

We do. We do.

Our next question comes from Alex Henderson of Needham.

Yes. I just wanted to go back to that last answer. When you say it's significantly larger than the $50 million to $100 million that Christian threw out, I think you're referring to over an extended period of time. I think his question was really reflecting, is it potentially $50 million to $100 million in an annual revenue opportunity as opposed to over a long period of time, multiyear opportunity? Can you just clarify that response relative to the scaling as an annual run rate?

Yes. And that's what I was referring. That's -- I answered the question the way you're thinking about it, Alex. And what I would say is we have an Investor Day coming...

So the answer was that it's over a long period then, not over -- you think it could be $50 million to $100 million annually?

Correct. Yes. Okay.

And a final question -- go ahead.

Yes. I was going to say, I think -- I was just mentioning, we have an Investor Day coming up, and Nabil Bukhari who -- he is our Chief Technology Officer as well as our Chief Product Officer and runs engineering, you'll have an opportunity to hear him go into great detail. And that we'll also share all of the new growth vectors that we have that relate around 5G and what it means.

We've hired a new SVP who's going to be running this and taking what is -- if you frame a $50 million to $100 million opportunity on an annualized basis and if you go out a couple of years and have that kind of a target, we're talking about expanding the addressable market to other service providers who are hiring teams specifically to go focus on this new growth vector, given that the technology differentiation and the innovation that we're bringing.

The question I really wanted to ask as opposed to getting a clarification on the prior questions was around the SolarWinds hack. First off, I assume that you guys were not impacted by it. Otherwise, I would have heard -- I would assume that we would heard about that.

But have you had conversations with the C-suite-related people, CISOs, CIOs about what's the impact of the SolarWinds spend -- or hack was on spending intentions, particularly on either security-related products or on networking-related budgets. How do you see that impacting spending?

Yes. We don't -- yes, I would just say, first of all, from a SolarWinds perspective, no impact at Extreme. We dodged that and did not have any issues. We do not see any impact to the downside of networking spend.

In fact, as networks become more distributed and as what we would say as enterprise becoming more of the -- more focused on the edge and delivering the edge and the investment being on delivering the user experience that normally an enterprise employee might have on-prem or on-campus or on-branch, now they're going to have it in a more distributed way. If anything, we only see it fueling more investment in networking and shining a light on the fact that networking is becoming more strategic today than ever before. So I think people are more aware of that now. And what's happened with the pandemic and COVID has only accelerated that.

And SolarWinds only shine the light on how important security is. And I think we -- I will comment and shout out that we have the most secure cloud than any of our competitors in the industry. We're the only ones that have all the security certifications. And so as far as customer data being protected, I do think that's also having an impact as to why we're taking share in cloud because of the assurance of security within networking data that resides in ExtremeCloud IQ.

Okay. So just to be clear, you haven't heard anything specific from the C-suite about increasing IT budgets or change in budget mix or anything of that sort since that's occurred?

I mean we're seeing -- on our side, we're very focused on networking, as you know, and we're seeing very healthy demand for networking. And we have seen an acceleration of the digital transformation of networking with our customers across all of our enterprise customers.

If I could shift gears. Can you just give us an update on when you expect, a, to expand the universal product line; and b, be complete on that launch? I think the last time we talked, you said the December quarter would be when the universal line would be fully implemented and fully deployed. Is that still the schedule? And when's the next set of products come out to help fill that out?

So we've come out on the -- we've come out with the 5520. And I would say that's a very -- it's a very healthy switch. But what we're coming out with in the, I would say, in the April time frame, is a, I would say, the next universal switch in the universal switch family, which is a high runner. And then later in our -- in the calendar third quarter, we expect kind of the next family of switches coming out in the universal family.

We have -- we're there on the wireless side as well. So I think you'd continue to see more wireless products that are coming out of the universal. And then early Q4, I think you'd see an impact from the next family of universal switches coming out.

If I can just follow-up one last extension of that question, and then I'll see the store. Remi, to the extent that your margins have already moved up towards the 62% level before you get those universal products out, how much uplift do you see from those products finally getting to full adoption and full availability from the full line so that if we look out beyond that launch, is that another 200 basis points or 100 basis points? Or what is the benefit that's still to accrue from integrating all your products with a similar set of functionality, parts and components and all that sort of good stuff. Is it...

I wish introducing a new product range would have an impact of more than 100 basis points. But typically, the impact that we see because some of that, obviously, is given back to customers and partners and as a form of discounts to remain competitive. It's typically tens of basis points impact, and I would expect that to play out over the next, I would say, 4 quarters. To add point, the majority of the range in edge or aggregation will have been launched by the end of this calendar year. So we should be seeing some benefit of that in the first half of fiscal '22 for us.

Our next question comes from Dave Kang of B. Riley.

Nice quarter, gentlemen. My first question is -- actually a clarification. I may have missed it. Subscriptions bookings, it was 140% year-over-year. Did you give a sequential number?

Let me see if I can find it real quick. I seem to remember that it was 100%, but I'm just checking.

It was 40%. Dave, it was a 40% sequential growth. Yes. Our field teams have all embraced the cloud and customers know that they have to consider cloud. And if you're considering cloud, you need to consider Extreme. So we're seeing -- we're getting a lot more of that, and our field has embraced the cloud.

We are also putting more and more technology into the cloud. Most recently, our management software, XMC, we've made available to the cloud. XMC manages a lot of devices. So we're expecting the migration of XMC into the cloud to drive even further growth of cloud subscription because of all the devices that are managed under that management platform.

Got it. And then regarding recurring revenue, when do you think that, that will reach your target of 40%? Is that something that can happen maybe next calendar year? And once it does, where does your gross margin go? Maybe perhaps mid 60s?

Yes. So we'll provide more color on that at the Analyst Day. Dave, it's going to take it longer than calendar '22. I think we're probably 2 years out before we reach the high 30s. But hopefully, with the deferred revenue balance that I mentioned of $309 million and continuing to grow more than 100% on a year-over-year basis, we see a path to getting there, but we won't be there for calendar '22.

Okay. So maybe calendar '23, when you get close to that, where does your gross margin go?

So look at the overall services and subscription gross margin today, which is in the mid-60s and think about the fact that the subscription margin itself is higher than the services margin. And so as cloud subscription grow, that 65% should be increasing. So I don't want to provide specific guidance ahead of the Analyst Day, but I just want to provide some metrics for you to get an idea of where it should be headed.

Sure. Just a couple more questions. Regarding -- so actually three maybe. Packet broker, so it sounds like you shipped in the December quarter and is starting to ramp heading into this calendar year. Is that what's happening?

So we're expecting packet broker to -- that product is more of a Q4 fiscal '21 event as far as impacting bookings and revenue. I think it's the other 5G opportunity that's got traction and is beginning to ramp in a more meaningful way.

I thought that was more like a September quarter, but it sounds like it got pulled in then?

Yes. I'm not sure how that was guided previously, but that has been on a very a continuous path. And what this -- how this evolves is that, yes, our customer is selling into large service providers. And as they start to embrace the solution, that starts to ramp.

And I would say we're at the very early stages of adoption of the solution. It's a very large service provider. So it's being successful, and we're starting to see that ramp. And then packet broker, we see coming into the -- our fiscal Q4 and then fiscal Q1 of '22.

Got it. Just to be clear on the first one that you talked about, the one that's currently ramping. I assume that's the European network equipment vendor. And as Alex was talking about this, you're talking about $50 million to $100 million annually, just to be clear?

Yes. We're packaging 5G, yes, all of our 5G opportunities in that bucket.

But $50 million to $100 million annually, though, right?

Yes.

Okay. Okay. Just one final question -- actually, a couple more. Regarding the European customer, so how would demand dynamics change in the ORAN, open RAN environment? Will they still go with your solution? Or will actually their customer dictate which switch to use?

Thanks, David, and we'll have to move on after this one.

Yes. I'm not sure I heard the question, Dave. Sorry.

The ORAN, open RAN, where open architecture, will they still go with your solution? Or will -- is it going to be -- could that change?

No. I mean we're at the very early stages, David. It's very, very early. And I would say there's -- we're at the very early stages of a large addressable market for this particular solution. And I think what's going on with RAN might only, it might only enhance the requirement for the solution that we're -- the full stack solution we're a part of.

Our next question comes from Eric Martinuzzi of Lake Street.

Yes. Maybe I missed it, but what is the deadline for getting the December quarter button up? Just when are you expecting to have that done by and what's the deadline?

So the deadline filing is February 9, and we obviously expect to complete our reviews and file timely.

Okay. And then just understanding the pretty robust guide, I was -- certainly, it was ahead of me and certainly ahead of consensus. But as I looked at that, I was anticipating Q1 -- sorry, the Q3 to be down sequentially. What's behind that sequential growth that you're seeing here? If you could just put it into a particular product bucket. Obviously, you've got the pipeline to support that $245 million guide at the midpoint. Take me a layer deeper, please.

Yes. So the fact that we're -- because we haven't completed our review of this potential adjustments, we're providing a wide range on revenue because we're assuming that there might be an impact and adjustment that would need to be made.

And that's why if you take the midpoint of the range that we're providing and you take the midpoint of the guidance, you're seeing a slight increase. But I would say that prior to this adjustment, we would have seen a slight decrease. So I'm going to specify that, first of all.

And secondly, as I mentioned in my first answer earlier, there are specific verticals that had not recovered as of December, and I mentioned specifically sports and entertainment. We've seen also health care enjoying a recovery. It started this past quarter. It's going to continue. And so those are helping us sort of mitigate the normal impact of the seasonality that you would typically expect in March.

And I would -- and just a little more detail on that, we've seen -- yes, we've seen pent-up demand for -- we won Major League Baseball. It's a huge win, a lot of stadiums. And with Major League baseball, we have the league. It's not a hunting license to go after each club. So you'll see a lot of builds happening. And that -- they want to get that done before spring training, et cetera.

So we'll see that come back as well as NFL spend and NASCAR spend where we have significant presence and opportunities. So you see that.

We're seeing service provider opportunities tick up, as we mentioned before. And in general, what we're seeing is the fact that we're getting a lot of interest in our cloud platform from a traditional enterprise perspective. And that cloud adoption and people being more interested in Extreme, wanting to hear as people look to cloud to solving the distributed enterprise and more and more people want to understand our solution, our differentiation, and it's just opening up more opportunities and we were seeing it in our funnel.

Our next question comes from Erik Suppiger of JMP Securities.

First off, on the Cloud IQ, can you talk about how the mix of products -- how that profile is changing? Is it predominantly the WiFi products? And is the -- are the wireline products starting to become a bigger piece of that?

Yes. I would say, today, I mean 90 -- a high 90% number would be wireless products. We just came in -- we came out with the 5520 that's got an embedded Cloud IQ license. And so we've started selling those. And as I mentioned in my comments, Erik, we're really focused on adoption. So we've sold the switches that have got embedded licenses. And now we're starting to see the, I would say, the very initial adoption, and then we're expecting that to ramp very quickly.

I also mentioned that our XMC, which is our Extreme Management Center platform, that was a perpetual license on-prem software. And we've made that part of our cloud offering. So I think you're going to see a lot of switches coming into our cloud associated with the migration of traditional perpetual software to subscription software from the cloud with the migration of a lot of customers, and that's happening globally.

Do you think switches could reach 5% in the next few quarters?

We haven't really come out with that. But what I would say is that's something we should address on Investor Day coming up. That's a great topic for Investor Day.

Okay. Fair enough. The -- can you talk a little bit about your supply chain? Are there any component issues? Or has the supply chain pretty much eased up at this point?

Yes. I think at this stage, the semiconductor industry is feeling a lot of demand across multiple industries. And so we compete for our chips but we have an excellent relationship with Broadcom. We consider them to be strategic partners. And they work with us very closely.

So we haven't really seen supply chain constraints, I think, because of the strength of those relationships. But we do understand that it is tight out there. And certain products' lead times have increased. But for us, it's not an issue.

But there are some related chips that are still pretty long lead times?

Yes. That's the nature of our business. So I would say there's nothing that's -- I would say there's more pressure now than there has been before. But I think because of the partnership and the relationships we have, we just have to be smarter about how we buy.

Do you think that some of your competitors are getting hurt by some of the constraints out there?

We wouldn't be surprised. But I don't think we have enough knowledge to comment.

Okay. And lastly, can we assume tariffs are not a factor for you in light of having moved your supply chain in light of the new administration? I'm just wondering if that will make any difference from a tariff perspective.

Actually, Erik, I was going to say that tariff, as I mentioned in my preliminary comments, have been a benefit to gross margin in Q2. We expect it to continue to be the case not because they have been removed, not because we have relocated our supply chain, which -- we still have a mix of China, Taiwan and Mexico, but that mix has not changed, but more because we have implemented a new method in terms of the way we claw back those tariffs. And that has been a benefit to us in terms of the the cost of the tariff that's embedded in our cost of goods sold.

Is that going to improve if they get away from tariffs?

It would actually improve. We're going to see the benefit of what I just described in fiscal Q3 and fiscal Q4. If for any reason the new administration were to remove tariffs altogether, then we would get that improvement to be sustained over time.

Our next question comes from John Roy of Water Tower Research.

Great. So Ed, you were talking about enterprises being interested in your cloud. Maybe you could give us a little color on the larger client and enterprise business last quarter and what you project might be interesting going forward?

Yes. Just to say, I just -- I missed the front end of the question about -- you were saying enterprise...

Enterprise customers who were interested in your cloud business. And I was interested in how the large clients are looking at you guys these days?

Yes. I mean I can give you an example of a very large customer and a very large potential customer where we were in a -- we displaced, I would say, the 2 largest competitors in our industry. One of the benefits that we have is that our largest competitor has got structural impediments, limitations to what they can offer via cloud. And when they compete for enterprise customers, it's almost like they're 2 separate companies. And they have very limited capabilities in terms of what they can do as far as this ubiquitous end-to-end cloud management platform.

That's what we bring. So we have more breadth in terms of end-to-end cloud from the edge into the core of the network than any of our -- than any competitor in the industry.

The second thing that we offer that is very differentiated from anyone else in the industry is cloud choice. So enterprise customers, it's a hybrid environment. And so they're multi-cloud because they have applications that are running in multiple different public clouds. They have applications running from cloud service providers and private clouds. And then they all have their own certain applications that will run in their own hosted cloud.

In our environment, we offer all 3 solutions, and we offer the capability to manage all of those environments from ExtremeCloud IQ. No one else can do that, especially the 2 largest competitors that we have. So if you're looking for flexibility in cloud choice, here, you have -- we have one solution that provides you with the flexibility that no one else can provide. And that's a meaningful differentiator and that's something that matters.

Data is another thing that we talk about. Networking is the last place to unleash data, if you will. And if you think about all the intelligence that you have from a network, i.e., all edge devices that are connected, all users that are connecting and then the applications that they're using, when are they using them, and there's a lot of insights that can be gained from the network. The idea is that you could have a centralized network that gathers all those insights and you have one place to go to change business outcomes. Again, we're offering unlimited data. And why wouldn't you collect that data? Our competitors are not.

Finally, security. We have the most secure cloud. We have ISO certification, SOC certification. So if you're worried about security, and I think everyone in the enterprise arena is worried about security, then I think you want to make sure that the data from your network is secure. And we're the only ones that can provide the level of security.

So these are all serious differentiators. And it has clearly opened doors for us, and we're winning in competitive situations because of them.

Our next question comes from Woo Jin Ho of Bloomberg Intelligence.

Great squeezing me in. So Ed, can you just talk about the nature of the RFPs today? Are we starting to get to a point where RFPs are starting to look more like the pre-pandemic era? Or are we still leveraging existing customers and customers are still looking around for upgrades to existing products?

We see it changing. We see the industry evolving, and we're at the right place at the right time. Frankly, we've never been in a stronger competitive position because of our cloud. Because I think the traditional networking providers and where they have market share, I think as people are evolving their networks now more than ever, as people consider the new normal, the next normal, I think people want to get a different perspective, a different view. And so I think that's part of what's opening up doors for us at Extreme.

So does that imply that you're able...

We don't see the industry going back to the traditional model.

Got it. Okay. And then a technology question, if I may. So it looks like WiFi 6E is around the corner, and I know that we're still early in the WiFi 6 upgrade cycle. Does that technology node presented new opportunity to gain share in WiFi as well as drive more ExtremeCloud IQ business in the future?

I think it's premature to make a call on WiFi 6E. That said, we'll be right out there early. We'll be on the early end of the wave as far as the market is concerned.

I'd like to turn the call back over to Mr. Meyercord for any closing remarks.

Okay. Thank you, operator, and I want to thank everybody for participating in the call. We have a -- Extreme is in an inflection point where for many years, we've made acquisitions, we've built up scale and we've been investing in consolidating the technology, the teams, the cultures and everything into Extreme. At this point, we are One Extreme with the universal hardware platform, with everything moving into the cloud. We are now in a position to invest in innovation, which is an exciting time for us at Extreme. And we say there's never been a better time to be a partner of Extreme or to be an employee of Extreme.

So I'll just step back and thank everybody for joining us on the call. I want to recognize our employees, partners and customers for your engagement and commitment, our employees for a job well done at these times.

Register for Investment Day. I think there's going to be a huge amount of information that will be valuable. We're going to dive deep into the technology and the opportunity that we've got. So registration information will be coming shortly. Stay tuned. Thanks, everybody, and have a good evening.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect. Have a great day.