Extreme Networks Inc Q4 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Extreme Networks Fourth Quarter Fiscal Year 2021 Financial Results Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. 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, everyone, to the Extreme Networks fourth quarter 2021 and year-end 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, 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 at 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; the impact of the COVID pandemic; challenges in our supply chain, specifically as they relate to chip shortages; the impact of tariffs, digital transformation initiatives as well. We caution you not to place 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 and any additional risk factors in subsequent 10-Q filings. Any forward-looking statements made on this call may reflect our analysis as of today, and we have no plans or duty to update them, except as required by law. Now, I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Thank you, Stan. And thank you all for joining us this morning. Q4 capped off a record year in our 25-year history as we crossed over the billion dollar revenue mark for the very first time. This is an important milestone and it was a long-term goal of ours. Importantly, the momentum we built throughout the year with 36% overall year-over-year bookings growth that drove 29% revenue growth in the fourth quarter has carried into fiscal 2022. The strength of our year-end results are understated, given the fact that we tripled our backlog to over $100 million over the course of the year. Our execution has never been sharper, and as a result, Extreme is in the strongest competitive position it's ever been in. This is evident in our industry leadership and significant growth opportunities in two of the fastest growth segments in our industry – cloud-driven enterprise networking and 5G network infrastructure services. The demand for our solutions and the volume of new opportunities are unprecedented, and we're taking share. This is evident in our funnel, our current and projected top-line growth forecast, our highest ever full-year gross and operating margins, and our record free cash flow generation. The momentum of our cloud-driven business bookings continues to grow. Market share data from 650 Group affirms that Extreme remains the second largest in cloud networking, with 11% share last year. We're outpacing the market with our fourth consecutive quarter of triple-digit growth in new subscriptions bookings and 111% bookings growth during Q4. Our total cloud services business is now on an annualized run rate of over $100 million in bookings and over $70 million in revenue. As the second largest cloud-based networking vendor, we currently manage 1.7 million devices on XIQ, marking eight straight quarters of rapid growth in customer accounts and managed devices. We continue to innovate with our cloud networking capabilities, making our CoPilot tool available to all users in June. It delivers what we call explainable AI for a growing list of use cases in the form of next level analytics and automation. Importantly, we brought our network management software that includes third-party devices with our XIQ site engine offering, which opens a seamless path to bring millions of devices managed by our popular and widely deployed XMC on-prem software to the cloud. The industry is noticing our momentum. CRN named XIQ Product of the Year and CoPilot was named the coolest new offering of the year. We continue to be a leader in the Gartner Magic Quadrant and we consistently carry the top rankings for customer service in Gartner's peer reviews for the last four years. To date, we have upgraded approximately 40% of our portfolio to Universal Hardware, which is the latest generation of chipsets from Broadcom with embedded XIQ licenses. This is on track with our plan laid out at the beginning of the year. In fiscal Q3, we noted that the 5520 was the most successful product introduction ever. But we broke this record in Q4 with the introduction of the 5420. The 5420 brings higher margins to our value tier, with 80 gig stacking, MACsec ready encryption, and new multi-rate capabilities up to 2.5 gigabit speeds, along with up to 90 watts of PoE. We also launched our 9920 next-gen packet broker this quarter. The product was delivered in record time, with a product cycle of one year on a new hardware platform. This was an amazing feat by our engineering and product teams that is unprecedented. On the wireless side, we enable routing capabilities on the AP302W to expand our SD-WAN capabilities. As we announced earlier this week, we were the first enterprise networking company in the industry to ship Wi-Fi 6E access points to our customers. That's the AP4000. Wi-Fi 6E brings an unprecedented amount of clean spectrum at the 6 GHz band that enables new apps and use cases. It's the first time in more than a decade that a new frequency band has been added to Wi-Fi. This band enables super high multi-gig speeds, and the AP can run on 2.4, 5, and 6 GHz frequencies simultaneously with enhanced security on top. Our target customers are on the front end of an investment cycle, and the momentum of large deals and project-based business continues to grow as our large deal funnel was up 50% heading into fiscal 2022. Customers are accelerating their return to work environments that are more flexible and hybrid in nature, supporting our infinite enterprise vision. The networking industry is set to experience the highest growth in years given this new normal, and global stimulus spending is also fueling growth as we come out of this historic pandemic. As Rémi will discuss, the next wave of recovery in spending is coming from the hospitality sector. We experienced particular strength with casino and hospitality customers this quarter, such as Wynn Resorts, Shooting Star Casino, Turning Stone Casino, Hard Rock Amsterdam Hotel, and others. In the sports and entertainment segment, notable new wins were Stanford University Stadium where we displaced Cisco in the heart of Silicon Valley. Government stimulus is also funding part of the recovery, with programs across the globe in the education space, such as the FCC's Emergency Connectivity Fund, providing $7 billion to address the Homework Gap. Korea has announced $250 million direct investment in COVID-related education issues. The UK’s £1.4 billion catch-up program complements existing programs like Digital Pact in Germany and Giga Schools in Japan. With Extreme's exposure to the education market, we stand to benefit from all these investments globally over the next several years. So what is Extreme doing to capitalize on this unique opportunity? Having proven out our success with essentially one main SaaS application in XIQ, we're making investments in our business to monetize the secular trend towards more software services with a complete migration to the cloud. We're investing in talent and new programs to drive SaaS customer success. This requires not only new sales and services expertise that we have brought in-house but also focused IT investments to enable a more enhanced SaaS experience. We intend to make the customer experience a core competency and investing in new IT platforms to deliver these capabilities will be a keen focus for Extreme over the next fiscal year. On the senior leadership front, we have made new hires from the likes of ServiceNow and other SaaS native companies. In our service provider business, we recognize initial bookings and revenue of our 5G growth opportunities, and we remain well on our way to over $20 million of 5G business in fiscal 2022, in line with our expectations. Both of our 5G solutions, the 9920 platform for services assurance and the cloud-native infrastructure solutions we sell to our OEM partner are gaining steam in the marketplace. We remain confident in our growth plan for CNIS as the list of service providers around the world testing this solution continues to grow and we have clear visibility to the ramp in sales. The funnel of opportunities remains strong across the broad range of verticals and market segments that we serve. The record backlog with which we entered fiscal 2022 gives us confidence in our ability to capitalize on our growth objectives. We expect to grow our market share and realize a level of organic growth we have not witnessed for many years. And with that, I'll turn the call over to our CFO, Rémi Thomas.

Thanks, Ed. As Ed noted, we finished fiscal 2021 on a very strong note and executed well across the board. Q4 total revenue of $278.1 million grew 29% year-over-year and 10% quarter-over-quarter. Strong demand for our wired and wireless portfolio grew 38% year-over-year and 11% quarter-over-quarter product revenue growth. Services revenue grew 11% year-over-year and 7% quarter-over-quarter. For the fourth quarter in a row, our cloud business exceeded our expectations. New cloud subscription bookings grew 111% year-over-year. Our total cloud managed subscription business, including renewals, exceeded $100 million in annualized bookings and grew to over $70 million in annualized revenue in Q4. Our recurring revenue, which includes support for both hardware and software, managed services and subscriptions, grew 6%, both sequentially and year-over-year to $78 million and accounted for 28% of total revenue. Non-GAAP earnings per share was $0.19, up from $0.03 in the year-ago quarter and from $0.16 last quarter, once again reflecting faster growth in our revenue than in our costs and expenses. For fiscal 2021, our non-GAAP EPS grew to $0.57, up from $0.12 in fiscal 2020, driven by the combination of top line recovery and improvement in gross margin and a reduction in expenses. Total product revenue was $195.8 million, and our product book-to-bill ratio was 1.18. Wired revenue grew 55% from a year ago and 21% sequentially, led by record edge switching revenue, along with solid performance in campus switching and data center. All the while as bookings reached an all-time high, wireless revenue was impacted by supply constraints and grew 1% year-over-year and fell 12% quarter-over-quarter. Total services revenue reached a record $82.3 million, up 11% from the year-ago quarter and 7% sequentially, largely driven by the strength of cloud subscriptions. Our total services book-to-bill ratio was 1.34, fueled by growth in subscription bookings. The growth of cloud subscription and service renewals resulted in total deferred revenue of $346 million, up 8% from $294 million in the year-ago quarter and up 3% from $318 million in Q3. Deferred revenue related to our cloud subscription was well in excess of $100 million exiting fiscal 2021. This will help sustain our recurring services and subscription revenue growth going forward. From a vertical standpoint, the highest sequential growth came from education on the strength of both K-12 and higher education businesses. Other areas of strength were service providers, where we began to see initial demand for our 5G solutions take off one quarter ahead of our expectations, manufacturing, state and federal governments, and transportation and logistics. Our sports and entertainment business was up triple digits year-over-year as venue and hospitality business continued to build. In fact, nearly all verticals were up strong double digits or better from a year ago. Our non-GAAP gross margin of 60.5% improved 110 basis points from a year-ago quarter, but declined from 61.5% in Q3. The year-over-year increase in the company's gross margin was driven for the most part by product, where the very significant increase in volume drove a much higher absorption of the fixed cost components of our costs. It more than offset year-over-year decline in our services gross margin. The sequential drop of 1 percentage point in the company's total gross margin was due to an increasing component and freight costs against the current backdrop of a severe shortage of components and on the services side by a higher mix of professional services revenue associated with MLB deployments. Q4 non-GAAP operating expenses were $130.9 million, up from $116.8 million in the year-ago quarter and up from $127.3 million in Q3, essentially reflecting higher sales and marketing costs. The net result of faster top line growth compared to costs and expenses was a non-GAAP Q4 operating margin of 13.4%, a company record, up from just 5.2% in the year-ago quarter and 11.3% in Q3. On an annual basis, an operating margin of 10.9% marks the first time in company history that Extreme finished a year at double-digit non-GAAP operating margins. The non-GAAP earnings per share of $0.19 included a tax adjustment of $0.04, primarily due to one-time catch-up modification of the non-GAAP effective tax rate to reflect a greater revenue contribution of the US entity to the company's overall non-GAAP pre-tax profit. The non-GAAP tax adjustments, which would normally have been attributed to this quarter, was $0.01 and would have resulted in non-GAAP EPS of $0.22. Going forward, we anticipate the non-GAAP effective tax rate will be approximately 16% for fiscal 2022. The recovery in operating profits, combined with good management of operating working capital, resulted in the highest ever fully cash flow from operations of $57 million in Q4 and free cash flow of $52.2 million. In fact, for all fiscal 2021, cash flow from operations was a record $144.5 million and free cash flow was $127.4 million. Our cash conversion cycle reached historically low levels of 22 days compared to an already low 31 days in Q3. We ended Q4 with $247 million in cash and equivalents compared to $203 million at the end of Q3. Our net debt decreased to just shy of $100 million, down from $148 million in Q3. As a result, our leverage ratio fell to 2. And starting in early August, the interest cost carried on our Term Loan A debt will drop by another 50 basis points from an all-in rate of 3.19% to 2.69%. Now turning to guidance. As I noted entering Q4, demand is outstripping supply for certain products, which led to a record backlog for products entering fiscal 2022, such as our Universal platforms. The supply constraints are leading to further rising component and freight costs as we enter Q1. We continue to proactively manage the supply chain and our strategic relationship with Broadcom is helping us in this regard. Importantly, we have secured vendor commitments that will allow us to accelerate product delivery and bring down backlog as of Q2 and beyond. As a result, the combination of our strong results and execution gives us greater confidence in our fiscal 2022 outlook. We expect fiscal 2022 revenue towards the high end of our 5% to 9% long-term growth target, with double-digit operating income margin and significant free cash flow growth. For Q1, we expect year-over-year growth to be in line with our full-year outlook and expect revenue in the range of $250 million to $265 million. Q1 non-GAAP gross margin is anticipated to be in the range of 58% to 60%. Q1 non-GAAP operating expenses are expected to be in the range of $121.5 million to $123.5 million. The sequential decrease in OpEx is primarily related to lower sales commission and other sales and marketing costs associated with seasonality and relatively similar R&D and G&A costs compared to Q4 2021. Q1 non-GAAP earnings are expected to be in the range of $16.7 million to $26.7 million, or $0.13 to $0.20 cents per diluted share. In Q1, we expect average shares outstanding to be 133.2 million on a non-GAAP basis.

Our first question comes from Eric Martinuzzi with Lake Street.

Congratulations on the real strong finish there to FY 2021. That's terrific. And the healthy guide as well. I'm curious to know regarding the demand environment, there's definitely - with your enterprise customers, I know a lot of them, at least on the larger side. There was a return to the office. There was a return to the campus. Just curious to know the IT priority they've got because you've got a lot of people that have been gone for a while. I'm just wondering about where you guys, where networking gear and wireless access stands in the pecking order of IT priorities, whether from a budgeting perspective or from a manpower perspective?

It's pretty interesting what's going on in the environment out there. When the pandemic first hit, there was a lot of spending in network peripherals. They had to arm students that were going back to their homes and workers going back to their homes, healthcare workers, etc. And now what we're seeing is the reimagining of the workplace or the work environment, where enterprise customers are thinking about more of a flexible work environment, a hybrid work environment. This is why you hear us talk about the distributed enterprise or the infinite enterprise because what it means is that the enterprises are taking responsibility for the new edge of the network. The new edge of the network is going to be that individual, wherever you are and whatever device you're on, as opposed to being in a branch of an office. And that's why the cloud-enabled networking is the fastest growing segment in the networking industry. We have the industry's highest quality cloud. Because of our cloud-native infrastructure, we're in a position to deliver more services than anyone else. Our vision is really catching enterprise customers by surprise. As people rethink their environments, networking has become a higher priority, and cloud has become more important. It brings a lot of complexity in terms of a distributed network. Cloud simplifies that. From an Extreme perspective, that’s why we're seeing so much demand. Enterprise customers are contemplating cloud. If they're a Cisco customer, they say, well, I'd like to get another opinion from a competitor. They should hear from Extreme because they're number two in terms of size. Our architecture is fundamentally better equipped to provide a cohesive services edge platform than Cisco, for sure, and then all the other competitors. Now customers are surprised when they're hearing from Extreme. Extreme is moving much further down competitive processes, and our hit rate in terms of batting average is off the charts.

So, you're saying that, given this shift in the - wherever you are - operate from wherever you are, that favors you guys, that is a priority for your enterprise and education accounts?

Oh, absolutely. It's driving cloud. It makes sense, right? You want to have a centralized platform, where you have complete visibility to all the devices that you're managing in the network, but also have all the insights to the edge devices being supported. That's what our cloud does better than any other cloud in the industry. It's also future forward in terms of the services coming down the line, and we have the most cohesive vision in the industry.

Our next question comes from Alex Kim with Needham.

I was hoping you could talk about your approach and the industry approach to pricing, given what's going on. To what extent do you anticipate some increase in prices, when you might be increasing them and what you're seeing from your competitors on that subject? Clearly, there's going to be some pass-throughs here.

Alex, we are seeing - and yes, we are aware of competitor price increases. The most important move for Extreme is the migration to the Universal platforms that you're aware of. We've talked about a 40% migration. It's the new technology, and we caught up. We're on the latest wave of Broadcom technology in terms of the latest generation chipsets. As you just saw with our Wi-Fi 6E announcement, we're first to market. For us, you're going to see that portfolio completely migrate. It simplifies our SKUs and streamlines our supply chain, leading to a nice gross margin benefit from the migration to this higher-margin Universal platform. You'll see that migration happen over this fiscal year. As for the pass-through of costs, the fortunate thing for us is that we do have near-term increases in costs, but we've established a great relationship with Broadcom, and we don’t just consider them a vendor; we consider them a strategic partner. They're working well with us. The good news is that we've secured commitments, and now we feel confident about unlocking backlog in Q2, and then we have confidence in allocations and wafer allocations for Q3 and beyond. We have to be smart about it. We're looking at potential tactical price increases for specific products, but at this stage, we don't have a formal plan.

So, you haven't increased any prices to date?

We're always looking at our portfolio, Alex. So, I would say you'll always see changes and us elevating prices, particularly on older products, which is kind of normal business for us. The other way we manage it is through discounting control.

If you were to look at it from the perspective of, on average, your competitors not having a newer product line, not having the ability to benefit from the Universal integration of components, can you quantify or just generally speak to? Is it 2%? Is it 5%? Is it 8%? What kind of price increases are you seeing from Cisco and Hewlett Packard and others?

I think it's safe to say 5% to 10%.

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

First of all, just going back to the supply chain challenges, do you think this current quarter – fiscal first quarter will be the bottom in terms of gross margin? How should we think about gross margin going forward?

Yeah, I'll start off and then let Rémi pick it up. But the answer is yes. For us, the September quarter experiences the most pressure. I think the same is true for the rest of the industry. As I mentioned earlier, we've gotten secure shipment dates for what we need in Q2, given the strength of our teams working and the strategic nature of the relationship with Broadcom. We expect the easing to begin in Q2; this quarter will bear the brunt of it. Rémi, do you want to add?

If you take the midpoint of our guidance for Q1, Dave, you see that it's 59%. Compare that to where we landed in Q4, which was 60.5%. So, we're looking at a 1.5 percentage point impact, taking the midpoint. If you apply the math to the revenue we're calling out, that gives you an idea of the size of the impact, driven by two things: the higher cost of components that we're having to pay to secure deliveries and higher freight costs. We used to ship anywhere between 25% and 35% of our shipments by sea, and right now, we're at about 95% to 100% by air to accelerate delivery. These two components add up to that 1.5 percentage point difference between Q4 and Q1. We think this is probably the highest we'll see, and improvements will start in Q2 and onwards, especially with a higher mix of Universal Hardware platforms going forwards, which carry higher gross margins than older products.

My second question is regarding your fiscal 2022 outlook, high end of 5% to 9%. Can you share some key assumptions, such as like 5G? I think you already talked about $20 million? Could there be some upside to that? And wireless Wi-Fi, other verticals?

We have the benefit of having a funnel. We have a lot of opportunities and better visibility. We're seeing higher velocity. As we roll into fiscal 2022, the strength we saw in July continues as we move into July, which is generally a softer month for us. This ties into our position in cloud. It's the fastest-growing segment in the industry. As people rethink and consider cloud, most of the cloud has been wireless. But now, they're starting to think more broadly about edge switching and migrating other platforms to cloud. We're in a very strong, probably the most competitive position of all players in the industry, certainly the strongest position we've had. Our teams are out winning in the market. There's more competitive differentiation at Extreme today than since I've been involved with the company for over a decade. Demand for our solutions is at an all-time high. It's driven by our competitive solutions, the innovation we're bringing, and the consistency of our vision and messaging. We've got a smaller market share in the industry relative to Cisco or HPE. When customers look at us, they may not have looked at Extreme for a long time. They're surprised to find out the quality of our solutions and the vision we have as a potential partner for the future. This is how we won Major League Baseball, great example. Some of these casinos were great examples. I mentioned Stanford University Stadium, where they chose Extreme due to their need for a better Wi-Fi solution; that gives confidence to our field and our sellers.

My last question is actually about the supply chain issues, talking about the margin impact. What about the top line impact; how much revenue are we leaving on the table because of component shortages?

If you recall the prepared remarks from Ed, we talked about a backlog entering Q1 that was $100 million. That's about three times the level it was entering Q1 of fiscal 2021. That gives you an idea of the magnitude of how the backlog has built. I would say that if it weren't for product constraints – but we don't like to make those comments because we always have product constraints – our revenue, both for Q4 and Q1 would have been tens of millions of dollars higher.

Our next question comes from Chris Schwab with Craig-Hallum.

Congratulations on a great quarter. Just a whole list of – a litany of wonderful things going for you. I just want to get to gross margins versus the top line growth drivers you guys have highlighted. With the supply chain issue becoming less of a headwind, it appears in the second half of your fiscal year, and by that time, I would imagine just about every product you'll be shipping will be on the refreshed Universal platform. And then as we can get some moderation and expedited freight costs and that supply chain of freight normalizes, how good could gross margins be exiting the year if those events were to occur?

If you think about the drivers of gross margin, on the downside right now, which will impact Q1 and, to a lesser extent, Q2, you have those higher component costs to secure deliveries and freight costs. On the upside, you have the introduction of Universal Hardware. We have the ability to selectively raise prices on specific products, and more importantly, we can control discounting, which we are managing effectively. The deferred revenue is significant, currently over $340 million, which will capture a higher percentage of support and subscription revenue as it grows from the current 28%. When factoring all that, we should be exiting Q4 fiscal 2022 above 60%, and we feel confident about the long-term targets that we've established at the Analyst Day. Even though we have the short-term impact of the two items I mentioned earlier, we’re still on track.

And then, you add into the fact that you have probably the most competitive product lineup for customers.

You just said it. Really, that statement came from you.

Our next question comes from Paul Silverstein with Cowen.

A couple from me. First off, Rémi, I don't think I've heard you give – and understand why you won't. But did you give us a number of your expectation for gross margin all-in for fiscal 2022? Or is it just too hard?

I didn't. But the goal is to be above 60% for the full year. We'll exit at a higher rate and hope to be above 61% by Q4. Taking the average for the year and considering the mix of revenue between the various quarters, we feel confident about being above 60% for the full year.

And then, the higher freight costs that you and everybody else is saying, is there any concern that freight costs continue to go up? If I heard you correctly, you're already shipping 95% by air. So, it sounds like the mix of sea to air can’t get any higher. But is there any concern that freight costs will continue to go up and prove a headwind?

There are two factors. Firstly, right now, we’re almost at 100% air. The second one is the actual cost of carrying a ton of product over the Pacific and Atlantic. To bring products from China to El Paso, we tend to use commercial airlines. Because capacity has been limited since COVID, the rates are up. As commercial traffic picks up, you can see that airports are getting busier. We expect airlines to add capacity and the unit price for carrying a ton of products to come down. So, to your point, it doesn’t get any worse than it currently is. In fact, when I look at our forecast for that part of our cost of goods sold, in Q1 versus Q4, it’s actually down slightly sequentially. It’s the component costs that are rising.

So, Rémi, to be clear, because it makes perfect sense that as commercial airlines add capacity, you and everybody else should see prices going down. But to be clear, you're already seeing that or that's just…

Yes. The price on certain routes is starting to ease a bit. But it's more than offset by the rising component costs we see from Q4 to Q1.

On that second point about rising component costs, is there any visibility as to incremental increases throughout the year, or do you already have prices locked in?

No. We're in constant dialogue to secure commitments for deliveries in Q2 and onwards. We have good visibility on how much it will cost us.

On the demand side, what's your historical experience with respect to customer cancellations of the orders and backlog? I assume that's rare.

Paul, that’s a pretty rare occurrence. We have seen a couple of small one-off situations where there's urgent demand. Distributors are rating the vendors, and we’re getting high rankings. Extreme is potentially becoming a go-to because of how we manage the supply chain.

Ed, everybody – all the networks say they're trustworthy on networking. The pandemic silver lining has been customers providing extended visibility beyond the usual book and ship. That said, the investment community is still worried there's some degree, perhaps meaningful, of over-ordering. What is your visibility into true demand and the risk that there's a healthy amount – and healthy, obviously, would be the wrong word, but a meaningful amount of over-ordering going on? And true demand is far less than what your nominal order book and other demand metrics would indicate?

I think you need to consider Extreme and our business mix. You might see more over-ordering from larger service providers and Fortune 50 accounts. We don’t see it as much. We might see some stocking orders from distributors getting ahead of global supply chain constraints. In terms of our backlog, it's a pretty small percentage. For example, school districts upgrading their networks, they're not as sophisticated to get ahead of global supply chain clients. Most of our orders are project-driven. The Stanford University Stadium case shows that they're ordering because they need a better Wi-Fi solution. That’s true for almost all orders we see from customers.

We operate under a two-tier distribution model, where we recognize revenue based on sell-in to distributors, who provide products to business partners selling them to end customers. Hypothetically, if an end customer cancels their order, most partners don’t accept order cancellations. What the distributors would do is reallocate those goods because they're short on everything. We measure the risk of return through stock rotations, and right now, stock rotations are at an all-time low because everything in their warehouses needs to be delivered to business partners experiencing strong demand.

Let me ask one more question on this line. Playing devil's advocate, and correct me if I'm wrong, but I think the last time we saw a meaningful over-ordering crisis would be the telecom Internet bubble back in the late 90s. Given how long it's been, and not unique to Extreme, if there is some degree of over-ordering today, Rémi, based on your comments, would that be reflected in a broader collapse?

I can tell you we are not in a bubble as far as IT spend. We're at the very front end of an investment in 5G infrastructure; this is the largest infrastructure investment of our lifetimes and is very mature. There could be near-term concerns about preordering, but that seems more like a service provider issue for larger carriers. For enterprise customers upgrading their networks, with the new spectrum band in Wi-Fi in the 6 GHz space, customers will need to upgrade their capabilities. All these secular trends will be around for years to come, and we don't foresee any visibility indicating a bubble at this stage.

This concludes the question-and-answer session. I would now like to turn the call back over to Ed Meyercord for closing remarks.

Thank you, everybody, for tuning in. I can tell you, we just had all of our global teams together for our sales kickoff meeting. The consensus among our employees is that there's never been a better time to be an Extreme seller. We're seeing great demand, and our technology innovation is really coming to the forefront with the strength of our product and engineering teams. Things are looking good, and we have great momentum going into this quarter. Thank you all for joining us and for all the Extreme stakeholders, employees, partners, and customers tuning in as well. Have a great day.

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