Earnings Call Transcript - EXTR Q1 2022

Stan Kovler, Vice President of Corporate Strategy and Investor Relations

Thank you, Norma, and welcome, everyone, to the Extreme Networks' First Quarter 2022 Earnings Conference Call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Networks' President and CEO, Ed Meyercord; 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, the impact of the COVID pandemic and challenges in our supply chain as they relate to chip shortages and otherwise. 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, 2021, filed with the SEC, and any additional risk factors in subsequent 10-Q filings. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law. Now I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Edward Meyercord, President and CEO

Thank you, Stan, and thank you all for joining us this morning. Q1 was characterized by unprecedented bookings growth and continued double-digit year-over-year revenue growth. Q1 bookings accelerated to 45% year-over-year growth, even higher than the 36% achieved in Q4. This continued strength in demand was evidenced by a record 43 customers that booked over $1 million in business with Extreme in Q1, up from 32 in Q4, and our backlog doubled to over $200 million. This marks the third consecutive quarter of double-digit bookings and revenue growth, including the third consecutive quarter of double-digit product revenue growth. Given the demand trends at hand and our backlog, which we expect to grow once again in Q2, we now expect double-digit organic revenue growth in fiscal '22. We further improved our competitive position and according to industry research firm 650 Group, gained 1 point of share in each of the prior 2 quarters in the campus enterprise networking market. In cloud-managed networking, the fastest-growing segment of our industry, we strengthened our competitive position and our 13% market share is larger than the #3 and #4 vendor share combined. Customers are accelerating their investments in digital transformation related to return to work environments that are more flexible and hybrid in nature, supporting our Infinite Enterprise vision. The networking industry is experiencing the highest growth in years, and our growth is accelerated by the fact that we are taking share in this environment. The combination of our leading cloud management solution, universal wired and wireless platforms, our automated campus fabric and simple licensing model provides customers with unparalleled value for their networking needs. We are focused on supporting our customers' increasingly distributed networks in what we call the Infinite Enterprise, where cloud becomes the connective tissue. Given the heightened awareness of our brand, the strength of our competitive position with channel partners and enterprise customers and the technology differentiation of our solutions, we see continued momentum building the value of opportunities in our pipeline. And we are closing a larger percentage of deals with an increase in our funnel conversion rate. This quarter, we doubled down on our Infinite Enterprise vision with the acquisition of Ipanema. We now have important new capabilities to support the Infinite Enterprise such as session-based application performance management, policy enforcement, firewall as a service, WAN edge routing, all delivered from the cloud. Our new WAN edge capabilities will be delivered as a service and become an important driver of our software subscription recurring revenue. Since we closed the acquisition on September 15, our business integration and product development plans are tracking ahead of plan. We expect to turn up our new SaaS back office operating systems, our new customer success and lifecycle management platform and complete the system integration in early fiscal Q3. This will support the rollout of our Extreme branded WAN edge solutions globally. And since we announced the acquisition, we have received positive feedback and reverse inquiry from customers and partners, showing significant interest in our new capabilities. Meanwhile, product cycles in the infrastructure business are getting shorter with new innovations coming out that require cloud to drive them. We grew SaaS Subscription Bookings by 71% year-over-year and our growth would have been even higher in SaaS if we were able to meet customer demand since new subscription bookings of X IQ Pilot, our base cloud management license are currently attached to new product sales. Our total cloud services business is now on an annualized run rate of nearly $130 million in bookings. As Rémi will discuss in greater detail, we have begun to report SaaS annual recurring revenue, which was $78 million this quarter, up 54% year-over-year and 15% quarter-over-quarter. In our service provider business, we continue to execute towards our goal of attaining $20 million of 5G business in fiscal '22, in line with our expectations. Both of our 5G solutions, the 9920 Packet Broker visibility solution and the cloud-native infrastructure solutions for IP fabric automation performed well, and we expect growth to accelerate into the first half of calendar '22. In our core network infrastructure business, we delivered several key innovations during the quarter. We announced that Novant Health was the first commercial Wi-Fi 6E customer in the industry. Extreme solution allows users to take advantage of the full 1,200 megahertz of new spectrum and enables enhanced care experience to patients such as new communication tools and telehealth at peak network performance. The combination of new AP4000 hardware with ExtremeCloud IQ, which is the only ISO certified cloud network management platform in the industry, provides an unrivaled data security posture for Novant. On the wired side of our portfolio, we have a strong slate of universal products coming out in the first half of calendar '22 to further expand our previous mid-range upgrades with the 5420 and 5520 with a lower-tier and a higher-density offering. Both product lines are targeted at the product refresh of our existing portfolio and new use cases such as software-upgradable multi-rate capabilities. We are creating new API capabilities for customers to enable our wireless, NAC and analytics capabilities to directly integrate Extreme's management functions with third-party systems. We can extend our functionality with custom applications and are set to offer a standard pipeline-based software development kit with integrated sample code. Despite all the accelerated innovation happening at Extreme, we remain committed to driving simplicity and networking. We are employing a mobile-first philosophy, and we will further enhance our mobile app for a more intuitive user experience and shorten our new release cadence to enable users to manage their switching environment along with wireless. We now enable features such as onboarding wired devices, capturing and uploading images, device performance visibility, and the overall network scorecard. With our co-pilot artificial intelligence and machine learning engine, we provide our customers with new explainable insights that can optimize network performance, identify potential security risks, anomalous threats, network vulnerabilities and enable operating efficiencies. These differentiated and enhanced capabilities strengthen our profile as a leading innovator in cloud networking. We are adding new over-the-top cloud capabilities that will accelerate our cloud transformation with multi-domain cloud licenses. This allows us to sell software for devices that are not tethered to Extreme's networking infrastructure. The first use case solution of our multi-domain cloud is our new partnership with Zebra Technologies to add enhanced network visibility to Zebra handheld devices managed through XIQ. This allows a networking administrator to help users get much better troubleshooting support through our intuitive insights engine. This unmatched visibility will dramatically reduce time to resolution for these business-critical devices. The funnel of opportunities remained strong across the broad range of verticals and market segments we serve. The record backlog with which we entered Q2 gives us confidence in our ability to capitalize on our growth objectives. We continue to grow our market share and realize a level of organic growth we have not witnessed for many, many years. And with that, I will turn the call over to our CFO, Rémi Thomas.

Rémi Thomas, CFO

Thanks, Ed. As Ed noted, we started off fiscal '22 on a very strong note and executed well across the board. Q1 total revenue of $267.7 million grew 14% year-over-year. Strong demand for our wired and wireless portfolio drove year-over-year growth of 15% for product revenue and 11% for services and subscription revenue. Our overall bookings grew 45% year-over-year, led by 52% for product, 18% for services and 71% for SaaS subscription. This quarter, we began to report our SaaS annual recurring revenue or SaaS ARR of $78 million, which grew 54% year-over-year and 15% quarter-over-quarter. The historical ARR data can be found on Page 18 of our Q1 earnings deck posted on our website. We also reported SaaS ending deferred revenue of $122 million, up 45% year-over-year and 9% quarter-over-quarter. Our total cloud-managed subscription business, including renewals, approached $130 million during the quarter, up from over $115 million in Q4. Non-GAAP earnings per share was $0.21, up from $0.09 in the year-ago quarter and from $0.19 last quarter. Total services revenue reached a record $82.5 million, up 11% from the year-ago quarter and was flat sequentially, largely driven by the strength of cloud subscriptions. The growth of cloud subscription and services renewals resulted in total deferred revenue of $356 million, up 20% from $298 million in the year-ago quarter and up 3% from $346 million in Q4. On a geographic basis, product bookings in the Americas, EMEA and APAC were all up strong double digits from the year-ago quarter. From a vertical standpoint, the highest year-over-year growth came from the service provider, followed by government, health care and education. Our non-GAAP gross margin of 60.3% was above the high end of our guidance range and was flat from the year-ago quarter and down just 20 basis points from 60.5% in Q4. The year-over-year increase in the company's gross margin was driven for the most part by product, which benefited from the higher absorption of the fixed components of our COGS through increased volume and a better mix. Our Q1 non-GAAP operating expenses were $124.5 million, up from $122.6 million in the year-ago quarter and down from $130.9 million in Q4, reflecting the variable sales and marketing costs associated with our revenue volume. We set a second consecutive record for operating margin at 13.8%, up from 13.4% in Q4 and just 8.3% in the year-ago quarter. Our cash conversion cycle reached a historically low level of just 9 days following an already low 22 days last quarter and 44 days last year. The sequential reduction was primarily driven by a decrease in days sales outstanding and an increase in days payables outstanding. Our net debt increased to just shy of $139 million, up from $100 million in Q4 due to the acquisition of Ipanema for $71 million. Our covenant leverage ratio fell to 1.6 and starting in early November, the interest costs carried on our Term Loan A debt will drop by another 50 basis points from an all-in rate of 2.7% to 2.2%. Now, turning to guidance. The strength of bookings against the backdrop of continued supply chain constraints will lead to a further increase in backlog in Q2. We expect revenue to be in the range of $265 million to $280 million, up 13% year-over-year at the midpoint. Q2 non-GAAP gross margin is anticipated to be in the range of 57% to 59% as we expect elevated expedite fees and freight costs to peak this quarter. Q2 non-GAAP operating expenses are expected to be in the range of $125.8 million to $127.4 million. The sequential increase in OpEx is primarily related to higher sales commissions and higher R&D expenses, reflecting a full quarter of Ipanema expenses. Q2 non-GAAP earnings are anticipated to be in the range of $18.4 million to $28.9 million or $0.14 to $0.21 per diluted share. We do expect product availability to improve entering Q3, leading to accelerated revenue growth. We're thus raising our revenue outlook for the full fiscal '22 to double-digit growth compared to our prior guidance of 5% to 9%. We anticipate that the reduction in expedite and shipping fees, combined with the full impact of our recent pricing actions, will lead to a gross margin recovery in the second half of fiscal '22. As a result, we have increased confidence in our ability to deliver an operating margin of between 10% and 15% of fiscal '22. With that, I will now turn it over to the operator to begin the Question-and-Answer Session.

Alex Henderson, Analyst

Certainly, an outstanding quarter. I was wondering if you could give us a little bit more detail on what you're seeing in terms of your price hikes, the impact on product sales associated with those price hikes? And with, I think, both Cisco and Arista and probably HPL on the positive of what they've done, increasing prices, can you talk about what the competitive price hikes look like? And then on the supply chain side of it, I get with the idea that it's going to peak here in the current period. Are you expecting that you're going to work down the backlog in the guide or are you expecting that the backlog will stay at current levels through the end of the fiscal year in the guide of 10% growth?

Edward Meyercord, President and CEO

This is Ed. I'll take the lead here, Rémi, before you chime in. Regarding the pricing environment, we have observed that competitors in the industry are raising their prices. On average, this increase is around 10% to 15%, which aligns with our own actions. We implemented our price increase on October 1, but due to our backlog and accounting methods, the benefits of this increase will not be realized until the second half of our fiscal year, specifically in Q3 and Q4. As we indicated earlier, we are raising our revenue guidance this quarter, anticipating an increase in backlog. This is largely driven by strong demand. We are experiencing booking levels we have not seen before. As I noted, there are more opportunities arising, and we are successfully converting these into bookings, leading to higher-than-expected demand and growth. This, combined with supply chain constraints, is contributing to the backlog increase we are seeing in Q2. Rémi, would you like to add anything?

Rémi Thomas, CFO

The only thing I would add, Ed, is in the past, when we had price increase in November of 2018 related to the tariff, we saw some of that being discounted because we still wanted to maintain our competitive position, given that this is something that we see at our competitors as well, and we basically make sure there's a strong discipline so far. We've seen basically our discounting being held up. And actually, in Q1, we saw an actual reduction in our discounting behavior in the field. So the price hikes are holding up and they're translating to higher ASP and hopefully, higher revenue numbers once we're able to work through our existing backlog.

Alex Henderson, Analyst

So if I could, so just to be clear, you said you're going to increase backlog. I think you made that comment relative to the December quarter. Are you saying you're expecting to increase backlog again in March and June? Or are you expecting the backlog to hold at the December level through the end of the year or work it down?

Edward Meyercord, President and CEO

Alex, yes, we're expecting to work it down starting in the March quarter.

Alex Henderson, Analyst

I'm a little confused by the guide then because if the price increase is 10% to 15%, it's kicking in, in the March and June quarter, and we hold the services line fairly flat, that would imply only 6% to 8% type growth in product sales in the back half of the year to get to it, with 15% in the first 2 quarters. So double digits is a nice number. It's a nice increase, but it doesn't seem to catch for both. I worked down in backlog and a price hike.

Edward Meyercord, President and CEO

Yes, we don't expect to eliminate all of the backlog, but we anticipate making progress on it. When we refer to double digits, it's a broad range, and we are looking at growth higher than 10% for the second half of the year.

Eric Martinuzzi, Analyst

So just to be clear, that goes from 10% up to 99%, Ed, is that the case for the double-digit?

Edward Meyercord, President and CEO

Very good, very good.

Eric Martinuzzi, Analyst

Okay. I'll go to the lower end of that. Okay. So I wanted to dive down, drill in a little bit deeper. You talked about an increase in your funnel conversion rate. Is that the same thing as an improvement in your win rate?

Edward Meyercord, President and CEO

Yes. There are several factors contributing to this. We discussed the enhancement of the Extreme brand as more individuals turn to cloud solutions. Extreme is becoming recognized as a cloud leader, holding the second-largest market share and being one of the fastest-growing companies in the cloud sector. As customers explore cloud networking options, they're increasingly considering Extreme, leading to more opportunities for us. Additionally, we're seeing a higher conversion rate for these opportunities. We're winning more competitive bids for larger projects, which is evident in the deals we've mentioned that exceed $1 million. Another key element is our go-to-market strategy, particularly our partner program for channel partners, which has gained significant traction. We've dedicated more resources to support our partners with automation tools, making it easier for them to promote Extreme. As the market shifts toward cloud solutions, partners are turning to us, resulting in increased revenue from those partnerships. Our strong cloud offering, comprehensive end-to-end solutions, and our unique cloud-native architecture, which sets us apart from the industry's largest competitor, provide us with a substantial advantage. Additionally, as data becomes increasingly vital in the cloud space, we possess unique capabilities for data provision and retention that generate valuable insights. This technical differentiation is evident in competitive scenarios where Extreme is being sought after and winning more often. Furthermore, the channel is recognizing the potential of promoting Extreme, leading to greater success for us in that area.

Eric Martinuzzi, Analyst

I wanted to better understand the second quarter guidance regarding the impact from Ipanema. Before we address that, could you tell me what the revenue impact was in the first quarter from Ipanema? I know you finalized that deal very close to the end of Q1, but what was the revenue impact?

Edward Meyercord, President and CEO

Rémi, you want to pick that up?

Rémi Thomas, CFO

Yes, it was immaterial, Eric. Call it a few hundred thousand dollars. We only consolidated 2 weeks of revenue, and then we have a deferred revenue haircut that was applied to that.

Eric Martinuzzi, Analyst

Okay. For Q2 guidance, you're estimating a revenue range of $265 million to $280 million. How much of that comes from Ipanema? How is it being accounted for? Is there a purchase accounting adjustment, or is this a non-GAAP revenue estimate?

Rémi Thomas, CFO

We do, unfortunately. So we expect the contribution of pre-deferred revenue haircut to be slightly less than $5 million. But by the time you apply the deferred revenue haircut, you're looking at a couple of million.

Dave Kang, Analyst

Nice quarter. I guess the first question is regarding the supply chain constraints. How much of your revenue in the fiscal first quarter was impacted by supply chain or component shortages? And how much are you including in your fiscal second quarter guidance?

Edward Meyercord, President and CEO

I'll start off by noting that we built $100 million of incremental backlog in the quarter, rising from just over $100 million to just over $200 million. This highlights the strong booking momentum on the demand side as well as the ongoing supply chain challenges. With this level of backlog entering the quarter, we continue to observe robust demand, which is pushing our bookings above expectations, although we remain constrained by supply chain issues. A year ago, our main chipset vendor extended lead times to a year, requiring us to proactively coordinate with suppliers, particularly Broadcom, to secure shipping dates for this quarter. As Rémi pointed out, we are at a peak concerning expedite fees and increased shipping costs, which we anticipate will continue. With our revenue guidance, we are still building backlog, but we expect these constraints to ease as we approach the March and June quarters. Currently, we are returning to the annual ordering cycle where we placed orders last year and now have much better visibility on deliveries from Broadcom, which is crucial for our supply chain management. We are also collaborating with secondary and tertiary vendors to supply other components and parts alongside our ODMs to support production. Rémi, do you have anything else to add?

Rémi Thomas, CFO

No, no. I think you highlighted the key point, which is that backlog increased $100 million. Obviously, we always have product constraint and customer constraint in every quarter. So under even normal circumstances, we'd never be able to ship that $100 million. So that's the order of magnitude of the impact of supply chain constraints on our revenue.

Dave Kang, Analyst

Got it. You mentioned that fiscal second quarter might represent the lowest point regarding the supply chain effects. Should we expect lead times to stabilize and prices to stop increasing? Is that the reason why you view the fiscal second quarter as the bottom? Also, for the second half of the fiscal year, as you start raising prices, should we anticipate gross margins returning to around 60%? What are your thoughts on gross margins for the second half?

Edward Meyercord, President and CEO

Yes, we do expect to improve our gross margin in the second half of the year. This is influenced by supply chain issues. Currently, all of our products are being expedited, and we are incurring high fees for this. Additionally, we are entering the holiday season, which has tightened shipping options, forcing us to use air shipping. We anticipate these constraints will ease, providing us with more competitive options through the holiday season into March. Consequently, on the cost side, we will benefit from reduced expedite fees and lower shipping and transportation costs starting in March and continuing through June. On the pricing front, we need to clear the backlog before we fully benefit from the price increases, which we expect to realize in March. Thus, in the March quarter, we will see the impact of higher pricing and lower costs. The full effect of these changes will be felt as we progress through June and into September.

Christian Schwab, Analyst

Congratulations on the strong performance this quarter. Could you provide an update on your product availability and backlog outlook for Wi-Fi 6, as well as your current views on the transition to it?

Edward Meyercord, President and CEO

Yes, thank you, Christian. The Wi-Fi 6 chipsets are contributing to our constraints. One of the things we've done well, which has been recognized by our distributors, is setting realistic expectations for our customers and orders. Our supply chain teams collaborate closely with our field teams on strategic opportunities and prioritize large, important accounts based on these opportunities. We believe Wi-Fi 6 will be a game changer by expanding spectrum and providing new capabilities. According to our Wi-Fi product and PLM teams, this is a significant cycle that differentiates us compared to the last 10 to 15 years. Since we were the first to market with Wi-Fi 6, we anticipate that demand will increase rapidly. Wi-Fi 6 is currently constrained, similar to the rest of our product portfolio, but we expect significant ramp-up in the second half of the year.

Paul Silverstein, Analyst

Ed and Rémi, I apologize if I missed it, but did you all say anything about the new wireless products contribution and what you're expecting for the ramp, giving us an uptick?

Rémi Thomas, CFO

The contribution from bookings has been strong, Paul. However, the wireless segment is somewhat more limited compared to wired. As a result, our revenue contribution this quarter was in the low to mid-20s, compared to the high 20s in previous quarters. In terms of bookings, both wireless and wired are experiencing similar growth rates exceeding 50%, as I mentioned earlier.

Paul Silverstein, Analyst

Rémi, shame on me, I think I used poor language. I was actually referring to the new platforms, one of which you've got a relationship with, one of the big U.S. carriers and the other one on what you're selling into an OEM.

Edward Meyercord, President and CEO

You're talking about service provider.

Rémi Thomas, CFO

No problem at all. I would say that this was one of the stronger growth areas. There's one vertical that performed better in terms of year-over-year growth, which is our sports and entertainment sector, but that was due to a favorable comparison since it was minimal a year ago. Our service provider business increased by 68% year-over-year in terms of bookings and accounted for slightly more than around 6% of total bookings this quarter. This strong contribution was driven by the combination of our relationship with a major U.S. service provider and a large telecommunications equipment manufacturer based in Europe.

Edward Meyercord, President and CEO

And Rémi, if I could add. Paul, just to provide a bit more detail. The deployment on the Packet Broker side, which is our visibility manager, has mostly been in test mode. That deployment schedule will begin in earnest in the first calendar quarter, and we expect it to ramp up throughout 2022. Regarding our OEM partner and the growth of our 5G solution, a few interesting developments have occurred. There were two alternatives for telecom service providers to choose from: an NFVI solution and a cloud-native infrastructure solution. In the case of the cloud-native solution, we are the sole source vendor. During the quarter, they shifted away from NFVI as a competitive option, and everyone is now adopting the cloud-native infrastructure solution, which is beneficial for us since it is 100% Extreme. We are seeing positive news, and you will hear more from us as several large carriers are starting to initiate deployments. We expect this to ramp up as indicated for 2022. The shift to cloud-native is significant, and that is where we excel in terms of our fabric automation and the infrastructure services we provide.

Paul Silverstein, Analyst

Rémi, if I was more alert, perhaps I could do the math myself, but I'm hoping you'll make it easy for me to avoid any mistakes. What was the service provider as a percentage of bookings in the preceding quarter? You mentioned it was 6% this quarter. What about the quarter before?

Rémi Thomas, CFO

It was 8% in Q4. The business now and the EMI business. And it was 5% a year ago.

Paul Silverstein, Analyst

5% a year ago. Perfect. Guys, I trust the answer is nothing, but let me ask the question, which is, other than supply chain, which doesn't appear to be all that impacted as impacted or as perhaps one would have thought. What are the risks? What do you worry about? What could go wrong over the next 12 months from here?

Edward Meyercord, President and CEO

Yes, Paul, the main issue for us is the supply chain. Fortunately, we have a strong partnership with Broadcom, who has been very supportive. Additionally, we're now working with Tier 2 and Tier 3 suppliers that we typically wouldn't engage with, making it a tactical effort in managing our supply chain. This is our top priority. Secondly, we're launching new software services, including our pilot license X IQ Pilot. We are quickly progressing and plan to roll out our first Extreme branded SD-WAN and SD branch solutions in the first half of fiscal '22, which we are very excited about. We are also establishing a new back office for SaaS and a customer success and lifecycle management platform to enhance the customer experience. There is significant investment and focus on these initiatives at Extreme, as we see an opportunity to generate software subscription revenue from services, starting with the SD-WAN service we will be launching. We are ahead of schedule and beginning the rollout in Europe, with plans to introduce our SD-WAN capabilities globally in the first half of calendar '22. This represents a new growth area for us, and there is a lot of enthusiasm and focus on software and adding new licenses on top of our existing XIQ Pilot licenses. These developments are what we are intensely focused on, and they drive our excitement about pursuing new growth opportunities and increasing recurring revenue at Extreme.

Paul Silverstein, Analyst

Ed, would you all mind if I squeeze in 2 more? Apologies to you and others on the call. But I've got 2 other quick questions I was hoping to ask.

Edward Meyercord, President and CEO

Yes, I think Stan's letting you roll.

Paul Silverstein, Analyst

I greatly appreciate it, guys. First off, and again, I apologize if you already said this, but how much of the incremental growth is a function of new customer additions? How much is a function of deeper penetration of the existing customer base?

Edward Meyercord, President and CEO

Yes. It's a combination of both. What I would say is this quarter, we have seen an uptick in what we would call new customer logos. And I'd say that's being driven by the channel for one. We are attracting new channel partners, and we are, I think, getting more wallet share with people in the channel realizing I can position Extreme and win with Extreme here. So I think that's one of the big drivers of new logos for us. And then in competitive situations, as I mentioned before, the brand awareness of Extreme has gone up. And so people are more aware because it's known in the industry that we're clearly the #2 in cloud networking. That's a secular trend in our industry, where more and more people are going to be moving. As you look at networking and the confluence of networking and cloud and then more security and more services being delivered at the edge of the network, all of a sudden Extreme is in a leadership position and a strong place. So we are getting more inquiry. And so it's a combination of, I think, the brand recognition, our stronger competitive position in the industry, specifically with cloud as one and then what's happening in the channel, which is driving higher than normal new logo activity at Extreme.

Paul Silverstein, Analyst

Last question from me. Rémi, I recognize that the price increases will clearly benefit your peers. However, I am interested in your perspective. Many of your competitors have noted a worsening supply chain situation, affecting both product availability and inputs, resulting in significant price increases and expedited fees. What makes you confident that this quarter will be the peak, and why aren't you seeing conditions worsen?

Rémi Thomas, CFO

Because, Paul, we operate very closely to large suppliers, namely, Broadcom, and we get good visibility in terms of the POs that we place with them, their commitment dates and the cost of the expedite fees associated with these POs. And so when we look at what's expected for Q2 and then Q3 and Q4, we do anticipate that we'll see a decline. And at the same time, we're going to get more of the benefit from the price actions that we just took. As Ed mentioned earlier, for the backlog, which was booked at the prior pricing to wash through. And once that's the case, you're basically selling in at the new price, and you'll see the full benefit of that in Q3 and Q4. There's going to be some impact in Q2, but not big enough to offset the impact of expedite fees and freight costs, whereas as of Q3 gets better and Q4 gets even better. So it's really the timing of the actions we're taking and the full impact versus the timing of those expedite fees that we're paying. And actually, the peak of the expedite fees is expected to be in Q2.

Alex Henderson, Analyst

I wanted to discuss something Paul mentioned but from a different perspective. With the price increase taking effect on October 1, customers are motivated to make purchases before the new prices are implemented. To what extent do you believe this has happened? Additionally, do you expect to accumulate a similar backlog in the December quarter, given that it represents the peak of supply constraints, as you did this quarter? I also have a follow-up regarding the duration of the orders. Is there any indication of how much this is extending the timeline for fulfilling orders?

Edward Meyercord, President and CEO

Sure, Alex. We monitor this closely, and we have an analytics tool called Clari that integrates with Salesforce, providing us with excellent insights into our pipeline and funnels. This allows us to track newly created opportunities within the quarter and those that may get pushed back. We review this data weekly, giving us strong visibility on incoming opportunities. It's clear that when we raise prices, some customers may rush to purchase at the lower price. In this current environment, demand might come in sooner than expected as people try to secure their positions due to supply chain awareness. We've implemented several price increases, including those related to tariffs. Generally, we see typical customer behavior in response to these changes. One important factor we monitor is the health of the upcoming quarter. If business pulls in, we're cautious about potential dips in bookings in the subsequent quarter. However, our funnel for opportunities remains robust for the December quarter, which gives us confidence moving forward. While we can't pinpoint the exact percentage of bookings that have been pulled in, we focus on the opportunities for December and the insights from our field teams at various levels. The feedback continues to be strong, and the funnel looks solid, indicating that this isn't just a temporary trend for the current quarter. Alex, I don't think we expect to increase our backlog by $100 million, and that was specific to this quarter. However, we do anticipate growing our backlog overall. We will have a book-to-bill ratio exceeding 1.

Alex Henderson, Analyst

And any comment about the duration of the orders that are going into the backlog? As an example, Juniper talked about $1 billion increase in backlog and I don't remember the percentage, but I think it was a 30% increase in backlog, but only a 15% increase in backlog if adjusted for duration. Are you seeing a similar situation where you're seeing orders further into the future, and therefore, there's a duration stretch?

Edward Meyercord, President and CEO

We assess both customer and product constraints, and we don't observe a significant change in our customer constraints. This means customers are placing orders for future delivery beyond the current quarter. Consequently, our order duration is typically shorter, perhaps less than that of Juniper or other customers. We rarely see orders extending beyond six months.

Alex Henderson, Analyst

Okay. One last question, and I'll leave the floor. The top 4 verticals, the SP, government, health care, education, I was surprised that your focus is much more around enterprise campus now. I would have thought the enterprise would have been stronger. Can you talk a little bit about enterprise as an aggregate as opposed to the service provider, government and education market?

Edward Meyercord, President and CEO

When we mention government, we are referring to enterprise customers, specifically campus enterprise customers. That is the primary focus. We are not specifically targeting federal government. Could you discuss the enterprise environment, excluding government, service providers, healthcare, and education? Was the overall performance consistent with the increase? Yes, we're observing a consistent trend among enterprise customers as they adapt to a new environment. They are increasingly looking to support a more distributed and flexible workforce. Customers learned from COVID that they can operate effectively in remote settings. More of our clients are focusing on providing support for end users in a hybrid manner, whether they are working from home or in the office. This reflects our concept of the Infinite Enterprise, as the edge of the network shifts away from the corporate office while still delivering a consistent user experience regardless of location. This is where the significance of the Ipanema acquisition comes into play, allowing us to offer cloud-based application performance management, routing, and security. We are witnessing substantial investments and a rapid acceleration of digital transformation as businesses adjust to the new normal.

Rémi Thomas, CFO

And if I can just add. Sorry, Alex. We typically are not a huge player in the carpeted enterprise, if that's what you're alluding to, Alex, but it's captured in 2 segments, enterprise outside of our verticals like health care, retail, etc. It's captured in manufacturing, which is up high single digits year-over-year and accounts for slightly less than 10% of revenue and what we call other industry verticals, and that was up 33% year-over-year and represented about 18% of total bookings. So to Ed's point, it was a healthy trend. But as you know, that's not necessarily our main focus when it comes to verticals.

Alex Henderson, Analyst

Well, yes. But on the other side of that coin, that's where you have an opportunity to penetrate, that's great. That's what I was looking for.

Stan Kovler, Vice President of Corporate Strategy and Investor Relations

Thank you, Norma, and we're up on the hour. So thank you to everybody who could join us on the call today. We want to shout out to Extreme employees for an incredible effort during a difficult quarter, for delivering excellent results. We also want to shout out to our channel partners and our customers out there. We wish everyone good health in this environment. We will remind everyone that we will be attending the Needham, Credit Suisse and Cowen conferences this upcoming quarter, and we hope to see you there. Thanks, everybody, and have a great day.

Operator, Operator

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