Good day, and thank you for standing by. Welcome to the Extreme Networks' fourth quarter fiscal year 2022 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Stan Kovler, Vice President, Investor Relations and Corporate Strategy. Please go ahead.
Thank you, Catherine. Welcome to the Extreme Networks' fourth fiscal quarter and year-end 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.
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. Any forward-looking statements made on this call reflect our analysis as of today. 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. We had a strong quarter and year, and I'm pleased with the progress our teams are making. Our results for fiscal 2022 highlight unprecedented demand for Extreme solutions and a very vibrant and healthy market for networking. We reported record bookings growth of 24%, which is a clear indication that we're taking share and winning in the market. Our forward-looking funnel for fiscal 2023 is up double digits year-over-year. This is a leading indicator of future bookings growth. The differentiation of our fabric and cloud solutions for enterprise customers and our targeted solutions for very large service provider customers, combined with the high performance of our global sales and channel teams, gives us the confidence in our outlook for continued growth and demand.
Our technology solutions are critical to infrastructure initiatives underpinning digital transformation for all of our customers around the world. We believe these important projects will continue to remain a priority irrespective of a changing macroeconomic environment. For the year, our double-digit revenue growth led to an all-time high revenue of $1.1 billion, yet it was understated by the $400 million of incremental backlog we built during the year. Our total Q4 ending backlog was $513 million, thanks to the current supply chain environment. Despite margin pressures, we were also pleased to generate a record $60 million of free cash flow during the quarter, bringing our net debt to EBITDA below 1. The continued improvement in our operating model allowed us to achieve record non-GAAP EPS of $0.70 per share for the year, up 35% year-over-year.
We expect these bottom-line earnings growth trends to continue. A record 208 customers spent more than $1 million with Extreme during fiscal 2022, up 28% from a year ago. We attribute this success to our strategy of leveraging channel partners as a vehicle for growth in the enterprise market while focusing our direct sellers on larger projects. Our sales productivity is at an all-time high as a result, and we have more teams over quota than any time in our history. There's never been a better time to be at Extreme as demonstrated by our sellers in the field. In addition, our competitive position in the industry has never been stronger. Small share gains have a large impact on Extreme from both a financial and industry recognition perspective.
Our distributors, channel partners, and our customers have taken notice of the industry accolades we're receiving for our solutions and service. For the first time, we eclipsed the largest industry player in the Gartner Magic Quadrant, where we are an established leader for four years. For the fifth year in a row, Extreme was named Gartner's Choice for wired and wireless LAN access infrastructure. This recognition carries weight with our target enterprise customers. Our differentiated cloud-based solutions drove subscription bookings growth to 58%, and we achieved annualized cloud SaaS bookings of $170 million exiting Q4. Demand for our innovative SaaS solutions is also driving demand for our products, and we believe the level of organic subscription growth we are seeing today is sustainable. Our ARR reached $103 million in Q4, up 47% year-over-year and 8% quarter-over-quarter.
We continue to build on our vision of the Infinite Enterprise with the launch of ExtremeCloud SD-WAN solutions, extending our cloud edge services across wide area networks. These solutions, along with our AIOps developments around Digital Twin and CoPilot, will provide the next wave of growth in our subscription business and support our long-term subscription revenue outlook of 35%-45%. We received tremendous feedback from our annual Extreme Connect user conference that we held live for the first time in several years. Associated content sessions were viewed more than 4,000 times over 1.5 days. We also showcased our ecosystem of over 100+ technology integrations and partnerships on display at the event. Next week, we're oversubscribed for our sales kickoff event for our direct sellers and channel partners, where we expect over 1,000 live up in Boston.
We exceeded our stated goal of generating an incremental $20 million in fiscal 2022 sales of our 5G solutions to service providers. We're starting to experience pull-through business thanks to a significant ramp in next-generation global telco network deployments. We're working on expanded use cases with our OEM partner for additional cloud-native solutions where we're the preferred vendor. Today, our teams are more confident in navigating the challenging supply chain environment thanks to a combination of strategic relationships, new processes, and more consistency with secondary and tertiary component suppliers, and success in the broker market for components. In addition, our teams have been successful in re-engineering products to improve lead times for customers. This allowed us to release nearly $20 million in backlog during the quarter. These efforts were enabled by a number of our cross-functional teams working with ODMs and suppliers.
We were able to create new product SKUs and certify them in record time. Our customers recognize this agility, and it's creating new business opportunities for us. As we noted during our Investor Day in May, we expect to continue to build backlog for the next several quarters, given our outlook for continued bookings growth and the gradual recovery in supply chain. Per the guidance we provided, we expect sequential improvements in our ability to deliver product to customers throughout fiscal 2023. Based on the lead times and commitments, we expect backlog will begin to shrink by Q4 of fiscal 2023. We have complete visibility into our product backlog and have received negligible cancellations to date of less than 1% of bookings. Our backlog primarily consists of our latest generation universal products.
When we begin to ship product, we will also see an improvement in subscription and services bookings that are attached to our wired and wireless products. At Extreme, we're focused on finding new ways to enable better outcomes for our customers. This quarter, Extreme helped Unicoop Firenze, an Italian grocer with over 100 locations and over $2 billion in annual turnover, bring next-generation retail experiences to its customers through our ExtremeCloud SD-WAN solution, lowering costs, simplifying management, and providing ease of deployment. At North Carolina A&T, the nation's largest HBCU, serving more than 13,000 students, Extreme Fabric solutions are being used to expand the campus network and improve the digital learning experience for students while enhancing security. The re-architected environment was created with the help of our award-winning services team.
This quarter, we booked the largest network infrastructure as a service deal in Extreme's history with a U.S. federal customer. $10 million campus switching deal over 5 years. We leveraged our capital solutions group to deliver a new OpEx-based consumption model for this federal customer. Again, our ability to be flexible with our enterprise customers is an important differentiator for us. In Q4, we continued to expand our universal portfolio with the introduction of the 5720 Universal Switch designed to support data-heavy applications such as Wi-Fi 6E. We also continue to innovate on best-in-class Wi-Fi 6E and ultra-wideband APs. Extreme's first-to-market move in Wi-Fi 6E is leading us to win in the market transition. Adoption of 6E wireless will also drive multi-gig switching demand in the future. We nearly doubled our Wi-Fi 6E revenue during the quarter sequentially as we've improved our ability to deliver access points to customers.
6E is now over 25% of our wired, wireless AP revenue. Net-net, I'm incredibly excited to see our team execute at such a high level across the organization, from our product team delivering incredible innovation, to our sales and marketing team driving demand, our supply chain and ops teams delivering product in a challenging environment, and the cross-functional support from all the other organizations are putting Extreme in a position for unprecedented growth in top line, cash flow, and earnings in future quarters and years to come. With that, I'll turn the call over to our CFO, Rémi Thomas.
Thanks, Ed. As Ed described, we had solid execution in fiscal 2022 with record bookings and backlog generation, double-digit revenue growth, and overall improving margins in spite of the supply chain environment. Strong demand for our portfolio of products, services, and subscription drove year-over-year bookings growth of 24% in fiscal 2022 and 8% in Q4. With a product book-to-bill ratio of 1.29 for the year and 1.23 for the quarter, we exited the year with $513 million in backlog, up more than $400 million year-over-year and close to $90 million sequentially. That's nearly three full quarters of product revenue. We achieved double-digit revenue growth for the year to surpass the $1.1 billion mark.
Our fourth quarter revenue of $278.2 million came above the high end of our expectations entering the quarter, reflecting the ability of our supply team to either source more components or qualify alternative ones. We grew our SaaS subscription bookings by 58% in fiscal 2022, and 51% in Q4. We're making a change to how we report our SaaS ARR. We're now basing it on an annualized view of our quarterly subscription revenue as opposed to the annualized contract value. Historical data can be found on page 15 of the Q4 earnings deck posted on our website. Based on this methodology, our ARR reached $103 million in Q4 at 47% year-over-year, and 8% quarter-over-quarter.
SaaS deferred revenue was $157 million at the end of Q4, up 40% year-over-year, and 10% quarter-over-quarter. For the year, we achieved record EPS of $0.77, up from $0.57 a year ago. Q4 non-GAAP earnings per share was $0.15, in line with our expectations entering the quarter. On a geographic basis, and looking at revenue, our top-performing region was EMEA, which delivered revenue growth of 23% for the year and 10% for Q4. The Americas grew 3% for the year, but declined in Q4, impacted by fewer stadium deployments this quarter. Finally, although APAC revenue declined slightly for the year, it enjoyed a very strong recovery of 48% in Q4, resulting from improved execution across the board.
From a vertical standpoint, this time looking at total company bookings, the highest year-over-year growth in fiscal 2022 came from sports and entertainment, followed by government and healthcare. For Q4 specifically, the highest growth came from government, followed by healthcare and service provider. From a product category standpoint, our wired product bookings grew 28% for the year, but were down slightly in Q4 due to a very demanding comparison in the campus segment. Wireless product bookings grew 25% for the year and maintain a healthy growth rate of 6% in Q4. Total wired revenue grew at a high single-digit rate for the year, but declined in Q4 due to supply chain constraints. Our wireless revenue, on the other hand, grew at a double-digit rate for the year and in the mid-20s for Q4 as we were able to release a meaningful part of our backlog.
Services and subscription revenue of $91.1 million in Q4 was up 11% year-over-year, taking the total for the year to $350.6 million, up 13%. This growth was largely driven by the strength of cloud subscriptions, for which revenue grew 34% in Q4 and 37% for the year. Total Q4 recurring revenue, including maintenance, managed services, and subscription, rose to $87.3 million or 31% of total company revenue, up from 28% last quarter. For the full year, our recurring revenue was 30% of total. The growth of cloud subscription and service renewals drove the total deferred revenue sitting on our balance sheet to $402 million, up 16% from the year ago quarter and 8% sequentially.
Our non-GAAP gross margin came in at 57%, down 1 percentage point sequentially and 3.5 percentage points year-over-year, driven by lower product gross margin. In addition to high expedite fees and freight costs, our product gross margin was impacted by an unfavorable mix. For the full year, total company gross margin would have been at least 600 basis points higher, if not for these elevated expedite fees and freight costs. On the other hand, services and subscription non-GAAP gross margin improved to 70.7% in Q4, up from 64% in the year-ago quarter and 65.1% sequentially, driven by a high mix of subscription and maintenance and lower professional services revenue based on the timing of certain high-touch stadium deployments.
Q4 non-GAAP operating expenses were $132 million, up from $131 million in the year ago quarter and from $130 million in Q3, reflecting lower R&D expenses but higher sales and marketing expenses. OpEx as a percentage of revenue was 47.3%. For the full year, operating expenses dropped to 46.1% of revenue at the lower end of the long-term range of 46%-49% we had provided at our analyst day in early 2021. All in all, operating margin was 9.6% for the quarter and 12.2% for fiscal 2022, the highest on record. Net debt was reduced by $35 million sequentially to $114 million as a result of a record operating cash flow of $60 million this quarter.
This was driven by strong collections as well as an acceleration in the pace of tariff duty drawbacks. During Q4, we repurchased a total of 2.05 million shares of our common stock for $20 million with an average price of $9.74 per share. For the full year, we repurchased $45 million worth of stock. We currently have $200 million remaining in our new buyback authorization as of July 1. Now, turning to guidance. For Q1, we expect revenue to be in the range of $279 million-$289 million. Q1 non-GAAP gross margin is anticipated to be in the range of 57%-59%. Q1 non-GAAP operating expenses are expected to be in the range of $130.7 million-$134.2 million.
Q1 non-GAAP earnings are anticipated to be in the range of $19.9 million-$26.5 million, or $0.15-$0.20 per diluted share. We anticipate that the reduction in expedited and shipping fees, combined with the full impact of our recent pricing actions, will lead to a progressive recovery in gross margin throughout fiscal year 2023, with Q4 expected to be above 60%. For the year, we expect 10%-15% revenue growth with an operating margin in the 10%-15% range. With that, I will now turn it over to the operator to begin the question-and-answer session.
Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Alex Henderson with Needham & Company. Your line is open.
Thank you very much. Great job, guys. It's in a tough environment. Wanted to get a better handle on the bookings in 4Q and the outlook commentary going into the first half of fiscal 2023. It sounds like clearly you expect supply constraints to stay through most of the fiscal year. Do you A see any improvement in supply in your expectations in the first half of the year?
Second, you know, what's going on in that pipeline as you're looking at that first half, you know, outlook, and particularly, if you look at the bookings numbers in the fourth quarter, how did that play on geography, and how do you think that looks going into the upcoming quarter, particularly in EMEA? Thanks.
Thanks, Alex. Rémi, why don't you let me jump in, and then you can fill in. Alex, you know, you're rightfully pointing out kind of this how we're looking at bookings, which is really our measure of true demand, and then versus revenue. Our revenue outlook is really a function of supply chain and product that we are able to release given the massive backlog that we built up, and the continued strength of bookings. I'll just start off with supply chain. You've asked about that. What we see is a gradual improvement throughout the year. Think of a step function where we will be stepping our revenue quarter by quarter throughout the year, based on our outlook of supply chain.
We do have more confidence, as we've mentioned before, strong relationships with the likes of Broadcom, where we are not constrained. It's more about secondary, tertiary component vendors where we've established direct relationships, normal processes, and have consistency now in our expectations around delivery. Then some of the creative things that our teams are doing around re-engineering, et cetera, and then more products showing up in the spot market. Our teams, as I mentioned in my comments, are more confident today than they have been in our ability to step function, you know, our supply of product to our customers' partners. What does that mean? That is how we built the revenue forecast for fiscal 2023, which is that step function with sharper improvement in the second half of the fiscal.
As it relates to demand, our demand has been strong, as we've talked about it for the year, 24% for us. That's record-breaking performance. However, the seasonality for bookings is very different. In an environment where people know that there are long lead times, when there are pricing actions like there were last year in response to increased expenses, we had a couple of price raises. In that case, people wanted to get ahead. We saw extraordinary bookings growth at the very end of the September quarter last year, end of the March quarter as far as bookings. There was a lot of pull-ins from the other periods.
Normally you would see, you know, the peak in June and then, you know, slow down in September, you know, peak in December and then slow down in March. In this case, you know, what you saw was an explosion in September last year, a slowdown from that level in December, an explosion in March, and then a slight slowdown. In terms of our internal plans, we hit our internal target, which is why we continue to grow bookings. But relative to where we were in the March quarter with the pricing action, it was different. As we look out at the first half of fiscal 2023, we see bookings growth continue. That is a function of several factors.
First of all, we rely on our teams and our bottoms-up roll-up from direct sellers in the field rolling up geographically. There's a lot of confidence from our field teams and the numbers that they're actually calling. I'd say stronger than in years past. The second thing, we look at that funnel, and we run our own metrics, and look at the commit levels and the confidence levels. With our algorithms and our formulas there, and they're up. As we mentioned, if you look at our funnel year-over-year, we are up over double digits in terms of the opportunities. Over the course of last year, with competitiveness at Extreme, you know, our conversion rate from that funnel has improved.
We're more confident about the quality of the funnel and our ability to win, and we still see growth there. Finally, we have an AI tool. We call it a number based on all the CRM activity and looking at the opportunities. That's up. And then our partners, channel partners and our distributors, they have an outlook and a view, and they're calling a number. When we look at all those different data points, it points to increase in demand. What I would tell you is that for the first quarter, we definitely expect to be over a book-to-bill of one, and the normal seasonal trends in bookings and comparisons will likely be different because of the pricing actions.
EMEA?
Rémi, do you wanna comment?
No, I think you gave a very detailed view of-
Yeah. Alex, as it relates to EMEA, we continue to see strength. So we're not seeing it. I know that this is something that you're paying close attention to and that you're concerned about. We can't provide that data point for you. We're not seeing it. We continue to see strength. The question is whether or not that's because we're taking market share, you know, against, you know, a macro or if our data point is a valid macro data point.
It's a good result to you either way. Thanks so much for the detail.
Yeah.
Thank you. One moment. Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.
Hi. Thanks very much. It's good to be on the call. I guess asking that part of the last question a slightly different way. I think you said that by the fourth quarter of the fiscal year, you think book-to-bill will be below one. I guess my question there is that more of a function of less confidence in demand when you look that far out, or more confidence in the supply chain, you know, allowing you to eat into the backlog and report extraordinary revenue growth in the back half of the year?
Yeah. Hi, Mike. It's a good question, and it's all supply chain. You know, as I mentioned, we continue to see strength in demand, going out for the year, and growth. On the supply chain side, where we are most constrained, and we talked about in our components, and these are tier two, tier three components, where we need every component to make a switch or to make an access point. Without it, you know, we can't ship. We can't produce and we can't ship. Some of our suppliers have fabs that are coming online in the first part of the calendar year.
The fact of the matter is that we have a schedule, we have visibility to how our components will come online, and then we'll see a greater supply of those components than the ones that are holding us up.
Right. I guess 'cause I'm new to this, I just need some clarification between definitions when we're talking about fiscal years versus calendar years. You know, when you're talking about improvement in every quarter of 2023, is that a fiscal year comment or a calendar year comment? Can you talk about any kind of green shoots, you know, color on green shoots that you may be seeing or not seeing in the actual calendar second half of 2022?
Yeah. I think the comments for the fiscal apply to calendar. I think the calendar, our view of the calendar 2023 is the second half of calendar 2023. You'll see even a greater inflow of product as we start taking down backlog. I mean, what we've been talking about is just releveling our revenue to real demand, which is resetting this book-to-bill. On top of it, we're talking about building backlog where we'll have hundreds of millions of backlogs to release. That is, again, that will continue and that will only gain velocity in the second half of the calendar.
All right. Okay.
Any other-
Sorry to, I don't know if I'm already beating a dead horse, but can you give us any, if we think about fiscal 2Q, the December quarter gross margin. I mean, I know you don't normally guide two quarters out, but do you have any color on how we should think about the supply chain or, you know, versus pricing versus other factors for the sequential gross margin into December?
Like, based on you know, our view of expedite fees, freight costs that are starting to come down as more capacity is being built between Taiwan and Shanghai, in El Paso, where we have our main hub, we feel confident that we can improve the gross margin sequentially by close to one percentage point, so that we now see ourselves in Q2 at around 59%.
Great. Well, I have more questions, but I think I'll pass it on, to be fair to other people. Thank you. Thank you very much.
You're welcome.
Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Your line is open.
Yeah, I wanted to address the FX impact of the strong dollar. I was actually concerned that you guys might be, you know, backing away from the 10%-15% growth in FY 2023 based on the strength of the dollar versus the pound and the euro. Could you address that?
Sure. There's two aspects, Eric. The first one is the competitiveness of our product. Unless some of our customers are willing to go with Huawei or with Alcatel-Lucent Enterprise, which is a way smaller player, if we're dealing with Juniper, Cisco, HP, Aruba, that has not proven to be a problem. Believe me, I'm asking the questions every Monday on our sales call to our head of EMEA sales. So far, customers basically are absorbing the impact of, you know, higher prices in their local currency, specifically if they're in the Eurozone, because all of our competitors use the dollar as a functional currency with the exception of the two that I mentioned.
Second aspect is we have a significant cost base, not so much in terms of R&D, but obviously in sales and marketing with a significant presence in Europe. As we account for that, it basically has a favorable impact on our OpEx. As a prudent CFO with a very prudent treasurer, we're hedging ourselves against the euro and the Indian rupee to lock in some of these rates. You know, the impact that you'll see on P&L depends on how smart we've been in terms of our hedging, but that second aspect is favorable to the P&L.
Okay. You talk about Q4 relief in the supply chain or I guess the release of the backlog. Is that consistent with your comments in May at the Investor Day? I could have sworn you were talking about Q3 relief.
Go ahead, Ed.
Yeah, I was gonna say it is consistent, and I think not to be confused with, you know, how our suppliers begin turning up product and then how that product affects our supply chain. I think in Norman's commentary, he was talking about suppliers where we're constrained, turning up and opening up new fabs and then turning up production lines to start releasing products. There's an evolution there. That is happening in the first quarter, and they're on schedule. That's happening in Q4 and in calendar Q1. Then those components have to make it into our supply chain. Our timetable for that is we're seeing a significant step in our Q4 of those much needed components that we can then turn around and ship product.
Okay. It was really more of an upstream comment, and that the P&L impact is Q4. Okay. Thanks.
It is. I think keep in mind we are forecasting a significant step in each quarter going forward. Normally there'd be seasonality in the September quarter in revenue, but we're guiding to a step-up. We're guiding to a step-up in December, a step-up in March, a step-up in June. It's you know, we're seeing this gradual release with some pretty larger steps happening in the March and then especially in the June timeframe.
Yeah, definitely unusual times.
Yep. Yep.
Okay, thanks for taking my question.
Thank you. As a reminder, to ask a question, press star one one. One moment. We have a follow-up from Alex Henderson with Needham & Company. Your line is open.
Great. The double dip. All right. Wanted to just clarify on the FX and international sales. Do you have any receivables that you have exposure on relative to the FX that could be impacted by the strong dollar, weak currencies in the international market, particularly Europe, that are either unhedged or would be impacted by you know, further strength in the dollar?
The functional currency that we use with our VADs, where we basically collect 85% of our receivable, happens to be the dollar. That means that whatever bill was in dollar, they have to come up with the right amounts to meet that bill. No exposure there.
Relative to the functional currency, internationally, and particularly in EMEA, what percentage of your revenues are in dollars versus local currencies? I assume that there are some. I'm pretty sure that there are some that are in local currencies. Could you just clarify what that percentage, since this is such a large factor these days?
I don't know the exact percentage, but I would assume it's 95% unless we have guaranteed a net price in the local currency, which to my knowledge, we don't do. We sometimes will guarantee a net price. Some customers are immune from the price increase we've done until the framework agreement we have with them expires. In any event, that price is always set in dollars, to my knowledge.
No, that's higher than I thought it was. Thanks for the clarification.
Yeah.
Going back to the environment, it's hard to believe that the Europeans, you know, are not seeing some pressure in the pipeline. Can you talk a little bit more about the pipeline relative to Europe? You haven't seen any slowdown or any increase in the number of signatures related stretching of lead times, anything on that, on those type of metrics? It seems hard to believe that given massive hit that economy is taking, that there hasn't been any change at all in conditions.
I would add, you know, a couple things to that, Alex. You know, one is, it's something that we're looking at very closely, and we're watching very closely, and the answer is no. We really haven't seen that. As I mentioned before, is that a function of us taking share? We're seeing with our position in cloud and with our position in fabric and the quality of our story, and then the quality of the actual implementations, we're getting more fast. Is this a function that we're seeing more opportunities from a share gain perspective? That could be part of it.
The other thing I would say on an overarching basis is that networking infrastructure is critical, probably more strategic today than it's been. If you're looking at digital transformation, the connective tissue is the network, and the connective tissue is the cloud. These are really important, complicated projects that, you know, we're not seeing these projects being deprioritized. When we look at sort of the difference that the new networks can make in terms of driving customer outcomes and business outcomes, these are not the first projects to go. If things are getting cut, you know. It's why I made the comment about the anti-recessionary nature of critically important networking projects. I would reinforce, we're not seeing it yet.
That's fabulous. Okay. One more question, next one on the internal side of things. Have you changed your, you know, behavior relative to hiring? What are you seeing in terms of wage inflation? What are you seeing in terms of, you know, staffing churn? Any thoughts on those elements of the drive OpEx? And when does your annual merit increases, so that we can put them in our model?
Annual merit increases for us are in the second half of the fiscal. They would come into play at January, February timeframe, in the March quarter. You know, for us, what I would tell you is that our turnover remains unusually low, and I think that some of that has to do with our success in the marketplace and the kind of talent that we're attracting right now at Extreme. You know, from that standpoint, we are out in the market and we are out hiring. We are being very disciplined in our spend and our investments, because real demand is a lot higher in the market, and we're driving a much higher demand than what we're spending for, because our revenue is lower.
We've been making some key strategic hires in the channel and in our sales leadership. I think we're better organized now to support the channel, and we see a real channel growth opportunity. I would say we're hiring. Right now we're in investment mode, but we're constrained because we're governing investment by our revenue, and our revenue is artificially low because it's not a reflection of real demand because of supply chain, if that makes sense.
Would you then, as supply chain improves, accelerate the hiring, to take advantage of your accelerating revenue growth? It sounds like that's the answer to that question.
We would blend, you know, returns to investment in the business and growth with returns to current shareholders.
Makes sense. Wanted to just get a little bit more clarity on the embedded backlog in the systems backlog. The stuff that's, you know, relevant to service, the stuff that's relevant to subscriptions for software that, you know, are tied to actual shipments. If we were to take a ratio of the, you know, say it's $100 million worth of systems, what would the equivalent portion of software and services be that are embedded in that, you know, deferred revenue for systems? Is it 25%, 30%? Is it 50%? How do we think about it?
I don't know that we have that kind of metric because in that 100, you have to see what is our campus portfolio as opposed to our wireless portfolio. Typically, the attach rate that we're now seeing around our wireless portfolio for cloud is around 60%. Every time you sell 100 switches, in 60% of the case, the customers will take XIQ to manage that. You know, the dollar amount related to that is a lower number than that, which we haven't really disclosed. I'm not sure we can answer that question, Alex.
Well, the services should be pretty straightforward, right?
Services attach is typically about $7. You sell $100 worth of switch or access point, you typically get $7. As far as XIQ is concerned, it's really very different between switching and-
Alex, I think we should circle back. We should circle back with you on this one.
Okay, great. Thank you very much. I'll cede the floor.
Yeah.
We have a question from Dave Kang with B. Riley. Your line is open.
Yes, good morning. Nice quarter. First on clarification, I think, Rémi, you talked about gross margin would have been 600 basis points higher. I'm assuming that was for fiscal fourth quarter.
No, that was for the full year.
What was the full for fiscal fourth quarter? Can I get that number?
It was about the same.
Same? Okay.
Yeah.
Got it. Yeah, regarding, I assume, you know, a lot of that has to do with expedite fees. I mean, have we seen the peak of that or when do we see that peaking? Because gross margin obviously declined one percentage point sequentially. I'm assuming that was a function of that.
Actually the expedite fees and freight costs in Q4 versus Q3 and versus what we expected didn't really come as a surprise. What really drove that 1% gross margin impact was a mix. We had a significantly stronger quarter for wireless, and our gross margin on wireless are lower than for our wired products. To your question about have we seen the peak, the answer is yes. As we look at the expected, what we call PPV, purchase price variance, which is really what we pay in addition to the normal invoices to secure supplies from Broadcom and other vendors, we actually see a slight improvement in Q1. Same for freight cost. I mentioned earlier that there is now more capacity being added back by commercial airlines between Asia and the United States.
We're basically leveraging that commercial airline capacity to carry our product so that the bill that we expect to pay this quarter is actually gonna be down sequentially. Which is why we're suggesting a one percentage point improvement sequentially.
Got it. Sticking with wireless, what is the mix between wired versus wireless for product revenue?
This quarter it went back up. It had been depressed because we were delivering more on the wired side. This quarter, we went back up to 28% wireless, 72% wired.
Got it. Regarding your backlog, I think last quarter you talked about, you know, backlog of maybe 500, maybe slightly higher, but clearly you've already exceeded that and you're implying that will continue to go up. How should we think about the new peak? Are we talking about maybe 600, even higher? After peaking, you know, can you maybe talk about the rate of decline going into, you know, I'm assuming that's gonna be more of a fiscal 2024.
Ed, do you wanna comment? I'll go, Dave, and Ed, you can feel free to add.
I wanted to clarify. I wasn't sure about the question of rate of decline. Dave, we're-
The backlog decline.
Oh, the backlog. Yeah. We would expect to see backlog decline. What we mentioned is that we would level out and start chipping away at that in our Q4. We're not expecting a meaningful impact, but it's really in the second half of calendar 2023 that you'll start to see us take more meaningful chunks out of that backlog. It will all be based on supply of components and the increased volume. I think through what, you know, our fiscal year, the second half of our fiscal year, you'll see a step-up. Then throughout fiscal 2024 and probably into fiscal 2025, you'll see us rightsize our backlog.
Where do you think it'll peak, around 600?
You know, I'm not sure we've provided guidance on that, but, you know, I think that's a fairly conservative number.
Got it.
I would say that's a safe number based on the strength of bookings that we've got, relative to supply, especially if you look at the trend over the last several quarters.
Got it. Just a couple more. Can we get the latest update on SD-WAN and Ipanema, how that's progressing?
Sure. We had our Extreme Connect conference, and we announced that we were launching ExtremeCloud SD-WAN. Our teams came in ahead of schedule as far as putting the SD-WAN solution in our cloud. One of the things you'll hear us talk about is that we have one cloud orchestrating services, and we're the only provider in the industry that has, you know, a single cloud, you know, delivering cloud management, you know, on campus as well as wide area network cloud management. This is how we are differentiated, and we're looking at bringing new WAN edge services that we can orchestrate across our cloud. This is a 6-12-month selling cycle, so we've just launched.
What we're seeing is the funnel start building of opportunities. We've already seen, I mentioned,
Our next question is a follow-up from Mike Genovese with Rosenblatt Securities. Your line is open.
Great. I had a fairly long list of follow-ups, but then they mostly just got asked in the last two questions. I'm just gonna end with, for me, CoPilot. I know it's early days, but do you have revenues there yet? What's the pipeline looking like for? How, you know, do you sell that product and what's customer acceptance like? Thank you.
Yeah. Mike, it's a great question. It's something we're really excited about. We talked about the next generation of sort of new growth vectors for subscription. Clearly, you know, SD-WAN, we've gotten a lot of attention around Digital Twin is a unique capability. Then, you know, Copilot with AIOps and automation and some of the operational savings that we're gonna bring. The launch is really this upcoming week in Boston. There's a huge amount of training and enablement and you know, an official launch with our own internal sellers, with marketing programs and incentives as well as for our partners. More to come on that. We're very excited about the capability and the differentiation and what that can do.
Still early innings here, but stay tuned.
Okay. I guess if we think very long-term, you know, years down the road, and we kind of dimensionalize the CoPilot opportunity versus the core XIQ opportunity, like, what percentage?
Yeah, we haven't guided there yet, Mike, and I think that's something that we can come back. What we do is we look at customers, and we look at their software subscription spend. Obviously the core is a pilot license, and then you start layering services on top of that. You know, we look at, you could call it, you know, it's an additive strategy where we're looking at adding services on top of that pilot. I think for us to give you a meaningful answer there, we need to do some modeling for you to try to be responsive and kinda understand what you're trying to build in there. I think it's premature for us to give you an answer on the call today.
Sorry, Mike, you should think of this as an opportunity for us to improve our net retention rate. If our gross retention rate is in the high 80s%, low 90s%, when we go back to the customer and renew, we're typically gonna upsell them with this type of product and get an additional few percentage points and increase our net retention rate.
Fantastic. Thank you very much.
Thank you. That's all the time we have for questions. I'd like to turn the call back to management for closing remarks.
Okay. Thank you. Well, we appreciate everyone joining us today, and we appreciate the engagement with the analysts. Great questions. Yeah, we're very excited as we turn the corner into our fiscal 2023. It's you know, the bookings growth, and the demand for Extreme in the market is unprecedented. I would just say, personally, I'm very proud of the team. I know we have a lot of customers, partners, employees who listen in on the call, and I would congratulate everyone on a job well done and a tremendous momentum that we've got turning the corner.
Again, across the board from the product teams, the sales and marketing teams, our services teams, supply chain, ops teams, and then, you know, everyone supporting the efforts at Extreme. We're just in a very unique position for top line growth, and cash flow and earnings growth, not just the next couple of quarters, but the next several years. We're excited about it. Thank you again for joining us and have a great day.
This concludes today's conference. Thank you for participating. You may now disconnect.