Ladies and gentlemen, thank you for standing by, and welcome to the Extreme Networks' Q1 FY '21 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] I would now like to introduce your host for this conference call, Mr. Stan Kovler. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the Extreme Networks First Fiscal Quarter 2021 Earnings Conference Call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. And with me today are Extreme Networks' President and CEO, Ed Meyercord; and CFO, Remi Thomas. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations and our financial results presentation, are both available in the Investor Relations section of our website at extremenetworks.com. I would like to remind you that during today's call, our discussion may include forward-looking statements about Extreme Networks' future business, financial and operational results; growth expectations and strategies; the impact of COVID-19 pandemic, acquired technologies, products and new product introductions, operations, pricing, changes to our supply chain; the impact of tariffs, acquisition and integration of Aerohive Networks and digital transformation initiatives. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements as described in our risk factors in our 10-K report for the period ending June 30, 2020, filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law. I also wanted to make you aware that beginning with our first quarter of fiscal 2021, we are changing how we calculate our non-GAAP provision for income taxes in accordance with the SEC guidance on non-GAAP financial measures compliance and disclosure interpretation. We have adjusted the fiscal 2020 non-GAAP tax provision and the impact on EPS for all four quarters of fiscal 2020 is provided in our Investor Relations deck on our website on Page 18. There is no impact to the cash flow of the Company. And with that, I will now turn the call over to Extreme Networks' President and CEO, Ed Meyercord.

Thank you, Stan, and thank you all for joining us this morning. Our Q1 results marked the second straight quarter of sequential growth, reflects continued improvements in customer demand and our team's execution. As we noted in our preannouncement, we outperformed our initial expectations of revenue and earnings, grew operating profit on a quarter-over-quarter and year-over-year basis and paid down $20 million of our revolving credit facility, given the strength of our cash flow in the quarter. And as announced today, we paid down another $20 million last week, given the strong start to Q2. After returning to sequential growth in June, our business in Q1 grew 9% sequentially across all our geographies, most notably in the Americas and APJC, where revenue grew double digits from the prior quarter. We achieved this despite Q1 typically being a seasonally weaker quarter. We also achieved 14% product revenue growth and 20% quarter-over-quarter growth of new cloud subscriptions. We're seeing customers accelerate their migration to ExtremeCloud IQ. The number of managed devices grew 19% on top of strong growth last quarter, and we now manage 1.4 million devices on the fastest-growing cloud platform in the industry. Daily traffic in our cloud grew from 3 petabytes per day in Q4 to 5 petabytes per day in Q1. Momentum continues to build as evidenced by the numbers. It's the strength of our customer relationships that have allowed us to weather COVID-19. People are always surprised to learn that it's Extreme Networks that supports the critical infrastructure vital to the fabric of our daily lives, and this was the driving force by our ability to overcome the challenges. When we compete for new logos, it's very powerful when we share customer names such as Federal Express; Volkswagen; Samsung; University of North Carolina; Kroger; Schneider Electric; W.L. Gore, the manufacture of Gore-Tex; Ontario Power Generation that uses extreme edge-to-cloud solutions at its nuclear power plants; Sherry Tay, the largest hospital in Europe and 1/3 of the NHS Trust Hospitals in the U.K., the New York Stock Exchange, retailers such as El Corte Inglés, Canadian Tire, Macy's, Lowe's; and the list goes on. These customers all rely on Extreme for their mission-critical infrastructure. And we recently won Major League Baseball, a big win against our largest competitor. I'm sure many of you may have noticed Extreme's banner on the right outfield wall and maybe our APs in the dugout of the World series in the NLCS. This is the beginning of a long-term relationship with MLB, where you will begin to notice Extreme in all ballparks in the future. We can put a stamp on the fact that Extreme is clearly playing in the major leagues. We also took important actions to streamline our go-to-market organization to better support both large strategic customer accounts as well as our smaller enterprise customers working with newly formed field teams tightly aligned with partners. At the same time, we've streamlined our engineering organization to drive future velocity and deliver what we call our universal experience. Both of these actions are allowing us to drive greater efficiencies and higher productivity. It's an exciting time to be in networking. If there's anything we've learned over the past seven months, it's that networking has never been more critical or strategic. And we're in the dawn of a new era where data is king, and this bodes well for Extreme. Today's networks are much more complex with multiple applications running across hybrid environments and data being stored in multi-cloud environments. The proliferation of edge devices and distributed architectures, it's about intelligence and insights into customers, employees, connected devices, network and application performance. Today, more than ever before, it's about data, data from the network that can be used to drive improved business outcomes in ways that were never contemplated when Extreme developed the very first gigabit Ethernet switch nearly 25 years ago. So here we are at another one of those inflection points in the networking industry that creates a significant new opportunity for all players. At Extreme, we're committed to winning with what we're calling effortless networking. And this is about bringing simplicity to complexity, enabling our customers to do more with less by leveraging data and automation. And how are we doing this? There are three main tenets of effortless: the user experience, the buying experience and the selling and go-to-market experience. Our strategy and our operating plan is to make all of these easy. As far as user experience, we're aggressively investing in end-to-end innovative solutions from our core fabric technology to our wired and wireless edge applications, all running on universal hardware that can be managed from a single cloud. And from the cloud, we bring simplicity, complete visibility of the entire network and the intelligence and insights that come with unlimited data, machine learning and cloud choice. As for the buying experience, our universal hardware platforms will become available in the middle of this quarter. These platforms provide simpler configurations that support choice of our use cases and multiple OSes, fewer SKUs to manage and allow customers to have maximum flexibility to change their network configuration. As for the selling and go-to-market experience, our universal platforms will come with ExtremeCloud IQ licenses for connectivity to cloud management out of the box. Our customers can still leverage the power of our XMC on-prem software and add additional capabilities from the cloud innovation we bring. Our cloud strategy is not about rip and replace. And it brings total cost of ownership savings to customers with this one enterprise, one network, one cloud approach. We're offering more applications in cloud IQ than any other provider in the industry, with machine learning and artificial intelligence tools, analytics, air defense security, locationing, all-in-one license. We added an unmatched number of applications into our ExtremeCloud IQ license at no additional cost. So this, too, will significantly reduce the total cost of ownership for our customers and provide us with a competitive advantage by exposing the hidden cost of our competitor solutions. And our licensing model is truly unique in the industry as we are the only one to offer easy-to-use coolable and transferable license at a single price for all networking elements, whether it's an access point or a core switch. Through our LEAP program, we're offering flexible payment structures where customers combine with traditional CapEx or OpEx models. LEAP usage by our customers was up 50% sequentially in Q1, and we see continued growth in our funnel. And from our own digital transformation perspective, our newly launched channel self-service platform got off to an excellent start, and momentum is accelerating. 14% of the growth generated during Q1 went through channel self-service, which is now up to 41% at this point in Q2. This program offers volume-based promotions to enable 0-touch discounts to our distributors and partners. It's making it easier to drive our long-tail business and is giving time back to our field to build pipeline and develop new opportunities. As we head into our 25th year, there is yet again another inflection point in networking. It's the age of data. It's creating new opportunities for all of us, and there's never been a better time to take advantage of being an Extreme customer. We continue to expect a gradual recovery from COVID to progress throughout fiscal '21 and see good growth in our funnel of opportunities. Extreme is emerging from all of this as a stronger and a much more competitive company. And with that, I'll turn the call over to our CFO, Remi Thomas.

Thanks, Ed. Total revenue of $235.8 million grew 9% quarter-over-quarter, mainly driven by product revenue, up 14%, while services revenue edged up 1% quarter-to-quarter. Our recurring revenue contributed 31% of revenue compared to 34% of revenue in the previous quarter, although product revenue grew faster than service revenue. Non-GAAP earnings per share was $0.09, up from $0.03 last quarter and up from $0.07 in the year ago quarter. The strong quarter-over-quarter recovery in our bottom line was once again the result of higher revenue combined with continued control over our cost and expenses. Total product revenue was $161.4 million, and our total product book-to-bill ratio was approximately 105. Revenue associated with newly introduced products grew quarter-over-quarter, while our orders for universal hardware platforms scheduled to ship in mid-calendar Q4 continue to ramp. Demand is currently outstripping supply for the new universal platforms. Wired revenue grew over 20% sequentially and led by strength in edge and campus switching, while our wireless revenue was slightly down from the prior quarter. Total services revenue reached $74.4 million, up 6% year-over-year and 1% quarter-over-quarter, largely driven by cloud subscriptions. Our total services book-to-bill ratio was 1.1 as customers continue to upgrade and support their existing network requirements. New cloud subscription bookings grew 20% sequentially. And based on our Q1 bookings, our total cloud-managed subscription business reached over $17 million in annualized run rate. During the quarter, the Americas contributed 55.3% to total revenue; the MEA, 34.4%; and APJC closed out the remaining 10.3%. From a verticals perspective, we saw sustained demand in government and education, particularly in higher ed, a strong recovery in manufacturing, both on a year-over-year and quarter-over-quarter basis and finally, a sequential recovery in retail and transportation and logistics. Demand remained muted in health care and service provider in communications in Q1. While sports and entertainment revenue remain low, consistent with the past two quarters, the prospect of fans returning to stadiums and our recent win with MLB make us optimistic about a recovery for this vertical in the second half of FY '21. Non-GAAP gross margin was 60.3%, up from 59.9% in the year ago quarter and compared to 59.4% in Q4. The sequential increase was largely attributable to a 4.5 point jump in product gross margin, boosted by four factors; higher volume, a greater mix of high-margin new products, lower excess and obsolete inventory and lower freight and tariff costs. Q1 non-GAAP operating expense of $122.6 million increased from $116.8 million in the prior quarter, but decreased 10.6% or almost $15 million from $137.2 million in the year ago quarter. As anticipated, the sequential increase in operating expense was due to the reversal of temporary cost control measures such as employee pay cuts that were introduced at the start of Q4 to preserve liquidity. With top line growing faster than cost and expenses, we generated a non-GAAP operating margin of 8.3%, up from 5.2% in Q4 and 6.2% in the year ago quarter. As a result, on a dollar basis, our operating profit of $19.7 million grew from $11.2 million last quarter but also from $15.9 million in the year ago quarter. The recovery in our operating profit, combined with the good management of operating working capital resulted in free cash flow of $21.7 million, up from $6.2 million in Q4 and from use of cash of $5.4 million in the year ago quarter. We're focused on strengthening our balance sheet. And after paying down $20 million of our $55 million revolver, we ended Q1 with $193 million in cash and equivalents compared to $194 million at the end of Q4. Given our expectations of another strong quarter of cash flow in fiscal Q2, we paid down another $20 million of our revolver balance on October 23 and have just $15 million remaining to pay down. We expect ending gross cash in Q2 to be roughly in line with ending gross cash in Q1. Our cash conversion cycle improved to 44 days, down from 70 days in Q4 and 74 days in the year ago quarter. The decrease was driven mostly by a reduction in DSOs and a sharp improvement in our days of inventory with much higher days payable that we believe will revert to more normalized levels over time. We made sequential progress in reducing our inventory levels to $56 million, down from $63 million as of the end of Q4. We still have room for improvement. And the launch of our universal platform to switching and access points with the resulting reduction in the number of SKUs carried out in our portfolio should help us achieve a structural reduction in inventory. Now turning to guidance. We expect Q2 revenue to be in the range of $235 million to $245 million, following a better-than-seasonal quarter in Q1. Q2 GAAP gross margin is anticipated to be in the range of 56.8% to 57.5% and non-GAAP gross margin in the range of 60% to 60.6%. Q2 GAAP operating expenses are expected to be in the range of $134.5 million to $137.5 million and non-GAAP OpEx in the range of $122.1 million to $125.1 million. The slight increase in OpEx of 1% at the midpoint is primarily related to higher sales commissions we anticipate and to a lesser extent, expected rise in spend and travel and entertainment in comparison to the minimal level incurred in Q1. Q2 GAAP earnings are expected to be a net loss in the range of $4.3 million to $9.2 million or a loss of $0.03 to $0.07 per share. Non-GAAP net income is expected to be in the range of $10.6 million to $15.5 million or $0.09 to $0.12 per diluted share. In Q2, we expect average shares outstanding to be approximately 123.4 million on a GAAP basis and 124.3 million on a non-GAAP basis. With that, I will now turn it over to the operator to begin the question-and-answer session.

[Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan.

This is Bharat on for Samik. So the first question that I had was on, like, what are the demand trends that you're seeing on a geographic basis. I mean, last time, I think you highlighted some weakness in regions such as France, Portugal, like within the EMEA region. And how -- is that starting to pick up now? And then with -- particularly with resurgence of COVID in like several regions globally, is there a risk at all that you're starting to see probably impacting your order trends as you look into the end of the year? Is there a risk that is starting to come up in like customer conversations already?

Thanks, Samik. And I'll jump in, and Rémi, please hop in behind me here if I leave something out. But Samik, you're right, there has been a resurgence of COVID in France, Italy, Spain. What we call Southern has been hit particularly hard. And so we have seen softness in those markets although it has been offset by strength in what we've seen, for example, in Asia, in our Northern Asia markets. Germany remains very resilient and demand is strong, and that's our largest market in EMEA. And then our Eastern Nordics region and our Middle East regions have also remained strong and resilient. So what we're seeing, it really depends on where you are, but where we have weakness, we were also seeing that counterbalanced by resiliency, if that's helpful. The other thing we would say is that demand remains strong in the Americas marketplace, and we highlighted the growth, a strong sequential growth in Americas. And we're seeing that continue to build based on the opportunities that we're seeing being created in our funnel. Rémi, any color to what I've just said?

Yes. If I just could add two things. The first one is that when we put together our guidance, we factored in the fact that we call the sub corn, which includes France, Portugal, Italy and Spain, we're seeing a resurgence in COVID cases. And so, we built a bit of conservatives around that. Secondly, my -- if I take the example of France that I happen to be familiar with is that to announce some measures tonight. We feel like a lot of it will relate around kids having sometimes go remotely. Homeworking for most of our customers has been the norm for the last seven months. Most of our customers have now gone back in the office. And so if there's quick rules as to the ability of employees to go to the office, we don't really necessarily think it would affect our business more than it already does today. It's just that the recovery that we've been expecting in the Southern corn in general, in France, in particular, is just going to take longer than expected. But to an extent, it's largely factored in.

Okay. Got it. And then as a follow-up, I mean, looking at some of the trends by verticals here. So if I thought your comment correctly, the trend in service provider vertical in particular, you said that demand remains muted there. So, I mean similar concerns have been raised by other equipment suppliers of like a slowdown in the second half of 2020. So just can you walk us through like what are your expectations in 2Q from that vertical in particular?

Sure. So I think, Samik, some of the service provider customers that you might think of in the traditional sense, we actually had strength. We mentioned Hurricane Electric. This is an Internet service provider based in California. And companies like Service.com in Amsterdam and Netherlands, we have a very targeted and niche solution. And I would say that it's been somewhat flattish is how we see that business. We also have, I would say, non-network service provider customers. An example there would be like a Verizon, where they act more like an enterprise customer, even though they are a service provider and business there remains strong. I would say that between some of our larger service providers who are aggressively moving into 5G and have 5G requirements, whether that is in their internal networks or supporting their external networks, we have some very significant opportunities that we see happening in the second half of our fiscal year, first half of calendar and really building for a strong fiscal '22. And here, these are very targeted applications that I would say relate more directly to Extreme and relationships with some very large customers as opposed to general trends in service provider. Rémi, any additional color?

No. I would just add one thing. We're depending on one large service provider and one large telco equipment maker, and this quarter was a little softer for that service provider, but already the trends that we would say in terms of product bookings in October highlights what you just said that the expectation for service provider incomes are fairly positive for the second half of fiscal '21.

Our next question comes from Alex Henderson with Needham.

I wanted to talk a little bit about the universal product launch and the implications and timing of its ramp. You made some comments relative to the availability being constrained that orders were coming in ahead of your availability. I assume that the margins on this product are going to be better. Is there an initial decrement to margins as you start to initially ship these products because of the low initial volumes and start-up costs? And then does it ramp sequentially into the March quarter in terms of availability, causing an offset to the seasonality? And once it's gotten to full volumes, what's the differential between current product line and on margins at the gross level?

So let me jump in, again, Rémi, a follow-up. Yes, the margins will be better on the universal platform. And if you think about what we're doing, Alex, you take the old Bosch portfolio and excess portfolio and then all the different SKUs associated with different operating systems, legacy technology from all the acquisitions we've made, this brings it all together now, okay? So we have one platform, and you can run both flavors of personalities or operating systems with a single piece of hardware. And this is also -- we're rolling it out with our access points. The 55 20 is the first switch that's coming out in a couple of weeks. This will be followed by another two high-runner switches for us coming out in the spring. And what I would say is that this hasn't been a lower volume. We've announced GA in the middle of November. And this is, by far, will be the most successful product launch we've had. And largely, we've had more demand prior to GA than any other switching product. And what we're seeing in the funnel is significant in terms of the growth. And then the fact that we have embedded ExtremeCloud IQ licenses, it will be incredibly easy just to dial up and dial into our cloud platform. So -- and that's part of the reason for the demand. So as far as how we volume weight the gross margin of the new product introduction relative to the overall business, I'm not sure we have that guidance quite yet. And I'll let Rémi follow up on that.

I would just say, Alex, that the way we allocate our fixed cost, a fixed part of our cost of goods sold, is over the entire production, and so the comment of you're going to have low volume, therefore, low margin, it's actually not how it works. The way it works is you look at the bill of material of that product and the list price and the level of discounting that you have to do given the fact that demand is pretty strong, we're not really in the business discounting that product. And given the fact that it's a new product, which includes, by definition, low bill material, we would expect the gross margin on a variable basis to be high. And that contributing to the overall volume of the Company will enable us to continue to absorb those fixed costs that I referred to earlier. So this should not be any negative impact to gross margin at the launch.

So can you go back to the other elements of the question, which is availability and impact on seasonality going into seasonally weaker first quarter calendar, your third quarter fiscal? Does that lack of availability and the timing of that launch and the strong demand for it cause the first quarter to be more seasonally robust than traditional seasonality. It's a bit early to say? Go ahead.

Yes. I was going to say, I wouldn't -- we have planned for a significant volume in our second quarter. And so we're not seeing shortages to that. And we planned for -- we've seen demand building in our funnel. And that's only grown. And so our supply chain team, which has done an amazing job navigating the revised environment here in COVID has done a great job, and they're planning on high volumes for this quarter. And we believe we're going to be able to support those volumes, and then that will carry over into Q3. So, we're not -- I wouldn't call us looking at constraints. I would think about it more as for us, the most successful product launch we've had since I've been with the Company.

Let me ask the question one more time because I'm still trying to get at the issue. Does it cause a change in the seasonal pattern between the December and March quarters? Because it sounds like with the November, middle of November launch, strong demand and ramping orders that, that might result in better-than-normal seasonality?

And my answer is it's a bit too early to say. It's a bit too early to say. There's multiple factors that will drive our business in the March quarter. And that is one amongst many.

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

First question regarding your second quarter outlook of approximately $240 million, can you break out between services -- expected services versus existing customers versus a new logo? I thought that was very helpful during the NDR.

Rémi, can you take that one?

Sure. Just looking at the mix between product and services, we would expect basically our product business to hedge up slightly, if I take the midpoint of the guidance of $240 million from the $161.4 million that we reported and our services plus subscription business to grow slightly faster than product this quarter, which is kind of the opposite of what we saw in Q1. And the reason for our more conservative guidance around product is because we had such a strong quarter in Q1, which is not the normal seasonal pattern that we have seen in the past and the conservative around certain regions, such as the southern course that we already addressed in the prior question.

And how much do you think new logo business will need to be -- to hit your midpoint?

We think it should be between 15% and 20%, which is the typical range that we see every quarter, and we don't see it materially different this quarter.

Got it. And then second question, regarding SD-WAN, now that Juniper is acquiring 128, does this put more pressure on you to go out and acquire SD-WAN technology or perhaps invest more to strengthen your SD-WAN capability?

Yes, I think that's a very fair ask. And I think the answer to that question is yes. When we look at it, build versus buy versus partner, and we have our own SD-WAN solution, and we have teams that are looking at what we would call our SD branch capabilities. But the short answer is yes. We are looking at this, and we are investing at this, and we do see opportunities to be very competitive. Overall, at a very high level, what we're seeing is that some of the traditional solutions may be less meaningful in the new world, where the lines between WAN and LAN are disappearing, and we look at it as one network. You'll hear us talk about one enterprise, one network, one cloud. And so I think we're thinking forward on that. So -- and I would say, from a security perspective, we have our fabric connect technology, which has been incredibly popular with enterprise customers. And that technology, we are extending out to the edge of the network, and we've extended it out to wireless. So we are seeing that evolution, but it's evolving in a way that's different than the traditional SD-WAN technology. But it is an area of investment for us.

Sure. And my last question is. What were some of the key factors that enabled you to the incumbent MLV?

Well, I think it's what we're talking about. It's our solution in terms of being end-to-end. It is our cloud, and it is our analytics. And ultimately, I think it's the ease of doing business with Extreme versus a larger competitor and sort of the quality of relationship that we can bring. So I think it's a lot of factors, but as they look at our solutions, and this is happening with a lot of customers. And they look at just the end-to-end, the simplicity of our hardware end-to-end. They look at the simplicity of our cloud. They look at data that we can deliver and then some new analytics solutions that we'll be bringing to market. And I think when they look at that whole package, they -- I think it was a hands-down decision. We are -- one thing that we'll talk about is the total cost of ownership. Customers who move to Extreme can save a lot of money from a total cost of ownership perspective. When you look at the unified hardware platform with universal hardware, and then when you look at this cloud, where we're putting all of our software into the cloud, and we're including more applications than anyone else. So software licensing can get very expensive. What we find is a lot of customers out there not using what they've already bought from our competitors. And when they look at our option, we can bring significant savings to them by this one enterprise, one network, one cloud with a lot of software and a lot of applications included.

Our next question comes from Ryan Meyers with Lake Street Capital.

First one for me. So you called out stronger sales execution in each geography that drove the strong performance during the quarter. Just wondering, if you can give us some more color on that.

Yes. What we did back in the May time frame, and it really followed through into the first quarter, is we reorganized our field. And we reorganized our field in a way to have teams focusing on strategic accounts. These are larger strategic accounts. An example of that would be Gores. They supply the material for Gore-Tex. They're global. This was a very large order that requires global support, a global support network and a coordinated effort. So when you have a customer that's like a $10 million global customer, in this case, it requires a different selling motion than what we might have for our traditional business, let's say, E-Rate elementary school system here in the U.S. And so what we did is we created a team that was very focused on that strategic motion globally. We separated our teams. And then we created territory models where we have field teams, they are very closely aligned with this huge partner network that we have. So now it's a function of having teams dedicated to partners that are in the field that are focused on the territory model and also supporting run rate business there. And then there are teams that are exclusively focused on the Volkswagens, the Samsungs, these kind of very large accounts so we can deliver better, more competitive solutions and service to them. That has been very effective and has been very well received.

Okay. That's helpful. And then last one for me. This is more towards Rémi. So you guys had a strong operating margin this quarter, 8.3%. You guided 8% to 9.5%. Should we see this 8% to 9% range kind of the new normal?

I would certainly hope so. As I look at the rest of the year, though, and although we're not providing guidance, but we should go back to the normal seasonal pattern in the March quarter, which should be weaker. So you may see a bit of a drop there. And then obviously, the high point should be Q4. But we're really not in the business of having operating margin below 8%. And if anything, we'd like to get to 10% as soon as possible.

[Operator Instructions] Our next question comes from Paul Silverstein with Cowen.

Yes. First off, I apologize to anybody else if this has already been asked and answered, but have been dropped in the call twice. Hopefully, that's not a message. First off, government and education is 40% of your revenue. My question is, how much of the current strength is specific to this vertical? And how is your visibility with respect to government and education? Obviously, government budgets play a big role here, and I recognize that's hard to predict, but any insight you can offer be greatly appreciated.

Yes. So Paul, our visibility comes from our -- obviously, our funnel of opportunities. I just talked about the way that we've reorganized our field, and that's been very helpful as well. Most of our education customers are going to fall into this territory model. And there, they can provide better attention and then also work more closely with our partners to drive that business. It's a little bit different in the U.S. In the U.S., we have dedicated what we call SLED teams. And so we have dedicated enterprise and dedicated SLEDs that have this territory and strategic approach. And within the U.S., we've had a very successful E-Rate season. We're starting a new E-Rate process, a new funding cycle, if you will. And our teams are incredibly bullish about what we're going to be able to do with now universal hardware, cloud and the software tools that we're going to be able to provide. There's an E-Rate component. There are K-12 schools that buy outside of E-Rate and then there's higher education. And then there is government. And I would say these teams are doing incredibly well right now in international markets, with more of the territory accounts that are focusing on education. And we continue to see strength. And we see this strength flowing through this year and we're -- it's a little early, but we're already optimistic about fiscal '22 based on what we're seeing in terms of the 470 process and filings around E-Rate and just how we're much better organized to go after that business with a much more competitive offering.

And how much of it is the new organization versus -- correct me if I'm wrong, but obviously, with most -- whether major league baseball, whatever the sport with no fans in the stadiums, your traditional classic Extreme wireless LAN business has to be at de minimis or very modest levels. And then on the other hand, Aerohive on their call, they did 50-plus percent, as much as 60% of the revenue, from the education vertical alone. I assume that's a big part of the strength. The question being, I also assume that a lot of your strength is from simply E-Rate being strong. And that's the question, how much of the strength is a function of strong E-Rate funding and is dependent upon ongoing strong E-Rate funding? As part of that question, the education piece that's tied to E-Rate, what percentage -- how is that as a portion of your government and education accounts for 40% of revenue? And then I've got two follow-ups.

Yes. I think -- I mean, as it relates to E-Rate, this was a strong funding cycle, and we saw funding come earlier. We had a significant E-Rate business that came in earlier than expected into Q4, and we continue to see strength in that business. I think the solutions, if you look at who's winning the E-Rate business and you look at our largest competitors, there's traditional business and then there's their cloud business, and they did a huge amount of business from the cloud. And so the cloud solution is a very popular solution with E-Rate. Prior to this coming year, we haven't had an end-to-end cloud-based story to tell. And now we have a very compelling story to tell, and we're fully integrated. So we have the benefit of cloud. We have the benefit of wireless edge into the core of the network. And so our value added proposition, our competitive position is much stronger, the way we're organized is much better, and we have more resources behind it. There are funding programs happening in Germany and funding programs happening in Japan that we've gotten organized around, whether it's incremental government funding. So we're much better organized to go after that business. And again, that our solution is more competitive. So when we look at the benefit of our fabric, which is secure, it's easy to deploy. It's very popular with state and local governments and school systems. And then you look at how we're extending that fabric and the benefits of fabric out to the edge and the fact that all of this can be managed from a single cloud, no one else can do that. So, we have a competitive advantage that we think plays very well with our government customers as well as with our education customers and we're obviously going to run hard after it.

And the percentage of revenue from the government and education vertical that comes from K-12 or from E-Rate or both?

Rémi, do you want to?

Yes, Paul. Education was very, very strong this quarter as a percentage of our total revenue. Total bookings, it was between 26% and 28%. I don't want to give too precise a range. I would say that E-Rate was slightly less than 1/3. Higher ed was slightly more than 1/3. And K-12 outside of E-Rate was about 1/3 of that 26% to 28%. So we're fairly diversified in the education segment now. And overall, that segment has been very strong, both in Q4 and in Q1. And we expect it to continue to be strong as we hit Q2.

I appreciate that breakdown. One follow-up, if I may. On gross margin, Rémi, any sense for -- looking at the full fiscal year, any sense for what a reasonable best case will look like or a reasonable worst-case for that matter?

We feel we should be north of 60%, and it will be a combination of pricing discipline on the product side, the introduction of new products. We're almost at 100% of our program. By December of 2021, we intend to launch a new refresh with the universal platform. And we're aiming to refresh about 70% of the mainstream platforms that we have in both wired and wireless. And then the third one is obviously going to be the change in the mix. The strength in bookings for subscription does not have an immediate impact on revenue because our typical subscription contracts are spread over three years. So you take $100 today, we recognize a 36 of that the first month. But as that revenue for subscription builds up from the current $13 million, $14 million a quarter to more, obviously, that's going to help drive stronger margins for the Company overall. So we've got to be over 60% for this fiscal '21.

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

Congratulations on execution in a challenging environment. All of my questions had to relate to Paul's regarding government education sector, and they've been answered. So I don't have a question for you.

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

I had a question about universal hardware. And Rémi, you were saying that you're planning to have a 70% refresh of, I guess, SKUs by the December 2021. Is that kind of what you were saying?

That's kind of what I was saying. I would just specifically mention that data center is not included in my comments. We will have some specific products in the data center space, like the 91 50, the 92 50 that would be part of a refresh. But the center product is typically built for specific use case for the key customers that we support there. And so applying a universal platform to data center would not necessarily be the best thing to do. However, for campus, both core and edge and access point, that's the plan.

Great. And then as a follow-on to that. Obviously, we're going to be trying to push more software content in the universal hardware platform. Do you plan on some point in the future maybe breaking out how much universal, maybe even how much is software in terms of revenues?

Well, we don't intend to build separately for the OS versus the hardware itself. The idea is that we sell you switch, and you can choose to have automated campus software, which is boss and boss or you can choose to have a smart home software, which is XOs on that same hardware, but we don't say the switch cost $100, the x amount of dollars for the OS and X amount of dollars for the hardware itself together. What we do, however, is to sell you a subscription on top of that. And for the 55 20, the year one for that subscription will be embedded in the price. With RevPro, our red break engine, we'll be able to carve out the value of the switch that we sold you and the value of that first year subscription. And the idea is to get customers excited about the subscription and have them renew after a year.

Great. And maybe one follow-up on the verticals, not education, this is more of a health care question. Obviously, they're very busy with a lot of other things. Do you think that at some point, you're going to see a recovery in health care and this COVID kind of need to be done before that you expect that to happen?

Yes. Rémi, I'll take this. We have started to see the recovery in health care. And I think when COVID hit, most of our health care customers were in environments where they postponed elective surgery, and it put them in a difficult position. What we've seen in this quarter in Q1 is the beginning of what we see as a recovery. And then as far as our funnel heading into the next quarter is that we're seeing growth. So from our lens, we're seeing it coming back.

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

Great. Ed, can you just talk a little bit more about the pipeline and the funnel? I mean, how does it compare today relative to pre-pandemic times? And can you just add a little bit more detail as it relates to deal sizes and the campus switching as well as the wireless opportunity in terms of the funnel itself?

Sure. What's happening as it relates to deal sizes, we're seeing deal sizes going up. As we look at the overall funnel, we're seeing our funnel grow. So quarter-over-quarter, we saw funnel growth going into Q1. We have funnel growth going into Q2. So we're looking at this seasonally. We're still below the funnel that we had a year ago, Q2, but I would say that the quality of our funnel is a lot higher. And the level of scrutiny that we've applied to the funnel and the tools that we're using now are giving us a lot more confidence in the predictability of our forecast. It has to do with the improved quality of our teams and the quality of the forecast being driven from the bottoms-up as well as an AI tool that we use that sits on top of Salesforce. That calls a number, and it provides us with an added layer of inflection, where we see disparities with our field teams. And the third leg of the stool is now we're getting forecast from our distributors. 70% of our business flows through distributors, and they work directly with partners. And now they're giving us their forecast. So we triangulate all of these to help us get better visibility. So quantitatively, we're seeing the funnel grow quarter over quarter over quarter. It's still off a bit from last year's funnel, but the quality of what we have in the funnel is better, and we have more confidence in how we're calling the conversion of the funnel into bookings.

Great. And I was a little -- I wouldn't say surprised, but interesting on the campus switching dynamic versus the wireless dynamic in the quarter, especially given that you have a product refresh coming up. I would think that there would be some delays on campus switching. Could you just talk a little bit more about what happened in campus switching in the quarter? And I'm assuming that capital switching momentum is still going to be robust given the universal platform that you're rolling out?

Yes. We are expecting continued strength in our switching, especially our new platforms. Our highest running platforms are coming out in the spring time frame. So -- and we continue to see strength there. On the wireless side, interestingly, our units were up, but it was more pricing pressure. And our ASPs came down and offset unit growth for the quarter. So we're still seeing strong wireless demand. I would also comment on the strength of E-Rate, which tends to be more wireless-oriented in Q4. And I would also comment that our stadium business, which also is wireless, had a very slow September quarter. So I think it was the combination of the movement of those two verticals as well as the difference in the ASPs for wireless. Rémi, do you want to add anything?

Yes. We saw great strength in some of our high runners on the wired side, the 440-G2, the 435, which was built in cloud wireless. Fabric in health care, although health care was not a super strong quarter, but fabric sold very well in health care and higher ed. So the X465, 435 and VSP4900 had a great quarter. I would add, Ed, that the pickup that we saw in the run rate that we've been calling out throughout the quarter, all that pent-up demand, that really is driven by our installed base and the installed base of Extreme and terraces product. That really helped more of the wired business than the wireless business, I would say. And to your point, wireless is typically big in stadiums and really not much of that business.

Okay. I know we're coming up to time. Can I ask another?

Yes.

So given that you've been focused on growing the subscription base, I'm going to take a different angle on the seasonality question. How should we think about the seasonality of the business over the long term?

You mean quarter -- I mean, looking at the four quarters?

Yes. Not in near term, I'm just thinking about it from a longer-term perspective.

I mean, this year is a bit strange because of COVID, but I would say Q1 is typically a weak quarter. Q2 because of December, where we see a lot of budget -- you're on budget pushing, especially in EMEA, is a stronger quarter, so you should be expecting that to be up anywhere between 5% and 8% depending on the year. Then we drop back in the March quarter because not a whole lot is happening, both in the Americas and EMEA. And then we always finish strongly in the June quarter because that's the year-end, and it's where people hit their quotas and accelerators.

But do they grow...

Yes. And I would add to that and just say, I don't think at this stage, given the evolution of our business, I'm not sure we can say we're going to go back to the way that we were. And there, Rémi mentioned, strong quarters in international markets where they close out the calendar year, and we see a lot of spending there. And then that leads to a weaker March quarter. Our SLED vertical, there's a lot that happens in our September quarter and a lot that happens in the December quarter, and then March is typically a weaker quarter there. However, with new wins in stadium, for example, and we see major league baseball and NFL, as that comes back, I think you'll see some offsetting trends with bookings that would naturally happen in that first quarter. So the mix of our verticals continues to evolve and to change. Obviously, we're still in this COVID world. And I think it's a little bit -- I think it might be a little bit premature to call the long-term seasonality cycles that we've had.

Next question is the follow-up question from Alex Henderson with Needham.

A couple of questions that came up off of the commentary. You mentioned pricing pressure in wireless. Could you talk a little bit about why that's occurring? Is that a function of your competitiveness being -- putting pressure on your competition and they're reacting to it? Or what's causing that?

Do you want me?

Go ahead.

We talked about our ASP. I would not necessarily considered as an acceleration price pressure. We do see one competitor being slightly more aggressive this quarter, but it's what we're seeing, and it's more anecdotal than hopefully a long-term trend. It's just that the mix of what we sold this quarter was more towards entry range product at this stage. As you know, the NFL typically would use WiFi six higher-end product. And so because education was the main driver for this quarter performance, not necessarily just E-Rate, but K-12 in general, and those products are more entering, that explains a drop in ASP, more than an accelerated price pressure outside of this one customer -- this one competitor.

I see. And then the second question, I just wanted to go through the universal product line time line in terms of what percentage of the product is converted to the universal line in the current quarter, in the March quarter and forward? Is it 100% in November, excluding data center?

No, no, no. It's just one product being launched, the 5520, which happens to replace two products that were in our Gen 2 refresh and then it's going to ramp over time. We have not yet built -- we mentioned 70% of already, which is the target by December of 2021. We have not built sort of a quarter-by-quarter bridge that we're willing to communicate at this stage. But as soon as we're ready, we'll provide that schedule. But for Q1, it's very small. And the product is going to be launched around mid-November, so will have impact only on six weeks out of the quarter.

So what portion of the product line does the current version that you're launching this quarter actually represent? Because it sounds like that's still something in the 25% vicinity.

No, it's less than that. It's designed to replace the 450 and 465, but both products will continue to be sold. And we expect the cross over between the 5520 and these four products that it's replacing to happen sometimes in the second half of fiscal 2021.

Just to be clear, I'm saying it represents against -- I mean, clearly, you're not displacing those products and those other products are going away. That takes time to happen, but the portion of the line that it represents those products that are being replaced and it would be what 20% of the line?

I don't want to make the number.

I do have a follow up.

Yes. I think we have to follow up. Our highest runners are coming in the spring, Alex.

I see. So, we should assume a fairly low run upfront for the universal impact and then larger impact coming off the spring launches and then full getting to 70% by the December time frame is the trajectory over time for this line.

Yes. And then just the 70%, just to be crystal clear, was not related to actual volume, but it's actually the product that we have by main families. So the fact that we have 70% of the product doesn't mean that it will be 70% of the volume because the other products it's replacing will ramp down over time.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Ed Meyercord.

Kevin, thank you. And thanks, everybody, who could join us on the call today. And as always, I want to thank Extreme employees working in a challenging environment. We're making a lot of progress. And I think you'll continue to see the strength in the business evolve over the coming quarters. So thanks, everybody, and have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.