Q3 2023 Extreme Networks Inc. Earnings Call
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Ladies and gentlemen, please standby we are experiencing technical difficulties with the webcast and we are working on that once again, ladies and gentlemen, please standby.
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Q1, good day and welcome to the extreme networks Q3 of fiscal year 2023 financial results call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on.
Your telephone you will then hear an automated message advising that your hand is right to withdraw your question Press Star. One one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker Mr. Stan Kofler. Please go ahead.
Thank you operator, and good morning, everybody welcome to the extreme networks third fiscal quarter of 2023 earnings Conference call.
Thank you all for your patience, we were experiencing some technical issues with the webcast.
I'll now so everyone who's able to join.
I lead Investor Relations and corporate strategy with me today are extreme networks', president and CEO admire cord and interim CFO Kristina tape.
We just distributed a press release and filed an 8-K detailing extreme networks' financial results for the quarter and earlier. This week filed an 8-K announcing our new CFO .
For your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliations.
Available in the Investor Relations section of our website at extreme Networks' Dot com, along with our presentation, which should be up right now there is a link.
I would like to remind you that during today's call. Our discussion may include forward looking statements about extremes future business financial and operational results growth expectations and strategies, our financial disclosures on this call will be made on a non-GAAP basis unless stated otherwise we caution you not to put undue reliance on these forward looking statements.
Involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements ASIC described by our risk factors in our 10-K report for the period ended June 32022 filed with the SEC.
Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law.
Now I will turn the call over to extremes, President and CEO Edmar Court.
Thank you Stan and thank you all for joining US this morning extreme.
Extreme delivered another quarter of record results driven by solid execution of our teams. Our topline performance was highlighted by improvements in our supply chain that drove 16% total revenue growth and 22% product revenue growth on a year over year basis.
We achieved double digit.
Rose and eight of the past nine quarters, our operating margin and EBITDA also achieved quarterly records in Q3.
Product orders grew 6% sequentially and orders from new customers grew 20% during this timeframe.
This is the second consecutive quarter, where new logos are playing a substantial role that our growth.
We believe demand trends will continue as customers recognize the simplicity of our one network one cloud solutions relative to the complexity and total cost of ownership of our largest competitors.
Although our Q3 bookings typically declined sequentially in the March quarter. We in fact grew from December reflecting strong demand.
With our funnel of opportunities remains robust, we expect more normal seasonality and higher sequential growth in Q4.
We expect total revenue growth to accelerate to over 20% from the prior year based on improved product availability.
And we're reiterating our long term growth outlook in the mid teens through fiscal 'twenty five based on confidence in our ability to take market share given the size of our market.
We're a small share gains have a big impact on our growth rate.
Okay.
For the first time extremes non-GAAP operating margin surpassed the 15% Mark and we achieved EPS of 29 cents in Q3 up from 27 cents in Q2 and from 'twenty one sets in the year ago quarter. We expect these bottom line earnings trends to continue and for earnings to grow fat.
Foster than revenues over the long term, given increasing gross margins and operating leverage.
Demand is being driven by the execution of our field teams are strategic partners and the competitive differentiation of our solutions.
We're the only networking vendor that has flexible universal hardware and combines cloud choice with with best in class automation. The most widely deployed fabric.
And the industry's simplest licensing model.
Our end to end solutions operationalize from one cloud makes it easy to manage the entire enterprise network, we offer visibility access control security and machine learning and AI across wired wireless and SD Wan infrastructure by a single cloud.
The evidence of our success can be seen in Marquis and new logo with large global deals with brands such as Kroger Cedar Fair Boingo, a hold and others, we're gaining share across our key verticals driven by our competitive differentiation for example in E rate, we grew faster than the market and we gained share.
Sure, most notably against our largest competitors.
During the quarter bookings from customers, who spent more than $1 million with extreme were the highest in our history.
Given the strength of our solutions and our elevated profile with strategic partners, we're being invited to compete for larger projects and we're winning more we expect these trends to continue.
Some top wins for the quarter included Kroger, one of the largest U S grocers with 2800 stores across the country.
This deployment will become the world's largest cloud managed network with more than 110000 access points manage be extreme cloud with Wi Fi six E. Kroger will benefit from faster speeds lower latency and more security across its entire network.
Our technology will have Kroger drive energy savings improve the shopper experience streamline operations and drive business transformation initiatives to create their store of the future.
Our success in retail also extended into Europe , where a old Albert Hein, our global supermarket chain with stores across 10 countries, serving 60 million shoppers a week.
Those extreme for its cloud driven wireless deployment at our co pilot AI ml and sites available on extreme cloud.
In the Middle East, we won one of the largest health care providers in Saudi Arabia.
Extreme at a partner deployed a secure end to end fabric enabled network at two new hospitals, the new state of the art facilities will rely on extreme to support and secure a wide range of new digital services.
Cedar Fair owner and operator of 15 amusement parks five hotels across North America selected extreme to deploy Wifi 60 ready networks across its properties to provide high speed connectivity and bandwidth for operational needs like digital signage cashless payments and guest device connectivity.
Activity.
Catawba College in North Carolina will leverage machine learning and AI featured in co pilot to proactively detect network anomalies improved network performance reduce time consuming task for the ITT team and streamline operations.
<unk> will also offer extreme academy as part of its computer science curriculum.
And the venue space, we had continued success with sports franchises and one Amiga mutual arena in Rhode Island, and Prudential Arena in New Jersey home of the New Jersey Devils.
This quarter, we were able to bring our lead times down faster than expected in Q3, putting us in a healthier position.
The actions, we have taken with our supply chain over the past year. It gives us greater visibility and confidence that the consistently quarter ramp up of our product deliveries.
AD revenue will continue.
We expect our backlog will normalize to a range of $75 million to $100 million in.
In our Q1 fiscal 'twenty five.
Our exposure to the fastest growing areas of the networking market.
Our share gains and expanding go to market partnerships provide ample growth opportunities to drive double digit bookings growth.
We will also expand our subscription business to our entire hardware portfolio in fiscal 'twenty four.
Yeah.
We are forecasting market share gains with large targeted partners leveraging the strength of our existing integrated solutions in our core market verticals.
And have new partnerships with Comcast and new go to market motions with Verizon for example.
Additionally, since we established a more strategic relationship with one, particularly large U S. Based reseller R. E rate awards grew 100% year over year with total bids submitted on behalf of extreme by this reseller up 50% despite softness in the market.
We will build on this these other relationships as we enter fiscal 'twenty four.
As we look forward to the next quarter I'm excited about our incoming CFO , Kevin Rhodes, who starts on may 30th and brings a wealth of experience from several successful SaaS companies. Kevin has a great track record of delivering operational and financial excellence with a clear focus on shareholder value.
Last quarter, I ask Kristina Tait to step into the role of interim CFO and she has executed flawlessly. Thank you Cristina I will look forward to her partnership continuing with Kevin to drive our financial strategy and take extreme to the next level.
And with that I will turn the call over to Christina Thanks.
Thanks, Ed Q3 financial results reflect record revenue operating margin and EBITDA driven by increased product availability. We were also able to pay down $25 million in debt and repurchased $25 million worth of our shares leaving net debt at just $34 million.
The strong execution of our teams drove 29% growth in new SaaS bookings in our SaaS AAR or continue to rise we are confident in our Q4 and FY2023 outlook and reiterate our commitment to mid teens long term growth through fiscal year 'twenty five.
Our third quarter revenue of $332.5 million grew 16% year over year, and 4% quarter over quarter exceeding the high end of our expectations entering the quarter.
Product revenue accelerated to 22% growth year over year, and 8% sequentially attributable to both campus switching and wireless Lan, partially offset by a decline in data center.
New subscription bookings grew by 29% year over year SaaS AAR are grew 22% year over year, so $117 million up from $96 million in the year ago quarter.
Subscription deferred revenue was up 39% year over year to $199 million.
Revenue on a geographic basis once again reflects the timing of product shipments to our distributors across the regions.
Regarding our bookings performance as Ed mentioned product bookings grew 6% sequentially and we continue to expect sequential bookings growth into Q4 as well.
The supply chain environment is improving significantly and lead times are coming down faster than we expected.
During Q3, our direct customer order backlog did remain flat.
With product shipment lead times coming down our distributors are adjusting their stocking orders to align with delivery timing at.
At the end of Q3, our backlog represented five times, our expected normalized level. We continue to expect the normalized level of backlog to be in the range of $75 million to $100 million by Q1 fiscal year 'twenty five.
Although distributor backlog Israel leasing at an accelerated pace our scenario based planning gives us confidence to reiterate our long term guidance of mid teens revenue growth and gross margin in the range of 64% to 66% through fiscal 'twenty five.
From a vertical standpoint, our largest vertical remains government and education at over 35% of total bookings this quarter.
The large wins in the retail sector increase the retail transportation and logistics vertical mix to 15% of bookings.
Manufacturing remained around 10%, while sports and entertainment grew to slightly less than 10% of bookings.
Services and subscription revenue was $91.4 million up 5% year over year.
This growth was largely driven by the strength of cloud subscription revenue up 30% year over year.
Total Q3 recurring revenue, including maintenance managed services and subscriptions was at $87 million or 26% of total company revenue.
The growth of cloud subscriptions and maintenance drove the total deferred revenue to $464 million up 25% from the year ago quarter and 4% sequentially.
Our gross margin came in at 59, 1% up 60 basis points sequentially and 110 basis points from the year ago quarter. This.
This was attributable to improvements in both our product gross margin and services gross margin.
<unk> gross margin benefited from higher revenue and an improvement in supply chain and distribution costs as well as product mix.
Our services and subscription gross margin was at 67, 3% in Q3 up 30 basis points from the prior quarter and 2.2 percentage points from last year due to lower managed services in RMA costs based on better product quality.
Q3, operating expenses were $144 million up from $130 million in the year ago quarter and from $139 million in Q2, 23, reflecting higher R&D investment and sales and marketing expenses to support higher revenue growth.
Total operating expense as a percentage of revenue was 43, 4% down 30 basis points versus last quarter and down 2.1 percentage points compared to last year as we continue to drive operating leverage in the business.
The combination of strong revenue growth gross margin expansion and operating leverage contributed to achieving a record operating margin of 15, 6% up from 12, 5% in the year ago quarter and from 14, 9% in Q2.
Q3 earnings per share were 29 cents at the high end of our guidance entering the quarter.
This quarter, we generated free cash flow of $45.8 million driven by record EBITDA as well as a sequential two day improvement in our cash conversion cycle to 22 days.
Now turning to guidance, we remain confident in the revenue outlook for Q4 are supported by our strong funnel of opportunities our product backlog and our services and subscription deferred revenue balance.
As products get delivered to customers and networks are installed this should drive subscription and services bookings and billings that in many cases have been deferred or delayed until products are delivered to match service terms.
We continue to expect that the reduction in expedite fees and shipping costs combined with the full impact of our recent pricing actions will lead to a continued recovery in gross margin in Q4 and into fiscal year 'twenty four.
Against this backdrop, we expect for Q4 revenue to be in the range of $340 million to $350 million.
Gross margin to be in the range of 59% to 61%.
Operating margin to be in the range of 15.5% to 17, 3%.
And earnings to be in the range of 28 to 34 cents per diluted share.
For full fiscal year 'twenty, three we expect revenue growth of 16% at the midpoint with an operating margin of around 15%.
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. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile the Q&A roster.
Our first question will come from the line of Mike Genovese <unk> with Rosenblatt Securities. Your line is open.
Hey, great. Thanks, so much.
I guess I have to ask.
About the just the distributor backlog change.
Give us more color on that I guess.
The numbers you guys gave I'm calculating that.
Backlog, maybe went down about 100 million quarter over quarter.
One question is is all of that is going to be in revenue.
This quarter next quarter the quarter after or in some of that actually sort of quote unquote go away.
Yes, Mike let me jump in and then Kristina feel free to to follow yes, we are weak.
Theres a distributor a component of backlog and then there's the customer order component.
And as we said the the customer order component of backlog did not change during.
During the quarter, but the distributor ordering is is driven by.
Lead times, and and lead times came in faster than we expected this quarter, which you know that.
That occurrences as good news because it means that the market is getting healthier and we're able to deliver products to customers sooner.
At the same time it means that our distributors will adjust their orders accordingly.
And the early ordering that we had experienced earlier, which effectively go away in an older orders would be adjusted effectively.
Modified.
The shorter lead time, so you know what we're doing is where we're trying to focus people Mike on our revenue outlook and were confirming the mid teens.
Revenue growth through our fiscal 'twenty five.
And with it with a new target point of $75 million to $100 million.
In an ending backlog are.
We think that distributors going forward are going to have.
They'll keep more.
More orders on us and they'll have more inventory on hand, so they don't get caught the way they caught the way they got caught this last cycle. So.
What we want people to do is focus on that 75 to one.
$100 million, and then that would be a landing point for backlog and then focus on what we're calling is going to be this mid teens.
I am at it.
Amid a mid teens revenue.
Growth rate through fiscal 'twenty, five Christiana I don't know if you want to add anything to that.
Thanks, Ed I would just add that the distribute you know as we went through this constrained supply chain environment are the days that distributors were Ah ha on order with us where what's elevated and as lead times come down as Ed mentioned.
The whole environment is is getting normalized and so the distributor orders in the backlog is coming to that normalized level of $75 million to $100 million and we expect that to.
To get to that level at around Q1, 25, and as Ed said, our scenario based planning gives us commitment and confidence in the guidance that we gave.
Right perfect that all makes sense and clearly what I mean.
If you look at the growth rate for this year and what you're projecting for the next couple of years, we don't see.
Anything sort of macro negative here and so I was wondering do you believe that's more of a function of health.
Healthy trends in the verticals that you play in it would be great. If you could sort of go through some of those verticals and sort of rank. What you are seeing or is it a is it a is it a function of share gains.
Or how do you how do you see.
Their success is what's the main driver there.
Mike I think you hit on all three so.
One is we are we are playing first of all we're playing in.
We mentioned and I think Kristina reviewed our verticals and now we're doing in terms of.
Our government.
Accounts internationally as in.
And state and local governments, and education, which which remained strong.
Retail was particularly strong presence across this quarter, obviously, when you get huge wins like Kroger.
That has an effect on mix manufacturing remains strong.
Overall enterprise spending and networking has been pretty resilient and I think when you do market checks with some of the larger distributors.
Distributors and some of the resellers out there I think they will tell you that networking is probably one of the more resilient categories.
So the other one is obviously, yeah, we're taking share and we're taking share in terms of our our batting average and winning.
Competitive processes Kroger being a great example.
And then also we also mentioned in E rate.
When where we have a very large channel reseller.
Well known out in the market, it's doubling down on extreme.
Yeah. They grew their their E rate with extreme by 100% and then we won.
50% more so even in our E rate market.
Was considered to be somewhat soft this year with that channel partner, we saw 50% growth. So we have opportunities to grow with our partners.
As I mentioned, our funnel looks very healthy.
And our batting average continues to hold up we're performing well because of competitive differentiation.
And yes, I think overall, where we play in the enterprise market is pretty resilient.
Okay perfect. If I could just one final quick follow up I mean should we just assume that.
In the future that we won't see the backlog and the book to Bill in the quarterly presentation. So is that a.
Change going forward.
I think what we'll do is we'll let you know how we're trending towards that end goal.
Okay. Thanks, a lot congratulations on a great outlook. Thanks, Mike.
Thank you one moment for our next question.
And that will come from the line of Alex Henderson with Needham Your line is open.
Great. Thanks so.
Obviously, a very nice quarter, a nice print.
The only thing that surprised me was that inventory actually went up I was expecting.
You know as supply improves that inventory might go down and create additional cash flow.
We had excellent cash flow in the quarter, but.
Inventory went up.
Give us a sense of the timing of when you expect inventory to start to.
To normalize and come back in and when that cash generation.
Well will occur.
Yeah at a high level.
Alex you know, we're shipping out a lot more product and we are expecting our product shipments to increase so I think you'll expect to see that build is as were building inventory to support shipments of more product, but let me add Chris Let me have Cristina jump in.
Sure so.
Inventory was actually unnaturally low during the supply chain constrained environment and so the fact that our inventory is increasing as is another sign that the supply chain environment is improving raw material is flowing finished goods, where you know where we're building. Our first finished goods to be able to ship out.
So there is an element of timing to this as well, but we do actually expect inventory to keep going up for the next few quarters.
As that product flows and then we'll get to normalized level I'll, just say just reiterate again that the levels. We were seeing were not natural and we're getting to a more normalized level of inventory internally as well.
Looking.
At the subscription business.
Ah the SaaS, but particularly that.
The mechanics of us of a high growth in <unk>.
<unk> SaaS subscription generally.
Creates a reduction in.
Realized revenue in the period that the those contracts happened if there had been a.
A direct product order instead of a SaaS order obviously you would have ended up with.
Higher revenues.
On the upfront sale instead of just the small portion of the SaaS subscription.
So can you give us any sense of what the cannibal or what the reduction in the contribution to growth is as a result of the high rate of success in your SaaS business.
We were not seeing a high level of cannibalization. So are we had a very I would call pretty low upfront software business that has been trending down over time, but it was not significant or material and so the subscription growth.
It's not cannibalizing from that or from our product sales.
Well I mean, it's not cannibalizing, but it's not being recognized in the current period, it's being deferred into future periods because of the.
The mechanics of a SaaS.
Whereas normally if you sold the product the same amount of product.
That you signed in the SaaS subscription you would get.
More upfront and less in the future periods.
So almost by definition if.
If you sign something on March 31st you get no revenues in the quarter, whereas there was purchased you would have the entire revenue. So clearly it has to reduce the recognition of revenue.
Sure as far as the mix of our revenue shifts to more recurring revenue such as SaaS and subscription absolutely that is going to happen because we book the contract and maybe a single year contract or a multi year contract, but we recognize that revenue over time, so yes, as the mix of our overall mix shifts.
That phenomenon will be definitely there I thought you were saying.
Saying that it was actually reducing some other part of our business and.
Just the recognition of it so how much if it had been straight product sales how much additional revenue growth would have been in the quarter.
Okay.
I don't know I don't know if we have that answer I don't have I don't have that answer yes. Okay.
Maybe we can take it offline and come back and dig in a little deeper I mean, one of the things that Kristina mentioned earlier said.
Yeah.
Because our backlog, yes, we do have a lot of subscription.
Well as service and maintenance tied up in that backlog.
And then as that releases, we are expecting to see an acceleration in that growth rate. The other thing that I mentioned is that.
We're doing a lot of work so that we can effectively sell subscriptions on all of our hardware, which we don't have today and that will also create a really nice growth wave.
In addition to some of the other.
The packaging and the services that we're putting together with some of our partners.
One last question and I'll cede the floor.
The universal product.
It's making progress I'm, assuming that that's increasing as a percentage of our revenues there is gross margin benefit as that.
The increases as a percentage of shipped product.
And you. Additionally have a lot of supply chain costs that you've been absorbing as a result of inflated.
Logistics and in parts costs.
When we exit this year, how much is left of that.
Costs to normalize in 2020 for 2025.
So our expectation for gross margin, we are reiterating our long term guidance of 64% to 66% by the end of FY 'twenty five.
Gives you a sense of how much left we're at 59, 1% in Q3, we're guiding a midpoint of 60% in Q4, and then we expect to see that step improvement to the 64 to 66 range by the end of FY 'twenty five.
So 400 is 500 basis points of margin that's caught up in those two variables.
In supply chain costs as well as improvement in gross margin as well as the mix seeing the subscription higher margin subscription.
Revenue in our mix will also contribute to that margin expansion.
Great. Thank you so much.
Thanks, Alex.
Thank you one moment for our next question.
And that will come from the line of Dave Kang with B Riley Your line is open.
Hi, Thank you good morning.
My first question is regarding gross margin so.
You provided 60% for fiscal fourth quarter, and then you're guiding to 65% for fiscal 'twenty five for fiscal 'twenty. Four should we think of gross margins sort of like is it could be like over to get ramp from fourth quarter two fiscal 'twenty five.
Xactly similar to what we communicated last quarter no change in that guidance that we expect to see about a half a point to a point of improvement each quarter sequentially as we had true.
FY 'twenty four.
Got it and then on the on your Universal platform can you give us an update.
When do we expect when should we expect that full 100% universal.
Yeah, Dave so.
We will be completing the universal platform.
Oh.
The build out of our universal platform over over the course of this year. So we're excited about that and then the adoption of our universal platforms has.
Has been incredibly high so we would expect 90%.
By the end of the year.
And.
You're one of the things it's been our most popular seller in terms of the adoption. So.
The universal platforms had been our most successful product releases. The other thing I'll say is that the quality.
Universal has been significantly higher than any other product we've had in our history. So as it relates to operational support.
It.
It's been a very very very popular.
Product.
And then if I remember correctly I believe you.
Mention something about.
Expecting an uptick once that happens.
Can you kind of.
Quantify the situation.
So I guess you were talking about next year. So should we expect some kind of a new.
Uptick in orders or demand because of that.
Well, it's helpful. I'd say, yes, it's part of our solution.
Yeah.
If you recall universal hardware is the most flexible hardware in the market for it in the enterprise space because you can run different personalities. When you combine that universal hardware with management and the features of our cloud and the cloud choice. We bring and then you combine that with our unique fabric.
Technology, we're able to build solutions in the market.
Our better differentiate it.
End to end wired wireless across.
The the wireless Lan in terms of our SD Wan solution. So.
It creates a lot of flexibility it provides simplicity and it provides choice and and yes, that's absolutely a contributor on the demand side. When we look at this this linear growth in our gross margin, we factored in the adoption of universal platforms into that equation.
Christine I don't know if you want to add anything to that from a gross margin perspective no.
And I'll just reiterate what you said, it's built into our.
Outlook.
Got it and my last question is should we still expect subscription revenue CAGR to be 35% to 45%.
Yes, we are confirming our long term guidance yet.
Okay. Thanks.
Okay.
Thank you, ladies and gentlemen, due to time restraints, we ask that you. Please limit yourself to one question and one follow up question one moment for our next question.
Okay.
Okay.
And that will come from the line of Paul Silverstein with Cowen Your line is open.
It feels like with the man you're describing is broad.
I've got to ask.
Much of the strength.
Perfect.
Education and government.
Sounds like that was extremely strong comps.
Well, Paul we had.
An incredibly large number of million dollar plus deals.
In education, and I'd say that.
We are in that vertical we are doing very well with the channel and partner community I gave them an E rate example, where.
Even in a kind of a soft E rate climate, we have partner adoption, which is driving up our share in that market.
We also have big wins this quarter. For example example, Palm Beach County schools, six 5 million dollar win.
We're getting into larger deals and we're winning more larger deals and I think the channel community is realizing that they can get out and win with extreme and quite frankly, we have a differentiated solution. What's interesting is that because the because of our success and some of the even larger wins in the retail.
Verticals, and then sports verticals.
It was actually down.
The map normally we talk about 40% state local government education and in this quarter. It was down at 35%, we ticked up to 15% in retail the other vertical has kind of held in there so it.
It remains strong and from our standpoint.
We are seeing larger opportunities, we're winning larger opportunities.
And that's part of the share gain story, which is why we talk about large crumbs and the opportunity for us to take small small share points and it has a big impact on our bookings and our overall our long term revenue target.
And just to just to be clear the question I'm trying to get at.
Just to be clear.
The strength you are describing is broad based when you look at your order book your funnel.
<unk> revenue.
Not primarily or exclusively about the public sector and education vertical that's been 35% to 40% of revenue throughout your customer base I just want to make sure that's correct.
Correct statement.
Okay.
The other point I am trying to make is that theres partner penetration I mean, one of the things that we talked about we have Comcast as a new partner or extreme.
Yeah.
Pretty large company they do a lot of business.
We won.
Cedar Fair 8 million dollar plus deal with a new relationship with a partner like Comcast Verizon. We're now certified in Horizon's portfolio and we're working directly with their enterprise sellers. While this is new so we're opening up and this is another large channel partner and they are excited about our solution and bringing extreme to market. So.
With some of these larger partners now we have what what our new growth opportunities with the same portfolio of product.
So.
You know from that standpoint.
It is it is broad based.
We will see enterprise overall enterprise growth and then we would expect to see this growth happen.
Really littered across all of our verticals.
Alright I appreciate it thank you.
Okay.
Thank you one moment for our next question.
That will come from the line of Eric Martin Newsy with Lake Street Capital. Your line is open.
Yes, I understand the R&D spending is up I know you guys have extreme connect coming up here in a couple of weeks, just where are we putting those R&D dollars are these kind of evolutionary enhancements to the existing products or could we see some.
Some expansion in the breath of of where you're headed.
The product portfolio.
Well thanks for the question, Eric a lot of.
A lot of what we're doing is investing.
In our existing platforms and developing.
Yeah, the completion of our universal platforms further development of our wireless platforms and we're investing a lot obviously in cloud.
And the kinds of features that we can orchestrate overcloud historically, we've had.
And that product, which is effectively access control and security in the network.
We are cloud of flying that solution, and we will be adding that into our offerings.
The other thing that we're doing is we're packaging our complete solutions for new channel partners to provide managed services.
In our in our space managed services or on the rise, but it's commercially really complicated and you hear us talk about simplicity, we're bringing simplicity to a market that's complicated.
And we think we have a real differentiator with our managed services solutions portfolio and this is taking effectively the.
Existing.
Our products and our cloud and services that we have that we're developing and packaging. It in a very simple licensing framework. That's generated a lot of interest in the marketplace. So this is an area, where we expect to take share and effectively what we're doing is we will be supporting a managed service. So.
Yes that will be coming out at connect and then finally edge cloud, there's a lot of conversation about edge cloud.
There will be a reveal at connect.
Where because of the way, we're developing our platform and it's really around cloud choice no no enterprise customer.
Our supplier in the networking industry.
Is able to offer the kind of choice that we can provide and choice.
Has to do with public cloud versus private cloud versus what goes to datacenter versus kind of what stays on campus.
We are going to be able to provide more flexibility than anyone as as companies are wrestling with this and so we'll.
We will also there'll be a reveal around extreme edge cloud.
And where data resides and enterprise networks that I think will will be further differentiation for extreme. So these are areas that we're investing in and quite frankly, there's a lot of interest in the market, particularly with with large partners for these kinds of solutions.
Got it look forward to the news.
Thank you one moment for our next question.
That will come from the line of Greg <unk> with West Park Capital. Your line is open.
Thank you Ed.
Could you hear me.
Can hear you Greg good good thanks.
I was I have a question for you regarding.
Your network security offerings as you continue to move upstream into subscription based cloud based services.
What kind of Nextgen network security.
Products or services, rather are you going to be offering and then doing so can you sort of deliberately.
Coach on the turf of some of the network security vendors that you are working with right now.
Yes.
For the question so.
Security our industry is as is pretty complicated and there's a lot of different layers.
People make the analogy of the layers of the onion to describe.
All the different elements one of the one of the big Differentiators that we have on our solution set today as our fabric and our fabric technology.
It has inherent security built in and then the idea that we can extend that security.
Out across the wide area network.
With our SD Wan solution.
Is truly unique in the marketplace and brings.
<unk> brings a level of security that is just inherent in the network. So one of the things that we can do with that is effectively provide inherent security as opposed to an over the top solution.
Which brings a lot of simplicity again and likely savings.
Remember, we also have air defense.
Which is one of the leading Wi Fi security solutions, that's out in the marketplace. Obviously this is something that's critical in winning something like a kroger or these distributed networks.
And that also is an element of our offer.
And I referenced earlier network access control.
And policy and identity management around who is accessing the network and access security and we are taking what is a very mature and proven technology and <unk> cloud <unk> This and once again.
We will have an access control.
Security element that will be inherent in built into the network, which will be differentiated so.
It will we.
We will be in a position to compete and we think attract a lot of interest by simplifying these security elements into a single solution.
And within a single license that we believe will be disruptive in the marketplace.
Great. Thank you for that.
Okay.
Thank you one moment for our next question.
And that will come from the line of Christian Schwab with Craig Hallum. Your line is open.
Hey, great. Thanks for taking my questions here.
As we look at the backlog, which we discussed looked to be down roughly $100 million.
Due to adjustments in distributor orders can you tell us what percentage of the backlog that's left is <unk>.
<unk> revenue customer orders or distributors still.
Yeah. So thanks Christian for the question what we've what we said is it's.
Overall backlog is about five X obviously.
Distributor behavior is a little more tied to lead times and lead times came down faster, we're expecting them to come down. So we really don't want to get into sort of dissecting backlog really what we want to do is reinforce our outlook of revenue growth.
And we're doing that out through our fiscal 25, which is out there and so we baked that into our revenue guide and that's where we're trying to focus everyone.
Well.
Great Okay.
When you guys are doing then.
I guess my second question is you know you look at your scenario based planning.
Over the next two and a half three years.
What do you expect.
The industry growth rate for the verticals you serve to be growing at.
How much market share gain.
Are you assuming.
And that growth rate.
Over that timeframe and then you know what percentage is youll catch up orders from backlog.
That couldnt be shipped.
During COVID-19.
Is that how you guys look at it or maybe you could.
We have to factor in we have to factor in the industry, where obviously factoring a backlog run off.
And then we're we're also looking at share gains so.
I would say the overall industry, we see this kind of mid mid single digit growth.
And the overall industry.
When you look at the release of backlog as I mentioned before we are expecting our distributors to have more on order with us in the future than they did in the past because if we go back to pre supply chain issues. It was very much a just in time model and that obviously put a lot of risk on their business.
This is where we landed at that 75 to 100 million number. So in your model you should think about $75 million to $100 million of backlog is kind of the ending point in <unk>.
Our our.
Our Q1 fiscal 'twenty five.
That's where we see that and then we have share gains.
Earlier in your report you mentioned.
A large.
A large reseller that.
The outlook was down.
So in our case with those kinds of resellers because of their size small share points create big opportunities and we mentioned one of those resellers, where literally in kind of a soft rate market.
You know were up 50%. So these are the kinds of things that we can do at extreme because of our relative size.
And you know it.
It gives us a growth advantage. If you will some of these other larger partners I mentioned when you open up a Comcast when you open up a Verizon when you open up some of these larger managed services partners.
We opened up the door if for growth opportunities, where quite frankly, we haven't played and the growth opportunities are quite large so a point of market share is over 20% growth on top of the market. So it doesn't take a lot of share gains for for extreme.
To outgrow the market and then for us to get to that mid teens number.
Okay.
Great answer thanks, Yeah. Thanks, Yeah.
Thanks Christian.
Thank you and I'm showing no further questions in the queue. At this time I would now like to turn the call back over to extreme Networks' CEO , Mr. Ed My accord.
Thanks, Sri and.
Thanks, everyone for joining the call obviously, we're excited about the quarter.
And the performance we had a lot of records I want to shout out to the extreme employees.
Our partner community.
Everyone that they joined in on these calls because we have a lot of momentum right. Now we say, there's never been a better time to be at extreme the competitive.
Differentiation is there and it's fun to be winning in the marketplace. So shout out to those teams and then also.
Investors for your continued participation and interest in the company.
We're holding on to very strong guide in terms of.
Topline growth.
And margin expansion both at the gross margin line, and then operating leverage down to the bottom line. So.
We appreciate your interest in extreme and.
We're quite confident about the quarters to come.
Thanks, everyone and have a great day.
Thank you all for participating. This concludes today's program you may now disconnect.
Okay.
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Okay.
Yeah.
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