Extreme Networks, Inc.

Ladies and gentlemen, please stand by. We are experiencing technical difficulties with the webcast, and we are working on that. Once again, ladies and gentlemen, please stand by. Good day and welcome to the Xtreme Network's Q3 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 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, press star 1-1 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 Kozler. Please go ahead.

Thank you, operator, and good morning, everybody. Welcome to the Xtreme Network's third fiscal quarter 2023 earnings conference call. Thank you all for your patience. We were experiencing some technical issues with the webcast that have been resolved now, so everyone is able to join. I lead investor relations and corporate strategy. With me today, our Extreme Networks President and CEO, Ed Myercord, and Interim CFO, Christina Tate. 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 and non-GAAP reconciliations, is available in the Investor Relations section of our website at extremenetworks.com. along with our presentation, which should be up right now. There's a link. I would like to remind you that during today's call, our discussion may include forward-looking statements about Xtreme's 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 as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements, as described by our risk factors in our 10-K report for the period ended June 30, 2022, 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 Xtreme's President and CEO, Ed Myercord.

Thank you, Stan, and thank you all for joining us this morning. Xtreme delivered another quarter of record results driven by solid execution of our teams. Our top-line 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 growth in 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 in 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 remaining 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 25, based on confidence in our ability to take market share, given the size of our market, where small share gains have a big impact on our growth rate. For the first time, Xtreme's non-GAAP operating margins surpassed the 15% mark, and we achieved EPS of 29 cents in Q3, up from 27 cents in Q2 and from 21 cents in the year-ago quarter. We expect these bottom line earnings trends to continue and for earnings to grow faster than revenues over the long term given increasing gross margins and operating leverage. Demand is being driven by the execution of our field teams, our strategic partners, and a competitive differentiation of our solutions. We're the only networking vendor that has flexible universal hardware and combines cloud choice 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, machine learning, and AI across wired, wireless, and SD-WAN infrastructure via single cloud. The evidence of our success can be seen in marquee new logo and large global deals with brands such as Kroger, Cedar Fair, Boingo, Ahold, 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, most notably against our largest competitors. During the quarter, bookings from customers who spent more than a million dollars with Xtreme 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 2,800 stores across the country. This deployment will become the world's largest cloud managed network with more than 110,000 access points managed via Xtreme Cloud. With Wi-Fi 6E, Kroger will benefit from faster speeds, lower latency, and more security across its entire network. Our technology will help 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 Ahold Albert Hein, a global supermarket chain with stores across 10 countries serving 60 million shoppers a week, chose Xtreme for its cloud-driven wireless deployment and our co-pilot AI ML Insights available on Xtreme Cloud. In the Middle East, we won one of the largest healthcare providers in Saudi Arabia. Xtreme and 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 Xtreme 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 Xtreme to deploy Wi-Fi 6E-ready networks across its properties to provide high-speed connectivity and bandwidth for operational needs like digital signage, cashless payments, and guest device connectivity. Catawba College in North Carolina will leverage machine learning and AI featured in Copilot to proactively detect network anomalies, improve network performance, reduce time-consuming tasks for the IT team, and streamline operations. Catawba will also offer Xtreme Academy as part of its computer science curriculum. In the venue space, we had continued success with sports franchises and won Amica 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 give us greater visibility and confidence that the consistently quarter ramp-up of our product deliveries and revenue will continue. We expect our backlog will normalize to a range of 75 to 100 million in our Q1 fiscal 25. 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 24. We are forecasting market share gains with large targeted partners, leveraging the strength of our existing integrated solutions and 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, our E-rate awards grew 100% year over year with total bids submitted on behalf of Xtreme by this reseller up 50% despite softness in the market. We will build on this and these other relationships as we enter fiscal 24. 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 asked Christina Tate to step into the role of interim CFO, and she has executed flawlessly. Thank you, Christina. I will look forward to her partnership continuing with Kevin to drive our financial strategy and take Xtreme to the next level. And with that, I will turn the call over to Christina.

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 repurchase $25 million worth of our shares, leaving net debt at just $34 million. The strong execution of our teams drove 29% growth in new SAS bookings and our SAS ARR continued to rise. We are confident in our Q4 and FY23 outlook and reiterate our commitment to mid-teens long-term growth through fiscal year 25. 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. SAS ARR grew 22% year over year to $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 region. 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 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 to $100 million by Q1 fiscal year 25. Although distributor backlog is releasing 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 25. 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 increased 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 was attributable to improvements in both our product gross margin and services gross margin. Product 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 and 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 as 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 24. Against this backdrop, we expect for Q4 revenue to be in the range of $340 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 23, 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 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment while we compile the Q&A roster. Our first question will come from the line of Mike Genovese with Rosenblatt Securities. Your line is open.

Hey, great. Thanks so much. I guess I have to ask, you know, about the distributor backlog change. If you could give us more color on that. I guess from the numbers you guys gave on calculating that backlog maybe went down about 100 million. quarter over quarter, and I guess one question is, is all of that gonna be in revenue this quarter, next quarter, the quarter after, or did some of that actually sort of quote-unquote go away?

Yeah, Mike, let me jump in, and then Christina, feel free to follow. Yeah, there's a distributor component of backlog, and then there's the customer order component, And as we said, the customer order component of backlog did not change during the quarter. But the distributor ordering is driven by lead times. And lead times came in faster than we expected this quarter, which that occurrence is good news because it means that the market is getting healthier and we're able to deliver products to customers sooner than At the same time, it means that our distributors will adjust their orders accordingly, and the early ordering that we had experienced earlier would effectively go away, and older orders would be adjusted effectively and modified to the shorter lead time. So what we're doing is we're trying to focus people, Mike, on our revenue outlook, and we're confirming the mid-teens revenue growth through our fiscal 25 and with a new target point of 75 to 100 million in ending backlog. We think that distributors going forward are going to have, they'll keep more orders on us and they'll have more inventory on hand so they don't get caught the way they got caught this last cycle. So, you know, what we want people to do is focus on that 75 to 100 million, and then that would be a landing point for backlog, and then focus on, you know, what we're calling is gonna be this mid-teens revenue growth rate through fiscal 25. Christine, I don't know if you want to add anything to that.

Thanks, Ed. I would just add that as we went through this constrained supply chain environment, the days that distributors were on order with us was elevated. And as lead times come down, as Ed mentioned, the whole environment is getting normalized. And so the distributor orders and the backlog is coming to that normalized level of 75 to 100 million. And we expect that 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.

Great. Perfect. That all makes sense. And, you know, clearly, when we do look at the growth rate for this year and what you're projecting for the next couple of years, we don't see, you know, anything sort of, you know, macro negative here. And so I was wondering, you know, do you believe that's more of a function of healthy trends in the verticals that you play in? And it'd be great if you could sort of go through some of those verticals and sort of rank what you're seeing? Or is it a function of share gains? Or, you know, how do you see your success as what's the main driver there?

Well, Mike, I think you hit on all three. So one is, you know, we are playing, first of all, we're playing in, you know, we mentioned and I think Christina reviewed our verticals and how we're doing in terms of, you know, our government accounts internationally and state and local governments and and education, which remains strong. Retail was particularly strong for us 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 and some of the retailers out there, I think they'll tell you that networking is probably one of the more resilient categories. So the other one is, obviously, we're taking share, and we're taking share in terms of our batting average and winning competitive processes, Krover being a great example. And then also, we also mentioned an E-rate where we have a very large channel reseller, very well known out in the market, that's doubling down on Xtreme. So they grew their E-rate bids with Xtreme by 100%, and then we won 50% more. So even in an E-rate market that 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 yeah, I think overall, where we play in the enterprise market is pretty resilient.

Okay, perfect. If I just do one final quick follow-up, I mean, should we just assume that... you know in the future that we won't see the um the backlog in the book to bill in the quarterly presentations is that you know a change going forward yeah i think what we'll do is just it will 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 that, you know, as supply improves, that inventory might go down and create additional cash flow. I obviously had excellent cash flow in the quarter, but inventory went up. Can you give us a sense of the timing of when you expect inventory to start to normalize and come back in and when that cash generation will occur?

Yeah, at a high level, Alex, we're shipping out a lot more product and we're expecting our product shipments to increase. I think you'll expect to see that build as we're building inventory to support shipments of more product. But let me have Christina jump in.

Sure. So inventory was actually unnaturally low during the supply chain constrained environment. And so the fact that our inventory is increasing is another sign that the supply chain environment is improving. Raw material is flowing. Finished goods, we're building our 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 the product flows, and then we'll get to normalized level. I'll 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, the SAS particularly that the mechanics of this of a high growth and SAS subscription generally creates a reduction in realized revenue in the period that those contracts happen if they'd have been a direct product order instead of a SAS 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 reduction in the contribution to growth is as a result of the high rate of success in your SaaS business?

We're not seeing a high level of cannibalization. So 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 is 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 mechanics of SaaS, whereas normally if you sold the product, the same amount of product that you sign in the SaaS subscription, you would get more upfront and less in the future periods. So almost by definition, if you sign something on March 31st, you get no revenues in the quarter, whereas if it was purchased, you would have the entire revenue. clearly it has to reduce the recognition of revenue.

Sure. As the mix of our revenue shifts to more recurring revenue, such as FAS and subscription, absolutely that is going to happen because we book the contract. It may be a single-year contract or a multi-year contract, but we recognize that revenue over time. So yes, as our overall mix shifts, that phenomenon will be definitely there. I thought you were saying that it was actually reducing some other part of our business.

Just the recognition timing of it. If it had been straight product sales, how much additional revenue growth would have been in the quarter?

I don't know if we have that answer.

I don't have that answer.

Maybe we can take it offline and come back and dig in a little deeper. I mean, one of the things that Christina mentioned earlier is that because of backlog, we do have a lot of subscription as 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 see you at the floor. The universal product is making progress. I'm assuming that that's increasing the percentage of revenues. There's gross margin benefit as that increases as the 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 parts costs. when we exit this year, how much is left of that cost to normalize in 2024, 2025?

So our expectation for gross margin, we're reiterating our long-term guidance of 64 to 66 percent by the end of FY25. So that 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 FY25.

So 400 to 500 basis points of margin that's caught up in those two variables?

Both in supply chain costs, as well as improvement in gross margin, as well as the mix, seeing the subscription, higher margins, subscription, revenue and 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. Reilly. Your line is open.

Thank you. Good morning. My first question is regarding gross margins. So you provided 60% for fiscal fourth quarter, and then you're guiding to 65% for fiscal 25. For fiscal 24, should we think of gross margins sort of like a linear ramp from fourth quarter to fiscal 25?

Exactly. 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 head through FY24.

Got it. And then on universal platform, can you give us an update? When should we expect that full 100% universal? Yeah, Dave, so we will be completing the universal platform

the build-out of our universal platform over the course of this year. So we're excited about that. And then the adoption of our universal platforms has been incredibly high. So we would expect 90% by the end of the year. And one of the things, it's been our most popular seller in terms of the adoption. So The Universal platforms have been our most successful product releases. The other thing I'll say is that the quality of Universal has been significantly higher than any other product we've had in our history. So as it relates to operational support, it's been a very, very, very popular product.

And then if I remember correctly, I believe you mentioned something about expecting an uptake once that happens. Can you kind of quantify the situation? So I guess you're talking about next year. So should we expect some kind of a new uptake in orders or demand because of that?

Well, it's helpful. I'd say it's part of our solution. If you recall, universal hardware is the most flexible hardware in the market 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 that are differentiated, you know, end-to-end, you know, wired wireless across the wireless LAN in terms of our SD-WAN solution. So, you know, it creates a lot of flexibility. It provides simplicity, and it provides choice. And, yeah, that's absolutely a contributor on the demand side. When we look at this linear growth in our gross margin, You know, we factored in the adoption of universal platforms into that equation. And, Christine, I don't know if you want to add anything to that from a gross margin perspective.

No, 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're confirming our long-term guidance. Yep.

Okay, thank you.

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. And that will come from the line of Paul Silverstein with Cowan. Your line is open.

Thanks. It sounds like the demand you're describing is broad-based, but I've got to ask, how much of the strength is specific to education and government? It sounds like that was extremely strong for your comments.

Well, Paul, we had an incredibly large number of million-dollar-plus deals in education, and I'd say that, you know, we are – In that vertical, we are doing very well with the channel and partner community. I gave 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, Palm Beach County Schools, $6.5 million 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 Xtreme. And quite frankly, we have a differentiated solution. What's interesting is that because of our success and some of the even larger wins in the retail verticals and then sports verticals, it was actually down. The math, normally we talk about 40% state, local government education. And in this quarter, it was down to 35%. We ticked up to 15% in retail. The other vertical is kind of held in there. So 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 share points. And it has a big impact on our bookings.

and uh overall our our long-term revenue target and just just to be clear the question i'm trying to get at um just to be clear the strength you're describing is broad-based when you look at your order book your funnel your current revenue that's not primarily or exclusively about that public sector and education vertical that's been 35 40 of revenue it's throughout your customer base. I just want to make sure. That's correct.

That's a correct statement.

Okay.

And the other point I'm trying to make is that there's partner penetration. I mean, one of the things that we talked about, you know, we have, you know, Comcast is a new partner of Xtreme. Pretty large company. They do a lot of business. You know, we won, you know, Cedar Fair $8 million plus deal with a new relationship with a partner like Comcast. Verizon, we're now certified in Verizon's portfolio and we're working directly with their enterprise sellers. Well, this is new. So we're opening up and this is another large channel partner and they're excited about our solution and bringing Xtreme to market. So with some of these larger partners now, we have what are new growth opportunities with the same portfolio product. So, you know, from that standpoint, 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.

I appreciate it. Thank you.

Thank you. One moment for our next question. That will come from the line of Eric Martinuzzi with Lake Street Capital. Your line is open.

Yeah, 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 pointing those R&D dollars at? Are these kind of evolutionary enhancements to the existing products, or could we see some expansion in the breadth of where you're headed with the product portfolio?

Thanks for the question, Eric. A lot of what we're doing is investing, you know, in our existing platforms and developing 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 over cloud. Historically, we've had a NAC product, which is effectively access control and security in the network. We are cloudifying that solution, and we'll 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 space, managed services are 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 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'll be supporting a managed service. So yeah, 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 enterprise customer or 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 data center versus kind of what stays on campus. We are going to be able to provide more flexibility than anyone as companies are wrestling with this. And so we'll also, there'll be a reveal around Extreme Edge Cloud. and where data resides in enterprise networks that I think will be a further differentiation for Xtreme. So these are areas that we're investing in. And quite frankly, there's a lot of interest in the market, particularly 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 Messiaf with West Park Capital. Your line is open.

Thank you, Ed. Could you hear me?

I can hear you, Greg.

Good, good. Thanks. 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 next-gen network security products or services, rather, are you going to be offering? And in doing so, can you sort of deliberately encroach on the turf of some of the network security vendors that you're working with right now?

Yeah, thanks for the question. So security in our industry is pretty complicated, and there's a lot of different layers involved. People make the analogy of the layers of the onion to describe all the different elements. One of the big differentiators that we have in our solution set today is our fabric and our fabric technology that 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 brings a level of security that's 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 we're cloudifying this. And once again, we will have an access control security element that will be inherent and built into the network, which will be differentiated. So it will, 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 within a single license that we believe will be disruptive in the marketplace.

Great. Thank you for that.

Thank you. One moment for our next question. And that will come from the line of Christian Schwab with Craig Hallam. Your line is open.

Hey, thanks for taking my question, Stan. 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, you know, deferred revenue, customer orders, or distributors still?

Yeah, so thanks, Christian, for the question. You know, what we've said is it's, you know, the overall backlog is about 5x. 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 bake that into our revenue guide. And that's where we're trying to focus everyone.

Great. Okay. Ed, so when you guys are doing the I guess my second question is, you know, you look at your scenario-based planning, you know, over the next, you know, two and a half, three years. You know, what do you expect, you know, the industry growth rate for the verticals you serve to be growing at? You know, how much market share gain are you assuming in that growth rate over that timeframe? And then, you know, what percentage is, you know, catch-up orders from backlog, you know, that couldn't be shipped, you know, during COVID? Is that how you guys look at it? Or maybe you could explain?

Yeah, I mean, look, we have to factor in the industry. We're obviously factoring a backlog runoff. And then we're also looking at share gains. So, you know, I would say the overall industry, we see this kind of mid-single-digit growth in the overall industry. When you look at the release of backlog, as I mentioned before, we're 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. So, This is where we landed at that 75 to 100 million number. So in your model, you should think about 75 to 100 million of backlog is kind of the ending point in our Q1 fiscal 25. So that's where we see that. And then we have share gains. I know earlier in your report, you mentioned a large share A large reseller that, you know, the outlook was down. You know, in our case, you know, with those kinds of resellers, because of their size, small share points create big opportunities. And, you know, we mentioned one of those resellers where literally in kind of a soft E-rate market, you know, we're up 50%. So these are the kinds of things that we can do at Xtreme because of our relative size. And, you know, it gives us, you know, a growth advantage, if you will. Some of these other larger partners I mentioned, you know, when you open up a Comcast, when you open up a Verizon, when you open up some of these larger managed services partners, we open up the door for, you know, 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 Xtreme to outgrow the market and then for us to get to that mid-teens number.

Okay. That's a great answer. Thanks, Ed. 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 Xtreme Network CEO, Mr. Ed Myercourt.

Thanks, Cherie. 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 Xtreme employees, our partner community, everyone that they join 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 Xtreme. Uh, the competitive differentiation is there and, and it's, it's fun to be winning in the marketplace. So shout out to those teams. And then also, uh, investors for your, um, continued participation and, and interest in the company. Um, you know, we're holding on to a very strong guide in terms of, uh, top line growth and margin expansion, uh, both of the gross margin line and then operating leverage down at the bottom line. So, um, We appreciate your interest in Xtreme, and we're quite confident about the quarters to come. So thanks, everyone, and have a great day.

Thank you all for participating. This concludes today's program. You may now disconnect.