This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day and thank you for standing by. Welcome to the Xtreme Network's first quarter fiscal year 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stan Kofler, Vice President of Corporate Strategy and Investor Relations. Please go ahead.
spk08: Thank you, Abigail. Good morning, everyone, and welcome to Xtreme Network's first quarter 2024 earnings conference call. I'm Stan Kofler, Vice President of Corporate Strategy and Investor Relations. With me today are Xtreme's President and CEO and Meijer Cord and CFO, Kevin Rhodes. We just distributed a press release and filed an 8K detailing Extreme Network's financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations, is available in the Investor Relations section of our website at extremenetworks.com, along with our earnings presentation. Today's call and our discussion may include forward-looking statements based on our current expectations about Extreme's future business, financial, and operational results, growth expectations, and strategies, All 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. These risks are described in our risk factors in the 10-K report for the period ending June 30, 2023, filed with the SEC. And 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. Following our prepared remarks, we will take questions. And now, I will turn the call over to Xtreme's President and CEO, Ed Myercord.
spk03: Thanks, Dan, and thank you all for joining us this morning. Xtreme delivered another strong quarter with revenue growth of 19% and EPS growth of 75%. We continue to move up market, and the dollar value of deals over a million dollars continue to grow quarter over quarter. Cloud adoption remains strong on 30% year-over-year ARR growth to $141 million, and SaaS deferred revenue grew 38% year-over-year. Customer retention metrics remain high, a testament to our customers' loyalty and preference for our industry-leading solutions. We outpaced overall market growth in the quarter and expect continued share gains in fiscal 24 in our core business. Our new go-to-market initiatives outperform in the quarter as well. This includes expansion across APAC, certifications and regulated industries like state and federal government, the addition of seven new managed service providers, and a new disruptive white space opportunity to sell the enterprise through large service providers with a private subscription offer. In addition, we have a plan to license all network devices connected to our evolving extreme cloud platform. This will deliver even greater simplicity, value, and flexibility beyond the cloud management capabilities we offer today and create more stickiness for our SaaS business. Our strategic initiatives around differentiated zero trust posture, expanded machine learning, and AI capabilities are expected to drive expansion, ARR growth, and average revenue per user. At the end of fiscal Q1, we felt the impact of the macro environment trends in our industry and lowered our outlook for near-term top-line growth. The higher interest rate environment and economic challenges in some of our larger markets, like Germany, lengthened sales cycles and pushed out a larger amount of end-of-quarter orders in Q1 than we would normally expect. Our channel partners are digesting a large volume of backlog release and focusing on network deployment slowing down their current ordering. And as a result, we don't expect run rate business to ramp as quickly as anticipated. In light of what we would call an air pocket of demand and decision making, leading to our revised growth outlook for the year, we took immediate action to realign resources to drive higher productivity and profitability. As a result, we continue to expect high teams operating margin in fiscal 24. That will allow us to grow our EPS by over 25% during the year. Our funnel of opportunities continues to grow up double digits on a year-over-year basis as our underlying business and competitive position remains strong. Over the long term, we expect to return to a mid-teens top-line growth outlook and a mid-20s operating margin. And here's why. Customers tell us they're tired of complexity, inflexibility, and the high costs associated with the old networking models from the larger networking companies. They choose Xtreme because we set the bar for modern networking with a combination of innovative and flexible technology, licensing and deployment simplicity, and a focus on driving impactful business outcomes. Customers view their network as a strategic asset to enhance operations, power and scale new services, and reduce business risk, especially cybersecurity risk. Our customers choose Xtreme for three primary reasons. First is operational simplicity. That is driving IT productivity, network availability, ease of use, improving both time to value and total cost of ownership of their networking investment. We're the only networking provider that can deploy campus networking fabrics from our cloud. This makes moves, adds, and changes to networks simple and seamless, allows customers to segment networks and provides unmatched security and resiliency. While fabrics are common in data center environments, we're the only competitor who can bring these services to the dynamic campus environment orchestrated through our cloud. We create one network, one cloud for customers to remove the complexity of managing their entire network infrastructure. Second, we offer unmatched flexibility. We offer cloud choice, public, private, hybrid, and edge cloud deployments that can be managed through a single interface. Our universal switches offer OS choice and deployment options. We have the industry's simplest licensing. Unlike competitors, we don't require our customers to hire full-time employees just to manage licenses. And finally, we're the only networking vendor that can manage a mixed environment without requiring them to rip and replace all their infrastructure at once as they modernize. Third, our cloud solutions offer actionable business insights, security scale, and innovative technologies such as AIOps and automation. Our AIOps solution now cover over 200,000 devices and are gaining traction with large customers as they look for new ways to leverage the network to drive better business outcomes. With our digital twin technology, customers can stage and test their network deployment in a digital environment. shaving months of actual physical deployment and troubleshooting time. Our AIOps solutions proactively identify network issues, reduce false alarms, and allow IT teams to be proactive instead of reactive. Here are a few examples. We help San Diego Community College connect 80,000 students across multiple campuses with our fabric technology. No other vendor in our industry has the expertise or ability to create a single, secure, hyper-segmented campus network that enables zero-touch provisioning of new locations or moves, adds, and changes to network elements within a matter of minutes. With one network running on one cloud, they decreased OpEx by 50%. Again, none of our competitors can do this. The Dubai World Trade Center recently hosted Jitex, the world's largest technology trade show, which was powered by Xtreme's wireless, fabric, and cloud solutions. The venue supported more than 180,000 attendees and 6,000 exhibitors at this massive event. They used extreme fabric to quickly, simply, and securely segment 3,300 individual networks in a matter of days with an IT staff of two people. Conference attendees thought it was impossible. To accomplish this with our competitive solution, it would take weeks with a much larger IT team and introduces significant margin of error due to their complexity. A global leading fast food chain has selected Xtreme Cloud SD-WAN to ensure consistent performance and improve guest experiences at its 1500 locations across the UK. With Xtreme, this industry leader has greater visibility across its network and will be able to simplify network management at all locations, increase overall network security, and optimize operations by improving performance for critical applications. These large accounts become important references and brand builders for Xtreme. Our increasing pool of large, high-profile customers and our technology differentiation is why we continue to see the value of deals over a million dollars grow each quarter. In Q1, we had more than 30 deals over a million dollars. We continue to have a healthy customer order backlog with clear visibility to order with specific customer request dates through the balance of our fiscal year. This quarter, our product lead times normalized, allowing us to continue working down backlog from product constraints. We continue to expect our backlog to settle in a range of 75 million to 100 million by the end of Q4 fiscal 24. Next week at our investor day, we'll dive into specifics as to why our technology differentiation brings unmatched simplicity, flexibility, and insights that are driving more and more of these high profile customer wins. And the wins are elevating our brand and driving share gains both in the channel as well as with our enterprise customers. We'll also share why we're so excited about new commercial opportunities with our recently launched modern managed services platform, a private subscription offer for very large service providers, our highly targeted certification and security, compliance opportunity, and the elevation of our entire portfolio to subscription licensing. All these factors provide accelerants to the share gains we're driving in our core business. And with that, I'd like to turn the call over to Kevin.
spk10: Thanks, Ed. I'm encouraged not only by our performance in the first quarter, but also our ability to be decisive and take prudent action as we experience shifts in market demand. Let me talk about our first quarter results, and then I'll move to the outlook. In the first quarter, we again demonstrated strong financial and operational performance. We also showed that we remain committed to continuing that level of performance in the future. Let me get into the numbers. First quarter revenue of $353.1 million grew 19% year over year, exceeding the high end of our expectations entering the quarter. Product revenue of $253.5 million grew 23% year over year, reflecting continued improvement in our supply chain environment. We achieved strong double-digit year over year growth in campus switching, which grew sequentially as well. SAS ARR grew 30% year-over-year to $141 million, up from $109 million in the year-ago quarter. Driven by the strength of our renewals, subscription deferred revenue was up 38% year-over-year to $236 million. Total subscription and support revenue was $99.7 million, up 9% year-over-year. This growth was largely driven by the strength of cloud subscription revenue up 32% year-over-year. Recurring revenue continues to be a positive story at Xtreme. Total recurring revenue of $95 million grew 11% year-over-year, accounting for 27% of overall revenue. Additionally, as we ship products from Backlog, it will be a tailwind for our SaaS growth. Based on our current outlook, we expect recurring revenue to be approximately 30% of our revenue for fiscal 2024. The growth of cloud subscriptions and support drove the total deferred revenue to $525 million, up 24% year over year. Our gross margin increased once again, achieving 61.1% as compared to 60.2% in the fourth quarter and 57.6% in the year-ago quarter. That's up 90 basis points sequentially and up 350 basis points year over year. We attribute our gross margin improvements to the excellent work by our supply chain team, lower overall distribution costs, and a greater mix of high margin subscription revenue. Our first quarter operating expenses were $153 million, up from $135 million in the year-ago quarter, and down from $156 million in the fourth quarter. The year-over-year increase reflects increased R&D investment and sales and marketing expenses to support our higher revenue growth plans. Our strong revenue growth, gross margin expansion, and operating expense management contribute to another increase in our operating margin, now at 17.7%, up from 12.1% in the year-ago quarter, and up from 17.4% in the prior quarter. To that end, first quarter earnings per share was 35 cents. above the high end of our guidance range entering the quarter. We finished the first quarter with cash and cash equivalents of $224 million and net cash of $27 million after repurchasing another $25 million worth of shares. We've repurchased $125 million of our shares over the last four quarters and are executing on our commitment to offset dilution from stock awards. we expect our share count to remain relatively flat for the rest of this year. The $71 million that we generated in free cash flow represents a 20% free cash flow margin above the high end of our long-term model. And we also generated $68 million of adjusted EBITDA. Now turning to guidance. We remain optimistic about the enterprise networking spending environment and our ability to take shares. However, looking ahead at the balance of fiscal 2024, we are taking a more cautious tone in light of the current spending environment. Based on changing customer buying patterns and macroeconomic conditions, we are tempering our revenue outlook for this quarter and the balance of the year. We do believe that this is an air pocket as opposed to a more systemic issue within our target markets. For the second quarter, we expect Revenue to be in a range of $312 million to $327 million. Gross margin to be in a range of 60.2% to 62.2%. Operating margin to be in a range of 15.4% to 17.3%. And earnings to be in a range of 26 to 31 cents per diluted share on a share count of $134 million, 134 million shares. Despite expected near-term market conditions and lower revenue expectations, for the full year of fiscal 24, we expect mid to high single digits of revenue growth, which we believe is above industry growth estimates and implies our share gains will continue. We have also taken recent actions to ensure we align our cost structure with the current level of revenue growth that we expect to achieve. As a result, we believe we are well positioned to deliver strong profitability and improved operating margins during the year, and we expect to generate EPS growth of approximately 25% in fiscal 2024. As Ed noted, we remain committed to long-term double-digit growth, and I see tremendous opportunity for Xtreme to grow our business, accelerate our recurring revenue contribution from subscription and support, and improve our margins and cash flow. I look forward to laying out some of our long-term plans our new long-term plans at our investor day next week. And with that, I'll now turn the call back to the operator to begin the Q&A session.
spk01: Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up and return to the queue for additional questions. One moment for our first question. Our first question comes from David Vogt with UBS. Your line is open.
spk02: Hey, thank you. This is actually Andrew on for David. I wanted to ask you, one of the big issues looking at this industry for some time now has been the elevated backlog. Certainly you've had it as well. So what I'm wondering is maybe you can help us understand a little bit better, you know, how much of the sort of mixed signals that the backlog has been sending to the entire industry is driving your slower outlook versus entirely macro. Can you sort of pull that apart for us and help us understand it?
spk03: Yeah, Andrew, I'll jump in. And then, Kevin, you can follow up. Andrew, I think when we think about the backlog and you think about what's happened over the course of the last several quarters, and it's not just Xtreme, it's the whole industry, there's been a very high level of backlog release into the channel. And so in terms of how it's affecting current demand, you might say digestion, but effectively we put a lot of product into the channel. And so our channel partners are receiving a lot of product and they're moving forward deploying and they're very busy deploying networks. And with that focus on receiving an unusual, an unusually high amount of product and networking gear, they're really active in deployment mode right now. And I would say, you know, there's, and with some of this, they paused, some of their purchasing and some of the drawdown from the channel. So I think that's how that's affecting, that's how you should think about this affecting the demand, the current demand equation. As we said, you know, we're calling it, you know, an air pocket. This will pass as they deploy the networks. You know, they're going to get back to kind of normal course ordering that will be consistent with kind of normal course demand for networking in the industry. Kevin, do you want to add anything to that?
spk10: I think you hit it, Ed. I think you hit all the points.
spk02: OK. And then just my follow up on that is just obviously you've got backlog working down. You expect it now to normalize in Q4. You've got some very difficult comps in the back half. What is it that gives you the confidence that you're going to see revenue reacceleration in the back half to hit your fiscal 24 revenue targets?
spk03: Well, Andrew, it's really about what we see in our funnel. We have a very clear picture of opportunities and all those opportunities have kind of a timeline next to them. And it's the quality and the quantity and volume of our funnel that gives us the confidence to make the call. As we turned into Q2, Kevin mentioned that our teams became more cautious with their call. Some of the bookings that we would normally see at the end of the quarter didn't happen. And with the slowdown of sales cycle, people became a lot more cautious about the call here. A lot of those opportunities landed in the second half of the year. These are high quality opportunities. And so I would say that's what's driving the confidence interval. Kevin, I'll give you a shot to jump in as well.
spk10: Yeah, I mean, as we think about, you know, the quarterly revenue throughout the rest of the year and our guidance for the full year, I mean, obviously Q4 is the toughest comp that we have with the $365 million last year. But we're not calling for accelerating growth over top of that. We think that we're going to hit about mid-teens for the full year compared to the full year of 2023. Thanks.
spk05: One moment for our next question.
spk01: Our next question comes from Alex Henderson with Needham. Your line is open.
spk07: Great. Just a quick clarification on the guide. So if I were to look at the guide for the upcoming quarter, I assume that the vast majority of the swing is in product sales and that the strength of software growth plus the normal services growth off of lagging product sales would suggest that overall services quarter to quarter and for the year would continue to gradually increase over the course of the next three, four quarters. Is that a fair assessment? That's right. That's right. It's all in product sales.
spk10: For the most part, I mean, you know, that's the, I mean, obviously the attach rate, right, with subscription and support is associated with products. So you'll see a little bit of moderation. in the revenue there for subscription and support as it relates to you know product uh being being lower but with the majority of the reduction you know in anticipation of revenue for the full year uh would be on the product side and that's just literally the digestion issue the macroeconomic people are just taking longer to make decisions and decision cycles are lengthening And we feel like we're in this air pocket where we think we will come out of it. The question is the absorption period, if you will, within the market and when some macro market come back. I think we're seeing this with many companies across the sector.
spk07: So just to be clear, the growth in services is generally driven off of the last two years' worth of product sales. Therefore, it should continue to increase quarter to quarter over the course of the 24 period, even if it's at a very flattish kind of trajectory. So it's almost all in product sales.
spk10: That would be our expectation.
spk07: Okay. So if that's the case, in order to hit your guidance as given, it sounds like your product sales literally have to be down in the December quarter and essentially flat for the full year. excluding the just printed quarter is is that also an accurate read and if that's the case you know what what is the mechanics underneath the surface between the inventory drawdown at your channel versus the sell-through so what is the rate of sell-through look like if you were to look at it from the customer perspective as opposed to the two-tier channel distribution perspective.
spk10: I mean, first of all, fourth quarter is a long way away right now. We look at just the pipeline. We've got a combination of backlog that is expected for customer request dates in the fourth quarter, so we have that information. We've got the overall pipeline, and we know some of that pipeline relates to existing customers, some of it's new logos, so we assess that pipeline. naturally between Q2 and Q3, we'll build more pipeline for Q4. And so I would say we throw that all through the machine and we look at you know, what we think we're going to achieve for the year, and it's up, but it's up, you know, on a full year basis, you know, that mid, you know, that single to high, mid to high single digits for the full year as it relates to Q4. Yes, we've got a tough comp there, as I said, as I mentioned, you know, that could be flattish, you know, in the fourth quarter, but, you know, for the full year, still up.
spk07: Yeah, the question really was, what's the difference between sell through to customers, i.e., what is the underlying customer growth rate in terms of buying product from your channel, as opposed to the workdown of inventory in your two-tier distribution channel. So if you were to look underneath the surface here, yes, there's flat product sales, but that is reflective of underlying sell-through of what? percentage of your revenues coming out of the two-tier distribution. So how much of this is the channel distribution inventory destocking, and how much of this is a weakness in underlying demand?
spk10: I mean, it's hard to tease that and pull that apart naturally, Alex. We don't have perfect visibility into all of that. I would say that our two-tier reseller and distribution program, it's relatively healthy, is what I would say. They've got healthy, now fully normalized inventory levels that they have. We don't have too much necessarily in the distribution level, and we've got our own healthy amount that we have on our own warehouse. We're looking at it as more end customer demand challenges right now. This air pocket is more of an end customer demand. I mean, you've got two wars going on right now, et cetera, et cetera. So we're just seeing Europe being this more sluggish, I would say, area of any, we commented particularly in Germany, that's the area that's really, I'll call it, you know, causing the slowdown is mostly in the European area. We're doing well in APAC and the U.S. still continues to be strong, but if there's any area, it's that.
spk01: One moment for our next question. Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Your line is open.
spk12: Yes, open to just a clarification first on the guide for FY24. That mid to high single digits, are we talking 4% to 9%? I guess you would, yes. Okay. And then the, I guess the change in demand environment, it seems like up until about maybe six weeks ago, we were still pretty confidently talking about a mid-teens growth rate, not only for FY24, but for FY25. Was there a particular event or two that, you know, that you guys can point back to as the market shifting kind of all at once? Yeah, Ed, you want to cover that?
spk03: Yeah, Eric, it really happens if you look at the way our business flows from an ordering standpoint, and it's the entire industry. there's a buildup towards the end of the quarter where most of the orders come in in the last month of the quarter. And literally, I would say the last two weeks of the quarter, when we have a huge pipeline of deals and committed deals, our sellers, and then the alarm started coming back that, hey, this is going to push. They decided, the decision by and it's really across geographies, across industries, across verticals where, you know, there was this wave of, of messaging coming from our field that deals were going to slip and push at an unusually high level. And that, that, that, it caught us off guard because we, you know, no one really saw that coming. You know, we've heard about it, but, but that happened. And so there was a, it started flipping at the end of the quarter. And then as we look forward, our teams just got a lot more cautious with their call given the environment. And what we're hearing is that there's more scrutiny over budgets, more people are getting involved in the purchasing process. The projects are still good. The projects are still going to happen. Maybe there's a prioritization issue that takes place. but you're seeing more purchasing, more financial types. A lot of different players come into the decision-making process. They just slow things down. And we weren't in a situation where we lost business. We were in a situation where our opportunities just moved out to the right. And that happened literally the last two weeks of the quarter. A lot of those orders... don't really affect the quarter because now, you know, we're getting close to a point where, you know, what we book in a quarter is what we ship. And at the end of the quarter, when orders come in, you know, you don't turn around, you know, that would be kind of more normal backlog with what happens at the end of the quarter, you know, the orders come in and they turn into your revenue and your shipments for the next quarter. And so it was that softness at the very end of the quarter that caused us to, you know, to look at Q2 to be more cautious and conservative. And our field teams, on the heels of what happened at the end of the quarter, felt they should be more cautious with their calls. So that's really, it's kind of a combination of those two things that happen.
spk10: And Ed, I would even comment that beyond September 30th, like even to October, we were still seeing some of the same buying pattern issues, you know, in the last 30 days that caused us to also assess, you know, what our Q2 revenue would look like leading up to today.
spk12: Yeah, thanks for taking my question.
spk04: Thanks, Eric.
spk01: Our next question. Our next question comes from Timothy Horan with Oppenheimer. Your line is open.
spk09: Thanks, guys. Ed, when you study past periods of slowdown, maybe talking to the channel, I mean, can this last six months, you know, 18 months? Can these networks just, you know, run hotter for a little bit longer? And I know you've been asked a few times, but can you just maybe give us a rough estimate of, you know, what percentage of the lower guide comes from just working down inventory at the channel versus, you know, end user demand? Just kind of hearing mixed signals. Yeah, I know it's very hard to quantify, but just a little bit more color. Thanks.
spk03: Yeah, it is hard to quantify, Tim, and thanks for the question. And I'll give an example. Some of our largest partners, and I'll pick on EMEA and I'll pick on Germany specifically, they're having a fantastic year. They've gotten all of this product that's been released from backlog. And they are focused and super active in deploying networks for their customers on our behalf. They are fully consumed. And you see their business is way off year over year with us. These are an example of a strategic partner with really healthy business and amazing customers. However, their focus right now is on deploying all that equipment. And so their business is off. They fully expect business to return. And so that's why, as we look at, you know, with our outlook, we know it's coming back. It's just there's a near term, you know, and we're calling it an air pocket for the channel to deploy. If I had to put it, if I had to just make up a number and place a guess on how much I would allocate to, the slowdown of decision-making, more people coming into the decision-making process, budgetary constraints pushing versus channel digestion. Kevin, you can jump in, but if I had to give it a finger, I'd probably say half, half and half.
spk10: Yeah, I was thinking 60 macro, 40 digestion, but somewhere in there.
spk03: Yeah. And Tim, the other piece is there historically has been a run rate business, and that run rate business is not insignificant. And we knew that run rate is starting to come back, which is encouraging to us. Our anticipation is that there would be a step function in run rate throughout the course of this fiscal year. And I think that run rate is happening more slowly. We think that's also a byproduct of what's going on in the channel.
spk09: Yeah, that's Craig Tuller. So, I mean, basically, a lot of the distribution is full out at this point. They can't handle any more capacity. It's maybe half as full.
spk03: There's the distribution side, okay, and distribution as inventory. And then there are channel partners themselves, and they're busy, and they're saying, okay, distributors don't ship me that product yet because I need to finish this project and then I'll take delivery for the next project. So, you know, and that slows down distributor buying as well because they're waiting for what we call POS, but they're waiting for our channel partners, you know, to draw down on their inventory. So it's kind of, it's just gotten backed up a little bit, which is why we're calling it digestion, but it will pass. it will pass.
spk09: Very helpful. Thank you.
spk03: And I would say, yes, we've been here before. We've seen this happen before. You know, it's a quarter, you know, a quarter to a few quarter phenomenon, but it will pass. We factored all this into our revised outlook for the year and for the quarter.
spk05: Thank you. One moment for our next question.
spk01: Our next question comes from Dave Kang with B. Riley. Your line is open.
spk04: Thank you. Good morning. I may have missed it, but were product orders up or down or any color on that?
spk10: So Dave, we haven't really quoted any dollar amount for orders from one quarter to another. We have tended to say that orders you know, have been up sequentially or down sequentially, et cetera. In our second quarter, we had a softer quarter because of what we just discussed around the pushing out of some of those orders. And as you think about it, you know, a first quarter order that pushes out, you're obviously not shipping it, and it may get done in Q2. So I would say, yes, we had a softer, you know, orders quarter in Q1 than we expected. And that's reflected in our Q2 guidance.
spk04: And do you expect similar trends in fiscal second quarter, or do you think they're going to rebound?
spk10: Right now, I would say our visibility into the second quarter is stronger than it was in the first quarter from a orders perspective. But we're not done with the quarter yet. And so I don't know whether at the end of the year we'll have the same phenomenon that we had in September with orders pushing again. So that's the challenge, if you will, that we have right now from a visibility perspective, the macroeconomic is, you know, are these sales cycles going to continue to elongate? You know, are things going to continue to push where you can't ship it in a quarter? That's the phenomenon.
spk03: Yeah, Kevin, I'll jump in and say that, you know, from a revenue perspective, the impact on revenue, we feel like, you know, We hit bottom in the December quarter with product orders being up slightly. But again, a lot of those orders now in our environment will spill into the March quarter. Orders that come in at the end of the quarter usually don't get shipped and wind up shipping in the following quarter. Does that answer your question, Dave?
spk04: Yes, yes. And my follow-up is regarding your competitors. Previously, you said you don't typically run into Juniper and Arista. Juniper and Arista, it seems like their enterprise business has been growing nicely in recent quarters. Are you seeing them more in your end markets?
spk03: We never see Arista. Their enterprise market is very different than our enterprise market. I think that's an extension of maybe the large financials and some of the other larger, an extension of their cloud data center business with larger customers. But in our market, it would be very unusual for us to see Arista As it relates to Juniper, we see that more frequently, and Juniper is investing in the enterprise market, I think, more heavily in the verticals where we play. I think if you read the tea leaves on what Juniper said, I think they're calling the same high single-digit growth from a demand perspective that we are in the near term. From a revenue perspective, they're still unloading a lot of backlog.
spk04: Got it. Thank you.
spk01: One moment for our next question. Our next question comes from Christian Swab with Craig Callum. Your line is open. Hey, great.
spk11: Thanks for taking my question. So is it safe to assume that backlog is probably almost back to a somewhat normalized level since the conversation is returning to kind of pre-COVID conversation, you know, talking about a funnel and a pipeline versus previous conversations of a backlog driving material growth for a material period of time. Is that fair?
spk03: Christian, I think it's fair to say that our backlog as it relates to distribution has normalized. But we still have a fair amount of customer backlog that's out there. And I can give an example of like Kroger. We had a very large win with Kroger. They're deploying to all their stores. They don't necessarily want all the equipment upfront at once. They want to time that with their deployment. So we have customer request dates, very specific customer request dates. That is one example of many. And what we've said and what continues to be the case is that we see the normalization of our backlog at the end of fiscal, you know, Q4 of this fiscal year. That's right.
spk11: That's right. And just to follow up on that, the pushouts that you were talking about at quarter end, you know, is that direct customer pushouts or was that unanticipated distribution channel pushouts?
spk03: Those are customer, yeah.
spk11: That's right. Okay, great. And then my last question, you know, a return to 15% top line growth in 25 with, you know, 30% of your revenue recurring seems like a really strong growth rate for products. So I'm trying to figure out or back into, you know, what you guys is, growth assumptions for industry growth is versus market share gains to attain that growth objective?
spk10: Well, a couple of things. I mean, one, we'll go through the long range model next Tuesday, right, at our investor conference. So we can talk a little bit more about 25 then. Right now, we're not guiding for 25. I think the biggest point is that recurring revenue will continue to grow. You're seeing subscriptions grow 30% right now. And so we have to, you know, that's the gift that keeps on giving, you know, over the next several years. We think this is an air pocket, as we mentioned earlier. And so we think that there will be demand coming back, you know, towards the end of this year into 2025. So that should, you know, normalize. And we still have a good, like we talked about, pipeline. um and we have a building pipeline and so that gives us you know confidence as well that this is a macroeconomic issue for a period of time and hopefully will you know abate um you know here within this year and then 25 should be a normal you know more spending you know normal normalized spending year at least that's that's the visibility we have right now into 2025. and christian i would point out we you know a lot of our confidence comes from funnel and we mentioned that we have double digit
spk03: funnel growth in terms of the year-over-year opportunities. And so a lot of the opportunities that are getting pushed out will come to fruition in addition to new demand. So there's a combination of our core business where we're taking share. If Cisco is a market proxy in terms of what they're calling, it's kind of low single digit. When we take share, the function is how much share. Appointed market share is over 20% growth for Xtreme. because of our relative size. And that's in the core business. And I also mentioned, you know, we have invested and we've just rolled out and we're in the early stage of ramping a managed services platform. There's a lot of interest in MSP. We're seeing a lot more people turn to MSP. We've talked about some of our other strategic investments in terms of global security compliance, certifications, that apply in the US market as well as targeted opportunities abroad. And we have some other interesting opportunities that are really white spaces for us where we haven't played. So as we look at the components of core market taking share, and then we look at new white space investments where we haven't played before, and they're more commercial models. They don't require heavy investment, but it's more about relationship and go-to-market. And these are new for us, and they're just at the early stages of ramp. So those growth rates will be much higher than the market. And to Kevin's point, I would encourage participation next week at our investor conference because we're going to get into it in a lot of detail.
spk11: Okay, great.
spk03: And the last point I would make is that that subscription line is growing at 30%.
spk11: Right, right. I understood that math. I just wanted the market share gain math, which I think you directly understand what you're saying. Great. Thank you.
spk03: Thanks, Christian. Thanks, Christian.
spk01: One moment for our next question. Our next question comes from Greg Messianoff with West Park Capital. Your line is open.
spk06: Yes, thank you. Looking at your geographic distribution, can you hear me?
spk04: Yes, we can. Yes, we got you.
spk06: Oh, good. Okay, got you. Okay, looking at your global geographic distribution, I think EMEA was about 40% last quarter. I didn't see what it was this slide. I haven't had a chance to see it yet, but... Going forward, given that EMEA has been a soft area for you for understandable reasons, do you foresee just shifting your sales and marketing focus more back home to the domestic market and maybe to Asia-Pac markets to kind of offset, to kind of channel your resources where the opportunities are still strong from a macro standpoint?
spk03: Yeah, Greg and me is still hovering around 40%. I think it was 41% ish. We talked about realigning resources and the answer is yes. We're actively managing, fortunately because of our size and because of the way we manage the business, we move very quickly and we're realigning resources to drive our investment behind success, you know, where we see the growth markets. Within a very short time when we realized what was going on here with near-term demand, we made some quick decisions, as we pointed out. And a lot of those decisions were around go-to-market. And we commented on investment in Asia Pacific. There's a lot of, you know, year-over-year growth in Asia Pacific for us will be higher. a whole mean overall. And we're looking at target investments, for example, in federal where we have significant opportunities and in other pockets. But your point is spot on. Yes, we're looking at realigning resources where we can drive growth in the business. And we also look at the productivity of our resources that are in the field. And if sales are off, then we have to realign those resources to make sure we're driving productivity.
spk06: Gotcha. And my follow-on is, Ed, you very briefly mentioned what I thought was a very interesting opportunity, that you are currently in, I guess, discussions with some carriers about offering an enterprise solution through wireless carriers. Can you give a little more color on that?
spk03: Yeah, I think we'll talk more in detail next week at our investor conference, but the bottom line is that we've We have some strong relationships with some very large service providers who are dissatisfied with current networking relationships. And there's been a kind of, I'd say, mutual outreach. We see some creative ways to work with them to help them drive the profitability of their business. There's a lot of interest in this. It's still early innings, but the volumes and potential size of the opportunities are quite large. And so, yeah, there's an opportunity for us to work with them in a way where they can enhance and drive profitability and kind of reinvigorate some of their enterprise sales by replacing, I'd say, some of maybe the older, larger networking vendors with Xtreme. And, you know, we've got a customized solution that we're working on, and we'll share more details in Investor Day. Thank you. Thanks, Greg.
spk01: One moment for our next question. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.
spk13: Great, thanks. A lot of my questions have been asked already, questions about your sort of new go-to-market initiatives and confidence that ORS will come back. So I just want to kind of summarize those comments for us, you know, again. And then my second question, which I'll ask now, is just if you could talk about margins. You know, despite the revenue cut, you're still looking for pretty good EPS growth. So just sort of go through those dynamics of what we should expect from margins a little bit more, please. Thanks.
spk03: Sure. You know, there's what we're doing, Mike, there's what we're doing in the core business to take share. You know, in my comments, I made a point of commenting on what matters the most in the market overall right now. And networks are inherently complex. And in the enterprise space, people are trying to come to grips with how do we simplify the how do we simplify the environment and how do we make sure that we have flexibility going forward and we don't have a vendor lock situation where we get kind of stuck in a certain technology? And do we have modern networking tools? And today, Xtreme is by far the simplest in terms of our solutions. We offer the most flexibility and we have the most modern tools in terms of modern networking tools. we become a very attractive alternative. So our share gain profile, and when we're winning the kind of accounts that we're winning with the kind of names that we're winning for references, that bodes very well for us. And our customer names support our brand and support us in building our brand in the marketplace. So that's just core market share gains You'll hear more about that, but we have a ton of these larger opportunities behind this, and it's kind of success begets success. In terms of the new market opportunities, a lot of enterprise customers don't want to be in the networking business, and so they want service provider or managed service providers, which are a lot of people in our channel, to provide a managed service. The problem with managed services is that the platforms are really complicated and difficult to manage. And a managed service provider has to have so many interfaces into so many different clouds and into so many different portals, and the billing is complicated, et cetera. So we set out over a year ago to build a managed service platform, a modern managed service platform based on simplicity. And we've come up with what is a very exciting platform that greatly simplifies the ability to provide a managed service from a networking perspective and all the elements that we're providing. And so there's been a huge amount of excitement around it. It does take a while to stand up. We started off with a goal of five service providers. We mentioned now we're at seven. We think that's gonna scale up quite a bit. And we're gonna make it much easier for a managed service provider to deliver a networking experience far easier. And then with the simplicity of licensing et cetera, the whole package will make it easier. So we're, we're optimistic there. It doesn't really affect fiscal 24 much, but it'll start to play a role in fiscal 25. Um, we talked about the, uh, a private subscription offers to some very large service providers to support them and their enterprise business. Um, very early innings here. We have, you know, a couple of large players we're talking to one specifically that has a massive, um, backlog and pipeline of opportunities. So we're excited about that. We're investing in FedCerts. It's an area that we had underinvested in previously. We have new resources that we've hired that have uncovered some very targeted specific opportunities that we're pursuing that open up much higher than normal industry growth opportunities there. We also mentioned Asia Pacific where We have been rebuilding that team. We have very strong leadership there and we see big opportunities and verticals like hospitality. And we've had a massive, the largest deal ever that we've won in Asia Pacific, a $10 million deal in Indonesia. We can build on that success. We're having a lot of success right now in Japan Korea, where we've been historically strong, we have some really large opportunities with some of the large players there. So those are the areas in terms of managed service, this global security and certification, the private offer, as well as Asia-Pacific investments. The last thing that we're doing is we're about 66% of our networking gear is licensed and runs in cloud. And we have a plan to make that 100%. So we see accelerated growth in subscription as we build out our extreme cloud, not just a cloud management platform or a management tool, but an extreme cloud platform as a service orchestrator. And we'll talk about that on Investor Day as well.
spk13: That was a lot of color. Thanks for that. And then just on the margins, you know, Talk more about how the bottom line here grows a lot faster than the top one.
spk10: You want me to cover that one? Go for it. Yeah, I think, Mike, you know, so it's kind of rooted in our planning process, right? When we develop our annual planning process, we look at discretionary spend and what that is and our fixed spend. And we understand that the levers we need to pull, you know, if we need to pull back, we can pull back. You know, on hiring, we can pull back, you know, on discretionary spend and the like if we see the business environment changing. We were able to act quickly, which was great for us in the quarter to this kind of evolving market environment. So that's still enabling us to have a good second quarter from an EPS perspective and obviously helps us for the rest of the year as well. So I would say we feel confident in our ability to achieve that 25% growth in EPS this year. There's not many companies out there where you can say, hey, even if your top line is single to high teens revenue growth, you're still delivering 25% profitability. And we've been delivering high levels of growth and profitability for quite some time, for several years. And so we think that that is an important element for shareholders to look at and realize that this company is going to get through this air pocket. still deliver, you know, good, strong, profitable growth this year. And then next year we'll turn back into a more, you know, mid-teens growth, you know, company and deliver that margin, you know, as well. So that's the goal.
spk13: Greg, can I just say one quick follow-up there? Could you just talk a little bit of, you know, sort of gross margin versus operating margin? The comments seem to me focus more on the operating expenses. Yeah, they do. Is there a gross margin to come as well?
spk10: Yeah, I mean, we're going to continue to look at ways of how we can continue to expand our gross margin for sure, Mike. I think we originally said that we're expecting it to be somewhere in the 62% range for the full year. We're not backing off that. We think that we will continue to see improvement throughout the year. I don't know if it's going to be 90 basis points sequentially every single quarter, but we are expecting that we can continue to improve our gross margins, you know, throughout the year. That's going to help.
spk03: Yeah, and Mike, what's implied in a 62% gross margin is obviously we end the year, you know, over that and more of a 63% range. So, relates to growth margins, we continue to see gross margins stepping here as we come out of supply chain. And as we see some of the mixed dynamics as it relates to subscription, et cetera.
spk13: Good point, Ed. Yep. Thanks for the answers.
spk01: Thank you. That concludes the question and answer session. At this time, I would like to turn it back to Ed Meyerchord for closing remarks.
spk03: Okay. Well, first of all, I thank everybody for participating in the call. We appreciate your interest in Xtreme. I want to shout out, we get a lot of employees and customers and partners that join as well. So I want to thank our employees for all the hard work and customers and partners for the business relationship and the commitment to Xtreme. As far as everyone is concerned here, we invite everyone to tune in to Investor Day. We have a lot of opportunities and we're going to go into a lot of detail. around the core market, the growth opportunities, as well as kind of what this looks like from a financial perspective. So we invite everyone to participate there, and we hope to see you there. I'll reiterate, we see this as a short-term phenomenon, and we remain committed long-term to delivering on double-digit growth in the top line, and obviously what that means with operating leverage to the bottom line. Thanks, everybody, and have a great day.
spk01: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Disclaimer