Extreme Networks - Q2 2024
January 31, 2024
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to Extreme Networks' second quarter fiscal year 2024 financial results conference call. At this time, all participants are on 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 one one on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Stan Kovler, Vice President of Corporate Strategy and Investor Relations. Please go ahead.
Stan Kovler (VP of Corporate Strategy and Investor Relations)
Thank you, Livia, and good morning, everyone. Welcome to Extreme Networks' second quarter 2024 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Networks President and CEO, Ed Meyercord, and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations, is available in the investor relations section of our website at extremenetworks.com, 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 ended June 30, 2023, and subsequent 10-Q reports 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. Following our remarks, we will take your questions. Now, I will take the call, turn the call over to Extreme's President and CEO, Ed Meyercord.
Ed Meyercord (President and CEO)
Thank you, Stan, and thank you all for joining us this morning. Our second quarter results were in line with our previously announced revised Q2 outlook. We did have some highlights in the quarter. SaaS ARR grew 37%, which reinforces the value of our differentiated cloud platform. We have 44 customers who spent over $1 million on Extreme solutions, demonstrating both customer retention and our ability to take new logos from larger competitors. Gross profit is 62.5%, showing continued improvements and the benefit of a higher mix of high-margin recurring revenue. At a high level, the networking industry is exiting the final stage of the COVID-induced era of supply chain constraints, which has significantly impacted our business. We've made the conscious decision to put channel digestion behind us in the March quarter.
Our distributors and partners have lowered inventory purchases, which we expect to accelerate in the third quarter. We expect to emerge in the fourth quarter at a much more normalized level of revenue and earnings. Our bookings trends and funnel of new opportunities are strong indicators of customer demand. While larger deals are still experiencing elongated sales cycles, particularly in North America, we continue to win against the competition on a bookings basis with an uptick in new logos. Our EMEA business has stabilized and grew from the prior year, and APAC bookings continued to grow over the prior year. In addition to sequential and year-on-year funnel growth, we grew the number of transacting partners, accounts, and deal volume during the quarter. These trends and the expanded go-to-market opportunities give us confidence that we are positioned for a return to meaningful growth in fiscal 2025.
We've attracted a growing list of 14 managed service provider partners exiting the second quarter, with seven already driving transactions. We're positioned to expand our MSP footprint as partners are drawn to the simplicity of one cloud, the flexibility of our unified hardware, and our unique consumption billing model. We make it simple for these service providers to deliver seamless, high-quality networking experience to their customers. We've also made inroads, establishing a private subscription offer through a highly targeted list of large service providers. As noted at our November Investor Day, this market segment opens a $5 billion addressable market. In November, we introduced ExtremeCloud Universal ZTNA, the first network security offering to integrate network application and device access within a single solution. This helps move organizations to a zero trust policy for all devices across the network.
This, combined with our industry-leading Campus Fabric solution, extends our value proposition in helping customers both manage and secure their networks. Yesterday, we launched new Wi-Fi 7 access points and the 4000 Series Universal Switches, designed to help highly distributed enterprise organizations create improved network connectivity, security, and application performance. Both of these new cloud-managed platforms leverage AIOps and machine learning to deliver faster remediation and enhanced network visibility. These new products also integrate well with ExtremeCloud Universal ZTNA to enhance network security posture. The integration of AI, security, and analytics into a single platform is a key differentiator for us, Extreme, as it allows us to bring greater simplicity and flexibility for customers....
This is why we continue to win large deals with manufacturers like LG Energy Solution, leading healthcare facilities like NHS Trust hospitals in the UK, educational institutions like London South Bank University, Leeds Beckett, and Kingston University, and large venues like Wells Fargo Center and Canada Life Centre. I've made previously announced leadership changes to streamline and strengthen our go-to-market capabilities. Earlier this month, Norman Rice was appointed as our Chief Commercial Officer, and is now focused on driving revenue growth and leading the company's sales, partner, and services organizations. He successfully built our go-to-market sales motions in stadiums and venues, driving large opportunities with Verizon and Kroger, and has been at the forefront of driving our new commercial opportunities with large service providers. He has valuable experience managing revenue operations, with deep knowledge of our complex supply chain environment.
Our Chief Product and Technology Officer, Nabil Bukhari, is focused on increasing our SaaS revenue in his newly mentioned role as our GM of our subscription business. We've also deepened our bench of SaaS expertise on the executive team over the past six months, with the additions of our new Chief Marketing Officer, Monica Kumar, in December, and CFO, Kevin Rhodes, last May. The alignment of the team is crucial to helping accelerate growth and capture more share. The Extreme brand continues to get elevated in the marketplace through our customer wins and differentiated technology that creates more simplicity and flexibility across complex networking environments. Our promise of one network, one cloud, remains a competitive differentiator. One network is underpinned by our universal hardware, highlighted by Campus Fabric, which has unparalleled campus security benefits and allows users to segment networks 10 times faster than any competitor.
One Cloud offers customers modern networking tools with built-in AIOps, and we're unique because we're the only provider to offer cloud choice, whether that's public, private, hybrid, or edge. We're winning deals based on helping customers find new ways to deliver better outcomes, such as increased IT productivity, reduced OpEx, or securing their business. The simplicity and flexibility of One Network, One Cloud remains a competitive differentiator, particularly in a time when major competitors have created complexity with disjointed solutions and uncertainty in their long-term rationalization of products and solutions. We remain the only pure-play networking company with a differentiated and integrated portfolio and a clear roadmap. We believe our exposure to the fastest-growing areas of the networking market, share gains, and new go-to-market partnerships provide ample growth opportunities to drive double-digit growth in the long term.
We're forecasting market share gains with targeted partners, leveraging the strength of our unique solutions for the enterprise. With that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.
Kevin Rhodes (EVP and CFO)
Thanks, Ed. Despite lower revenue in the second quarter, we improved our gross margin sequentially and optimized our operating expenses to maintain a healthy operating margin profile. Our EPS was therefore impacted less than our revenue shortfall in the quarter. In the second quarter, we took proactive action that enabled us to protect our profitability while continuing to invest in our strategic initiatives. We will continue to focus on aligning our cost structure accordingly as we navigate the second half of our fiscal year. Let me get into the numbers. Second quarter revenue of $296.4 million fell 7% year-over-year and was in line with our revised outlook. Product revenue of $186.6 million fell 16.5% year-over-year, reflecting continued channel digestion and elongated sales cycles that are impacting the networking industry.
These trends are consistent across both switching and wireless products. Our product backlog has normalized this quarter, earlier than we initially anticipated, and our bookings approximated our product revenue for the first time in four quarters. In fact, our bookings trends were positive in both EMEA and APAC, where each grew double digits year-over-year. From a vertical perspective, while total bookings fell slightly, both quarter-over-quarter and from the prior year, our healthcare, education, manufacturing, and transportation/logistics vertical markets grew from the prior year. We are encouraged by this level of customer activity, which informs our view that we will be able to get channel digestion phase behind us as quickly as possible. SaaS ARR and recurring revenue was a bright spot in our quarter.
SaaS ARR grew 37% year-over-year to $158 million, driven by the strength of our renewals and activations of previously shipped products. Subscription deferred revenue was up 32% year-over-year to $246 million. As we ship product from backlog, it's generating a tailwind for SaaS growth. Total subscription and support revenue was $110 million, up 16% year-over-year. This growth was largely driven by the strength of our cloud subscription revenue, up 39% year-over-year. Returning revenue continues to be a positive at Extreme.... Total recurring revenue of $101 million grew 14% year-over-year and 6% sequentially to now 34% of total revenue.
Based on our current outlook, we expect recurring revenue to account for approximately 35% of the full fiscal 2024 year revenue. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $549 million, up 23% year-over-year and 5% sequentially. Gross margin was 62.5%, up 140 basis points from the prior quarter and up 400 basis points compared to the prior year-ago quarter. This is the third quarter in a row that we've achieved 60+% gross margin, which has proven to be an achievable level for Extreme at normalized scale. We attribute this to improvements in mix, due to the higher contribution of subscription and support revenue, and an improvement in supply chain and distribution-related costs.
Our second quarter operating expenses were $141 million, down $12 million from $153 million in the first quarter, and up slightly from $139 million in the year ago quarter. We plan to take additional actions to further optimize our operating expenses to the level of revenue we expect to achieve in the second half of fiscal 2024, in order to preserve our margin structure in the fourth quarter and into fiscal 2025. Operating margin for the second quarter was 14.8%, down from 17.7% and similar to 14.9% in the prior year quarter. This is the 6th quarter in a row of double-digit operating margins, also an achievable level for the company at normalized scale.
All in, second quarter, non-GAAP earnings per share was $0.24, down from $0.25 in the first quarter and $0.27 in the year ago quarter. We finished the quarter with $221 million in cash and net cash of $26 million after repurchasing another $25 million of our shares. We've repurchased $153 million worth of our shares over the past five quarters. The $28.6 million of free cash flow we generated in the quarter was impacted by lower revenue and the use of working capital for purchases of raw materials and inventory based on our prior year purchase commitments. We expect a recovery in cash flow as revenue recovers and component purchases become more balanced with normalized sell-through rates. Now turning to guidance.
This quarter, we expect sell-through to be significantly higher than sell-in, which we believe will have a meaningful impact on our operating results. To quantify this impact, we expect a $40-$50 million reduction in channel inventory in the third quarter, which will allow us to cover to a more normalized level of revenue in the fourth quarter. As a result, we plan to take further cost actions to drive the recovery in earnings per share and cash flow. Heading into the fourth quarter, we are expecting improved sequential revenue growth based on our funnel and the seasonality of our business, led by our education vertical. We believe our proactive approach to managing through this industry challenge will enable us to deliver improved growth and profitability in fiscal year 2025.
For the third quarter, we expect as follows: revenue to be in a range of $200-$210 million, gross margin to be in a range of 59.5%-61.5%, operating loss to be in a range of 12.4%-8.8%, and loss per basic share in the range of $0.22-$0.17. A basic share count is expected to be around 129 million shares.
Looking further ahead into our fourth quarter, we expect revenue to be in a range of $265 million-$275 million, gross margins to be flat to slightly up from the third quarter, non-GAAP operating margin to be in a range of 10%-13%, GAAP operating margin to be 1%-4%, and fully diluted share count of 131 million-132 million shares. With that, I'll now turn the call over to the operator to begin the question-and-answer session.
Operator (participant)
Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1, 1 on your telephone and wait for your name to be announced. To withdraw your question, you may press star 1, 1 again. Please stand by while we compile the Q&A roster. Our first question coming from the line of Eric Martinuzzi from Lake Street Capital Markets. Your line is open.
Eric Martinuzzi (Senior Research Analyst)
Yeah, I wanted to address the leadership change here and the how we're going to be approaching the channel differently than we were before. If you could talk a little bit about what Norman Rice is going to be doing. I guess we've sort of lost touch with the channel demand. You know, those are my words, not yours, but what are we doing to help improve that channel monitoring? What processes is Norman putting in place?
Ed Meyercord (President and CEO)
Yeah. Thanks, Eric. You know, one of the first things that Norman has done and with our leadership teams is to stratify our customer base and to split out what is-
... more run rate business in terms of business that's less than $50,000 in an order, and what that business looks like, which is gonna be more channel-driven and can be impacted more through distributors and marketing activities. And to provide more clarity to the project-based business and stratifying that project-based business. And I'd say that's, you know, that's a big change that Norman's bringing to the equation. You know, the other thing that I'll mention is that Norman and Kevin, you know, were the architects behind our Private Subscription Offer, which is a channel-led initiative that we believe will be disruptive. There's a lot of demand with some of the larger service providers that we're working with.
That's building up, and I think you'll start to see, and we'll be in a position to announce meaningful deals in the second half of this year. I also mentioned earlier in my comments about the managed services provider partners that we have who are signing up, and it's. There's the portfolio benefits and our technology benefits, along with the unique capability that people are very interested in, which is our consumption billing model, which provides for a lot of efficiency for that go-to-market motion. So, it's a stratification of the opportunities, and I'd say a more highly targeted approach to the channel, to the core business, along with these targeted new commercial models that we're going to market with.
Norman is very well, you know, he, he's the best qualified person to lead us on that front.
Eric Martinuzzi (Senior Research Analyst)
Okay. And then, you know, looking at the guidance here, I mean, just a really dramatic reset. I'm wondering, was there a you know, the prior year outlook because we had a guidance reset coming out of Q1, and now we've had an even more dramatic reset coming out of Q2. What's the you know, the confidence level here? We've got one month under our belts for Q3. Are we seeing any evidence to say things are getting better as far as the you know, this sequential step up in Q4?
Ed Meyercord (President and CEO)
Yeah, Eric, I mean, we commented on, you know, on the funnel and opportunities, specifically commenting on progress that we've seen in EMEA, in Asia Pacific. And Kevin also touched on the fact that, you know, we're heading into E-rate season, and, you know, this looks to be a pretty strong E-rate season for us. The, you know, the declines came as we were looking into Q2. Our outlook for Q2 and our plans to take down channel inventory, the reality is, we couldn't take inventory down nearly as much as that we had intended. And I would say with the elongated sales cycles and with bookings pushing out the way they did, it only deepened our position in the channel.
And we had to make a decision as to whether or not we want to manage this out over time or take it all in one fell swoop. And, you know, our view and our perspective is to get it cleaned up and get normalized as we head into Q4 and turn the corner on 25. So we're, yeah, and that's how we've made the decisions that we're making. Demand is obviously gonna be masked by inventory flowing out of the channel, and that's a $40 million-$50 million number that you heard Kevin talk about. And then as we go into Q4, we do have seasonality, and we are expecting more normal seasonality as we go into that quarter, and we have the E-rate business, and we have a significantly larger funnel.
That's what gives us confidence. We're, you know, very focused on the cleanup here this quarter and then delivering and exceeding our outlook for the June quarter.
Eric Martinuzzi (Senior Research Analyst)
Thanks for taking my questions.
Ed Meyercord (President and CEO)
Yeah. Thanks, Eric.
Operator (participant)
Thank you. Our next question coming from the line of Timothy Horan with Oppenheimer. Your line is open.
Timothy Horan (Managing Director, Senior Analyst)
Thanks, guys. Can you just talk about maybe the end user demand? Are customers maybe waiting for Wi-Fi 7 or CBRS or further upgrades, you know, to cloud? You know, just any color what's going on? Because, you know, the step down, you know, next quarter's guidance versus what you were thinking six months ago is, you know, incredibly dramatic. You know, the channel numbers that you just gave, you know, seem to only tell part of the story. Thanks.
Ed Meyercord (President and CEO)
Yeah, Tim, I think that's what you're seeing, a much more conservative outlook as it relates to demand. Yes, in some cases, in the Wi-Fi market, there will be some people that are holding off for Wi-Fi 7. We've talked about elongated sales cycles, which has been very real in the U.S., where we've had verbal commitments for pretty exciting wins for Extreme, but the deals themselves have been pushed out. And when we look at deals in our funnel that get to the commit level, you know, we close on those deals. It's more of a function of time. So, you know, we're looking at this as timing. If you look at, and this is why we're providing guidance for Q4.
We're confident in the guide and how we're gonna come out of this in Q4, but we are setting that base level at a more conservative level than we had in the past. And I'd say, Tim, to your point, I think we're feeling a little bit burned in terms of what we were expecting to close in the funnel. And, you know, we've gone back and taken a fresh view of that, and, you know, our view is to put it behind us and reset here with a clean path to going forward. As we look into fiscal 25, you know, there will be some tough comps if we look at the Q1 and Q2.
As we get into calendar 2025, you know, we see ourselves on a really nice and a very strong footing for driving double-digit growth and resuming where we left off.
Timothy Horan (Managing Director, Senior Analyst)
And so, Wi-Fi 7, can you maybe just talk about how much of an improvement it is, you know, for the customers or your benefits? And, you know, maybe how does the pricing of the product look like, your ability to supply it? And then just lastly, on Wi-Fi 7, and is, you know, what the competitive environment looks like. And do you think this is one of the things kinda driving the elongated sales cycles, or are customers waiting for this? Yeah, I mean, I think it's fair to say that, you know, that there are gonna be some customers in the marketplace that are waiting on this. You know, the benefit that you have in Wi-Fi 7 is you have the different frequency bands, and you have, in our case, higher bandwidth, which is important. And then we're also bringing, you know, dual bands in terms of speeds. And so there's a lot more flexibility in the solution. So yeah, every time you have these upgrades, there's higher quality in terms of connectivity. In this case, there's more bandwidth. There's more flexibility in terms of end user devices that we pick up on different frequencies.
Ed Meyercord (President and CEO)
And then, you know, we have the dual bandwidth capabilities in terms of how we connect to the network. You know, this, the Wi-Fi 7 for us is cloud managed, in addition to our 4000 series switch, which is purely cloud managed. You know, and in this, we're bringing some unique capabilities that provide a lot of advantages in terms of how to deploy and run networks, you know, relative to the traditional CLI model, where provisioning and network deployments can be done in a much more efficient fashion and a more automated way. So yeah, there are a lot of benefits in what's coming out in our most recent releases. And yeah, in terms of opportunities, it could have an impact.
Timothy Horan (Managing Director, Senior Analyst)
When does it start shipping at scale?
Ed Meyercord (President and CEO)
Well, look, you know, we are GA at this point, so I think you would expect to see, you know, shipping from Wi-Fi 7 begin in Q3 and really ramp up and begin to ramp in Q4.
Timothy Horan (Managing Director, Senior Analyst)
Thank you.
Operator (participant)
Thank you. Our next question coming from the line of David Budd with UBS. The line is open.
David Budd (Senior Project Manager)
Great. Thanks, guys, for taking my questions. Maybe to start on the competitive landscape and the dynamic, I think you guys spent a lot of time talking about taking sort of the inventory, destocking, you know, pained short term, but you also talked about normal seasonality in Q4, talking about gaining share over the long term. Can you maybe just kinda talk about what you're seeing competitively in the market today that gives you confidence that, you know, we can get back to share gains over the intermediate and longer term? And then I have a follow-up question as well.
Ed Meyercord (President and CEO)
Yeah, Dave, thanks. So, I'll comment on that. You know, what gives us confidence is what we see happening in the market every day. And, you know, we've talked about the largest competitor in the space that has a very different cloud solution, and we continue to see the industry moving to cloud, and we have a leadership position in cloud. So the largest player in the marketplace has got, you know, a very different cloud solution from the traditional enterprise solution. In addition to that, you know, they continue to invest, you know, in other markets. And so the level of complexity that we're feeling in the marketplace, you know, surrounding the largest competitor, is very real and opens up a lot of opportunities.
We've talked about some of the larger deals that we're getting into. We continue to move upmarket, and you'll see us, you know, continuing to do this with some of the announcements that will come out of Extreme, where in these highly competitive and highly contested processes, we're coming out on top. And so you're seeing the likes of Cisco and HP and Juniper getting pushed back and Extreme winning, and that's part of how we're upleveling our brand. So, you know, that's one of the ways that we have confidence, you know, relative to the largest player. It's very top of mind, the HP acquisition of Juniper. What will that mean? You know, in our case, it means that, you know, one of our competitors will be going away.
We see a lot of opportunities, certainly over the next couple of years, as they're looking to rationalize their product portfolios. This is gonna create opportunities. In fact, it already has, where we're already getting calls from customers, direct customers and end users in the field, as well as partners who are concerned and very unsure about what does that product roadmap look like and what is it going to look like? This gives us, you know, it, you know, these just create, they create more opportunities for us.
David Budd (Senior Project Manager)
No, great. That's helpful. And maybe just a follow-up. You know, you talked about a strong E-rate season coming up and getting back to hopefully some degree of normal seasonality by the June quarter. Recognizing that obviously the first half of fiscal 2025 is difficult comps on a year-over-year basis, are you planning for what I would consider to be more normal seasonal behavior on a quarter-over-quarter basis as we get through June going forward? Or is there still some digestion from whether it's order growth intake, you know, underlying demand, sort of channel digestion, that we should expect as we go through the second half of this calendar year into 2025? And then just maybe one final one for Kevin, if I could slip it in there. You mentioned, you know, obviously, you know, double-digit margins at normalized scale, I think the phrase was.
Would just love to get some more color on, you know, how he's thinking about it, 'cause I know at the Analyst Day, obviously, you guys had talked about, you know, margins above, let's call it fiscal 2022 levels, back into mid-teens, but just wanted to get more color on, you know, what scale do you need to get to, to get back to margins that are more robust than, let's say, fiscal 2022.
Ed Meyercord (President and CEO)
And I'll cover the first part of the question, and Kevin, I'll let you jump in and cover the second part. You know, we're looking, I think, at yes, more traditional seasonality as you look at, you know, the shifts going from, you know, Q1, you know, Q4 into Q1 to Q2, et cetera. I think in the core business, the outlier here is going to be some of the new commercial motions that we have that are not likely to be in the same seasonal patterns. So some of the larger deals that traditionally we would not have access to in terms of our Private Subscription Offer, for example, are not necessarily gonna fall into that, you know, the traditional-
David Budd (Senior Project Manager)
Okay
Ed Meyercord (President and CEO)
...seasonal flow of the core business. And, and I'd say the same thing is true with, with our MSP business, is that ramps, that's just gonna be more of a, a steady incline than it will be kind of traditional, seasonal business. Kevin, do you wanna comment on the second, second part of the question?
Kevin Rhodes (EVP and CFO)
Sure. Sure, absolutely, happy to. You know, our current—we—the reason why we gave the fourth quarter outlook is to actually show what we believe will be a more normalized. We do believe we will grow off of Q4, so we're not thinking that that is, like, the new number forever because we have these opportunities with MSP and ESPO that will continue to, you know, mature and provide, you know, further growth in the future. But with Q4 being 10%-13%, we believe that's a good jumping-off point. But we will maintain, you know, operating margins in the double digits, you know, throughout this fourth quarter and throughout next year, is our plan.
You know, in terms of, like, how much we can scale from where we were in 2023 or 2024 in the future, we really have to go and spend a little bit more time looking at, you know, what our 2025, 2026 contributions are gonna be to get, you know, into that, the higher realms of, you know, mid-teens to high teens, even to 20% scale, you know, beyond that. But we do think it's possible. I mean, we are already showing the discipline that if we need to, we could take costs out of the business to drive and keep our margins, you know, at that double-digit level.
And what we need to do is, we're focused on that, is continue to scale and grow the business and generate, you know, more profitability over time. And that's exactly what Ed and I are intending to do, is to continue to scale the operating margins over time.
David Budd (Senior Project Manager)
Great. Thanks, guys.
Operator (participant)
Thank you. And as a reminder, to ask a question, please press star one one. And our next question coming from the line of Christian Schwab with Craig-Hallum Capital. Your line is open.
Christian Schwab (Managing Partner, Senior Research Analyst)
Hey, good morning, guys.
Ed Meyercord (President and CEO)
Good morning.
Christian Schwab (Managing Partner, Senior Research Analyst)
So Ed, you know, now that, you know, it's become evident of, of, you know, overearning during supply chain issues, et cetera, et cetera, and competitors not having products, you know, when we look at your business and we baseline modest growth before we entered this period, and I kinda come up with a number of about, you know, $1.1 billion ±, is that kind of what you believe the business, you know. We're a little bit below that run rate in March, a little bit above that or kind of in that line in June. Is that kind of our starting point, from, from your top-line growth initiatives? Is that fair, or is that not the way you think about it at all?
Ed Meyercord (President and CEO)
I think it's fair. We're gonna build out of this, and, you know, what we've said is—and Christian, we use the language, kind of more normalized to comment on the June quarter. And, you know, when you kind of run the math on some growth on that kind of baseline business, you get to the 1.1. So I think that's a fair assessment. Kevin, I don't know if you want to add to that or comment.
Kevin Rhodes (EVP and CFO)
No, I think you're right, Ed. I mean, with Q4 being at that level and then a jumping-off point there, with it being the new normal. We do believe that we will continue to grow the business. We'll have a better growth story in the second half of our fiscal year 2025 than the first half. But in general, yeah, in terms of, you know, range, $1.1 billion is the new normal is about right.
Christian Schwab (Managing Partner, Senior Research Analyst)
... And if you know, and it is Norman's work doing anything about moving to you know selling product as a service you know across the board and putting a mechanism in place to be more aggressive in that? Or is that something you're gonna watch some of the other people in the industry do, to see if there's tremendous customer interest?
Ed Meyercord (President and CEO)
No, I think you're gonna see us be a lot more aggressive. And, you know, we've I mentioned that the triumvirate of Norman stepping in and taking the lead as Chief Commercial Officer. Nabil is our Chief Technology and Chief Product Officer, but he's also, you know, running a cross-functional team on SaaS and subscription. And, you know, one of the things that you're seeing is really nice growth on the subscription line and really healthy margins on that subscription business. And so, you know, as we think about growth, you know, we have plans to continue that growth on the subscription line. Also, we have the benefit of gross margins on that. You know, finally, we made a key hire, Monica Kumar, who's come and joined us.
You know, I think, you know, she's gonna be the glue between, you know, our product orgs and our, and our selling orgs. And I think we'll-we have an opportunity to be much more targeted, and I would say much more aggressive, in direct outreach to the market, more broadly, as well as, more targeted with, with the channel. And we have some really interesting growth opportunities in the channel. So, I think this represents a unique opportunity for Extreme to really step up in the marketplace, and that's how we see it.
Christian Schwab (Managing Partner, Senior Research Analyst)
Great. And then my last question to do with the recent consolidation in the space. You did a big consolidation, you know, years ago and extremely confused your customer base about which products you were gonna support and which products you were not going to support. So I think with that as a backdrop, should set you up, you know, to be well-positioned to take advantage of what could be potential confusion in the marketplace. Do you think that that will help be a competitive advantage for you to gain share?
Ed Meyercord (President and CEO)
We do. You know, it looks like, you know, from the announcement, it looks like the HP was very interested in, you know, the AI platform that Juniper brings to the equation, and that Juniper leadership will be heading the networking side. What does that mean to the massive installed base of Aruba and Aruba technology? It's. You know, it raises a lot of questions, and for customers, it raises an awful lot of questions. Keep in mind, Juniper is coming enterprise, really from a service provider position, and so in terms of the breadth of their portfolio, they are still, you know, Mist was very much kind of driving the efforts. And in terms of the full end-to-end enterprise solution, it's not as robust.
And so how that incorporates and how that gets, you know, built into the Aruba enterprise solution set, there are a lot of questions out there, and I think that's gonna create opportunities for us. You know, we're very focused on a very clean and simple and flexible solution in terms of our universal hardware, in terms of interfacing with one cloud. This presents a very fresh alternative and a very clean alternative for customers that are out there. The other thing that, you know, you're aware of, Christian, from our prior M&A activities is that, you know, they baked a lot of synergy into the formula.
You know, when you look at, you know, $430 million-$450 million of expense coming out of the business, you know, you're talking about thousands of people coming out of that business. And where they come from and how that plays out, again, will create disruption. And as I mentioned earlier, we've gotten calls from-- We're already getting calls from employees and customers and partners, so we think this, you know, this will present opportunities, potentially hiring opportunities and new growth opportunities for us.
Christian Schwab (Managing Partner, Senior Research Analyst)
Great. No other questions. Thank you.
Ed Meyercord (President and CEO)
Yeah. Thank you.
Operator (participant)
Thank you. Our next question coming from the line of Dave Kang with B. Riley, your line is open.
Dave Kang (Senior Research Analyst)
Thank you. Good morning. My first question is regarding bookings. You reported that Asia and Europe were up double digits year-over-year. Just wondering if you can provide any color on North America bookings.
Kevin Rhodes (EVP and CFO)
I mean, the color is, I'd say that's the area where we've been challenged, Dave, in terms of, you know, the bookings. We were close to a book-to-bill ratio of one in the quarter, so that was positive news. But North America was down year-over-year.
Dave Kang (Senior Research Analyst)
Got it. And then so, sounds like, fiscal third quarter, you know, most of the excess inventories will be flushed out. So can we expect fiscal fourth quarter to be sort of like a clean channel inventory?
Kevin Rhodes (EVP and CFO)
Yes, that's, that's exactly our intent, is to get that clean and to have, you know, get normalized in the fourth quarter and beyond.
Dave Kang (Senior Research Analyst)
So it sounds like, based on your-
Ed Meyercord (President and CEO)
I would just add, you know, we look at obviously normalized backlog has happened quickly and more quickly than originally anticipated. And as we look at entering Q4, we look at normalized backlog and normalized channel inventory. So, somewhat of a, you know, a clean slate as we head into Q4 and turn the corner into fiscal 25.
Dave Kang (Senior Research Analyst)
Based on your fiscal fourth quarter guide, revenue guide, you're implying that orders will be up significantly, sequentially from third to fourth quarter, correct?
Kevin Rhodes (EVP and CFO)
Yeah, we've got the E-rate season there. We mentioned that earlier. So we are expecting sequential growth. You know, our two strongest quarters in a year are the fourth quarter and the second and fourth quarter of our fiscal year. So as we think about the June quarter, we got the E-rate season there. We've got a stronger pipeline than we have in the third quarter here, and we've got strong E-rate season coming at us, so we are expecting sequential growth in bookings.
Dave Kang (Senior Research Analyst)
My last question is, Ed, you mentioned that, fiscal 25, you're expecting meaningful growth. Just wondering, if you can kind of provide additional color. Should we expect, like, double digit? Would that be meaningful?
Ed Meyercord (President and CEO)
That's correct, and that's how we're thinking about it, David. So we looked at, there's gonna be a tough comp in the first quarter, given that we landed, you know, $353 last year, or this, you know, for Q1 of this year. Then, you know, I think you get to the second half as we turn the corner into calendar 2025.
Obviously, we'll have a very much easier comp in Q3, but we expect that our marketing initiatives, you know, our go-to-market initiatives in terms of the core business, and then the realization of these new commercial models, that are growing, but they haven't really had an impact on our financials yet, that by the time we get to that calendar 25 timeframe, you'll start to see a much more meaningful impact of those initiatives coming into play and adding to growth over just what we would consider to be kind of core market growth.
Dave Kang (Senior Research Analyst)
Got it. Thank you.
Operator (participant)
Thank you. Our next question coming from the line of Alex Henderson with Needham. Your line is open.
Alex Henderson (Senior Analyst)
So your commentary about $1.1 billion being the run rate revenue number and the guide for the fourth quarter of the fiscal year at $265 million-$275 million is quote-unquote "more normalized" is a little bit troubling, considering in the fourth quarter of 2019, you did $252 million, and for the full year 2019, you did roughly a billion at $995.8 million. And that's 2019. That would put a growth rate to your quote-unquote "normalized" $1.1 billion of around 2.5% over that timeframe. And certainly, you would not say that that's a reasonable growth rate.
So the question I have for you is: What is the real normalized number if you were to adjust, you know, these numbers to, to fully normalize the, the baseline? You say $1.1 billion is normalized, but I don't think you believe you're a 2.5% growth company. So can you please adjust, that language a little bit for us, in terms of understanding how much the fourth quarter is still unnormalized as opposed to more normalized? And what would be the run rate of revenue if you had a fully normalized full year? Thank you.
Ed Meyercord (President and CEO)
Yeah, Alex, so, let me, Kevin, just-
Kevin Rhodes (EVP and CFO)
Yeah.
Ed Meyercord (President and CEO)
Hit the high level, and then I'll let you come in and fill in. But Alex, we're obviously it's a pretty massive reset here in our Q3, you know, with a lot of cleanup involved. We have new teams, and we have a new approach that are coming in and looking to sort of build off of a base and resetting the foundation. Whether or not it would be normal seasonality going into Q1, or is there still conservatism in that, you know, that Q4 number, where you could still see some growth, sequential growth coming out of that?
You know, we wanted to provide the outlook for our fiscal Q4 to provide, again, what we're calling more normalized. Will that be a fully normalized bookings number? You know, there, I think we need some work on that, and we'll definitely be coming back to you with a more refined outlook on how we see the evolution of booking, especially considering these other commercial models, which, quite frankly, we have not included in our outlook.
Kevin Rhodes (EVP and CFO)
I think that's the key, Ed. I think that the MST model is very nascent, very early. The ESPO model we have, as well as private subscription offers, also very early in its stages. This is based on the run rate of the existing business and products. So we've got ZTNA coming on board. We've got Wi-Fi 7 coming on board. We've got new products, innovations coming out that will continue to give us that tailwind in the future. Right now, we're just not prepared to go and guide for 2025 or beyond, but wanted to give the, at least the normalized Q4 at this point.
Ed Meyercord (President and CEO)
And Alex, the other comment to make is that, you know, we have seen. You know, earlier we saw Asia Pacific recovering, you know, more quickly. And then we've seen EMEA come with year-over-year growth that Kevin mentioned. And we just haven't seen it yet in the Americas. And so the timing of that Americas recovery to the normal buying cycle and how all of that kicks in from a timing perspective, and, you know, we have a lot of large deals that are in the hopper for us. Really exciting from a brand perspective in terms of where we are in these competitive processes.
But they're very lumpy, and it's, I think it's a little challenging for the team right now to stick their necks out and call some of these larger deals, if that makes sense.
Alex Henderson (Senior Analyst)
That's not my problem. My problem is the guidance commentary that normalized full-year revenue run rate would be at $1.1 billion, which is obviously still incorporating a significant amount of backlog adjustment. And the comment that more normalized implies that it's almost normal, and it's certainly not in the fourth quarter. So what is the nut that you're assuming for the fourth quarter? What would be fully normalized fourth quarter? I mean, can you give us some sense of what more normalized means in terms of the scaling of it?
Ed Meyercord (President and CEO)
Yeah, it—I mean, I'm not sure we're there. I'm not sure we're there yet. I mean, if we look at a $275 number, yeah, if we look at a $275 number in Q4, and obviously, you know, there's the math to get to $1.1, when you just roll that over. So there's not—I guess, you would say there's not a lot of growth built into that for a normalized fiscal 2025, Alex.
Alex Henderson (Senior Analyst)
Well, I mean, to you, you did $253 in fourth quarter of 2019, and now you're telling me $275 is close to normalized?
Ed Meyercord (President and CEO)
Well, I mean, Alex-
Alex Henderson (Senior Analyst)
Difficult trying to reconcile those two numbers.
Ed Meyercord (President and CEO)
Well-
Alex Henderson (Senior Analyst)
You're not even close to normalized in that context. So how big is the nut? Are we still absorbing $30-$40 million in the June quarter of inventory absorption?
Kevin Rhodes (EVP and CFO)
Yeah, Alex, I mean, the thing that you're missing, I think, is the North America is still recovering. It was down year-over-year.
Alex Henderson (Senior Analyst)
I'm not missing anything. I'm asking what the nut is that you're assuming when you give us the guidance for the fourth quarter in terms of the absorption in the recovery in the environment.
Kevin Rhodes (EVP and CFO)
We're assuming-
Alex Henderson (Senior Analyst)
How big is that nut?
Kevin Rhodes (EVP and CFO)
We're assuming no incremental amount, as you say, nuts in the fourth quarter. We assume absorption will occur in the third quarter, with no more absorption needed in the fourth quarter. What we need to see is the market. The entire market is down right now. This is not just an Extreme issue. This is an exogenous issue that's, you know, across all IT and all networking. And so where we hope is that the market starts to come back, and that we will see the North American market come back and appreciate your point, but, like, we've got to get the whole market to come back and spend, you know, across the board to help.
Alex Henderson (Senior Analyst)
Great. Thanks.
Kevin Rhodes (EVP and CFO)
Okay.
Operator (participant)
Thank you. I will now turn the call back over to Mr. Ed Meyercord for any closing remarks.
Ed Meyercord (President and CEO)
Okay. Thank you. Thank you, everybody, for participating on the call, and obviously, we'll have call backs with many of you. And we appreciate all the good questions. I also want to take time to thank our employees, and customers and partners who are participating here and for all the work as we're transitioning through this cycle, and putting ourselves on more normalized footing, as we've been talking about. Yeah, we are absolutely looking forward to putting this chapter behind us. And yeah, we're committed to innovating in the industry, and continuing to deliver new solutions, and we're committed to these strategic initiatives, that will drive long-term growth for us at Extreme.
Thanks, everybody, and have a good day.
Operator (participant)
Ladies and gentlemen, that ends our conference for today. Thank you for your participation. You may now disconnect.