Extreme Networks - Q4 2023
August 2, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Extreme Networks' fourth quarter fiscal year 2023 financial results conference call. At this time, all participants are on a listen-only mode. After this week'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 automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand conference over to you, speaker host. Stan Kovler, Head of Investor Relations, please go ahead.
Stan Kovler (VP)
Thank you, operator. Good morning, everybody, and welcome to Extreme Networks' fourth quarter and fiscal year-end 2023 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 CFO, Kevin Rhodes. We just distributed a press release and filed an Form 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. Our financial disclosures on this call will be 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 our Form 10-K report for the period ended June 30th, 2022, and subsequent Form 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 prepared remarks, we will take your questions. Now I will turn the call over to Extreme's President and CEO, Ed Meyercord.
Ed Meyercord (President and CEO)
... Performance, with revenue growth accelerating to 31% in the fourth quarter and 18% overall for the year. This is the second consecutive year of double-digit organic growth. We also delivered $1.09 a share in EPS, up 42% year-over-year, and we expect the bottom line trends to continue, with earnings growing faster than revenues. Our free cash flow doubled in fiscal 2023, and we ended the year with a net cash position, even after paying down $80 million in debt and buying back $100 million of our stock. We outperformed our original top-line outlook for fiscal 2023, and based on industry analyst estimates, outgrew the market by 2 times. This, combined with the increase in volume of larger deals and new logos, is a clear indication that we're taking share from our largest competitors.
Customers recognize that Extreme offers the simplest and easiest to manage end-to-end enterprise networking platform in the industry. Our One Network, One Cloud, One Extreme solution, enhanced with our AIOps capabilities, excels relative to the complex and high total cost of ownership solutions of our competitors. With this differentiation, new growth vectors, and the higher level of our team's execution, I am confident at our continued growth outlook. With today's modern network as a connected tissue in enterprise digital transformations, the demand for our advanced cloud-driven solutions remains strong. We continue to elevate both our competitive position and the awareness of the Extreme brand in the market, resulting in funnel growth. Increasingly, customers are recognizing our value proposition and placing their trust in Extreme to deliver better outcomes for their mission-critical network deployments.
Given our market share position, we're benefiting from being in such a large and growing market, where small share gains have a big impact on Extreme's financial results. In our fourth quarter, bookings grew mid-single digits sequentially and were in line with normal seasonality. We expect normal seasonal trends going forward as industry lead times return to normal. Our U.S. business was particularly strong in Q4, partially offset by Germany and the APAC region. With this backdrop, we expect revenue growth to remain strong in fiscal 2024 and to start the year with mid-teens growth in Q1. Our competitive differentiation and continued success is being driven by our One Network, One Cloud, One Extreme solution. At the core of our one network promise is our universal hardware portfolio.
This is the most flexible, highest performing, end-to-end networking hardware in the industry, and with Extreme's unique and highly differentiated fabric, we make it simple to orchestrate applications and policy across the entire campus, from the core to the wireless edge and across the wide area network. We bring enhanced security, the ability to segment networks and zero-touch provisioning, eliminating confusion, complexity, and the need for additional IT staff. This is in stark contrast to our competitors' fabric solutions, which were designed for service provider and data center networks and not meant for campus. With one cloud, we're the only provider to offer choice in how customers manage their networks: public, private, edge, or hybrid cloud through a single interface.
We're the only vendor that can manage both Extreme and third-party hardware, providing enhanced visibility, flexibility, and the ability to seamlessly upgrade to an Extreme network at your own pace. Finally, our CoPilot AIOps capabilities provide proactive insights and analytics to improve network availability and management. With One Extreme, we deliver the industry's most simple commercial terms for licensing, with 1 price for all devices. Our licenses are portable and poolable, providing unmatched value and simplicity. This is in stark contrast with our competitors, who have complex, tiered licensing models that are notorious for hidden costs. Customers increasingly view their network as a strategic asset to streamline operations, power and scale new services, and reduce business risk. Our AIOps solutions are getting traction with customers as they look for new ways to leverage the network to drive better business outcomes.
This is evidenced by the 182 customers that spent over $1 million with Extreme in fiscal 2023. Some highlights from our fourth, fourth quarter include wins with the University of Mount Union. They upgraded their network with our end-to-end wired and wireless solution. The new network provides seamless AI and fabric-powered automation and optimization across the campus, which improves IT productivity. Northampton NHS Trust, a leading hospital in the U.K., needed to upgrade its network to keep pace with increasing bandwidth demands generated by IoT medical devices, AI and medical applications, and Wi-Fi in patient rooms. With the new Wi-Fi 6 network, they are simplifying IT operations and improving patient care. One of the world's largest ski mountain conglomerates, with 50 resorts across 15 states and 3 countries, chose Extreme after deep frustration with one of our largest competitors.
Our value proposition of creating one network managed by one cloud was essential to the customer in order to conduct a seamless migration, with visibility and management capability to both the legacy and new network environments from our cloud, eliminating the risk of rip and replace. We extended success in retail with a key win with a leading grocery chain in Mexico. With nearly 900 locations, the company is upgrading its network with analytics and cloud management capabilities to support a better retail experience. They're also leaning into AIOps with our CoPilot solution to help augment their IT staff. Lastly, we expanded our footprint within MLB and the NHL, winning new deals with the Arizona Diamondbacks, Philadelphia Phillies, and Philadelphia Flyers, cementing our leadership position in sports and entertainment venues.
Extreme was once again recognized by Gartner Peer Insights as the customer's choice for enterprise networking for the sixth consecutive year. We're recognized for our strength in product innovation, ease of deployment, and outstanding customer support. We're also named one of the best places to work based on our Flex First remote work policy, our culture of inclusivity, and employee satisfaction. This quarter, we were able to bring our product lead times down again as our supply chain environment continues to improve. We have the benefit of a healthy backlog of customer orders, with request dates that spread fairly evenly through the end of our fiscal year. End customer orders remained firm and distributor orders have normalized, giving us confidence in our outlook for this fiscal year. We continue to expect our backlog to settle in a range of $75 million-$100 million in Q1 2025.
Our exposure to the fastest-growing areas of the networking market, share gains, new go-to-market partnerships, provide ample growth opportunities to drive double-digit growth long term. We are forecasting market share gains with channel partners, leveraging the strength of our unique solutions in the enterprise market. We also have an opportunity to expand our subscription business to our entire hardware portfolio in fiscal 2024. We introduced a disruptive managed services platform that will expand our go-to-market footprint and add a new growth vector for Extreme as we progress through the year. I'm looking forward to our Investor Day, currently scheduled for November seventh, at the NHL headquarters in New York City. We will provide details soon. We hope to see you there.
With that, I'd like to welcome our new CFO, Kevin Rhodes, and ask him to cover the financials in his inaugural earnings call with Extreme. Kevin?
Kevin Rhodes (EVP and CFO)
Thanks, Ed. Let me say, it's been a pleasure for me to join Extreme at a time when its financial position has never been stronger. I'm encouraged not only by our financial performance, but also our competitive differentiation in this large market with great opportunities to take share. In my first couple of months on the job, I'm impressed with the company's culture and the level of talent we have in this organization. At all levels in our company, I see strong sense of urgency, ownership, curiosity and commitment, and a real desire to win. During fiscal 2023, we once again demonstrated the level of execution this management team expects, and we are committed to continuing that in the future. Let me get into the numbers. First, I'll start with the fourth quarter.
Revenue was $363.9 million and grew 31% year-over-year, and 9% quarter-over-quarter, exceeding the high end of our expectations entering the quarter. Product revenue accelerated to $261.7 million, or 40% growth year-over-year, and 9% sequentially, reflecting continued improvement in our supply chain environment. We achieved strong double-digit growth in both campus switching and wireless LAN, partially offset by a decline in data center revenue. Our SaaS ARR grew 25% year-over-year to $129 million, up from $103 million in the year ago quarter. Driven by the strength of our renewals, subscription deferred revenue was up 38% year-over-year to $217 million.
Total services and subscription revenue was $102.2 million, up 12% year-over-year. This growth was largely driven by the strength of our cloud subscription revenue, which was up 27% year-over-year. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $501 million, up 25% year-over-year and 8% sequentially. Our gross margin came in at 60.2%, up 110 basis points sequentially, and 320 basis points from the year-ago quarter. We attribute this to improvements in product gross margin, due to higher revenue and an improvement in the supply chain and distribution costs, as well as product mix.
Fourth quarter operating expenses were $156 million, up from $132 million in the year ago quarter, and up from $144 million in the third quarter of 2023, reflecting higher investment in R&D and sales and marketing expenses to support our higher revenue growth. Our strong revenue growth, gross margin expansion, and operating leverage contributed to another record quarter for operating margin at 17.4%, up from 9.6% in the year ago quarter and up from 15.6% in the prior quarter. To that end, fourth quarter earnings per share were $0.33 at the high end of our guidance entering the quarter. For the full year, fiscal 2023, revenue of $1.3 billion grew 18% from the prior year on product revenue growth of 22%.
During fiscal year 2024, we expect continued strong product revenue growth, given the growing interest in our solutions by customers and the ongoing normalization of our backlog. Wireless product revenue grew at over twice the rate of our switching product revenue during the year. Recurring revenue is another positive story here at Extreme. We generated $380 million of subscription, maintenance, and a small amount of professional services revenue. This is highly predictable and visible revenue for our company, and we continue to drive more recurring revenue over time. As we ship products from backlog, it is generating a tailwind for SaaS growth. Gross margin for fiscal 2023 ended the year at 58.9%, up 50 basis points year-over-year, based upon improvements in supply chain related costs, price increases, and cost absorption, owing to higher revenue and larger scale.
Operating margin of 15.2% grew 290 basis points from a year ago. Operating expenses as a percentage of revenue improved to 43.7%, which is better than our Investor Day guidance. GAAP EPS grew 76% from a year ago. Non-GAAP EPS of $1.09 per share grew 42%, representing the significant operating leverage we have in our model. We also strengthened our balance sheet with strong cash generation and the refinancing of our debt. We ended the quarter, the end of the year, with net cash position of $10 million, after repurchasing $25 million worth of our shares at the average price of $17.32 per share.
The $235 million of free cash flow we generated during the year represents an 18% free cash flow margin at the high end of our long-term model. Of this amount, $75.5 million was generated in the fourth quarter, driven by higher gross margins and EBITDA. Lastly, at the end of fiscal 2023, we refinanced our long-term facility with a $200 million term loan and $150 million of available revolving credit. The interest rate is currently just over 7% annually. Our balance sheet remains in excellent condition, with a leverage ratio well below 0.5 turn. Now, turning to guidance. We remain optimistic about the enterprise networking spending environment and our ability to take share. Customer spending trends are reverting back to normal seasonal patterns, given the improvements in our networking supply chain.
As a reminder, the fourth quarter tends to be a seasonally higher quarter than the first quarter. Our gross margin outlook is also benefiting from an improved supply chain, as expedite fees and shipping costs continue to improve. For the first quarter, we expect the following: Revenue to be in a range of $342 million to $352 million. Gross margin to be in a range of 59.5% to 61.5%. Operating margin to be in a range of 15.3% to 17.6%, and earnings to be in a range of $0.28-$0.33 per diluted share. All in, I see tremendous opportunity for Extreme to grow our business, accelerate our revenue contribution from SaaS, and improve our margins and cash flow.
I look forward to laying out some of our plans at our Investor Day later this year. With that, I'll now turn it 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 one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by while we compile the queue roster. First question coming from the line of Alex Henderson with Needham. Your line is open.
Alex Henderson (Analyst)
Great. Thanks so much. Nice print, and thanks for the good performance for the year. I, I was hoping you could give us some sense of, you know, what your expectation is as we look out at the full year. You had talked about 15% plus growth over the 3-year period, I think, earlier. Obviously, you've outperformed that in 2023. Is it reasonable to think that you're still on track, given the backlog for another 15% plus type year in 2024? Just operationally, can you give us a little bit of a guidance on the interest and tax line for the FY 2024 period? Thanks.
Ed Meyercord (President and CEO)
Thanks. Thanks. Thanks, Alex. Kevin, as, as far as, outlook for the year, do you want to take that one?
Kevin Rhodes (EVP and CFO)
Yeah, I'm happy to. I would say, you know, Alex, we're very much on track with what we laid out already from fiscal, you know, 2023 to 2025 outlook. We feel good about that. I would say, yes, we, we feel that we are still going to be in the mid-teens growth for the full year.
Alex Henderson (Analyst)
Then on the interest rate? Interest rate.
Kevin Rhodes (EVP and CFO)
Yeah. On the interest rate, let me just pull that up, and we can certainly, you know, talk through that. You know, we, we believe that, you know, we're feeling comfortable, you know. Taxes for the year, we believe are going to be somewhere, again, we're looking for the full year, about around 22%, you know, on full year tax rate.
Alex Henderson (Analyst)
That's non-GAAP?
Kevin Rhodes (EVP and CFO)
Non-GAAP, yep. Yeah, that's what I'm talking about, non-GAAP. When we're thinking about, you know, interest, we have $200 million, you know, outstanding. We've got about 7% cost of debt, we've got about, you know, 5-- I'd say 5%, generation against that, so a 2% spread, but not all $200 million, you know, debt, all the debts outstanding. I'd say we generally think that we'll probably have about, you know, $150 million-$200 million of, of investment, you know, income off that 5%. I think they're going to somewhat break even, or be slightly, you know, in interest, you know, expense, not a tremendous amount.
Alex Henderson (Analyst)
Last year, in 2023, you did $12.7 million in interest expense and other income. Is it reasonable to think that that'll come down, you know, very slightly?
Kevin Rhodes (EVP and CFO)
Yeah, I think it will. I, I, I think it will come down.
Alex Henderson (Analyst)
Okay. Thank you.
Operator (participant)
Thank you. Our next question coming from the line of Timothy Horan with Oppenheimer, the line is open.
Timothy Horan (Analyst)
Thanks, guys. 2 questions, if you don't mind. I'm getting a lot of the same questions, but why are you doing so well with bookings at this point with very large customers? Why the, why the success in large deals? Can you talk about your, your new ExtremeCloud Edge product? Has that been launched? You know, maybe some of the learnings from that. Thank you.
Ed Meyercord (President and CEO)
Thanks, Tim, and, yeah, I think, you know, what's happened, we talked about it in my comments. I talked about the volume of large deals. IT deals that are over $1 million, growing. I think this is, this is really about the upleveling of Extreme in the marketplace. You know, we've been in the leadership quadrant at Gartner now for five years running, and our position only strengthened. It was last year that we actually went in front of Cisco, and as enterprise customers are looking to upgrade their networks, they're considering Extreme now more than ever before. People are surprised to learn that the kinds of customer relationships that we have.
When we win Kroger, which is the world's largest grocer, and we're building out the world's largest cloud-managed network, you know, that was a hotly contested piece of business. All the major competitors were there, and Extreme won out. You know, when we, when we win one of the world's largest cruise lines, where each ship is 4 -- $5 million dollars, and, you know, we win the first ship in a fleet of 43, and the customer is thrilled with the difference in experience in dealing with Extreme versus dealing with one of the largest competitors, that just opens up the door, you know, for more. Then we can take these reference accounts, and enterprise customers are surprised to learn that, you know, every time you get a FedEx package, it's run through an Extreme network.
Every time you fly in the U.S. airspace, that you're flying on an Extreme network, technically, because the FAA runs on Extreme. You know, these kinds of stories, you know, are becoming more and more known out in the industry, and so our reputation has gone up. What it's doing is it's giving us more opportunities. When we come in with our One Network, One Cloud, One Extreme solution, which is really about this seamless end-to-end hardware, super flexible, high-performance hardware, all managed within one cloud, end-to-end, our competitors don't have that. When you look at the commercial terms and the simplicity of our licensing, the quality of our service, and especially the performance of our fabric, which is truly the only campus-grade fabric in the industry....
It really turns heads, and it's just creating a lot more opportunity. Here it's about success begetting success. You know, I mentioned Kroger, you know, they're in the middle of a large acquisition. That initial deal was for wireless. We have a, you know, larger switching opportunity there, and then when they close that acquisition, they standardize on our technology. Just some examples of kind of what's happening in the market. You know, our competitive position, it was truly differentiated, and then our brand, we've upleveled our brand. That's really helping us get the attention. By the way, that also plays into the channel community because partners realize that they see that we're winning these larger deals, and it allows us to gain more mind share within the channel.
That's been, that's been a big part of it. In terms of Cloud Edge, Tim, we know you were, you were over in Berlin at our user conference. You know, this is, this is a big deal, especially in where, you know, sovereign data, becomes, you know, more and more important. You know, we have we have begun to sell, our Cloud Edge, not surprisingly, to European customers. One of the things I mentioned in our notes is that we're building, and we, we, we've just come out with our managed services platform, which is a brand new growth vector for Extreme.
You know, more on this later to come, but, you know, here again, you know, this is where, you know, having an edge cloud that could be part of an MSP service offering can be very powerful. Yeah, I, I'd say early innings on Cloud Edge, we have a lot of a lot of interest, and, and then, it's gonna be an important part of our platform in the managed services going forward.
Timothy Horan (Analyst)
Just, on Cloud Edge, are you getting much interest in doing AI inferencing, you know, or even, you know, some maybe, training, you know, on this infrastructure?
Ed Meyercord (President and CEO)
I, you know, Tim, I think it's early, early innings, and it's, it's, it's a little too soon to call. I think right now, the, the major, the, the major interest is around the, you know, cloud sovereignty and sort of keeping data, you know, in market, if you will. Obviously, with European countries, that's really important. There's a lot of examination going on right now, and, you know, our teams are, are actively working a lot of opportunities, you know, in markets. Japan is another market where maintaining the data in market becomes really important. I'd say that's, that's the primary interest today. I think more to come on that.
Timothy Horan (Analyst)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question coming from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is open.
Eric Martinuzzi (Analyst)
Yeah, I'm looking for a little bit more detail. You talked about, I, I, I think it was weakness in Germany and APAC. Is that something that's, you expect to get resolved in the relatively near term?
Ed Meyercord (President and CEO)
Yeah. Hi, Eric. Yes, we do, and actually, we're seeing it, we're seeing it happen now. You know, Germany went into a recession, and it was the first time that the country went into recession since World War II, and so it definitely created a bit of a shock. You know, it slowed down some of the buying cycles, and that has impacted us for the last six months or so. We've seen encouraging signs. We've seen the funnel pick up, we've seen larger deals come back into the funnel, and we see that strengthening. The other key driver is what we call our run rate business. This is really coming from the channel. The run rate business dried up with supply chain constraints, and we're seeing that come back.
That, that also plays a big role in EMEA and in German markets, where we have a very deep channel and partner community, where we see a lot of that run rate business. The signs are encouraging for us. You know, we feel like we bottomed out there, but we're coming back.
Eric Martinuzzi (Analyst)
Okay. And then,
Ed Meyercord (President and CEO)
With Asia Pacific, I would say the same thing. You know, in last quarter, we saw the, you know, run rate business as well as some of the larger project deals go away, and now we're seeing them come back with strength. Asia Pacific is usually one of the first markets to come back, and we're, we're seeing that happen, and we're also seeing it happen in Germany. Interestingly, in EMEA and the rest of the markets, they remain very strong, and the demand in the U.S. market remains very strong.
Eric Martinuzzi (Analyst)
Got it. You talked about share gains, and I'm wondering if you're doing anything different this fiscal year with regard to channel partner engagement or incentive to really capitalize on what you've characterized as your, you know, your, your rising reputation to, to continue to expand those gains?
Ed Meyercord (President and CEO)
Absolutely, Eric. You know, what we've done is We've, we've got named partners, which are just over 200 partners that are our target, and more strategic partners, where we put in place specific business plans with them with quarterly business reviews. I can tell you the growth targets there are, you know, significantly higher than what we're calling for the company. The interest level is quite high. I think, you know, with the supply-constrained environments and some of the macro challenges, they've been pinched by some of the larger players, and they're excited about the opportunity to work with Extreme. For us, it's, it's a big opportunity to expand wallet share. There's, there's our name partners, there are new partner opportunities that we're looking at.
I mentioned the MSP platform that we're building. We will attract new partners, higher volume partners, with our platform. Finally, with non-name partners or the, or the larger base of what we call authorized partners, when the run rate business comes back with supply chain loosening, we'll see more volumes out of those partners as well. The answer is yes, we see a huge opportunity in the channel. There's clearly channel fatigue with some of the larger players and some of the, the issues with, with their solutions in the marketplace, and then some of the issues with their commercial practices.
Eric Martinuzzi (Analyst)
Understand. Congrats on the quarter, and good luck in FY 2024.
Ed Meyercord (President and CEO)
Thanks, Eric.
Eric Martinuzzi (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question coming from the line of Christian Schwab with Craig-Hallum. Your line is open.
Christian Schwab (Analyst)
Hey, hey, good morning. Thanks for taking my question. Ed, I'm just wondering if you could go through the puts and takes of, of, you know, upside, you know, or potential risks to the 15% guidance for this year. We have supply chain normalizing. We kinda have a mixed geographical situation. We have, you know, tremendous shown success in market share gains. We kinda have a mixed geographical outlook for the year by people other than myself. I'm just wondering, you know, as we, you know, have a conversation this time next year, you know, what are the one or two things that would make that 15%, 20%, and what would be the one or two things that maybe put it at risk?
Ed Meyercord (President and CEO)
Sure. Thanks, Christian, and, you know, you mentioned geos. We have considerable strength in Americas. The growth was very strong throughout the year in Americas and in Q4, we see that continuing. I, I made the comment on the call earlier, and you're familiar with this, but again, given our relative market size as a, you know, call it 6%, 7% share player in the industry, you know, there are these large crumbs. Small share gains for us have a big impact on our financial statement. It doesn't take a lot of market share for us to grow our top line and hit that target that we've laid out there.
In terms of geos, EMEA is our second-largest geo market, and it is very healthy. The, the challenge for us was specifically in Germany there. As I mentioned earlier, we're seeing, we're seeing them start to come out, and we're seeing strengthening in the funnel and the forecast with Germany. Importantly, there's this run rate business. I'll come back to that in a second. Finally, APAC, we have new leadership and strengthened relationships, with distribution as well as channel there. Again, I, I think if I look at our, the health of our funnel, globally relative to what we're calling, I'd say we, we have the strongest funnel in that region today. So that.
Christian Schwab (Analyst)
Mm-hmm.
Ed Meyercord (President and CEO)
that's changed pretty quickly. So we're, we're very bullish on Asia Pacific and a, and a sharp rebound, I'd say at a, at a, at a higher growth, growth rate. I'd say with EMEA, we think the other markets are gonna pick up the slack, in Germany, and then we'll see that recover, and then we see continued strength in, in the U.S. market. One of the things we're doing is we're doubling down on our certification investment. We, we are opening up fairly large opportunities, that we haven't had in the past in the federal space. Also, our commitment to certifications are helping out what's happening in SLED, with state and local governments, as they look more and more to federal certs. This is, this is providing some wind in our sails and opening up some new opportunities.
The run rate business is important to mention because if we look at run rate, you know, at its peak, generating in a call between $15 million-$20 million a quarter, you know, we saw that, you know, cut in half or more with the slowdown of supply chain. As that returns to normal, that's gonna provide us with some tailwinds.
Christian Schwab (Analyst)
Mm-hmm.
Ed Meyercord (President and CEO)
We, we do have, I mentioned, some new growth vectors, with commercial terms. MSP is really us packaging our existing portfolio and creating a very simple platform, and it's really about commercial simplicity, and, and then the strength of our One Network, One Cloud, One Extreme, that is got-- it's generated a lot of interest out there with some of our existing partners, as well as some new partners that are a lot larger than the, the traditional profile of an Extreme partner. We're guardedly optimistic. We've just launched the platform, and that will ramp throughout the year as we turn the corner to 2025. I mentioned that we're, we're enabling the entire portfolio at Extreme to be run and managed from the cloud, and this is gonna open up growth and subscription.
This will happen at the beginning of our calendar year, and you'll see us build momentum there. We also have some other initiatives that we believe will be disruptive and create high growth with some very large partners, like Verizon, for example, very excited to run with Extreme. We're being added to their selling list. I mean, these are the upside opportunities. Obviously, from a macro perspective, there are always macroeconomic risks. You know, I, I think, you know, we've, we've, we've seen that, we've, we've heard about that. There's always something unforeseen that, you know, kind of comes around the corner.
you know, at this stage of the game, you know, we've just gone through regional director reviews, going around the world, examining and scrubbing pipeline and funnel. you know, at this stage of the game, we, we feel very confident in the demand outlook.
Christian Schwab (Analyst)
That's great. No other questions. Thanks, Ed.
Ed Meyercord (President and CEO)
Thanks, Christian.
Operator (participant)
Thank you. One moment for our next question. 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 your competitive landscape. Just wondering if you're seeing much about Juniper in various enterprise enterprise segments. Seems like they've been very vocal about their success in enterprise segments
Ed Meyercord (President and CEO)
Yeah, Dave, thanks. You know, good question, and, and, you know, I would say, if we had to pick a competitor where we go toe-to-toe, that is, it is, you know, most competitive out there, it's probably Juniper and their enterprise solution today. Juniper and Extreme are about the same size in the enterprise space. We don't see them as much as we see Cisco and HPE at 16 and at 60 and 15%. 75% of the market that we run into is with Cisco and HPE, and then to a much lesser extent, Juniper, but, but, but they're out in the market. We are seeing them more, and, and I think they're, they're experiencing some of the same success that, that we are.
We do have competitive differentiation with Juniper, as you know, and the market knows. Juniper has been a service provider company first. They acquired Mist, which is a Wi-Fi, was a Wi-Fi only, a cloud Wi-Fi only company. Now they're trying to migrate their switching solutions, and they're trying to push that into the Mist framework. It's more complicated than Extreme. We have advantages with respect to our cloud, and 1 cloud, where versus a multi-cloud environment. We have advantages around cloud choice, and we also have advantages with our network and our universal hardware platform that's end-to-end. I'd say the big differentiator for us in the market today is our fabric. It's cloud differentiation and fabric.
We are the only player that has a truly differentiated campus fabric. Juniper Networks has an IP fabric, you know, designed for data center. It just doesn't work well in a campus environment. When customers see our fabric, and if we do a comparison head-to-head, we're really blowing away our competitors, and that's kind of a secret sauce for us right now. As people learn about the ease of provisioning network, the ease of deploying policy into a fabric that automatically updates the entire campus environment. Most of the data center fabrics are static by definition. Ours is dynamic and flexible, and customers really don't believe it when it's pitched in PowerPoint, but when they see it, and then they experience it, they're blown away.
This has been a huge factor for us winning, and, you know, it's one of our, for us, it's a, it's a big competitive advantage for us against Juniper.
Dave Kang (Senior Research Analyst)
Thank you. I guess, my follow-up question is, you know, they've been very vocal about their AI capability. What is your strategy, AI strategy going forward?
Ed Meyercord (President and CEO)
Yeah, I mean, look, we, Extreme and Juniper, you know, are the, are the leaders in the space in terms of AIOps. You know, we have different, we have different capabilities, but, you know, this is... You know, I, I, I, I go to Kroger, right? I mean, we, we won Kroger, and obviously, you know, they want to build the grocery store of the future, and that hinges on AI capabilities and AIOps. They're looking to automate their environments. They're looking for unique insights, actionable insights. When we look at our differentiation versus Juniper, I'd say it's about the quality of actionable insights that come from our AI ML tool.
Yeah, this is, you know, this is where we're focused, Dave, and, I would say, you know, Juniper is, is very good at marketing, their capabilities here.
Dave Kang (Senior Research Analyst)
Thank you.
Operator (participant)
Thank you. Our next question coming from the line of Greg Mesniaeff with Westpark Capital. Your line is open.
Greg Mesniaeff (Analyst)
Thank you. Thank you for taking my question. Ed, just a high-level question for you. If, if just for argument's sake, one of your strategic goals were to come true in its entirety, and your entire subscription base transitioned to a subscription model, how would that impact product revenue and revenue growth and the timing of revenues? Thanks.
Ed Meyercord (President and CEO)
Thanks, Greg. You know, it's a good question. If you look at, if you look at today, if you look at our portfolio and, you know, what we can manage from the cloud, it's, it's about, it, you know, it's, it's, it's less than, it's less than 50% of our installed base, but in terms of what we're selling, it's probably in the 60% range. The idea that we could, we could increase the volume from 60% to 100%, is, is, is obviously a big deal for us. There will also be an opportunity for migrations of our existing base, which would accelerate, the subscription revenue as well.
You know, our, our solutions, the, the, the current solutions that we're offering today, where we have our subscriptions being tied to hardware, some of the new growth initiatives we have, we are untethering the hardware in a way where we'll be able to sell subscription, cloud subscriptions, and software subscriptions that are untethered to our hardware, and that obviously will, will create, you know, a unique growth opportunity.
Greg Mesniaeff (Analyst)
Thanks. As the sales mix continues to transition to software and subscription, would the impact on hardware revenue be in any way impacted negatively?
Ed Meyercord (President and CEO)
Well, I, for us, you still need hardware and a network. I, I think it's our subscription differentiation, our, our cloud differentiation, you know, our fabric capabilities, that, that when, when we win, when we win because of our cloud story and our AIOps tools and our AIOps stories, it pulls through the hardware. As people are looking at building the network of the future and modernizing their infrastructure, and they consider our capabilities as it relates to software and, and what we can do with our cloud, it helps us take share, and it helps us in, in winning that business that pulls through hardware. I would say, no, this is, this is really about us picking up share.
We can lead with, with our software capabilities, our cloud capabilities, AIOps, and then when we win, we pull through the hardware.
Greg Mesniaeff (Analyst)
Great. Thank you.
Operator (participant)
Thank you. Our next question coming from the line of Mike Genovese with Rosenblatt Securities. Your line is open.
Mike Genovese (Analyst)
Thank you very much. Can we get just an update on the backlog? Last quarter, you said 5 times normal. Do we have a metric for this quarter?
Kevin Rhodes (EVP and CFO)
Mike, we said last quarter that we were not going to, you know, give, you know, we were gonna move away from giving a specific backlog number each and every quarter. I think what Ed said in his prepared remarks is that our backlogs now, we feel like it will start to normalize throughout 2024 and into Q1 of 2025. We feel good about the level of backlog we have. For instance, it's, you know, primarily, I'd say 90+% is all end customer orders at this point, and so the distribution, you know, orders that we had, you know, in the past have basically worked themselves through the system, especially with supply chain getting better.
We feel good about, you know, those end customer orders and the timing of when those orders need to be, you know, shipped to those customers, based on their own I'll call it, like, you know, upgrade cycle and whatnot. We feel like it'll come down fairly evenly throughout the year and into Q1 of 2025. Feeling good about the level of backlog that we have, you know, and, and, and the, and the timing of that coming out.
Mike Genovese (Analyst)
Okay, that's helpful. What about an expectation, you know, since we're 3 months later here, just an expectation for when orders might turn positive year-over-year? Do you have a view there?
Kevin Rhodes (EVP and CFO)
Well, orders turning positive year-over-year. I mean, I mean, we expect that as a growing company, you know, we expect orders to continue to grow throughout the year in 2024. I would say, you know, each quarter we are expecting, you know, continued improvement in growth year-over-year.
Ed Meyercord (President and CEO)
I think, you know, Mike, it, you know, from pointing to the... if you recall last September quarter, we had a price, an October 1st price increase that we put in place and that pulled in a huge amount of order volume, literally in the last two weeks of the quarter, to create somewhat of a lopsided quarter, a record quarter, if you will, for bookings last year in September. We do not have a price increase on the board for this year, you know, we have, as Kevin said, as we look out at the year, we are looking at, you know, bookings growth throughout the year.
Mike Genovese (Analyst)
Okay, fantastic. Then, last question from me. I mean, you guys have, you know, just reiterated, I think, you know, 2024 and 2025, you know, sort of at least mid-teens revenue growth. You know, I mean, and you obviously have a ton of competitive and product momentum there. I'm kind of wondering, you know, in 2026, 2027, even 2028, do you think that the basis of competition in the industry is going to be sort of the same as it is now? Or is there, you know, is there, is there more work to be done in the, you know, in the corporate development and product development areas? You know, my question really is: what do you have to do now to ensure that the momentum continues in 2026, 2027, 2028?
Ed Meyercord (President and CEO)
Yeah, that yeah, and that really goes back to some of the investments that we're making. I mentioned that we are doing a lot of work in with some of our growth and with some of our new growth vectors. Managed services, the industry is moving more towards managed services, and we are building, I mentioned in my comments, very disruptive platform. It's disruptive in the simplicity of how it operates commercially. The fact that you can have the entire network, that you can have complete visibility through, you know, a cloud, and that you can orchestrate services from the cloud, and that you have a workspace that you can use to manage, it makes it very easy for you to deliver a managed service.
It's-- the managed service model falls down because of the complexity of the commercial, commercial terms, and then the execution and the operation of delivering all of these services in a way that can be managed. What we're providing will be, by far, the industry's most simplest platform for delivering this, and we see a massive growth opportunity here. It's early innings. We're not calling a forecast there, but that is clearly a growth vector. We're also branching out into new, large, more-- It's more of a service provider type relationship with large customers that have potential to spend a significant volumes relative to our traditional partner base.
We're creating a very, a private offer, that will be very compelling, that we believe will be an opportunity for us to take share, and it provides significant value to these large players, relative to the current arrangements they currently have with some of the largest players in the industry. There is share shift. We have some big ideas about being disruptive and, and share shift there. The final thing I'll mention is our Federal investment. We have been underinvested in Federal. Our investment now is really proving to be timely with some of the large opportunities that we have. With the, the certs that we're investing in, it, it, it will truly open up other investments. There's also the convergence of networking with cloud and security. We bring a lot of security elements.
If you look at technology that we have that's very mature, we'll also be introducing access, security, technologies in the future, that will be announced in the future that can also be somewhat disruptive.
Mike Genovese (Analyst)
All right, well, you have a lot going on, so I better, I better let you get back to work. Thanks, Ed.
Ed Meyercord (President and CEO)
We are. We're busy, but our teams, we have a lot of growth opportunities.
Kevin Rhodes (EVP and CFO)
Good. Thanks, Mike.
Operator (participant)
Thank you. Now, I'm not showing any further questions in the queue at this time. I would now like to turn the call back over to Mr. Ed Meyercord for any closing remarks.
Ed Meyercord (President and CEO)
Thanks, Livia, and thanks, everybody, for your participation on the call. Obviously, to the investors that joined in today, and also we have, yeah, our employees that dial in, and we have partners and distributors who listen in as well, and maybe some customers. So we appreciate that. I'd say, I'd reiterate, you know, there's never been a better time to be at Extreme. Kevin mentioned it in his remarks. You know, we're in an incredibly strong financial position, and we have very interesting and unique growth opportunities, you know, that we believe will sustain this the growth levels that we mentioned. I would encourage investors to please attend the upcoming investor conference, and then over the next several months, coming up in New York. Details to follow, and we hope to see you there.
Thanks, everybody, and have a great day.
Operator (participant)
Ladies and gentlemen, that does end our conference call today. Thank you for your participation. You may now disconnect.