Extreme Networks Inc

NASDAQ:EXTR

Earnings Call Analysis

Strong Q1 Performance with Cautious FY2024 Outlook

In Q1, revenue soared to $353.1 million, a 19% year-over-year increase, with product revenue up by 23% and SaaS ARR climbing 30%. Gross margins also improved to 61.1%, contributing to an operating margin of 17.7%. Earnings per share hit $0.35, and free cash flow reached a high 20%. Despite robust performance, the forecast is tempered due to the current spending climate. Second-quarter earnings are expected to be between $0.26 and $0.31 per share, amid a lower revenue projection. Still, the company anticipates mid- to high-single digit revenue growth for FY2024 and predicts a 25% EPS growth, underlining continued optimism in market share gains and profitability.

Exceeding Expectations with Strong Revenue Growth

The company reported a robust financial and operational performance for the first quarter, with revenue soaring to $353.1 million, marking a 19% growth from the previous year. This figure surpassed their initial expectations for the quarter. Their success was carried by significant growth across diverse product lines, such as campus switching, and a substantial 23% year-over-year increase in product revenue, which totaled $253.5 million.

Substantial Boost in Subscription Services

The Software-as-a-Service (SaaS) Annual Recurring Revenue (ARR) experienced a notable 30% year-over-year growth, reaching $141 million, up from $109 million. Subscription deferred revenue also surged by 38% year-over-year to $236 million, fueled by solid renewals. The overall recurring revenue, which represents a steady and predictable income stream, grew by 11% year-over-year and accounted for 27% of total revenue, indicating a strengthening of the company's subscription model.

Gross Margin and Earnings See Marked Improvement

The company's gross margin saw an upward trend, reaching 61.1%, which is a substantial increase from the same period last year and the previous quarter, highlighting their operational efficiency and successful cost management strategies. Operating expenses did see a rise compared to the previous year to support higher projected revenue growth. Nonetheless, this has not hindered profitability, as evidenced by an increased operating margin of 17.7% and earnings per share at $0.35, exceeding their guidance range.

Strong Cash Position and Shareholder Value Focus

The company maintains a healthy financial position with $224 million in cash and cash equivalents and net cash of $27 million after an aggressive share repurchase program, which saw $25 million worth of shares bought back this quarter. The share count is expected to remain stable throughout the year, signaling management’s commitment to shareholder value and confidence in the company’s cash generation capabilities.

Cautious Outlook Amidst Economic Headwinds

Looking ahead, the company has adopted a more cautious stance in light of changing customer buying patterns and broader macroeconomic conditions. They expect some reduction in revenue due to slower decision-making processes among their customers. For the second quarter, projected revenue ranges between $312 million to $327 million, with anticipated gross margins between 60.2% and 62.2%, and operating margins forecasted between 15.4% and 17.3%. Earnings per share are expected to fall between $0.26 to $0.31.

Optimism for Continued Market Share Growth

Despite a conservative near-term market outlook, the company forecasts mid- to high single-digit revenue growth for the full fiscal year 2024, which they believe will outpace industry growth and continue market share expansion.

Strategic Focus on Aligning Cost Structure

Confronted with a potential slowdown in product sales and increased caution in the market, particularly in Europe, the company has recently taken steps to align their cost structure with evolving revenue expectations. The management expressed confidence in their ability to deliver improved profitability and maintain strong operating margins through these adjustments.

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by, and welcome to the Extreme Networks First Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stan Kovler, Vice President of Corporate Strategy and Investor Relations. Please go ahead.

[Stan Kovler, executive]

Thank you Abigail. Good morning, everyone, and welcome to Extreme Networks First Quarter 2021 Earnings Conference Call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are stream's President and CEO; and Ed Meyercord; 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 and is available on the Investor Relations section of our website at extremenetworks.com along with our earnings presentation. Today's call and our discussion may include forward-looking statements based on our current expectations about Extreme's future business, financial and operational results, growth expectations and strategies. All financial disclosures on this call will be made on a non-GAAP basis, unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in the 10-K report for the period ending June 30, 2023, filed with the SEC, and any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them, except as required by law. Following our prepared remarks, we will take questions. And now I will take the -- I will turn the call over to Extreme's President and CEO, Ed Meyercord.

[Edward Meyercord, executive]

Thanks, Stan, and thank you all for joining us this morning. Extreme delivered another strong quarter with revenue growth of 19% and EPS growth of 75%. We continue to move upmarket and the dollar value of deals over $1 million continued to grow quarter-over-quarter. Cloud adoption remained strong on 30% year-over-year ARR growth to $141 million and SaaS deferred revenue grew 38% year-over-year. Customer retention metrics remain high, a testament to our customers' loyalty and preference for our industry-leading solutions. We outpaced overall market growth in the quarter and expect continued share gains in fiscal '24 in our core business. Our new go-to-market initiatives outperformed in the quarter as well. This includes expansion across APAC certifications and regulated industries like state and federal government, the addition of seven new managed service providers and a new disruptive white space opportunity to sell the enterprise through large service providers with a private subscription offer. In addition, we have a plan to license all network devices connected to our revolving Extreme Cloud platform -- this will deliver even greater simplicity, value and flexibility beyond the cloud management capabilities we offer today and create more stickiness for our SaaS business. Our strategic initiatives around differentiated zero trust posture, expanded machine learning and AI capabilities are expected to drive expansion, ARR growth and average revenue per user. At the end of fiscal Q1, we felt the impact of the macro environment trends in our industry and lowered our outlook for near-term top line growth. The higher interest rate environment and economic challenges in some of our larger markets like Germany, license sales cycles have pushed out a larger amount of end-of-quarter orders in Q1 than we would normally expect. Our channel partners are digesting a large volume of backlog release and focusing on network deployment, slowing down their current ordering. And as a result, we don't expect run rate business to ramp as quickly as anticipated. In light of what we would call an air pocket of demand and decision-making, leading to our revised growth outlook for the year, we took immediate action to realign resources to drive higher productivity and profitability. As a result, we continue to expect high teens operating margin in fiscal '24. That will allow us to grow our EPS by over 25% during the year. Our funnel of opportunities continues to grow up double digits on a year-over-year basis as our underlying business and competitive position remains strong. Over the long term, we expect to return to a mid-teens top line growth outlook and a mid-20s operating margin. And here's why. Customers tell us their tire of complexity, and flexibility and the high costs associated with the old networking models from the larger networking companies. They choose extreme because we set the bar for modern networking with a combination of innovative and flexible technology, licensing and deployment simplicity and a focus on driving impactful business outcomes. Customers view their network as a strategic asset to enhance operations, power and scale new services and reduce business risk, especially cybersecurity risk.Our customers choose Extreme for 3 primary reasons. First is operational simplicity. That is driving IT productivity, network availability, ease of use, improving both time to value and total cost of ownership of their network investment. We're the only networking provider that can deploy campus networking fabrics from our cloud -- this makes moves, adds and changes to networks, simple and seamless allows customers to segment networks and provides unmatched security and resiliency. While fabrics are common and data center environments, we're the only competitor who can bring these services to the dynamic campus environment orchestrated through our cloud. We create one network, one cloud for customers to remove the complexity of managing their entire network infrastructure. Second, we offer unmatched flexibility. We offer cloud choice, public, private, hybrid and edge cloud deployments that can be managed through a single interface. Our universal switches offer OS choice and deployment options. We have the industry's simplest licensing, unlike competitors, we don't require our customers to hire full-time employees just to manage licenses. And finally, we're the only networking vendor that can manage a mixed environment without requiring them to rip and replace all their infrastructure at once as they modernize. Third, our cloud solutions offer actionable business insights, security scale and innovative technologies such as AI ops and automation. Our AI ops solution now cover over 200,000 devices and are gaining traction with large customers as they look for new ways to leverage the network to drive better business outcomes. With our digital tool technology, customers can stage and test their network deployment in a digital environment, shaving months of actual physical deployment and troubleshooting times. Our AIOps solutions proactively identify network issues, reduce loss alarms and allow IT teams to be proactive instead of reactive. Here are a few examples. We helped San Diego Community College connects 80,000 students across multiple campuses with our fabric technology. No other vendor in our industry has the expertise or ability to create a single secure hypersegmented campus network that enables zero-touch provisioning of new locations or moves ads and changes to network elements within a matter of minutes. With one network running on one cloud, they decreased OpEx by 50%. Again, none of our competitors can do this. The Dubai World Trade Center, recently hosted Gitex, the world's largest technology trade show, which was powered by Extreme's wireless fabric and cloud solutions. The venue supported more than 180,000 attendees and 6,000 exhibitors at this massive event. They use Extreme Fabric to quickly, simply and securely segment 3,300 individual networks in a matter of days with an IT staff of 2 people, conference attendee so as impossible. To accomplish this with our competitor solution, it would take weeks with a much larger IT team and introduces significant margin of error due to their complexity. A global leading fast food chain has selected Extreme Cloud SD-WAN to ensure consistent performance and improved guest experiences at its 1,500 locations across the U.K. With Extreme, this industry leader has greater visibility across its network, and we'll be able to simplify network management at all locations, increase overall network security and optimize operations by improving performance for critical applications. These large accounts become important references and brand builders of Extreme. Our increasing pool of large, high-profile customers and our technology differentiation is why we continue to see the value of deals over $1 million grow each quarter. In Q1, we have more than 30 deals over $1 million. We continue to have a healthy customer order backlog with clear visibility to order with specific customer request dates through the balance of our fiscal year. This quarter, our product lead times normalize, allowing us to continue working down backlog from product and strengths. We continue to expect our backlog to sell in a range of $75 million to $100 million by the end of Q4 fiscal '24. Next week at our Investor Day, we'll dive into specifics as to why our technology differentiation brings on MAX simplicity, flexibility and insights that are driving more and more of these high-profile customer wins. And the wins are elevating our brand and driving share gains, both in the channel as well as enterprise customers. We'll also share why we're so excited about new commercial opportunities with our recently launched modern managed services platform, a private subscription offer for very large service providers, our highly targeted certification and security, compliance opportunity and the elevation of our entire portfolio to subscription licensing. All these factors will provide accelerants to the share gains we're driving in our core business. And with that, I'd like to turn the call over to Kevin.

[Kevin Rhodes, executive]

Thanks, Ed. I'm encouraged not only by our performance in the first quarter, but also our ability to be decisive and take prudent action as we experience shifts and market demand. Let me talk about our first quarter results, and then I'll move to the outlook. In the first quarter, we again demonstrated strong financial and operational performance. We also show that we remain committed to continuing that level of performance in the future. Let me get into the numbers. First quarter revenue of $353.1 million grew 19% year-over-year, exceeding the high end of our expectations entering the quarter. Product revenue of $253.5 million grew 23% year-over-year, reflecting continued improvement in our supply chain environment. We achieved strong double-digit year-over-year growth in campus switching, which grew sequentially as well. SaaS ARR grew 30% year-over-year to $141 million, up from $109 million in the year ago quarter. Driven by the strength of our renewals, subscription deferred revenue was up 38% year-over-year to $236 million. Total subscription and support revenue was $99.7 million, up 9% year-over-year. This growth was largely driven by the strength of cloud subscription revenue, up 32% year-over-year. Recurring revenue continues to be a positive story at Extreme. Total recurring revenue of $95 million grew 11% year-over-year, accounting for 27% of overall revenue. Additionally, as we ship products from backlog, it will be a tailwind for our SaaS growth. Based on our current outlook, we expect recurring revenue to be approximately 30% of our revenue for fiscal 2024. The growth of cloud subscriptions and support drove the total deferred revenue to $525 million, up 24% year-over-year. Our gross margin increased once again, achieving 61.1% as compared to 60.2% in the fourth quarter and 57.6% in the year ago quarter. That's up 90 basis points sequentially and up 350 basis points year-over-year. We attribute our gross margin improvements to the excellent work by our supply chain team, lower overall distribution costs and a greater mix of high-margin subscription revenue. Our first quarter operating expenses were $153 million, up from $135 million in the year ago quarter and down from $156 million in the fourth quarter. The year-over-year increase reflects increased R&D investment and sales and marketing expenses to support our higher revenue growth plans. Our strong revenue growth, gross margin expansion and operating expense management contributed to another increase in our operating margin, now at 17.7%, up from 12.1% in the year ago quarter and up from 17.4% in the prior quarter. To that end, first quarter earnings per share was $0.35, above the high end of our guidance range entering the quarter. We finished the first quarter with cash and cash equivalents of $224 million and net cash of $27 million after repurchasing another $25 million worth of shares. We've repurchased $125 million of our shares over the last 4 quarters and are executing on our commitment to offset dilution from stock awards. We expect our share count to remain relatively flat for the rest of this year. The $71 million that we generated in free cash flow represents a 20% free cash flow margin above the high end of our long-term model. And we also generated $68 million of adjusted EBITDA. Now turning to guidance. We remain optimistic about the enterprise networking spending environment and our ability to take share. However, looking ahead at the balance of fiscal 2024, we are taking a more cautious tone and lighten the current spending environment. Based on changing customer buying patterns and macroeconomic conditions, we are tempering our revenue outlook for this quarter and the balance of the year. We do believe that this is an air pocket as opposed to a more systemic issue within our target markets. For the second quarter, we expect revenue to be in a range of $312 million to $327 million; gross margin to be in a range of 60.2% to 62.2%, operating margin to be in a range of 15.4% to 17.3% and and earnings to be in a range of $0.26 to $0.31 per diluted share on a share count of $14 million -- 134 million shares. Despite expected near-term market conditions and lower revenue expectations for the full year fiscal '24, we expect mid- to high single digits of revenue growth, which we believe is above industry growth estimates and implies our share gains will continue. We have also taken recent actions to ensure we align our cost structure with the current level of revenue growth that we expect to achieve. As a result, we believe we are well positioned to deliver strong profitability and improved operating margins during the year, and we expect to generate EPS growth of approximately 25% in fiscal 2024. We -- as Ed noted, we remain committed to long-term double-digit growth, and I see tremendous opportunity for Extreme to grow our business, accelerate our recurring revenue contribution from subscription and support and improve our margins and cash flow. I look forward to laying out some of our long-term plans--our new long-term plans at our Investor Day next week. And with that, I'll now turn the call back to the operator to begin the Q&A session.

[Operator]

At this time, we'll conduct the question-and-answer session. [Operator Instructions]. One moment for our first question. Our first question comes from David Vogt with UBS.

[Unknown Analyst]

This is actually Andrew on for David. I wanted to ask you, one of the big sort of issues looking at this industry for some time now has been the elevated backlog, certainly, you've had it as well. So what I'm wondering is, maybe you can help us understand a little bit better how much of the sort of mixed signals that the backlog has been sending to the entire industry is driving your slower outlook versus entirely macro? Can you sort of pull that apart for us and help us understand it?

[Edward Meyercord, executive]

Yes. Andrew, I'll jump in. And then -- and Kevin, you can -- you can follow up, Andrew, I think when we think about the backlog and you think about what's happened over the course of the last several quarters, there's -- and it's not just extreme, it's the whole industry. There's been a very high level of backlog release into the channel. And so in terms of how it's affecting current demand, you might say digestion, but effectively, we put a lot of product into the channel. And so our channel partners are receiving a lot of product and they're moving forward, deploying and a very busy deploying networks. And with that focus on receiving an unusually high amount of product and networking gear, they're really active in deployment mode right now. And I would say there's -- and with others, they paused some of their purchasing and some of the drawdown from the channel. So I think that's how that's affecting--that's how you should think about this affecting the demand -- the current demand equation. As we said, we're calling it an air pocket, this will pass. As they deploy their networks, they're going to get back to kind of normal course ordering that will be consistent with kind of normal course demand for networking in the industry. Kevin, do you want to add anything to that?

[Kevin Rhodes, executive]

I think you hit it. I think you hit all the points.

[Unknown Analyst]

And then just my follow-up on that is just, obviously, you've got backlog working down, you expect it now to normalize in Q4. You've got some very difficult comps in the back half. What is it that gives you the confidence that you're going to see a revenue reacceleration in the back half to hit your fiscal '24 revenue targets?

[Edward Meyercord, executive]

Well, Andrew, it's really about what we see in our funnel. We have a very clear picture of opportunities and all those opportunities have kind of a time line next to them. And it's the quality and the quantity and volume of our funnel that gives us the confidence to make the call. As we turn into Q2, Kevin mentioned that our teams became more cautious with their call some of the bookings that we would normally see at the end of the quarter didn't happen. And with the slowdown of sales cycle, people became a lot more cautious about the call here. A lot of those opportunities landed in the second half of the year. These are high-quality opportunities. And so I would say that that's what's driving the confidence interval. Kevin, I'll give you a shot to jump in as well.

[Kevin Rhodes, executive]

Yes. I mean as we think about the quarterly revenue throughout the rest of the year and our guidance for the full year, I mean, obviously, Q4 is the toughest comp that we have with the $365 million last year. But we're not calling for accelerating growth over top of that. We think that we're going to hit about mid-teens for the full year compared to the full year 2023...

[Operator]

Our next question comes from Alex Henderson with Needham.

[Alex Henderson, analyst]

Great. Just a quick clarification on the guide. So if I were to look at the guide for the upcoming quarter, I assume that the vast majority of the swing is in product sales and the strength of software growth plus the normal services growth off of lagging product sales would suggest that overall services quarter-to-quarter and for the year, we continue to gradually increase over the course of the next 3, 4 quarters. Is that a fair assessment that...

[Kevin Rhodes, executive]

Right now, it's all on product sales. For the most part, I mean, that's the -- I mean, obviously, the attach rate, right, with subscription and support, it's associated with products. So you'll see a little bit of moderation in the revenue there for subscription and support as it relates to product being lower. But with the majority of the reduction in anticipation of revenue for the full year would be on the product side. And that's just literally the digestion issue, the macroeconomic, people are just taking longer to make decisions and decision cycles are lengthening. And we feel like we're in this air pocket where we think we will come out of it. The question is the absorption period, if you will, within the market and when some macro market come back. I think we're seeing this with many companies across the sector.

[Alex Henderson, analyst]

So just to be clear, the growth in services is generally driven off the last 2 years' worth of product sales, therefore, it should continue to increase quarter-to-quarter over the course of the 24 period, even if it's at a very flattish kind of trajectory. So it's almost all in product sales.

[Edward Meyercord, executive]

That would be our expectation.

[Alex Henderson, analyst]

Okay. So if that's the case, in order to hit your guidance as given it sounds like your product sales literally have to be down in the December quarter and essentially flat for the full year, excluding the just printed quarter. Is that also an accurate read? And if that's the case, what is the mechanics underneath the surface between the inventory drawdown at your channel versus the sell-through. So what is the rate of sell-through look like if you were to look at it from the customer perspective as opposed to the 2-tier channel distribution perspective.

[Edward Meyercord, executive]

I mean, first of all, fourth quarter is a long way away right now. We look at just the pipeline, the -- we've got a combination of backlog that is expected for customer request dates in the fourth quarter. So we have that information. We've got the overall pipeline, and we know some of that pipeline relates to existing customers, some of it's new logos, we assessed that pipeline. Naturally, between Q2 and Q3, we'll build more pipeline for Q4. And so I would say we throw that all through the machine, and we look at what we think we're going to achieve for the year, and it's up, but it's up on a full year basis, that mid- that single-to-high -- mid- to high single digits for the full year as it relates to Q4. Yes, we've got a tough comp there, as I mentioned, that could be flattish in the fourth quarter, but for the full year is still up.

[Alex Henderson, analyst]

The question really was, what's the difference between sell-through to customers? And i.e., what is the underlying customer growth rate in terms of buying product from your channel as opposed to the work down of inventory in your 2-tier distribution channel. So if you were to look underneath the surface here, yes, there's flat product sales, but that is reflective of underlying sell-through of what percentage of your revenues coming out of the 2-tier distribution. So how much of this is the channel distribution inventory destocking? And how much of this is a weakness in underlying demand.

[Edward Meyercord, executive]

I mean it's hard to tease that and pull that apart, naturally A. We don't have perfect visibility into all of that. I would say that our 2-tier reseller and distribution program, like it's relatively healthy is what I would say. Like they've got healthy now fully normalized inventory levels that they have. We don't have too much necessarily in the distribution level. And we've got our own healthy amount that we have on our own in warehouse. -- we're looking at as more end customer demand challenges right now, this air pocket is more of an end customer demand. I mean you've got 2 wars going on right now, et cetera, et cetera. So we're just seeing Europe being this more sluggish, I would say, area of any -- we commented particularly in Germany, that's the area that's really, I'll call it, causing the slowdown is mostly in the European area. We're doing well in APAC. The U.S. still continues to be strong. But if there's any area it's that...

[Operator]

Our next question comes from Eric Martinuzzi with Lake Street Capital Markets.

[Erick Martinuzzi, analyst]

So to just a clarification first on the guide for FY '24, that mid- to high single digits, are we talking 4% to 9%.

[Kevin Rhodes, executive]

I guess you would, yes.

[Erick Martinuzzi, analyst]

Okay. And then the -- I guess, the change in demand environment, it seems like up until about maybe 6 weeks ago, we were still pretty confidently talking about a mid-teens growth rate, not only for FY '24, but for FY '25. Was there any particular event or to that you guys can point back to as the market shifting kind of all at once?

[Kevin Rhodes, executive]

Yes, Ed, do you want to cover that?

[Edward Meyercord, executive]

Yes. Eric, it really happens. If you look at business -- the way our business flows from an ordering standpoint, and it's the entire industry, there's a buildup towards the end of the quarter where most of the orders come in, in the last month of the quarter. And literally, I would say, the last 2 weeks of the quarter when we have a huge pipeline of deals and committed deals, our sellers and then the alarm started coming back that, hey, this is going to push they decided the decision by -- and it's really across geographies across industries, across verticals where there was this wave of messaging coming from our field that deals were going to slip and push at an unusually high level. And that -- it caught us off guard because we -- no one really saw that coming. We've heard about it, but that happened. And so there was -- it started slipping at the end of the quarter. And then as we look forward, our teams just got a lot more cautious with their call given the environment. And what we're hearing is that there's more scrutiny over budgets, more people are getting involved in the purchasing process. The projects are still good. The projects are still going to happen. Maybe there's a prioritization issue that takes place. But you're seeing more purchasing, more financial types, a lot of different players come into the decision-making process. They just slowed things down. And we are not -- we were in a situation where we lost business. We were in a situation where our opportunities just moved out to the right. And that happened literally the last 2 weeks of the quarter. A lot of those orders don't really affect the quarter because now we're getting close to a point where what we book in the quarter is what we ship. And at the end of the quarter, when orders come in, you don't turn around, that would be kind of more normal backlog with what happens at the end of the quarter, the orders come in and they turn into your revenue and your shipments for the next quarter. And so it was that softness at the very end of the quarter that caused us to look at Q2 to be more cautious and conservative. And our field teams on the heels of what happened at the end of the quarter felt they should be more cautious with their calls. So that's really -- it's kind of the combination of those 2 things that happened.

[Kevin Rhodes, executive]

And Ed, I would even comment that beyond September 30, like even to October, we were still seeing some of the same buying pattern issues in the last 30 days that caused us to also assess what our Q2 revenue would look like leading up to today.

[Operator]

Our next question comes from Timothy Horan with Oppenheimer.

[Timothy Horan, analyst]

Ed, when you studied past periods of slowdown maybe talking to the channel, I mean, in this last 6 months, 18 months from these networks just run hotter for a little bit longer. And I know you've been asked a few times, but can you just maybe give us a rough guestimate of what percentage of the lower guide comes from just working down the inventory at the channel versus end-user demand just kind of hearing mixed signals. I know it's very hard to quantify, but just a little bit more color...

[Edward Meyercord, executive]

Yes, it is hard to quantify, Tim, and thanks for the question. I'll give you an example. Some of our largest partners and I'll use -- I'll pick on EMEA and I'll pick on Germany specifically, they're having a fantastic year. They've gotten all of this product that's been released from backlog, and they are solely -- they're focused and super active in deploying networks for their customers on our behalf. They are fully consumed. And you see their business is way off year-over-year with us. These are an example of a strategic partner with really healthy business and amazing customers. However, their focus right now is on deploying all that equipment. And so their business is off. They fully expect business to return. And so that's why as we look at with our outlook, we know it's coming back. It's just there's a near term -- and we're calling it an air pocket for the channel to deploy. If I had to put it -- if I had to just make up a number and place a guess on how much I would allocate to the slowdown in decision-making, more people coming into the decision-making process, budgetary constraints, pushing versus channel digestion. Kevin, you can jump in. But if I could give it a finger like, I'd probably say half and half.

[Kevin Rhodes, executive]

I was thinking 60 macro 40 digestion but...

[Edward Meyercord, executive]

Yes. And Tim, the other piece is there historically has been a run rate business. And that run rate business is not insignificant. And we knew that run rate is starting to come back, which is encouraging to us. Our anticipation is that there would be a step function and run rate throughout the course of this fiscal year. And I think it's -- that run rate is happening more slowly. We think that's also a byproduct of what's going on in the channel.

[Timothy Horan, analyst]

Yes. That's great color. So I mean, basically our distribution is full out at this point, they can't handle any more capacity is maybe half...

[Edward Meyercord, executive]

There's the distribution side, okay, in distribution inventory. And then there our channel partners themselves and they're busy and they're saying, okay, distributors don't ship me that product yet because I need to finish this project and then I'll take delivery for the next project. So -- and that flows down distributor buying as well because they're waiting for what we call POS, but they're waiting for our channel partners to draw down on their inventory. So it's kind of -- it's just gotten backed up a little bit, which is why we're calling it digestion, but it will pass. It will pass. And I think we've been here before. We've seen this happen before. It's a quarter 2 quarter phenomenon, but it will pass. We factored all this into our revised outlook for the year and for the quarter.

[Operator]

Our next question comes from Dave Kang with B. Riley.

[Dave Kang, analyst]

I may have missed it, but were product orders up or down? Or any color on that...

[Kevin Rhodes, executive]

So Dave, we haven't really quoted any dollar amount for orders from one quarter to another. We have tended to say that orders had been up sequentially or down sequentially, et cetera. In our second quarter, we had a softer quarter because of what we just discussed about the pushing out of some of those orders. And as you think about it, a first quarter order that pushes out, you're obviously not shipping it and it may get done in Q2. So I would say, yes, we had a softer orders quarter in Q1 than we expected. And that's reflective in our Q2 guidance.

[Dave Kang, analyst]

And do you expect similar trends in fiscal second quarter? Or do you think they're going to rebound?

[Kevin Rhodes, executive]

We were -- we -- right now, I would say our visibility into the second quarter is stronger than it was in the first quarter from an orders perspective. But we're not done with the quarter yet. And so I don't know whether at the end of the year, we'll have the same phenomenon that we had in September with orders pushing again. So that's the challenge, if you will, that we have right now from a visibility perspective, the macroeconomic is are these sales cycles going to continue to elongate are things going to continue to push where you can't ship it in the quarter. That's the phenomenon...

[Edward Meyercord, executive]

Yes, Kevin, I'll jump in and say that from a revenue perspective, the impact on revenue, we feel like we hit bottom in the December quarter with product orders being up -- being up slightly. But Again, a lot of those orders now in our environment will spill into the March quarter. Orders that come in at the end of the quarter usually don't get shipped and wind up shipping in the following quarter. So Yes. Does that answer your question, Dave?

[Dave Kang, analyst]

Yes, yes. And my follow-up is regarding your competitors, previously, you said you don't typically run into Juniper and Arista Kinneper and Arista seems like their enterprise business has been growing nicely in recent quarters. Are you seeing the more your end markets?

[Kevin Rhodes, executive]

We see -- we never see Arista. Their enterprise market is very different than our enterprise market. I think that's an extension, maybe the large financials and some of the other larger an extension of their cloud data center business with larger customers. But in our market, it would be very unusual for us to see Arista. As it relates to Juniper, we see them more frequently and Juniper is investing in the enterprise market, I think, more heavily in the verticals where we play. I think if you read the tea leaves on what Juniper said, I think they're calling the same high single-digit growth from a demand perspective that we are in the near term. From a revenue perspective, they're still unloading a lot of backlog.

[Operator]

Our next question comes from Christian Schwab with Craig-Hallum.

[Christian Schwab, analyst]

Great. So is it safe to assume that backlog is probably almost back to a somewhat normalized level since the conversation is returning to kind of precoded conversation talking about a funnel and a pipeline versus previous conversations on the backlog driving material growth for a material period of time. Is that fair?

[Edward Meyercord, executive]

Christian, I think it's fair to say that the -- our backlog as it relates to distribution has normalized, but we still have a fair amount of customer backlog that's out there -- and I can give an example of like Kroger. We had a very large win with Kroger. They're deploying all their stores. They don't necessarily want all the equipment upfront at once. They want to time that with their deployment. So we have customer request dates, very specific customer request dates. That is one of -- one example of many. And what we've said and what continues to be the case is that we see the normalization of our backlog at the end of fiscal -- Q4 of this fiscal year.

[Christian Schwab, analyst]

That's right. And just a follow-up on that, the pushouts that you were talking about at quarter end. Is that direct customer pushouts? Or is that -- was that unanticipated distribution channel pushouts?

[Edward Meyercord, executive]

Those... Those are customers...

[Christian Schwab, analyst]

That's right. Okay. Great. And then my last question, return to 15% top line growth in '25 with 30% of your revenue recurring. It seems like a really strong growth rate for products. So I'm trying to figure out or back into what you guys' growth assumptions for industry growth is versus market share gains to attain that growth objective...

[Kevin Rhodes, executive]

Well, a couple of things. I mean, one, we'll go through the long-range model next Tuesday, right, at our investor conference. So we can talk a little bit more about 25 that. Right now, we're not guiding for 25%. I think the biggest point is that recurring revenue will continue to grow. You're seeing subscriptions grow 30% right now. And so we think that's the gift that keeps on giving over the next several years. We think this is an air pocket, as we mentioned earlier. And so we think that there will be demand coming back towards the end of this year into 2025. so that should normalize. And we still have a good -- like we talked about pipeline. And we have a building pipeline. And so that gives us confidence as well that this is a macroeconomic issue for a period of time and hopefully will abate here within this year and then 25% should be a normal -- more spend normalized spending year. At least that's the visibility we have right now into 2025.

[Edward Meyercord, executive]

And Christian, I'd point out we -- a lot of our confidence comes from funnel, and we mentioned that we have double-digit funnel growth in terms of the year-over-year opportunities. And so a lot of the opportunities that are getting pushed out will come to fruition in addition to new demand. So there's a combination of our core business where we're taking share if Cisco is a market proxy in terms of what they're calling, it's kind of low single digit. When we take share, the function is how much share -- a point of market share is over 20% growth for Extreme because of our relative size. And that's in the core business. And I also mentioned we have invested and we've just rolled out, and we're in the early stage of ramping a managed services platform. There's a lot of interest in MSP. We're seeing a lot more people turn to MSP. We talked about some of our other strategic investments in terms of global security compliance certifications that apply in the U.S. market as well as targeted opportunities abroad. And we have some other interesting opportunities that are really white spaces for us where we have in play. So as we look at the components of core market, taking share and then we look at new white space investments where we haven't played before, and they are more commercial models. They don't require heavy investment, but it's more about relationship and go-to-market. And these are new for us, and they're just at the early stages of ramp. So those growth rates will be much higher than the market. And to Kevin's point, I would encourage participation next week at our investor conference because we're going to get into it in a lot of detail. And the last point I would make is that that subscription line is growing at 30%.

[Christian Schwab, analyst]

Right. No, I understood that math. I just wanted the market share game math, which I think you directionally understand what you're saying.

[Operator]

One moment for our next question -- our next question comes from Greg Mason with Westpark Capital.

[Greg Mesniaff, analyst]

Looking at your geographic distribution... Can you hear me?

[Edward Meyercord, executive]

Yes, we can. We got you.

[Greg Mesniaff, analyst]

Okay. Looking at your global geographic distribution, I think EMEA was about 40% last quarter. I didn't see what it was this slide. I haven't had a chance to see it yet. But going forward, given that EMEA has been a soft area for you for understandable reasons, do you foresee just shifting your sales and marketing focus more back home to the domestic market and maybe the to Asia Pac markets to kind of offset to kind of channel your resources where the opportunities are still strong from a macro standpoint?

[Kevin Rhodes, executive]

Yes, Greg, EMEA is still hovering around 40%. I think it was 41%-ish. We talked about realigning resources and the answer is yes. We're actively managing unfortunately, because of our size and because of the way we manage the business, we move very quickly. And yes, we're realigning resources to drive our investment behind success where we see the growth markets within a very short time when we realized what was going on here with near-term demand, we made some quick decisions as we pointed out. And a lot of those decisions were around go-to-market. And we commented on investment in Asia Pacific. There's a lot of year-over-year growth in Asia Pacific for us will be higher a whole mean overall. And -- we're looking at targeted investments, for example, in federal, where we have significant opportunities and in other pockets. But your point is spot on. Yes, we're looking at realigning resources where we can drive growth in the business. And we also look at the productivity of our resources that are in the field. And if sales are off, then we have to realign those resources to make sure we're driving productivity.

[Greg Mesniaff, analyst]

Got you. And my follow-on is, Ed, you very briefly mentioned what I thought was a very interesting opportunity that you are currently in, I guess, discussions with some carriers about offering an enterprise solution through wireless carriers. Could you give a little more color on that?

[Edward Meyercord, executive]

Yes. I think we'll talk more in detail next week at our investor conference. But the bottom line is that we have some strong relationships with some very large service providers who are just satisfied with current networking relationships. And there's been a kind of I'd say, mutual outreach. We see some creative ways to work with them to help them drive the profitability of their business. There's a lot of interest in this. It's still early innings, but the volumes and potential size of the opportunities are quite large. And -- so yes, there's an opportunity for us to work with them in a way where they can enhance and drive profitability and kind of reinvigorate some of their enterprise sales by replacing, I'd say, some of maybe the older larger networking vendors with Extreme. And we've got a customized solution that we're working on, and we'll share more details at Investor Day.

[Operator]

For our next question. [Operator Instructions]. Our next question comes from Mike Genovese with Rosenblatt Securities.

[Michael Genovese, analyst]

A lot of my questions have been asked already. questions about your sort of new go-to-market initiatives and confidence that orders will come back. So I'll just want to kind of summarize those comments for us again.And then my second question, which I'll ask now is just if you could talk about margins. Despite the revenue cut, you're still looking for pretty good EPS growth. So just sort of go through those dynamics of what we should expect for margins a little bit more, please?

[Edward Meyercord, executive]

Sure. So there's what we're doing that, Mike, is what we're doing in the core business to take share. In my comments, I made a point of commenting on what matters the most in the market overall right now and networks are inherently complex. And in the enterprise space, people are trying to come to grips with how we simplify, how do we simplify the environment and how do we make sure that we have flexibility going forward, and we don't have a vendor lock situation where we get kind of stuck in a certain technology. And do we have modern networking tools. And today, Extreme is by far the simplest in terms of our solutions the most flexibility, and we have the most modern tools in terms of modern networking tools. So we become a very attractive alternative. So our share gain profile and when we're winning the kind of accounts that we're winning with the kind of names that we're winning for references, that bodes very well for us. And our customer names support our brand and support us in building our brand in the marketplace. So that's just core market, market share gains. You'll hear more about that, but we have a ton of these larger opportunities behind us, and it's kind of success begets success. In terms of the new market opportunities, a lot of enterprise customers don't want to be in the networking business. And so they want service provider or managed service providers, which are a lot of people in our channel to provide a managed service. The problem with managed services is that the platforms are really complicated and difficult to manage, and a managed service provider has to have so many interfaces into so many different clouds and into so many different portals and the billing is complicated, et cetera. So we set out over a year ago to build a managed service platform, a modern managed service platform based on simplicity. And we are -- we've come up with what is a very exciting platform that greatly simplifies the ability to provide a managed service from a networking perspective and all the elements that we're providing. And so there's been a huge amount of excitement around it. It does take a while to stand up. We started off with a goal of 5 service providers. We mentioned now we're at 7. We think that's going to scale up quite a bit. And we're going to make it much easier for a managed service provider to deliver a networking experience far easier.And then with the simplicity of licensing, et cetera, the whole package will make it easier. So we're optimistic there. It doesn't really affect fiscal '24 much, but it will start to play a role in fiscal '25. We talked about the private subscription offer. So some very large service providers to support them in their enterprise business. Very early innings here. We have a couple of large players we're talking to one specifically. It has a massive backlog and pipeline of opportunities. So we're excited about that. We are investing in Fedsure. It's an area that we had underinvested in previously. We have new resources that we've hired that have uncovered some very targeted specific opportunities that we're pursuing, that open up much higher than normal industry growth opportunities there. We also mentioned Asia Pacific, where we have been rebuilding that team. We have very strong leadership there, and we see big opportunities in verticals like hospitality. And we've had a massive -- the largest deal ever that we've won in Asia Pacific, a $10 million deal in Indonesia, we can build on that success. We're having a lot of success right now in Japan, in Korea, where we've been historically strong. We have some really large opportunities with some of the large players there. So those are the areas in terms of managed service, this global security and certification the private offer as well as Asia Pacific investments. The last thing that we're doing is we're about 66% of our networking gear is licensed and runs in cloud, and we have a plan to make that 100%. So we see accelerated growth in subscription as we build out our Extreme Cloud, not just the cloud management platform or a management tool, but an Extreme cloud platform as a service orchestrator, and we'll talk about that at Investor Day as well...

[Michael Genovese, analyst]

Great. That was a lot of color. And then just on the margins, talk more about how the bottom line here grows a lot faster than the top...

[Kevin Rhodes, executive]

You want me to cover that one.

[Edward Meyercord, executive]

Go for it.

[Kevin Rhodes, executive]

I think, Mike -- so our kind of rooted in our planning process, right? When we develop our annual planning process, we look at discretionary spend and what that is and they are fixed spend. And we understand that levers we need to pull, if we need to pull back, we can pull back on hiring. We can pull back on discretionary spend and the like if we see the business environment changing. We were able to act quickly, which was great for us in the quarter to this kind of evolving market environment. So that's still enabling us to have a good second quarter from an EPS perspective and obviously helps us for the rest of the year as well. So I would say we feel confident in our ability to achieve that 25% growth in EPS this year. There's not many companies out there where you can say, hey, even if your top line is is single to high teens revenue growth, you're still delivering 25% profitability, and we've been delivering high levels of growth and profitability for quite some time for several years. And so we think that, that is an important element for shareholders to look at and realize that this company is going to get through this air pocket still deliver good, strong profitable growth this year. And then next year, we'll turn back into a more mid-teens growth company and deliver that margin as well. So that's the goal.

[Michael Genovese, analyst]

Can I just have one quick follow-up there. Could you just talk a little bit sort of gross margin versus operating margin. The comments seem to me focus more on the operating expenses -- is the gross margin to come as well?

[Kevin Rhodes, executive]

Yes. I mean we're going to continue to look at ways of how we can continue to expand our gross margin for sure, Mike. I think we originally said that we are expecting it to be somewhere in the 62% range for the full year. We're not backing off that. We think that we will continue to see improvement throughout the year. I don't know if it's going to be 90 basis points sequentially every single quarter, but we are expecting that we can continue to improve our gross margins throughout the year. That's going to help...

[Edward Meyercord, executive]

Yes. And Mike, what's implied in a 62% gross margin is obviously, we end the year over that and more of a 63% range. So it relates to gross margins, we continue to see gross margins stepping here as we come out of supply chain and as we see some of the mix dynamics as it relates to subscription, etcetera.

[Operator]

That concludes the question-and-answer session. At this time, I would like to turn it back to Ed Meyercord for closing remarks.

[Edward Meyercord, executive]

Okay. Well, first of all, thanks, everybody, for participating on the call. We appreciate your interest in Extreme. I want to shout out. We get a lot of employees and customers and partners that joined as well. So I want to thank our employees for all the hard work and customers and partners for the business relationship and the commitment to Extreme. As far as everyone is concerned here, we invite everyone to tune in to Investor Day. I we have a lot of opportunities, and we're going to go into a lot of detail around the core market, the growth opportunities as well as kind of help what this looks like from a financial perspective. So we invite everyone to participate there. And we hope to see you there. I'll reiterate, we see this as a short-term phenomenon, and we remain committed long term to delivering on double-digit growth in the top line. And obviously, what that means with operating leverage to the bottom line. Thanks, everybody, and have a great day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.