Extreme Networks Inc

NASDAQ:EXTR

Earnings Call Analysis

Earnings Tell a Tale of Recovery and Growth

Second quarter revenue declined 7% from the previous year to $296.4 million, with the gross profit margin improving to 62.5%. The company is adjusting to supply chain constraints due to COVID-19 by promising a stable supply chain moving forward. They are reducing channel inventory by $40 to $50 million in Q3, expecting normalized Q4 revenue. SaaS ARR expanded impressively by 37% to $158 million, highlighting effective cloud strategies and customer retention as 44 customers spent over $1 million. They foresee recurring revenue making up 35% of full-year fiscal 2024 revenue. Going forward, management anticipates shedding operational costs to maintain a steady margin and projects a recovery in cash flow. Third-quarter revenue guidance is set at $200 to $210 million, with an expected loss per share of $0.22 to $0.17. Q4 revenue is forecasted between $265 to $275 million, spotlighting an optimistic growth trajectory.

Embracing the Cloud for Growth Amidst a Changing Industry Landscape

Extreme Networks showcased resilience in a transitioning networking industry, facing elongated sales cycles influenced by shifts such as pandemic-induced supply chain constraints. Despite a 7% year-over-year revenue dip to $296.4 million, the company harnessed its cloud platform to post a robust 37% year-over-year spike in SaaS Annual Recurring Revenue (ARR), reaching $158 million. They also achieved a solid 62.5% gross profit, underscoring the profitability of a shift toward high-margin, recurring revenue streams. This shift is a strategic pivot as the company moves past the inventory adjustment phase in its channel and prepares to normalize earnings by the fourth quarter, positioning for meaningful growth in fiscal 2025.

Strategic Maneuvers in a Tightened Market

While product revenue descended by 16.5% year-over-year to $186.6 million, the company's proactive measures to optimize operating expenses and protect profitability resulted in a less significant impact on Earnings Per Share (EPS). These measures, alongside a stabilized customer demand signaled by increased bookings, particularly in EMEA and APAC regions, suggest a structured alignment of cost with the organization's strategic growth plan. Encouraging trends in healthcare, education, and other key verticals imply that as channel digestion eases, the company is aptly positioned to capitalize on renewed market conditions.

Recurring Revenue Streams Fuel Optimism

The brightest highlight lay in recurring revenues, which rose to $110 million, up 16% from the previous year, driven by a surge in renewals and activations. This, in combination with a 32% boost in subscription deferred revenue year-over-year, totalling $246 million, points to a sustainable growth model underpinned by the company's cloud subscription service. Extreme Networks' focus on SaaS and cloud services has not only buffered near-term fluctuations but also laid a foundation for a recurring revenue model that promises stability and ongoing customer engagement.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to Extreme Networks' Second Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-answer session. [Operator Instructions].Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Stan Kovler, Vice President of Corporate Strategy and Investor Relations. Please go ahead.

[Stan Kovler, executive]

Thank you, Olivia, and good morning, everyone. Welcome to Extreme Networks' Second Quarter 2024 Earnings Conference Call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations.With me today are Extreme Networks' President and CEO, Ed Meyercord; and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the quarter.For your convenience, a copy of the press release, which includes our GAAP and non-GAAP reconciliations is available in the Investor Relations section of our website at extremenetworks.com along with our earnings presentation. Today's call and our discussion may include forward-looking statements based on our current expectations about Extreme's future business, financial and operational results, growth expectations and strategies.All financial disclosures on this call will be made on a non-GAAP basis, unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in the 10-K report for the period ended June 30, 2023, and subsequent 10-Q reports filed with the SEC.Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them except as required by law. Following our remarks, we will take your questions. Now I will turn the call over to Extreme's President and CEO, Ed Meyercord.

[Edward Meyercord, executive]

Thank you, Stan, and thank you all for joining us this morning. Our second quarter results were in line with our previously announced revised Q2 outlook.We did have some highlights in the quarter. SaaS ARR grew 37%, which reinforces the value of our differentiated cloud platform. We have 44 customers who spent over $1 million on Extreme solutions, demonstrating both customer retention and our ability to take new logos from larger competitors and gross profit of 62.5%, showing continued improvements and the benefit of a higher mix of high-margin recurring revenue.At a high level the networking industry is exiting the final stage of the COVID-induced era of supply chain constraints, which has significantly impacted our business. We've made a conscious decision to put channel digestion behind us in the March quarter.Our distributors and partners have lowered inventory purchases, which we expect to accelerate in the third quarter. We expect to emerge in the fourth quarter at a much more normalized level of revenue and earnings. Our bookings trends and funnel of new opportunities are strong indicators of customer demand. While larger deals are still experiencing elongated sales cycles, particularly in North America, we continue to win against the competition on a bookings basis with an uptick in new logos.Our EMEA business has stabilized and grew from the prior year, and APAC bookings continue to grow over the prior year. In addition to sequential and year-on-year funnel growth, we grew the number of transacting partners accounts and deal volume during the quarter.These trends and the expanded go-to-market opportunities give us confidence that we are positioned for a return to meaningful growth in fiscal '25. We've attracted a growing list of 14 managed service provider partners exiting the second quarter with 7 already driving transactions.We're positioned to expand our MSP footprint as partners have drawn to the simplicity of one cloud, the flexibility of our unified hardware and our unique consumption billing model. We make it simple for these service providers to deliver seamless, high-quality networking experience to their customers. We've also made inroads establishing a private subscription offer through a highly targeted list of large service providers. As noted at our November Investor Day, this market segment opens a $5 billion addressable market.In November, we introduced Extreme Cloud Universal ZTNA, the first network security offering to integrate network application and device access within a single solution. This helps move organizations to a zero trust policy for all devices across the network.This, combined with our industry-leading campus fabric solution extends our value proposition and helping customers both manage and secure their networks. Yesterday, we launched new WiFi 7 Access Points and the 4,000 series universal switches designed to help highly distributed enterprise organizations create improved network connectivity, security and application performance.Both of these new cloud managed platforms leverage AI ops to machine learning to deliver faster remediation and enhance network visibility. These new products also integrate well with Extreme Cloud Universal ZTNA to enhance network security posture. The integration at AI, security and analytics into a single platform is a key differentiator for Extreme as it allows us to bring greater simplicity and flexibility for customers. This is why we continue to win large deals with manufacturers like LG Energy Solutions, leading health care facilities like NHS Trust Hospitals in the U.K., educational institutions like London South Bank University, Leeds Beckett and Kingston universities and large venues like Wells Fargo Center and Canada Life Center. I've made previously announced leadership changes to streamline and strengthen our go-to-market capabilities. Earlier this month, Norman Rice was appointed as our Chief Commercial Officer and is now focused on driving revenue growth and leading the company's sales, partner and services organizations.He successfully built our go-to-market sales motions and stadiums and venues, driving large opportunities with Verizon and Kroger and has been at the forefront of driving our new commercial opportunities with large service providers.He has valuable experience managing revenue operations with deep knowledge of our complex supply chain environment. Our Chief Product and Technology Officer, Nabil Bukhari, is focused on increasing our SaaS revenue in his newly mentioned role as our GM of our subscription business.We've also deepened our bench of SaaS expertise on the executive team over the past 6 months with the additions of our new Chief Marketing Officer, Monica Kumar, in December; and CFO, Kevin Rhodes, last May. The alignment of the team is crucial to helping accelerate growth and capture more share. The Extreme brand continues to get elevated in the marketplace through our customer wins and differentiated technology that creates more simplicity and flexibility across complex networking environments.Our promise of one network, one cloud remains a competitive differentiator. One network is underpinned by our universal hardware highlighted by campus fabric, which has unparalleled campus security benefits that allows users to segment networks 10x faster than any competitor.One Cloud offers customers modern networking tools with built-in AI ops, and we're unique because we're the only provider to offer cloud choice, whether that's public, private, hybrid or edge.We're winning deals based on helping customers find new ways to deliver better outcomes such as increased IT productivity, reduced OpEx or securing their business. The simplicity and flexibility of one network, one cloud remains a competitive differentiator, particularly in a time when major competitors have created complexity with disjointed solutions and uncertainty in their long-term rationalization of products and solutions.We remain the only pure-play networking company with a differentiated and integrated portfolio and a clear road map. We believe our exposure to the fastest-growing areas of the networking market, share gains and new go-to-market partnerships provide ample growth opportunities to drive double-digit growth in the long term.We're forecasting market share gains with targeted partners leveraging the strength of our unique solutions for the enterprise. And with that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.

[Kevin Rhodes, executive]

Thanks, Ed. Despite lower revenue in the second quarter, we improved our gross margin sequentially and optimized our operating expenses to maintain a healthy operating margin profile.Our EPS was therefore impacted less than our revenue shortfall in the quarter. In the second quarter, we took proactive actions that enabled us to protect our profitability while continuing to invest in our strategic initiatives.We will continue to focus on aligning our cost structure accordingly as we navigate the second half of our fiscal year.Let me get into the numbers. Second quarter revenue of $296.4 million fell 7% year-over-year and was in line with our revised outlook. Product revenue of $186.6 million fell 16.5% year-over-year, reflecting continued channel digestion and elongated sales cycles that are impacting the networking industry. These trends are consistent across both switching and wireless products.Our product backlog has normalized this quarter earlier than we initially anticipated, and our bookings approximated our product revenue for the first time in 4 quarters. In fact, our bookings trends were positive in both EMEA and APAC, where each grew double digits year-over-year.From a vertical perspective, while total bookings fell slightly, both quarter-over-quarter and from the prior year, our health care, education, manufacturing and transportation/logistics vertical markets grew from the prior year.We are encouraged by this level of customer activity, which informs our view that we will be able to get channel digestion phase behind us as quickly as possible. SaaS ARR and recurring revenue was a bright spot in our quarter. SaaS ARR grew 37% year-over-year to $158 million, driven by the strength of our renewals and activations of previously shipped products.Subscription deferred revenue was up 32% year-over-year to $246 million. As we ship product from backlog, it's generating a tailwind for SaaS growth. Total subscription and support revenue was $110 million, up 16% year-over-year. This growth was largely driven by the strength of our cloud subscription revenue, up 39% year-over-year.Recurring revenue continues to be a positive at Extreme. Total recurring revenue of $101 million grew 14% year-over-year and 6% sequentially to now 34% of total revenue. Based on our current outlook, we expect recurring revenue to account for approximately 35% of the full fiscal 2024 year revenue. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $549 million, up 23% year-over-year and 5% sequentially. Gross margin was 62.5%, up 140 basis points from the prior quarter and up 400 basis points compared to the prior year ago quarter.This is the third quarter in a row that we've achieved 60-plus percent gross margin, which has proven to be an achievable level for Extreme at normalized scale. We attribute this to improvements in mix due to the higher contribution of subscription and support revenue and an improvement in supply chain and distribution-related costs. Our second quarter operating expenses were $141 million, down $12 million from $153 million in the first quarter and up slightly from $139 million in the year ago quarter. We plan to take additional actions to further optimize our operating expenses to the level of revenue we expect to achieve in the second half of fiscal 2024 in order to preserve our margin structure in the fourth quarter and into fiscal 2025.Operating margin for the second quarter was 14.8%, down from 17.7% and similar to 14.9% in the prior year quarter. This is the sixth quarter in a row of double-digit operating margins, also an achievable level for the company at normalized scale.All in, second quarter non-GAAP earnings per share was $0.24, down from $0.25 in the first quarter and $0.27 in the year ago quarter. We finished the quarter with $221 million in cash and net cash of $26 million after repurchasing another $25 million of our shares.We have repurchased $153 million worth of our shares over the past 5 quarters. The $28.6 million of free cash flow we generated in the quarter was impacted by lower revenue and the use of working capital for purchases of raw materials and inventory based on our prior year purchase commitments. We expect a recovery in cash flow as revenue recovers and component purchases become more balanced with normalized sell-through rates. Now, turning to guidance. This quarter, we expect sell-through to be significantly higher than sell-in, which we believe will have a meaningful impact on our operating results. To quantify this impact, we expect a $40 million to $50 million reduction in channel inventory in the third quarter, which will allow us to cover to a more normalized level of revenue in the fourth quarter.As a result, we plan to take further cost actions to drive the recovery in earnings per share and cash flow. Heading into the fourth quarter, we are expecting improved sequential revenue growth based on our funnel and the seasonality of our business, led by our education vertical.We believe our proactive approach to managing through this industry challenge will enable us to deliver improved growth and profitability in fiscal year 2025. For the third quarter, we expect as follows: revenue to be in a range of $200 million to $210 million; gross margin to be in a range of 59.5% to 61.5%, operating loss to be in a range of 12.4% to 8.8% and loss per basic share in the range of $0.22 to $0.17. A basic share count is expected to be around 129 million shares.Looking further ahead into our fourth quarter, we expect revenue to be in a range of $265 million to $275 million; gross margins to be flat to slightly up from the third quarter. Non-GAAP operating margin to be in a range of 10% to 13%, GAAP operating margin to be 1% to 4% and fully diluted share count of 131 million to 132 million shares.With that, I'll now turn the call over to the operator to begin the question-and-answer session.

[Operator]

Thank you. [Operator Instructions]. First question coming from the line of Eric Martinuzzi from Lake Street Capital Markets.

[Eric Martinuzzi, analyst]

I wanted to address the leadership change here and how we're going to be approaching the channel differently than we were before. If you could talk a little bit about what Norman Rice is going to be doing, I guess, we've sort of lost touch with the channel demand. Those are my words, not yours, but what are we doing to help improve that channel monitoring? What processes is Norman putting in place?

[Edward Meyercord, executive]

Yes. Thanks, Eric. One of the first things that Norman has done and with our leadership teams is to stratify our customer base and to split out what is more run rate business in terms of business that's less than $50,000 in order and what that business looks like, which is going to be more channel driven and can be impacted more through distributors and marketing activities and to provide more clarity to the project-based business and stratifying that project-based business.Eric, see that's a big change that Norman is bringing to the equation. The other thing that I mentioned is that Norman and Kevin, were the architects behind our private subscription offer which is a channel-led initiative that we believe will be disruptive.There's a lot of demand with some of the larger service providers that we're working with. That's building up, and I think you'll start to see, and we'll be in a position to announce meaningful deals in the second half of this year. And I also mentioned earlier in my comments about the managed services provider partners that we have who are signing up and there's the portfolio benefits and our technology benefits along with the unique capability that people are very interested in, which is our consumption billing model, which provides for a lot of efficiency for that go-to-market motion.So, it's the stratification of the opportunities, and I'd say a more highly targeted approach to the channel to the core business, along with these targeted new commercial models that we're going to market with. And Norman is very well, he's the best qualified person to lead us on that front.

[Eric Martinuzzi, analyst]

And then looking at the guidance here, just a really dramatic reset. I'm wondering, was there the prior year outlook, because we had a guidance reset coming out of Q1 and now we've had even more dramatic reset coming out of Q2. What's the confidence level here? We've got 1 month under our belts for Q3. Are we seeing any evidence to say things are getting better as far as the sequential step-up in Q4?

[Edward Meyercord, executive]

Yes, Eric, I mean, we commented on the funnel and opportunities specifically commenting on the progress that we've seen in EMEA and Asia Pacific. And Kevin also touched on the fact that we're heading into E-Rate season and this looks to be a pretty strong E-Rate season for us.The declines came as we were looking into Q2, our outlook for Q2 and our plans to take down channel inventory, the reality is we couldn't take inventory down nearly as much as that we had intended. And I would say with the elongated sales cycles and with bookings pushing out the way they did, it only deepened our position in the channel.And we had to make a decision as to whether or not we want to manage this out over time or take it all in one fell swoop. And our view and our perspective is to get it cleaned up and get normalized as we head into Q4 and turn the quarter on '25. So, that's how we've made the decisions that we're making. Demand is obviously going to be masked by inventory flowing out of the channel, and that's $40 million to $50 million number that you heard Kevin talk about. And then as we go into Q4, we do have seasonality and we are expecting more need, a normal seasonality as we go into that quarter, and we have the E-Rate business and we have a significantly larger funnel. And that's what gives us confidence. So, we're very focused on the cleanup here this quarter and then delivering and exceeding our outlook for the June quarter.

[Operator]

And our next question coming from the line of Timothy Horan with Oppenheimer.

[Timothy Horan, analyst]

Can you just talk about maybe the end user demand? Are customers may be waiting for WiFi 7 or CBRS or further upgrades to cloud? Just any color what's going on, because the step down next quarter's guidance versus what you were thinking 6 months ago was incredibly dramatic. The channel numbers that you just gave, it seemed to only tell part of the story.

[Edward Meyercord, executive]

Yes, Tim, I think you're seeing a much more conservative outlook as it relates to demand. Yes, in some cases, in the WiFi market there will be some people that are holding off for WiFi 7.We've talked about elongated sales cycles which has been very real in the U.S., where we've had verbal commitments for pretty exciting wins for Extreme, but the deals themselves have been pushed out.And when we look at deals in our funnel that get to the commit level, we closed on those deals, it's more of a function of time. So, we're looking at this as timing and this is why we're providing guidance for Q4, we are confident in the guide and how we're going to come out of this in Q4, but we are setting that base level at a more conservative level than we had in the past.And I'd say, Tim, to your point, I think we're feeling a little bit [Indiscernible] in terms of what we were expecting to close in the funnel and we've gone back and taken a fresh view of that. And our view is to put it behind us and reset here with the clean path going forward.As we look into fiscal '25, there will be some tough comps if we look at the Q1 and Q2 but as we get into calendar '25, we see ourselves on a really nice and a very strong footing for driving double-digit growth and resuming where we left off.

[Timothy Horan, analyst]

And so WiFi 7, can you maybe just talk about how much of an improvement it is for the customers or your benefits? And maybe how does the pricing of the product look like your ability to supply it? And then just lastly on WiFi 7, what the competitive environment looks like? And do you think this is one of the things kind of driving the elongated sales cycles? Are customers waiting for this?

[Edward Meyercord, executive]

I think it's fair to say that there are going to be some customers in the marketplace that are waiting on this. The benefit that you have in WiFi 7 is you have the different frequency bands and you have, in our case, higher bandwidth which is important.And then we're also bringing dual bands in terms of speeds and so, there's a lot more flexibility in the solution. So, every time you have these upgrades there's higher quality in terms of connectivity. In this case, there's more bandwidth, there's more flexibility in terms of end-user devices that we pick up on different frequencies and then we have the dual bandwidth capabilities in terms of how we connect to the network.The WiFi 7 for us is cloud managed in addition to our 4000 series switch, which is purely cloud managed. And in this, we're bringing some unique capabilities that provide a lot of advantages in terms of how to deploy and run networks relative to the traditional CLI model where provisioning and network deployments can be done in a much more efficient fashion and a more automated way. So, yes, there are a lot of benefits in what's coming out in our most recent releases. And yes, in terms of opportunities, it could have an impact.

[Timothy Horan, analyst]

And when does it start shipping at scale?

[Edward Meyercord, executive]

Well, we are GA at this point, so, I think you would expect to see shipping from WiFi 7 begin in Q3 and really ramp up and begin to ramp in Q4.

[Operator]

Thank you. And our next question coming from the line of David Vogt with UBS.

[David Vogt, analyst]

Maybe to start on the competitive landscape on that dynamic. I think you guys spent a lot of time talking about that, thinking sort of the inventory destocking pain short term, but you also talked about normal seasonality in Q4, and talking about gaining share over the long term. Can you maybe just kind of talk about what you're seeing competitively in the market today that gives you confidence that we can get back to share gains over the intermediate and longer term? And then I have a follow-up question as well.

[Edward Meyercord, executive]

Yes, Dave, thanks. So, I'll comment on that. What gives us confidence is what we see happening in the market every day. And we've talked about the largest competitor in the space that has a very different cloud solution, and we continue to see the industry moving to cloud and we have a leadership position in cloud.So, the largest player in the marketplace has got a very different cloud solution from the traditional enterprise solution. In addition to that, they continue to invest in other markets. And so, the level of complexity that we're feeling in the marketplace surrounding the largest competitor is very real and opens up a lot of opportunities.We've talked about some of the larger deals that we're getting into. We continue to move up market, and you'll see us continuing to do this with some of the announcements that will come out of Extreme, where in these highly competitive and highly contested processes, we're coming out on top. And so, you're seeing the likes of Cisco and HP and Juniper getting pushed back and Extreme winning, and that's part of how we're up-leveling our brand. So, that's one of the ways that we have confidence relative to the largest player. Everyone is very top of mind, the HP acquisition of Juniper. What will that mean? In our case it means that one of our competitors will be going away. We see a lot of opportunities certainly over the next couple of years is, they're looking to rationalize their product portfolios.This is going to create opportunities, in fact, it already has, where we're already getting calls from customers, direct customers and end users in the field as well as partners who are concerned and very unsure about what does that product road map look like and what is it going to look like? And these create more opportunities for us.

[David Vogt, analyst]

And maybe just a follow-up. You talked about a strong E-Rate season coming up and getting back to, hopefully, some degree of normal seasonality by the June quarter. Recognizing that obviously the first half of fiscal '25 is difficult comps on a year-over-year basis, are you planning for what I would consider to be more normal seasonal behavior on a quarter-over-quarter basis as we get through June going forward or is there still some digestion from whether it's order growth intake, underlying demand/sort of channel digestion that we should expect as we go through the second half of this calendar year into '25?And then just maybe one final one for Kevin, if I could slip it in there. You mentioned, obviously, double-digit margins at normalized scale, I think the phrase was. I would just love to get some more color on how we're thinking about it because I know at the Analyst Day, obviously, you guys have talked about margins above, let's call it, fiscal '22 levels back into the mid-teens, but I just wanted to get more color on what scale do you need to get to you to get back to margins that are more robust than, let's say, fiscal '22?

[Edward Meyercord, executive]

I'll cover the first part of the question. And Kevin, I'll let you jump in and cover the second part. We're looking, I think, yes, more traditional seasonality as you look at the shifts going from Q4 into Q1 to Q2, et cetera, I think in the core business, that the outlier here is going to be some of the new commercial motions that we have that are not likely to be in the same seasonal patterns.So, some of the larger deals that traditionally we would not have access to in terms of our private subscription offer, for example, are not necessarily going to fall into the traditional seasonal flow of the core business. And I'd say the same thing is true with our MSP business as that ramps, that's just going to be more of a steady incline than it will be kind of a traditional seasonal business. Kevin, do you want to comment on the second part of the question?

[Kevin Rhodes, executive]

Sure. Absolutely happy to. The reason why we gave the fourth quarter outlook is to actually show what we believe will be more normalized. We do believe we will grow off of Q4. So, we're not thinking that, that is like the new number forever because we have these opportunities with MSP and ESCO that will continue to mature and provide further growth in the future.But with Q4 being 10% to 13%, we believe that's a good jumping off point. But we will maintain operating margins in the double digits throughout this fourth quarter and throughout next year is our plan.In terms of like how much we can scale from where we were in '23 or '24 in the future, we really have to go and spend a little bit more time looking at where our '25, '26 contributions are going to be to get into the higher realms of mid-teens to high teens, even to 20% scale beyond that. But we do think it's possible. I mean we are already showing the discipline that if we need to, we could take cost out of the business to drive and keep our margins at that double-digit level.And what we need to do is and we're focused on that is continue to scale and grow the business and generate more profitability over time. And that's exactly what Ed and I are intending to do is to continue to scale the operating margins over time.

[Operator]

Thank you. [Operator Instructions]. And our next question coming from the line of Christian Schwab with Craig-Hallum Capital.

[Christian Schwab, analyst]

So you don't know that it's become evident of over-earning doing supply chain issues, et cetera, et cetera, and competitors not having products. When we look at your business and we baseline modest growth before we enter this period, and I kind of come up with a number of about $1.1 billion, plus or minus. Is that kind of what you believe the business we're a little bit below that run rate March? A little bit above that or kind of in that line in June? Is that kind of our starting point from your top line growth initiatives? Is that fair or is that not the way you think about it at all?

[Edward Meyercord, executive]

I think it's fair. We're going to build out of this. And yes, what we've said is, Christian, we used the language kind of more normalized to comment on the June quarter.And when you kind of run the math on some growth on that kind of baseline business you get to the $1.1 billion. So, I think that's a fair assessment. Kevin, I don't know if you want to add to that or comment.

[Kevin Rhodes, executive]

I think you're right, Ed. I mean with Q4 being at that level and then a jumping off point there, with it being the new normal, we do believe that we will continue to grow the business. We'll have a better growth story in the second half of our fiscal year '25 than the first half. But in general, yes, in terms of range, $1.1 billion as the new normal is about right.

[Christian Schwab, analyst]

Is Norman's work doing anything about moving to selling product as a service across the board and putting a mechanism in place to be more aggressive in that? Or is that something you're going to watch some of the other people in the industry do to see if there's tremendous customer interest?

[Edward Meyercord, executive]

I think you're going to see us be a lot more aggressive. And I mentioned that the triumvirate of Norman stepping in and taking the lead as Chief Commercial Officer, Nabil is our Chief Technology and Chief Product Officer, but he's also running a cross-functional team on SaaS and subscription.And one of the things that you're seeing is really nice growth on the subscription line and really healthy margins on that subscription business. And so, as we think about growth, we have plans to continue that growth in the subscription line, also, we have the benefit of gross margins on that.Finally, we made a key hire, Monica Kumar, who's come and joined us. I think she's going to be the glue between our product orgs and our selling orgs, and I think we have an opportunity to be much more targeted and I would say, much more aggressive in direct outreach to the market more broadly as well as more targeted with the channel. And we have some really interesting growth opportunities in the channel. So, I think this represents a unique opportunity for Extreme to really step up in the marketplace and that's how we see it.

[Christian Schwab, analyst]

And then my last question, with the recent consolidation in the space. You did a big consolidation years ago and extremely confused your customer base, by which products you were going to support and which products you were not going to support. So, I think with that as a backdrop, should set you up to be well positioned to take advantage of what could be potential confusion in the marketplace. Do you think that that will help be a competitive advantage for you to gain share?

[Edward Meyercord, executive]

We do. From the announcement it looks like the HP was very interested in the AI platform that Juniper brings to the equation and that Juniper leadership will be heading the networking side, what does that mean to the massive installed base of Aruba and Aruba technology? It raises a lot of questions. And for customers, it raises an awful lot of questions.And, keep in mind, Juniper has come in enterprise really from a service provider position. And so, in terms of the breadth of their portfolio, this was very much kind of driving the efforts.And in terms of the full end-to-end enterprise solution, it's not as robust. And so, how that incorporates and how that gets built into the Aruba Enterprise solution set, there are a lot of questions out there, and I think that's going to create opportunities for us. And we're very focused on a very clean and simple and flexible solution in terms of our universal hardware, in terms of interfacing with one cloud, this presents a very fresh alternative and a very clean alternative for customers that are out there. The other thing that you're aware of, Christian, from our prior M&A activities is that they baked a lot of synergy into the formula. And when you look at $430 million, $450 million of expense coming out of the business, you're talking about thousands of people coming out of that business and where they come from and how that plays out, again, will create some disruption.And as I mentioned earlier, we're already getting calls from employees and customers and partners. So, we think this will present opportunities, potentially hiring opportunities and new growth opportunities for us.

[Operator]

And our next question coming from the line of Dave Kang with B. Riley.

[Dave Kang, analyst]

My first question is regarding bookings. You reported that Asia and Europe were up double digits year-over-year. Just wondering if you can provide any color on North America bookings?

[Kevin Rhodes, executive]

I'd say that's the area where we've been challenged in terms of the bookings. We were close to a book-to-bill ratio of 1 in the quarter, so that was positive news. But North America was down year-over-year.

[Dave Kang, analyst]

And then it sounds like fiscal third quarter, most of the inventory excess inventories will be flushed out. So, can we expect fiscal fourth quarter to be sort of like a clean channel inventory?

[Kevin Rhodes, executive]

Yes, that's exactly our intent is to get that clean and to get normalized in the fourth quarter and beyond.

[Edward Meyercord, executive]

I would just add, we look at obviously, normalized backlog has happened quickly, more quickly than originally anticipated and as we look at entering Q4, we look at normalized backlog and normalized channel inventory. So, it's somewhat of a clean slate as we head into Q4 and turn the quarter into fiscal '25.

[Dave Kang, analyst]

And based on your fiscal fourth quarter guide, revenue guide, you're implying that orders will be up significantly sequentially from third to fourth quarter, correct?

[Kevin Rhodes, executive]

Yes. We've got the E-Rate season there. We mentioned that earlier. So, we are expecting sequential growth. Our 2 strongest quarters in a year are the second and fourth quarter of our fiscal year. So, as we think about the June quarter, we got the E-Rate season there. We've got a stronger pipeline then we have in the third quarter here, and we've got strong E-Rate season coming at us. So, we are expecting sequential growth in bookings.

[Dave Kang, analyst]

And my last question is, Ed, you mentioned that fiscal '25, you're expecting meaningful growth. Just wondering if you can kind of provide additional color. Should we expect like double digits? Would that be meaningful?

[Edward Meyercord, executive]

That's correct and that's how we're thinking about it, David. So, there is going to be a tough comp in the first quarter given that we landed at 3.53% last year or for Q1 of this year, then I think you get to the second half as we turn the corner into calendar '25, obviously, we'll have a much easier comp in Q3.But we expect that our marketing initiatives, our go-to-market initiatives in terms of the core business and then the realization of these new commercial models that are growing, but they haven't really had an impact on our financials yet, but by the time we get to that calendar '25 time frame you'll start to see a much more meaningful impact of those initiatives coming into play and adding to growth over just what we would consider to be kind of core market growth.

[Operator]

And our next question coming from the line of Alex Henderson with Needham.

[Alex Henderson, analyst]

So your commentary about $1.1 billion being the run rate revenue number and the guide for the fourth quarter of the fiscal year at $265 million to $275 million, is "more normalized", is a little bit troubling considering in the fourth quarter of 2019, you did $252 million and for the full year 2019, you did roughly $1 billion at $995.8 million, and that's 2019.That would put a growth rate to your "normalized" $1.1 billion of around 2.5% over that time frame and certainly, you would not say that that's a reasonable growth rate. So, the question I have for you is what is the real normalized number if you were to adjust these numbers to fully normalize the baseline. You say $1.1 billion is normalized, but I don't think you believe you're a 2.5% growth company.So, can you please adjust that language a little bit for us in terms of understanding how much the fourth quarter is still unnormalized as opposed to more normalized? And what would be the run rate of revenue if you had a fully normalized full year?

[Edward Meyercord, executive]

Let me, Kevin, you just hit a high level and then I'll let you come in and fill in. But, Alex, obviously, it's a pretty massive reset here in our Q3 with a lot of cleanup involved. We have new teams and we have a new approach that are coming in and looking to sort of build off of the base and resetting the foundation, whether or not it would be normal seasonality going into Q1 or is there still conservatism in that Q4 number where you could still see some growth, sequential growth coming out of that, we wanted to provide the outlook for our fiscal Q4 to provide, again, what we're calling more normalized.Will that be a fully normalized bookings number? There, I think we need some work on that and we'll definitely be coming back to you with a more refined outlook on how we see the evolution of booking, especially considering these other commercial models, which, quite frankly, we have not included in our outlook.

[Kevin Rhodes, executive]

I think that's the key, Ed. I think that the MSP model is very nascent. It's very early. The ESCO model we have as well the private subscription offers also very early and in stages. This is based on the run rate of the existing business and products that we've got ZTNA coming on board, we've got WiFi 7 coming on board, we've got new products, innovations coming out that will continue to give us a tailwind in the future.Right now, we're just not prepared to go and guide for 2025 or beyond, but wanted to give at least the normalized Q4 at this point.

[Edward Meyercord, executive]

And, Alex, the other comment to make is that, earlier we saw Asia Pacific recovering more quickly and then we've seen EMEA come with year-over-year growth that Kevin mentioned. And we haven't seen it yet in the Americans and so the timing of that Americas recovery to the normal buying cycle and how all of that kicks in from a timing perspective.And we have a lot of large deals that are in the hopper for us, really exciting from a brand perspective in terms of where we are in these competitive processes. But they're very lumpy, and I think it's a little challenging for the team right now to stick their necks out and call some of these larger deals.

[Alex Henderson, analyst]

That's not my problem. My problem is the guidance commentary that normalized full year revenue run rate would be at $1.1 billion, which is obviously still incorporating a significant amount of backlog adjustment and the comment that more normalized implies that it's almost normal and it's certainly not in the fourth quarter. So, what is the nut that you're assuming for the fourth quarter, what would be fully normalized fourth quarter? I mean, can you give us some sense of what more normalized means in terms of the scaling of it?

[Edward Meyercord, executive]

Yes. I mean I'm not sure we're there yet. I mean if we look at a $275 million number, yes, if we look at a $275 number in Q4, and obviously, there's a math to get to $1.1 billion when you just roll that over. So, I guess you would say there's not a lot of growth built into that for a normalized fiscal '25, Alex.

[Alex Henderson, analyst]

I mean you did $253 in fourth quarter of 2019 and now you're telling me $275 is close to normalized? It's difficult trying to reconcile those 2 numbers. We're not even close to normalized in that context. So, how big is the nut? Are we still absorbing $30 million, $40 million in the June quarter of inventory absorption?

[Kevin Rhodes, executive]

Yes, Alex. I mean the thing that you're missing, I think, is the North America is still recovering. It was down year-over-year.

[Alex Henderson, analyst]

I'm not missing anything. I'm asking what the nut is that you're assuming when you give us the guidance for the fourth quarter in terms of the absorption in the recovery, in the environment. How big is that nut?

[Kevin Rhodes, executive]

We're assuming no incremental amount, as you say, nuts in the fourth quarter. We assume absorption will occur in the third quarter with no more absorption needed in the fourth quarter.What we need to see is we need to see the market, the entire market is down right now. This is not just an extreme issue, this is an exogenous issue that's across all IT and all networking. And so, where we see and what we hope is that the market starts to come back and that we will see the North American market come back. And I appreciate your point but like, we've got to get the whole market to come back and spend across the board.

[Operator]

Thank you. And I will now turn the call back over to Mr. Ed Meyercord for any closing remarks.

[Edward Meyercord, executive]

Okay. Thank you. Thank you, everybody for participating on the call. And obviously, we'll have callbacks with many of you, and we appreciate all the good questions.I also want to take time to thank our employees and customers and partners who are participating here and for all the work as we're transitioning through this cycle and putting ourselves on a more normalized footing as we've been talking about.We are absolutely looking forward to putting this chapter behind us and we're committed to innovating in the industry and continuing to deliver new solutions, and we're committed to these strategic initiatives that will drive long-term growth for us at Extreme. So, thanks everybody and have a good day.

[Operator]

Ladies and gentlemen, that does our conference for today. Thank you for your participation. You may now disconnect.