Q3 2024 Extreme Networks Inc Earnings Call

Participants

Stan Kovler; Vice President - Corporate Strategy and Investor Relations; Extreme Networks Inc

Edward Meyercord; President, Chief Executive Officer, Director; Extreme Networks Inc

Kevin Rhodes; Chief Financial Officer; Extreme Networks Inc

Presentation

Operator

Thank you for standing by, and welcome to the Extreme Networks Third Quarter Fiscal Year 2024 financial results. (Operator Instructions) As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Stan Kovler, Vice President of Corporate Strategy and Investor Relations. Please go ahead, sir.

Stan Kovler

Yes, and thank you, operator.
Good morning and welcome to the Extreme Networks. Third Quarter 2024 earnings conference call and stakeholder Vice President of Corporate Development and Investor Relations. With me today are Extreme's President and CEO, Ed Meyercord, and EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an eight K detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website at extremenetworks.com, along with our earnings presentation, today's call and our discussion may include certain forward-looking statements based on our current expectations about Stream's future business, financial and operational results, growth expectations and strategies. Our financial disclosures on this call will be on a non-GAAP basis, unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements because they involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors and the 10 K report for the period ended June 30th, 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 prepared remarks, we will take questions from now. I'll turn the call over to exchange President and CEO, Ed Meyercord.

Edward Meyercord

Thank you, Stan, and thank you all for joining us this morning. Our results were in line to slightly better than our third quarter outlook. Highlights from Q. three include net new logo bookings grew double digits globally, with particular strength in the US market. Our SaaS ARR grew by 38% year over year as we continued to deliver in our value proposition of flexibility and simplicity with our One Network one cloud strategy. And we were successful in reducing channel inventory at the high end of our 40 to 50 million range, bringing us closer to channel normalization. As expected, we're calling for meaningful sequential revenue growth heading into our fiscal fourth quarter. But note that industry-wide customer and channel digestion will continue to create a drag on normalized bookings and revenue customers and channel partners continue to work through purchases and orders, and we expect demand normalization during the second half of calendar 20. For the expected sequential growth in revenue, bookings will help us return to solid profitability and cash flow generation during the fourth quarter, our funnel of opportunities is up from the prior quarter. We anticipate that the upcoming stage of growth will be driven by an increasing number of deals that exceed 1 billion as we continue to move upmarket.
Last week, we hosted our annual Connect user conference in Fort Worth, Texas. It was oversubscribed and our biggest event yet with about 19% growth in customer attendees from a year ago, the event focused on the intersection of networking, security and AI, and we made several announcements relative to those topics. We've demonstrated IQstream cloud, Universal ZTNA., the first network security offering to integrate network application and device security within a single solution by combining cloud, Mac and ZTNA. into a single easy-to-use SaaS offering. We help customers ensure unified observability, frictionless user experiences and a consistent security policy for applications and devices. As the BPM market transitions to ZTNA., the proliferation of individual applications each with their own policy dashboard is adding complexity and expense for enterprise customers, Vice President of one of our multibillion-dollar channel partners joined us on the main stage of Connect and said, the identity focused approach with a common policy engine is a game changer. This was further evidenced by the pack breakout sessions at Connect where discussions on Zero Trust Drew's standing-room-only crowds when added to our unique enterprise fabric. This allows us to present a highly differentiated security value proposition to enterprise customers we also increased the scale of our fabric solution to extend fabric over SD-WAN, broadening the reach from the data center to branch customers love our fabric because it's simple to deploy highly resilient makes it easy to segment the network, which dramatically minimizes the blast radius and exposure of cyberattacks. We expect the broadening of our security offerings to drive significant traction for our business with growth opportunities across our top verticals such as education, health care, retail, manufacturing, transportation, logistics, et cetera. Our customers and partners also reacted very favorably to IQstream labs, a dynamic ecosystem where creativity, collaboration, cutting edge technology converge to fuel innovation of early stage technology, we provided a tech preview of AI expert, a generative AI solution that delivers substantial optimizations and cost savings in the design deployment and management of enterprise networking and security.
Finally, we announced that we are the first vendor to allow WiFi 6E customers such as the San Francisco Giants, Cedar Fair and BYU. to unlock outdoor stick to kicker, heard spectrum to experience faster speeds, increased range of coverage and expanded capacity for outdoor connectivity. There was a lot of discussion that Ken asked about industry M&A and the disruption that it's causing. We feel that lots of questions about Cisco, diversifying away from network and customers, fatigue with the cost complexity and lack of flexibility because we're doing business with them.
As it relates to H. E's acquisition of Juniper, most questions focused on risk and how to protect their technology investments. Customers are worried and don't have a clear view of technology roadmaps for the potential negative impact the integration.
They have down the line.
We feel confident Extreme's pure-play focus on secure network and finding new ways to deliver better outcomes for our customers will remain a competitive advantage. We were named as a leader in the Gartner MQ for the sixth consecutive time. Once again, Cisco move down and vision and execution and customers are taking notice.
Turning to new wins. We had a strong quarter in higher education. We won Washington University and St. Louis, one of the country's top universities, which selected Extreme to modernize its networking infrastructure, displacing Cisco IQstream fabric solutions will help the university create a simple, scalable and secure network across the campus and with ExtremeCloud IQ wash, you will be able to manage its entire network, including third party applications.
Third party devices in Amea spending remained challenging across many of our largest verticals and revenue is impacted by channel digestion. However, we continued our success in winning international sports venues such as pollution Dortmund, which one of the largest football clubs in Germany. They're deploying WiFi 6E fabric, IQstream analytics across the stadium to create next-gen experiences like NC concessions, AR/VR and biometrics.
In Asia Pacific, booking trends have been stable for a number of quarters. And we're seeing success, particularly in the hospitality sector, where we've added multiple new logos across Asia in the quarter. We also displaced Cisco at several major customers, including Korean Airlines, a 30-year customer. We're deploying across 250 of their sites worldwide, including their global headquarters in Seoul. Our new go-to-market initiatives are helping us grow and gain share as well. We grew our MSP. partner base to 23 during the quarter with many more in queue. The vast majority of MS/B revenue is net new logos our MSP footprint is expanding as partners appreciate 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 experiences as we contemplate our recovery. We're encouraged by our funnel and believe that customer's demand for our solutions will continue to improve, and we expect a resumption of growth to follow into fiscal 25.
And with that, I'd like to turn the call over to our CFO, Kevin rose to walk us through the results and guidance. Tim, are you there?

Kevin Rhodes

Sorry about that.
I was on mute. I apologize because I mean our eyes. So thanks that sorry about that. And let me let me get into our results. So our results were in line and slightly ahead of our outlook as we expected entering the quarter, we worked through a significant amount of channel and customer digestion the average overall channel inventory reduction was at the high end of our 40 to $50 million estimates. So we believe this will position us for a return to normalized growth which will be better aligned to customer demand trends. We also took proactive action at the end of the quarter to rightsize our costs, which will enable us to generate profitability again, while continuing to support our strategic and product initiatives.
Let me get into some of the numbers. Revenue of $211 million declined sequentially during the quarter, primarily due to the market dynamics impacting our industry and was slightly above our forecast. Product revenue of $106 million reflected the previously mentioned channel digestion, along with elongated sales cycles, which are also impacting the in the networking industry. These trends are relatively consistent across both switching and wireless products. Pricing discount rates on product orders was largely intact with prior quarters. And our product backlog was once again at a normalized level and within our expected range.
Looking back over the last several quarters, our subscription revenue has been a great success story for us since the acquisition of Aerohive in 2019, we've gone from annualized revenue of $40 million to $152 million per year as our business has shifted to cloud management. It's important to take both product trends and our recurring subscription and support revenue into account as this is what customers are buying from extreme. We expect the strong growth of SaaS ARR to continue overall bookings and most notably product bookings were well above our revenue in the quarter. On a vertical basis, our education business grew double digits year over year, led by higher ed and our K through 12 business was in line with our expectations. On a year over year basis, healthcare was up double digits and we saw sequential growth in retail service provider and sports and entertainment, all of which grew double digits. Even in this challenging environment, IQstream is still gaining share by attracting and winning new customers. Ces ARR and recurring revenue was once again a bright spot in the quarter, up 38% year over year, driven by the strength of our renewals and our ACT and activations of previous previously shipped product subscription deferred revenue was up 29% year over year to 258 million. Total subscription and support revenue was 105 million, up 14% year over year. This growth was largely driven by the strength of cloud subscription revenue. Based on our current outlook, we expect recurring revenue to account for approximately 35% of full year fiscal 2024 revenue. The growth of cloud subscriptions and support drove the total deferred revenue to $558 million, up 20% year over year. Gross margin was 57.6%, down 490 basis points from the prior quarter and 150 basis points compared to a year ago quarter. Our fixed overhead costs were impacted by reduced product revenue, and we incurred about an additional 7.5 million of excess raw material costs in the quarter. This occurred as we transitioned one of our primary original design manufacturers out of China and into Vietnam. Without this cost, we would have achieved 61.2% margins in the quarter. We currently expect gross margins to recover back above 60% in the fourth quarter. Our third quarter operating expenses were 147 million, up 3% from the year-ago quarter. During the quarter, we did take action to optimize our expense structure to the level of revenue we expect to achieve, including getting back to operating profitability in the fourth quarter and into fiscal year 2025. On a run rate basis, we took over our approximately 35 to $40 million of annualized expenses, which will help us drive operating leverage as revenue recovers.
The operating margin in the third quarter was a loss of 12.2%, down from a profit margin of 14.8% last quarter and from a profit margin of 15.6% in the year-ago quarter. All in third quarter non-GAAP loss per share was $0.19 and in line with our outlook. This compares to earnings per share of $0.24 in the second quarter in earnings per share of $0.29 in the year-ago quarter. We ended the quarter with 151 million of cash and net debt of $42 million. The $74 million usage of free cash flow in the quarter was due to the lower revenue and use of working capital for purchases of raw materials and finished goods inventory based on prior year purchase commitments, we expect a recovery in cash flow as revenue recovers in the fourth quarter and component purchases become more balanced with normalized sell-through rates.
Now turning to guidance heading into the fourth quarter, we are expecting improved sequential revenue growth based in our funnel and the seasonality of our business led by our education vertical. We believe the recovery in revenue and earnings will also drive a recovery in cash flow. However, we are taking a cautious tone to guidance at this time. For the fourth quarter, we expect guidance as follows revenue to be in a range of 250 million to $260 million, gross margin to be in a range of 61.6% to 63.6%. Operating margin to be in a range of 9% to 11.5% and earnings per share to be in a range of 11 to $0.15. That's based on fully diluted share count to be expected around 131 million shares for the full year 2024, we expect as follows revenue to be in a range of 1,000,000,110.5 million, 1 billion, 120.5 billion non-GAAP gross margin to be in a range of 60.9% to 61.4% operating margin to be in a range of 9.3% to 9.9% and earnings per share to be in a range of $0.51 to $0.55. Fully diluted share count is expected to be around 131 to 132 million shares.
And with that, I'll now turn it over to the operator to begin the Q&A session.

Question and Answer Session

Operator

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone.
Our first question comes from the line, Alex Henderson from Needham.
Your question, please, guys.
So I was hoping you could talk a little bit about what you think the normalized revenue base for the Company is what the companies longer sustainable growth rate is. And once you come out of this correction where you think you can get your margins to you talked about 64% to 66% gross margins in the past. Is that Tina, can you give us just some sort of some guidelines on what a normalized base, it should look like.
Hey, Alex?
Yes, Alex, this is Ed. Let me let me jump in and then Kevin, I'll let you if you come in behind me as far as the model is concerned, Alex, yes, we're still seeing it sluggishness macros lagging to sluggishness in Europe.
And then you'll note that we had a lower volume of large deals this past quarter at 28, which is a low for us. And we're seeing elongated sales cycles in some of our larger projects. So when when when this is normalized and when we look at a level where we are, we feel is achievable in this market with the resources that we have on our team and you're looking at moving up closer to $300 million a quarter and revenue from from where we are today. So we are we see a lot of room for growth. And the other comment that I'll make is that market conditions we believe are going to help us over the next 12 months given what's going on with the competitive landscape right now, there's a lot of chatter and there's a lot of noise in the partner channel community as well as with end users around concerns about technology decisions that they need to make. And if you're a partner that you want to bank your business on. As a result, we think we're going to start to see more opportunities coming to IQstream is is in a way a safe haven for technology decisions that are future forward. So this was we heard this loud and clear, it will take time for new partners to establish funnel and establish business with extreme and ramp. And the same thing is true with partners, but we've we will have very specific motions to aggressively go after this against both sets of our larger competitors. I think it creates a unique market opportunity. Kevin, do you want to do you want to follow up with more specifics in terms of margins and the modeling questions?
Yes.
I mean, I think I think you're accurate yet in terms of what we're seeing as opportunities for growth coming out of of that, what's the new normal look like, right coming out of the I'll call it field the cycle that we're in right now and absorption, et cetera. I would think that we the new normal should be above $300 million in revenue is what we are shooting for and obviously growth above. And beyond that, the market opportunity is there for us. We are taking share and you could see with Korean Airlines and others that are 30-year customers of Cisco that are moving and coming over to us as we continue to build on our software story here, Alex, I think that's going to bode well for us, especially as we add in more security, more AI. All of that, I think is going to be and we heard that loud and clear at our Connect conference that people were excited about our vision for what the product enhancements are going to be in the future. And more and more of these customers or prospects are saying they want to lean in our way. So we got to get through this cycle with the market. But but in general, in the future, like as things come back, we think we're very well positioned for growth.
So the question was asked around the gross margin in that 64, 66 still attainable. And when do you think you'll come out of this cycle? Do you think you're all the way through the year calendar year? Or do you think it can happen before?
Yes. So 64 to 66, when you look at our guidance for for Q4, right? We're at 61.6 to 63.6, and we're really touching at the high end of our guidance at 64% range. That you just talked about. So you know, we described that as a longer kind of three year vision for where we're going to get the 64 to 66. But yes, we are absolutely still envisioning that be our target range for gross margin.
Yes, Alex, it is as far as the timing of the recovery is concerned, yes, I think it's going to depend a lot on the the spending environment in Amea and then just the timing and our ability to close on on the pipeline of opportunities that we already have.
I would say we have visibility.
We have a very healthy funnel of opportunities. The question on that funnel, it is the timing. And then we have a, I would say, a somewhat gun-shy team and Europe because I we've been we've been burned several quarters by expecting that spending cycles to come back and we just haven't seen it come back as quickly as we thought.
So net-net, it's difficult for us to make that call.
We we suspect that we'll start to see signs of this this quarter and into next quarter. I would say with a lot more confidence in December.
That's helpful.
Thank you.
And our next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Your question, please.
Yes, I wanted to take a look at the operating expense expectation for Q4. I know you took actions kind of mid-quarter here in Q three, and I think I've got the number right OpEx in Q3 at $147 million. What's the expectation for Q4?
Yes. So right now, we're expecting OpEx in Q4. I'm just looking for on here. It's at one 33 is what we're expecting that to be, Eric.
Okay. And I'm assuming the bulk of the <unk> kind of restructuring effort there was around the sales and marketing that correct. And we looked at all spend, to be honest, we Eric and obviously most we looked at program spend first and foremost because we value all of our extreme employees you still have to make adjustments across the board. But we really I would say we looked at it from a network design perspective and optimize the company's structure that way as opposed to just going in and taking out certain functions. We looked at how do we how do we reimagine our go to market, but also R & D deal focus areas and in across-the-board other areas as well. So I would say we optimize across the entire company to get there.
Okay.
I think I'm going to say Kevin and our guide, Eric, we we we knew that we were going to be taking expenses out of the business. So in our guide, that was that was part of the original guide.
Yes, yes, I understand the net new logo growth growth, so double digits in Q three, that kind of was a pleasant surprise for me. Given the overall macro environment still being challenging, what do you think was the key driver behind the new logo growth?
Yes, we were encouraged because what we're seeing and I mentioned in my comments that we're moving upmarket and we see a return to health as we get back to this kind of you've called your 35 to 40 plus million dollar plus deals in a quarter. This quarter was unusually low how ever. And we had a handful of really nice wins in the quarter that you have, including eight digit, an eight digit win and some some large seven digit wins that that dumb that that created it really nice new logo wins, and that's what sort of inflated the new logo amounts in terms of the dollar volume amount of new logo business we have a lot of that in our funnel as well, which is what we're excited about. That said, when we're calling Q4, we don't want to rely on large binary deals that they could move either way. We feel like we're in a stronger competitive position with some of the logos we talked about at Connect. We had Clover up on stage saying that they are very experienced with extreme far exceeded expectations. And there's a lot of new business opportunities, obviously with the world's largest grocer, Korean Air, major airlines after 30 years with Cisco kind of set up and ready for a change. They made the trip and flew all the way from Seoul to be their big endorsement. That means a lot of those markets, a Wash U prestigious university, making the move really intrigued by fabric in our security story. And so these are just some of the examples of of large wins, important logos important reference accounts, we are winning and we won them in the quarter. We don't necessarily have the magnitude of those deals in Q4 to call, which is why when you look at the Q3 to Q4, you might be wondering Okay, what you own or why am I not seeing more growth?
We want to be careful about calling the larger deals, but the fact of the matter is we are we are more competitive and we are winning them and success begets success in this marketplace. So that's that's what's giving us confidence and with a few more of these things that should really strengthen the our position, our confidence we're calling a stronger 25.
Thank you.
Thank you. One mobile for our next question and our next question comes from the line of David Vos from UBS. Your question, please.
This is Brian in for David. Thanks for taking my question. So on balance sheet inventory, that increased quarter over quarter to 105 million from 100, 53 million last quarter. Can you discuss how inventory should get worked down given the somewhat soft Q1 revenue guide relative to 90 days ago? And then I have a follow-up. Thank you.
Sure, Brian. I'll take that one. And so we did we did have a use of cash in the quarter for a building of inventory. You have to realize that, first of all, all of these inventory purchases that are coming in now we're more than a year ago, when does those orders were put in place? And naturally, what we're seeing in the market right now is the slowdown is obviously exacerbating, if you will, the inventory builds. There's a positive on that, which is we've bought all this inventory. It's all good inventory that we have on our balance sheet. We worked down the inventory, the distribution side of things we talked about and we had our inventory that we've now paid for. So that's going to be a cash generation opportunity for us in the future. I would say over the next year. All of that inventory is good inventory and should work itself into the market over time. We assess our inventory balances every quarter. As an example, you saw this quarter we moved one of our ODMs out of China into Vietnam. They brought the raw inventory that we had there for the raw materials. We ended up taking that out, and that's just because of the movement of the line. And we were reestablishing that line in Vietnam as we moved out of China, these are materials that we were using for the China market. And so it just didn't make sense because we weren't replacing that line. So we evaluate it every quarter, but right now, yes, we had a build in the inventory, but that's going to generate cash.
Got it.
That's helpful. And then as a follow-up, can you share with us what would be a normal inventory level when product revenue slashed demand normalizes is there a good rule of thumb? Can we think about it as like a percentage of quarterly product revenue?
Yes, I mean so we were running, I would say more like $19 million of inventory in the past. So we're probably double the size that we would like to be at on a percentage of revenue, 90 into roughly 11 billion, $900 million of product revenue would give you about 10% of the total annual product revenue is just to give you a guidance range from our perspective, you know that will work itself down over the next year. As an aside, I would also say in Q4, we expect inventory levels to come down.
That's another thing that we're looking at right now I'll take you one moment for our next question, correct.
And our next question comes from the line of David Kang from B. Riley. Your question, please.
Thank you. Good morning, first question is on seasonality for fiscal first quarter 25. I know that's typically a seasonally weak, but any difference this time?
Yes, David, I think given where we are in Q4. And given how we're looking to build from Q. three, I don't think we're at a point where we can say that normal seasonality applies just because of the unusual nature of demand and the market environment that we're in today. So whereas normally, I think what you're hitting on is the fact that there's this dip in September and then you were up in December, a dip in March and then up in June. I don't think that the traditional seasonality adjustments will apply.
So you're implying that it could be up or even at or at least flat maybe for September from June to September?
Yes.
I think given where we are today, Kevin mentioned that well, I mentioned we have some large deals that are somewhat binary.
And I will say Kevin mentioned before talking about the guidance that we want to, we want to be more cautious and have a more cautious tone. And in Q three, we had a number we can argue the bar wasn't that high, but we're on track for hitting a number. And that's how we want to run the business and how we want to manage expectations where we're going to meet or exceed our guidance. And we've set the table in such a way that way for Q4, I think it's too early to call?
I think right now Kevin will get upset with me if I circle in Q1. But what I would say is I don't think the year that we're not at a point to say we've returned to normalcy and normal seasonality.
Got it live. Okay.
Okay. Man up.
My follow-up question was on bookings. You said book-to-bill was way over one but just wondering if you can comment on how they compare like maybe sequentially or maybe year over year on the bookings side?
Yes, product bookings, yes, we didn't. We didn't describe how it was. I would say it's still a challenged environment for bookings. I would say our overall bookings product and overall bookings was similar to what we had last quarter, slightly down from where it was last quarter, but similar from a from that. So I would say that that's good because it gives you some level of stability in what the bookings are going to be quarter to quarter. That being said, we're really looking for us to have, as I said, Europe come back in other areas of strength to come back in the second half of next year for us to really start to see significant growth.
And my last question is on, you know, regarding Europe, I mean, which particular verticals are weak of sounds like education was pretty good in any particular verticals. That's a still weak in Europe?
Yes, it's mainly the government business.
We look at what our category of SLED, which in Europe, basically, it was including and state and country governments and local governments in education. And we've seen a pause in spending there. And I think, yes, this is where we have a lot of business that that 40% mix was a mix for the entire company. When that will come back, we are confident that it's going to come back, but I think more now than ever before. And we're seeing them sweating assets and taking more time to move forward with planned network upgrades. And these are a lot of these are existing customers. And yes, that this is where we are, especially in the German market that we call doc, which has been very slow for us when that comes back and we believe it will come back, it's going to bring a lot of momentum to our sales recovery.
And then I would I would note that we are looking at quarter over quarter Q4 versus Q3, an increase in our bookings expectations at this point given given the revenue growth.
Got it.
Thank you.
Thank you. One moment for our next question and our next question comes from the line of Timothy Horan from Oppenheimer. Your question, please.
Thanks.
So just following up on the on the government side, what percentage of that is do you think is in the office space versus places like railroad stations and other public venues or only because and I've been in a bunch of government buildings lately and like no one's in the office, I mean, they really need to upgrade these WiFi networks anytime soon. People are coming in all that much.
Yes, Tim, I'm not sure we're able that we're going to be able to pinpoint it.
And we have that we have a we have a lot of different government agencies, everything from Yes, in in Germany, the Department of IT. for example, we have many defense ministries in different European countries. And so it's it's very distributed. And the other comment that I'll make is that we also have very distributed channel and our channel partners have long-standing and very strong relationships with all these customers. And so it is very much of a cyclical business. And when they when they just set when they make the decision to refresh and then when they release the funds, they go through with it. We are not hearing anything that says that what we know is that the cycles have been delayed, but we have not heard anything to the effect of. We're just not going to do it. And we think at some point that there will be a return to normalcy, particularly in the government verticals and up.
Yes.
Maybe just related to this, I mean, what is the average upgrade cycle historically? And um, you know, I know you're saying it's kind of extended out like it.
You don't.
How much can they extend that out of the they really want to.
And I guess related to this, you know, what impact of 67 having on, you know, those pesky life cycles?
Yes.
So I think normally in wireless, we would say wireless, you have three to five years switching five to seven years would be the normal life cycles.
Tim, as we think about, sometimes there may be an acceleration or break through WiFi. 6e was important because it adds six gigahertz spectrum and it's kind of a game changer in terms of what it does and extending the range of WiFi, lower latency, et cetera. So WiFi seven will carry that as well. And then it also depends on devices that are coming into the network and being able to support the bandwidth. In some cases, you'll see customers, yes, usually customers will fall into that range Yes, if you're getting to five years and on WiFi gear, you're starting to fall behind and it becomes more and more difficult to support the edge devices that are that are coming into your environment. And so especially when we think about the stadium environments, et cetera, that are early adopters and moving quickly into 6E. So I think it's fair to go with those ranges. There are rare examples of people that are just they're still running switches that are 10 years old up, but it's not really prudent to do that because usually those devices are end of life end of support. And if there's a networking issue, it's hard to recover if you have the older, the older gear.
Great.
Thanks a lot.
And just lastly on, are you seeing any change in churn at all in your customer base now, I guess.
Yes, I think our customer base remains very solid in most of our businesses with our existing customers. And we see this in terms of subscription renewals, we see it in terms of service rules and and in terms of competitive wins out in the marketplace.
In terms of projects, I would chalk up the current phenomenon more too. It delays elongated sales cycles and spending delays more than than competitive. We are a story of the market today is resonating now more than ever before, particularly with the complexity, our lack of flexibility and then the expense of total cost of ownership of dealing with the largest competitor and there's there's there's frustration there. There's also that frustration of the channel of, for example, in Germany, we've heard that, Dave, it discontinued some of their gold partners who are now looking for a new home, in which case IQstream is the best alternative today. And so with our competitive position, given the differentiation of our technology given R-Vision and the integration of security with networking and then the modern networking tools that we're bringing to bear, not just with our purpose-built machine learning AI tools for the network, but also new generative AI capabilities that we just rolled out. So I think people are excited about the vision and Extreme is the only pure play networking company. So as people are contemplating and upgrading to the most modern and future forward networking infrastructure. We also have the capability through our cloud to manage our competitors' equipment. We're the only people that can do that, and we have a very unique value proposition with fabric. So all of these things coming together, our sellers and our partners can position extreme in a way that's stronger today than ever before. And there's disruption in the marketplace. So as the market comes back, we do we are very we're very confident in our position.
Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone.
And our next question comes from the line of Christian Schwab from Craig Hallum Capital.
Your question please.
Great.
Thanks, guys.
So I guess my first question is regarding the excess inventory. Understand the good news of potentially generating cash as that normalizes back to your goal of 90 million on ITO given the state of the market. And, you know, is there any risk that that we should assume that you may be more aggressive with pricing strategies to move that inventory a little bit faster?
Christian?
Yes, I'll cover that. What I would I would say couple of things. One I said in my prepared remarks that so far we are holding price as a company, which is good through Q3. We are also hearing and seeing in market that some of our competitors with excess inventory themselves are starting to get discount more heavily. And so we have to evaluate that on an ongoing basis. So we know how we are doing versus day. We're typically 10% to 15% cheaper than Cisco in the first place. So they do discount more. It's easy to discount a lot more in order to be at our pricing. So that tends to help us being slightly lower than what they are already. But that being said, you know, we evaluate on a quarter-to-quarter basis. The key here is going to be like how much is WiFi seven adopted six e. we still have some WiFi six in place, but we do believe that we can move that inventory over time. And that's what we evaluated on a quarter-to-quarter basis.
And how much WiFi six inventory, do you have is that a material amount?
Is that, you know, $20 million worth or is it materially less than that now I think is a tickets that are less on?
It's not I would say it's not a huge amount of the one 85 Ticketmaster.
Okay, perfect.
And then on the new, I guess, to Mr. Henderson's question on, I guess the new aspirational near term, the revenue target is $1.2 billion kind of run rate, 300 million a quarter. They do that, right. So you know, 25, we're still moving through cautious spending and elongated sales cycle, Cisco pricing, competitiveness, blah-blah-blah channel, trying to figure out which products they want to sell. So should we should kind of assume in fiscal year 26, you know, as you know, our $1.2 billion plus goal depending on market conditions.
Is that fair on fiscal 26, I think that's big.
Yes.
I mean, obviously, there's a lot of efforts in terms of what is going to happen from a market place perspective. And when will it come back on is the big question, right? The channel digestion activity in that cycle and does that end in this calendar year and then that generates a bit more positive tailwind for the entire industry coming into January of 2026 and into our fiscal year. I personally think that there are still a couple of quarters, at least if not a couple maybe a few quarters even through the end of the year here in order to get back to normal. And then once we get back to normal, we should start to see us getting into the yes, $300 million range on ITO as a company at that point. Obviously, at that point, we'll start to get some normalized seasonality from a Q. one Q. three being our lower quarters in Q2, Q4 being our higher quarters. And some of you will have why contraction and expansion in this quarter is once we get back to the new normal, but we think that's going to be, you know, a few quarters.
And great.
And then my last question is, should we assume the 135 million plus or minus of OpEx run rate is the appropriate run rate. And I forget exactly how and where to bid. But on the two to support and drive or recovery to 300 million of $1.2 billion in revenue. Is that the right OpEx number?
We should be assuming that when we do get there, you'll still be running that plus or minus?
Yes. I mean, I think I mean so I think that what we're looking at in Q4, right? It's just a pocket in time and there are other quarters that have, for instance, the other events and then that will make that OpEx you kind of ebb and flow. We will have, for instance, you don't merit increases coming in at some point in the future and some other expenses that come into the future. But for now, I would say that's the expected run rate for the current quarter.
Okay. Fantastic. Thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Ed Meyercord for any further remarks.
Okay.
Thank you.
And now we appreciate all the questions and the time and interest in IQstream for everybody participating in the call. I also want to shout out to our we have a lot of employees joining in here, customers and partners. I'm for all of the work and especially the engagement last week and connect. And we are going through a challenging period here we are in terms of the rebound, I would say we're excited about rebounding and I would say the return to normalcy in the industry and our and our position and what we're going to be able to do so.
Thank you all.
Thank you for a Thanks for participating and Doug look forward to seeing you on the road.
Thank you.
Ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.