Welcome, everybody. Hope everybody got some sugar for this session, or some caffeine, as we drift into the afternoon of day one. For everybody, I'm Meta Marshall. I cover the networking space here at Morgan Stanley. We're delighted to have Extreme Networks and Kevin Rhodes, CFO of Extreme Networks, here with us. I'm gonna start with a brief disclosure, and then we'll get into more exciting conversations.
Okay. Sounds good.
So for important disclosures, please see the Morgan Stanley Research website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Kevin, very timely to have you here, I think. There's been a lot of inventory digestion and macro pressure impacting the networking market, that's been putting pressure on your business and much of the networking space.
Mm-hmm.
Can you just give us an overview of, you know, when these challenges began and how they've progressed over time, or how the makeup of those headwinds have progressed?
Sure. I mean, it's primarily COVID-induced, right?
Yep.
During the period of COVID, you had a lack of supply because a lot of the manufacturing had shut down. You had all these people who were getting in line to get their orders eventually.
Mm-hmm.
The question was, When would that occur? So that created a lot of backlog, backlog opportunity and a lot of orders, and people were getting in line just to get those orders. Then all of a sudden, we started to see supply chain coming back online. Supply chain started to come in a little bit faster than we realized.
Mm-hmm.
And so we thought that supply would kind of come in over time, and the reality is it kind of came in all at a fell swoop.
Mm.
And so we were basically getting those orders out into through distribution into the resellers to install over a period of time, and that's where you saw a lot more, I'll call it, revenue outpacing demand.
Mm-hmm
... from a bookings perspective. Because even though you had general, you know, normal bookings in a given quarter, you were able to revenue off the backlog, you know-
Mm-hmm
... over time. So a lot of the industry saw a real, real growth area for a period of time, and then all of a sudden, the backlog started to come down because those orders were fulfilled, and now Book-to-Bill became one. And so, what we are trying to do now is all kind of managed through this channel digestion or this-
Mm-hmm
... digestion of all this inventory that's coming through right now. And so with all those orders from the backlog coming through, you've got all that inventory coming through, and not enough, if you will, installers-
Yeah
... to actually install all the inventory. And so there's really a pinch point, if you will, of how to get that inventory out into the marketplace. And then the overall macroeconomic environment has not been as good as it was-
Mm-hmm
... a year or even a year and a half ago, as you saw, you know, post-COVID, like, a lot of people coming back online, you saw more orders coming there. And so now we end up being with higher interest rates, a little bit more of a macro challenge in the market-
Mm-hmm
... which has reduced the amount of inventory, or reduced the amount of demand that there is in the marketplace. That's created this, this disconnect.
Okay, that's helpful. So, I mean, how do you judge just, you know, when to expect recovery from the current digestion period, maybe separate from kind of macro?
So we've gotten very focused around looking at our pipeline-
Mm-hmm
... looking at the pipeline of opportunities that we have. For instance, we felt like it was important for us, as a company, to get through the channel digestion issue, especially at the, at the disty level in the third quarter, and that would lead to us getting back to a more normalized, you know, backlog, as well as just the inventory in the fourth quarter. And then, as we think about the next 2-3 quarters out, that we think that demand will start to come back sometime later this year, second half, but probably more beyond September, like September, October.
Yeah.
Get through the summer months, and we'll see more normalized inventory levels in Q4, and then demand coming back in the September quarter.
Okay. Are there specific customer types that you kind of expect to recover sooner rather than later, or certain product types that you expect to come back sooner versus later?
Yeah, I mean, we definitely have strength in certain vertical markets and then certain regions of the world. So maybe I'll talk about both. From a regional perspective, where we've had strength, for instance, has been some of the weaker areas, like Germany.
Mm-hmm.
We have real strength there and have a good market share there, but that's been fairly weak, and they've been in technical recession. Same thing with England, same thing with Japan. All three of those regions are pretty strong for us, but yet those have been weak from a macroeconomic perspective. When we see those start to come back, we think that we will, you know, generate a lot of market share in those particular, you know, regions of the world. From a product set, we actually do quite well in switching, we do quite well on wireless.
We think that our Campus Fabric is a differentiated fabric, and our cloud management software is agnostic. We can run our cloud management software in AWS, Azure, GCP, or your own hybrid cloud. We see the differentiation from a product perspective being the combined network solution that we have enables enterprises to use our technology in a different way than you can get with the IP fabrics that tend to exist within the industry.
Okay. And just, you know, you mentioned kind of the inventory digestion, but just how are you judging how much inventory is in the channel to digest?
... So we have good visibility, so I call it the 80, you know, 20 rule. About 80% of our revenue comes from 20% of our distribution partners. So we've got some larger, you know, partners that are in, in that world. And, and so from our perspective, you know, we have real-time visibility into their inventory levels. As they get orders in, they're fulfilling those orders. Those orders are fulfilled either 100% through what they have on hand, or they may have partial orders, partial inventory on hand, and they may need us to supply the other in order to fulfill the total order. But I would say, in general, we have very good visibility into what distribution has on hand.
Okay.
And then there's the other 20%, you know, that is more like we—either it's a phone call or it's weekly reporting that we have with them, but again, they're much smaller, longer tail-
Okay
... of our distribution network.
Okay, that's helpful. And so, you know, just as we get past this sort of macro disruption or kind of period of digestion, just what are you expecting from growth there, and just what gives you confidence that that comes in kind of that fiscal 25 period?
Yeah, I mean, part of it is just... So it's obviously there's disruption in our marketplace right now.
Mm-hmm.
and there's a lot of fear, uncertainty, doubt as to, you know, at the end customer level, where they should be buying and what the world's gonna look like in 6 months or 12 months from now, with HP and Juniper merging together.
Mm-hmm
... CommScope having their challenges, and Ruckus being underneath the CommScope name. There's a number of different industry players out there right now that a lot of people and customers are just worried about-
Yeah
- you know, where are they gonna go and buy from? It creates an opportunity for us.
Mm-hmm.
And so that opportunity is really when people are at an inflection point: where am I gonna buy my next networking gear from? You know, it creates an opportunity for us. The other thing I'd say for Extreme Networks is, we're getting introduced into more million dollar opportunities than we ever have before. And so these large multi-million dollar opportunities, and we're knocking some down when there's, like, an RFP process, and there's four of us in that process, including Cisco, Juniper, HP, and us. You know, I'll cite Kroger as a good example, very competitive win on our part, 2,400 stores, and that was all a technology-
Mm-hmm
... you know, purchase and a technology buy from their perspective.
Okay.
And so we are purpose-built for the enterprise.
Okay.
That's where we're seeing, you know, real, real world benefit from.
Okay, perfect. So, you know, I think for a lot of people, kind of the strength that we saw coming out of the pandemic on campus spending made sense. You know, there was hybrid work. We're investing in return to office. Is return to work still a tailwind, or what do you see driving kind of continued investment, that you're seeing at the campus?
Yeah, I mean, return to work is certainly part of it. Like, we call that the carpeted enterprise, right?
Mm-hmm.
We still see that. I would say that the higher demand is going to be, one, Wi-Fi 7.
Mm-hmm.
It's got 4-5 times the amount of speeds that you have in Wi-Fi 5 or 6, and so that will create an opportunity for all of us in the future. You know, we also see, just in general, more and more proliferation of devices-
Mm-hmm
...online, and even AI, right? Even if you've got machine learning models or Large Language Models that are happening, you know, in the data center, it still has to make its way back out-
Mm-hmm
... to the end user of that information, and so that's making its way through the network, effectively. And so we think about our network and what we do is, you know, we're the heart and the vascular system of the enterprise-
Mm-hmm
... you know, delivering oxygen to the enterprise. And so, you know, that vast array of network that we have is basically delivering all that, that good information that they need in order to do their business.
Mm-hmm.
And so that for us is really where we see, you know, proliferation of devices, more AI happening and going over the internet, and then just more analytics as well, driving that world.
Okay. You alluded to it earlier, but, you know, the HPE and Juniper acquisition has been top of mind for investors, just given what happens to the competitive dynamics of the market. You know, just how do you think it can change the competitive environment, and what have you been hearing from customers or kind of channel partners?
I think the biggest question or the biggest concern is uncertainty.
Mm-hmm.
It's the fear, uncertainty, and doubt around, you know, what's this mean for me in the future for those resellers, for those employees? You know, $450 million of announced synergies that have to occur-
Right
... in order for that deal to be a successful one. Where is that gonna come from? It's got to come from cuts-
Mm-hmm
... of employees. Where are those gonna come from? No one knows.
Yeah.
Then the roadmap. Just what's the roadmap look like? Does Aruba survive? Does Mist survive? I think the management team is coming along with it, so, who's making those decisions? Is HP making those decisions?
Yeah.
Or Aruba making those decisions? I think no one knows. And so I think resellers are worried, especially at the low end. Are they gonna be there or lost in the HP enterprise?
Mm-hmm.
I think the employees are worried 'cause they know they have got, you know, cuts coming, and then, and then we've got resellers - I'm sorry, we've got end customers who are worried about what's the roadmap gonna look like, and what's this mean for them?
Have you heard anything similar from, I mean, just the CommScope enterprise, just given kind of what distress they've been under lately?
Yeah, I mean, I mean, CommScope - I mean, obviously they've got their own challenges with debt, and-
Yeah
... and the debt is massive, and just a really difficult quarter most recently. You know, Ruckus is a good little business that's sitting within CommScope, but the reality is it's got, you know, the mothership, if you will, challenges.
Yeah
... on the debt side of things. And so, we don't see them that often.
Uh-huh.
We know that they play, for the most part, in the E-Rate K through 12-
Yeah
space, and they also, you know, play in the hospitality space. But that's all I can really comment there.
Yeah. Okay. You've been very disciplined over the past few years, kind of since you've done a lot of this roll-up around the verticals that you target. Just how does that change or how does your view of that strategy change, given the consolidation that we are seeing, and does that create any kind of new opportunities?
On the vertical market side?
Yeah.
You know, so we're strong on the SLED side.
Mm-hmm.
About 40% of our revenue comes from state, local, and education. I think about education as kind of the K through 12, but also the higher education side of things-
Yeah
- where we play very well. All of those kind of end markets within SLED are really great for us because we love environments where there's a lot of change occurring.
Mm-hmm.
Like I said, at the outset, like, a lot of our competitors kind of sit in the data center, and it's a static kind of IP Fabric that they use, and that's-
Mm
... what they tend to use in general. Ours is a very dynamic, you know, Campus Fabric that effectively is really purpose-built for companies or institutions or whatnot that constantly change.
Mm-hmm.
They have lots of people coming in, coming out, and they have a lot of change. You know, things like, you know, this room, it might be, you know, carry 2 access points initially, but if everybody were on video right now, you know-
Yeah
... you'd need 3 more access points in the room to make it all work. Well, ours can self-provision within 2 minutes, and you can have all 5 access points up and running.
Okay.
Their solutions, you probably need an on-site network engineer to come in, and it's going to take them an hour to go get it provisioned.
Okay
... command line interfaces and the like. And so that's what we think is a real differentiator for us, is that real Campus Fabric.
But not expanding those kind of verticals, despite kind of what your-
No, I mean, SLED's one, retail is another, manufacturing is another, that we've actually competed-
Yeah
... very well in, and, hospitality is another that we're making really good inroads on.
Okay.
Those are all the very clear, you know, industries that we think that we can compete very well in, and we are.
And then just given you guys do compete within education, I know maybe a little more skewed to higher education, but E-Rate cycles always get brought up. Is that something that, you know, you think can kind of help midway through this year?
Yeah. I mean, we even talked about this in terms of our Q4, like, guidance-
Mm
... that we gave out. You know, we gave not only Q3 guidance, but also Q4, just to kind of bridge where we thought we were going to come out, you know-
Yeah
... post Q3, with a digestion issue kind of behind us on the disti side. We have more quotes and more pipeline this year than we had last year. We're in the fourth year at a five-year cycle, but we've got a lot of quotes that are outstanding on E-Rate. And we think that given the HP-Juniper merger-
Mm
... given where Ruckus is within CommScope's, you know, challenges, like all of that, you know, we think this could be a good E-Rate season for us.
Okay.
Again, for people in the audience, that's K through 12 purchasing in a government program that basically sponsors network infrastructure upgrades.
Got it. You've, you've talked a lot about kind of managed services as a channel. Just, you know, how do you see the managed service provider opportunity developing, and just how can you differentiate within that channel?
So this is an area that we are starting to lean into. So managed service providers. So typically, when we sell, we sell in a CapEx model, and so people, when they buy our hardware, they're buying it, you know, you know, 100%, and they're buying it themselves. Where we see an opportunity is to enable managed service providers. That is, they are the ones who are buying the equipment, and they're installing it with their customers, typically smaller customers, who, who they will manage the entire IT infrastructure, the closet, the networking, the desktops, you know, support operations, et cetera, for that company. And what we are doing is we're building a consumptive billing model for those MSPs.
So not only can they buy the, the hardware from us, but also they pay on a usage basis on what their licensing is, their licensing, and naturally, they have a direct line of support with us as well. And we're, we're basically signing up 25 this year, 25 next year, the year after. We think each one of these new resellers that we don't have today will be a new vector of growth for us, and we think that we can get $2 million-$5 million per reseller-
Mm-hmm
... you know, at scale. And so that's an interesting, you know, opportunity for us to really drive more, more market share and, and new market share that we've never had before.
Okay, got it. You mentioned on your past earnings call that you expect to begin shipping Wi-Fi 7, and then again in the Q3 and beginning to ramp into Q4. You kind of alluded to that, earlier. Can you just talk about the demand you're seeing for Wi-Fi 7? You know, and just what are you hearing from customers, just in terms of, like, how you can expect to model this ramp?
Sure, sure. I mean, so some people, for instance, you know, Ruckus went Wi-Fi 5 to Wi-Fi 7. They skipped 6.
Mm-hmm.
So, we see, like, none of... Like, HP, Juniper, or Cisco, none of them have come out with Wi-Fi 7 right now.
Mm-hmm.
It is 4-5 times faster than Wi-Fi 6, and so there is a marked difference in what Wi-Fi 7 is going to give from a speed perspective. Going back to AI, going back to how many more, you know, devices are coming online with the network, and people are using the network to get more and more data, you know, on what people are doing within their network. Or I think about an example of, you know, a stadium, like a Gillette Stadium in Boston, where I'm from, right? They're not only tracking what websites you go to, but also where you are in the stadium as well.
Right.
And they're using that information to make the experience for that customer even better. If you sat in line for 10 minutes to get a beer or to get snacks, they're trying to figure out, "Well, how do we make that experience better for the end consumer?" So all of that data is being used, and that's where there's an upgrade cycle coming from many customers. Yes, some customers went to Wi-Fi 6, and so they may not need to upgrade for a period of time, but there's a whole swath of customers that are at Wi-Fi 5 that, in the next 2, 3 years, will be interested in getting to Wi-Fi 7, and it's, like I said, 4-5 times faster. So we think that that'll be a real natural, you know, opportunity for us to upgrade those customers.
Okay. You're very generous in saying they're making the customer experience better versus just trying to sell them more beer -
Yeah
... and hats in the future. Okay.
They would like-
All right
... they would like to do that, too.
Yeah. All right. So, you've recently had some changes with your go-to-market. You've appointed a new COO. Just what has changed in terms of your focus on go-to-market strategy and just how you're looking at growth going forward?
Yeah, there's actually really two changes that have happened here recently. So not only did we take our COO and convert him into a Chief Commercial Officer.
Mm-hmm.
So now he owns both the sales side, as well as the supply chain and delivery of revenue for the company. His name's Norman Rice. He's been with the company for six years now, and he's outstanding. I really like, like working with Norman. So Norman's thinking about the go-to-market slightly differently than we used to think about the go-to-market in the past. So let me just say that, and then the other part is that we just hired Monica Kumar, and Monica is our new CMO. So really two pillars on the go-to-market side, where a new CCO and then a new CMO coming in. And coming online, and really them pairing themselves with the CTO to make sure that we've got a triumvirate of people that are really, you know, looking at the go-to-market in a different way.
A few things that we are doing, first and foremost, stratifying our opportunities in a different way and going to market in a different way with them. So under $50,000 deals, those deals, we have a different, you know, process for going after those deals. Those tend to be primarily reseller-focused and have the reseller focusing on those deals. As we go up to million dollar + deals, there's a continuum here of reseller only, all the way up to Extreme only.
Mm-hmm.
In the middle, kind of a hybrid approach of us and the reseller trying to sell those opportunities. But we're going to spend our time more concertedly on, you know, $500,000-$10 million + deals in our sales force and have our sales force really focused on those larger deals as they spend their time, which we think is a good use of their time, as opposed to spending their time on smaller deals and just every deal that's in the pipeline.
Okay.
And then on the account-based marketing side of things, or just the marketing side in general, different, if you will, motions for the marketing as well. So a $10 million deal has a very different marketing motion to it than a $250,000 deal-
Mm
... with an existing customer. So making sure that we've got all the marketing messages and all the marketing collateral, if you will, and making sure that we've got white papers, and we've got webinars, and we've got all those things that need to get a $10 million deal through the cycle.
Okay. Maybe circling back, we spent a lot of time talking about kind of campus demand and Wi-Fi. We haven't spent as much time talking about data center, which I know is kind of a smaller portion-
Mm-hmm
... of the business, but just any different trends you would point out on data center versus kind of campus?
I mean, we don't have a lot of data center business.
Yeah.
So, you know, I would say, from our perspective, you know, we are very enterprise-focused. And while data center is good, and while we have an IP Fabric as well-
Yeah
... that can work within the data center, we have not focused necessarily on switching that would drive you the hyperscalers and that sort of thing.
Yeah.
I would say, for us, we're just being very focused-
Mm-hmm
... on the enterprise and feel like that is the area-
Yeah
... where we will compete the best. And while we might have to give up some opportunity in data centers, while we still, people can still buy our hardware-
Yeah
... for their own data center, we're not trying to, like, outfit AWS, Azure, and GCP.
No, no. But just any different trends with enterprise and just in terms of how, you know, either how macro is impacting data center versus campus for enterprises, or is it pretty much the same?
Yeah. Yeah, I mean, obviously, AI right now is impacting-
Yeah
... data center a bit, where people are starting to buy more and beef up their data centers to manage the large language algorithms and models that they have there. The data center, clearly, with Arista and others that play-
Yeah
... in that world, are doing fairly well. But, but from our perspective, that's where we see the pull through coming through-
Okay
... is the end user of that-
Yeah
... is going to get that through the network.
Perfect. Subscription growth has been a big portion of the growth story-
Yeah
Over the past couple of years. You know, who is that customer that is most interested in that sale? And, you know, sometimes we hear noise in the marketplace around competitive pushback around those who aren't selling subscriptions, saying customers don't like it, but how much of that is competitive talk ?
We think we've got great subscription software. We think our cloud management software is really good, too. We're gonna add more and more features over time, and we believe we are very much leaning into that strategy as a company. As a matter of fact, you know, my background, SaaS, CFO primarily.
Mm-hmm.
As I think about this business and my role here as a CFO, is really to SaaSify this business a lot more, and so we will continue to lean in there. The MSP business that we have is gonna be 100% attached. We are moving our company to hardware sales with 100% attached. We're bundling software and subscription together-
Mm-hmm
Starting in July, and that's gonna be 100% attached. And then we've got a great new motion happening within the service provider space that is 100% subscription.
Mm-hmm.
and so we think that that is an area we will continue to lean into. We've had really enjoyed great growth out of that part of the business, and we'll continue to see that in the future.
Okay.
We will continue to add more and more features over time that just inure to the benefit of-
Mm-hmm
our customers who are on those subscriptions, and they don't have to pay more for that.
Right.
They've already paid, you know, into it.
Do you ever get any pushback or kind of competitive pushback from having a kind of subscription piece to your sales?
The customers who use our subscription cloud management love it.
Okay.
They can't think about not having it.
Right.
as we add more security features to it-
Mm-hmm
like Zero Trust Network Access, and we start building security features within the network, we think that that is what's going to carry us in the future with our customers, that they will... They don't know what they want until they see it.
Yeah.
A little Apple adage, you know, and that's our view is, like, we will deliver to them all of the features that they think they don't know that they need today, but they will realize tomorrow they absolutely need them.
Okay, perfect. You've had 60%+ gross margins for the past three quarters, despite inventory digestion, macro weakness, pressuring the top line. You know, what were the main drivers and the strength on the gross margins , and how sustainable are those going forward?
Yeah, I mean, there's probably two vectors of growth there on the growth margin side. One, just we've improved our product gross margins over time-
Mm-hmm
because the cost of material has come down over time. And we were able to generate, you know, some price increases with that.
Mm-hmm.
But, but, but as costs have come down, we've not necessarily had to reverse-
Mm-hmm
-some of those price increases that we've experienced over time. So we are seeing a better benefit from, from product. You know, shipping is cheaper than it was before. I'm no longer paying $0.50 for a screw-
Yeah
like I had at one point when you just couldn't find any screws anywhere, you know, et cetera. So, so clearly, some of that supply chain has eased, and we've helped and got benefit out of that. The other vector is just, subscription-
Mm-hmm
And our subscription and support, both of those elements are at a higher, you know, overall margin than our, our products. And so as we sell more of that, we will see, you know, even higher subscription overall margin from the subscription and support margins just being a larger mix.
Okay, perfect. Your long-term operating margin target is 23%-25%.
Mm-hmm.
Can you talk about how you plan on improving operating margins over time and, you know, just how you're optimizing kind of your OpEx?
Yeah. I mean, I can't talk about it now in Q3 because we're not gonna have a lot of operating margin.
Yeah.
But when I think back to Q4-
Right
-when we were at 18%, you know, I, I know how we can get there-
Mm-hmm
as a company, and we have strong visibility that we can get back to, you know, that 18% where we already were-
Right. Mm-hmm
and then move to 20%, and then the 23%-25% in the future. Part of that is going to be all these, you know, the MSP market, you know, maturing for us. This Extreme subscription private offer-
Mm-hmm
-that matures over time for us, that is 100% subscription. And then with this cloud attach that we have at 100%, too, that's gonna drive, you know, more margin for us as a business. So, so we're gonna continue to sell product, but we're also gonna get 100% attach from that, and that, I'll call it the future hardware sale that we have, is gonna be a richer, better margin-
Mm-hmm
in the future than it is even today.
Okay. Perfect. Before I ask any more questions, any questions from the audience? We have a question here.
Yeah, so, so you saw Cisco go through Meraki and how they had to manage kind of the two platforms at the same time. You're now seeing HPE and Juniper doing the same time. What's the... How do you, how do you see those parallels in terms of your ability to capture any, impact from those? That's question number one. Question number two is, has there really been any real success with this subscription model? I mean, I don't see it in Juniper's model. I don't see it in Cisco's model, where it's like, okay, well, we'll charge you for operations. And if you look at the, you know, if you look at whether Juniper's Apstra, they don't break it out, or you look at Mist, they don't break it out. You look at, Cisco's DNA Center, they don't break it out. You know, management-
Right
Teams tend to say good things when things are good. So I guess those are my two questions. Number one, do you see the parallel between the Juniper acquisition and the opportunities there, as you saw with Cisco Meraki? And then number two is, what evidence do you have that customers will actually pay for operation software? Thanks.
Okay. Sure, sure. On the first side, like, I can't speak for why Cisco did not integrate Meraki and Catalyst, you know, well together. They've owned Meraki for over, what? 9 years, 10 years at this point. Hard to understand why they didn't integrate those. HP and Juniper, obviously, to be determined whether those can be elegantly integrated together. What I can tell you is that Extreme has done 5 or 6 acquisitions over the last 5 to 6 years, and we have absolutely integrated all those companies together and all those platforms together, and I call it part of our DNA.
I mean, our CEO, Ed Meyercord, and our CTO, Nabil Bukhari, have very much, you know, focused on making sure that we have one universal hardware platform. Not only can our cloud management software see our own technology, but believe it or not, we can actually see into our competitors' technology better in some cases than they can see their own technology.
Are the opportunities the same with these disruptions, you see? Can you replicate some of the synergy that you did with the Meraki acquisition with the Mist Juniper acquisition?
Yeah, I mean, so the question is just like, will this create an opportunity for us? And I think the answer is yes. I think that we will create an opportunity for us as we think about the disruption in the marketplace of people... I mean, number one, we already see it today on the Cisco side, that we have won opportunities because of the disruption between Catalyst, DNA, and Meraki, and they don't work together. We've won deals in that world. Obviously, we're hoping that we will win deals because of the roadmap issues and how HP and Juniper will have to come together, and they'll have to align that technology, but that creates, you know, FUD in the marketplace around what is going to be, you know, the roadmap for them. On your second question, which was, remind me again?
Operations software.
Operations software, and just how sticky it is.
That didn't work out so many of the.
Yeah, I mean, look at our 39% year-over-year growth. I think apparently we're doing something right on people buying our operations software and the cloud management software that we have. And we get, you know, high renewals in that regard. So what we are doing is we're adding more and more features to that, like a typical software company. And so if you just have cloud management software and it sits there on its own and never changes, I think that's the problem that you would see and face with some of the other cloud management softwares out that are out there. But we're thinking about our cloud management software as an ecosystem.
Not only that we will add more features to over time, that we can actually integrate our software with other software out there that people will use. Security software is a good example, and that would create more value in the overall subscription. So we think that is a big market opportunity for us to go after, and we do believe between AIOps, you know, being embedded within our cloud software, we have this thing called Digital Twin, where you can go and create a virtual network. All of those are things to test, exactly. All of those are things that people really love about our software and how, you know, our cloud management software works. So hopefully, we will continue to be successful as we are today.
Something that you would pivot towards as a service on top of this? This is not an irrational thing.
No, it's absolutely something we are thinking about right now, adding security as part of it. For instance, ZTNA, Zero Trust Network Access, is something we've already added into the cloud management software today. We did it in December.
Okay. Maybe as we wrap up with the last final questions, you know, just how are you thinking about capital allocation from here?
Yeah. We've been buying shares-
Mm-hmm.
-for a while. I, you know, I'd say we, we bought, you know, $25 million a quarter for probably the last five or six quarters, as a company. We will continue to buy shares. I'm pausing a little bit in Q3 here just to get through this channel, channel digestion-
Mm.
and purchase of inventory ourselves. But, you know, I think back in... As I think forward into the next quarter, in Q4 and beyond, we will continue to be buying shares.
Okay.
For sure.
Then, obviously, you guys have been acquisitive in the past. Just what is your appetite for M&A? You know, you've largely pursued a roll-up strategy, but there's obviously a lot of interesting adjacencies, whether security, software, or otherwise.
Security software are certainly areas-
Yeah
-that we would look at. There are other opportunities out there. I would say that we are pragmatic-
Mm-hmm.
that we are looking for things that are accretive, and if it's of interest to it, we're not gonna be afraid to do even hard deals like we've done deals out of bankruptcy before.
Yeah.
So we know how to do deals, we know how to integrate them well. You should be rest assured that if we do a deal, it is something that we can integrate well, that we, you know-
Yeah
... we have all of the DNA to be able to do that. But that being said, we have nothing like on the near horizon that we're really looking to try and pull the trigger on right now.
Okay. Any last favorite questions? All right, perfect. Kevin, thank you so much for being here today.
Thank you. Thanks for having me.