Alex Henderson: Yes, the question really was what’s the difference between sell through to customers and i.e. what is the underlying customer growth rate in terms of buying product from your channel as opposed to the work down of inventory in your two-tier distribution channel? So, if you were to look underneath the surface here, yes, there’s flat product sales, but that is reflective of underlying sell through of what percentage of your revenues coming out of the two-tier distribution. So how much of this is the channel distribution inventory destocking and how much of this is a weakness in underlying demand?
Ed Meyercord: I mean, it’s hard to cheese that and pull that apart naturally Alex, we don’t have perfect visibility into all that. I would say that our two-tier reseller and distribution program, it’s relatively healthy is what I would say. They have got healthy now, fully normalized inventory levels that they have. We don’t have too much necessarily in the distribution level and we’ve got our own healthy amount that we have on our own in warehouse. We’re looking at more end customer demand challenges right now. This air pocket is more of an end customer demand. I mean, you got two wars going on right now, et cetera, et cetera. So we’re just seeing Europe being this more sluggish, I would say, area of any we commented, particularly in Germany, that’s the area that’s really I’ll call causing the slowdown is mostly in the European area. We’re doing well in APAC and U.S. still continues to be strong, but if there is any area, it’s that.
Alex Henderson: Thanks.
Operator: One moment for our next question. Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Your line is open.
Eric Martinuzzi: Yes, I was hoping to. Just a clarification first on the guide for FY’24, that mid- to high-single digits, are we talking 4% to 9%?
Kevin Rhodes: I guess you would, yes.
Eric Martinuzzi: Okay. And then I guess the change in demand environment, it seems like up until about maybe six weeks ago, we were still pretty confidently talking about a mid teens growth rate, not only for FY’24, but for FY’25. Was there a particular event or two that you guys can point back to as the market shifting kind of all at once?
Kevin Rhodes: Yes, Ed, you want to cover that?
Ed Meyercord: Yes. Eric it really happens if you look at the way our business flows from an ordering standpoint and it’s the entire industry. There is a build up towards the end of the quarter where most of the orders come in, in the last month of the quarter. And literally, I would say the last two weeks of the quarter when we have a huge pipeline of deals and committed deals, our sellers and then the alarm started coming back that, hey, this is going to push. The decision by – and it’s really across geographies, across industries, across verticals, where there was this wave of messaging coming from our field that deals were going to slip and push at an unusually high level. And it caught us off guard because no one really saw that coming.
We’ve heard about it, but that happened. And so it started slipping at the end of the quarter and then as we look forward, our teams just got a lot more cautious with their call, given the environment. And what we’re hearing is that there’s more scrutiny over budgets, more people are getting involved in the purchasing process. The projects are still good, the projects are still going to happen, maybe there is a prioritization issue that takes place, but you’re seeing more purchasing, more financial types a lot of different players come into the decision making process. They just slowed things down. We weren’t in a situation where we lost business. We were in a situation where our opportunities just moved out to the right. And that happened literally the last two weeks of the quarter.
A lot of those orders don’t really affect the quarter because now we’re getting close to a point where what we book in a quarter is what we ship. And at the end of the quarter, when orders come in, you don’t turn around. That would be kind of more normal backlog with what happens at the end of the quarter. The orders come in and they turn into your revenue and your shipments for the next quarter. And so it was that softness at the very end of the quarter that caused us to look at Q2 to be more cautious and conservative. And our field teams, on the heels of what had happened at the end of the quarter felt they should be more cautious with their calls. So, that’s really – it’s kind of the combination of those two things that happened.
Kevin Rhodes: And Ed, I would even comment that beyond September 30, like even to October, we were still seeing some of the same buying pattern issues in the last 30 days that caused us to also assess what our Q2 revenue would look like leading up to today.
Eric Martinuzzi: Got it. Thanks for taking my question.
Ed Meyercord: Thanks, Eric.
Operator: One moment for our next question. Our next question comes from Timothy Horan with Oppenheimer. Your line is open.
Timothy Horan: Thanks guys. Ed, when you study past periods of slowdown may be talking to the channel, I mean, in this last six months, 18 months can these networks just run hotter for a little bit longer? And I know you’ve been asked a few times, but can you just maybe give us a rough guesstimate of what percentage of the lower guide comes from just working down inventory at the channel versus end user demand? Just kind of hearing mixed signals. Yes, I know it’s very hard to quantify, but just a little bit more color. Thanks.
Ed Meyercord: Yes. It is hard to quantify Tim. And thanks for the question. And I’ll give an example with some of our largest partners and I’ll use – I’ll pick on EMEA and I’ll pick on Germany specifically. They’re having a fantastic year. They’ve gotten all of this product that’s been released from backlog, and they are solely – they’re focused and super active in deploying networks for their customers on our behalf. They are fully consumed and you see their business is way off year-over-year with us. These are an example of a strategic partner with really healthy business and amazing customers. However, their focus right now is on deploying all that equipment. And so their business is off. They fully expect business to return.
And so that’s why, as we look at with our outlook, we know it’s coming back. It’s just – there’s a near term. And we’re calling it an air pocket for the channel to deploy. If I had to put it – if I had to just make up a number and place a guess on how much I would allocate to the slowdown of decision making, more people coming into the decision making process, budgetary constraints, pushing versus channel digestion. Kevin, you can jump in, but if I had to give it a finger, like I’d probably say half and half.
Kevin Rhodes: Yes, I was thinking 60 macro, 40 digestion, but somewhere in that.
Ed Meyercord: Okay. Yes. And Tim, the other piece is there historically has been a run rate business and that run rate business is not insignificant. And we knew that run rate is starting to come back, which is encouraging to us. Our anticipation is that there would be a step function in run rate throughout the course of this fiscal year. And I think it’s – that run rate is happening more slowly. We think that’s also a byproduct of what’s going on in the channel.
Timothy Horan: Yes, that’s great color. So, I mean, basically you can look at the distribution is full out at this point. They can’t handle any more capacity is maybe half to slow down…
Ed Meyercord: There’s the distribution side, okay, and distribution has inventory, and then, there are channel partners themselves and they’re busy and they’re saying, okay, distributors don’t ship me that product yet because I need to finish this project, and then I’ll take delivery for the next project. So the – and that slows down distributor buying as well because they’re waiting for what we call POS. But they’re waiting for our channel partners to draw down on their inventory. So it’s kind of, it’s just gotten backed up a little bit which is why we’re calling it digestion, but it will pass.
