Samik Chatterjee: Okay. Thank you. Thanks for taking my question.
Operator: Thank you. The next question is coming from Alex Henderson from Needham. Alex, your line is live.
Alex Henderson: Great. Thanks. I was hoping you could give us some sense of when you think some things are going to normalize. And most specifically, the — at what juncture do you think your backlog is fully normalized? And at what juncture do you think your excess inventory will normalize? I assume that’s with a lag to the backlog. And do you think that there’s any risk within that inventory as we’re going through these delays and changing environment? Is there anything in your inventory that you think might be an obsolescence problem? Thanks.
Ken Miller: Good questions. On the backlog front, backlog has come down faster or normalized faster than we expected this year largely because the supply chain has actually improved much quicker than we expected from a lead time perspective. So we have seen backlog come down. I expect it to continue to come down in the fourth quarter as well. I still believe we will remain — we’ll exit the year at an elevated backlog position. But at this point, I do not believe it will be two times the elevated position that we’ve been talking about in prior periods. So I think it will be elevated but not quite two times. I do expect backlog to fully normalize probably by the middle of next year. I would say probably the first half to the middle of next year, backlog should be kind of fully normalized.
Inventory has been growing throughout the last couple of years. I would expect this to plateau and start to come down at some point in 2024. It is going to take longer. To your point, the inventory kind of normalization, if you will, it’s going to take a few years, in my opinion. And I don’t think we’ll ever get down to previous normals, right? I think we’ve learned some lessons with the recent supply chain situation. I think we’ll continue to carry inventory at higher levels than we historically did, but there is still a fairly sizable room for it to reduce over the next few years. And on the cost of that inventory, there are costs. I mean I mentioned in the gross margin guidance, we had a very strong gross margin quarter really highlighted by software, services.
And we are seeing some of the earlier transitory costs, i.e. logistics and expedite fees come down. But some of the goodness in gross margin was offset by an increase in inventory-carrying charges. That would include excess and obsolescence reserves as well as just carrying charges. So we are paying for those now. That’s factored in, obviously, to our results and to our near-term and longer-term guidance. I do think there’s opportunity for those to reduce over time as inventory starts to normalize.
Alex Henderson: Great. Thanks.
Operator: Thank you. The next question is coming from Simon Leopold from Raymond James. Simon, your line is live.
Simon Leopold: Great. Thanks for taking the question. First, just a quick clarification, if I might. In your prepared remarks, you talked about a return to normal seasonality in 2024, and you also make a reference to Q1 being down double digits in the past. Are we to take it that you expect Q1 ’24 to be down by a double-digit rate? That’s the clarification, simple. In terms of the broader question, however, I see a number of the third-party market research firms expect the campus environment, both wireless LAN and campus switching, will decline in 2024. And you’ve been experiencing some good growth here. I assume it’s decelerating, but you sound very confident that you’ll still grow. Could you help us unpack what separates your view from the market research firms? Thank you.
Rami Rahim: Thanks for the question, Simon. I’ll start with your second question first, and I’ll then hand it over to Ken. So first, you’re right, I am confident in our campus and branch business. We have grown over the last few years even in the face of pretty significant headwinds. At a time when, for example, the middle of COVID where some of our peers were seeing some declines, we consistently saw growth in our campus and branch business. I think the solutions that we’re offering that include AIOps that simplify and reduce the cost of operations actually truly resonate with customers that are looking for executing on digital transformation projects in a situation where their budgets are challenged, right? We’re basically enabling them to transform their business with less total cost of ownership.
That’s part of the value proposition of our solutions that’s really resonating. In addition to that, the campus and branch market all up if you include wired, wireless and WAN is a $25 billion market opportunity, give or take, of which we’re a small player and plenty of room for us to grow, even in the face of a total addressable market that’s not growing all that much or even not even growing at all. So for all of these reasons, I’m super optimistic about our Enterprise business and especially our campus and branch business moving forward.
Ken Miller: Yeah. And on your clarification question, the short answer is yes, I would expect a sequential decline from Q4 to Q1 in that double-digit realm based on kind of previous traditional patterns.
Simon Leopold: Thank you.
Operator: Thank you. The next question is coming from David Vogt from UBS. David, your line is live.
David Vogt: Great. Thanks guys for taking my question. I’m going to kind of bundle a couple of things here, all related, if you may — if you let me. So I’m trying to understand sort of the seasonal patterns of the business that you referenced going into Q1 and then sequentially getting stronger because the business is a little bit different today than it was pre-COVID, right? Mist is much stronger, and I would imagine the severity of the decline in cloud is much deeper than you would have anticipated. So I guess the first question is, does the normal seasonal patterns hold? Or is there some sort of variability around the normal seasonal patterns in the years prior to COVID? And then in conjunction with that, I think you said backlog should get normalized by the end of the second quarter.
Does that mean you’re expecting roughly $300 million, $400 million, maybe $500 million of revenue from backlog in the first half of 2024 to show up as revenue? And then I have a follow-up.
