Extreme Networks Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Extreme Networks 4th Quarter Full Year 20 24 Financial Results. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Stan Kovler, Vice President of Corporate Development and Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Extreme Networks' 4th quarter fiscal 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 EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an 8 ks detailing Extreme Networks' financial results for the quarter.

Speaker 1

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 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 ks report for the period ended June 30, 2023, and subsequent 10 Q reports filed with the SEC.

Speaker 1

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. Further, we will be discussing our non GAAP adjusted results excluding the impact of our increase in E and O reserves to show our operational results and to allow for better comparisons to our normal reporting and prior outlook. A reconciliation of our non GAAP and adjusted results

Speaker 2

can be found in the press release and financial presentation.

Speaker 1

Following our prepared remarks, we will take questions. And now, I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Speaker 2

Thank you, Stan, and thank you all for joining us this morning. Our results in the 4th quarter were impacted by an extraordinary provision for excess and obsolete inventory. This was based on a comprehensive analysis and our decision to have our sellers focus on next generation products to strengthen our competitive position. As we enter fiscal 2025, we're confident that we've eliminated the headwinds from both our channel and direct inventory and have now put the challenges of the supply chain constraint cycle behind us. Excluding the E and O reserve in the quarter, we were slightly ahead of our top line outlook aided by growth in order volume and improvement in our run rate business across all geos.

Speaker 2

Both are positive macro indicators of the return of market demand and the elimination of excess supply conditions that persisted in 2024. ARR from software subscriptions remained strong, up 29% year over year and we've been recognized by industry analysts as the 2nd largest player in cloud networking as we rapidly approach the $3,000,000 mark for devices managed in our cloud. The growing demand for our solutions is a result of the flexibility, simplicity and the unique value proposition we offer to enterprise partners and customers relative to our competitors. We de risk enterprise customer migration to modern networking infrastructure and offer unmatched premier services to ensure that customers get the most out of their investment with Extreme. Specifically, customers truly value the flexibility we offer to manage both Extreme and 3rd party hardware, which allows them to migrate and upgrade at their pace without disruption.

Speaker 2

A great example from this quarter is Evian Pabst in Germany, the world's leading industrial manufacturer of precision fans and motors. They're a longtime Cisco customer, wanted to migrate to a modern network with Extreme without disrupting operations. We allowed them to transition to Extreme while still supporting the old Cisco gear until the project was complete. Customers are also embracing our modern fabric because it's simple to deploy with 0 touch provisioning. It offers unmatched security and visibility, micro segmentation capability that dramatically minimizes the blast radius of lateral cyber attacks.

Speaker 2

And it provides the resiliency and flexibility to make moves, adds and changes to the network without taking it out of service. None of our competitors an enterprise fabric with these capabilities. Davidson College in North Carolina recently decided to deploy Extreme Fabric to support the college's hybrid flex learning model, allowing seamless integration of in person and online classes. By leveraging our fabric, they were able to provide a more efficient, scalable and secure network environment across the campus and remote sites. The combination of this fabric with the industry's most flexible, simple, secure and advanced end to end cloud management platform makes for a powerful combination.

Speaker 2

When ASDA, one of the UK's largest retailers, was looking to modernize network management and operations, they chose Extreme Cloud because they wanted a solution that could help them seamlessly manage 800 locations while reducing CapEx, creating a scalable platform for the future and improving network performance across all of its stores. Our new go to market initiatives are beginning to add to the growth equation and allowing us to gain share as well. We grew our MSP partner base to 27 during the quarter. Partners are attracted to the flexibility of our unique consumption based billing model and poolable licensing. No one else in the industry offers these economic benefits or this level of commercial licensing simplicity.

Speaker 2

Our MSP bookings doubled sequentially in the Q4 and we're seeing good traction globally. Customers and partners are also 100% aligned with our technology roadmap and vision of the future. Last week, we hosted our direct sellers and partners at a highly immersive training event Extreme Academy Live, where we showcased how we're driving the convergence of cloud networking, security and generative AI. The engaging main stage sessions, demos, hands on training have generated positive buzz and infectious energy among sellers and partners as this is what customers are demanding in their modern networking environment. There was particular excitement for our layered security solutions with network access control, ZTNA and Fabric.

Speaker 2

Last month, Gartner published a paper on network security in which it said that traditional network access control offerings no longer cover emerging enterprise needs, urging its clients to explore Universal's DT and A that combines the capability of core network access control functions along with securing users across any location with ZTNA. We have a single policy engine for cloud based NAC and ZTNA which no one else in our industry can offer. At Extreme Academy Live, we also previewed advancements to our Extreme AI expert, a generative AI solution that delivers insights that improve productivity, lowers total cost of ownership and makes networking simple. While the solution is currently in tech preview within Extreme Labs, we announced a co innovation alliance with Intel last week in which we'll leverage a combination of network data and unique device data from PCs through Intel's connectivity analytics and Gen AI to make networks smarter, faster and more resilient. With all these pieces coming together, we're building the industry's most modern networking platform.

Speaker 2

Given the substantial M and A activity with our industry's largest players, we're benefiting from the disruption it is causing with enterprise customers and channel partners. The largest player is investing away from networking with no intent to integrate acquired technologies and solutions. This makes them complicated to stitch together, very expensive and time consuming. During the quarter, we displaced Cisco at several major customer sites, including Minnesota Vikings, City of Prescott, Bank of Indonesia, a major NHS hospital in the U. K, Vandalia Health in the U.

Speaker 2

S, a Fortune 500 U. S.-based manufacturing company and numerous schools and universities. The 2nd and third largest players will also become increasingly distracted by their business combination. They'll have to make difficult decisions to abandon technology installed at tens of thousands of customers. Portfolio rationalization and integration creates risk.

Speaker 2

Today, customers and partners in our space are looking to de risk their investments in networking, which makes Extreme a far better alternative. Recently, we displaced HP and Juniper across a number of sites, including Voss Automotive in Germany, University of North Carolina, Texas Tech University to name a few. Going forward, we expect sequential revenue growth to continue during the 1st and second quarters and year over year growth for the full year. This growth will be accompanied by increased margins and cash flow. Our confidence in this outlook is based on the quality and volume of opportunities in our funnel as well as the current momentum in new funnel generation.

Speaker 2

The combination of our unique solutions, investments in innovation, strong leadership position and the Gartner MQ mixed with the uncertainty of competitors' commitment to networking and long term support of their products has created a promising opportunity for Extreme to return to growth in fiscal 2025. With that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.

Speaker 3

Thanks, Ed. Operationally, our results were slightly ahead of our outlook for the quarter. As we expected entering the quarter, our channel inventory position has now fully normalized. We are confident that sell in and sell through rates are balanced and this will position us for a return to normalized growth as customer demands and trends continue to improve as we saw in the quarter. As we said for several quarters, unlocking the unlocking of the supply chain constraints this past year resulted in elevated levels of channel inventory that we and the rest of the networking industry have been working through.

Speaker 3

During fiscal year 2024, while managing the inventory issues, we held steadfast in our investments in innovation in our areas of growth, and those engines remain unabated. At the end of fiscal 2024, we found ourselves with a high level of inventory on hand related to our older generation of products relative to our outlook for these and our new products. These conditions drove our decision to increase inventory reserves for products going end of sale in fiscal 2025 by $46,500,000 which is reflected in our GAAP and non GAAP results. The reserve also includes a loss on some supplier commitments. On a positive note, we believe we are through the extraordinary cycle and enter fiscal 2025 feeling confident that our challenges are in the rearview mirror.

Speaker 3

With that in mind, I'll be discussing our non GAAP adjusted results, excluding the impact of our increase in E and O reserves to allow for a better comparisons to our normal reporting in our prior outlook. Let me get into some of the numbers. 4th quarter revenue of $257,000,000 grew 22% sequentially during the quarter based on a sharp recovery in product sales from the Q3. On a geographic basis, the recovery in EMEA reflects an improvement in channel conditions in that region rather than a sharp rebound in end customer demand. Product revenue of $153,000,000 grew 43% sequentially, reflecting better alignment with channel sell through as we have discussed for some time.

Speaker 3

The sequential improvement reflects a sharp rebound in wireless revenue and strong growth in campus switching. Product backlog was once again within our expected range. Overall bookings and most notably product bookings were once again above our revenue in the quarter. I'm also encouraged by other indicators of our recovery with growth in transacting partners, number of transactions and transacting accounts during the quarter. Extreme is gaining share by attracting a higher percentage of revenue from new customers in the Q4 versus the year ago quarter.

Speaker 3

We had 38 customers spend over $1,000,000 on Extreme Solutions this quarter. For fiscal year 2024, we had 164 customers who spent over $1,000,000 up from 152 customers in the prior year. SaaS ARR continued to show strong top line growth, a 29% growth year over year, driven by the strength of our renewals and activations of previously shipped products. Subscription deferred revenue was up 23% year over year to $267,000,000 Our subscription and support revenue was $104,000,000 Our recurring revenue growth has been largely driven by the strength of cloud subscription revenue. Total recurring revenue grew 9 percentage points year over year to 39% of 4th quarter revenue and 36% of fiscal 2024 revenue.

Speaker 3

Our services business remains solid despite the fluctuations in product revenue trends. We achieved year over year improvement and new service penetration rates, new premier services and overall maintenance revenue, particularly in the Americas. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $575,000,000 up 15% year over year. Gross margin achieved a high watermark of 63.5%, up 2 30 basis points from the prior quarter and up 3 30 basis points compared to a year ago. The combination of higher product revenue to cover fixed overhead costs drove the sequential better results.

Speaker 3

We currently expect gross margin to continue to improve throughout fiscal 2025. Our 4th quarter operating expenses were $128,000,000 down $19,000,000 sequentially and down $27,000,000 from the year ago quarter. This is a reflection of our stringent cost controls and a reduction of incentive compensation. This helped drive a sequential improvement in our operating margin and along with increased revenue drove our return to profitability from the Q3. Heading into fiscal 2025, we do expect operating expenses to increase along with the recovery in our business due to higher incentive compensation.

Speaker 3

Operating margin for the 4th quarter was 13.5%, up from a loss of 8.6% in the prior quarter, but down from a profit margin of 17.4% in the prior year quarter. All in, 4th quarter adjusted EPS was $0.19 up from a loss per share of $0.14 in the 3rd quarter and down from EPS of $0.33 in the year ago quarter. We ended the quarter with $157,000,000 in cash and net debt of $33,000,000 The $11,000,000 of free cash flow in the quarter reflects higher revenue and adjusted profitability and a sharp decline in inventory purchases as commitments wound down. We expect a recovery in cash flow in fiscal 2025 as we grow revenue, improve profitability and sell out the inventory we have on hand. Now let's turn to guidance.

Speaker 3

Our funnel of opportunities remains healthy and we are encouraged by the level of improving customer and new logo activity that we are seeing, which should bode well for us heading into the New Year. Looking ahead to the Q1, we are expecting improved sequential revenue growth based on our funnel across many of our verticals. For the Q1, we expect guidance as follows: revenue to be in a range of $255,000,000 to $265,000,000 gross margin to be in a range of 62% to 64%, operating margin to be in a range of 7.8% to 10.4%, earnings per share to be in a range of $0.10 to $0.14 Our fully diluted count is expected to be about 133,000,000 shares. For the full fiscal year 2025, we expect revenue to be in a range of 1,110,000,000 dollars to $1,135,000,000 We expect our gross and operating margins to improve throughout the year and to grow our cash flow. Further improvements in inventory and turnover are expected to come organically tied to growth and customer demand for newer products.

Speaker 3

And with that, I will now turn the call over to the operator to begin the Q and A session.

Operator

Thank you. And the first question will come from Eric Mantinozi with Lake Street Capital Markets. Your line is now open.

Speaker 4

Hey, thanks for taking my question. Curious on the guidance for FY 2025, what kind of macro assumptions do you have built in, maybe not on a quarter by quarter basis, but let's take it sort of first half versus second half. Are we anticipating a recovery? And if so, when? Yes.

Speaker 4

Eric, this is Ed.

Speaker 2

I'll cover it. Thanks for the question. We are expecting a gradual recovery in the Q1 and then we're expecting it to accelerate in Q4. And that's based on the visibility that we have with current opportunities in our funnel. So it's and then we would expect to see that carry through into calendar 2025.

Speaker 2

So I would say, when you said when you

Speaker 4

did accelerate Q4, did you you were talking about calendar Q4?

Speaker 2

Yes. So our Q2 and calendar Q4, we're expecting to see an acceleration. And for us, it's highly visible. Got

Speaker 4

you. The when you say it's highly visible, is that based on kind of orders from end users or channel and just channel orders?

Speaker 2

Orders from end users that are coming from both our channel as well as direct.

Speaker 4

Okay. And then the congratulations on the competitive displacements. I know you win for a number of different reasons, but is there 1 or 2 product capabilities that you would point to as to why these displacements are happening?

Speaker 2

Yes. I called some of that out. There are 3 different elements that I called out. The first is, we have technology that allows us to manage competitor equipment. And so as enterprise customers are contemplating moving to cloud, moving to end to end kind of most modern networking platforms, there's a migration involved.

Speaker 2

And so because we're able to manage competitor equipment, it means we can provide a seamless migration and transition, as I mentioned with Evian past, where we can still manage Cisco gear while they migrate. So it's in the industry, we're the easiest player and the least risky player for upgrading your network to modern infrastructure because we have the capability to provide visibility and basic management for all of our competitor gear while you're installing and deploying Extreme. So that's unique. Our competitors don't have that. The second is our fabric.

Speaker 2

We have a very modern enterprise fabric. It's something that our competitors do not have. And we have unique capabilities as it relates to the ease of deploying networks and provisioning networks, turning up sites, etcetera. We talk about 0 touch provisioning, where you add a network device and it automatically comes up and it's automatically provisioned based on policies that are determined in the fabric. The other thing that fabric has is micro segmentation where you can literally create thousands of networks within a single physical network.

Speaker 2

We talk about Dubai Exhibition Center is a great example where Cisco sponsored actually paid for the network in the exhibition hall and then they migrated to Extreme because we have the ability to create thousands of networks for each exhibitor can have and buy its own network with its own SLA and they're doing this with an IT team of like 2 or 3 people. So this ability to segment the network is something that our competitors just simply don't have. And the other value of that segmentation is from a security standpoint, here I'll take you to Philadelphia, Penn Medical Center, brand new 500,000 square foot facility downtown Philadelphia. They run on our fabric. 47 operating rooms, each operating room has its own network.

Speaker 2

And if there's a hacker that gets through one of a medical device, they can't see any other IP addresses, so they can't go anywhere. So from a security perspective, it becomes the blast radius from a hack is minimized to wherever it's hacked the segment of that network. So no one else has that. It's one it's another reason why we won Washington University. It's also very resilient.

Speaker 2

So typical things that would bring a network down don't bring the fabric down. And you can make moves as and changes as I mentioned to a network, while the network is hot and running and you don't have to take it down. So these are all characteristics of an enterprise fabric that started off in a data center. We've extended it out through the aggregation and core layers out to the edge switching, out to wireless and now across the wide area network. And this is what makes our comparable SD WAN solution so competitive because you can literally extend that fabric and those policies out.

Speaker 2

No one else has that. Finally, it's about cloud. And our cloud platform is by far the most flexible in terms of cloud options that we provide, in terms of which public cloud you want to be in, in terms of cloud deployment models, in terms of the security that we have built into our cloud. And then finally, just the simplicity and ease of use and managing the network and the capabilities. We recently just come out with really interesting mapping capabilities and we're looking at very soon coming out with the ability through our cloud and then through our mapping application to see other non extreme equipment in your environment.

Speaker 2

You can imagine that in an IoT world and the likes of Kroger and we have so many other customers that are so excited about this evolution where you have one map where you can literally see every connected device, not just network elements. So but these are a few of the things that we have that are truly distinct and unique for Extreme. And there's a lot of uncertainty in the environment. And as people are contemplating upgrading modernizing their networking infrastructure, which is obviously really important as everything runs in the network. We bring unique differentiating capabilities.

Speaker 2

And in addition, we are derisking decisions because if you're looking at the number 2 and number 3 players out there, you have no idea what's going to survive.

Speaker 4

Thank you.

Operator

And our next question comes from Dave Pang with B. Riley. Your line is now open.

Speaker 5

Yes, good morning. Ed, while you're at it talking about your technology, some of your competitors have been really talking up their AI functionality. Just wondering if you can kind of go over your AI functionality and how they stack up against how it stacks up against some of your competitors?

Speaker 2

Sure. The AI that you're hearing about in the networking industry is really around AIOps. And this is kind of incorporating the machine learning and data science together for driving better outcomes in the network. And this is Extreme is a leader here. We have our co pilot application.

Speaker 2

This is really what Mist was so famous for in terms of their integration with ServiceNow and creating all those trouble tickets. They and so I think that's kind of the 1st generation AI that I would say that between Extreme and Mist, we have a leadership position. I also think it's another reason why HP bought Mist, because HP fell way behind and they were sort of in trouble in terms of kind of their go forward outlook from under investing in their networking portfolio. As we move forward, the next generation of AI is coming into play, and this is generative AI. We talked about AI expert.

Speaker 2

We are investing in and we're very focused on building a networking platform where it will fundamentally change how you interface with the network. And we also mentioned Intel and our ability to pull in other data sources from our ecosystem partners and alliance partners, the likes of Zebra appliances that are out there or cameras that are out there. Here, this is about us developing a platform where truly it's the cloud management becomes part of an overall platform, where you have you talk into the platform through the form of queries, knowledge queries about our products, about configurations, etcetera, overall intelligence queries about what's going on in your network. What I think is most exciting is going to be around reporting. If you're in healthcare and biomed comes to you and they're complaining about the network because a piece of medical equipment is not connecting, you can just ask the network, give me a report on that client and its behavior over the last 48 hours.

Speaker 2

And then it's right at your fingertips and it happens. So troubleshooting something like that in that environment is literally going to be happening within minutes or an hour instead of what can take weeks today. So there's this fundamental shift. This is where we're investing and we have it is going to fundamentally change the way the strategic value of networking, especially if you have a platform and you start pulling in other data sources that provide more insights and more intelligence into the broader network.

Speaker 5

And when do you think when should we expect that the next generation, the generative AI to be available?

Speaker 2

Yes. And we are we just had our Extreme Academy Live event. And we have opened this up in our AI labs to all of our sellers. So our sellers are now in there, which is going to be really helpful because now our sales teams can help us develop our technology, which is really how this next generation of AI works as we sort of train it. And this is going to continue to evolve.

Speaker 2

We have a schedule to gradually open this up to partners, which you'll see a first round of partner in October and then in November. And then we're looking at the early part of next year calendar 2025 to roll it out in earnest. So and then there will be a migration path where we start moving people over into the platform, of which our cloud management capability will be obviously a fundamental part of the platform. So we're investing here. We're working the teams are working very hard.

Speaker 2

We're inclusive. We're bringing a lot into the platform and the product. The other thing I would mention is that from an AI perspective, we have over 20 different agents that we've developed. We're partnered with Microsoft and CoPilot, And we have use cases for sales enablement. We have a sales assistant that is being very helpful and we're incorporating this in our service function.

Speaker 2

As far as self help, we're incorporating it across many functions of the company, which is I guess more of the non product, if you will, use cases for AI at Extreme.

Speaker 5

And I guess at the bottom at the end of the day, I mean, what does it do to your ARR? I assume it's already growing at 30% year over year. I mean, could that accelerate recurring revenue growth?

Speaker 2

I mean, Dave, what I would say is, I think sustaining that kind of growth rate over a long period of time is difficult. And I think what this is going to allow us to do is this potential for accelerated growth. But what this is going to allow us to do is to maintain that 30 we've called 30% growth. If you look at adding in security, for example, which is evolving and we're expecting that used ETNA product that I mentioned to go GA in the fall, That will be our first offering where we have subscription that's untethered to. It doesn't require extreme hardware or extreme devices.

Speaker 2

So there's a security opportunity. And then as we move to a platform, we're going to continue to evolve with our ecosystem partners and what we call alliance partners and pulling in more data and intelligence from their devices. And so it's still early innings in terms of how we translate all this into the long term growth rate. But this is going to allow us to attach more and more devices, including non extreme devices, just anything tethered to the network and then sell more and more subscription to those devices. So that's the long term strategy.

Speaker 5

Sounds good. Thank you.

Operator

Okay. And the next question will come from Christian Schwab with Craig Hallum. Your line is now open.

Speaker 3

Great. As we move into

Speaker 6

post this fiscal year end and we talked about growth continuing and accelerating into Q4. But now that you've had enough time to kind of digest the overbuying because of COVID and now we made the last steps of cleaning up the channel inventory excess levels. What do you see as your long term top line growth objective?

Speaker 2

Yes. Well, Christian, thanks for the question. And I know on the last call, you were someone who picked up on the inventory and that being an issue. If you look at historical, September is a tough comp for us. We had a large September revenue quarter last year in anticipation of a bookings forecast that didn't materialize.

Speaker 2

As we go as a result, when you compare year over year, you're going to come up with a mid call it a mid single digit growth rate for us just looking at the guide that we provided. Longer term, if you look at the second half of the year, obviously, it's going to be much higher. And so we see ourselves as a double digit grower long term. It's going to be really interesting to see how things play out in the competitive environment. There's going to be at this stage of the game, number 2 and number 3 are still saying nothing's going to change out in the market and we all know that's not the case.

Speaker 2

And as that evolves, it's going to have an impact on the channel and it's going to cause some dislocation as it will with enterprise customers. And we are absolutely the best alternative. So depending on how that share shift materializes, that could affect what we're calling. But I think what we've called is 10%, 12% at Investor Day. We're confident in double digit going into 26%.

Speaker 3

Great. And then just my last question. Where do you

Speaker 6

think the greatest market share opportunity geographically in the channel is for you given the competitive dislocation potential?

Speaker 2

I'd slice it into 2 pieces, Christian. I think here in the U. S, I think there's a big opportunity. And I think we're poised to execute on that. And I think that's where you'll feel a lot of that dislocation.

Speaker 2

In Europe, we have different challenges in the channel and we're less channel focused in the U. S. And we're becoming more and more channel focused in the U. S. In Europe, we have a well established and many more partners to drive the network, but they tend to be smaller.

Speaker 2

So we're moving up market in EMEA to larger partners. We have a distinct strategy for that. We're going to do the same thing here in the U. S. And then we're also going to build out a broader base here in the U.

Speaker 2

S. So around competitive dislocation, these are opportunities. Cisco is taking a lot of action out in the channel given their movement away from networking as a focus area and this will create opportunities for us. We also are coming out with these other commercial models. We've talked about private subscription and maybe a new way to approach markets that traditionally we've not penetrated well with a different kind of relationship with a much larger service provider.

Speaker 2

The commercial models that we're pursuing are going to open up doors and give us I would that is purely channel focus, both of them. And we think that over the next coming years, that will open up a lot of opportunity.

Speaker 3

Great. No other questions. Thanks guys. Thanks, Chris.

Operator

And our next question comes from Timothy Horan with Oppenheimer. Your line is open.

Speaker 7

Thank you. So Ed, congratulations on rolling out this new, I don't know exactly what you call it overlay SaaS product that will manage all of an enterprise's network. Well, I guess, what do you kind of call this product? And does anyone else out there have it? And can you maybe just describe what's the return on invested capital for customers?

Speaker 7

Ultimately, I know this is just the first product rolling out there, but when do you envision having a kind of full platform out there? And what's your ROIC for customers?

Speaker 2

Thanks, Tim. Yes, we what we talk about is like kind of what's happening in terms of like platformization, not to strangle that word. But the idea is standing up a platform. What we have today, we have cloud management capabilities And then our cloud management for our networking elements becomes an element of our platform. And then the idea is through our alliance partners with everything that's tethered to the network, we are in a position now and we create a platform where we can ingest data and information from those devices.

Speaker 2

And then we can provide more services based on information from those devices. So it's early innings. We're working on standing up that platform that will be we'll see what our competitors are doing. But we will create a pure play networking platform. And what we're aiming to do is to make it very easy for that platform to integrate with other sources of data or where we can supply data into other platforms.

Speaker 2

The company that was out talking about platforms Palo Alto got a lot of notice for all the different solutions that they put together and then creating a platform. And I'd say, that's a model that will be followed and I know it's talked about. I think you should think about it like that.

Speaker 7

And will it basically be able to manage all or most enterprise legacy hardware ultimately?

Speaker 2

Yes. In our case, yes, we're not developing the technology so that we're going back a decade to go try to find old networking gear that we can attach. We're looking forward. And we're looking forward our universal hardware platforms where today that's 80 plus percent of what we sell and it's moving it will move to 100%. All of that attaches to the cloud.

Speaker 2

And then it becomes more about ecosystem partners. We mentioned Intel and being able to grab data from other sources away from our networking equipment. So Zebra Technologies is another one where we have an integration with Zebra where we can find where we have intelligence about those devices, the location of the devices, the performance of the devices, connectivity, etcetera, that we can feed back to a user where they have thousands and thousands of these Zebra devices in their network.

Speaker 7

So I know it's and lastly, sorry, I know it's really, really early, but and you're probably not sure how you're going to charge for it. But can you talk about what kind of improvement the customers will experience and the payback period for customers?

Speaker 2

It's too soon for me to talk about payback, Tim. But it the obvious benefits here for us are the simplicity and ease in which you have access to information that's contained in the network or that's to things that are tethered to the network. And I mentioned reporting, that's the big one. I spoke to a CIO who talked about the constant fights with biomed around device connectivity in healthcare. And now all of a sudden, you can literally just query the network and ask the network for reports that historically have taken a long time and then a lot of troubleshooting to figure out.

Speaker 2

So massive time savings, time savings equates to efficiencies, efficiencies and cost savings. Traditional networking engineers can now be more productive and more strategic. And there's a transformation that's going to happen there, because the network is strategic, but you're no longer going to need some of the old skills of the old networks and you can repurpose to more value add. Thank you.

Operator

Our next question comes from David Voigt with UBS. Your line is open.

Speaker 8

Great guys. Thanks for squeezing me in. And Kevin and Scott team, appreciate all the color on the inventory. If I may, can I dig in a little bit on what kind of transpired in the quarter? Because the obsolescence charge looks like it's about 30% of your finished goods inventory.

Speaker 8

Can you help us understand sort of what the products were? How you're thinking about it? And even with the charge, inventory is still a bit elevated relative to historical levels when you've been at the sort of revenue run rate from a product perspective. So you can help us understand kind of what's going on there and how to think about it going forward? And then I have a follow-up.

Speaker 2

Kevin, you want to take that one?

Speaker 3

Yes, I'm happy to. So David,

Speaker 2

I would

Speaker 3

say throughout the year, we were evaluating and looking at just like we do every single quarter, our inventory levels and that sort of as we've got into the Q4 as we are doing our planning for this next year, as we were looking at our funnel of activity, what we saw is more and more opportunities created around newer generations, universal hardware, etcetera, and realizing that we had some inventory that is going to end the life in 2025. When we looked at that and realized that a lot of our sellers are not really incentivized nor do we want them to be pushing kind of whole older technologies, we realized that this would be a good opportunity, if you will, for us to evaluate what our strategy in 2025 and looking at our inventories and making sure that we had basically brought it to the net realizable value that we would expect us to sell out in this next year. Some of it was a combination of raw materials, so we had not created yet those older technologies. Remember, we had to buy some of these components. Year, 2 years ago, we had to buy them when there was elevated demand.

Speaker 3

Those orders were put into our ODMs and then we were getting those raw materials. Well, you're probably not going to create new finished goods if in fact you have raw materials and you're not even moving the finished goods. And so we took a look at all of that and just came to the conclusion that this was the right thing to do in the Q4. That's the best way to describe it.

Speaker 8

And then on the balance of 1 $41,000,000 which still seems a bit elevated relative to back if I go back to fiscal 2020 when you were kind of at this revenue run rate on the product side, just want to kind of get a sense of what's going on there?

Speaker 3

So the good news is that the 141 that we have now, all that's all fresh new universal hardware. We feel very confident in our ability to go forward. We're kind of clean on that level and that that's new product that will be sold out. And we think that the normal kind of level of our inventory is going to be about between $60,000,000 $80,000,000 in that range based on historical numbers. And so we'll still generate cash flow from that $141,000,000 going down, let's call it $60,000,000 to $80,000,000 of free cash flow in this next year based on that finished goods inventory selling out.

Speaker 8

Great. And can I slip one more in maybe for Ed? When you think about the demand drivers in 2025, you talked about obviously a sequential improvement in December, obviously year over year growth against an easy compare in March. When you think about sort of the environment as we turn into calendar 2025, I think visibility still seems a little bit light to us. What gives you confidence that you can grow revenue kind of in that mid teens in the back half of your fiscal 2025 or the early part of 2025?

Speaker 8

I get the comp is easy in March, but I'm maybe thinking a little bit more longer term in terms of the normalization in the environment. I know Kevin talked about demand and channel seems to be aligned, but just any sort of color there would be great.

Speaker 2

Yes. I mean, David, it's overall, it's the technology differentiation that we have today is very strong. And we've made changes to our sales organization, our marketing organization, organization and we've attracted a lot of new talent. It's very good and I would say the rigor around and we've overhauled our reporting on funnel, our reporting on funnel, our reporting on funnel, our reporting on funnel, our reporting on funnel generation. And we have a lot more clarity and visibility, which gives us confidence into, 1, what we currently have in our funnel of opportunities and why we're creating them.

Speaker 2

And then 2, our the momentum we have around funnel generation. And this is really what's going to give us confidence. So there's kind of what we're doing in terms of how we're executing as a company. There's a macro cycle evolution, which we think will be somewhat favorable. And then finally, there's the conditions within our industry and what is going on.

Speaker 2

And between HPE and Juniper, there's a lot of work that they have to do and a lot of risk they have to put out into the market, which we fully intend to take advantage of. And then Cisco just continues to move in a direction that creates complexity and creates challenges for customers. And it just feels like with both the channel and end user customers that those that volume of opportunity is getting greater in terms of where do they go. There's one less place to go with Juniper and HP getting together. And at this stage of the game, we become the least risky and I think most attractive modern networking platform to go to.

Speaker 8

Great. Thank you.

Operator

I show no further questions in the queue at this time. I would now like to turn the call back to Ed Meyercord for closing remarks.

Speaker 2

Thanks, Michelle. Let me just say thank you to everyone who's joined the call. We appreciate investors and our analysts. We thank you for the questions. Here, I also we have a lot of our employees and partners who are joined in on the call and of course want to thank them for the work.

Speaker 2

And we've got a tremendous opportunity ahead of us And we appreciate you being with us and we're looking forward to updating you on more things to come. Have a great day.

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Earnings Conference Call
Extreme Networks Q4 2024
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