Q4 2024 Extreme Networks Inc Earnings Call
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Operator: Ladies and gentlemen, thank you for standing by. Welcome to Extreme Networks' fourth quarter and full year 2024 financial results.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to extreme networks fourth quarter full year 'twenty 'twenty four financial results. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. 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 Change: To ask a question during this session you wouldn't need to press star one on your telephone.
Speaker Change: Didn't hear an automated message of biting your hand, it straight to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would like now to turn the conference over to Stan Cope Blurb, Vice President of corporate development.
Speaker Change: And Investor Relations. Please go ahead.
Stan Kovler: Thank you, operator. Good morning, everyone, and welcome to the Extreme Networks fourth 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.
stakeholder: Thank you operator, good morning, everyone and welcome to the extreme networks fourth quarter fiscal 2024 earnings conference call I'm stakeholder Vice President of corporate strategy and Investor Relations with me today are extreme networks', president and CEO admire cord and EVP and CFO, Kevin Rhodes, We just distributed a press release and <unk>.
Stan Kovler: We just distributed a press release and filed an 8k detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release, which includes our gap to non-gap 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.
Speaker Change: File an 8-K detailing extreme networks' financial results for the quarter for your convenience a copy of the press release, which includes our GAAP to non-GAAP reconciliations is available in the Investor Relations section of our website and extreme networks dotcom, along with our earnings presentation.
Speaker Change: Today's call and our discussion may include certain forward looking statements based on our current expectations about extremes 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.
Stan Kovler: 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-K report for the period ending June 30, 2023, and subsequent 10-Q reports filed with the SEC.
Speaker Change: As they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements.
Speaker Change: These risks are described in our risk factors in the 10-K report for the period ended June 30th 2023, and subsequent 10-Q reports filed with the SEC.
Stan Kovler: 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. Additionally, we will be discussing our non-GAAP-adjusted results excluding the impact of our increase in E&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 can be found in the press release and financial presentation. Following our prepared remarks, we will take questions, and now I will turn the call over to Xtreme's President and CEO, Ed Meyercord.
Speaker Change: 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.
Speaker Change: Further we will be discussing our non-GAAP adjusted results, excluding the impact of our increase in reserves to show our operational results and to allow for better comparisons to our normal reporting in prior outlook a reconciliation of our non-GAAP and adjusted results can be found in the press release and financial presentation.
Edmar Court: Following our prepared remarks, we will take questions and now I will turn the call over to extremes, President and CEO Edmar Court.
Edward Meyercord: Thank you, Stan, and thank you all for joining us this morning. Our results in the fourth 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 25, we're confident that we've eliminated the headwinds from both our channel and direct inventory and have now put the challenges, Supply Chain Constraint Cycle Behind Us. Excluding the E&O reserve in the quarter, we were slightly ahead of our top line outlook, aided by growth and order volume Both are positive macro indicators of the return of market demand and the elimination of the excess supply conditions that persisted in 2024.
Edmar Court: Thank you Stan and thank you all for joining US. This morning, our results in the fourth quarter were impacted by an extraordinary provision for excess and obsolete inventory.
Edmar Court: 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 'twenty five we're confident that we've eliminated the headwinds from both our channel and direct inventory and mapped out but the challenges of the supply chain constraint cycle.
Edmar Court: Behind us.
Edmar Court: Excluding the 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. Both are positive macro indicators of the return of market demand and the elimination of excess supply conditions that persisted in 2024.
Edward Meyercord: ARR from software subscriptions remains strong, up 29% year over year, and we've been recognized by industry analysts as the second largest player in cloud networking as we rapidly approach the 3 million mark for devices managed in our cloud. The growing demand for our solutions is a result of the flexibility, simplicity, and 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 Xtreme.
Edmar Court: <unk> from software subscriptions remained strong up 29% year over year, and we've been recognized by industry analysts as the second largest player in cloud networking as we rapidly approached the 3 million Mark for devices managed in our cloud.
Speaker Change: The growing demand for our solutions as a result of the flexibility simplicity and a unique value proposition, we offer to enterprise partners and customers relative to our competitors.
Speaker Change: We derisked 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.
Edward Meyercord: Specifically, customers truly value the flexibility we offer to manage both extreme and third-party hardware, which allows them to migrate and upgrade at their pace without disruption. A great example from this quarter is EBM Papst, a world-leading industrial manufacturer of precision fans and motors.
Speaker Change: Specifically customers truly value the flexibility we offer to manage both extreme and third party hardware, which allows them to migrate and upgraded their pace.
Speaker Change: Disruption.
Speaker Change: A great example from this quarter is <unk>, perhaps in Germany, the world's leading industrial manufacturer of precision fans and motors that are long time, 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.
Edward Meyercord: They're a long-time Cisco customer who 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 zero touch provisioning. It offers unmatched security and visibility, and a micro-segmentation capability that dramatically minimizes the blast radius of lateral cyber attacks
Speaker Change: And so the project is complete.
Speaker Change: Customers are also embracing our modern fabric because it's simple to deploy with zero touch provisioning. It offers unmatched security and visibility micro segmentation capability that dramatically minimises the blast radius of lateral cyber attacks.
Edward Meyercord: 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 have 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.
Speaker Change: 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 have an enterprise fabric with these capabilities.
Speaker Change: Davidson College in North Carolina, recently decided to deploy extreme fabric to support the colleges hybrid flex learning model, allowing seamless integration of in person and online classes.
Edward Meyercord: 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. When ASDA, one of the UK's largest retailers, was looking to modernize network management and operations, they chose Xtreme 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 uses.
Speaker Change: Leveraging our fabric they were able to provide a more efficient scalable and secured network environment across the campus and remote sites.
The combination of this fabric with the industry's most flexible simple secure advanced end to end cloud management platform makes for a powerful combination when asset one of the Uk's largest retailers was looking to modernize network management and operations. They chose extreme cloud because they wanted a solution there.
Speaker Change: It 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.
Edward Meyercord: 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 license. No one else in the industry offers these economic benefits or this level of commercial licensing simplicity. Our MSP bookings doubled sequentially in the fourth quarter, and we're seeing good traction globally.
Speaker Change: 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.
Speaker Change: Partners are attracted to the flexibility of our unique consumption based billing model and tunable licensing.
Speaker Change: No one else in the industry offers these economic benefits or this level of commercial licensing simplicity, our MSP bookings doubled sequentially in the fourth quarter and we're seeing good traction globally.
Edward Meyercord: 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 mainstay sessions, demos, and 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.
Speaker Change: Customers and partners are also 100% aligned with our technology roadmap and vision of the future.
Speaker Change: Last week, we hosted our direct sellers and partners at a highly immersive training event extreme Academy live where we showcase 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 bias.
Speaker Change: <unk> energy among sellers and partners as this is what customers are demanding and they are modern networking environments.
Edward Meyercord: There was particular excitement for our layered security solutions with Network Access Control, ZTNA, and Fabric. 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 ZTNA 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 Xtreme Academy Live, we also previewed advancements to our Xtreme AI experts.
Speaker Change: There was particular excitement for our layered security solutions with network access control Z TNA and fabric.
Speaker Change: Last month, Gartner published a paper on network security, and which had said that traditional network access control offerings no longer cover emerging enterprise needs urge against clients to explore universal's the G&A.
Speaker Change: Combines the capability of core network access control functions, along with securing users across any location with <unk>. We have a single policy engine for cloud based snack and the G&A, which no one else in our industry can offer.
Speaker Change: At extreme Academy life, we also previewed advancements to our extreme AI expert at.
Edward Meyercord: 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 advanced networking platform.
Speaker Change: The generative AI solution that delivers and site insights that improve productivity lower total cost of ownership and makes networking simple.
Speaker Change: While our solution is currently in tech preview with an extreme labs, we announced a co innovation alliance with Intel last week, and which will leverage a combination of network data and unique device data from Pcs.
Speaker Change: Through Intel's connectivity analytics and Gen AI to make network smarter faster and more resilient with all these pieces coming together, we're building the industry's most modern networking platform.
Edward Meyercord: Given the substantial M&A activity with our industry's largest pliers, we're benefiting from the disruption it is causing with enterprise customers and channel partners. The biggest 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.
Speaker Change: Given the substantial M&A activity with our industry's largest players we're benefiting from the disruption it is causing with enterprise customers and channel partners.
Speaker Change: The largest player is investing away from networking with no intent to integrate acquired technologies and solutions.
This makes it complicated to stitch together very expensive and time consuming.
Edward Meyercord: During the quarter, we displayed Cisco at several major customer sites, including Minnesota Vikings, City of Prescott, Bank of Indonesia, a major NHS hospital in the UK, Vandalia Health in the US, a Fortune 500 US-based manufacturing company, and numerous schools and universities. The second 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 Change: During the quarter, we displaced Cisco, it's several major customer sites and.
Speaker Change: Including Minnesota Vikings City of Prescott back of Indonesia are major NHS hospital in the UK Vandalia health in the U S. A fortune 500 U S based manufacturing company and numerous schools and universities.
Speaker Change: The second or third largest players will also become increasingly distracted by their business combination.
Speaker Change: They will have to make difficult decisions to abandon technology installed at tens of thousands of customers portfolio rationalization and integration creates risk.
Edward Meyercord: Today, customers and partners in our space are looking to de-risk their investments in networks. Recently, we replaced HP and Juniper across a number of sites, including Voss Automotive in Germany, the University of North Carolina, and Texas Tech University, to name a few.
Speaker Change: Today customers and partners in our space are looking to derisk their investments in networking, which makes extreme a far better alternative.
Speaker Change: Recently, we displaced H P and juniper across a number of sites.
Speaker Change: Including boss automotive in Germany University of North Carolina, Texas Tech University to name a few.
Edward Meyercord: Going forward, we expect sequential revenue growth to continue during the first 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. The combination of our unique solutions, investments in innovation, strong leadership position, and the Gartner MQ.
Speaker Change: Going forward, we expect sequential revenue growth to continue during the first and second quarters and year over year growth for the full year.
Speaker Change: 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 and new funnel generation.
Speaker Change: The combination of our unique solutions investments in innovation strong leadership position in the Gartner MQ.
Speaker Change: Mixed with the uncertainty of competitors commitment to networking and long term support of their products has created a promising opportunity.
Edward Meyercord: Mixed with the uncertainty of competitors' commitment to networking and long-term support of their products has created a promising opportunity for Xtreme to return to growth in Fiscal 24. With that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.
Speaker Change: We're extreme to return to growth in fiscal 'twenty five.
Speaker Change: With that I'd like to turn the call over to our CFO, Kevin Rhodes to walk us through the results and guidance.
Kevin Rhodes: Thanks, Ed.
Kevin Rhodes: 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.
Kevin Rhodes: 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.
Kevin Rhodes: 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... As we've said for several quarters, 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 to manage. During fiscal year 2024, while managing the inventory issues 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.
Kevin Rhodes: And trends continue to improve as we saw in the quarter.
Kevin Rhodes: As we've said for several quarters unlocking the unlocking.
Kevin Rhodes: The supply chain constraints. This past year resulted in elevated levels of channel inventory that we and the rest of the networking industry had been working through.
Kevin Rhodes: During fiscal year 2024, while managing the inventory issues, we held steadfast in our investments in innovation and our areas of growth and those engines remain unabated.
Kevin Rhodes: At the end of fiscal 2024, we found ourselves with a high level of inventory on hand related to our older generation products relative to our outlook for these in our new products.
Kevin Rhodes: These conditions drove our decision to increase inventory reserves for products going into sale in fiscal 2025 by $46.5 million, which is reflected in our GAAP and non-GAAP results. The reserve also includes a loss on some supplier commitments.
Kevin Rhodes: These conditions drove our decision to increase inventory reserves for products going end of sale in fiscal 2025 by $46 5 million.
Kevin Rhodes: Which which is reflected in our GAAP and non-GAAP results. The reserve also includes a loss and some supplier commitments.
Kevin Rhodes: 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. With that in mind, I'll be discussing our non-GAAP-adjusted results, excluding the impact of our increase in E&O reserves, to allow for a better comparison to our normal reporting and our prior outlook. Let me get into some of the numbers.
Kevin Rhodes: On a positive note. We are believe we believe we are through the extraordinary cycle and enter fiscal 2025, feeling confident that our challenges are in the rearview mirror.
Speaker Change: With that in mind I'll be discussing our non-GAAP adjusted results, excluding the impact of our increase in <unk> reserves to allow for a better comparisons to our normal reporting in our prior outlook, let me get into some of the numbers.
Kevin Rhodes: For the quarter, revenue of $257 million grew 22% sequentially during the quarter, based on a sharp recovery in product sales from the third quarter. 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 million grew 43% sequentially, reflecting better alignment with channel sell-through, as we have discussed for some time. The sequential improvement reflects a sharp rebound in wireless revenue and strong growth in campus switch. 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.
Speaker Change: Fourth quarter revenue of $257 million grew 22% sequentially during the quarter based on a sharp recovery in product sales from the third quarter.
Speaker Change: 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.
Speaker Change: Product revenue of $153 million grew 43% sequentially, reflecting better alignment with channel sell through as we have discussed for some time.
Speaker Change: The sequential improvement reflects the sharp rebound in wireless revenue and strong growth in campus switching.
Speaker Change: Product backlog was once again within our expected range.
Speaker Change: Overall bookings and most notably product bookings were once again above our revenue in the quarter.
Kevin Rhodes: 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 and the fourth quarter versus the year ago quarter. We had 38 customers spend over a million dollars on Extreme solutions this quarter.
Speaker Change: I'm also encouraged by other indicators of a 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 fourth quarter versus the year ago quarter.
Speaker Change: We have 38 customers spend over $1 million on extreme solutions this quarter.
Kevin Rhodes: For fiscal year 2024, we had 164 customers who spent over a million dollars, up from 152 customers in the prior year. SAS ARR continued to show strong top-line growth at 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 million. Our subscription and support revenue was $104 million.
Speaker Change: For fiscal year 2024, we had 164 customers who spent over $1 million up from 152 customers in the prior year.
Speaker Change: SaaS AAR continued to show strong top line growth at 29% growth year over year, driven by the strength of our renewals and Activations are previously shipped products.
Speaker Change: Subscription deferred revenue was up 23% year over year to $267 million.
Speaker Change: Our subscription and support revenue was $104 million.
Kevin Rhodes: 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 fourth-quarter revenue and 36% of fiscal 2024 revenue. Our services business remains solid.
Speaker Change: Our recurring revenue growth has been largely driven by the strength of cloud subscription revenue.
Speaker Change: Total recurring revenue grew nine percentage points year over year to 39% of fourth quarter revenue and 36% of fiscal 2020 for revenue.
Speaker Change: Our services business remained solid.
Speaker Change: 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.
Kevin Rhodes: Despite the fluctuations in product revenue, 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 million, up 15% year-over-year. Gross margin achieved a high watermark of 63.5%, up 230 basis points from the prior quarter and up 330 basis points compared to a year
Speaker Change: The growth of cloud subscriptions and maintenance drove the total deferred revenue to $575 million.
Speaker Change: Up 15% year over year.
Speaker Change: Gross margin achieved a high watermark of 63, 5% up 230 basis basis points from the prior quarter and up 330 basis points compared to a year ago. The.
Kevin Rhodes: The combination of higher product revenue to cover fixed overhead costs drove the sequential better or worse. We currently expect gross margin to continue to improve throughout fiscal 2020. Our fourth quarter operating expenses were $128 million, down $19 million sequentially, and down $27 million from the year-ago quarter. This is a reflection of our stringent cost controls and a reduction of incentive compensation.
Speaker Change: The combination of higher product revenue to cover fixed overhead costs drove the sequential better results.
Speaker Change: We currently expect gross margin to continue to improve throughout fiscal 2025.
Speaker Change: Our fourth quarter operating expenses were $128 million down $19 million sequentially and down $27 million from the year ago quarter. This is a reflection of our stringent cost controls and a reduction of incentive compensation.
Kevin Rhodes: This helped drive a sequential improvement in our operating margin and, along with increased revenue, drove a return to profitability from the third quarter. Heading into Fiscal 25, we do expect operating expenses to increase along with the recovery in our business due to higher incentive compensation. Operating margin for the fourth 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, fourth quarter adjusted EPS was $1,970, up from a loss per share of 14 cents in the third quarter and down from EPS of 33 cents in the year-ago quarter.
Speaker Change: This helped drive the sequential improvement in our operating margin and along with increased revenue drove a return to profitability from the third quarter.
Speaker Change: Heading into fiscal 'twenty five we do expect operating expenses to increase along with the recovery in our business due to higher incentive compensation.
Speaker Change: Operating margin for the fourth quarter was 13, 5% up from a loss of eight 6% in the prior quarter, but down from a profit margin of 17, 4% in the prior year quarter.
Speaker Change: All in fourth quarter, adjusted EPS was <unk> 19.
Speaker Change: Up from a loss per share of <unk> 14 in the third quarter and down from EPS of <unk> 33.
Speaker Change: In the year ago quarter.
Kevin Rhodes: We ended the quarter with $157 million in cash and net debt of $33 million. The $11 million 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 Guy.
Speaker Change: We ended the quarter with $157 million in cash and net debt of $33 million the $11 million of free cash flow in the quarter reflects higher revenue and adjusted profitability and a sharp decline in inventory purchases as commitments while Jonathan.
Jonathan: We expect a recovery in cash flow in fiscal 2025, as we grow revenue improved profitability and sell out the inventory we have on hand.
Jonathan: Now, let's turn to guidance.
Kevin Rhodes: 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 fifth and first quarter, we are expecting improved sequential revenue growth based on our funnel across many of our. For the first quarter, we expect guidance as follows. Revenue is expected to be in a range of $255 million to $265 million, and gross margin is expected to be in a range of 62 to 64%.
Jonathan: Our funnel of opportunities remains healthy and we are encouraged by the level of improving customer and new logo activity.
Jonathan: We are seeing.
Jonathan: So it should bode well for us heading into the new year looking.
Jonathan: Looking ahead to the to the first quarter, we're expecting improved sequential revenue growth based on our funnel across many of our verticals.
Jonathan: For the first quarter, we expect guidance as follows.
Jonathan: Revenue to be in a range of 255 million to $265 million.
Jonathan: <unk> margin to be in a range of 62% to 64%.
Kevin Rhodes: Operating margin is expected to be in a range of 7.8% to 10.4%, and earnings per share is expected to be in a range of 10 to 14 cents. Our fully diluted count is expected to be about 133 million shares. For the full fiscal year 2025, we expect revenue to be in a range of $1,110,000,000 to $1,135,000,000. We expect our growth and operating margins to improve throughout the year and to grow on cash. Further improvements in inventory and turnover are expected to come organically tied to growth and customer demand for newer products. And with that, I will now turn the call over to the operator to begin the Q&A.
Jonathan: Operating margin to be in a range of seven 8% to 10, 4%.
Jonathan: Earnings per share to be in a range of 10% to 14.
Jonathan: Our fully diluted count is expected to be about 133 million shares.
Jonathan: For the full fiscal year 2025, we expect revenue to be in a range of $1 billion $110 million to $1 billion $135 million.
We expect our gross and operating margins to improve throughout the year and to grow our cash flow.
Speaker Change: Further improvements in inventory and turnover are expected to come organically tied to growth and customer demand for newer products and with that I will now turn the call over to the operator to begin the Q&A session.
Operator: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And the first question will come from Erick Mantenozzi with Lake Street Capital Markets. Your line is now open.
Speaker Change: Thank you.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: And the first question will come from Eric.
Speaker Change: Manta Nosy with Lake Street capital markets. Your line is now open.
Erick Martinuzzi: Hey, thanks for taking my question. Curious about the guidance for FY 25. What kind of macro assumptions do you have built in?
Speaker Change: Hey, Thanks for taking my question.
Speaker Change: Curious on the guidance for FY 'twenty, five 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 or are we anticipating.
Speaker Change: A recovery and if so when.
Edward Meyercord: 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?
Eric: Yes, Eric.
Eric: As Ed I'll cover it but thanks for the question.
Edward Meyercord: Yeah, Eric, this is Ed. I'll cover it. Thanks for the question.
Ed: We are expecting a gradual recovery.
Eric: In the first quarter and then we're expecting it to accelerate in Q4.
Edward Meyercord: We are expecting a gradual recovery in the first quarter, 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, you know, and then we would expect to see that carry through into calendar 25. So I would say, I would say.
Speaker Change: That's based on the visibility that we have with current opportunities in.
Speaker Change: And our funnel so it's.
Speaker Change: Yes.
Speaker Change: And then we would expect to see that carry through into calendar 'twenty five.
Edward Meyercord: When you said accelerate Q4, were you talking about calendar Q4?
Speaker Change: Okay.
Speaker Change: Hey, a modest amount.
Speaker Change: Q4.
Speaker Change: Talking about calendar Q4.
Edward Meyercord: Yes. So, you know, our Q2 and calendar Q4, we're expecting to see an acceleration. And for us, it's highly visible.
Speaker Change: Yes, so our Q2.
Speaker Change: In calendar Q4, where except we were expecting to see.
Speaker Change: An acceleration.
Speaker Change: And it's for US it's highly visible.
Edward Meyercord: That's it. The The, when you say it's highly visible, is that based on orders from end users, or channel and just channel orders?
Speaker Change: Got you.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: When you say, it's highly visible is that based on kind of orders from end users or channel.
Speaker Change: And just channel orders.
Edward Meyercord: Orders, orders from end users that are coming from both our channel as well as directly.
Speaker Change: Orders orders from end users.
Speaker Change: That are coming from both our channel as well as direct.
Speaker Change: Okay.
Edward Meyercord: And then the congratulations on the competitive displacements. I know you win for a number of different reasons, but is there one or two product capabilities that you would point to as to why these displacements are happening?
Speaker Change: And then the.
Speaker Change: Congratulations on the competitive displacements I know you win for a number of different reasons, but is there one or two product capabilities that you would point to as to why these displacements are happening.
Edward Meyercord: I called some of that out. There are three different elements that I called out. The first is that we have technology that allows us to manage competitor equipment. And so as enterprise customers are contemplating moving to the cloud, moving to end-to-end, kind of the most modern networking platforms, there's a migration involved. And so because we're able to manage competitor equipment, it means we can provide a seamless migration and transition, as I mentioned with EVM past, where we can still manage Cisco gear while they migrate.
Edward Meyercord: Yeah, I call
Speaker Change: I called some of that out.
Speaker Change: There are three different elements that I called out the first is.
Speaker Change: We have technology that allows us to manage that competitor equipment.
Speaker Change: And so as enterprise customers are contemplating moving to cloud moving to <unk> and kind of.
Speaker Change: Most modern.
Speaker Change: Networking platforms.
Speaker Change: There is a migration involved and so because we're able to manage competitor equipment.
Speaker Change: It means we can we can provide.
Speaker Change: Seamless.
Speaker Change: Migration and transition as I mentioned with IBM past, where we can still manage Cisco gear, while they migrate so.
Edward Meyercord: So it's in the industry where 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.
Speaker Change: It's in the.
Speaker Change: Where were the easiest play.
Speaker Change: 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 competitors gear, while youre installing and deploying extreme so thats unique our competitors don't have that the second is our fabric.
Edward Meyercord: Our competitors don't have that. The second is our fabric. 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, et cetera. We talk about zero-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.
Speaker Change: We have a very modern enterprise fabric.
Speaker Change: It's <unk>.
Speaker Change: Something that our competitors do not have.
Speaker Change: And we have unique capabilities as it relates to the ease of deploying networks and provisioning networks, turning up sites et cetera, we talk about zero touch provisioning.
Speaker Change: Where you add.
Speaker Change: Network.
Speaker Change: Ice and it automatically comes up and it's automatically provisioned based on policies that are determined in the fabric.
Edward Meyercord: The other thing the fabric has is micro segmentation, where you can literally create thousands of networks within a single physical network. We talk about, you know, Dubai Exhibition Center is a great example where Cisco sponsored and 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 to have and buy its own network with its own SLA. And they're doing this with an IT team of like two or three people.
Speaker Change: Other thing that fabric has is micro segmentation, where you can literally create thousands of networks within a single physical network.
Speaker Change: We talk about Dubai exhibition Centre 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.
Speaker Change: <unk> of networks for each exhibitor can have by its own network with its own SLA and they're doing this with an it team of like two or three people. So this ability to segment the network.
Edward Meyercord: 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, a brand new, half a million square foot facility in downtown Philadelphia. They run on our fabric.
Speaker Change: It's something that our competitors just simply don't have.
Speaker Change: And the other value that segmentation is from from a security standpoint.
Speaker Change: I will take you to Philadelphia.
Speaker Change: Penn Medical Center.
Brand, new half a million square foot facility downtown Philadelphia, They run on our fabric.
Edward Meyercord: 47 operating rooms. Each operating room has its own network. And if there's a hacker that gets through through one of the medical devices, they can't see any other IP addresses, so they can't go anywhere.
Speaker Change: 47 operating rooms.
Speaker Change: Each operating room has its own network and if.
Speaker Change: There is a hacker that gets through through one of our medical medical device.
Speaker Change: They can't see any other IP addresses so they can't go anywhere so from a security perspective.
Edward Meyercord: 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 just one.
Speaker Change: It becomes the blast radius from a hack is.
Speaker Change: Minimize to wherever attack this segment of that network. So no one else has that.
Edward Meyercord: It's another reason why we won Washington University. It's also very resilient, so typical things that would bring a network down don't bring the fabric down. And you can make moves 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 across the network. No one else has that either.
Speaker Change: Another reason why we won Washington University.
Speaker Change: It's also very resilient so typical things that we bring a network down don't bring the fabric down.
Speaker Change: And you can make moves adds and changes as I mentioned to a network.
Speaker Change: 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.
Speaker Change: Through.
Speaker Change: The aggregation and core layers out to the edge switching out to wireless and now across the wide area network.
Speaker Change: And this is what makes our comparable SD Wan solution. So competitive because you can literally extend that fabric and those policies out.
Edward Meyercord: Finally, it's about the cloud, and our cloud platform is by far the most flexible in terms of the 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've 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 Change: No one else has that finally, it's about cloud and.
Speaker Change: 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.
Speaker Change: In terms of the security built into our cloud.
Speaker Change: And then finally, just the simplicity and ease of use.
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.
Speaker Change: Application to see.
Speaker Change: Other non extreme equipment in your environment, you can imagine that.
Edward Meyercord: 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. But these are just 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 and modernizing their networking infrastructure, which is obviously really important as everything runs in the network, we bring unique differentiating capabilities. And, in addition, we are de-risking decisions because, If you're looking at the number two and number three players out there, you have no idea what's going to survive.
Speaker Change: Iot World and the likes of Kroger and we have so many other customers 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.
Speaker Change: And there's a lot of uncertainty in the environment and as people are contemplating.
Speaker Change: Upgrading moderate modernizing their networking infrastructure, which is obviously really important as everything runs on the network.
Speaker Change: We bring unique differentiating capabilities.
Speaker Change: And.
Speaker Change: In addition, we are derisking decisions because.
Speaker Change: If youre if youre looking at the number two or number three players out there.
Speaker Change: You have no idea, what's going to survive.
Speaker Change: Thank you.
Operator: As a reminder, to ask a question, please press star 11 on your telephone. And our next question comes from Dave Kang with B Raleigh. Your line is now open.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone.
Speaker Change: And our next question comes from Dave Kang with B Riley. Your line is now open.
Dave Kang: 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 could kind of go over your AI functionality and how it stacks up against some of your competitors. Sure.
Dave Kang: Yes, good morning.
And while you're at it talking about Europe.
Dave Kang: <unk>.
Speaker Change: Some of your competitors.
Speaker Change: <unk> had been really talking up their AI.
Speaker Change: Functionality just wondering if you can kind of go over your AI functionality and how they stack up against the how.
Speaker Change: How it stacks up against all.
Edward Meyercord: Sure. The AI that you're hearing about in the networking industry is really around AI operations. And this is kind of incorporating machine learning and data science together for driving better outcomes in the network. And this is, you know, Extreme is a leader here.
Speaker Change: All your competitors sure.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: The AI that you're hearing about in the networking industry is really around AI ops.
Edward Meyercord: We have our co-pilot application. This is really what, you know, MIST was so famous for in terms of, you know, their integration with ServiceNow and creating all those trouble tickets. And so I think that's kind of the first generation AI that I would say that, you know, 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 experts.
Edward Meyercord: We are investing in, and we're very focused on building a networking platform that will fundamentally change how you interface with the network. And, you know, we also mentioned Intel and our ability to pull in other data sources from our ecosystem partners and alliance partners, the likes of, you know, Zebra appliances that are out there or Verkata cameras that are out there. You know, here, this is about us developing a platform where, truly, the cloud management becomes part of an overall platform where you have, you know, you talk into the platform, you know, through the form of queries, knowledge queries about our products, about configurations, et cetera, you know, overall intelligence queries about what's going on in your network.
Speaker Change: Fundamentally change how you interface with the network.
Speaker Change: And we also mentioned Intel and our ability to pull in other data sources.
From our ecosystem partners and Alliance partners.
Speaker Change: Alikes of Zebra appliances that are out there or Carter cameras that are out there.
Speaker Change: Sure. This is about us developing a platform we're truly.
Speaker Change: It's the the cloud management becomes part of an overall platform.
Speaker Change: Where you have.
Speaker Change: You talk into the platform through the form of queries knowledge queries about.
Speaker Change: About our products about configurations et cetera.
Speaker Change: Overall intelligence queries about what's going on in your network. What I think is most exciting is going to be around reporting.
Edward Meyercord: What I think is most exciting is gonna 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, you know, give me a report on that client. And its behavior over the last 48 hours. And then it's right at your fingertips, and it happens. So troubleshooting something like that in that environment is literally gonna be happening within minutes or an hour instead of, you know, what can take weeks.
Speaker Change: If you're in health care and Biomed comes to you and they are complaining about the network because a piece of medical equipment is not connecting.
Speaker Change: You can just ask the network now give me a report on that.
Speaker Change: That client.
Speaker Change: Its behavior over the last 48 hours and then it's right at your fingertips in it 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.
Edward Meyercord: So there's this fundamental shift. This is where we're investing. We have, Yeah, it is going to fundamentally change the way you know 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
Speaker Change: We have.
It is going to fundamentally change the way that the strategic value of networking, especially if you have a platform and you start pulling in.
Speaker Change: Other data sources that provide more insights more intelligence into the broader broader network.
Edward Meyercord: And when do you think when should we expect the next generation, generative AI, to be available?
Speaker Change: And when do you think when should we expect that.
Speaker Change: The next generation.
Janet generative.
Speaker Change: We have to be able to vulnerable.
Edward Meyercord: Yeah, and we are, you know, 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, you know, this is going to continue to evolve. We have a schedule to gradually open this up to partners, which you'll see a first round of partners in October and then in November. And then we're looking at the early part of next year's calendar. 25 to roll it out in earnest.
Speaker Change: Yeah.
Speaker Change: We are.
Speaker Change: Yes, we just had our extreme Academy live event.
Speaker Change: And we have opened we have opened this up and 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.
Speaker Change: And.
Speaker Change: This is going to continue to evolve we have a schedule to gradually open this up to partners, which you'll see our first round of partner in October and then in November and then we're looking at the.
Speaker Change: The early part of next year calendar.
Edward Meyercord: So, and then there will be a migration path where we start moving people over to 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. We're inclusive.
Edward Meyercord: 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. For example, we have a sales assistant. That's been very helpful, and we're incorporating this in our service function as far as self-help is concerned. We're incorporating it across many functions of the company, which is, I guess, more the non-product, if you will, use cases for AI at Extreme.
Edward Meyercord: And you know, I guess, at the end of the day, I mean, what is it, what does it do to your ARR? I assume it's already growing at 30% year over year. I mean, could that accelerate, you know, recurring revenue growth? Dave, what would I say?
Edward Meyercord: Dave, what I would say is that 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, there's 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, So, you know, there's a security opportunity. And then, you know, as we move to a platform, we're gonna continue to evolve with our ecosystem partners and what we call alliance partners, pulling in more data and intelligence from their devices.
Speaker Change: If you look at adding in security for example.
Speaker Change: Which is evolving and we're expecting that use <unk> product that I mentioned to go G. A in the fall that will be our first offering where we have.
Speaker Change: Subscription untether too it doesn't require extreme.
Speaker Change: Extreme hardware or extreme devices. So there's a there's a security opportunity.
Speaker Change: And then as we move to our platform.
Speaker Change: We're going to continue to evolve with our ecosystem partners.
Speaker Change: And what we call Alliance partners.
Speaker Change: 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 the long term growth rate, but.
Edward Meyercord: And so it's still early innings in terms of how we translate all this into a 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 subscriptions to those devices. So that's the long-term strategy.
Speaker Change: This is going to allow us to attach more and more devices, including non extreme devices, just anything tethered to the network.
Speaker Change: And then sell more and more subscription to those devices. So that's that's the that's the long term strategy.
Dave Kang: Sounds good. Thank you.
Speaker Change: Sounds good thank you.
Speaker Change: Okay.
Speaker Change: And the next question will come from Christian Schwab with Craig Hallum. Your line is now open.
Christian Schwab: Great. You know, as we move into, you know, post this fiscal year, and we talked about, you know, growth continuing and accelerating into Q4. But, you know, now that you've had enough time to kind of, you know, digest the overbuying because of COVID and now hopefully make the last steps of cleaning up the panel inventory excess levels, what do you see as your long-term top line growth objective?
Speaker Change: Great.
Christian Schwab: As we move into <unk>.
Speaker Change:
Speaker Change: This fiscal year, and then we talked about.
Speaker Change: Continuing and accelerating into Q4, but you know now that you've had enough time to kind of you know.
Speaker Change: Digests the over buying because of Covid didn't know.
Speaker Change: The last steps of cleaning up the channel inventory excess levels.
Speaker Change: What do you see as your long term.
Speaker Change: Top line growth objective.
Edward Meyercord: Yeah, 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, and we had a large September revenue quarter last year in anticipation of a bookings forecast that didn't materialize. As a result, when you compare year over year, you're going to come up with, call it, a mid-single-digit growth rate for us. Just looking at the guide that we provided.
Christian Schwab: Yes Christian.
Christian Schwab: Yes. Thanks. Thanks for the question and then I know on the last call you.
Christian Schwab: You are someone who picked up on the inventory.
Christian Schwab: And.
Christian Schwab: That being an issue.
Speaker Change: If you look at if you look at historical September is a tough comp for us.
Speaker Change: We had.
Speaker Change: A large September revenue quarter last year in anticipation of.
Speaker Change: In anticipation of a bookings forecast that that didn't materialize.
Speaker Change: But as we go as a result.
Speaker Change: When you compare year over year, youre going to come up with.
Speaker Change: Yeah.
Speaker Change: Mid call it a mid single digit growth rate for us.
Edward Meyercord: Longer term, if you look at the second half of the year, obviously, it's going to be much higher. And so, you know, we see ourselves as a double-digit grower in the long term. It's going to be really interesting to see how things play out in the competitive environment. There will be, at this stage of the game, number two and number three are still saying nothing's going to change in the market, and we all know that's not the case.
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 are we see ourselves as a double digit grower long term.
Speaker Change: It's going to be really interesting to see how things play out and the competitive environment.
Speaker Change: There's going to be.
Speaker Change: At this stage of the game.
Speaker Change: Two and number three are still saying nothing is going to change out in the market and we all know that's not the case and as that evolves, it's going to have an impact on the channel and it's going to cause some some dislocation.
Edward Meyercord: 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, and we're that we're absolutely the best alternative. So depending on how that share shift materializes, you know, that could affect what we're calling, but I think what we've called is, you know, 10 12%, an investor day. We're confident in double digits going into 20.
Speaker Change: As it will with enterprise customers.
Speaker Change: And if we are that we are absolutely the best alternative so.
Speaker Change: Depending on how that share shift materializes.
Speaker Change: And that can affect what we're calling but.
Speaker Change: Take what we've called as 10% to 12% at Investor Day.
Speaker Change: Confident in double digit going into 'twenty six.
Edward Meyercord: And then just my last question, where do you think the greatest market share opportunity geographically in the channel is for you given, you know, the competitive, you know, location potential?
Speaker Change: Great and then just my last question, where do you think the greatest market share opportunity geographically.
Speaker Change: And the channel is for.
Speaker Change: For you given the.
Edward Meyercord: I'd slice it into two pieces, Christian. I think, you know, 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. 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 In Europe, we have a well-established network and many more partners to drive the network, but they tend to be smaller.
Edward Meyercord: So we're moving up the market in EMEA to larger partners. We have a distinct strategy for that. We're gonna do the same thing here in the U.S., and then we're also gonna build out a broader base here in the U.S. So around competitive dislocation, you know, 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.
Edward Meyercord: Markets that traditionally we have not penetrated well, with a different kind of relationship with a much larger service provider, the commercial models that we're pursuing are going to open up doors and give us, you know, that is purely channel focused. Both of them, we think that over the next coming years, that will open up a lot of opportunities.
Christian Schwab: Great. No other questions. Thanks, guys.
Operator: And our next question comes from Timothy Horan with Oppenheimer. Your line is open.
Speaker Change: And our next question comes from Timothy Horan with Oppenheimer. Your line is open.
Timothy Horan: 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, you know, does anyone else out there have it? And can you maybe just describe what the return on invested capital for customers is, you know, ultimately? I know this is just the first product rolling out there, but, you know, when do you anticipate having a kind of full platform out there, and what's your ROIC for customers?
Timothy Horan: Thank you so Ed congratulations on rolling out this new I don't know exactly what you call it overlays SaaS product.
Timothy Horan: We'll manage the all of an enterprise's network up or I guess, what are you kind of call. This product then does anyone else out there habit.
And can you maybe just describe it.
Speaker Change: What's the return on invested capital for customers. 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 whats your OFC for customers.
Edward Meyercord: Thanks, Tim. Yeah, we... Yeah, I... What we talk about is kind of what's happening in terms of platformatization, not to strangle that word. But the idea of standing up a platform, what we have today, you know, we have cloud management capabilities. And then, you know, our cloud management for our networking elements becomes an element of our platform. And then the idea is through our alliance partners.
Dan: Thanks, Dan.
Dan: Yes.
Dan: Yes.
Speaker Change: What we talk about as I kind of what's happening in terms of like platform innovation.
Speaker Change: Yeah.
Speaker Change: That word, but the idea of standing up a platform. We have today, we have cloud management capabilities.
Speaker Change: And then our cloud management for our networking elements becomes an element of our platform.
Speaker Change: And.
Speaker Change: And then the idea is through our alliance partners.
Edward Meyercord: With everything that's tethered to the network, you know, we're in a position now, and we have created a platform where we can ingest data and information from those devices, and then we can provide more services based on information from those devices. So it's early innings.
Speaker Change: With everything Thats tethered to the network, we are in a position now and we create a platform where we can ingest.
Speaker Change: Data and information from those devices.
Edward Meyercord: We're working on setting up that platform so we can 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 to other platforms. 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 created a platform. And I'd say that's a model that will be followed, and I know it's being talked about. I think you should think about it like that.
Edward Meyercord: And will it basically be able to manage all or most enterprise-legacy hardware in the end?
Edward Meyercord: Yes, in our case, yeah, we're not developing the technology so that we're going back a decade to try to find old networking gear that we can attach. You know, we're looking forward, and we're looking forward to our universal hardware platforms, where today that's, you know, 80 plus percent of what we sell, and it's, you know, it's moving, it will, it will move to 100%.
Edward Meyercord: All of that attaches to the cloud. And then it becomes more about ecosystem partners, you know, we mentioned Intel, and being able to grab data, you know, from other sources, away from, you know, 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, etc., that we can feed back to a user where, you know, they have, you know, thousands and thousands of these Zebra devices in their network.
Edward Meyercord: 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, you know, what kind of improvement the customers will experience and, you know, the payback period for customers? It's too soon.
Edward Meyercord: It's too soon for me to talk about payback, Tim, but the obvious benefits here for us are the simplicity and ease with which you have access to information that's contained in the network or 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 Change: The obvious benefits here for us are the <unk>.
Speaker Change: Simplicity and ease in which you have access to information.
Speaker Change: 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 and healthcare and now all of a sudden you can literally just query the network.
Speaker Change: And asked the network for reports that historically, we've taken a long time.
Speaker Change: And then a lot of troubleshooting to figure out so massive time savings time savings equates to efficiencies.
Edward Meyercord: So massive time savings; time savings equates to efficiencies, efficiencies, and cost savings. Digital 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 them for more value add.
Speaker Change: Efficiencies and cost savings traditional networking engineers can now be more productive and more strategic.
Speaker Change: And you know there is a transformation thats going to happen there.
Speaker Change: 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.
Speaker Change: Thank you.
Operator: As a reminder, to ask a question, please press star 11 on your telephone. Our next question comes from David Voigt with UBS. Your line is open.
Speaker Change: Yeah.
Speaker Change: As a reminder to ask a question. Please press star one one on your telephone. Our next question comes from David Voight with UBS. Your line is open.
David Voigt: Great guys. Thanks for squeezing me in. And Kevin and that team appreciate all the color on the inventory.
David Voigt: 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 percent of your finished goods inventory. Can you help us understand sort of what the products are, and how you're thinking about them? And, you know, even with the charge, inventory is still a bit elevated relative to historical levels when you're at this sort of revenue run rate from a product perspective. So you can help us understand what's going on there and how to think about it going forward. And then I have a follow-up question.
Kevin Rhodes: Kevin, Kevin, do you want to take that one?
Kevin Rhodes: Yeah, I'm happy to. So David, I would, I would say, throughout the year, we were evaluating and looking at, just like we do every single quarter, you know, our inventory levels, and that sort of thing. As we got into the fourth quarter, as we were doing our planning for this next year, as we were looking at our, you know, funnel of activity, what we saw was more and more opportunities created around newer generations, universal hardware, etc.
Kevin Rhodes: And realizing that we had some inventory that was going to end of life, end to end. You know, we're 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 whole older technologies, we realized that this would be a good opportunity, if you will, for us to evaluate our strategy in 2025, looking at our inventories, and making sure that we had basically brought them to the net realizable value that we would expect us to sell out in this next year.
Kevin Rhodes: Some of it was a combination of raw materials that we had not created yet. Remember, we had to buy some of these components a year, two years ago; we had to buy them when there was elevated demand; those orders were put into our ODMs. And then, you know, 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 we took a look at all of that and just came to the conclusion that this was the right thing to do in the fourth quarter. That's the best way to describe it.
David Voigt: And then on the balance of 141, which still seems a bit elevated relative to, you know, back in fiscal 20, when you're 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.
Kevin Rhodes: So, the good news is that the 141 that we have now, that's all fresh, new, universal hardware. We feel very confident in our ability to go forward.
Kevin Rhodes: We're kind of clean on that level and that that's a 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 and $80 million in that range based on historical numbers. And so, we'll still generate cash flow from that 141 going down, let's call it 60 to $80 million of free cash flow this next year based on that finished goods inventory, you know, selling.
Speaker Change: Turning down let's call it $60 million to $80 million of free cash flow in this next year based on that finished goods inventory selling out.
David Voigt: Great. And can I slip one more in, maybe for Ed?
Speaker Change: Great and can I slip one more in maybe for Ed when you think about it.
Speaker Change: The demand drivers in 25, you talked about obviously, a sequential improvement in December obviously year over year growth against an easy compare in March.
David Voigt: When you think about the demand drivers in 25, you talked about, you know, obviously a sequential improvement in December, obviously year-over-year growth against an easy comparison in March. But when you think about sort of the environment as we turn into calendar 25, you know, 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, you know, your fiscal year 25 or the early part of 2025?
Speaker Change: When you think about sort of the environment as we turned into calendar 'twenty five I think visibility still seems a little bit light to us.
Speaker Change: What gives you confidence that you can grow revenue kind of in that mid teens in the back half of your fiscal 'twenty five or the early part of 2025 I get the comp is easy in March, but 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.
David Voigt: I get that the comp is easy in March, but I'm maybe thinking a little bit longer term in terms of the normalization in the environment. I know Kevin talked about demand and channel, and I think they seem to be aligned, but just any sort of color there would be great.
Edward Meyercord: Yeah, I mean, David, the overall, the technology differentiation that we have today is, is very strong. And as it is, we've made changes to our sales organization, our marketing organization, and we've attracted a lot of new talent. It's very good.
Speaker Change: Yeah.
Speaker Change: David It's overall, it's the technology differentiation that we have today is very strong.
Speaker Change: And.
Speaker Change: As we've made changes to.
Speaker Change: Our sales organization, our marketing organization and.
Speaker Change: We've attracted a lot of new talent.
Edward Meyercord: And I would say the rigor around, and we've overhauled our reporting on funnel, our reporting on funnel generation. And we have a lot more clarity and visibility, which gives us confidence into, you know, what we currently have in our funnel of opportunities, and, and why we're creating them. And then, two, the momentum we have around funnel generation. And this is, this is really what's going to give us confidence.
Edward Meyercord: So that's kind of what we're doing in terms of how we're executing as a company. There's a macro, 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 and Yeah, I think between HP and Juniper, there's a lot of work that they have to do and, and a lot of risk they have to put out into the market, which, you know, we fully intend to take advantage of, and then Cisco, you know, just continues to move in a direction that creates complexity and creates challenges for customers.
Edward Meyercord: And it just feels like, with both the channel and end user customers, that if that volume of opportunity is getting greater, in terms of where they go, there's one less place to go with Juniper and HP getting together. And at this stage of the game, we have become the least risky and, I think, the most attractive modern networking platform to go to.
Operator: I have no further questions in the queue at this time. I would now like to turn the call back to Ed Meyercord for closing remarks.
Edward Meyercord: Thanks, Michelle. Let me just say thank you to everyone who's joined the call. We appreciate it. We appreciate investors and our analysts. We thank you for the questions. Here, I also have a lot of our employees and partners who are joining in on the call and, of course, want to thank them for, you know, the work. 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.
Operator: This does conclude today's conference call. Thank you for participating. You may now disconnect.