Extreme Networks - Q4 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Extreme Networks' fourth quarter full year 2024 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. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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.

Stan Kovler (VP of Corporate Development and Investor Relations)

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. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP and 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-K report for the period ended June 30, 2023, and subsequent 10-Q reports filed with the SEC. 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&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 Extreme's President and CEO, Ed Meyercord.

Ed Meyercord (President and CEO)

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 of the 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 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.

ARR 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 approach the three million 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 third-party hardware, which allows them to migrate and upgrade at their pace without disruption. A great example from this quarter is ebm-papst 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 zero-touch provisioning. It offers unmatched security and visibility, micro-segmentation capability that dramatically minimizes the blast radius of lateral cyberattacks. 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.

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 U.K.'s largest retailers, was looking to modernize network management and operations, they chose ExtremeCloud 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. Our MSP bookings doubled sequentially in the fourth quarter, 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.

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 Extreme Academy Live, we also previewed advancements to our Extreme AI Expert, a generative AI solution that delivers insight, 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 GenAI to make networks smarter, faster, and more resilient. With all these pieces coming together, we're building the industry's most modern networking platform. 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. 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 Indonesia, a major NHS hospital in the U.K., Vandalia Health in the U.S., 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, install the tens of thousands of customers. Portfolio rationalization and integration creates risk. 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 BOS 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 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, 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.

Kevin Rhodes (EVP and CFO)

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've said for several quarters, 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. 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 $46.5 million, 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. 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 comparisons to our normal reporting and our prior outlook.

Let me get into some of the numbers. Fourth 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 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 fourth quarter versus the year-ago quarter. We had 38 customers spend over $1 million on Extreme Solutions this quarter. For fiscal year 2024, we had 164 customers who spent over $1 million, up from 152 customers in the prior year. SaaS ARR continued to show strong top-line growth at 29% 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.

Our recurring revenue growth has been largely driven by the strength of cloud subscription revenue. Total recurring revenue grew nine percentage points year-over-year to 39% of fourth quarter revenue and 36% of fiscal 2024 revenue. Our services business remained solid, despite the fluctuations in product revenue trends. We achieved year-over-year improvement in 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 ago.

The combination of higher product revenue to cover fixed overhead costs drove the sequential better results. We currently expect gross margin to continue to improve throughout fiscal 2025. 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. This helped drive a sequential improvement in our operating margin, and along with increased revenue, drove our return to profitability from the third quarter. Heading into fiscal 2025, 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 $0.19, up from a loss per share of $0.14 in the third quarter and down from EPS of $0.33 in the year-ago quarter. 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 guidance. 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 first quarter, we are expecting improved sequential revenue growth based on our funnel across many of our verticals. For the first quarter, we expect guidance as follows: Revenue to be in a range of $255 million-$265 million. Gross margin to be in a range of 62%-64%. Operating margin to be in a range of 7.8%-10.4%. Earnings per share to be in a range of $0.10-$0.14.

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 $1.11 billion-$1.135 billion. 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. With that, I will now turn the call over to the operator to begin the Q&A session.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. And the first question will come from Eric Martinuzzi with Lake Street Capital Markets. Your line is now open.

Eric Martinuzzi (Senior Research Analyst)

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?

Ed Meyercord (President and CEO)

Yeah, Eric, I, this is Ed. I'll cover it, and thanks for the question. We, 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 2025. So I would say a modest-

Eric Martinuzzi (Senior Research Analyst)

When you said accelerate Q4, did you—you were talking about calendar Q4?

Ed Meyercord (President and CEO)

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

Eric Martinuzzi (Senior Research Analyst)

Gotcha. When you say it's highly visible, is that based on kind of orders from end users or channel into channel orders?

Ed Meyercord (President and CEO)

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

Eric Martinuzzi (Senior Research Analyst)

Okay. And then the congratulations on the competitive displacements. I know you, 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?

Ed Meyercord (President and CEO)

Yeah, I called some of that out. There are three different elements that I called out. You know, the first is, we have a technology that allows us to manage the competitor equipment. And so as enterprise customers are contemplating moving to cloud, moving to end-to-end, kind of, you know, 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 ebm-papst, 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. 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.

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 Centre as, you know, a great example, where Cisco sponsored, actually paid for the network in the exhibition hall, and then they migrated to Extreme because we had 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, two or three 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, a brand-new, 500,000-square-foot facility, downtown Philadelphia. They run on our fabric.

47 operating rooms, you know, each operating room has its own network. And if there's a hacker that gets through, through one of a medical, you know, 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, you know, wherever it's hacked, the segment of that network. So no one else has that. 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, adds, 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, you know, 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, you know, our comparable SD-WAN solution so competitive, because you can literally extend that fabric and those policies out. No one else has that. Finally, it's about cloud, and, you know, our cloud platform is by far the most flexible in terms of cloud options that we provide, in terms of which public cloud you wanna 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, you know, mapping capabilities, and we're looking at, you know, very soon coming out with the ability through our cloud and then through our mapping application, to see other non-Extreme equipment, you know, in your environment. You can imagine that, you know, 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 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 on the network, we bring unique differentiating capabilities. And you know, 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 gonna survive.

Eric Martinuzzi (Senior Research Analyst)

Thank you.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone. And our next question comes from Dave Kang with B. Riley. Your line is now open.

Dave Kang (Senior Research Analyst of Technolgy and Research)

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 kinda go over your AI functionality and how it stacks up against some of your competitors?

Ed Meyercord (President and CEO)

Sure. You know, the AI that you're hearing about in the networking industry is really around AIOPS. And this is kind of, you know, incorporating the, you know, machine learning and data science together for driving better outcomes in the network. And this is, you know, Extreme is a leader here. We have our CoPilot 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, you know, 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, you know, this is generative AI. We talked about AI Expert. 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, you know, we also mentioned Intel and our ability to pull in other data sources from our ecosystem partners and alliance partners, you know, the likes of, you know, Zebra appliances that are out there or Verkada cameras that are out there.

You know, this is about, you know, us developing a platform where truly it's 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 about our products, about configurations, et cetera. You know, overall intelligence queries about what's going on in your network. 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, "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, you know, within minutes or an hour instead of, you know, what can take weeks today. So there's this fundamental shift. This is where we're investing, and, you know, we have. You know, 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 network.

Dave Kang (Senior Research Analyst of Technolgy and Research)

When do you think, and when should we expect the next generation, the generative AI?

Ed Meyercord (President and CEO)

We're, we're-

Dave Kang (Senior Research Analyst of Technolgy and Research)

To be available?

Ed Meyercord (President and CEO)

Yeah, you know, we are, you know, we just had our Extreme Academy Live event, and we have opened this up in our Extreme Labs to all of our sellers. So our sellers are now in there, which is gonna 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 it, 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, 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. You know, we're working. The teams are working very hard. 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, you know, 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.

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

Dave Kang (Senior Research Analyst of Technolgy and Research)

You know, I guess at the bottom, you know, at the end of the day, I mean, what does 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?

Ed Meyercord (President and CEO)

I mean, Dave, what I would say is, I think, you know, you know, sustaining that kind of growth rate over a long period of time is, is difficult. And I, I think what, what this is gonna allow us to do, there's, there's potential for accelerated growth, but what this is gonna allow us to do is to maintain, you know, that 30, you know, we've called 30% growth. If you look at adding in, you know, security, for example, which, you know, is evolving, and we're expecting, you know, that Universal ZTNA product that I mentioned to go GA in the fall, you know, that will be our first offering where we have, subscription that's untethered to... It doesn't require, Extreme hardware or Extreme devices. So, you know, there's a, 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, and what we call alliance partners, and pulling in more data and intelligence from their devices. And so it, it's still early innings in terms of how we translate all this into the long-term, long-term growth rate. But, you know, this is gonna 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, that's the long-term strategy.

Dave Kang (Senior Research Analyst of Technolgy and Research)

Sounds good. Thank you.

Operator (participant)

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

Christian Schwab (Senior Research Analyst)

Great. You know, as we move into, you know, post this fiscal year end, and we talked about, you know, growth continuing and accelerating, you know, into Q4. But, you know, now that you've had enough time to kind of, you know, digest, you know, the overbuying 'cause of COVID and now, hopefully, make the last steps of cleaning up the panel inventory, excess levels, you know, what do you see as your long-term, you know, top-line growth objective?

Ed Meyercord (President and CEO)

Yeah. Well, Christian, you know, thanks, thanks for the question, and, you know, I know on the last call, you, you, you, you were someone who picked up on the inventory, and, and, you know, you know, that, that being an issue. If you look at, if you look at historical, September is a tough comp for us. You know, we had a, you know, we had a, a, a large September revenue quarter last year in anticipation of, in anticipation of, of a bookings forecast that, that, didn't materialize. But as, as we go f- as a result, when you compare year-over-year, you know, you're, you're gonna come up with, you know, a, a, 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 gonna be much higher. And so, you know, we see ourselves as a double-digit grower long term. It's gonna be really interesting to see how things play out in the competitive environment. There's gonna be at this stage of the game, number two and number three are still saying nothing's gonna change out in the market, and we all know that's not the case. And as that evolves, it's gonna have an impact on the channel, and it's gonna cause some dislocation, as it will with enterprise customers. And we are absolutely the best alternative. So, you know, 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% at Investor Day. You know, we're confident in double-digit going into 2026.

Christian Schwab (Senior Research Analyst)

Great. And then just my last question: Where do you think the greatest market share opportunity geographically in the channel is, you know, for you, given, you know, the competitive dislocation potential?

Ed Meyercord (President and CEO)

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 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. So we're moving upmarket 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's taking a lot of action out in the channel, given their movement away from networking, you know, 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. The commercial models that we're pursuing are gonna open up doors and give us, you know, I would say, you know, that is purely channel-focused, both of them. And we think that, you know, over the next coming years, that will open up a lot of opportunity.

Christian Schwab (Senior Research Analyst)

Great. No other questions. Thanks, guys.

Ed Meyercord (President and CEO)

Thanks, Christian.

Operator (participant)

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

Timothy Horan (Managing Director and Senior Analyst)

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, you know, have it? And can you maybe just describe, what's the return on invested capital for customers, you know, ultimately? I know this is just the first product rolling out there, but, you know, when do you envision having a kind of full platform out there, and what's the ROIC for customers?

Ed Meyercord (President and CEO)

Thanks, Tim. Yeah, you know, what we talk about is, like, kind of what's happening in terms of, like, platformization, you know, not to, you know, strangle that word. But the idea is 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, you know, of our platform. And then the idea is, through our alliance partners, with everything that's tethered to the network, you know, we're in a position now, and we create a platform where we can ingest data and information from those devices, and then we can provide, you know, more services based on information from those devices. So it's early innings.

We're working on, you know, standing up that platform that will be-- we'll see what our competitors are doing, but, but, you know, we will create, you know, 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. You know, the company that was, you know, 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, you know, that's a model that will be followed, and I know it's talked about. I think you should think about it like that.

Timothy Horan (Managing Director and Senior Analyst)

Will it basically be able to manage all or most enterprise legacy hardware, ultimately?

Ed Meyercord (President and CEO)

Yes. In our case, yeah, 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. You know, we're looking forward, and you know, we're looking for our Universal Hardware platforms, where today that's 80%+ of what we sell, and it's moving. It will move to 100%, and 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 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, et cetera, 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.

Timothy Horan (Managing Director and Senior Analyst)

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 gonna charge for it. But can you talk about, you know, what kind of improvement the customers will experience and, you know, your, the payback period for customers?

Ed Meyercord (President and CEO)

It's too soon for me to talk about payback, Tim, but you know, the obvious, you know, benefits here for us are you know, 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. Now, that's the big one. I spoke to a CIO who talked about the constant fights with biomed around device connectivity in healthcare, and, you know, 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. So massive time savings. Time savings equates to efficiencies, you know, efficiencies and cost savings. Traditional networking engineers can now be more productive and more strategic.

And you know, there's a transformation that's gonna happen there, because you know, the network is strategic, but you're no longer gonna need some of the old skills of the old networks, and you can repurpose to, you know, more value add.

Timothy Horan (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from David Vogt with UBS. Your line is open.

David Vogt (Analyst)

Great, guys. Thanks for squeezing me in. And Kevin and Stan 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. Can you help us understand sort of what the products were, how you're thinking about it? And, you know, even with the charge, inventory is still a bit elevated relative to, you know, historical levels when you've been at this 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.

Ed Meyercord (President and CEO)

Kevin? Kevin, you wanna take that one?

Kevin Rhodes (EVP and CFO)

Yeah, I'm happy to. So, David, I, You know, I would, I would say, you know, throughout the year, we were evaluating and looking at, just like we do every single quarter, you know, our inventory levels and that sort. 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 is more and more opportunities created around newer generations, Universal Hardware, et cetera, and realizing that we had some inventory that was gonna end of 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 kinda old, older technologies, we realized that this would be a good opportunity, if you will, for us to evaluate, you know, what, what our strategy in 2025, 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. 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 gonna 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, you know, 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 Vogt (Analyst)

And then on the balance of $141, which still seems-

Kevin Rhodes (EVP and CFO)

Yeah

David Vogt (Analyst)

A bit elevated relative to-

Kevin Rhodes (EVP and CFO)

Yeah

David Vogt (Analyst)

You know, back, if I go back to fiscal 2020 when you were kind of at this revenue run rate on the product side, just wanna get, get a better sense of what's going on there.

Kevin Rhodes (EVP and CFO)

So the good news is that the 141 that we have now, all you know, that's all fresh, new, Universal, you know, Hardware. We feel very confident in our ability to go forward. We're kinda clean on that level, and that's new product that will be sold out. And we think that the normal kind of level of our inventory is gonna be about, you know, between $60 million 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 million-$80 million of free cash flow in this next year based on that finished goods inventory, you know, selling out.

David Vogt (Analyst)

Great. And, and can I slip one more in, maybe for Ed? When you think about the demand drivers in 2025, you talked about, you know, 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, 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 2025 or the early part of 2025? 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.

Ed Meyercord (President and CEO)

Yeah, I mean, yeah, David, it's, you know, overall, it's the technology differentiation that we have today is very strong. You know, we've made changes to, you know, our sales organization and our marketing organization, and we've attracted a lot of new talent. It's very good, and I would say the rigor around... We've overhauled our reporting on funnel, our reporting on funnel generation. You know, there's... We have a lot more, you know, clarity and visibility, which gives us confidence into, you know, what, one, what we currently have in our funnel of opportunities, and why we're creating them, and then, two, the momentum we have around funnel generation. This is really what's gonna 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, 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, you know, you know, between HP 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, you know, we fully intend to take advantage of. And then, you know, Cisco, you know, just continues to move, you know, 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 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've become the least risky, and I think, most attractive modern networking platform to go to.

David Vogt (Analyst)

Great. Thank you.

Operator (participant)

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.

Ed Meyercord (President and CEO)

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, we have a lot of our employees and partners who are joined in on the call, and of course, wanna thank them for, you know, the work. And, and, you know, we, we've got a tremendous opportunity ahead of us, and, you know, we, we appreciate you being with us, and, we're looking forward to updating you on, on more things to come. Have a great day.

Operator (participant)

This does conclude today's conference call. Thank you for participating. You may now disconnect.