Ladies and gentlemen, thank you for standing by. Welcome to Extreme Network's 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. [Operator Instructions] 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.

Thank you, operator. Good morning, everyone, and welcome to the Extreme Network's fourth quarter fiscal 2024 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Network's President and CEO, Ed Meyercord, and EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Network's 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 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.

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 3 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-risked 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. Their longtime Cisco customer wanted to migrate to a modern network with Extreme without disrupting operations. We allowed them…

Thanks, Ed. Operationally, our results were slightly ahead of our outlook for the quarter. As we expected entering the quarter, our channel inventory position has now fully normalized. We are confident that sell-in and sell-through rates are balanced and this will position us for a return to normalized growth as customer demands and trends continue to improve as we saw in the quarter. As we said for several quarters, unlocking -- the unlocking of the supply chain constraints this past year resulted in elevated levels of channel inventory that we and the rest of the networking industry have been working through. 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 will be discussing our non-GAAP adjusted results, excluding the impact of our increase in E&O reserves to allow for better comparisons to our normal reporting in our prior outlook. Let me get into some of the numbers. Fourth quarter revenue up $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…

Thank you. [Operator Instructions] And the first question will come from Eric Martinuzzi with Lake Street Capital Markets. Your line is now open.

Hey. Thanks for taking my question. Curious on the guidance for FY-25, what kind of macro assumptions do you have built in, maybe not on a quarter-by-quarter basis, but so let's take it sort of first half versus second half? Are we anticipating a recovery? And if so, when?

Yeah. Eric, this is Ed. I'll cover it. Thanks for the question. 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 -- and then we would expect to see that carry through into calendar ‘25. So, I would say a modest –

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

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

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

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

Okay. 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?

I called some of that out. There are three different elements that I called out. The first is, we have technology that allows us to manage competitor equipment. And so -- as enterprise customers are contemplating moving to cloud, moving to end to end, kind of, most modern networking platforms, there's a migration involved. 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, 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 that Fabric has is micro segmentation, where you can literally create thousands of networks within a single physical network. We talk about Dubai Exhibition center, is a great example, where Cisco sponsored, actually paid for the network in the exhibition hall and then they migrated to Extreme, because we have the ability to create thousands of networks for each exhibitor can have and buy its own network with its own SLA, and they're doing this with an IT team of like two or three people. So,…

Thank you.

[Operator Instructions] And our next question comes from David Kang with B. Riley. Your line is now open.

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

Sure. The AI that you're hearing about in the networking industry is really around AI ops, and this is, kind of, incorporating the machine learning and data science together for driving better outcomes in the network. And this is -- Extreme is a leader here; we have our CoPilot application. This is really what Mist was so famous for in terms of 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 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 their go forward outlook from under investing in their networking portfolio. As we move forward, the next generation of AI is coming into play, and this is generative AI. We talked about AI Expert, we are investing in, and we're very focused on building a networking platform where it will fundamentally change how you interface with the network. And we also mentioned Intel and our ability to pull in other data sources from our ecosystem partners and alliance partners, the likes of Zebra appliances that are out there or Verkada cameras that are out there. Here this is about us developing a platform where truly it’s -- the cloud management becomes part of that overall platform, where you have -- you talk into the platform through the form of queries, knowledge queries about our products, about configurations, et cetera, overall intelligence queries about what's going on in your network. What I think is most exciting is going to be around reporting. If you're in healthcare and biomed comes to you and they're complaining about the network, because a piece of medical equipment is not connecting, you can just ask the network, give me a report on that client and its behavior over the last 48 hours, and then it's right at your fingertips and it happens. So troubleshooting something like that in that environment is literally going to be happening within minutes or an hour instead of what can take weeks today. So, there's this fundamental shift. This is where we're investing and we have -- it is going to fundamentally change the way the strategic value of networking, especially if you have a platform and you start pulling in other data sources that provide more insights and more intelligence into the broader network.

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

Yeah. We are -- we just had our Extreme Academy live event and we have opened this up in our AI labs to all of our sellers. So, our sellers are now in there, which is going to be really helpful, because now our sales teams can help us develop our technology, which is really how this next generation of AI works as we sort of train it. And this is going to continue to evolve. We have a schedule to gradually open this up to partners, which you'll see a first round of partner in October and then in November, and then we're looking at the early part of next year calendar ‘25 to roll it out in earnest. And then there will be a migration path where we start moving people over into the platform of which our cloud management capability will be obviously a fundamental part of the platform. So, we're investing here. We're working -- the teams are working very hard. We're inclusive, we're bringing a lot into the platform and the product. The other thing I would mention is that from an AI perspective, we have over 20 different agents that we've developed. We're partnered with Microsoft and CoPilot and we have use cases for sales enablement. We have a sales assistant that is being very helpful and we're incorporating this in our service function. As far as self-help, we're incorporating it across many functions of the company, which is, I guess more of the non-product, if you will, use cases for AI at Extreme.

And I guess at the bottom, 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 recurring revenue growth?

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

Sounds good. Thank you.

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

Great. You know, as we move into post this fiscal year, I know we talked about growth continuing and accelerating into Q4. But, now that you've had enough time to kind of digest the over buying because of COVID and now hopefully the last steps of cleaning up the channel inventory, excess levels. What do you see as your long-term top line growth objectives?

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. 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 a mid, call it, a mid-single digit growth rate for us just looking at the guide that we provided. Longer term, if you look at the second half of the year, obviously it's going to be much higher. And so, we see ourselves as a double-digit grower long-term. It's going to be really interesting to see how things play out in the competitive environment. There's going to be at this stage of the game, number two and number three are still saying nothing's 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 dislocation, as it will with enterprise customers and we're absolutely the best alternative. So, depending on how that share shift materializes, that could affect what we're calling. But I think what we've called is 10%, 12% at Investor Day, we're confident in double digit going into ‘26.

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

I'd slice it into two pieces, Christian. I think, here in the US, 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 US and we're becoming more and more channel focused in the US. 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 up market in EMEA to larger partners. We have a distinct strategy for that. We're going to do the same thing here in the US and then we're also going to build out a broader base here in the US. So around competitive dislocation, these are opportunities. Cisco is taking a lot of action out in the channel given their movement away from networking as a focus area, and this will create opportunities for us. We also are coming out with these other commercial models. We've talked about private subscription and maybe a new way to approach markets that traditionally we've not penetrated well with a different kind of relationship with a much larger service provider. The commercial models that we're pursuing are going to open up doors and give us, I would say that is purely channel focused, both of them. And we think that over the next coming years that will open up a lot of opportunity.

Great. No other questions. Thanks guys.

Thanks Christian.

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

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

Thanks, Tim. What we talk about is like what's happening in terms of, like, [platformitization] [ph], not to strangle that word, but the idea of standing up a platform. What we have today, we have cloud management capabilities, and then our cloud management for our networking elements becomes an element of our platform. And then the idea is through our alliance partners with everything that's tethered to the network, we are in a position now and we create a platform where we can ingest data and information from those devices and then we can provide more services based on information from those devices. So, it's early innings. We're working on standing up that platform that we'll see what our competitors are doing, but we will create a pure play networking platform. And what we're aiming to do is to make it very easy for that platform to integrate with other sources of data or where we can supply data into other platforms. The company that was out talking about platforms, Palo Alto, got a lot of notice for all the different solutions that they put together and then creating a platform, and I'd say that's a model that will be followed and I know it's talked about. I think you should think about it like that.

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

Yes. In our case, we're not developing the technology so that we're going back a decade to go try to find old networking gear that we can attach, we're looking forward. Our universal hardware platforms where today that's 80 plus percent of what we sell and it's moving, it will move to 100%, all of that attaches to the cloud and then it becomes more about ecosystem partners. We mentioned Intel and being able to grab data from other sources away from our networking equipment. So, Zebra Technologies is another one, where we have an integration with Zebra, where we can find, where we have intelligence about those devices, the location of the devices, the performance of the devices, connectivity, et cetera, that we can feed back to a user where they have thousands and thousands of these Zebra devices in their network.

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

It's too soon for me to talk about payback, Tim, but the obvious benefits here for us are the simplicity and ease in which you have access to information that's contained in the network, or that's to things that are tethered to the network. And I mentioned reporting, that's the big one and 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 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, efficiencies and cost savings. Traditional networking engineers can now be more productive and more strategic. And there's a transformation that's going to happen there because the network is strategic, but you're no longer going to need some of the old skills of the old networks, and you can repurpose to more value add.

Thank you.

[Operator Instructions] Our next question comes from David Vogt with UBS. Your line is open.

Great, guys. Thanks for squeezing me in. And Kevin and – 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 even with the charge, inventory is still a bit elevated relative to 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.

Kevin, you want to take that one?

Yeah, I'm happy to. So, David, I would say, throughout the year we were evaluating and looking at, just like we do every single quarter, our inventory levels in that sort. As we got into the fourth quarter, as we are doing our planning for this next year, as we were looking at our funnel of activity, what we saw is more and more opportunities created around newer generations, universal hardware, et cetera and realizing that we had some inventory that was going to 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 kind of older technologies, we realized that this would be a good opportunity, if you will, for us to evaluate 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. Year, two years ago, we had to buy them when there was elevated demand, those orders were put into our ODMs, and then we were getting those raw materials. Well, you're probably not going to create new finished goods if in fact you have raw materials and you're not even moving the finished goods. And so, we took a -- look at all of that and just came to the conclusion that this was the right thing to do in the fourth quarter. That's the best way to describe it.

And then on the balance of $141 million, which still seems a bit elevated relative to back -- if I go back to fiscal ‘20, when you were kind of at this revenue run rate on the product side, just want to, kind of, get a sense what's going on there.

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

Great. And can I flip one more in maybe for Ed? When you think about 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. When you think about sort of the environment as we turn into calendar ‘25, I think visibility still seems a little bit light to us. What gives you confidence that you can grow revenue kind of in that mid-teens in the back half of your fiscal ‘25 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.

Yeah. I mean, David, overall, it's the technology differentiation that we have today is very strong. And we've made changes to our sales organization, our marketing organization, and we've attracted a lot of new talent. It's very good. And I would say the rigor around and we've overhauled our reporting on funnel, our reporting on funnel generation. And we have a lot more clarity and visibility which gives us confidence into, 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 and this is really what's going to give us confidence. So, there's kind of what we're doing in terms of how we're executing as a company. There's a macro cycle evolution which we think will be somewhat favorable. And then finally there's the conditions within our industry and what is going on. And 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 we fully intend to take advantage of. And then Cisco just continues to move in a direction that creates complexity and creates challenges for customers. And it just feels like with both the channel and end user customers that that volume of opportunity is getting greater in terms of where do they go. There's one less place to go with Juniper and HP getting together. And at this stage of the game, we become the least risky and I think, most attractive modern networking platform to go to.

Great. Thank you.

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.

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

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