Extreme Networks Inc

NASDAQ:EXTR

Earnings Call Analysis

Extreme Networks Optimistic About Fiscal 2025 After Inventory Issues

Extreme Networks faced significant inventory challenges in Q4 2024, leading to a $46.5 million provision for excess and obsolete stock. This action positioned the company to focus on next-gen products, clearing supply chain constraints. Q4 revenue grew 22% sequentially, and ARR from software subscriptions increased 29% YoY, driven by cloud networking. Looking ahead, revenue for Q1 2025 is forecasted between $255M-$265M with EPS of $0.10-$0.14. For fiscal 2025, the company expects $1.110B-$1.135B, anticipating improved margins and cash flow, leveraging a strong customer funnel and new product strategies.

Strong Q4 Performance Driven by Product Recovery

In the fourth quarter, Extreme Networks reported a revenue of $257 million, reflecting a notable 22% growth sequentially. This recovery was significantly aided by a 43% increase in product sales, quantified at $153 million, indicating improved alignment with channel sell-through rates. The strong demand was primarily attributed to a rebound in wireless revenue and campus switching solutions, suggesting a growing market need for the company's networking products. This positive trend aligns with an overall increase in operational efficiency as they clean up excess inventory from previous overbuying due to pandemic-induced supply chain constraints.

Guidance and Revenue Forecast for FY 2025

Looking ahead to fiscal year 2025, Extreme Networks provided optimistic guidance, expecting revenue to range between $1.110 billion and $1.135 billion. Specifically, for Q1 FY 2025, the projected revenue is estimated between $255 million and $265 million. Gross margins are anticipated to be between 62% and 64%, while operating margins are projected to be within 7.8% to 10.4%. Furthermore, the company expects a sequential improvement in revenue growth due to a healthy funnel of opportunities and improving customer engagement, positioning them for steady expansion.

Profitability and Margin Enhancements

The operating margin for the fourth quarter improved significantly to 13.5%, recovering from a prior loss of 8.6% in the third quarter, although this is still down from 17.4% in the year-ago quarter. The company reported an adjusted EPS of $0.19, up from a loss of $0.14 in the previous quarter, indicating a strong return to profitability driven by stringent cost controls and reduced operating expenses. Gross margins also reached a new high of 63.5%, up 230 basis points sequentially and 330 basis points year-over-year, reflecting the successful absorption of fixed overheads as sales improved.

Inventory Management and Future Cash Flow

Notably, Extreme Networks faced challenges with excess inventory related to older generation products and recorded an excess and obsolete inventory provision of $46.5 million. However, they are optimistic about executing future sales strategies that will drive down inventory levels and generate cash flow, projecting free cash flow of $60 million to $80 million based on existing inventory. The company feels confident that any remaining old inventory issues are now resolved, setting the stage for improved operational dynamics in FY 2025.

Technological Edge and Competitive Displacement

Extreme Networks has successfully displaced significant competitors like Cisco, HP, and Juniper at various customer sites by emphasizing their advanced solutions such as the Fabric and Zero-Touch Provisioning technologies. Their unique capabilities enable seamless migration for enterprises transitioning to modern networking infrastructure, which provides an evident advantage over their competitors. Furthermore, the company's engagement in partnerships and co-innovation, notably with Intel, underpins the development of AI-integrated networking solutions, enhancing their product attractiveness in a rapidly evolving market.

Increased Focus on SMB and Recurring Services

The company's Software as a Service (SaaS) offerings remain robust, with an annual recurring revenue (ARR) growth of 29% year-over-year. The total recurring revenue now constitutes 39% of Q4 revenue. Additionally, the growth of managed service provider (MSP) partnerships to 27 indicates a strategic pivot to capitalize on the broader SMB market, leveraging service consumption models that are not commonly offered in the industry. This diversified strategy not only mitigates risks associated with reliance on traditional sales channels but also stabilizes revenue flows.

A Multifaceted Road Ahead

Overall, Extreme Networks is experiencing a renaissance, rebounding from past inventory oversights while leveraging technological advancements and strategic partnerships to enhance profitability. They project mid-to-high single-digit year-over-year growth expectations for the first of fiscal 2025, with confidence in achieving double-digit growth driven by new customer acquisition and market share gains, particularly as they expand in both U.S. and global markets during a period of competitive disruption in the industry.

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Extreme Networks Fourth Quarter and Full Year 2024 Financial Results. [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.

[Stan Kovler, executive]

Thank you, operator. Good morning, everyone, and welcome to the Extreme Networks Fourth Quarter and 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 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.

[Edward Meyercord, executive]

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 derisk 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 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 until the project was complete. Customers are also embracing our modern Fabric because it's simple to deploy the zero-touch provisioning. It offers unmatched security and visibility and 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 Extreme Cloud because they wanted a solution that could help them seamlessly manage 800 locations while reducing CapEx, creating a scalable platform for the future and improving network performance across all of its stores.

Our new go-to-market initiatives are beginning to add to the growth equation and allowing us to gain share as well. We grew our MSP partner base to 27 during the quarter. Partners are attracted to the flexibility of our unique consumption-based billing model and poolable licensing. No one else in the industry offers these economic benefits or this level of commercial licensing simplicity. 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 road map 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 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 of Indonesia, a major NHS Hospital in the U.K., Vandalia Health in the U.S., a Fortune 500 U.S.-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 their tens of thousands of customers. Portfolio rationalization and integration creates risk. Today, customers and partners in our space are looking to derisk their investments in networking, which makes Extreme a far better alternative. Recently, we displaced HP and Juniper across a number of sites, including VOSS Automotive in Germany, University of North Carolina, Texas Tech University, to name a few.

Going forward, we expect sequential revenue growth to continue during the 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 in 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 '25.

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, executive]

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 -- 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 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 and 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% 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. 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 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 the 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 $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.

During -- 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 to $265 million; gross margin to be in a range of 62% to 64%; operating margin to be in a range of 7.8% to 10.4%; earnings per share to be in a range of $0.10 to $0.14. Our fully diluted count is expected to be about 133 million shares. For the full fiscal year 2025, we expect revenue to be in a range of $1.110 billion to $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.

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

[Operator]

[Operator Instructions] And the first question will come from Eric Martinuzzi with Lake Street Capital Markets.

[Eric Martinuzzi, analyst]

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 let's take it sort of first half versus second half. Are we anticipating a recovery? And if so, when?

[Edward Meyercord, executive]

Yes, 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...

[Eric Martinuzzi, analyst]

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

[Edward Meyercord, executive]

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

[Eric Martinuzzi, analyst]

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?

[Edward Meyercord, executive]

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

[Eric Martinuzzi, analyst]

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

[Edward Meyercord, executive]

Yes. I called some of that out. There are 3 different elements that I called out. The first is we have a technology that allows us to manage that 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 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 0 touch provisioning, where you add a network device and it automatically comes up and it's automatically provisioned based on policies that are determined in the Fabric. The other thing the 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 2 or 3 people. So this ability to segment the network is something that our competitors just simply don't have. And the other value of that segmentation is from a security standpoint, here, I'll take you to Philadelphia, Penn Medical Center, a brand-new 0.5 million square foot facility, downtown Philadelphia, they run on our Fabric. 47 operating rooms, each operating room has its own network. And if there's a hacker that gets through one of a medical device, they can't see any other IP addresses, so they can't go anywhere. So from a security perspective, it becomes the blast radius from a hack is minimized to wherever it's hacked, the segment of that network. So no one else has that. It's 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. I mean, enterprise Fabric that started off in a data center. We've extended it out through the aggregation and core layers out to the edge switching out to wireless, and now across the wide area network. And this is what makes our comparable SD-WAN solution so competitive because you can literally extend that Fabric and those policies out. No one else has that.

Finally, it's about cloud and our cloud platform is by far the most flexible in terms of cloud options that we provide in terms of which public cloud you want to be in, in terms of cloud deployment models, in terms of the security that we have built into our cloud. And then finally, just the simplicity and ease of use and managing the network and the capabilities. We recently just come out with really interesting mapping capabilities, and we're looking at very soon coming out with the ability through our cloud and then through our mapping application to see other non-Extreme equipment in your environment. You can imagine that in an IoT world and the likes of Kroger, and we have so many other customers that are so excited about this evolution where you have one map where you can literally see every connected device, not just network elements.

So -- but these are a few of the things that we have that are truly distinct and unique for Extreme. And there's a lot of uncertainty in the environment. And as people are contemplating, upgrading and modernizing their networking infrastructure, which is obviously really important as everything runs on the network. We bring unique differentiating capabilities. And in addition, we are derisking decisions because if you're looking at the #2 and #3 players out there, you have no idea what's going to survive.

[Operator]

[Operator Instructions] And our next question comes from Dave Kang with B. Riley.

[Dave Kang, analyst]

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

[Edward Meyercord, executive]

Sure. The AI that you're hearing about in the networking industry is really around AIOps. And this is kind of incorporating the machine learning and data science together for driving better outcomes in the network. And this is -- Extreme is a leader here. We have our CoPilot application. This is really what Mist is so famous for in terms of their integration with ServiceNow and creating all those trouble tickets. They -- and so I think that's kind of the 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 kind of their go-forward outlook from underinvesting 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 an 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 health care and biomed comes to you and they're complaining about the network because the 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 ready to 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 -- yes, 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.

[Dave Kang, analyst]

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

[Edward Meyercord, executive]

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

So -- and then there will be a migration path where we start moving people over into the platform of which our cloud management capability will be obviously a fundamental part of the platform. So we're investing here. We're working. The teams are working very hard. 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.

[Dave Kang, analyst]

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

[Edward Meyercord, executive]

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, 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 UZTNA product that I mentioned to go GA in the fall. That will be our first offering where we have a 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 subscriptions to those devices. So that's the long-term strategy.

[Operator]

And the next question will come from Christian Schwab with Craig-Hallum.

[Christian Schwab, analyst]

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

[Edward Meyercord, executive]

Yes. Well, Christian, thanks for the question. And I know on the last call, you or 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 -- in anticipation of a bookings forecast that did materialize. As we go -- 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. 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, #2 and #3 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 dislocation as it will with enterprise customers. And we are absolutely the best alternative. So depending on how that share shift materializes, that could affect what we're calling. But I think what we've called is 10%, 12% at Investor Day, we're confident in double-digit going into '26.

[Christian Schwab, analyst]

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?

[Edward Meyercord, executive]

I'd slice it into 2 pieces, Christian. I think here in the U.S., I think there's a big opportunity, and I think we're poised to execute on that. And I think that's where you'll feel a lot of that dislocation 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 up market in EMEA to larger partners. We have a distinct strategy for that. We're going to do the same thing here in the U.S. and then we're also going to build out a broader base here in the U.S.

So around competitive dislocation, these are opportunities. Cisco is taking a lot of action out in the channel given their movement away from networking as a focus area, and this will create opportunities for us. We also are coming out with these other commercial models. We've talked about private subscription and maybe the 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.

[Operator]

And our next question comes from Timothy Horan with Oppenheimer.

[Timothy Horan, analyst]

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. 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?

[Edward Meyercord, executive]

Thanks, Tim. We -- what we talk about is like kind of what's happening in terms of like [ platformitization ], 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 will be -- we'll see what our competitors are doing, but we will create a pure-play networking platform. And what we're aiming to do is to make it very easy for that platform to integrate with other sources of data or where we can supply data into other platforms. 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 I know it's talked about. I think you should think about it like that.

[Timothy Horan, analyst]

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

[Edward Meyercord, executive]

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. And we're looking forward our universal hardware platforms where today that's 80-plus percent of what we sell, and it's moving, it will move to 100%. All of that attaches to the cloud. 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.

[Timothy Horan, 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 going to charge for it. But can you talk about what kind of improvement customers will experience and your -- the payback period for customers?

[Edward Meyercord, executive]

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. I spoke to a CIO who talked about the constant fights with Biomed around device connectivity in health care. 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.

[Operator]

[Operator Instructions] Our next question comes from David Vogt with UBS.

[David Vogt, analyst]

Great, guys. And Kevin and [ Ed ] team, I 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 still a bit elevated relative to historical levels when you've been at the sort of revenue run rate from a product perspective. So you can help us understand kind of what's going on there and how to think about it going forward? And then I have a follow-up.

[Edward Meyercord, executive]

Kevin, you want to take that one?

[Kevin Rhodes, executive]

Yes, 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 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 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 is 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 whole older technologies, we realized that this would be a good opportunity, if you will, for us to evaluate what our strategy in 2025 and looking at our inventories and making sure that we had basically brought it to the net realizable value that we would expect us to sell out in this next year. Some of it was a combination of raw materials. So we have not created yet those older technologies. Remember, we had to buy some of these components year, 2 years ago, we had to buy them when there was elevated demand. 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.

[David Vogt, analyst]

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

[Kevin Rhodes, executive]

So the good news is, 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 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 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.

[David Vogt, analyst]

Great. And can I slip 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 guess 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.

[Edward Meyercord, executive]

Yes. I mean, David, it's -- overall, it's the technology differentiation that we have today is very strong. And as 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 -- 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, are 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 those -- that volume of opportunity is getting greater in terms of where do they go. There's one last 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.

[Operator]

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

[Edward Meyercord, executive]

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, I 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.

[Operator]

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