Earnings Call Transcript - EXTR Q4 2024

Operator, Operator

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. 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, Vice President of Corporate Development and Investor Relations

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.

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 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 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 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 UK's largest retailers, was looking to modernize network management and operations, they chose Extreme Cloud because they wanted a solution that could help them seamlessly manage 800 locations while reducing CapEx, creating a scalable platform for the future, and improving network performance across all of its stores. Our new go-to-market initiatives are beginning to add to the growth equation and allowing us to gain share as well. We grew our MSP partner base to 27 during the quarter. Partners are attracted to the flexibility of our unique consumption-based billing model and poolable licensing. No one else in the industry offers these economic benefits or this level of commercial licensing simplicity. 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 that improves 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 generative AI to make networks smarter, faster and more resilient. With all these pieces coming together, we're building the industry's most modern networking platform. 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 UK, Vandalia Health in the US, a Fortune 500 US-based manufacturing company and numerous schools and universities. The second and third largest players will also become increasingly distracted by their business combination. They'll have to make difficult decisions to abandon technology installed at tens of thousands of customers. Portfolio rationalization and integration creates risk. Today, customers and partners in our space are looking to de-risk their investments in networking, which makes Extreme a far better alternative. Recently, we displaced HP and Juniper across a number of sites, including Voss Automotive in Germany, University of North Carolina, and 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 '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, 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 said for several quarters, unlocking 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 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 have 38 customers spending 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 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 a sequential improvement in our operating margin and along with increased revenue, drove a return to profitability from the third quarter. Heading into fiscal '25, we do expect operating expenses to increase along with the recovery in our business due to higher incentive compensation. Operating margin for the fourth quarter was 13.5%, up from a loss of 8.6% in the prior quarter, but down from a profit margin of 17.4% in the prior year quarter. All in, fourth quarter adjusted EPS was $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 and 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 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

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

Eric Martinuzzi, Analyst

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?

Ed Meyercord, President and CEO

We are anticipating a gradual recovery in the first quarter, with an acceleration expected in the fourth quarter, based on the visibility we have from current opportunities in our pipeline. We also expect this trend to continue into calendar year 2025. Therefore, I would characterize our growth expectation as modest based on the insights we currently have.

Eric Martinuzzi, Analyst

When you mentioned accelerating Q4, were you referring to calendar Q4?

Ed Meyercord, President and CEO

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

Eric Martinuzzi, Analyst

Got you. When you say it's highly visible, is that based on orders from end users or just channel orders?

Ed Meyercord, President and CEO

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

Eric Martinuzzi, Analyst

Okay. Congratulations on the competitive displacements. I know you win for a number of different reasons, but are there one or two product capabilities that you would highlight as key to these displacements?

Ed Meyercord, President and CEO

I mentioned a few key elements. First, we have technology that allows us to manage competitor equipment. This is crucial as enterprise customers consider migrating to cloud-based solutions and modern networking platforms. Our ability to manage competitor equipment facilitates a seamless transition, as demonstrated with our collaboration with ebm-papst, where we managed Cisco gear during their migration. This makes us the easiest and least risky option for upgrading networks to modern infrastructure, as we provide visibility and basic management for competitor gear during the installation of Extreme. This is a distinctive advantage that our competitors lack. The second important aspect is our Fabric, which is a modern enterprise solution that sets us apart from our competitors. It simplifies the deployment and provisioning of networks, including zero-touch provisioning. When you add a network device, it automatically activates and gets provisioned based on the established policies in the Fabric. Additionally, the Fabric features micro-segmentation, allowing the creation of thousands of networks within a single physical network. A notable example of this is the Dubai Exhibition Center, where Cisco initially sponsored the network but migrated to Extreme to enable individual exhibitor networks with specific service level agreements, efficiently managed by a small IT team. From a security standpoint, the segmentation offered by our Fabric is invaluable. For instance, at the new Penn Medical Center in Philadelphia, each of the 47 operating rooms operates on its own network. If a hacker compromises a medical device, they cannot access other IP addresses, thereby minimizing the risk of broader attacks. This unique capability also contributed to our success with Washington University. Our Fabric is highly resilient, allowing changes to be made while the network remains operational, a crucial feature for any enterprise. Our comparable SD-WAN solution is also competitive due to the extension of the Fabric and its associated policies. Finally, our cloud platform is the most flexible in terms of options, deployment models, and built-in security. We have recently introduced advanced mapping capabilities that will soon allow users to view non-Extreme equipment in their environment, catering to the growing IoT landscape, which excites many of our customers. These distinct and unique capabilities position Extreme favorably as customers seek to modernize their networking infrastructure amidst uncertainties. We mitigate risks for decision-makers who may be uncertain about the longevity of other market players.

Eric Martinuzzi, Analyst

Thank you.

Operator, Operator

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

David Kang, Analyst

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

Ed Meyercord, President and CEO

Sure. The AI that you're hearing about in the networking industry is really around AI ops, incorporating machine learning and data science together for driving better outcomes in the network. And this is Extreme's leadership position; 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, which we are investing in, and we're very focused on building a networking platform that will fundamentally change how you interface with the network. We also mentioned Intel and our ability to pull in other data sources from our ecosystem and alliance partners, the likes of Zebra appliances or Verkada cameras. This is about us developing a platform where truly the cloud management becomes part of that overall platform, where you can ask the platform, queries, knowledge queries about our products, about configurations, 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 for 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 will 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.

David Kang, Analyst

When do you expect the next generation of Generative AI to be available?

Ed Meyercord, President and CEO

We recently held our Extreme Academy live event and have opened it up in our AI labs to all of our sellers. This will be very beneficial as our sales teams can now assist in developing our technology, which is essential for the next generation of AI as we continue to train it. This initiative will keep evolving. We plan to gradually open this up to partners, starting with a first round in October and then in November, with further rollout expected early next year, calendar year '25. There will also be a migration path to move users onto the platform, where our cloud management capability will be a crucial component. We are making significant investments here, and our teams are working diligently. We are being inclusive and integrating a lot into the platform and product. Additionally, we have developed over 20 different AI agents and are partnered with Microsoft and CoPilot for sales enablement. Our sales assistant tool has been very effective, and we are also implementing this in our service functions. In terms of self-help, we are incorporating AI across many areas of the company, focusing on non-product use cases at Extreme.

David Kang, Analyst

What impact will this have on your ARR? I assume it's already growing at 30% year-over-year. Could this lead to an acceleration in recurring revenue growth?

Ed Meyercord, President and CEO

I mean, Dave, what I would say is I think that sustaining that kind of growth rate over a long period of time is difficult. And I think what this is going to allow us to do is this potential for accelerated growth, but what this is going to allow us to do is to maintain that 30%, we've called it a 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 a subscription that 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.

David Kang, Analyst

Sounds good. Thank you.

Operator, Operator

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

Christian Schwab, Analyst

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 overbuying 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?

Ed Meyercord, President and CEO

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-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.

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?

Ed Meyercord, President and CEO

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 opportunities.

Christian Schwab, Analyst

Great. No other questions. Thanks guys.

Ed Meyercord, President and CEO

Thanks, Christian.

Operator, Operator

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

Timothy Horan, 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. 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?

Ed Meyercord, President and CEO

Thanks, Tim. What we talk about is like what's happening in terms of platformization, 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.

Timothy Horan, Analyst

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

Ed Meyercord, President and CEO

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, 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

I understand it's quite early, and you may still be figuring out your pricing strategy, but could you discuss the improvements customers can expect and the payback period for them?

Ed Meyercord, President and CEO

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 relating 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.

Timothy Horan, Analyst

Thank you.

Operator, Operator

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 – 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.

Ed Meyercord, President and CEO

Kevin, you want to take that one?

Kevin Rhodes, EVP and CFO

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 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 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 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.

David Vogt, Analyst

Regarding the remaining balance of $141 million, which appears somewhat high compared to fiscal 2020 when you had a similar revenue run rate on the product side, I’d like to understand what is happening there.

Kevin Rhodes, EVP and CFO

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'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.

David Vogt, Analyst

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.

Ed Meyercord, President and CEO

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.

David Vogt, Analyst

Great. Thank you.

Operator, 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.

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, 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, Operator

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