Extreme Networks Inc (EXTR) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Extreme Networks fourth quarter fiscal 2002 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press "*" followed by the number "1" on your telephone keypad. As a reminder, this conference call is being recorded today, Wednesday, July 17th 2002. I would now like to turn the call over to Mr. John Carvell, Director of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Extreme Networks fourth quarter Earnings Conference Call. On the call today are Gordon Stitt, President, CEO and Chairman of Extreme Networks; and Harold Covert, Vice President and CFO. Earlier this afternoon, we issued our fourth quarter fiscal 2002 earnings press release. A copy of this release is available on our website at www.extremenetworks.com. As a reminder, this call is being recorded and broadcast live over the Internet. The recording will be posted on our website and will be available for replay shortly after the conclusion of the call. Some of the remarks made during the call may include forward-looking statements as governed by the Private Securities Reform Act of 1995. Any statement of our future events and trends including steps the company plans to take to improve the financial results or financial conditions should be considered as forward-looking statements. These forward-looking statements may differ from actual results and are subject to risks and uncertainties as detailed in our filings with the SEC and in our press release today. I would now like to turn the call over to Gordon Stitt.

Thank you, John. And good afternoon to all of you. Thank you for joining us today. We've completed another very positive quarter for Extreme Networks. And it's my pleasure to share with you our progress and many achievements since we spoke last April. Most important message I want to convey to you today is this: Extreme Networks continues to deliver strong performance in every significant operational and financial category. We've now completed three straight quarters of sequential revenue and operating profit growth. Our sales strategy and global channels are strong. Our business infrastructure is more capable than at any time in our history. And our comprehensive solutions have been increasingly accepted and successful across our target markets. We have maintained a laser-sharp focus on our two primary strategic goals; that is, first to be the preferred alternative vendor in the enterprise networking market, and to lead the emerging market for Ethernet metro service provider networks. Our total dedication to these goals has brought Extreme increased recognition from customers, industry analysts and the financial community as one of the most competitive players in our field. Before I get into the quarterly results, I'd like to take a few minutes to review the year in total, a year that certainly has been unlike any other. The June quarter marks the end of our fiscal year and the end of our sixth year in business and our third year as a public company. Certainly, the past 12 months have been among the most difficult in our industry's history. It's been a time of momentous change in the world of telecommunications when many of the old rules of the game have gone out of the window and have been replaced by new realities. This has been the time of weakness, instability and doubts for corporate America and for the global economy. It's also been a time of national crisis without a parallel in many of our life times. One year ago, no one could have predicted the turbulent, uncertain and continuously surprising times we're living in now. But despite all various challenges and turbulence, Extreme Networks has achieved major progress to drive in its vision of a simpler, more effective universal network of [architecture] into a reality.

As a company, we have performed well this year. A key to our performance this year is that we recognized and adopted to change, while remaining focused on our core strategies. Extreme responded to the sudden change in market economic conditions with remarkable operational agility. At the beginning of the fiscal year, we had already made major changes in how we're running the business. We're placing our emphasis on cost control and operational efficiency and quickly evolved into a linear, more agile company to have the stay-in power to the current downturn in our markets. While we moved quickly to change our operational approach, we remained steadfastly committed to our core strategies. Unlike some of our competitors who seemed to go through an identity crisis this year, Extreme continued to press forward with our vision of a simplified networking environment based on Ethernet and IP and our short focus on the large enterprise and metro service for the other markets. As buying decisions became more and more ROI-based, Extreme successfully positioned itself as the provider of the most effective applications infrastructure; and it is the preferred best-agreed alternative to the market leader. We are now reaching more senior decision makers than ever before with our solutions-oriented messages -- simplicity, performance and superior return on investment. We've done a great job of telling the world that Extreme Networks is helping its customers solve real business problems, not just only [indiscernible]. I'm very proud of the performance of our management team this year. I think there are few other companies that have managed to do well in this incredibly difficult environment. But while we're busy adapting the company to new market conditions, the Extreme team also delivered a solid performance in products and technologies. In the first three quarters of the year, Extreme introduced maximum Ethernet scalability with a standards based 10-gigabit [Ethernet]; it's called Black Diamond. We added important head switching platforms in both the Summit and Alpine product lines and the revolutionary Summit Px1 application switch which brought Extreme it's fifth Network+Interop Best of Show award in as many years.

Extreme's ability to conceive and create products that consistently raise the [discernible] of performance, ease of use, and cost effectiveness remains strong. In only six short years, we've seen our Ethernet and IP vision make a significant impact on the networking world. More than ever before, Extreme stands on the absolute forefront of networking technology and is destined to be one of the key architects of the networking future. I would like to turn to the results of the fourth quarter, in which it became clear to many that Extreme has emerged as a formidable challenger to the market leader. And how have we achieved this? I believe our ability to rapidly adapt to change marketplace, combined with a sharp focus on our growth in customers brought us to this point. We believe that Extreme has rapidly gained lion share to fulfill alternative in enterprise market, and the distance between Extreme and the rest of the pack just keeps getting wider. While discussing Extreme's business operations in the fourth quarter, I'd like to focus on three areas: our strong and well-balanced sales channels, our world-class business infrastructure and our continuing strong financial performance. First of all, global sales channel. We continue to read the benefit of global sales channel strategy. For the second straight quarter, Extreme's end market enterprise business scored double-digit gains. And our Americas metro's service provider business began to recover posting solid growth. The Americas now count for about 40 percent of quarterly revenues. Although EMEA and Asia were slightly down from the quarter, our overall results once again improved sequentially, demonstrating the continuing strength of our vast global selling strategy. During the fourth quarter, we found new business develops through our channel partners. And very significantly, Extreme is beginning to replace other vendors as the alternative to Cisco with a number of larger system integrators and distributors. We've been working very hard on our channel strategy and programs over the past few months to increase the value of Extreme to our channel partners. Many of our competitors have been experiencing serious channel difficulties in recent times, and we're moving quickly to exploit the situation to our advantage.

Our vertical market strategy is becoming a more important part of our sales performance every quarter. We continue to experience increasing success in several key vertical markets, especially education, government and healthcare. Secondly, our world-class business infrastructure. As an operating entity, Extreme is in better shape than ever before. Over the past year, we've added considerable management band strength to our team, streamlined and refocused our global sales force, developed and refined our operating model, and implemented a new and vastly more powerful business information system. During the quarter, we substantially completed a major yearlong IT initiative and brought new ERP and CRM applications online. The investment we have made in the leading edge business management tools will pay enormous dividends as we expand our global reach. We now have the infrastructure we need to grow and support a multibillion-dollar international business. And third, our financial performance. Despite the continuing slowdown in the world economy, Extreme continuous to deliver strong quarterly performance and a continuously improving balance sheet. By almost any measure, we've had a much more successful year than most of our competitors. In the fourth quarter, Extreme once again expanded both revenue and margins and achieved results in line with our operating model and with analysts' expectations. As we recorded today, the revenue for the June quarter was a $113.1 million, and pro forma earnings were 3 cents per share. Our sales team continues to execute well in what is still a tight market. With costs well under control and productivity rising quickly, we're very well positioned to grow rapidly within the -- when the macroeconomic environment improves. Perhaps more importantly, we've now demonstrated that we can sustain moderate sequential growth in the current slow economic environment. I would like to now take a few minutes to discuss our quarterly activities in more depth before turning the call over to Harold for a more detailed review of our financials. Core to our success in winning and retaining customers is the fundamental value proposition that we offer: a simpler, better-performing network that delivers a better return on every dollar invested.

Extreme has remained focused on providing the most effective applications infrastructure for our customers, and our reputation as a quality company with quality products and services continues to grow. There are few notable sales wins that we had during this quarter. First of all, German automaker Volkswagen is now repeat Extreme customer. VW had already implemented both Black Diamond and Alpine platforms at the [Welstorg] headquarters back in 2001. However, VW is now coming back to Extreme for more, happy with their experience at the Welstorg plant where Extreme Powers built their production and office networks. VW is now extending their Extreme Network to other manufacturing plants in Europe, most recently the Poznan plant in Poland. VW chose Extreme for key features, better quality service and high [power] density on both platforms combining to provide easier deployment and configuration, plus a cost effective service and support package tailored to their needs. In partnership with our reseller T- Systems, a subsidiary of Deutsche Telekom, we look forward to a long and successful relationship with the earlier. Also in Germany, Siemens Dematic AG of Munich, a leading global name in material handling and automation, has a selective and Extreme Networks infrastructure including our Alpine solution to meet its goal of [indiscernible] in some of the advanced voice applications over the [indiscernible] network. As I mentioned before, education remains the key market for Extreme. We've had several winds in this phase during the quarter. A very prestigious McGill University in Montreal has selected Extreme products to build an advanced supercomputing cluster. Clusters are having a significant impact on scientific research and Extreme often gets a call to provide high-capacity switching solutions for these advanced networks. The Physics Department at McGill, specializing in astrophysics, nuclear energy and condensed matter, is centering that cluster on our Black Diamond platform, where they will create a mesh of more than 600 gigabit Ethernet connections to take advantage of our superior quality of service and a low latency performance to push the limits of physics research.

The University of Pennsylvania is extending critical multi-layer performance at the edge of our campus network with dozens of our recently introduced Summit 48si switches. DuPen is a long-standing customer and is using many extreme products to provide advanced computing applications throughout their campus. An upgraded core and edge network equipped with our gigabit and fast Ethernet switches, computer enhanced research and learning has become [stable] with the university experience at DuPen. We also continue to have success in the government market. During the quarter, two more United States army bases have begun implementation of Extreme Networks gigabit Ethernet solutions for their high transaction data environments. For example, at Fort Eustis in Virginia, the army is relying on three of our switching platforms: Black Diamond, Alpine and Summit to effectively manage their wide ranging transportation command activity which are responsible for tracking thousands of goods and services across the globe. This new installation at Fort Eustis adds to our already impressive list of installations with the army, including our extensive network at the Pentagon. The healthcare industry has continually presented key opportunities for Extreme to deliver our enhanced Ethernet technology. This quarter, we were successful from our solutions to Norwalk Hospital in Connecticut, with an extensive facility consisting of a 20-acre medical complex, staffed with more than 300 doctors and 2,000 support personnel. Hospital committed to upgrade internet network infrastructure with Extreme's Black Diamond and Summit 48si switching solutions. These will support its fax implementation schedule and provide an improved network infrastructure for its advanced patient monitoring systems. Norwalk was impressed with the superior simplicity and consistency of our product platforms and our ability to extend critical layer 3 capability such as IP Multicast at the edge of their network. In the manufacturing sector, Detroit Diesel, a subsidiary of Daimler Chrysler, which makes heavy-duty engines for marine, military and automotive markets pushed into the edge with Extreme. They have recently upgraded their multi building campus network with our Summit 48si and Summit 48e2 switches.

These advanced edged platforms for high-end manufacturing software applications and a part of Detroit Diesel infrastructure for future converged voice and video services. And in the Ethernet metro space, we continue to win important new business. Emerging markets in Asia continue to make strategic investments in Metro Ethernet infrastructure. Telecom Asia, Thailand's leading provider of telecommunication services including Internet access, cable TV and multimedia services has selected Extreme switching solutions with delivery of high band with NBPM services to local business customers. Telecom Asia were impressed with our complete solution, giving them the ability to build a highly reliable and resilient network infrastructure that allows customized delivery of profitable services to their customers. Arrowhead AB of Sweden is establishing metro com activity with our Ethernet solutions over a broadband fiber optic infrastructure. Arrowhead is linking 40 different cities to provide sought after broadband Internet access services. After a comprehensive evaluation process, Arrowhead found Extreme's offerings to be the most progressive and practical solution to meet its requirements over a shortened development timeframe. Arrowhead leveraged Extreme expertise and long experience in the metro to implement numerous innovative networking concepts. We're happy to report that the Arrowhead network, now in production, features dozens of our Black Diamond core switches along with many Summit edge switches. And finally in Germany, [NetClone], a service provider, will be utilizing Extreme platforms to provide advanced layer 3 gigabit Ethernet MAN services. NetClone will deliver more flexible bandwidth and transparent LAN services to their base of enterprise business customers. The NetClone network is well suited for voice and video and employs both our core and edge Extreme switching solutions. This new network will be one of the most advanced in Europe and represents a breakthrough for innovation in that region. Earlier, I said that Extreme is destined to be a key architect of the networking future. Fulfilling that visionary role and meeting the needs of today's customers requires a continual investment in new product development. Since the beginning, we've consistently spent around 14 percent of revenues on R&D.

The strong commitment is what has enabled Extreme to build a comprehensive, best agreed Ethernet solutions that we offer today. To maintain our position in this marketplace, we must continually expand and extend our solutions set by creating new and better products. We would expect that our R&D investment will remain at the current levels and then increase in the second half of fiscal 03. I would like to share with you some of the -- some of our important new product developments in the fourth quarter that occurred in both systems and software. Last month, we introduced a new member of our flagship Black Diamond family of high-performance core switches. The new Black Diamond 6804 is more compact platform which delivers all the advanced capabilities that have made Black Diamond the leader in the core switching market. Many enterprise and source provider customers have increasingly limited amount of rack space in their data centers. If they still need to meet their requirement for full redundancy and scalability within their networks, the Black Diamond 6804 uniquely addresses this with its smaller size and feature set while protecting our customers' investment by leveraging the same ASIX, same software and same network management system that's used across our entire Black Diamond line. Our core Black Diamonds, the new 6804, provides maximum Ethernet scalability from 10 megabits per second to 10 gigabits per second that features high availability with no single point of failure, the [refill timer] power supplies and management modules and hot swappable components designed to provide nonstop network services. That's rather the history of the company. We talked a lot about our unique approach to networking and hardware that has enabled much of our success in the marketplace. But in networking, customer problems can't be solved by hardware alone and Extreme has always had world-class software architects and engineers on our team. During Q4, we introduced a very important new software product as part of our infrastructure and services management portfolio. This product ISM Provision delivers a total management solution to speed service activation, automate devise configuration, and moderate performance of the networks given both metro service providers and enterprise customers' time and money.

And networks can't scale efficiently without a complete and integrated set of tools to manage devices and better control of the Provision and Internet services. ISM Provision brings together the essential tools that metro providers enterprises need to automate significant tasks and gain better control over their services and infrastructure. Within the industry, there hasn't been a complete management solution for deploying and managing Ethernet-based services until ISM provision. We're excited about this product as it brings in new level of management capability and sophistication to Ethernet networking that eclipses everything available up till now. Now, ISM Provision complements our already feature-rich network management product Epicenter, which also underwent a major upgrade during Q4. We also released a new version of our Extreme operating system, which added numerous features, including additional protocol support and robustness and reliability enhancements to meet the demands of both enterprise and service-provider customers. The fourth quarter saw the introduction of both new platforms and important new software. We reported that our R&D spending remains near the high end of its range and there is a reason for that. Customers choose a networking supplier for both its ability to deliver current solution and for a compelling roadmap to the future. The investments we have made over the last several years have enabled us to deliver the right products at the right time. Let me do -- bring up a couple of examples. First of all, our Ethernet Automatic Protection Switching (EAPS), which provides nearly instantaneous fail-over between redundant Ethernet [ranks]. Our EAPS brings a level of resilience to Ethernet networking that actually exceeds that of legacy, technology such as [indiscernible]. We have a worldwide installed base of customers who are relying on EAPS today including both Metro Service Provider and the enterprise customers. Now with the industry standard for the similar RPR technology, now delayed a full year -- that's well into the end of 03. The value of Extreme's rapid development process to our customers is clear.

We consistently deliver what our customers need when they need it. And also at this time, we believe, we are in a very sweet spot of our Inferno based technology cycle with a complete product range and the flexibility to address customer needs to both our hardware A6 and our sophisticated software. Our ability to rapidly deliver features and functionality drives the continuing growth and acceptance of our switching platforms. Our recently introduced Summit 48si is one of the fastest growing products in the company's history. Incredible popularity is due to our advanced extreme work feature set that enables the customer to provision new features like net login security while maintaining wire-speed performance. Our fixed configuration product line is not just a bunch of commodity switches. Customers choose Extreme platforms because they support Wire-Speed Layer3 Switching, quality service, and other advanced features as provided as part of ExtremeWare. These value-added features on the Summit platform clearly differentiate Extreme from low-end commodity switch vendors. Sales of our Alpine module of [indiscernible] product line continued strong in fiscal year 02. And during the fourth quarter, we shipped the first small form factor Alpine 3802 platform which contributed substantial incremental revenue at the low end of the aggregation market segment. Alpine 10/100 port shipments increased during the quarter as the platform continued to gain acceptance in the high end of 10/100 access in aggregation. Now, as you conceive from a platform standpoint, we pulled out all our product lines over the past year -- Summit, Alpine and Black Diamond. We have delivered our first 10 [KB] Internet solution and important new features such as IPv6 and EAPS. ExtremeWare operating system has been significantly enhanced and ISN provision breaks new grounds for advanced management of large Ethernet based network. And we remain one of the very few vendors with the routing software necessary to run an enterprise network with tens of thousands of nodes and thousands of switches. Clearly, Extreme's complete Ethernet solutions continue to set the pace in our target market and we are committed to making the right R&D investments to keep it that way.

I talked about the challenges and accomplishments of fiscal. I would like to now look ahead to the new year that we've just begun. During fiscal, you'll see an increased emphasis on key partnerships and alliances from Extreme. To significantly grow our business, we need allies of many kinds in technology and products, especially in sales distribution and system integration. Our success to date is making it possible for Extreme to attract technology and business partners who are also market leaders. We are moving aggressively to secure the right partners for the battles we face in the years ahead. I believe that Extreme has achieved a certain critical [matrix] point in our history and much of our strategic thinking is centered on how we can best exploit the strong fundamental position we have built over the past six years. Today, we have a very strong balance sheet that gives us the ability to be opportunistic when the right technology of business investments becomes available. Though we have no specific plans regarding acquisitions or external investments at the moment, we will be looking at ways we can leverage our strong financial position to accelerate growth over the course of the year in line with our overall business strategy. Finally, I would like to talk briefly about the important technology and market drivers we see over the next year or two. In the networking business, applications drive the purchase of infrastructure, and over the next year, much of our development, partnering and solutions marketing activity will center on key network applications as they provide us with some of our best opportunities to increase market share. The core Extreme architecture is simply a better solution for applications infrastructure. We are already working closely with other leading technology to companies to develop and market a multi-service infrastructure that can support emerging high bandwidth [indiscernible] applications, which every network will eventually be called on to support. We'll be talking a lot more about our applications, solutions, strategy and products in the coming month. In a nutshell, Extreme Networks is in great shape. Many of our historic competitors are stumbling or out of the race and the pace is picking up. We'll continue to deliver the best technology, the best product in the most comprehensive and capable Ethernet solution set available today.

Our selling channels are strong. Our business infrastructure is world class, and our financial performance is consistent. Extreme's good reputation is growing every day, and more and more people are seeing us as one of the few serious contenders in the industry. Had a good quarter, remarkable [indiscernible], and we are running strong in the race for the future of networking. Now, I'd like to turn the call over to Harold for a more detailed review of our fourth quarter financial results.

Thank you Gordon. For our Q4, FY 2002, our results and every major income statement category: revenue, gross margin, operating profit and pro forma net income represented an improvement over the results that we achieved in Q3 FY 2002. The same trend is present when Q3 FY 2002 was compared to Q2 FY 2002. From our balance sheet standpoint, our position in every major working capital category on June 30th 2002, cash, cash equivalence and marketable securities, net accountable sales and net inventory represents an improvement when compared to the position on June 30th 2001, the end of our last fiscal year. I will discuss the income statement and balance sheet in detail in a moment. First, I would like to give you a quick update on our operating infrastructure and the progress that we have made, implementing important new business tools. Our new ERP, CRM and Data Warehouse System is operational and functioning effectively. These admission critical applications are the cornerstone of Extreme Networks' enterprise digital framework. This digital framework will enhance our capability to achieve world-class performance and superior customer satisfaction in a consistent and predictable manner by employing web centric approach to our business from both an internal and external standpoint. Customers, supply chain partners, distribution channel partners and other stakeholders can interact with Extreme, using eBusiness applications. These applications make it easy to do business with us on a highly productive manner. Turning to our operating results for Q4 FY 2002, we have three goals as we enter the quarter. First, achieve sequential revenue growth. Next, improve sequential operating profit as a percent of revenue and to continue to generate positive cash from operations including capital expenditures. I'm happy to say that we achieved each of these goals. Please note that my comments regarding expenses, operating profit and pro forma net income do not include deferred compensation and amortization expense for intangible assets.

For our Q4 FY 2002, we incurred deferred compensation expense of $2.2 million and $0.1 million for amortization expense. The deferred compensation charge on an after-tax basis which approached to approximately 0.1 cents per share essentially represents the difference between pro forma and GAAP net income for FY 2002. Revenue for Q4 FY 2002 was 113.1 million versus 111.1 million in Q3 FY 2002 and 115.1 million in Q4 FY 2001. Our book-to-bill ratio was greater than 1 for Q4 FY 2002, and we ended the call with backlog at the high end of our normal range. On a geographic basis, the Americas represented 43 percent of our revenue for Q4 FY 2002 versus 36 percent in Q3 FY 2002 and 43 percent in Q4 FY 2001. Europe represented 21 percent of our revenue for Q4 FY 2002 versus 24 percent in Q3 FY 2002 and 21 percent in Q4 FY 2001, and Asia represented 36 percent of revenue for Q4 FY 2002 versus 40 percent in Q3 FY 2002 and 36 percent for Q4 FY 2001. Our geographic revenue percentages as a percent of total revenue have now returned to a pattern that is more in line with our historical performance and current goals. We expect our current profile to remain fairly consistent, moving forward. For Q4 FY 2002, we have one customer that accounted for more than 10 percent of our revenue on an individual basis. TechData, a large distributor focused on our US customers accounted for 14 percent of our revenue for the quarter. The revenue split between enterprise and service provider segments for Q4 FY 2001 was approximately 75 percent enterprise and 25 percent service provider.

Enterprise includes government and educational customers. Our service provider customers are primarily international. The revenue split between enterprise and service provider is essentially in line with our historical trends and expected performance. Product mix consisted of 56 percent modular and 44 percent stackable for Q4 FY 2002 versus 48 percent modular and 52 percent stackable in Q3 FY 2002 and 60 percent modular and 40 percent stackable in Q4 FY 2001. Although there are variations in product mix from quarter to quarter, we do not anticipate a consistent shift in product mix in the near term. Q4 FY 2002 gross margin was 53.6 percent compared to 53.2 percent in Q3 FY 2002 and 51.8 percent in Q4 FY 2001. While at the macro level, there was competitive pressure for specific deals from a pricing standpoint, we did not experience a major change in the macro-pricing environment. ASPs for Q4 FY 2002 were consistent with recent historical trends. Operating expenses were 55.6 million in Q4 FY 2002, $56 million in Q3 FY 2002 and $59.4 million in Q4 FY 2001. For Q4 FY 2002, R&D expense represented 13.3 percent of revenues, selling, marketing and support 30.1 percent and G&A 5.8. Moving forward, we plan to leverage our current operating infrastructure and thereby increase expenses at a slower rate than the expected increase in revenue. Operating profit for Q4 FY 2002 was $5 million versus 3.2 million in Q3 FY 2002 and 0.1 million in Q4 FY 2001. The sequential increase in operating profit is a result of our focus on continuous improvement in operational performance.

Other income and expense for Q4 FY 2002 was $0.9 million compared to 0.8 million in Q3 FY 2002 and 1.8 million in Q4 FY 2001. The difference on a year-over-year basis is primarily a result of a drop in interest income due to a decrease in interest rates and expenses related to our convertible bonds. The convertible bonds were issued in November 2001. Proforma net income for Q4 FY 2002 was 3.8 million compared to 2.6 million in Q3 FY 2002 and 1.3 million for Q4 FY 2001. Proforma earnings per share were 3 cents for Q4 FY 2002, 2 cents for Q3 FY 2002 and a penny for Q4 FY 2001. Our long-term proforma tax rate remains at approximately 35 percent. Turning to the balance sheet, I would like to highlight several items. First, our cash, cash equivalents and marketable securities bonds on June 30th 2002 was 400 million compared to 397 million on March 31st 2002 and 192 million on June 30th 2001. Please note that we issued $200 million of convertible bonds in November of 2001 from which we received net proceeds of approximately $194 million. As indicated for Q4 FY 2002, we met our goals continuing to achieve positive cash flow from operations including capital expenditures. Accounts receivable were $51 million on June 30th 2002, which equates to a DSO of 41 days. DSO for Q3 FY 2002 was 45 days and DSO for Q4 FY 2001 was 49 days. Net inventory on June 30th 2002 was $25 million compared to $36 million on the equivalent March 31st 2002 and $61 million on June 30th 2001.

Channel inventory was within targeted levels at the end of Q4 2002. Keep in mind that we recognized revenue based on sell-off for distributors. Therefore, this shipment of inventory into the channel does not impact reported revenue. Revenue related to resellers and direct sales to end users is generally recognized when we ship product to the reseller or end user. Resellers and end users do not have inventory return privileges. Staffing, including temporary personnel, as of June 30th 2002 was 987 versus 1,006 on March 31st 2002 and 1,037 on June 30th 2001. As of June 30th 2002, the company had 117.2 million shares of common stock outstanding on a fully diluted basis. Now, I'd like to address financial guidance. As a result of the uncertain global and macro-economic environment in general and in particular in the technology sector, we will not provide any specific financial guidance. We believe that this business environment is not likely to change in the near term and have adjusted our operating model to take this view into consideration. Our primary focus is on sequential revenue growth and continuous improvement in operating performance. In this regard, I would like to offer a number of comments. From the [addressed] market and overall product-offering standpoint, we believe that we are well positioned and have a very competitive value proposition to offer current and prospective customers. We are optimistic that we will continue to expand both gross margin and operating profit as we enhance our operating infrastructure. Key programs to achieve this goal include monitoring and controlling all key aspects of our supply chain, including closely working with partners to ensure that we effectively manage materials. Materials represent more than 80 percent of our cost of goods sold, thereby providing a major opportunity for cost containment and improvement, streamlining our business processes by utilizing our new global ERP, CRM and Data Warehouse System.

Successful implementation of these back-office applications enables us to drive the majority of our customer and operational transactions through our digital framework and thereby increase operational productivity and customer satisfaction. Utilizing key performance indicators and benchmarking to ensure that all members of our management team are aware of best of class practices for each key activity performed by the company and that we have necessary action programs in place to achieve continuous improvement as we pursue a world-class performance. And finally, a key point. We expect to continue to generate cash from operations, taking both operating and capital expenditure requirements into consideration. Now, I'd like to turn the call back over to Gordon.

Thanks Harold. Once again, I've had the pleasure of reporting a very positive quarter for Extreme. We're making substantial progress on all fronts while continuing to deliver strong performance in every significant operational and financial category. Our global sales channels are strong. We've built a world-class business infrastructure, and we are in the absolute sweet spot of our tech-cycle -- technology cycle. Everyday, we gain more recognition as a company destined to play a major role in the future of enterprise networking. And as we do, some of our competitors drift into the backwaters. In closing, I'd like to remind you of the two primary goals of Extreme Networks. First, to be the preferred alternative in the enterprise market and second to lead the emerging market for Ethernet Metro service providers. I think we're making real progress in achieving these strategic objectives. And I'd like to take a moment and express my sincere thanks to each and every member of the Extreme team for a great performance in 2002. I know it seems like a very long winter, but we're headed for the summer [Celsius] and the future is very bright. I want to thank each and every one of our employees for their efforts. With that, I'd like to open up the call for questions.

Go ahead operator; we can now take questions.

I would like to remind everyone, if you do have a question press "*" followed by the number "1" on your telephone keypad. Please hold for the first question. Your first question is from Alex Henderson with Salomon Smith Barney.

Thank you. I was wondering if you could talk a little bit how the linearity in the quarter shook up, particularly between the US and Japanese markets. Harold, if I remember correctly, you were kind of tracking to flattish in Japan through the end of May. It sounds like you've weakened a little bit at the end of the period, and my sense is that the US might have weakened a little bit in June. Can you give us some color on that?

Yes, I would say that our linearity patterns through the quarter was pretty typical, and I think, we've stated this before. It's in the range of about 20 percent for month one, 30 percent for month two and then 50 percent for month three. I would point out that our book-to-bill ratio was over one for the quarter, and then we did end the quarter with our backlog at the high end of the normal range. So, I think I would characterize the quarter as pretty typical from a linearity standpoint.

So, is your book-to-bill solidly -- I mean, we had talked about 105 type of book-to-bill needed to offset the seasonal weakness that you would normally see in September. Are you able to say that you're comfortable with that target and that characteristic?

Yes, I would say that, you know, we haven't really given the absolute number. We've always said it's a foot below one or over one, and it was over one for us, and we were comfortable that we hit our target and what we needed to do to enter this quarter that we're in right now with all the momentum we need.

So did you see any softness in the US or in Japan in the month of June?

We had good operations in the US. You can see a fairly significant increase going from 36 to 43 percent from a total revenue standpoint, and Japan coming off some very strong quarters in quarter one and quarter two and level not a little bit in quarter three was pretty much in line of overall goals.

Sir, you didn't answer the question, did you see any softness in June?

I think, you know, again, it was pretty much in line with our overall goals, and we haven't seen any drop-offs or any activity we did not expect.

Thank you.

Your next question is from Sam Wilson with Merrill Lynch.

Hi Harold, hi Gordon. Two questions for you. One is, Gordon, we've heard a lot of speculations on sales force reorganization or some of the further alignment with the vertical sales. Can you, kind of, give us a sense of where you stand in terms of that? Do you view the sales force as right size and ready to go right now, and what are some of the verticals that may be you historically haven't focused on that you are now focusing on? And Harold, a question for you. Inventories were down 30 percent sequentially, and I know you trapped channel inventories in your inventory balance sheet line item that seems to suggest that channel inventories dropped, you know, a healthy amount. Is that a correct assessment?

Let me answer first, and I'll turn it back over to Gordon. The channel inventory is actually -- we're consistent with the previous quarter, so the improvement that you're seeing is primarily in raw materials and some in finished goods. So channel inventories were relatively flat quarter-over-quarter.

Yes, Sam and I just want to add, you know, the channel inventories are in line with where we'd like them to be. Regarding sales force reorganization, over the last year -- if you recall we entered this fiscal year with a sales force that had really been built for a high growth market, and we've certainly really focus on performance and productivity over the last four quarters and we've achieved the results this quarter with fewer people than we did, you know, similar numbers now a year ago. So we continue to refine that. But early this year, we've made some changes in how we address channels particularly here in the US. And we're starting to see the fruits of that in terms of enhanced productivity across our sales team and really better performance through our reseller channels.

And Gordon, what are some of the verticals may be that you're starting to focus on that historically you haven't focus on very much?

I would say Sam that in terms of verticals, it's been pretty consistent. We certainly emphasis on the ones that I mentioned, that is education. I think here in the US our government sales have being stronger recently than they were a year ago. But the education and healthcare continue to be strong and also, you know, industrial companies like some of those that I mentioned, you know, have always been a strong for us.

Thank you gentlemen.

Next call.

Please hold for the next question. If you would like to ask a question, simply press "*" followed by the number "1" on your telephone keypad and please also keep all questions limited to one question. Your next question is from Christin Armacost with SG Cowen.

Thank you. Will all of the wins that you highlighted Gordon in the various sectors; government, education, healthcare. Can you now provide us with an idea of what percent that contributes to your total business, and I have a follow up?

You know, at this point, you know, we are making improvements in our internal systems, as we've discussed to give us better information about our performance and verticals, and that information is a great value to our marketing teams. But at this point, we really don't plan to break that out.

Okay, then as a follow up, if I -- following up on your partnership activity, would it be fair to say that the most value added partnerships are likely to come from Asia, and with Europe being down this quarter, how do you feel about Europe going into what's seasonally the more challenging quarter?

Well, first of all from a partnership basis, I think that's really a worldwide phenomenon. In Japan, we've had very, very strong partners over the years, and they continue to do an outstanding job for us and be very, very productive. In the US, we've enhanced our partners over the course of the last six months and bringing in, you know, really people who have much larger scale, and that can bring us into a much larger deals, and that's really the focus of our worldwide channel strategy and the same thing is true in Europe and throughout EMEA. We're really beginning that transformation and moving towards our large partners. You know, regarding your comments about EMEA, although, [it] were down slightly if you look at these kind of dollar levels that -- you know the shift of one or two deals can have an impact at these volume levels. So, although certainly the summer is typically a slow in EMEA, we do expect, you know, roughly flat performance.

Thank you.

Your next question is from Lissa Bogaty with CSFB.

Thanks, can you hear me okay.

Yes Lissa.

Two questions, first of all I guess I'm all confused. Did you say at the beginning in the call that Asia was down a little bit or up a little, including Japan?

Yes, we actually said that Asia was down a little bit from our total percent of revenue standpoint.

Okay, then, did you reallocate? Did you also say it was 36 percent?

Yes, we said Asia was 36 percent for Q4 versus 40 percent for Q3.

Okay then, you must have reallocated the other segments or something like that because I guess my -- all right. I'll go through that offline then. And secondly, in -- you know, the September is the end of the US government fiscal year, so it's typically a strong season for federal government spending, and I was wondering whether or not you think that we'll see a normal, you know, upswing in federal government spending, again, this September.

-Lisa this is Gordon. I think that's a tough one to call. A lot of the deals that we're working there are pretty long term.

Okay, great. Thanks.

Your next is from Steve Kamman with CIBC World Market.

Howdy folks. Good to see the cash flow statements. Thanks very much for sending that; I applaud that. In terms of just a question on the state and local government, what's your exposure there? And then, it's just a broader question. I'm hearing from your comments, you felt like you really felt like you really took some share out there from some people who're, you know, pretty clearly adding there own problems. Given that, you know, we had a 1.8 percent increase in revenues, does this suggest the total market was weak or if you could just sort of walk me through that.

Steve, this is Gordon. I think it's, you know, clearly it's hard for us to say without seeing everyone else's results, you know, what the overall size of the market is. We do feel, however, that in looking at deal-by-deal basis that we are improving our win rate.

So if you guys -- I was just -- is it -- am I wrong to assume that you guys came in pretty flat when the market overall declined?

Well, once again, I don't have the numbers, but my guess is that the market was relatively flat.

And then exposure to state and local government; I'm just trying to get a sense on that, mostly in the US. It looks like it could come in a little weak.

Well, the state and local market is actually an interesting area, and it's an area where we have been putting some emphasis over the last several months. One of the interesting opportunities in that space is actually in the metro area. When you look at a lot of these small cities, municipalities, counties, you know, there has been a difficult time getting the kind of metro services that they really need and want, that is pure Ethernet services and so, we've seen actually a number of municipalities going out and going out to bid and starting to build their own metro networks.

Thanks a lot.

And we're in a great opportunity for that.

Your next question is from Inder Singh with Prudential.

Yes hi. I wanted to ask you, if you look beyond the next one or two quarters, Gordon; if you could comment on the growth rate that you see for the prices of the business that you're really focused on and if you think about layer 3 and layer 2 Ethernet switching, you know, what do you see in terms of a growth rate that we should look for after some of the disruptions are sort of behind us.

Yes, it's a good question. I think if you look at some of the lower forecasts for layer 3, they show growth certainly in calendar year '03 and you know, I think that's based upon, you know, some returning to normalcy which I believe will happen. You know, layer 3 is an up and coming market. It's growing and even a small growth rate there, half the size of this market generates significant incremental dollars. I think at some point in time, Enterprise Networking will return to historical growth rates of, you know, somewhere around an annual rate of 20 percent. It's just a matter of economic conditions that are holding us back right now.

Great. Thank you.

Your next question is from [Ted] LaFountain with Needham.

Gordon, I'm wondering if you could walk us through the revenue breakdown, with a little more color on that. Over the last couple of quarters, the aggregate revenues have been pretty darn consistent but within that, we've seen some interesting swings between stackable and modular, and I'm wondering if there is a pattern there, if there is something we should be aware of, it's -- if it's a reflection of the geographic shifts or whatever.

Yes, Ted. That's a good question, that's something that you know we're faced with quite a bit and particularly on the stackable side when people ask, you know, why are stackables strong or why are they not strong and really the answer is that, you know, we focus on the large enterprise and on metro Ethernet, and our customers buy a solution from us and that solution is comprised, all the time, of products from multiple product lines. It's extremely rare to have a customer, for example, only buy Summit switches form us. They almost always buy an Alpine and Black Diamonds and then some Summit switches. So we do see some changes in the shift there. In all honesty, well, we certainly look at them internally and ask ourselves is there a reason for it, and generally, as you track it down to, you know, deal by deal basis -- and once again, most of our business is in large enterprise which are large deals -- you can look at a customer making a particular choice towards a particular architecture that really influenced which products.

Well, a little more color then on that response. With the emergence of the 10 gig Ethernet over the next several quarters, is that likely to eschew the shift towards modular as large enterprises service the early adopters of that sort of product.

I think that its too early to tell. Certainly, 10 gig is going to be used in modular systems, you know, for the first -- lets call it year for that market. I mean, it's just to make sense from where that technology will be used as a corporate or metro backed on to be in a, you know, fault-tolerant chassis configuration. So certainly, that technology will be used in chassis. I'm not sure at this point whether that will have, you know, the effect of shifting, you know, our business mix in a material way.

Okay thanks.

Your next question is from Sanjeev Wadhwani with RBC Capital Markets.

Thanks so much. Two quick questions. Harold, it looks like the US market increased about 22 percent or so sequentially. I'm presuming most of them was coming from the Enterprise segment. Also, could you comment on Japan as to whether Japan declined, more or less, than the overall Asian market and what do you expect from Japan going forward in the September quarter. Thanks so much.

Yes. In regard to the US, it did increase by, you know, roughly 20 percent or so and that was primarily Enterprise driven and in Japan -- Japan did come off a little bit more than the rest of Asia, but again, that was coming off some fairly strong quarters and in the first part of our fiscal year and I -- we had expected that to happen. So I think, if you look at the trends overall from a geographic stand point, they're pretty much back in line with where we had targeted them to be in our historical patterns.

Do you expect Japan to sort of remain consistent with the rest of the Asian market in September, going forward?

Yes. I think, if you look at the split from the [sizes] that we have right now that profile is probably going to remain pretty consistent going forward, and again, that does fit with our historical past.

Got it. Thank you.

Your next question is from Tim Luke from Lehman Brothers.

Thanks. I was wondering -Harold if you could just address the deferred revenue? It seemed to have, sort of, slipped a little bit sequentially, and as you told [indiscernible] accrued liabilities went down. If you could just talk through that? Thanks.

Yes. Our deferred revenue primarily represents maintenance contracts that extend over typically a 12 or 24-month period. Occasionally, our professional services contracts that flow through them. We don't recognize the revenue on that till the projects are complete. So you make a little variation from that, but it's fundamentally the maintenance deferred revenue, and it's fairly consistent with the revenue growth that we have right now.

Okay. On the accrued.

Pardon.

On the accrued liabilities, which went from 125 to 77, just if you have the color on that.

Yes. The biggest change was when we did the transaction on our lease here, on our corporate headquarters, on the -- the transaction was open enough, so having to a reserve approximately $40 million, which reversed now that we've taken those assets and put them on the books. So it really wasn't a cash impact. It was just an accounting entry more than anything else. That was the majority of the drop.

Just to be clear. In your segment revenues I mean I was -- in the prior quarter you'd said 7 percent other and 33 percent Japan and now you're saying, it's 36 percent for Asia in total. Do you have the split on those two?

Yes, in the call we normally don't breakout Japan. We will do that when we do our K. But I had mentioned that Asia was 36 percent for this quarter and 40 percent last quarter.

And is there in that region a split that you're seeing between enterprise and service provider or any trends there that you would want to look for going forward?

Yes, that region is more oriented than other regions towards service provider. And I think that pattern certainly was there this quarter, and we expect that to continue.

And any dynamics, US up 22 percent in terms of Enterprise, and now you're suggesting that it's slightly fairly flattish. Is that just a seasonal impact in the US?

I think, we're seeing some of the positive impacts of the sales force enhancements that we made in the channel realignments. And yes -- again our goal going forward now is to grow revenue, and we believe that the breakout from the percentage standpoint right now is where it should be.

Thank you. [indiscernible] any impact on operating expenses given that you've now got the SAP behind you, you know, or CRM behind you.

No. Those expenses were all pretty well aligned and built into the budget. I think the key here is that we now have an infrastructure that can really handle, I think, higher revenue volumes than we -- we'll probably have; so, we should see some more productivity improvements as we move forward.

Thanks. Good luck.

Thank you.

Your next question is from Erik Suppiger with Pacific Growth Equities.

Hi. Can you hear me?

Yes, Erik. Hi, how're you doing?

Hey. I'm just curious; you're still anticipating sequential improvements next quarter, but we have weakness -- clear weakness out of Europe seasonally, and it's -- you know, it's probably going to be slow both in North America and Asia as well. Is your growth assumption -- is that based on continued market share gains or do you anticipate that there is going to be any improvement in the market for next quarter or even the second half of this year?

Yes, I think -- Erik, this is Gordon. I think it's safe to say, we expect to continue market share gains.

And do you -- are there any areas -- are you taking much or anything from Cisco do you believe. Is your win rate against Cisco changed, or is this exclusively from the struggling players in the market?

Well, I think that, you know, certainly we win our fair share against Cisco but if you go back to our goals, you know, our goal is to be the clear alternative and when we're there, our goal is to differentiate ourselves and extend our lease from the other companies that want to achieve that position and you know, we certainly are seeing market share gains there. But you know, clearly we want to be able to beat Cisco on occasion as well.

Thank you very much.

Due to time restraint we will now take our last question from Ted Jackson from U.S. Bancorp.

I didn't think I was going to make it. A couple of questions. I guess the first is, could you remind us what is the normal range to your backlog and then secondly, do you believe that you can maintain that 900,000 other income line going forward, and I guess lastly, is it fair to assume that the weakness in Japan has been with service provide base and -- or some business comes from that? Thanks.

Yes, let me start with the backlog. We haven't giving absolute numbers out on that in the past, and we don't want to start doing it now. But I would say, if you look over the last four or five quarters and you look at the backlog at the end of each quarter, we're at the high-end of the range over -- of those quarters --this quarter; so that's the key. In regards to the other income and interest, we believe that we can maintain in the 0.8 to 0.9 area and in Japan and Asia the service provider space was fairly strong, this quarter, for us.

So then it will be fair to assume that with the enterprise segment within Asia; that was weaker?

Yes, I guess we don't go into a lot of the detail on that, but I think that would be safe to say.

Okay.

Okay, this is Gordon. Just a comment on that. As you know that, you know, Japan's fiscal year ends March 31st, and their supplemental budget this year was less than it has been in previous years and that really impacts educational institutions and government, and so you know, I think that's one of the reasons that large enterprise in Japan was a little slower.

Thank you

Operator? Well, this should conclude the Extreme Networks fourth quarter fiscal 2002 call. Thank you for calling in and a replay will be available on our website at www.extremenetworks.com, and that's on the investor relations page of our website. Thank you.

Thank you for attending today's conference call. You may now disconnect.