Extreme Networks Inc (EXTR) 2003 Q4 法說會逐字稿

Ladies and gentlemen and welcome to the Extreme Networks, Quarter Four 2003 Earnings Release Conference Call.

At this time all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session.

If anyone needs assistance at anytime during the conference, please press the "star" followed by the "0".

As a reminder, this conference is being recorded Friday, July 18, 2003.

I would now like to turn the conference over to Mr. Harold Covert, please go ahead sir.

Thank you, good morning.

On the call with me today is Gordon Stitt, President, CEO, and Chairman of Extreme Networks.

Earlier this morning we issued a press release announcing our financial results for Q4 FY2003.

A copy of this release is available on our website at www.extremenetworks.com.

A couple of reminders, this call is being recorded and broadcast live over the internet, Friday, July 18, 2003.

It will be posted on our website and available for replay shortly after the conclusion of the call.

Some of the remarks made during this call may include forward-looking statements as governed by the Private Securities Reform Act of 1995.

Any statements about future events and trends including steps we plan to take to improve our 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 risk 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.

Thank you Hal, and thanks everyone for joining us so early today.

As indicated in our press release, we generated revenue of $87.3m which compares to 85.2m in Q3 and is in line with what we had expected.

This is up little over 2% from revenue last quarter and represents the first increase in sales that we have seen in the last several quarters.

Also, happy to say that our backlog at end of quarter also increased from our backlog at the end of Q3.

But we did have an operating loss for the quarter and we did incur some special charges, most significant charges are non-cash charge of a 154m which is related to creating an allowance for deferred tax asset, Ale will talk about that in some more detail.

We also had some modest charges relating to restructuring and layoff that we did at the end of June, which resulted in a charge of $4.6m.

Total loss was $1.47 per share for the quarter or on a pro forma basis 6 cents per share.

Looking at those pro forma numbers that is flat from last quarter and again Hal will provide further details on our results in a few minutes.

As you know, last week we announced that Hal will be leaving as CFO at the end of August, to spend some more time with his family.

Hal has been instrumental in helping us stand solid financial footing during this recession and downturn in technology spending.

His mandate, when he came on board just to help us post our balance sheet and position us well for future growth as we work to bring our next generations of technology to market.

We will much appreciate his commitment to stand with us in a consulting capacity after he leaves at the end of August and help us in a transition to our new CFO.

And personally, I have seen that progress and I want to say that is well underway.

But first of all, I would like to start out by outlining our near-term and mid-term goals and to provide some guidance.

First of all revenue; we expect revenue during fiscal year 2004 to be at least $400m representing double-digit growth from fiscal year '03.

Second, we will be profitable for this new fiscal year.

Expected we will breakeven in the current quarter corresponding any unforeseen global events.

In that point, I fully expect that we will turn profitable and increase profitability throughout the rest of the year.

Expected cash flow will be positive throughout the year.

We have a full new year of product introductions, which I will address a little bit later, so those are our goals.

At this point I would like to lay out some plans for achieving those goals and break them down to the actions, some of which have already been taken.

Then I'll go through and discuss some of our results.

So to achieve profitability we are addressing a number of areas, revenue, operating expense and cost of goods, and cost of goods both related to products and services.

At the end of June we took action to reduce our cost structure through reduction in our employee base.

The reduction was approximately 8% of our full time work force.

There have also been cuts in our temporary and contract work force.

Rather than cutting across the board, we made strategic reorganizations of our company and eliminated or reduced certain functions.

This way we are able to reduce labor cost as well as program cost.

Want to ensure you that our critical programs particular in product or delivery have not been affected.

As a result we took a charge of $1.8m to cover our severance cost.

We entered the new quarter with this lower cost basis in place.

We've also taken some temporary measures to reduce cost and include things such as plant shutdowns around holidays and salary reductions.

Myself, our Vice President of Engineering, our CEO have all taken voluntary reductions of 50%, and we've asked some of our other senior team members to take modest cuts.

These temporary measures have an impact in Q1 and Q2, and we entered Q1 with these reductions in place.

We have a number of action plans that our operations team is working on, as part of our profitability plans.

These are related to manufacturing overhead, cost of our supply-chain operations, and our logistics.

We have efforts underway that will lead to significant improvements in our product gross margins.

Some of these are in place and others are in the process of continuous improvement that will bring benefit throughout the year.

We also have a number of improvements for the cost of our service operations that are underway that will reduce the cost of overhead, [DEPA] costs, and logistics.

And regarding operating expense, we expect that operating expense through the year will be relatively flat, with Q1 operating expense being lower in the quarter-end due to reductions enforced in program cost reductions.

Please note that our engineering expenses were some what high in Q4 '03 due to accelerated development of our key technologies.

Based upon this move to profitability, I expect that cash flow will be positive throughout the year.

There have been some concerns on part of some of you regarding our commitments profitability.

I want to make clear that I am personally committed to profitability as is our board and our management team.

There should be no doubt in your mind.

We've taken a number of actions already, and we'll continuer to take actions in the near term to achieve that goal.

I'd like to take a moment now and provide a little color on our results and at the same time discuss some of the results of our channel efforts.

Looking at our increase in sales this year, there was some standouts -- excuse me, this quarter there were some standouts.

The Americas has had double digit increase in bookings which is the fist increase in bookings in the Americas in four quarters.

And looking at this growth in the America's, our EASP partners, that is our highest level of certified resellers, grew by 14%.

Subset of that which is our national resellers actually grew 21% quarter-over-quarter based upon bookings.

As you'll recall, we made some changes to our distribution system last October.

These changes have had a positive impact in continuing momentum as we now have our third consecutive quarter growth in this very important channel.

SPC and Siemens in particular have done extremely well, and we've won some important deals together.

Dell also continues to do very well.

During the quarter, we also signed a global resale agreement with Verizon, making them our newest national partner.

Our U.S. channel program is doing very well.

I'd like to congratulate our sales team for creating this momentum.

It will serve us well into the future.

A couple of comments about Asia.

Japan was down quarter-over-quarter due to slower carrier spending.

Carrier business in Japan has always been somewhat lumpy.

Japanese economy has been challenging for sometime.

For the first time in four quarters, we have seen an up tick in our Japan enterprise business.

We view this as an important sign and hope that it will continue.

Non-Japan Asia also did very well.

We have strong book-to-bill.

We also announced an important new reseller in China, which is Legend Computer.

As we've been aggressively working to improve the performance of our service business, during the quarter we saw the first results since you can see we had strong revenue growth. [Inaudible] to do on both the service revenue and service expense side, but we are making strong progress.

I also wish to note that the loss in our service business was primarily related to some one-time charges -- are related to impairment of some IT system.

Now, I would like to shift gears -- give you an update on our products.

Looking at the quarter just completed and our goals for fiscal 2004, we are very satisfied with the progress we've made and with the strong acceptance of our new products, particularly given the generous offers in IT spending for much of this year and last year, as well as increased competition in our space.

More than ever before, equipment providers must demonstrate their value in the marketplace.

Well price will always be important when you are buying technology -- you are not buying commodity.

Building an infrastructure is an investment for today and the future, and will advance your drive towards enhanced productivity at lower costs.

That's what we are so good at doing and that's why customers select Extreme.

As our third and soon our fourth generation of technology, we are offering our customers solutions that enhance productivity with higher performance at lower cost than anything else in the marketplace.

We are very pleased at how well our new technology has been received by the market.

Our third generation silicon technology, which we rolled out early in the quarter, is doing very well.

Triumph gives our enterprise and metro customer's enhanced gigabyte and 10-gigabyte Ethernet connectivity and provides extensive new features such as multilevel queuing and fine grain traffic shaping, all the while being fully compatible with existing inferno-based systems.

Our existing customers like this technology because it preserves their investment while increasing their capabilities.

Our new customers like Triumph because it's truly industry leading.

And as with our first and second generation platforms, these product lines tend to have long lives preserving and protecting the customers' investment in technology by extending the life cycle of their existing infrastructure all the while making enhancements.

During the quarter we unveiled an important new technology called the Unified Access Architecture for seamless integration of wireless and wire data networking targeted at medium and large enterprise.

Our approach is fundamentally different from what others are offering in the marketplace.

Extreme's strategy is to centralize the integration of data and voice management and security in a single network.

So our approach organizations can build networks that can manage future application and devices.

Ultimately it's not about the LAN, wireless LANs, or wireless enterprises it's simply about a networked enterprise.

The Unified Access Architecture is the only viable strategy that enables the proliferation of devices on a network whether wired or wireless with the lowest cost of ownership.

And it's the unification of one network combined with the flexibility and cost effectiveness of our solution that has generated positive comments within the industry and excitement among existing and prospective customers.

I am very pleased to say that we quickly sold out our first quarter production of the Summit(R) 300, which is the first platform to implement Unified Access.

Industry recognition includes comments such as "Extreme's Unified Access Architecture entry is a stand out" and "A Unified Network approach will be become the new standard for wired and wireless networking, and one of our favorites -- "companies waiting for a secure way to deploy scalable wireless networks from an established player now have a solution from Extreme."

As in the past we once again went further in our strategy for network advancements by redefining the core of the network with our Fourth Generation Silicon Technology, and called 4GNSS.

I think most of you know it by the code name Genesis.

Designed for the emerging 10 gigabit Ethernet core, the new architecture provides the first truly programmable and adaptable core switching architecture to support nonstop network environments.

This technology enables customers to prepare their network infrastructure or even hundreds or thousands or millions of devices that will be placed upon it.

The 4GNSS architecture incorporates a new approach to building scalable core networks by enabling adaptable, nonstop switching with dense wire speed 10 gigabit Ethernet performance.

Response to Genesis has also been excellent, and although we have not yet announced the systems or pricing, customer response has been fantastic.

They have the highest density that has been shown and people are responding to our high availability nonstop features.

We're currently on track to deliver Genesis during the December quarter.

Regarding our current 10 gigabit Ethernet technology, which is based upon Triumph.

I am very pleased to say that Extreme holds the number one position over this market while an industry research firm Dell'Oro Group ranked Extreme as the leader for the second calendar quarter.

Before I can turn things over to Hal, I would like to make some final observations.

First of all I believe that the double digit growth we saw in the U.S. was an important turning point.

Customers are resonanting with our message of a simpler higher performance network that integrates voice, video, and data and reduces operations costs.

Ultimately innovation makes the difference and determines whether or not a company will be a leader or a follower in the drive towards enhanced productivity.

We've always been leader in at Extreme networks, which is why we work so hard to continue to innovate for our customers and come expect to expect from us.

Because of our unwavering combination of unique architectural and operational simplicity, we will continue to provide them with the lowest cost of ownership.

As I mentioned we are on track to launch our fourth generation Genesis later this year.

True to our commitment of innovation, we have been working towards Genesis for over 3 years and considered a true rebirth for Extreme Networks that will give us the foundation for our next period of growth.

Products based on this fourth generation platform will benefit from a significantly improved performance and functionality.

Now, I'd like to turn the call over to Hal for his comments on our financials.

Hal.

Thank you Gordon.

I will now cover two topics -- $154m non-cash charge to establish a valuation allowance against our deferred tax asset that was recorded for Q4 FY2003 and a detailed discussion of Q4 FY2003 financial results.

First, $154m non-cash deferred tax asset charge.

In the process of evaluating our deferred tax asset for recoverability before closing our books for Q4 FY2003, we evaluated the requirements of Statement of Financial Accounting Standards Number 109.

This pronouncement gives greater weight to previous losses than the outlook for future profitability when determining whether deferred tax assets can be used.

Based upon our most recent 3- year history of losses and relying on our other guidance specified in SFAS No. 109 we determined that it was appropriate to establish a complete valuation allowance against our deferred tax assets.

This valuation allowance will be evaluated periodically and can be reversed partially or totally if business results have sufficiently improved to support realization of our deferred tax asset.

Just before discussing our results for Q4 FY2003 I would like to point out that we will highlight the split between product and service revenues as well as gross margin.

The service gross margin calculation includes all of service-related expenses.

In the past some service-related expenses were included in operating expenses as part of the line item and titled sales, marketing and service expense.

The company has posted a set of worksheets on its investor relations website that reflects the same presentation format for all four quarters of fiscal 2003 which we believe could be relevant for the purpose of comparing company performance over the periods included.

In addition, product and service revenue in these worksheets has been split out for fiscal 2001 and fiscal 2002.

However, gross margin for the same periods is presented in total, since the company does not have records that details product and service cost of revenue in separate categories.

The company was able to reflect the re-classification of service expenses that had previously been included in operating expenses for fiscal 2001 and fiscal 2002 in these worksheets.

Turing to the quarterly results, total revenue for Q4 FY2003 was 87.3m versus 85.2 in Q3 FY2003.

Service revenue for Q4 FY2003 was 10.6m and 8.9m for Q3 FY2003.

Our book-to-bill ratio was greater than 1 for Q4 FY2003 and we entered a quarter with backlog within our normal range.

On a geographic basis, the Americas represented 45% of our revenue for Q4 FY2003 versus 36% in Q3 FY2003.

Europe represented 27% of our revenue for Q4 of 2003 versus 28% in Q3 FY2003.

Japan represented 18% of our revenue for Q4 FY2003, versus 26% in Q3 FY2003 and Asia not including Japan, represented 10% of our revenue for Q4 FY2003 versus 10% in Q3 FY2003.

For Q4 FY2003 we had one customer Tecdata a large distributor focused on our U.S. customers that accounted for more than 10% of our revenue on an individual basis.

The revenue split between enterprise and service provider segments for Q4 FY2003 was approximately 85% enterprise and 15% service provider.

Enterprise includes government and education customers.

Our service provider customers are primarily international.

Product mix consisted of 54% modular and 46% stackable for Q4 of y2003 versus 51% modular and 49% stackable in Q3 FY2003.

Total gross margins for Q4 FY2003 was 37.5% versus 39.8% for Q3 FY2003.

Product gross margins for Q4 FY2003 was 45.1% compared to 45.9% for Q3 FY2003.

Service gross margins was negative 17% for Q4 FY2003 and negative 12% for Q3 FY2003.

The primary reason for the decrease in gross margin was due to discontinuing an outsource contract related to our service line of business that resulted in a charge of $1.8m that was recorded in Q4 FY2003.

Not including this charge are service line of business starting to show improvement.

Operating expenses were $50m for Q4 FY2003 compared to $46.6m for Q3 FY2003.

The increase in operating expenses for Q4 is essentially due to a $1.8m charge for severance expense related to a reduction in staff implemented in July 2003 and a $1m write-off of goodwill.

The goodwill write-off eliminated the remaining goodwill carried on our balance sheet.

I would also like to point out that research and development expense for Q4 FY2003 were $16.3m versus $13.7m for Q3 FY2003.

The increase was a result of accelerating selected research and development expenses for our new products currently under development during the quarter.

The operating loss for Q4 FY2003 was 17.3m versus a $12.7m loss for Q3 FY2003.

The unfavorable comparison is due to the $1.8m outsource contract charge the 1.8m severance expense and the $1m write off for goodwill.

Other income and expense for Q4 FY2003 was $1m compared to $1m in Q3 FY2003.

Net loss for Q4 FY2003 was a 170.4m including a $154m differed tax asset charge compared to 7.6m net loss for Q3 FY2003.

Net loss per share was a $1.47 for Q4 FY2003 of which $1.33 was accounted for by the differed tax assets charge versus a loss of 7 cents per share for Q3 FY2003.

Moving to the balance sheet, I would like to highlight several items.

First our cash, cash equivalents, and marketable securities balance on June 29, 2003, was 402m compared to 407m on March 30, 2003.

Capital expenditures for Q4 FY2003 were 1.9m versus 1.7m for Q3 FY2003.

Accounts receivable were $27m on June 29, 2003, which equates to a DSO of 28 days.

DSO for Q4 FY2002 was 41 days.

Net inventory on June 29, 2003, was $19m compared to $25m reported on June 30, 2002.

Channel inventory was within targeted levels at the end of Q4 FY2003.

Keep in mind that we recognized revenue based on sell-off for distributors; therefore the 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.

Staff as if of the end of June 29, 2003 was 841 versus 834 on March 30, 2003.

We implemented a reduction in staff of approximately 69 people during the month of July; these people are included in June 29, 2003, total.

As of June 29, 2003 the company had 116m shares of common stock outstanding on a fully diluted basis.

I will now turn the call back over to Gordon.

Thank you Hal.

Before offering my concluding remarks, I would like to again thank Hal for his contribution to Extreme and for his tireless efforts towards achieving results.

Behalf of the team here wish him all the best in wherever he does and to have a great life.

To summarize several points, first of all we saw revenue growth for the first time several quarters largely driven by U.S. enterprise business.

Our national resellers were particularly strong validating our U.S. channel strategy.

Our new products met with excellent response. [Inaudible] has been well accepted by current and prospective customers.

On our Unified Access Architecture, which is a combined wire and wireless strategy is met with an outstanding reception from analysts and customers alike.

As I mentioned, our production for this quarter is already sold out.

In Genesis, which we will ship in the December quarter looks to be the industry's leading 10 gigabyte Ethernet platform.

Finally, we will be hosting a number of investor bus tours at our corporate offices during August and I would like to encourage you to attend.

And we've a busy follow up schedule on investor conferences and we are currently planning to host an Analyst Investor Day during October in New York City, at which time we will talk about our technology and future plan.

We look forward to see you all in person and to introducing our new CFO in short order.

Thank you.

Operator we are now ready for questions.

Thank you sir.

Ladies and gentlemen at this time we will begin the question and answer session.

If you have a question, please press the "star" followed by the "1" on your pushbutton phone.

If you would like to decline from the polling process please press the "star" followed by the "2".

You will hear a three tone prompt acknowledging your selection.

Your questions will be pulled in the order they are received.

If you are using the speaker equipment, you will resource the handset before pressing the numbers.

One moment please, for our first question.

Our first question comes from Mr. Sam Wilson; please state your company name followed by your question.

Hi good morning, this is Sam Wilson from JMP Securities.

A couple of questions maybe one for Harold and one for Gordon.

First Gordon, with the changes you've made in your channel since late last year and into this year, can you talk a little bit about how the mix of wins is changing between large customer wins, big contract wins versus smaller orders departmental buys, and just what influence the channel is having on that?

And how, you know, just -- I want to get a sense maybe for price competition a little bit.

In the stackable side, it's been mentioned in another conference calls and I just want to see if you give some color there as to price competition in stackables?

Thank you.

Hi Sam, its Gordon.

Good morning.

So in terms of your question about channels, you know, once again we are really pleased that are -- what I'll call are high-end channels, those that have the highest level of certification, grew in the U.S.

And, you know, we've looked at the mix there and it really is across all levels.

We had strengthened in deals under a $100,000 and strengthened in larger deals as well.

You know, standout was you know during the quarter we booked some business through SPC which was a Park County School District, which is the sixth largest school district in the country.

And I think that's probably one of our largest channel wins ever.

It’s a deal that goes over 3 years, and is pretty significant.

So, I think that's an example of a very large deal that has a lot of locations, a lot of integration services, and just as you know a great opportunity for us to deliver Voice, Voice over IP, video you know to one of the nation's largest school districts.

In comment, I am going to go ahead and take the question that you ended Hal, regarding Summit pricing.

As you may have seen, we did introduce a couple of new Summit products during the quarter.

I didn't specifically talk about them on the call, that is the Summit 200 series, which is a -- you know a low cost series of products for us.

One of things that we are seeing, you know, previously is we see a lot of strength in our 48SI product line, but as some new low cost products have come into the market, some of our resellers and sales teams have been tempted to discount the 48SI to compete.

And so what we did was introduce our own line of low cost Layer 3 switches -- that is the Summit 200, to really provide a direct comparison, and so in some situations where a customer wants to use our black diamond surrounded with very low cost fixed configuration switches we have a solution and our teams don’t need to resort so much to discounting some of our higher-end products.

And that has been very successful even with this very recent announcement of those products, you know, particularly in some of the price sensitive areas such as education.

Next question please.

Thank you.

Thank you.

Our next question comes from Alex Henderson.

Please state your company name followed by your question.

Thanks Citigroup.

A couple of questions on the guidance.

First up, your forecast or your indication of $400m in revenues for the full year seems fairly aggressive.

Can you give us some of the inputs that are causing you to conclude that your revenues will accelerate, and I couldn't quite get a -- or rather didn't get quite the metric of what you thought the September quarter revenues might move up towards?

And then second, breakeven, quickly can you give us a little bit more granularity on the operating cost, the Opex line and service cost line?

Why it could come down to breakeven that quickly?

I know you said that service costs were improving, but if I strip out the charge -- that $1.8m charge still was up solidly -- service cost was up solid sequentially?

Yes, Alex first of all the service costs were pretty flat actually quarter-on-quarter, but going in a reverse order.

You know, regarding guidance and looking at the $400m number, I didn't break that down by quarter because I think that's pretty tough for us to do and I'll leave that as an exercise.

In terms of why we came up with that -- that's not a number we pulled out of the air.

We have done a rigorous analysis in terms of bottoms up from our sales team and looking out to the next couple of quarters in terms of what their commits are, you know, looking at our pipeline, looking also at the performance of new products.

I think it's a big factor.

And we went through a pretty extensive planning exercise and looking at each of product lines and how we expect them to grow and what we see the impact of new products coming in.

So there was a lot of analysis from sales productivity, from regional productivity, from product line, migration in terms of some products being replaced by newer -- higher performing versions, and that's where we came up with that number.

Could you give us some sense of whether how much you weighed the pickup in economic conditions or a change in customer demand conditions as part of that equation?

In all honesty - - it really wasn't part of the equation.

You know our view is there is nothing we can do about that.

The market conditions are what they are- - the economy is going to do what its' going to do.

We believe that through productivity improvements in our sales force and from bringing more competitive technology to market that we can generate that level of growth relatively independent of the economy.

Okay.

Thank you our next question comes from Mark Sue.

Please state your company name followed by your question.

Hi it's Unterberg Towbin.

Gordon what were the new products as a percentage of sales this quarter and how do you see that ramping by the end of the year and how should we look at the gross margins on the product side as we see the new products ramp?

Hey Mark this is Gordon.

The actual contribution in terms of the aggregate revenue of new products was actually pretty small, you know we're not going to you know pin down a particular number but you know the Triumph products were ramping you know during the quarter.

And you know the Summit 200 actually, you know, started shipping this quarter.

So it didn't have an impact and the wireless as we've mentioned you know we're shipping modest quantity this quarter with strong volumes hitting in December.

So really you know we were largely driven by our infernal products you know during this quarter.

And then also the timing of the new CFO?

Well I've begun a search.

So we've to retain search going.

I currently met face-to-face with five candidates and I expect to meet with some more over the next couple of weeks.

So, we're moving this as quickly as we can.

We want to get some overlap ideally while Hal is here.

Got it.

Thank you.

Thanks Mark.

Thank you.

Our next question comes from Subu -- Subrahmanyan, please state your company name followed by your question.

Good morning, thank you.

It's Sanders Morris, two quick questions, first on the service business.

If you could talk a little bit more on what your plans are in terms of getting that back to profitability?

And just for your profitability in cash flow timeframe, just as a clarification.

Do you say as early as starting next quarter or was it for full year fiscal '04?

I wasn't sure I got that.

Okay, good morning [Subu].

So, addressing your second question first, I don't expect to be profitable during the current quarter that is the September quarter.

Our goal is to target break-even performance.

We do expect to be profitable during the December quarter and then to increase that as we move into the second half of the year.

From the service standpoint, there are number of elements I think one element to point out is we did see strong revenue growth in service and underlying that we've seen a strong bookings in service, particularly driven by Americans, but many of our issues with service and the profitability have been related to you know international revenue.

You know that will take some time to work through as we re-price contracts when they come up for negotiations.

So you'll see continued work on the top line there as we move through the year.

On the cost side we're doing a lot of work in terms of the organization, making that organization more efficient and also looking at some of our suppliers there, some of our vendor contracts that provide [depo] and logistic support and really working on that as well.

And just as a follow-up here in line of business, did you directionally give any comments on where you're expecting next quarter to fall in this kind of ramp, you're expecting towards $400m next year?

No I didn't give any specifics as I mentioned to Alex earlier, I'll leave that exercise to you.

Thank you.

Thanks Subu.

Thank you.

Our next question comes from Christin Armacost.

Please take your company name followed by your question.

Yeah, thank you, SG Cowen.

I wanted to get a -- some clarification on where the breakeven rate is and as you look at the $400m target and your profitability targets, how much of that will be driven -- how much of the profitability target will be driven from revenue growth versus further cost reductions?

And back to the revenue target if that's growing 2 to 3 x probably with the economy or the overall industrial growth that's implying taking significant share?

As you discuss some of the due diligence you've done and looking at some of the account opportunities, which areas or which companies do you think you can take the greater share from?

Thank you.

Hi, Christin.

So there is a, I think in your last question -- one question I think you slipped four or five of them in there.

Hey I am just doing what the rest of the people do.

So regarding breakeven, we brought our fixed costs down, and as I mentioned there is two components -- that one is what I would call permanent reductions, some of those were program changes, some of those were organizational changes, some of those were reductions in force.

There is also some temporary measures, and by temporary cost reductions that will affect the first half, and by temporary once again there are some salary reductions and some client shutdowns around holidays.

And those should bring our breakeven down to somewhere in $90m range in the near term, low 90s, and that would be for the next couple of quarters.

We hope to eliminate those temporary measures after that.

Some of the other reductions come from what I'll call supply chain improvements, and that's a process we have been working very hard on over the last year, and it's a pretty much a continual process and you'll see that ramp in.

So that part of getting to breakeven number is some pretty significant supply chain improvements and we have those within our sites.

And I am sorry, I forget your -- you had another question after that.

Well, the -- it's all on the profitability so, and not at the cost component side that was answered.

The revenue growth in terms of taking share and either by industry segment where it has the greatest opportunities or companies you think you can take the greatest share from?

Yeah, I think, in looking that, first of all this was, you know, a pretty detailed bottom ups analysis, you know, looking at geographies and channels and end pipeline and also new products contribution.

As I mentioned, you know, although certainly you know the overall economy pick ups, we'd certainly be pleased to see that, you know, that's not a really big factor in our numbers.

You know in terms of the overall market size, I've seen some pretty aggressive growth forecast from some of the market forecasters of particularly for the Layer 3 segment.

So from what I've seen although enterprise spend is looking to be slightly down and some networking segments to follow it.

The Layer 3 market is forecasted in the next five years to have pretty robust growth.

That said, once again we came from a bottoms up analysis and we do see that there are some competitors that we can take share from and I would say it's relatively across the board.

Thank you.

Our next question comes from Sanjiv Wadhwani, please state your company followed by your question.

U.S.

Bancorp Piper Jaffray.

Two questions first of all on the restructuring, can you give a little more detailed --- what areas were cut and are all the cuts done, are we -- are there some more that we should be expecting?

And then in terms of expenses for the September quarter specifically on the gross margin side, 37% for June when should see that trending for September and I am just trying to get an outlook for the $400m revenue that you've projected for 2004 where do you see gross margins coming in eventually -- are we heading back to sort of the 45% range or where do they tap out eventually thanks?

Well Sanjiv let me take the first part.

The $1.8m restructuring charge that we talked during the quarter was primarily severance expense, and that was across the all the functionaries.

And Gordon you want to take the second part.

I am sorry Sanjiv; can you go through the question one more time?

On the gross margin side they were about 37.5% for June, I am trying to see what we should be expecting that to head to in the September quarter and also for the $400m projections for fiscal 04, where do we eventually see gross margins heading -- are we heading are we heading it back to the 45% range or so or where do you think it sort of maxes out?

Yeah I want to be careful here in making commitments that we can keep.

And looking at the near term, I can see an increase, you know, from cost reductions of couple of percentage points, you know that is a couple of hundred basis points in gross margin coming from supply chain, and we have that mapped out pretty well.

Got it, thanks.

Thank you our next question comes from Tim Luke, please state your company name followed by your question.

Thank you.

Tim Luke of Lehman.

Gordon I was wondering as you look forward in the September period whether you could give some color on the -- how you see the regions developing?

I think you said that you saw some very strong order right in the U.S., but given the seasonality associated with September should we say that they're flat or up slightly and then if you could talk about some of the other regions, that'll be great.

Thank you.

Yes Jim.

Yes regional forecasting is pretty tough these days, but I'll take a shot at it.

You know, I think the U.S. is, you know, really turning the corner and gaining some momentum there I think that momentum is going to continue.

Our U.S. sales force is pretty excited about the results you know they've been working hard you know going through these channel transitions over the last couple of quarters and I think we'll generate some good momentum there.

Asia is pretty tough to forecast, you know, our expectations you know there are -- I'll just say moderate, could be flat, could be up a little bit, and as you know from a seasonal perspective Europe is, you know, this quarter can be dicey, but I think if you look to the growth its going to come from the U.S. and from non-Japan Asia.

Could I also just ask of the follow up, if you could just clarify the new product timeline for launches as you go through the next three months?

Yes, I can certainly go through that.

The Triumph product that is the first wave of Triumph products, which are blades for our BlackDiamond and Alpine and those bring high density gigabit Ethernet to the market; put us in a very competitive position there.

Those products are all in production for both of those platforms.

So, that's actually a four-line items and those are in volume production and were during the quarter.

Now, we have some in the Triumph 10-gigabit platform as also in volume production.

We have some other parts of the Triumph series that we've not publicly announced that will ship during the September quarter, but towards the end of the quarter.

So, you know modest impact in the current quarter, stronger impact in the December quarter.

Our wireless products that is the Unified Access product, which is primarily the Summit 300 product.

We do expect to deliver that during the September quarter.

Once again, it will be towards the backend of the quarter, and our expectations there are fairly modest and we did sell out those products and we expect to be in the high volume production of that in the December quarter.

The Summit 200, which we announced just a couple of weeks ago, we announced simultaneously with full volume production and that product is doing very well.

The platforms based upon Genesis, the one that we have shown is called [Mariner] which is our large scale core system.

We have had that at customer sites for early testing and we are on track to deliver that in modest volumes in December.

Thank you.

Thank you.

Our next question comes from Stephen Chin.

Please state your company name followed by your questions.

Great thank you, its UBS.

Question for Hal, on your last conference call you mentioned that some orders from the Americas were actually booked late in the March quarter, which shipped early in the June quarter and that was clearly the case as [to get] a strong Americas quarter.

And my question is was the Americas booking strength that was first seen at the end of March, did that remain relatively distant through the June quarter or was it again skewed towards the last month's of the quarter and then second question is that can you just talk a little bit about the poor and average selling price [transferable] [to stackables] and modulars and [sales of stackables] were down sequentially was that due mostly to the lower stackable units or was it due to a decline in the average selling prices.

Yes Stephen let me take the first part relative to your linearity to the quarter.

It was pretty typical, I think as you know we are 20/30/50 and we followed that pattern pretty much throughout the quarter for our American operations.

Gordon you want to take the second part on pricing and so forth?

Yes, on pricing, I don't have a concrete analysis there and there are certainly variations by region, but I would say there was nothing unusual.

Okay, thank you.

Thank you.

Our next question comes from Richard Church.

Please state your company name followed by your question.

Thanks, Wachovia Securities.

Can you comment on what percent of revenue was from the Triumph-based, BlackDiamond and Alpine products and what is your goal going forward, where did you expect to exist the year Triumph's-- as a percent of mix?

Yeah, Hi Rich.

This is Gordon.

We don't have a specific number that you know we are going to give on an ongoing basis there.

You know, I think, I mentioned response to one of the earlier questions that it was a modest contribution.

Whenever you look at a transition like that, you know, of course what we wanted to -- was to see a smooth transition you know from Inferno to Triumph and our sales force you know, begin you know bidding the Triumph product you know when they were announced.

So, that is -- there was a relatively smooth migration during the quarter given the sale cycle time.

You know we expect that to take several quarters to transition, and some of the Inferno products will certainly continue for quite some time given just the characteristics of the product.

So, I look at going from primarily Inferno to primarily Triumph to be roughly a three-quarter period.

Okay, and with regard to the Summit 200 line, is that the mind that’s based on Merchant Silicon?

Yes, it is.

It is based on Merchant Silicon, but it does run our software.

Do you expect it to push Triumph down to that line as well?

There was a -- there was a pretty distinct line between Triumph and what the Merchant Silicon does, and they are really targeted at different segments of the market.

The Merchant Silicon thus provide a low-cost solution and you can certainly see that from a number of vendors.

Now our differentiation of course is we are running the same software on that Merchant Silicon.

So we have years of experience and millions of ports of Layer 3 experience built into that software, and we believe that's what we will differentiate our platforms at that end.

The Triumph technology has significantly greater capabilities than merchant silicon in a number of various particularly in traffic shaping area and also when you just look at the size of memory and that sort of thing and then you know it's really intended for large-scale enterprise networks.

So I think for our target customer base they understand the difference between Triumph-based product and the Summit 200.

But I think the Summit 200 is proven to be very successful already in university environments, and what I would call in some mid-sized enterprise environments where there are some parts of the network where they are just looking for, you know, for low cost productivity.

Okay.

Thank you.

Thank you.

Our next question comes from Andy Schopick (ph.).

Please take your company name followed by your question.

Good morning, Nutmeg Securities (ph.).

Hal, couple of point questions please.

Tech Data can you specify what the contribution was in the quarter and for the fiscal year at this time?

Yeah, Tech data typically is over 10%.

It ranges between 10 and 15%.

I think they were pretty much right in the middle of the range for the quarter.

How about for the year?

Probably in the middle of the range of the year too.

Okay.

Gordon, product transition concerns or issues here, given the fact that really you've got two products coming into the market here in relatively short time frame.

You've been through these in the past, but I am wondering in this particular case given the accelerated nature of what you are doing, whether you have some issues or concerns with respect to managing those product transition issues here in the first half of the current fiscal year anything out of the normal?

So a couple of comments you know as you suggest, you know we have a bench of this before and I would also certainly say there is always risks whenever there is a transition.

But, if you look at the -- you know the different elements in place here.

So the Inferno to Triumph transition does impact our BlackDiamond and Alpine platforms which are the bulk of our revenue.

And during the quarter that has gone very smoothly and I have no indication that it's going to do anything but that in the future and that continued the smooth migration.

I'd like to note our inventory numbers were actually down in the quarter and when you go through transition and can bring your inventories down I'd say we got a fantastic operations team managing that.

If I look at some of the other transitions for example the Summit 200 really fits the slot that we didn’t' have in our product line that is a low cost high software functionality layer 3 product.

So, I think that will slot in pretty nicely.

You know the wireless product is Summit 300, once again doesn’t replace an existing product.

So that’s really a matter of doing a good job of ramping production there.

And the same thing for our Mariner system towards the year end.

I think we've done an excellent job of thoroughly positioning that you know where that fits in the network versus we're existing BlackDiamonds fit and I think you know -- in my, I've talked to a lot of customers over the last several months about that platform and just spent a lot of time, lot of face time and I think customers really understand you know where that platform fits and where the BlackDiamond fits.

So, I'm optimistic with that these go well.

Oh Thanks.

Hal best of luck to you and just I wanted to ask whether or not you'd be available for some follow up questions later today?

Yeah later today, thanks a lot.

Thank you.

Thank you.

Our next question comes from Erik Suppiger.

Please state your company name followed by your question.

Pacific Growth Equities.

First of all, Gordon, I have heard that you've hired some territorial sales managers; does this signify any change in your stay over channel strategy at all?

Hi Erik.

We have -- in the U.S., we have been adding people to the sales force during the quarter.

And as you know, we have a number of -- I guess I would say different types of reps.

We have been really focused on named accounts and are getting the national channels going.

As I mentioned earlier on the call, I am pretty comfortable that that's going well and momentum is building.

So we have been adding some folks in areas to, as you describe them as regional reps or territorial reps that are covering a territory versus named account and that to provide a little bit better coverage.

Okay, just in terms of where you want to get the headcount, can you give us any kind of metrics may be revenue per employee or any kind of range of what additional changes you might expect on the headcount front?

Well on the headcount front, you know from where we sit today you know we expect it to be relatively flat, as we go through the year.

So you know we therefore expect productivity improvements as we achieve sales growth.

You know I don’t have a specific metric, we are looking at that across different functions, certainly in the sales side we're managing it very carefully in terms of making sure that we're achieving the productivity numbers in the sales force.

Okay, last question -- Japan was down very notably can you discuss what happened there?

Sure.

You know our business in Japan, excuse me, has been a you know a mix of carrier and enterprise and it's -- when it's been strong it's been strong as a result of carrier spend and when it has been down, you know, as it was this quarter, it is the result of, you know, a lack of carrier build out.

You know, our business there is lumpy, in that we have several large customers and, carrier don't build out or at least not in Japan on a consistent basis, they build up the network, build revenues, and build up the networks some more.

So the one comment I did made and I do want to repeat is that given the lumpiness of this business and the fact that those networks are in pretty good shape, we've really been emphasizing enterprise sales over the last couple quarters when we saw the first pickup in I believe four quarters of enterprise bookings in Japan.

So I view that as a positive sign on the enterprise side.

Great.

Thank you much.

Thanks Erik.

Thank you our next question from Steve Kamman, please state your company name followed by your question.

Yeah, just trying to work out more on two things -- one gross margin dropped dramatically and I am just trying to figure out is that a permanent -- I mean I understand that services is contributing to that, but are you expecting to bring that up; and/or should we be looking at a 37-40% gross margin going forward?

No this is Gordon now and Hal may add to this, no we expect gross margins to go up.

And I am just trying to figure out the lever that's doing that, I mean was this a one-time impact in the last few quarters that that services margin has dropped; or are you going to change pricing; or how are you going to aid the contracts to do that?

Yeah I think in particular for the current quarter -- quarter four, the $1.8m charge that we had included in the service cost caused the gross margin to drop of.

If you take that out, it would have been relatively flat.

Okay.

That's in there?

I think going forward Gordon mentioned supply chain improvements and other activities that would help improve the gross margin.

Okay so we can take that $1.8m out maybe to get a more normalized number?

Yes you would end up with pretty much flat if you did that.

And then the other thing, the pro-forma numbers you've got out seem to imply continuing to take out the tax benefits of $3.8m and rolling out forward and I'm just trying to figure out -- I'm assuming you guys are modeling in $400m next year so you get back to profitability, but we are probably going to get some pretty confused numbers out there depending on whether by GAAP we want to keep that tax benefit in and on, so any thoughts there?

Well certainly I we would likely keep the tax benefits not in the numbers until we return to profitability;

I think I mentioned that earlier in the call.

Okay but it's in your pro-forma numbers right now you have this $3.8m tax benefits?

Yes that was for the current quarters just to keep things on an apples to apples basis so people--.

Going forward we should take that out?

I think you should use your judgment and make a decision on that.

All right thanks much.

Thank you our next question comes from John Wilson, please state your company name followed by your question.

Yeah hi, it’s John Wilson of RBC Capital Markets.

I guess -- and I apologize I did not have a chance to go through over your statements yet or anything, but just to clarify last quarter you talked about the change in moving $4.8m from the OPEX up to the gross margin line.

Is it that -- just to clarify that's happening in Q1 or that was built into these numbers in Q4?

That’s was actually built into the numbers in Q4.

And the spread sheets that we have put up on our websites also have those -- that re-classification in it for the full fiscal year of '03.

Okay.

So given that on an apples-to-apples it looks like, does OPEX actually go up sequentially?

If you back that out from Q3.

It did go up primarily because of R&D going from 13.7 in quarter three to 16.3 in quarter four, and it will also have some charges that were included in operating expenses.

Okay, thanks.

And then just for Gordon, I guess I am just wondering given the uncertainty, given what you guys have gone through for the last couple of quarters, I just seem to be a little counterintuitive that you would feel comfortable giving sort of specifics on our four-quarter forward outlook in terms of the top line, but especially given your comments on the backlog and everything else, your level of uncomfort in talking about what Q1 would be -- I just don’t -- I guess I am struggling to understand why you wouldn’t give us a shorter-term view before you see September coming on the top line?

Well, I wanted to give you guys some work to do.

I got enough work to do already.

Seriously, I think that we have certainly implied a lot of the short-term results.

I do think there are always things that move around in the short term, and I think we want to be clear -- I want to be clear on this call in terms of what our goals and objectives are and then our goals for productivity and to be as specific as is reasonable there, and our goals for revenue growth and to be as specific as is reasonable there.

Clearly, as I am sure you will hear from other companies over the next week and half -- over the last week, there is still uncertainty there in the market and uncertainty is going to hit in a more near term basis.

I think the comment that we are making is that we see a robust market out there.

I think the growth; the turnaround in U.S.

Enterprise seemed to strengthen bookings.

You know, I view that as a positive sign and even the strength in enterprise bookings in Japan, although that a smaller part of our business, I view as a positive sign.

And you know we want to indicate that you know for the fiscal year what our goals are and may leave it at that.

So we should look at it as a longer-term goal with near-term uncertainty?

There's always going to be some uncertainty in this climate until we see some real overall stabilization.

And as I've mentioned, you know, what we've done is go from a bottoms up.

You know, we've had our sales teams in town and you know and gone through their forecast and their pipelines and you know when we look out over the four quarters, we were pretty confident of those goals.

Alright.

Thanks very much.

So operator, we'll take one more question.

Thank you.

Our next question comes from Jason Ader.

Please state your company name followed by your question.

Thomas Weisel Partners.

Last but not least, thanks.

I have a few questions.

First, could you tell us what the breakeven would be this quarter without the temporary -- for this first half of the fiscal year without the temporary cost reductions, cost measures?

And how much of the contribution does that have on a go-forward basis in other words?

You said, low 90s, so in other words would that be --?

Yes.

Without any temporary reductions, our breakeven point would be closer to 100m, give or take a couple of millions.

And then on the DSOs, why did they go down so substantially?

Well, the DSOs were actually up a little bit this quarter from the previous quarter.

If you look at it on a year-to-year comparison, they were down pretty substantially.

And it's primarily due to collections and shipments into the channel.

Okay.

So the -- the compare you gave us for last year not--.

Yeah.

Alright.

—-For the quarter they were 20 days.

Alright, great.

And then, last question, just I kind of -- I don't want to be the dead horse, Gordon on this near term, long-term thing but -- and it seems like in this environment its harder to forecast -- much harder to forecast long-term and easy to forecast near term even though its very difficult to forecast near term.

So, I am just trying to understand the rationale and going out with the target like you did for the whole fiscal year -- just given the uncertainty in the economy, given the uncertainty in, you know, the forecasting methodology today.

Now I understand you explained how you got to those numbers, but it just -- it just doesn't -- it just seems like there is disconnect between the current environment and your willingness to go out with these kinds of targets?

Well, Jason, it may be counterintuitive, although I don't think it’s a disconnect.

You know, when we look at it over a longer term and lets even go beyond in our fiscal year '04, and we put together all the forecasts from industry analysts and from some of your economists and others, and you look at the networking business in general and you look at specifically at the Layer 3 segment, there is some pretty robust growth being forecast by both Gartner and Dell'Oro group in the Layer 3 segment and really seen that becoming a dominant segment in enterprise.

You know you -- I think there is a lot of opportunities also in the Ethernet services or the metro-Ethernet space, once again in the longer term.

In a near term for us it's, I think it's a little a tougher to forecast because with deal size of a couple million dollars falling on one week in the quarter or the next week outside of the quarter, creates I guess I would call some lumpiness that’s a little tougher to forecast.

So you know I would say that as we go on a little further know we have some very, very competitive products in the pipeline that are giving us confidence, the overall Layer 3 forecasts are giving this confidence.

In the near term, there's some lumpiness and there still, sales cycles are a little bit unpredictable particularly here in the U.S. and something moves out a couple of weeks it can have a big impact.

So I hope that explains it.

Thanks very much.

Well with that we'd like to conclude and thank you every body for particularly in the West coast for getting up early with us this morning, and we'll look forward to speaking with you in the quarter.

Thank you very much.

Thank you.

Ladies and gentlemen this concludes the Extreme Networks fourth quarter 2003 earnings release conference call.

If you would like to listen to a replay of today's conference please dial 1-800-405-2236 or 303-590-3000 using the access number of 541-841.

Once again, if you'd like to listen to a replay today's conference please dial 1800-405-2236 or 303-590-3000 using the access number of 541-841.

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