Extreme Networks, Inc.
Jan 31, 2011
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Extreme Networks Reports Q2 in Line With Previous Guidance

Product Revenue Increased 9 Percent Year over Year

SANTA CLARA, Calif., Jan. 31, 2011 /PRNewswire/ -- Extreme Networks, Inc. (Nasdaq: EXTR) today announced financial results for its 2011 fiscal second quarter ended December 26, 2010.  For the quarter, total net revenue increased seven percent to $85.1 million, as compared to $79.4 million in the second quarter last year.  Previously issued guidance to investors was for net revenue of $85-$88 million.

"Both EMEA and APAC posted solid performance, again this quarter," said Oscar Rodriguez, President & CEO of Extreme Networks.  "Product revenue in North America increased about 8 percent over Q2 last year, but did not improve from Q1 as we had expected.  We have just appointed a new vice president of NA Sales and have reorganized North America to provide improved customer focus."

Rodriguez continued, "We have completed a review of our Company strategy.  While we will continue to serve the broader Enterprise Campus, Data Center and Service Provider markets, we will specifically focus our efforts and resources on identified high-growth verticals within those broader markets.  As a result, we believe this will enable us to grow revenue in high-growth vertical markets.  Further, aimed at continuing to improve financial performance, during mid January, we took actions to reduce headcount by approximately 35 employees or roughly 5% of worldwide headcount.  This action will result in a restructuring charge in Q3 between $1.0 million to $1.5 million.  Additionally, we have initiated cost reduction programs aimed at driving additional efficiencies throughout the Company.  We believe these actions are targeted to expand gross margins and accelerate our ability to reach our stated target of double-digit operating income.  Going forward, we believe these actions will lower our operating expense by up to $2 million per quarter and $8 million annually."

Second quarter non-GAAP operating income was $5.3 million or 6.2% percent of net revenue, representing a significant improvement as compared to operating income of $4.2 million or 5.3% of net revenue in the second quarter last year.  Non-GAAP operating income in the 2011 fiscal first quarter was $4.6 million or 5.5 percent of net revenue.

In the second quarter the Company reported non-GAAP net income of $5.1 million or $0.06 per diluted share.  That compares to a non-GAAP net income of $4.8 million or $0.05 per diluted share in the second quarter last year, and to non-GAAP net income of $4.8 million or $0.05 per diluted share in the 2011 fiscal first quarter.  Non-GAAP financial results exclude the impact of stock-based compensation, restructuring charges and litigation settlements.  A reconciliation of GAAP to non-GAAP financial measures is included in the accompanying financial tables.

Operating income on a GAAP basis was $9.1 million for the quarter, representing a significant improvement as compared to an operating loss of $2.0 million for the second quarter of last year. The second quarter this year benefited from the net favorable impact of $4.2 million in litigation settlements.  In the second quarter last year, operating income included a restructuring charge of $4.1 million.  Reported operating income was $2.5 million in the 2011 fiscal first quarter.

Net income on a GAAP basis for quarter was $8.9 million or $0.10 per diluted share, including the net favorable impact of $4.2 in litigation settlements.  That compares to a net loss of $1.4 million or $0.02 loss per diluted share in the second quarter last year, including the impact of the restructuring charge of $4.1 million.  In the 2011 fiscal first quarter, net income on a GAAP basis was $2.7 million or $0.03 per diluted share.

For the quarter, total net revenue in North America was $28.0 million, revenue in EMEA was $40.0 million, and revenue in APAC was $17.1 million.  That compares to revenue of $27.5 million in North America, $37.8 million in EMEA, and $14.1 million in APAC a year-ago.

Total cash and investments increased $6.0 million from the first quarter to $141.7 million and the Company has no long-term debt.  Cash and investments were favorably impacted by the collection of $3.8 million cash related to the settlement on property litigation and positive cash flow from operations.

2011 Fiscal Third Quarter non-GAAP Financial Guidance

For its 2011 fiscal third quarter ending March 27, 2011, the Company currently expects net revenue to be in a range of $82-$85 million and non-GAAP net income, before a charge related to the realignment of our strategy, of $0.05 to $0.08 per diluted share.  In conjunction with the realignment of our strategy we anticipate to write-off assets between $4.0 million to $4.5 million or $0.04 to $0.05 per diluted share.

Conference Call and Slide Presentation

Extreme Networks will host a conference call to discuss these results today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time).  The conference call may be heard by dialing 1-877-303-9826 (international callers dial 1-224-357-2194).  A 7-day replay will be available following the call by dialing 1-800-642-1687 (international callers dial 1-706-645-9291).  The conference call passcode is 35088115.  In addition, a live webcast and replay of the call will be available at http://investor.extremenetworks.com.  Financial information to be discussed during the conference call will be posted in the Investor Relations section of the Company's website www.extremenetworks.com.

Non-GAAP Financial Measures

Extreme Networks provides all financial information required in accordance with generally accepted accounting principles (GAAP).  To supplement our consolidated financial statements presented in accordance with GAAP, we are also providing with this press release non-GAAP net income/(loss), non-GAAP operating income/(loss) and non-GAAP earnings/(loss) per diluted share.  In preparing our non-GAAP information, we have excluded, where applicable, the impact of restructuring charges, share-based compensation and litigation settlements.  We believe that excluding these items provides both management and investors with additional insight into our current operations, the trends affecting the Company and the Company's marketplace performance.  In particular, management finds it useful to exclude these items in order to more readily correlate the Company's operating activities with the Company's ability to generate cash from operations.  Accordingly, management uses these non-GAAP measures, along with the comparable GAAP information, in evaluating our historical performance and in planning our future business activities.  Please note that our non-GAAP measures may be different than those used by other companies.  The additional non-GAAP financial information we present should be considered in conjunction with, and not as a substitute for, our financial information presented in accordance with GAAP.  We have provided a non-GAAP reconciliation of the Condensed Consolidated Statement of Operations for the periods presented in this release, which are adjusted to exclude restructuring charges, share-based compensation expense and litigation settlements for these periods.  These measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures for comparable financial information and understanding of the Company's ongoing performance as a business.  Extreme Networks uses both GAAP and non-GAAP measures to evaluate and manage its operations.

Extreme Networks, Inc.

Extreme Networks provides converged Ethernet network infrastructures that support data, voice and video for enterprises and service providers. The company's network solutions feature high performance, high availability and scalable switching solutions that enable organizations to address real-world communications challenges and opportunities. Operating in more than 50 countries, Extreme Networks provides wired and wireless secure LANs, data center infrastructure and Service Provider Ethernet transport solutions that are complemented by global, 24x7 service and support. For more information, visit: http://www.extremenetworks.com

Extreme Networks is either a trademark or registered trademark of Extreme Networks, Inc. in the United States and/or other countries.

This announcement contains forward-looking statements, including our guidance regarding future results, that involve risks and uncertainties, including statements regarding the Company's expectations regarding financial performance and product introduction.  Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including, but not limited to: a challenging macro-economic environment both in the United States and overseas; fluctuations in demand for the Company's products and services; a highly competitive business environment for network switching equipment; the Company's effectiveness in controlling expenses, the possibility that the Company might experience delays in the development of new technology and products; customer response to its new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation, and a dependency on third parties for certain components and for the manufacturing of the Company's products.  The Company undertakes no obligation to update the forward-looking information in this release.  More information about potential factors that could affect the Company's business and financial results is included in its filings with the Securities and Exchange Commission, including, without limitation, under the captions: "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors," which are on file with the Securities and Exchange Commission."

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)







December 26,



June 27,


2010



2010


(unaudited)









ASSETS





Current assets:






Cash and cash equivalents

$                 46,878



51,944


Short-term investments

43,625



64,854


Accounts receivable, net

46,820



42,057


Inventories, net

24,218



21,842


Deferred income taxes

338



392


Prepaid expenses and other current assets, net

7,944



3,932



Total current assets

169,823



185,021

Property and equipment, net

42,722



43,572

Marketable securities

51,182



18,561

Other assets, net

15,572



15,731



Total assets

$               279,299



262,885







LIABILITIES AND STOCKHOLDERS' EQUITY





Current liabilities:






Accounts payable

$                 16,109



18,543


Accrued compensation and benefits

17,751



16,305


Restructuring liabilities

1,693



3,097


Accrued warranty

2,811



3,169


Deferred revenue, net  

32,982



29,552


Deferred revenue, net of cost of sales to distributors

17,106



18,345


Other accrued liabilities

18,608



13,381



Total current liabilities

107,060



102,392








Restructuring liabilities, less current portion

-



273

Deferred revenue, less current portion

7,145



7,633

Deferred income taxes

108



731

Other long-term liabilities

56



2,661







Commitments and contingencies

-



-







Stockholders' equity:






Convertible preferred stock, $.001 par value, issuable in series, 2,000,000 shares






 authorized; none issued

-



-


Common stock, $.001 par value, 750,000,000 shares authorized;






130,881,110 issued at December 26, 2010 and 129,827,715 at June 27, 2010

131



130


Treasury stock, 39,625,305 at December 26, 2010 and June 27, 2010

(149,666)



(149,666)


Additional paid-in-capital

959,530



956,792


Accumulated other comprehensive income

2,455



1,100


Accumulated deficit

(647,520)



(659,161)



Total stockholders' equity

164,930



149,195



Total liabilities and stockholders' equity

$               279,299



262,885



EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)






































Three Months Ended


Six Months Ended





December 26,


December 27,


December 26,


December 27,





2010


2009


2010


2009

Net revenues:











Product



$                 70,334


$                 64,469


$               139,547


$       115,228


Service



14,797


14,928


29,421


30,478




Total net revenues

85,131


79,397


168,968


145,706












Cost of revenues:









Product



30,893


27,199


61,723


50,917


Service



6,257


6,435


12,428


12,266




Total cost of revenues

37,150


33,634


74,151


63,183












Gross profit:









Product



39,441


37,270


77,824


64,311


Service



8,540


8,493


16,993


18,212




Total gross profit

47,981


45,763


94,817


82,523












Operating expenses:









Sales and marketing

25,087


24,613


49,993


46,282


Research and development

12,028


12,444


24,889


26,055


General and administrative

5,963


6,520


12,548


13,765


Restructuring charge, net of reversal

-


4,145


-


3,633


Litigation settlement

(4,200)


-


(4,200)


-




Total operating expenses

38,878


47,723


83,230


89,735












Operating income (loss) 

9,103


(1,960)


11,587


(7,212)

Interest income 

332


388


661


710

Interest expense 

(29)


(30)


(59)


(69)

Other expense 

117


(40)


(158)


(117)

Income (loss) before income taxes

9,523


(1,642)


12,031


(6,688)

Provision for income taxes 

594


(263)


390


173









Net income (loss) 

$                   8,929


$                 (1,379)


$                 11,641


$         (6,861)












Basic and diluted net income (loss) per share:








Net income (loss) per share - basic

$                     0.10


$                   (0.02)


$                     0.13


$           (0.08)

Net income (loss) per share - diluted

$                     0.10


$                   (0.02)


$                     0.13


$           (0.08)

Shares used in per share calculation - basic

90,878


89,059


90,592


88,951

Shares used in per share calculation - diluted

91,274


89,059


90,942


88,951



EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)













Six Months Ended



December 26,


December 27,



2010


2009

Cash flows from operating activities:





 Net income (loss)


$                  11,641


$              (6,861)

 Adjustments to reconcile net income (loss) to net cash




       provided by operating activities:





    Depreciation and amortization


3,148


3,023

    Change in value / loss on value of UBS option to put securities

2,429


47

    Auction rate securities mark to market, trading gain

(2,429)


(47)

    Provision for doubtful accounts


30


-

    Excess and obsolete inventory


(100)


960

    Deferred income taxes


(569)


(69)

    Loss on retirement of assets


109


78

    Stock-based compensation


2,485


3,158

    Restructuring charge, net of reversal


-


3,633

    Changes in operating assets and liabilities, net





      Accounts receivable


(4,793)


(2,982)

      Inventories


(2,294)


(5,216)

      Prepaid expenses and other assets


(3,855)


(3)

      Accounts payable


(2,434)


9,410

      Accrued compensation and benefits


1,447


(689)

      Restructuring liabilities


(1,677)


(4,418)

      Accrued warranty


(359)


60

      Deferred revenue, net


2,943


1,231

      Deferred revenue, net of cost of sales to distributors

(1,239)


6,365

      Other accrued liabilities


6,576


2,156

      Other long-term liabilities


(2,605)


(1)

 Net cash provided by operating activities


8,454


9,835






Cash flows used in investing activities:





 Capital expenditures


(2,407)


(2,720)

 Purchases of investments


(70,147)


(18,958)

 Proceeds from maturities of investments and marketable securities

11,800


8,775

 Proceeds from sales of investments and marketable securities

46,961


6,377

 Net cash used in investing activities


(13,793)


(6,526)






Cash flows provided by financing activities:





 Proceeds from issuance of common stock


273


397

 Net cash provided by financing activities


273


397






 Net (decrease) increase in cash and cash equivalents

(5,066)


3,706

Cash and cash equivalents at beginning of period

51,944


49,233

Cash and cash equivalents at end of period


$                  46,878


$             52,939



EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

GAAP TO NON-GAAP RECONCILIATION

(In thousands, except per share amounts)

(Unaudited)








Three Months Ended


Six Months Ended


December 26,

December 27,


December 26,

December 27,


2010

2009


2010

2009







Net income (loss)- GAAP Basis

$                          8,929

$                        (1,379)


$                              11,641

$                                 (6,861)







Non-GAAP adjustments




Stock-based compensation expense

$                             350

$                          2,030


$                                2,466

$                                   3,166

Litigation settlement

$                                  (4,200)

$                               -


$                              (4,200)

$                                        -

Restructuring charge, net of reversal

$                                -

$                          4,145


$                                      -

$                                   3,633


$                        (3,850)

$                          6,175


$                              (1,734)

$                                   6,799







Net income (loss)  - Non-GAAP Basis

$                          5,079

$                          4,796


$                                9,907

$                                      (62)







Non-GAAP adjustments






Cost of product revenue

$                               15

155


$                                   214

$                                      223

Cost of service revenue

5

146


149

221

Sales and marketing

388

683


960

979

Research and development

(118)

611


493

986

General and administrative

60

435


650

757

Litigation settlement

(4,200)

-


(4,200)

-

Restructuring charge, net of reversal

-

4,145


-

3,633

Total non-GAAP adjustments

$                        (3,850)

$                          6,175


$                              (1,734)

$                                   6,799



SOURCE Extreme Networks, Inc.

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