Extreme Networks, Inc.
Aug 14, 2014
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Extreme Networks Reports Fourth Quarter and Fiscal Year 2014 Financial Results

Q4 GAAP Revenue of $155.3 million & non-GAAP Revenue of $156.9 million
Q4 GAAP EPS loss of $0.17 & non-GAAP EPS of $0.09
Fiscal Year GAAP Revenue of $519.6 million & non-GAAP Revenue of $524.8 million
Fiscal Year GAAP EPS loss of $0.60 & non-GAAP EPS of $0.30

SAN JOSE, Calif., Aug. 14, 2014 /PRNewswire/ -- Extreme Networks, Inc. (Nasdaq: EXTR) today released financial results for the fourth quarter of fiscal year 2014, ended June 30, 2014.  GAAP revenue was $155.3 million and non-GAAP revenue was $156.9 million.  GAAP net loss for the fourth fiscal quarter was $16.2 million, or $0.17 per share, and non-GAAP net income was $8.5 million, or $0.09 per diluted share.  This is the second quarter that Extreme Networks is reporting full quarter results that include the Enterasys acquisition.

Extreme Networks Logo

For the full fiscal year, Extreme Networks reported GAAP revenue of $519.6 million, compared to $299.3 million for fiscal 2013.  Fiscal year non-GAAP revenue was $524.8 million.  GAAP net loss was $57.3 million, or $0.60 per share, for fiscal 2014, compared to GAAP net income of $9.7 million, or $0.10 per diluted share, for 2013.  On a non-GAAP basis, net income for the fiscal 2014 was $29.5 million, or $0.30 per diluted share, compared to $16.2 million, or $0.17 per diluted share, for fiscal 2013.

"Extreme ended our first fiscal year as a combined company with a strong finish.  Our sales force integration is complete, with all territories rationalized, and the team is aligned and executing, which is evident in this quarter's results.  Our new channel program brings together legacy partner programs and provides better resources and incentives for our more than 2,700 worldwide partners.  With new branding rolled out this year, our go to market approach has never been stronger," said Chuck Berger, president and CEO of Extreme Networks.  "Our engineering team continues to create products that deliver on our promise of simple, fast and smart networking solutions, including our new SDN platform and IdentiFi outdoor wireless access point."

Berger added, "On the integration front, Extreme had a number of significant accomplishments.  Most notably, we successfully combined ERP systems in early July, two months ahead of schedule.  With our relationship to our customers, partners, distributors, vendors and employees united on a single interface, the combined company is in a better position than ever to seamlessly deliver value to the customer."

Fiscal Q4 2014 Financial Metrics:



Fourth Quarter









(in millions, except per share amounts and percentages)









(unaudited)









2014



2013



Change

GAAP Net Revenue













Product


$

121.8



$

64.5



$

57.3



89

%

Service


$

33.5



$

15.0



$

18.5



123

%

Total Net Revenue


$

155.3



$

79.5



$

75.8



95

%

Gross Margin


53.4

%


55.3

%


(1.9)%



(3)%


Operating Margin/Loss


(8.7)%



3.7

%


(12.0)%



(324)%


Net (Loss) Income


$

(16.2)



$

3.2



$

(19.4)



(606)%


Earnings per diluted share


$

(0.17)



$

0.03



$

(0.20)



(667)%















Non-GAAP Net Revenue













Product


$

121.8



$

64.5



$

57.3



89

%

Service


$

35.1



$

15.0



$

20.1



134

%

Total Net Revenue


$

156.9



$

79.5



$

77.4



97

%

Gross Margin


56.9

%


55.3

%


1.6

%


3

%

Operating Margin


7.2

%


8.2

%


(1.0)%



(12)%


Net Income


$

8.5



$

6.7



$

1.8



27

%

Earnings per diluted share


$

0.09



$

0.07



$

0.02



29

%

  • Cash and investments ended the quarter at $105.9 million, as compared to $106.1 million from the prior quarter.
  • Accounts receivable balance ending Q4 was $124.7 million, with non-GAAP days sales outstanding (DSO) of 72, both impacted by heavy shipments near the end of the quarter.
  • Inventory ending Q4 was $57.1 million, a decrease of $6 million from the prior quarter, due to continued right sizing of inventory.

Recent Business Highlights:                                                                 

  • Selected by Tennessee Titans to set up In-Stadium Wi-Fi and Analytics. Extreme's IdentiFi high performance Wi-Fi technology will provide fans the capability to seamlessly access mobile services and custom applications in the Nashville's LP Field.
  • Announced an open and standards-based Software Defined Networking (SDN) platform. This versatile offering will enable customers to meet challenges in implementing SDN and evolve data center orchestration, automation and provisioning.
  • Advances mobile scalability with IdentiFiTM Wireless LAN. With the addition of the 802. 11ac WLAN outdoor access point, IdentiFi is one of the most complete and scalable enterprise Wi-Fi solutions addressing both indoor and outdoor wireless connectivity.
  • Named proud partner of the Pro Football Hall of Fame. Centered on education and community outreach in K-12 school districts, the partnership highlights Extreme's leadership as a provider of optimized networking and wireless solutions to support education innovation.
  • Launched Extreme Partner Network. The program offers a single global framework to simplify the way business is done, empowering partners to deliver significant value to customers while simplifying engagement and maximizing partner profitability.
  • Recognized as a leader and innovator
    • Named a "Champion" in the 2014 Vendor Landscape report assessing Network Access Control solutions for secure network edge.
    • Awarded the 2014 Network Innovation Award for the Purview application by SearchNetworking.
    • Recognized with two 2014 Manufacturing Leadership Awards.

Business Outlook:
For its first quarter of fiscal 2015 ending September 30, 2014, the Company is targeting GAAP revenue in a range of $149 million to $154 million with non-GAAP revenue in a range of $150 million to $155 million. GAAP gross margin is targeted at 51% and non-GAAP gross margin targeted at 55%. Operating expenses are targeted to be between $86 million and $88 million on a GAAP basis and $75 million to $77 million on a non-GAAP basis. GAAP net loss is targeted to be between $7 million to $12 million, or $0.08 to $0.12 per diluted share.  Non-GAAP net income is targeted in a range of $6 million to $8 million, or $0.06 to $0.08 per diluted share. The GAAP and non-GAAP net income targets are based on an estimated 96 million and 101 million average outstanding shares, respectively. The estimates for non-GAAP revenue include purchase accounting adjustments for deferred revenue of approximately $1M related to our acquisition of Enterasys Networks. The estimates for non-GAAP gross margin include adjustments of $4 million for amortization of intangibles, $1 million for purchase accounting adjustments and $1 million stock based compensation expense. The estimate for non-GAAP operating expenses exclude $7 to $8M for amortization of intangibles and integration expenses related to our acquisition of Enterasys Networks, stock based compensation expenses of $4 to $5 million and executive transition costs of $0.5 million.

Financial Model Targets:
The Company is targeting a quarterly financial model of operating at an approximate non-GAAP operating income of 10%, exiting the fiscal year ending June 30, 2015.  To achieve this goal, the Company intends to focus on completing the integration of the two companies, achieving its synergy goals and growing its revenue.

Conference Call:
Extreme Networks will host a conference call at 5:00 p.m. Eastern (2:00 p.m. Pacific) today to review the highlights of the fourth fiscal quarter 2014 and business outlook, including significant factors and assumptions underlying the targets noted above. The conference call will be available to the public through a live audio web broadcast via the Internet at http://investor.extremenetworks.com and a replay of the call will be available on the website through August 13, 2015.  The conference call may also be heard by dialing 1-877-303-9826 (international callers dial 1-224-357-2194). Supplemental 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 including the non-GAAP reconciliation attached to this press release. The encore recording can be accessed by dialing (855) 859-2056 /or international 1 (404) 537-3406; Conference ID #: 74641489.

About Extreme Networks:
Extreme Networks, Inc. (NASDAQ: EXTR) is setting a new standard for superior customer experience by delivering network-powered innovation and marketing leading service and support. Extreme Networks delivers high-performance switching and routing products for data center and core-to-edge networks, wired/wireless LAN access, and unified network management and control.  Its award-winning solutions include software-defined networking (SDN), cloud and high-density Wi-Fi, BYOD and enterprise mobility, identity access management and security.  Extreme Networks is headquartered in San Jose, CA and has more than 12,000 customers in over 80 countries. For more information, visit the Company's website at http://www.extremenetworks.com.

Non-GAAP Financial Measures:
Extreme Networks provides all financial information required in accordance with generally accepted accounting principles (GAAP). To supplement its consolidated financial statements presented in accordance with GAAP, the Company is also providing with this press release non-GAAP net income/(loss) and non-GAAP operating income/(loss) financial measures. In preparing non-GAAP information, the company has excluded, where applicable, the impact of acquisition and integration costs, purchase accounting adjustments, amortization of acquired intangibles, restructuring charges, executive transition costs, share-based compensation, gain on sale of facilities and litigation settlements.  The company believes that excluding these items provides both management and investors with additional insight into its 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 the Company's historical performance and in planning its future business activities. Please note that the company's non-GAAP measures may be different than those used by other companies. The additional non-GAAP financial information the company presents should be considered in conjunction with, and not as a substitute for, the company's financial information presented in accordance with GAAP.  The Company has provided a non-GAAP reconciliation of the Condensed Consolidated Statement of Operations for the periods presented in this release, which are adjusted to exclude acquisition and integration costs, purchase accounting adjustments, amortization of acquired intangibles, restructuring charges, share-based compensation expense and gain on sale of facilities 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.

Forward Looking Statements:
Actual results, including with respect to the Company's financial targets and general business prospects, could differ materially due to a number of factors, including the risks that:

  • The Company may not achieve targeted revenues for the Company's products and services given increasing price competition and product technology developments in key network switching equipment markets;
  • The Company may be unable to effectively integrate the businesses of Extreme Networks and Enterasys Networks, both in terms of customer acceptance of combined product lines as well as the need to align the Company's cost structure to meet the company's financial goals, including controlling expenses, and meet financial covenants as part of the Company's debt financing used to acquire Enterasys Networks;
  • The Company may not accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as it experiences wide fluctuations in supply and demand;
  • The Company is dependent on third parties to manufacture its products and any potential production delays could preclude the Company from shipping sufficient quantities to meet customer orders or could result in higher production costs and lower margins;
  • Ongoing uncertainty in global economic conditions, infrastructure development or customer demand could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments;
  • The Company may be unable to complete development and commercialization of products under development, such as its pipeline of new network switches and related software;
  • The Company may be adversely affected by ongoing litigation.

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.  Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Extreme Networks disclaims any obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)






June 30, 2014


June 30, 2013







ASSETS






Current assets:






Cash and cash equivalents

$

73,190



$

95,803


Short-term investments

32,692



43,034


Accounts receivable, net of allowances of $3,618 at June 30, 2014 and $1,252 at June 30, 2013

124,664



47,642


Inventories

57,109



16,167


Deferred income taxes

1,058



386


Prepaid expenses and other current assets

15,562



5,749


Total current assets

304,275



208,781


Property and equipment, net

46,554



23,644


Marketable securities



66,776


Intangible assets, net

87,459



4,243


Goodwill

69,458




Other assets, net

18,686



7,980


Total assets

$

526,432



$

311,424


LIABILITIES AND STOCKHOLDERS' EQUITY






Current liabilities:






Current portion of long-term debt

$

29,688



$


Accounts payable

37,308



27,163


Accrued compensation and benefits

26,677



13,503


Restructuring liabilities

322



1,466


Accrued warranty

7,551



3,296


Deferred revenue, net

74,735



33,184


Deferred distributors revenue, net of cost of sales to distributors

31,992



17,388


Other accrued liabilities

38,035



16,502


Total current liabilities

246,308



112,502


Deferred revenue, less current portion

22,942



8,270


Long-term debt, less current portion

91,875




Other long-term liabilities

8,595



1,507


Commitments and contingencies






Stockholders' equity

156,712



189,145


Total liabilities and stockholders' equity

$

526,432



$

311,424


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)






Three Months Ended