Extreme Networks, Inc.
EXTREME NETWORKS INC (Form: 8-K, Received: 11/07/2017 16:12:39)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (date of earliest event reported): November 7, 2017

 

EXTREME NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

Delaware

 

000-25711

 

77-0430270

(State or other jurisdiction

of incorporation)

 

(Commission

File No.)

 

(I.R.S. Employer

Identification No.)

 

6480 Via Del Oro

San Jose, California 95119

(Address of principal executive offices)

Registrant's telephone number, including area code:

(408) 579-2800

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 


Item 2.02 Results of Operations and Financial Condition

On November 7, 2017, Extreme Networks, Inc. issued a press release announcing certain financial results for the quarter ended September 30, 2017. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated herein by reference in its entirety.

The information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 to this Current Report on Form 8-K, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information contained in this Item 2.02 and in the accompanying Exhibit 99.1 shall not be incorporated by reference into any registration statement or other document filed by Extreme Networks with the Securities and Exchange Commission, whether made before or after the date of this Current Report, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference to this Item 2.02 and Exhibit 99.1 in such filing.

 

 

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

 

99.1

 

Press Release dated November 7, 2017.

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: November 7, 2017

 

EXTREME NETWORKS, INC.

 

 

 

By:

 

/s/ B. DREW  DAVIES

 

 

B. Drew Davies

 

 

Executive Vice President, Chief Financial Officer (Principal Accounting Officer)

 

Exhibit 99.1

FOR IMMEDIATE RELEASE

 

 

 

 

 

For more information, contact:

 

 

 

 

 

Investor Relations

Laurie Little

 

Media Contact

Ben Haber

212/481-2050

 

617/624-3200

extreme@tpr-ir.com

 

ExtremeUS@racepointglobal.com

 

Extreme Networks Reports First Quarter Fiscal Year 2018 Financial Results

 

SAN JOSE, Calif., November 7, 2017 -- Extreme Networks, Inc. (“Extreme”) (Nasdaq: EXTR) today released financial results for its fiscal first quarter ended September 30, 2017.

 

First Quarter Results:   

 

 

First quarter revenue was $211.7 million, an increase of 73% year-over-year.

 

 

GAAP gross margin for the first fiscal quarter was 53.1% and non-GAAP gross margin was 56.7%.  

 

 

GAAP operating margin for the first fiscal quarter was 2.1% and non-GAAP operating margin was 10.6%, an increase of 540 and 280 basis points, respectively, year-over-year.  

 

 

GAAP net income for the first fiscal quarter was $4.4 million, or $0.04 per diluted share. Non-GAAP net income was $18.6 million, or $0.16 per diluted share, an increase of $10.8 million and $0.09, respectively, year-over-year.

 

Our first quarter results exceeded our expectations on both the top and bottom line, making this our tenth consecutive quarter of solid financial performance and a strong start to our fiscal year,” stated Ed Meyercord, President and CEO of Extreme Networks.  “We are especially pleased to report another consecutive quarter of organic growth primarily driven by our enterprise switching solutions and solid wireless performance that was above current industry growth rates. Our continued financial improvement, combined with our accretive acquisitions, continues to drive us toward our goal of greater than 15% operating margins by the end of fiscal 2018.”

 

“With the completion of the acquisitions of the Avaya and Brocade campus and data center networking businesses, our teams are working hard to ensure a smooth transition for our new customers, partners and employees,” continued Meyercord. “The newly refreshed product and software portfolios we acquired positions us to expand our market share with cross-selling opportunities and increased penetration across our targeted verticals.  We believe our improved position as a Visionary in the 2017 Gartner Magic Quadrant for Wired and Wireless LAN Access Infrastructure compared to the previous year provides further evidence of the innovation and quality of our products and solutions, and supports our strategy of providing, end-to-end, networking solutions for enterprise customers from the access edge to the data center with 100% insourced customer service.”

 

Recent Key Events :


 

Completed Acquisition of Brocade’s Data Center Business : Extreme announced the closing of its acquisition of Brocade Communications Systems, Inc.’s datacenter switching , routing and analytics business. This acquisition secures Extreme’s position as the third largest player in the enterprise networking market and includes the VDX, MLX, SLX, CES, CER, Workflow Composer, Automation Suites, and certain other data center related products that enhance Extreme’s data center technology portfolio.

 

Industry Recognition : For the third consecutive year, Extreme has been positioned furthest to the right and this year, is also positioned highest to the top by Gartner, Inc. in the "Visionaries" quadrant of the Gartner Magic Quadrant 1 for Wired and Wireless LAN Access Infrastructure. In addition, Extreme is rated in Gartner’s Peer Insights among 21 vendors in the Data Center Hardware Networking category. As of October 31, 2017, Extreme has an overall rating of 4.8 out of 5 based on 65 customer reviews.

 

First Product Announcement Integrating Avaya’s Networking Technology : To address the time constraints and resources spent on managing complex networks, Extreme introduced its Secure Automated Campus™, a cost-effective alternative to outdated traditional networking solutions that delivers plug-and-play simplicity and true business agility. The solution combines Avaya's field-proven Fabric Connect infrastructure, Extreme's industry-leading Extreme Management Center ™ and Extreme's top-ranked support services to eliminate networking complexity, increase security and deliver increased visibility into the network.

 

Introduced New WiNG Solution for Hospitality Deployments: Extreme announced its ExtremeWireless™ WiNG AP 7612 designed to support the specific needs of the hospitality industry. With the WiNG AP 7612, Extreme offers customers a solution with hotel-grade aesthetics, faster installation and application Quality of Service right at the AP.

 

1  

   Gartner, Inc.: Magic Quadrant for the Wire and Wireless LAN Access Infrastructure, Tim Zimmerman, Christian Canales, Bill Menezes, October 17, 2017

 

Disclaimer: Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consis t of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a part icular purpose.

 

Disclaimer: Gartner Peer Insights reviews constitute the subjective opinions of individual end-users based on their own experiences, and do not represent the views of Gartner or its affiliates.

Fiscal Q1 2018 Financial Metrics:

(in mil lions, except percentages and per share information)

 


 

 

Q1 FY'18

 

 

Q1 FY'17

 

 

Change

 

 

 

 

 

 

 

(As adjusted)

 

 

 

 

 

 

 

 

 

GAAP Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

164.8

 

 

$

90.1

 

 

$

74.7

 

 

 

83

%

Service

 

 

46.9

 

 

 

32.5

 

 

 

14.4

 

 

 

44

%

Total Net Revenue

 

$

211.7

 

 

$

122.6

 

 

$

89.1

 

 

 

73

%

Gross Margin

 

 

53.1

%

 

 

53.7

%

 

-60bps

 

 

 

(1

)%

Operating Margin

 

 

2.1

%

 

 

(3.3

)%

 

540bps

 

 

 

164

%

Net Income (Loss)

 

$

4.4

 

 

$

(5.7

)

 

$

10.1

 

 

 

177

%

Income (loss) per basic and diluted share

 

$

0.04

 

 

$

(0.05

)

 

$

0.09

 

 

 

180

%

Non-GAAP Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

164.8

 

 

$

90.1

 

 

$

74.7

 

 

 

83

%

Service

 

 

46.9

 

 

 

32.6

 

 

 

14.3

 

 

 

44

%

Total Net Revenue

 

$

211.7

 

 

$

122.7

 

 

$

89.0

 

 

 

73

%

Gross Margin

 

 

56.7

%

 

 

56.8

%

 

-10bps

 

 

NM

 

Operating Margin

 

 

10.6

%

 

 

7.8

%

 

280bps

 

 

 

36

%

Net Income

 

$

18.6

 

 

$

7.8

 

 

$

10.8

 

 

 

139

%

Earnings per diluted share

 

$

0.16

 

 

$

0.07

 

 

$

0.09

 

 

 

129

%

 

 

 

With the adoption of new revenue recognition accounting guidance (“ASC 606”) in FY’18, we have adjusted prior periods.  The impact of these adjustments are to the balance sheet and income statement, are noted with “as adjusted”.

 

Cash and investments ended the quarter at $154.1 million, an increase of $22.6 million from the prior quarter and an increase of $50.8 million from the prior year.

 

Accounts receivable balance ending Q1 was $116.5 million, with days sales outstanding (“DSO”) of 51.

 

Q1 ending inventory was $58.1 million, an increase of $10.7 million from the prior quarter and an increase of $13.4 million from the prior year.

 

Business Outlook :

 

Extreme’s Business Outlook is based on current expectations.  The following statements are forward-looking, and actual results could differ materially based on market conditions and the factors set forth under “Forward-Looking Statements” below.

 

For its second quarter of fiscal 2018 ending December 31, 2017, the Company is targeting revenue in a range of $236.0 million to $246.0 million.  GAAP gross margin is targeted between 52.5% and 54.1% and non-GAAP gross margin is targeted between 56.9% and 58.4%. Operating expenses are targeted to be between $158.9 million and $162.9 million on a GAAP basis and $117.5 million to $121.5 million on a non-GAAP basis. GAAP earnings are targeted to be between a net loss of $40.2 million to $35.0 million or a loss of $(0.35) to $(0.31) per basic share.  Non-GAAP earnings are targeted in a range of net income of $12.5 million to $17.0 million, or $0.10 to $0.14 per diluted share. The GAAP net loss targets are based on 113.9 million average outstanding shares and non-GAAP net income targets are based on an estimated 119.7 million average outstanding shares.  Included in the GAAP Guidance is a charge of $25.0 million which was paid to Broadcom to allow Extreme to acquire the datacenter assets directly from Brocade.  This $25.0 million was included in the total purchase consideration previously disclosed.


 

The following table shows the GAAP to non-GAAP reconciliation for Q2 FY’18 guidance:

 

Gross Margin      Rate

 

 

Operating Margin Rate

 

 

Earnings per     Share

 

GAAP

52.5% - 54.1%

 

 

(14.8)% - (12.1)%

 

 

$(0.35)-$(0.31)

 

Estimated adjustments for:

 

 

 

 

 

 

 

 

 

 

 

Amortization of product intangibles

 

2.1%

 

 

 

3.7%

 

 

$

0.08

 

Stock based compensation

 

0.3%

 

 

 

2.3%

 

 

$

0.05

 

Amortization of non product intangibles

 

0.4%

 

 

 

2.3%

 

 

$

0.05

 

Acquisition and integration costs

 

1.5%

 

 

 

13.0%

 

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP

56.9% - 58.4%

 

 

7.2% - 9.0%

 

 

$0.10 - $0.14

 

 

The total of percentage rate changes may not equal the total change in all cases due to rounding.

 

Conference Call:

Extreme will host a conference call at 4:30 p.m. Eastern (1:30 p.m. Pacific) today to review the first fiscal quarter results as well as the second fiscal quarter 2018 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 November 7, 2018.  The conference call may also be heard by dialing 1 (877) 303-9826 / or international 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 1 (855) 859-2056 /or international 1 (404) 537-3406   Conference ID # 98898524.

 

About Extreme Networks:

Extreme Networks, Inc. (EXTR) delivers software-driven networking solutions that help IT departments everywhere deliver the ultimate business outcome: stronger connections with customers, partners and employees. Wired to wireless, desktop to datacenter, on premise or through the cloud, we go to extreme measures for our customers in more than 80 countries, delivering 100% insourced call-in technical support to organizations large and small, including some of the world’s leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, and manufacturing. Founded in 1996, Extreme is headquartered in San Jose, California. For more information, visit Extreme's website or call 1-888-257-3000.

 

Extreme Networks and the Extreme Networks logo, Extreme Management Center, ExtremeWireless, ExtremeWireless WiNG, Extreme Secure Automated Campus, ExtremeControl, ExtremeAnalytics, and ExtremeCloud are either trademarks or registered trademarks of  Extreme Networks, Inc.  in  the United States  and/or other countries.

 

Non-GAAP Financial Measures:

Extreme provides all financial information required in accordance with generally accepted accounting principles (“GAAP”). The Company is providing with this press release non-GAAP gross margins, non-GAAP operating expenses, non-GAAP net income and non-GAAP earnings per share. In preparing non-GAAP information, the Company has excluded, where applicable, the impact of share-based compensation, acquisition and integration costs, purchase accounting adjustments, acquired inventory


adjustments, amortization of acquired intangibles and other income.  The Company believes that excluding these items provides both management and investors with additional insight into its current operations, the trends affecting the Company, the Company's marketplace performance, and the Company's abilit y to generate cash from operations. Please note 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 s ubstitute for, the Company's GAAP financial information.  

 

The Company has provided a non-GAAP reconciliation of the results for the periods presented in this release, which are adjusted to exclude certain items as indicated.  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:

Statements in this release, including those concerning the Company’s business outlook, future financial and operating results, any anticipated benefits related to the asset acquisition with Avaya and Brocade and overall future prospects are forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this release. Actual results or events could differ materially from those anticipated in those forward-looking statements as a result of certain factors, including: our ability to realize the anticipated benefits of the acquisition of the WLAN business from Zebra Technologies Corporation, the networking business from Avaya and the data center switching, routing and analytics business  assets from Brocade;  our ability to successfully integrate the acquired technologies and operations from the Avaya and  Brocade assets into our business and operations;  failure to achieve targeted revenues and forecasted demand from end customers; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development or introduction of new technology and products; customer response to our new technology and products; risks related to pending or future litigation; and a dependency on third parties for certain components and for the manufacturing of our products.  

 

More information about potential factors that could affect the Company's business and financial results is included in the Company’s 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".  Except as required under the U.S. federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission, 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.

 

 

 

 

 


EX TREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

 

September 30,

2017

 

 

June 30,

2017

 

 

 

 

 

 

 

(As adjusted)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

153,014

 

 

$

130,450

 

Accounts receivable, net of allowance for doubtful accounts of $1,685 at September 30, 2017 and $1,190 at June 30, 2017

 

 

116,500

 

 

 

93,115

 

Inventories

 

 

58,100

 

 

 

47,410

 

Prepaid expenses and other current assets

 

 

18,237

 

 

 

27,867

 

Total current assets

 

 

345,851

 

 

 

298,842

 

Property and equipment, net

 

 

38,627

 

 

 

30,240

 

Intangible assets, net

 

 

67,328

 

 

 

25,337

 

Goodwill

 

 

118,554

 

 

 

80,216

 

Other assets

 

 

27,524

 

 

 

25,065

 

Total assets

 

$

597,884

 

 

$

459,700

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

17,863

 

 

$

12,280

 

Accounts payable

 

 

50,567

 

 

 

31,587

 

Accrued compensation and benefits

 

 

38,810

 

 

 

42,662

 

Accrued warranty

 

 

13,499

 

 

 

10,584

 

Deferred revenue, net

 

 

90,705

 

 

 

79,048

 

Other accrued liabilities

 

 

52,335

 

 

 

37,044

 

Total current liabilities

 

 

263,779

 

 

 

213,205

 

Deferred revenue, less current portion

 

 

28,500

 

 

 

25,293

 

Long-term debt, less current portion

 

 

149,729

 

 

 

80,422

 

Deferred income taxes

 

 

7,204

 

 

 

6,576

 

Other long-term liabilities

 

 

13,235

 

 

 

8,526

 

Commitments and contingencies

 

 

-

 

 

 

-

 

Stockholders’ equity

 

 

135,437

 

 

 

125,678

 

Total liabilities and stockholders’ equity

 

$

597,884

 

 

$

459,700

 


EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

 

(As adjusted)

 

Net revenues:

 

 

 

 

 

 

 

 

Product

 

$

164,774

 

 

$

90,093

 

Service

 

 

46,941

 

 

 

32,511

 

Total net revenues

 

 

211,715

 

 

 

122,604

 

Cost of revenues:

 

 

 

 

 

 

 

 

Product

 

 

80,045

 

 

 

44,249

 

Service

 

 

19,289

 

 

 

12,469

 

Total cost of revenues

 

 

99,334

 

 

 

56,718

 

Gross profit:

 

 

 

 

 

 

 

 

Product

 

 

84,729

 

 

 

45,844

 

Service

 

 

27,652

 

 

 

20,042

 

Total gross profit

 

 

112,381

 

 

 

65,886

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

34,285

 

 

 

18,299

 

Sales and marketing

 

 

55,561

 

 

 

36,859

 

General and administrative

 

 

12,185

 

 

 

8,287

 

Acquisition and integration costs

 

 

4,244

 

 

 

2,321

 

Amortization of intangibles

 

 

1,614

 

 

 

4,142

 

Total operating expenses

 

 

107,889

 

 

 

69,908

 

Operating income (loss)

 

 

4,492

 

 

 

(4,022

)

Interest income

 

 

647

 

 

 

57

 

Interest expense

 

 

(2,215

)

 

 

(647

)

Other income (expense), net

 

 

3,127

 

 

 

(223

)

Income (loss) before income taxes

 

 

6,051

 

 

 

(4,835

)

Provision for income taxes

 

 

1,675

 

 

 

907

 

Net income (loss)

 

$

4,376

 

 

$

(5,742

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

0.04

 

 

$

(0.05

)

Net income (loss) per share - diluted

 

$

0.04

 

 

$

(0.05

)

Shares used in per share calculation - basic

 

 

112,241

 

 

 

105,955

 

Shares used in per share calculation - diluted

 

 

118,431

 

 

 

105,955

 

 


EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

Net cash provided by operating activities

 

$

18,598

 

 

$

9,574

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,421

)

 

 

(1,635

)

Acquisitions

 

 

(68,047

)

 

 

-

 

Proceeds from sale of equity investment

 

 

4,922

 

 

 

-

 

Net cash used in investing activities

 

 

(70,546

)

 

 

(1,635

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

80,000

 

 

 

-

 

Loan fees on borrowings

 

 

(1,494

)

 

 

 

 

Repayments of debt

 

 

(4,093

)

 

 

(3,250

)

Proceeds from issuance of common stock, net of tax

 

 

42

 

 

 

3,416

 

Net cash provided by financing activities

 

 

74,455

 

 

 

166

 

 

 

 

 

 

 

 

 

 

Foreign currency effect on cash

 

 

57

 

 

 

38

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

22,564

 

 

 

8,143

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

130,450

 

 

 

94,122

 

Cash and cash equivalents at end of period

 

$

153,014

 

 

$

102,265

 


Extreme Networks, Inc.

Non-GAAP Measures of Financial Performance

 

To supplement the Company's consolidated financial statements presented in accordance with generally accepted accounting principles, ("GAAP"), Extreme Networks uses non-GAAP measures of certain components of financial performance.  These non-GAAP measures include non-GAAP net income, non-GAAP earnings per diluted share, non-GAAP gross margin, non-GAAP operating expenses and free cash flow.

 

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release.  In this press release, Extreme Networks also presents its target for non-GAAP expenses, which is expenses less share-based compensation expense, acquisition and integration costs, purchase accounting adjustments, acquired inventory adjustments, amortization of acquired intangibles and other income.

 

Non-GAAP measures presented in this press release are not in accordance with or alternative measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies.  In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles.  Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Extreme Networks' results of operations as determined in accordance with GAAP.  These non-GAAP measures should only be used to evaluate Extreme Networks' results of operations in conjunction with the corresponding GAAP measures.

 

Extreme believes these non-GAAP measures when shown in conjunction with the corresponding GAAP measures enhance investors' and management's overall understanding of the Company's current financial performance and the Company's prospects for the future, including cash flows available to pursue opportunities to enhance shareholder value.  In addition, because Extreme Networks has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company's financial reporting.

 

For its internal planning process, and as discussed further below, Extreme's management uses financial statements that do not include share-based compensation expense, acquisition and integration costs, purchase accounting adjustments, acquired inventory adjustment, amortization of intangibles and other income.  Extreme’s management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.

 

As described above, Extreme excludes the following items from one or more of its non-GAAP measures when applicable.

 

Share-based compensation . This expense consists of expenses for stock options, restricted stock and employee stock purchases through its ESPP.  Extreme Networks excludes share-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses that the Company does not believe are reflective of ongoing cash requirement related to operating results. Extreme Networks expects to incur share-based compensation expenses in future periods.

 

Acquisition and integration costs. Acquisition and integration costs consist of legal and professional fees related to the acquisition of a) Zebra Technologies Corporation’s wireless LAN business b) Avaya, Inc.’s networking assets, as well as the fabric-based secure networking solutions and network security solutions business of Avaya, Inc., and c) Brocade’s data center assets; Extreme Networks excludes these expenses since they result from an event that is outside the ordinary course of continuing operations.


Purchase accounting adjustments .  Purchase accounting adjustments relating to deferred revenue consists of adjustments to the carrying value of deferred revenue.  We have recorded adjustments to the assumed deferred revenue to reflect only a fulfillment margin and thereby excluding the profit margin and revenue which would have been incurred had Extreme Networks entered into the service contract post-acqui sition.

 

Acquired inventory adjustments .   Purchase accounting adjustments relating to the mark up of acquired inventory to fair value less disposal costs.

 

Amortization of acquired intangibles.   Amortization of acquired intangibles includes the monthly amortization expense of acquired intangible assets such as developed technology, customer relationships, trademarks and order backlog.  The amortization of the developed technology intangible is recorded in product cost of goods sold, while the amortization for the other intangibles are recorded in operating expenses.  Extreme Networks excludes these non-cash expenses since they result from an intangible asset and for which the period expense does not impact the operations of the business and are non-cash in nature.

 

Other income . Other income consists of the gain on the sale of our equity investment in a private company.

 

In addition to the non-GAAP measures discussed above, Extreme uses free cash flow as a measure of operating performance.  Free cash flow represents operating cash flows less net purchase of property and equipment on a GAAP basis.  Extreme considers free cash flows to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, which can then be used to, among other things, invest in Extreme’s business, make strategic acquisitions, and strengthen the balance sheet.  A limitation of the utility of free cash flows as a measure of financial performance is that it does not represent the total increase or decrease in the Company's cash balance for the period.

 

 


EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

GAAP TO NON-GAAP RECONCILIATION

(In thousands, except percentages and per share amounts)

(Unaudited)

 

 

 

 

Non-GAAP Revenue

Three Months Ended

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

(As adjusted)

 

Revenue - GAAP Basis

$

211,715

 

 

$

122,604

 

Adjustments:

 

 

 

 

 

 

 

Purchase accounting adjustment

 

-

 

 

 

133

 

Revenue - Non-GAAP Basis

$

211,715

 

 

$

122,737

 

 

Non-GAAP Gross Margin

Three Months Ended

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

(As adjusted)

 

Gross profit - GAAP Basis

$

112,381

 

 

$

65,886

 

Gross margin - GAAP Basis percentage

 

53.1

%

 

 

53.7

%

Adjustments:

 

 

 

 

 

 

 

Stock based compensation expense

 

225

 

 

 

300

 

Purchase accounting adjustments

 

-

 

 

 

133

 

Acquired inventory adjustments

 

2,938

 

 

 

-

 

Acquisition and integration costs

 

1,846

 

 

 

-

 

Amortization of intangibles

 

2,564

 

 

 

3,417

 

Total adjustments to GAAP gross profit

$

7,573

 

 

$

3,850

 

Gross profit - Non-GAAP

$

119,954

 

 

$

69,736

 

Gross margin - Non-GAAP percentage

 

56.7

%

 

 

56.8

%

 

Non-GAAP Operating Income

Three Months Ended

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

(As adjusted)

 

GAAP operating income (loss)

$

4,492

 

 

$

(4,022

)

GAAP operating income (loss) percentage

 

2.1

%

 

 

(3.3

)%

Adjustments:

 

 

 

 

 

 

 

Stock based compensation expense

 

4,803

 

 

 

3,475

 

Acquisition and integration costs

 

6,090

 

 

 

2,321

 

Acquired inventory adjustments

 

2,938

 

 

 

-

 

Amortization of intangibles

 

4,178

 

 

 

7,559

 

Purchase accounting adjustments

 

-

 

 

 

133

 

Executive transition costs

 

-

 

 

 

34

 

Litigation

 

-

 

 

 

27

 

Total adjustments to GAAP operating income (loss)

$

18,009

 

 

$

13,549

 

Non-GAAP operating income

$

22,501

 

 

$

9,527

 

Non-GAAP operating income percentage

 

10.6

%

 

 

7.8

%

 


Non-GAAP Net Income

Three Months Ended

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

(As adjusted)

 

GAAP net income (loss)

$

4,376

 

 

$

(5,742

)

Adjustments:

 

 

 

 

 

 

 

Stock based compensation expense

 

4,803

 

 

 

3,475

 

Acquisition and integration costs

 

6,090

 

 

 

2,321

 

Amortization of intangibles

 

4,178

 

 

 

7,559

 

Acquired inventory adjustments

 

2,938

 

 

 

-

 

Purchase accounting adjustments

 

-

 

 

 

133

 

Executive transition costs

 

-

 

 

 

34

 

Litigation

 

-

 

 

 

27

 

Gain on sale of equity investment

 

(3,757

)

 

 

-

 

Total adjustments to GAAP net income (loss)

$

14,252

 

 

$

13,549

 

Non-GAAP net income

$

18,628

 

 

$

7,807

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

Non-GAAP net income per share-diluted

$

0.16

 

 

$

0.07

 

 

 

 

 

 

 

 

 

Shares used in net income per share-diluted

 

 

 

 

 

 

 

Non-GAAP shares used

 

118,431

 

 

 

107,275

 

 

 

Free Cash Flow

Three Months Ended

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

(As adjusted)

 

Cash flow provided by operations

$

18,598

 

 

$

9,574

 

Less: PP&E CapEx spending

 

(7,421

)

 

$

(1,635

)

Total free cash flow

$

11,177

 

 

$

7,939