Extreme Networks Reports First Quarter Fiscal Year 2015 Financial Results
"Our top line results were impacted by market conditions that caused customers to delay buying decisions beyond our first quarter. Sales in
"During the quarter, we made significant progress towards finalizing the integration of the acquisition of Enterasys: successfully converging on a single ERP system, closing the
"On
Fiscal Q1 2015 Financial Metrics: | |||||||||||||||
First Quarter | |||||||||||||||
(in millions, except per share amounts and percentages) | |||||||||||||||
(unaudited) | |||||||||||||||
2015 |
2014 |
Change | |||||||||||||
GAAP Net Revenue |
|||||||||||||||
Product |
$ |
102.7 |
$ |
61.0 |
$ |
41.7 |
68% |
||||||||
Service |
33.6 |
$ |
14.9 |
$ |
18.7 |
126% |
|||||||||
Total Net Revenue |
$ |
136.3 |
$ |
75.9 |
$ |
60.4 |
80% |
||||||||
Gross Margin |
51.8% |
57.6% |
(5.8)% |
(10)% |
|||||||||||
Operating (Loss) Margin |
(12.6)% |
0.5% |
(13.1)% |
(2,620)% |
|||||||||||
Net Loss |
$ |
(19.3) |
$ |
— |
$ |
(19.3) |
100% |
||||||||
Loss per diluted share |
$ |
(0.20) |
$ |
— |
$ |
(0.20) |
100% |
||||||||
Non-GAAP Net Revenue |
|||||||||||||||
Product |
$ |
102.7 |
$ |
61.0 |
$ |
41.7 |
68% |
||||||||
Service |
$ |
34.4 |
$ |
14.9 |
$ |
19.5 |
131% |
||||||||
Total Net Revenue |
$ |
137.1 |
$ |
75.9 |
$ |
61.2 |
81% |
||||||||
Gross Margin |
55.6% |
57.8% |
(2.2)% |
(4)% |
|||||||||||
Operating Margin |
0.9% |
7.5% |
(6.6)% |
(88)% |
|||||||||||
|
$ |
(0.9) |
$ |
5.3 |
$ |
(6.2) |
(117)% |
||||||||
(Loss) Earnings per diluted share |
$ |
(0.01) |
$ |
0.06 |
$ |
(0.07) |
(117)% |
- Cash and investments ended the quarter at
$104.5 million , as compared to$105.9 million from the prior quarter. - Accounts receivable balance ending Q1 was
$100 million , with days sales outstanding (DSO) of 67. - Inventory ending Q1 was
$55.3 million , a decrease of$1.8 million from the prior quarter, due to continued right-sizing of inventory.
Recent Business Highlights:
- Extended venue business to
NBA andNHL . During the quarter, we extended our venue business with our firstNBA andNHL venues. We also announced wins at theCincinnati Bengals ,Jacksonville Jaguars andTennessee Titans during the quarter as well as our first Division One football venue atBaylor University . - Announced Microsoft Lync qualification. Extreme is the first vendor to achieve SDN and Quality of Service (QoS) qualification for both wired and wireless hardware. With the certification, Extreme's wired and wireless hardware are now easier to deploy in increasingly popular unified communications environments.
- Unveiled high performance, high density, edge switch. Providing exceptional port density in a small form factor; Extreme's new Summit® X460-G2 offers core-class intelligent switching and routing with high-performance cross stacking technology and options for
1/10/40 GbE uplinks. It is powered by ExtremeXOS®, our modular operating system and, like all Extreme switches, the Summit X460-G2 is optimized to work with NetSight® management and Purview™ analytics applications and is SDN ready. - Launched new IdentiFi™ offering. With all of the features and functionality that are offered within Extreme's mobility portfolio, the IdentiFi 3805 discreet access point provides customers with a low cost entry point into the IdentiFi wireless product line.
Business Outlook:
For its second quarter of fiscal 2015 ending
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
Conference Call:
About
Non-GAAP Financial Measures:
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;
- 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 effectively integrate the businesses of
Extreme Networks andEnterasys 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 meeting financial covenants as part of the Company's debt financing used to acquireEnterasys 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;
- 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.
The matters set forth in this press release 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. Because such statements deal with future events, they are subject to risks and uncertainties. Other important factors that could cause actual results to differ materially are contained in the Company's 10-Qs and 10-Ks that are on file with the
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) | |||||||
|
| ||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
74,067 |
$ |
73,190 |
|||
Short-term investments |
30,395 |
32,692 |
|||||
Accounts receivable, net of allowances of |
99,980 |
124,664 |
|||||
Inventories |
55,341 |
57,109 |
|||||
Deferred income taxes |
1,069 |
1,058 |
|||||
Prepaid expenses and other current assets |
13,486 |
14,143 |
|||||
Total current assets |
274,338 |
302,856 |
|||||
Property and equipment, net |
46,258 |
46,554 |
|||||
Intangible assets, net |
78,710 |
87,459 |
|||||
Goodwill |
70,877 |
70,877 |
|||||
Other assets, net |
18,867 |
18,686 |
|||||
Total assets |
$ |
489,050 |
$ |
526,432 |
|||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current liabilities: |
|||||||
Current portion of long-term debt |
$ |
30,500 |
$ |
29,688 |
|||
Accounts payable |
29,994 |
37,308 |
|||||
Accrued compensation and benefits |
21,712 |
26,677 |
|||||
Restructuring liabilities |
186 |
322 |
|||||
Accrued warranty |
7,889 |
7,551 |
|||||
Deferred revenue, net |
72,599 |
74,735 |
|||||
Deferred distributors revenue, net of cost of sales to distributors |
26,060 |
31,992 |
|||||
Other accrued liabilities |
35,768 |
38,035 |
|||||
Total current liabilities |
224,708 |
246,308 |
|||||
Deferred revenue, less current portion |
21,968 |
22,942 |
|||||
Long-term debt, less current portion |
90,250 |
91,875 |
|||||
Other long-term liabilities |
9,014 |
8,595 |
|||||
Commitments and contingencies |
|||||||
Stockholders' equity |
143,110 |
156,712 |
|||||
Total liabilities and stockholders' equity |
$ |
489,050 |
$ |
526,432 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) | |||||||
Three Months Ended | |||||||
|
| ||||||
|
|||||||
Product |
$ |
102,672 |
$ |
61,045 |
|||
Service |
33,602 |
14,871 |
|||||
Total net revenues |
136,274 |
75,916 |
|||||
Cost of revenues: |
|||||||
Product |
54,025 |
27,516 |
|||||
Service |
11,722 |
4,693 |
|||||
Total cost of revenues |
65,747 |
32,209 |
|||||
Gross profit: |
|||||||
Product |
48,647 |
33,529 |
|||||
Service |
21,880 |
10,178 |
|||||
Total gross profit |
70,527 |
43,707 |
|||||
Operating expenses: |
|||||||
Research and development |
23,347 |
9,937 |
|||||
Sales and marketing |
44,779 |
22,694 |
|||||
General and administrative |
11,074 |
6,934 |
|||||
Acquisition and integration costs |
4,058 |
3,695 |
|||||
Restructuring charge, net of reversals |
— |
75 |
|||||
Amortization of intangibles |
4,467 |
— |
|||||
Total operating expenses |
87,725 |
43,335 |
|||||
Operating (loss) income |
(17,198) |
372 |
|||||
Interest income |
146 |
275 |
|||||
Interest expense |
(836) |
— |
|||||
Other expense, net |
(434) |
(255) |
|||||
(Loss) income before income taxes |
(18,322) |
392 |
|||||
Provision for income taxes |
1,008 |
427 |
|||||
|
$ |
(19,330) |
$ |
(35) |
|||
Basic and diluted net (loss) income per share: |
|||||||
|
$ |
(0.20) |
$ |
— |
|||
|
$ |
(0.20) |
$ |
— |
|||
Shares used in per share calculation - basic |
97,314 |
94,062 |
|||||
Shares used in per share calculation - diluted |
97,314 |
94,062 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) | |||||||
Three Months Ended | |||||||
|
| ||||||
|
$ |
1,632 |
$ |
1,925 |
|||
Cash flows from investing activities: |
|||||||
|
(2,784) |
(9,808) |
|||||
Proceeds from maturities of investments and marketable securities |
2,000 |
13,062 |
|||||
Purchases of intangible assets |
(252) |
— |
|||||
|
(1,036) |
3,254 |
|||||
Cash flows from financing activities: |
|||||||
Borrowings under Revolving Facility |
24,000 |
— |
|||||
Repayment of debt |
(24,813) |
— |
|||||
Proceeds from issuance of common stock |
1,738 |
1,799 |
|||||
|
925 |
1,799 |
|||||
Foreign currency effect on cash |
(644) |
227 |
|||||
|
877 |
7,205 |
|||||
Cash and cash equivalents at beginning of period |
73,190 |
95,803 |
|||||
Cash and cash equivalents at end of period |
$ |
74,067 |
$ |
103,008 |
Non-GAAP Measures of Financial Performance
To supplement the Company's consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP,
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,
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
For its internal planning process, and as discussed further below, Extreme Network's management uses financial statements that do not include stock-based compensation expense, acquisition and integration costs, purchase accounting adjustments, amortization of intangibles, and restructuring expenses.
As described above,
Stock based compensation expense. This expense consists of expenses for stock options, restricted stock and employee stock purchases through its ESPP.
Acquisition and integration costs. Acquisition and integration costs primarily consist of legal and professional fees, severance costs, and other expenses related to the acquisition and integration of Enterasys Inc.
Amortization of intangibles. Amortization of 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.
Purchase accounting adjustments relating to deferred revenue. Purchase accounting adjustments 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
Restructuring expenses. Restructuring expenses primarily consist of cash severance and termination benefits.
In addition to the non-GAAP measures discussed above,
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS GAAP TO NON-GAAP RECONCILIATION (In thousands, except per share amounts) (Unaudited) | |||||||
Non-GAAP Revenue |
Three Months Ended | ||||||
|
| ||||||
Revenue - GAAP Basis |
$ |
136,274 |
$ |
75,916 |
|||
Adjustments: |
|||||||
Purchase accounting adjustments |
$ |
766 |
$ |
— |
|||
Revenue - Non-GAAP Basis |
$ |
137,040 |
$ |
75,916 |
|||
Non-GAAP Gross Margin |
Three Months Ended | ||||||
|
| ||||||
Gross profit - GAAP Basis |
$ |
70,527 |
$ |
43,707 |
|||
Gross margin - GAAP Basis percentage |
51.8% |
57.6% |
|||||
Adjustments: |
|||||||
Stock based compensation expense |
$ |
574 |
$ |
142 |
|||
Purchase accounting adjustments |
$ |
766 |
$ |
— |
|||
Amortization of intangibles |
$ |
4,292 |
$ |
— |
|||
Gross profit - Non-GAAP Basis |
$ |
76,159 |
$ |
43,849 |
|||
Gross margin - Non-GAAP Basis percentage |
55.6% |
57.8% |
|||||
Non-GAAP Operating Income |
Three Months Ended | ||||||
|
| ||||||
GAAP operating (loss) income |
$ |
(17,198) |
$ |
372 |
|||
GAAP operating (loss) income percentage |
(12.6)% |
0.5% |
|||||
Adjustments: |
|||||||
Stock based compensation expense |
$ |
4,813 |
$ |
1,575 |
|||
Acquisition and integration costs |
$ |
4,058 |
$ |
3,695 |
|||
Restructuring charge, net of reversal |
$ |
— |
$ |
75 |
|||
Amortization of intangibles |
$ |
8,759 |
$ |
— |
|||
Purchase accounting adjustments |
$ |
766 |
$ |
— |
|||
Total adjustments to GAAP operating income |
$ |
18,396 |
$ |
5,345 |
|||
Non-GAAP operating income |
$ |
1,198 |
$ |
5,717 |
|||
Non-GAAP operating income percentage |
0.9% |
7.5% |
|||||
Non-GAAP Net Income |
Three Months Ended | ||||||
|
| ||||||
GAAP net loss |
$ |
(19,330) |
$ |
(35) |
|||
Adjustments: |
|||||||
Stock based compensation expense |
$ |
4,813 |
$ |
1,575 |
|||
Acquisition and integration costs |
$ |
4,058 |
$ |
3,695 |
|||
Restructuring charge, net of reversal |
$ |
— |
$ |
75 |
|||
Amortization of intangibles |
$ |
8,759 |
$ |
— |
|||
Purchase accounting adjustments |
$ |
766 |
$ |
— |
|||
Total adjustments to GAAP net income |
$ |
18,396 |
$ |
5,345 |
|||
Non-GAAP net (loss) income |
$ |
(934) |
$ |
5,310 |
|||
Earnings per share |
|||||||
Non-GAAP diluted net (loss) income per share |
$ |
(0.01) |
$ |
0.06 |
|||
Shares used in diluted net income per share calculation |
97,314 |
95,695 |
|||||
Free Cash Flow |
Three Months Ended | ||||||
|
| ||||||
Cash flow provided by operations |
$ |
1,632 |
$ |
1,925 |
|||
Add: PP&E CapEx spending |
$ |
(2,784) |
$ |
(9,808) |
|||
Total free cash flow |
$ |
(1,152) |
$ |
(7,883) |
|||
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