Extreme Networks Reports Second Quarter Fiscal Year 2014 Financial Results
"We completed the acquisition of Enterasys on the final day of October making Extreme the fifth largest Ethernet switching company in the market. Our second quarter non-GAAP results, that were within our guidance on both revenue and earnings per share; demonstrate the scale we have achieved as a result of the acquisition," said
Fiscal Q2 2014 Financial Metrics:
Second Quarter | ||||||||||||||||||||||||||||
(in millions, except per share amounts and percentages) | ||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
2014 |
2013 |
Change | ||||||||||||||||||||||||||
GAAP Net Revenue |
||||||||||||||||||||||||||||
Product |
$ |
119.1 |
$ |
60.3 |
$ |
58.8 |
98% |
|||||||||||||||||||||
Service |
$ |
27.5 |
$ |
15.3 |
$ |
12.2 |
80% |
|||||||||||||||||||||
Total Net Revenue |
$ |
146.6 |
$ |
75.6 |
$ |
71.0 |
94% |
|||||||||||||||||||||
Gross Margin |
48% |
54% |
(6)% |
|||||||||||||||||||||||||
Operating Margin/Loss |
(9)% |
(5)% |
(4)% |
|||||||||||||||||||||||||
Net Income |
$ |
(16.0) |
$ |
(4.2) |
$ |
(11.8) |
||||||||||||||||||||||
Earnings per diluted share |
$ |
(0.17) |
$ |
(0.04) |
$ |
(0.13) |
||||||||||||||||||||||
Non-GAAP Net Revenue |
||||||||||||||||||||||||||||
Product |
$ |
119.1 |
$ |
60.3 |
$ |
58.8 |
98% |
|||||||||||||||||||||
Service |
$ |
29.2 |
$ |
15.3 |
$ |
13.9 |
91% |
|||||||||||||||||||||
Total Net Revenue |
$ |
148.3 |
$ |
75.6 |
$ |
72.7 |
96% |
|||||||||||||||||||||
Gross Margin |
56% |
54% |
2% |
|||||||||||||||||||||||||
Operating Margin |
11% |
4% |
7% |
|||||||||||||||||||||||||
Net Income |
$ |
14.1 |
$ |
2.8 |
$ |
11.3 |
||||||||||||||||||||||
Earnings per diluted share |
$ |
0.14 |
$ |
0.03 |
$ |
0.11 |
- Non-GAAP Gross margin for Q2 was 56.4%, an increase of two percentage points year over year and a decrease of two percentage points quarter over quarter.
- Cash and investments ended the quarter at
$112.0 million , as compared to$199.4 million from Q1 of fiscal 2014. We used$180 million related to the acquisition ofEnterasys Networks and acquired$100 million in debt during the quarter. - Accounts receivable balance ending Q2 was
$94.3 million , a (net) increase of$55.0 million from Q1 of fiscal 2014, with days sales outstanding (DSO) of 58, an increase of 11 days from Q1 of fiscal 2014. We recorded$25.7 million of accounts receivable as part of the Enterasys acquisition onOctober 31, 2013 . - Inventory ending Q2 was
$62.9 million , a (net) increase of$32.5 million from Q1 of fiscal 2014 and represents 85 days of inventory (DOI), a decrease of 14 days from Q1 of fiscal 2014. We recorded$33.7 million of inventory as part of the Enterasys acquisition onOctober 31, 2013 .
Recent Business Highlights:
Extreme Networks completed the acquisition ofEnterasys Networks for$180 million , net of cash acquired, onOctober 31 , 2013. The company also entered into a 5 year$125 million credit facility and drew$65 million in term debt and$35 million in revolver debt for the acquisition and to fund general corporate obligations. The company has$25 million remaining on the credit facility.Extreme Networks andEnterasys Networks' L2/3 Ethernet switch revenues during Q2 CY13 combined for #5 in overall market share among leading vendors, according to statistics from the Dell'Oro Group's 1Q13 L2/3 Ethernet market share report.- The
National Football League (NFL) and Super Bowl XLVIII namedExtreme Networks as its Official Wi-Fi Analytics Provider. - A Readers' Choice Top 100 Product award has been awarded to
Extreme Networks for itsIdentiFi Wireless solution byDistrict Administration magazine , a key source of information for school superintendents across the country. - Extreme introduced the Summit(R) X770, a groundbreaking, highly scalable Top of Rack (TOR) switch with market leading 10GbE density and investment protection aimed at data centers and big data.
Business Outlook:
Financial targets for the third fiscal quarter reflect the acquisition of
Financial Model Targets:
The company is targeting a quarterly financial model of operating at a non-GAAP operating income of 10% +/-, by the end of fiscal 2015. To achieve this goal, the company intends to focus on completing the integration of the two companies and growing its revenue with high performing and lower cost products and services.
The schedules attached to this release are an integral part of the release.
Conference Call:
About
For more information, visit the company's website at http://www.extremenetworks.com.
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 risk that the company may not obtain sufficient orders to achieve targeted revenues for the company's products and services given both increasing price competition in key network switching equipment markets and the need to align the company's cost structure to meet the company's financial goals; the company's effectiveness in controlling expenses, the risk that it or its distributors and other channel partners are not able to develop and expand customer bases and 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 risk that its results will suffer if it is unable to balance fluctuations in customer
demand and capacity; risks associated with the ramp-up of production of its new products and its entry into new business channels different from those in which it has historically operated; the risk that it may experience production delays that preclude it from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that 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; its ability to complete development and commercialization of products under development, such as its pipeline of new network switches and related software; its ability to lower costs; risks resulting from the concentration of business
among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; the rapid development of new technology and competing products that may impair demand or render its products obsolete; the potential lack of customer acceptance for new products; risks associated with ongoing litigation; a dependency on third parties for certain components and for the manufacturing of the company's products; our ability to receive the anticipated benefits of the acquisition of Enterasys; and the ability to meet and effectively manage the Company's debt obligations. More information about potential factors that could affect the company's business and financial results is included in its filings with the
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) | |||||||||||
|
| ||||||||||
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ |
68,304 |
$ |
95,803 |
|||||||
Short-term investments |
43,713 |
43,034 |
|||||||||
Accounts receivable, net of allowances of |
94,337 |
47,642 |
|||||||||
Inventories |
62,935 |
16,167 |
|||||||||
Deferred income taxes |
863 |
386 |
|||||||||
Prepaid expenses and other current assets |
15,273 |
5,749 |
|||||||||
Total current assets |
285,425 |
208,781 |
|||||||||
Property and equipment, net |
49,416 |
23,644 |
|||||||||
Marketable securities |
— |
66,776 |
|||||||||
Intangible assets |
109,146 |
4,243 |
|||||||||
Goodwill |
57,922 |
— |
|||||||||
Other assets, net |
15,546 |
7,980 |
|||||||||
Total assets |
$ |
517,455 |
$ |
311,424 |
|||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Current portion of long-term debt |
$ |
4,063 |
$ |
— |
|||||||
Accounts payable |
54,422 |
27,163 |
|||||||||
Accrued compensation and benefits |
26,557 |
13,503 |
|||||||||
Restructuring liabilities |
709 |
1,466 |
|||||||||
Accrued warranty |
4,618 |
3,296 |
|||||||||
Deferred revenue, net |
71,435 |
33,184 |
|||||||||
Deferred distributors revenue, net of cost of sales to distributors |
22,184 |
17,388 |
|||||||||
Other accrued liabilities |
25,701 |
16,502 |
|||||||||
Total current liabilities |
209,689 |
112,502 |
|||||||||
Deferred revenue, less current portion |
18,335 |
8,270 |
|||||||||
Long-term debt, less current portion |
95,125 |
— |
|||||||||
Other long-term liabilities |
9,913 |
1,507 |
|||||||||
Commitments and contingencies |
|||||||||||
Stockholders' equity |
184,393 |
189,145 |
|||||||||
Total liabilities and stockholders' equity |
$ |
517,455 |
$ |
311,424 |
|||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) | |||||||||||||||||||||||||||||||
Three Months Ended |
Six Months Ended | ||||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Net revenues: |
|||||||||||||||||||||||||||||||
Product |
$ |
119,065 |
$ |
60,259 |
$ |
180,109 |
$ |
121,378 | |||||||||||||||||||||||
Service |
27,518 |
15,292 |
42,389 |
30,300 | |||||||||||||||||||||||||||
Total net revenues |
146,583 |
75,551 |
222,498 |
151,678 | |||||||||||||||||||||||||||
Cost of revenues: |
|||||||||||||||||||||||||||||||
Product |
66,893 |
29,377 |
94,409 |
59,853 | |||||||||||||||||||||||||||
Service |
9,845 |
5,435 |
14,538 |
11,111 | |||||||||||||||||||||||||||
Total cost of revenues |
76,738 |
34,812 |
108,947 |
70,964 | |||||||||||||||||||||||||||
Gross profit: |
|||||||||||||||||||||||||||||||
Product |
52,172 |
30,882 |
85,700 |
61,525 | |||||||||||||||||||||||||||
Service |
17,673 |
9,857 |
27,851 |
19,189 | |||||||||||||||||||||||||||
Total gross profit |
69,845 |
40,739 |
113,551 |
80,714 | |||||||||||||||||||||||||||
Operating expenses: |
|||||||||||||||||||||||||||||||
Research and development |
18,896 |
11,007 |
28,832 |
21,573 | |||||||||||||||||||||||||||
Sales and marketing |
40,636 |
22,093 |
63,330 |
44,120 | |||||||||||||||||||||||||||
General and administrative |
11,189 |
6,644 |
18,125 |
12,003 | |||||||||||||||||||||||||||
Acquisition and integration costs |
8,688 |
— |
12,382 |
— | |||||||||||||||||||||||||||
Restructuring charge, net of reversals |
430 |
5,176 |
505 |
5,167 | |||||||||||||||||||||||||||
Amortization of intangibles |
3,778 |
— |
3,778 |
— | |||||||||||||||||||||||||||
Litigation settlement |
— |
(421) |
— |
(421) | |||||||||||||||||||||||||||
Gain on sale of facilities |
— |
— |
— |
(11,539) | |||||||||||||||||||||||||||
Total operating expenses |
83,617 |
44,499 |
126,952 |
70,903 | |||||||||||||||||||||||||||
Operating (loss) income |
(13,772) |
(3,760) |
(13,401) |
9,811 | |||||||||||||||||||||||||||
Interest income |
172 |
261 |
447 |
531 | |||||||||||||||||||||||||||
Interest expense |
(524) |
(1) |
(524) |
(1) | |||||||||||||||||||||||||||
Other expense, net |
(937) |
(300) |
(1,192) |
(649) | |||||||||||||||||||||||||||
(Loss) income before income taxes |
(15,061) |
(3,800) |
(14,670) |
9,692 | |||||||||||||||||||||||||||
Provision for income taxes |
925 |
406 |
1,352 |
983 | |||||||||||||||||||||||||||
Net (loss) income |
$ |
(15,986) |
$ |
(4,206) |
$ |
(16,022) |
$ |
8,709 | |||||||||||||||||||||||
Basic and diluted net income per share: |
|||||||||||||||||||||||||||||||
Net (loss) income per share - basic |
$ |
(0.17) |
$ |
(0.04) |
$ |
(0.17) |
$ |
0.09 | |||||||||||||||||||||||
Net (loss) income per share - diluted |
$ |
(0.17) |
$ |
(0.04) |
$ |
(0.17) |
$ |
0.09 | |||||||||||||||||||||||
Shares used in per share calculation - basic |
95,216 |
94,501 |
94,639 |
94,619 | |||||||||||||||||||||||||||
Shares used in per share calculation - diluted |
95,216 |
94,501 |
94,639 |
95,514 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) | |||||||||||||||
Six Months Ended | |||||||||||||||
|
| ||||||||||||||
Net cash (used in) provided by operating activities |
$ |
(4,869) |
$ |
8,077 | |||||||||||
Cash flows from investing activities: |
|||||||||||||||
Capital expenditures |
(12,562) |
(3,026) | |||||||||||||
Acquisition, net of cash acquired |
(180,000) |
— | |||||||||||||
Purchases of investments |
(9,045) |
(25,886) | |||||||||||||
Proceeds from maturities of investments and marketable securities |
20,062 |
9,322 | |||||||||||||
Proceeds from sales of investments and marketable securities |
54,578 |
8,447 | |||||||||||||
Purchases of intangible assets |
— |
(335) | |||||||||||||
Proceeds from sales of facilities |
— |
42,659 | |||||||||||||
Net cash (used in) provided by investing activities |
(126,967) |
31,181 | |||||||||||||
Cash flows from financing activities: |
|||||||||||||||
Draw on Revolving Facility |
35,000 |
— | |||||||||||||
Issuance of Term Loan |
65,000 |
— | |||||||||||||
Repayment of debt |
(813) |
— | |||||||||||||
Proceeds from issuance of common stock |
4,803 |
1,614 | |||||||||||||
Repurchase of common stock |
— |
(6,171) | |||||||||||||
Net cash provided by (used in) financing activities |
103,990 |
(4,557) | |||||||||||||
Foreign currency effect on cash |
347 |
469 | |||||||||||||
Net (decrease) increase in cash and cash equivalents |
(27,499) |
35,170 | |||||||||||||
Cash and cash equivalents at beginning of period |
95,803 |
54,596 | |||||||||||||
Cash and cash equivalents at end of period |
$ |
68,304 |
$ |
89,766 |
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 an 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 acquired intangibles, restructuring expenses and gains related to the sale of the
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 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 inventory and deferred revenue. Purchase accounting adjustments consists of adjustments to the carrying value of deferred revenue and the step up of the carrying value for finished goods inventory. 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.
Gains related to the sale of facilities. The one-time net gain related to the sale of the
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 |
Six Months Ended | |||||||||||||
|
|
|
| ||||||||||||
Revenue - GAAP Basis |
$ |
146,583 |
$ |
75,551 |
$ |
222,498 |
$ |
151,678 |
|||||||
Adjustments: |
|||||||||||||||
Purchase accounting adjustment |
$ |
1,764 |
$ |
— |
$ |
1,764 |
$ |
— |
|||||||
Revenue - Non-GAAP Basis |
$ |
148,347 |
$ |
75,551 |
$ |
224,262 |
$ |
151,678 |
|||||||
Non-GAAP Gross Margin |
Three Months Ended |
Six Months Ended | |||||||||||||
|
|
|
| ||||||||||||
Gross profit - GAAP Basis |
$ |
69,845 |
$ |
40,739 |
$ |
113,551 |
$ |
80,714 |
|||||||
Gross margin - GAAP Basis percentage |
47.6% |
53.9% |
51.0% |
53.2% |
|||||||||||
Adjustments: |
|||||||||||||||
Stock based compensation expense |
$ |
198 |
$ |
206 |
$ |
502 |
$ |
538 |
|||||||
Purchase accounting adjustments |
$ |
11,000 |
$ |
— |
$ |
11,000 |
$ |
— |
|||||||
Amortization of intangibles |
$ |
2,694 |
$ |
— |
$ |
2,694 |
$ |
— |
|||||||
Gross profit - Non-GAAP Basis |
$ |
83,737 |
$ |
40,945 |
$ |
127,748 |
$ |
81,252 |
|||||||
Gross margin - Non-GAAP Basis percentage |
56.4% |
54.2% |
57.0% |
53.6% |
|||||||||||
Non-GAAP Operating Income |
Three Months Ended |
Six Months Ended | |||||||||||||
|
|
|
| ||||||||||||
GAAP operating income |
$ |
(13,772) |
$ |
(3,760) |
$ |
(13,401) |
$ |
9,811 |
|||||||
GAAP operating income percentage |
(9.4)% |
(5.0)% |
(6.0)% |
6.5% |
|||||||||||
Adjustments: |
|||||||||||||||
Stock based compensation expense |
$ |
3,458 |
$ |
1,616 |
$ |
5,033 |
$ |
3,784 |
|||||||
Acquisition and integration costs |
$ |
8,688 |
$ |
— |
$ |
12,382 |
$ |
— |
|||||||
Restructuring charge, net of reversal |
$ |
430 |
$ |
5,176 |
$ |
505 |
$ |
5,167 |
|||||||
Amortization of intangibles |
$ |
6,472 |
$ |
— |
$ |
6,472 |
$ |
— |
|||||||
Purchase accounting adjustments |
$ |
11,000 |
$ |
— |
$ |
11,000 |
$ |
— |
|||||||
Litigation settlement |
$ |
— |
$ |
(421) |
$ |
— |
$ |
(421) |
|||||||
Gain of sale of facilities |
$ |
— |
$ |
— |
$ |
— |
$ |
(11,539) |
|||||||
Total adjustments to GAAP operating income |
$ |
30,048 |
$ |
6,371 |
$ |
35,392 |
$ |
(3,009) |
|||||||
Non-GAAP operating income |
$ |
16,276 |
$ |
2,611 |
$ |
21,991 |
$ |
6,802 |
|||||||
Non-GAAP operating income percentage |
11.0% |
3.5% |
9.8% |
4.5% |
|||||||||||
Non-GAAP Net Income |
Three Months Ended |
Six Months Ended | |||||||||||||
|
|
|
| ||||||||||||
GAAP net income |
$ |
(15,986) |
$ |
(4,206) |
$ |
(16,022) |
$ |
8,709 |
|||||||
Adjustments: |
|||||||||||||||
Stock based compensation expense |
$ |
3,458 |
$ |
1,616 |
$ |
5,033 |
$ |
3,784 |
|||||||
Acquisition and integration costs |
$ |
8,688 |
$ |
— |
$ |
12,382 |
$ |
— |
|||||||
Restructuring charge, net of reversal |
$ |
430 |
$ |
5,176 |
$ |
505 |
$ |
5,167 |
|||||||
Amortization of intangibles |
$ |
6,472 |
$ |
— |
$ |
6,472 |
$ |
— |
|||||||
Purchase accounting adjustments |
$ |
11,000 |
$ |
— |
$ |
11,000 |
$ |
— |
|||||||
Litigation settlement |
$ |
— |
$ |
(421) |
$ |
— |
$ |
(421) |
|||||||
Gain of sale of facilities |
$ |
— |
$ |
— |
$ |
— |
$ |
(11,539) |
|||||||
Currency loss from closing of a foreign subsidiary |
$ |
— |
$ |
616 |
$ |
— |
$ |
465 |
|||||||
Total adjustments to GAAP net income |
$ |
30,048 |
$ |
6,987 |
$ |
35,392 |
$ |
(2,544) |
|||||||
Non-GAAP net income |
$ |
14,062 |
$ |
2,781 |
$ |
19,370 |
$ |
6,165 |
|||||||
Earnings per share |
|||||||||||||||
Non-GAAP diluted net income per share |
$ |
0.14 |
$ |
0.03 |
$ |
0.20 |
$ |
0.06 |
|||||||
Shares used in diluted net income per share calculation |
98,352 |
94,501 |
97,023 |
95,514 |
|||||||||||
Free |
Three Months Ended |
Six Months Ended | |||||||||||||
|
|
|
| ||||||||||||
Cash flow used in operations |
$ |
(6,794) |
$ |
1,025 |
$ |
(4,869) |
$ |
8,077 |
|||||||
Add: PP&E CapEx spending |
(2,754) |
(1,464) |
(12,562) |
3,026 |
|||||||||||
Total free cash flow |
$ |
(9,548) |
$ |
(439) |
$ |
(17,431) |
$ |
11,103 |
SOURCE
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