Extreme Networks Reports Third Quarter Fiscal Year 2014 Financial Results
"Revenues of the combined Company grew three percent on a pro forma basis when compared to the prior year, with growth across all four sales regions. During the quarter we also had a number of product introductions including the release of our 802.11ac wireless products and our 100GbE blade for the BlackDiamond® X8. NetSight 6.0 was also released bringing network control and visibility, long enjoyed by the Enterasys installed base, to Extreme products. We also expanded our relationship with the
Berger added, "The integration efforts following the acquisition of Enterasys continue ahead of plan with the next major milestone, combining our ERP onto a single platform, on target to occur early in the first fiscal quarter of 2015. Once completed, we will be able to truly operate as a single Company and realize further cost synergies from the acquisition."
Fiscal Q3 2014 Financial Metrics: |
|||||||||||
Third Quarter |
|||||||||||
(in millions, except per share amounts and percentages) |
|||||||||||
(unaudited) |
|||||||||||
2014 |
2013 |
Change |
|||||||||
GAAP Net Revenue |
|||||||||||
Product |
$ |
109.9 |
$ |
54.1 |
$ |
55.8 |
103% |
||||
Service |
$ |
31.9 |
$ |
14.1 |
$ |
17.8 |
126% |
||||
Total Net Revenue |
$ |
141.8 |
$ |
68.2 |
$ |
73.6 |
108% |
||||
Gross Margin |
50% |
56% |
(6)% |
||||||||
Operating Margin/Loss |
(17)% |
(3)% |
(14)% |
||||||||
Net Income |
$ |
(25.1) |
$ |
(2.2) |
$ |
(22.9) |
|||||
Earnings per diluted share |
$ |
(0.26) |
$ |
(0.02) |
$ |
(0.24) |
|||||
Non-GAAP Net Revenue |
|||||||||||
Product |
$ |
109.9 |
$ |
54.1 |
$ |
55.8 |
103% |
||||
Service |
$ |
33.8 |
$ |
14.1 |
$ |
19.7 |
140% |
||||
Total Net Revenue |
$ |
143.7 |
$ |
68.2 |
$ |
75.5 |
111% |
||||
Gross Margin |
55% |
56% |
(1)% |
||||||||
Operating Margin |
2% |
5% |
(3)% |
||||||||
Net Income |
$ |
1.6 |
$ |
3.3 |
$ |
(1.7) |
|||||
Earnings per diluted share |
$ |
0.02 |
$ |
0.04 |
$ |
(0.02) |
-
Non-GAAP Revenue of
$143.7 million increased three percent compared to$139.5 million from the pro forma combined company year over year. -
Cash and investments ended the quarter at
$106.1 million , as compared to$112.0 million from the prior quarter -
Accounts receivable balance ending Q3 was
$94.2 million , flat with the prior quarter, with non-GAAP days sales outstanding (DSO) of 59, an increase of 1 day from the prior quarter. -
Inventory ending Q3 was
$63.1 million , flat with the prior quarter and represents 104 non-GAAP days of inventory (DOI), an increase of 16 days from the prior quarter.
Recent Business Highlights:
-
Won the 2014 Gold Stevie Award for Contact
Service Center of the Year. - Unveiled new high performance enterprise wireless solutions featuring wireless 802.11ac, and new BlackDiamond® X8 100GbE IO modules for the data center. Both products are now generally available and have begun shipping.
-
Released NetSight 6.0 Centralized management and is
Extreme Networks primary network management software solution providing automated provisioning leading to rapid problem identification and resolution across the entire network. -
Purview, an application analytics application intelligence gathering tool at Layer 7 directly enables rapid decisions for better business outcomes and was selected as a finalist for Best of
Interop 2014 Awards. -
IdentiFi™
Wireless LAN Wins Network Computing Magazine's Wireless Product of the Year
Business Outlook:
For its fourth quarter of fiscal 2014 ending
CFO Transition
The Company also announced that
"I am very pleased that Ken will be joining the team. He is an experienced CFO, a seasoned leader, and has a solid track record to build on the great work we have done to take
"I want to thank John for his many contributions to
"Working at
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;
-
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 meet 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;
- 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's 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
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) |
|||||
|
|
||||
ASSETS |
|||||
Current assets: |
|||||
Cash and cash equivalents |
$ |
71,355 |
$ |
95,803 |
|
Short-term investments |
34,700 |
43,034 |
|||
Accounts receivable, net of allowances of |
94,187 |
47,642 |
|||
Inventories |
63,142 |
16,167 |
|||
Deferred income taxes |
846 |
386 |
|||
Prepaid expenses and other current assets |
16,552 |
5,749 |
|||
Total current assets |
280,782 |
208,781 |
|||
Property and equipment, net |
47,209 |
23,644 |
|||
Marketable securities |
— |
66,776 |
|||
Intangible assets, net |
97,205 |
4,243 |
|||
Goodwill |
64,537 |
— |
|||
Other assets |
18,061 |
7,980 |
|||
Total assets |
$ |
507,794 |
$ |
311,424 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||
Current liabilities: |
|||||
Current portion of long-term debt |
$ |
28,875 |
$ |
— |
|
Accounts payable |
36,138 |
27,163 |
|||
Accrued compensation and benefits |
25,483 |
13,503 |
|||
Restructuring liabilities |
537 |
1,466 |
|||
Accrued warranty |
7,825 |
3,296 |
|||
Deferred revenue, net |
71,183 |
33,184 |
|||
Deferred distributors revenue, net of cost of sales to distributors |
24,217 |
17,388 |
|||
Other accrued liabilities |
26,326 |
16,502 |
|||
Total current liabilities |
220,584 |
112,502 |
|||
Deferred revenue, less current portion |
19,667 |
8,270 |
|||
Long-term debt, less current portion |
93,500 |
— |
|||
Other long-term liabilities |
8,506 |
1,507 |
|||
Commitments and contingencies |
|||||
Stockholders' equity |
165,537 |
189,145 |
|||
Total liabilities and stockholders' equity |
$ |
507,794 |
$ |
311,424 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) |
|||||||||||
Three Months Ended |
Nine Months Ended |
||||||||||
|
|
|
|
||||||||
Net revenues: |
|||||||||||
Product |
$ |
109,891 |
$ |
54,072 |
$ |
290,001 |
$ |
175,450 |
|||
Service |
31,871 |
14,131 |
74,260 |
44,431 |
|||||||
Total net revenues |
141,762 |
68,203 |
364,261 |
219,881 |
|||||||
Cost of revenues: |
|||||||||||
Product |
58,703 |
25,206 |
153,112 |
85,059 |
|||||||
Service |
12,204 |
5,060 |
26,742 |
16,171 |
|||||||
Total cost of revenues |
70,907 |
30,266 |
179,854 |
101,230 |
|||||||
Gross profit: |
|||||||||||
Product |
51,188 |
28,866 |
136,889 |
90,391 |
|||||||
Service |
19,667 |
9,071 |
47,518 |
28,260 |
|||||||
Total gross profit |
70,855 |
37,937 |
184,407 |
118,651 |
|||||||
Operating expenses: |
|||||||||||
Research and development |
24,265 |
9,381 |
53,098 |
30,954 |
|||||||
Sales and marketing |
44,703 |
20,644 |
108,033 |
64,764 |
|||||||
General and administrative |
11,278 |
6,288 |
29,401 |
18,292 |
|||||||
Acquisition and integration costs |
6,443 |
— |
18,826 |
— |
|||||||
Restructuring (credit) charge, net of reversals |
(6) |
1,076 |
499 |
6,242 |
|||||||
Amortization of intangibles |
7,666 |
— |
11,444 |
— |
|||||||
Litigation settlement (income) expense |
(100) |
2,450 |
(100) |
2,029 |
|||||||
Gain on sale of facilities |
— |
— |
— |
(11,539) |
|||||||
Total operating expenses |
94,249 |
39,839 |
221,201 |
110,742 |
|||||||
Operating (loss) income |
(23,394) |
(1,902) |
(36,794) |
7,909 |
|||||||
Interest income |
156 |
256 |
603 |
786 |
|||||||
Interest expense |
(764) |
— |
(1,288) |
— |
|||||||
Other expense, net |
(146) |
(165) |
(1,338) |
(814) |
|||||||
(Loss) income before income taxes |
(24,148) |
(1,811) |
(38,817) |
7,881 |
|||||||
Provision for income taxes |
910 |
409 |
2,262 |
1,392 |
|||||||
Net (loss) income |
$ |
(25,058) |
$ |
(2,220) |
$ |
(41,079) |
$ |
6,489 |
|||
Basic and diluted net (loss) income per share: |
|||||||||||
Net (loss) income per share - basic |
$ |
(0.26) |
$ |
(0.02) |
$ |
(0.43) |
$ |
0.07 |
|||
Net (loss) income per share - diluted |
$ |
(0.26) |
$ |
(0.02) |
$ |
(0.43) |
$ |
0.07 |
|||
Shares used in per share calculation - basic |
96,069 |
92,968 |
95,116 |
94,069 |
|||||||
Shares used in per share calculation - diluted |
96,069 |
92,968 |
95,116 |
95,094 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) |
|||||
Nine Months Ended |
|||||
|
|
||||
Net cash (used in) provided by operating activities |
$ |
(30,617) |
$ |
7,003 |
|
Cash flows from investing activities: |
|||||
Capital expenditures |
(17,384) |
(4,422) |
|||
Acquisition, net of cash acquired |
(180,000) |
— |
|||
Purchases of investments |
(9,045) |
(40,113) |
|||
Proceeds from maturities of investments and marketable securities |
26,722 |
13,867 |
|||
Proceeds from sales of investments and marketable securities |
56,594 |
12,478 |
|||
Purchases of intangible assets |
— |
(335) |
|||
Proceeds from sales of facilities |
— |
42,659 |
|||
Net cash (used in) provided by investing activities |
(123,113) |
24,134 |
|||
Cash flows from financing activities: |
|||||
Borrowings under Revolving Facility |
59,000 |
— |
|||
Borrowings under Term Loan |
65,000 |
— |
|||
Repayment of Term Loan |
(1,625) |
— |
|||
Proceeds from issuance of common stock |
6,296 |
2,539 |
|||
Repurchase of common stock |
— |
(10,973) |
|||
Net cash provided by (used in) financing activities |
128,671 |
(8,434) |
|||
Foreign currency effect on cash |
611 |
293 |
|||
Net (decrease) increase in cash and cash equivalents |
(24,448) |
22,996 |
|||
Cash and cash equivalents at beginning of period |
95,803 |
54,596 |
|||
Cash and cash equivalents at end of period |
$ |
71,355 |
$ |
77,592 |
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 Santa Clara campus.
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 Santa Clara campus consists of the gross proceeds of the sale less the expenses directly related to the sale such as commissions, closing costs and legal fees.
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 |
Nine Months Ended |
|||||||||
|
|
|
|
||||||||
Revenue - GAAP Basis |
$ |
141,762 |
$ |
68,203 |
$ |
364,261 |
$ |
219,881 |
|||
Adjustments: |
|||||||||||
Purchase accounting adjustments |
$ |
1,912 |
$ |
— |
$ |
3,676 |
$ |
— |
|||
Revenue - Non-GAAP Basis |
$ |
143,674 |
$ |
68,203 |
$ |
367,937 |
$ |
219,881 |
|||
Non-GAAP Gross Margin |
Three Months Ended |
Nine Months Ended |
|||||||||
|
|
|
|
||||||||
Gross profit - GAAP Basis |
$ |
70,855 |
$ |
37,937 |
$ |
184,407 |
$ |
118,651 |
|||
Gross margin - GAAP Basis percentage |
50% |
55.6% |
50.6% |
54.0% |
|||||||
Adjustments: |
|||||||||||
Stock based compensation expense |
$ |
688 |
$ |
179 |
$ |
1,190 |
$ |
717 |
|||
Purchase accounting adjustments |
$ |
3,803 |
$ |
— |
$ |
14,803 |
$ |
— |
|||
Amortization of intangibles |
$ |
4,042 |
$ |
— |
$ |
6,736 |
$ |
— |
|||
Gross profit - Non-GAAP Basis |
$ |
79,388 |
$ |
38,116 |
$ |
207,136 |
$ |
119,368 |
|||
Gross margin - Non-GAAP Basis percentage |
55.3% |
55.9% |
56.3% |
54.3% |
|||||||
Non-GAAP Operating Income |
Three Months Ended |
Nine Months Ended |
|||||||||
|
|
|
|
||||||||
GAAP operating (loss) income |
$ |
(23,394) |
$ |
(1,902) |
$ |
(36,794) |
$ |
7,909 |
|||
GAAP operating (loss) income percentage |
(16.5)% |
(2.8)% |
(10.1)% |
3.6% |
|||||||
Adjustments: |
|||||||||||
Stock based compensation expense |
$ |
4,841 |
$ |
1,841 |
$ |
9,874 |
$ |
5,625 |
|||
Acquisition and integration costs |
$ |
6,443 |
$ |
— |
$ |
18,826 |
$ |
— |
|||
Restructuring (credit) charge, net of reversal |
$ |
(6) |
$ |
1,076 |
$ |
499 |
$ |
6,242 |
|||
Amortization of intangibles |
$ |
11,708 |
$ |
— |
$ |
18,180 |
$ |
— |
|||
Purchase accounting adjustments |
$ |
3,803 |
$ |
— |
$ |
14,803 |
$ |
— |
|||
Litigation settlement (income) expense |
$ |
(100) |
$ |
2,618 |
$ |
(100) |
$ |
2,197 |
|||
Gain of sale of facilities |
$ |
— |
$ |
— |
$ |
— |
$ |
(11,539) |
|||
Total adjustments to GAAP operating income |
$ |
26,689 |
$ |
5,535 |
$ |
62,082 |
$ |
2,525 |
|||
Non-GAAP operating income |
$ |
3,295 |
$ |
3,633 |
$ |
25,288 |
$ |
10,434 |
|||
Non-GAAP operating income percentage |
2.3% |
5.3% |
6.9% |
4.7% |
|||||||
Non-GAAP Net Income |
Three Months Ended |
Nine Months Ended |
|||||||||
|
|
|
|
||||||||
GAAP net (loss) income |
$ |
(25,058) |
$ |
(2,220) |
$ |
(41,079) |
$ |
6,489 |
|||
Adjustments: |
|||||||||||
Stock based compensation expense |
$ |
4,841 |
$ |
1,841 |
$ |
9,874 |
$ |
5,625 |
|||
Acquisition and integration costs |
$ |
6,443 |
$ |
— |
$ |
18,826 |
$ |
— |
|||
Restructuring (credit) charge, net of reversal |
$ |
(6) |
$ |
1,076 |
$ |
499 |
$ |
6,242 |
|||
Amortization of intangibles |
$ |
11,708 |
$ |
— |
$ |
18,180 |
$ |
— |
|||
Purchase accounting adjustments |
$ |
3,803 |
$ |
— |
$ |
14,803 |
$ |
— |
|||
Litigation settlement (income) expense |
$ |
(100) |
$ |
2,618 |
$ |
(100) |
$ |
2,197 |
|||
Gain of sale of facilities |
$ |
— |
$ |
— |
$ |
— |
$ |
(11,539) |
|||
Currency loss from closing of a foreign subsidiary |
$ |
— |
$ |
— |
$ |
— |
$ |
465 |
|||
Total adjustments to GAAP net income |
$ |
26,689 |
$ |
5,535 |
$ |
62,082 |
$ |
2,990 |
|||
Non-GAAP net income |
$ |
1,631 |
$ |
3,315 |
$ |
21,003 |
$ |
9,479 |
|||
Earnings per share |
|||||||||||
Non-GAAP diluted net income per share |
$ |
0.02 |
$ |
0.04 |
$ |
0.21 |
$ |
0.10 |
|||
Shares used in diluted net income per share calculation |
99,512 |
94,600 |
97,853 |
95,094 |
|||||||
Free |
Three Months Ended |
Nine Months Ended |
|||||||||
|
|
|
|
||||||||
Cash flow used in operations |
$ |
(25,747) |
$ |
(1,075) |
$ |
(30,617) |
$ |
7,003 |
|||
Add: PP&E CapEx spending |
(4,822) |
(1,396) |
(17,384) |
(4,422) |
|||||||
Total free cash flow |
$ |
(30,569) |
$ |
(2,471) |
$ |
(48,001) |
$ |
2,581 |
|||
SOURCE
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