Extreme Networks Reports Fourth Quarter and Fiscal Year 2014 Financial Results
For the full fiscal year,
"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
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 theNashville'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
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;
- 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 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 |
$ |
73,190 |
$ |
95,803 |
|||
Short-term investments |
32,692 |
43,034 |
|||||
Accounts receivable, net of allowances of |
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 |
| |||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||
(Unaudited) | |||||||||||||||
Three Months Ended |
Year Ended | ||||||||||||||
|
|
|
| ||||||||||||
Net revenues: |
|||||||||||||||
Product |
$ |
121,761 |
$ |
64,505 |
$ |
411,761 |
$ |
239,955 |
|||||||
Service |
33,532 |
14,957 |
107,793 |
59,388 |
|||||||||||
Total net revenues |
155,293 |
79,462 |
519,554 |
299,343 |
|||||||||||
Cost of revenues: |
|||||||||||||||
Product |
60,561 |
30,803 |
213,673 |
115,862 |
|||||||||||
Service |
11,810 |
4,684 |
38,552 |
20,855 |
|||||||||||
Total cost of revenues |
72,371 |
35,487 |
252,225 |
136,717 |
|||||||||||
Gross profit: |
|||||||||||||||
Product |
61,200 |
33,702 |
198,088 |
124,093 |
|||||||||||
Service |
21,722 |
10,273 |
69,241 |
38,533 |
|||||||||||
Total gross profit |
82,922 |
43,975 |
267,329 |
162,626 |
|||||||||||
Operating expenses: |
|||||||||||||||
Research and development |
24,048 |
9,567 |
77,146 |
40,521 |
|||||||||||
Sales and marketing |
48,634 |
22,438 |
156,666 |
87,202 |
|||||||||||
General and administrative |
11,511 |
8,434 |
40,912 |
26,725 |
|||||||||||
Acquisition and integration costs |
6,890 |
— |
25,716 |
— |
|||||||||||
Restructuring charge, net of reversals |
11 |
593 |
510 |
6,836 |
|||||||||||
Amortization of intangibles |
5,267 |
— |
16,711 |
— |
|||||||||||
Litigation settlement (income) expense |
— |
— |
(100) |
2,029 |
|||||||||||
Gain on sale of facilities |
— |
— |
— |
(11,539) |
|||||||||||
Total operating expenses |
96,361 |
41,032 |
317,561 |
151,774 |
|||||||||||
Operating (loss) income |
(13,439) |
2,943 |
(50,232) |
10,852 |
|||||||||||
Interest income |
148 |
284 |
751 |
1,070 |
|||||||||||
Interest expense |
(796) |
— |
(2,085) |
— |
|||||||||||
Other (expense) income, net |
(217) |
243 |
(1,555) |
(571) |
|||||||||||
(Loss) income before income taxes |
(14,304) |
3,470 |
(53,121) |
11,351 |
|||||||||||
Provision for income taxes |
1,927 |
286 |
4,189 |
1,678 |
|||||||||||
Net (loss) income |
$ |
(16,231) |
$ |
3,184 |
$ |
(57,310) |
$ |
9,673 |
|||||||
Basic and diluted net (loss) income per share: |
|||||||||||||||
Net (loss) income per share - basic |
$ |
(0.17) |
$ |
0.03 |
$ |
(0.60) |
$ |
0.10 |
|||||||
Net (loss) income per share - diluted |
$ |
(0.17) |
$ |
0.03 |
$ |
(0.60) |
$ |
0.10 |
|||||||
Shares used in per share calculation - basic |
96,713 |
93,611 |
95,515 |
93,954 |
|||||||||||
Shares used in per share calculation - diluted |
96,713 |
94,894 |
95,515 |
95,044 |
| |||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(In thousands) | |||||||
(Unaudited) | |||||||
Year Ended | |||||||
|
| ||||||
Net cash (used in) provided by operating activities |
$ |
(26,843) |
$ |
32,237 |
|||
Cash flows from investing activities: |
|||||||
Capital expenditures |
(22,373) |
(12,737) |
|||||
Acquisition, net of cash acquired |
(180,000) |
— |
|||||
Purchases of investments |
(9,045) |
(57,712) |
|||||
Proceeds from maturities of investments and marketable securities |
28,722 |
16,367 |
|||||
Proceeds from sales of investments and marketable securities |
56,594 |
28,528 |
|||||
Purchases of intangible assets |
(87) |
(625) |
|||||
Proceeds from sales of facilities |
— |
42,659 |
|||||
Net cash (used in) provided by investing activities |
(126,189) |
16,480 |
|||||
Cash flows from financing activities: |
|||||||
Borrowings under Revolving Facility |
83,000 |
— |
|||||
Borrowings under Term Loan |
65,000 |
— |
|||||
Repayment of debt |
(26,437) |
— |
|||||
Proceeds from issuance of common stock |
8,017 |
7,084 |
|||||
Repurchase of common stock |
— |
(14,475) |
|||||
Net cash provided by (used in) financing activities |
129,580 |
(7,391) |
|||||
Foreign currency effect on cash |
839 |
(119) |
|||||
Net (decrease) increase in cash and cash equivalents |
(22,613) |
41,207 |
|||||
Cash and cash equivalents at beginning of period |
95,803 |
54,596 |
|||||
Cash and cash equivalents at end of period |
$ |
73,190 |
$ |
95,803 |
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, 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 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
Executive transition expenses. This expense is related to the costs associated with the severance payments, both cash and stock based, for the Company's prior executives and the cost of transitioning with the new executives.
Currency loss related to closing of certain foreign subsidiaries. This is related to the closing of our Japanese subsidiary. This has accumulated over time and has historically been included in Other Comprehensive Income.
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 |
Year Ended | |||||||||||||
|
|
|
| ||||||||||||
Revenue - GAAP Basis |
$ |
155,293 |
$ |
79,462 |
$ |
519,554 |
$ |
299,343 |
|||||||
Adjustments: |
|||||||||||||||
Purchase accounting adjustments |
$ |
1,579 |
$ |
— |
$ |
5,256 |
$ |
— |
|||||||
Revenue - Non-GAAP Basis |
$ |
156,872 |
$ |
79,462 |
$ |
524,810 |
$ |
299,343 |
|||||||
Non-GAAP Gross Margin |
Three Months Ended |
Year Ended | |||||||||||||
|
|
|
| ||||||||||||
Gross profit - GAAP Basis |
$ |
82,922 |
$ |
43,975 |
$ |
267,329 |
$ |
162,626 |
|||||||
Gross margin - GAAP Basis percentage |
53.4 |
% |
55.3 |
% |
51.5 |
% |
54.3 |
% | |||||||
Adjustments: |
|||||||||||||||
Stock based compensation expense |
$ |
540 |
$ |
3 |
$ |
1,730 |
$ |
720 |
|||||||
Purchase accounting adjustments |
$ |
1,579 |
$ |
— |
$ |
16,383 |
$ |
— |
|||||||
Amortization of intangibles |
$ |
4,292 |
$ |
— |
$ |
11,028 |
$ |
— |
|||||||
Gross profit - Non-GAAP Basis |
$ |
89,333 |
$ |
43,978 |
$ |
296,470 |
$ |
163,346 |
|||||||
Gross margin - Non-GAAP Basis percentage |
56.9 |
% |
55.3 |
% |
56.5 |
% |
54.6 |
% | |||||||
Non-GAAP Operating Income |
Three Months Ended |
Year Ended | |||||||||||||
|
|
|
| ||||||||||||
GAAP operating (loss) income |
$ |
(13,439) |
$ |
2,943 |
$ |
(50,232) |
$ |
10,852 |
|||||||
GAAP operating (loss) income percentage |
(8.7)% |
3.7 |
% |
(9.7)% |
3.6 |
% | |||||||||
Adjustments: |
|||||||||||||||
Stock based compensation expense |
$ |
6,047 |
$ |
886 |
$ |
15,922 |
$ |
6,512 |
|||||||
Acquisition and integration costs |
$ |
6,890 |
$ |
— |
$ |
25,716 |
$ |
— |
|||||||
Restructuring charge, net of reversal |
$ |
11 |
$ |
593 |
$ |
510 |
$ |
6,836 |
|||||||
Amortization of intangibles |
$ |
9,559 |
$ |
— |
$ |
27,739 |
$ |
— |
|||||||
Purchase accounting adjustments |
$ |
1,579 |
$ |
— |
$ |
16,383 |
$ |
— |
|||||||
Litigation settlement (income) expense |
$ |
— |
$ |
— |
$ |
(100) |
$ |
2,197 |
|||||||
Gain on sale of facilities |
$ |
— |
$ |
— |
$ |
— |
$ |
(11,539) |
|||||||
Executive transition expenses |
$ |
600 |
$ |
2,086 |
$ |
600 |
$ |
2,086 |
|||||||
Total adjustments to GAAP operating income |
$ |
24,686 |
$ |
3,565 |
$ |
86,770 |
$ |
6,092 |
|||||||
Non-GAAP operating income |
$ |
11,247 |
$ |
6,508 |
$ |
36,538 |
$ |
16,944 |
|||||||
Non-GAAP operating income percentage |
7.2 |
% |
8.2 |
% |
7.0 |
% |
5.7 |
% | |||||||
Non-GAAP Net Income |
Three Months Ended |
Year Ended | |||||||||||||
|
|
|
| ||||||||||||
GAAP net (loss) income |
$ |
(16,231) |
$ |
3,184 |
$ |
(57,310) |
$ |
9,673 |
|||||||
Adjustments: |
|||||||||||||||
Stock based compensation expense |
$ |
6,047 |
$ |
886 |
$ |
15,922 |
$ |
6,512 |
|||||||
Acquisition and integration costs |
$ |
6,890 |
$ |
— |
$ |
25,716 |
$ |
— |
|||||||
Restructuring charge, net of reversal |
$ |
11 |
$ |
593 |
$ |
510 |
$ |
6,836 |
|||||||
Amortization of intangibles |
$ |
9,559 |
$ |
— |
$ |
27,739 |
$ |
— |
|||||||
Purchase accounting adjustments |
$ |
1,579 |
$ |
— |
$ |
16,383 |
$ |
— |
|||||||
Litigation settlement (income) expense |
$ |
— |
$ |
— |
$ |
(100) |
$ |
2,197 |
|||||||
Gain on sale of facilities |
$ |
— |
$ |
— |
$ |
— |
$ |
(11,539) |
|||||||
Executive transition expenses |
$ |
600 |
$ |
2,086 |
$ |
600 |
$ |
2,086 |
|||||||
Currency loss from closing of a foreign subsidiary |
$ |
— |
$ |
— |
$ |
— |
$ |
465 |
|||||||
Total adjustments to GAAP net income |
$ |
24,686 |
$ |
3,565 |
$ |
86,770 |
$ |
6,557 |
|||||||
Non-GAAP net income |
$ |
8,455 |
$ |
6,749 |
$ |
29,460 |
$ |
16,230 |
|||||||
Earnings per share |
|||||||||||||||
Non-GAAP diluted net income per share |
$ |
0.09 |
$ |
0.07 |
$ |
0.30 |
$ |
0.17 |
|||||||
Shares used in diluted net income per share calculation |
99,125 |
94,894 |
98,171 |
95,044 |
|||||||||||
Free |
Three Months Ended |
Year Ended | |||||||||||||
|
|
|
| ||||||||||||
Cash flow used in operations |
$ |
3,774 |
$ |
25,235 |
$ |
(26,843) |
$ |
32,237 |
|||||||
Add: PP&E CapEx spending |
(4,988) |
(8,315) |
(22,373) |
(12,737) |
|||||||||||
Total free cash flow |
$ |
(1,214) |
$ |
16,920 |
$ |
(49,216) |
$ |
19,500 |
|||||||
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