extr-10q_20181231.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2018      

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-25711

 

EXTREME NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

DELAWARE

 

77-0430270

[State or other jurisdiction

of incorporation or organization]

 

[I.R.S Employer

Identification No.]

 

 

6480 Via Del Oro,

San Jose, California

 

95119

[Address of principal executive office]

 

[Zip Code]

Registrant’s telephone number, including area code: (408) 579-2800

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “an emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by checkmark 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.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at January 24, 2019, was 116,759,619

 

 

 

 


 

EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED

December 31, 2018

 

INDEX

 

 

 

 

 

 

PAGE

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended December 31, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4.

Controls and Procedures

41

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3.

Defaults Upon Senior Securities

43

 

 

 

Item 4.

Mine Safety Disclosure

43

 

 

 

Item 5.

Other Information

43

 

 

 

Item 6.

Exhibits

44

 

 

Signatures

45

 

2


 

 

 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

December 31,

2018

 

 

June 30,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

140,643

 

 

$

121,139

 

Accounts receivable, net of allowance for doubtful accounts of $1,678 at December 31, 2018 and $1,478 at June 30, 2018

 

 

144,909

 

 

 

212,423

 

Inventories

 

 

58,297

 

 

 

63,867

 

Prepaid expenses and other current assets

 

 

39,088

 

 

 

30,484

 

Total current assets

 

 

382,937

 

 

 

427,913

 

Property and equipment, net

 

 

74,499

 

 

 

78,519

 

Intangible assets, net

 

 

63,544

 

 

 

77,092

 

Goodwill

 

 

137,799

 

 

 

139,082

 

Other assets

 

 

53,170

 

 

 

47,642

 

Total assets

 

$

711,949

 

 

$

770,248

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

9,009

 

 

$

9,007

 

Accounts payable

 

 

34,977

 

 

 

75,689

 

Accrued compensation and benefits

 

 

46,500

 

 

 

50,351

 

Accrued warranty

 

 

12,808

 

 

 

12,807

 

Deferred revenue

 

 

138,239

 

 

 

130,865

 

Other accrued liabilities

 

 

70,035

 

 

 

81,153

 

Total current liabilities

 

 

311,568

 

 

 

359,872

 

Deferred revenue, less current portion

 

 

47,854

 

 

 

43,660

 

Long-term debt, less current portion

 

 

174,246

 

 

 

188,749

 

Deferred income taxes

 

 

1,699

 

 

 

6,135

 

Other long-term liabilities

 

 

60,711

 

 

 

59,100

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock, $.001 par value, issuable in series, 2,000 shares

     authorized; none issued

 

 

 

 

 

 

Common stock, $.001 par value, 750,000 shares authorized; 119,089 and 116,124 shares issued, respectively; 116,723 and 116,124 shares outstanding, respectively

 

 

119

 

 

 

116

 

Additional paid-in-capital

 

 

962,924

 

 

 

942,397

 

Accumulated other comprehensive loss

 

 

(2,725

)

 

 

(1,703

)

Accumulated deficit

 

 

(829,447

)

 

 

(828,078

)

Treasury stock at cost: 2,366 and 0 shares, respectively

 

 

(15,000

)

 

 

-

 

Total stockholders’ equity

 

 

115,871

 

 

 

112,732

 

Total liabilities and stockholders’ equity

 

$

711,949

 

 

$

770,248

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

 

December 31,

2018

 

 

December 31,

2017

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

189,567

 

 

$

174,850

 

 

$

367,287

 

 

$

339,624

 

Service

 

 

63,113

 

 

 

56,273

 

 

 

125,279

 

 

 

103,214

 

Total net revenues

 

 

252,680

 

 

 

231,123

 

 

 

492,566

 

 

 

442,838

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

86,487

 

 

 

78,472

 

 

 

170,030

 

 

 

158,517

 

Service

 

 

24,894

 

 

 

23,665

 

 

 

49,166

 

 

 

42,954

 

Total cost of revenues

 

 

111,381

 

 

 

102,137

 

 

 

219,196

 

 

 

201,471

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

103,080

 

 

 

96,378

 

 

 

197,257

 

 

 

181,107

 

Service

 

 

38,219

 

 

 

32,608

 

 

 

76,113

 

 

 

60,260

 

Total gross profit

 

 

141,299

 

 

 

128,986

 

 

 

273,370

 

 

 

241,367

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

52,204

 

 

 

45,907

 

 

 

103,445

 

 

 

80,192

 

Sales and marketing

 

 

68,342

 

 

 

65,659

 

 

 

135,924

 

 

 

121,220

 

General and administrative

 

 

13,886

 

 

 

11,669

 

 

 

26,657

 

 

 

23,854

 

Acquisition and integration costs, net of bargain purchase gain

 

 

67

 

 

 

34,115

 

 

 

2,613

 

 

 

38,359

 

Restructuring charges, net of reversals

 

 

474

 

 

 

 

 

 

1,282

 

 

 

 

Amortization of intangibles

 

 

1,575

 

 

 

2,746

 

 

 

3,716

 

 

 

4,360

 

Total operating expenses

 

 

136,548

 

 

 

160,096

 

 

 

273,637

 

 

 

267,985

 

Operating income (loss)

 

 

4,751

 

 

 

(31,110

)

 

 

(267

)

 

 

(26,618

)

Interest income

 

 

643

 

 

 

717

 

 

 

1,037

 

 

 

1,364

 

Interest expense

 

 

(3,066

)

 

 

(2,504

)

 

 

(6,592

)

 

 

(4,719

)

Other (expense) income, net

 

 

(399

)

 

 

(643

)

 

 

88

 

 

 

2,484

 

Income (loss) before income taxes

 

 

1,929

 

 

 

(33,540

)

 

 

(5,734

)

 

 

(27,489

)

(Benefit ) provision for income taxes

 

 

(5,270

)

 

 

(1,617

)

 

 

(3,868

)

 

 

58

 

Net income (loss)

 

$

7,199

 

 

$

(31,923

)

 

$

(1,866

)

 

$

(27,547

)

Basic and diluted net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

0.06

 

 

$

(0.28

)

 

$

(0.02

)

 

$

(0.24

)

Net income (loss) per share - diluted

 

$

0.06

 

 

$

(0.28

)

 

$

(0.02

)

 

$

(0.24

)

Shares used in per share calculation - basic

 

 

117,544

 

 

 

113,621

 

 

 

117,456

 

 

 

112,931

 

Shares used in per share calculation - diluted

 

 

119,544

 

 

 

113,621

 

 

 

117,456

 

 

 

112,931

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

 

December 31,

2018

 

 

December 31,

2017

 

Net income (loss)

 

$

7,199

 

 

$

(31,923

)

 

$

(1,866

)

 

$

(27,547

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains on available for sale securities

 

 

 

 

 

54

 

 

 

 

 

 

237

 

Net change in foreign currency translation adjustments

 

 

(28

)

 

 

432

 

 

 

(525

)

 

 

787

 

Other comprehensive income (loss), net of tax:

 

 

(28

)

 

 

486

 

 

 

(525

)

 

 

1,024

 

Total comprehensive income (loss)

 

$

7,171

 

 

$

(31,437

)

 

$

(2,391

)

 

$

(26,523

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,866

)

 

$

(27,547

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

13,476

 

 

 

8,093

 

Amortization of intangible assets

 

 

13,552

 

 

 

11,023

 

Provision for doubtful accounts

 

 

861

 

 

 

1,180

 

Stock-based compensation

 

 

15,525

 

 

 

11,828

 

Deferred income taxes

 

 

(6,516

)

 

 

(2,135

)

Unrealized/realized (gain) loss on equity investment

 

 

274

 

 

 

(3,757

)

Realized gain on bargain purchase

 

 

 

 

 

(4,920

)

Non-cash interest

 

 

1,532

 

 

 

510

 

Other non-cash items

 

 

(344

)

 

 

1,308

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

66,568

 

 

 

(11,188

)

Inventories

 

 

5,570

 

 

 

(449

)

Prepaid expenses and other assets

 

 

(12,390

)

 

 

1,188

 

Accounts payable

 

 

(40,050

)

 

 

17,547

 

Accrued compensation and benefits

 

 

(3,851

)

 

 

3,734

 

Deferred revenue

 

 

11,568

 

 

 

4,446

 

Other current and long-term liabilities

 

 

(2,298

)

 

 

3,387

 

Net cash provided by operating activities

 

 

61,611

 

 

 

14,248

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(11,140

)

 

 

(13,309

)

Business acquisitions

 

 

 

 

 

(97,581

)

Proceeds from sale of investment

 

 

727

 

 

 

4,922

 

Net cash used in investing activities

 

 

(10,413

)

 

 

(105,968

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

 

 

 

100,000

 

Repayments of debt

 

 

(14,750

)

 

 

(8,686

)

Loan fees on borrowings

 

 

(545

)

 

 

(1,494

)

Repurchase of stock

 

 

(15,000

)

 

 

 

Proceeds from issuance of common stock, net of tax withholding

 

 

5,005

 

 

 

(1,536

)

Capital lease financing

 

 

(183

)

 

 

 

Contingent consideration obligations

 

 

(3,856

)

 

 

 

Deferred payments on an acquisition

 

 

(2,000

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(31,329

)

 

 

88,284

 

Foreign currency effect on cash

 

 

(365

)

 

 

94

 

Net increase (decrease) in cash

 

 

19,504

 

 

 

(3,342

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

121,139

 

 

 

130,450

 

Cash and cash equivalents at end of period

 

$

140,643

 

 

$

127,108

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

6


 

 EXTREME NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.

Description of Business and Basis of Presentation

Extreme Networks, Inc., together with its subsidiaries (collectively referred to as “Extreme” or the “Company”), is a leader in providing software-driven networking solutions for enterprise customers.  The Company conducts its sales and marketing activities on a worldwide basis through distributors, resellers and the Company’s field sales organization. Extreme was incorporated in California in 1996 and reincorporated in Delaware in 1999.

The unaudited condensed consolidated financial statements of Extreme included herein have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations.  The condensed consolidated balance sheet at June 30, 2018 was derived from audited financial statements as of that date but does not include all disclosures required by generally accepted accounting principles for complete financial statements. These interim financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and cash flows for the interim periods presented and the financial condition of Extreme at December 31, 2018. The results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for fiscal 2019 or any future periods.

Fiscal Year

The Company uses a fiscal calendar year ending on June 30.  All references herein to “fiscal 2019” or “2019” represent the fiscal year ending June 30, 2019.  All references herein to “fiscal 2018” or “2018” represent the fiscal year ended June 30, 2018.

Principles of Consolidation

The consolidated financial statements include the accounts of Extreme and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

The Company predominantly uses the United States Dollar as its functional currency.  The functional currency for certain of its foreign subsidiaries is the local currency.  For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated to United States Dollars at current month end rates of exchange; and revenue and expenses are translated using the monthly average rate.

Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

2.

Summary of Significant Accounting Policies

For a description of significant accounting policies, see Note 3, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018. There have been no material changes to the Company’s significant accounting policies since the filing of the Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The guidance was adopted effective July 1, 2018 and the Company reclassified a $0.5 million unrealized gain, net of tax, related to its available-for-sale investments from accumulated other comprehensive loss to accumulated deficit as a cumulative-effect adjustment in the accompanying condensed consolidated balance sheets.  Future changes in fair value will be included in earnings in each period.

7


 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to provide guidance on the classification of eight cash flow issues in order to reduce diversity in practice.  The Company adopted the new guidance effective July 1, 2018. The amendments in this update have been applied on a retrospective transition method to each period presented. The adoption of this guidance did not have a material effect on the Company’s presentation of cash flows.  

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Historically GAAP had prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold outside the consolidated group.  The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-16 effective July 1, 2018 on a modified retrospective basis. The adoption of this guidance did not have a material effect on the Company’s financial statements. 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718.  Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Company adopted this guidance effective July 1, 2018, on a prospective basis.  The adoption of this guidance did not have a material effect on the Company’s financial statements.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under Topic 842, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the statement of operations will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of Topic 842 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, Topic 842 is applied on the modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.  The Company believes that Topic 842 will have a material impact on its financial position, as a result of recognizing right-of-use assets and lease liabilities on its consolidated balance sheets. In addition, in December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), which includes narrow-scope improvements for lessors to increase transparency and comparability about leasing transactions. The Company continues to evaluate the impact these new standards will have on its condensed consolidated statement of operations and statement of cash flows. This guidance will become effective for the Company beginning with its fiscal year 2020, beginning on July 1, 2019.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which is intended to allow companies to better align risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. In addition, in October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815), which amends Topic 815 to add the overnight index swap (OIS) rate based on the secured overnight financing rate as a fifth U.S. benchmark interest rate. These standards are effective for interim and annual reporting periods beginning after December 15, 2018. The Company is continuing to evaluate the accounting, transition and disclosure requirements of these standards, but does not believe it will have a material impact on the Company’s financial statements upon adoption. This guidance is effective for the Company beginning with its fiscal year 2020, beginning on July 1, 2019.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), this standard that allows the reclassification from AOCI to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). The amount of the reclassification is the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances related to items remaining in AOCI. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The new standard is to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the change in the income tax rate in the Tax Reform Act are recognized. Management is currently evaluating implementation options and impact on the Company's financial statements and related disclosures.  This guidance is effective for the Company beginning with its fiscal year 2020, beginning on July 1, 2019.

8


 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs determining Level 3 fair value measurements will be added. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements. This guidance is effective for the Company beginning with its fiscal year 2021, beginning on July 1, 2020.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements. This guidance is effective for the Company beginning with its fiscal year 2021, beginning on July 1, 2020.

 

3.

Revenues

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted on July 1, 2017, using the retrospective method.  The Company derives the majority of its revenue from sales of its networking equipment, with the remaining revenue generated from service fees primarily relating to maintenance contracts with additional revenues from professional services, and training for its products. The Company sells its products and maintenance contracts direct to customers and to partners in two distribution channels, or tiers. The first tier consists of a limited number of independent distributors that stock its products and sell primarily to resellers.  The second tier of the distribution channel consists of a non-stocking distributors and value-added resellers that sell directly to end-users.  Products and services may be sold separately or in bundled packages.

Revenue Recognition         

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  Certain of the Company’s contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct.  For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on its relative standalone selling price.  The stand-alone selling prices are determined based on the prices at which the Company separately sells these products.  For items that are not sold separately, the Company estimates the stand-alone selling prices using the best estimated selling price approach.  

The Company’s performance obligations are satisfied at a point in time or over time as work progresses.  Substantially all of the Company’s product sales revenues as reflected on the condensed consolidated statements of operations for the three and six months ended December 31, 2018 and 2017 are recognized at a point in time. Substantially all of the Company’s service revenue is recognized over time.  For revenue recognized over time, the Company uses an input measure, days elapsed, to measure progress.  

On December 31, 2018, the Company had $186.1 million of remaining performance obligations, which is comprised of deferred maintenance revenue and services not yet delivered.  The Company expects to recognize approximately 48 percent of its remaining performance obligations as revenue in fiscal 2019, an additional 35 percent in fiscal 2020 and 17 percent of the balance thereafter.

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue in the consolidated balance sheet. Services provided under renewable support arrangements of the Company are billed in accordance with agreed-upon contractual terms, which are typically at periodic intervals (e.g., quarterly or annually).  The Company sometimes receives payments from its customers in advance of services being provided, resulting in deferred revenues.  These liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.

Revenue recognized for the three months ended December 31, 2018 and 2017 that was included in the deferred revenue balance at the beginning of each period was $59.9 million and $36.9 million, respectively. Revenue recognized for the six months ended December 31, 2018 and 2017 that was included in the deferred revenue balance at the beginning of each period was $88.8 million and $52.9 million, respectively.

9


 

Contract Costs. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.  Management expects that commission fees paid to sales representative as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company’s capitalized balances in the amount of $5.3 million and $3.2 million at December 31, 2018 and 2017, respectively.  Capitalized commission fees are amortized on a straight-line basis over the average period of service contracts of approximately three years, and are included in “Sales and marketing” in the accompanying condensed consolidated statements of operations.  Amortization recognized during the three months ended December 31, 2018 and 2017, was $0.7 million and $0.5 million, respectively.  Amortization recognized during the six months ended December 31, 2018 and 2017 was $1.4 million and $0.9 million, respectively. There was no impairment loss in relation to the costs capitalized.  

Estimated Variable Consideration. There were no material changes in the current period to the estimated variable consideration for performance obligations which were satisfied or partially satisfied during previous periods. 

Revenue by Category

The following table sets forth the Company’s revenue disaggregated by sales channel and geographic region based on the customer’s ship-to locations (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

 

 

Distributor

 

Direct

 

Total

 

 

Distributor

 

Direct

 

Total

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

44,141

 

$

55,326

 

$

99,467

 

 

$

56,269

 

$

54,559

 

$

110,828

 

Other

 

 

8,269

 

 

5,380

 

 

13,649

 

 

 

1,155

 

 

5,698

 

 

6,853

 

Total Americas

 

 

52,410

 

 

60,706

 

 

113,116

 

 

 

57,424

 

 

60,257

 

 

117,681

 

EMEA

 

 

79,876

 

 

32,773

 

 

112,649

 

 

 

55,956

 

 

33,624

 

 

89,580

 

APAC

 

 

4,767

 

 

22,148

 

 

26,915

 

 

 

5,131

 

 

18,731

 

 

23,862

 

Total net revenues

 

$

137,053

 

$

115,627

 

$

252,680

 

 

$

118,511

 

$

112,612

 

$

231,123

 

 

 

 

Six Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

 

 

Distributor

 

Direct

 

Total

 

 

Distributor

 

Direct

 

Total

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

100,883

 

$

115,262

 

$

216,145

 

 

$

98,661

 

$

105,549

 

$

204,210

 

Other

 

 

12,762

 

 

10,904

 

 

23,666

 

 

 

15,491

 

 

12,093

 

 

27,584

 

Total Americas

 

 

113,645

 

 

126,166

 

 

239,811

 

 

 

114,152

 

 

117,642

 

 

231,794

 

EMEA

 

 

141,207

 

 

63,611

 

 

204,818

 

 

 

107,188

 

 

61,527

 

 

168,715

 

APAC:

 

 

7,116

 

 

40,821

 

 

47,937

 

 

 

8,395

 

 

33,934

 

 

42,329

 

Total net revenues

 

$

261,968

 

$

230,598

 

$

492,566

 

 

$

229,735

 

$

213,103

 

$

442,838

 

 

Customer Concentrations

The Company performs ongoing credit evaluations of its customers and generally does not require collateral in exchange for credit.

The following table sets forth major customers accounting for 10% or more of the Company’s net revenues:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

 

December 31,

2018

 

 

December 31,

2017

 

Tech Data Corporation

 

22%

 

 

12%

 

 

19%

 

 

12%

 

Westcon Group Inc.

 

15%

 

 

14%

 

 

14%

 

 

15%

 

Jenne Corporation

 

12%

 

 

*

 

 

12%

 

 

10%

 

10


 

 

The following table sets forth major customers accounting for 10% or more of the Company’s accounts receivable balance:

 

 

 

December 31,

2018

 

 

June 30,

2018

 

Westcon Group Inc.

 

23%

 

 

*

 

Tech Data Corporation

 

22%

 

 

17%

 

Jenne Corporation

 

*

 

 

13%

 

 

 

 

 

 

 

 

 

 

*    Less than 10% of accounts receivable

 

 

 

 

 

 

 

 

 

4. Business Combinations

Fiscal 2018 Acquisitions

Data Center Business

The Company completed its acquisition of the data center business (the “Data Center Business”) of Brocade Communication Systems, Inc.’s (“Brocade”) on October 27, 2017 (the “Data Center Closing Date”), pursuant to an Asset Purchase Agreement (the “Data Center Business APA”) dated as of October 3, 2017, by and between the Company and Brocade for an aggregate purchase consideration of $84.3 million. Under the terms and conditions of the Data Center Business APA, the Company acquired customers, employees, technology and other assets of the Data Center Business as well as assumed certain contracts and other liabilities of the Data Center Business.

The following table below summarizes the final allocation of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):

 

 

 

Final Allocation

 

Accounts receivables

 

$

33,488

 

Inventories

 

 

19,934

 

Prepaid expenses and other current assets

 

 

988

 

Property and equipment

(a)

 

20,220

 

Other assets

 

 

4,734

 

Accounts payable and accrued expenses

 

 

(16,494

)

Deferred revenue

 

 

(33,025

)

Net tangible assets acquired

 

 

29,845

 

Identifiable intangible assets

 

 

32,800

 

Goodwill

(a)

 

21,692

 

Total intangible assets acquired

 

 

54,492

 

Total net assets acquired

 

$

84,337

 

 

 

(a)

Includes an adjustment after the measurement period to record $1.3 million of additional property and equipment acquired at an international location.

Campus Fabric Business

The Company completed its acquisition of Avaya Inc.’s (“Avaya”) fabric-based secure networking solutions and network security solutions business (the “Campus Fabric Business”) on July 14, 2017, (the “Campus Fabric Business Closing Date”) pursuant to an Asset Purchase Agreement (the “Campus Fabric Business APA”) dated March 7, 2017.  Under the terms and conditions of the Campus Fabric Business APA, the Company acquired the customers, employees, technology and other assets of the Campus Fabric Business, as well as assumed certain contracts and other liabilities of the Campus Fabric Business, for total consideration of $79.4 million. 

11


 

The following table below summarizes the final allocation of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):

 

 

Final Allocation

 

Accounts receivables

$

19,527

 

Inventories

 

14,165

 

Prepaid expenses and other current assets

 

240

 

Property and equipment

 

5,406

 

Other assets

 

7,009

 

Accounts payable and accrued expenses

 

(31,670

)

Deferred revenue

 

(8,994

)

Other long-term liabilities

 

(5,849

)

Net tangible assets acquired

 

(166

)

Identifiable intangible assets

 

41,300

 

In-process research and development

 

2,400

 

Goodwill

 

35,892

 

Total intangible assets acquired

 

79,592

 

Total net assets acquired

$

79,426

 

 

Capital Financing Business

On December 1, 2017, Company completed its acquisition of a capital financing business (the “CF Business”), pursuant to a Bill of Sale and Assignment and Assumption Agreement (the “Assumption Agreement”) between the Company and Broadcom.  Under the terms and conditions of the Assumption Agreement, the Company acquired customers, employees, contracts and lease equipment of the CF Business equal to the earn out payments to Broadcom of 90% of acquired financing receivables to be collected commencing at the closing date.

Net assets acquired included financing receivables of $13.7 million, lease equipment of $3.5 million and identifiable intangible assets of $0.8 million, and the fair value of the contingent consideration was $13.0 million. As the preliminary fair value of the net assets acquired exceeded the fair value of the purchase consideration, the Company recorded a bargain purchase gain of $5.0 million.

Pro forma financial information

The following unaudited pro forma results of operations are presented as though the acquisitions of the Data Center Business, CF Business and Campus Fabric Business had occurred as of the beginning of fiscal 2017 presented after giving effect to purchase accounting adjustments relating to inventories, deferred revenue, depreciation and amortization on acquired property and equipment and intangibles, acquisition costs, interest income and expense and related tax effects.

The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition been consummated as of the beginning of fiscal 2017, nor are they necessarily indicative of future operating results. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the unaudited pro forma results.

The unaudited pro forma financial information for the three and six months ended December 31, 2017, combines the historical results for Extreme for those periods, which include the results of the Data Center Business and CF Business subsequent to the acquisition date, with their historical results up to the acquisition date.

Pro forma results of operations from the Data Center Business, CF Business and Campus Fabric Business acquisitions included in the pro forma results of operations for the three and six months ended December 31, 2017, have not been adjusted for the adoption of Topic 606 because the Company determined it is impractical to estimate the impact of the adoption.

12


 

The following table summarizes the unaudited pro forma financial information (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2017

 

Net revenues

 

$

252,532

 

 

$

537,040

 

Net income (loss)

 

$

1,152

 

 

$

(7,622

)

Net income (loss) per share - basic

 

$

0.01

 

 

$

(0.07

)

Net income (loss) per share - diluted

 

$

0.01

 

 

$

(0.07

)

Shares used in per share calculation - basic

 

 

113,621

 

 

 

112,931

 

Shares used in per share calculation - diluted

 

 

119,656

 

 

 

112,931

 

 

5.

Balance Sheet Accounts

Cash and Marketable Securities

The following is a summary of cash and marketable securities (in thousands):

 

 

 

December 31,

2018

 

 

June 30,

2018

 

Cash

 

$

140,643

 

 

$

121,139

 

Marketable securities (consisting of available-for-sale securities)

 

 

428

 

 

 

1,459

 

Total cash and marketable securities

 

$

141,071

 

 

$

122,598

 

 

Marketable equity securities are recorded in “Prepaid expense and other current assets” in the accompanying condensed consolidated balance sheets as these securities are publicly-traded with readily determinable values. Marketable equity securities are classified as available-for-sale and reported at fair value with unrealized gains and losses included in “Other (expense) income, net” in the accompanying condensed consolidated statements of operations.

Inventories

The Company values its inventory at lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company has established inventory allowances when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Any written down or obsolete inventory subsequently sold has not had a material impact on gross margin for any of the periods presented.

Inventories consist of the following (in thousands):

 

 

 

December 31,

2018

 

 

June 30,

2018

 

Finished goods

 

$

44,179

 

 

$

49,393

 

Raw materials

 

 

14,118

 

 

 

14,474

 

Total Inventories

 

$

58,297

 

 

$

63,867

 

 

Property and Equipment, Net

Property and equipment consist of the following (in thousands):

 

 

 

December 31,

2018

 

 

June 30,

2018

 

Computers and equipment

 

$

70,121

 

 

$

60,677

 

Purchased software

 

 

22,968

 

 

 

21,389

 

Office equipment, furniture and fixtures

 

 

11,564

 

 

 

14,980

 

Leasehold improvements

 

 

51,167

 

 

 

50,070

 

Total property and equipment

 

 

155,820

 

 

 

147,116

 

Less: accumulated depreciation and amortization

 

 

(81,321

)

 

 

(68,597

)

Property and equipment, net

 

$

74,499

 

 

$

78,519

 

13


 

 

Deferred Revenue

Deferred revenue represents amounts for (i) deferred maintenance and support revenue and (ii) other deferred revenue including professional services and training when the revenue recognition criteria have not been met.   

Guarantees and Product Warranties

The Company’s standard hardware warranty period is typically 12 months from the date of shipment to end-users and 90 days for software. For certain products, the Company offers a limited lifetime hardware warranty commencing on the date of shipment from the Company and ending five (5) years following the Company’s announcement of the end of sale of such product. Upon shipment of products to its customers, the Company estimates expenses for the cost to repair or replace products that may be returned under warranty and accrue a liability in cost of product revenue for this amount. The determination of the Company’s warranty requirements is based on actual historical experience with the product or product family, estimates of repair and replacement costs and any product warranty problems that are identified after shipment.  The Company estimates and adjusts these accruals at each balance sheet date in accordance with changes in these factors.

The following table summarizes the activity related to the Company’s product warranty liability during the three and six months ended December 31, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2018

 

 

December 31,

2017

 

 

December 31,

2018

 

 

December 31,

2017

 

Balance beginning of period

 

$

12,601

 

 

$

13,499

 

 

$

12,807

 

 

$

10,584

 

Warranties assumed due to acquisitions

 

 

 

 

 

526

 

 

 

 

 

 

3,682

 

New warranties issued

 

 

4,145

 

 

 

1,657

 

 

 

7,867

 

 

 

3,929

 

Warranty expenditures

 

 

(3,938