extr-8k_20200129.htm
false EXTREME NETWORKS INC 0001078271 0001078271 2020-01-29 2020-01-29

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (date of earliest event reported): January 29, 2020

 

EXTREME NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

Delaware

 

000-25711

 

77-0430270

(State or other jurisdiction

of incorporation)

 

(Commission

File No.)

 

(I.R.S. Employer

Identification No.)

 

6480 Via Del Oro

San Jose, California 95119

(Address of principal executive offices)

Registrant's telephone number, including area code:

(408579-2800

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

EXTR

 

NASDAQ Global Market

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark 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.

 


Item 2.02 Results of Operations and Financial Condition

On January 29, 2020, Extreme Networks, Inc. (the “Company”) issued a press release announcing certain financial results for the quarter ended December 31, 2019. A copy of the press release is furnished as Exhibit 99.1 to this report.

The information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 to this Current Report on Form 8-K, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information contained in this Item 2.02 and in the accompanying Exhibit 99.1 shall not be incorporated by reference into any registration statement or other document filed by the Company with the Securities and Exchange Commission, whether made before or after the date of this Current Report, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference to this Item 2.02 and Exhibit 99.1 in such filing.

 

 

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

 

99.1

 

Press Release dated January 29, 2020.

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: January 29, 2020

 

EXTREME NETWORKS, INC.

 

 

 

By:

 

/s/ REMI THOMAS

 

 

Remi Thomas

 

 

Executive Vice President, Chief Financial Officer (Principal Accounting Officer)

 

extr-ex991_6.htm

Exhibit 99.1

 

FOR IMMEDIATE RELEASE

 

 

For more information, contact:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Relations

 

 

 

Media Contact

 

Stan Kovler

 

 

 

Christi Nicolacopoulos

919/595-4196

 

 

 

603/952-5005

 

Investor_relations@extremenetworks.com

 

 

 

pr@extremenetworks.com

 

Extreme Networks Reports Second Quarter Fiscal Year 2020 Financial Results

Announces Completion of $30 Million Accelerated Share Repurchase Program

Conference Call at 8:00 a.m. EST

 

SAN JOSE, Calif., January 29, 2020 -- Extreme Networks, Inc. (“Extreme”) (Nasdaq: EXTR) today released financial results for its fiscal second quarter ended December 31, 2019.

 

Fiscal Second Quarter Results:  

 

 

Revenue $267.5 million, up 6% year-over-year and up 5% quarter-over-quarter

 

GAAP EPS $(0.20), down $(0.26) year-over-year and up $0.11 quarter-over-quarter

 

Non-GAAP EPS $0.13, flat year-over-year and up $0.05 quarter-over-quarter

 

GAAP gross margin 55.6% compared to 55.9% in Q2 last year

 

Non-GAAP gross margin 60.0% compared to 58.2% in Q2 last year  

 

GAAP operating margin (5.7)% compared to 1.9% in Q2 last year

 

Non-GAAP operating margin 9.0%, compared to 8.0% in Q2 last year

 

Net cash provided by operating activities was $22.1 million

 

Free Cash Flow of $17.9 million

 

“Our Q2 Non-GAAP EPS of $0.13 was the result of achieving our long-standing Non-GAAP gross margin target of 60% for the first time in Extreme’s history and growing operating margin both year-over-year and quarter-over-quarter. We made progress in the integration of Aerohive Networks and in extracting related synergies. Nevertheless, Q2 revenue fell short of our guidance expectations owing to weakness in US public sector and Asia Pacific,” stated Ed Meyercord, President and CEO of Extreme Networks.  

 

Meyercord added, “We executed a $30 million accelerated share repurchase program during the quarter, reflecting opportunistic action by our Board of Directors and demonstrating our ongoing commitment to drive shareholder value and minimize dilution from our equity programs.  We remain confident in our ability to execute our long-term strategy and will continue to use share repurchases as a vehicle to create value for our shareholders.”

 

Meyercord also announced significant changes to Extreme’s sales organization. “We are very focused on driving growth in our business through increased efficiency and sales productivity.  We’ve made changes to streamline operations as we head into the second half of 2020. I am confident that these changes, along


 

with the refresh and stratification of our product portfolio, will enhance our go-to-market efforts and allow us to drive further gross margins.

 

“With our revised guidance we now expect to achieve Non-GAAP operating income margins in the 12-13% range by the end of fiscal year 2020.  We expect to attain organic growth and our 15% Non-GAAP long term operating margin target in the second half of calendar year 2020.  We are confident in our guidance and the execution of our plan based on the growing strength of our enterprise franchise in the market, the market migration to cloud-based networking and our leadership position, our execution on delivering our cloud platform, growth opportunities with 5G and other ecosystem partners, and a clear path to margin expansion from structurally higher gross margins and expense reductions,” concluded Meyercord.

 

Recent Key Highlights:

 

During the second quarter of Fiscal Year 2020, Extreme initiated a $30 million Accelerated Share Repurchase Program “ASR” with Bank of America with 3.85 million shares initially delivered to Extreme. The ASR was funded using the Company’s working capital. As of December 31, 2019, Extreme Networks had 118.4 million shares of common stock outstanding.  On January 28, 2020, the program settled with approximately 382,000 additional shares. Total average price of the share repurchases was $7.09.   

 

The School District of Palm Beach County has standardized on ExtremeSwitching, ExtremeWireless, and Extreme Management Center to centrally, simply, and securely manage connectivity and device access throughout the tech-forward district. The technology will be deployed alongside existing Aerohive (now Extreme) access points. Palm Beach County has the tenth-largest public-school district in the United States, and the fifth-largest school district in Florida, with 180 schools, 193,000 students and 22,340 employees, including more than 12,900 teachers.

 

Init7, a Swiss provider of broadband Internet, IP-TV and IP Wholesale, will deploy Extreme Networks solutions throughout its international IP backbone as part of a global network refresh. ExtremeRouting SLX 9640s will enable Init7 to offer 100G services from 45 company-owned points of presence (PoPs) in Switzerland, elsewhere in Europe, and America.

 

UC Health, a collaboration between University of Cincinnati Physicians, University of Cincinnati Medical Center, Drake and West Chester Hospital, has deployed Extreme’s campus fabric solution, including Extreme Fabric Connect, Fabric Attach, Extreme Management Center, and ExtremeControl software. The Extreme-powered network enables the health system to connect, segment, and secure a growing volume of connected medical and consumer IoT devices, and will eventually support HVAC and lighting, across four inpatient campuses and 58 outpatient locations. It also allows for rapid onboarding of new buildings, systems, and devices as the health system expands.

 

Hills Limited, a publicly traded Australian B2B solutions provider in the building technologies sector, has deployed Extreme networking solutions across 20 sites, including ExtremeSwitching, ExtremeAnalytics, Extreme Management Center and ExtremeControl software, replacing its

 


 

 

legacy network infrastructure to bring the management of its voice and data network in-house and accelerate adoption of cloud-based services.

 

The National Football League's Tennessee Titans have upgraded to Extreme's industry-leading Wi-Fi 6 solutions, including ExtremeWireless and ExtremeAnalytics, providing tens of thousands of fans with faster speeds and higher-performance connectivity on game day.

 

Extreme announced availability of Extreme Retail Select curated cloud technology packages designed to remove the cost and complexity associated with selecting, buying, building, deploying, and managing network services at retail locations. The turn-key network solutions give retail chains and franchises the ability to quickly and easily automate set-up and management of network connectivity from one to thousands of sites, maximize operational efficiencies, and deliver consistent services and experiences at scale.  With Extreme Retail Select, we developed a unique interface to deliver end user data, such as dwell times, loyalty information, and site flow that supports marketing and sales initiatives to drive better business outcomes.

 

Extreme introduced new capabilities for its Extreme Fabric Automation software designed to augment enterprise IT teams and reduce human error. The solution automatically manages the validation, testing, and operation of data center fabric networks while providing critically important network reliability and resiliency. Extreme also announced availability of two new high-performance switches embedded with guest VMs – the SLX 9150 leaf switch and the SLX 9250 spine switch.

 

Extreme announced it was named an October 2019 Gartner Peer Insights Customers' Choice for Data Center Networking. The company received a 4.7 out of 5 rating among customers across many different verticals. This is the second consecutive year Extreme Networks was recognized by its customers as a Gartner Peer Insights Customers' Choice in this category.

Gartner Peer Insights Customers’ Choice constitute the subjective opinions of individual end-user reviews, ratings, and data applied against a documented methodology; they neither represent the views of, nor constitute an endorsement by, Gartner or its affiliates.


 


 

 

Fiscal Q2 2020 Financial Metrics:

(in millions, except percentages and per share information)

 

 

Q2 FY'20

 

 

Q2 FY'19

 

 

Change

 

GAAP Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

190.5

 

 

$

189.6

 

 

$

0.9

 

 

-%

 

Service

 

 

77.0

 

 

 

63.1

 

 

 

13.9

 

 

 

22

%

Total Net Revenue

 

$

267.5

 

 

$

252.7

 

 

$

14.8

 

 

 

6

%

Gross Margin

 

 

55.6

%

 

 

55.9

%

 

-30 bps

 

 

-

 

Operating Margin

 

 

(5.7

)%

 

 

1.9

%

 

-760 bps

 

 

-

 

Net Income (Loss)

 

$

(23.5

)

 

$

7.2

 

 

$

(30.7

)

 

 

426

%

Income (loss) per diluted share

 

$

(0.20

)

 

$

0.06

 

 

$

(0.26

)

 

 

433

%

Non-GAAP Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

190.5

 

 

$

189.6

 

 

$

0.9

 

 

-%

 

Service

 

 

77.0

 

 

 

63.1

 

 

 

13.9

 

 

 

22

%

Total Net Revenue

 

$

267.5

 

 

$

252.7

 

 

$

14.8

 

 

 

6

%

Gross Margin

 

 

60.0

%

 

 

58.2

%

 

180 bps

 

 

-

 

Operating Margin

 

 

9.0

%

 

 

8.0

%

 

100 bps

 

 

-

 

Net Income

 

$

15.8

 

 

$

15.5

 

 

$

0.3

 

 

 

2

%

Income per diluted share

 

$

0.13

 

 

$

0.13

 

 

$

-

 

 

 

 

 

 

 

Q2 ending cash and cash equivalents balance was $140.4 million, an increase of $9.0 million from Q1, this was primarily driven by operating cash flow generation of $22.1 million and investing activity cash flow generation of $25.5 million, including $29.7 million of proceeds from sales and maturities of short-term investments, offset by cash usage of $38.7 million for financing activities, including $30.0 million applied to the accelerated share repurchase program.

 

Q2 Accounts Receivable balance was $159.8 million, with days sales outstanding of 55, the same as Q1 and an increase of 2 days from Q2 last year.  

 

Q2 ending inventory was $79.7 million, a decrease of $2.7 million from Q1 and an increase of $21.4 million from Q2 last year.  The year-over-year increase in inventory largely reflects advanced purchases ahead of rising tariffs, new products, and to a lesser extent, the addition of Aerohive Networks inventory.

 

Q2 ending gross debt was $375.3 million, a decrease of $4.7 million from Q1 and an increase of $190.0 million from Q2 last year following the refinancing of our debt in Q1 to acquire Aerohive Networks in August 2019. Net Debt* of $234.9 million increased by $16.0 million from $218.9 million in Q1.

Extreme uses the non-GAAP free cash flow metric as a measure of operating performance. Free cash flow represents GAAP operating cash flows less purchases of property, plant and equipment. Extreme considers free cash flow as useful information for management and investors regarding the amount of cash generated by the business after the purchases of property, plant, and equipment, which can then be used to, among other things, invest in Extreme’s business, make strategic acquisitions, and strengthen the balance sheet. A limitation of the utility of the non-GAAP free cash flow metric as a measure of financial performance is that it does not represent the total increase or decrease in the Company's cash balance for the period. As shown in the table below (in thousands):

 


 

 

Free Cash Flow

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2019

 

 

December 31,

2018

 

 

December 31,

2019

 

 

December 31,

2018

 

Cash flow provided by operations

$

22,112

 

 

$

27,281

 

 

$

21,911

 

 

$

61,611

 

Less: PP&E CapEx spending

 

(4,198

)

 

 

(3,723

)

 

 

(9,438

)

 

 

(11,140

)

Total free cash flow

$

17,914

 

 

$

23,558

 

 

$

12,473

 

 

$

50,471

 

 

*Net Debt is defined as gross debt minus cash: as shown in the table below (in millions):

 

Gross debt

 

 

Cash

 

 

Net debt

 

$

375.3

 

 

$

140.4

 

 

$

234.9

 

 

Business Outlook:

Extreme’s Business Outlook is based on current expectations. The following statements are forward-looking, and actual results could differ materially based on market conditions and the factors set forth under “Forward-Looking Statements” below.

 

For its third quarter of fiscal 2020, ending March 31, 2020, the Company is targeting:

 

 

 

(in millions)

Low-End

 

 

High-End

 

FQ3'20 Guidance – GAAP

 

 

 

 

 

 

 

Total Net Revenue

$

255.0

 

 

$

265.0

 

Gross Margin

 

56.0

%

 

 

58.0

%

Operating Expenses

$

147.3

 

 

$

154.1

 

Operating Margin

 

(1.8

%)

 

 

(0.2

%)

Net Loss

$

(12.8

)

 

$

(8.6

)

Loss per basic share

$

(0.11

)

 

$

(0.07

)

Shares outstanding used in calculating GAAP EPS

119.4

 

 

119.4

 

FQ3’20 Guidance – Non - GAAP

 

 

 

 

 

 

 

Total Net Revenue

$

255.0

 

 

$

265.0

 

Gross Margin

 

59.1

%

 

 

61.1

%

Operating Expenses

$

129.3

 

 

$

135.3

 

Operating Margin

 

8.4

%

 

 

10.0

%

Net Income

$

13.1

 

 

$

18.3

 

Income per diluted share

$

0.11

 

 

$

0.15

 

Shares outstanding used in calculating Non-GAAP EPS

 

122.6

 

 

 

122.6

 

 

The following table shows the GAAP to non-GAAP reconciliation for Q3 FY’20 guidance:

 

 


 

 

Gross Margin

Rate

 

 

Operating

Margin Rate

 

 

Earnings per

Share

 

GAAP

56.0% - 58.0%

 

 

(1.8%) - (0.2%)

 

 

($0.11) - ($0.07)

 

Estimated adjustments for:

 

 

 

 

 

 

 

 

 

 

 

Amortization of product intangibles

2.3%

 

 

2.3%

 

 

$

0.05

 

Stock based compensation

0.3%

 

 

4.0%

 

 

$

0.09

 

Restructuring

-

 

 

0.2%

 

 

$

-

 

Acquisition and integration costs

0.1%

 

 

2.4%

 

 

$

0.05

 

Adjustment to acquired inventories

-

 

 

-

 

 

$

-

 

Amortization of non-product intangibles

0.3%

 

 

1.2%

 

 

$

0.03

 

Non-GAAP

59.1% - 61.1%

 

 

8.4% - 10.0%

 

 

$0.11 - $0.15

 

 

The total of percentage rate changes may not equal the total change in all cases due to rounding.

 

Conference Call:

Extreme will host a conference call at 8:00 a.m. Eastern (5:00 a.m. Pacific) today to review the second fiscal quarter results as well as the business outlook for third fiscal quarter ending March 31, 2020, including significant factors and assumptions underlying the targets noted above. The conference call will be available to the public through a live audio web broadcast via the internet at http://investor.extremenetworks.com and a replay of the call will be available on the website through February 5, 2020. The conference call may also be heard by dialing 1(877) 303-9826 or international 1 (224) 357-2194. Supplemental financial information to be discussed during the conference call will be posted in the Investor Relations section of the Company's website www.extremenetworks.com including the non-GAAP reconciliation attached to this press release. The encore recording can be accessed by dialing 1 (855) 859-2056 or international 1 (404) 537-3406. Conference ID # 2146939. The encore recording will be available for 7 days following the call.

 

About Extreme Networks:

Extreme Networks, Inc. (EXTR) is the industry’s first cloud-driven, end-to-end enterprise networking company. Our best-of-breed technology solutions, from the wireless and IoT edge to the data center, are flexible, agile, and secure to accelerate the digital transformation of our customers and provide them with the fastest path to the autonomous enterprise. Our 100% in-sourced services and support are number one in the industry. Even with 50,000 customers globally, including half of the Fortune 50 and some of the world's leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, and manufacturing, we remain nimble and responsive to ensure customer and partner success. We call this Customer-Driven Networking™. Founded in 1996, Extreme is headquartered in San Jose, California. For more information, visit Extreme's website or call 1-888-257-3000.

 

Extreme Networks, the Extreme Networks logo, ExtremeSwitching, ExtremeWireless, Extreme Management Center, ExtremeRouting, Extreme Fabric Connect, ExtremeAnalytics, ExtremeControl, Extreme Retail Select, and Extreme Fabric Automation, are trademarks of Extreme Networks, Inc. or its subsidiaries in the United States and/or other countries.

 

Non-GAAP Financial Measures:

Extreme provides all financial information required in accordance with generally accepted accounting principles (“GAAP”). The Company is providing with this press release non-GAAP gross margins, non-GAAP operating margins, non-GAAP operating expenses, non-GAAP net income and non-GAAP

 


 

earnings per share. In preparing non-GAAP information, the Company has excluded, where applicable, the impact of share-based compensation, acquisition and integration costs, acquired inventory adjustments, amortization of acquired intangibles, inventory valuation adjustment, restructuring charges, income tax and free cash flow.  The Company believes that excluding these items provides both management and investors with additional insight into its current operations, the trends affecting the Company, the Company's marketplace performance, and the Company's ability to generate cash from operations. Please note the Company's non-GAAP measures may be different than those used by other companies. The additional non-GAAP financial information the Company presents should be considered in conjunction with, and not as a substitute for, the Company's GAAP financial information.  

 

The Company has provided a non-GAAP reconciliation of the results for the periods presented in this release, which are adjusted to exclude certain items as indicated.  These measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures for comparable financial information and understanding of the Company's ongoing performance as a business. Extreme Networks uses both GAAP and non-GAAP measures to evaluate and manage its operations.

 

Forward Looking Statements:

Statements in this release, including those concerning the Company’s business outlook, future financial and operating results, acquired technologies and operations, future price increases, changes to our supply chain, the introduction of new products, the impact of tariffs on our products, the success of our digital transformation initiatives, the impact of the Aerohive acquisition integration, and overall future prospects are forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this release. Actual results or events could differ materially from those anticipated in those forward-looking statements as a result of certain factors, including: our failure to achieve targeted revenues and forecasted demand from end customers; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development or introduction of new technology and products; customer response to our new technology and products; risks related to pending or future litigation; and a dependency on third parties for certain components and for the manufacturing of our products.  

 

More information about potential factors that could affect the Company's business and financial results are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 and other documents of the Company on file with the Securities and Exchange Commission (available at www.sec.gov).  Except as required under the U.S. federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission, Extreme Networks disclaims any obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

 

###

 

 


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

December 31,

2019

 

 

June 30,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

140,414

 

 

$

169,607

 

Accounts receivable, net of allowance for doubtful accounts of $1,083 and $1,054 respectively

 

 

159,790

 

 

 

174,414

 

Inventories

 

 

79,664

 

 

 

63,589

 

Prepaid expenses and other current assets

 

 

37,744

 

 

 

34,379

 

Total current assets

 

 

417,612

 

 

 

441,989

 

Property and equipment, net

 

 

67,938

 

 

 

73,554

 

Operating lease right-of-use assets, net

 

 

57,194

 

 

 

 

Intangible assets, net

 

 

86,740

 

 

 

51,112

 

Goodwill

 

 

330,184

 

 

 

138,577

 

Other assets

 

 

54,985

 

 

 

51,642

 

Total assets

 

$

1,014,653

 

 

$

756,874

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt, net of unamortized debt issuance costs of $7,334 and $1,261, respectively

 

$

16,814

 

 

$

9,011

 

Accounts payable

 

 

65,995

 

 

 

65,704

 

Accrued compensation and benefits

 

 

55,718

 

 

 

51,625

 

Accrued warranty

 

 

16,209

 

 

 

14,779

 

Current portion, operating lease liability

 

 

17,921

 

 

 

 

Current portion, deferred revenue, net

 

 

180,935

 

 

 

144,230

 

Other accrued liabilities

 

 

69,365

 

 

 

70,680

 

Total current liabilities

 

 

422,957

 

 

 

356,029

 

Deferred revenue, less current portion

 

 

96,902

 

 

 

59,012

 

Long-term debt, less current portion, net of unamortized debt issuance costs of $7,334 and $1,251, respectively

 

 

348,916

 

 

 

169,739

 

Operating lease liability, less current portion

 

 

58,598

 

 

 

 

Deferred income taxes

 

 

2,114

 

 

 

1,957

 

Other long-term liabilities

 

 

34,239

 

 

 

54,150

 

Commitments and contingencies

 

 

 

 

 

 

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; 124,616 and 121,538 shares issued, respectively; 118,400 and 119,172 shares outstanding, respectively

 

 

125

 

 

 

122

 

Additional paid-in-capital

 

 

1,008,176

 

 

 

986,772

 

Accumulated other comprehensive loss

 

 

(2,485

)

 

 

(2,473

)

Accumulated deficit

 

 

(914,710

)

 

 

(853,434

)

Treasury stock at cost: 6,216 and 2,366 shares, respectively

 

 

(40,179

)

 

 

(15,000

)

Stockholders’ equity

 

 

50,927

 

 

 

115,987

 

Total liabilities and stockholders’ equity

 

$

1,014,653

 

 

$

756,874

 

 


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2019

 

 

December 31,

2018

 

 

December 31,

2019

 

 

December 31,

2018

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

190,492

 

 

$

189,567

 

 

$

375,626

 

 

$

367,287

 

Service

 

 

76,980

 

 

 

63,113

 

 

 

147,352

 

 

 

125,279

 

Total net revenues

 

 

267,472

 

 

 

252,680

 

 

 

522,978

 

 

 

492,566

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

91,387

 

 

 

86,487

 

 

 

182,778

 

 

 

170,030

 

Service

 

 

27,414

 

 

 

24,894

 

 

 

54,286

 

 

 

49,166

 

Total cost of revenues

 

 

118,801

 

 

 

111,381

 

 

 

237,064

 

 

 

219,196

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

99,105

 

 

 

103,080

 

 

 

192,848

 

 

 

197,257

 

Service

 

 

49,566

 

 

 

38,219

 

 

 

93,066

 

 

 

76,113

 

Total gross profit

 

 

148,671

 

 

 

141,299

 

 

 

285,914

 

 

 

273,370

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

55,380

 

 

 

52,204

 

 

 

114,496

 

 

 

103,445

 

Sales and marketing

 

 

75,436

 

 

 

68,342

 

 

 

146,793

 

 

 

135,924

 

General and administrative

 

 

15,098

 

 

 

13,886

 

 

 

30,080

 

 

 

26,657

 

Acquisition and integration costs

 

 

8,994

 

 

 

67

 

 

 

24,919

 

 

 

2,613

 

Restructuring charges, net of reversals and impairment

 

 

6,622

 

 

 

474

 

 

 

12,759

 

 

 

1,282

 

Amortization of intangibles

 

 

2,377

 

 

 

1,575

 

 

 

4,307

 

 

 

3,716

 

Total operating expenses

 

 

163,907

 

 

 

136,548

 

 

 

333,354

 

 

 

273,637

 

Operating (loss) income

 

 

(15,236

)

 

 

4,751

 

 

 

(47,440

)

 

 

(267

)

Interest income

 

 

477

 

 

 

643

 

 

 

1,144

 

 

 

1,037

 

Interest expense

 

 

(6,234

)

 

 

(3,066

)

 

 

(11,398

)

 

 

(6,592

)

Other (expense) income, net

 

 

(748

)

 

 

(399

)

 

 

(190

)

 

 

88

 

(Loss) income before income taxes

 

 

(21,741

)

 

 

1,929

 

 

 

(57,884

)

 

 

(5,734

)

Provision (benefit) for income taxes

 

 

1,797

 

 

 

(5,270

)

 

 

3,392

 

 

 

(3,868

)

Net (loss) income

 

$

(23,538

)

 

$

7,199

 

 

$

(61,276

)

 

$

(1,866

)

Basic and diluted net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share - basic

 

$

(0.20

)

 

$

0.06

 

 

$

(0.51

)

 

$

(0.02

)

Net (loss) income per share - diluted

 

$

(0.20

)

 

$

0.06

 

 

$

(0.51

)

 

$

(0.02

)

Shares used in per share calculation - basic

 

 

119,555

 

 

 

117,544

 

 

 

119,891

 

 

 

117,456

 

Shares used in per share calculation - diluted

 

 

119,555

 

 

 

119,544

 

 

 

119,891

 

 

 

117,456

 

 

 


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six Months Ended

 

 

 

December 31,

2019

 

 

December 31,

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(61,276

)

 

$

(1,866

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

14,251

 

 

 

13,476

 

Amortization of intangible assets

 

 

17,772

 

 

 

13,552

 

Reduction in carrying amount of right-of-use asset

 

 

8,477

 

 

 

-

 

Provision for doubtful accounts

 

 

626

 

 

 

861

 

Share-based compensation

 

 

19,792

 

 

 

15,525

 

Deferred income taxes

 

 

801

 

 

 

(6,516

)

Non-cash restructuring and impairment charges

 

 

7,622

 

 

 

-

 

Unrealized/realized gain on equity investment

 

 

-

 

 

 

274

 

Non-cash interest expense

 

 

1,982

 

 

 

1,532

 

Other

 

 

735

 

 

 

(344

)

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

25,751

 

 

 

66,568

 

Inventories

 

 

3,157

 

 

 

5,570

 

Prepaid expenses and other assets

 

 

(274

)

 

 

(12,390

)

Accounts payable

 

 

(9,070

)

 

 

(40,050

)

Accrued compensation and benefits

 

 

(3,036

)

 

 

(3,851

)

Operating lease liabilities

 

 

(9,051

)

 

 

-

 

Deferred revenue

 

 

6,181

 

 

 

11,568

 

Other current and long-term liabilities

 

 

(2,529

)

 

 

(2,298

)

Net cash provided by operating activities

 

 

21,911

 

 

 

61,611

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(9,438

)

 

 

(11,140

)

Business acquisitions, net of cash acquired

 

 

(219,458

)

 

 

 

Maturities and sales of investments

 

 

45,249

 

 

 

727

 

Net cash used in investing activities

 

 

(183,647

)

 

 

(10,413

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

199,500

 

 

 

 

Loan fees on borrowings

 

 

(10,514

)

 

 

(545

)

Equity forward contract

 

 

(4,821

)

 

 

 

Repayments of debt

 

 

(24,950

)

 

 

(14,933

)

Repurchase of common stock

 

 

(25,179

)

 

 

(15,000

)

Proceeds from issuance of common stock, net of tax withholding

 

 

2,906

 

 

 

5,005

 

Payment of contingent consideration obligations

 

 

(2,000

)

 

 

(3,856

)

Deferred payments on an acquisition

 

 

(2,206

)

 

 

(2,000

)

Net cash provided by (used in) financing activities

 

 

132,736

 

 

 

(31,329

)

 

 

 

 

 

 

 

 

 

Foreign currency effect on cash

 

 

(193

)

 

 

(365

)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

 

(29,193

)

 

 

19,504

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

169,607

 

 

 

121,139

 

Cash and cash equivalents at end of period

 

$

140,414

 

 

$

140,643

 

 


 

Extreme Networks, Inc.

Non-GAAP Measures of Financial Performance

 

To supplement the Company's condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, ("GAAP"), Extreme Networks uses non-GAAP measures of certain components of financial performance.  These non-GAAP measures include non-GAAP net income, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP earnings per diluted share and Free Cash Flow.

 

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, Extreme Networks also presents its target for non-GAAP expenses, which is expenses less share-based compensation expense, acquisition and integration costs, acquired inventory adjustments, restructuring charges, amortization of acquired intangibles, inventory valuation adjustments, income tax and free cash flow.

 

Non-GAAP measures presented in this press release are not in accordance with or alternative measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies.  In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles.  Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Extreme Networks' results of operations as determined in accordance with GAAP.  These non-GAAP measures should only be used to evaluate Extreme Networks' results of operations in conjunction with the corresponding GAAP measures.

 

Extreme believes these non-GAAP measures when shown in conjunction with the corresponding GAAP measures enhance investors' and management's overall understanding of the Company's current financial performance and the Company's prospects for the future, including cash flows available to pursue opportunities to enhance stockholder value.  In addition, because Extreme Networks has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company's financial reporting.

 

For its internal planning process, and as discussed further below, Extreme's management uses financial statements that do not include share-based compensation expense, acquisition and integration costs, acquired inventory adjustment, amortization of intangibles, inventory valuation adjustments, restructuring charges, leased asset impairments, income tax and free cash flow.  Extreme’s management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.

 

As described above, Extreme excludes the following items from one or more of its non-GAAP measures when applicable.

 

Stock-based compensation. Consists of associated expenses for stock options, restricted stock and the Company’s Employee Stock Purchase Plan.  Extreme Networks excludes share-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses that the Company does not believe are reflective of ongoing cash requirement related to its operating results. Extreme Networks expects to incur share-based compensation expenses in future periods.

 

 

 


 

Acquired inventory adjustments. Purchase accounting adjustments relating to the mark up of acquired inventory to fair value less disposal costs.

Acquisition and integration costs. Acquisition and integration costs consist of specified compensation charges, software charges, legal and professional fees related to the acquisition of Aerohive in fiscal 2020 and the acquisition of the Campus Fabric and Data Center Businesses in fiscal 2019. Extreme Networks excludes these expenses since they result from an event that is outside the ordinary course of continuing operations.

Amortization of intangibles. Amortization of intangibles includes the monthly amortization expense of 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.  Extreme Networks excludes these expenses since they result from an intangible asset and for which the period expense does not impact the operations of the business and are non-cash in nature.

 

Inventory valuation adjustments. Adjustments relating to the mark down of inventory due to duplication of products lines with acquisition of Aerohive net of recoveries on the sale of inventory marked down in previous quarters.

 

Restructuring expenses. Restructuring expenses primarily consist of severance costs for employees which have no benefit to continuing operations and impairment of right-of-use assets, long-lived assets and other charges related to excess facilities. Extreme Networks excludes restructuring expenses since they result from events that occur outside of the ordinary course of continuing operations.

 

Income tax. Income tax adjustment relates to a tax benefit resulting from changes introduced by Tax Reform related to US net operating losses allowing the release of US valuation allowance as well as a separate tax benefit resulting from the release of a foreign valuation allowance given anticipated future profitability.

 

We do not reflect a tax effect associated with the Non-GAAP operating adjustments as the adjustments are primarily related to the US entity which has a full valuation of various loss carryforward tax attributes.  

 

 

 

 


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

GAAP TO NON-GAAP RECONCILIATION

(In thousands, except percentages and per share amounts)

(Unaudited)

 

 

 

 

Non-GAAP Revenue

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2019

 

 

December 31,

2018

 

 

December 31,

2019

 

 

December 31,

2018

 

Revenue - GAAP Basis

$

267,472

 

 

$

252,680

 

 

$

522,978

 

 

$

492,566

 

Revenue - Non-GAAP Basis

$

267,472

 

 

$

252,680

 

 

$

522,978

 

 

$

492,566

 

 

Non-GAAP Gross Margin

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2019

 

 

December 31,

2018

 

 

December 31,

2019

 

 

December 31,

2018

 

Gross profit - GAAP Basis

$

148,671

 

 

$

141,299

 

 

$

285,914

 

 

$

273,370

 

Gross margin - GAAP Basis percentage

 

55.6

%

 

 

55.9

%

 

 

54.7

%

 

 

55.5

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

907

 

 

 

894

 

 

 

1,504

 

 

 

1,417

 

Acquired inventory adjustments

 

3,434

 

 

 

 

 

 

7,303

 

 

 

 

Acquisition and integration costs

 

1,734

 

 

 

 

 

 

1,884

 

 

 

1,755

 

Amortization of intangibles

 

6,867

 

 

 

4,800

 

 

 

13,259

 

 

 

9,732

 

Inventory valuation adjustments

 

(1,169

)

 

 

 

 

 

3,677

 

 

 

 

Total adjustments to GAAP gross profit

$

11,773

 

 

$

5,694

 

 

$

27,627

 

 

$

12,904

 

Gross profit - Non-GAAP

$

160,444

 

 

$

146,993

 

 

$

313,541

 

 

$

286,274

 

Gross margin - Non-GAAP percentage

 

60.0

%

 

 

58.2

%

 

 

60.0

%

 

 

58.1

%

 

Non-GAAP Operating Income

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2019

 

 

December 31,

2018

 

 

December 31,

2019

 

 

December 31,

2018

 

GAAP operating loss

$

(15,236

)

 

$

4,751

 

 

$

(47,440

)

 

$

(267

)

GAAP operating loss percentage

 

(5.7

)%

 

 

1.9

%

 

 

(9.1

)%

 

 

(.1

)%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense, cost of revenues

 

907

 

 

 

894

 

 

 

1,504

 

 

 

1,417

 

Stock based compensation expense, R&D

 

3,260

 

 

 

2,797

 

 

 

5,695

 

 

 

5,139

 

Stock based compensation expense, S&M

 

3,511

 

 

 

2,983

 

 

 

7,230

 

 

 

5,342

 

Stock based compensation expense, G&A

 

2,801

 

 

 

2,026

 

 

 

4,884

 

 

 

3,627

 

Inventory valuation adjustments

 

(1,169

)

 

 

 

 

 

3,677

 

 

 

 

Acquisition and integration costs

 

10,728

 

 

 

 

 

 

26,803

 

 

 

4,368

 

Restructuring charge, net of reversal

 

6,622

 

 

 

474

 

 

 

12,759

 

 

 

1,282

 

Acquired inventory adjustments

 

3,434

 

 

 

 

 

 

7,303

 

 

 

 

Amortization of intangibles

 

9,244

 

 

 

6,375

 

 

 

17,566

 

 

 

13,448

 

Total adjustments to GAAP operating loss

$

39,338

 

 

$

15,549

 

 

$

87,421

 

 

$

34,623

 

Non-GAAP operating income

$

24,102

 

 

$

20,300

 

 

$

39,981

 

 

$

34,356

 

Non-GAAP operating income percentage

 

9.0

%

 

 

8.0

%

 

 

7.6

%

 

 

7.0

%

 

 


 

Non-GAAP Net Income

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2019

 

 

December 31,

2018

 

 

December 31,

2019

 

 

December 31,

2018

 

GAAP net loss

$

(23,538

)

 

$

7,199

 

 

$

(61,276

)

 

$

(1,866

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

10,479

 

 

 

8,700

 

 

 

19,313

 

 

 

15,525

 

    Inventory valuation adjustments

 

(1,169

)

 

 

 

 

 

3,677

 

 

 

 

Acquisition and integration costs

 

10,728

 

 

 

 

 

 

26,803

 

 

 

4,368

 

Restructuring charge, net of reversal

 

6,622

 

 

 

474

 

 

 

12,759

 

 

 

1,282

 

Acquired inventory adjustments

 

3,434

 

 

 

 

 

 

7,303

 

 

 

 

Amortization of intangibles

 

9,244

 

 

 

6,375

 

 

 

17,566

 

 

 

13,448

 

Income tax

 

 

 

 

(7,290

)

 

 

 

 

 

(7,770

)

Total adjustments to GAAP net loss

$

39,338

 

 

$

8,259

 

 

$

87,421

 

 

$

26,853

 

Non-GAAP net income

$

15,800

 

 

$

15,458

 

 

$

26,145

 

 

$

24,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income per share-diluted

$

0.13

 

 

$

0.13

 

 

$

0.21

 

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in net income per share-diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP shares used

 

123,187

 

 

 

119,544

 

 

 

123,446

 

 

 

119,893