Extreme Networks Reports Second Quarter Fiscal Year 2016 Financial Results

Q2 GAAP Revenue of $139.3 Million & Non-GAAP Revenue of $139.7 Million

Q2 GAAP EPS Loss of $0.07 & Non-GAAP EPS Income of $0.09

Jan 28, 2016, 07:00 ET from Extreme Networks, Inc.

SAN JOSE, Calif., Jan. 28, 2016 /PRNewswire/ -- Extreme Networks, Inc. (Nasdaq: EXTR) today released financial results for its fiscal second quarter ended December 31, 2015.  Second quarter GAAP revenue was $139.3 million and non-GAAP revenue was $139.7 million.  GAAP net loss for the second fiscal quarter was $7.2 million, or $0.07 per basic share, and non-GAAP net income was $9.0 million, or $0.09 per diluted share.

"We delivered another quarter of strong results across all geographies reflecting the continued success of our go-to-market strategy," stated Ed Meyercord, President and CEO of Extreme Networks.  "Revenue growth in the US was driven by strength in education with the expected rebound in E-Rate business, while EMEA generated strong results with government and manufacturing customers," said Meyercord.  "In addition, our continued focus on controlling costs has delivered significant operating and net income expansion year over year." 

"Now that we've laid the groundwork over the past two quarters," Meyercord continued, "we are concentrating our efforts on new product introductions and executing our solutions-based selling initiatives in our target vertical markets.  With better visibility into our pipeline and strong business momentum, we are projecting year over year growth for the March quarter."

Recent Key Events:   

  • Unveiled First Flow-based 802.11ac Wave 2 Wireless Solution. During the quarter, we expanded our wireless portfolio with high-density 802.11ac Wave 2 access points (APs) to address the network demands driven by mobility, smart devices and the rapidly expanding wireless enabled Internet of Things.
  • Enhanced Partner Program. To further empower and reward our channel partners, we announced several enhancements to the Extreme Partner Network (EPN) aimed at delivering increased predictability, expanded training and solution-based incentive programs. We also announced two new ExtremeWorks Managed Services offerings to allow partners to take advantage of new consumption models while evolving their businesses to be better positioned for future opportunities.
  • Integrations with VMware. To accelerate the adoption of the Software-Defined Data Center (SDDC) for SMBs and enterprises, we announced extended integration offerings with VMware to deliver IT management and analytics solutions. As part of the collaboration, our NetSight advanced network management system is now integrated with the VMware vRealize® Suite.
  • Key Customer Wins in Focus Markets. Extreme Networks continued to showcase customer momentum across the global education, healthcare, manufacturing, sports and entertainment, and government markets. Notable Customer wins include the Matanuska-Susitna Borough School District, Royal Bolton NHS Trust, Instituto Nacional de Antropologia e Historia, Becker Stahl-Service GmbH, SAK Holdings, Comision Reguladora de Energia,Twin Rivers Unified School District. In addition, Extreme was awarded NRG Stadium, Home of the Houston Texans and Super Bowl LI.

 

Fiscal Q2 2016 Financial Metrics:

2016

2015

Change

GAAP Net Revenue

Product

$

105.4

$

112.5

$

(7.1)

(6)%

Service

34.0

34.7

(0.8)

(2)%

Total Net Revenue

$

139.3

$

147.2

$

(7.9)

(5)%

Gross Margin

50.4%

51.1%

(.7)%

(1)%

Operating Loss

(3.8)%

(7.5)%

3.7%

(49)%

Net Loss

$

(7.2)

$

(13.1)

$

5.9

(45)%

Loss per basic share

$

(0.07)

$

(0.13)

$

0.06

(46)%

Non-GAAP Net Revenue

Product

$

105.4

$

112.5

$

(7.1)

(6)%

Service

34.3

35.5

(1.2)

(3)%

Total Net Revenue

$

139.7

$

148.0

$

(8.3)

(6)%

Gross Margin

53.6%

54.6%

(1.0)%

(2)%

Operating Margin

7.8%

4.5%

3.3%

72%

Net Income

$

9.0

$

4.7

$

4.3

91%

Earnings per diluted share

$

0.09

$

0.05

$

0.04

71%

 

Cash and investments ended the quarter at $85.9 million, as compared to $82.0 million from the prior quarter.

 

Accounts receivable balance ending Q2 was $73.1 million, with days sales outstanding (DSO) of 48.

 

Inventory ending Q2 was $56.6 million, a decrease of $5.1 million from the prior quarter.

Business Outlook:

For its third quarter of fiscal 2016 ending March 31, 2016, the Company is targeting GAAP revenue in a range of $117.6 million to $127.6 million with non-GAAP revenue in a range of $118.0 million to $128.0 million. GAAP gross margin is targeted between 49.9% and 51.2% and non-GAAP gross margin targeted between 53.5% and 54.5%. Operating expenses are targeted to be between $69.5 million and $72.0 million on a GAAP basis and $62.0 million to $64.5 million on a non-GAAP basis. GAAP net loss is targeted to be between $9.0 million to $13.0 million, or $0.09 to $0.13 per share.  Non-GAAP earnings are targeted in a range of a net loss of $1.0 million to net income of $3.0 million, or a loss of $0.01 to net income of $0.03 per diluted share. The GAAP and non-GAAP net income (loss) targets are based on an estimated 103 million and 106 million average outstanding shares, respectively. Targeted non-GAAP earnings exclude expenses related to stock-based compensation expense, the amortization of acquired intangibles, acquisition and integration related expenses, restructuring expenses, litigation expenses, overhead adjustments and the purchase accounting adjustment related to deferred service revenue.

Conference Call:

Extreme Networks will host a conference call at 8:00 a.m. Eastern (5:00 a.m. Pacific) today to review the second fiscal quarter results and third fiscal quarter 2016 business outlook, 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 October 28, 2016.  The conference call may also be heard by dialing 1-877-303-9826 (international callers dial 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 (855) 859-2056 /or international 1 (404) 537-3406; Conference ID #:21560759.

About Extreme Networks:

Extreme Networks, Inc. (EXTR) delivers software-driven networking solutions that help IT departments everywhere deliver the ultimate business outcome: stronger connections with customers, partners and employees. Wired to wireless, desktop to datacenter, we go to extreme measures for our 20,000-plus customers in more than 80 countries, delivering 100% insourced support to organizations large and small, including some of the world's leading names in business, education, government, healthcare, manufacturing and hospitality. 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 and the Extreme Networks logo, ExtremeWireless, ExtremeControl and ExtremeAnalytics are either trademarks or registered trademarks of Extreme Networks, Inc. in the United States and/or other countries.

Non-GAAP Financial Measures:

Extreme Networks provides all financial information required in accordance with generally accepted accounting principles (GAAP). The Company is providing with this press release non-GAAP revenue, non-GAAP gross margins, non-GAAP operating expenses, and non-GAAP income (loss) per share. In preparing non-GAAP information, the Company has excluded, where applicable, the impact of acquisition and integration costs, purchase accounting adjustments, amortization of acquired intangibles, restructuring charges, litigation expenses, share-based compensation and overhead adjustments.  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 that 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 prospects, future financial and operating results, 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: failure to achieve targeted revenues and forecast demand from end customers, increased price competition,  ongoing uncertainty in global economic conditions, infrastructure development or customer demand, collectability of receivables, the ability to meet current financial covenants,  dependencies on third parties to manufacture our products, delays in development and commercialization of products under development, and ongoing litigation.

More information about potential factors that could affect the Company's business and financial results is included in the Company's filings with the Securities and Exchange Commission, including, without limitation, under the captions: "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors".  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) (Unaudited)

December 31,

2015

June 30,

2015

ASSETS

Current assets:

Cash and cash equivalents

$

85,865

$

76,225

Accounts receivable, net of allowances of $6,464 at December 31, 2015 and $2,396 at June 30, 2015

73,110

92,737

Inventories

56,601

58,014

Deferred income taxes

705

760

Prepaid expenses and other current assets

9,925

10,258

Total current assets

226,206

237,994

Property and equipment, net

32,948

39,862

Intangible assets, net

35,138

52,132

Goodwill

70,877

70,877

Other assets

27,618

27,795

Total assets

$

392,787

$

428,660

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt

$

14,625

$

11,375

Accounts payable

25,536

40,135

Accrued compensation and benefits

28,995

25,195

Accrued warranty

10,415

8,676

Deferred revenue, net

75,548

76,551

Deferred distributors revenue, net of cost of sales to distributors

31,677

40,875

Other accrued liabilities

29,968

32,623

Total current liabilities

216,764

235,430

Deferred revenue, less current portion

21,505

23,231

Long-term debt, less current portion

47,375

55,500

Deferred income taxes

3,471

2,979

Other long-term liabilities

8,536

7,285

Commitments and contingencies

Stockholders' equity

95,136

104,235

Total liabilities and stockholders' equity

$

392,787

$

428,660

 

EXTREME NETWORKS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)

Three Months Ended

Six Months Ended

December 31,

2015

December 31,

2014

December 31,

2015

December 31,

2014

Net revenues:

Product

$

105,355

$

112,501

$

196,736

$

215,173

Service

33,950

34,707

67,150

68,309

Total net revenues

139,305

147,208

263,886

283,482

Cost of revenues:

Product

57,103

60,496

104,037

114,521

Service

11,927

11,550

24,456

23,272

Total cost of revenues

69,030

72,046

128,493

137,793

Gross profit:

Product

48,252

52,005

92,699

100,652

Service

22,023

23,157

42,694

45,037

Total gross profit

70,275

75,162

135,393

145,689

Operating expenses:

Research and development

20,716

24,000

40,984

47,347

Sales and marketing

37,058

43,971

73,120

88,750

General and administrative

9,775

10,306

18,951

21,380

Acquisition and integration costs

807

3,500

1,145

7,558

Restructuring charge, net of reversals

3,031

8,634

Amortization of intangibles

4,251

4,467

8,718

8,934

Total operating expenses

75,638

86,244

151,552

173,969

Operating loss

(5,363)

(11,082)

(16,159)

(28,280)

Interest income

29

196

56

342

Interest expense

(809)

(825)

(1,635)

(1,661)

Other income (expense), net

112

(64)

1,079

(498)

Loss before income taxes

(6,031)

(11,775)

(16,659)

(30,097)

Provision for income taxes

1,203

1,330

2,101

2,338

Net loss

$

(7,234)

$

(13,105)

$

(18,760)

$

(32,435)

Basic and diluted net loss per share:

Net loss per share - basic

$

(0.07)

$

(0.13)

$

(0.18)

$

(0.33)

Net loss per share - diluted

$

(0.07)

$

(0.13)

$

(0.18)

$

(0.33)

Shares used in per share calculation - basic

102,369

98,677

101,677

97,996

Shares used in per share calculation - diluted

102,369

98,677

101,677

97,996

 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

Six Months Ended

December 31,

2015

December 31,

2014

Net cash provided by operating activities

$

13,967

$

41,453

Cash flows from investing activities:

Capital expenditures

(1,409)

(3,962)

Proceeds from maturities of investments and marketable securities

-

3,000

Proceeds from sales of investments and marketable securities

-

9,051

Purchases of intangible assets

-

(419)

Net cash (used in) provided by investing activities

(1,409)

7,670

Cash flows from financing activities:

Borrowings under Revolving Facility

15,000

24,000

Repayment of debt

(19,875)

(56,438)

Proceeds from issuance of common stock

2,330

1,722

Net cash used in financing activities

(2,545)

(30,716)

Foreign currency effect on cash

(373)

(2,625)

Net increase  in cash and cash equivalents

9,640

15,782

Cash and cash equivalents at beginning of period

76,225

73,190

Cash and cash equivalents at end of period

$

85,865

$

88,972

 

Extreme Networks, Inc. Non-GAAP Measures of Financial Performance

To supplement the Company's consolidated financial statements presented in accordance with 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 earnings per diluted share, non-GAAP gross margin, non-GAAP operating expenses 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 stock based compensation expense, acquisition and integration costs, purchase accounting adjustments, amortization of intangibles, restructuring expenses and overhead adjustments.

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 Networks believes that 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 shareholder value.  In addition, because Extreme Networks has historically reported certain non-GAAP results to investors, the Company believes that 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 Networks' management uses financial statements that do not include stock-based compensation expense, acquisition and integration costs, purchase accounting adjustments, amortization of  intangibles, restructuring expenses, litigation expenses and overhead adjustments.  Extreme Networks' management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.

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

Stock based compensation expense. This expense consists of expenses for stock options, restricted stock and employee stock purchases through its ESPP.  Extreme Networks excludes stock 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 operating results. Extreme Networks expects to incur stock-based compensation expenses in future periods.

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.  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 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.  Extreme Networks excludes these non-cash expenses since they result from an intangible asset and for which the period expense does not impact the operations of the business.

Purchase accounting adjustments relating to deferred revenue.  Purchase accounting adjustments relating to deferred revenue consists of adjustments to the carrying value of deferred revenue.  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 Extreme Networks entered into the service contract post-acquisition.

Restructuring expenses. Restructuring expenses primarily consists of cash severance and termination benefits. Extreme Networks excludes restructuring expenses since they result from events that often occur outside of the ordinary course of continuing operations. Extreme Networks expects to incur restructuring expenses in future periods.

Litigation expenses. Litigation expenses consist of legal and professional fees and expenses related to our on-going ligation matter as a result of a securities laws class action lawsuit.

Overhead adjustments. Overhead adjustment relate to service inventory overhead capitalization.

In addition to the non-GAAP measures discussed above, Extreme Networks uses free cash flow as a measure of operating performance.  Free cash flow represents operating cash flows less net purchase of property and equipment on a GAAP basis.  Extreme Networks considers free cash flows to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, which can then be used to, among other things, invest in Extreme Networks business, make strategic acquisitions, and strengthen the balance sheet.  A limitation of the utility of free cash flows 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.

 

EXTREME NETWORKS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

GAAP TO NON-GAAP RECONCILIATION

(In thousands, except per share amounts)

(Unaudited)

Non-GAAP Revenue

Three Months Ended

Six Months Ended

December 31,

2015

December 31,

2014

December 31,

2015

December 31,

2014

Revenue - GAAP Basis

$

139,305

$

147,208

$

263,886

$

283,482

Adjustments:

   Purchase accounting adjustment

377

$

766

754

$

1,533

Revenue - Non-GAAP Basis

$

139,682

$

147,974

$

264,640

$

285,015

Non-GAAP Gross Margin

Three Months Ended

Six Months Ended

December 31,

2015

December 31,

2014

December 31,

2015

December 31,

2014

Gross profit - GAAP Basis

$

70,275

$

75,162

$

135,393

$

145,689

Gross margin - GAAP Basis percentage

50.4%

51.1%

51.3%

51.4%

Adjustments:

   Stock based compensation expense

554

574

1,216

1,121

   Purchase accounting adjustments

377

766

754

1,533

   Amortization of intangibles

3,708

4,292

8,000

8,583

   Service inventory overhead capitalization

-

-

(1,493)

-

Gross profit - Non-GAAP Basis

$

74,914

$

80,794

$

143,870

$

156,926

Gross margin - Non-GAAP Basis percentage

53.6%

54.6%

54.4%

55.1%

Non-GAAP Operating Income

Three Months Ended

Six Months Ended

December 31,

2015

December 31,

2014

December 31,

2015

December 31,

2014

GAAP operating loss

$

(5,363)

$

(11,082)

$

(16,159)

$

(28,280)

GAAP operating loss percentage

(3.8)%

(7.5)%

(6.1)%

(10.0)%

Adjustments:

   Stock based compensation expense

3,945

4,750

8,616

9,563

   Acquisition and integration costs

807

3,500

1,145

7,558

   Restructuring charge,net of reversal

3,031

-

8,634

-

   Amortization of intangibles

7,959

8,759

16,718

17,517

   Purchase accounting adjustments

377

766

754

1,533

   Litigation

79

-

79

-

   Service inventory overhead capitalization

-

-

(1,493)

-

Total adjustments to GAAP operating loss

$

16,198

$

17,775

$

34,453

$

36,171

Non-GAAP operating income

$

10,835

$

6,693

$

18,294

$

7,891

Non-GAAP operating income percentage

7.8%

4.5%

6.9%

2.8%

Non-GAAP Net Income

Three Months Ended

Six Months Ended

December 31,

2015

December 31,

2014

December 31,

2015

December 31,

2014

GAAP net loss

$

(7,234)

$

(13,105)

$

(18,760)

$

(32,435)

Adjustments:

   Stock based compensation expense

3,945

4,750

8,616

9,563

   Acquisition and integration costs

807

3,500

1,145

7,558

   Restructuring charge, net of reversal

3,031

-

8,634

-

   Amortization of intangibles

7,959

8,759

16,718

17,517

   Purchase accounting adjustments

377

766

754

1,533

   Litigation

79

-

79

-

   Service inventory overhead capitalization

-

-

(1,493)

-

Total adjustments to GAAP net loss

$

16,198

$

17,775

$

34,453

$

36,171

Non-GAAP net income

$

8,964

$

4,670

$

15,693

$

3,736

Earnings per share

Non-GAAP diluted net income per share

$

0.09

$

0.05

$

0.15

$

0.04

Shares used in diluted net income per share calculation

Non-GAAP shares used

105,087

100,788

103,997

100,606

Free Cash Flow

Three Months Ended

Six Months Ended

December 31,

2015

December 31,

2014

December 31,

2015

December 31,

2014

Cash flow used in operations

$

7,441

$

39,822

$

13,967

$

41,453

Add: PP&E CapEx spending

(776)

$

(1,178)

(1,409)

(3,962)

Total free cash flow

$

6,665

$

38,644

$

12,558

$

37,491

 

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SOURCE Extreme Networks, Inc.



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