EXTREME NETWORKS INC [EXTR] Filings

10-Q 1 extr-10q_20220930.htm 10-Q extr-10q_20220930.htm

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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 September 30, 2022


☐	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.]

2121 RDU Center Drive, Suite 300, Morrisville, North Carolina		27560
[Address of principal executive offices]		[Zip Code]

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

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 Select Market

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 (§ 232.405 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “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 ☒

As of October 21, 2022, the registrant had 131,345,266 shares of common stock, $0.001 par value per share, outstanding.

EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED

September 30, 2022

INDEX


		PAGE
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2022 and June 30, 2022	3

	Condensed Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021	4

	Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2022 and 2021	5

	Condensed Consolidated Statements of Stockholders' Equity for the three months ended September 30, 2022 and 2021	6

	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2022 and 2021	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosure	36

Item 5.	Other Information	36

Item 6.	Exhibits	37

Signatures		38

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	September 30, 2022			June 30, 2022
ASSETS
Current assets:
Cash	$	198,344		$	194,522
Accounts receivable, net		158,727			184,097
Inventories		51,766			49,231
Prepaid expenses and other current assets		73,267			61,239
Total current assets		482,104			489,089
Property and equipment, net		47,952			49,578
Operating lease right-of-use assets, net		34,269			36,454
Intangible assets, net		28,565			32,515
Goodwill		400,144			400,144
Other assets		64,746			60,730
Total assets	$	1,057,780		$	1,068,510
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt, net of unamortized debt issuance costs of $2,236 and $2,276, respectively	$	35,764		$	33,349
Accounts payable		84,848			84,338
Accrued compensation and benefits		47,544			53,710
Accrued warranty		11,522			10,852
Current portion of operating lease liabilities		12,805			13,956
Current portion of deferred revenue		252,841			238,262
Other accrued liabilities		57,375			65,714
Total current liabilities		502,699			500,181
Deferred revenue, less current portion		171,144			163,357
Long-term debt, less current portion, net of unamortized debt issuance costs of $1,860 and $2,430, respectively		231,640			270,570
Operating lease liabilities, less current portion		31,291			33,256
Deferred income taxes		7,311			7,717
Other long-term liabilities		3,092			3,086
Commitments and contingencies (Note 9)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value, issuable in series, 2,000 shares authorized; none issued		—			—
Common stock, $0.001 par value, 750,000 shares authorized; 141,706 and 139,742 shares issued, respectively; 131,227 and 129,263 shares outstanding, respectively		142			140
Additional paid-in-capital		1,125,204			1,115,416
Accumulated other comprehensive loss		(5,170	)		(3,055	)
Accumulated deficit		(921,487	)		(934,072	)
Treasury stock at cost, 10,479 shares		(88,086	)		(88,086	)
Total stockholders’ equity		110,603			90,343
Total liabilities and stockholders’ equity	$	1,057,780		$	1,068,510

See accompanying notes to condensed consolidated financial statements.

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	September 30, 2022			September 30, 2021
Net revenues:
Product	$	206,276		$	185,161
Service and subscription		91,413			82,523
Total net revenues		297,689			267,684
Cost of revenues:
Product		99,763			80,944
Service and subscription		31,218			31,137
Total cost of revenues		130,981			112,081
Gross profit:
Product		106,513			104,217
Service and subscription		60,195			51,386
Total gross profit		166,708			155,603
Operating expenses:
Research and development		50,989			47,766
Sales and marketing		78,382			69,527
General and administrative		18,547			17,003
Acquisition and integration costs		390			1,510
Restructuring and related charges		481			279
Amortization of intangibles		523			1,154
Total operating expenses		149,312			137,239
Operating income		17,396			18,364
Interest income		392			110
Interest expense		(3,826	)		(3,880	)
Other income, net		371			171
Income before income taxes		14,333			14,765
Provision for income taxes		1,748			2,069
Net income	$	12,585		$	12,696

Basic and diluted income per share:
Net income per share – basic	$	0.10		$	0.10
Net income per share – diluted	$	0.09		$	0.10

Shares used in per share calculation – basic		130,289			128,324
Shares used in per share calculation – diluted		132,933			133,225

See accompanying notes to condensed consolidated financial statements.

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended
	September 30, 2022			September 30, 2021
Net income	$	12,585		$	12,696
Other comprehensive income (loss):
Derivatives designated as hedging instruments:
Change in unrealized gains and losses on interest rate swaps		299			(85	)
Reclassification adjustment related to interest rate swaps		(276	)		281
Change in unrealized gains and losses on foreign currency forward contracts		—			(201	)
Net change from derivatives designated as hedging instruments		23			(5	)
Net change in foreign currency translation adjustments		(2,138	)		(906	)
Other comprehensive loss		(2,115	)		(911	)
Total comprehensive income	$	10,470		$	11,785

See accompanying notes to condensed consolidated financial statements.

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

(Unaudited)

	Common Stock				Additional Paid-			Accumulated Other			Treasury Stock						Accumulated			Total Stockholders'
	Shares		Amount		In-Capital			Comprehensive Loss			Shares			Amount			Deficit			Equity
Balance at June 30, 2021		133,279	$	133	$	1,078,602		$	(2,811	)		(6,597	)	$	(43,113	)	$	(978,343	)	$	54,468
Net income		—		—		—			—			—			—			12,696			12,696
Other comprehensive loss		—		—		—			(911	)		—			—			—			(911	)
Issuance of common stock from equity incentive plans, net of tax withholdings		3,072		3		(4,375	)		—			—			—			—			(4,372	)
Share-based compensation		—		—		10,444			—			—			—			—			10,444
Balance at September 30, 2021		136,351	$	136	$	1,084,671		$	(3,722	)		(6,597	)	$	(43,113	)	$	(965,647	)	$	72,325

Balance at June 30, 2022		139,742	$	140	$	1,115,416		$	(3,055	)		(10,479	)	$	(88,086	)	$	(934,072	)	$	90,343
Net income		—		—		—			—			—			—			12,585			12,585
Other comprehensive loss		—		—		—			(2,115	)		—			—			—			(2,115	)
Issuance of common stock from equity incentive plans, net of tax withholdings		1,964		2		(4,001	)		—			—			—			—			(3,999	)
Share-based compensation		—		—		13,789			—			—			—			—			13,789
Balance at September 30, 2022		141,706	$	142	$	1,125,204		$	(5,170	)		(10,479	)	$	(88,086	)	$	(921,487	)	$	110,603

See accompanying notes to condensed consolidated financial statements.

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	September 30, 2022			September 30, 2021
Cash flows from operating activities:
Net income	$	12,585		$	12,696
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,953			5,155
Amortization of intangible assets		4,128			6,440
Reduction in carrying amount of right-of-use asset		3,063			3,902
Provision for doubtful accounts		23			26
Share-based compensation		13,789			10,444
Deferred income taxes		(85	)		682
Non-cash interest expense		552			1,314
Other		(3,595	)		(176	)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		25,347			28,281
Inventories		(2,671	)		604
Prepaid expenses and other assets		(318	)		(18,640	)
Accounts payable		(591	)		2,577
Accrued compensation and benefits		(6,564	)		(22,540	)
Operating lease liabilities		(3,952	)		(4,839	)
Deferred revenue		9,699			7,680
Other current and long-term liabilities		(6,629	)		6,648
Net cash provided by operating activities		49,734			40,254
Cash flows from investing activities:
Capital expenditures		(3,139	)		(3,410	)
Business acquisition, net of cash acquired		—			(69,517	)
Net cash used in investing activities		(3,139	)		(72,927	)
Cash flows from financing activities:
Payments on debt obligations		(37,125	)		(16,750	)
Payments for tax withholdings, net of proceeds from issuance of common stock		(3,999	)		(4,372	)
Payment of contingent consideration obligations		—			(559	)
Deferred payments on an acquisition		(1,000	)		(1,000	)
Net cash used in financing activities		(42,124	)		(22,681	)
Foreign currency effect on cash		(649	)		(191	)
Net increase (decrease) in cash		3,822			(55,545	)

Cash at beginning of period		194,522			246,894
Cash at end of period	$	198,344		$	191,349

See accompanying notes to the condensed consolidated financial statements.

EXTREME NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 U.S. generally accepted accounting principles have been condensed or omitted under such rules and regulations. The condensed consolidated balance sheets at June 30, 2022 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, 2022.

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 September 30, 2022. The results of operations for the three months ended September 30, 2022 are not necessarily indicative of the results that may be expected for fiscal 2023 or any future periods.

Fiscal Year

The Company uses a fiscal calendar year ending on June 30. All references herein to “fiscal 2023” or “2023” represent the fiscal year ending June 30, 2023. All references herein to “fiscal 2022” or “2022” represent the fiscal year ended June 30, 2022.

Principles of Consolidation

The unaudited condensed 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 functional currency environment, all assets and liabilities are translated to United States Dollars at current month end rates of exchange and revenues 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 2, 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, 2022. 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 and Recently Issued Accounting Pronouncements

There were no recently adopted accounting standards which would have a material effect on our condensed consolidated financial statements and accompanying disclosures, and no recently issued accounting standards that are expected to have a material impact on our condensed consolidated financial statements and accompanying disclosures.

Revenues

The Company accounts for revenues in accordance with ASU 2014-09, Revenue from Contracts from Customers (Topic 606). The Company derives the majority of its revenues from sales of its networking equipment, with the remaining revenues generated from sales of services and subscriptions, which primarily includes maintenance contracts and software subscriptions delivered as software as a service (“SaaS”) and additional revenues from professional services, and training for its products. The Company sells its products, maintenance contracts and SaaS 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 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 other observable inputs.

The Company’s performance obligations are satisfied at a point in time or over time as the customer receives and consumes the benefits provided. Substantially all of the Company’s product sales revenues are recognized at a point in time. Substantially all of the Company’s service, subscription, and SaaS revenues are recognized over time. For revenues recognized over time, the Company uses an input measure, days elapsed, to measure progress.

On September 30, 2022, the Company had $424.0 million of remaining performance obligations, which are primarily comprised of deferred maintenance and SaaS revenues. The Company expects to recognize approximately 49% of its deferred revenue as revenue in fiscal 2023, an additional 27% in fiscal 2024 and 24% 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 condensed consolidated balance sheets. Services provided under renewable support arrangements of the Company are billed in accordance with agreed-upon contractual terms, which are either billed fully at the inception of contract or 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 condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

Revenue recognized for the three months ended September 30, 2022 and 2021 that was included in the deferred revenue balance at the beginning of each period was $80.0 million and $73.4 million, respectively.

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 representatives as a result of obtaining service and subscription contracts and contract renewals are recoverable and therefore the Company’s condensed consolidated balance sheets included capitalized balances in the amount of $16.8 million and $16.3 million at September 30, 2022 and June 30, 2022, respectively. Capitalized commissions are included within other assets in the condensed consolidated balance sheets. 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 September 30, 2022 and 2021, was $2.1 million and $1.8 million, respectively.

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.

Revenues by Category

The Company operates in three geographic regions: Americas, EMEA (“Europe, Middle East and Africa”) and APAC (“Asia Pacific”). The following table sets forth the Company’s revenues disaggregated by sales channel and geographic region based on the billing addresses of its customers (in thousands):

	Three Months Ended
	September 30, 2022						September 30, 2021
	Distributor		Direct		Total		Distributor		Direct		Total
Americas:
United States	$	73,314	$	64,312	$	137,626	$	56,068	$	67,331	$	123,399
Other		16,025		4,098		20,123		7,799		3,367		11,166
Total Americas		89,339		68,410		157,749		63,867		70,698		134,565
EMEA		76,256		39,253		115,509		77,898		35,731		113,629
APAC		2,038		22,393		24,431		4,335		15,155		19,490
Total net revenues	$	167,633	$	130,056	$	297,689