EXTR
$8.99
Extreme Networks
($.01)
(.11%)
Earnings Details
3rd Quarter March 2018
Tuesday, May 08, 2018 4:05:00 PM
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Summary

Extreme Networks Misses

Extreme Networks (EXTR) reported 3rd Quarter March 2018 earnings of $0.18 per share on revenue of $262.0 million. The consensus earnings estimate was $0.21 per share on revenue of $266.0 million. The Earnings Whisper number was $0.23 per share. Revenue grew 76.2% on a year-over-year basis.

The company said it expects fourth quarter non-GAAP earnings of $0.16 to $0.23 per share on revenue of $277.0 million to $287.0 million. The current consensus earnings estimate is $0.29 per share on revenue of $287.5 million for the quarter ending June 30, 2018.

Extreme Networks Inc is a provider of network infrastructure equipment & services for enterprises, data centers, & service providers. Its customers include businesses, hospitals, hotels, universities, telecommunications companies & government agencies.

Results
Reported Earnings
$0.18
Earnings Whisper
$0.23
Consensus Estimate
$0.21
Reported Revenue
$262.0 Mil
Revenue Estimate
$266.0 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Extreme Networks Reports Third Quarter Fiscal Year 2018 Financial Results

SAN JOSE, Calif., May 8, 2018 /PRNewswire/ -- Extreme Networks, Inc. ("Extreme") (Nasdaq: EXTR) today released financial results for its fiscal third quarter ended March 31, 2018.

Extreme Networks Logo (PRNewsFoto/Extreme Networks) (PRNewsFoto/Extreme Networks) (PRNewsfoto/Extreme Networks, Inc.)

Third Quarter Results: 

  • Third quarter revenue was $262.0 million, an increase of 76% year-over-year.
  • GAAP gross margin for the third fiscal quarter was 54.6%, a decrease of 90 basis points year-over-year, and non-GAAP gross margin was 57.9% year-over-year, an increase of 70 basis points year-over-year. 
  • GAAP operating margin for the third fiscal quarter was (3.1) % and non-GAAP operating margin was 9.3%, compared to (1.8) % and 9.8% , respectively, year-over-year.
  • GAAP net loss for the third fiscal quarter was $13.6 million, or $0.12 per basic share, a decrease of $8.6 million and $0.07 per basic share, respectively, year-over-year. Non-GAAP net income was $19.0 million, or $0.16 per diluted share, an increase of $6.8 million and $0.05 per diluted share, respectively, year-over-year.

"We made significant progress continuing to build the 'new' Extreme in the third fiscal quarter with year-over-year revenue growth and non-GAAP gross margin improvement, hitting all of our critical milestones associated with the systems integration of our newly acquired assets," stated Ed Meyercord, President and CEO of Extreme Networks.

"We achieved organic growth of 8% in core Extreme revenue, driven by strength in our wireless business, and 10% sequential growth in our acquired Campus Fabric revenue. Given strong demand, we built our order backlog by over $7M during the quarter. We expect improvement in our gross margins in our last fiscal quarter of 2018 as we continue to approach our 60% target, in addition to significant sequential and year-over-year quarterly revenue growth."

"On January 15th, we successfully completed the migration of the data and IT systems of the acquired Data Center assets and on April 9th, we completed a similar migration of the acquired Campus Fabric assets. The migration was on schedule with orders being booked, billed, and shipped on the first day of the cut-over.  And we relocated approximately 265 employees into our newly renovated San Jose campus as planned on April 30th. This completed our IT integration efforts following our recent acquisitions and we are now tracking and operating in one instance of our ERP system and procurement systems. Our teams have done an outstanding job driving our business while managing these large and complex integration initiatives."

Meyercord added, "Finally, our recent acquisitions are meaningfully strengthening our brand, our competitive position and our technology differentiation in the market evidenced by significant growth in our pipeline, which includes many cross-selling opportunities. In our fourth fiscal quarter, we expect to deliver continued year-over-year organic growth in our core Extreme business with less seasonality in our fourth fiscal quarter than prior years due to revenue trends from our acquired assets.  After reviewing our pipeline we anticipate we will remain on track to meet or exceed our annual target of $430 million of newly acquired revenue from our recent acquisitions.  Looking out into fiscal 2019, we remain on track to grow revenue 3 to 5% in the combined portfolio as compared to our second-half 2018 run-rate." 

Recent Key Highlights:

  • Concord Hospital, a large regional hospital system, serves half a million patients and over 5,000 network users across 30 locations. Concord deployed Extreme Fabric Connect™ to achieve the self-networking benefits of MPLS without the cost and complexity. Extreme's Fabric Connect gives Concord the ability to secure and protect sensitive data with network segmentation and run as many as 3,000 IoT devices on the network at any one time.
  • MetLife Stadiumpart of the Meadowlands Sports Complex, serves as the home stadium for two National Football League (NFL) franchises: the New York Giants and the New York Jets, with a capacity of 82,500 seats. Metlife deployed ExtremeSwitching™ platforms running the ExtremeXOS® Operating System with Extreme Management Center (XMC) and ExtremeAnalytics to support an upgraded audio network and additional services. Extreme's switches continue to support third party technologies such as Wi-Fi, VoIP, and distributed video and content.
  • Oral Roberts University, a leading college in Tulsa, Oklahoma, relies on Extreme Networks solutions to power extraordinary, campus-wide mobile experiences for students, faculty and staff. Exceptional service is ensured via the use of ExtremeAnalytics™, which allows network managers to see campus-wide traffic patterns, dwell times and more, via a single dashboard, and make adjustments in real-time. ORU has leveraged Extreme solutions to offer cutting-edge digital learning initiatives and enhanced social media and cultural experiences since 2017. Since then, the University has accepted seven awards for technology design and effectiveness, including the Campus Technology 2017 Impact Award and 2018 Ellucian Technology Award for Global Impact.
  • Extreme Networks introduced ExtremeLocation™, a solution that allows retailers to identify, engage and provide personalized guest experiences in-store via shoppers' mobile devices. This offering brings a new level of insight to retail customers by collecting contextual analytics from both Wi-Fi and BLE beacon technology.
  • Extreme Networks completed its Extreme Now world tour bringing its leadership team directly to customers in 55 cities in 22 countries. The Now tour culminated in Extreme's global user conference, Extreme Connect, held in Scottsdale, Arizona in late April. At Connect, over 350 customers and partners across industries became Extreme Networks Certified Insider community members, networked with peers, and received technical training across Extreme's edge, campus and data center solutions portfolio. 
  • On May 1, 2018, Extreme Networks, Inc. entered into a Credit Agreement that provides for a $40 million, five-year revolving credit facility and a $190 million, five-year term loan. On May 1, 2018, the Company borrowed approximately $200 million under the Senior Secured Credit Facilities in order to pay off existing debt and for general corporate purposes and to refinance at a 1.0% lower rate. The Senior Secured Credit Facilities will bear interest, as of May 1, 2018, at a rate per annum equal to LIBOR plus 1.50% to 2.75%, or the adjusted base rate plus 0.50% to 1.75%, based on the Company's Consolidated Leverage Ratio. 

Fiscal Q3 2018 Financial Metrics:

(in millions, except percentages ad per share information)



Q3 FY'18


Q3 FY'17


Change






(As adjusted)








GAAP Results of Operations














Product


$

203.5


$

111.3


$

92.2



83%


Service



58.5



37.9



20.6



54%


Total Net Revenue


$

262.0


$

149.2


$

112.8



76%


Gross Margin



54.6%



55.5%


-90 bps



(2)%


Operating Margin



(3.1)%



(1.8)%


-134 bps



(74)%


Net Loss


$

(13.6)


$

(5.0)


$

(8.6)



(172)%


Loss per basic and diluted share


$

(0.12)


$

(0.05)


$

(0.07)



(140)%


Non-GAAP Results of Operations














Product


$

203.5


$

111.3


$

92.2



83%


Service



58.5



37.9



20.6



54%


Total Net Revenue


$

262.0


$

149.2


$

112.8



76%


Gross Margin



57.9%



57.2%


70 bps



1%


Operating Margin



9.3%



9.8%


-50 bps



(5)%


Net Income


$

19.0


$

12.2


$

6.8



55%


Earnings per diluted share


$

0.16


$

0.11


$

0.05



45%


  • With the adoption of new revenue recognition accounting guidance ("ASC 606") since July 1, FY'18, we have adjusted prior periods. The impact of these adjustments to the balance sheet and income statement, are noted with "as adjusted".
  • Cash and investments ended the quarter at $105.3 million, a decrease of $22.9 million from Q2 and a decrease of $12.0 million from Q3 last year, driven primarily by the funding of the acquisition of the Campus Fabric and Data Center businesses.
  • Accounts receivable balance ending Q3 was $188.4 million, with days sales outstanding ("DSO") of 65.
  • Q3 ending inventory was $77.8 million, a decrease of $5.6 million from the prior quarter and an increase of $28.1 million from Q3 last year.
  • Q3 ending debt was $178.7 million, a decrease of $4.5 million from Q2 and an increase of $83.8 million from Q3 last year, driven primarily by borrowings to fund Extreme's acquisitions of the Campus Fabric and Data Center businesses.

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 fourth quarter of fiscal 2018, ending June 30, 2018, the Company is targeting revenue in a range of $277.0 million to $287.0 million.  GAAP gross margin is targeted between 56.0% and 58.1% and non-GAAP gross margin is targeted between 58.0% and 60.0%. Operating expenses are targeted to be between $148.6 million and $152.2 million on a GAAP basis and $136.5 million to $139.5 million on a non-GAAP basis. GAAP earnings are targeted to be between net income of $1.5 million to $9.6 million or a net income of $0.01 to $0.08 per diluted share.  Non-GAAP earnings are targeted in a range of net income of $19.2 million to $27.9 million, or $0.16 to $0.23 per diluted share. The GAAP and non-GAAP per share targets are based on 121.5 million average outstanding shares.

The following table shows the GAAP to non-GAAP reconciliation for Q4 FY'18 guidance:


Gross Margin 
Rate



Operating
Margin Rate



Earnings per
Share


GAAP

56.0% - 58.1%



2.3% - 5.1%



$0.01-$0.08


Estimated adjustments for:












Amortization of product intangibles

1.7%



1.7%



$

0.04


Stock based compensation

0.2%



2.9%



$

0.07


Amortization of non product intangibles

-



0.6%



$

0.01


Acquisition and integration costs

0.1%



1.2%



$

0.03














Non-GAAP

58.0% - 60.0%



8.7% - 11.4%



$0.16 - $0.23


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 4:30 p.m. Eastern (1:30 p.m. Pacific) today to review the third fiscal quarter results as well as the fourth fiscal quarter ended June 30, 2018 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 May 7, 2019.  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 # 7777378.

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, on premise or through the cloud, we go to extreme measures for our customers in more than 80 countries, delivering 100% insourced call-in technical support to organizations large and small, including some of the world's leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, and manufacturing. 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, Extreme Management Center, ExtremeWireless, ExtremeWireless WiNG, Extreme Secure Automated Campus, ExtremeControl, ExtremeAnalytics, and ExtremeCloud are either trademarks or registered trademarks of Extreme Networks, Inc. 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, purchase accounting adjustments, acquired inventory adjustments, amortization of acquired intangibles, restructuring charges, executive transition costs, litigation expenses, other income and income tax.  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, any anticipated benefits related to the asset acquisitions with Avaya and Brocade, the status of the integration of the acquired technologies and operations from the Avaya and Brocade assets into our business and operations 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 ability to realize the anticipated benefits of the acquisition of the networking business from Avaya and the data center switching, routing and analytics business assets from Brocade; our ability to successfully integrate the acquired technologies and operations from Avaya and Brocade assets into our business and operations;  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 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)




March 31,

2018



June 30,

2017








(As adjusted)


ASSETS









Current assets:









Cash and cash equivalents


$

103,177



$

130,450


Accounts receivable, net of allowance for doubtful accounts of $1,796 at March 31, 2018 and $1,190 at June 30, 2017



188,408




93,115


Inventories



77,756




47,410


Prepaid expenses and other current assets



26,659




27,867


Total current assets



396,000




298,842


Property and equipment, net



86,487




30,240


Intangible assets, net



85,406




25,337


Goodwill



129,244




80,216


Other assets



43,348




25,065


Total assets


$

740,485



$

459,700


LIABILITIES AND STOCKHOLDERS' EQUITY









Current liabilities:









Current portion of long-term debt


$

24,720



$

12,280


Accounts payable



90,800




31,587


Accrued compensation and benefits



40,591




42,662


Accrued warranty



12,812




10,584


Deferred revenue, net



117,741




79,048


Other accrued liabilities



77,042




37,044


Total current liabilities



363,706




213,205


Deferred revenue, less current portion



38,828




25,293


Long-term debt, less current portion



153,958




80,422


Deferred income taxes



5,628




6,576


Other long-term liabilities



65,440




8,526


Commitments and contingencies







Stockholders' equity



112,925




125,678


Total liabilities and stockholders' equity


$

740,485



$

459,700


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)




Three Months Ended



Nine Months Ended




March 31,

2018



March 31,

2017



March 31,

2018



March 31,

2017








(As adjusted)







(As adjusted)


Net revenues:

















Product


$

203,527



$

111,321



$

543,151



$

319,469


Service



58,477




37,875




161,691




108,708


Total net revenues



262,004




149,196




704,842




428,177


Cost of revenues:

















Product



94,485




52,275




253,002




159,151


Service



24,536




14,117




67,490




40,684


Total cost of revenues



119,021




66,392




320,492




199,835


Gross profit:

















Product



109,042




59,046




290,149




160,318


Service



33,941




23,758




94,201




68,024


Total gross profit



142,983




82,804




384,350




228,342


Operating expenses:

















Research and development



50,920




24,691




131,112




67,003


Sales and marketing



72,240




38,790




193,460




116,674


General and administrative



11,707




9,612




35,561




27,296


Acquisition and integration costs, net of bargain purchase gain



9,316




3,418




47,675




9,908


Restructuring and related charges, net of reversals



4,920




7,719




4,920




9,572


Amortization of intangibles



2,101




1,193




6,461




7,510


Total operating expenses



151,204




85,423




419,189




237,963


Operating loss



(8,221)




(2,619)




(34,839)




(9,621)


Interest income



740




236




2,104




374


Interest expense



(4,044)




(1,177)




(8,763)




(3,000)


Other income (expense), net



(359)




(251)




2,125




551


Loss before income taxes



(11,884)




(3,811)




(39,373)




(11,696)


Provision for income taxes



1,729




1,166




1,787




3,252


Net loss


$

(13,613)



$

(4,977)



$

(41,160)



$

(14,948)


Basic and diluted net loss per share:

















Net loss per share - basic


$

(0.12)



$

(0.05)



$

(0.36)



$

(0.14)


Net loss per share - diluted


$

(0.12)



$

(0.05)



$

(0.36)



$

(0.14)


Shares used in per share calculation - basic



115,059




109,213




113,641




107,531


Shares used in per share calculation - diluted



115,059




109,213




113,641




107,531


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)




Nine Months Ended




March 31,

2018



March 31,

2017


Net cash (used in) provided by operating activities


$

(1,730)



$

43,961


Cash flows from investing activities:









Capital expenditures



(21,999)




(7,832)


Business acquisitions



(97,581)




(51,088)


Proceeds from sale of non-marketable equity investment



4,922





Deposit related to future acquisition






(10,239)


Net cash used in investing activities



(114,658)




(69,159)


Cash flows from financing activities:









Borrowings under Term Loan



100,000




48,250


Loan fees on borrowings



(1,494)




(1,327)


Repayments of debt



(13,278)




(7,775)


Proceeds from issuance of common stock, net of tax withholding



4,657




9,180


Payments of contingent consideration



(671)





Net cash provided by financing activities



89,214




48,328











Foreign currency effect on cash



(99)




28











Net (decrease) increase in cash and cash equivalents



(27,273)




23,158











Cash and cash equivalents at beginning of period



130,450




94,122


Cash and cash equivalents at end of period


$

103,177



$

117,280


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 share-based compensation expense, acquisition and integration costs, purchase accounting adjustments, acquired inventory adjustments, restructuring charges, executive transition costs, litigation, amortization of acquired intangibles, other income and income tax.

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 to 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 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, purchase accounting adjustments, acquired inventory adjustment, amortization of intangibles, restructuring charges, executive transition costs, litigation, other income and income tax.  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.

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

Acquisition and integration costs. Acquisition and integration costs consist of legal and professional fees related to the acquisition of a) Wireless LAN business, b) Campus Fabric business, c) Data Center business and d) the bargain purchase gain for the capital financing business; Extreme Networks excludes these expenses since they result from an event that is outside the ordinary course of continuing operations.

Purchase accounting adjustments.  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.

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

Amortization of acquired intangibles.  Amortization of acquired 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 and are non-cash in nature.

Restructuring expenses. Restructuring expenses primarily consist of severance costs for employees which have no benefit to continuing operations and accrued lease costs pertaining to the estimated future obligations for non-cancelable lease payments and accelerated depreciation of leasehold improvements related to excess facilities. Extreme Networks excludes restructuring expenses since they result from events that often occur outside of the ordinary course of continuing operations.

Executive transition expenses.  Executive transition expenses consists of severance and termination benefits.  The expenses are incurred through execution of pre-established employment contracts with senior executives. 

Litigation expenses. Litigation expenses consist of legal and professional fees and expenses related to our on-going litigation matters.

Other income. Other income consists of the gain on the sale of our equity investment in a private company.

Income tax.   Income tax adjustments relate to the tax impact of reducing the US tax rate applied to deferred tax items pursuant to the recently enacted US tax legislation as well as the tax benefit resulting from the impairment of a lease acquired from Avaya in Canada.

In addition to the non-GAAP measures discussed above, Extreme 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 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's 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 percentages and per share amounts)

(Unaudited)


Non-GAAP Revenue

Three Months Ended



Nine Months Ended



March 31,

2018



March 31,

2017



March 31,

2018



March 31,

2017







(As adjusted)







(As adjusted)


Revenue - GAAP Basis

$

262,004



$

149,196



$

704,842



$

428,177


Adjustments:
















Purchase accounting adjustment











133


Revenue - Non-GAAP Basis

$

262,004



$

149,196



$

704,842



$

428,310



Non-GAAP Gross Margin

Three Months Ended



Nine Months Ended



March 31,

2018



March 31,

2017



March 31,

2018



March 31,

2017







(As adjusted)







(As adjusted)


Gross profit - GAAP Basis

$

142,983



$

82,804



$

384,350



$

228,342


Gross margin - GAAP Basis percentage


54.6%




55.5%




54.5%




53.3%


Adjustments:
















Stock based compensation expense


517




129




1,172




737


Purchase accounting adjustments











133


Acquired inventory adjustments


597




1,963




4,784




4,263


Acquisition and integration costs


3,068




(413)




7,586




5,104


Amortization of intangibles


4,581




891




11,109




6,027


Total adjustments to GAAP gross profit

$

8,763



$

2,570



$

24,651



$

16,264


Gross profit - Non-GAAP

$

151,746



$

85,374



$

409,001



$

244,606


Gross margin - Non-GAAP percentage


57.9%




57.2%




58.0%




57.1%



Non-GAAP Operating Income

Three Months Ended



Nine Months Ended



March 31,

2018



March 31,

2017



March 31,

2018



March 31,

2017







(As adjusted)







(As adjusted)


GAAP operating loss

$

(8,221)



$

(2,619)



$

(34,839)



$

(9,621)


GAAP operating loss percentage


(3.1)%




(1.8)%




(4.9)%




(2.2)%


Adjustments:
















Stock based compensation expense


7,818




2,474




19,646




9,328


Acquisition and integration costs, net of bargain purchase gain


12,384




3,005




55,261




15,012


Restructuring charge, net of reversal


4,920




7,719




4,920




9,572


Acquired inventory adjustments


597




1,963




4,784




4,263


Amortization of intangibles


6,682




2,084




17,570




13,537


Purchase accounting adjustments











133


Executive transition costs











34


Litigation


207




(44)




(158)




219


Total adjustments to GAAP operating income

$

32,608



$

17,201



$

102,023



$

52,098


Non-GAAP operating income

$

24,387



$

14,582



$

67,184



$

42,477


Non-GAAP operating income percentage


9.3%




9.8%




9.5%




9.9%



Non-GAAP Net Income

Three Months Ended



Nine Months Ended



March 31,

2018



March 31,

2017



March 31,

2018



March 31,

2017







(As adjusted)







(As adjusted)


GAAP net loss

$

(13,613)



$

(4,977)



$

(41,160)



$

(14,948)


Adjustments:
















Stock based compensation expense


7,818




2,474




19,646




9,328


Acquisition and integration costs, net of bargain purchase gain


12,384




3,005




55,261




15,012


Restructuring charge, net of reversal


4,920




7,719




4,920




9,572


Acquired inventory adjustments


597




1,963




4,784




4,263


Amortization of intangibles


6,682




2,084




17,570




13,537


Purchase accounting adjustments











133


Executive transition costs











34


Litigation


207




(44)




(158)




219


Gain on sale of non-marketable equity investment








(3,757)





Income tax








(3,102)





Total adjustments to GAAP net loss

$

32,608



$

17,201



$

95,164



$

52,098


Non-GAAP net income

$

18,995



$

12,224



$

54,004



$

37,150


















Earnings per share
















Non-GAAP net income per share-diluted

$

0.16



$

0.11



$

0.45



$

0.34


















Shares used in net income per share-diluted
















Non-GAAP shares used


120,688




112,576




119,588




110,455



Free Cash Flow

Three Months Ended



Nine Months Ended



March 31,

2018



March 31,

2017



March 31,

2018



March 31,

2017


Cash flow (used in) provided by operations

$

(15,978)



$

24,673



$

(1,730)



$

43,961


Less: PP&E CapEx spending


(8,690)




(3,170)




(21,999)




(7,832)


Total free cash flow

$

(24,668)



$

21,503



$

(23,729)



$

36,129


 

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