Extreme Networks: Fiscal 2Q14 Financial Results

Extreme Networks, Inc. announced GAAP revenue of $146.6 million for its second quarter of fiscal 2014 ending December 31, 2013.

This represents a 94% increase compared to revenue of $75.6 million reported for the second quarter of fiscal 2013 and a 93% increase compared to the first quarter of fiscal 2014.

The second fiscal quarter results included two full months of Enterasys Networks acquired for $180 million.

GAAP net loss for the second fiscal quarter was $16.0 million or $0.17 per share, which includes $11.0 million of purchase accounting expenses, $8.7 million of acquisition and integration costs, $6.5 million of amortization of intangibles related to the Enterasys Networks acquisition and $3.5 million of stock based compensation. This is compared to a GAAP net loss for the second quarter of fiscal 2013 of $4.2 million or $0.04 per share, which included $5.2 million related to restructuring charges and $1.6 million of stock based compensation. On a non-GAAP basis, revenue was $148.3 million, which includes a purchase accounting adjustment of $1.8 million and net income for the second quarter of fiscal 2014 was $14.1 million, or $0.14 per diluted share, compared to non-GAAP net income for the second quarter of fiscal 2013 of $2.8 million, or $0.03 per diluted share.

“We completed the acquisition of Enterasys on the final day of October making Extreme the fifth largest Ethernet switching company in the market. Our second quarter non-GAAP results, that were within our guidance on both revenue and earnings per share; demonstrate the scale we have achieved as a result of the acquisition,” said Chuck Berger, president and CEO, Extreme Networks. “Our integration plans are on track. The senior management team for the combined company has been established and announced and we continue to make steady progress towards a complete integration. In mid January, in a joint announcement with the NFL, we were named the Official WIFI analytics provider of the NFL and Super Bowl XLVIII. Our newly released Purview Wifi data analytics product provided the NFL with detailed information about Wifi usage at Super Bowl XLVIII.”

Fiscal Q2 2014 Financial Metrics:

• Non-GAAP Gross margin for Q2 was 56.4%, an increase of two percentage points year over year and a decrease of two percentage points quarter over quarter.
• Cash and investments ended the quarter at $112.0 million, as compared to $199.4 million from Q1 of fiscal 2014. We used $180 million related to the acquisition of Enterasys Networks and acquired $100 million in debt during the quarter.
• Accounts receivable balance ending Q2 was $94.3 million, a (net) increase of $55.0 million from Q1 of fiscal 2014, with days sales outstanding (DSO) of 58, an increase of 11 days from Q1 of fiscal 2014. We recorded $25.7 million of accounts receivable as part of the Enterasys acquisition on October 31, 2013.
• Inventory ending Q2 was $62.9 million, a (net) increase of $32.5 million from Q1 of fiscal 2014 and represents 85 days of inventory (DOI), a decrease of 14 days from Q1 of fiscal 2014. The company recorded $33.7 million of inventory as part of the Enterasys acquisition on October 31, 2013.

Recent Business Highlights:                                                                 

• Completed the acquisition of Enterasys Networks for $180 million, net of cash acquired, on October 31, 2013. The company also entered into a 5 year $125 million credit facility and drew $65 million in term debt and $35 million in revolver debt for the acquisition and to fund general corporate obligations. The company has $25 million remaining on the credit facility.
• With Enterasys Networks’ L2/3 Ethernet switch revenues during Q2 CY13 combined for #5 in overall market share among leading vendors, according to statistics from the Dell’Oro Group’s 1Q13 L2/3 Ethernet market share report.
• The National Football League (NFL) and Super Bowl XLVIII named the company as its official Wifi analytics provider.
• A Readers’ Choice Top 100 Product award has been awarded to Extreme Networks for its IdentiFi Wireless solution by District Administration magazine, a source of information for school superintendents across the country.
• Introduced the Summit X770, a scalable Top of Rack (TOR) switch with 10GbE density and investment protection aimed at data centers and big data.

Business Outlook:
Financial targets for the third fiscal quarter reflect the acquisition of Enterasys Networks for a full quarter. For its third quarter of fiscal 2014 ending March 31, 2014, the company is targeting GAAP revenue in a range of $138 million to $153 million with non-GAAP revenue in a range of $140 million to $155 million. GAAP gross margin is targeted in a range of 50% to 52% and non-GAAP gross margin targeted to be 55% to 57%. Operating expenses are targeted to be between $88 million and $94 million on a GAAP basis and $75 million to $81 million on a non-GAAP basis. GAAP net loss is targeted to be between $15 million to $20 million, or $0.15 to $0.21 per diluted share. Non-GAAP net income is targeted in a range of $0.5 million to $6.0 million, or $0.01 to $0.06 per diluted share. The GAAP and non-GAAP net income targets are based on an estimated 96 million +/- and 99 million +/- average 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 and the step-up value of the acquired inventory and the purchase accounting value related to deferred service revenue.

To read the earnings call transcript