EXTREME NETWORKS, INC. This quarterly report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including in particular, our expectations regarding market demands, customer requirements and the general economic environment, future results of operations, and other statements that include words such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "continue" and similar expressions. These forward-looking statements involve risks and uncertainties. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q for the second quarter endedDecember 31, 2021 , our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 , and other filings we have made with theSecurities and Exchange Commission . These risk factors, include, but are not limited to: risks related to supply chain disruptions; fluctuations in demand for our products and services; 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; fluctuations in the global economy, including political, social, economic, currency and regulatory factors (such as the outbreak of COVID-19); risks related to pending or future litigation; a dependency on third parties for certain components and for the manufacturing of our products and our ability to receive the anticipated benefits of acquired businesses. Business Overview The following discussion is based upon our unaudited condensed consolidated financial statements included elsewhere in this Report. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory and service parts, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. For further information about our critical accounting policies and estimates, see the "Critical Accounting Policies and Estimates" section included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."Extreme Networks, Inc. ("Extreme" or "Company") is a leading provider of end-to-end, cloud-driven networking solutions and top-rated services and support. Providing a set of comprehensive solutions from the Internet of Things ("IoT") edge to the cloud, Extreme designs, develops, and manufactures wired and wireless network infrastructure equipment as well as a leading cloud networking platform and applications portfolio using cloud management, machine learning ("ML"), and artificial intelligence ("AI") to deliver network policy, analytics, security, and access controls. Our solutions enable companies to embrace the value of new cloud technology without having to rip and replace existing infrastructures. Extreme has been pushing the boundaries of networking technology for a quarter of a century, driven by a higher purpose of helping our customers connect beyond the network. Extreme's cloud-driven technologies provide flexibility and scalability in deployment, management, and licensing of networks globally. Our global footprint provides service to over 50,000 customers across the world including some of the world's leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, manufacturing and service providers. We derive all our revenues from the sale of our networking equipment, software subscriptions, and related maintenance contracts.
Industry Background
Enterprises are adopting new Information Technology ("IT") delivery models and
applications that require fundamental network alterations and enhancements
spanning from the access edge to the data center. With the impact of the global
pandemic, we believe IT teams in every industry will need more control and
better insights than ever before to ensure secure, distributed connectivity and
comprehensive centralized visibility. ML and AI technologies have the potential
to vastly improve the network experience in the post-pandemic world by collating
large data sets to increase accuracy and derive resolutions to improve the
operation of the network. When applied with cloud-driven networking and
automation, administrators can quickly scale to provide productivity,
availability, manageability, security, and speed, regardless of how distributed
the network is.
27
--------------------------------------------------------------------------------
We believe that the network has never been more vital than it is today. As
administrators grapple with more data, coming from more places, more connected
devices, and more Software-as-a-service ("SaaS") based applications, the cloud
is fundamental to establishing a new normal. Traditional network offerings are
not well-suited to fulfill enterprise expectations for rapid delivery of new
services, more flexible business models, real-time response, and massive
scalability. As enterprises continue to migrate increasing numbers of
applications and services to either private clouds or public clouds offered by
third parties and to adopt new IT delivery models and applications, they are
required to make fundamental network alterations and enhancements spanning from
device access points ("AP") to the network core. In either case, the network
infrastructure must adapt to this new dynamic environment. Intelligence and
automation are key if enterprises are to derive maximum benefit from their cloud
deployments. Service providers are also investing in network enhancements with
platforms and applications that deliver data insights, provide flexibility, and
can quickly respond to new user demands and 5G use cases.
We believe Extreme stands to benefit from the use of its technology to manage
distributed campus network architecture centrally from the cloud. Extreme has
blended a dynamic fabric attach architecture, that delivers simplicity for moves
and changes at the edge of the network, together with corporate-wide role-based
policy. This enables customers to migrate to new cloud managed switching and
Wi-Fi, agnostic of the existing networking or wireless equipment they already
have installed. In the end, we expect these customers to see lower operating and
capital expenditures, lower subscription costs, lower overall cost of ownership
and more flexibility along with a more resilient network. We estimate the total
addressable market for our Enterprise Networking solutions consisting of cloud
networking, wireless local area networks ("WLAN"), data center networking,
ethernet switching, campus local area networks ("LAN"), and software-defined
wide area network ("SD-WAN") solutions to be approximately $26 billion and
growing at approximately five percent per year over the next three years. In
addition, we estimate that 5G provides an estimated $3 billion serviceable
available market for Service Provider Networking.
The Extreme Strategy
The year 2020 resulted in unprecedented change - from the physical footprint of offices, to supply chain operations, to how we connect. Organizations and workforces extend anywhere and everywhere. IT leaders are now tasked with ensuring the global, hybrid workforce is functional and successful no matter where they are and ensure people can work wherever they want. Extreme has recognized that the way we and our customers communicate has changed and the new normal has given rise to these distributed enterprise environments, or in other words, the Infinite Enterprise, which has three key tenets:
• Infinitely distributed connectivity is the enterprise-grade reliable
connectivity that allows users to connect to anywhere, from anywhere. It is
always present, available and assured, while being secure and manageable.
• Scalable cloud allows administrators to harness the power of the cloud to
efficiently onboard, manage, orchestrate, troubleshoot the network, and find
data and insights of the distributed connectivity at their pace in their way.
• Consumer-centric experience designed to deliver a best-in-class experience to
users who consume network services.
Extreme's broad product, solutions and technology portfolio supports these three tenets and continues to innovate and evolve them to help businesses succeed.
Key elements of Extreme's strategy and differentiation include:
• Creating effortless networking solutions that allow all of us to advance. We
believe that progress is achieved when we connect-allowing us to learn,
understand, create, and grow. We make connecting simple and easy with
effortless networking experiences that enable all of us to advance how we
live, work, and share.
• Provide a differentiated end-to-end cloud architecture. Cloud networking is
estimated to be a
projected to be the fastest growing part of the networking industry at
approximately 20% per year over the next three years, according to data from
650
significantly over the past decade. We believe we deliver a combination of
innovation, reliability, and security with the leading end-to-end cloud
management platform powered by ML and AI that spans from the IoT edge to the
enterprise data center. Key characteristics of our cloud architecture
include:
o A robust cloud management platform that delivers visibility,
intelligence, and assurance from the IoT edge to the core.
o Cloud Choice for customers: Our cloud networking solution is available
on all major cloud providers (Amazon Web Services ("AWS"), Google
Cloud Platform ("GCP") and Microsoft Azure).
o Unlimited Network Data plans for the length of the cloud subscription
to improve an organization's ability to make smarter, more effective
business decisions.
o Consumption Flexibility: Offer a range of financing and network
purchase options. Our value-based subscription tiers (including
Connect, Navigator and Pilot) provide customers withflexibility to
grow as they go, as well as offer pool-able and portablelicenses that
can be transferred between products (e.g. access points and switches)
at one fixed price.
28
--------------------------------------------------------------------------------
o "No 9s" Reliability and Resiliency to ensure business continuity for
our customers.
o Zero-Trust Security (Information Security Management ("ISO") 27001
Certified).
• Offer customers choice: public or private cloud, or on-premises. We leverage
the cloud where it makes sense for our customers and provide on-premises
solutions where customers need it and also have a solution for those who
want to harness the power of both. Our hybrid approach gives our customers
options to adapt the technology to their business. At the same time, all of
our solutions have visibility, control and strategic information built in,
all tightly integrated with a single view across all of the installed
products. Our customers can understand what is going on across their network
and applications in real time - who, when, and what is connected to the
network - critical for bring your own device ("BYOD") and IoT usage.
• Highest value of cloud management subscriptions. ExtremeCloud IQ Pilot
provides our customers with four key applications enabling organizations to
eliminate overlays.
o Extreme AirDefense™ is a comprehensive wireless intrusion prevention
system that simplifies the protection, monitoring and security of
wireless networks. With the added Bluetooth and Bluetooth low energy
intrusion prevention, network administrators can address growing
threats against Bluetooth and low energy devices.
o ExtremeLocation™ delivers proximity, presence and location-based
services for advanced contact tracing in support of the
location-intelligent enterprise.
o ExtremeGuest™ is a comprehensive guest engagement solution that
enables IT administrators to use analytical insights to engage
visitors with personalized engagements.
o Extreme IoT™ delivers simple and secure onboarding, profiling,
segmentation and filtering of IoT devices on a production network.
• Offers universal platforms for enterprise class switching and wireless
infrastructure. Extreme offers universal platforms which support multiple
deployment use cases, providing flexibility and investment protection.
o Universal switches (5520/5420) support fabric or traditional
networking with a choice of cloud or on-premises (air-gapped or cloud
connected) management.
o Universal WiFi 6 APs (300/400 series) support campus or distributed
deployments with a choice of cloud or on-premises (air-gapped or cloud
connected) management.
o Universal licensing with one portable management license for any
device and for any type of management. For switches, OS feature
licenses are portable, and bulk activated through ExtremeCloud IQ.
• Enable a common fabric to simplify and automate the network. Fabrictechnologies virtualize the network infrastructure (decoupling network
services from physical connectivity) which enables network services to be
turned up faster, with lower likelihood of error. They make the underlying
network much easier to design, implement, manage and troubleshoot.
• End-to-End Portfolio. Our cloud-driven solutions provide visibility, control
and strategic intelligence from the edge to the data center, across networks
and applications. Our solutions include wired switching, wireless switching,
wireless access points, WLAN controllers, routers, and an extensive
portfolio of software applications that deliver AI-enhanced access control,
network and application analytics, as well as network management. All can be
managed, assessed and controlled from a single pane of glass on premises or
from the cloud.
• Provide high-quality "in-house" customer service and support. We seek to
enhance customer satisfaction and build customer loyalty through
high-quality service and support. This includes a wide range of standard
support programs to the level of service our customers require, from
standard business hours to global 24-hour-a-day, 365-days-a-year real-time
responsive support.
• Extend switching and routing technology leadership. Our technological
leadership is based on innovative switching, routing and wireless products,
the depth and focus of our market experience and our operating systems - the
software that runs on all of our networking products. Our products reduce
operating expenses for our customers and enable a more flexible and dynamic
network environment that will help them meet the upcoming demands of IoT,
mobile, and cloud.
• Expand Wi-Fi technology leadership. Wireless is today's network access
method of choice and every business must deal with scale, density and BYOD
challenges. The network edge landscape is changing as the explosion ofmobile devices increases the demand for mobile, transparent, and always-on
wired to wireless edge services. The unified access layer requires
distributed intelligent components to ensure that access control and
resiliency of business services are available across the entire
infrastructure and manageable from a single console. We are at a technology
inflection point with the pending migration from Wi-Fi 5 solutions to Wi-Fi
6 (802.11ax), focused on providing more efficient access to the broad array
of connected devices. We believe we have the industry's broadest Wi-Fi 6
wireless portfolio providing intelligence for the wired/wireless edge and
enhanced by our cloud architecture with machine learning and AI-driven
insights.
29
--------------------------------------------------------------------------------
• Offer a superior quality of experience. Our network-powered application
analytics provide actionable business insights by capturing and analyzing
context-based data about the network and applications to deliver meaningful
intelligence about applications, users, locations and devices. With an easy
to comprehend dashboard, our applications help businesses turn their network
into a strategic business asset that helps executives make faster and more
effective decisions.
• Expand market penetration by targeting high-growth market segments. Within
the campus, we focus on the mobile user, leveraging our automation
capabilities and tracking WLAN growth. Our data center approach leverages
our product portfolio to address the needs of public and private cloud data
center providers. We believe that the cloud networking compound annual
growth rate will continue to outpace the compound annual growth rate for
on-premises managed networking. Our focus is on expanding our technology
foothold in the critical cloud networking segment to accelerate not only
cloud management adoption, but also subscription-based licensing (SaaS)
consumption.
• Leverage and expand multiple distribution channels. We distribute our
products through select distributors, a large number of resellers and
system-integrators worldwide, as well as several large strategic partners.
We maintain a field sales force to support our channel partners and to sell
directly to certain strategic accounts. As an independent networking vendor,
we seek to provide products that, when combined with the offerings of our
channel partners, create compelling solutions for end-user customers.
• Maintain and extend our strategic relationships. We have established
strategic relationships with a number of industry-leading vendors to both,
provide increased and enhanced routes to market, and collaboratively develop
unique solutions.
Acquisition
On September 14, 2021 , we completed our acquisition (the "Acquisition") of
Ipanematech SAS ("Ipanema"), the cloud-native enterprise Software-Defined Wide
Area Network ("SD-WAN") business unit of Infovista pursuant to a Sale and
Purchase Agreement. Under the terms of the Acquisition, the net consideration
paid by Extreme to Ipanema stockholders was $70.9 million . The primary reason
for the Acquisition was to acquire the talent and the technology to allow us to
expand our portfolio with new cloud-managed SD-WAN and security offerings to
support our enterprise customers.
Key Financial Metrics
During the second quarter of fiscal 2022, we achieved the following results:
• Net revenues of
quarter of fiscal 2021.
• Product revenues of
quarter of fiscal 2021.
• Service and subscription revenues of
million in the second quarter of fiscal 2021.
• Total gross margin of 56.5% of net revenues compared to 57.9% of net
revenues in the second quarter of fiscal 2021.
• Operating income of
million in the second quarter of fiscal 2021.
• Net income of
second quarter of fiscal 2021.
During the first six months of fiscal 2022, we reflected the following results:
• Cash flows provided by operating activities of
• Cash of $173.5 million as of December 31, 2021 compared to $246.9 million
as of June 30, 2021 .
30
--------------------------------------------------------------------------------
Net Revenues
The following table presents net product and service and subscription revenues for the periods presented (dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31, $ % December 31, December 31, $ %
2021 2020 Change Change 2021 2020 Change Change
Net revenues:
Product $ 191,102 $
165,845
68.0 % 68.5 % 68.6 % 68.5 %
Service and subscription 89,831 76,283 13,548 17.8 % 172,354 150,689 21,665 14.4 %
Percentage of net revenues 32.0 % 31.5 % 31.4 % 31.5 %
Total net revenues $ 280,933 $ 242,128 $ 38,805 16.0 % $ 548,617 $ 477,930 $ 70,687 14.8 %
Product revenues increased $25.3 million or 15.2% for the three months ended
December 31, 2021 , as compared to the corresponding period of fiscal 2021.
Product revenues increased $49.0 million or 15.0% for the six months ended
December 31, 2021 , as compared to the corresponding period of fiscal 2021. The
product revenues increase was primarily due to stronger demand for our products
and also due to the material slow-down in global demand during the corresponding
period of fiscal 2021 due to the global outbreak of COVID-19.
Service and subscription revenues increased $13.5 million , or 17.8% for the
three months ended December 31, 2021 as compared to the corresponding period in
fiscal 2021. The increase in service and subscription revenues was primarily due
to the growth in our subscription revenues and partially due to the acquisition
of Ipanema.
Service and subscription revenues increased $21.7 million , or 14.4% for the six
months ended December 31, 2021 as compared to the corresponding period in fiscal
2021. The increase in service and subscription revenues was primarily due to the
growth in our subscription revenues.
The following table presents the product and service and subscription, gross
profit and the respective gross profit percentages for the periods presented
(dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31, $ % December 31, December 31, $ %
2021 2020 Change Change 2021 0 2020 Change Change
Gross profit:
Product $ 100,169 $ 91,840 $ 8,329 9.1 % $ 204,386 $ 179,841 $ 24,545 13.6 %
Percentage of product revenues 52.4 % 55.4 % 54.3 % 55.0 %
Service and subscription 58,617 48,352 10,265 21.2 % 110,003 95,369 14,634 15.3 %
Percentage of service and subscription revenues 65.3 % 63.4 % 63.8 % 63.3 %
Total gross profit $ 158,786 $ 140,192 $ 18,594 13.3 % $ 314,389 $ 275,210 $ 39,179 14.2 %
Percentage of net revenues 56.5 % 57.9 % 57.3 % 57.6 %
Product gross profit increased $8.3 million or 9.1% for the three months ended
December 31, 2021 , as compared to the corresponding period in fiscal 2021. The
increase in product gross profit was primarily due to increased revenues along
with lower excess and obsolete inventory charges of $1.9 million and lower
amortization of intangibles due to certain intangibles being fully depreciated,
partially offset by higher distribution cost of $5.1 million primarily due to
higher freight costs and higher product costs of $14.0 million primarily related
to higher expedite fees due to supply constraints.
Product gross profit increased $24.5 million or 13.6% for the six months ended
December 31, 2021 , as compared to the corresponding period in fiscal 2021. The
increase in product gross profit was primarily due to increased revenues along
with lower excess and obsolete inventory charges of $2.4 million and lower
amortization of intangibles due to certain intangibles being fully depreciated,
partially offset by higher distribution cost of $4.6 million primarily due to
higher freight costs and higher product costs of $19.8 million primarily related
to higher expedite fees due to supply constraints.
Service and subscription gross profit increased $10.3 million or 21.2% for the
three months ended December 31, 2021 , as compared to the corresponding period in
fiscal 2021. The increase was primarily due to increased service and
subscription revenues, partially offset by higher personnel costs, professional
fees and increased cloud service costs.
Service and subscription gross profit increased $14.6 million or 15.3% for the
six months ended December 31, 2021 , as compared to the corresponding period in
fiscal 2021. The increase was primarily due to increased service and
subscription revenues, partially offset by higher professional fees and
increased cloud service costs.
31
--------------------------------------------------------------------------------Operating Expenses
The following table presents operating expenses for the periods presented
(dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31, $ % December 31, December 31, $ %
2021 2020 Change Change 2021 2020 Change Change
Research and development $ 48,080 $ 49,186 $ (1,106 ) (2.2 )% $ 95,846 $ 98,710 $ (2,864 ) (2.9 )%
Sales and marketing 71,565 66,732 4,833 7.2 % 141,092 131,057 10,035 7.7 %
General and administrative 17,877 16,360 1,517 9.3 % 34,880 32,821 2,059 6.3 %
Acquisition and
integration costs 2,113 - 2,113 100.0 % 3,623 1,975 1,648 83.4 %
Restructuring and related
charges 292 695 (403 ) (58.0 )% 571 1,696 (1,125 ) (66.3 )%
Amortization of
intangibles 804 1,506 (702 ) (46.6 )% 1,958 3,298 (1,340 ) (40.6 )%
Total operating expenses $ 140,731 $ 134,479 $ 6,252 4.6 % $ 277,970 $ 269,557 $ 8,413 3.1 %
Research and Development Expenses
Research and development expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), consultant fees and prototype expenses related to the design, development, and testing of our products. Research and development expenses decreased by$1.1 million or 2.2% for the three months endedDecember 31, 2021 , as compared to the corresponding period in fiscal 2021. The decrease in research and development expenses was due to a$1.4 million decrease in facility and information technology costs, a$0.6 million decrease in professional and contractor fees and a$0.5 million decrease in software licenses and engineering project costs, partially offset by a$1.4 million increase in personnel related costs due to increased headcount. Research and development expenses decreased by$2.9 million or 2.9% for the six months endedDecember 31, 2021 , as compared to the corresponding period in fiscal 2021. The decrease in research and development expenses was due to a$2.8 million decrease in facility and information technology costs and a$1.9 million decrease in software licenses and engineering project costs which lowered the depreciation expense, partially offset by a$1.8 million increase in personnel related costs. Sales and Marketing Expenses Sales and marketing expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), as well as trade shows and promotional expenses. Sales and marketing expenses increased by$4.8 million or 7.2% for the three months endedDecember 31, 2021 , as compared to the corresponding period in fiscal 2021. The increase in sales and marketing expenses was primarily due to a$4.0 million increase in personnel costs primarily due to higher compensation and benefits costs due to increase in headcount, a$1.0 million increase in travel costs and a$0.2 million increase in other expenses primarily information technology costs, partially offset by a$0.4 million decrease in professional fees. Sales and marketing expenses increased by$10.0 million or 7.7% for the six months endedDecember 31, 2021 , as compared to the corresponding period in fiscal 2021. The increase in sales and marketing expenses was primarily due to a$8.1 million increase in personnel costs due to higher compensation and benefits costs due to increase in headcount, a$2.0 million increase in travel cost and a$0.6 million increase in other expenses primarily marketing and sales promotions costs, partially offset by a$0.7 million decrease in professional fees.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), legal and professional service costs, and facilities and information technology costs.
General and administrative expenses increased by$1.5 million or 9.3% for the three months endedDecember 31, 2021 , as compared to the corresponding period in fiscal 2021. The increase in general and administrative expenses was primarily due to a$0.8 million increase in legal and professional fees and a$0.7 million increase in equipment and software licensing costs. General and administrative expenses increased by$2.1 million or 6.3% for the six months endedDecember 31, 2021 , as compared to the corresponding period in fiscal 2021. The increase in general and administrative expense was primarily due to$1.4 million increase in personnel costs primarily compensation expenses, a$0.5 million increase in equipment and software licensing costs and$0.1 million increase in other expenses primarily professional fees and travel. 32 --------------------------------------------------------------------------------
Acquisition and Integration Costs
During the three months endedDecember 31, 2021 , we incurred acquisition and integration costs of$2.1 million . During the six months endedDecember 31, 2021 , we incurred$3.6 million of integration costs. Acquisition and integration costs for the three and six months endedDecember 31, 2021 consisted primarily of professional fees for legal advisory services, system and product integrations, and financial services related to the acquisition of Ipanema. During the three months endedDecember 31, 2020 we did not incur any acquisition and integration costs. During the six months endedDecember 31, 2020 , we incurred$2.0 million of acquisition and integration costs. Acquisition and integration costs for the six months endedDecember 31, 2020 consisted primarily of additional professional fees for system integration and financial services related to the Aerohive acquisition.
Restructuring and Related Charges
For the three and six months ended
For the three and six months endedDecember 31, 2020 , we recorded restructuring charges of$0.7 million and$1.7 million , respectively. We continued our cost reduction initiative began in the third quarter of fiscal 2020 and recorded related severance, benefits, and equipment relocation charges of$0.4 million and$1.1 million respectively, related to the 2020 Plan. In addition, we had facility-related charges of$0.3 million and$0.6 million , respectively, related to our previously impaired facilities.
Amortization of Intangibles
During the three months endedDecember 31, 2021 and 2020, we recorded$0.8 million and$1.5 million , respectively, of operating expenses for amortization of intangibles. During the six months endedDecember 31, 2021 and 2020, recorded$2.0 million and$3.3 million , respectively, of operating expenses for amortization of intangibles. The decreases were primarily due to lower amortization related to certain acquired intangibles from previous acquisitions becoming fully amortized. Interest Expense During the three months endedDecember 31, 2021 and 2020, we recorded$3.1 million and$6.1 million , respectively, in interest expense. During the six months endedDecember 31, 2021 and 2020, we recorded$7.0 million and$12.7 million , respectively, in interest expense. The decreases in interest expense were primarily driven by lower average loan balances and lower average rates during the respective period under our Amended and Restated Credit Agreement (as amended, the "2019 Credit Agreement"), datedAugust 9, 2019 , by and among us, as borrower, several banks and other financial institutions as Lenders,BMO Harris Bank N.A ., as an issuing lender and swingline lender,Silicon Valley Bank , as an Issuing Lender, and Bank of Montreal, as administrative agent and collateral agent for the Lenders.
Other Income (Expense), Net
During the three months endedDecember 31, 2021 and 2020, we recorded other income, net of$0.1 million and other expense, net of$1.0 million , respectively. During the six months endedDecember 31, 2021 and 2020, recorded other income, net of$0.2 million and other expense, net of$1.8 million , respectively. The changes for the three and six months endedDecember 31, 2021 was primarily due to foreign exchange gains from the revaluation of certain assets and liabilities denominated in foreign currencies intoU.S. Dollars.
Provision for Income Taxes
For the three months endedDecember 31, 2021 and 2020, we recorded an income tax provision of$1.8 million . For the six months endedDecember 31, 2021 and 2020, we recorded an income tax provision of$3.9 million and$3.1 million , respectively. The income tax provisions for the three and six months endedDecember 31, 2021 and 2020 consisted of (1) taxes on the income of our foreign subsidiaries, (2) foreign withholding taxes, (3) state taxes in jurisdictions where we have no remaining state net operating losses and (4) tax expense associated with the establishment of aU.S. deferred tax liability for amortizable goodwill resulting from the acquisition ofEnterasys Networks, Inc. , the WLAN Business, the Campus Fabric Business and the Data Center Business. 33 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Report are prepared in accordance with accounting principles generally accepted inthe United States . Certain information and footnote disclosures normally included in financial statements prepared in accordance withU.S. generally accepted accounting principles have been condensed or omitted underSEC rules and regulations. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. As discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedJune 30, 2021 , we consider the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements: • Revenue Recognition • Inventory Valuation and Purchase Commitments
There have been no changes to our critical accounting policies since the filing of our last Annual Report on Form 10-K.
Liquidity and Capital Resources
The following table summarizes information regarding our cash (in thousands):
December 31, June 30,
2021 2021
Cash $ 173,548 $ 246,894
As of December 31, 2021 , our principal sources of liquidity consisted of cash of
$173.5 million and accounts receivable, net of $133.3 million , and available
borrowings under our five-year 2019 Revolving Facility of $60.2 million . Our
principal uses of cash include the purchase of finished goods inventory from our
contract manufacturers, payroll and other operating expenses related to the
development and marketing of our products, purchases of property and equipment,
and repayments of debt and related interest. We believe that our $173.5 million
of cash at December 31, 2021 , our cash flow from operations, and the
availability of borrowings from the 2019 Revolving Facility will be sufficient
to fund our planned operations for at least the next 12 months.
On November 2, 2018 , our Board of Directors announced that it had authorized
management to repurchase up to $60.0 million of our shares of common stock for
two years from the date of authorization, of which $15.0 million was used for
repurchases in fiscal 2019 and $30.0 million was used for repurchases in fiscal
2020. In February 2020 , our Board of Directors increased the authorization to
repurchase by $40.0 million to $100.0 million and extended the period for
repurchases for three years from February 5, 2020 . Purchases may be made from
time to time in the open market or in privately negotiated transactions. The
manner, timing and amount of any future purchases will be determined by our
management based on their evaluation of market conditions, stock price,
Extreme's ongoing determination that it is the best use of available cash and
other factors. The repurchase program does not obligate Extreme to acquire any
shares of its common stock, may be suspended or terminated at any time without
prior notice and will be subject to regulatory considerations. During the three
and six months ended December 31, 2021 , we repurchased a total of 1,829,333
shares of common stock on the open market at a total cost of $25.0 million . As
of December 31, 2021 , we have $30.0 million available under our share repurchase
program.
In connection with the acquisition of Aerohive, as of August 9, 2019 , we amended
the 2018 Credit Agreement, which is no longer outstanding, and entered into the
2019 Credit Agreement. The 2019 Credit Agreement provides for a five-year first
lien term loan facility in an aggregate principal amount of $380.0 million and a
five-year revolving loan facility in an aggregate principal amount of $75.0
million ("2019 Revolving Facility"). In addition, we may request incremental
term loans and/or incremental revolving loan commitments in an aggregate amount
not to exceed the sum of $100.0 million plus an unlimited amount that is subject
to pro forma compliance with certain financial tests. On August 9, 2019 , we used
the proceeds to partially fund the acquisition of Aerohive and for working
capital and general corporate purposes.
At our election, the initial term loan (the "Initial Term Loan") under the 2019
Credit Agreement may be made as either base rate loans or Eurodollar loans. The
applicable margin for base rate loans ranges from 0.25% to 2.50% per annum and
the applicable margin for Eurodollar loans ranges from 1.25% to 3.50%, in each
case based on Extreme's Consolidated Leverage Ratio. All Eurodollar loans are
subject to a Base Rate floor of 0.00%. The 2019 Credit Agreement is secured by
substantially all of our assets.
34
--------------------------------------------------------------------------------
The 2019 Credit Agreement requires us to maintain certain minimum financial
ratios at the end of each fiscal quarter. The 2019 Credit Agreement also
includes covenants and restrictions that limit, among other things, our ability
to incur additional indebtedness, create liens upon any of our property, merge,
consolidate or sell all or substantially all of our assets. The 2019 Credit
Agreement also includes customary events of default, which may result in
acceleration of the outstanding balance.
Financial covenants under the 2019 Credit Agreement require us to maintain a
minimum consolidated fixed charge and consolidated leverage ratio at the end of
each fiscal quarter through maturity. The 2019 Credit Agreement also includes
covenants and restrictions that limit, among other things, our ability to incur
additional indebtedness, create liens upon any of our property, merge,
consolidate or sell all or substantially all of our assets. The 2019 Credit
Agreement also includes customary events of default which may result in
acceleration of the outstanding balance.
On April 8, 2020 , we entered into the First Amendment to waive certain terms and
financial covenants of the 2019 Credit Agreement through July 31, 2020 . On May
8, 2020 , we entered into the Second Amendment which superseded the First
Amendment and provided certain revised terms and financial covenants through
March 31, 2021 . Subsequent to March 31, 2021 , the original terms and financial
covenants under the 2019 Credit Agreement resumed in effect. The Second
Amendment required us to maintain certain minimum cash requirement and certain
financial metrics at the end of each fiscal quarter through March 31,
2021 . Under the terms of the Second Amendment, we were not permitted to exceed
$55.0 million in our outstanding balance under the 2019 Revolving Facility, the
applicable margin for Eurodollar rate was 4.5% and we were restricted from
pursuing certain activities such as incurring additional debt, stock
repurchases, making acquisitions or declaring a dividend, until we are in
compliance with the original covenants of the 2019 Credit Agreement. On November
3, 2020 , we and our lenders entered into the Third Amendment to increase the
sublimit for letters of credit to $20.0 million . On December 8, 2020 , we and our
lenders entered into the Fourth Amendment to waive and amend certain terms and
financial covenants within the 2019 Credit Agreement through March 31, 2021 .
The Second Amendment provided for us to end the covenant Suspension Period early
and revert to the covenants and interest rates per the original terms of the
2019 Credit Agreement dated August 9, 2019 by filing a Suspension Period Early
Termination Notice and Covenant Certificate demonstrating compliance. For the
twelve-month period ended March 31, 2021 our financial performance was in
compliance with the original covenants defined in the 2019 Credit Agreement and
as such we filed a Suspension Early Termination Notice and Covenant Certificate
with the administration agent subsequent to filing our Quarterly Report on Form
10-Q for the period ended March 31, 2021 . Returning to compliance with the
covenants per the original terms of the 2019 Credit Agreement dated August 9,
2019 , resulted in our Eurodollar loan spread decreasing from 4.5% during the
suspension period to 2.75% and unused facility commitment fee decreasing from
0.4% to 0.35%, and the limitation on revolver borrowings being removed effective
May 1, 2021 after filing of the certificate with the administrative agent.
Key Components of Cash Flows and Liquidity
A summary of the sources and uses of cash is as follows (in thousands):
Six Months Ended
December 31 , December 31,
2021 2020
Net cash provided by operating activities
(76,170 ) (8,039 )
Net cash used in financing activities (59,394 ) (65,237 )
Foreign currency effect on cash (264 ) 602
Net decrease in cash $ (73,346 ) $ (9,903 )
35
--------------------------------------------------------------------------------
Net Cash Provided by Operating Activities
Cash flows provided by operations in the six months endedDecember 31, 2021 , were$62.5 million , including our net income of$26.0 million and non-cash expenses of$54.1 million for items such as amortization of intangibles, share-based compensation, depreciation, reduction in carrying amount of right-of-use assets, deferred income taxes, and interest. Other sources of cash for the period included decreases in accounts receivables and increase in deferred revenues. This was partially offset by increase in inventories and prepaid expenses and other current assets and decreases in accounts payable, accrued compensation, operating lease liabilities and other current and long-term liabilities. Cash flows provided by operations in the six months endedDecember 31, 2020 , were$62.8 million , including our net loss of$11.9 million and non-cash expenses of$61.7 million for items such as amortization of intangibles, share-based compensation, depreciation, reduction in carrying amount of right-of-use assets, deferred income taxes and imputed interest. Other sources of cash for the period included a decrease in inventory and increases in accounts payable, accrued compensation, and deferred revenues. This was partially offset by decreases in other current and long-term liabilities and operating lease liabilities and increases in accounts receivables and prepaid expenses and other current assets.
Cash flows used in investing activities in the six months endedDecember 31, 2021 were$76.2 million primarily due to the payment of$69.5 million (net of cash acquired) for the acquisition of Ipanema and$6.7 million for the purchases of property and equipment.
Cash flows used in investing activities in the six months ended
Cash flows used in financing activities in the six months endedDecember 31, 2021 were$59.4 million due primarily to debt repayments of$23.9 million , share repurchases of$25.0 million under our share repurchase program, payment of contingent consideration of$0.8 million ,$2.0 million for deferred payments on acquisitions and$7.7 million for taxes paid on vested and released stock awards net of proceeds from the issuance of shares of our common stock under our Employee Stock Purchase Plan ("ESPP") and exercise of stock options. Cash flows used in financing activities in the six months endedDecember 31, 2020 were$65.2 million due primarily to debt repayments of$64.5 million , payment of contingent consideration of$1.0 million , and$2.0 million for deferred payments on acquisitions. This was partially offset by$2.3 million of proceeds from the issuance of shares of our common stock under our ESPP and exercise of stock options, net of taxes paid on vested and released stock awards.
Foreign Currency Effect on Cash
Foreign currency effect on cash decreased in the six months endedDecember 31, 2021 , primarily due to changes in foreign currency exchange rates between theU.S. Dollar and particularly the Indian Rupee, theUK Pound, and the EURO. Foreign currency effect on the cash increased in the six months endedDecember 31, 2020 , primarily due to changes in foreign currency exchange rates between theU.S. Dollar and particularly the Indian Rupee, theUK Pound, and the EURO.
Contractual Obligations
The following summarizes our contractual obligations as ofDecember 31, 2021 , and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands): Payments due by Period Less than More than Total 1 Year 1-3 years 3-5 years 5 years Contractual obligations: Debt obligations$ 322,875 $ 30,875 $ 292,000 $ - $ - Interest on debt obligations 14,954 6,514 8,440 - - Unconditional purchase obligations 53,243 53,243 - - - Contractual commitments 83,912 27,738 34,633 17,233 4,308 Lease payments on operating leases 46,883 10,282 23,865 8,807 3,929 Deferred payments for an acquisition 5,000 4,000 1,000 - - Contingent consideration for an acquisition 208 208 - - - Other liabilities 393 151 242 - - Total contractual cash obligations$ 527,468 $ 133,011 $ 360,180 $ 26,040 $ 8,237 36
--------------------------------------------------------------------------------
The contractual obligations referenced above are more specifically defined as follows:
Debt obligations related to amounts owed under our 2019 Credit Agreement.
Interest on debt obligations includes the effect of our interest rate swap agreements.
Unconditional purchase obligations represent the purchase of long lead-time component inventory that our contract manufacturers procure in accordance with our forecasts. We expect to honor the inventory purchase commitments within the next 12 months.
Contractual commitments to suppliers represent commitments for future services.
Lease payments on operating leases represent base rents and operating expense obligations to landlords for facilities we occupy at various locations.
Deferred payments for the acquisition of the Data Center Business represent
payments of
Contingent consideration for an acquisition of a capital financing business inDecember 2017 from Broadcom, at the estimated fair value. Actual payments could be different.
Other liabilities include our commitments towards debt related fees and specific arrangements other than inventory.
The amounts in the table above exclude immaterial income tax liabilities related to uncertain tax positions as we are unable to reasonably estimate the timing of settlement.
We did not have any material commitments for capital expenditures as of
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
© Edgar Online, source
