Extreme Networks Reports First Quarter Fiscal Year 2021 Financial Results

SAN JOSE, Calif., Oct. 28, 2020 /PRNewswire/ -- Extreme Networks, Inc. ("Extreme") (Nasdaq: EXTR) today released financial results for its first fiscal quarter ended September 30, 2020.

Fiscal First Quarter Results:

    --  Revenue $235.8 million, down 8% year-over-year and up 9%
    --  GAAP EPS $(0.07), up from ($0.31) in Q1 last year
    --  Non-GAAP EPS $0.09, up from $0.07 in Q1 last year
    --  GAAP gross margin 57.3% compared to 53.7% in Q1 last year
    --  Non-GAAP gross margin 60.3% compared to 59.9% in Q1 last year
    --  GAAP operating margin at breakeven compared to (12.6)% in Q1 last year
    --  Non-GAAP operating margin 8.3%, compared to 6.2% in Q1 last year
    --  Net cash provided by operating activities of $24.7 million
    --  Free Cash Flow of $21.7 million

"Our quarterly results exceeded our outlook across all of our financial metrics. The network is more strategic than ever, delivering valuable data that provides greater intelligence and insights customers can use to drive better outcomes. At Extreme, we make it easier than any other vendor to capture this valuable data and use it productively. We also offer more choice and flexibility for end-to-end solutions in today's more distributed networking environment. This is elevating Extreme's competitive position in customer and partner conversations, leading to more opportunities and enhancing our future growth outlook," stated Ed Meyercord, President and CEO of Extreme.

"Customer adoption of our cloud-based networking solutions drove 20% sequential growth of new subscription bookings of ExtremeCloud IQ, the fastest growing cloud-managed platform in the industry. During the quarter we had significant customer wins across our portfolio and in our targeted key verticals, including, most notably, our win of Major League Baseball," concluded Meyercord.

"Stronger execution in each of our geographic regions drove solid sequential growth for the second consecutive quarter. This revenue growth, combined with improved gross margins and reduced operating expenses, resulted in a significant improvement in profitability and cash flow," stated Remi Thomas, CFO of Extreme.

"We have repaid another $20 million of our revolving credit facility on October 23, leaving a remaining balance at just $15 million. We are off to a good start in Q2 and remain well positioned throughout fiscal 2021 to deliver improving operating leverage and cash flow," concluded Thomas.

Recent Key Highlights:

    --  Extreme was identified as the fastest-growing vendor in Omdia's 2020
        Cloud Managed Networking Report. Omdia is a global technology research
        group established following the merger of the research division of
        Informa Tech's research brands - Ovum, Heavy Reading, Tractica - and the
        acquired IHS Markit technology research portfolio. In the report, Omdia
        found that of the top five vendors in the cloud-managed networking
        market, Extreme has experienced the largest increase in market share in
        the past year.

    --  Extreme announced it has integrated Bluetooth® and Bluetooth Low Energy
        Intrusion Prevention detection capabilities into its Extreme
        AirDefense(TM) Wireless Intrusion Prevention System. Extreme has the
        largest threat detection library in the industry. It was first to offer
        24/7/365 Wireless Intrusion Prevention and first to utilize Wi-Fi access
        points as sensors. By adding Bluetooth and Bluetooth Low Energy to
        AirDefense, network administrators can use a single platform to address
        325+ known threat vectors, as well as growing threats against Bluetooth
        and BLE devices using proven automated detection, identification,
        classification, notification, and mitigation capabilities.

    --  KODA AUTO, a leading car manufacturer in the Volkswagen Group, upgraded
        its network with Extreme's campus networking technology to advance its
        digital transformation effort. Extreme's solutions, including Extreme
        Fabric Connect, provide  KODA AUTO with a secure, agile, and resilient
        network which has increased its infrastructure's stability and capacity,
        as well as staff productivity--helping to maximize business growth and
        application performance.

    --  Wisconsin Center, a premier convention facility and the host of the 2020
        Democratic National Convention, deployed the ExtremeCloud IQ((TM))
        network management platform and high-density Wi-Fi 6 access points to
        deliver agile, secure, and reliable connectivity throughout its meeting
        rooms, ballrooms, and exposition center, as well as in its sister venue,
        the Miller High Life Theatre. Wisconsin Center has additionally
        leveraged the platform to monetize its network, offering dedicated Wi-Fi
        for event organizers that need guaranteed bandwidth beyond event
        connectivity, and pay-as-you go Wi-Fi for public guests.

    --  Kean University, the first post-secondary institution in New Jersey, has
        selected Extreme campus networking solutions and services to deliver
        seamless, secure connectivity and enable immersive video conferencing
        across 40 academic and administrative buildings and residence halls on
        its main campus. The University will extend Extreme Fabric Connect
        software already deployed in the network to new ExtremeSwitching
        technology at its network edge to automate onboarding and management of
        mobile and network devices, support its shift to new digital teaching
        and learning initiatives for 11,000 students and staff, and enable
        contact tracing and proximity sensing.

    --  Hurricane Electric, a global Internet service provider based in
        California, deployed Extreme data center solutions in its global
        internet backbone to provide IP transit and layer 2 transport services
        to over 200 major exchange points and 9,000 networks spanning over 190
        countries. Extreme SLX hardware, including the new SLX9740 IPV4/IPV6
        internet border router, enable Hurricane Electric to cost-effectively
        meet growing demand for high-density 100G transport services while
        meeting space and power requirements.

    --  Extreme announced the formation of a Corporate Social Responsibility
        Council to promote sustainable development, corporate philanthropy, and
        the empowerment of people - both inside and outside the company. To
        drive this effort, the company named Katy Motiey as the company's first
        Chief Sustainability Officer, in addition to her current role as Chief
        Administrative Officer. Extreme also appointed Kimberley Basnight to
        Head of Diversity and Inclusion, in addition to her role as Chief of
        Staff/Office of the CEO.

    --  Extreme introduced new universal platforms for its switching and
        wireless portfolios. The new platforms enable simplified ordering,
        licensing, and warranty processes, as well as reduced complexity and
        flexible operations, creating a more effortless experience for customers
        and minimizing total cost of ownership.
    --  In addition to offering unmatched cloud deployment flexibility, portable
        licensing across the entire portfolio, unlimited data duration, and
        industry-leading uptime, Extreme announced it will offer five valuable
        applications at no additional cost to ExtremeCloud IQ customers with a
        Pilot subscription, providing IT departments with advanced wireless
        intrusion protection, location services, IoT management, guest access,
        and compliance capabilities from a single tool. Subscribers can do more
        for their organizations without spending additional dollars, while
        potentially retiring overlay applications used to deliver these

              Fiscal Q1 2021 Financial Metrics:
    (in millions, except percentages and per share information)

                                                                Q1 FY'21             Q1 FY'20                

              GAAP Results of Operations

            Product                                                      $
       161.4            $
         185.1                     $
        (23.7) (13)

            Service and subscription                                           74.4                    70.4                              4.0     6

            Total net revenue                                            $
       235.8            $
         255.5                     $
        (19.7)  (8)

            Gross margin                                                       57.3                    53.7
                                                                                   %                      %              360 bps

            Operating margin                                                  (0.0)                 (12.6)
                                                                                   %                      %             1258 bps

            Net loss                                                     $
       (8.8)          $
         (37.7)                      $
        28.9    77

            Net loss per diluted share                                  $
       (0.07)          $
         (0.31)                      $
        0.24    77

              Non-GAAP Results of Operations

            Product                                                      $
       161.4            $
         185.1                     $
        (23.7) (13)

            Service and subscription                                           74.4                    70.4                              4.0     6

            Total net revenue                                            $
       235.8            $
         255.5                     $
        (19.7)  (8)

            Gross margin                                                       60.3                    59.9
                                                                                   %                      %               40 bps

            Operating margin                                                    8.3                     6.2
                                                                                   %                      %              210 bps

            Net income                                                    $
       11.0              $
         8.9                        $
        2.0    23

            Net income per diluted share                                  $
       0.09             $
         0.07                       $
        0.02    29

    --  Q1 ending cash balance was $193.1 million, a decrease of $0.8 million
        from the end of Q4. This was primarily driven by cash usage of $22.8
        million for financing activities, related to partial repayment of our
        revolving credit facility and principal payments on our term loan, along
        with $3.0 million for capital expenditures, partially offset by
        operating cash flow generation of $24.7 million.

    --  Q1 accounts receivable balance was $123.6 million, with days sales
        outstanding of 48, a decrease of 4 days from Q4 and a decrease of 7 days
        from Q1 last year.

    --  Q1 ending inventory was $55.8 million, a decrease of $6.8 million from
        Q4 and a decrease of $26.6 million from Q1 last year.  The
        year-over-year and quarter-over-quarter decreases in inventory largely
        reflect demand planning considerations, while the sequential decrease is
        a function of SKU rationalization as we prepare for the introduction of
        our Universal Platform products.
    --  Q1 ending gross debt* was $396.0 million, a decrease of $24.8 million
        from the prior quarter. The decrease reflects the principal debt payment
        of approximately $4.8 million and a payment of $20.0 million on the
        revolving credit facility. The $16.0 million increase from Q1 last year
        resulted primarily from the borrowings under the revolving facility
        partially offset by principal debt payments. Net debt* of $202.9 million
        decreased by $24.0 million from $226.9 million in Q4.

Extreme uses the non-GAAP free cash flow metric as a measure of operating performance. Free cash flow represents GAAP net cash provided by operating activities, less purchases of property, plant and equipment. Extreme considers free cash flow as useful information for management and investors regarding the amount of cash generated by the business after the purchases of property, plant 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 this non-GAAP free cash flow metric 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. The following table shows non-GAAP free cash flow calculation (in thousands):

                Free Cash Flow                            Three Months Ended

                                                 September 30,                      September 30,

                                                          2020                                2019

     Cash flow provided by (used in) operations                 $
              24,745                  $

     Less: PP&E CapEx spending                                             (3,023)                     (5,239)

     Total free cash flow                                       $
              21,722                $

*Gross debt is defined as long-term and current portion of long-term debt as shown on the balance sheet plus unamortized debt issuance costs. Net debt is defined as gross debt minus cash, as shown in the table below (in millions):

            Gross debt    Cash     Net debt


           396.0    $
        193.1          $

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 various factors, including market conditions and the factors set forth under "Forward-Looking Statements" below.

For its second quarter of fiscal 2021, ending December 31, 2020, the Company is targeting:

               (in millions, except percentages and per share information) Low-End             High-End

                FQ2'21 Guidance - GAAP

     Total Net Revenue                                                                                 $
       235.0             $

     Gross Margin                                                                                            56.8                    57.5
                                                                                                                 %                      %

     Operating Expenses                                                                                $
       134.5             $

     Operating Margin                                                                                       (0.4)
                                                                                                                 %                    1.4

     Net Loss                                                                                          $
       (9.2)            $

     Net Loss per basic share                                                                         $
       (0.07)           $

     Shares outstanding used in calculating GAAP EPS                                            123.4                 123.4

                FQ2'21 Guidance - Non-GAAP

     Total Net Revenue                                                                                 $
       235.0             $

     Gross Margin                                                                                            60.0                    60.6
                                                                                                                 %                      %

     Operating Expenses                                                                                $
       122.1             $

     Operating Margin                                                                                         8.0                     9.5
                                                                                                                 %                      %

     Net Income                                                                                         $
       10.6              $

     Net Income per diluted share                                                                       $
       0.09              $

     Shares outstanding used in calculating non-GAAP EPS                                                    124.3                   124.3

The following table shows the GAAP to non-GAAP reconciliation for Q2 FY'21 guidance:

                                               Gross Margin     Operating             Earnings per

                                                   Rate        Margin Rate                Share

     GAAP                                    56.8% - 57.5% (0.4)% - 1.4%  
       $(0.07) - $(0.03)

     Estimated adjustments for:

     Amortization of product intangibles              2.4%           2.4%                         0.05

     Share-based compensation                         0.4%           4.3%                         0.08

     Restructuring                                                   0.3%                         0.01

     Amortization of non-product intangibles          0.3%           1.2%                         0.02

     Non-GAAP                                60.0% - 60.6%   8.0% - 9.5%    
          $0.09- $0.12

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 8:00 a.m. Eastern (5:00 a.m. Pacific) today to review the first fiscal quarter results as well as the business outlook for second fiscal quarter ending December 31, 2020, 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 for 7 days following the call. The conference call may also be heard by dialing 1 (877) 303-9826 or international 1 (224) 357-2194 with Conference ID # 1042849. 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 # 1042849. The encore recording will be available for 7 days following the call.

About Extreme:
Extreme Networks, Inc. (EXTR) creates effortless networking experiences that enable all of us to advance. We push the boundaries of technology leveraging the powers of machine learning, artificial intelligence, analytics, and automation. Over 50,000 customers globally trust our end-to-end, cloud-driven networking solutions and rely on our top-rated services and support to accelerate their digital transformation efforts and deliver progress like never before. For more information, visit Extreme's website or follow us on Twitter, LinkedIn, and Facebook.

Extreme Networks, the Extreme Networks logo, ExtremeCloud IQ, and Extreme Fabric Connect, are trademarks of Extreme Networks, Inc. or its subsidiaries in the United States and/or other countries. The Bluetooth® word mark is a registered trademark owned by the Bluetooth SIG, Inc. and any use of such mark by Extreme Networks is under license. Other trademarks shown herein are the property of their respective owners.

Non-GAAP Financial Measures:
Extreme provides all financial information required in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company is providing with this press release non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share, and non-GAAP free cash flow. In preparing non-GAAP information, the Company has excluded, where applicable, the impact of share-based compensation, acquisition and integration costs, acquired inventory adjustments, amortization of acquired intangibles, inventory valuation adjustment, and restructuring charges. 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 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, acquired technologies and operations, the introduction of new products, our ability to deliver improving operating leverage and cash flow, along with a recovery in revenue growth, through fiscal 2021, the expected impact of COVID-19 and related macroeconomic conditions, 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 failure to achieve targeted revenues and forecasted demand from end customers; a highly competitive business environment for network switching equipment and cloud management of network devices; 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; macroeconomic and political and geopolitical factors, a dependency on third parties for certain components and for the manufacturing of our products; and the impacts of COVID-19, and any worsening of the global business and economic environment as a result, on the Company's business, financial condition and operating results.

More information about potential factors that could affect the Company's business and financial results are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included in the Company's Annual Report on Form 10-K for the year ended June 30, 2020, and other documents of the Company on file with the Securities and Exchange Commission (available at www.sec.gov). Except as required under the U.S. federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission, Extreme 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.
                                                                                                                                       (In thousands, except per share amounts)

                                                                                                                                                                                     September 30,               June 30,

                                                                                                                                                                                              2020                    2020


              Current assets:

              Cash                                                                                                                                                                                $
        193,116           $

              Accounts receivable, net of allowance for doubtful accounts of $1,193 and                                                                                                                 123,637                  122,727
                                                                                                                                                      $1,212, respectively

              Inventories                                                                                                                                                                                55,830                   62,589

              Prepaid expenses and other current assets                                                                                                                                                  34,097                   35,019

              Total current assets                                                                                                                                                                      406,680                  414,207

              Property and equipment, net                                                                                                                                                                55,995                   58,813

              Operating lease right-of-use assets, net                                                                                                                                                   48,460                   51,274

              Intangible assets, net                                                                                                                                                                     59,903                   68,394

              Goodwill                                                                                                                                                                                  331,159                  331,159

              Other assets                                                                                                                                                                               57,297                   55,241

              Total assets                                                                                                                                                                        $
        959,494           $


              Current liabilities:

              Current portion of long-term debt, net of unamortized debt issuance costs of                                                                                                         $
        51,515            $
                                                                                                                                           $2,485 and $2,484, respectively

              Accounts payable                                                                                                                                                                           59,440                   48,439

              Accrued compensation and benefits                                                                                                                                                          45,529                   50,884

              Accrued warranty                                                                                                                                                                           13,484                   14,035

              Current portion, operating lease liabilities                                                                                                                                               19,560                   19,196

              Current portion, deferred revenue                                                                                                                                                         192,330                  190,226

              Other accrued liabilities                                                                                                                                                                  53,753                   58,525

              Total current liabilities                                                                                                                                                                 435,611                  397,821

              Deferred revenue, less current portion                                                                                                                                                    105,463                  100,961

              Long-term debt, less current portion, net of unamortized debt issuance costs of                                                                                                           335,461                  394,585
                                                                                                                                           $6,539 and $7,165, respectively

              Operating lease liabilities, less current portion                                                                                                                                          46,414                   50,238

              Deferred income taxes                                                                                                                                                                       2,446                    2,334

              Other long-term liabilities                                                                                                                                                                24,188                   27,751

              Commitments and contingencies

              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; 129,532                                                                                                                            130                      127
    and 127,114 shares issued, respectively; 122,935 and 120,517 shares outstanding,

              Additional paid-in-capital                                                                                                                                                              1,046,921                1,035,041

              Accumulated other comprehensive loss                                                                                                                                                      (4,936)                 (6,378)

              Accumulated deficit                                                                                                                                                                     (989,091)               (980,279)

              Treasury stock at cost: 6,597 and 6,597 shares, respectively                                                                                                                             (43,113)                (43,113)

              Total stockholders' equity                                                                                                                                                                  9,911                    5,398

              Total liabilities and stockholders' equity                                                                                                                                          $
        959,494           $

                EXTREME NETWORKS, INC.
                                                                   (In thousands, except per share amounts)

                                                                                              Three Months Ended

                                                                                                 September 30,                    September 30,

                                                                                                            2020                            2019

     Net revenues:

     Product                                                                                                         $
      161,396                  $

     Service and subscription                                                                                             74,406                        70,372

     Total net revenues                                                                                                  235,802                       255,506

     Cost of revenues:

     Product                                                                                                              73,395                        91,391

     Service and subscription                                                                                             27,389                        26,872

     Total cost of revenues                                                                                              100,784                       118,263

     Gross profit:

     Product                                                                                                              88,001                        93,743

     Service and subscription                                                                                             47,017                        43,500

     Total gross profit                                                                                                  135,018                       137,243

     Operating expenses:

     Research and development                                                                                             49,524                        59,116

     Sales and marketing                                                                                                  64,325                        71,357

     General and administrative                                                                                           16,461                        14,982

     Acquisition and integration costs                                                                                     1,975                        15,925

     Restructuring and related charges, net of reversals                                                                   1,001                         6,137

     Amortization of intangibles                                                                                           1,792                         1,930

     Total operating expenses                                                                                            135,078                       169,447

     Operating loss                                                                                                         (60)                     (32,204)

     Interest income                                                                                                         118                           667

     Interest expense                                                                                                    (6,663)                      (5,164)

     Other (expense) income, net                                                                                           (887)                          558

     Loss before income taxes                                                                                            (7,492)                     (36,143)

     Provision for income taxes                                                                                            1,320                         1,595

     Net loss                                                                                                        $
      (8,812)                $

     Basic and diluted net loss per share:

     Net loss per share - basic and diluted                                                                           $
      (0.07)                  $

     Shares used in per share calculation - basic and diluted                                                            121,705                       120,226

                EXTREME NETWORKS, INC.
                                                                                                 (In thousands)

                                                                                                                                  Three Months Ended

                                                                                                                                     September 30,               September 30,

                                                                                                                                                2020                       2019

                Cash flows from operating activities:

              Net loss                                                                                                                              $
      (8,812)                $

              Adjustments to reconcile net loss to net cash provided by (used in)
    operating activities:

              Depreciation                                                                                                                                6,727                          7,101

              Amortization of intangible assets                                                                                                           8,491                          8,425

              Reduction in carrying amount of right-of-use asset                                                                                          4,038                          4,317

              Provision for doubtful accounts                                                                                                                                             401

              Share-based compensation                                                                                                                    8,302                          8,834

              Deferred income taxes                                                                                                                         312                            357

              Non-cash restructuring and impairment charges                                                                                                                             3,839

              Non-cash interest expense                                                                                                                   1,103                            904

              Other                                                                                                                                       1,380                           (78)

              Changes in operating assets and liabilities, net of acquisitions

              Accounts receivable                                                                                                                         (910)                        33,490

              Inventories                                                                                                                                 6,628                        (2,108)

              Prepaid expenses and other assets                                                                                                         (1,521)                         (486)

              Accounts payable                                                                                                                           10,628                       (11,198)

              Accrued compensation and benefits                                                                                                         (5,482)                      (10,277)

              Operating lease liabilities                                                                                                               (4,812)                       (4,631)

              Deferred revenue                                                                                                                            6,607                          2,001

              Other current and long-term liabilities                                                                                                   (7,934)                       (3,355)

              Net cash provided by (used in) operating activities                                                                                        24,745                          (202)

                Cash flows from investing activities:

              Capital expenditures                                                                                                                      (3,023)                       (5,239)

              Business acquisitions, net of cash acquired                                                                                                                           (219,458)

              Maturities and sales of investments                                                                                                                                      15,503

              Net cash used in investing activities                                                                                                     (3,023)                     (209,194)

                Cash flows from financing activities:

              Borrowings under Term Loan                                                                                                                                              199,500

              Loan fees on borrowings                                                                                                                                                (10,515)

              Payments on debt obligations                                                                                                             (24,750)                      (20,099)

              Proceeds from issuance of common stock, net of tax withholding                                                                              3,581                          4,136

              Payment of contingent consideration obligations                                                                                             (603)                         (635)

              Deferred payments on an acquisition                                                                                                       (1,000)                       (1,000)

              Net cash (used in) provided by financing activities                                                                                      (22,772)                       171,387

              Foreign currency effect on cash                                                                                                               294                          (229)

              Net decrease in cash                                                                                                                        (756)                      (38,238)

                Cash at beginning of period                                                                                                  193,872                        169,607

                Cash and cash equivalents at end of period                                                                               $
      193,116                  $

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

To supplement the Company's consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, ("GAAP"), Extreme uses non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP net income, non-GAAP earnings per diluted share and non-GAAP 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 also presents its target for non-GAAP operating expenses, which is operating expenses less share-based compensation expense, restructuring charges and amortization of acquired intangibles.

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's results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate Extreme's 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 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 stockholder value. In addition, because Extreme 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, acquired inventory adjustments, acquisition and integration costs, amortization of acquired intangibles, inventory valuation adjustments, and restructuring charges. 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. Consists of associated expenses for stock options, restricted stock awards and the Company's Employee Stock Purchase Plan. Extreme 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 its operating results. Extreme expects to incur share-based compensation expenses in future periods.

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

Acquisition and integration costs. Acquisition and integration costs consist of specified compensation charges, software charges, legal and professional fees related to the acquisition of Aerohive. Extreme excludes these expenses since they result from an event that is outside the ordinary course of continuing operations.

Amortization of acquired intangibles. Amortization of acquired intangibles includes the monthly amortization expense of intangible assets such as developed technology, customer relationships, trademarks and order backlog. The amortization of the developed technology and order backlog are recorded in cost of goods sold, while the amortization for the other intangibles are recorded in operating expenses. Extreme excludes these 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.

Inventory valuation adjustments. Adjustments relating to the mark down of inventory due to duplication of products lines with acquisition of Aerohive net of recoveries on the sale of inventory marked down in previous quarters.

Restructuring charges. Restructuring charges primarily consist of severance costs for employees which have no benefit to continuing operations and impairment of right-of-use assets, long-lived assets and other charges related to excess facilities. Extreme excludes restructuring expenses since they result from events that occur outside of the ordinary course of continuing operations.

Income Taxes. Beginning with our first quarter of fiscal 2021, we are changing how we calculate our non-GAAP provision for income taxes in accordance with the SEC guidance on non-GAAP Financial Measures Compliance and Disclosure Interpretation. Previously, the non-GAAP tax provision consisted of current and deferred income tax expense on a GAAP basis as if our carryforward net operating losses were sufficient to offset our non-GAAP adjustments. Beginning with our first quarter of fiscal 2021, we have assumed our U.S. federal and state net operating losses would have been fully consumed by the historical non-GAAP financial adjustments, eliminating the need for a full valuation allowance against our U.S. deferred tax assets which consequently, enables our use of research and development tax credits which were previously not utilizable. The non-GAAP tax provision will now consist of current and deferred income tax expense commensurate with the non-GAAP measure of profitability using our blended U.S. statutory tax rate of 24.2%. We have adjusted the fiscal 2020 non-GAAP tax provision to reflect the 2020 non-GAAP operating results to be comparable with fiscal 2021 results.

This change will not affect our non-GAAP income before income taxes, actual cash tax payments or cash flows, but will result in a higher or lower non-GAAP provision for income taxes depending on the level and jurisdictional mix of pre-tax income and available U.S. research and development tax credits. As of June 30, 2020, we had U.S. federal net operating loss carryforwards of $287 million and state net operating loss carryforwards of $156 million. We do not expect to pay substantial taxes on a GAAP basis in the U.S. and certain other foreign jurisdictions for the foreseeable future due to our net operating loss carryforward balances. Over the near term, most of our cash taxes will continue to be mainly driven by the tax expense of our foreign subsidiaries which amounts have not historically been significant. We also believe our long-term effective GAAP tax rate will be lower than the U.S. statutory rate based upon our established tax structure.

                EXTREME NETWORKS, INC.
                              (In thousands, except percentages and per share amounts)

                Revenues                                          Three Months Ended

                                      September 30,                                      September 30,

                                               2020                                                2019

     Revenues - GAAP                                 $
              235,802                               $

                Non-GAAP Gross Margin                  Three Months Ended

                                             September 30,                       September 30,

                                                      2020                                 2019

     Gross profit - GAAP                                    $
              135,018                $

     Gross margin - GAAP percentage                                        57.3                       53.7
                                                                               %                         %


     Share-based compensation expense                                       630                        597

     Acquired inventory adjustments                                                                 3,869

     Acquisition and integration costs                                       10                        150

     Amortization of intangibles                                          6,633                      6,392

     Inventory valuation adjustments                                                                4,846

     Total adjustments to GAAP gross profit                   $
              7,273                 $

     Gross profit - non-GAAP                                $
              142,291                $

     Gross margin - non-GAAP percentage                                    60.3                       59.9
                                                                               %                         %

                Non-GAAP Operating Income                          Three Months Ended

                                                         September 30,                      September 30,

                                                                  2020                                2019

     GAAP operating loss                                                  $
              (60)                $

     GAAP operating loss percentage                                                  (0.0)                        (12.6)
                                                                                          %                             %


     Share-based compensation expense, cost of revenues                                630                            597

     Share-based compensation expense, R&D                                           2,272                          2,435

     Share-based compensation expense, S&M                                           2,647                          3,719

     Share-based compensation expense, G&A                                           2,753                          2,083

     Inventory valuation adjustments                                                                               4,846

     Acquisition and integration costs                                               1,985                         16,075

     Restructuring charges, net of reversals                                         1,001                          6,137

     Acquired inventory adjustments                                                                                3,869

     Amortization of intangibles                                                     8,425                          8,322

     Total adjustments to GAAP operating loss                           $
              19,713                   $

     Non-GAAP operating income                                          $
              19,653                   $

     Non-GAAP operating income percentage                                              8.3                            6.2
                                                                                          %                             %

                Non-GAAP Net Income                                           Three Months Ended

                                                                    September 30,                       September 30,

                                                                             2020                                 2019

     GAAP net loss                                                                 $
              (8,812)                $


     Share-based compensation expense                                                            8,302                            8,834

     Inventory valuation adjustments                                                                                             4,846

     Acquisition and integration costs                                                           1,985                           16,075

     Restructuring charge, net of reversal                                                       1,001                            6,137

     Acquired inventory adjustments                                                                                              3,869

     Amortization of intangibles                                                                 8,425                            8,322

     Tax effect of non-GAAP adjustments                                                             58                          (1,435)

     Total adjustments to GAAP net loss                                             $
              19,771                   $

     Non-GAAP net income                                                            $
              10,959                    $

     Earnings per share

     Non-GAAP net income per share-diluted                                            $
              0.09                     $

     Shares used in net income per share-diluted:

     GAAP Shares used in per share calculation - basic and diluted                             121,705                          120,226

     Potentially dilutive equity awards                                                            901                            3,479

     Non-GAAP diluted shares used in per share calculation                                     122,606                          123,705

View original content to download multimedia:http://www.prnewswire.com/news-releases/extreme-networks-reports-first-quarter-fiscal-year-2021-financial-results-301161262.html

SOURCE Extreme Networks, Inc.