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, 2019 , our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 , and other filings we have made with theSecurities and Exchange Commission . These risk factors, include, but are not limited to: 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; 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 "Critical Accounting Policies and Estimates" section included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."Extreme Networks, Inc. , together with its subsidiaries (collectively referred to as "Extreme" and as "we", "us" and "our") is a leader in providing cloud-driven networking solutions for enterprise, data center, and service provider customers. Providing a combined end-to-end solution from the IoT edge to the cloud, Extreme designs, develops, and manufactures wired and wireless network infrastructure equipment and develops the software and cloud architecture for network management, policy, intelligence, analytics, security, and assurance. We were incorporated inCalifornia inMay 1996 and reincorporated inDelaware inMarch 1999 . Our corporate headquarters are located inSan Jose, California . We derive substantially all of our revenue from the sale of our networking equipment, software, and related maintenance contracts. Extreme delivers software-driven solutions from the IoT edge to the cloud that are agile, adaptive, and secure to enable autonomous enterprises of the future. We recognize that every customer environment is unique with its own requirements, which may be industry-specific or site driven. We address these distinctions with our Extreme Elements architecture. Elements gives customers and partners the power to mix and match a broad array of software, hardware, and services (including third-party applications) to create a custom network that can be managed and automated from end-to-end and enabled with intelligence and assurance from the cloud. With this strategic asset in place, organizations have the foundation needed to drive both digital transformation and the outcomes impacting each one of us. Our 100% in-sourced services and support are number one in the industry, and even as we increase the breadth of our portfolio and scale our organization, we remain nimble and responsive to ensure customer and partner success. We are relentless in our commitment to our over 50,000 customers around the world, including over half of the Fortune 50 and some of the world's leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, and manufacturing, and provide the building blocks that drive competitive advantage, accelerate innovation, and improve the human experience. Enterprise network administrators from the data center to the access layer need to respond to the rapid digital transformational trends of cloud, mobility, big data, social business and the ever-present need for network security. Accelerators such as Internet of Things ("IoT"), artificial intelligence ("AI"), bring your own device ("BYOD"), machine learning, cognitive computing, and robotics add complexity to challenge the capabilities of traditional networks. Technology advances have a profound effect across the entire enterprise network placing unprecedented demands on network administrators to enhance management capabilities, scalability, programmability, agility, and analytics of the enterprise networks they manage. 29 -------------------------------------------------------------------------------- Improving the network experience for enterprises that increasingly require greater simplification at the edge or the access layer of the network to ensure business success and provide a secure, unified, wired / wireless infrastructure augmented and managed through a single plane of glass remains a key focus for Extreme. We enhanced our product portfolio in fiscal year 2019 with the launches of our suite of Wi-Fi 6 access points, ExtremeAI software solutions, and Defender for IoT to simplify IoT security. Enterprises have also migrated increasing numbers of applications and services to either private clouds or public clouds offered by third parties and are adopting new IT delivery models and applications that require fundamental network alterations and enhancements spanning from device access point 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. A trend affecting the enterprise network equipment market is the adoption of the cloud-managed enterprise WLAN in the enterprise market. We continued execution towards our strategic objectives by expanding our cloud portfolio with the acquisition ofAerohive Networks, Inc. ("Aerohive") inAugust 2019 . This acquisition enhances our cloud offering by adding a 3rd generation cloud with Machine Learning/Artificial Intelligence insights and analytics that we intend to expand to all the Extreme ElementsTM. This cloud-driven solution will be the only offering in the market that seamlessly integrates the Cloud with on premises infrastructures and spans from the IoT edge to the enterprise data center.
The Extreme Strategy
We are focused on delivering end-to-end networking and software solutions for today's enterprise environments. From wireless and wired access technologies, through the campus, core, and into the datacenter, Extreme is developing solutions to deliver outstanding business outcomes for our customers. Leveraging a unified management approach, both on premises and in the cloud, we continue to accelerate adoption and delivery of new technologies in support of emerging trends in enterprise networking. We continue to execute on our growth objectives by maximizing customer, partner, and shareholder value. In fiscal 2017, we completed the acquisition of the WLAN Business from Zebra. In fiscal 2018, we completed the acquisitions of the Campus Fabric Business from Avaya and the Data Center Business from Brocade. InAugust 2019 , we acquired the entire Cloud Networking portfolio from Aerohive. These acquisitions support our growth strategy to lead the enterprise network equipment market with end-to-end software-driven cloud and on-premises solutions for enterprise customers from the data center to the wireless edge. After the closing of the acquisitions of the Campus Fabric Business and Data Center Business, Extreme immediately became a networking industry leader with more than 30,000 customers. In addition, the acquisition of Aerohive brought us another 20,000+ customers and solidify our position as the third ranked networking vendor inthe United States and the second ranked cloud networking provider globally. As a network switching leader in enterprise, datacenter, and cloud, we combine and extend our world-class products and technologies to provide customers with some of the most advanced, high performance and open solutions in the market as well as a superb overall customer experience. The combination of all the Extreme ElementsTM is significant in that it brings together distinct strengths addressing the key areas of the network, from unified wired and wireless edge, to the enterprise core, to the data center to offer a complete, unified portfolio of cloud-driven network access solutions.
Provider of high quality, cloud-driven, secure networking solutions and the industry's #1 customer support organization
• Only end-to-end cloud-driven networking vendor with management,
intelligence, and assurance values built into every solution.
• Delivering new releases of next generation portfolio Elements organically
and through acquisition.
Key elements of our strategy include:
• Focus on being nimble and responsive to customers and partners. We work with
our customers to deliver cloud-driven solutions from the IoT edge to the
cloud that are agile, adaptive, and secure to enable digital transformation
for our customers. We help our customers move beyond just "keeping the
lights on", so they can think strategically and innovate. By allowing
customers to access critical decision-making intelligence, we are ablereduce their daily tactical work, so they can spend their time on learning
and understanding how to innovate their business with IT.
• Provide the industry's first and only 3rd generation end-to-end cloud
architecture. Cloud technologies have evolved significantly over the past
decade, from monolithic software images hosted remotely to microservices
providing machine learning insights continuous integration and delivery of
new features. We deliver unrivaled 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.
• 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.
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• Cloud-driven networking services-led solutions. 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.
• Offer customers choice - cloud or on-premises. We leverage cloud where it
makes sense for our customers and provide on premises solutions where
customers need it and have a solution for those that 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's going on across the network and applications
in real time - who, when, and what is connected to the network, which is
critical for BYOD and IoT.
• Enable IoT without additional IT resources. In a recent IoT IT
infrastructure survey, enterprise IT decision makers across industryverticals indicated their preference to opt for their existing wireless
connectivity infrastructure to support IoT devices. These preferences will
place unprecedented demand on network administrators to enhance management
capabilities, scalability and programmability of the enterprise networks
they manage without additional IT resources.
• Provide a strong value proposition for our customers. Our cloud-managed
wired and wireless networking solutions provide additional choice and
flexibility with cloud or on-premises options for device and application
management coupled with our award-winning services and support. This
delivers a strong value proposition to the following customers and
applications:
? Enterprises and private cloud data centers use our products to deploy
automated next-generation virtualized and high-density infrastructure
solutions.
? Enterprises and organizations in education, healthcare, retail,manufacturing, hospitality, transportation and logistics, and government
agencies use our solutions for their mobile campus and backbone networks.
? Enterprises, universities, stadiums, healthcare, and hospitality
organizations use our solutions to enable better visibility and control
of their data processing and analytics requirements.
• Provide high-quality 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
that provide the level of service our customers require, from standard
business hours to global 24-hour-a-day, 365-days-a-year real-time response
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, etc. Furthermore, our network operating systems, ourprimary merchant silicon vendor Broadcom, and select manufacturing partners
permit us to leverage our engineering investment. We have invested in
engineering resources to create leading-edge technologies to increase the
performance and functionality of our products, and as a direct result, the
value of our solution to our current and future customers. We look for
maximum synergies from our engineering investment in our targeted verticals.
• 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 increase in demand being seen today, fueled by more users
with multiple devices, increases the expectation that everything will just
work. The network edge landscape is changing as the explosion of mobile
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 andmanageable 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 have the industry's broadest Wi-Fi 6 wireless portfolio
providing intelligence for the wired/wireless edge and enhanced by our 3rd
generation cloud architecture with machine learning and AI-driven insights.
• Continue to deliver unified management and a common fabric across the
wired/wireless environment from the Data Center to the mobile Edge. Our rich
set of integrated management capabilities provides centralized visibility
and highly efficient anytime, anywhere control of enterprise wired and
wireless network resources.
• Offer a superior quality of experience. Our network-powered application
analytics provide actionable business insight 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 to turn their
network into a strategic business asset that helps executives make faster
and more effective decisions.
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Data can be mined to show how applications are being used enabling a better understanding of user behavior on the network, identifying the level of user engagement and assuring business application delivery to optimize the user experience. Application adoption can be tracked to determine the return on investment associated with new application deployment.
Visibility into network and application performance enables our customers to pinpoint and resolve performance bottlenecks in the infrastructure whether they are caused by the network, application or server. This saves both time and money for the business and ensures critical applications are running at the best possible performance.
• Cloud-driven networking solutions for the enterprise. We are a cloud-driven
networking solution company focused on the enterprise. We focus our R&D team
and our sales teams to execute against a refined set of requirements for
optimized return on investment, faster innovation, and clearer focus on mega
trends and changes in the industry. As a cloud-driven networking company, we
offer solutions for the entire enterprise network, the data center, the
campus, the core and the WLAN.
• 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
our product portfolio to address the needs of public and private Cloud Data
Center providers. Within the Campus we also target the high-growth physical
security market, converging technologies such as Internet Protocol ("IP")
video across a common Ethernet infrastructure in conjunction with technology
partners. Cloud Networking is the fastest growing segment of WLAN growth,
with a 15% projected compound annual growth rate year over year (compared to
low single digits for the WLAN industry as a whole), and our focus is on
expanding our technology foothold in this key segment with the acquisition
of Aerohive 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, and several large strategic partners. We
maintain a field sales force to support our channel partners and to selldirectly 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, but also to collaboratively
develop unique solutions. We announced this in the second quarter of fiscal
year ended
largest merchant silicon provider, as their preferred choice for enterprise
campus deployments. As a Broadcom preferred provider for enterprise campus
networking solutions, Extreme will give enterprise customers and partners
powerful security, segmentation, resiliency, policy, telemetry, and
performance advantages as they pursue cloud-driven digital transformation
with the industry's most simple, secure, and intelligent campus
architecture.
We seek to differentiate ourselves in the market by delivering a value proposition based on a software-driven approach to network management, control and analytics.
Our key points of differentiation include:
• Extreme ElementsTM Extreme Elements are the building blocks that enable the
creation of an Autonomous Network to deliver the positive outcomes important
to customer organizations, including those in education, healthcare, retail,
manufacturing, transportation and logistics, and government. Combining
architecture, automation, and artificial intelligence, Extreme Elements
enable customers to get what they need, when and where they need it.
• Cloud-Driven end-to-end networking solutions. The acquisition of Aerohive
enhances our cloud offering with a 3rd generation cloud with Machine
Learning/Artificial Intelligence insights and analytics that we intend to
expand to all the Extreme ElementsTM. This breadth of coverage from the edge
to the enterprise data center will be unique in the industry, and cloud
networking is the fastest growing segment of the networking industry.
• Data center to access edge wired and wireless solutions. Extreme offers a
complete, unified portfolio of software-driven network access solutions from
the edge to the cloud. We have the latest in wireless access points for both
outdoor and indoor use plus a complete line of networking options for the
Campus, Core, and Data Center, all of which are enhanced with our extensive
portfolio of intelligent applications.
• Multi-vendor management from a "single pane-of-glass". Extreme's Management
Center ("XMC") is a single unified management system that is designed to
provide visibility, security, and control across the entire network. This
can make the network easier to manage and troubleshoot, often with lower
operating expenses. Extreme's software can manage third-party vendors'
network devices, allowing our customers to potentially maximize device
lifespan and protect investments.
• Software-driven vertical solutions. Extreme's software-driven solutions are
designed to be easily adaptable to vertical solutions in industries such as
healthcare, education, manufacturing, retail, transportation and logistics,
government and hospitality. Extreme solutions are also designed to be
well-suited for vertical-specific partners in these industries.
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• Extreme Validated Design. Helping customers consider, select, and deploy
data center network solutions for current and planned needs is our mission.
Extreme Validated Designs offer a fast track to success by accelerating that
process. Validated designs are repeatable reference network architectures
that have been engineered and tested to address specific use cases and
deployment scenarios.
• Application-aware Quality of Service ("QoS") and analytics. Extreme has
innovative analytic software that enables our customers to see application
usage across the network and apply policies that maximize network
capabilities. This allows our customers to improve the user experience.
• Built-in identity and access control. Our network access control and
identity management solutions are delivered with our network infrastructure
to reduce the need to add expensive software or hardware that may require
complex compatibility testing.
• Easier policy assignment and SDN. Our software applications allow our
customers to assign policy across the entire network, and Extreme Workflow
Composer improves IT agility by automating the entire network
lifecycle-including initial provisioning, configuration, validation, and
troubleshooting/auto-remediation-with event-driven automation. The SDNcomponent adds versatility for implementing policies that increase network
utilization.
• 100% in-sourced tech support. ExtremeWorks delivers best in class customer
support in the industry with 92% first call resolution through a 100%
in-sourced support model.
• Strengthens the Channel. Extreme sells products primarily through an
ecosystem of channel partners which combine our portfolio elements together
to create customized IT solutions for end user customers.
Key Financial Metrics
During the second quarter of fiscal 2020, we achieved the following results:
• Net revenues of
quarter of fiscal 2019.
• Product revenue of
quarter of fiscal 2019.
• Service revenue of
quarter of fiscal 2019.
• Total gross margin of 55.6% of net revenues compared to 55.9% of net
revenues in the second quarter of fiscal 2019.
• Operating loss of
million in the second quarter of fiscal 2019.
• Net loss of
second quarter of fiscal 2019.
During the first six months of fiscal 2020, we reflected the following results:
• Cash flow provided by operating activities of
cash flow provided by operating activities of
months ended
million as of
Net Revenues
The following table presents net product and service revenue for the periods presented (dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31, $ % December 31, December 31, $ %
2019 2018 Change Change 2019 2018 Change Change
Net Revenues:
Product $ 190,492 $
189,567
71.2 % 75.0 % 71.8 % 74.6 %
Service 76,980 63,113 13,867 22.0 % 147,352 125,279 22,073 17.6 %
Percentage of net revenue 28.8 % 25.0 % 28.2 % 25.4 %
Total net revenues $ 267,472 $ 252,680 $ 14,792 5.9 % $ 522,978 $ 492,566 $ 30,412 6.2 %
Product revenue increased
Service revenue increased$13.9 million , or 22.0% for the three months endedDecember 31, 2019 . Service revenue increased$22.1 million , or 17.6% for the six months endedDecember 31, 2019 . The increase in service revenues was attributable to growth related to the acquisition of Aerohive, as well as higher legacy maintenance revenue. 33
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The following table presents the product and service, 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, $ %
2019 2018 Change Change 2019 2018 Change Change
Gross profit:
Product $ 99,105 $ 103,080 $ (3,975 ) (3.9 )% $ 192,848 $ 197,257 $ (4,409 ) (2.2 )%
Percentage of product revenue 52.0 % 54.4 % 51.3 % 53.7 %
Service 49,566 38,219 11,347 29.7 % 93,066 76,113 16,953 22.3 %
Percentage of service revenue 64.4 % 60.6 % 63.2 % 60.8 %
Total gross profit $ 148,671 $ 141,299 $ 7,372 5.2 % $ 285,914 $ 273,370 $ 12,544 4.6 %
Percentage of net revenues 55.6 % 55.9 % 54.7 % 55.5 %
Product gross profit decreased $4.0 million or 3.9% for the three months ended
December 31, 2019 , as compared to the corresponding period in fiscal 2019. The
decrease in product gross profit was primarily due to the expensing of the fair
value step-up of inventories acquired from Aerohive of $3.4 million , higher
distribution charges of $1.7 million and higher amortization of intangible
assets of $1.2 million . This was offset by gross profit from higher revenues and
more favorable manufacturing costs due to cost reduction efforts.
Product gross profit decreased $4.4 million or 2.2% for the six months ended
December 31, 2019 , as compared to the corresponding period in fiscal 2019. The
decrease in product gross profit was primarily due to the expensing of the fair
value step-up of inventories acquired from Aerohive of $7.3 million , higher
excess and obsolete inventory charges of $3.5 million , higher amortization of
intangible assets of $2.2 million and higher distribution costs of $1.1
million . This was partially offset by gross profit from higher revenues and more
favorable manufacturing costs due to cost reduction efforts.
Service gross profit increased $11.3 million and $17.0 million or 29.7% and
22.3% for the three and six months ended December 31, 2019 . The increases were
primarily due to a higher level of service revenues related to the acquisition
of the Aerohive, partially offset by higher service material costs and personnel
costs due to increased headcount to support acquired contracts as well as
amortization of intangible assets of $0.8 million and $1.4 million for the
respective three and six-month periods ended December 31, 2019 .
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, $ %
2019 2018 Change Change 2019 2018 Change Change
Research and development $ 55,380 $ 52,204 $ 3,176 6.1 % $ 114,496 $ 103,445 $ 11,051 10.7 %
Sales and marketing 75,436 68,342 7,094 10.4 % 146,793 135,924 10,869 8.0 %
General and administrative 15,098 13,886 1,212 8.7 % 30,080 26,657 3,423 12.8 %
Acquisition and integration costs 8,994 67 8,927 * 24,919 2,613 22,306 853.7 %
Restructuring charges, net of reversals and
impairment 6,622 474 6,148 1,297.0 % 12,759 1,282 11,477 895.2 %
Amortization of intangibles 2,377 1,575 802 50.9 % 4,307 3,716 591 15.9 %
Total operating expenses $ 163,907 $ 136,548 $ 27,359 20.0 % $ 333,354 $ 273,637 $ 59,717 21.8 %
* Not meaningful.
Research and Development Expenses
Research and development expenses consist primarily of personnel costs (which consists of compensation, benefits and stock-based compensation), consultant fees and prototype expenses related to the design, development, and testing of our products. Research and development expenses increased by$3.2 million or 6.1% for the three months endedDecember 31, 2019 , as compared to the corresponding period of fiscal 2019 primarily due to the acquisition of Aerohive. The increase in research and development expenses was due to$1.3 million of increased salary and compensation costs,$1.8 million increased costs related to equipment, supplies and third-party design and engineering collaboration charges,$0.1 million of increased professional and contractor fees,$0.3 million in increased facility and information technology costs partially offset by a$0.3 million reduction in other operating costs. 34 -------------------------------------------------------------------------------- Research and development expenses increased by$11.1 million or 10.7% for the six months endedDecember 31, 2019 , as compared to the corresponding period of fiscal 2019 primarily due to the acquisition of Aerohive. The increase in research and development expenses was due to$6.7 million of increased salary and compensation costs,$3.4 million of increased costs related to equipment, supplies and third-party design and engineering collaboration charges,$0.2 million of increased professional and contractor fees, a$0.6 million in increased facility and information technology costs, and$0.2 million increase in other operating costs. Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel costs (which consists of compensation, benefits and stock-based compensation), as well as trade shows and promotional expenses.
Sales and marketing expenses increased by$7.1 million or 10.4% for the three months endedDecember 31, 2019 , as compared to the corresponding period of fiscal 2019 primarily due to the acquisition of Aerohive. The increase was primarily due to$4.5 million of personnel costs,$0.7 million of professional fees and$0.9 million of increased facility and information technology costs,$0.4 million in travel and sales promotion costs and$0.6 million of software and equipment costs. Sales and marketing expenses increased by$10.9 million or 8.0% for the six months endedDecember 31, 2019 , as compared to the corresponding period of fiscal 2019 primarily due to the acquisition of Aerohive. The increase was primarily due to$9.0 million of personnel costs,$1.9 million of professional fees and$1.6 million of increased facility and information technology costs, and$1.0 million of increased software and equipment costs partially offset by a$2.6 million reduction in travel and sales promotion costs.
General and Administrative Expenses
General and administrative expense consists primarily of personnel costs (which consists of compensation, benefits and stock-based compensation), legal and professional service costs, travel and facilities and information technology costs. General and administrative expenses increased by$1.2 million or 8.7% for the three months endedDecember 31, 2019 , as compared to the corresponding period of fiscal 2019, primarily due to the acquisition of Aerohive. The increase in general and administrative expenses was primarily due to$0.6 million of increased personnel costs,$0.2 million in higher facility and information technology costs,$0.1 million in professional fees, and$0.3 million of insurance premiums. General and administrative expenses increased by$3.4 million or 12.8% for the six months endedDecember 31, 2019 , as compared to the corresponding period of fiscal 2019, primarily due to the acquisition of Aerohive. The increase in general and administrative expenses was primarily due to$1.7 million of increased personnel costs,$0.4 million in higher facility and information technology costs$0.8 million in professional fees and$0.5 million of insurance premiums.
Acquisition and Integration Costs
During the three and six months endedDecember 31, 2019 , we incurred$9.0 million and$24.9 million , respectively of acquisition and integration costs including a$6.8 million compensation charge for certain Aerohive Executives' stock awards which were accelerated due to change-in-control and termination provisions included in the Executives' employment contracts. Other acquisition and integration costs consist primarily of professional fees for financial and legal advisory services and severance charges for Aerohive employees.
During the three and six months ended
Restructuring Charges, Net of Reversals and Impairment
For the three months endedDecember 31, 2019 we recorded restructuring charges of$6.6 million . The charges consisted primarily of excess facility charges of$3.9 million for impairment of right-of-use assets related mainly to ourMilpitas, California facilities. Additionally, we continued our reduction-in-force initiative begun in the fourth quarter of fiscal 2019 and we recorded severance and benefits charges of$2.7 million . For the six months endedDecember 31, 2019 we recorded restructuring charges of$12.8 million . The charges consisted primarily of excess facility charges of$7.9 million for impairment of right-of-use assets related to ourMilpitas California ,South San Jose California , andSalem New Hampshire facilities. Additionally, we continued our reduction-in-force initiative begun in the fourth quarter of fiscal 2019 and we recorded severance and benefits charges of$4.9 million . 35 -------------------------------------------------------------------------------- For the three and six months endedDecember 31, 2018 , we recorded restructuring charges of$0.5 million and$1.3 million , respectively, associated with a reduction-in-force in the fourth quarter of fiscal 2018 and additional excess facility charges. Amortization of Intangibles During the three months endedDecember 31, 2019 and 2018, we recorded$2.4 million and$1.6 million , respectively, of operating expenses for amortization of intangibles in the accompanying condensed consolidated statements of operations. The increase was mainly due to amortization of acquired intangibles from the Aerohive acquisition offset by lower amortization related to certain acquired intangibles from previous acquisitions becoming fully amortized. During the six months endedDecember 31, 2019 and 2018, we recorded$4.3 million and$3.7 million , respectively, of operating expenses for amortization of intangibles in the accompanying condensed consolidated statements of operations. The increase was mainly due to amortization of acquired intangibles from the Aerohive acquisition offset by lower amortization related to certain acquired intangibles from previous acquisitions becoming fully amortized.
Interest Expense
During the three months endedDecember 31, 2019 and 2018, we recorded$6.2 million and$3.1 million , respectively, in interest expense. The increase in interest expense was primarily driven by higher outstanding loan balances and other charges due to refinancing our Credit Agreement inAugust 2019 . During the six months endedDecember 31, 2019 and 2018, we recorded$11.4 million and$6.6 million , respectively, in interest expense. The increase in interest expense was primarily driven by higher outstanding loan balances and other charges due to refinancing our Credit Agreement inAugust 2019 .
Other Income (Expense), Net
During the three months endedDecember 31, 2019 and 2018, we recorded expense of$0.7 million and$0.4 million , respectively, in other income (expense), net. The change for the three months endedDecember 31, 2019 was primarily due to foreign exchange gains and losses from the revaluation of certain assets and liabilities denominated in foreign currencies intoU.S. Dollars. During the six months endedDecember 31, 2019 and 2018, we recorded expense of$0.2 million and other income of$0.1 million , respectively, in other income (expense), net. The change for the six months endedDecember 31, 2019 was primarily due to foreign exchange gains and losses 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, 2019 and 2018, we recorded an income tax provision of$1.8 million and tax benefit of$5.3 million , respectively. For the six months endedDecember 31, 2019 and 2018, we recorded an income tax provision of$3.4 million and tax benefit of$3.9 million , respectively. The income tax provisions for the three and six months endedDecember 31, 2019 , consisted primarily of (1) taxes on the income of the Company's foreign subsidiaries, (2) foreign withholding taxes (3) 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, and (4) state taxes in jurisdictions where the Company has no remaining state Net Operating Losses. In addition, the three and six months endedDecember 31, 2018 included tax benefits associated with the release of valuation allowance resulting from changes introduced by US tax reform as well as the release of a valuation allowance recorded against deferred tax assets inAustralia .
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 . 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, 2019 , 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 36
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• Business Combinations • 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.
New Accounting Pronouncements
See Note 2 of the accompanying condensed consolidated financial statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.
Liquidity and Capital Resources
The following summarizes information regarding our cash and working capital (in
thousands):
December 31, June 30,
2019 2019
Cash $ 140,414 $ 169,607
Working capital (deficit) $ (5,345 ) $ 85,960
As of December 31, 2019 , our principal sources of liquidity consisted of cash of
$140.4 million , accounts receivable, net of $159.8 million , and available
borrowings from our five-year 2019 Revolving Facility of $60.3 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,
repayments of debt and related interest and repurchases of common stock
outstanding. We believe that our $140.4 million of cash at December 31, 2019 and
the availability of borrowings from the 2019 Revolving Facility will be
sufficient to fund our principal uses of cash 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 its common stock for two years
from the date of authorization, of which $15.0 million was used for repurchases
in the second quarter of fiscal 2019. 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 common stock, may be
suspended or terminated at any time without prior notice and will be subject to
regulatory considerations. In November 2019 , the Company entered into an
accelerated share repurchase agreement (the "November 2019 ASR") to repurchase
shares of the Company's common stock. Pursuant to the November 2019 ASR, the
Company paid $30.0 million for an initial delivery of 3,850,000 shares valued at
$25.2 million . The remaining balance of $4.8 million was recorded as a forward
contract in the Company's common stock. The forward contract was settled on
January 24, 2020 and the Company received an additional 381,505 shares of its
common stock.
In connection with the acquisition of Aerohive as discussed in Note 4 of the
accompanying condensed consolidated financial statements included elsewhere in
this Report, as of August 9, 2019 , we amended the 2018 Credit Agreement and
entered into the 2019 Credit Agreement, 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. The 2019 Credit Agreement provides for a 5-year first lien term loan
facility in an aggregate principal amount of $380 million ("2019 Term Loan") and
a 5-year revolving loan facility in an aggregate principal amount of $75 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 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.
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.
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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. At December 31, 2019 , we were in
compliance with the covenants of the 2019 Credit Agreement.
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,
2019 2018
Net cash provided by operating activities $ 21,911 $ 61,611
Net cash used in investing activities (183,647 ) (10,413 )
Net cash provided by (used in) financing activities 132,736 (31,329 )
Foreign currency effect on cash (193 ) (365 )
Net (decrease) increase in cash $ (29,193 ) $ 19,504 Net Cash Provided by Operating Activities
Cash flows provided by operations in the six months endedDecember 31, 2019 , were$21.9 million , including our net loss of$61.3 million and non-cash expenses of$72.1 million for items such as amortization of intangibles, reduction in carrying amount of right-of-use asset, depreciation, restructuring, deferred income taxes and imputed interest. Other sources of cash for the period included a decrease in accounts receivables and inventory and increases in deferred revenues. This was partially offset by decreases in accounts payable, accrued compensation, other current and long-term liabilities, and operating lease liabilities. Cash flows provided by operations in the six months endedDecember 31, 2018 were$61.6 million , including our net loss of$1.9 million and non-cash expenses of$38.4 million for items such as amortization of intangibles, stock-based compensation, depreciation, deferred income taxes and imputed interest. Other sources of cash for the period included a decrease in accounts receivables, inventories and increases in deferred revenues. This was partially offset by decreases in accounts payable, accrued compensation and other current and long-term liabilities, and increases in prepaid expenses and other current assets.
Cash flows used in investing activities in the six months endedDecember 31, 2019 were$183.6 million , including$219.5 million for the acquisition of Aerohive (net of cash acquired), purchases of property and equipment of$9.4 million , which was partially offset by proceeds of$45.2 million related to the maturity and sales of short-term investments. Cash flows used in investing activities in the six months endedDecember 31, 2018 were$10.4 million which consisted of purchases of property and equipment of$11.1 million and proceeds of$0.7 million related to the sale of investments.
Net Cash Provided by (Used in) Financing Activities
Cash flows provided by financing activities in the six months endedDecember 31, 2019 were$132.7 million due primarily to additional borrowings of$199.5 million under our 2019 Credit Agreement to partially fund our acquisition of Aerohive,$2.9 million of proceeds from the issuance of shares of our common stock under our Employee Stock Purchase Plan ("ESPP"), the exercise of stock options and net of taxes paid on vested and released stock awards. This was partially offset by debt repayments of$25.0 million , assumed from the Aerohive acquisition, payment of loan fees of$10.5 million , contingent consideration of$2.0 million , and$2.2 million for deferred payments on acquisitions. Cash flows provided by financing activities for the period also included repurchasing of our common shares valued at$25.2 million during the six months endedDecember 31, 2019 , in accordance with our approved share repurchase plan. The share repurchases were executed through an accelerated share repurchase program, and future share repurchases may be completed through the combination of individually negotiated transactions, accelerated share repurchases, and/or open market purchases. In addition, related to this transaction, there was an equity forward contract related to the Company's stock of$4.8 million . As ofDecember 31, 2019 , we have$19.8 million available under our share repurchase plan. Our Credit Facility does not contain any restrictions on the amount of borrowings that can be used to make share repurchases, as long as we are in compliance with our financial and non-financial covenants. 38 -------------------------------------------------------------------------------- Cash flows used in financing activities in the six months endedDecember 31, 2018 were$31.3 million consisting of repayments of debt totaling$14.9 million , contingent consideration of$3.9 million , and$2.0 million for deferred payments on acquisitions. This was partially offset by$5.0 million of proceeds from the issuance of shares of our common stock under our Employee Stock Purchase Plan, the exercise of stock options and net of taxes paid on vested and released stock awards. Cash flows used in financing activities for the period also included repurchasing of our common shares valued at$15.0 million during the six months endedDecember 31, 2018 , in accordance with our approved share repurchase plan.
Foreign Currency Effect on Cash
Foreign currency effect on cash decreased in the three months endedDecember 31, 2019 , primarily due to changes in foreign currency exchange rates between theU.S. Dollar and particularly the Brazilian Real, Indian Rupee and the EURO. Foreign currency effect on cash decreased in the three months endedDecember 31, 2018 , primarily due to changes in foreign currency exchange rates between theU.S. Dollar and particularly the Brazilian Real, Indian Rupee and the EURO.
Contractual Obligations
The following summarizes our contractual obligations as ofDecember 31, 2019 , and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands): Less than More than Total 1 Year 1-3 years 3-5 years 5 years Contractual Obligations: Debt obligations$ 375,250 $ 19,000 $ 52,250 $ 304,000 $ - Interest on debt obligations 76,011 18,804 34,338 22,869 - Unconditional purchase obligations 47,578 47,578 - - - Contractual commitments 82,250 23,500 47,000 11,750 - Lease payments on operating leases. 84,960 10,534 39,784 22,137 12,505 Deferred payments for an acquisition 13,000 4,000 8,000 1,000 -
Contingent consideration for an acquisition 4,152 2,367
1,695 90 -
Other liabilities 1,090 236 473 381 -
Total contractual cash obligations $ 684,291 $ 126,019 The contractual obligations referenced above are more specifically defined as follows:
Debt obligations related to amounts owed under our 2019 Credit Agreement.
Unconditional purchase obligations represent the purchase of long lead-time component inventory that our contract manufacturers procure in accordance with our forecast. We expect to honor the inventory purchase commitments within the next 12 months.
Contractual commitments to suppliers for future services.
Non-cancelable operating lease obligations 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 a
Contingent consideration for the Capital Financing Business acquisition, at 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
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