EXTREME NETWORKS, INC. This Quarterly Report on Form 10-Q for the second quarter endedDecember 31, 2022 (this "Report") 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 Report, our Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 , and other filings we have made with theSecurities and Exchange Commission . These risk factors, include, but are not limited to: risks related to supply chain disruptions; fluctuations in demand for our products and services; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development or introduction of new technology and products; customer response to our new technology and products; fluctuations in the global economy, including political, social, economic, currency and regulatory factors (such as the outbreak of COVID-19); risks related to pending or future litigation; a dependency on third parties for certain components and for the manufacturing of our products and our ability to receive the anticipated benefits of acquired businesses. Business Overview The following discussion is based upon our unaudited condensed consolidated financial statements included elsewhere in this Report. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory and service parts, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. For further information about our critical accounting policies and estimates, see the "Critical Accounting Policies and Estimates" section included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."Extreme Networks, Inc. ("Extreme" or "Company") is a leading provider of cloud networking solutions and industry leading services and support. Extreme designs, develops, and manufactures wired, wireless, and software-defined wide area-network ("SD-WAN") infrastructure equipment. The Company's cloud solution is a single platform that offers unified network management of wireless access points, switches, and SD-WAN. It leverages machine learning, Artificial Intelligence Operations and analytics to help customers deliver secure connectivity at the edge of the network, speed cloud deployments and uncover actionable insights saves time, lowers costs and streamlines operations. Extreme is currently managing more than two million devices in the cloud. Extreme has been pushing the boundaries of networking technology since 1996, driven by a higher purpose of helping our customers connect beyond the network. Extreme's cloud networking technologies provide flexibility and scalability in deployment, management, and licensing of networks globally. Our global footprint provides service to more than 50,000 customers and 10 million daily end users across the world including some of the world's leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, manufacturing and service providers. We derive all our revenues from the sale of our networking equipment, software subscriptions, and related maintenance contracts.
Industry Background
Enterprises are adopting new Information Technology ("IT") delivery models and
applications that require fundamental network alterations and enhancements
spanning from the access edge to the data center. As networks become more
complex and more distributed in nature, we believe IT teams in every industry
will need more control and better insights than ever before to ensure secure,
distributed connectivity and comprehensive centralized visibility. Machine
Learning ("ML") and Artificial Intelligence ("AI") technologies have the
potential to vastly improve the network experience in the post-pandemic world by
collating large data sets to increase accuracy and derive resolutions to improve
the operation of the network. When ML and AI are applied with cloud-driven
networking and automation, administrators can quickly scale to provide
productivity, availability, accessibility, manageability, security, and speed,
regardless of the distribution of the network.
As the edge of the network continues to expand, our customers are faced with
managing more endpoints. With that comes a host of challenges. This continued
expansion creates issues such as: a higher risk of cyberattacks, an increase in
applications running across the network which creates a need for more bandwidth.
With more endpoints to manage, application performance suffers, and the tug on
internal systems and IT staff becomes more intense. There are more alarms, more
IT tickets and often time technology that is being overworked. Most times they
have little visibility into the root cause of the problem and are left trying to
pinpoint where, when and how these issues exist. Meanwhile, organizational
productivity suffers.
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We believe that the network has never been more vital and strategic than it is
today. As administrators grapple with more data, coming from more places, more
connected devices, and more Software-as-a-service ("SaaS") based applications,
the cloud is fundamental to establishing a new normal. Traditional network
offerings are not well-suited to fulfill enterprise expectations for rapid
delivery of new services, more flexible business models, real-time response, and
massive scalability.
As enterprises continue to migrate increasing numbers of applications and
services to either private clouds or public clouds offered by third parties and
to adopt new IT delivery models and applications, they are required to make
fundamental network alterations and enhancements spanning from device access
points ("AP") to the network core. In either case, the network infrastructure
must adapt to this new dynamic environment. Intelligence and automation are key
if enterprises are to derive maximum benefit from their cloud deployments. With
automation applications becoming increasingly critical in manufacturing,
warehousing, logistics, healthcare and other key industries, we believe this
will continue to create demand for networking technology to serve as a
foundation to run these services.
Service providers are investing in network enhancements with platforms and applications that deliver data insights, provide flexibility, and can quickly respond to new user demands and 5G use cases.
We believe Extreme will continue to benefit from the use of its technology to
manage distributed campus network architecture centrally from the cloud. Extreme
has blended a dynamic fabric attach architecture that delivers simplicity for
moves and changes at the edge of the network together with corporate-wide
role-based policy. This enables customers to migrate to new cloud managed
switching, Wi-Fi, and SD-WAN, agnostic of the existing switching or wireless
equipment they already have installed. In the end, we expect these customers to
see lower operating and capital expenditures, lower subscription costs, lower
overall cost of ownership and more flexibility along with a more resilient
network.
We estimate the total addressable market for our Enterprise Networking solutions
consisting of cloud networking, wireless local area networks ("WLAN"), data
center networking, ethernet switching, campus local area networks ("LAN"), and
SD-WAN solutions to be approximately $33 billion and growing at approximately
12% annually over the next three years. This comprises of $22 billion for campus
networking, $4.6 billion for 5G service available market in 5G and data centers,
for which Extreme is targeting growing to approximately $50 - $100 million per
year over the next three to five years, and a $2.2 billion SD-WAN market. We
also participate in the $4 billion networking software market for solutions such
as cloud-based network management, network automation, on-premises network
management, and other networking related software.
The Extreme Strategy
Extreme makes networking intelligent, flexible, and most importantly a strategic asset. The combination of our solutions provides the connectivity, bandwidth, performance, and insights that organizations of all sizes need to move their organization forward. IT leaders are now tasked with ensuring the global, hybrid workforce is functional and successful no matter where they are and ensure people can work wherever they want. The data that sits in the network provides a goldmine of insights that guide our customers to find new ways to drive better outcomes. Cloud allows customers to gain real-time visibility and insights into areas such as app usage, location, and workflow patterns across their environment, helping to inform strategic business decisions and create personalized experiences. Customers benefit from visibility, control, and reduced time to resolution. This is the cornerstone of our One Network, One Cloud, One Extreme vision. Extreme has recognized that the way we and our customers communicate has changed and has given rise to these distributed enterprise environments, or in other words, the Infinite Enterprise, which has three key tenets:
• Infinitely distributed connectivity is the enterprise-grade reliable
connectivity that allows users to connect to anywhere, from anywhere. It is
always present, available and assured, while being secure and manageable.
• Scalable cloud allows administrators to harness the power of the cloud to
efficiently onboard, manage, orchestrate, troubleshoot the network, and find
data and insights of the distributed connectivity at their pace in their way.
• Consumer-centric experience designed to deliver a best-in-class experience to
users who consume network services.
Extreme's broad product, solutions and technology portfolio supports these three tenets and continues to innovate and evolve them to help businesses succeed.
Key elements of Extreme's strategy and differentiation include:
• Creating effortless networking solutions that allow all of us to advance. We
believe that progress is achieved when we connect-allowing us to learn,
understand, create, and grow. We make connecting simple and easy with
effortless networking experiences that enable all of us to advance how we
live, work, and share.
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• Provide a differentiated end-to-end cloud architecture. Cloud networking is
estimated to be a
cloud managed services and cloud-managed products, which are largely WLAN
access points and ethernet switches, growing at a 13% over the next three
years, according to data from 650
technology has evolved significantly over the past decade. We believe we
deliver a combination of innovation, reliability, and security with the
leading end-to-end cloud management platform powered by ML and AI that spans
from the Internet of Things ("IoT") edge to the enterprise data center. Key
characteristics of our cloud architecture include:
o A robust cloud management platform that delivers visibility,
intelligence, and assurance from the IoT edge to the core.
o
on all major cloud providers (Amazon Web Services ("AWS"),
Cloud Platform ("GCP") and Microsoft Azure).
o Enhanced Network Data plans to improve an organization's ability to
make smarter, more effective business decisions.
o Consumption Flexibility: Offer a range of financing and network
purchase options. Our value-based subscription tiers (including
Connect, Navigator and Pilot) provide customers withflexibility to
grow as they go, as well as offer pool-able and portablelicenses that
can be transferred between products (e.g., access points and switches)
at one fixed price.
o "No 9s" Reliability and Resiliency to ensure business continuity for
our customers.
• Offer customers choice: public or private cloud, or on-premises. We leverage
the cloud where it makes sense for our customers and provide on-premises
solutions where customers need them and also have a solution for those who
want to harness the power of both. Our hybrid approach gives our customers
options to adapt the technology to their business. At the same time, all of
our solutions have visibility, control and strategic information built in,
all tightly integrated with a single view across all of the installed
products. Our customers can understand what is going on across their network
and applications in real time - who, when, and what is connected to the
network, which is critical for bring your own device ("BYOD") and IoT usage.
• Highest value of cloud management subscriptions. ExtremeCloud IQ Pilot
provides our customers with four key applications enabling organizations to
eliminate overlays.
o Extreme AirDefense™ is a comprehensive wireless intrusion prevention
system that simplifies the protection, monitoring and security of
wireless networks. With the added Bluetooth and Bluetooth low energy
intrusion prevention, network administrators can address growing
threats against Bluetooth and low energy devices.
o ExtremeLocation™ delivers proximity, presence and location-based
services for advanced contact tracing in support of the
location-intelligent enterprise.
o ExtremeGuest™ is a comprehensive guest engagement solution that
enables IT administrators to use analytical insights to engage
visitors with personalized engagements.
o Extreme IoT™ delivers simple and secure onboarding, profiling,
segmentation and filtering of IoT devices on a production network.
• Offers universal platforms for enterprise class switching and wireless
infrastructure. Extreme offers universal platforms which support multiple
deployment use cases, providing flexibility and investment protection.
o Universal switches (5720/5520/5420/5320) support fabric or traditional
networking with a choice of cloud or on-premises (air-gapped or cloud
connected) management.
o Universal WiFi 6/6E Aps (300/400, 5000 series) support campus or
distributed deployments with a choice of cloud or on-premises
(air-gapped or cloud connected) management.
o Universal licensing with one portable management license for any
device and for any type of management. For switches, operating system
feature licenses are portable, and bulk activated through ExtremeCloud
IQ.
• Enable a common fabric to simplify and automate the network. Fabrictechnologies virtualize the network infrastructure (decoupling network
services from physical connectivity) which enables network services to be
turned up faster, with lower likelihood of error. They make the underlying
network much easier to design, implement, manage and troubleshoot.
• End-to-End Portfolio. Our cloud-driven solutions provide visibility, control
and strategic intelligence from the edge to the data center, across networks
and applications. Our solutions include wired switching, wireless switching,
wireless access points, WLAN controllers, routers, and an extensive
portfolio of software applications that deliver AI-enhanced access control,
network and application analytics, as well as network management. All can be
managed, assessed and controlled from a single pane of glass on premises or
from the cloud.
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--------------------------------------------------------------------------------• Provide high-quality "in-house" customer service and support. We seek to
enhance customer satisfaction and build customer loyalty through
high-quality service and support. This includes a wide range of standard
support programs to the level of service our customers require, from
standard business hours to global 24-hour-a-day, 365-days-a-year real-time
responsive support.
• Extend switching and routing technology leadership. Our technological
leadership is based on innovative switching, routing and wireless products,
the depth and focus of our market experience and our operating systems - the
software that runs on all of our networking products. Our products reduce
operating expenses for our customers and enable a more flexible and dynamic
network environment that will help them meet the upcoming demands of IoT,
mobile, and cloud.
• Expand Wi-Fi technology leadership. Wireless is today's network access
method of choice and every business must deal with scale, density and BYOD
challenges. The network edge landscape is changing as the explosion ofmobile devices increases the demand for mobile, transparent, and always-on
wired to wireless edge services. The unified access layer requires
distributed intelligent components to ensure that access control and
resiliency of business services are available across the entire
infrastructure and manageable from a single console. We are at a technology
inflection point with the pending migration from Wi-Fi 5 solutions to Wi-Fi
6 (802.11ax), focused on providing more efficient access to the broad array
of connected devices. We believe we have the industry's broadest Wi-Fi 6
wireless portfolio providing intelligence for the wired/wireless edge and
enhanced by our cloud architecture with machine learning and AI-driven
insights.
• Offer a superior quality of experience. Our network-powered application
analytics provide actionable business insights by capturing and analyzing
context-based data about the network and applications to deliver meaningful
intelligence about applications, users, locations and devices. With an easy
to comprehend dashboard, our applications help businesses turn their network
into a strategic business asset that helps executives make faster and more
effective decisions.
• Expand market penetration by targeting high-growth market segments. Within
the campus, we focus on the mobile user, leveraging our automation
capabilities and tracking WLAN growth. Our data center approach leverages
our product portfolio to address the needs of public and private cloud data
center providers. We believe that the cloud networking compound annual
growth rate will continue to outpace the compound annual growth rate for
on-premises managed networking. Our focus is on expanding our technology
foothold in the critical cloud networking segment to accelerate not only
cloud management adoption, but also subscription-based licensing (SaaS)
consumption.
• Leverage and expand multiple distribution channels. We distribute our
products through select distributors, a large number of resellers and
system-integrators worldwide, as well as several large strategic partners.
We maintain a field sales force to support our channel partners and to sell
directly to certain strategic accounts. As an independent networking vendor,
we seek to provide products that, when combined with the offerings of our
channel partners, create compelling solutions for end-user customers.
• Maintain and extend our strategic relationships. We have established
strategic relationships with a number of industry-leading vendors to both,
provide increased and enhanced routes to market, and collaboratively develop
unique solutions.
• Expand our reach with ExtremeCloud SD-WAN. ExtremeCloud SD-WAN is asoftware-defined wide area networks solution offered as an all-inclusive
subscription, which includes hardware, the cloud-based SD-WAN service,
support and maintenance, and customer success support. This helps customers
reduce total cost of ownership as they deliver quality user experience for
applications used in site-to-site and site-to-cloud environments. This
solution detects and optimizes applications automatically and can apply
performance-based dynamic WAN selection for quality and reliability.
Included also are security options such as a built-in zone-based firewall,
EdgeSentry (in partnership with Check Point) for cloud-based firewall as a
service and other advanced security capabilities, and integration with
Secure Web Gateway partners such as Palo Alto Networks, Zscaler, and
Symantec.
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Key Financial Metrics
During the second quarter of fiscal 2023, we achieved the following results:
• Net revenues of
quarter of fiscal 2022.
• Product revenues of
quarter of fiscal 2022.
• Service and subscription revenues of
million in the second quarter of fiscal 2022.
• Total gross margin of 57.1% of net revenues compared to 56.5% of net
revenues in the second quarter of fiscal 2022.
• Operating income of
quarter of fiscal 2022.
• Net income of
of fiscal 2022.
During the first six months of fiscal 2023, we reflected the following results:
• Cash flows provided by operating activities of
• Cash of
as of June 30, 2022 .
Net Revenues
The following table presents net product and service and subscription revenues for the periods presented (dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31, $ % December 31, December 31, $ %
2022 2021 Change Change 2022 2021 Change Change
Net revenues:
Product $ 223,445 $
191,102
70.2 % 68.0 % 69.8 % 68.6 %
Service and subscription 94,903 89,831 5,072 5.6 % 186,316 172,354 13,962 8.1 %
Percentage of net revenues 29.8 % 32.0 % 30.2 % 31.4 %
Total net revenues $ 318,348 $ 280,933 $ 37,415 13.3 % $ 616,037 $ 548,617 $ 67,420 12.3 %
Product revenues increased $32.3 million or 16.9% for the three months ended
December 31, 2022 as compared to the corresponding period in fiscal 2022.
Product revenues increased $53.5 million or 14.2% for the six months ended
December 31, 2022 as compared to the corresponding period in fiscal 2022. The
increases in product revenues were primarily due to strong demand for our
products and higher shipments resulting from an easing in supply chain
constraints which had impacted our ability to fulfill the demand for our
products.
Service and subscription revenues increased $5.1 million or 5.6% for the three
months ended December 31, 2022 as compared to the corresponding period in fiscal
2022. Service and subscription revenues increased $14.0 million or 8.1% for the
six months ended December 31, 2022 as compared to the corresponding period in
fiscal 2022. The increases in service and subscription revenues were primarily
due to the growth in our subscription business.
The following table presents the product and service and subscription, gross
profit and the respective gross profit percentages for the periods presented
(dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31, $ % December 31, December 31, $ %
2022 2021 Change Change 2022 2021 Change Change
Gross profit:
Product $ 119,858 $ 100,169 $ 19,689 19.7 % $ 226,371 $ 204,386 $ 21,985 10.8 %
Percentage of product revenues 53.6 % 52.4 % 52.7 % 54.3 %
Service and subscription 61,797 58,617 3,180 5.4 % 121,992 110,003 11,989 10.9 %
Percentage of service and subscription revenues 65.1 % 65.3 % 65.5 % 63.8 %
Total gross profit $ 181,655 $ 158,786 $ 22,869 14.4 % $ 348,363 $ 314,389 $ 33,974 10.8 %
Percentage of net revenues 57.1 % 56.5 % 56.5 % 57.3 %
30-------------------------------------------------------------------------------- Product gross profit increased$19.7 million or 19.7% for the three months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in product gross profit was primarily due to increased product revenues along with lower amortization of intangibles due to certain intangibles being fully amortized, lower distribution costs due to easing of supply chain constraints, partially offset by higher product costs and higher excess and obsolete inventory. Product gross profit increased$22.0 million or 10.8% for the six months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in product gross profit was primarily due to increased product revenues along with lower amortization of intangibles due to certain intangibles being fully amortized, partially offset by higher product costs, higher overhead costs and higher excess and obsolete inventory. Service and subscription gross profit increased$3.2 million or 5.4% for the three months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. Service and subscription gross profit increased$12.0 million or 10.9% for the six months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increases in service and subscription gross profits were primarily due to increased service and subscription revenues, partially offset by higher cloud services costs.
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, $ %
2022 2021 Change Change 2022 2021 Change Change
Research and development $ 52,618 $ 48,080 $ 4,538 9.4 % $ 103,607 $ 95,846 $ 7,761 8.1 %
Sales and marketing 80,538 71,565 8,973 12.5 % 158,920 141,092 17,828 12.6 %
General and administrative 24,085 17,877 6,208 34.7 % 42,632 34,880 7,752 22.2 %
Acquisition and
integration costs - 2,113 (2,113 ) (100.0 )% 390 3,623 (3,233 ) (89.2 )%
Restructuring and related
charges 476 292 184 63.0 % 957 571 386 67.6 %
Amortization of
intangibles 504 804 (300 ) (37.3 )% 1,027 1,958 (931 ) (47.5 )%
Total operating expenses $ 158,221 $ 140,731 $ 17,490 12.4 % $ 307,533 $ 277,970 $ 29,563 10.6 %
Research and Development Expenses
Research and development expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), consultant fees and prototype expenses related to the design, development, and testing of our products. Research and development expenses increased by$4.5 million or 9.4% for the three months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in research and development expenses was primarily due to a$1.6 million increase in personnel costs due to higher compensation costs primarily related to share-based compensation, a$0.4 million increase in consultant fees, a$0.9 million increase in software licenses and engineering project costs, a$0.7 million increase in equipment related costs, a$0.4 increase in facility and information technology costs and a$0.5 million increase in other costs primarily related to travel and recruiting expenses. Research and development expenses increased by$7.8 million or 8.1% for the six months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in research and development expenses was primarily due to a$3.3 million increase in personnel related costs due to higher compensation costs primarily related to share-based compensation, a$0.7 million increase in consultant fees, a$1.4 million increase in software licenses and engineering project costs, a$1.0 million increase in equipment related costs, a$0.7 increase in facility and information technology costs and a$0.7 million increase in other costs primarily related to travel and recruiting expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), as well as trade shows and promotional expenses. Sales and marketing expenses increased by$9.0 million or 12.5% for the three months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in sales and marketing expenses was primarily due to a$7.0 million increase in personnel costs due to higher compensation and benefits costs primarily related to higher commissions and share-based compensation, a$1.3 million increase in travel costs and a$0.9 million increase in marketing and facilities related costs, partially offset by a$0.2 million decrease in equipment and other expenses. 31 -------------------------------------------------------------------------------- Sales and marketing expenses increased by$17.8 million or 12.6% for the six months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in sales and marketing expenses was primarily due to a$11.8 million increase in personnel costs due to higher compensation and benefits costs primarily related to higher commission and share-based compensation, a$4.1 million increase in travel costs and a$2.0 million increase in marketing and other related expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), legal and professional service costs, and facilities and information technology costs.
General and administrative expenses increased by$6.2 million or 34.7% for the three months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in general and administrative expenses was primarily due to a$2.9 million increase in personnel costs due to higher compensation and benefits costs primarily related to share-based compensation, a$1.4 million increase in professional service fees and a$2.3 million increase in litigation charges, partially offset by a net$0.4 million decrease in facilities and other costs. General and administrative expenses increased by$7.8 or 22.2% for the six months endedDecember 31, 2022 as compared to the corresponding period in fiscal 2022. The increase in general and administrative expenses was primarily due to a$4.5 million increase in personnel costs due to higher compensation and benefits costs primarily related to share-based compensation, a$0.8 million increase in professional service fees, a$2.3 million increase in litigation charges and a net$0.2 million increase in other costs.
Acquisition and Integration Costs
During the three months ended
During the three and six months endedDecember 31, 2021 , we incurred$2.1 million and$3.6 million , respectively, of acquisition and integration costs, which primarily consisted of professional fees for legal advisory services, system and product integrations and financial services related to the acquisition of Ipanema.
Restructuring and Related Charges
For the three and six months ended
For the three and six months ended
Amortization of Intangibles
During the three months endedDecember 31, 2022 and 2021, we recorded$0.5 million and$0.8 million , respectively, of operating expenses for amortization of intangibles. During the six months endedDecember 31, 2022 and 2021, we recorded$1.0 million and$2.0 million , respectively. The decreases were primarily due to lower amortization related to certain acquired intangibles from previous acquisitions becoming fully amortized.
Interest Expense
During the three months ended
Other Income, Net
During the three months endedDecember 31, 2022 and 2021, we recorded other income, net of$0.1 million and$0.1 million , respectively. During the six months endedDecember 31, 2022 and 2021, we recorded other income, net of$0.5 million and$0.2 million , respectively. The changes for the three and six months endedDecember 31, 2022 was primarily due to foreign exchange impact 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, 2022 and 2021, we recorded an income tax provision of$2.6 million and$1.8 million , respectively. For the six months endedDecember 31, 2022 and 2021, we recorded an income tax provision of$4.4 million and$3.9 million , respectively. 32 -------------------------------------------------------------------------------- The income tax provisions for the three and six months endedDecember 31, 2022 and 2021 consisted of (1) taxes on the income of our foreign subsidiaries, (2) foreign withholding taxes, (3) state taxes in jurisdictions where we have no remaining state net operating losses and (4) tax expense associated with the establishment of aU.S. deferred tax liability for amortizable goodwill resulting from the acquisition ofEnterasys Networks, Inc. , the WLAN Business, the Campus Fabric Business and the Data Center Business.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Report are prepared in accordance with accounting principles generally accepted inthe United States . Certain information and footnote disclosures normally included in financial statements prepared in accordance withU.S. generally accepted accounting principles have been condensed or omitted underSEC rules and regulations. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. As discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedJune 30, 2022 , we consider the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements: • Revenue Recognition • Inventory Valuation and Purchase Commitments
There have been no changes to our critical accounting policies since the filing of our last Annual Report on Form 10-K.
Liquidity and Capital Resources
The following table summarizes information regarding our cash (in thousands):
December 31, June 30,
2022 2022
Cash $ 202,521 $ 194,522
As of December 31, 2022 , our principal sources of liquidity consisted of cash of
$202.5 million , accounts receivable, net of $152.1 million , and available
borrowings under our five-year 2019 Revolving Facility of $60.2 million . Our
principal uses of cash include the purchase of finished goods inventory from our
contract manufacturers, payroll and other operating expenses related to the
development and marketing of our products, purchases of property and equipment,
and repayments of debt and related interest. We believe that our $202.5 million
of cash at December 31, 2022 , our cash flow from operations, and the
availability of borrowings from the 2019 Revolving Facility will be sufficient
to fund our planned operations for at least the next 12 months.
On May 18, 2022 , our Board of Directors authorized management to repurchase up
to $200.0 million shares of our common stock over a three-year period commencing
July 1, 2022 . A maximum of $25.0 million may be repurchased in any quarter. On
November 17, 2022 , the Board increased the authorization to repurchase in any
quarter from $25.0 million per quarter to $50.0 million per quarter. Purchases
may be made from time to time in the open market or pursuant to 10b5-1 plan. The
manner, timing and amount of any future purchases will be determined by our
management based on their evaluation of market conditions, stock price,
Extreme's ongoing determination that it is the best use of available cash and
other factors. The repurchase program does not obligate Extreme to acquire any
shares of its common stock, may be suspended or terminated at any time without
prior notice and will be subject to regulatory considerations. During the three
months ended December 31, 2022 , we repurchased a total of 2,578,175 shares of
common stock on the open market at a total cost of $49.8 million . As of December
31, 2022 , we have $150.2 million available under our share repurchase program.
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On August 9, 2019 , we entered into the 2019 Credit Agreement. The 2019 Credit
Agreement provides for a five-year first lien term loan facility in an aggregate
principal amount of $380.0 million and a five-year revolving loan facility in an
aggregate principal amount of $75.0 million ("2019 Revolving Facility"). In
addition, we may request incremental term loans and/or incremental revolving
loan commitments in an aggregate amount not to exceed the sum of $100.0 million
plus an unlimited amount that is subject to pro forma compliance with certain
financial tests. On August 9, 2019 , we used the proceeds to partially fund the
acquisition of Aerohive and for working capital and general corporate purposes.
At our election, the initial term loan (the "Initial Term Loan") under the 2019
Credit Agreement may be made as either base rate loans or Eurodollar loans. The
applicable margin for base rate loans ranges from 0.25% to 2.50% per annum and
the applicable margin for Eurodollar loans ranges from 1.25% to 3.50%, in each
case based on Extreme's Consolidated Leverage Ratio. All Eurodollar loans are
subject to a Base Rate floor of 0.00%. The 2019 Credit Agreement is secured by
substantially all of our assets.
The 2019 Credit Agreement requires us to maintain certain minimum financial
ratios at the end of each fiscal quarter. The 2019 Credit Agreement also
includes covenants and restrictions that limit, among other things, our ability
to incur additional indebtedness, create liens upon any of our property, merge,
consolidate or sell all or substantially all of our assets. The 2019 Credit
Agreement also includes customary events of default, which may result in
acceleration of the outstanding balance.
Financial covenants under the 2019 Credit Agreement require us to maintain a
minimum consolidated fixed charge and consolidated leverage ratio at the end of
each fiscal quarter through maturity. The 2019 Credit Agreement also includes
covenants and restrictions that limit, among other things, our ability to incur
additional indebtedness, create liens upon any of our property, merge,
consolidate or sell all or substantially all of our assets. The 2019 Credit
Agreement also includes customary events of default which may result in
acceleration of the outstanding balance.
On April 8, 2020 , we entered into the First Amendment to waive certain terms and
financial covenants of the 2019 Credit Agreement through July 31, 2020 . On May
8, 2020 , we entered into a Second Amendment which superseded the First Amendment
and provided certain revised terms and financial covenants through March 31,
2021 . The Second Amendment required us to maintain certain minimum cash
requirement and financial metrics at the end of each fiscal quarter through
March 31, 2021 and we were restricted from pursuing certain activities such as
incurring additional debt, stock repurchases, making acquisitions or declaring a
dividend, until we came into compliance with the original covenants of the 2019
Credit Agreement. On November 3, 2020 , we and our lenders entered into a Third
Amendment to increase the sublimit for letters of credit to $20.0 million . On
December 8, 2020 , we and our lenders entered into a Fourth Amendment to waive
and amend certain terms and financial covenants within the 2019 Credit Agreement
through March 31, 2021 .
The Second Amendment provided for us to end the covenant Suspension Period early
and revert to the covenants and interest rates per the original terms of the
2019 Credit Agreement dated August 9, 2019 by filing a Suspension Period Early
Termination Notice and Covenant Certificate demonstrating compliance. For the
twelve-month period ended March 31, 2021 , our financial performance was in
compliance with the original covenants defined in the 2019 Credit Agreement and
as such we filed a Suspension Early Termination Notice and Covenant Certificate
with the administration agent subsequent to filing our Quarterly Report on Form
10-Q for the period ended March 31, 2021 . During the three and six months ended
December 31, 2022 , we were in compliance with all the original terms and
financial covenants under 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,
2022 2021
Net cash provided by operating activities
(6,271 ) (76,170 )
Net cash used in financing activities (105,611 ) (59,394 )
Foreign currency effect on cash (456 ) (264 )
Net increase (decrease) in cash $ 7,999 $ (73,346 )
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Net Cash Provided by Operating Activities
Cash flows provided by operations in the six months endedDecember 31, 2022 , were$120.3 million , including our net income of$30.5 million and non-cash expenses of$50.3 million for items such as amortization of intangibles, share-based compensation, depreciation, reduction in carrying amount of right-of-use assets, deferred income taxes, and interest. Other sources of cash for the period included a decrease in accounts receivable and increases in accounts payable, accrued compensation and deferred revenue. This was partially offset by increases in inventories, prepaid expenses and other current assets and decreases in operating lease liabilities and other current and long-term liabilities. Cash flows provided by operations in the six months endedDecember 31, 2021 were$62.5 million , including our net income of$26.0 million and non-cash expenses of$54.1 million for items such as amortization of intangibles, share-based compensation, depreciation, reduction in carrying amount of right-of-use assets, deferred income taxes and interest. Other sources of cash for the period included a decrease in accounts receivable and increase in deferred revenue. This was partially offset by increases in inventories and prepaid expenses and other current assets and decreases in accounts payable, accrued compensation, operating lease liabilities and other current and long-term liabilities.
Cash flows used in investing activities in the six months ended
Cash flows used in investing activities in the six months endedDecember 31, 2021 were$76.2 million primarily due to the payment of$69.5 million (net of cash acquired) for the acquisition of Ipanema and$6.7 million for the purchases of property and equipment.
Cash flows used in financing activities in the six months endedDecember 31, 2022 were$105.6 million due primarily to debt repayments of$46.6 million ,$2.0 million for deferred payments on acquisitions, share repurchase of$49.8 million under our share repurchase program, and$7.2 million for taxes paid on vested and released stock awards net of proceeds from the issuance of shares of our common stock under our Employee Stock Purchase Plan ("ESPP"). Cash flows used in financing activities in the six months endedDecember 31, 2021 were$59.4 million due primarily to debt repayments of$23.9 million , share repurchases of$25.0 million under our share repurchase program, payment of contingent consideration of$0.8 million ,$2.0 million for deferred payments on acquisitions and$7.7 million for taxes paid on vested and released stock awards net of proceeds from the issuance of shares of our common stock under our ESPP and exercise of stock options.
Foreign Currency Effect on Cash
Foreign currency effect on cash decreased in the six months endedDecember 31, 2022 , primarily due to changes in foreign currency exchange rates between theU.S. Dollar and particularly the Indian Rupee, theUK Pound, and the EURO.
Contractual Obligations
As ofDecember 31, 2022 , we had contractual obligations resulting from our debt arrangement, agreements to purchase goods and services in the ordinary course of business and obligations under our operating lease arrangements. Our debt obligations relate to amounts owed under our 2019 Credit Agreement. As ofDecember 31, 2022 , we had$262.0 million of debt outstanding which are payable on quarterly installments through our fiscal year 2025. We are subject to interest rate on our debt obligations and unused commitment fee. See Note 8, Debt, in the Notes to Condensed Consolidated Financial Statements for additional information regarding our debt obligations. Our 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. As ofDecember 31, 2022 , we had non-cancelable commitments to purchase$57.1 million of inventory. See Note 9, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements for additional information regarding our purchase obligations.
We have contractual commitments to our suppliers which represent commitments for
future services. As of
We lease facilities under operating lease arrangements at various locations that expire at various dates through our fiscal year 2032. As ofDecember 31, 2022 , the value of our obligations under operating leases was$47.7 million .
We have immaterial income tax liabilities related to uncertain tax positions and we are unable to reasonably estimate the timing of the settlement of those liabilities.
We did not have any material commitments for capital expenditures as of
35
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
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