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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission file number 000-25711

 

Extreme Networks, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

77-0430270

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

6480 Via del Oro

San Jose, California

 

95119

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (408) 579-2800

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $407.5 million as of December 31, 2016, the last business day of the Registrant’s most recently completed second fiscal quarter, based upon the per share closing price of the Registrant’s common stock as reported on The NASDAQ Global Market reported on such date.  For purposes of this disclosure, shares of common stock held or controlled by executive officers and directors of the registrant and by persons who hold more than 5% of the outstanding shares of common stock have been treated as shares held by affiliates. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

113,064,935 shares of the Registrant’s Common stock, $.001 par value, were outstanding as of September 6, 2017.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for the 2017 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated herein by reference in Part III of this Annual Report on Form 10-K.

 

 

 


EXTREME NETWORKS, INC.

FORM 10-K

INDEX

 

 

 

 

 

Page

Forward Looking Statements

 

 

 

 

 

 

 

PART I

 

2

 

 

 

 

 

Item 1.

 

Business

 

2

 

 

 

 

 

Item 1A.

 

Risk Factors

 

17

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

33

 

 

 

 

 

Item 2.

 

Properties

 

33

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

33

 

 

 

 

 

 

 

PART II

 

34

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

34

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

36

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

38

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

51

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

53

 

 

 

 

 

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

93

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

93

 

 

 

 

 

Item 9B.

 

Other Information

 

94

 

 

 

 

 

 

 

PART III

 

95

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

95

 

 

 

 

 

Item 11.

 

Executive Compensation

 

95

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

95

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

95

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

95

 

 

 

 

 

 

 

PART IV

 

96

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

96

 

 

 

 

 

SIGNATURES

 

97

 

 

i


 

FORWARD LOOKING STATEMENTS

Except for historical information contained herein, certain matters included in this annual report on Form 10-K are, or may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words "will," "may," "designed to," "believe," "should," "anticipate," "plan," "expect," "intend," "estimate" and similar expressions identify forward-looking statements, which speak only as of the date of this annual report. These forward-looking statements are contained principally under Item 1, "Business," and under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," but may also be in other sections of this annual report on Form 10-K. Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include those described in Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.

PART I

Item1. Business

Overview

Extreme Networks, Inc., together with its subsidiaries (collectively referred to as “Extreme” and as “we”, “us” and “our”) is a leader in providing software-driven networking solutions for enterprise customers. Providing a combined end-to-end solution from the data center to the access point, Extreme designs and develops wired and wireless network infrastructure equipment and develops the software for network management, policy, analytics, security and access controls. We strive to help our customers and partners Connect Beyond the Network by building world-class software and network infrastructure solutions that solve the wide range of problems faced by information technology (“IT”) departments.

 

During fiscal year 2017, Extreme experienced a 13% year-over-year revenue growth.  These results reflect continued execution toward our strategic objectives, including results from the recently acquired wireless local area network (“WLAN”) business (“WLAN Business”) from Zebra Technologies Corporation (“Zebra”).

 

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 by placing unprecedented demands on network administrators to enhance management capabilities, scalability, programmability, agility, and analytics of the enterprise networks they manage.

A trend affecting the enterprise network equipment market is the continued adoption of the cloud-managed enterprise WLAN in the enterprise market. Hybrid cloud is a cloud computing environment which uses a mix of on-premises, private cloud and third-party, public cloud services with orchestration between the two platforms. We introduced ExtremeCloud, our Cloud offering in 2016 and announced our enhanced cloud offering in 2017.  ExtremeCloud is the only offering in the market that seamlessly integrates the Cloud with on premise infrastructures.

To facilitate the readers understanding, the following is a list of common terms in our industry used in the discussion of our business:

 

Access Point: A wireless access point, or more generally just access point (“AP”), is a networking hardware device that allows a Wi-Fi device to connect to a wired network.  (Industry term)

 

OpenFlow: OpenFlow (“OF”) is considered one of the first software-defined networking (“SDN”) standards. It originally defined the communication protocol in SDN environments that enables the SDN Controller to directly interact with the forwarding plane of network devices such as switches and routers, both physical and virtual (hypervisor-based), so it can better adapt to changing business requirements. (Source: SDx Central)

 

OpenStack:  OpenStack software controls large pools of compute, storage, and networking resources throughout a datacenter, managed through a dashboard or via the OpenStack API. OpenStack works with popular enterprise and open source technologies making it ideal for heterogeneous infrastructure. (Source: OpenStack.org)

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CloudStack:  CloudStack is an open source cloud computing software for creating, managing, and deploying infrastructure cloud services. It uses existing hypervisors such as KVM, VMware ESXi and XenServer/XCP for virtualization.

 

Single Pane of Glass: Single pane of glass is a term used to describe a management display console that integrates all parts of a computer infrastructure.

 

Fabric Attach: Avaya, Inc.’s (“Avaya”) Avaya Fabric Attach (“FA”) fundamentally introduces autonomic/automatic attachment to network services for end users IoT devices to a network infrastructure. Fabric Attach and Fabric Connect are key building blocks of the Avaya SDN Fx™ architecture.

 

Fabric Connect:   Fabric Connect is an extended implementation of the IEEE/IEFT standards for Shortest Path Bridging (“SPB”).  It offers a full-service network virtualization technology that combines the best of Ethernet and the best of IP. 

 

Campus (Network): A campus network, or campus area network, or corporate area network or (“CAN”) is a computer network made up of an interconnection of local area networks (“LANs”) within a limited geographical area, such as a college campus, company campus, hospital, hotel, convention center or sports venue. 

 

Data Center: A data center is a facility used to house computer systems and associated components, such as telecommunications and storage systems. It generally includes redundant or backup power supplies, redundant data communications connections, environmental controls (e.g. air conditioning, fire suppression) and various security devices. 

 

Data Center Fabric technologies: Also known as networking switch fabric, is the basic topology of how a network is laid out and connected to switch traffic on a data or circuit-switched network. 

 

Edge: An edge device is a device which provides an entry point into enterprise or service provider core networks. Examples include routers, routing switches, integrated access devices (“IADs”), multiplexers, and a variety of metropolitan area network (“MAN”) and wide area network (“WAN”) access devices.

 

Access: Network access is the closest point of entry to a network whether it is a wireless access point, Ethernet connection, or Wi-Fi device. 

 

Aggregation: In computer networking, the term aggregation applies to various methods of combining (aggregating) multiple network connections in parallel in order to increase throughput beyond what a single connection could sustain, and to provide redundancy in case one of the links should fail.

 

Core: A core network, or network core, is the central part of a telecommunications network that provides various services to customers who are connected by the access network.

 

Layer 3 Data Center Interconnect; A Data Center Interconnect (“DCI”) refers to the networking of two or more different data centers to achieve business or IT objectives. This interconnectivity between separate data centers enables them to work together, share resources and/or pass workloads between one another.  A Layer 3 DCI refers to interconnection made through layer 3 of the commonly-referenced multilayered communication model, Open Systems Interconnection (“OSI”).

 

Flipped Classroom: Flipped classroom is an instructional strategy and a type of blended learning that reverses the traditional learning environment by delivering instructional content, often online, outside of the classroom.

 

Industry Background

The networking industry appears to be invigorated by a wave of technological change:

 

Ethernet (wired and wireless) has solidified its role in both public and private networks through its scalability, adaptability and cost-effectiveness. At the same time, the enterprises and service providers expect the technology to follow a price-performance curve that mandates continued innovation by Ethernet vendors.

 

The mobile workforce continues to proliferate. Employees expect high-quality and secure access to corporate resources in a BYOD world across a diversity of endpoints such as laptops, tablets, smart phones and wearables, whether they are within the corporate firewall or on-the-go.  With ExtremeManagement, IT departments focus their investment decisions on this mobile workforce, taking a unified view of wireless access, from the campus core and the data center.  Networking vendors offer end-to-end solutions that permit IT managers to meet employee expectations and to maximize IT return on investment.

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Verticals such as healthcare, education, manufacturing, government, hospitality, which includes sports and entertainment venues and retail are connecting with their customers and guests beyond the network. These enterprises are investing in guest and location technologies that connect with their customers via their mobile devices over their WLAN. This allows them to obtain rich analytics for contextual marketing, which in turn, enables them to deliver a personalized brand experience. ExtremeGuest and ExtremeLocation have been built on cloud-based technology for simple implementation and fast release to market to better provide necessary insights into guest demographics and location-based analytics.

 

Growing usage of the cloud. Enterprises have migrated increasing numbers of applications and services to either private clouds or public clouds offered by third parties.  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. Ethernet speeds, scaling from 10 Gigabits per second ("G") to 40G and even 100G, provide the infrastructure for both private and public clouds. In addition, there is growing interest in SDN approaches that may include technologies such as OpenFlow, OpenStack, and CloudStack for increased network agility.

 

Vendor consolidation is expected to continue. Consolidation of vendors within the enterprise network equipment market and between adjacent markets (storage, security, wireless & voice software and applications) continues to gain momentum. We identified this trend in 2013 with our acquisition of Enterasys. Further, we believe customers are demanding more end-to-end, integrated networking solutions. To address this demand, we acquired the WLAN Business of Zebra in October 2016, and Avaya’s fabric-based secure networking solutions and network security solutions business (“Avaya Networking”) in July 2017.

Our strategy, product portfolio and research and development are closely aligned with what we have identified as the following trends in our industry:

 

The software segment of the worldwide enterprise network equipment market has continued to evolve and demands for improvements in Network Management will continue.

 

Extreme announced our Enterprise Management Console in the fourth quarter of fiscal 2016.  This innovative software helps IT network administrators to navigate the unprecedented demands caused by the surge of IoT devices and technology.

 

SDN is providing more revenue and delivery models to the industry.

 

Extreme’s SDN offering is innovative and adaptable to a wide range of use cases.

 

Enterprise adoption of the cloud and open-source options are disrupting traditional license and maintenance business models.

 

Extreme announced cloud offerings in April 2016 and began participation in the OpenSwitch program in May 2016.

 

Growth of wireless devices continues to outpace hardwire switch growth.

 

Extreme announced our 802.11ac Wave 2 wireless offering in late 2015 and plans to continue to advance our wireless portfolio of indoor and outdoor access points.

 

The Extreme Strategy

Extreme is focused on delivering end-to-end IP networking 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 premise 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 2014, we completed the acquisition of Enterasys Networks, on October 28, 2016, we completed the acquisition of the WLAN Business from Zebra, and on July 14, 2017, we completed the acquisition of Avaya Networking. These acquisitions support our growth strategy to lead the enterprise network equipment market with end-to-end software-driven solutions for enterprise customers from the data center to the wireless edge.  After the closing of the Avaya Networking transaction, Extreme immediately became a networking industry leader with more than 30,000 customers. As a network switching leader in enterprise, datacenter and cloud, after closing of the Avaya Networking business, 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 Extreme and Avaya Networking 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 and cloud.  

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Provider of high quality, software-driven, secure networking solutions and the industry’s #1 customer support organization  

 

Only multi-vendor network management with “single pane of glass”

 

Delivering new releases of next generation portfolio organically and through acquisition

Key elements of our strategy include:

 

Enable customers and partners to “Connect Beyond the Network”.  We work with our customers to clearly understand their challenges and help them innovate with the latest networking technology. We help them 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 able reduce their daily tactical work so they can spend their time on learning and understanding how to innovate their business with IT.

 

Enable a common fabric to simplify and automate the network.  With the acquisition of Avaya Networking, Extreme now has access to field proven Campus and Data Center Fabric technologies.  Fabric technologies 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.  

 

Software-driven networking services-led solutions. Our software-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 and controllers. We offer a suite of products that are tightly integrated with access control, network and application analytics as well as network management. All can be managed, assessed and controlled from one single pane of glass.

 

Offer customers choice – cloud or on premise. We leverage cloud where it makes sense for our customers and provide on premise solutions where customers need it. 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 one single pane of glass. 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 conducted in December 2016, enterprise IT decision makers across industry verticals 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 that provide additional choice and flexibility with on or off premise network, device and application management coupled with our award-winning services and support provide 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, manufacturing, hospitality, transportation and logistics and government agencies use our solutions for their mobile campus and backbone networks.

 

Enterprises, universities, 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-day-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 Ethernet Switches.  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, our primary merchant silicon vendor, 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.

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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. This new “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.  Our unified access layer portfolio provides intelligence for the wired/wireless edge

 

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.

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.

 

Software-driven networking solutions for the enterprise. We are a software-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 software-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 Data Center approach leverages our product portfolio to address the needs of 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.

 

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 sell directly to certain strategic accounts. As an independent Ethernet switch 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 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:

 

Data Center to access edge wired and wireless solutions.  The addition of the WLAN Business and the Avaya Networking assets will allow Extreme to offer a complete, unified portfolio of software-driven network access solutions.   We offer the latest in wireless access points for both outdoor and indoor use plus a complete line of switches for the Campus, Core and Data Center.      

 

Multi-vendor management from a “single pane-of-glass”.  Extreme’s Management Center (“EMC”) 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, including Avaya Networking products, enabling our customers to potentially maximize device lifespan and protect investments.

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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.

 

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.  Extreme Control, a network access control, and identity management solution is delivered with the wired and wireless hardware. This may reduce the need to add on expensive software or hardware that may require complex compatibility testing.

 

Easier policy assignment and SDN.  ExtremeControl and ExtremeManagement software allow our customers to assign policy across the entire network.  The SDN component 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.  

 

Extreme sells products primarily through an ecosystem of channel partners which combine our Ethernet, wireless and management and software analytics products with their vertical-specific offerings to create IT solutions for end user customers

 

Products

Our software-driven networking products offer resilient high-performance networking, granular visibility and control and strategic intelligence for business innovation and operational simplicity. Fabric technologies enable “network-wide automation” that provides simple “plug-and-play” operation and much faster time-to-service. We build our products into vertical market solutions for converged campus networks that provide user and device mobility.  Data Center and Cloud administrators are able to virtualize their servers and storage over our high-performance Ethernet infrastructure. Extreme’s access control and analytics software provides visibility, control, strategic intelligence and security from the Data Center to the Edge - all through a single pane-of-glass.

Our product categories include:

 

Edge/Access Ethernet switching systems. Our ExtremeSwitching Edge/Access Switch portfolio delivers Ethernet connectivity for the Edge of the network. Within this portfolio are products offering Access connection speeds ranging from 100 Megabit to 10 Gigabit – including new multi-rate 2.5 Gigabit and 5 Gigabit capabilities. These Switches provide various physical presentations (copper and fiber) along with options to deliver traditional Ethernet or convergence-friendly Power-over-Ethernet (“POE”), including high-power universal PoE consisting of 60W power to support new classes of Ethernet-powered devices. These Switching products, combined with our mature operating systems, deliver the features, performance, and reliability required by our customers to deploy, operate and manage converged networking infrastructures.

This category was further enhanced in fiscal year 2017 with the introduction of a new family of entry-level Access Switches, the ExtremeSwitching 200 Series which target small and medium enterprises looking for an economical wired Access solution. The category of products has also been enhanced by the recent addition of the Avaya Networking assets, which brings three additional product lines – the ERS 3000, 4000, and 5000 Series which address, respectively, entry-level, mainstream, and premium edge networking markets.  These families have been refreshed in fiscal 2017 to add the latest switching architectures enabling them to deliver more physical capabilities. The ERS 3000, 4000 and 5000 Series also provide seamless access to a Fabric-based Core by delivering automation and hyper-segmentation, along with the ability to harden the perimeter of the network infrastructure.  

 

Aggregation/Core Ethernet switching systems. Our ExtremeSwitching Aggregation/Core Switches are designed to address the demanding needs of Aggregation, Top-of-Rack and Campus Core environments.  Delivering 10G, 25G, 40G, 50G and now also 100G connectivity with maximum throughput and reliability, these switches provide flexible Ethernet connectivity over a range of interface types and speeds and are available in both fixed and modular (or chassis-based) configurations. These Switching platforms, in conjunction with our advanced operating systems and centralized management software, provide the density, performance, and reliability required to serve in a diverse range of environments, especially where application demands and uptime expectations are mission-critical.

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This category was enhanced in fiscal year 2017 with the introduction of the ExtremeSwitching X870 Series, a high-density 100G switch designed for high-performance enterprise and Cloud Data Centers. This is available in a compact 1RU form factor and supports multi-rate 10G, 25G, 40G, 50G and 100G interface speeds. The X870 Series is ideal for either Spine/Leaf or high-density Top-of-Rack architectures.  During fiscal year 2017, we also introduced ExtremeSwitching X690 Series, a are high-density, purpose-built 10Gb/100Gb switches ideal for top-of-rack and/or edge leaf applications within high-performance data centers. The X690 supports a range of interface speeds, including 1Gb, 10Gb, 25Gb, 40Gb 50Gb and 100Gb, the X690 comes in a compact 1RU form factor.

The addition of Avaya Networking assets included the recently released VSP 8600 Series – a next-generation, low-profile, high-density Ethernet switch for the Core and Aggregation.  This new switch complements the fixed and semi-modular VSP 8000 Series products that are currently in the market, and together these products empower the creation of versatile always-on campus solutions that are Fabric-enabled and 100 Gigabit-ready. The technologies supported by these innovative platforms can also leverage automated network attachment to proactively reduce operational burden and time-to-service.

 

Data Center switching systems: Our ExtremeSwitching Data Center switches provide the highest levels of reliability and throughput - specifically designed to address the exacting demands of high-performance enterprise and Cloud Data Centers.  These switches are available in both fixed and modular chassis configurations and include a set of advanced features such as redundant management and fabric modules, hot-swappable line cards on our chassis-based platforms, as well as multi-speed stacking of up to 100 Gigabits and flexible 10/25/40/50/100 Gigabit port options on our fixed-form platforms, which makes these switches well-suited for a majority of enterprise Data Center environments. Both platform types also provide redundant power supplies and fan trays to ensure high hardware availability.  

These switches also provide key feature extensions for Data Centers through technologies that include Virtual Extensible LAN (“VXLAN”), MPLS/VPLS, and Shortest Path Bridging (“SPB”) capabilities – the latter available on the recently-acquired Avaya Core Switches. In addition to these capabilities, our Data Center Switches offer innovative traffic optimization enabling Virtual Machine (“VM”) mobility via Layer 3 Data Center Interconnect.  And our CoreFlow2 architecture delivers tens of millions of flows for deep visibility and control over users, services, and applications to meet the analytic and policy demands of today’s business applications.  

 

High-density Wi-Fi. Our ExtremeWireless and its family of Wireless Access Points is a centralized management and appliance that enables the deployment of wired-like performance, at scale for high-density in every environment. Our Wireless Access Point products offer both indoor and outdoor 802.11a/b/g/n/ac Access Points. Proven in the most demanding environments, ExtremeWireless delivers an exceptional experience for BYOD and mobile users wherever they may roam. During fiscal year 2017, we continued our growth in high-density venue deployments with many additional NFL stadiums.

We are creating a single architecture from the Campus Core to the unified wired/wireless Edge thereby extending the Fabric Attach capability to ExtremeWireless APs.  This will enable ExtremeWireless integration into existing and new Fabric Connect deployments and will also enable rapid, zero-touch deployment of ExtremeWireless APs.

 

Highly scalable, distributed Wi-Fi networks. Our acquisition of the WLAN Business broadened our market penetration with a proven distributed wireless architecture that serves many top retailers, hospitality brands and transportation and logistics companies globally. ExtremeWireless WiNG has an extensive portfolio of indoor and outdoor 802.11ac (Wave 1 and 2) APs, with both virtualized and appliance-based controllers, an industry unique Wireless over VDSL2 wall plate solution and AirDefense; a premier wireless security solution.

 

Centralized network visibility, control, and insights. Our Extreme Management Center empowers our customers to turn their network into a strategic business asset that drives crucial business objectives. It provides visibility, control and meaningful information across the wired and wireless network, from the edge to the private cloud, across multi-vendor environments. Our Extreme Management Center gives IT departments visibility and automated control over users, devices, and applications. It enables them to manage, automate and report on the entire network and applications. With Extreme Management Center, IT can correlate network and application performance with user and device activities to troubleshoot issues fast. Strategic information from the network allows enterprises make real-time decisions on policies, devices, applications, and people. This way, the implementation of new technologies such as BYOD and IoT can be automated and securely executed. Customers can deploy, configure, monitor and support the complete range of wired, wireless and switching infrastructure and set network-wide policy to enable enterprises to reduce the overall cost of network administration and operations, protect corporate resources and provide a consistently high-quality user experience that is managed through a single pane of glass, no need to switch screens or applications.

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Network access control for secure BYOD and IoT management. ExtremeControl is part of our Extreme Management Center and lets enterprises unify the security of their wired and wireless networks with in-depth visibility and control over users, devices, and applications. Granular policy controls enable enterprises to comply with policies and compliance obligations. They can use ExtremeControl to locate, authenticate and apply targeted policies to users and devices as users connect to the network for secure BYOD, guest access, and IoT. ExtremeControl is integrated with major enterprise platforms, including solutions for network security, enterprise mobility management, analytics, Cloud, and Data Center. In addition, it offers an open northbound API for customized integrations to key enterprise platforms.

Key product features include:

 

Enables secure guest access and BYOD via a self-service portal with social media logins

 

Reduces security vulnerabilities with end-system posture assessment

 

Expands security integration with next-generation firewalls

 

Offers visibility across your network with advanced reporting and alerting

 

Offers an open API for customized integrations.

 

Application analytics for strategic intelligence.  

ExtremeAnalytics, also part of our Extreme Management Center, is a network-powered application analytics and optimization solution that captures network data, then aggregates, analyzes, correlates and reports on it to enable better decision making and improved business performance. Granular visibility into network and application performance, users, locations and devices empowers our customers to make data-driven business decisions. Customers can save operational costs, solve issues faster and deliver a superior end user experience with real-time data in one easy-to-read dashboard. Our solution speeds up troubleshooting by separating the network from application performance so IT can quickly identify root-causes. ExtremeAnalytics makes our customers’ networks safer as it monitors shadow IT, identifies and reports malicious or unwanted applications, and monitors security compliance. Because of the value ExtremeAnalytics was able to provide, Extreme was selected as the Official Wi-Fi & Analytics Provider for the NFL, including Super Bowl XLVIII, XLIX, XLVI and XLI.

Key product features include:

 

Enables troubleshooting and visualization of all wireless clients with our intuitive event analyzer

 

Allows customers to manage quality of experience by understanding network and application performance in one simple view

 

Provides contextual data about applications on the network without performance degradation

 

Includes transport layer independent application fingerprinting (a network security term to describe a collection of attributes from a network device).

 

Allows customers to identify problems proactively

ExtremeGuest is complemented with ExtremeLocation which is a cloud service that enables enterprises to incorporate location-based services, which when combined with guest analytics, can power contextual marketing campaigns for retailers and hotel chains.

 

Cloud-based network management: simple, flexible, and powerful.  ExtremeCloud is an elastic, API driven wired and wireless cloud network management solution that offers advanced visibility and control over users and applications. Application analytics allow managed service providers (“MSPs”) to deliver insights about how customer networks are being used and which policies they need to implement to optimize user experience. ExtremeCloud empowers MSPs to explore new revenue streams without additional investment in Cloud infrastructure. ExtremeCloud keeps operational cost low, adjusts to customer demand and protects their brand with white labeling. Elasticity and API foundation combined with zero-touch provisioning, multi-tenancy and delegation allows MSPs to optimize their operations and address the needs of geographically distributed customers from a single location. Extensive REST APIs enable end-to-end automation and empower MSPs to be more agile and responsive to customer needs.

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Sales, Marketing and Distribution

We conduct our sales and marketing activities on a worldwide basis through a channel that utilizes distributors, resellers and our field sales organization. As of June 30, 2017, our worldwide sales and marketing organization consisted of 598 employees, including vice presidents, directors, managers, sales representatives, and technical and administrative support personnel. We have domestic sales offices located in six states and international sales offices located in 30 countries. The new talent brought in through the acquisitions of the WLAN Business and Avaya Networking business adds significant depth to our marketing efforts.

We sell our products primarily through an ecosystem of channel partners who combine our Ethernet, wireless, management and analytics software products with their vertical specific offerings to create compelling information technology solutions for end-user customers. We utilize our field sales organization to support our channel partners and to sell directly to certain end-user customers, including some large global accounts.

The details of our sales and distribution channels are as follows:

 

Alliance, Original Equipment Manufacturers ("OEM") and Strategic Relationships. We have active Alliance, OEM & strategic relationships with Barco NV, Ericsson Enterprise AB, Silicon Graphics International, Inc. (acquired by HP), PC HK Ltd., Nokia Siemens Networks and Aviat Networks, Inc. as well as other global industry technology leaders in which our products are qualified to be included into an overall solution or reference architecture.  These tested and validated solutions are then marketed and sold by the Alliance, OEM or strategic partners into their specific verticals, market segments and customers as turnkey offerings.

 

Distributors. We have established several key relationships with leading distributors in the electronics and computer networking industries. Each of our distributors primarily resells our products to resellers. The distributors enhance our ability to sell and provide support to resellers who may benefit from the broad service and product fulfillment capabilities offered by these distributors. Extreme maintained distribution agreements with our largest distributors, Westcon Group, Tech Data Corporation and Jenne Corporation on substantially the same material terms as we generally enter into with each of our distributor partners.  Distributors are generally given the right to return a portion of inventory to us for the purpose of stock rotation, to claim rebates for competitive discounts and participate in various cooperative marketing programs to promote the sale of our products and services. We defer recognition of revenue on all sales to distributors who maintain inventory of our products until the distributors sell the product, as evidenced by monthly “sales-out” reports that the distributors provide to us, provided other revenue recognition criteria are met. (See “Revenue Recognition” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

 

Resellers. We rely on many resellers worldwide that sell directly to the end-user customer. Our resellers include regional networking system resellers, resellers who focus on specific vertical markets, value added resellers, network integrators and wholesale resellers. We provide training and support to our resellers and our resellers generally provide the first level of contact to end-users of our products. Our relationships with resellers are on a non-exclusive basis. Our resellers are not given rights to return inventory and do not automatically participate in any cooperative marketing programs. We generally recognize product revenue from our reseller and end-user customers at the time of delivery, provided other revenue recognition criteria are met. When significant obligations or contingencies remain after products are delivered, such as installation or customer acceptance, revenue and related costs are deferred until such obligations or contingencies are satisfied. (See “Revenue Recognition” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

 

Field Sales. Our field sales organization is trained to sell solutions, support and develop leads for our resellers and to establish and maintain key accounts and strategic end-user customers. To support these objectives, our field sales force:

 

Assists end-user customers in finding solutions to complex network system and architecture problems.

 

Differentiates the features and capabilities of our products from competitive offerings.

 

Continually monitors and understands the evolving networking needs of enterprise and service provider customers.

 

Promotes our products and ensures direct contact with current and potential customers.

 

Assists our resellers to drive opportunities to closure business.

Although we compete in many vertical markets, in fiscal year 2017, we have focused on the specific verticals of healthcare, education, manufacturing, government and hospitality, which includes sports and entertainment venues. Years of experience and a track record of success in the verticals we serve enables us to address the following industry-specific problems.

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Healthcare:

 

Patient services. In an increasingly competitive healthcare market, ensuring patient and visitor access from a variety of devices to the Internet can be a competitive advantage. We have several medical facilities worldwide that can reference Extreme’s expertise in meeting the challenges of patient services which include: online services, guest Wi-Fi, IoT, wearables and sensors.

 

The majority of new medical devices are IP-based.  Not only are most medical devices monitored through the network, they are regulated by various government agencies across the globe.  Extreme has success in meeting this challenge with compliance through our complete wireless and wired product suite overseen by innovative management and analytics.

 

Clinical workflow has shifted to real-time mobility inside and outside the hospital.  Medical professionals often access critical patient records through network connections.  Extreme’s reliable and comprehensive technology, including the latest Wave 2 capability, is backed by practical experience in addressing the demanding needs of clinical workflow.

Education:

 

New styles of teaching. Personalized learning, flipped classrooms and competency-based education depend on well-managed high-bandwidth digital content delivery. Extreme has extensive knowledge in smart classroom and large campus environments; both of which are experiencing a growing presence of IoT devices. Our easy-to-manage networks provide the bandwidth necessary to deliver digital content, including emerging styles like virtual and mixed reality, to thousands of students with the speed and quality required.  Extreme has demonstrated the ability to provide high density, two-way Internet connectivity so that each student has a rich and uninterrupted educational experience.

 

Online and technology-based assessment is growing in importance. K-12 is implementing high stakes standardized testing and higher education is moving to BYOD for online mid-term and final exams. ExtremeAnalytics helps ensure tests proceed by providing visibility into the network flow from student device to local school server to remote testing server.

 

Protecting student privacy, safety and digital freedom.  Extreme has built-in access and identity control to protect the safety and privacy of students, faculty and administrators.  This all in one offering helps ease the burden on education institutions that have limited IT resources.

Manufacturing:

 

Operations to meet the fast-changing customer and market requirements.  Flexible manufacturing and build-to-order processes place high demands on the network for material and shop floor control.  Extreme’s proven technology strives to meet these demands in some of the world’s most demanding manufacturing environments.

 

Speed, adaptability and innovation are the new currencies in the manufacturing realm.  A fast and reliable network can help to accommodate speed.  Extreme’s full suite of wired and wireless product and management and analytics software enable agile manufacturing.

 

Visibility into plant and back office technology performance.  Extreme’s management, control and analytics provide end-to-end network visibility from a single console without the need to swap user interfaces.  This unique capability is well-suited for plant and back office environments.

Government:

 

Secure access. Government agencies are being challenged to provide their employees and the citizens they serve with secure, cost-effective, high-speed access to online information and resources. For today’s agencies, high quality video, collaboration, social media, VoIP and multimedia applications have become mission-critical services. These applications have placed unprecedented bandwidth and control demands on existing networks.

 

Management of new technologies. The increasingly rapid deployment of wireless access, data center virtualization and the adoption of cloud computing have further complicated network management and control. For federal government agencies, the challenge is determining how to deliver secure, seamless, always-on access to these mission-critical services.  

 

Controlling costs. Agencies need to deliver access from laptops, tablets, smartphones and other types of devices, at any time, from any place and from anywhere, while at the same time maximizing efficiencies and cost savings across all areas of the network infrastructure.  Extreme provides a rich set of networking solutions that strive to be cost-effective and secure and allow government agencies to meet not only today’s needs, but also to be prepared for future demands.

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Hospitality:

 

Developing a cohesive and enhanced mobile experience.  Through real world experience in sports stadiums, where over 70,000 fans actively access the Internet, Extreme has developed the expertise to handle the most demanding venue challenges. Our hospitality experience spans hotels, casinos, theaters, convention centers, vacation destinations and outdoor venues.

 

Emphasizing the user experience and mobile engagement.  Extreme has the ability to monitor applications so that policy to maximize user experience can be implemented in fixed and mobile environments with the same set of management tools from a single pane of glass.

 

Generating revenue opportunities for the business.  Knowing the behaviors of customers and clients is a key to success and Extreme Analytics provides visibility to the usage patterns and traits of network users.  

 

Retail:

 

Transforming the brick and mortar retail experience. Extreme’s strength in the retail vertical is built upon years of experience and enhanced with the acquisition of WLAN Business.   Extreme is able to deliver Wi-Fi across distribution centers, driving efficiencies in logistics workflow while enabling in-store Wi-Fi to maximize associate resource planning and customer engagement.  ExtremeAnalytics, Extreme’s location and mobile usage analytics tool, also provides brands with unique insights into in-store behaviors of their customers.  This is fast becoming one of Extreme’s competitive differentiators in the retail vertical.

Furthermore, in fiscal 2017, we decided to focus on the following customer profiles where we believe we can add the most value:

 

Customer size: Those customers with annual revenue of $100 million to $2.5 billion.  

 

Target deployment: Campus deployments with 250 to 5,000 employees or education campuses with 1,000 to 15,000 students.  

 

Target data centers:  Data centers with 1,000 servers or less.

 

Vertical markets: Healthcare, education, government, manufacturing, hospitality, which includes sports and entertainment venues, and retail.

 

Customer characteristics: Our customers tend to operate in transient environments, such as college campuses, hospitals and sports venues, where BYOD and secure network access and identity control are critical. Their networks must be highly available with the ability to continue operations in the event of a service interruption. Secure access is essential to ensuring the protection of mission-critical systems and confidential information. Often tasked to manage the network with a limited IT staff, our customers appreciate the excellent service and support we strive to provide.

Customers with 10% of net revenue or greater

The following table sets forth major customers accounting for 10% or more of our net revenue:

 

 

 

Year Ended

 

 

 

June 30,

2017

 

 

June 30,

2016

 

 

June 30,

2015

 

Tech Data Corporation

 

 

18%

 

 

 

17%

 

 

 

15%

 

Jenne Corporation

 

 

12%

 

 

 

14%

 

 

*

 

Westcon Group Inc.

 

 

11%

 

 

 

14%

 

 

 

15%

 

 

*

Less than 10% of revenue

International sales

International sales are an important portion of our business. In fiscal 2017, sales to customers outside of the United States accounted for 49% of our consolidated net revenues, compared to 55% in fiscal 2016 and 57% in fiscal 2015. These sales are conducted primarily through foreign-based distributors and resellers managed by our worldwide sales organization. In addition, we have direct sales to end-user customers, including large global accounts.  The primary markets for sales outside of the United States are countries in Europe and Asia, as well as Canada, Mexico, Central America and South America.

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We operate in one segment, the development and marketing of network infrastructure equipment. Information concerning revenue, results of operations and revenue by geographic area is set forth under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Note 10 of our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, both of which are incorporated herein by reference.  Information on risks attendant to our foreign operations is set forth below in Item 1A. “Risk Factors.”

Marketing

We continue to develop and execute on a number of marketing programs to support the sale and distribution of our products by communicating the value of our solutions to our existing and potential customers, our distribution channels, our resellers and our technology alliance partners.  Our marketing efforts include participation in industry tradeshows, conferences and seminars, publication of technical and educational articles in industry journals, communication across social media channels, frequent updates to our publicly available website, promotions, web-based training courses, advertising, analyst relations and public relations.  We also submit our products for independent product testing and evaluation.  Extreme participates in numerous industry analyst ratings including ratings from Gartner Magic Quadrants, Gartner Critical Capabilities, Forrester Waves, IDC MarketScapes and InfoTech Vendor Landscapes.

Backlog

Our products are often sold on the basis of standard purchase orders that are cancelable prior to shipment without significant penalties. In addition, purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in customer requirements and manufacturing capacity. Our business is characterized by seasonal variability in demand and short lead-time orders and delivery schedules. Actual shipments depend on the then-current capacity of our contract manufacturers and the availability of materials and components from our vendors.  Although we believe the orders included in the backlog are firm, all orders are subject to possible rescheduling by customers, cancellations by customers which we may elect to allow without penalty to customer, and further pricing adjustments on orders from distributors.  Therefore, we do not believe our backlog, as of any particular date is necessarily indicative of actual revenue for any future period.

Our product backlog at June 30, 2017, net of anticipated back end rebates for distributor sales, was $25.5 million, compared to $26.8 million at June 30, 2016.

Seasonality

Like many of our competitors, we historically have experienced seasonal fluctuations in customer spending patterns, which generally adversely affect our first and third fiscal quarters. This pattern should not be relied upon or be considered indicative of our future performance, however, as it has varied in the past.

Customer Service and Support

Our customers seek high reliability and maximum uptime for their networks. To that extent, we provide the following service offerings:

 

Support services for end-users, resellers and distributors. We meet the service requirements of our customers and channel partners through our Technical Assistance Centers ("TACs"), located in Morrisville, North Carolina; Salem, New Hampshire; Holtsville, New York; Reading, United Kingdom; Penang, Malaysia; Brno, Czech Republic; Utrect, Netherlands and Chennai, India. Our TAC engineers and technicians assist in diagnosing and troubleshooting technical issues regarding customer networks. Development engineers work with the TACs to resolve product functionality issues specific to each customer.

 

Professional services. We provide consultative services to improve customer productivity in all phases of the network lifecycle – planning, design, implementation, operations and optimization management. Our network architects develop and execute customized software and service-led networking solutions for deployment plans to meet individualized network strategies. These activities may include the management and coordination of the design and network configuration, resource planning, staging, logistics, migration and deployment. We also provide customized training and operational best practices manuals to assist customers in the transition and sustenance of their networks.

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Education. We offer classes covering a wide range of topics such as installation, configuration, operation, management and optimization – providing customers with the necessary knowledge and experience to successfully deploy and manage our products in various networking environments. Classes may be scheduled and available at numerous locations worldwide. We deliver training using our staff, on-line training classes and authorized training partners. In addition, we make much of our training materials accessible free-of-charge on our internet site for customers and partners to use in self-education. We believe this approach enhances the market’s ability to learn and understand the broad array of advantages of our products.

Long-Lived Assets

See Note 3 of our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our long-lived assets.

Manufacturing

We outsource the majority of our manufacturing and supply chain management operations as part of our strategy to maintain global manufacturing capabilities and to reduce our costs. We conduct quality assurance, manufacturing engineering, document control and test development at engineering facilities at Morrisville, North Carolina; Salem, New Hampshire; Toronto, Canada and Chennai, India. This approach enables us to reduce fixed costs and to flexibly respond to changes in market demand. Our end-to-end supply chain, including our two engineering facilities at Morrisville and Chennai are all ISO 9001 certified.

We use Alpha Networks, Inc. (“Alpha Networks”) headquartered in Hsinchu, Taiwan to design and manufacture our Summit, A-Series, B-Series, C-Series, Stackable products, G-Series, D-Series, I-Series and 800-Series Standalone products and Black Diamond chassis products. Alpha Networks is a global networking Original/Joint Design Manufacturer ("ODM/JDM") leader with core competencies in areas such as Ethernet, LAN/MAN, Wireless, Broadband and VoIP.  Alpha Networks manufacturing processes and procedures are ISO 9001 certified.

We use Benchmark Electronics, Inc. ("Benchmark") headquartered in Huntsville, Alabama and Flextronics International ("Flextronics") headquartered in Singapore, to manufacture our S-Series and K-Series chassis products, 7100-Series Stackable products and SSA Standalone products.  Benchmark and Flextronics have a significant investment in capital to ensure they have the latest in manufacturing and test technologies and both companies are ISO 9001 certified.

The ExtremeWireless Access Point products are supplied by Senao Electronics ("Senao"), headquartered in Taipei, Taiwan.  With the addition of WiNG Wireless, which was part of the WLAN Business from Zebra, we also use Wistron NeWeb Corporation (“WNC”) headquartered in Hsinchu, Taiwan; Universal Scientific Industrial (“USI”) headquartered in Shanghai, China and Accton Technology Corporation (“Accton”) headquartered in Hsinchu, Taiwan to design and manufacture WiNG Access Points.  Senao, WNC, USI and Accton manufacturing processes and procedures are ISO 9001 certified.

All of our manufacturers utilize automated testing equipment to perform product testing and burn-in with specified tests. Together we rely upon comprehensive inspection testing and statistical process controls to assure the quality and reliability of our products.

We use a collaborative sales and operations planning (“S&OP”) forecast of expected demand to determine our material requirements. Lead times for materials and components vary significantly, and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We order most of our materials and components on an indirect basis through our ODM/JDM, OEMs and contract manufacturers’ (“CMs”). Purchase commitments with all of our manufacturers are generally on a purchase order basis.

Research and Development

The success of our products to date is due in large part to our focus on research and development. We believe that continued success in the marketplace will depend on our ability to develop new and enhanced products employing leading-edge technology. Accordingly, we plan to undertake development efforts with an emphasis on increasing the reliability, performance and features of our family of products, and designing innovative products to reduce the overall network operating costs of customers.

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Our product development activities focus on solving the needs of customers in the enterprise campus by providing an end-to-end, wired and wireless network solution from the access edge to the private clouds in targeted verticals. Current activities include the continuing development of our innovative switching technology aimed at extending the capabilities of our products. Our ongoing research activities cover a broad range of areas, including, in particular, 40G and 100G Ethernet, routing, timing and resiliency protocols, open standards interfaces, software defined networks, network security, identity management, data center fabrics, and wireless networking.

We plan to continue to enhance the functionality of our modular operating systems which have been designed to provide high reliability and availability. This allows us to leverage a common operating system across different hardware and network chipsets.

As of June 30, 2017, our research and development organization consisted of 495 employees.  Research and development efforts are conducted in several of our locations, including San Jose, California, Morrisville, North Carolina; Salem, New Hampshire; Toronto, Canada, and Bangalore and Chennai, India. Our research and development expenses in fiscal years 2017, 2016 and 2015 were $93.7 million,   $78.7 million and $93.4 million, respectively.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.  As of June 30, 2017, we had 493 issued patents in the United States and 352 patents outside of the United States.  The expiration dates of our issued patents in the United States range from 2018 to 2032.  Although we have patent applications pending, there can be no assurance that patents will be issued from pending applications or that claims allowed on any future patents will be sufficiently broad to protect our technology.  With respect to trademarks, we have a number of pending and registered trademarks in the United States and outside the United States.

We enter into confidentiality, inventions assignment or license agreements with our employees, consultants and other third parties with whom we do business, and control access to, and distribution of, our software, documentation and other proprietary information.  In addition, we provide our software products to end-user customers primarily under “shrink-wrap” or "click-through" license agreements.  These agreements are not negotiated with or signed by the licensee, and thus these agreements may not be enforceable in some jurisdictions.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

Competition

The market for network switches, routers and software (including analytics) which is part of the broader market for networking equipment is extremely competitive and characterized by rapid technological progress, frequent new product introductions, changes in customer requirements and evolving industry standards. We believe the principal competitive factors in this market are:

 

expertise and familiarity with network protocols, network switching/routing/wireless and network management;

 

expertise and familiarity with application analytics software;

 

expertise with network operations and management software;

 

product performance, features, functionality and reliability;

 

price/performance characteristics;

 

timeliness of new product introductions;

 

adoption of emerging industry standards;

 

customer service and support;

 

size and scope of distribution network;

 

brand name;

 

breadth of product offering;

 

access to customers; and

 

size of installed customer base.

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We believe we compete with our competitors with respect to many of the foregoing factors. However, the market for network switching solutions is dominated by a few large companies, particularly Cisco Systems, Inc., Dell, Hewlett-Packard Company, Huawei Technologies Co. Ltd., and Juniper Networks Inc. Most of these competitors have longer operating histories, greater name recognition, larger customer bases, broader product lines and substantially greater financial, technical, sales, marketing and other resources.

With the acquisitions of assets from Zebra and Avaya, we believe Extreme is uniquely positioned to address the most pressing market needs from the campus to the data center.

In addition, in order to increase our competitive position in the market, on March 29, 2017, we entered into an Asset Purchase Agreement with LSI Corporation and, solely for the purposes set forth in the Asset Purchase Agreement, Broadcom Corporation (“Broadcom”), to purchase the data center technology business of Brocade Communication Systems, Inc. and its subsidiaries (“Brocade Data”). This transaction is subject to certain conditions that may not occur, and if we do consummate the transaction, we may not realize the anticipated benefits and will assume certain contracts and related liabilities.  (See “Risk Factors” in Item 1A below.)

Restructuring

Fiscal year 2015

During the fourth quarter of fiscal 2015, we implemented a plan to reduce costs through targeted restructuring activities intended to reduce operating costs and realign our organization in the current competitive environment. We initiated a plan to reduce our worldwide headcount by more than 225 employees, primarily in sales and marketing as well as research and development, consolidate specific global administrative functions, and shift certain operating costs to lower cost regions, among other actions.  

Fiscal year 2016

During fiscal 2016, we continued to realign our operations by abandoning excess facilities, primarily in San Jose, California; Salem, New Hampshire and Morrisville, North Carolina in addition to other smaller leased locations. These excess facilities represented approximately 32% of the floor space in the aggregate at these locations and included general office and warehouse space.

Fiscal year 2017

During fiscal 2017, we continued to realign our operations by continuing to review our excess facilities, expected sublease income, and implemented a reduction force.  The Company subleased its previous headquarters location at Rio Robles Drive in San Jose, California (“Rio Robles”) and moved into a larger location at 6480 Via del Oro in San Jose, California (“Via del Oro”) acquired as part of the WLAN Business acquisition.  Additionally, due to the acquisition of Avaya Networking and the anticipated acquisition of Brocade Data, there is a need to accommodate the increase in headcount.  To address this need, the Company decided to reoccupy a majority of the previously exited space in its Salem, New Hampshire location.  In addition, the Company announced a reduction-in-force during the fiscal year affecting 90 employees.  

Environmental Matters

We are subject to various environmental and other regulations governing product safety, materials usage, packaging and other environmental impacts in the United States and in various countries where our products are manufactured and sold.  We are also subject to regulatory developments, including recent SEC disclosure regulations relating to so-called "conflict minerals," relating to ethically responsible sourcing of the components and materials used in our products.  To date, compliance with federal, state, local, and foreign laws enacted for the protection of the environment has had no material effect on our capital expenditures, earnings, or competitive position.

We are committed to energy efficiency in our product lines. Accordingly, we believe this is an area that affords us a competitive advantage for our products in the marketplace. We maintain compliance with various regulations related to the environment, including the Waste Electrical and Electronic Equipment and the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment regulations adopted by the European Union. To date, our compliance efforts with various United States and foreign regulations related to the environment has not had a material effect on our operating results.

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Employees

As of June 30, 2017, we employed 1,628 people, including 598 in sales and marketing, 495 in research and development, 174 in operations, 261 in customer support and services, and 100 in finance and administration. We have never had a work stoppage and no employees in the United States are represented under a collective bargaining agreement. We consider our employee relations to be good.

We believe our future success depends on our continued ability to attract, integrate, retain, train and motivate highly qualified employees, and upon the continued service of our senior management and key employees.  None of our executive officers or key employees is bound by an employment agreement which mandates that the employee render services for any specific term. The market for qualified personnel is highly competitive.

Organization

We were incorporated in California in May 1996, and reincorporated in Delaware in March 1999. Our corporate headquarters are located at 6480 Via del Oro, San Jose, CA 95119 and our telephone number is (408) 579-2800.  We electronically file our Securities Exchange Commission (“SEC”) disclosure reports with the SEC and they are available free of charge at both www.sec.gov and www.extremenetworks.com.  The public may also read or copy any materials we file with the SEC at the SEC’s public reference room at Station Place, 100 F Street, N.E., Washington, DC 20549.  The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

Our corporate governance guidelines, the charters of our audit committee, our compensation committee, our nominating and corporate governance committee and our code of conduct policy (including code of ethics provisions that apply to our principal executive officer, principal financial officer, controller and senior financial officers) are available on our website at www.extremenetworks.com under “Corporate Governance.” These items are also available to any stockholder who requests them by calling (408) 579-2800.  

 

 

Item 1A. Risk Factors

The following is a list of risks and uncertainties which may have a material and adverse effect on our business, operations, industry, financial condition, results of operations or future financial performance. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, results of operations, industry, financial position and financial performance in the future.

We may not realize anticipated benefits of past or future acquisitions, divestitures and strategic investments, and the integration of acquired companies or technologies may negatively impact our business and financial results or dilute the ownership interests of our stockholders.

As part of our business strategy, we review acquisition and strategic investment prospects that we believe would complement our current product offerings, augment our market coverage or enhance our technical capabilities, or otherwise offer growth opportunities. In the event of any future acquisitions, we could:

 

issue equity securities which would dilute current stockholders' percentage ownership;

 

incur substantial debt;

 

assume contingent liabilities; or

 

expend significant cash.

These actions could have a material adverse effect on our operating results or the price of our common stock.

For example, on October 28, 2016, we completed the acquisition of the WLAN Business from Zebra Technologies Corporation and amended our credit facility with our lenders to finance the acquisition.  As of June 30, 2017, we have $93.7 million of indebtedness outstanding.

On July 14, 2017, we completed the acquisition of Avaya’s Networking business under section 363 of the United States Code, 11 U.S.C. § 101-1532 (the “Bankruptcy Code”) for a purchase price of $100.0 million subject to certain adjustments set forth in the purchase agreement.

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Further, on March 29, 2017, we entered into an Asset Purchase Agreement with LSI Corporation and, solely for the purposes set forth in the Asset Purchase Agreement, Broadcom Corporation, to purchase the data center technology business of Brocade Communication Systems, Inc. and its subsidiaries. This transaction is subject to certain conditions that may not occur, and if we do consummate the transaction, we may not realize the anticipated benefits and will assume certain contracts and related liabilities.

Moreover, even if we do obtain benefits in the form of increased sales and earnings, these benefits may be recognized much later than the time when the expenses associated with an acquisition are incurred. This is particularly relevant in cases where it would be necessary to integrate new types of technology into our existing portfolio and new types of products may be targeted for potential customers with which we do not have pre-existing relationships.

Our ability to realize the anticipated benefits of our acquisitions and investment activities, including the WLAN Business and Avaya Networking, also entail numerous risks, including, but not limited to:

 

difficulties in the assimilation and successful integration of acquired operations, technologies and/or products;

 

unanticipated costs, litigation or other contingent liabilities associated with the acquisition or investment transaction;

 

incurrence of acquisition- and integration-related costs, goodwill or in-process research and development impairment charges, or amortization costs for acquired intangible assets, that could negatively impact our operating results and financial condition;

 

the diversion of management's attention from other business concerns;

 

adverse effects on existing business relationships with suppliers and customers;

 

risks associated with entering markets in which we have no or limited prior experience;

 

the potential loss of key employees of acquired organizations and inability to attract or retain other key employees; and

 

substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.

We may not be able to successfully integrate any businesses, products, technologies, or personnel that we might acquire in the future, and our failure to do so could have a material adverse effect on our business, operating results and financial condition.

Our strategic transaction with Broadcom may not be consummated or may not deliver the anticipated benefits we expect.

On March 29, 2017, we entered into an Asset Purchase Agreement with LSI Corporation and, solely for the purposes set forth in the Asset Purchase Agreement, Broadcom Corporation, to purchase the data center technology business of Brocade Communication Systems, Inc. and its subsidiaries (the “Brocade Data”). This transaction is subject to certain conditions that may not occur, and if we do consummate the transaction, we may not realize the anticipated benefits and will assume certain contracts and related liabilities.

We are devoting a significant proportion of our time and resources to consummating the Brocade Data transaction, however, there can be no assurance that such activities will result in the consummation of this transaction.  

The closing of the Brocade Data transaction is subject to the consummation of the merger of Bobcat Merger Sub, Inc., a direct wholly owned subsidiary of LSI, with and into Brocade, upon the terms and subject to the conditions set forth in the Agreement and Plan of Merger, dated as of November 2, 2016, by and among Broadcom Limited, Broadcom, Brocade and Bobcat Merger Sub, and the satisfaction of customary closing conditions, including, among other matters, (i) the absence of any law or governmental order prohibiting or preventing the consummation of the transactions contemplated by the Asset Purchase Agreement, (ii) the receipt of certain needed governmental approvals and authorizations, (iii) the accuracy of the representations and warranties and compliance with the covenants set forth in the Asset Purchase Agreement, each in all material respects, and (iv) the absence of any material adverse effect on the business.

In the event that any of these closing conditions are not satisfied, we may not be able to consummate the Brocade Data transaction. In addition, even if we are able to consummate the Brocade Data transaction, such transaction may not deliver the benefits we anticipate or enhance stockholder value.

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Our credit facilities impose financial and operating restrictions on us.

Our debt instruments, including our Credit Facility, as amended, entered into in connection with the WLAN Business and Avaya Networking business, impose, and the terms of any future debt may impose, operating and other restrictions on us. These restrictions could affect, and in many respects limit or prohibit, among other items, our ability to:

 

incur additional indebtedness;

 

create liens;

 

make investments;

 

enter into transactions with affiliates;

 

sell assets;

 

guarantee indebtedness;

 

declare or pay dividends or other distributions to stockholders;

 

repurchase equity interests;

 

change the nature of our business;

 

enter into swap agreements;

 

issue or sell capital stock of certain of our subsidiaries; and

 

consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.

The agreements governing our Credit Facility, as amended, also require us to achieve and maintain compliance with specified financial ratios. A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under our debt instruments. If any such default occurs, the lenders under our credit agreement may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. The lenders under our credit agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our credit agreement will have the right to proceed against the collateral granted to them to secure the debt. If the debt under our credit agreement were to be accelerated, we cannot give assurance that this collateral would be sufficient to repay our debt.

If we fail to meet our payment or other obligations under our Credit Facility, as amended, the lenders under such Credit Facility, as amended, could foreclose on, and acquire control of, substantially all of our assets.

Our Credit Facility, as amended, is jointly and severally guaranteed by us and certain of our subsidiaries. Borrowings under our Credit Facility, as amended, are secured by liens on substantially all of our assets, including the capital stock of certain of our subsidiaries, and the assets of our subsidiaries that are loan party guarantors. If we are unable to repay outstanding borrowings when due, the lenders under our credit agreement will have the right to proceed against this pledged capital stock and take control of substantially all of our assets.

Our revenues may decline as a result of changes in public funding of educational institutions.

A portion of our revenues comes from sales to both public and private K-12 educational institutions. Public schools receive funding from local tax revenue, and from state and federal governments through a variety of programs, many of which seek to assist schools located in underprivileged or rural areas. The funding for a portion of our sales to educational institutions comes from a federal funding program known as the E-Rate program. E-Rate is a program of the Federal Communications Commission that subsidizes the purchase of approved telecommunications, Internet access, and internal connection costs for eligible public educational institutions.  The E-Rate program, its eligibility criteria, the timing and specific amount of federal funding actually available and which Wi-Fi infrastructure and product sectors will benefit, are uncertain and subject to final federal program approval and funding appropriation continues to be under review by the Federal Communications Commission, and we cannot assure that this program or its equivalent will continue, and as a result, our business may be harmed. Furthermore, if state or local funding of public education is significantly reduced because of legislative or policy changes or by reductions in tax revenues due to changing economic conditions, our sales to educational institutions may be negatively impacted by these changed conditions.  Any reduction in spending on information technology systems by educational institutions would likely materially and adversely affect our business and results of operations.  This is a specific example of the many factors which add additional uncertainty to our future revenue from our education end-customers.

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To successfully manage our business or achieve our goals, we must attract, retain, train, motivate, develop and promote key employees, and failure to do so can harm us.

Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, service and operations personnel, many of whom would be difficult to replace. We do not have employment contracts with these individuals that mandate that they render services for any specific term, nor do we carry life insurance on any of our key personnel. We have experienced and may in the future experience significant turnover in our executive personnel.  Changes in our management and key employees could affect our financial results, and a recent reduction in force, may impede our ability to attract and retain highly skilled personnel.  We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, service, finance and operations personnel.  The market for these personnel is competitive, and we have had difficulty in hiring employees, particularly engineers, in the time-frame we desire.

A number of our employees are foreign nationals who rely on visas and entry permits in order to legally work in the United States and other countries.  In recent years, the United States has increased the level of scrutiny in granting H-1(B), L-1 and other business visas.  In addition, the current U.S. administration has indicated that immigration reform is a priority. Compliance with United States immigration and labor laws could require us to incur additional unexpected labor costs and expenses or could restrain our ability to retain skilled professionals.  Any of these restrictions could have a material adverse effect on our business, results of operations and financial conditions.

We cannot assure you we will be profitable in the future, and our financial results may fluctuate significantly from period to period.

We have reported losses in each of our three most recent fiscal years. In addition, in years when we reported profits, we were not profitable in each quarter during those years. We anticipate continuing to incur significant sales and marketing, product development and general and administrative expenses. Any delay in generating or recognizing revenue could result in a loss for a quarter or full year. Even if we are profitable, our operating results may fall below our expectations and those of our investors, which could cause the price of our stock to fall.

We may experience challenges or delays in generating or recognizing revenue for a number of reasons and our revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including, but not limited to, the following:

 

our dependence on obtaining orders during a quarter and shipping those orders in the same quarter to achieve our revenue objectives;

 

decreases in the prices of the products we sell;

 

the mix of products sold and the mix of distribution channels through which products are sold;

 

acceptance provisions in customer contracts;

 

our ability to deliver installation or inspection services by the end of the quarter;

 

changes in general and/or specific economic conditions in the networking industry;

 

seasonal fluctuations in demand for our products and services;

 

a disproportionate percentage of our sales occurring in the last month of the quarter;

 

our ability to ship products by the end of a quarter;

 

reduced visibility into the implementation cycles for our products and our customers’ spending plans;

 

our ability to forecast demand for our products, which in the case of lower-than-expected sales, may result in excess or obsolete inventory in addition to non-cancelable purchase commitments for component parts;

 

our sales to the telecommunications service provider market, which represents a significant source of large product orders, being especially volatile and difficult to forecast;

 

product returns or the cancellation or rescheduling of orders;

 

announcements and new product introductions by our competitors;

 

our ability to develop and support relationships with enterprise customers, service providers and other potential large customers;

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our ability to achieve and maintain targeted cost reductions;

 

fluctuations in warranty or other service expenses actually incurred;

 

our ability to obtain sufficient supplies of sole- or limited-source components for our products on a timely basis;

 

increases in the price of the components we purchase; and

 

changes in funding for customer technology purchases in our markets, such as policy changes in public funding of educational institutions in the United States in accordance with the Federal Communications Commission’s E-Rate program.

Due to the foregoing and other factors, many of which are described herein, period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance.

The global economic environment has and may continue to negatively impact our business and operating results.

The challenges and uncertainty currently affecting global economic conditions may negatively impact our business and operating results in the following ways:

 

customers may delay or cancel plans to purchase our products and services;

 

customers may not be able to pay, or may delay payment of, the amounts they owe us, which may adversely affect our cash flow, the timing of our revenue recognition and the amount of our revenue;

 

increased pricing pressure may result from our competitors aggressively discounting their products;

 

accurate budgeting and planning will be difficult due to low visibility into future sales;

 

forecasting customer demand will be more difficult, increasing the risk of either excess and obsolete inventory if our forecast is too high or insufficient inventory to meet customer demand if our forecast is too low; and

 

our component suppliers and contract manufacturers have been negatively affected by the economy, which may result in product delays and changes in pricing and service levels.

If global economic conditions do not show continued improvement, we believe we could experience material adverse impacts to our business and operating results.

We depend upon international sales for a significant portion of our revenue which imposes a number of risks on our business.

International sales constitute a significant portion of our net revenue. Our ability to grow will depend in part on the expansion of international sales. Our international sales primarily depend on the success of our resellers and distributors. The failure of these resellers and distributors to sell our products internationally would limit our ability to sustain and grow our revenue. There are a number of risks arising from our international business, including:

 

longer accounts receivable collection cycles;

 

difficulties in managing operations across disparate geographic areas;

 

difficulties associated with enforcing agreements through foreign legal systems;

 

reduced or limited protection of intellectual property rights, particularly in jurisdictions that have less developed intellectual property regimes, such as China and India;

 

higher credit risks requiring cash in advance or letters of credit;

 

potential adverse tax consequences;

 

compliance with regulatory requirements of foreign countries, including compliance with rapidly evolving environmental regulations;

 

compliance with U.S. laws and regulations pertaining to the sale and distribution of products to customers in foreign countries, including export controls and the Foreign Corrupt Practices Act;

 

the payment of operating expenses in local currencies, which exposes us to risks of currency fluctuations.

 

political and economic turbulence;

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terrorism, war or other armed conflict;

 

compliance with U.S. and other applicable government regulations prohibiting certain end-uses and restrictions on trade with embargoed or sanctioned countries, such as Russia, and with denied parties;

 

potential import tariffs imposed by the United States and the possibility of reciprocal tariffs by foreign countries;

 

difficulty in conducting due diligence with respect to business partners in certain international markets;

 

increased complexity of accounting rules and financial reporting requirements;

 

fluctuations in local economies; and

 

natural disasters and epidemics.

Any or all of these factors could have a material adverse impact on our business, financial condition, and results of operations.

Substantially all of our international sales are United States dollar-denominated. The continued strength and future increases in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets. In the future, we may elect to invoice some of our international customers in local currency, which would expose us to fluctuations in exchange rates between the United States dollar and the particular local currency. If we do so, we may decide to engage in hedging transactions to minimize the risk of such fluctuations.

We have entered into foreign exchange forward contracts to offset the impact of payment of operating expenses in local currencies to some of our operating foreign subsidiaries. However, if we are not successful in managing these foreign currency transactions, we could incur losses from these activities.

Local laws and customs in many countries differ significantly from, or conflict with, those in the United States or in other countries in which we operate. In many foreign countries, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we have implemented policies, procedures and training designed to ensure compliance with these U.S. and foreign laws and policies, there can be no complete assurance that any individual employee, contractor, channel partner, or agents will not violate our policies and procedures. Violations of laws or key control policies by our employees, contractors, channel partners, or agents could result in termination of our relationship, financial reporting problems, fines, and/or penalties for us, or prohibition on the importation or exportation of our products, and could have a material adverse effect on our business, financial condition and results of operations.

We expect the average selling price of our products to decrease, which is likely to reduce gross margin and/or revenue.

The network equipment industry has traditionally experienced an erosion of average selling prices due to a number of factors, including competitive pricing pressures, promotional pricing and technological progress. We anticipate the average selling prices of our products will decrease in the future in response to competitive pricing pressures, excess inventories, increased sales discounts and new product introductions by us or our competitors. We may experience decreases in future operating results due to the erosion of our average selling prices. To maintain our gross margin, we must develop and introduce on a timely basis new products and product enhancements and continually reduce our product costs. Our failure to do so would likely cause our revenue and gross margin to decline.

We purchase several key components for products from single or limited sources and could lose sales if these suppliers fail to meet our needs.

We currently purchase several key components used in the manufacturing of our products from single or limited sources and are dependent upon supply from these sources to meet our needs. Certain components such as tantalum capacitors, SRAM, DRAM, and printed circuit boards, have been in the past, and may in the future be, in short supply. We have encountered, and are likely in the future to encounter, shortages and delays in obtaining these or other components, and this could have a material adverse effect on our ability to meet customer orders. Our principal sole-source components include:

 

ASICs - merchant silicon, Ethernet switching, custom and physical interface;

 

microprocessors;

 

programmable integrated circuits;

 

selected other integrated circuits;

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custom power supplies; and

 

custom-tooled sheet metal.

Our principal limited-source components include:

 

flash memory;

 

DRAMs and SRAMs;

 

printed circuit boards;

 

CAMs;

 

connectors; and

 

timing circuits (crystals & clocks).

We use our forecast of expected demand to determine our material requirements. Lead times for materials and components we order vary significantly, and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. If forecasts exceed orders, we may have excess and/or obsolete inventory, which could have a material adverse effect on our operating results and financial condition. If orders exceed forecasts, we may have inadequate supplies of certain materials and components, which could have a material adverse effect on our ability to meet customer delivery requirements and to recognize revenue.

Our top ten suppliers accounted for a significant portion of our purchases during the quarter. Given the significant concentration of our supply chain, particularly with certain sole or limited source providers, any significant interruption by any of the key suppliers or a termination of a relationship could temporarily disrupt our operations.  Additionally, our operations are materially dependent upon the continued market acceptance and quality of these manufacturers’ products and their ability to continue to manufacture products that are competitive and that comply with laws relating to environmental and efficiency standards. Our inability to obtain products from one or more of these suppliers or a decline in market acceptance of these suppliers’ products could have a material adverse effect on our business, results of operations and financial condition. Other than pursuant to an agreement with a key component supplier which includes pricing based on a minimum volume commitment, generally we do not have agreements fixing long-term prices or minimum volume requirements from suppliers. From time to time we have experienced shortages and allocations of certain components, resulting in delays in filling orders. Qualifying new suppliers to compensate for such shortages may be time-consuming and costly and may increase the likelihood of errors in design or production. In addition, during the development of our products, we have experienced delays in the prototyping of our chipsets, which in turn has led to delays in product introductions. Similar delays may occur in the future. Furthermore, the performance of the components from our suppliers as incorporated in our products may not meet the quality requirements of our customers.

Intense competition in the market for networking equipment could prevent us from increasing revenue and attaining profitability.

The market for network switching solutions is intensely competitive and dominated primarily by Brocade Communications Systems, Inc., Cisco Systems Inc., Dell, Hewlett-Packard Company, Huawei Technologies Co. Ltd. and Juniper Networks, Inc. Most of our competitors have longer operating histories, greater name recognition, larger customer bases, broader product lines and substantially greater financial, technical, sales, marketing and other resources. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, they have larger distribution channels, stronger brand names, access to more customers, a larger installed customer base and a greater ability to make attractive offers to channel partners and customers than we do. Some of our customers may question whether we have the financial resources to complete their projects and future service commitments.

For example, we have encountered, and expect to continue to encounter in the future, many potential customers who are confident in and committed to the product offerings of our principal competitors. Accordingly, these potential customers may not consider or evaluate our products. When such potential customers have considered or evaluated our products, we have in the past lost, and expect in the future to lose, sales to some of these customers as large competitors have offered significant price discounts to secure these sales.

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The pricing policies of our competitors impact the overall demand for our products and services. Some of our competitors are capable of operating at significant losses for extended periods of time, increasing pricing pressure on our products and services. If we do not maintain competitive pricing, the demand for our products and services, as well as our market share, may decline. From time to time, we may lower the prices of our products and services in response to competitive pressure. When this happens, if we are unable to reduce our component costs or improve operating efficiencies, our revenue and gross margins will be adversely affected.

We may not fully realize the anticipated positive impacts to future financial results from our restructuring efforts.

We have undertaken restructuring efforts in the past to streamline operations and reduce operating expenses. Our ability to achieve the anticipated cost savings and other benefits from our restructuring efforts within expected time frames is subject to many estimates and assumptions and may vary materially based on factors such as market conditions and the effect of our restructuring efforts on our work force. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. We cannot assure that we will fully realize the anticipated positive impacts to future financial results from our current or future restructuring efforts. If our estimates and assumptions are incorrect or if other unforeseen events occur, we may not achieve the cost savings expected from such restructurings, and our business and results of operations could be adversely affected.

Industry consolidation may lead to stronger competition and may harm our operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. For example, some of our current and potential competitors for enterprise data center business have made acquisitions or announced new strategic alliances, designed to position them with the ability to provide end-to-end technology solutions for the enterprise data center. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition. Furthermore, particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more numerous participants.

We intend to invest in engineering, sales, services, marketing and manufacturing on a long term basis, and delays or inability to attain the expected benefits may result in unfavorable operating results.

While we intend to focus on managing our costs and expenses, over the long term, we also intend to invest in personnel and other resources related to our engineering, sales, services, marketing and manufacturing functions as we focus on our foundational priorities, such as leadership in our core products and solutions and architectures for business transformation. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.

Our success is dependent on our ability to continually introduce new products and features that achieve broad market acceptance.

The network equipment market is characterized by rapid technological progress, frequent new product introductions, changes in customer requirements and evolving industry standards. If we do not regularly introduce new products in this dynamic environment, our product lines will become obsolete. These new products must be compatible and inter-operate with products and architectures offered by other vendors. We have and may in the future experience delays in product development and releases, and such delays have and could in the future adversely affect our ability to compete and our operating results.

When we announce new products or product enhancements or end of sale existing products that have the potential to replace or shorten the life cycle of our existing products, customers may defer or cancel orders for our existing products. These actions could have a material adverse effect on our operating results by unexpectedly decreasing sales, increasing inventory levels of older products and exposing us to greater risk of product obsolescence.

Even if we introduce new switching products, alternative technologies could achieve widespread market acceptance and displace the Ethernet technology on which we have based our product architecture. For example, developments in routers and routing software could significantly reduce demand for our products. As a result, we may not be able to achieve widespread market acceptance of our current or future products.

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If we do not successfully anticipate technological shifts, market needs and opportunities, and develop products, product enhancements and business strategies that meet those technological shifts, needs and opportunities, or if those products are not made available or strategies are not executed in a timely manner or do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenues will suffer.

The markets for our products are constantly evolving and characterized by rapid technological change, frequent product introductions, changes in customer requirements, and continuous pricing pressures. We cannot guarantee that we will be able to anticipate future technological shifts, market needs and opportunities or be able to develop new products, product enhancements and business strategies to meet such technological shifts, needs or opportunities in a timely manner or at all. For example, the move from traditional network infrastructures towards SDN has been receiving considerable attention. In our view, it will take several years to see the full impact of SDN, and we believe the successful products and solutions in this market will combine hardware and software elements together.  If we fail to anticipate market requirements or opportunities or fail to develop and introduce new products, product enhancements or business strategies to meet those requirements or opportunities in a timely manner, it could cause us to lose customers, and such failure could substantially decrease or delay market acceptance and sales of our present and future products and services, which would significantly harm our business, financial condition, and results of operations. Even if we are able to anticipate, develop and commercially introduce new products and enhancements, we cannot assure that new products or enhancements will achieve widespread market acceptance.

The cloud networking market is still in its early stages and is rapidly evolving. If this market does not evolve as we anticipate or our target end customers do not adopt our cloud networking solutions, we may not be able to compete effectively, and our ability to generate revenue will suffer.

The cloud networking market is still in its early stages. The market demand for cloud networking solutions has increased in recent years as end customers have deployed larger networks and have increased the use of virtualization and cloud computing. Our success may be impacted by our ability to provide successful cloud networking solutions that address the needs of our channel partners and end customers more effectively and economically than those of other competitors or existing technologies.  If the cloud networking solutions market does not develop in the way we anticipate, if our solutions do not offer significant benefits compared to competing legacy network switching products or if end customers do not recognize the benefits that our solutions provide, then our potential for growth in this cloud market could be adversely affected.

Claims of infringement by others may increase and the resolution of such claims may adversely affect our operating results.

Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents, copyrights (including rights to “open source” software) and other intellectual property rights. Because of the existence of a large number of patents in the networking field, the secrecy of some pending patents and the issuance of new patents at a rapid pace, it is not possible to determine in advance if a product or component might infringe the patent rights of others. Because of the potential for courts awarding substantial damages, the lack of predictability of such awards and the high legal costs associated with the defense of such patent infringement matters that would be expended to prove lack of infringement, it is not uncommon for companies in our industry to settle even potentially unmeritorious claims for very substantial amounts. Furthermore, the entities with whom we have or could have disputes or discussions include entities with extensive patent portfolios and substantial financial assets. These entities are actively engaged in programs to generate substantial revenue from their patent portfolios and are seeking or may seek significant payments or royalties from us and others in our industry.

Litigation resulting from claims that we are infringing the proprietary rights of others has resulted and could in the future result in substantial costs and a diversion of resources, and could have a material adverse effect on our business, financial condition and results of operations. We previously received notices from entities alleging that we were infringing their patents and have been party to patent litigation in the past.

Without regard to the merits of these or any other claims, an adverse court order or a settlement could require us, among other actions, to:

 

stop selling our products that incorporate the challenged intellectual property;

 

obtain a royalty bearing license to sell or use the relevant technology, and that license may not be available on reasonable terms or available at all;

 

pay damages;

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redesign those products that use the disputed technology; or

 

face a ban on importation of our products into the United States.

In addition, our products include so-called “open source” software. Open source software is typically licensed for use at no initial charge, but imposes on the user of the open source software certain requirements to license to others both the open source software as well as modifications to the open source software under certain circumstances. Our use of open source software subjects us to certain additional risks for the following reasons:

 

open source license terms may be ambiguous and may result in unanticipated obligations regarding the licensing of our products and intellectual property;

 

open source software cannot be protected under trade secret law;

 

suppliers of open-source software do not provide the warranty, support and liability protections typically provided by vendors who offer proprietary software; and

 

it may be difficult for us to accurately determine the developers of the open source code and whether the acquired software infringes third-party intellectual property rights.

We believe even if we do not infringe the rights of others, we will incur significant expenses in the future due to defense of legal claims, disputes or licensing negotiations, though the amounts cannot be determined. These expenses may be material or otherwise adversely affect our operating results.

Our operating results may be negatively affected by defending or pursuing claims or lawsuits.

We have in the past, currently are and will likely in the future pursue or be subject to claims or lawsuits in the normal course of our business. In addition to the risks related to the intellectual property lawsuits described above, we are currently parties to other litigation as described in Note [8] to our Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Regardless of the result, litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a lawsuit in which we are a defendant could result in a court order against us or payments to other parties that would have an adverse effect on our business, results of operations or financial condition. Even if we are successful in prosecuting claims and lawsuits, we may not recover damages sufficient to cover our expenses incurred to manage, investigate and pursue the litigation. In addition, subject to certain limitations, we may be obligated to indemnify our current and former customers, suppliers, directors, officers and employees in certain lawsuits. We may not have adequate insurance coverage to cover all of our litigation costs and liabilities.

If we fail to protect our intellectual property, our business could suffer.

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, we cannot ensure that the actions we have taken will adequately protect our intellectual property rights or that other parties will not independently develop similar or competing products that do not infringe on our patents. We generally enter into confidentiality, invention assignment or license agreements with our employees, consultants and other third parties with whom we do business, and control access to and distribution of our intellectual property and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise misappropriate or use our products or technology, which would adversely affect our business.

When our products contain undetected errors, we may incur significant unexpected expenses and could lose sales.

Network products frequently contain undetected errors when new products or new versions or updates of existing products are released to the marketplace. In the past, we have experienced such errors in connection with new products and product updates. We have experienced component problems in prior years that caused us to incur higher than expected warranty, service costs and expenses, and other related operating expenses. In the future, we expect that, from time to time, such errors or component failures will be found in new or existing products after the commencement of commercial shipments. These problems may have a material adverse effect on our business by causing us to incur significant warranty, repair and replacement costs, diverting the attention of our engineering personnel from new product development efforts, delaying the recognition of revenue and causing significant customer relations problems. Further, if products are not accepted by customers due to such defects, and such returns exceed the amount we accrued for defective returns based on our historical experience, our operating results would be adversely affected.

26


 

Our products must successfully inter-operate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. The occurrence of system errors, whether or not caused by our products, could result in the delay or loss of market acceptance of our products and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems would likely have a material adverse effect on our business, operating results and financial condition.

Our dependence on a few manufacturers for our manufacturing requirements could harm our operating results.

We primarily rely on our manufacturing partners: Alpha Networks, Inc. headquartered in Hsinchu, Taiwan; Senao Networks, Inc. headquartered in Taoyuan, Taiwan; Benchmark Electronics headquartered in Huntsville, Alabama; and select other partners to manufacture our products. We have experienced delays in product shipments from our manufacturing partners in the past, which in turn delayed product shipments to our customers. These or similar problems may arise in the future, such as delivery of products of inferior quality, delivery of insufficient quantity of products, or the interruption or discontinuance of operations of a manufacturer, any of which could have a material adverse effect on our business and operating results. In addition, any natural disaster or business interruption to our manufacturing partners could significantly disrupt our business. While we maintain strong relationships with our manufacturing partners, our agreements with these manufacturers are generally of limited duration and pricing, quality and volume commitments are negotiated on a recurring basis. The failure to maintain continuing agreements with our manufacturing partners could adversely affect our business. We intend to introduce new products and product enhancements, which will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers.

As part of our cost-reduction efforts, we will need to realize lower per unit product costs from our manufacturing partners by means of volume efficiencies and the utilization of manufacturing sites in lower-cost geographies. However, we cannot be certain when or if such price reductions will occur. The failure to obtain such price reductions would adversely affect our operating results.

We must continue to develop and increase the productivity of our indirect distribution channels to increase net revenue and improve our operating results.

Our distribution strategy focuses primarily on developing and increasing the productivity of our indirect distribution channels. If we fail to develop and cultivate relationships with significant channel partners, or if these channel partners are not successful in their sales efforts, sales of our products may decrease and our operating results could suffer. Many of our channel partners also sell products from other vendors that compete with our products. Our channel partners may not continue to market or sell our products effectively or to devote the resources necessary to provide us with effective sales, marketing and technical support. We may not be able to successfully manage our sales channels or enter into additional reseller and/or distribution agreements. Our failure to do any of these could limit our ability to grow or sustain revenue.

Our operating results for any given period have and will continue to depend to a significant extent on large orders from a relatively small number of channel partners and other customers. However, we do not have binding purchase commitments from any of them. A substantial reduction or delay in sales of our products to a significant reseller, distributor or other customer could harm our business, operating results and financial condition because our expense levels are based on our expectations as to future revenue and to a large extent are fixed in the short term. Under specified conditions, some third-party distributors are allowed to return products to us and unexpected returns could adversely affect our results.

The sales cycle for our products is long and we may incur substantial non-recoverable expenses or devote significant resources to sales that do not occur when anticipated.

The purchase of our products represent a significant strategic decision by a customer regarding its communications infrastructure. The decision by customers to purchase our products is often based on the results of a variety of internal procedures associated with the evaluation, testing, implementation and acceptance of new technologies. Accordingly, the product evaluation process frequently results in a lengthy sales cycle, typically ranging from three months to longer than a year, and as a result, our ability to sell products is subject to a number of significant risks, including risks that:

 

budgetary constraints and internal acceptance reviews by customers will result in the loss of potential sales;

 

there may be substantial variation in the length of the sales cycle from customer to customer, making decisions on the expenditure of resources difficult to assess;

 

we may incur substantial sales and marketing expenses and expend significant management time in an attempt to initiate or increase the sale of products to customers, but not succeed;

27


 

 

if a sales forecast from a specific customer for a particular quarter is not achieved in that quarter, we may be unable to compensate for the shortfall, which could harm our operating results; and

 

downward pricing pressures could occur during the lengthy sales cycle for our products.

Failure to successfully expand our sales and support teams or educate them in regard to technologies and our product families may harm our operating results.

The sale of our products and services requires a concerted effort that is frequently targeted at several levels within a prospective customer's organization. We may not be able to increase net revenue unless we expand our sales and support teams in order to address all of the customer requirements necessary to sell our products.

We cannot assure that we will be able to successfully integrate employees into our company or to educate and train current and future employees in regard to rapidly evolving technologies and our product families. A failure to do so may hurt our revenue growth and operating results.

Failure of our products to comply with evolving industry standards and complex government regulations may adversely impact our business.

If we do not comply with existing or evolving industry standards and government regulations, we may not be able to sell our products where these standards or regulations apply. The network equipment industry in which we compete is characterized by rapid changes in technology and customers' requirements and evolving industry standards. As a result, our success depends on:

 

the timely adoption and market acceptance of industry standards, and timely resolution of conflicting U.S. and international industry standards; and

 

our ability to influence the development of emerging industry standards and to introduce new and enhanced products that are compatible with such standards.

In the past, we have introduced new products that were not compatible with certain technological standards, and in the future, we may not be able to effectively address the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards.

Our products must also comply with various U.S. federal government regulations and standards defined by agencies such as the Federal Communications Commission, standards established by governmental authorities in various foreign countries and recommendations of the International Telecommunication Union. In some circumstances, we must obtain regulatory approvals or certificates of compliance before we can offer or distribute our products in certain jurisdictions or to certain customers. Complying with new regulations or obtaining certifications can be costly and disruptive to our business.

If we do not comply with existing or evolving industry standards or government regulations, we will not be able to sell our products where these standards or regulations apply, which may prevent us from sustaining our net revenue or achieving profitability.

If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed.

Our ability to successfully implement our business plan and comply with regulations requires an effective planning and management process. We need to continue improving our existing, and implement new, operational and financial systems, procedures and controls. We need to ensure that any businesses acquired, including the WLAN Business and the Avaya Networking businesses, are appropriately integrated in our financial systems. Any delay in the implementation of, or disruption in the integration of acquired businesses, or delay and disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to record and report financial and management information on a timely and accurate basis, or to forecast future results.

28


 

Changes in the effective tax rate including from the release of the valuation allowance recorded against our net U.S. deferred tax assets, or adverse outcomes resulting from examination of our income or other tax returns or change in ownership, could adversely affect our results.

Our future effective tax rates may be volatile or adversely affected by changes in our business or U.S. or foreign tax laws, including: the partial or full release of the valuation allowance recorded against our net U.S. deferred tax assets; expiration of or lapses in the research and development tax credit laws; transfer pricing adjustments; tax effects of stock-based compensation; or costs related to restructuring. The current U.S. administration and key members of Congress have made public statements indicating that tax reform is a priority. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our foreign earnings. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, there is no assurance that such determinations by us are in fact adequate. Changes in our effective tax rates or amounts assessed upon examination of our tax returns may have a material, adverse impact on our cash flows and our financial condition.

Our future effective tax rate in particular could be adversely affected by a change in ownership pursuant to U.S. Internal Revenue Code Section 382. If a change in ownership occurs, it may limit our ability to utilize our net operating losses to offset our U.S. taxable income. If U.S. taxable income is greater than the change in ownership limitation, we will pay a higher rate of tax with respect to the amount of taxable income that exceeds the limitation. This could have a material adverse impact on our results of operations. On April 26, 2012, we adopted an Amended and Restated Rights Agreement to help protect our assets (the “Rights Agreement”). In general, this does not allow a stockholder to acquire more than 4.95% of our outstanding common stock without a waiver from our board of directors, who must take into account the relevant tax analysis relating to potential limitation of our net operating losses. Our Rights Agreement is effective through May 31, 2018, subject to ratification by a majority of the stockholders of the Company at the next annual shareholders meeting, expected to be held on November 9, 2017.

Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent an acquisition of Extreme, which could decrease the value of our Common Stock.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions of our certificate of incorporation and bylaws and Delaware law will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some of our stockholders.

Our Rights Agreement provides that if a single stockholder (or group) acquires more than 4.95% of our outstanding common stock without a waiver from our Board of Directors, each holder of one share of our common stock (other than the stockholder or group who acquired in excess of 4.95% of our common stock) may purchase a fractional share of our preferred stock that would result in substantial dilution to the triggering stockholder or group. Accordingly, although this plan is designed to prevent any limitation on the utilization of our net operating losses by avoiding issues raised under Section 382 of the U.S. Internal Revenue Code, the Rights Agreement could also serve as a deterrent to stockholders wishing to effect a change of control.

Compliance with laws, rules and regulations relating to corporate governance and public disclosure may result in additional expenses.

Federal securities laws, rules and regulations, as well as NASDAQ Stock Market rules and regulations, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose civil and criminal penalties for companies and their Chief Executive Officers, Chief Financial Officers and directors for securities law violations. These laws, rules and regulations and the interpretation of these requirements are evolving, and we are making investments to evaluate current practices and to continue to achieve compliance, which investments may have a material impact on the Company’s financial condition.

29


 

We are required to evaluate the effectiveness of our internal control over financial reporting on an annual basis and publicly disclose any material weaknesses in our controls.  Any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and significant expense to remediate, and ultimately could have an adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess the effectiveness of our internal control over financial reporting and to disclose if such controls were unable to provide assurance that a material error would be prevented or detected in a timely manner. We have an ongoing program to review the design of our internal controls framework in keeping with changes in business needs, implement necessary changes to our controls design and test the system and process controls necessary to comply with these requirements. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company will have been detected.

If we or our independent registered public accounting firm identifies material weaknesses in our internal controls, the disclosure of that fact, even if quickly remedied, may cause investors to lose confidence in our financial statements and its stock price may decline. Remediation of a material weakness could require us to incur significant expenses and, if we fail to remedy any material weakness, our ability to report our financial results on a timely and accurate basis may be adversely affected, our access to the capital markets may be restricted, our stock price may decline, and we may be subject to sanctions or investigation by regulatory authorities, including the U.S. Securities and Exchange Commission or the NASDAQ Stock Market LLC. We may also be required to restate our financial statements from prior periods. Execution of restatements create a significant strain on our internal resources and could cause delays in our filing of quarterly or annual financial results, increase our costs and cause management distraction. Restatements may also significantly affect our stock price in an adverse manner.

Our headquarters and some significant supporting businesses are located in Northern California and other areas subject to natural disasters that could disrupt our operations and harm our business.

Our corporate headquarters are located in Silicon Valley in Northern California. Historically, this region as well as our R&D centers in North Carolina and New Hampshire have been vulnerable to natural disasters and other risks, such as earthquakes, fires, floods and tropical storms, which at times have disrupted the local economy and posed physical risks to our property. We have contract manufacturers located in Taiwan where similar natural disasters and other risks may disrupt the local economy and pose physical risks to our property and the property of our contract manufacturer.

In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries. If such disruptions result in delays or cancellations of customer orders for our products, our business and operating results will suffer.

We currently do not have redundant, multiple site capacity in the event of a natural disaster, terrorist act or other catastrophic event. In the event of such an occurrence, our business would suffer.

Our stock price has been volatile in the past and our stock price may significantly fluctuate in the future.

In the past, our common stock price has fluctuated significantly. This could continue as we or our competitors announce new products, our results or those of our customers or competition fluctuate, conditions in the networking or semiconductor industry change, or when investors, change their sentiment toward stocks in the networking technology sector.

In addition, fluctuations in our stock price and our price-to-earnings multiple may make our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stock rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.  These fluctuations may adversely affect the trading price or liquidity of our common stock. Some companies, including us, that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention and resources.  

30


 

We rely on the availability of third-party licenses.

Some of our products are designed to include software or other intellectual property, including open source software, licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, could have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.  Further, the failure to comply with the terms of any license, including free open source software, may result in our inability to continue to use such license. Our inability to maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products and product enhancements, could require us, if possible, to develop substitute technology or obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could delay or prevent product shipment and harm our business, financial condition, and results of operations.

System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, disrupt our internal operations and harm public perception of our products, which could adversely affect our business.

In the ordinary course of business, we store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners on our networks. In addition, we store sensitive data through cloud-based services that may be hosted by third parties and in data center infrastructure maintained by third parties. The secure maintenance of this information is critical to our operations and business strategy. Increasingly, companies, including us, are subject to a wide variety of attacks on their networks on an ongoing basis. Despite our security measures, our information technology and infrastructure may be vulnerable to penetration or attacks by computer programmers and hackers, or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks, creating system disruptions or slowdowns and exploiting security vulnerabilities of our products, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen, which could subject us to liability to our customers, suppliers, business partners and others, and cause us reputational and financial harm. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of our networks. This can be true even for “legacy” products that have been determined to have reached an end of life engineering status but will continue to operate for a limited amount of time.

If an actual or perceived breach of network security occurs in our network or in the network of a customer of our networking products, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. In addition, the economic costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure. Because the techniques used by computer programmers and hackers, many of whom are highly sophisticated and well-funded, to access or sabotage networks change frequently and generally are not recognized until after they are used, we may be unable to anticipate or immediately detect these techniques. This could impede our sales, manufacturing, distribution or other critical functions, which could adversely affect our business.

Market conditions and changes in the industry could lead to discontinuation of our products or businesses resulting in asset impairments.

In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Any decision to limit investment in or dispose of or otherwise exit businesses may result in the recording of special charges, such as inventory and technology-related write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products. Our estimates with respect to the useful life or ultimate recoverability of our carrying basis of assets, including purchased intangible assets, could change as a result of such assessments and decisions. Although in certain instances, our supply agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed, our loss contingencies may include liabilities for contracts that we cannot cancel with contract manufacturers and suppliers. Further, our estimates relating to the liabilities for excess facilities are affected by changes in real estate market conditions.

31


 

If our products do not effectively inter-operate with our customers’ networks and result in cancellations and delays of installations, our business could be harmed.

Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products must inter-operate with many or all of the products within these networks as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may need to modify our software networking solutions to fix or overcome these errors so that our products will inter-operate and scale with the existing software and hardware, which could be costly and could negatively affect our business, financial condition, and results of operations. In addition, if our products do not inter-operate with those of our customers’ networks, demand for our products could be adversely affected or orders for our products could be canceled. This could hurt our operating results, damage our reputation, and seriously harm our business and prospects.

We have liabilities for real estate leases in excess of what is necessary for our current business.

We have real estate leases that we are currently trying to sublease or that we have had to write-off their cost. Until such time that we are able to sublease these properties, or the current leases expire, we may incur financial liabilities for real estate leases significantly in excess of what is necessary for our current business.

The results of the United Kingdom's referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum.  The terms of the withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiated the withdrawal process in March 2017.  Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal.  The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal.  These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.  Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our securities.

While the full effects of the referendum will not be known for some time, the referendum and beginnings of the British exit from the European Union could cause disruptions to, and create uncertainty surrounding, our business with customers in the United Kingdom. One of the most immediate effects of the referendum to date includes the currency exchange rate fluctuations that have resulted in the strengthening of the U.S. Dollar against the U.K. Pound Sterling. The weaker U.K. Pound Sterling means that revenues earned in U.K. Pounds Sterling translate to lower reported U.S. Dollar revenues. The weaker U.K. Pound Sterling also means that expenses incurred in U.K. Pounds Sterling translate to lower reported U.S. Dollar expenses. In addition, the continued strength and future increases in the value of the U.S. Dollar relative to the U.K. Pounds Sterling could make the sale of our products less competitive in the United Kingdom. 

Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our products.

As a public company, we are subject to requirements under the  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the regulations adopted by the SEC as a result of the Dodd-Frank Act, that require us to perform certain reasonable country of origin inquiry and diligence exercises, and disclose and report on our diligence process and efforts to ascertain whether or not our products may contain “conflict minerals” mined from the Democratic Republic of the Congo or adjoining countries.  These requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we continue to incur additional costs to comply with these disclosure requirements, including costs related to conducting ongoing diligence procedures and, if applicable, potential changes to products, processes or sources of supply as a consequence of such activities. We may encounter challenges to satisfy customers who require that all of the components of our products are certified as “conflict free.” If we cannot satisfy these customers, they may choose a competitor’s products.

 

 

32


 

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We started leasing our current headquarters, which is located in San Jose, California, in October 2016. We also lease office space and executive suites in various other geographic locations domestically and internationally for research and development, sales and service personnel and administration. Our aggregate lease expense for fiscal year 2017 was $9.4 million.

At June 30, 2017, the significant facilities that we leased were as follows:

 

Location

 

Use

 

Size

 

 

 

 

 

(in square feet)

 

San Jose, California

 

Principal administrative, research and development, sales and marketing facilities

 

 

102,139

 

Salem, New Hampshire

 

Research and development, sales and marketing and administrative offices

 

 

197,259

 

Morrisville, North Carolina

 

Research and development, sales and administrative offices

 

 

54,530

 

Chennai, India

 

Research and development facilities

 

 

43,839

 

Bangalore, India

 

Research and development facilities

 

 

62,257

 

Shannon, Ireland

 

Administrative offices

 

 

13,046

 

 

The above leases expire at various dates between fiscal year 2018 and fiscal year 2023.

Item 3. Legal Proceedings

The information set forth under the heading “Legal Proceedings” in Note 5, Commitments, Contingencies and Leases, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not Applicable

 

 

33


 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices and Dividends

Our common stock trades on the NASDAQ Global Market and commenced trading on NASDAQ on April 9, 1999 under the symbol “EXTR.”  The following table sets forth the high and low sales prices as reported by NASDAQ.  Such prices represent prices between dealers, do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.

 

Stock Prices

 

High

 

 

Low

 

Fiscal year ended June 30, 2017:

 

 

 

 

 

 

 

 

First quarter

 

$

4.54

 

 

$

3.37

 

Second quarter

 

$

5.10

 

 

$

4.05

 

Third quarter

 

$

7.51

 

 

$

5.15

 

Fourth quarter

 

$

10.70

 

 

$

6.90

 

Fiscal year ended June 30, 2016:

 

 

 

 

 

 

 

 

First quarter

 

$

3.56

 

 

$

2.13

 

Second quarter

 

$

4.42

 

 

$

3.34

 

Third quarter

 

$

3.99

 

 

$

2.35

 

Fourth quarter

 

$

3.78

 

 

$

3.08

 

 

As of September 6, 2017, there were 202 stockholders of record of our common stock.  Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We have never declared or paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.

Certain information regarding our equity compensation plan(s) as required by Part II is incorporated by reference from our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2017 Annual Meeting of Stockholders not later than 120 days after the end of the fiscal year covered by this report.

34


 

STOCK PRICE PERFORMANCE GRAPH

Set forth below is a stock price performance graph comparing the annual percentage change in the cumulative total return on our common stock with the cumulative total returns of the CRSP Total Return Index for The NASDAQ Stock Market (U.S. companies) and the NASDAQ Computer Manufacturers Securities for the period commencing July 1, 2012 and ending on June 30, 2017.  The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

Comparison of Five-Year Cumulative Total Returns

Performance Graph for Extreme Networks, Inc.

 

 

Prepared by CRSP (www.crsp.uchicago.edu), Center for Research in Security Prices, Booth School of Business, The University of Chicago. Used with permission. All rights reserved.

 

 

35


 

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial data for each of the fiscal years ended June 30, 2017, 2016, 2015, 2014 and 2013 derived from the Company’s audited financial statements (in thousands, except per share amounts). These tables should be reviewed in conjunction with the Consolidated Financial Statements in Item 8 and related Notes, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results may not be indicative of future results.

 

 

 

Year Ended

 

 

 

June 30,

 

 

 

2017(1)

 

 

2016(2)

 

 

2015(3)

 

 

2014(4)

 

 

2013(5)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

598,118

 

 

$

528,389

 

 

$

552,940

 

 

$

519,554

 

 

$

299,343

 

Operating (loss) income

 

$

(733

)

 

$

(25,550

)

 

$

(62,994

)

 

$

(50,232

)

 

$

10,852

 

Net (loss) income

 

$

(8,517

)

 

$

(31,884

)

 

$

(71,643

)

 

$

(57,310

)

 

$

9,673

 

Net (loss) income per share – basic

 

$

(0.08

)

 

$

(0.31

)

 

$

(0.72

)

 

$

(0.60

)

 

$

0.10

 

Net (loss) income per share – diluted

 

$

(0.08

)

 

$

(0.31

)

 

$

(0.72

)

 

$

(0.60

)

 

$

0.10

 

Shares used in per share calculation – basic

 

 

108,273

 

 

 

103,074

 

 

 

99,000

 

 

 

95,515

 

 

 

93,954

 

Shares used in per share calculation – diluted

 

 

108,273

 

 

 

103,074

 

 

 

99,000

 

 

 

95,515

 

 

 

95,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Balance Sheets Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, short-term investments and marketable

   securities

 

$

130,450

 

 

$

94,122

 

 

$

76,225

 

 

$

105,882

 

 

$

205,613

 

Inventories

 

$

45,880

 

 

$

40,989

 

 

$

58,014

 

 

$

57,109

 

 

$

16,167

 

Total assets

 

$

483,346

 

 

$

374,423

 

 

$

428,660

 

 

$

526,432

 

 

$

311,424

 

Deferred revenue, net

 

$

104,341

 

 

$

94,860

 

 

$

99,782

 

 

$

97,677

 

 

$

41,454

 

Debt, net of issuance costs

 

$

92,702

 

 

$

55,074

 

 

$

66,400

 

 

$

120,990

 

 

$

 

Other long-term liabilities

 

$

15,102

 

 

$

13,328

 

 

$

10,264

 

 

$

8,595

 

 

$

1,507

 

Common stock and capital in excess of par value

 

$

909,155

 

 

$

884,706

 

 

$

865,382

 

 

$

845,364

 

 

$

821,425

 

Accumulated deficit

 

$

(800,257

)

 

$

(791,740

)

 

$

(759,856

)

 

$

(688,213

)

 

$

(630,903

)

 

(1)

Fiscal 2017 net loss and net loss per share includes acquisition and integrations costs of $13.1 million, amortization of intangibles of $8.7 million and a restructuring charge of $8.9 million.

(2)

Fiscal 2016 net loss and net loss per share includes acquisition and integrations costs of $1.1 million, amortization of intangibles of $17.0 million and a restructuring charge of $11.0 million.

(3)

Fiscal 2015 net loss and net loss per share includes acquisition and integration costs of $10.2 million, amortization of intangibles of $17.9 million and a restructuring charge of $9.8 million.

(4)

Fiscal 2014 net loss and net loss per share includes acquisition and integration costs of $25.7 million, amortization of intangibles of $16.7 million and a restructuring charge of $0.5 million.

(5)

Fiscal 2013 net income and net income per share includes a gain on sale of facilities of $11.5 million, a restructuring charge of $6.8 million and a charge for litigation settlement, net of $2.0 million.

36


 

Quarterly Financial Data (Unaudited)

Quarterly results for the years ended June 30, 2017 and 2016 are as follow (in thousands, except per share amounts):

 

 

 

June 30,

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

 

2017(1)

 

 

2017(2)

 

 

2016(3)

 

 

2016(4)

 

Net revenues

 

$

178,701

 

 

$

148,664

 

 

$

148,111

 

 

$

122,642

 

Gross profit

 

$

101,739

 

 

$

82,146

 

 

$

75,354

 

 

$

65,246

 

Net income (loss)

 

$

12,177

 

 

$

(3,246

)

 

$

(7,362

)

 

$

(6,479

)

Net income (loss) per share – basic

 

$

0.11

 

 

$

(0.05

)

 

$

(0.08

)

 

$

(0.06

)

Net income (loss) per share – diluted

 

$

0.11

 

 

$

(0.05

)

 

$

(0.08

)

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

 

2016(5)

 

 

2016(6)

 

 

2015(7)

 

 

2015(8)

 

Net revenues

 

$

139,617

 

 

$

124,886

 

 

$

139,305

 

 

$

124,581

 

Gross profit

 

$

72,675

 

 

$

62,720

 

 

$

70,275

 

 

$

65,118

 

Net loss

 

$

(2,340

)

 

$

(10,784

)

 

$

(7,234

)

 

$

(11,526

)

Net loss per share – basic

 

$

(0.02

)

 

$

(0.10

)

 

$

(0.07

)

 

$

(0.11

)

Net loss per share – diluted

 

$

(0.02

)

 

$

(0.10

)

 

$

(0.07

)

 

$

(0.11

)

 

(1)

Net income and net income per share include the effect of acquisition and integration costs of $3.2 million, amortization of intangibles of $1.2 million and a reversal of restructuring charges of $0.7 million.

(2)

Net loss and net loss per share include the effect of acquisition and integration costs of $3.4 million, amortization of intangibles of $1.2 million and a restructuring charge of $7.7 million.

(3)

Net loss and net loss per share include the effect of acquisition and integration costs of $4.2 million, amortization of intangibles of $2.2 million and a restructuring charge of $1.9 million.

(4)

Net loss and net loss per share include the effect of acquisition and integration costs of $2.3 million, amortization of intangibles of $4.1 million.

(5)

Net loss and net loss per share include the effect of amortization of intangibles of $0.8 million and a restructuring charge of $0.1 million.

(6)

Net loss and net loss per share include the effect of amortization of intangibles of $4.1 million and a restructuring charge of $1.4 million.

(7)

Net loss and net loss per share include the effect of acquisition and integration costs of $0.8 million and amortization of intangibles of $4.3 million and a restructuring charge of $3.0 million.

(8)

Net loss and net loss per share include the effect of acquisition and integration costs of $0.3 million and amortization of intangibles of $4.5 million and a restructuring charge of $5.6 million.

Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year.

 

 

37


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

The following discussion should be read with the Consolidated Financial Statements and the related notes in Item 8 of Part II of this Report.

The following discussion is based upon our Consolidated Financial Statements included elsewhere in this Report, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.  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 is a leading provider of network infrastructure equipment and offers related maintenance contracts for extended warranty and maintenance to our enterprise, data center and service provider customers.  We were incorporated in California in May 1996, and reincorporated in Delaware in March 1999.  Our corporate headquarters are located in San Jose, California. Substantially all of our revenue is derived from the sale of our networking equipment and related maintenance contracts.

Extreme Networks, Inc., together with its subsidiaries (collectively referred to as “Extreme” and as “we”, “us” and “our”) is a leader in providing software-driven networking solutions for enterprise customers. Providing a combined end-to-end solution from the data center to the access point, Extreme designs, develops and manufactures wired and wireless network infrastructure equipment and develops the software for network management, policy, analytics, security and access controls. We strive to help our customers and partners Connect Beyond the Network by building world-class software and network infrastructure solutions that solve the wide range of problems faced by IT departments.

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.

A trend effecting the Enterprise Network Equipment market is the continued adoption of the cloud-managed enterprise WLAN in the enterprise market. Hybrid cloud is a cloud computing environment which uses a mix of on-premises, private cloud and third-party, public cloud services with orchestration between the two platforms. We introduced our Cloud offering in 2016 and announced its enhanced cloud offering in 2017.  ExtremeCloud is the only offering in the market that seamlessly integrates the cloud with on-premise infrastructures. (See Part 1, Item 1. Business, for additional discussion of the Company’s business)

Acquisition

On October 28, 2016, we completed the acquisition of Zebra’s WLAN Business assets.  Under the terms of the purchase agreement, we acquired customers, employees, technology and other assets as well as assumed certain contracts and other liabilities of the WLAN Business, for net cash consideration to $49.5 million.

We have accounted for the acquisition using the acquisition method of accounting.  The purchase price allocation as of the acquisition date is set forth in Note 2 Business Combinations in our Notes to Consolidated Financial Statements and reflects fair values. The fair values were determined through established and generally accepted valuation techniques, including work performed by third-party valuation specialists.  All valuations were considered finalized as of June 30, 2017.

During the fiscal year ended June 30, 2017, we recognized acquisition costs of $2.1 million and integration costs of $6.6 million, which is included in “Acquisition and integration costs” in the accompanying condensed consolidated statements of operations.

38


 

On July 14, 2017, we completed the acquisition of Avaya Networking, Avaya’s fabric-based secure networking solutions and network security solutions business, that had been announced on March 7, 2017, and funds were remitted to Avaya pursuant to the purchase agreement. We acquired customers, employees, technology and other assets, as well as assume contracts and other liabilities of the Avaya Networking business, for a purchase price of $100.0 million, subject to certain adjustments.  Pursuant to certain ancillary agreements, Avaya will also provide us with access to certain technology related to Avaya Networking, as well as transition services for a period of time following the closing of the transaction.  As a condition of our agreement, the Company made deposits of $10.2 million in our fiscal third quarter to be applied to the purchase price upon closing.  See Note 14. Subsequent Events for additional information.

The acquisition will be accounted for using the acquisition method of accounting whereby the acquired assets and liabilities of the Avaya Networking will be recorded at their respective fair values and added to those of ours including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets.  Results of operations of Avaya Networking will be included in our operations beginning with the closing date as noted above.

During fiscal year ended June 30, 2017, we recognized acquisition costs of $2.2 million, which is included in “Acquisition and integration costs” in the accompanying consolidated statements of operations related to the Purchase Agreement.

Future Acquisitions

On March 29, 2017, we entered into an additional Asset Purchase Agreement (the “Purchase Agreement II”) with LSI Corporation, (“LSI”), and, solely for the purposes set forth in the Purchase Agreement II, Broadcom to purchase the Brocade Data business of Brocade.  Upon the terms and subject to the conditions of the Purchase Agreement II, we will acquire customers, employees, technology and other assets of Brocade Data, as well as assume certain contracts and other liabilities of Brocade Data, for an upfront cash closing payment equal to $35.0 million, plus a deferred payment equal to $20.0 million to be paid $1 million per quarter for 20 quarters following the closing date of the transaction (the “Closing,” and such date, the “Closing Date”), plus quarterly earn out payments equal to 50% of profits of Brocade Data for the five-year period commencing at the end of our first full fiscal quarter following the Closing Date.  Pursuant to certain ancillary agreements, LSI will also provide us with access to certain technology related to Brocade Data, as well as transition services for a period of time following the Closing.  The acquisition will include the rights to have manufactured and sold Brocade’s current SLX based solutions product portfolio, which launched in March 2017.  The Purchase Agreement II is contingent upon Broadcom acquiring Brocade.   (See Item 1A Risk Factors for additional information).

During the fiscal year ended June 30 2017, we recognized acquisition costs of $2.2 million, which is included in “Acquisition and integration costs” in the accompanying consolidated statements of operations related to the Purchase Agreement II.

Results of Operations

Following is a summary of our results of operations during fiscal 2017:

 

Net revenue of $598.1 million, increased 13.2% from fiscal 2016 net revenue of $528.4 million.

 

Product revenue of $451.5 million, increased 14.2% from fiscal 2016 product revenue of $395.5 million.

 

Service revenue of $146.7 million, increased 10.3% from fiscal 2016 service revenue of $132.9 million.

 

Total gross margin of 54.3% of net revenue in fiscal 2017, compared to 51.2% in fiscal 2016.

 

Restructuring charge of $8.9 million, for excess facilities and contract termination.

 

Operating loss of $0.7 million, was a decrease in the operating loss of $24.8 million from fiscal 2016.

 

Net loss was $8.5 million in fiscal 2017, a decrease of $23.4 million from a net loss of $31.9 million in fiscal 2016.

 

Cash flow provided by operating activities of $59.3 million, compared to cash flow provided by operating activities of $30.4 million in fiscal 2016, an increase of $28.9 million.  Cash and cash equivalents were $130.5 million as of June 30, 2017, an increase of $36.4 million compared to fiscal.2016

39


 

Net Revenues

The following table presents net product and service revenue for the fiscal years 2017, 2016 and 2015 (dollars in thousands):

 

 

 

Year Ended

 

 

Year Ended

 

 

 

June 30,

2017

 

 

June 30,

2016

 

 

$

Change

 

 

%

Change

 

 

June 30,

2016

 

 

June 30,

2015

 

 

$

Change

 

 

%

Change

 

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

451,459

 

 

$

395,464

 

 

$

55,995

 

 

 

14.2

%

 

$

395,464

 

 

$

418,046

 

 

$

(22,582

)

 

 

(5.4

)%

Percentage of net revenue

 

 

75.5

%

 

 

74.8

%

 

 

 

 

 

 

 

 

 

 

74.8

%

 

 

75.6

%

 

 

 

 

 

 

 

 

Service

 

 

146,659

 

 

 

132,925

 

 

 

13,734

 

 

 

10.3

%

 

 

132,925