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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Mar. 31, 2024

The Company uses a fiscal calendar year ending on June 30. All references herein to “fiscal 2024” represent the fiscal year ending June 30, 2024. All references herein to “fiscal 2023” represent the fiscal year ended June 30, 2023.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Extreme and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated.

The Company predominantly uses the United States Dollar as its functional currency. The functional currency for certain of its foreign subsidiaries is the local currency. For those subsidiaries that operate in a local functional currency environment, all assets and liabilities are translated to United States Dollars at current month end rates of exchange and revenues, and expenses are translated using the monthly average rate.

Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Recently Adopted Accounting Pronouncements

There were no recently adopted accounting standards which would have a material effect on our condensed consolidated financial statements and accompanying disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. All disclosure requirements of ASU 2023-07 are required for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2023-07 on its consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures to enhance income tax disclosures primarily through changes in the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2023-09 on its consolidated financial statements and related disclosures.

Revenue Recognition

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of the Company’s contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on its relative standalone selling price. The stand-alone selling prices are determined based on the prices at which the Company separately sells these products. For items that are not sold separately, the Company estimates the stand-alone selling prices using other observable inputs.

The Company’s performance obligations are satisfied at a point in time or over time as the customer receives and consumes the benefits provided. Substantially all of the Company’s product sales revenues are recognized at a point in time. Substantially all of the Company’s subscription and support revenues are recognized over time. For revenues recognized over time, the Company uses an input measure, days elapsed, to measure progress.

On March 31, 2024, the Company had $558.3 million of remaining performance obligations, which primarily comprised deferred maintenance and deferred SaaS revenues. The Company expects to recognize approximately 18% of its deferred revenue as revenue in the remainder of fiscal 2024, an additional 42% in fiscal 2025, and 40% of the balance thereafter.

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue in the condensed consolidated balance sheets. Services provided under renewable support arrangements of the Company are billed in accordance with agreed-upon contractual terms, which are either billed fully at the inception of contract or at periodic intervals (e.g., quarterly or annually). The Company generally receives payments from its customers in advance of services being provided, resulting in deferred revenues. These liabilities are reported on the condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

Revenue recognized for the three months ended March 31, 2024 and 2023 that was included in the deferred revenue balance at the beginning of each period was $95.9 million and $81.0 million, respectively. Revenue recognized for the nine months ended March 31, 2024 and 2023 that was included in the deferred revenue balance at the beginning of each period was $230.8 million and $193.7 million, respectively.

Contract Costs. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. Management expects that commission fees paid to sales representatives as a result of obtaining subscription and support contracts and contract renewals are recoverable and therefore the Company’s condensed consolidated balance sheets included capitalized balances in the amount of $22.7 million and $20.0 million at March 31, 2024 and June 30, 2023, respectively. Capitalized commissions are included within other assets in the condensed consolidated balance sheets. Capitalized commission fees are amortized on a straight-line basis over the average period of service contracts of approximately three and a half years, and are included in “Sales and marketing” in the accompanying condensed consolidated statements of operations. Amortization recognized during the three months ended March 31, 2024 and 2023 was $2.8 million and $2.3 million, respectively. Amortization recognized during the nine months ended March 31, 2024 and 2023 was $8.0 million and $6.7 million, respectively.

Estimated Variable Consideration. There were no material changes in the current period to the estimated variable consideration for performance obligations, which were satisfied or partially satisfied during previous periods.

Revenues by Category

The Company operates in three geographic regions: Americas, EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). The following table sets forth the Company’s net revenues disaggregated by sales channel and geographic region based on the billing addresses of its customers (in thousands):


	Three Months Ended
	March 31, 2024							March 31, 2023
	Distributor			Direct		Total		Distributor		Direct		Total
Americas:
United States	$	52,543		$	71,539	$	124,082	$	74,743	$	64,337	$	139,080
Other		5,934			4,357		10,291		14,079		4,523		18,602
Total Americas		58,477			75,896		134,373		88,822		68,860		157,682
EMEA		18,313			40,722		59,035		111,664		40,326		151,990
APAC*		(1,464	)		19,092		17,628		5,186		17,649		22,835
Total net revenues	$	75,326		$	135,710	$	211,036	$	205,672	$	126,835	$	332,507


	Nine Months Ended
	March 31, 2024						March 31, 2023
	Distributor		Direct		Total		Distributor		Direct		Total
Americas:
United States	$	251,694	$	204,689	$	456,383	$	245,852	$	203,991	$	449,843
Other		16,709		19,565		36,274		14,080		4,523		18,603
Total Americas		268,403		224,254		492,657		259,932		208,514		468,446
EMEA		184,706		128,537		313,243		285,066		120,482		405,548
APAC		7,510		47,140		54,650		14,627		59,923		74,550
Total net revenues	$	460,619	$	399,931	$	860,550	$	559,625	$	388,919	$	948,544

*The distributor revenue in the APAC region for the three months ended March 31, 2024 reflects a higher level of customer rebates for the distributors, resulting from higher sell-through to end users than the Company's product sales into these distributors.

For the nine months ended March 31, 2024, the Company generated approximately 10% of its net revenues from the Netherlands. For the three and nine months ended March 31, 2023, the Company generated 17% and 12% of its net revenues from the Netherlands, respectively. No other foreign country accounted for 10% or more of its net revenues for the three and nine months ended March 31, 2024 and 2023.

Cash and Cash Equivalents

The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

The following table summarizes the Company's cash and cash equivalents (in thousands):


	March 31, 2024		June 30, 2023
Cash	$	143,421	$	227,675
Cash equivalents		7,586		7,151
Total cash and cash equivalents	$	151,007	$	234,826

Inventories

Inventories are stated at the lower of cost, or net realizable value. Extreme uses a standard cost methodology to determine the cost basis for its inventories. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company adjusts the carrying value of its inventory when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Any previously written down or obsolete inventory subsequently sold has not had a material impact on gross margin for any of the periods presented.

The following table summarizes the Company's inventory by category (in thousands):


	March 31, 2024		June 30, 2023
Finished goods	$	158,228	$	78,180
Raw materials		27,129		10,844
Total inventories	$	185,357	$	89,024

Property and Equipment, Net

The following table summarizes the Company's property and equipment, net by category (in thousands):


	March 31, 2024			June 30, 2023
Computers and equipment	$	75,413		$	81,612
Purchased software		55,853			51,444
Office equipment, furniture and fixtures		8,796			8,899
Leasehold improvements		48,301			48,943
Total property and equipment		188,363			190,898
Less: accumulated depreciation and amortization		(141,109	)		(144,450	)
Property and equipment, net	$	47,254		$	46,448

Deferred Revenue

Deferred revenue represents invoiced amounts for deferred maintenance, SaaS, and other deferred revenue including professional services and training when the revenue recognition criteria have not been met.

Guarantees and Product Warranties

The majority of the Company’s hardware products are shipped with either a one-year warranty or a limited lifetime warranty, and software products receive a 90-day warranty. Upon shipment of products to its customers, the Company estimates expenses for the cost to repair or replace products that may be returned under warranty and accrues a liability in cost of product revenues for this amount. The determination of the Company’s warranty requirements is based on actual historical experience with the product or product family, estimates of repair and replacement costs, and any product warranty problems that are identified after shipment. The Company estimates and adjusts these accruals at each balance sheet date in accordance with changes in these factors.

The following table summarizes the activity related to the Company’s product warranty liability during the following periods (in thousands):


	Three Months Ended						Nine Months Ended
	March 31, 2024			March 31, 2023			March 31, 2024			March 31, 2023
Balance at beginning of period	$	11,397		$	11,820		$	12,322		$	10,852
New warranties issued		3,312			4,161			9,763			11,976
Warranty expenditures		(3,642	)		(3,679	)		(11,018	)		(10,526	)
Balance at end of period	$	11,067		$	12,302		$	11,067		$	12,302

To facilitate sales of its products in the normal course of business, the Company indemnifies its resellers and end-user customers with respect to certain matters. The Company has agreed to hold the customer harmless against losses arising from intellectual property infringement and certain other losses. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to estimate the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on its operating results or financial position.

Concentrations

The Company may be subject to concentration of credit risk as a result of certain financial instruments consisting of accounts receivable. See Note 3, Revenues, for the Company’s accounts receivable concentration. The Company does not invest an amount exceeding 10% of its combined cash in the securities of any one obligor or maker, except for obligations of the United States government, obligations of United States government agencies, and money market accounts.

Earnings Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income by the weighted-average number of shares of common stock used in the basic net income per share calculation plus the dilutive effect of shares subject to repurchase, options and unvested RSUs.