x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
DELAWARE | 77-0430270 | |
[State or other jurisdiction of incorporation or organization] | [I.R.S Employer Identification No.] | |
3585 Monroe Street, Santa Clara, California | 95051 | |
[Address of principal executive office] | [Zip Code] |
Large accelerated filer | o | Accelerated filer | x | |||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
PAGE | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
October 2, 2011 | July 3, 2011 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 44,214 | $ | 49,972 | |||
Short-term investments | 31,933 | 41,357 | |||||
Accounts receivable, net of allowances of $1,131 at October 2, 2011 and $1,412 at July 3, 2011 | 28,638 | 33,689 | |||||
Inventories, net | 23,014 | 21,583 | |||||
Deferred income taxes | 674 | 681 | |||||
Prepaid expenses and other current assets, net | 6,345 | 10,132 | |||||
Total current assets | 134,818 | 157,414 | |||||
Property and equipment, net | 41,825 | 41,877 | |||||
Marketable securities | 64,548 | 55,648 | |||||
Intangible assets | 4,388 | 4,906 | |||||
Other assets, net | 10,711 | 11,128 | |||||
Total assets | $ | 256,290 | $ | 270,973 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 12,181 | $ | 15,092 | |||
Accrued compensation and benefits | 11,219 | 13,723 | |||||
Restructuring liabilities | 1,753 | 3,183 | |||||
Accrued warranty | 2,702 | 2,640 | |||||
Deferred revenue, net | 28,633 | 29,613 | |||||
Deferred distributors revenue, net of deferred cost of sales to distributors | 11,998 | 16,552 | |||||
Other accrued liabilities | 13,726 | 19,050 | |||||
Total current liabilities | 82,212 | 99,853 | |||||
Restructuring liabilities, less current portion | — | — | |||||
Deferred revenue, less current portion | 7,554 | 7,360 | |||||
Deferred income taxes | 118 | 93 | |||||
Other long-term liabilities | 2,327 | 2,381 | |||||
Commitments and contingencies (Note 3) | |||||||
Stockholders’ equity: | |||||||
Convertible preferred stock, $.001 par value, issuable in series, 2,000,000 shares authorized; none issued | — | — | |||||
Common stock, $.001 par value, 750,000,000 shares authorized; 132,512,444 and 92,887,139 shares issued and outstanding, respectively, at October 2, 2011 and 132,147,451 and 92,522,146 shares issued and outstanding, respectively, at July 3, 2011 | 132 | 132 | |||||
Treasury stock, 39,625,305 shares at October 2, 2011 and July 3, 2011 | (149,666 | ) | (149,666 | ) | |||
Additional paid-in-capital | 966,080 | 963,565 | |||||
Accumulated other comprehensive income | 2,398 | 3,703 | |||||
Accumulated deficit | (654,865 | ) | (656,448 | ) | |||
Total stockholders’ equity | 164,079 | 161,286 | |||||
Total liabilities and stockholders’ equity | $ | 256,290 | $ | 270,973 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Net revenues: | |||||||
Product | $ | 63,213 | $ | 69,213 | |||
Service | 15,681 | 14,624 | |||||
Total net revenues | 78,894 | 83,837 | |||||
Cost of revenues: | |||||||
Product | 29,478 | 30,830 | |||||
Service | 5,880 | 6,170 | |||||
Total cost of revenues | 35,358 | 37,000 | |||||
Gross profit: | |||||||
Product | 33,735 | 38,383 | |||||
Service | 9,801 | 8,454 | |||||
Total gross profit | 43,536 | 46,837 | |||||
Operating expenses: | |||||||
Sales and marketing | 22,121 | 24,906 | |||||
Research and development | 12,408 | 12,861 | |||||
General and administrative | 6,270 | 6,585 | |||||
Restructuring charge, net of reversal | 955 | — | |||||
Total operating expenses | 41,754 | 44,352 | |||||
Operating income | 1,782 | 2,485 | |||||
Interest income | 293 | 329 | |||||
Interest expense | (37 | ) | (30 | ) | |||
Other expense | 57 | (277 | ) | ||||
Income before income taxes | 2,095 | 2,507 | |||||
Provision (benefit) for income taxes | 512 | (205 | ) | ||||
Net income | $ | 1,583 | $ | 2,712 | |||
Basic and diluted net income per share: | |||||||
Net income per share - basic | $ | 0.02 | $ | 0.03 | |||
Net income per share - diluted | $ | 0.02 | $ | 0.03 | |||
Shares used in per share calculation - basic | 92,768 | 90,305 | |||||
Shares used in per share calculation - diluted | 94,055 | 90,610 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 1,583 | $ | 2,712 | |||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||
Decrease in accrued investment income | 961 | 315 | |||||
Depreciation and amortization | 1,341 | 1,539 | |||||
Amortization of intangible assets | 519 | 503 | |||||
Change in value / loss on value of UBS option to put securities | — | 2,429 | |||||
Auction rate securities mark to market, trading gain | — | (2,429 | ) | ||||
Provision for doubtful accounts | (140 | ) | — | ||||
Excess and obsolete inventory | 37 | 11 | |||||
Deferred income taxes | 7 | (709 | ) | ||||
Stock-based compensation | 1,895 | 2,109 | |||||
Unrealized (gain)/loss on foreign exchange | (366 | ) | (1,187 | ) | |||
Changes in operating assets and liabilities, net | |||||||
Accounts receivable | 5,191 | 2,394 | |||||
Inventories | (1,468 | ) | 1,343 | ||||
Prepaid expenses and other assets | 4,203 | (1,544 | ) | ||||
Accounts payable | (2,909 | ) | (1,214 | ) | |||
Accrued compensation and benefits | (2,505 | ) | (582 | ) | |||
Restructuring liabilities | (1,406 | ) | (912 | ) | |||
Accrued warranty | 62 | (376 | ) | ||||
Deferred revenue, net | (786 | ) | (1,173 | ) | |||
Deferred distributors revenue, net of cost of sales to distributors | (4,554 | ) | (2,921 | ) | |||
Other accrued liabilities | (5,579 | ) | 3,325 | ||||
Other long-term liabilities | (30 | ) | (2,481 | ) | |||
Net cash (used in) provided by operating activities | (3,944 | ) | 1,152 | ||||
Cash flows used in investing activities: | |||||||
Capital expenditures | (748 | ) | (1,362 | ) | |||
Purchases of investments | (21,096 | ) | (43,541 | ) | |||
Proceeds from maturities of investments and marketable securities | 10,300 | 5,800 | |||||
Proceeds from sales of investments and marketable securities | 9,915 | 33,144 | |||||
Net cash used in investing activities | (1,629 | ) | (5,959 | ) | |||
Cash flows provided by financing activities: | |||||||
Proceeds from issuance of common stock | 620 | 86 | |||||
Net cash provided by financing activities | 620 | 86 | |||||
Foreign currency effect on cash | (805 | ) | 342 | ||||
Net decrease in cash and cash equivalents | (5,758 | ) | (4,379 | ) | |||
Cash and cash equivalents at beginning of period | 49,972 | 51,944 | |||||
Cash and cash equivalents at end of period | $ | 44,214 | $ | 47,565 |
Amortized Cost | Fair Value | Unrealized Holding Gains | Unrealized Holding Losses | ||||||||||||
October 2, 2011 | |||||||||||||||
Money market funds | $ | 23,868 | $ | 23,868 | $ | — | $ | — | |||||||
U.S. corporate debt securities | 96,670 | 96,481 | 117 | (306 | ) | ||||||||||
U.S. government agency securities | — | — | — | — | |||||||||||
$ | 120,538 | $ | 120,349 | $ | 117 | $ | (306 | ) | |||||||
Classified as: | |||||||||||||||
Cash equivalents | $ | 23,868 | $ | 23,868 | $ | — | $ | — | |||||||
Short-term investments | 31,927 | 31,933 | 40 | (34 | ) | ||||||||||
Marketable securities | 64,743 | 64,548 | 77 | (272 | ) | ||||||||||
$ | 120,538 | $ | 120,349 | $ | 117 | $ | (306 | ) | |||||||
Amortized Cost | Fair Value | Unrealized Holding Gains | Unrealized Holding Losses | ||||||||||||
July 3, 2011 | |||||||||||||||
Money market funds | $ | 30,405 | $ | 30,405 | $ | — | $ | — | |||||||
U.S. corporate debt securities | 89,004 | 89,249 | 287 | (43 | ) | ||||||||||
U.S. government agency securities | 7,746 | 7,756 | 13 | (3 | ) | ||||||||||
$ | 127,155 | $ | 127,410 | $ | 300 | $ | (46 | ) | |||||||
Classified as: | |||||||||||||||
Cash equivalents | $ | 30,405 | $ | 30,405 | $ | — | $ | — | |||||||
Short-term investments | 41,245 | 41,357 | 114 | (1 | ) | ||||||||||
Marketable securities | 55,505 | 55,648 | 186 | (45 | ) | ||||||||||
$ | 127,155 | $ | 127,410 | $ | 300 | $ | (46 | ) |
Amortized Cost | Fair Value | ||||||
Due in 1 year or less | $ | 31,927 | $ | 31,933 | |||
Due in 1-2 years | 51,319 | 51,247 | |||||
Due in 2-5 years | 13,424 | 13,301 | |||||
Due in more than 5 years | — | — | |||||
Total investments in available for sale debt securities | $ | 96,670 | $ | 96,481 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
October 2, 2011: | |||||||||||||||||||||||
U.S. corporate debt securities | $ | 48,320 | $ | (297 | ) | $ | 2,025 | $ | (9 | ) | $ | 50,345 | $ | (306 | ) | ||||||||
$ | 48,320 | $ | (297 | ) | $ | 2,025 | $ | (9 | ) | $ | 50,345 | $ | (306 | ) |
• | Level 1 - Quoted prices in active markets for identical assets or liabilities; |
• | Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
• | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
October 2, 2011: | Level 1 | Level 2 | Total | ||||||||
(In thousands) | |||||||||||
Assets | |||||||||||
Investments: | |||||||||||
Money market funds | 23,868 | — | 23,868 | ||||||||
Corporate notes/bonds | — | 96,481 | 96,481 | ||||||||
Total | 23,868 | 96,481 | 120,349 | ||||||||
Liabilities | |||||||||||
Foreign currency forward contracts | — | 303 | 303 | ||||||||
Total | $ | — | $ | 303 | $ | 303 | |||||
July 3, 2011: | Level 1 | Level 2 | Total | ||||||||
(In thousands) | |||||||||||
Assets | |||||||||||
Investments: | |||||||||||
Federal agency notes | $ | — | $ | 7,756 | $ | 7,756 | |||||
Money market funds | 30,405 | — | 30,405 | ||||||||
Corporate notes/bonds | — | 89,248 | 89,248 | ||||||||
Total | 30,405 | 97,004 | 127,409 | ||||||||
Liabilities | |||||||||||
Foreign currency forward contracts | — | 37 | 37 | ||||||||
Total | $ | — | $ | 37 | $ | 37 |
October 2, 2011 | July 3, 2011 | ||||||
Inventory, gross | $ | 26,805 | $ | 26,487 | |||
Less: Write down for excess and obsolete inventory | 3,791 | 4,904 | |||||
Inventory, net | $ | 23,014 | $ | 21,583 |
Weighted Average Remaining Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
October 2, 2011 | |||||||||||||
Patents | 7.6 years | $ | 1,800 | $ | 457 | $ | 1,343 | ||||||
License Agreements | 6.8 years | 8,140 | 5,213 | 2,927 | |||||||||
Other Intangibles | 1.0 years | 324 | 206 | 118 | |||||||||
$ | 10,264 | $ | 5,876 | $ | 4,388 |
Weighted Average Remaining Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
July 3, 2011 | |||||||||||||
Patents | 7.7 years | $ | 1,800 | $ | 387 | $ | 1,413 | ||||||
License Agreements | 6.5 years | 8,140 | 4,788 | 3,352 | |||||||||
Other Intangibles | 1.2 years | 324 | 183 | 141 | |||||||||
$ | 10,264 | $ | 5,358 | $ | 4,906 |
For the fiscal year ending: | ||
Remaining in fiscal 2012 | $1,219 | |
2013 | 1,156 | |
2014 | 313 | |
2015 | 214 | |
2016 | 214 | |
Thereafter | 1,272 | |
Total | 4,388 |
October 2, 2011 | July 3, 2011 | ||||||
Deferred services | $ | 35,961 | $ | 36,025 | |||
Deferred product | |||||||
Deferred revenue | 652 | 1,984 | |||||
Deferred cost of sales | (426 | ) | (1,036 | ) | |||
Deferred product revenue, net | 226 | 948 | |||||
Balance at end of period | 36,187 | 36,973 | |||||
Less: current portion | 28,633 | 29,613 | |||||
Non-current deferred revenue, net | $ | 7,554 | $ | 7,360 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Balance beginning of period | $ | 35,802 | $ | 36,193 | |||
New support arrangements | 14,600 | 13,493 | |||||
Recognition of support revenue | (14,672 | ) | (14,269 | ) | |||
Balance end of period | 35,730 | 35,417 | |||||
Less current portion | 28,176 | 27,807 | |||||
Non-current deferred revenue | $ | 7,554 | $ | 7,610 |
October 2, 2011 | July 3, 2011 | ||||||
Deferred revenue | $ | 16,005 | $ | 22,454 | |||
Deferred cost of sales | (4,007 | ) | (5,902 | ) | |||
Total deferred distributors revenue, net of deferred cost of sales to distributors | $ | 11,998 | $ | 16,552 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Balance beginning of period | $ | 2,640 | $ | 3,169 | |||
New warranties issued | 1,648 | 1,291 | |||||
Warranty expenditures | (1,586 | ) | (1,666 | ) | |||
Balance end of period | $ | 2,702 | $ | 2,794 |
October 2, 2011 | July 3, 2011 | ||||||
Accrued income taxes | $ | 658 | $ | 897 | |||
Accrued general and administrative costs | 2,273 | 5,373 | |||||
Accrued research and development costs | 2,098 | 1,734 | |||||
Accrued in-transit inventory and freight | 2,137 | 2,777 | |||||
Accrued marketing development funds | 2,388 | 2,492 | |||||
Other accrued liabilities | 4,172 | 5,777 | |||||
Total | $ | 13,726 | $ | 19,050 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Cost of product revenue | $ | 156 | $ | 192 | |||
Cost of service revenue | 114 | 144 | |||||
Sales and marketing | 496 | 572 | |||||
Research and development | 472 | 611 | |||||
General and administrative | 657 | 590 | |||||
Total share-based compensation expense | $ | 1,895 | $ | 2,109 |
Number of Shares (000’s) | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($ 000’s) | |||||||||||
Options outstanding at July 4, 2011 | 9,132 | $ | 4.01 | |||||||||||
Granted | 2,131 | $ | 3.29 | |||||||||||
Exercised | (138 | ) | $ | 2.08 | $ | 173 | ||||||||
Canceled | (397 | ) | $ | 3.70 | ||||||||||
Options outstanding at October 2, 2011 | 10,728 | $ | 3.91 | |||||||||||
Exercisable at October 2, 2011 | 6,094 | $ | 4.41 | $ | 4.30 | $ | 611 | |||||||
Vested and expected to vest at October 2, 2011 | 10,167 | $ | 3.94 | $ | 5.19 | $ | 777 |
Number of Shares (000’s) | Weighted- Average Grant- Date Fair Value | Aggregate Fair Market Value | ||||||||
Unvested at July 4, 2011 | 1,870 | $ | 2.79 | |||||||
Granted | 429 | $ | 3.01 | |||||||
Vested | (104 | ) | $ | 3.03 | $ | 316 | ||||
Canceled | (160 | ) | $ | 3.10 | ||||||
Unvested at October 2, 2011 | 2,035 | $ | 2.80 |
Stock Option Plan | Employee Stock Purchase Plan | ||||||||||
Three Months Ended | Three Months Ended | ||||||||||
October 2, 2011 | September 26, 2010 | October 2, 2011 | September 26, 2010 | ||||||||
Expected life | 5 yrs | 4 yrs | 0.25 yrs | 0.25 yrs | |||||||
Risk-free interest rate | 1.09 | % | 1.11 | % | 0.04 | % | 0.17 | % | |||
Volatility | 59 | % | 58 | % | 62 | % | 59 | % | |||
Dividend yield | — | % | — | % | — | % | — | % |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Net income | $ | 1,583 | $ | 2,712 | |||
Other comprehensive income: | |||||||
Change in unrealized gain (loss) on investments: | 444 | 361 | |||||
Foreign currency translation adjustments | |||||||
Beginning balance | 3,449 | 954 | |||||
Ending balance | 2,588 | 2,214 | |||||
Foreign currency translation adjustments change | (861 | ) | 1,260 | ||||
Total comprehensive income | $ | 1,166 | $ | 4,333 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Net income | $ | 1,583 | $ | 2,712 | |||
Weighted-average shares used in per share calculation – basic | 92,768 | 90,305 | |||||
Incremental shares using the treasury stock method: | |||||||
Stock options | 316 | 271 | |||||
Unvested restricted awards | 820 | 34 | |||||
Employee Stock Purchase Plan | 151 | — | |||||
Weighted-average share used in per share calculation – diluted | $ | 94,055 | $ | 90,610 | |||
Net income per share – basic | $ | 0.02 | $ | 0.03 | |||
Net income per share – diluted | $ | 0.02 | $ | 0.03 | |||
Three Months Ended | |||||
October 2, 2011 | September 26, 2010 | ||||
Weighted stock options outstanding: | |||||
In-the-money options | — | — | |||
Out-of-the-money options | 8,713 | 7,157 | |||
Total potential shares of common stock excluded from the computation of net income per share | 8,713 | 7,157 |
Termination Benefits | |||
Balance at July 3, 2011 | $ | 3,183 | |
Period charges | 991 | ||
Period reversals | (36 | ) | |
Period payments | (2,385 | ) | |
Balance at October 2, 2011 | $ | 1,753 |
Three Months Ended | ||||||||||||||
October 2, 2011 | September 26, 2010 | $ Change | % Change | |||||||||||
Net Revenues: | ||||||||||||||
Americas | 33,439 | 32,066 | 1,373 | 4.3 | % | |||||||||
Percentage of net revenue | 42.4 | % | 38.3 | % | ||||||||||
EMEA | 30,891 | 33,888 | (2,997 | ) | (8.8 | )% | ||||||||
Percentage of net revenue | 39.2 | % | 40.4 | % | ||||||||||
APAC | 14,564 | 17,883 | (3,319 | ) | (18.6 | )% | ||||||||
Percentage of net revenue | 18.5 | % | 21.3 | % | ||||||||||
Total net revenues | $ | 78,894 | $ | 83,837 | $ | (4,943 | ) | (5.9 | )% |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | Net revenues of $78.9 million compared to net revenues of $83.8 million in the first quarter of fiscal 2011. |
• | Total gross margin of 55.2% of net revenues compared to 55.9% in the first quarter of fiscal 2011. |
• | Operating income of $1.8 million compared to operating income of $2.5 million in the first quarter of fiscal 2011. |
• | Net income of $1.6 million compared to net income of $2.7 million in the first quarter of fiscal 2011. |
• | Cash used in operating activities of $3.9 million for the three months ending October 2, 2011 compared to cash provided by operating activities of $1.2 million for the three months ending September 26, 2010. |
• | Cash and cash equivalents, short-term investments and marketable securities decreased by $6.3 million in the three months ended October 2, 2011 to $140.7 million from $147.0 million as of July 3, 2011, primarily as a result of cash used in operating activities. |
Three Months Ended | ||||||||||||||
October 2, 2011 | September 26, 2010 | $ Change | % Change | |||||||||||
Net Revenues: | ||||||||||||||
Americas | $ | 33,439 | $ | 32,066 | $ | 1,373 | 4.3 | % | ||||||
Percentage of net revenue | 42.4 | % | 38.3 | % | ||||||||||
EMEA | 30,891 | 33,888 | (2,997 | ) | (8.8 | )% | ||||||||
Percentage of net revenue | 39.2 | % | 40.4 | % | ||||||||||
APAC | 14,564 | 17,883 | (3,319 | ) | (18.6 | )% | ||||||||
Percentage of net revenue | 18.5 | % | 21.3 | % | ||||||||||
Total net revenues | $ | 78,894 | $ | 83,837 | $ | (4,943 | ) | (5.9 | )% |
Three Months Ended | ||||||||||||||
October 2, 2011 | September 26, 2010 | $ Change | % Change | |||||||||||
Net Revenue: | ||||||||||||||
Product | $ | 63,213 | $ | 69,213 | $ | (6,000 | ) | (8.7 | )% | |||||
Percentage of net revenue | 80.1 | % | 82.6 | % | ||||||||||
Service | 15,681 | 14,624 | 1,057 | 7.2 | % | |||||||||
Percentage of net revenue | 19.9 | % | 17.4 | % | ||||||||||
Total net revenue | $ | 78,894 | $ | 83,837 | $ | (4,943 | ) | (5.9 | )% |
Three Months Ended | ||||||||||||||
October 2, 2011 | September 26, 2010 | $ Change | % Change | |||||||||||
Gross profit: | ||||||||||||||
Product | $ | 33,735 | $ | 38,383 | $ | (4,648 | ) | (12.1 | )% | |||||
Percentage of product revenue | 53.4 | % | 55.5 | % | ||||||||||
Service | 9,801 | 8,454 | $ | 1,347 | 15.9 | % | ||||||||
Percentage of service revenue | 62.5 | % | 57.8 | % | ||||||||||
Total gross profit | $ | 43,536 | $ | 46,837 | $ | (3,301 | ) | (7.1 | )% | |||||
% of Total Revenue | 55.2 | % | 55.9 | % |
Three Months Ended | ||||||||||||||
October 2, 2011 | September 26, 2010 | $ Change | % Change | |||||||||||
Sales and marketing | $ | 22,121 | $ | 24,906 | $ | (2,785 | ) | (11.2 | )% | |||||
Research and development | 12,408 | 12,861 | (453 | ) | (3.5 | )% | ||||||||
General and administrative | 6,270 | 6,585 | (315 | ) | (4.8 | )% | ||||||||
Restructuring, net | 955 | — | 955 | (100.0 | )% | |||||||||
Total operating expenses | $ | 41,754 | $ | 44,352 | $ | (2,598 | ) | (5.9 | )% | |||||
Operating income | $ | 1,782 | $ | 2,485 | $ | (703 | ) | (28.3 | )% |
Three Months Ended | |||||
October 2, 2011 | September 26, 2010 | ||||
Sales and marketing | 28.0 | % | 29.7 | % | |
Research and development | 15.7 | % | 15.3 | % | |
General and administrative | 8.0 | % | 7.9 | % | |
Restructuring, net | 1.2 | % | — | % | |
Total operating expenses | 52.9 | % | 52.9 | % | |
Operating income | 2.3 | % | 3.0 | % |
• | Share-Based Compensation |
• | Revenue Recognition |
• | Inventory Valuation |
• | Long Lived Assets |
• | Allowance for Doubtful Accounts |
• | Deferred Tax Valuation Allowance |
• | Accounting for Uncertainty in Income Taxes |
• | Legal Contingencies |
October 2, 2011 | July 3, 2011 | ||||||
Cash and cash equivalent | $ | 44,214 | $ | 49,972 | |||
Short-term investments | 31,933 | 41,357 | |||||
Marketable securities | 64,548 | 55,648 | |||||
Total cash and investments | $ | 140,695 | $ | 146,977 | |||
Working capital | $ | 52,606 | $ | 57,561 |
Three Months Ended | |||||||
October 2, 2011 | September 26, 2010 | ||||||
Net cash provided by operating activities | $ | (3,944 | ) | $ | 1,152 | ||
Net cash used in investing activities | (1,629 | ) | (5,959 | ) | |||
Net cash provided by financing activities | 620 | 86 | |||||
Foreign currency effect on cash | $ | (805 | ) | $ | 342 | ||
Net decrease in cash and cash equivalents | $ | (5,758 | ) | $ | (4,379 | ) |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Maturing in | |||||||||||||||||||
Three months or less | Three months to one year | Greater than one year | Total | Fair Value | |||||||||||||||
(In thousands) | |||||||||||||||||||
Included in short-term investments | $ | 3,681 | $ | 28,252 | — | $ | 31,933 | $ | 31,933 | ||||||||||
Weighted average interest rate | 1.23 | % | 1.14 | % | — | ||||||||||||||
Included in marketable securities | — | — | $ | 64,548 | $ | 64,548 | $ | 64,548 | |||||||||||
Weighted average interest rate | — | — | 1.05 | % |
Unrealized gain given a decrease in interest rate of X bps | Fair value as of October 2, 2011 (In thousands) | Unrealized loss given an increase in interest rate of X bps | ||||||
(100 bps) | (50 bps) | 100 bps | 50 bps | |||||
$1,215 | $604 | $96,481 | $(1,185) | $(595) |
Item 4. | Controls and Procedures |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds – Not applicable |
Item 3. | Defaults Upon Senior Securities – Not applicable |
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
Item 6. | Exhibits |
(a) | Exhibits: |
Incorporated by Reference | |||||||||||
Exhibit Number | Description of Document | Form | Filing Date | Number | Filed Herewith | ||||||
10.1 | Resignation Agreement and General Release of Claims, dated September 13, 2011, between Extreme Networks, Inc. and Justin DiMacchia. | 8-K | 9/15/2011 | 10.1 | |||||||
10.2 | Letter Agreement, dated September 13, 2011, between Extreme Networks, Inc. and James Judson. | 8-K | 9/15/2011 | 10.2 | |||||||
10.3 | Offer Letter Agreement, dated September 13, 2011, between Extreme Networks, Inc. and Margaret Echerd. | 8-K | 9/15/2011 | 10.3 | |||||||
31.1 | Section 302 Certification of Chief Executive Officer | X | |||||||||
31.2 | Section 302 Certification of Interim Chief Financial Officer | X | |||||||||
32.1 | Section 906 Certification of Chief Executive Officer | X | |||||||||
32.2 | Section 906 Certification of Interim Chief Financial Officer | X | |||||||||
101.INS | XBRL Instance Document.* | ||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document.* | ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.* | ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document.* | ||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.* | ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | ||||||||||
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended; are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended; and otherwise are not subject to liability under these sections. |
EXTREME NETWORKS, INC. (Registrant) |
/S/ JAMES T. JUDSON |
JAMES T. JUDSON |
Interim Vice President and Chief Financial Officer |
1. | I have reviewed this Form 10-Q of Extreme Networks, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: | November 10, 2011 | /s/ OSCAR RODRIGUEZ | |
Oscar Rodriguez | |||
President and Chief Executive Officer |
1. | I have reviewed this Form 10-Q of Extreme Networks, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: | November 10, 2011 | /s/ JAMES T. JUDSON | |
James T. Judson | |||
Interim Chief Financial Officer |
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ OSCAR RODRIGUEZ | |
Oscar Rodriguez | |
President and Chief Executive Officer | |
November 10, 2011 |
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ JAMES T. JUDSON | |
James T. Judson | |
Interim Chief Financial Officer | |
November 10, 2011 |
Condensed Consolidated Balance Sheets (unaudited) (Parentheticals) (USD $) In Thousands, except Share data | Oct. 02, 2011 | Jul. 03, 2011 |
---|---|---|
Assets: | ||
Allowance for doubtful accounts | $ 1,131 | $ 1,412 |
Stockholders' equity: | ||
Convertible preferred stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
Convertible preferred stock, shares authorized (in shares) | 2,000,000 | 2,000,000 |
Convertible preferred stock, shares issued (in shares) | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
Common stock, shares authorized (in shares) | 750,000,000 | 750,000,000 |
Common stock, shares issued (in shares) | 132,512,444 | 132,147,451 |
Common stock, shares outstanding (in shares) | 92,887,139 | 92,522,146 |
Treasury stock (in shares) | 39,625,305 | 39,625,305 |
Document and Entity Information | 3 Months Ended | |
---|---|---|
Oct. 02, 2011 | Oct. 31, 2011 | |
Document Information [Line Items] | ||
Entity Registrant Name | EXTREME NETWORKS INC | |
Entity Central Index Key | 0001078271 | |
Current Fiscal Year End Date | --06-30 | |
Entity Filer Category | Accelerated Filer | |
Document Type | 10-Q | |
Document Period End Date | Oct. 02, 2011 | |
Document Fiscal Year Focus | 2012 | |
Document Fiscal Period Focus | Q1 | |
Amendment Flag | false | |
Entity Common Stock, Shares Outstanding | 93,055,019 |
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Restructuring Liablities | 3 Months Ended | ||||||||||||||||||||||||||||||||
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Oct. 02, 2011 | |||||||||||||||||||||||||||||||||
Restructuring and Related Activities [Abstract] | |||||||||||||||||||||||||||||||||
Restructuring Liabilities | Restructuring Liabilities In fiscal 2011, the Company implemented restructuring plans, involving among other things, a reduction of its worldwide workforce. The associated restructuring costs consisted of cash severance, termination benefits, and asset impairments. Termination benefits include outplacement services, health insurance coverage, and legal costs. Asset impairments include adjustments to the cost basis of certain long-lived assets. During the three months ended October 2, 2011, the Company recognized additional restructuring charges of approximately $1.0 million, consisting of cash severance. The Company did not have restructuring charges during the three months ended September 26, 2010. Activity with respect to restructuring liabilities during the three months ended October 2, 2011 is as follows (in thousands):
|
Commitments, Contingencies and Leases | 3 Months Ended |
---|---|
Oct. 02, 2011 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments, Contingencies and Leases | Commitments, Contingencies and Leases Purchase Commitments The Company currently has arrangements with contract manufacturers and suppliers for the manufacture of its products. The arrangements allow them to procure long lead-time component inventory on the Company’s behalf based upon a rolling production forecast provided by it. The Company is obligated to the purchase of long lead-time component inventory that its contract manufacturer procures in accordance with the forecast, unless the Company gives notice of order cancellation outside of applicable component lead-times. As of October 2, 2011, the Company had non-cancelable commitments to purchase approximately $26.3 million of such inventory. Legal Proceedings The Company may from time to time be party to litigation arising in the course of its business, including, without limitation, allegations relating to commercial transactions, business relationships or intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict. Intellectual Property Litigation On April 20, 2007, the Company filed suit against Enterasys Networks in the United States District Court for the Western District of Wisconsin, Civil Action No. 07-C-0229-C. The complaint alleged willful infringement of U.S. Patents Nos. 6,104,700, 6,678,248, and 6,859,438, and sought injunctive relief against Enterasys' continuing sale of infringing goods and monetary damages. Enterasys responded to the complaint on May 30, 2007, and also filed counterclaims alleging infringement of three U.S. patents owned by Enterasys. On April 9, 2008, the Court dismissed Enterasys' counterclaims on one of its patents with prejudice. On May 5, 2008, the Court granted the Company's motion for summary judgment, finding that it does not infringe Enterasys' two remaining patents and dismissing all of Enterasys' remaining counterclaims with prejudice. On May 30, 2008, a jury found that Enterasys infringed all three of the Company's patents and awarded it damages in the amount of $0.2 million. The Court also ruled in the Company's favor on Enterasys' challenge to the validity of the Company's patents. On October 29, 2008, the Court denied Enterasys' post-trial motion for judgment as a matter of law, and granted Extreme Network's motion for a permanent injunction against Enterasys. The injunction order permanently enjoins Enterasys from manufacturing, using, offering to sell, selling in the U.S. and importing into the U.S. the Enterasys products accused of infringing Extreme Network's three patents. On March 16, 2009, the Court also denied Enterasys' motion for a new trial, but granted Enterasys' motion for a stay of the injunction pending appeal. On April 17, 2009, Enterasys filed its notice of appeal and on May 1, 2009, the Company filed its cross appeal. On September 30, 2010, the U.S. Court of Appeals for the Federal Circuit upheld the jury verdict of infringement by Enterasys of the Company's patents and the Districts Court's summary judgment of non-infringement by the Company of Enterasys' '727 patent. The Federal Circuit reversed the judgment of non-infringement by the Company of Enterasys '181 patent, holding that the District Court Judge applied an incorrect claim construction and reversed the District Court's denial of the Company's request for attorneys' fees as premature. See Note 11 regarding recent developments related to this lawsuit. On June 21, 2005, Enterasys filed suit against Extreme and Foundry Networks, Inc. (“Foundry”) in the United States District Court for the District of Massachusetts, Civil Action No. 05-11298 DPW. The complaint alleges willful infringement of U.S. Patent Nos. 5,251,205; 5,390,173; 6,128,665; 6,147,995; 6,539,022; and 6,560,236, and seeks: a) a judgment that the Company willfully infringes each of the patents; (b) a permanent injunction from infringement, inducement of infringement and contributory infringement of each of the six patents; (c) damages and a “reasonable royalty” to be determined at trial; (d) treble damages; (e) attorneys' fees, costs and interest; and (f) equitable relief at the Court's discretion. Petitions for reexamination were filed challenging five of the patents at issue to the U.S. Patent and Trademark Office, and a stay of the case was entered. Following the reexamination proceedings, Enterasys withdrew its allegations of infringement as to two of the patents, U.S. Patent Nos. 6,539,022 and 6,560,236. The stay was lifted on May 21, 2010, and the Court held claim construction hearings in December 2010. Fact discovery is ongoing. No trial date has been set. The Company intends to defend the lawsuit vigorously, but, due to the inherent uncertainties of litigation, it cannot predict the ultimate outcome of the matter at this time. Other Legal Matters Beginning on July 6, 2001, purported securities fraud class action complaints were filed in the United States District Court for the Southern District of New York. The cases were consolidated and the litigation is now captioned as In re Extreme Networks, Inc. Initial Public Offering Securities Litigation, Civ. No. 01-6143 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The operative amended complaint names us as defendants; six of the Company's present and former officers and/or directors, including its former CEO; and several investment banking firms that served as underwriters of its initial public offering and October 1999 secondary offering. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. Similar allegations were made in other lawsuits challenging over 300 other initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. The parties to the lawsuits have reached a settlement, which was approved by the Court on October 6, 2009. Extreme Networks is not required to make any cash payments in the settlement. The Court subsequently entered a final judgment of dismissal. Certain objectors have appealed the judgment. Subsequently, the District Court ruled that all objectors lacked standing to appeal. One of the objectors has appealed that ruling. If the appeal is successful, the Company intends to defend the lawsuit vigorously, but, due to the inherent uncertainties of litigation, it cannot predict the ultimate outcome of the matter at this time. Indemnification Obligations Subject to certain limitations, the Company may be obligated to indemnify its current and former directors, officers and employees. These obligations arise under the terms of its certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify, where applicable, generally means that the Company is required to pay or reimburse, and in certain circumstances the Company has paid or reimbursed, the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. It is not possible to estimate the maximum potential amount under these indemnification agreements due to the limited history of these claims. The cost to defend the Company and the named individuals could have a material adverse effect on its consolidated financial position, results of operations and cash flows in the future. Recovery of such costs under its directors and officers insurance coverage is uncertain. |
Disclosure about Segments of an Enterprise and Geographic Areas | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 02, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segments, Geographical Areas [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disclosure about Segments of an Enterprise and Geographic Areas | Disclosure about Segments of an Enterprise and Geographic Areas Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers with respect to the allocation of resources and performance. The Company operates in one segment, the development and marketing of network infrastructure equipment. The Company conducts business globally and is managed geographically. Revenue is attributed to a geographical area based on the location of the customers. The Company operates in three geographical areas: Americas, which includes the United States, Canada, Mexico, Central America and South America; EMEA, which includes Europe, Middle East and Africa; and APAC which includes Asia Pacific, South Asia and Japan. Prior to the first quarter of fiscal 2012, South America was included as part of EMEA. Revenue by geographical area (as presented in the table below) for the quarter ended September 26, 2010 has been adjusted to reflect this change. Information regarding geographic areas is as follows (in thousands):
Three customers accounted for greater than 10% of the Company’s revenue in the three months ended October 2, 2011. Two customers accounted for greater than 10% of the Company’s revenue in the three months ended September 26, 2010. Substantially all of the Company’s assets as of October 2, 2011 and September 26, 2010 were attributable to its Americas operations. |
Proposed Sale of Corporate Campus | 3 Months Ended |
---|---|
Oct. 02, 2011 | |
Reorganizations [Abstract] | |
Proposed Sale of Corporate Campus | Proposed Sale of Corporate Campus On September 23, 2010, the Company entered into an Option Agreement with Trumark Companies LLC (“Trumark”) in which the Company granted Trumark an option (the “Option”) to purchase half of its corporate headquarters campus (approximately eight acres) in Santa Clara, California, at a price of $24.0 million. Trumark made the first option payment of $0.5 million during the third quarter of fiscal 2011 and the second option payment of $0.5 million during the fourth quarter of fiscal 2011. These option payments are classified as a long term deferred gain on the sale of the building. Provided that Trumark continues to makes the required Option payments, Trumark will have sixteen months to exercise the Option. If Trumark exercises the Option, the closing on the purchase of half of the corporate headquarters campus will occur thirty days after such exercise. Exercise of the Option is contingent upon the successful rezoning of the property for residential development and other requirements of the City of Santa Clara which are expected to be completed within 9 to 12 months. The Company continues to classify all of its corporate headquarters campus as an asset held for use until the purchase contingencies have been eliminated and it is probable that the sale will be concluded within 12 months. |
Foreign Exchange Forward Contracts | 3 Months Ended |
---|---|
Oct. 02, 2011 | |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Foreign Exchange Forward Contracts | Foreign Exchange Forward Contracts The Company uses derivative financial instruments to manage exposures to foreign currency. The Company’s objective for holding derivatives is to use the most effective methods to minimize the impact of these exposures. The Company does not enter into derivatives for speculative or trading purposes. The Company records all derivatives on the balance sheet as Other Assets, Net at fair value. Changes in the fair value of derivatives are recognized in earnings as Other Income (Expense). The Company enters into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the foreign currency forecasted transactions related to certain operating expenses and remeasurement of certain assets and liabilities denominated in Japanese Yen, the Euro, the Swedish Krona, the Indian Rupee and the British Pound. These derivatives do not qualify as hedges. At October 2, 2011, these forward foreign currency contracts had a notional principal amount of $16.6 million and unrealized losses on foreign exchange contracts were $0.3 million. These contracts have maturities of less than 60 days. Changes in the fair value of these foreign exchange forward contracts are offset largely by remeasurement of the underlying assets and liabilities. Foreign currency transaction gains and losses were an immaterial gain for the three months ended October 2, 2011, and a $0.3 million loss for the three months ended September 26, 2010. |
Summary of Significant Accounting Policies | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated financial statements of Extreme Networks, Inc. (referred to as the “Company” or “Extreme Networks”) included herein have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations. The condensed consolidated balance sheet at July 3, 2011 was derived from audited financial statements as of that date but does not include all disclosures required by generally accepted accounting principles for complete financial statements. These interim financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2011. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and cash flows for the interim periods presented and the financial condition of Extreme Networks at October 2, 2011. The results of operations for the three months ended October 2, 2011 are not necessarily indicative of the results that may be expected for fiscal 2012 or any future periods. Reclassification The Company revised its previously reported Balance Sheet as of September 26, 2010 to reclassify approximately $3.0 million to “Cash and Cash Equivalents” that was previously reported as a reduction of “Accrued Compensation and Benefits”. As a result, as of September 26, 2010, cash and cash equivalents was revised to $47.6 million (previously reported as $44.6 million), and accrued compensation and benefits was revised to $15.8 million (previously reported as $12.8 million). In addition, the Company revised its previously reported Statement of Cash Flows for the three-month period ended September 26, 2010, to reclassify (i) accrued interest income and amortization related to its investments totaling $0.3 million, resulting in an increase in cash flows provided by operating activities and increase in cash flows used in investing activities, and (ii) unrealized gain of $0.3 million related to the translation of cash and investments held at its foreign subsidiaries, resulting in a decrease in cash flows provided by operating activities. The Company also made other conforming changes to the Statement of Cash Flows for the three months ended September 26, 2010. These revisions had no effect on previously reported Statements of Operations or Stockholders' Equity and were not material to the Company's financial statements taken as a whole. Revenue Recognition The Company derives the majority of its revenue from sales of its networking equipment and from service fees related to maintenance service contracts, professional services, and training for its products. The Company generally recognizes product revenue from its value-added resellers, non-stocking distributors and end-user customers at the time of shipment, provided that persuasive evidence of an arrangement exists, delivery has occurred, the price of the product is fixed or determinable, and collection of the sales proceeds is reasonably assured. In instances where the criteria for revenue recognition are not met, revenue is deferred until all criteria have been met. Revenue from service obligations under service contracts is deferred and recognized on a straight-line basis over the contractual service period. Service contracts typically range from one to two years. The Company makes certain sales to partners in two distribution channels, or tiers. The first tier consists of a limited number of independent distributors that stock its products and sell primarily to resellers. The Company defers recognition of revenue on all sales to its stocking distributors until the distributors sell the product, as evidenced by monthly “sales-out” reports that the distributors provide. The Company grants these distributors the right to return a portion of unsold inventory for the purpose of stock rotation and certain price protection rights. The distributor-related deferred revenue and receivables are adjusted at the time of the stock rotation return or price reduction. The Company also provides distributors with credits for changes in selling prices based on competitive conditions, and allows distributors to participate in cooperative marketing programs. The Company maintains estimated accruals and allowances for these exposures based upon its historical experience. In connection with cooperative advertising programs, the Company does not meet the criteria for recognizing the expenses as marketing expenses and accordingly, the costs are recorded as a reduction to revenue in the same period that the related revenue is recorded. The second tier of the distribution channel consists of a large number of third-party value-added resellers that sell directly to end-users. For product sales to value-added resellers, the Company does not grant return privileges, except for defective products during the warranty period, nor does the Company grant pricing credits. Accordingly, the Company recognizes revenue upon transfer of title and risk of loss to the value-added reseller, which is generally upon shipment. The Company reduces product revenue for cooperative marketing activities that may occur under contractual arrangements with its resellers. The Company's networking products are tangible products that contain software and non-software components that function together to deliver the tangible product's essential functionality. Therefore, pursuant to accounting standards for multiple-element revenue arrangements, for transactions initiated on or after the beginning of its fiscal year 2011, the Company allocates the total arrangement consideration to each separable element of an arrangement based on the relative selling price of each element. Under the accounting standards for multiple-element revenue arrangements, when the Company's sales arrangements contain multiple elements, such as products, software licenses, maintenance agreements, and/or professional services, the Company determines the standalone selling price for each element based on a selling price hierarchy. Under the selling price hierarchy, the selling price for each deliverable is based on the Company's vendor-specific objective evidence (“VSOE”), which is determined by a substantial majority of the Company's historical standalone sales transactions for a product or service falling within a narrow range. If VSOE is not available due to a lack of standalone sales transactions or lack of pricing within a narrow range, then third party evidence (“TPE”), as determined by the standalone pricing of competitive vendor products in similar markets, is used, if available. TPE typically is difficult to establish due to the proprietary differences of competitive products and difficulty in obtaining reliable competitive standalone pricing information. When neither VSOE nor TPE is available, the Company determines its best estimate of standalone selling price (“ESP”) for a product or service and does so by considering several factors including, but not limited to, the 12-month historical median sales price, sales channels, geography, gross margin objectives, competitive product pricing, and product lifecycle. In consideration of all relevant pricing factors, the Company applies management judgment to determine the Company's best estimate of selling price through consultation with and formal approval by the Company's management for all products and services for which neither VSOE nor TPE is available. Generally the standalone selling price of services is determined using VSOE and the standalone selling price of other deliverables is determined by using ESP. The Company regularly reviews VSOE, TPE and ESP for all of its products and services and maintains internal controls over the establishment and updates of these estimates. Pursuant to software revenue recognition accounting standards, the Company continues to recognize revenue for software using the residual method for its sale of standalone software products, including software upgrades, and for the sale of software that is not essential to the functionality of the hardware with which it is sold. After allocation of the relative selling price to each element of the arrangement, the Company recognizes revenue in accordance with the Company's policies for product, software, and service revenue recognition. Available-for-Sale Securities The following is a summary of available-for-sale securities (in thousands):
The amortized cost and estimated fair value of available-for-sale investments in debt securities at October 2, 2011, by contractual maturity, were as follows (in thousands):
The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Investments with maturities of greater than three months, but less than one year at the balance sheet date are classified as Short Term Investments. Investments with maturities of greater than one year at balance sheet date are classified as Marketable Securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, the Company diversifies its investments by limiting its holdings with any individual issuer. Investments include available-for-sale investment-grade debt securities that the Company carries at fair value. The Company accumulates unrealized gains and losses on the Company’s available-for-sale debt securities, net of tax, in accumulated other comprehensive income in the stockholders’ equity section of its balance sheets. Such an unrealized gain or loss does not reduce net income for the applicable accounting period. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) the Company intends to sell the instrument, (2) it is more likely than not that the Company will be required to sell the instrument before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). If the Company intends to sell or it is more likely than not that the Company will be required to sell the available-for-sale debt instrument before recovery of its amortized cost basis, the Company recognizes an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period credit loss), the Company separates the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income. The following table presents the Company’s investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
The Company determines the basis of the cost of a security sold or the amount reclassified out of accumulated other comprehensive income into earnings using the specific identification method. During the three months ended October 2, 2011, realized gains or losses recognized on the sale of investments were not significant. As of October 2, 2011, there were twenty-nine out of fifty-five investment securities that had unrealized losses. The unrealized gains / (losses) on the Company’s investments were caused by interest rate fluctuations. Substantially all of the Company’s available-for-sale investments are investment grade government and corporate debt securities that have maturities of less than 3 years. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized costs. The Company does not have other-than-temporary impairment on its investment securities. Fair Value of Financial Instruments The Company recognizes certain financial instruments at fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is measured based on a fair value hierarchy following three levels of inputs, of which the first two are considered observable and the last unobservable:
The following table presents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis:
Level 2 investment valuations are based on inputs such as quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, and state, municipal and provincial obligations. As of July 3, 2011, the Company had no assets or liabilities classified within Level 3. Inventory, Net Inventory is stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company reduces the carrying value of inventory based on excess and obsolete inventories which are primarily determined by age of inventory and future demand forecasts. At the point of the 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 written down or obsolete inventory subsequently sold has not had a material impact on gross profit for any of the periods disclosed. Inventories at October 2, 2011 and July 3, 2011, respectively, were (in thousands):
Long-lived assets Long-lived assets include property and equipment, intangible assets, and service inventory which the Company holds to support customers who have purchased service contracts with a hardware replacement element. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of the long-lived assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. There was no impairment of long-lived assets during the three months ended October 2, 2011 and September 26, 2010. Intangible assets The following tables summarize the components of gross and net intangible asset balances (in thousands):
Amortization expense was $0.5 million for the three months ended October 2, 2011 and September 26, 2010. Amortization expense expected to be recorded for each of the next five years is as follows (in thousands):
Deferred Revenue, Net Deferred revenue, net represents amounts for (i) deferred services revenue (support arrangements, professional services and training), and (ii) deferred product revenue net of the related cost of revenues where the revenue recognition criteria have not been met related to sales by the Company to its resellers or directly to its end-customers. Product revenue includes shipments to end-users and value-add resellers. The following table summarizes deferred revenue, net at October 2, 2011 and July 3, 2011, respectively (in thousands):
The Company offers renewable support arrangements, including extended warranty contracts, to its customers that range generally from one to two years. Deferred support revenue is included within deferred revenue, net within the deferred services category above. The change in the Company’s deferred support revenue balance in relation to these arrangements was as follows (in thousands):
Deferred Distributors Revenue, Net of Deferred Cost of Sales to Distributors At the time of shipment to distributors, the Company records a trade receivable at the contractual discount to list selling price since there is a legally enforceable obligation from the distributor to pay it currently for product delivered, the Company relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and the Company records deferred revenue and deferred cost of sales in “Deferred distributors revenue, net of deferred cost of sales to distributors” in the liability section of its consolidated balance sheets. Deferred distributors revenue, net of deferred cost of sales to distributors effectively represents the gross margin on the sale to the distributor; however, the amount of gross margin the Company recognizes in future periods will frequently be less than the originally recorded deferred revenue, net of cost of sales to distributors as a result of price concessions negotiated at time of sell-through to end customers. The Company sells each item in its product catalog to all of its distributors worldwide at contractually discounted prices. However, distributors resell the Company’s products to end customers at a very broad range of individually negotiated price points based on customer, product, quantity, geography, competitive pricing, and other factors. The majority of the Company’s distributors’ resales are priced at a discount from list price. Often, under these circumstances, the Company remits back to the distributor a portion of their original purchase price after the resale transaction is completed. Thus, a portion of the deferred revenue balance represents a portion of distributors’ original purchase price that will be remitted back to the distributor in the future. The wide range and variability of negotiated price credits granted to distributors does not allow the Company to accurately estimate the portion of the balance in the deferred revenue that will be remitted to the distributors. Therefore, the Company does not reduce deferred revenue by anticipated future price credits; instead, price credits are typically recorded against deferred distributors revenue, net of deferred cost of sales to distributors when incurred, which is generally at the time the distributor sells the product. The following table summarizes deferred distributors revenue, net of cost of sales to distributors at October 2, 2011 and July 3, 2011, respectively (in thousands):
Guarantees and Product Warranties The following table summarizes the activity related to the Company’s product warranty liability during the three months ended October 2, 2011 and September 26, 2010, respectively (in thousands):
The Company’s standard hardware warranty period is typically 12 months from the date of shipment to end-users. For certain access products, the Company offers a lifetime hardware warranty commencing on the date of shipment from the Company and ending five years following the Company’s announcement of the end of sale of such product. Upon shipment of products to the Company’s 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 revenue 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. In the normal course of business to facilitate sales of the Company’s products, the Company indemnifies the Company’s resellers and end-user customers with respect to certain matters. The Company has agreed to hold the customer harmless against losses arising from a breach of intellectual property infringement or other claims made against certain parties. 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 the Company’s operating results or financial position. Other Accrued Liabilities The following are the components of other accrued liabilities (in thousands):
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