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Extreme Networks Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: February 5, 2009 08:05PM

Extreme Networks Inc. (EXTR) filed Quarterly Report for the period ended 2008-12-28. Extreme Networks Inc. is a leading provider of a next generation of switching solutions that meet the increasing needs of enterprise local area networks internet service providers and content providers. The key advantages of its Layer 3 switching solutions are increased performance the ability to easily grow in size as customer needs change flexible allocation of network resources ease of use and lower cost of ownership. These advantages are obtained through the use of custom semiconductors known as ASICs in its products and through hardware and software designs. Extreme Networks Inc. has a market cap of $137.99 million; its shares were traded at around $2.03 with a P/E ratio of 25.6 and P/S ratio of 0.38.

Highlight of Business Operations:

In the second quarter of fiscal 2009, APAC revenues were $11.9 million, a decrease of $4.4 million or 27% from second quarter of fiscal 2008. Product revenues decreased $4.2 million or 29% and service revenue decreased $0.2 million or 14% compared to a year ago quarter. In the first six months of fiscal 2009, APAC revenues were $24.2 million which represented a decrease $8.6 million or 26% from the first six months of fiscal 2008. Product revenues decreased $8.0 million or 28% and service revenue decreased $0.6 million or 15%. We believe the decrease in APAC revenues compared to the second quarter of fiscal 2008 and the first six months of fiscal 2008 was primarily driven by our execution, as opposed to the broader economic climate. We are in the process of building the management team and partner relationships in the region.

Product gross profit in the second quarter of fiscal 2009 was $41.2 million, representing a decrease of $5.2 million or 11% from the second quarter of fiscal 2008. As a percentage of revenue, product gross profit decreased three percentage points. The decrease in product gross profit was primarily driven by a decrease in revenue of $4.9 million due to lower product volume, product mix and competitive pricing, an increase in distribution costs of $0.5 million, offset by a decrease in warranty costs of $0.4 million due to improvements in quality and a decrease in our estimated future warranty costs. Product gross profit for the first six months of fiscal 2009 was $85.4 million, a decrease of $3.9 million or 4% from $89.3 million in the first six months of fiscal 2008. The decrease in product gross profit was primarily due to lower product volume, product mix and competitive pricing, offset by lower warranty costs of $0.6 million, a decrease in excess and obsolescence cost of $0.6 million due to improved inventory management and favorable other manufacturing costs of $0.2 million.

Our cost of service revenue consists primarily of labor, overhead, repair and freight costs and the cost of spares used in providing support under customer service contracts. Service gross profit was $7.5 million in the second quarter of fiscal 2009, an increase of $0.9 million or 14% from $6.6 million in the second quarter of fiscal 2008. The improvement of service gross profit in the second quarter of fiscal 2009 was primarily due to the change in the amortization of our spares inventory of $0.6 million, a decrease in service overhead spending of $0.4 million due to the decrease of our variable compensation expense and spending controls. Service gross profit was $14.7 million for the first six months of fiscal 2009 and increase of $1.9 million or 15% from $12.8 million in the first six months of fiscal 2008. The increase in service gross profit is primarily the result of the reduction in customer specific warranty programs of $0.9 million, the change in the amortization of spares inventory of $0.4 million, a decrease in service overhead spending of $0.3 million due to the decrease of our variable compensation expense and spending controls.

Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well as trade shows and promotional expenses. Sales and marketing expenses increased to $25.8 million for the second quarter of fiscal 2009 from $25.1 million for the second quarter of fiscal 2008, an increase of $0.7 million, or 3%. This increase was primarily due to an increase in general marketing and sales expenses of $1.0 million, an increase of $0.2 million related to the launch of new products, an increase in contract labor of $0.2 million, offset by a decrease in salaries and benefits of $0.5 million due to decrease in our variable compensation expense, and lower sales commissions of $0.2 million. Marketing and sales expenses increased to $51.6 million for the first six months of fiscal 2009 from $49.6 million, an increase of $2.0 million or 4%. The increase was primarily due to an increase in general marketing and sales expenses of $1.2 million, an increase in marketing program expenses of $0.2 million, an increase in salaries and benefits of $0.6 million due to increased headcount, and an increase in recruiting expenses of $0.2 million, offset by a decrease in variable compensation expense of $0.6 million.

Research and development expenses consist principally of salaries and related personnel expenses, consultant fees and prototype expenses related to the design, development and testing of our products. Research and development expenses decreased to $13.9 million for the second quarter of fiscal 2009 from $17.1 million for the second quarter of fiscal 2008, a decrease of $3.2 million or 19%. The decrease was primarily due to a decrease in salaries and benefits of $2.5 million due to a decrease in our variable compensation expense, a reduction in project spending of $0.4 million, and the completion of the warrant amortization of $0.2 million in fiscal 2009. Research and development expenses decreased to $30.5 million for the first six months of fiscal 2009 from $33.6 million, a decrease of $3.1 million or 9%. The decrease was primarily due to a decrease in salaries and benefits of $1.5 million due to a decrease in our variable compensation expense, completion of warrant amortization of $1.0 million, lower project spending of $0.5 million and a reduction in stock based compensation expense of $0.2 million. We expense all research and development costs as incurred.

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, legal fees, professional fees and other general corporate expenses. General and administrative expenses decreased to $7.4 million for the second quarter of fiscal 2009 from $8.6 million for the second quarter of fiscal 2008, a decrease of $1.2 million, or 14%. This decrease was primarily due to a decrease in our variable compensation expense of $0.9 million and a decrease of stock based compensation of $0.2 million. General and administrative expenses increased to $15.8 million for the first six months of fiscal 2009 from $15.1 million for the first six months of fiscal 2008, an increase of $0.7 million or 5%. The increase was primarily due to an increase in professional fees of $1.3 million, an increase in litigation costs of $0.4 million, offset by a reduction in salaries and benefits of $0.3 million primarily due to the decrease in our variable compensation expense, a decrease in bad debt expense of $0.2 million, and a reduction in stock based compensation expense of $0.3 million.

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