This is a little late, but better than never...
Overview:
· Revenue came in at $144.7M, up 21% QoQ, up 163% YoY. EPS of $0.11, up 86.1% YoY.
· Book to Bill remained well above 1.
· 50% of revenue comes outside US.
· Service Provider sales were flat sequentially and domestic sales showed very modest growth. Sales in Europe and Asia were robust.
· Over 500 Employees in Field Offices in 23 Countries, established reseller agreement with Ericsson. Currently, Tech Data is Extreme’s largest distributor with over 20M in sales this Q.
· Significant wins include 2 large global banks, Pentagon (enterprise), continued sales to Yipes (metro), Hyundai and Maxtor.
· Over 800k Layer 3 switches shipped in Q2, 2M Layer 3 switches installed in CY2000 and over 3M Layer 3 switches installed.
· During CY00, Extreme migrated entire product line to 2nd generation technology codenamed “Inferno” which increases performance 4x and number of ports even more.
· DSOs increased to 66 days, up from 56 days, due to large back-end loaded shipments caused by component shortages. Inventories declined from $59M to$51M.
· Gross margin increased to 51.8%, from 51.3% in 1QFY01, due to a rich sales mix. Modest price discounting due to some “desperate pricing” acts from competitors.
Technology
· On the ASIC/Core side, i2 that has more functionality, lower cost and higher performance. Additionally, i2 will not obsolete “Inferno”, instead extends the life of “Inferno” by providing an easy migration path to existing customers
· I2 addresses the service provider market, especially MAN, where it will support traffic shaping and differential services and will provide 10GbE and costs less since there is more integration.
· The company predicts that first shipments of “i2” will begin early 2HCY01.
· Another technology codenamed “Avalanche” allows for strategic use of network processors in enhancing core “Inferno” and other core platforms by allowing Extreme to implement both customer and market specific solutions.
· “Avalanche” will allow Extreme’s customer to deliver new IP Network Applications and functionality without the customer having to rebuild their infrastructure.
· Expected to be delivering 1HCY01 in for packet over SONET (POS) for OC3/12/48 connectivity for Extreme’s Black Diamond family.
· MPLS built on Avalanche blade and integrated with Inferno.
Acquisition of Optranet
· Extreme bought privately held “Optranet” in Jan 01 and helps Extreme’s vision of Ethernet Everywhere to include legacy WAN (T-1, DS-3) as well as first mile technologies, i.e. VDSL and was developing these technologies on Extreme’s Alpine platform.
· Optranet beneficial for three reasons: (1) Puts Extreme in Enterprise LAN/WAN routing space and allows Extreme to provide a single box solution to its customers., (2) Allows Extreme to extend MAN solution to include Legacy Telecom technology by integrating it over Ethernet, and (3) provides revolutionary new technology, “Ethernet in the 1st mile” utilizing VDSL and Alpine to deliver connectivity to customers over copper thus allowing Service Providers to provide true broadband to their customers.
Q2 Financials
· $144.7M, up 21% QoQ and 163% YoY, B2B was >>1.
· Customer lead-times under 4 weeks.
· Mgmt expects to grow above overall market growth for the Layer 3 switch market.
· Mgmt forecasts FY01 revenues of 615M-635M and FY02 revenues of 950M-1B.
· Gross margins increased QoQ from 51.5% to 51.8% largely due to the fact that Alpine product shipments increased, offsetting the increased shipments of lower margin Summit.
· Backlog of Summit products in Sept, filled in current Q. Port shipments increased over 40% this Q due to accelerating growth in Summit product line.
· ASPs down this quarter due to product mix shift.
· MGMT forecasts that GM should increase to 52-54% over next year.
· Revenue from products introduced over the last 12 months accounts for over 80% of Q2 revenue and all products are now based on the “Inferno” chipset. “Inferno” technology discussed above.
· Modular product line contributed to 44% of Q2 revenue. Company expects modular revenues to contribute to over 50% over revenues for the year.
· Direct business contributed to 21% of revenue; no customer contributes to greater than 10% of revenue.
· Distributor Tech Data accelerated contribution. Currently is 14% of revenue.
· Company received 43% of revenues from North America, 31% of revenues from Asia Pacific and 26% of revenues from Europe. Currently 57% of revenues are International.
· R&D expense to be 10-12% of revenues; S&M expense to be 22-24% of revenues, G&A to be low to mid 3% of revenues and declining. Management expects operating margins of 15-17%.
Balance Sheet Items
· Ended Q2 with cash and investments of $276M, up $10M from previous Q.
· DSOs were up from prior Q to 66 days. Increase in DSO was attributed to shipment linearity due to Summit line and Increase in revenues from overseas.
· Management predicts DSOs will move down to around 50 days in the next couple of Qs.
· Inventory down to $51M down QoQ. Inventory levels will vary QoQ, while Inventory turns will continue to increase.
· Added 132 employees this Q, total headcount 924, annualized revenue/employee increased to 626k up 26k QoQ.
· Optranet acquisition will close in Q3, Extreme will take an In Process R&D charge to be determined later. Extreme will issued approximately 2M common stock and stock options.
Question and Answer
What percentage of revenues will Metro have compared to Enterprise one year out?
Difficult to predict. Company seeks balance in business. Currently, majority of business comes from Enterprise. Company not sure what % of revenues will come from MAN, however, Company foresee strong growth in Metro as well as Service Providers, such as hosting. Company has high hopes for Metro but no specific percentage goal for Metro.
What was the percentage of revenues for Gb Ethernet in Q2?
Gb Ethernet contributed to 46% of total revenues.
Who are your closest competitors in high speed switching and which products do you compete with by company?
Extreme competes against Cisco’s 6509 with Extreme’s Black Diamond 6808.
Extreme’s Black diamond 6808 provides:
· Higher density at Gb speeds, much higher density at 10/100
· Much better performance.
· Provides simpler architecture.
Competition with Cisco goes beyond product-by-product and specification-by-specification basis. Extreme can deliver and end-to-end solution in the Enterprise, Metro or Service Provider markets based on Ethernet and same architecture, provisioning and management software. The same architecture, provisioning and management software provides a much simpler network to operate compared to Cisco since to implement a Cisco solution; a provider would have to purchase products over many different product lines. Extreme is very confidant that the Black Diamond 6808 and 6816 will be able to support 10Gb speeds.
How do your Next generation products compare to Cisco?
In a few months, Extreme plans to ship the Black Diamond 6816, which provides double the capacity of the existing Black Diamond 6808.
What is the company seeing in the Enterprise and Service Provider markets and what is the breakout of those two segments?
Historically, Service Providers are approximately 25-35% of revenues. In Q2, Service Providers were at the low end of those numbers. Currently seeing strength in enterprise. With respect to Service Providers, Extreme has won a number of hosting deals in this Quarter and continues to see strength.
Extreme continues to deploy to Metro customers and continues to win contracts in the Metro markets.
Current, North America’s revenue was up 5% sequentially, will that pick up?
North America (US) grew slower than the rest of the world during Q2. Management expects U.S. to pick up in Q3.
Would you expect Service Providers to pick up in Q3, or further out?
Management believes that Extreme has an incredible product line to address markets and believes that overall business to grow across all business lines. Furthermore, Extreme expects increased growth and strength in the Service Provider areas, however wants to keep Extreme balanced.
Any reason for spike in deferred revenues?
No reason other than timing of shipments in and out of Tech Data and increases in services revenues. Extreme has booked new service contracts where the revenue from each contract is spread out over 12 months, therefore deferred revenue will go up.
What enhancements to product portfolio are necessary to “light” up metro markets.
Extreme infrastructure allows a Service Provider to build out and build up a network quickly delivering Gb Ethernet over dark fiber. One “hole” in the technology is when there is no fiber in the ground. Extreme has filled this hold with the acquisition of Optranet. Extreme expects to ship Alpine Platform with Legacy Telco technology (T-1, DS-3, VDSL) in 1HCY01.
How important is adding routing protocols?
Extreme has deployed OSPF, BPG4 among Service Provider customers and is happy with results. Extreme continues to enhance traffic management and traffic shaping software technology. Additionally, Extreme will be deploying MPLS under the Avalanche Platform sometime this CY. Company believes that it is Industry leader of protocols in Ethernet Environment.
When will Extreme be able to deliver a standardized Gb Ethernet product?
Depends on the availability of optical components. Management believes that a standard GbE product should be delivered by midyear.
What do you see as the competitive pricing environment in the Enterprise market and how will you defend?
Extreme feels that it is a reasonable environment, however, some competitors used “desperate acts” which lowered spot pricing. Management is confident of pricing structure since their investments of integrating technologies decrease costs. Additionally, management notes that Extreme’s prices are considerably lower than competition, thus competition has to discount greater.
What is the status update of the OC-3 and OC-12 line interfaces? Black Diamond 6816?
Extreme was hoping for Q2 however hampered by component shortages. The line interfaces has passed trials and management expects to ship a “reasonable” volume of OC-3 and OC-12 line interfaces during Q3. This is the same for the Black Diamond 6816. Component shortages (i.e. circuit boards) delayed shipments. Management predicts to deliver in Q3.
What are the factors that will allow Gross Margins to improve?
Gross margins will continue to improve since company has high volumes of Inferno chipsets that drives down the costs of 10/100 and Gb E. Additionally, company’s “I2” technology allows the integration of several chips into one, thus reducing costs. Additionally, company expects higher margins in the Avalanche line of products and that the Alpine products which incorporate legacy telco technologies .
How close is product to standard?
Extreme’s products are based on a proprietary technology. In order to standardize, customers with existing Extreme gear must upgrade with a blade swap and expects this to happen mid year, depending on standards activity. Extreme has designed chips that will be standards compliant. Extreme rolled out proprietary gear in order to get in front of the curve.
Are Wavelength Division Multiplexing (WDM) blades being developed?
Current 10Gb products are based on WDM and use four optical channels to achieve this data rate.
Any inflection points in Q2 to suggest any change in Enterprise spending?
Extreme has seen strong wins from large companies who will be deploying Extreme’s technology. Companies will continue to invest to improve the infrastructure and Extreme is in a strong position when companies are cautious about spending since products are less expensive than competition.
What percentage of inventory is in Distribution Channels (DC)?
About 15-17% of inventory is in DC and increased QoQ. Tech Data is an important distributor to Extreme and wants to keep a high availability of Extreme’s products.
What are the assumptions for price decreases?
Extreme is assuming 30% price erosion each year.
Are layer 4-7 (switching/load balancing) gaining traction?
Every port delivered across Alpine and Black Diamond uses Layer 4.
What percentage of market share of 3com and Cabletron in the market?
3Com exited high speed switching business last march; Extreme doesn’t compete against 3Com. As for Cabletron, Cabletron is now a number of companies and there is confusion as to where they are focused. Extreme feels that Cabletron is loosing traction in large Accounts.
Can you elaborate on “Avalanche”? Is it a motherboard?
Avalanche is a core technology based on network processors. Extreme’s first product using “Avalanche” is a blade inserted into Extreme’s Black Diamond products.
Do you see a slowdown in spending?
Management maintains that they have a balanced business along the Service Provider and Enterprise markets, Geographies and Product Lines. Extreme is able to adjust mixes quickly to continue growth rate.
Shipments show a backend linearity, was the order Linearity the same?
Order linearity was much better. Extreme got behind on a single product and shipped late, but that problem has now been solved.
How will GMs be over 50%?
Modular book to bill was greater than Summit book to bill. Modular products have a higher GM, thus allowing the company to forecast higher GMs. |
