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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2002
OR
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¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
.
Commission file number 000-25711
Extreme Networks, Inc.
(Exact name of Registrant as specified in its charter)
| Delaware |
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77-0430270 |
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| (State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer Identification
No.) |
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| 3585 Monroe Street Santa
Clara, California |
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95051 |
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| (Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: (408) 579-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $1,077,559,564 as of September 6, 2002, based upon the closing price on the Nasdaq National Market reported for such date.
This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.
115,370,403 shares of the Registrant’s Common stock, $.001 par value, were outstanding September 6, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant’s Definitive Proxy Statement to be issued in conjunction with the Registrant’s 2002 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the Registrant’s
fiscal year ended June 30, 2002.
FORM 10-K
INDEX
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3 |
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18 |
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18 |
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18 |
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46 |
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48 |
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77 |
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78 |
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78 |
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78 |
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78 |
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79 |
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83 |
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84 |
2
FORWARD LOOKING STATEMENTS
This annual report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995,
particularly statements relating to our expectations for the first quarter of fiscal 2003, our expectations regarding results of operations, product demand and revenue, cash flows, product gross margins, our expectations to continue to develop new
products and enhance existing products, our expectations regarding the amount of research and development expenses, our expectations relating to selling, general and administrative expenses, our efforts to achieve additional operating efficiencies
and to review and improve our business systems and cost structure, our expectations to continue investing in technology, resources and infrastructure, our expectations concerning the availability of products from suppliers and contract
manufacturers, anticipated product costs and sales prices, our expected effective income tax rate, our expectations that we have sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding the
rationalization of our workforce and facilities, and our expectations regarding materials and inventory management. These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained
in the section entitled “Risk Factors” identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution investors that actual results may differ
materially from those projected in the forward-looking statements as a result of certain risk factors identified in this Form 10-K and other filings we have made with the Securities and Exchange Commission. More information about potential factors
that could affect our business and financial results is set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
Extreme Networks, Inc., together with its subsidiaries, (collectively referred to as Extreme or the Company and as we, us and
our) is a leading provider of network infrastructure equipment for corporate, government, education and health care enterprises and metropolitan service providers. We were established in 1996 to address the issues caused by slow and expensive
legacy networks. We set out to change the industry by replacing complex software-based routers with simple, fast, highly intelligent, hardware-based switches. The broad acceptance of this innovative, simplified approach to networking has enabled us
to become an industry leader. Our ultimate goal is to realize our technology vision of Ethernet Everywhere — a unifying network strategy that uses proven Ethernet technology to simplify each element of the network. We believe our Ethernet
Everywhere vision is the foundation for a future of easily deployable, highly scalable, comprehensively managed, ubiquitous bandwidth for networks, applications and users.
Our family of switching products provides significant performance improvements compared to legacy infrastructures, while enabling greater network flexibility and scalability, ease of use and a lower
cost of ownership.
We have achieved these advantages by utilizing application specific integrated circuits, or ASICs, in our products
and by creating a common hardware, software and network management architecture for our products. In our products, the routing of network traffic, a function referred to as Layer 3 switching, is done primarily with our unique ASICs. ASICs provide
faster processing of data than the CPU/software implementations used in many conventional networking products. We believe that our ASIC-based designs can also provide a better price/performance ratio, resulting in a higher return on investment for
our customers. Since ASICs are built for specific purposes, a collection of ASICs, or chipset, allows for a lower cost structure with increased performance compared to other alternatives.
3
Industry Background
Businesses, governments, educational institutions and other organizations have become highly dependent on the Internet as their central communications infrastructure for providing connectivity for both
internal and external communications. New computing applications, such as enterprise resource planning, or ERP, customer relationship management, or CRM, large enterprise data warehouses and sophisticated online transaction and other e-business
applications, as well as the increased use of traditional applications such as e-mail and streaming media, require significant information technology resources for their support. The emergence of the desktop Internet browser as a standard user
interface has enabled bandwidth-intensive applications that integrate voice, video and data to be deployed extensively throughout organizations. The steady rise in application sophistication and the associated bandwidth load demands a fast, flexible
and scalable network infrastructure.
Networking environments can be segmented into local area networks, or LANs, wide area networks, or
WANs, and metropolitan area networks, or MANs.
LANs. LANs are traditional networks designed for connecting
users to many types of application servers, which may be held locally or remotely through either private WANs or through such systems as the Internet. The LAN consists of servers, clients, a network operating system and a communications link to
connect the LAN to other networks and to the Internet. The LAN market as Extreme participates consists primarily of large and medium-sized enterprise customers.
WANs. WANs are communication networks that span across large geographic areas, such as counties, states or countries.
The addition of WAN support to ASIC-based network switches permits Ethernet services to reach customers where integration with existing Synchronous Optical Network/Synchronous Digital Hierarchy, or
SONET/SDH, infrastructure is required.
The WAN market includes local exchange carriers, multiple tenant/dwelling unit service providers,
and Internet service providers, or ISPs, as primary customers, though an enterprise may also utilize a private WAN.
MANs. MANs are networks that link mid-sized geographic areas such as a city or an entire metropolitan area.
Due to wide deployment of Gigabit Ethernet, LANs have achieved geometric growth in bandwidth. Available bandwidth in WANs has also grown, as infrastructures are built out to accommodate the very rapid annual growth in
Internet traffic. The MAN has emerged as the key link between the LAN and the WAN.
In recent years, the MAN has become a critical and
dynamically evolving arena within the overall network infrastructure. In addition to steadily rising traffic load, the underlying network technologies, architectures and protocols are experiencing rapid change. The competitive landscape for MAN
service providers is shifting, with an influx of new carriers who do not necessarily depend upon legacy infrastructure technologies such as SONET/SDH.
The MAN market includes both metropolitan service providers and municipalities that utilize a private MAN to connect multiple public facilities, such as city hall, fire departments, road and vehicle maintenance facilities, hospitals
and emergency centers, social services and public libraries. The technologies and architectures associated with MANs are becoming popular within large and very large corporate enterprises, which can utilize private MANs to create a “super
campus” network, connecting facilities spread over a city-size area.
4
A network must be scalable in the following four dimensions:
Speed. Speed refers to the number of bits per second that can be transmitted across the network. Today’s network applications
increasingly require speeds of up to 100 Mbps to the desktop. Therefore, the backbone and server connections that aggregate traffic from desktops require speeds in excess of 100 Mbps. “Wire-speed” refers to the ability of a network device
to process an incoming data stream at the highest possible rate based on the full capability of the physical media, or wire without loss of packets. Wire-speed routing refers to the ability to perform Layer 3 switching at the maximum possible rate.
Bandwidth. Bandwidth refers to the volume of traffic that a network or a network device can handle before
traffic is “blocked,” or unable to get through without interruption. When traffic was more predictable, the amount of traffic across a network link or through a network device generally grew in line with the number of devices connected to
the network. With today’s data-intensive applications accessed in random patterns from both within and outside the core network, traffic can spike unpredictably, consuming significant bandwidth to the detriment of the network’s overall
performance.
Network size. Network size refers to the number of users and servers that are connected to a
network. Today’s networks must be capable of reliably connecting tens of thousands of users and servers while providing high performance and maximum application availability.
Quality of service. Quality of service refers to the ability to control the forwarding of traffic based upon its level of importance. Mission-critical enterprise
applications, such as voice-over-IP, or VOIP, require specific performance minimums, while traffic such as general e-mail and Internet surfing may not be as critical. In addition to basic standards-based prioritization of traffic according to
importance, enhanced quality of service also allocates bandwidth to specific applications based on a user-defined policy.
Opportunity
for Next Generation Switching Solutions
Several technology trends have enabled a new generation of networking equipment that can
meet the four scalability dimensions required by today’s enterprises and service providers and the bandwidth-intensive, mission-critical applications on which they depend.
While many different technologies have been deployed in the LAN environment over the past 25 years, Ethernet has become the overwhelmingly dominant LAN technology. According to the Dell’Oro Group,
an independent research organization, Ethernet is the technology used in over 99% of the LAN market in 2001 and over 800 million ports were shipped over the preceding ten-year period. Ethernet was evolved from its original 10 Mbps form
into 100 Mbps Fast Ethernet, 1,000 Mbps, or “Gigabit” Ethernet and 10,000 Mbps or 10 Gigabit Ethernet, which became available during 2002. Today, Ethernet is moving beyond the LAN; Gigabit Ethernet and 10 Gigabit Ethernet represent a
viable, high-capacity MAN backbone protocol, enabling broadband connections to be aggregated for transport across the core of the metropolitan network.
With the widespread adoption of Ethernet and Internet Protocol, or IP, networking technologies, the need to support a multi-transport, multi-protocol environment is diminishing. As a result, simplified routing functionality can be
embedded in fast, inexpensive ASICs to replace complex software/CPU designs used in conventional multi-protocol routers. The resulting device, called a Layer 3 switch, functions as a less expensive and significantly faster hardware-based router.
Layer 3 switches operate at multi-gigabit speeds and can support large networks. While Layer 3 switching dramatically increases network performance, many products fail to realize the potential of this technology as a result of inconsistent hardware,
software and management architectures.
Customers require a quality of service solution that supports both industry-standard
prioritization and user-defined quality of service that maps business processes and policies to network performance. In addition, to simplify the network, customers need a family of interoperable devices that utilize a consistent hardware, software
and management architecture.
5
The Extreme Networks Solution
We provide Ethernet networking solutions that meet the requirements of today’s enterprises and service providers by providing increased performance, scalability, policy-based quality of service,
simplicity of use and lower cost of ownership. Our products share a common hardware, software and network management architecture, are based on industry-standard routing and network management protocols and offer advanced policy-based quality of
service features. Our switches can be managed from any browser-equipped desktop PC or the Telnet applet supported in almost all operating systems. The Telnet applet allows access to the Command Line Interface, or CLI, which a system administrator
may prefer to use.
The key benefits of our solutions are:
Lower cost of ownership. Our products are generally less expensive than software-based routers, yet offer higher routing performance. We believe that by sharing a common
hardware, software and management architecture, our products can substantially reduce the cost and complexity of network management and administration. This uniform architecture creates a simpler network infrastructure that leverages the resources
businesses have invested in Ethernet/IP-based networks, thereby requiring fewer resources and time to maintain the network.
Simplicity. Networks typically consist of many different technologies and types of equipment. This complexity often makes it expensive and difficult to effectively manage and expand networks. We meet
these challenges by focusing on product consistency and simplicity. Our products share a common hardware, software and network management architecture and enable Layer 3 switching at wire-speed in each key area of the network. This allows customers
to build an integrated network environment that utilizes a consistent feature set, performance and management capabilities.
Ease of
use and implementation. Our products are designed to make networks easy to manage and administer, thereby reducing the overall cost of network ownership. Through the use of a standards-based design approach, our products
can be readily integrated into existing networks. Customers can usually upgrade to our products without the need for additional training. Moreover, our ExtremeWare operating system software simplifies network management with a consistent, robust
interface available in all product families.
High performance. Our products provide broadband Ethernet and
IP services with the non-blocking, wire-speed performance of an ASIC-based Layer 3 switching engine. With our switches, customers may achieve forwarding rates that are significantly faster than software-based routers.
Scalability. Our solutions offer customers the speed and bandwidth needed today — and the capability to scale their networks
to support demanding applications in the future — without the burden of additional training or software and system complexity. Customers who purchase standard Extreme products may later upgrade to advanced Layer 3 and Layer 4 features, such as
server load balancing or intermediate-to-intermediate system routing protocol, or ISIS, as this upgraded functionality is designed into our products.
Quality of service. Our policy-based quality of service enables customers to prioritize mission-critical applications. We provide industry-leading tools for allocating network resources to specific
applications. With our policy-based quality of service, customers can use a web-based interface to identify and control the forwarding of traffic from specific applications, in accordance with policies that the customers define. The quality of
service functionality of our ASICs allows policy-based quality of service to be performed at wire-speed. In addition to providing prioritization, customers can allocate specified amounts of bandwidth to specific applications or users.
6
The Extreme Networks Strategy
Our goal is to be the provider of the most effective applications and services infrastructure for large enterprises and service providers. We seek to provide our customers with a best-of-breed
alternative to single-sourced, highly proprietary networking equipment from larger competitors. Key elements of our strategy include:
Provide simple, easy to use, high-performance, cost-effective switching solutions. We offer customers easy to use, powerful, cost-effective switching solutions that meet the specific demands of
enterprises, and service and content providers. Our products provide customers with scalability from 10 Mbps Ethernet to 10 Gigabit Ethernet combined with the wire-speed, non-blocked routing of ASIC-based Layer 3 switching. We intend to
capitalize on our expertise in Ethernet, IP and hardware-based switching technologies to continuously develop new products that will meet the future requirements of a broad range of customers.
Expand market penetration. We continue to market our products to new customers in multiple market segments. The majority of our business is with enterprise
customers, including those in government, education and the health care sectors, in addition to large enterprises. Extreme has consistently focused on these markets since early in our history. Additionally, we aim to leverage our technology
development, service and support and business infrastructure resources to address the metropolitan Ethernet market. These customers include ISPs, content providers and MAN service providers. While currently most of our service provider and
MAN-related business is generated outside of the United States, we believe there is a long-term growth opportunity in the metropolitan Ethernet market on a worldwide basis. Once customers deploy our products in certain portions of their networks, we
offer products for other areas. As additional products are deployed, customers obtain the increased benefits of our solution by simplifying their networks, extending policy-based quality of service and reducing costs of ownership, while increasing
performance.
Extend switching technology leadership. Our technological leadership is based on proprietary
technology embedded in our ASICs, the ExtremeWare operating system and network management and software. We intend to invest our engineering resources in ASICs, software and other development areas to create leading-edge technologies that will
increase the performance and functionality of our products. We also intend to maintain our active role in industry standards committees such as the Institute for Electrical and Electronics Engineers, or IEEE, and the Internet Engineering Task Force,
or IETF.
Leverage and expand multiple distribution channels. We distribute our products through select
distributors and a large number of resellers. To quickly reach a broad, worldwide audience, we have more than 250 resellers in approximately 50 countries, including regional networking system resellers, network integrators and wholesale
distributors. We maintain a field sales force to support our resellers and to focus on select strategic accounts. We are continually developing and refining our two-tier distribution channel strategy.
Provide high-quality customer service and support. We seek to enhance customer satisfaction and build customer loyalty through
high-quality service and support. This includes a wide range of standard support programs that provide the level of service our customers require, from standard business hours to global 24-hour-a-day, 7-day-a-week, 365-day-a-year real-time response
support. We intend to continue to enhance the ease of use of our products, and to invest in additional support services by increasing staff and adding new support programs for our distributors and resellers. We are committed to providing
customer-driven product functionality through feedback from key prospects, consultants, channel partners and end-user customers.
Products
We deliver effective application and services infrastructure for enterprises and service providers based
on award-winning technology that combines simplicity, high performance, intelligence and a low cost of ownership. Our Layer 3 Summit, BlackDiamond and Alpine products share the same common hardware architecture and operating system, enabling
businesses to build a network infrastructure that is simple, easy to manage and scalable to meet the demands of future growth.
Extreme’s award-winning Inferno ASIC chipset is incorporated in all i-series products, including the BlackDiamond, Alpine and high-end Summit switches.
7
Our principal hardware and software products are as follows:
| Products |
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Configuration/Description |
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| Summit Stackable Product Family |
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| Summit1i Summit5i Summit7i Summit48i Summit48si Summit 24e3 Summit 24e2 |
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8 Gigabit Ethernet ports 16 Gigabit Ethernet ports 32 Gigabit Ethernet ports 48 10/100 Mbps Ethernet ports and 2 Dual-PHY Gigabit Ethernet ports 48 10/100 Mbps Ethernet ports and 2 Gigabit Ethernet ports 24 10/100 Mbps Ethernet ports and 2 Gigabit Ethernet
ports 24 10/100 Mbps Ethernet ports and 2 Gigabit Ethernet ports |
|
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| BlackDiamond Modular Chassis |
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| BlackDiamond 6804 |
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Up to 384 10/100 Mbps Ethernet ports, 48 Gigabit Ethernet ports, or four 10 Gigabit Ethernet ports in one chassis |
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6 slots to accommodate a variety of up to 4 connectivity modules and 2 management modules |
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| BlackDiamond 6808 |
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Up to 768 10/100 Mbps Ethernet ports, 96 Gigabit Ethernet ports, or eight 10 Gigabit Ethernet ports in one chassis |
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10 slots to accommodate a variety of up to 8 connectivity modules and 2 management modules |
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| BlackDiamond 6816 |
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Up to 1,536 Mbps Ethernet ports, 192 Gigabit Ethernet ports, or sixteen 10 Gigabit Ethernet ports in one chassis |
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20 slots to accommodate a variety of up to 16 connectivity modules and 4 management modules |
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| Alpine Modular Chassis |
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| Alpine 3802 |
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Up to 64 10/100 Mbps Ethernet ports or 8 Gigabit Ethernet ports in one chassis |
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3 slots to accommodate a variety of up to 2 connectivity modules and 1 WAN module. |
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| Alpine 3804 |
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Up to 128 10/100 Mbps Ethernet ports or 16 Gigabit Ethernet ports in one chassis |
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5 slots to accommodate a variety of up to 4 connectivity modules and 1 management module |
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| Alpine 3808 |
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Up to 256 10/100 Mbps Ethernet ports or 32 Gigabit Ethernet ports in one chassis |
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9 slots to accommodate a variety of up to 8 connectivity modules and 1 management module |
8
| Products |
|
Configuration/Description |
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| Application Switch |
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| SummitPx1 |
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A content-aware application switch to deliver Layer 4 ~ Layer 7 intelligence and consistent line-rate Gigabit Ethernet performance to Internet data centers,
massive web sites and large enterprises |
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| Software |
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| ExtremeWare |
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An embedded switch operating system featuring standard protocols, web-based configuration and policy-based quality of service. |
|
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| Infrastructure and Services Management (ISM) Software, including: |
|
Network management software that manages Layer 2 ~ Layer 7 application infrastructure |
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| EPICenter |
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An integrated application suite that simplifies configuration, troubleshooting and status monitoring of Extreme IP-based networks |
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| ISM Provision |
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An offline device configuration and service provisioning application offering middleware capabilities and industry-standard northbound application programming
interfaces, or APIs |
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| GlobalPx Content Director |
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A software based load balancer application that enables the deployment of multiple SummitPx1 units |
Summit Stackable Products
The Summit family of switches is designed to meet the demanding requirements of Enterprise and metropolitan-Ethernet-based applications. All inferno-chipset-based Summit switches share a
common switch architecture that provides scalability in four areas: speed, bandwidth, network size and policy-based quality of service. The Summit product family supports Gigabit and 10/100 Mbps aggregation for enterprise desktops and servers, large
Internet data centers, and broadband points of presence in MANs.
The Summit48i, Summit48si and the new Summit24e series switches allow
us to remain an industry leader in Layer 3 switching for the desktop. The Summit24e2 and Summit24e3 switches offer low entry costs for sophisticated Layer 2 and Layer 3 services, respectively, at the network edge. Additionally the Summit48i switch
delivers an aggregation switching solution with physical and logical access, security and user mobility features at the edge.
Other
members of the Summit product line address server-switching constraints by providing switched Gigabit Ethernet ports and 100 Mbps links to servers, delivering required bandwidth between servers, and to clients on attached segments. In server farms
and data centers, the Summit1i, Summit5i and Summit7i switches maximize server availability and performance by combining server load-balancing with wire-speed switching.
The Summit product family also includes the SummitPx1 Application Switch which delivers Layer 4 ~ Layer 7 intelligence to Internet data centers, massive web sites and large enterprises.
BlackDiamond 6800 Series
The
BlackDiamond 6800 series delivers carrier-class scalability, redundancy and high reliability for core switching in high-density Ethernet/IP enterprise and service provider networks. These modular switches include the fault-tolerant features
associated with mission-critical enterprise-class Layer 3 core switching, including redundant system management and switch fabric modules, hot-swappable modules and chassis components, load-sharing power supplies and management modules, up to eight
10 Mbps, 100 Mbps or Gigabit aggregated links, dual software images and system configurations, spanning tree and multipath routing, and redundant router protocols for enhanced system and network reliability. The BlackDiamond switch can accommodate
up to 16 I/O blades, including 10/100 Mbps, Gigabit and 10 Gigabit WAN interfaces.
9
The network core is the most critical point in the network, serving as the convergence point for the
majority of network traffic, including desktop, segment and server traffic. Network core switching involves switching traffic from desktops, segments and servers within the network. Owing to the high-traffic nature of the network core, the critical
elements in core switching include wire-speed Layer 3 switching, scalability, non-blocking hardware architecture, fault-tolerant mission-critical features, redundancy and link aggregation. The ability to support a variety of high-density speeds and
feeds and to accommodate an increasing number of high-capacity backbone connections is also important.
The BlackDiamond 6800 series is
certified to be compliant with Network Equipment Building Systems, or NEBS Level 3, and offers an extensive range of modules, including legacy connections such as Packet-over-SONET, or PoS, OC-3 and OC-12, and Asynchronous Transfer Mode, or ATM,
metropolitan connectivity through Multi-Protocol Label Switching, or MPLS, billing capabilities through Accounting and Routing Module, optical connectivity with Wave Division Multiplexing, or WDM, and industry-leading 10 Gigabit Ethernet
connectivity.
Alpine 3800 Series
The Alpine 3800 series provides a simple, resilient broadband infrastructure for MANs, ISPs and mid-range enterprise networks. The Alpine 3800 series provides total Ethernet coverage with support for both standard category 5 and
fiber optic media as well as first mile technologies that extend the reach of Ethernet-over-VDSL and legacy WAN technologies.
The Alpine
3800 series switches can be configured to scale from 8 to 56 Ethernet-over-VDSL ports. Even higher density can be achieved with a combination of Ethernet-over-VDSL and traditional copper or fiber Ethernet ports. The FM-8Vi module provides
Ethernet-over-VDSL at 10 Mbps full-duplex on each port, up to 2,500 feet.
ExtremeWare Software
ExtremeWare software is the embedded operating system software that is featured on all of our switches. It delivers the robust switching and routing protocol
support, management, control and security needed on current enterprise and service provider networks. Its standards-based, multi-layer switching and policy-based Quality of Service, or QoS, give network managers the tools needed to optimize network
capacity with consistent fault-tolerant behavior.
Infrastructure and Services Management
Extreme Infrastructure and Services Management, or ISM, is a network management software platform that manages Layer 2 ~ Layer 7 application infrastructures. ISM
is a total software portfolio that includes EPICenter software, an integrated application suite for network management, ISM Provision software for offline configuration and service provisioning and GlobalPx Content Director, a software based load
balancer application that enables the deployment of multiple SummitPx1 units. EPICenter software, the primary application in the ISM portfolio, is an integrated application suite that simplifies configuration, troubleshooting, inventorying and
status monitoring of IP-based networks. EPICenter software offers a comprehensive set of network management applications, accessible from a workstation with a Java-enabled web browser. To date, we have not generated significant revenue from this
product.
10
ISM Provision
ISM Provision software is a system-wide provisioning tool for infrastructure deployments and service activation over Extreme’s products. This software simplifies and automates network operations
for both enterprise and service provider customers. In Extreme-only environments, the application features an advanced graphical user interface, or GUI, allowing clients to manage network infrastructure and services. ISM Provision software’s
open interface allows for deployment in multi-vendor environments and for flow-through provisioning in large, complex networks. ISM Provision software can operate on a stand-alone basis, or can be integrated into off-the-shelf network infrastructure
management platforms.
GlobalPx Content Director
GlobalPx Content Director software directs client requests to the physical site best suited to respond to their request. This software uses metrics and policies such as site availability, response
time, site load, persistence and directed traffic tables to determine the site best suited to respond to client requests. GlobalPx Content Director software’s scheduling capabilities and management console enable administrators to efficiently
direct requests across multiple sites and to accommodate diverse company requirements.
Sales, Marketing and Distribution
We conduct our sales and marketing activities on a worldwide basis through distributors, resellers and our field sales organization.
A majority of our sales are currently made to partners in our distributor and reseller channels. The first tier consists of a limited number of independent distributors that sell primarily to resellers and end-user customers. The second tier of the
distribution channel is comprised of a large number of independent resellers that sell directly to end-user customers.
Distributors. We have established several key relationships with leading distributors in the electronics and computer networking industries. We intend to maintain these relationships with distributors
who may offer products or distribution channels that complement our own channels. Each of our distributors resells our products to reseller and end-user customers. The distributors enhance our ability to sell and provide support to end-user
customers, especially global accounts, who may benefit from the broad service and product fulfillment capabilities offered by these distributors. One distributor accounted for 15% and 16% of our net revenue in fiscal 2002 and fiscal 2001,
respectively. Distributors are generally given privileges to return a portion of inventory and participate in various cooperative marketing programs to promote the sale of our products and services.
Value-Added Resellers. We have entered into agreements to sell our products through more than 250 resellers in approximately
50 countries. Our value-added resellers include regional networking system resellers, resellers who focus on specific vertical markets, network integrators and wholesale distributors. We provide training and support to our resellers and our
resellers generally provide the first level of support to end users of our products. Our relationships with resellers are generally on a non-exclusive basis. Our resellers are not given privileges to return inventory and do not automatically
participate in any cooperative marketing programs.
Field sales. We have trained our field sales
organization to support and develop leads for our resellers and to establish and maintain a limited number of key accounts and strategic customers. To support these objectives, our field sales force:
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• |
assists end-user customers in finding solutions to complex network system and architecture problems; |
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differentiates the features and capabilities of our products from competitive offerings; |
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• |
continually monitors and understands the evolving networking needs of enterprise and service provider customers; |
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promotes our products and ensures direct contact with current and potential customers; and |
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• |
monitors the changing requirements of our customers. |
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As of June 30, 2002, our worldwide sales and marketing organization consisted of 397 individuals, including directors, managers, sales
representatives, and technical and administrative support personnel. We have domestic sales offices located in 23 states and international sales offices located in 19 countries.
International sales
International sales are an important and growing portion of
our business. In fiscal 2002, sales to customers outside of the United States accounted for 67% of our consolidated net revenue, compared to 57% in fiscal 2001 and 44% in fiscal 2000. These sales are conducted primarily through foreign-based
distributors and resellers managed by our worldwide sales organization, in addition to direct sales to end-user customers, including large global accounts. The primary markets for sales outside of the United States include the countries in Western
Europe and Japan. Although not a significant component of total revenues to date, we have also achieved sales growth in the People’s Republic of China and other countries throughout the Asia-Pacific region.
Marketing
We have a number of marketing
programs to support the sale and distribution of our products and to inform existing and potential customers and our distributors and resellers about the features and performance of our products. Our marketing efforts include participation in
industry tradeshows, technical conferences and technology seminars, preparation of competitive analyses, sales training, publication of technical and educational articles in industry journals, a publicly available website, web-based training
courses, advertising and public relations. In addition, we are developing e-commerce processes and systems for our resellers, distributors and end user customers. We also submit our products for independent product testing and evaluation.
Backlog
Our
products are often sold on the basis of standard purchase orders that are cancelable prior to shipment without significant penalties. In addition, purchase orders are subject to changes in quantities of products and delivery schedules in order to
reflect changes in customer requirements and manufacturing capacity. Our business is characterized by seasonal variability in demand and short lead-time orders and delivery schedules. Actual shipments depend on the then-current capacity of our
contract manufacturers and the availability of materials and components from our vendors. We believe that only a small portion of our order backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is
immaterial. Accordingly, we do not believe that backlog at any given time is a meaningful indicator of future revenue.
Customer
Support and Service
We offer modular and comprehensive ExtremeWorks service solutions to help protect our customers’ network
investments and support their business goals. The markets we address, including enterprises and service providers, all demand continuous uptime to maximize productivity. Our goal is to serve as a knowledgeable and experienced service partner who can
tailor service solutions to meet the specific business needs of our customers. Accordingly, in fiscal year 2002 we entered into a global services agreement with International Business Machines, Inc. for the provision of on-site hardware support to
customers. Expenses related to this agreement are recorded in sales, marketing and service expense on our consolidated statement of operations. We also maintain a relationship with Solectron Corporation for the handling of product returns and
repairs in various locations worldwide. Expenses related to this relationship are recorded in cost of revenue on our consolidated statement of operations.
Our service offerings are as follows:
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ExtremeWorks Professional Services |
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ExtremeWorks Global Services Management |
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| |
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ExtremeWorks Support Programs |
ExtremeWorks Professional Services. We specialize in providing solutions and consultative services to improve network productivity in all phases of the network lifecycle — evaluation, planning,
design, implementation and management. The professional services include customized and packaged consulting services that assist customers in an effort to optimize their networks by meeting their objectives for applications support, uptime and cost
control. Our network architects develop and execute customized hardware deployment plans to meet individualized network strategies. These activities include the management and coordination of the design and network configuration, resource planning,
staging, logistics, migration and deployment. We also provide technical documentation and training to assist customers in the transition to a new network.
We offer our customers a variety of technical consulting services, including:
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• |
Analysis — detailed audit and analysis of customer networks |
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• |
Policy-Based QoS — analysis and recommendation for deploying advanced traffic management and bandwidth prioritization features to match actual traffic
patterns |
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• |
Multicasting — strategy for deploying PIM-DM, PIM-SM, or DVMRP to best suit streaming media requirements |
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• |
Voice over IP — strategy and recommendations to deploy voice-over-IP utilizing our technology |
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• |
Load Balancing — design and implementation of our integrated load balancing features to help maximize server response while reducing equipment costs
|
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• |
Security — analysis of customer security needs and recommendations on how to implement advanced security features to meet those needs
|
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Interoperability Lab — use of the lab to analyze deployment options, resolve integration concerns, and assess performance and application thresholds
|
ExtremeWorks Global Services Management. Post-sales customer services are an integral
component of our comprehensive service solution. Global Services Management delivers customer service by means of a service account manager who serves as single point of contact to manage account service needs including the coordination of
activities with the Global Service Management team – the designated technical engineer, systems engineer and development engineer sponsor. Service account managers facilitate communications with cross- functional teams, escalate support issues
to streamline issue resolution, and maintain documentation of customer network configurations and topology maps for access by customer-authorized staff.
ExtremeWorks Support Programs. Our support programs are designed to support a broad range of customer service requirements. From standard business hours to 24-hour-a-day, 7-day-a-week, 365-day-a-year
global support, we attempt to meet the service requirements of all our customers through Technical Assistance Centers, or TACs, located in Santa Clara, California, Utrecht, Holland, and Tokyo, Japan. Our technical engineers assist in diagnosing and
troubleshooting technical issues regarding customer networks. This is part of our effort to ensure maximum network uptime and performance. Regional systems engineers serve as on-site engineering resources to provide consultative support and advice
for network operation. Development engineers work with the TACs to resolve product functionality issues specific to each customer.
We
utilize the Internet to distribute and obtain information from our customer base as an integral part of our service solution. This allows us to keep customers informed of the latest updates and developments at Extreme Networks, and contains
up-to-date information and technical documentation enabling customers to research issues and find answers to technical questions. Special features include a TAC database to obtain troubleshooting assistance and information for configuring software,
diagnosing hardware, and researching network issues. On-
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site support services are available in most locations worldwide for customers who require a more comprehensive level of service and support.
ExtremeWorks Education. Certified technical experts teach classes dealing with all of our products. The classes cover a wide range of topics such as
installation, configuration, operation, management and optimization — providing customers with the necessary knowledge and experience to successfully deploy and manage our products in various networking environments. Class sizes are limited and
are lab-intensive to promote high retention in a hands-on learning environment. Classes are scheduled and available at numerous locations worldwide.
In addition to the traditional instructor-led courses, we offer a portfolio of self-paced eLearning courses available through the Internet. These courses allow learners to gain knowledge of our products and network technology at
their own pace without leaving the home or office. We strive to deliver cost-effective training solutions to address the needs of all of our customers.
Manufacturing
We outsource the majority of our manufacturing and supply chain management operations as part of
our strategy to maintain global manufacturing capabilities and to reduce costs. We conduct quality assurance, manufacturing engineering, document control and test development at our main campus in Santa Clara, California. This approach enables us to
reduce fixed costs and to flexibly respond to changes in market demand.
Currently, we have strategic partnerships with three contract
manufacturers — Flextronics International, Ltd. for the manufacture of our products in San Jose, California; Plexus Corp. for the manufacture of our products in Nampa, Idaho and Penang, Malaysia; and Solectron Corporation for the manufacture of
our products in Milpitas, California. Each of these manufacturing processes and procedures is ISO 9002 certified. We design and develop the key components of our products, including ASICs and printed circuit boards. We determine the components that
are incorporated in our products and select the appropriate suppliers of such components. Our contract manufacturers utilize automated testing equipment to perform product testing and burn-in with specified tests. Together with our contract
manufacturers, we rely upon comprehensive inspection testing and statistical process controls to assure the quality and reliability of our products. We intend to regularly introduce new products and product enhancements that will require us to
rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers.
Although we use
standard parts and components for our products where it is appropriate, we currently purchase several key components used in the manufacture of our products from single or limited sources. Our principal single-source components include:
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programmable integrated circuits; |
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selected other integrated circuits; |
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custom power supplies; and |
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custom-tooled sheet metal. |
Our principal limited-source components include:
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dynamic and static random access memories, or DRAMs and SRAMs respectively; and |
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printed circuit boards. |
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Purchase commitments with our single- or limited-source suppliers are generally on a purchase order basis. LSI Logic Corporation is the
sole source for the ASICs that are used in our switches, whereas a number of other vendors supply standard product integrated circuits and microprocessors for our products. Any interruption or delay in the supply of any of these components, or the
inability to procure these components from alternate sources at acceptable prices and within a reasonable time, may have a material adverse effect on our business, operating results and financial condition. Qualifying additional suppliers can be
time-consuming and expensive and may increase the likelihood of errors.
We use our forecast of expected demand to determine our material
requirements. Lead times for materials and components vary significantly, and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We order many of our materials and components on an indirect
basis through our contract manufacturers.
Research and Development
The success of our products to date is due in large part to our focus on research and development. We believe that continued success in the marketplace will depend on our ability to develop
new and enhanced products employing leading-edge technology. Accordingly, we are undertaking development efforts with an emphasis on increasing the reliability, performance and features of our family of products, and designing innovative products to
reduce the overall network operating costs of customers.
Our product development activities focus on solving the needs of enterprises,
service providers and metropolitan area network markets. Current activities include the continuing development of a next-generation chipset aimed at extending the capabilities of our products. Our ongoing research activities cover a broad range of
areas, including, in particular, 10 Gigabit Ethernet and SONET, metropolitan network and Internet routing software, ASIC design, network management software, broadband access equipment and content networking devices.
Our products have been designed with a uniform system architecture for all products, that expedites our design and development cycle as well as the time to
market for new products and features. We have utilized this design approach to develop and introduce new products and enhancements following the introduction of our first- and second-generation products. We intend to continue with a simplified
approach to architectural design to develop and introduce additional products and enhancements in the future.
As of June 30, 2002, our
research and development organization consisted of 249 individuals. Our expenditures for research and development in fiscal 2002, 2001 and 2000 were $61.5 million, $57.9 million and $33.0 million, respectively. These amounts do not include
in-process research and development charges in the amount of $30.2 million related to our acquisitions in fiscal 2001.
Competition
The market for Internet switches is part of the broader market for networking equipment, which is
dominated by a few large companies, particularly Cisco Systems. Each of these companies has introduced, or has announced its intention to develop, switches that are or may be competitive with our products, such as the Catalyst 6000 family of
switches offered by Cisco Systems. In addition, there are a number of large telecommunications equipment providers, including Alcatel and Nortel Networks, which have entered the market for network equipment, particularly through acquisitions of
public and privately held companies. We expect to face increased competition, particularly price competition, from these and other telecommunications equipment providers. We also compete with other public and private companies that offer switching
solutions, including Dell Computer Corporation, Enterasys Networks, Foundry Networks, Huawei Technologies, Riverstone Networks and 3Com
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Corporation. These vendors offer products with functionality similar to our products or provide alternative network solutions. Current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to develop and offer competitive products. Furthermore, we compete with numerous companies that offer routers and other technologies and devices that traditionally have managed the
flow of traffic on the enterprise or metropolitan area networks.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger installed customer base, than we do. As a result, these competitors are able to devote greater resources
to the development, promotion, sale and support of their products. In addition, competitors with a large installed customer base may have a significant competitive advantage over us. We have encountered, and expect to continue to encounter, many
potential customers who are confident in and committed to the product offerings of our principal competitors, including Cisco Systems. Accordingly, these potential customers may not consider or evaluate our products. When such potential customers
have considered or evaluated our products, we have in the past lost, and expect in the future to lose, sales to some of these customers as large competitors have offered significant price discounts to secure these sales.
We believe the principal competitive factors in the network switching market are:
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expertise and familiarity with network protocols, network switching and network management; |
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product performance, features, functionality and reliability; |
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price/performance characteristics; |
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timeliness of new product introductions; |
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• |
adoption of emerging industry standards; |
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customer service and support; |
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size and scope of distribution network; |
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access to customers; and |
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size of installed customer base. |
We believe that we compete favorably with our competitors with respect to each of the foregoing factors. However, because many of our existing and potential competitors have longer operating histories, greater name recognition,
larger customer bases and substantially greater financial, technical, sales, marketing and other resources, they may have larger distribution channels, stronger brand names, access to more customers and a larger installed customer base than we do.
Such competitors may, among other things, be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to distribution partners than we can. To remain competitive, we believe that we
must, among other things, invest significant resources in developing new products and enhancing our current products and maintain customer satisfaction worldwide. If we fail to do so, our products will not compete favorably with those of our
competitors and that may have a material adverse effect on our business.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Based
on our commitment to build a patent portfolio, we have in process a number of patents relating to our proprietary technology. We have filed patents in selected countries abroad as deemed appropriate. There can be no assurance that these applications
will be approved, that any issued patents
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will protect our intellectual property, or that third parties will not challenge these patents or applications. Furthermore, there can be no assurance that others will not independently develop
similar or competing technology or design around any patents that we may obtain. With respect to trademarks, we have fourteen registered trademarks in the United States. In addition, we have a significant number of pending trademark applications and
registered trademarks abroad.
We enter into confidentiality or license agreements with our employees, consultants and corporate
partners, and control access to, and distribution of, our software, documentation and other proprietary information. In addition, we provide our software products to end-user customers primarily under “shrink-wrap” license agreements
included within the packaged software. These agreements are not negotiated with or signed by the licensee, and thus these agreements may not be enforceable in some jurisdictions. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or technology. There can be no assurance that these precautions will prevent misappropriation or infringement of our intellectual property. Monitoring unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation
regarding patent and other intellectual property rights. In particular, leading companies in the data communications and networking markets have extensive patent portfolios with respect to networking technology. From time to time, third parties,
including these leading companies, have asserted and may assert exclusive patent, copyright, trademark and other intellectual property rights against us in regard to technologies and related standards that we consider to be important. We expect to
increasingly be subject to infringement claims asserted by third parties as the numbers of products and competitors in the market for network switches grow and product functionality overlaps.
We have been in communication with a number of major technology companies that assert certain of our products require a license under a number of their patents. These parties have indicated
a willingness to grant us a non-exclusive license under the identified patents, as well as other patents that we may require. We are currently reviewing the identified patents to determine whether we consider a license necessary. However, there can
be no assurance that these licenses would be obtainable on commercially acceptable terms.
In the future, we may determine it is
necessary to initiate claims or litigation against third parties for infringement of our proprietary rights. Any such claims, whether asserted by us or a third party against us, could be time-consuming, result in costly litigation and diversion of
technical and management personnel or require us to develop non-infringing technology or enter into royalty or licensing agreements. Royalty-bearing license agreements, if required, may not be available on acceptable terms, if at all. In the event a
third party is successful in a claim of infringement, our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis may have a material, adverse effect on our business, operating results and
financial condition.
Employees
As of June 30, 2002, we employed 987 people, including 397 in sales and marketing, 249 in engineering, 100 in operations, 115 in customer support and service, and 126 in finance and administration. We have never had a work stoppage
and no personnel are represented under collective bargaining agreements. We consider our employee relations to be good.
We believe that
our future success depends on our continued ability to attract, integrate, retain, train and motivate highly qualified personnel, and upon the continued service of our senior management and key personnel. None of our personnel is bound by an
employment agreement. The market for qualified personnel is competitive,
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particularly in the San Francisco Bay Area, where our headquarters is located. At times, we have experienced difficulties in attracting new personnel.
Organization
We were incorporated in
California in May 1996 and reincorporated in Delaware in March 1999. Our corporate headquarters are located at 3585 Monroe Street, Santa Clara, CA 95051 and our telephone number is (408) 579-2800. Our website can be found at
www.extremenetworks.com.
Our principal administrative, sales, marketing
and research and development facilities are located in Santa Clara, California. We also lease office space and executive suites in various other geographic locations domestically and internationally for sales and service personnel and engineering
operations. Our aggregate lease expense for fiscal 2002 was approximately $10.4 million, net of sublease income of approximately $2.0 million. We believe our current facilities will adequately meet our growth needs for the foreseeable future, and we
are actively engaged in efforts to sublease excess space we acquired in prior years to meet the anticipated growth at that time. Our principal facilities are as follows:
| # of Bldgs
|
|
Location
|
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Leased/Owned
|
|
Square Footage
|
|
Purpose
|
| 6 |
|
Santa Clara, CA |
|
2 Leased 4 Owned |
|
Combined SF 295,764 |
|
Headquarters, Research & Development, Sales, Operations |
| |