Extreme Optimism Boosts Stock
Stitt said that the company's losses would end soon, forecasting a return to profit by the end of the company's fiscal 2004 (see Extreme Losses Dwarf Revenues), which just started with the current quarter. What’s more, Stitt pinpointed an aggressive revenue target of $400 million for the coming year. But he did not give any short-term guidance, except to say the company won't be profitable in its next quarter.
Wall Street cheered the news, sending Extreme's shares up $1.03 (22.08%) to $5.70 at midday.
Extreme posted a net loss of $170.4 million, or $1.47 a share, for the fiscal fourth quarter, which ended June 29. About $1.33 per share was attributed to a tax charge. For the full fiscal year 2003, the company reported a loss of $197.2 million, or $1.71 a share. In fiscal year 2002, the company reported a loss of $184 million, or $1.63 a share.
Revenues grew slightly in the quarter. The company reported $87.3 million in revenue in the fourth fiscal quarter, compared to $85.2 million in the third (see Extreme: Light Quarter, Denser Products ). A year ago, the company reported $113.1 million in the comparable period.
The focus of questions on the conference call was clearly on the forecast for future growth, rather than current results. Stitt attributed the forecast for revenue growth to a series of new product introductions -- including the rollout of its new ASIC technology along with its new 10-Gbit/s Ethernet platform, integrated wireless switch, and low-end Ethernet switch. He also expects increased demand for Layer 3 switching.
Stitt says he also sees an improvement coming from U.S. and Japanese enterprises. Enterprise sales made up about 85 percent of the company’s revenue in the quarter.
“We didn’t pull this figure out of the air,” Stitt said. “We did a rigorous, bottoms-up, analysis and looked at sales commitments and what was in the pipeline. We also looked at the performance of the new products and went through an extensive planning exercise.”
But analysts are less confident. On the call, several of them asked Stitt to clarify and restate why he would give such an optimistic long-term guidance and no short-term view.
"I just wanted to give you guys some work to do," said Stitt. "Seriously, we have certainly implied short-term results, and I want to be clear on this call what our goals and objectives are.”
One analyst, Mark Sue of CE Unterberg Towbin, is not sure that Extreme can reach these goals.
“Considering the current environment, this might be overly aggressive,” he says. “It will take a significant ramp in revenues to achieve this goal.”
Sue agrees that there is pent-up demand for Extreme’s new products, and he expects the company to benefit from the current product cycle. But he maintains his yearly revenue estimate of $378 million.
With Extreme's stock price roaring ahead, it's clear that Extreme's shareholders were ready to hear some good news after a particularly bleak few quarters. The company's share price has been underperforming that of competitors such as Foundry Networks Inc. (Nasdaq: FDRY) and Cisco Systems Inc. (Nasdaq: CSCO).
In fact, looking at profit margins, Extreme would appear to be coming under pressure from its big rivals. Extreme’s margins fell this quarter to 37.5 percent. This compares to about 59 percent from Foundry and 71 percent from Cisco.
Stitt said he expects margins to improve a few percentage points. And he pointed out that the company has taken several measures to improve margins and overall earnings by cutting costs. Stitt also said the company has improved supply chain management and has instituted temporary pay cuts for himself and some of the other top executives.
— Marguerite Reardon, Senior Editor, Light Reading