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Extreme Profits, Market Shrugs

Light Reading
News Analysis
Light Reading
7/22/2004

Extreme Networks Inc. (Nasdaq: EXTR) stock is sagging today after the company turned in a satisfactory earnings report but created some uncertainty about its near-term future.

Officials on yesterday's earnings call predicted revenue growth would be between zero and 5 percent for the September quarter. That's actually on par with analysts' estimates, but the "zero" part seems to be troubling investors. The reaction might be fueled by Extreme's comments that competition is heating up.

"We continue to see an uncertain future for Extreme, with the risk being a squeeze in the channel between Cisco at the high end and price-competitive players [such as the joint venture between 3Com Corp. (Nasdaq: COMS) and Huawei Technologies Co. Ltd.] at the low end," writes analyst Steve Kamman of CIBC World Markets, in a note issued this morning.

At midday today, Extreme's stock was down 49 cents, or 9 percent, at $5.09. While stocks were down in general, the sell-offs in other networking companies weren't as extreme [groan]: Foundry Networks Inc. (Nasdaq: FDRY) was off by about 4 percent at $11.57, while Cisco and Juniper Networks Inc. (Nasdaq: JNPR) were trading about even.

For the quarter ended June 27, Extreme reported profits of $2.3 million, or 2 cents per share, on revenues of $92.2 million, compared with losses of $167 million, or $1.44 per share, on revenues of $87.3 million for the same quarter a year ago. Those losses include a $154 million charge related to deferred tax assets.

On the conference call, CEO Gordon Stitt noted that the company's partnership with Avaya Inc. (NYSE: AV) is proceeding well, but it appears the actual numbers aren't impressive yet: $1 million revenues in the previous quarter and less than $5 million in the June quarter, officials said. Analysts seem to think the increase was quite small, "perhaps under $2 million," writes Tal Liani of Merrill Lynch & Co. Inc., in a note this morning.

Stitt also said sales of the BlackDiamond 10K, Extreme's 10-Gigabit Ethernet switch, were "up significantly" from the previous quarter. Analysts grilled him for specific numbers on this, but Stitt refused to cough up the nitty-gritty.

Tempering the good news, CFO Bill Slakey noted that the Avaya and BlackDiamond stories haven't become established trends for the company. "It is still a case where one or two large orders per quarter can make the difference between sequentially up or sequentially down revenue," he said on the conference call.

Overall, analysts were happy about Extreme's numbers, which slightly exceeded consensus expectations, but they differ on the stability of Extreme's situation.

"It is still too early to call the turnaround a success," writes analyst Ryan Hutchinson of W.R. Hambrecht & Co., in a note issued this morning.

In the opposite corner: "We feel that the company's fundamentals are improving and that Extreme will sustain steady growth for the foreseeable future," writes Erik Suppiger, analyst with Pacific Growth Equities Inc.

— Craig Matsumoto, Senior Editor, Light Reading


For more info on the state of industry financials, check out the coming Light Reading Live! event:

  • Light Reading's Telecom Investment Conference, in New York City, November 10.

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