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Extreme Slump Continues

Craig Matsumoto
4/26/2006

Extreme Networks Inc. (Nasdaq: EXTR) could be in for another tough quarter as the company tussles with sales-force issues and reseller recruiting -- what the industry likes to call "execution."

In yesterday's expectedly glum earnings announcement, executives said the company's book-to-bill ratio during its third quarter, which ended April 2, was less than 1.0 -- a sign that revenues could be declining further.

But they also cautioned that revenues can be unpredictable. "Our quarters are back-end loaded, with approximately 50 percent of our business done in the last month of the quarter, so it is fair to say our visibility can be limited," CFO William Slakey said on a conference call with analysts. "It is still a case where one or two large deals per quarter can make the difference between sequentially up or sequentially down revenue."

Extreme's stock fell 17 cents (3.6%) to $4.52 in after-hours trading last night.

Extreme had already warned of a third-quarter disappointment, saying revenues would land between $84 million and $85 million. The company had previously told analysts to expect something more like $90 million to $95 million. (See Extreme Lowers Q3 Outlook.)

Yesterday, the company announced third-quarter revenues of $85.5 million and net income of $2.8 million, or 2 cents per share, compared with revenues of $92.8 million and net income of $5.7 million, 5 cents per share, in the previous quarter. (See Extreme Reports Q3.) Pro forma profits of 3 cents per share outdid the mean analyst projection of 1 cent, according to Reuters Research .

For its third quarter a year ago, Extreme reported revenues of $91.9 million and losses of $1.3 million, 1 cent per share.

Extreme has now disappointed for two consecutive quarters, and the streak could extend to three given that book-to-bill number. For the third quarter, sales in the U.S. were up 6 percent from the previous quarter, but that was less than Extreme had anticipated, Slakey said. Japan was a disappointment too, with sales of $7.7 million versus $11 million in the previous quarter.

Part of the problem has been a loss of sales folks, analysts have said. Extreme executives said yesterday they're working to beef up both sales ranks and channels, but they admitted the results have been disappointing so far. "We had planned for those programs in aggregate to simply drive higher revenues," Slakey said.

Sales headcount was flat between the second and third quarter. Extreme wouldn't disclose its goal for sales recruiting in the quarter, other than to say it was simply more.

Executives dodged repeated questions as to why Extreme is having trouble adding sales personnel.

"Sales reps do move around in our industry, not only from Extreme but to Extreme," CEO Gordon Stitt said on the conference call. "Our goal this quarter is to end up with more [sales] heads than we ended last quarter." Extreme also happens to lack a North American vice president of sales, a vacancy that's obviously going to need plugging, Stitt noted.

Extreme wouldn't predict its fourth-quarter revenues, citing the fact that the previous quarter had been such an unpleasant surprise. Analysts polled by Reuters are expecting revenues of $89.2 million for Extreme's June quarter.

Separately this week, Extreme announced the $70 million sale of its Santa Clara, Calif. headquarters, contingent upon the land being re-zoned for residential development. That won't affect earnings this quarter -- or this year, even -- as the re-zoning will take 15-21 months, Extreme estimates. The company expects to move to new Silicon Valley headquarters in 2007. (See Extreme: Movin' Out and Extreme Preps Sale.)

— Craig Matsumoto, Senior Editor, Light Reading

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