Extreme's CFO Checks Out

Extreme Networks Inc. (Nasdaq: EXTR) is losing its CFO, Harold L. "Hal" Covert, in a move that has Wall Street tongues a-waggin'.

Covert, who came to Extreme in August 2001 from the CFO post at Silicon Graphics Inc. (SGI) (NYSE: SGI), has resigned for personal reasons, Extreme says (see Extreme CFO Resigns). He'd like to pursue other interests, and he wants to spend more time with his family, who've been living on the East Coast while he works out West.

For whatever reason Covert's leaving, Wall Street rarely sees the departure of a CFO as a good sign, and Extreme's stock is seeing the results. At press time, Extreme shares were trading at $5.16, down $1.10 (16.37%). Meanwhile, Extreme's competitor Foundry Networks Inc.'s (Nasdaq: FDRY) shares were trading at $18.21, up $0.78 (4.47%).

At least one analyst said there's likely more behind the departure than personal reasons. "Well, we all have a longing to do something other than what we're doing at our desks, so that's always part of the reason," says analyst Jim Kelleher of Argus Research. But he thinks Extreme's lackluster financial performance, evident in its last quarterly report is weighing on management (see Extreme Posts Disappointing Revenues).

With competitors like Foundry doing relatively well with revenues comparable to Extreme's, and getting some choice contracts to boot (see Foundry Gets a Fed Boost), it seems Extreme's not getting its share, Kelleher says. Hence, a head was bound to roll: "When the CFO falls, it's usually a cost issue... dissatisfaction with performance on the bottom line."

Another analyst says Covert's ideas of what to do with the money weren't making it with his boss. "With most of his focus on profitability and cash generation we believe the CFO of Extreme may have had some disagreements with the CEO Gordon Stitt ... [whose] priorities were instead on stemming the loss of market share and ramping on the timely delivery of new products," writes Mark Sue of CE Unterberg Towbin in a note today.

Extreme is at a key juncture, with all eyes on 10-Gbit/s. The company's current offering, a 10-Gbit/s blade for the BlackDiamond switch, is selling very well, Extreme says. The vendor claims that figures from the Dell'Oro Group indicate it was the No. 1 shipper of 10-Gbit/s Ethernet ports in the first quarter of 2003, exceeding shipments by the runnerup, Riverstone Networks Inc. (Nasdaq: RSTN), by 56 percent.

Extreme also says its first switch, codenamed Mariner, based on the vendor's fourth-generation 4GNSS ASIC for 10-Gbit/s use, is planned for release by year end (see Extreme Intros 10-GigE Platform).

Notably, Extreme's also looking to expand into the wireless arena. It forged into 802.11 wireless LAN territory with an announcement earlier this year, as covered in Light Reading's sister publication Unstrung (see Extreme Hatches Switch Surprise and Extreme Switches Both Ways).

But with Foundry and other competitors, most notably Cisco Systems Inc. (Nasdaq: CSCO), seeking their share of action in 10-Gbit/s and other areas that interest Extreme (see Foundry on the Switch Trail?), it's time for the vendor to move into high gear. "In our opinion, Extreme needs to make fairly aggressive changes to its model due to the significant emphasis on profitability by investors," writes Sue.

Extreme spokeswoman Valerie Bellofatto has no comment on analyst opinions about Covert's leaving, or on the activity of Extreme's stock.

Extreme is due for its next quarterly report, which should come out in July, though no date's been set. Wall Street analyst consensus predicts a per-share loss of ($0.05), according to First Call.

— Mary Jander, Senior Editor, Light Reading

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