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Extreme Trolls for a Bottom

Extreme Networks Inc. (Nasdaq: EXTR) reported a mixed bag of news last night on its fourth-quarter earnings call (see Extreme Meets Q4 Expectations). While the company made a profit for the first time since December of 2000, sales dropped slightly from a year ago. Management didn’t give any guidance on the call, stating that things were still too uncertain to predict what will happen in the September quarter.

Unlike other networking equipment providers like Juniper Networks Inc. (Nasdaq: JNPR), which focuses exclusively on service provider customers, Extreme was saved this quarter by its enterprise business (see Juniper Numbers Raise Questions). This fact helps validate what many have said for a long time: Recovery in the market will begin with enterprise customers while the service provider sector lags.

The company reported fourth-quarter earnings of $2.5 million, or 2 cents per share. This compares with a loss of $11.4 million, or 10 cents per share, a year earlier, and a third-quarter loss of $139.8 million, or $1.23 per share.

Excluding one-time charges, Extreme's earnings were slightly higher -- $3.8 million, or 3 cents per share. This put the company in line with analyst expectations, which also had it pegged for earnings around 3 cents per share, excluding one-time items.

Revenues for the fourth quarter were up slightly from the third -- $113.1 million compared to $111.1 million. This was slightly above analyst expectations, which averaged $112.5 million, according to First Call. Revenues were up for the third quarter in a row, but they were down compared to the $115.1 million reported for the same quarter a year ago.

While major cost-cutting moves helped the company meet expectations and reach profitability, the good fortune was also due to increased demand from enterprise customers in North America. The company reported that enterprise sales made up 75 percent of business in the quarter. The most active customers in this area were companies specializing in government, education, and healthcare. This news adds weight to predictions from analysts like Sam Wilson of Merrill Lynch & Co. Inc., who recently raised his rating on Extreme to Strong Buy from Buy, citing an expected recovery in spending by large corporate customers.

Service providers accounted for the other 25 percent of sales. What is interesting to note here is that service provider revenue actually increased slightly, up from 20 percent in the third quarter. The company attributed this to increased demand for metropolitan area networking gear in Asia.

“While the domestic service provider market remains very challenging, the company cited evidence of a potential recovery in the metro business with greater near-term opportunities in emerging markets overseas, particularly in Asia,” writes Mark Sue, an analyst with Frost Securities Inc., in a research note sent out to investors this morning.

But the call wasn’t all good news. While domestic sales were strong, overall sales in Europe and Asia were down, 11 percent and 8 percent respectively. The company said sales in Asia were down due to a seasonal dip in spending by large Japanese corporations.

As in past quarters, Extreme’s management said that it would not give guidance for the September quarter.

Extreme was trading down $0.71 (6.22%) to $10.71 today.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com
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