Extreme Networks? Extreme Share Price Crash, more like

Misses Wall Street numbers by circa $1m

Extreme Networks’ share price almost halved after its Q4 financials hit the wires on Wednesday, in spite of the US network infrastrucutre kit-maker reporting a double-digit bounce in turnover. It serves as a timely reminder that tech companies miss Wall Street forecasts at their peril.

While revenues rose 56 per cent to $278.3m for the three months ended 30 June, well up on revenues of $178.9m from the year-ago period, this fell short of analyst expectations for sales of, er, $279.22m.

It probably didn't help that Extreme posted a loss of $5.6m, against the previous year’s profit of $13.2m. This was, however, an improvement on the previous quarter’s $13m loss.

CEO Ed Meyercord trumpeted "stable" shipments from the automated campus business and a record quarter in software sales and related services to $11m. He could not in such glowing terms about the data centre networking line acquired from Brocade.

He mentioned "profile data center wins" with the next-gen SLX platform, including 20 $1m plus deals signed, twice as many as last quarter, but added: "We came up well short of our internal expectations".

"We were surprised by a shortfall of approximately $10m in our data center bookings during the last week of the quarter. It's clear we didn't handicap the pipeline appropriately. To address the issue, we changed leadership and we reduced our expectations by approximately $50m per quarter in Q1 in Q2 of fiscal 2019," Meyercord said on a conference call.

The router portfolio, he claimed, will be "fully fleshed out by calendar year end 2018 and [we] will be offering the scale of a router port at a switching port price."

Over the full 2018 financial year, Extreme burned $46.8m in losses on sales of $983.1m. This compared to losses of $1.74m on turnover of $607m in the previous full fiscal.

The corporate slide deck, as shown to investors (PDF) revealed that Extreme has a growing backlog of inventory - $63.9m in the last quarter was sitting in warehouses, against $47.4m in the last quarter – and capex for the quarter stood at $18.4m, versus $2.6m spent over the same period last year. Spend more, earn more, but make less.

Meyercord said:

We are streamlining our product portfolio and have active SKU reduction programs associated with older products and previously announced End-of-Life products. We have evaluated our product mix in the channel and see an opportunity to drive more flexibility, greater efficiency and higher margins.

Total debt on the books, less loan fees, at the end of Q4 FY2018 was $198m, “attributed to borrowings associated with the Campus Fabric acquisition and the new term loan and revolving line of credit we closed on May 1, 2018,” said CFO Drew Davies.

The business estimated revenues would fall and losses would deepen in the near future, with a predicted loss in the first quarter of fiscal year 2019 of between $6.9m and $14.6m.

Extreme Networks previously bought Avaya’s networks biz and Brocade’s data centre ops last year. Davies’ commentary (PDF, more a set of statements than commentary per se) put the current woes down to “purchase accounting adjustments resulting from our campus fabric and data centre acquisitions.”

The company's share price crashed from around $9 to $5.89 when its results were announced, rising to $6.24 at the time of writing. ®

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