January 30, 2023, 06:12 PM EST

While the tech industry suffers from large-scale layoffs, Extreme Networks had record hiring in the last six months. The company’s people and partners, according to CEO Ed Meyercord, are making all the difference and translating into double-digit revenue growth, while displacing the competition.

Extreme Networks is on a roll in 2023.

The Morrisville, N.C.-based networking specialist last week announced its fiscal 2023 Q2 earnings in which Extreme posted revenue of $318.35 million for the quarter that ended December 31, up 13 percent compared to year-ago revenues. The company’s software-as-a-service (SaaS) ARR continued its climb, reaching $115 million, up an impressive 29 percent year-over-year. Extreme President and CEO Ed Meyercord revealed that the company was so confident in end user demand that it raised its FY23 revenue growth outlook. He expects the momentum to only continue into Extreme’s FY24, especially as the supply chain environment improves.

Meyercord has attributed the company’s success in part to being what he refers to as the “right size company to work with.” That feature gives Extreme the space to innovate on its focused, cloud-first networking portfolio, while giving partners and end customers the attention and resources they need to grow their businesses and solve problems.

At the mid-point of its fiscal 2023, Extreme has been busy investing in its differentiated cloud networking platform and Universal Hardware to provide choice and simplicity for customers. The focus is paying off: Extreme and its partners are increasingly winning when up against its competition -- some of the largest networking players in the industry, including Cisco Systems.

Meyercord sat down with CRN post-Q2 2023 earnings to talk about the company’s investments and growth, the “loosening” backlog, and a new managed services platform partners can expect in the second half of the company’s 2023. Here are excerpts from the conversation.

MORRISVILLE – Extreme Networks  reported fiscal second-quarter profit of $17.9 million and its CEO hailed the results.

“Extreme (EXTR) delivered another quarter of great results. The continued strength of subscription and accelerated product deliveries drove another quarter of double-digit year-over-year revenue growth,” said  CEO Ed Meyercord in a statement. “We are raising our FY23 revenue growth outlook to the high-end of our 10-15% range and expect this momentum to continue into FY24, as the supply chain environment continues to improve.”

On a per-share basis, the Morrisville-based company said it had net income of 13 cents. Earnings, adjusted for one-time gains and costs, came to 27 cents per share.

“We feel confident in end customer demand. The majority of our bookings are with government, education, and healthcare sectors, where spending is more resilient. Our enhanced fabric and cloud subscription offerings are gaining traction in the marketplace. Finally, we have good visibility for the second half of the year based on the strength of our sales funnel,” Meyercord said.

The maker of network infrastructure equipment posted revenue of $318.3 million in the period.

For the current quarter ending in March, Extreme Networks expects its per-share earnings to range from 23 cents to 29 cents.

The company said it expects revenue in the range of $315 million to $325 million for the fiscal third quarter.

Chief Financial Officer is leaving

Extreme Networks also disclosed that its CFO, Rémi Thomas, “has accepted a position at a privately held software company and will resign from his position at Extreme.”

Thomas steps down as off Feb. 16.

Replacing Thomas on an interim bases is Senior Vice President and head of Financial Planning & Analysis, Cristina Tate.

Shares of Extreme Networks Inc. dropped more than 14% today despite the company posting better-than-expected quarterly earnings and raised its full-year revenue guidance.

In conjunction with the release of its quarterly results, Extreme Networks announced the resignation of Chief Financial Officer Rémi Thomas. The executive will remain with the company until Feb. 17. Cristina Tate, Extreme Networks’ senior vice president and head of financial planning and analysis, will become interim CFO. It’s possible the departure of the CFO gave investors pause.

San Jose, California-based Extreme Networks is a major provider of networking equipment. It sells switches and routers for data centers, as well as Wi-Fi access points that can be used to provide wireless connectivity at offices. More than 50,000 organizations use Extreme Networks products worldwide.

Extreme Networks’ revenue grew 13% year-over-year, to $318.35 million, in its fiscal second quarter ended Dec. 31. The company surpassed the Zacks consensus revenue estimate by 4.45%. Extreme Networks has topped analysts’ sales forecasts in each of the past four quarters. 

According to Extreme Networks, its second-quarter sales momentum was driven partly by strong demand for its software-as-a-service products. The company reported that annualized recurring revenue from SaaS products grew 29% year-over-year, to $115 million. 

Extreme Networks’ SaaS portfolio is headed by ExtremeCloud IQ, a cloud-based platform for managing network infrastructure. The platform can detect performance hiccups and potential cybersecurity issues, as well as provide remediation suggestions for administrators. ExtremeCloud IQ also promises to simplify other maintenance tasks, such as deploying firmware updates to Wi-Fi endpoints.

“We feel confident in end customer demand,” said Extreme Networks Chief Executive Officer Ed Meyercord. “The majority of our bookings are with government, education and healthcare sectors, where spending is more resilient. Our enhanced fabric and cloud subscription offerings are gaining traction in the marketplace. Finally, we have good visibility for the second half of the year based on the strength of our sales funnel.”

Extreme Networks generated $36.5 million in adjusted net income during its fiscal second quarter, a 29% increase from the same time a year ago. That allowed the company to deliver adjusted earnings per share of 27 cents, more than the 24 cents forecasted by the Zacks consensus estimate. Extreme Networks’ gross margin increased to 57.1% from 56.5% a year earlier.

Next quarter, the company expects to generate an adjusted net income of between $31.1 million and $38.4 million on $315 million to $325 million in revenue. Extreme Networks estimates its momentum will continue into the subsequent quarters. The company today raised its full-year revenue growth outlook to the high end of its previously provided 10% to 15% range. 

Photo: Extreme Networks

The one-year price performance of Extreme Networks (NASDAQ:NASDAQ:EXTR), a leader in cloud networking, contrasts sharply with the tech-heavy Invesco QQQ Trust (NASDAQ:QQQ) as shown in the blue chart below and is due to its favorable growth and profitability metrics as this thesis will elaborate upon, with the second quarter fiscal year 2023 results to be announced on January 25.

Moreover, looking into the products portfolio, they can simplify the management of network endpoints across customers' IT infrastructures and are appealing for cybersecurity purposes too. However, far from bragging about their merits, the aim of this thesis is instead to highlight how these can Improve operating efficiency for customers, and this, in an economic context where the cost of doing business has increased substantially due to inflationary pressures.

Also, taking into consideration the competition, I will also assess whether the company can increase pricing to absorb supply chain overheads in a dash to sustain profitability, especially in light of China's rapidly easing Covid lockdown measures.

I start with how the company has positioned its products.

Product positioning and Revenue Growth

The way the company has developed its portfolio, either organically or through M&As shows that it has positioned itself at the edge of the corporate network, namely through products like Fabric Connect and Extreme Fabric Attach as pictured below.

In fact, the edge is where its clients, which come from many industry verticals interact with their customers. These interactions can take the form of mobile transactions, IoT device communications, or simply employees accessing the corporate network for remote work. As such, the edge is also synonymous with vulnerability in terms of cyber threats.

This diversity of user endpoints, or points at which they access the corporate network also implies that IT departments experience considerable challenges in administering these.

To address the challenges, Extreme's Smart OmniEdge networking solution provides a unified Wi-Fi and wired infrastructure equipped with AI technologies that cater to both cloud and on-premises scenarios. This is all accessible through a centralized management console. Noteworthily, in contrast to a dispersed structure, a centralized organization, for administrating the network can prove to be speedy for decision-making, especially for IT functions where failure to take timely actions can result in millions of dollars of losses in downtime or loss of data.

Another advantage of centralization is the ease of enforcement of standards, whether it is for improving performance or compliance purposes. There are also advantages in terms of the number of employees who have to be employed, especially if some of the repetitive tasks like checking logs are automated using AI-driven applications.

Thus, for Extreme, applying automation features, not only makes management nimbler and scaling of the infrastructure easier in terms of services, users, and devices but, also optimizes TCO (Total Cost of Ownership) for customers. Also, as seen by the quarterly year-on-year acceleration in revenue growth to 20% in the March 2021 quarter (table below), after four consecutive quarters of regression, Extreme's products were rapidly adopted by companies migrating their IT workloads to the cloud as part of Covid-led digital transformation projects.

Talking specifics, the company was able to bag contracts as it adapted its network architectures to a cloud-first paradigm away from conventional hardware appliances.

However, there has been a deceleration in the rate of growth, to 11.2% in the third quarter of 2022, while the cost of revenues has increased by 16.9%. This is due to higher supply chain-related expenses, without any corresponding increase in product pricing, probably because of the competition.

The Competition and Supply Chain

Extreme designs and manufactures both wired and wireless network infrastructure equipment. It also develops software for network management, analytics, and security. This signifies that it competes with bigger companies like Juniper Networks (JNPR), Cienna Corporation (CIEN), and Cisco Systems (NASDAQ:CSCO) as shown in the table below.

First, a comparison of the revenue growth shows that except for Juniper, Extreme is growing faster than its peers. Second, Juniper is ahead of everyone else among network manufacturers as it is also cloud-centric, and has included a high dose of software-defined networking and AI in its product lines as I detailed in a previous thesis. This also explains its pole position in Gartner’s Leaders Magic Quadrant as pictured below.

However, Extreme is close behind and it also forms part of the leadership pack.

Still, despite its significant level of differentiation, Extreme still faces competition and this is the reason why it proceeded to "a very modest and targeted price increase" which became effective on October 1. This resulted in customers reducing bookings, but it was much less than in 2022 when Extreme resorted to a 12% price hike. This was done in the footsteps of Cisco incrementing prices.

As a result, Extreme should benefit from an increase in revenues in the second quarter of fiscal 2023 which ends in December 2022. At the same time, it has qualified more component (electronics and semiconductors) suppliers from China and Taiwan from whom it purchases parts for eventually assembling its networking equipment. This diversification in sourcing parts can result in a lower cost of revenues, with the management also anticipating a reduction in expedited fees incurred as freight costs for components sourced from East Asia reach its main hub in El Paso, Texas.

Discussion and Key Takeaways

Therefore a combination of factors ranging from higher product pricing, a more diversified component sourcing strategy, and fewer shipping expenses could see an increase in non-GAAP gross margins, possibly above 60% for the second half of its fiscal year, lasting from January to June 2023.

This compares to 57.6% in the first quarter of fiscal 2023 (Q1) which ended in September 2022. This was up by 0.6% from the June quarter and was attributed to an improvement in the supply chain and a reduction in freight costs, which was slightly offset by changes in the products/services mix.

However, this trend in supply-side improvement could be put in jeopardy, as with China rapidly easing its Covid zero policy, there has been news about 60K death with hospitals and healthcare systems being overwhelmed. Now, this may also cause some disruption in industrial activities in case workers did not have access to components factories, in turn preventing the fulfillment of overseas orders for the second quarter (Q2).

As a result, the company could face a shortage of raw materials resulting in lower production volumes which can impact its growth forecast of 10%-15% for fiscal 2023. Alternatively, Extreme could reach growth targets but at the expense of gross margins in case it has to incur higher costs to source chips from pricier Taiwanese companies or suffer from exceptionally high supply chain costs as a result of Covid hampering economic activities in China. In this case, the stock could suffer from volatility in case the management downgrades its guidance for the current fiscal year.

This is the reason why it is better to wait for an update from the management during Q2's earnings call on January 25 before making an investment decision. Also, with a valuation grade of "C", Extreme is overvalued with respect to the IT sector based on most metrics and does not represent an opportunistic buy for the time being.

Finally, with the progress made in component provider diversification and together with some level of pricing power, this is more of a stock to be put on your watchlist. Also, with the latest record backlog figures amounting to $555 million, or about two quarters of sales, this implies that once supply chain issues are resolved, there are longer-term growth prospects.

© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

MORRISVILLE, N.C., January 25, 2023--(BUSINESS WIRE)--Extreme Networks, Inc. (Nasdaq: EXTR), a leader in cloud networking, today announced that its CFO, Rémi Thomas, has accepted a position at a privately held software company and will resign from his position at Extreme. Thomas will remain with Extreme until February 16, 2023.

Extreme has initiated a search for a CFO with the assistance of a leading executive search firm. Senior Vice President and head of Financial Planning & Analysis, Cristina Tate, will take over as interim CFO. She is responsible for long-term planning, budgeting, forecasting, and management reporting and oversees all finance business partnerships across the various corporate functions at Extreme. She is also the Chair of Extreme’s Women in Networking (WIN) alliance. Prior to Extreme, Tate was at Micro Focus and Hewlett-Packard’s Software business unit. She holds a Bachelor of Arts in economics and mathematics from the University of California, Santa Barbara.

"I want to personally thank Rémi for his leadership at Extreme and helping oversee major milestones such as our acquisition and integration of both Aerohive Networks and Ipanema. He played a key role in our cloud transformation and helped successfully steer Extreme through a global pandemic and unprecedented supply chain challenges. We are forecasting accelerated growth over the next several years that will produce significant operating leverage that we are primed to take advantage of," stated Ed Meyercord, President and CEO.

"Cristina is a highly respected leader in our finance organization who is deeply involved in running our business day-to-day and executing our long-term strategy," continued Meyercord. "This is a great opportunity for her to step in and provide a seamless transition as we enter this exciting new phase of accelerated growth," he concluded.

CFO Rémi Thomas noted: "I am proud to have been part of the Extreme team that executed a growth strategy to cloudify our portfolio, took share, improved productivity and delivered structurally higher profitability and cash flow. Extreme is in a great position to achieve its long-term financial goals."

Story continues

Forward Looking Statements:

Statements in this release may be forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this release. actual results or events could differ materially from those anticipated in those forward-looking statements as a result of certain factors, including: the effectiveness of our solutions as compared with our customers' needs; a highly competitive business environment for software and switching equipment; the possibility that we might experience delays in the development or introduction of new technology and products; customer response to our new technology and products; the Company’s failure to achieve targeted financial metrics; macroeconomic and political and geopolitical factors; and supply chain disruptions and a dependency on third parties for certain components and for the manufacturing of our products.

More information about potential factors that could affect the Company's business and financial results are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022, Quarterly Report on form 10-Q for the quarter ended September 30, 2022, and other documents of the Company on file with the Securities and Exchange Commission (available at www.sec.gov). Except as required under the U.S. federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission, Extreme disclaims any obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

About Extreme Networks:

Extreme Networks, Inc. (EXTR) is a leader in cloud networking focused on delivering services that connect devices, applications, and people in new ways. We push the boundaries of technology leveraging the powers of machine learning, artificial intelligence, analytics, and automation. 50,000 customers globally trust our end-to-end, cloud-driven networking solutions and rely on our top-rated services and support to accelerate their digital transformation efforts and deliver progress like never before. For more information, visit Extreme's website at https://www.extremenetworks.com/ or follow us on LinkedIn, YouTube, Twitter, Facebook or Instagram.

Extreme Networks and the Extreme Networks logo are trademarks or registered trademarks of Extreme Networks, Inc. in the United States, and other countries.

View source version on businesswire.com: https://www.businesswire.com/news/home/20230125005254/en/

Contacts

Investor Relations and Press Contacts:

Stan Kovler
Vice President, Corporate Strategy & Investor Relations
Extreme Networks
919-595-4196
skovler@extremenetworks.com

Amy Aylward
Vice President, Corporate Marketing
Extreme Networks
603-952-5138
PR@extremenetworks.com