Extreme Networks (EXTR) Surges on Preliminary Results, Yet Not Translating to Bottom Line

July 21, 2014 • Top News • Tags:

Extreme Networks, a provider of network solutions like cloud and high density Wi-Fi, BYOD and identity access management and security, announced preliminary unaudited financial results for Q42014 fiscal period that exceeded the previous guidance. EXTR stock was up 15% on this news.

Extreme Networks announced unaudited preliminary results because the release of the final fourth quarter 2014 earnings report will be delayed due to the time required to complete its first year-end financial close and audit process since the Enterasys acquisition.

The acquisition, combined with increased R&D efforts, brought strong wireless LAN, network management and security technologies to Extreme’s operations. Since the deal occurred last September, investors are already seeing top line growth. The street needs to see this trickle down to profits next.

The Fiscal Q4 2014 Picture

Non-GAAP financials were projected as follows (with previous guidance inside the brackets):

  • Revenue: $154M-$156M (compared to $145M-$150M)
  • Gross Margin: 56.5%-57.5% (compared to ~55%)
  • Operating Expenses $77.5M-$79M (compared to $76M-$78M)
  • Non-GAAP EPS: $0.06- $0.08 (compared to $0.02- $0.04)

As you can see, guidance is up across the board indicating the success of Extreme’s operations as well as the successful acquisition of Enterasys. Given the above figures, the Q4 financials, which are expected August 14th, could look something like this:

extreme technology q4 projections

 

With the inclusion of interest and taxes, Extreme will be marginally profitable. Comparing to other periods, Extreme would experience a 96% increase in top-line from the same period a year ago and 9% growth QoQ. However, keep in mind these numbers are Non-GAAP.

GAAP figures could result in an Operating Loss figure that’s greater than $10M. Although top line is seeing great traction, operating expenses are also rising fast. The good thing about this is that about a quarter of expenses are spent on R&D, which should theoretically add value in the near future.

Conclusion

If the released results in mid-August indicate that Extreme is tightening their expenditures, EXTR could be a good candidate for a long term investment. The company is experiencing top line growth and trading at similar levels right after the Enterasys acquisition. With integration and more effective cost structure, Extreme could see the $6 range before summer is over.

 

 

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