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Online Video Beneficiaries: Extreme?

Posted on Wednesday, Sep 12th 2007

The increasing popularity of YouTube and its compatriot social video sharing sites is driving the online video trend. Other trends like video conferencing and IPTV are also contributing to the increasing video traffic. The enormous amount of video traffic and the need for higher bandwidth is putting networking equipment players like Cisco in high gear. In my earlier posts on Online Video Beneficiaries, I have covered Polycom, Cisco, and 3Com. In this post, I will look at Extreme’s standing as an online video beneficiary.

Extreme Networks, Inc. (Nasdaq: EXTR) is a leading provider of Ethernet solutions. Its core product lines include Summit, BlackDiamond, and Alpine. Established in 1996, Extreme provides converged network solutions that support voice, video, and data over wired and wireless infrastructures. Its security solution combines secure switches from its Sentriant product line with CLEAR-Flow, a security rules engine. This combination is meant to enable unified wired and wireless network access and IP Telephony in a secure environment.

On the financial front, Extreme reported net revenues of $342.8 million in fiscal year 2007, a decrease of 4.4% over fiscal 2006 with net revenues of $358.6 million. Net loss including share-based compensation expense of $6.2 million was $14.2 million, a decrease from net income of $8.5 million in fiscal 2006. Restructuring charges amounted to $4 million and research and development expenses were $67.1 million in fiscal 2007.

Revenues outside of the United States accounted for 59.9% of net revenues in fiscal 2007. U.S. revenues were $137.4 million, a decrease of $8.5 million, or 5.8% over fiscal 2006 primarily due to lower sales volume. Revenues outside the U.S., accounting for 59.9% of net revenues decreased by 0.6% compared to fiscal 2006 mainly due to a decrease of 4.8% in net revenues in Japan. The decline in net revenue in Japan was a result of lower demand for networking products within the service provider customer segment. Revenue in Europe, the Middle East, and Africa increased by $11.8 million, or 9.5%, as compared to fiscal 2006. Revenue in other international regions, primarily Asia Pacific, decreased by $1.1 million as compared to fiscal 2006 due to weak demand from enterprise customers.

Extreme does not seem to be benefiting too much from the online video trend. In fact, it appears that the company has no clue about what it is doing. I don’t see any coherent strategy, and most certainly no execution.

Extreme’s market cap is $391.45 Million and its stock is hovering around $3.5 after reaching a high of $4.5 in mid-July when it was selected by Nuffield Hospitals for designing and implementing wired and wireless Healthcare Network to support healthcare applications as well as voice and video over IP technologies. Not that I understand the big deal about winning this one account!

If I were to bet on a networking industry turnaround, especially one that requires winning market share away from Cisco, I cannot find a single reason for that bet to be Extreme. In a market that is fast growth, high momentum, and full of opportunities, the company is shrinking. Nah, I think I will pass on Extreme, and accept that it would probably wither on the vine. [I cannot help but wonder who is doing strategy for this company!]

Extreme Networks Inc. (EXTR)

This segment is a part in the series : Online Video Beneficiaries

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Generally great posts, but you wrote: “U.S. revenues were $137.4 million, a decrease of $8.5 million, or 5.8% over fiscal 2006 primarily due to lower sales volume.”

Let me guess – when revenues go up, it’s then primarily due to higher sales volumes!

Who knew?

Dan Gilmore Thursday, September 13, 2007 at 6:51 AM PT

Sorry, Dan. I think we missed to include the line of business / geography where that decline occurred.

Checking …

sm

Sramana Mitra Thursday, September 13, 2007 at 12:58 PM PT

The following causes are mentioned in Extreme’s annual report.

US Market:
1. A number of factors have contributed to the decline in revenues in the U.S., including turnover in sales and marketing personnel, intense competition, as well as the timing of customer purchase decisions.
2. The company experienced lower revenue in the
enterprise segment in the U.S.

Overall
1. The decrease in product revenue in fiscal 2007 from fiscal 2006 was principally due to lower sales volume and an increase in discounts.
2. The decrease in service revenue in fiscal 2007 from fiscal 2006 was due to a decrease in maintenance contract revenue as a result of lower product revenue.

Btw, decrease in revenues can be caused by many other reasons besides decrease in sale volume. One of them, as you see above, is increased discounting and resultant ASP erosion.

At any rate, Extreme looks like a company that is more or less imploding.

Sramana Mitra Sunday, September 16, 2007 at 11:22 AM PT

[…] segment is part 14 in a running series Jump to part: Introduction, Polycom, Cisco, 3Com?, Extreme?, Nortel, Juniper, Media, Alcatel?, Foundry, Akamai, F5, Seagate, SynthesisOnline Video is a clear […]

Online Video Beneficiaries: Synthesis - Sramana Mitra on Strategy Friday, October 12, 2007 at 11:59 AM PT

The company is starting to grow again. It even appears to be gaining share from CSCO in some segments:

Top Ranked Service Provider Router/Switch Vendors, by Revenue Growth Q3 2007
Quarterly Revenue Change

  1. Nortel +80%
  2. Tellabs +64%
  3. Foundry Networks +23%
  4. Extreme Networks +18%
  5. Juniper Networks +17%
  6. Cisco +12%

https://www.earthtimes.org/articles/show/news_press_release,226169.shtml

Brian Tuesday, November 20, 2007 at 3:43 PM PT

Amen!

Sramana Mitra Tuesday, November 20, 2007 at 3:48 PM PT