Why Extreme Networks shares plunged today

What happened

Shares of Extreme networks (EXTR -14.55%) fell 24.2% on Wednesday after a strong earnings report, with forecasts for the next quarter slightly above analyst consensus. At the same time, the maker of cloud-scale networking gear has seen some turnover in executive offices. The chart showed a slow rise throughout the day, resulting in a total price decline of 14.63% as the closing bell sounded.

So what

Let’s start with the change of direction. Extreme Networks CFO Remi Thomas is in a high-level position at a private, undisclosed software company, handing over the financial baton to acting senior vice president Cristina Tate. The change will take effect on February 16, ensuring a smooth transition. The search for a permanent replacement is already underway.

In the second-quarter earnings report, Extreme Networks saw revenue grow 13% year-over-year to $318 million. Software-as-a-service (SaaS) operations annual recurring revenue (ARR) grew 29% over the same period, while adjusted earnings rose from $0.20 to $0.27 per diluted share .

Your average Wall Street analyst was expecting earnings of around $0.24 per share on revenue close to $304 million, so Extreme cleared both bars with a wide margin.

Looking ahead to the third quarter, management set the midpoint of adjusted earnings guidance in line with analysts’ current view of $0.26 per share. The revenue forecast was about $320 million, or $6 million higher than analysts’ projections today.

Now what

The stock entered this report in full steam. In the three months to Tuesday’s closing bell, shares of Extreme had gained 26%. Full-year gains reached 55% over the same period, while major equity indices posted negative returns:

EXT Chart

EXTR data by YCharts

So Extreme’s stock was arguably primed for a correction as long as reported numbers were anything but stellar. Even so, there was a lot to like about this report, and I think the market reaction seems a bit silly. Even the CFO transition is an orderly affair, more of a career move for Remi Thomas than a red flag on Extreme’s current situation.

Stock isn’t cheap, but you’re buying from a quality company here. Extreme Networks benefits from high and growing demand for high-speed networks, from the data center to the cloud. Growth-oriented investors should take a closer look at this potentially explosive opportunity.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

Leave a Reply