Extreme Networks, Inc. Smashed Every Target in This Report

Networking equipment and management systems expert Extreme Networks (EXTR 0.14%) reported fourth-quarter earnings on Monday night. The company crushed both its own and Wall Street's expectations, and management followed up with strong guidance for the next quarter. Thanks to this stellar report, Extreme's shares opened 10.6% higher on Tuesday.

Extreme Networks' fourth-quarter results: The raw numbers

Data source: Extreme Networks.

In adjusted terms, earnings rose 70% year over year to $0.17 per share. Analysts would have settled for non-GAAP earnings of $0.15 per share on sales near $172 million, so this was a solid outperformance when measured against Wall Street's expectations.

Extreme also landed above the top end of its own guidance ranges for top-line revenues, GAAP earnings, gross margins, and more.

What happened with Extreme Networks this quarter?

• Extreme closed the acquisition of Avaya's networking operations near the end of July -- three weeks after closing the books for the fourth quarter. That deal is expected to add $200 million of annual sales, but the deal added nothing to the fourth quarter's results.
• Gross margins expanded thanks to Extreme's limited use of discounted prices, which in turn was made possible by the company's rising brand strength.
• CEO Ed Meyercord claimed that his company is taking market share from larger rivals including Cisco Systems (CSCO -0.73%) and Juniper Networks (JNPR -0.73%), and Extreme's strong sales growth support that bold statement. Keep in mind that Cisco's recent fourth-quarter report came with a downright gloomy market outlook while Extreme is setting its sights high, and there's another solid point of evidence. Keep these split forecasts in mind when Juniper reports earnings later this week.

Speaking of guidance, Extreme's management set up the following guidance ranges for the first quarter of fiscal year 2018:

• Revenues should land between $200 million and $210 million, up from $123 million in the year-ago quarter and including nearly a full quarter of contributions from the Avaya acquisition.
• GAAP earnings per share are expected to stop between a $0.01 loss and a $0.05 profit, compared to a $0.02 loss per share in the first quarter of 2017. The Avaya deal will weigh on Extreme's profit margins due to acquisition costs and Avaya's habit of discount-based sales tactics. It will take a few quarters to work the new asset's poor pricing discipline out of the system.
• Adjusted earnings per share, which exclude stock-based compensation expenses, acquisition-related costs, and other one-time items, stopped at $0.07 a year earlier. This time, that figure should arrive between $0.11 and $0.17.
• The Street's consensus estimates currently call for adjusted first-quarter earnings of roughly $0.07 per share on sales of approximately $149 million.

Image source: Extreme Networks.

What management had to say

The company is still looking ahead to closing its next big acquisition. Extreme expects to pick up the data center networking assets of Brocade (BRCD) in a $55 million all-cash deal when the rest of Brocade merges with Broadcom (AVGO 2.18%). That is now expected to happen in Extreme's second quarter, and Ed Meyercord sees this as a game changer:

"At the close of our Brocade asset purchase, we will cement our position as the #3 player in the enterprise market for end-to-end, wired and wireless networking solutions," he said in a conference call with analysts. "This gives us more advanced and brand recognition, and the new Extreme will have the important distinction of being the only pure-play enterprise networking provider in the industry."

Looking ahead

Extreme's acquisition hunger has provided plenty of growth fuel for the company, and investors are already enjoying the benefits of this strategy. When the acquisition dust has settled, we'll be looking at a networking specialist with annual sales above the $1 billion mark, which currently is a club with just two members -- Cisco and Juniper.

This company is doing a lot of things absolutely right these days, and Extreme's shareholders have enjoyed a 160% gain over the last 52 weeks. Juniper and Cisco better look out, because Extreme Networks is starting to look like a credible challenger to their enterprise networking operations.