What happened
Shares of Extreme Networks (EXTR -1.71%) fell as much as 24.2% lower on Wednesday, following a solid earnings report, with next-quarter guidance slightly above the analyst consensus. At the same time, the maker of cloud-scale networking equipment saw some turnover in the executive offices. The chart showed a slow climb throughout the day, leading up to a 14.63% total price drop as the closing bell chimed.
So what
Let's start with the management change. Extreme Networks CFO Remi Thomas is taking a high-level job at a private and undisclosed software company, handing the financial baton to senior VP Cristina Tate on an interim basis. The change will take effect on Feb. 16, ensuring a smooth transition. The search for a permanent replacement is already underway.
In the second-quarter earnings report, Extreme Networks saw revenues rise 13% year over year to $318 million. Annual recurring revenue (ARR) from software-as-a-service (SaaS) operations increased by 29% over the same time span, while adjusted earnings jumped from $0.20 to $0.27 per diluted share.
Your average Wall Street analyst had expected earnings of roughly $0.24 per share on revenues near $304 million, so Extreme cleared both bars by a wide margin.
Looking ahead to the third quarter, management set the midpoint of adjusted earnings guidance in line with the current analyst view of $0.26 per share. Revenue guidance pointed to approximately $320 million, $6 million above today's analyst projections.
Now what
The stock entered this report on a full head of steam. In the three months leading up to Tuesday's closing bell, Extreme's shares had gained 26%. The full-year gains rose to 55% in the same period, while major market indices showed negative returns:
So Extreme's stock was arguably primed for a correction as long as the reported figures were anything short of stellar. Even so, there was a lot to like in this report, and I think the market reaction looks a bit silly. Even the CFO transition is an orderly affair, more of a career move for Remi Thomas than a red flag over Extreme's current state of affairs.
The stock isn't cheap, but you're buying into a quality business here. Extreme Networks benefits from high and rising demand for high-speed networking, from the data center to the cloud. Growth investors should take a closer look at this potentially explosive opportunity.
