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Extreme Networks (EXTR) Submits Updated SEC Filings

Posted on June 28, 2007

Extreme Networks (EXTR), one of our dissappointing picks this year, has finally completed its options investigation and filed up-to-date financials with the SEC. We believe that this represents a turning point for the company, as it eliminates a major uncertainty that we think has held back the shares, even as Avaya, a big partner of EXTR was scooped up by private equity at a significant premium, and Foundry (FDRY), EXTR’s  main comp, has slowly regained favor with investors after it too finally filed updated financials with the SEC.

As we have mentioned in the past, the main knock against EXTR is that it simply can’t compete against CSCO or FDRY, as evidenced by declining US revenues in the last two years. However, despite the negativity towards the company, there are still signs of hope. Specifically, there is the company’s strong growth in regions outside the US, a host of new products that appear to be gaining some traction, and a highly capable new management team that is both restructuring the sales force and cutting costs. In addition, EXTR remains free cash-flow positive, has over $200 million in cash (no debt) and has little cap-ex needs. With a cost-structure that is being repaired (see the 8-K filed yesterday), we think there is plenty of room for financial improvement at EXTR even without much sales growth.

To top it off, EXTR’s stock price clearly has already priced in all the negatives. Currently, the stock is trading at 0.7 times EV/Sales, vs. FDRY 3.0X EV/Sales. In our view, the valuation gap makes little sense, and it’s possible that FDRY could consider a buyout of EXTR at these levels. Juniper is also, at times, rumored as a suitor for EXTR. In any case, the downside in EXTR now appears minimal, especially after the refiling of up-to-date financial restatements. On the upside, with even a small improvement in sales, the stock could easily double to $8, at which level the stock would still be priced at a major discount to peers, notwithstanding the company’s solid technology reputation.

Please Note: We first recommended Extreme Networks (EXTR) at $4.22, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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