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Extreme Networks (NASDAQ:EXTR) stock fell about 15% on Wednesday after downgrades at Oppenheimer and Lake Street following the company’s weak outlook provided during Q1 results.
Oppenheimer downgraded the shares to Perform from Outperform and removed its $35 price target on the shares. The analysts said that the company reported a strong Q1, but they were cutting estimates/rating on weak guidance/macro uncertainty, mainly in EMEA (Europe, the Middle East and Africa)
Enterprises can delay network upgrades in a weak economy, and the path to reaccelerate top-line growth is likely a year out. Many of Extreme Networks’ peers have also lowered guidance. The analysts think there is a chance the company will need to guide down again if the U.S. goes into recession.
The analysts added that Bookings began slowing three quarters ago and will likely stay soft for at least another three quarters. However, visibility is limited. They think the stock will continue to be under pressure until revenue growth reaccelerates, but it could bounce on the Investor Day, to be held on Tuesday, on new long-term growth initiatives.
The analysts think the company is still well-positioned in long-term. It has superior universal hardware/cloud platform, a straightforward licensing structure, and is uniquely positioned to benefit from the convergence of networking, compute, and the edge which will continuously layer in more security and AI capabilities.
Extreme Networks (EXTR) expects Q2 revenue to be between $312M and $327M. The consensus revenue estimate for Q2 is $367.95M.
The analysts noted that EXTR also lowered its full-year outlook and expects revenue growth in the mid-to-high single digits and EPS growth of 25%-plus.
The analysts have reduced their FY24/25 revenue estimates by 9% and 12%, respectively, within new guidance. They have also cut their FY24 EPS estimate from $1.56 to $1.38, reflecting new guidance of 25% growth.
Meanwhile, Lake Street downgraded Extreme Networks (EXTR) to Hold with a price target of $19 following the company’s outlook.
The analysts noted that the company is expecting mid-to-high single-digit growth but up until about mid-September, Extreme Networks was confidently expecting mid-teens revenue growth for FY’24.
However, higher interest rates and softness in Europe—mainly Germany—resulted in deal push-outs and buyer apprehension that had the company cutting its growth rate to a range of 4%-9%, the analysts added.
At present, the lower demand is seen as an “air pocket” with an expectation that organic demand will eventually support double-digit long-term growth.
The analysts added that while they are disappointed by the outlook, they are pleased to see the swift action on cost reductions.
The company will be taking a one-time restructuring charge in Q2 as it pulls about 8% out of its prior operating expense plan. The moves will mean lower discretionary spending, reduction of an undisclosed number of personnel, and elimination of certain budgeted positions, according to the analysts.
The analysts said that they were reducing their rating to Hold as they are modeling 0%-3% growth for the next three quarters. This outlook will translate into a near-term double-whammy of a lower multiple on lower earnings. They are looking to a better risk-return opportunity before getting more constructive on the shares.
Extreme Networks (EXTR) has a Buy rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors’ (2 authors) average rating is also Buy and so is the average Wall Street analysts’ rating.
