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Why Extreme Networks Shares Plunged as Much as 40% Today

Anders Bylund, The Motley Fool

What happened

Shares of enterprise networking expert Extreme Networks (NASDAQ: EXTR) fell as much as 40.3% on Wednesday morning, following a solid fourth-quarter and full-year report with a side of disappointing first-quarter earnings guidance. By noon EDT, the stock had recovered to a milder -- but still drastic -- 31% drop.

So what

In the fourth quarter of the 2018 fiscal year, Extreme Networks saw sales rising 56% year over year to $278 million, broadly in line with analyst projections. Adjusted earnings grew 18%, landing at $0.20 per diluted share and exceeding Wall Street's $0.19 consensus estimates. So far, so good.

But the midpoint of Extreme's first-quarter earnings guidance stopped at $0.04 per share, far below the current analyst view of $0.21 and the year-ago period's $0.16.

Yellow charting arrow diving steeply, set against a dark grey plur of other charting squiggles.

Image source: Getty Images.

Now what

In a prepared statement, CEO Ed Meyercord explained the soft guidance target:

We are resetting expectations for our data center business, and are taking swift action to rebuild our sales pipeline after a disappointing fiscal fourth quarter, while celebrating some key wins. ... We are now undertaking an initiative over the next six months to bring our portfolio together and consolidate distribution to improve channel efficiency. We expect this change to impact our revenues for the first two quarters of fiscal 2019 by approximately $30 million to $40 million as compared with prior full-year outlook.

Meyercord expects this program to improve his company's operating efficiency and strengthen Extreme's working-capital resources over time, but at the cost of some short-term pain.

Call me crazy, but I see this as a tempting buy-in opportunity. Extreme is a well-managed company that happens to be going through some growing pains after a huge buyout spree in 2017, and I actually appreciate management's willingness to make some difficult changes now that should result in stronger results in later reporting periods. The stock is now trading at prices not seen since March of 2017, and at the lowest price-to earnings ratios that Extreme has offered in more than five years.

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