Extreme Networks: Beneficiary of Online Video Boom?

The increasing popularity of YouTube and its compatriot social video sharing sites is driving the online video trend. Other trends like video conferencing and IPTV are also contributing to the increasing video traffic. The enormous amount of video traffic and the need for higher bandwidth is putting networking equipment players like Cisco in high gear. In my earlier posts on Online Video Beneficiaries, I have covered Polycom, Cisco, and 3Com. In this post, I will look at Extreme’s standing as an online video beneficiary.

Extreme Networks, Inc. (Nasdaq: EXTR) is a leading provider of Ethernet solutions. Its core product lines include Summit, BlackDiamond, and Alpine. Established in 1996, Extreme provides converged network solutions that support voice, video, and data over wired and wireless infrastructures. Its security solution combines secure switches from its Sentriant product line with CLEAR-Flow, a security rules engine. This combination is meant to enable unified wired and wireless network access and IP Telephony in a secure environment.

On the financial front, Extreme reported net revenues of $342.8 million in fiscal year 2007, a decrease of 4.4% over fiscal 2006 with net revenues of $358.6 million. Net loss including share-based compensation expense of $6.2 million was $14.2 million, a decrease from net income of $8.5 million in fiscal 2006. Restructuring charges amounted to $4 million and research and development expenses were $67.1 million in fiscal 2007.

Revenues outside of the United States accounted for 59.9% of net revenues in fiscal 2007. U.S. revenues were $137.4 million, a decrease of $8.5 million, or 5.8% over fiscal 2006 primarily due to lower sales volume. Revenues outside the U.S., accounting for 59.9% of net revenues decreased by 0.6% compared to fiscal 2006 mainly due to a decrease of 4.8% in net revenues in Japan. The decline in net revenue in Japan was a result of lower demand for networking products within the service provider customer segment. Revenue in Europe, the Middle East, and Africa increased by $11.8 million, or 9.5%, as compared to fiscal 2006. Revenue in other international regions, primarily Asia Pacific, decreased by $1.1 million as compared to fiscal 2006 due to weak demand from enterprise customers.

Extreme does not seem to be benefiting too much from the online video trend. In fact, it appears that the company has no clue about what it is doing. I don’t see any coherent strategy, and most certainly no execution.

Extreme’s market cap is $391.45 Million and its stock is hovering around $3.5 after reaching a high of $4.5 in mid-July when it was selected by Nuffield Hospitals for designing and implementing wired and wireless Healthcare Network to support healthcare applications as well as voice and video over IP technologies. Not that I understand the big deal about winning this one account!

If I were to bet on a networking industry turnaround, especially one that requires winning market share away from Cisco, I cannot find a single reason for that bet to be Extreme. In a market that is fast growth, high momentum, and full of opportunities, the company is shrinking. Nah, I think I will pass of Extreme, and accept that it would probably wither on the vine. [I cannot help but wonder who is doing strategy for this company!]