Extreme Networks Surprises by Backing Forecasts - TheStreet

Extreme Networks

(EXTR) - Get Report

said Tuesday that it's a cinch to meet fourth-quarter financial expectations, as corporate orders and gross margins have rebounded from last quarter's plunge. Its shares surged.

The news could be good for Extreme's rivals, too, as it suggests that information technology spending is starting to firm after a long, sharp decline. But with Extreme drawing nearly half of its business from Europe and Japan, a looming overseas slowdown could put the networker's first- and second-quarter numbers at risk, the company conceded.

In the Bag

With nearly two weeks to go in its fiscal fourth quarter, Extreme CFO Vito Palermo told investors at the

CIBC World Markets Communications Food Chain

conference in New York Tuesday that April and May sales were strong and that "June was already greater than May." Palermo didn't raise his financial forecast for the quarter ending June 30 but said he was "comfortable with estimates for the top and bottom line." Analysts expect Extreme to lose a penny a share on revenue of $110 million.

Extreme makes

Ethernet-based network equipment used to carry office data traffic onto the Internet. Ethernet gear rival


( FDRY) also gave an upbeat presentation at the CIBC show, leading some investors to believe that corporate spending on information technology may be stabilizing. This will likely be viewed as a positive for data networking king


(CSCO) - Get Report

, but some observers caution that Cisco's business encompasses far more than the Ethernet market and its sheer size makes it a hard comparison.

Extreme shares closed up $2.33, or 7.7%, to $32.30 on Tuesday, while Foundry jumped $2.24, or 12%, to $20.07. Cisco dropped a penny to $20.37.

Wall Street can be excused for pouncing on even the slightest whiff of good news among network gear makers, especially if Extreme is able to say something positive in this spending-averse climate. Two weeks before it reported its fiscal third-quarter results in April, Extreme

preannounced disappointing numbers and started cutting about 5% to 10% of its staff.

Good News, Bad News

Three points of good news were offset by one overriding caution, CIBC analyst Steve Kamman said of the Extreme presentation.

The good points: Gross margins are back above 50% after dipping to 48.7% last quarter. The company saw normal order flow, reassuring investors rocked by last quarter's canceled and suspended orders and dispelling the concern that this quarter's sales were just last quarter's delayed purchases. And Extreme is working through its inventory. As Cisco demonstrated, a company bent on growth can really stumble over a pile of parts that aren't being assembled into products as sales hit the skids.

"We're back to managing the business rather than looking for business," Palermo said during his half-hour presentation.

While Palermo did an admirable job of dishing up the quarter's good news, investors were left chewing on the

overseas problem. Europe is 28% of Extreme's business and Japan is 20%, so nearly half of the company's fortunes are tied to weakening regions that could offset any modest stability that sales have seen in the U.S.

"Other players in the industry are finding the same thing," says Kamman. "There are some issues there."

But hey, recovery is measured one quarter at a time these days.