3 Things Extreme Networks, Inc.'s Management Wants You To Know

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Networking software and equipment maker Extreme Networks (NASDAQ: EXTR) reported fourth-quarter results earlier this month, and it was a stellar performance. Sales rose 28% year over year, adjusted earnings more than doubled, and Extreme shares jumped as much as 14.7% higher on the news.

Extreme investors have enjoyed a 23% return since that report. Share prices have also more than doubled in 2017 and gained 170% in 52 weeks.

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To go along with that electrifying earnings report, Extreme Networks' management held a conference call with Wall Street analysts. Here are a few of the most enlightening details from that event.

1. Margins are about to shrink...

Comments by Extreme Networks CFO Drew Davies:

Buying other companies out of bankruptcy can add new assets on the cheap, but it's not always a painless experience. In this case, Avaya tried to prop up its collapsing business with generous discounts, and it will take new owner Extreme a few weeks to reverse that pricing policy.

The upcoming buyout of Brocade 's (NASDAQ: BRCD) data center networking operations is different. Here, Brocade was doing fine on its own but was asked to shed some of its assets before merging its core business with Broadcom (NASDAQ: AVGO). So Extreme gets to pick up a high-quality business without the headaches of recent bankruptcies, thanks to the findings of antitrust regulators.

Extreme is generally quite happy to grow by acquisition, having completed many smaller deals in recent years. In this way, management is building a significant challenger to the big boys of enterprise-class networking tools.

2.... but only briefly

Comments by Extreme Networks CEO Ed Meyercord:

So Extreme Networks has a plan in place to reverse the damage from Avaya's deep-discount pricing policies. Beyond just stepping Avaya's prices back up, the Brocade deal will add an immediate shot of gross-margin adrenaline and the company is also using a new, mor profitable sales process.

Overall, the company is shooting for gross margins above 60%. It's actually a process that started several years ago, and investors have embraced gross margins as a core value driver for this company and stock:

3. Competitive muscle

More comments from Meyercord, explaining Extreme's ability to compete with larger networking specialists like Hewlett-Packard Enterprise (NYSE: HPE) and Cisco Systems (NASDAQ: CSCO):

Very few companies can compete with Cisco's complete end-to-end portfolio of networking solutions, but Extreme will be one of them when the Brocade merger is completed. The company can already win head-to-head contract challenges based on its powerful network management software, designed to be agnostic about the actual routing and switching hardware it's being set up to manage.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom and Cisco Systems. The Motley Fool has a disclosure policy.