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Technology Stocks : Extreme Networks, Inc. (EXTR) -- Ignore unavailable to you. Want to Upgrade?

To: A.L. Reagan who wrote (617)	7/26/2001 12:18:16 PM
From: ms.smartest.person	Respond to of 770

Briefing.com Stock Brief: Enterprise Looking Better 26-Jul-01 09:28 ET [BRIEFING.COM - Robert J. Reid] Many investors/traders tend to lump all of the optical equipment makers under one umbrella. However, companies making network gear with exposure to enterprise customers are showing more promise than those with more exposure to service providers. This was reaffirmed in the latest round of conference calls Briefing.com has listened in on, including Foundry Networks (FDRY) and f5 Networks (FFIV) last night. It's Tough Out There It seems every few days some company in the optical space is announcing huge job cuts and warning of severe capital spending by its customers. A good case in point is Nortel (NT). A week ago, Nortel said challenging industry conditions are expected to continue and it does not expect meaningful growth in spending to occur before the second half of 2002. As such, it declined to provide guidance even for Q3. In other words, the second half of next year is a best case scenario. Nortel has more exposure to the service provider/carrier market (ILECs, CLECs, IXCs, ISPs, ASPs, wireless service providers, cable, hosting service providers). Lucent (LU) and Alcatel (ALA) are others with a lot of service provider exposure. The Enterprise Companies While it's still tough out there on the enterprise side, there are clearer signs that demand has held up better and the timetable for a meaningful turnaround is shorter. The main reason why enterprise customers are holding up better is customer diversification. Enterprise encompasses a whole host of sectors anywhere from healthcare to retail, or transportation to financial. When one group is weak, another may be more willing to spend. On the other hand, the companies that serve mainly telecom companies are suffering. Extreme Networks (EXTR 26.25) How many companies in the optical world have been guiding higher lately? It seems that a victory these days occurs when a company does not have to warn, let alone guide higher. Extreme did just that when it recently reported results as it guided FY02 revenues higher to $540-545 mln vs Multex consensus of $528 mln. In addition to a decent outlook in the US, another plus for Extreme is its exposure to China, the world's most populous nation. The infrastructure market in China is very strong. We believe it's the strongest market in the world as it is just beginning to build its network. Also, Beijing was awarded the 2008 Olympics last week, which will spur the development even more quickly. One estimate is that the government will spend over US$20 billion modernizing the city's infrastructure, including sports facilities, transportation systems and telecom networks. During JunQ, Extreme announced new deals with China Telecom and Korea Telecom. The company says it will sell 1,300 of its switches to China Telecom and a bunch of its BlackDiamond Ethernet switches to Korea Telecom for its asymmetric digital subscriber line (ADSL) build-out. Extreme is our favorite of the group as it is strategically positioned for an early rebound once the economy and spending starts to recover. Also it benefits from several new product cycles and is well positioned to capitalize on the MAN market as well as enterprise. Be warned that meaningful growth is not right around the corner, but once signs of an economic recovery begin to appear, we would be looking to EXTR first. EXTR -- 6 Month Chart Foundry Networks (FDRY 18.97) Don't read too much into Foundry not providing guidance for Q3 last night. That's how management ended the conference call as they are just being cautious. Foundry will also be well positioned once spending picks up. Of the three in this Brief, FDRY still has the most service provider exposure, but it is focusing on the enterprise side. In Q2, enterprise customers represented 70% of new wins business. Revenue split was 60/40 between enterprise and service provider business, up from 50/50 last qtr. Also, mgmt reiterated that China was strong and now represents FDRY's second largest market behind the US. Other positives include a book-to-bill greater than one and the company says it's not seeing material pricing pressure. f5 Networks (FFIV 13.10) Last night, FFIV reported $0.02 better than consensus, but guided slightly lower for SepQ. FFIV is intriguing for a number of reasons. Management is excited about the launch of its new IP Application Switch which will begin selling in SepQ. While the company guided lower, company described it as a temporary pause in the company's improvement. Enterprise exposure is increasing and now represents almost 90% of sales including JunQ account wins of AT&T Wireless, Metro One, Dow Chemical and State Farm Insurance. Balance sheet is strong with almost $3 per share in cash with no debt. Conclusion We do not see a need to rush into these stocks today, but we are much more confident in the turnaround in spending by enterprise customers. Some additional positive comments from EXTR over the next month or two would make us very comfortable buying that stock. It's an ugly spending environment out there, but we expect these names are the ones to own ahead of the Nortels, Alcatels, Lucents of the world. Please send comments or questions to rreid@briefing.com. Used with permission of briefing.com