Struggling to Compete, Extreme Networks Needs a New Home

Early this week, Extreme Networks warned that its financial results would fall short of expectations for the quarter that concluded on September 27. Instead of revenue of $80.4 million, which is what analysts had been forecasting, Extreme expects to report $66 million in revenue for its fiscal first quarter.

The company followed that discouraging news with an announcement of new modules for its BlackDiamond 8800 chassis switch. The new modules will enable a BlackDiamond chassis to handle wiring-closet, core, and data-center switching, giving the company a fully extensible networking solution in one box. That makes BlackDiamond a better investment for customers.

Would that Extreme were a better investment. The company blamed its latest market tribulations on “supply-chain constraints,” but some analysts thought Extreme was also on the losing end of intensifying competition.

In a press release announcing the downgraded revenue forecast, Extreme Networks’ president and CEO Mark Canepa said the following:

“Our supply chain was constrained during the quarter, impacting our ability to deliver product, close transactions and recognize revenue. Our North America business was particularly soft, as some deals were lost and others were delayed beyond the end of the quarter. I am disappointed that we did not execute to our advantage.

However, on a positive note, we expect to report that backlog and deferred revenue increased by approximately $6 million and total cash increased approximately $3 million for the quarter. We and our Board of Directors are committed to addressing the issues that produced these results. I look forward to giving a complete update on our earning release conference call. Further, we are anticipating giving guidance for our second quarter on the call.”

That call is scheduled for October 26, and a few investors and analysts are hoping the company might be in play before then as an acquisition target. In the analyst community, there are more than a few who believe the company is bedeviled by chronically poor execution.

Said Samuel Wilson of JMP Securities:

“We believe investors should be wary of Extreme until revenue and operating margins show consistent improvement.”

Wedbush Morgan analyst Rohit Chopra wrote:

“We believe the primary reason behind the revenue shortfall was poor execution and rapidly intensifying competition.”

Competitors cited by Chopra included Cisco Systems Inc., Hewlett-Packard Co., 3Com Corp., Juniper Networks Inc., and Brocade Communications Systems Inc. I definitely agree that Extreme takes a back seat to Cisco, HP, and Juniper, and 3Com is trying desperately to get back into contention in the enterprise-networking space in North America. Brocade’s switching products from Foundry Networks go up against those of Extreme in many accounts, too.

Most of its competitors are bigger than Extreme, with far more resources and at their disposal. That means they’re in a better position to develop product enhancements and extensions and to expand their marketing and sales programs. Some of Extreme’s execution problems can be attributed to its lack of corporate scale, though others resulted from obvious tactical missteps.

One can’t help thinking that the company would be better off in the hands of a bigger player. QLogic, a vendor of Fibre Channel adapters and switches, has been mentioned as a potential acquirer, but I’m not sure that’s the best home for Extreme, even if QLogic were to buy Extreme in the hope of fattening itself up as a subsequent acquisition candidate.

That sort of maneuvering is too convoluted. It would be better for Extreme if it made one stop instead of two on the acquisition trail.

When will such an acquisition occur? Well, that’s hard to say. The answer depends on the need of the acquirer, the price said acquirer is willing to pay, and the price Extreme is willing to accept. With its stock down this week and its market capitalization at $241 million, Extreme is priced to sell, even with an acquisition premium added to the final sum.

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Despite Challenges, Google Apps on Right Course

Google initiates so many projects and technologies that it’s fair for us to wonder whether the company is fully committed to all of them. Some are trial balloons — not quite shots in the dark, but not yet clearly defined products with specific application scenarios, customers, and target markets in mind.

At this point, now that Google CEO Eric Schmidt is making sales calls on its behalf, Google Apps ought to be considered an offering to which Google is fully committed. The web-based collaboration suite has drawn a growing number of customers, some of whom are willing to pay for it.

In an interview with Steve Lohr of the New York Times, Schmidt and Google co-founder Sergey Brin divulged that nearly two million organizations — government agencies and departments, non-profit organizations, and enterprises — have adopted Google Apps. Counted among that cohort are a few large companies, such as Motorola and Genentech.

So, with the company’s commitment to Google Apps no longer in question, we can turn to the earnest question of how far and how fast Google Apps can go in its quest for enterprise adoption. After all, even with Google’s enthusiastic marketing and unflagging corporate support, Google Apps will meet resistance from prospective customers.

One salient objection to the application suite involves availability. Google has had some well-publicized service outages. Those will have to be severely mitigated and kept to a bare minimum if Google is to make steady progress against incumbents Microsoft Office and Lotus Notes. Whenever these outages occur, one can be sure Microsoft and IBM will call attention to them.

Related to availability concerns are those pertaining to the security of cloud-based applications. Google works hard to implement measures that safeguard the privacy and security of customer data, but it needs to do more if it is to put this issue to rest. The company must redouble its efforts to work closely with security vendors and experts. It needs to see the big picture — and the big opportunity — and any vestiges of a not-invented-here mindset must be swept aside. Reaching out to those with common cause in cloud security is in Google’s enlightened self-interest.

Another factor is market inertia. Basically, customers — their IT departments and application users alike — are comfortable and familiar with their behind-the-firewall servers and desktop applications. As we have all discovered, at one time or another, change can be disruptive and threatening. In this area, Google has done its utmost to make the transition painless and seamless.

Although the New York Times piece mentioned a report from Forrester Research that found only 10 percent of those using Microsoft Outlook said they would be happy to have their e-mail switched, that’s a red herring. As many comments beneath the article pointed out, Google Web Apps supports IMAP and POP email accounts, allowing users to continue using their favorite desktop email clients (including Outlook) if they’re not inclined to switch to a browser-based interface.

Microsoft Exchange would go away, of course, but most knowledge workers wouldn’t care as long as they still had their familiar email clients and could still collaborate effectively with colleagues, partners, and customers.

It will take time for Google Apps to build on its base of early adopters and win over the majority of the marketplace. Still, I increasingly think it’s only a matter of time, that Google’s web-based model will prevail, and that Microsoft and IBM are fighting rearguard actions to preserve diminishing revenue streams from existing franchises. Both incumbents need to formulate strategic plans that go beyond defensive postures, but that’s not easily done by public companies under constant quarterly pressure to “beat the Street.”

With its franchise not under threat — with revenue from search advertising providing a lucrative cornerstone on which to build new palaces of wealth — Google finds itself in an enviable position. Unlike its enterprise-collaboration rivals, Google has little to lose and much to gain.