Extreme Networks Likely To Beat Q2 Driven By Backlogs As Supply Constraints Ease Out, Analyst Says

Needham analyst Alex Henderson reiterated Buy on Extreme Networks, Inc EXTR with a $23 price target.
Unlike components and semis, systems backlogs are virtually never double-ordered and rarely canceled.
Systems backlogs range from 30% at Cisco Systems, Inc CSCO to 60%+ at Juniper Networks, Inc JNPR, Infinera Corp INFN, Extreme, and Ceragon Networks Ltd CRNT to 100%+ at Ciena Corp CIEN and provide more than just high visibility against macro erosion.
Despite macro fears and Street expectations for declining estimates for the S&P for CY23, the analyst expects Extreme to deliver beat and raise results.
Extreme is still supply constrained, with a backlog equating to over 60% of estimated CY23 product sales.
In an environment where investors braced for estimate cuts, these backlogs, combined with improving availability and declining parts and logistics costs, provide ample upside to revenues and EPS and likely drive improving valuations.
In the case of Extreme, the analyst thinks the current conditions are already evidencing the proper dynamics to produce this outcome. Further, Extreme has done an excellent job positioning for AI cloud native. It has vital new products set to ramp up in its Universal product line, which should further improve its competitive position and offer even better gross margins.
As the economy weakens, Henderson looks for supply to improve and part costs to decline.
In turn, the analyst thinks this will allow Extreme to ship more products out of its large and firm backlog than expected, resulting in an upside to revenues and gross margins.
The Street expects 2Q23 revenue to be up 9% and EPS to be up 14% at the mid-point of the guide against the most challenging compare of the year.
Henderson thinks growth will exceed 10%, EXTR will beat EPS, and it will raise its guide for 3Q23 (CY1Q) and FY23.
In addition, the analyst expects improving supply to allow Extreme to bring down inventory and enhance its cash flow.
The analyst forecasts 12% revenue growth over the next three quarters. Henderson thinks improving supply availability at a rate above Extreme's expectations likely drive revenue growth of 15%+ over this period.
The analyst also thinks there is an upside to gross margins, and the upside to revenues should drive OpEx leverage.
Price Action: EXTR shares traded higher by 4.34% at $19.70 on the last check Monday.
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