Extreme Networks Inc. today reported fiscal second-quarter sales that topped the consensus estimate, but its adjusted earnings per share fell short of expectations. 

The results sent the company’s shares tumbling more than 16% on the Nasdaq.

San Jose, California-based Extreme Networks makes switches, Wi-Fi access points for offices and other networking equipment. It also sells a suite of cloud-based tools called ExtremeCloud for managing that equipment. The software can automate tasks such as configuring network devices’ cybersecurity settings and troubleshooting malfunctions.

Extreme Networks’ sales declined 6.9% year-over-year, to $296.4 million, in its second fiscal quarter ended Dec. 31. The company attributed the decline partly to decreased demand from distributors and other partners that resell its network equipment to customers. Analysts were expecting a steeper sales drop: The consensus estimate projected revenues $295.61 million.

There were multiple bright spots in Extreme Networks’ quarterly sales data. Recurring revenue, which is generated in significant part by its cloud-based network management tools, grew 14%-year-year to $101 million. It says its subscription software-as-a-service business now operates at an annualized revenue run rate of $158 million, a 37.4% jump from a year earlier. 

The company expects customer demand to start improving this quarter. “We expect to emerge in the fourth quarter at a more normalized level of revenue and earnings,” said Extreme Networks Chief Executive Ed Meyercord. “Our bookings trends and funnel of new opportunities are a better reflection of customer demand. We’re seeing stabilization across EMEA and growth in APAC.”

Extreme Networks estimates that demand from educational institutions will also boost its fourth-quarter sales. In the second quarter, deals with education and government customers drove about 40% of the company’s revenue. The healthcare sector was Extreme Networks’ second largest market, accounting for about 15% of sales, while the retail, transportation and manufacturing segments were also significant top-line contributors. 

In an investor presentation, the company listed two additional factors that may boost its sales going forward. The first is a reduction of product inventory at channel partners, which could prompt them to place more orders for new equipment. Additionally, it has identified “new growth opportunities with service providers and managed service providers.”

Adjusted diluted earnings per share amounted to 24 cents last quarter, down from 27 cents a year earlier. Analysts projected 25 cents per share. Topping the consensus earnings estimate despite last quarter’s revenue drop was partly the result of its higher gross margins, which climbed four percentage points from a year earlier, to 62.5%.

The company told investors that it will take “cost actions” to boost its profitability. It will also make changes to its go-to-market organization in a bid to increase the productivity of its sales teams. 

“Heading into the fourth quarter, we are expecting improved sequential revenue growth based on our funnel and the seasonality of our business, led by the Education vertical,” said Chief Financial Officer Kevin Rhodes. “This will position us to deliver improved profitability and cash flow in FY25.”

Image: Extreme Networks