A class action lawsuit was filed against Extreme Networks (EXTR) by Levi & Korsinsky on August 13, 2024. The plaintiffs (shareholders) alleged that they bought EXTR stock at artificially inflated prices between July 27, 2022, and January 30, 2024 (Class Period) and are now seeking compensation for their financial losses. Investors who bought Extreme Networks stock during that period can click here to learn about joining the lawsuit.
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Extreme Networks is an American networking solutions provider. The company designs and develops cloud-driven networking infrastructure solutions for government, education, healthcare, manufacturing, retail, sports, events, and transportation sectors.
Extreme Networks experienced strong demand for its networking solutions during the COVID-19 pandemic and expected this demand to persist, leading to large inventories and backlogs. The company’s tall claims about its organic demand, revenue growth, and market share gains are at the heart of this complaint.
Extreme’s Misleading Claims
According to the lawsuit, Extreme Networks, along with four of its current and former senior officers and directors (referred to as the Individual Defendants), repeatedly made false and misleading public statements throughout the Class Period. Particularly, they are accused of omitting truthful information about certain business and financial metrics from SEC filings and related material.
For instance, in a press release issued during the Class Period, the company’s CEO cited increasing market demand for networking solutions from global customers. The CEO also noted double-digit growth in new projects for Fiscal 2023 as proof of this increasing demand.
Similarly, in a letter posted on the website around August 29, 2022, the CEO mentioned that the company exited the year with a record product backlog of $513 million, representing 5x year-over-year growth. This massive backlog would accelerate revenue growth over the coming years, the CEO added.
Based on the continued momentum, the company even lifted its full-year Fiscal 2023 revenue growth outlook to the high-end range of between 10% and 15%. Furthermore, the company noted that the momentum was expected to continue well into Fiscal 2024, with the expected improvement in the supply chain environment.
Unfortunately, subsequent events (discussed below) revealed that Extreme Networks and its executives were misleading investors about the revenue growth prospects and market share gains without correctly anticipating a softening in demand.
Plaintiffs’ Arguments
The plaintiffs maintain that the Defendants deceived investors by lying and withholding critical information about the company’s business and financial condition during the Class Period. Importantly, the Defendants are accused of misleading investors about the company’s revenue and market share expectations.
The information became clear in a series of events that took place on January 8 and January 31, 2024. First, Extreme Networks issued a press release giving a business update that included a reduction in its Q2FY24 and long-term revenue expectations. The CEO attributed industry headwinds such as channel digestion and elongated sales cycles for the reduced outlook. Following the news, EXTR shares fell 7.4% on January 9.
Moreover, on January 31, Extreme Networks reported weak financial results for Q2FY24. Total revenues declined 7% year-over-year to $296.4 million. Also, product revenues came in at only $186.6 million, plunging 37% year-over-year. As a result, EXTR shares collapsed 18.8%.
To conclude, Extreme Networks allegedly misled investors about its revenue growth prospects for Fiscal 2024. Year-to-date, EXTR stock has declined 14.4%, causing damage to shareholder returns.
