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Downgrades send Extreme, Redback sliding

Despite reporting solid quarters, both Extreme Networks and Redback Networks lose ground after their stocks are downgraded.

Despite reporting solid quarters, both Extreme Networks and Redback Networks lost ground Thursday after their stocks were downgraded.

Shares for both network-equipment makers slipped by market close. Extreme Networks fell 11 percent, down $5.38 to $42.50. Earlier, shares touched $38.75. Redback Networks' stock saw a similar drop, down more than 15 percent, or $7.56, to $41. Shares earlier touched $37.38.

Reporting after the bell Wednesday, both companies posted strong, if not spectacular, sales and earnings in their latest quarter.

Extreme Networks posted a second-quarter profit of $12.6 million, or 11 cents a share, on sales of $144.7 million Wednesday, matching most analysts' estimates.

For its part, Redback snuck past estimates in its fourth quarter, posting a profit of $7.8 million, or 5 cents a share, on sales of $114.6 million. First Call analyst consensus expectations called for a profit of 4 cents a share on sales just north of $100 million.

While some analysts maintained their respective ratings on both stocks, a few said earnings weren't enough to overcome concerns about information technology spending and lower gross margins. Redback was downgraded by SG Cowen Securities and Raymond James & Associates while the ratings for both Redback and Extreme were cut by Thomas Weisel Partners.

At SG Cowen, analyst Cristin Armacost lowered Redback's rating to a "buy" from "strong buy" and the stock's 12-month price target was cut to $65 from $85. The analyst adopted a cautious stance on Extreme, reiterating a "neutral" rating on the stock because of the slowdown in IT spending and aggressive pricing pressure.

While Armacost remained positive on Redback's outlook and quality of customer base, the analyst said that changes in the company's business model, including significantly lower gross margins and decelerating Short Messaging System (SMS) growth, led to the cut.

Analyst Mark Edelen at Thomas Weisel Partners downgraded Redback to "buy" from "strong buy." In a research note, Edelen said he believes the communications sector is in the first third of its slump. He also cut Extreme to "buy" from "strong buy" based on the same concerns.

At Raymond James & Associates, Redback was reduced to "market perform" from "strong buy" along with a reduction in earnings estimates for fiscal 2001.

On the bullish side, U.S. Bancorp Piper Jaffray analyst Conrad W. Leifur reiterated a "strong buy" rating on the stock and raised 2001 revenue estimates on continued strong visibility.

For Extreme, analyst Martin Pyykkonen at C.E. Unterberg Towbin maintained a "buy" rating on the stock.

Pyykkonen said Extreme has established itself as a strong second supplier behind Cisco in the corporate enterprise market but that the company needs to further penetrate the service provider market for a more balanced revenue profile.

Staff writer Larry Barrett contributed to this report.