Brocade Battles Back

Brocade Communications Systems Inc. (Nasdaq: BRCD) today showed it is holding its own in an increasingly fierce battle among SAN switch vendors, as it announced improved sales in the fourth quarter.

Brocades quarterly revenues of $145 million and earnings of $8 million, or $0.03 per share, were slightly above consensus estimates (First Call projected $0.01). Revenues increased 5 percent from the previous quarter and 18 percent from the same quarter last year. Net income rose nearly 73 percent sequentially, up from $4.6 million, or $0.02 per share, last quarter.

CEO Greg Reyes said Brocade made gains in the enterprise, midrange, and entry-level markets and increased its worldwide installed port base 12 percent to 3.4 million. “We saw revenue growth across our entire business,” he said during a conference call with analysts.

Brocade's results suggest that it's suffering less in the Fibre Channel market than its longtime rival McData Corp. (Nasdaq: MCDTA), given the squeeze caused by the entry of Cisco Systems Inc. (Nasdaq: CSCO). Cisco last week announced its storage networking revenues grew 120 percent sequentially to $40 million, signaling it is finally making inroads after entering the market in late 2002 (see Cisco Storage Growing Up).

Reyes said he doesn't want to make too much of Cisco's quarter, noting that a good deal of Cisco's revenues were carried over from the previous quarter, when it had production problems. "It remains to be seen if the last quarter for Cisco was a one-time event or a harbinger of things to come,” Reyes said.McData executives say Cisco is a bigger threat to their company because it is the share leader in the director switch market, while Brocade dominates the midrange and low end (see Brocade & McData's Paths Diverge).

Pricing pressure caused by Cisco’s entry has hit the high end harder. While McData and Brocade both had layoffs this month, McData’s was much larger in scope (see McData McDownsized and Brocade Shaves Heads). McData cut 92 employees, roughly 9 percent of its staff; while Brocade laid off 25 hardware engineers, less than 2 percent. Brocade’s headcount of around 1,230 is up around 30 from when it laid off 115 employees last April.

Brocade seemed to avoid the pricing pressures last quarter. Its gross margin rose slightly to 54.9 percent from 54.6 percent in the previous quarter. Reyes referred to "more stable pricing" during the call.

McData reports quarterly earnings on February 26.

Brocade's earnings report was rosier than last quarter, when it failed to meet expectations after McData and Cisco stumbled. At that time, Brocade also forecast the second quarter of 2004 to be flat with the first because of expenses associated with a series of product rollouts in April (see Did Brocade Blow an Opportunity?).Now it looks as if the outlook could be a tad better. Brocade's guidance for next quarter calls for revenues between $143 million and $147 million, EPS between $0.02 and $0.03, and gross margin between 53 percent and 57 percent. Brocade is expected in April to announce low-cost switches as well as a new director switch to battle McData.

— Dave Raffo, Senior Editor, Byte and Switch