Brocade Bungles Quarter

Brocade Communications Systems Inc. (Nasdaq: BRCD) says sales for last quarter fell far short of meeting the companys previous forecast. The company blames a range of factors.

Brocade’s revised forecast is for revenues of $144 million to $145 million and earnings per share (EPS) of $0.07. Brocade’s previous guidance called for revenues of $155 million to $161 million and EPS of $0.08 to $0.09. Analysts polled by Thomson First Call expected $158.7 million in revenue and $0.09 EPS. Brocade posted revenues of $145.6 million in the same quarter last year, and its revenues were $161.6 million in the previous quarter.

Brocade’s new CEO Mike Klayko attributed the poor results to greater seasonality than expected and longer sales cycles pushing deals later in the year.

"As reported recently by several industry observers, the storage environment in the last two weeks of March was weak and while April was a good month, it was not enough to offset the weakness in March. As we enter the third fiscal quarter, our sales pipeline continues to grow and the pipeline we see today is a stronger one than it was entering our second quarter," Klayko said in a statement.

Also, Cisco Systems Inc. (Nasdaq: CSCO) has been making strong gains in the Fibre Channel switch market in recent quarters. The emergence of a third major vendor along with Brocade and McData Corp. (Nasdaq: MCDTA) at least contributed to longer sales cycle if not poorer sales for Brocade.Meanwhile, the Securities and Exchange Commission (SEC) is looking into an internal audit Brocade conducted last year that focused on how the company handled stock-based compensation, although there is no formal SEC investigation. Following Brocade’s audit, CEO Greg Reyes stepped down as CEO in January and Klayko moved up from VP of sales (see Brocade Switches CEOs, Restates ).

Although Brocade met or beat expectations the previous five quarters, its announcement today was not surprising. Last week, Merrill Lynch & Co. Inc.

analyst Shebly Seyrafi downgraded Brocade’s stock from Buy to Sell while predicting Brocade would fall $0.02 short of consensus earnings expectation.

Seyrafi attributed Brocade’s disappointing sales to weak SAN-related revenue at its partners, Hewlett-Packard Co. (NYSE: HPQ), IBM Corp. (NYSE: IBM), and Storage Technology Corp. (StorageTek) (NYSE: STK) last quarter.

“Additionally, the informal SEC investigation keeps lingering with no near-term end in sight and Cisco’s growth in the SAN switch market continues to be robust,” Seyrafi wrote in a note to clients. Seyrafi speculates that the informal SEC inquiry could take more than a year to complete.

With McData concentrating on closing its acquisition of Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) while rolling out new products, Cisco appears to be Brocade’s main nemesis now (see CNT, McData Mull Product Conundrum). Cisco’s storage revenue increased 40 percent sequentially and 70 percent year-over-year during the last quarter of 2004, with most of its gains in the high-end director space (see Cisco Storage Spikes and Cisco, McData in Director Draw).Analysts believe QLogic Corp. (Nasdaq: QLGC) is also making gains with low-end switches, a segment of the market that Brocade dominates. A looming Cisco-QLogic partnership for 4-Gbit/s switches could give Brocade more headaches down the road (see Cisco & QLogic: Headed for Huddle).

“Cisco is clearly taking aim at Brocade’s core market with aggressive pricing and a likely QLogic OEM deal,” Robert W. Baird & Co. Inc. analyst Dan Renouard wrote in a note to clients today. Renouard added the McData’s new 24-port low-end Sphereon switch and management “credibility issues” could be hurting Brocade.

With few exceptions, the first quarter of 2005 was rocky for those storage vendors that have announced earnings so far. IBM, Adaptec Inc. (Nasdaq: ADPT), Dot Hill Systems Corp. (Nasdaq: HILL), Engenio Information Technologies Inc., Overland Storage Inc. (Nasdaq: OVRL), Storage Technology Corp. (StorageTek) (NYSE: STK), and Sun Microsystems Inc. (Nasdaq: SUNW) all posted disappointing results. (See Storage Spending Slips, Adaptec Announces Earnings, Dot Hill Posts Q1, Overland Underperforms, and LSI Logic Announces Q1.)

Not all storage companies struggled, though. EMC Corp. (NYSE: EMC) and Emulex Corp. (NYSE: ELX) reported strong quarters (see EMC Growth Continues and Emulex Breaks Through. Also, analysts say Hitachi Data Systems (HDS) storage revenue increased 11 percent sequentially -- signaling that its Tagmastore enterprise SAN system could be starting to pick up steam (see HItachi Posts 2004 and Hitachi Struts Mr. Universal).

— Dave Raffo, Senior Editor, Byte and Switch0