Brocade Greases EMC's Palms

Brocade Communications Systems Inc. (Nasdaq: BRCD) used several aggressive sales tactics during its second quarter to try to gain share in the Fibre Channel switch market, including unusually generous sales incentives for EMC Corp. (NYSE: EMC) sales reps, according to several industry sources.

Brocade's sales push was designed to move its high-end SilkWorm 12000, which has faced stiff competition from McData Corp. (Nasdaq: MCDTA) and is now starting to vie with Cisco Systems Inc. (Nasdaq: CSCO).

As part of its strategy, Brocade was offering EMC system engineers (SEs) a "spiff" -- essentially, a kickback -- of $250 for each 16-port blade sold in the quarter, according to a source familiar with EMC. That amounts to a $2,000 spiff per 128-port dual-switch Brocade 12000 sold; the program topped out at $8,000 per sales rep for the quarter that ended in July. Another source says the spiffs have been extended through the October 2003 quarter. [Ed. note: A few disappointed EMC guys were expecting $2,000 spliffs.]

The program appears to have been specifically aimed at EMC; a source says that Brocade did not offer Hitachi Data Systems (HDS) reps, for example, the same incentives. EMC is the leading supplier of SAN infrastructure gear in the market, accounting for as much as two thirds of director-class switch sales (see EMC Holds Off on Cisco).

Industry observers say that while spiffs are very common, those reportedly offered by Brocade to EMC's SEs were well above the industry norm. "It shows they know their back is against the wall," says an executive at a major storage systems company. Brocade's other promotional efforts for the 12000 have included "buy two, get two free" deals, an offer one source characterized as "irrational."It's not clear how well these efforts have paid off for Brocade. Analysts say Brocade may not be achieving the traction it had hoped for in the director segment, despite having released a new version of its firmware that provides nondisruptive code load, Ficon support, and other features critical for high-end SANs (see Brocade Loads Code, Signs EMC).

Brocade's spiff program "implies the technology is not up to snuff," says Dan Renouard, an analyst with Robert W. Baird & Co. Inc. He also notes that "McData has a strong incumbent position among EMC reps that Brocade, regardless of product quality, would have a hard time displacing."

Brocade declined to comment for this article. EMC did not respond to requests for more information.

The intense sales drive from Brocade comes as SAN switch prices in general are on the downswing. McData is now selling entry-level FC switches at $550 per port (see McData Swings Switches Lower and McData Picks Brocade's Pocket). On the high end, Cisco has sold switches into certain accounts for less than $1,000 per port, industry sources say. On Cisco's earnings call this week, CEO John Chambers acknowledged that it had dropped prices of its MDS 9000 switches as much as 35 percent in the most recent quarter (see Cisco Misses SAN Sales Target and IBM Slashes Cisco MDS Pricing).

Meanwhile, EMC CEO Joe Tucci said yesterday at the company's annual analyst meeting that pricing in the Fibre Channel switch market continues to be steep. "The margins in the Fibre Channel switching and director space are still pretty rich," he said. "We think those can come down." (See EMC Salivates Over Software.) And, as one industry consultant notes: "Once prices go down, they don't go back up."Still, in spite of heavy pressure from both Cisco and McData over the course of the July quarter, Brocade should meet expectations for its third quarter with revenues of $135 million and earnings of 1 cent per share, writes Goldman Sachs & Co. analyst Laura Conigliaro in a note issued today.

"Although expectations have been falling rapidly... and both McData and Cisco remain significant competitive threats, our checks, while not comprehensive, suggest that enough of Brocade's business has remained stable for us to feel comfortable in this assessment," she writes.

On its previous earnings call, Brocade said it expects third-quarter revenues to be in the range of $131 million to $137 million, with earnings of 1 cent per share (see Brocade Hit With Q2 Loss).

But Conigliaro also says that, because Brocade's revenue growth will continue to be constrained by "competitive pressures," she expects the company to continue to reduce operating expenses in an effort to boost the bottom line -- which may mean more layoffs are in the cards for Brocade (see Brocade Chops More Heads and Brocade Cleans House).

Brocade plans to report its third-quarter 2003 results next Wednesday, Aug. 13, after the market closes.Todd "Spiffy" Spangler, US Editor, Byte and Switch