Brocade Puts Up Q1 Loss

Shares in Brocade Communications Systems Inc. (Nasdaq: BRCD) fell 8 percent Thursday morning, to $3.90 a share, after the company turned in a net loss for its first quarter of 2003 (see Brocade Hits Lowered Q1 Targets).

Brocade's results, reported Wednesday night, are in contrast with those of McData Corp. (Nasdaq: MCDTA) and Network Appliance Inc. (Nasdaq: NTAP), which both finished strong end-of-year quarters (see NetApp Q3 Profit Triples, and McData Blows Doors Off Q4).

Still, Brocade met its reduced expectations, reporting revenue of $123.1 million and a net loss of $6.9 million, or 3 cents per share, for the quarter ended Jan. 25, 2003. Excluding a restructuring charge of $10.1 million related to job cuts of about 160 employees, Brocade said it earned $300,000, or roughly break-even (see Brocade Cleans House).

For the second quarter of 2003, Brocade now expects revenue to be between $128 million and $133 million, or up 4 percent to 8 percent sequentially. However, the company expects to break even for the quarter, compared with previous estimates of a slight profit.

Brocade said it will add a $7 million R&D charge to its operating expenses next quarter without a corresponding increase in revenue, related to its acquisition of Rhapsody Networks. Rhapsody products will begin shipping in the second half of the year. Brocade executives also mentioned that the restructuring was complete; however, there is still a non-cash charge for in-process R&D and intangibles that the company will take in the current quarter. That charge will amount to between $125 million and $135 million (see Brocade Scoops Up Rhapsody)."In 2003, protecting customer investments is in; rip and replace is out," said Greg Reyes, chairman and CEO of Brocade, on a conference call with analysts. He says the Rhapsody products are being tightly integrated with Brocade's current Fibre Channel switches to enable "the next evolution in the SAN market."

Analysts peppered Brocade with questions on how it plans to defend itself against Cisco Systems Inc.'s (Nasdaq: CSCO) Andiamo switches, which are also aiming to provide such functions as replication and data management in the network.

"From an end-user standpoint, there is a fair number of questions; a number are evaluating [the Cisco switch]," said Reyes. "Regarding OEMs, I would be shocked to see them 'private label' it." He added, "It was supposed to be available in December; we are already in February, which tells me it's late and there are issues with it."

When analysts pointed out that Cisco has an extensive channel for selling networking gear, Reyes replied: "A number of our large OEMs sell through channels. We supply to them; they supply to channels... Cisco has no unique channel vector... The reality is, they have a data-only channel, which is irrelevant to this market." He added, "They certainly didn't have success in the channel with the NuSpeed product." (See Cisco Lays Off NuSpeed Team.)

Not everyone was fully convinced by his explanation. "Although we believe Brocade's ability to post continued sequential improvements in revenue going forward has improved, we are retaining our Hold/Aggressive rating on theses shares as Cisco's ramping SAN switching business and McData's continued success in the fabric switch arena remain concerns," wrote A.G. Edwards