Brocade Rises on Healthy Sales

Brocade reported better than expected financial results for last quarter, and its executives expressed optimism that its pending acquisition of rival McData will proceed as planned.

Brocade's $208.8 million in revenues and $0.14 earnings per share (EPS) exceeded its revenue guidance of $200 million to $205 million and EPS guidance of $0.10 to $0.12. The consensus of Wall Street analysts polled by Thomson Financial expected $203.5 million and $0.12.

With a revenue increase of 44 percent over last year and 11 percent from the previous quarter, Brocade clearly took market share from Cisco and McData last quarter. Cisco's storage revenues increased in the mid-teens last quarter while McData's preliminary report shows revenue shrank since last year. (See Cisco's Storage Slows and McData Finishes With a Flourish.)

Brocade announced plans to acquire McData for $713 million in August, pending approval from the Federal Trade Commission (FTC) that it clears antitrust regulations. (See Brocade Bags McData For $713M.)

CFO Richard Deranleau said on a conference call Tuesday with analysts he foresees no problem from the FTC, although the agency has already made two requests for information. Deranleau said he expects the deal to close as soon as January.Brocade execs did not attribute sales gains last quarter to customers moving away from McData because of the impending acquisition. Marketing VP Tom Buiocchi said there was still "healthy competition out there" between the two companies. "We've had competitive takeouts of the competition for quarters and quarters and quarters on end," he said. "I'm not sure there are any major differences there."

CEO Mike Klayko characterized it as "normal business as usual out there," and said Brocade and McData are operating as independent competing companies while putting together an integration team with members from both companies to insure a smooth transition.

One Wall Street analyst drew a connection between Brocades year over year gain and McData’s decrease.

In a research note, Mark Kelleher of Canaccord Adams wrote Brocade benefited from its early advantage in 4-Gbit/s switches as well as improved storage sales through EMC, Heweltt-Packard, and IBM but also pointed out: “Brocade’s out-performance in the quarter is nearly perfectly matched with McData’s underperformance. While we believe this trend was well under way before the merger announcement, we believe it has accelerated as customers view Brocade products as the more likely surviving platforms.”

Klayko said Brocade's fabric switch revenues grew 53 percent year over year and 19 percent sequentially, and director revenues grew 25 percent year over year and 2 percent from the previous quarter. Klayko characterized the industry director market as "flat to slightly down" sequentially last quarter.Looking ahead, Brocade forecasts revenues of $210 million to $215 million and EPS of $0.12 to $0.14 this quarter.

— Dave Raffo, News Editor, Byte and Switch