Brocade's Q3 Falls Short

Brocade surprised no one when the company reported lower-than-anticipated revenues on its third-quarter 2007 earnings call last night. (See Brocade Announces Earnings.)

"We showed a little less than expected on the top line and a little more on the bottom line," CEO Michael Klayko told analysts. "Overall, we are very pleased with both our results and execution in our third fiscal quarter."

For the three months ended July 28, 2007, Brocade reported $327.5 million in revenues, up 73 percent year-over-year but down 5 percent sequentially. Non-GAAP diluted earnings per share was 12 cents on net income of $49.5 million, a 6 percent sequential increase and a 60 percent increase year-over-year.

Execs cited "more cautious" enterprise spending, seasonal slowdowns, and spending delays by McData director customers awaiting replacement platforms. Brocade also purposely reduced sales of third-party products by $8.3 million.

Brocade execs said sales of SAN directors were flat sequentially, but embedded switch sales were "very strong." The firm has 14.1 million SAN ports installed.Brocade continues to suffer from the back-dating options scandal that forced out ex-CEO Greg Reyes, who's facing up to 20 years in jail and is due for sentencing November 21. (See Reyes Found Guilty of Fraud.) In all, the company spent $18 million last quarter in legal fees "associated with indemnification obligations to former employees and other related costs." As of the end of the quarter, Brocade had spent $33.5 million in legal fees so far this year.

Brocade exited the quarter with $639.2 million in cash and cash equivalents, 5 percent less than it had in the previous quarter, but 23 percent more than the same quarter last year.

Brocade's guidance calls for another slight downturn in revenue next quarter. In October, execs expect fourth-quarter sales to fall in the range of $330 million to $345 million, with non-GAAP EPS in the 12 to 13 cents range.

Still, the company is optimistic about its future plans. Four-gig Fibre Channel HBAs are shipping to "over a dozen distributors," management says, and the company's on track to deliver its "next-generation intelligent server adapters" next year, ones that support 8-Gbit/s Fibre Channel and 10-Gbit/s Ethernet.

Analysts had lukewarm responses to the report. At least one cited the threat of Cisco in the currently two-horse Fibre Channel switch race. "Brocade's July quarter announcement is unlikely to move the stock dramatically in either direction," wrote Laura Conigliaro and colleagues at Goldman Sachs in a report yesterday. "While macro factors appear to have hit Brocade more than its competition in the July quarter, increasing competitive pressure from Cisco will likely cause ongoing share erosion as the market becomes more of a duopoly."