Brocade: Tough Quarter, Bad Year

Brocade Communications Systems reported mixed financial results today, although execs are planning to boost future revenues with a major push into storage services. (See Brocade Reports Q4, 2005 Results.)

The vendor, which has faced stiff competition from rivals Cisco Systems and McData this year, reported fourth-quarter revenues of $145.5 million, down from $155.6 million in the same period last year, although this figure came in above analyst estimates of $144.19 million.

For the full year, the firm reported annual revenues of $574.1 million, down from $596.3 million in 2004, and below analyst estimates of $575.67 million.

On a GAAP basis, there were no quarterly earnings per share on net income of $1.1 million, compared to 8 cents on $20.3 million in the year ago quarter. Non-GAAP earnings for the quarter were 7 cents on net income of $19 million, down from 8 cents and $20.8 million in the fourth quarter of 2004. Analysts had estimated earnings of 5 cents per share.

The results cap a turbulent 12 months for Brocade. In addition to its year-long sales slump, Brocade has also faced delisting by Nasdaq for failing to file earnings reports on time; been under investigation for the way it accounted for stock options; and been embroiled in trying to get out of a deal to pay former CEO Greg Reyes as a consultant. (See Brocade Notified by Nasdaq , SEC Gets Formal With Brocade, and Brocade Blasts 'Consultant' Reyes.)Clearly looking to draw a line under these events during a conference call this morning, Brocade CEO Michael Klayko explained that whereas the firm solidified” its internal business in 2005, 2006 will be a year of services expansion.

“We plan to provide a full portfolio of services,” he explained, adding that these will be offered in conjunction with the vendor’s SilkWorm and Tapestry products. “Our SAN customers are undoubtedly not done building out their storage networks."

Brocade CFO Tony Canova recently hinted that the vendor has big plans in this area, focusing on SAN management, assessment, design, and implementation. (See Brocade Plans Services Blitz.)

Today, Canova explained that, by the end of 2006, he expects services to account for about 5 percent of Brocade’s revenues. He also confirmed that the vendor is going on a recruitment tear to increase its services headcount from 30 to 100 people.

Tom Buiocchi, Brocade’s vice president of marketing, said the new services will also be packaged with existing product offerings so they can be resold by partners.But Brocade is also working externally to bolster its services push. “We’re looking to expand that with partnerships with other vendors in the marketplace,” said Canova, without naming any names.

Klayko also used the call to highlight the strength of the vendor’s OEM partnerships, with Brocade notching up $160.2 million in sell-through business during the fourth quarter. This, he said, was the second highest figure in the company’s history, and comes at a time when rival McData is looking to iron out key issues with its own partner EMC. (See McData's Mixed Bag, McData Takes a Direct Hit, and McData's Qualification Quagmire.)

Canova was also grilled on the status of the SEC’s ongoing investigation into Brocade. “This could take a while,” he said. “It’s not something that we get a monthly update on.”

In early trading today, shares of Brocade fell 36 cents (7.95 percent) to $4.17.

— James Rogers, Senior Editor, Byte and SwitchOrganizations mentioned in this article: