Brocade Q3: Sharp Vision And Execution

During Brocade's Q3 conference call, CEO Mike Klayko sized up the "IP Ethernet Market" consisting of layer 2-3 switches, service provider routers and enterprise routers, at $34.5 billion. He pointed out that if Brocade wins 1% more of market share, it would grow by $300 million. All things considered, I believe that Mr. Klayko and Brocade are good for that 1% because they have demonstrated sharp vision and execution.

During the last eighteen months the networking industry entered two technology transitions that effected Brocade: the move from 4 gigabit to 8 gigabit Fibre Channel, and the beginning of broad network unification based on 10 gigabit Converged Enhanced Ethernet. Given the long lead times for product development and market readiness, the company's crisp execution indicates they had an excellent view of the playing field long before the transitions started.

Brocade introduced 8 gigabit Fibre Channel switch products in February of 2008 followed by Cisco in December of 2008. Brocade's execution combined with Cisco's focus on 10 gigabit Ethernet is paying off now as Brocade maintains market share and profitability in its traditional core business of storage networking. Brocade gross margins increased from 56.2% in Q2 to 58.2% in Q3.

Brocade is also executing well against a new adapter strategy that repositions Fibre Channel host bus adapter market development as a stepping stone to greater success with converged network adapters. During the earnings call, Brocade management talked about a million dollar quarter-over-quarter increase in Fibre Channel host bus adapter revenue - indicating the company is starting to leverage the OEM qualifications completed during the prior year. The revenue and strategic value of the adapter business is small today but could be a critical factor in Brocade's overall success in the future. That's because Cisco is delivering 10 gigabit Converged Enhanced Ethernet solutions consisting of switches and adapters working together to provide virtualized environments with networking resources on a per virtual machine basis. I expect Brocade to compete effectively in the unified networking market with a portfolio of FCoE switches and adapters that together deliver valuable end-to-end networking features such as Quality of Service.

Finally, Brocade is executing well on their long term plan. Brocade's traditional core business is storage networking based on Fibre Channel. But their future core business is unified data, storage and server networking based on Converged Enhanced Ethernet. Instead of trying to enter this mature market through internal product and market development, the company acquired a complete portfolio of highly competitive Foundry products along with a hardened field sales team. Furthermore, Foundry leadership is well represented on the new Brocade management team which will help guide the company towards its new priorities. During the next 18 months I see Brocade leveraging OEM dissatisfaction with Cisco to make good on at least some of that 1%.

Related Links: IT Brand Pulse on Brocade HBAs at www.youtube.com/itbrandpulse