Ethernet equipment

Brocade Feels the Pain

Shares of Brocade Communications Systems Inc. (Nasdaq: BRCD) fell 30 percent, to $3.44 per share, Friday morning as the company announced its third-quarter earnings will miss expectations.

For its third quarter, which ended July 30, Brocade expects revenues to be $500 million to $505 million, compared with its previous forecast of $540 million to $560 million.

Ethernet sales will actually grow 12 to 13 percent over last year's third quarter, but Brocade had expected more. And storage revenues, representing about two-thirds of Brocade's business, will be down 5 to 6 percent compared with a year ago.

Brocade's share price had fallen 7.6 percent on Thursday, the day when pretty much every stock fell. You have to wonder if some Brocade investor somewhere said, "Hey, it could be worse!"

Why this matters
It's not just that Brocade missed numbers; it's that the company is reporting weak demand in IT, from government customers in particular. That reinforces the hints coming out of other equipment vendors and adds to the pall that's building over this industry.

Last week, Extreme Networks Inc. (Nasdaq: EXTR) reported that Ethernet could be facing fierce pricing battles. And Juniper Networks Inc. (NYSE: JNPR) lowered its sales forecasts based on the downtrodden economy and an expected leveling-off of service-provider business.

It's just tough all around, and none of that bodes well for the most closely watched equipment vendor, Cisco Systems Inc. (Nasdaq: CSCO), which announces its earnings on Aug. 10. Odds of any happy surprises there just got even lower.

For more
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— Craig Matsumoto, West Coast Editor, Light Reading

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^Eagle^ 12/5/2012 | 4:56:53 PM
re: Brocade Feels the Pain

Here we go again.  Telecom / Datacom / IT are going to take a big battering.  Like we have been in successive downturns since 2001.  

More layoffs to come everywhere over the coming few quarters.  Both business top and bottom lines are suffering and the stock market is faltering.

Conventional wisdom CEOs will ship yet more jobs overseas in an attempt to drive costs even lower so that the company can "grow" and "compete".  

But meanwhile all those CEOs are accompishing is giving themselves more time to cash out.  

The act of shipping jobs overseas makes it easier for more low cost but high end quality competitors to be born in low wage countries, lower wage than even in China.  And shifts income from American workers overseas, in reality never to return.

And what happens, the company that the CEO was supposed to be "adding value to" and growing collapses due to low cost pressure.  

We find the CEO and board only enriched themselves and actually accelerated the demise of the company by destroying innovation and drive to excell with in the ranks.  The manuveur to ship production overseas, and then to outsource even that to ever lower cost sub-contractors only gave a few quarters of an illusion that the company was healthy and able to compete.   CEO did not save the company at all.  Shipped jobs helped the P/L just enough to allow the CEO and board to cash out.  Then leave before things get really bad.

totally crazy.

But looks like that is what will be happening.  Cisco lays off, but at the same time opens more design centers overseas.  standard pattern for almost our entire industry from components to subsystems to systems.  Yeah, I have been reading the Cisco "who gets laid off and what is the strategy going forward... blogs and chats as well as all the other news coming out.  

Look to this down turn that everyone is wispering about, and what is starting to show up on forward looking statements, to be the trigger that causes yet another massive 'belch' of jobs over to low cost countries.  This will trigger brutal competitive forces on any company that maintains substantial high cost operations here to "make it in america".  the tide will flow out and our industry.  the economy will fall further here in N. America. 

Can't make it here any more.

Note: I am not talking specifically about Brocade but rather the overall situation that seems to spiralling ever downhill in what was once a mighty industry here in North America.

The bad news from forward looking statements, Brocade, Cisco layoffs and re-org, faltering optical stocks, switching stocks, large systems OEM, Tellabs news, ALU, the near collapse of Neophtonics stock since IPO... heck on the quarterly call yesterday Neo reported revenues up and margins up and profit up, but stock still took a beating.   This general malaise is what I am referring to.  Look at Finisar stock, it was just starting to recover from the big downturns of a few years ago last year and early this year and now it is down significantly over the last several months.  Even though Finisar has been taking costs out from their bottom line rapidly for the last several quarters since Optium merged with Finisar.  

So, I know there are a LOT of brillian people on these boards.  How do we save our industry?  How do we save ourselves?  How do we make our sector of the economy thrive again in North America? (I am not talking about making transponders in asia and selling them here.  That adds little to the real economy out side of commissions to sales team and bonuses to executives.)

How do we have a thriving industry that develops and makes it here?

After all, we went through and equally brutal time in semiconductors back in the 80's and we saved that industry by combinations of public / private investment in various structural changes that allowed semi con companies to survive, and out compete asian suppliers.  Consortia like Semtech in Austin and many others were created to save the entire semicon industry here.

Do we need some thing like this for Telecom / Datacom?  

Just asking and looking to stimulate discussion.

Let the firebomb throwing and flaming begin.  But maybe we will also get some discussion that is informative and useful.


^Eagle^ 12/5/2012 | 4:56:52 PM
re: Brocade Feels the Pain


Those are 7 great steps that I heartily endorse.

Only one question: What about the pay gap betwen really amazing engineering teams that make the real value (along with customers and account management) vs "C" level employees?  In USA it is highest in the world.  I agree bosses should make more.  But the multiple that relatively small value add C level staff in most companies make over the folks who create the actual value in the products and technology is obscene.  Much higher than any place except perhaps in oligargy dictatorist russia.  Much higher than Japan, Europe, et all.  

I think CEO pay should be pegged to long term performance. Both long term performance of the company (NOT quarterly).. something like 5 years trend line or maybe something better than that.  (Just not sure what the mechanism should be). AND to long term performance of employees retirement funds.  I also think C leve and V level people should be locked out selling all stock post all IPO's for FAR longer than the normal 6 months.   Then if and only if both employees are doing well and the company is doing well over the long term do CEO's get a bonus.  And that bonus should be on the order of same scale or % of base salary that bonuses go to engineering teams.  Finally, I think that if you are on the board of one company, you should not be allowed to serve on any other boards in the same industry and never be allowed to serve on any boards with people you are on other boards with.

I would also tax all investment income and profits at standard income tax rates so hedge fund managers cannot game the system so easily (along with changing the rules for margin buying and selling and hedge fund regulations and reporting) 

Just a few thoughts.  Other wise, I say your 7 points are right on target!


paolo.franzoi 12/5/2012 | 4:56:52 PM
re: Brocade Feels the Pain


Seven's 7 step plan:

1 - Make it a tax penalty to ship jobs overseas, particularly design jobs, instead of a tax break.

2 - Actually enforce the laws of corporate governance and reporting that we have on the books (aka why did nobody go to jail under Sarbanes-Oxley).

3 - Make is a requirement that all Telecom and IT equipment deployed by the US government is designed and manufactured (all the way down to the component level - and no buying software stacks overseas either) in the US.

4 - If you buy equipment with US Government money, you must follow the rules in 3.

5 - Tax imports from China to equate to the amount that the currencies should float.

6 - Mandate a Fiber to the Home universal service of 100Mb/s broadband.

7 - Take all the IOCs lower than 100,000 lines and roll them into a single company and then eliminate USF.


paolo.franzoi 12/5/2012 | 4:56:51 PM
re: Brocade Feels the Pain


I understand what you mean by the multiple thing.  I saw that in my past company where as a VP the CEO had a salary that was 3x mine.  Thought that was over the top (I saw his in the financial docs).

I also agree that mechanisms to lock in long term growth as a mechanism over short term bursts.  I remember a health care company that drove the stock price up 4x over 10 years.  The CEO exercised a boatload of options and took home a huge chunk of money.  My view was that the guy got what he deserved, others were looking at the absolute dollars and very unhappy.

I really liked our bonus structure at AFC (and I think you want executives to have a higher percentage of variable compensation but probably not excessively more).  We used 25% Revenue $, 25% GM$, and 50% Net Margin $.  It was measured quarterly and annually.  A finance guy would walk in with numbers at the end of every quarter and we either got bonus $$ added to the pool or not.  Bonuses were paid out at the end of the year (if we got any) and the formula was the same for all employees on the bonus plan (percentages would vary).  The idea being to tie variable compensation to the things that drive stock price.  The delta from this and options is that you can not control stock price (many of the factors are well outside your control).

I think the BoD governance issue is even bigger than that.  I think that all public companies should have non-executive Chairmen.  Somehow BoDs must go back to representing the shareholders and holding the management accountable.  I really have no good way of doing that at the moment.  Maybe some clarity around the debate we were having about the function of a business in society.  I look at Sycamore and wonder - "Is there a mechanism that should exist to make that company go away?" 

Right now Sycamore has a Market Cap of $520M and Enterprise Value of $110M.  It loses money and has negative GM.  The employees are basically sucking the cash on hands into their pockets and away from the investors.  Why anybody invests there is beyond me, but they still have 10 years of cash if nothing happens.  10 years.  Basically the entire management team will be able to retire with that cash as a pension over the next 10 years.  Then they pay off the creditors and shut the doors.



raid 12/5/2012 | 4:56:51 PM
re: Brocade Feels the Pain

Companies are multi-national. It is in their interest to go to lower cost countries, a very rational thought process in a globalized world.

The solution is in the US public policy and not in the free markets. Free markets in a globalized world will naturally transfer jobs to lower wage countries.

(1) We'll need to set up incentives and barriers like other countries (China/India). To do business in the USA , mandate a certain amount of manufacturing and investment within the USA.

(2) Don't give out money and incentives to big banks or big corporations. Instead, provide the tax credits and incentives to small companies that produce jobs within the US economy.

(3) Build a base of government sponsored high technology manufacturing, and protect the Intellectual Property from going overseas through legislation.

In a world full of countries that have some form of public policy to nurture local industires, its going to be hard to create jobs locally without some creative public policy. 

Unfortunately, its not looking pretty in Washigton, idealogues on both sides have crushed any hopes of any pragmatic legislation. 

raid 12/5/2012 | 4:56:50 PM
re: Brocade Feels the Pain

I guess you are right (and I am wrong), atleast about the L2/L3 networking industry. I guess the American way has always been to out innovate and succeed!

That said, I think meaningful policy measures are required to keep jobs at home. This is also what other major nations do - China, India and Germany included. The US does the same to some extent but does not do it well. There's scope for good policy without becoming protectionist.



NetworkOptimizer 12/5/2012 | 4:56:50 PM
re: Brocade Feels the Pain

I understand now is not the time to preach. But, we as a country survived on our free market economy. We survived on our innovation. Even though I am in networking industry, I always felt things will move and I have to move on.

What's happening to this industry is the same transformation that happens to any industry (Mainframes, semiconductors, firmware companies). It's simple economics. Over the span of time everything will get commoditized. Companies has to evolve. Margins will get lower and only a handful of companies will survive.

As you can see the skill set requirement for jobs are changing too. It used to be hardware in 70-80, firmware 80-90, networking 90's, L4-L7 2000, applications now. No one is inventing anything new in Hardware/firmware/networking/L4-7, as the value add is not worth the price. Again everything is a commodity.

Eventually we will have 2-3 networking equipment vendors who will survive with 10% margins. Thats all.

That doesn't mean we need to add all regulations to limit outside vendors to sell in U.S. Imagine what will happen if other countries reciprocate. Most of the U.S companies survive on overseas sales (that's why their profits are going up). If other countries also add those regulations, these companies will layoff even more as U.S sales (almost stagnated) is not enough.

We need to innovate, plain and simple. We cannot just cut and paste old technology and make minor changes and hope that we can survive for another 50 years. All we did was make existing technology faster and cheaper. Nothing new. We need fire under our behinds to do that.

Any regulation changes only will prolong the pain for short term supposed benefit.

bollocks187 12/5/2012 | 4:56:49 PM
re: Brocade Feels the Pain

JimS-Seven - something we agree on. 


paolo.franzoi 12/5/2012 | 4:56:47 PM
re: Brocade Feels the Pain

I think if you read my posts:

1 - I think IT and Telecom is a huge security issue, particularly for the Federal Government.  Wonder what would happen TODAY if China cut off the US from components for its weapon systems.

- Goal 1:  Have some baseline of inside the US for manufacturing

2 - There are great financial incentives set up both by foreign governments and the way the US tax code works to move jobs outside the US.

- Goal 2:  Even the playing field so that jobs stay in the US.

3 - China is playing funny games with its currency (as well as other incentives) to encourage investment and exports.

- Goal 3:  Level the financial playing field

4 - Stimulate some productive change in the infrastructure to improve broaband.  Eliminate the massive inefficiencies lots of tiny little phone companies bring (ever wonder what kind of discounts a 10,000 line phone company gets).

- Goal 4:  Force spending and restructure the telcos.



Light-bulb 12/5/2012 | 4:56:47 PM
re: Brocade Feels the Pain

You are dead-on.  You can't "regulate" yourself to stay competitive, you end up slaved to the regulator body and then more regulations are necessary because you got something wrong etc...  The free market works.  It's the only system that has significantly raised a nations wealth. Some of the comments I've seen on this board lead me to believe folks believe in Big Government, you want to make it harder for companies to compete with our "loyal" or shall we say government sponsored companies...can we say fascist?  Why don't we all just turn into giant pigs and just eat at the trough for everything...

Innovation is it, we have to design a better mousetrap it's that simple.  If you wanted to help companies in the US, what you'd advocate for was a global campaign on patents and IP.  You'd create a way to enforce them.  Copying and reverse-engineering would be criminal, and would get your country increases import/export fees.  

The issue we run into is we create, someone steals, and our designs and concepts which should be making that company money are sold off to be integrated in the various IC companies.  

Some companies have seen this for a long time, and are trying to intelligize the network, build it into something vastly different than today.  Certainly there are reasons why I do want the network smarter. (It's already everywhere and touches everything)

Now back to poor Brocade...  look for an acquisition on the cheap...  it's too bad that Dell decided not to buy them, and even worse that Dell said that Brocades technology portfolio was lacking... yikes talk about the pot calling the kettle black... 

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