Market Spanks Brocade Hard

Shares of Brocade Communications Systems Inc. (Nasdaq: BRCD) plunged 27 percent today after the company revealed a much weaker outlook for its first quarter of fiscal 2003 -- a disclosure one analyst characterized as a "bombshell" -- as well as several high-level executive departures.

Brocade, which closed yesterday at $7.28, was trading at $5.30 as the market opened today, down more than 27 percent.

The sell-off shows a collapse of investor confidence in the company. Brocade said that for its first quarter, revenue will be between $120 million and $125 million and that it expects to break even. That projection excludes charges of $10 million to $20 million associated with Brocade's 12 percent headcount reduction; it also excludes charges related to the acquisition of Rhapsody Networks (see Brocade Cleans House, Brocade Purges Top Ranks, Brocade Scoops Up Rhapsody, and Brocade Swings Hatchet).

Brocade said its significantly lowered expectations for the current quarter reflected a temporary "contraction in the supply chain."

"We expect this condition to last no more than one quarter, and we expect to start resuming growth by 2003," said CFO Tony Canova on a conference call with analysts yesterday. He declined to provide a sales forecast beyond the current quarter.

Analysts had expected Brocade's Q1 top line to be slightly up sequentially -- and the shortfall was not well received. Wall Street almost unanimously gave the thumbs down [ed. note: or perhaps some other hand gesture] to the stock today as a result of Brocade's weak outlook. Analysts who hadn't already cut their ratings did so today:

In addition, RBC downgraded Brocade competitor McData Corp. (Nasdaq: MCDTA) from Sector Perform to Underperform based on Brocade's lowered forecasts, although First Albany reiterated its Buy rating on McData.

Thomas Weisel Partners analyst Jason Ader, who retained his Market Perform rating on Brocade, said the only explanation for the company's weaker first-quarter guidance is that "a major inventory correction is at play here." He says two of Brocade's OEMs, Hewlett-Packard Co. (NYSE: HPQ) and Dell Computer Corp. (Nasdaq: DELL), appear to be lowering their inventories.

Robert Montague, analyst at RBC, noted that while Brocade claims the industry at large is suffering, the market for SANs seems to be improving. Specifically, he cited improved storage traction by HP in the most recent quarter (see HP Storage Back in the Saddle).

"Contrary to Brocade's tone, and as outlined in our recent channel update, we are seeing an improvement in storage and SAN demand against the perceptible pause at the end of the September quarter," Montague wrote in a note today.

Wall Street also is concerned about the sudden exit of several high-ranking Brocade executives, including President and COO Mike Byrd, who announced yesterday he will leave the company "to spend more time" with his family. In addition, at least three top VPs -- Morris Taradalsky, formerly VP of engineering and CTO; Jeff Brooks, formerly VP of marketing; and Rich Geruson, formerly GM and VP of services and alliances -- have been shown the door, as Byte and Switch first reported earlier this week.

"Brocade positioned these departures as positives, but we sense that morale is low," wrote Bear Stearns analyst Andy Neff.

Analysts continued to point to Cisco Systems Inc.'s (Nasdaq: CSCO) imminent entry into the Fibre Channel switch market as hurting Brocade more than it's been letting on. "Cisco's entry into the market [is] creating a bit of a freeze on customers buying Brocade's products," writes A.G. Edwards analyst Shebly Seyrafi (see Storage OEMs Warm Up to Cisco).

However, Greg Reyes, Brocade's chairman and CEO, insisted on a call with analysts yesterday that he doesn't believe Cisco is contributing to Brocade's weaker sales. "There is no evidence of Cisco being present in the market," he said.

If that's true, then perhaps when Cisco does actually put the pedal to the metal in this market, Brocade will end up as roadkill.

— Todd Spangler, US Editor, Byte and Switch

BobbyMax 12/4/2012 | 9:18:11 PM
re: Market Spanks Brocade Hard Brocade was bent upon pulicizing its storage and chip products, that it did focus on consolidating the market. It also has hired management people who were relatively unknown. Brocade's product line kept growing rwegardless of the market situation.

It will be hard for Brocade to recover and be a force in the market place. Brocade never adjusted its workforce according to its revenue.
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