Brocade Beats Estimates

Brocade Communications Systems Inc. (Nasdaq: BRCD) managed to top analysts estimates for the quarter ended October 27, despite a steep year-over-year decline in earnings and a delay in its Silkworm 12000 switch schedule.

The Fibre Channel market leader posted pro forma earnings of $11 million, or 5 cents a share, compared with 11 cents per share one year ago. The Wall Street consensus called for earnings of 4 cents per share.

Brocade gained $117 million in revenues for the quarter, topping analysts’ expectations of $111 million but dropping from $132 million at the same time last year. Gross profit margins at 60 percent remained stable with last year’s figure. Brocade’s cash position climbed to $255 million, up from $155 million a year ago. And the book-to-bill ratio on orders is “comfortably above 1.0,” according to company officials.

Like many storage companies, Brocade was hit with several one-time charges from technology transitions, real estate costs, equipment write-offs, and investment write-downs. Taking these into consideration, Brocade’s loss for the quarter was $54 million, or 24 cents a share. During the corresponding period last year, the company had none of these charges.

Chief financial officer Tony Conova predicted during Brocade’s earnings conference call Wednesday that earnings for the first quarter 2002 would be flat at 5 cents a share and that revenues would range from flat to "slightly up" in the $116 million to $120 million range. He expects profit margins to remain around 60 percent.Although he said the company “is well positioned for growth in the second half of next year,” Conova did not offer any sales or earnings guidance beyond next quarter.

Officials downplayed the delay of the Silkworm 12000 director switch, which previously was slated to be in customers’ hands this quarter (see Brocade's Slip-Sliding SilkWorm). CEO Greg Reyes says that six of the company’s original equipment manufacturing (OEM) partners are beta testing the product. He said more than 100 units have been manufactured and the 12000 will be in general production during the first quarter of next year with “a smattering of units shipping in January.”

Reyes added, "There's been a lot of back-chat about this product and its timing which is way over-blown."

Gartner/Dataquest

analyst James Opfer says that although the 12000 is shipping behind schedule, that’s not necessarily a disadvantage, since “there is nothing out there with 2 gigabits and the same features.” He notes that, although McData Corp. (Nasdaq: MCDT) is the dominant player in the director class market, McData’s current product tops out at 1 gigabit and offers half the number of ports.

But Brocade’s stock price of more than 100 times next year’s projected earnings, coupled with uncertainty over the 12000 switch, are starting to gnaw at financial analysts. The stock was slammed with another Hold downgrade today, this one from CE Unterberg Towbin, which comes on the heels of a Hold downgrade from Needham & Co. Of the 25 analysts who follow Brocade, 12 now rate the stock a Hold, up from eight who so pegged it a month ago.Despite the slights by Wall Street, the stock has been moving upward in the technology sector’s typically paradoxical fashion. A month ago, Brocade shares were selling for $24.00. But even after a big selloff today, it traded in the aftermarket up 52 cents (1.8 percent) to $29.34, up 22 percent for the month.

— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com