Brocade Under Pressure

Market reaction to last night's earnings report from Brocade Communications Systems Inc. (Nasdaq: BRCD) was mixed today, with many analysts voicing their disappointment at the delay of the Silkworm 12000 director switch (see Brocade Beats Estimates and Brocade's Slip-Sliding SilkWorm).

CIBC World Markets analyst Paul Mansky downgraded the stock from Buy to Hold. In a note to investors, Mansky states his belief that the quality of earnings for the quarter was dubious” and that management used aggressive accounting practices for the period.

Mansky expresses concern that Brocade is among the richest valued names in the storage universe, trading at 12 times calendar year 2002 sales estimates and 94 times EPS estimates.

Mansky says much of the good news has already been factored into the stock, which is currently up 123 percent from its 52-week low on October 1.

Robertson Stephens analyst Dane E. Lewis notes that the company is "nearly fully valued," prompting the analyst to keep his Market Perform rating.On the delay of the 12000 switch, Mansky writes: “We continue to view the potential for a meaningful first half contribution from the 12000 as unlikely.” He says he is concerned by the reluctance of OEMs to embrace the product, given the poor market conditions.

During the earnings conference call yesterday, Brocade CEO Greg Reyes appeared to back away from the hype Brocade's created around the switch.

“It is an incremental opportunity for us; not all our revenue is tied to this product,” he said. “We are still very strong in our enterprise business with the existing modular product.”

Nevertheless, Merrill Lynch & Co. Inc. seems to think the 12000 is key to Brocade’s long-term prospects. While it maintains its Buy rating on the stock, future ratings will depend on Brocade’s ability to deliver the promised features and functionality with this switch, the firm states in a note to investors.

“Ultimately, the overall strength of the features on top of the platform is what matters strategically,” writes Merrill Lynch analyst Thomas Kraemer. “Software volume makes standards, standards drive margins and standards determine winners."Robert W. Baird & Co. Inc. analyst Dan Renounard has downgraded the stock from Market Outperform to Market Perform, attributing management's "defensive behavior" over the 12000 switch as his reason for the move.

Goldman Sachs & Co. hasupgraded the stock to its Recommended list from Market Outperform. Goldman analyst Laura Conigliaro cited “a strong new product cycle, high priority market, accelerating revenues and expanding margins,” as her reasons for being positive on the stock.

At 12:30 pm EST, Thursday, Brocade stock was trading up 8.23 percent at $31.20.

— Jo Maitland, Senior Editor, Byte and Switch
http://www.byteandswitch.com