Brocade's Banking on Directors

By James Rogers, February 15, 2008 11:55 AM

SAN specialist Brocade's director business is booming, although the vendor missed analysts' revenue estimates with its Q1 results last night.

"Our overall business is healthy and we are well poised as our product cycle and growth initiatives come to bear throughout 2008," Brocade's CEO Mike Klayko said on a conference call last night, as he highlighted continued growth in the vendor's directors and blade-switch modules.

Brocade did not break out specific figures on last night's call, but execs confirmed that director revenues were up 69 percent year-over-year and 13 percent sequentially, led by strong demand for the 48000 device.

Klayko also did a song and dance about Brocade's recently announced 8 Gbit/s DCX Backbone switch, which is already OEM'd by Sun. "We expect the majority of our OEMs to be active in the market with this product, as well as the 8 Gig upgrade to our 48K installed base in our Q2," said Klayko. "Our competitors will not have enterprise-class 8 Gig offerings until the end of 2008."The exec referred to the most recent Byte & Switch Data Center Poll during the call, highlighting the importance of data center fabrics for users.

"In a recent independent online poll by CMP Media, 85 percent of respondents indicated that developing a data center fabric strategy was extremely important for them this year," Klayko said. "And a majority of those respondents replied that Brocade had the most intriguing and compelling data center fabric vision."

[Editor's note: For the record, we're still scratching our heads over those poll results. But the people have spoken -- haven't they?]

Brocade is now positioning itself to tap into uber-fabric demand, according to Klayko. The company is planning to launch a slew of products during the coming year, including a refresh of its SAN product line and its File Area Network (FAN) offerings, which are now resold by IBM and HDS.

"We're on track to demonstrate and begin shipping significant new product advancements for our files business in the next 30 days," said Klayko.The exec also provided an update on Brocade's forthcoming launch of HBA products for use with the DCX. "We're on schedule to deliver those products by the end of our first fiscal half of '08," explained the CEO, adding that HDS and Fujitsu Siemens have already signed up to resell the technology.

Brocade's Q1 revenues were $347.8 million, up 55 percent from the same period last year, but below analyst estimates of $352.2 million and up only 2 percent sequentially.

The vendor reported earnings of 5 cents per share on net income of $19.8 million, down from 12 cents and net income of $33.3 million in the same period last year.

On a non-GAAP basis, Brocade's earnings were 16 cents on net income of $64.2 million, down from 17 cents and $49.4 million, in the year-before quarter, although this did not include results from Brocade's $973 million McData acquisition. Analysts had estimated earnings of 15 cents.

Analysts on the call bombarded Brocade execs with questions about the forthcoming fabric HBAs, but received scant product details, other than the fact that they will have Windows, Linux, Solaris, and VMware capabilities.Brocade's vice president of worldwide marketing Tom Buiocchi was also quizzed about the progress of Fibre Channel over Ethernet (FCOE), which is supported by the vendor's DCX switch.

"Well, the standards are progressing," he said. "We're confident that by the end of the year, the standard will be solidified [and] in terms of customer rollout, we expect that to be in late 2009."

With storage vendors wrestling with an uncertain economic climate and analysts given to kneejerk up- or down-grading, Brocade's CFO Richard Deranleau played it safe when stating the company's guidance.

"From an IT spending perspective, we remain guarded about spending at the macro level, but we remain more positive about spending at the enterprise level," he said.

Deranleau provided a wide margin for error, guiding toward Q2 revenue between $340 million and $355 million.Despite the continuing strength of Brocade's director business, at least one analyst warns that there remains a number of threats looming for the vendor. "Increasing competition from Cisco, softer enterprise spending, and potential product cycle miscues remain the key risks for the stock," wrote Goldman Sachs analyst Min Park in a note released this morning.

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