Blunt Blades Bloody Brocade

Brocade Communications Systems Inc. (Nasdaq: BRCD) isnt getting the boost from blades that it had hoped for.

Brocade executives fingered poor sales of embedded switches for blade servers and a slow ramp to 4-Gbit/s switches as reasons revenues fell below expectations last quarter (see Brocade Reports Earnings ).

The industry’s eventual transition from 2-Gbit/s equipment should take care of Brocade’s 4-Gbit/s sales, but its sequential drop in blade switch revenue could be a sign of trouble for Brocade in that emerging market.

Brocade CEO Mike Klayko blames the drop in blade server revenue on complicated sales processes at new blade server OEM partners, Dell Inc. (Nasdaq: DELL) and Hewlett-Packard Co. (NYSE: HPQ), rather than losses to the competition. But industry analysts suspect the combined blade switch offerings of QLogic Corp. (Nasdaq: QLGC) and McData Corp. (Nasdaq: MCDTA) hurt Brocade (see McData Hops on QLogic Blades and QLogic Breaks 20,000).

These companies show signs the blade server business is booming (see IDC: Blades Blast Off). QLogic, which sells blade switches with McData management software, reported a 45 percent sequential increase in blade server unit sales for its previous quarter. HP reported 53 percent year-over-year gain in blade server revenue last quarter (see HP CEO Calls for Better Storage).“Considering how rapidly the blade switch market is growing, a sequential decline [for Brocade] is somewhat alarming,” analyst Kaushik Roy of Susquehanna Financial Group wrote today in a note to clients.

Between Dell, HP, and IBM Corp. (NYSE: IBM), Brocade’s OEM blade switch partners have about 85 percent of the market share, according to IDC. Brocade clearly has high hopes for blade switches; 14 months ago it projected the potential market for Fibre Channel switch blades at over $150 million by 2006 (see Brocade Outlines Market Plans).

Brocade CFO Tony Canova says he still thinks blade business will take off. “The market is just beginning to ramp,” he said Thursday night on Brocade’s earnings call. “We’re confident the blade server market is a reality, and I wouldn’t take this quarter as a view of what the trend is.”

Klayko says blade server switches require a “different selling process” because they involve customers' storage and server groups, and he hopes to solve the problem by working more closely with Dell and HP sales teams.

Brocade has other problems to deal with as well. Its revenues of $122 million last quarter fell 19 percent from last year and 16 percent from the previous quarter. While in line with Brocade’s August 3 announcement, those figures fall far below the company's original guidance of $140 million to $145 million (see Brocade Bloodied Again).Brocade remains under investigation by the Securities and Exchange Commission (SEC) and the U.S. Department of Justice for the way it accounted for stock options from 2001 to 2004. The firm is in the process of restating earnings from 2001-2004 and could be delisted by Nasdaq if it doesn’t complete them by Sept. 30 (see SEC Gets Formal With Brocade).

Brocade did give sunny guidance, forecasting revenues of between $140 million and $145 million this quarter. Klayko says he expects all of Brocade’s major storage system OEMs to qualify its SilkWorm 48000 director and 200E switch by the end of this quarter (see Brocade Busts an IT Move).

— Dave Raffo, Senior Editor, Byte and Switch