Brocade Denies More Cuts

The latest murmurs of further headcount reductions at Brocade Communications Systems Inc. (Nasdaq: BRCD) aren't likely to make CEO Greg Reyes happy, as he was clearly in defensive mode this week on the topic of job cuts.

After the company's quarterly report Wednesday, the first analyst question related to whether job cuts would continue. Reyes didn't appear to like where the conversation was going.

"I really want to make sure that everybody is clear on this, that this restructuring we've taken is not a pattern," Reyes said. "It was done in the right way. And... we have done it in a way that gives us headroom to continue to invest in the business. Now, all that being said, I can tell you we're going to strive to continue to improve our business model and hold people accountable for performance."

Brocade laid off 110 employees, or 9 percent of total staff, this quarter, leaving an employee census of 1,100 (see Brocade Cites Plans For Growth). Cuts were made across all areas of the firm and include 25 hardware engineers laid off in February (see Brocade Shaves Heads).

The question now is, will they lay off more people?Rumors persist that Brocade may be working toward a total headcount reduction of 20 percent or more. One source close to the company says Brocade may have offered some employees an option to stay on for 60 days at full benefits before terminating them -- thereby avoiding the negativity associated with a big layoff this quarter.

Not true, says Brocade spokeswoman Leslie Davis, though "I can't speak to individual agreements people may have with the company." But even loss of headcount through such contracts, along with attrition and voluntary departures, would result in nowhere near the kind of percentages cited in scuttlebutt, she notes.

Brocade layoffs are nothing new. In April 2003, it cut headcount by 9 percent (see Brocade Chops More Heads). In November 2002, it shaved 12 percent (see Brocade Cleans House). Since the second quarter of 2003, when it posted a roster of 1,228 employees, its census has gone down a total of 10 percent.

Wall Street analysts were unfazed by the cuts, particularly given Brocade's claim they will contribute to $3 million to $4 million in savings this quarter. "[W]hile the knee-jerk reaction to a reduction in force is to assume that both the current quarter and out year revenue is in serious jeopardy, in the case of BRCD we view this more as part of what has been an ongoing process of expense reduction than anything else," writes analyst Brenden M. Smith Goldman Sachs & Co. in a note Thursday.

Would further layoffs affect that view? An analyst at another firm, who asked not to be named, says no. Brocade managed to show over $30 million in free cash flow despite operating margins of about 6 percent, the analyst says. Further staff reductions would probably not affect the company's ability to generate cash. In fact, it might help, though the perception of further reductions would give a negative impression initially, the analyst maintains.Mary Jander, Site Editor, Byte and Switch