Brocade Hits Estimates, Lays Off 110

While reporting revenues slightly above expectations, Brocade Communications Systems Inc. (Nasdaq: BRCD) today dropped in news of a major staff reduction (see Brocade Announces Earnings ).

Brocade reported revenue of $145.6 million, compared to First Call consensus estimates of $145 million. Its earnings of $0.03 per share met First Calls forecast. Brocade’s revenue was up 11 percent from last year, and its earnings of $8.1 million were up from a loss of $1.1 million last year.

The switchmaker said it would reduce its staff by 110 employees, or 9 percent of the company, however, in what CEO Greg Reyes called an “organizational alignment.” Part of the move includes consolidation of Brocade's OEM and end user/channel sales team into one, moving manufacturing to China, and outsourcing some research and development to India.

Forty of the employees involved in this layoff were let go earlier in the quarter, with the rest laid off today. Although there had been rumors of a major layoff at Brocade in recent weeks, a company spokeswoman last week told Byte and Switch that none were planned. [Ed. note: but did you ask them about “organizational alignments”?] Sources say more staff cuts are coming.

"This is not a reoccurring pattern," Reyes said in a conference call with analysts, although it is at least the fourth Brocade layoff since November of 2002 (see Brocade Shaves Heads, Brocade Chops More Heads and Brocade Cleans House).Brocade took a $10.5 million restructuring charge for severance, asset impairments, and contract terminations in connection with the layoffs.

Reyes said Brocade's revenues dropped sequentially on entry-level switches, which he blamed on a transition to new product. He said revenue in the midrange was about the same as the previous quarter and that Brocade gained on leader

McData Corp. (Nasdaq: MCDTA) in the director switch market. Analysts suspect other competitors are gaining on Brocade, however. Although Cisco Systems Inc. (Nasdaq: CSCO) did not disclose its storage revenues when it announced earnings last week and is seen as more of a rival to McData in the high end, analysts speculate that Cisco is cutting into Brocade’s midrange and low-end base (see Cisco Call Puts SANs in Storage). QLogic Corp. (Nasdaq: QLGC) is also making a move in the low end with aggressive pricing.

Reyes gave guidance for the current quarter of between $147 million and $152 million in revenues. Since the end of March, Brocade has announced new switches on the low and high ends, and last week the vendor announced it would offer a switch specifically for IBM blade servers (see IBM, Brocade Tie SAN Knot, Brocade Launches Meteor, and Brocade Dazzler Starts Low).

Reyes also said Brocade settled a claim with former Rhapsody shareholders regarding an earn-out payment associated with its November 2002 acquisition of Rhapsody (see Brocade Scoops Up Rhapsody). Reyes said Brocade did not issue 2.9 earn-out shares because it claims milestones for making the payments were not met. Brocade took a $6.9 million charge and will issue 1.3 million shares of common stock to the former Rhapsody shareholders.

McData announces its earnings Thursday.— Dave Raffo, Senior Editor, Byte and Switch