Brocade Sews Up a Good Quarter

During Brocade Communications Systems Inc.s (Nasdaq: BRCD) fourth-quarter earnings call Wednesday, CEO Greg Reyes tried to see how many times he could say “heterogeneous block-data networking” in a single day.

However annoying it may sound, the Reyes mantra is an important step for Brocade as it implies the company is working with several technologies to connect their customers' storage area networks (SANs) using optical technologies. More on that later.

As for the numbers, Brocade delivered impressive results (see Brocade Announces Q4, Stock Split). Its fourth quarter revenues rose to $132.1 million from $30.1 million in the year-ago quarter. Brocade earned $27.2 million in the quarter, up from $3.6 million a year ago, and its net earnings per share climbed from $0.03 to $0.22 a share (see Brocade's Business Booms).

Wall Street analysts expected Brocade to earn $0.20 per share with revenues of $118.9 million.

For its fiscal year 2000, Brocade generated $65.7 million in cash, invested $40.7 million in capital equipment, and made minority investments totaling $14.3 million. Brocade will begin fiscal year 2001 with $155 million in cash.For fiscal 2001, CFO Michael Byrd said Brocade expects to make $830 million in revenues, some two-and-a-half times its revenues for fiscal 2000.

Brocade shares dropped $7.25 to $153.75 during trading Wednesday. After hours, the stock slipped to $148.25, according to Island ECN. Evidently some droplets of worry about a slowing economy, reduced telecom spending, and seasonal slowdowns are continuing to form big clouds in the investment world.

Brocade also announced a 2-for-1 stock split would apply to shareholders of record on Dec. 11, 2000. The stock will trade on a split-adjusted basis on December 22.

One concern for the company continues to be that, though it dominates the SAN market, more than 80 percent of its revenues come from its eight largest customers.

Now, back to the CEO's fascination with heterogeneous block-data networking: A short while ago, Fibre Channel was the technology of choice for hooking SANs to each other and to corporate computer systems. Now, since more companies want to connect remotely located SANS, IP-based systems have been making headway.Hip to this trend, Reyes is guiding Brocade to focus on connecting SANs over distances using optical networking technologies. Now Brocade uses DWDM (dense wavelength-division multiplexing) and ATM (asynchronous transfer mode) technologies; in the future, however, it promises to play well with IP.

That’s a good thing, because one of its influential resellers, Cisco Systems Inc. (Nasdaq: CSCO), is migrating that way in a hurry. Earlier this year Cisco invested in one storage-over-IP firm, SAN Valley Systems, and it acquired NuSpeed, a startup in that same genre (see Cisco to Acquire NuSpeed Internet).

Storage-over-IP isn’t a hostile threat to Brocade yet, but when it gets there Brocade hopes it can interoperate so as not to end up as the Apple Computer of the SAN market (see SAN Surprise Jolts Market). That’s why, in between chirping buzzwords, Reyes noted that Brocade invested $18 million in interoperability labs, equipment, and testing resources during 2000.

“It’s not about who’s ASICs are bigger or how many ports you can jam into a chassis,” Reyes says. “It’s about being able to scale.”

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com