Brocade Sparks Latest Market Scare

Market leader Brocade leads chorus of warnings about short-term growth; analysts say SANs are healthy

February 23, 2001

4 Min Read
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In what has become almost a daily procession of gloomy forecasts, Brocade Communications Systems Inc. (Nasdaq: BRCD), the overwhelming leader of the market for storage-area networking (SAN) gear, was the latest technology company to reduce its guidance last night.

The company says economic conditions have stalled customer buying plans for the next quarter, making it tough to predict sales growth.

The announcement was made as part of Brocade's first-quarter earnings call after market close yesterday (see Brocade Enjoys $165M Q1). The company, which owns roughly 60 percent of the SAN market, posted net revenues of $165 million, more than 200 percent above revenues for the same time last year, and 25 percent over the previous quarter's figures. Diluted net income per share was $0.13, compared to $0.03 for the first quarter of 2000 and $0.11 for the last.

But earnings will stay flat next quarter, Brocade says, and growth will be roughly 19 percent for the last two quarters of 2001 -- resulting in growth of about 100 percent year over year.

The announcement caused a flurry of downgrades by financial analysts and sent Brocade's stock tumbling. Shares were trading at 41.13, down 3.56 (7.97%) by early afternoon today."Our short-term visibility has never been more opaque," CEO Greg Reyes told analysts during a conference call last night. He said normally Brocade has no problem getting "90 to 100 days' forecasting visibility" into what its customers plan to do. Now, he says, channel partners and direct customers are stalling on orders for Q2.

Reyes said he can't pinpoint the cause. "We have a confluence of conflicting data points," he jargoned. It adds up to customers rethinking their budgets. In a "softening" economic climate, he said, businesses of all kinds are getting stingier about how they're allocating IT dollars.

Similar cries of an order slowdown and reduced visibility have rippled through the storage networking market this week, causing analyst downgrades for other companies in the segment, including Finisar Corp. (Nasdaq: FNSR), McData Corp. (Nasdaq: MCDT), Network Appliance Inc. (Nasdaq: NTAP), and QLogic Corp. (Nasdaq: QLGC).

But analysts insist SANs in general, and Brocade in particular, have a bright future.

"SANs are definitely not fizzling," say Ara Mizrakjian, senior research analyst at Robertson Stephens. "I think we're seeing short-term response to macroeconomic concerns by enterprises. In the long term, the prospect for all [SAN] vendors is excellent, and particularly for [Brocade], since they own so much of the market."Others confirm this view. "We don't see any slowdown in demand for SANs," says Jon Oltsik, VP of corporate marketing at GiantLoop Network Inc., a privately held startup. As a supplier of metropolitan networking services, GiantLoop says a majority of its business is linking SANs in cities.

Oltsik acknowledges, though, that businesses may have big SAN plans, but no pocketbook to match. "We see people doing more homework before buying, and they're examining their options. People in general are spooked, and there's a general hesitation," he says. But at the same time, he asserts that many customers are on track with "aggressive" infrastructure and application rollout plans.

During last night's conference call, analysts seemed concerned that Brocade might be too optimistic about a pickup of business during the second half of this year. Some also seemed concerned that Brocade, by its own admission, relies on just seven customers for about 80 percent of its business.

But Brocade seemed confident of its plans. Executives say the company's new products, including 64-port and 128-port Fibre Channel fabric switches and the addition of 2-Gbit/s capabilities across its product line, are on track for delivery. International sales are up, and Brocade's finalized a reseller arrangement with Sun Microsystems Inc. (Nasdaq: SUNW). All this, execs said, added to specific customer commitments the company does know about for later this year, will ensure it can meet its figures.

CEO Reyes also waxed optimistic on the SAN market in general. He cited figures from Dataquest that indicate SANs will comprise 80 percent of a $50 billion external storage market by 2004. What's more, he thinks the year 2001 will mark a turning point, in which businesses start to realize that SANs are "among the most strategic IT investments of the decade."-- Mary Jander, senior editor, Light Reading

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