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Brocade results disappoint Wall Street

Prospect of 2010 recovery keeps faces smiley

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Despite quarterly sales growing 35 per cent in a year, Brocade disappointed Wall Street expectations and posted a loss due to legal and other exceptional items.

Revenues in its third fiscal 2009 quarter were $493.3m, a 3 per cent ($13m) decline on the previous quarter. The net loss of $21m was about a third of the previous quarter's $63.1m net loss and compares to a profit of $20.3m in the third quarter of Brocade's fiscal 2008. In that year-ago quarter Brocade's storage products represented 82 per cent of its revenues; they are 58 per cent now, with Foundry's networking gear the cause of the difference.

The storage revenues were down 2.6 per cent sequentially, 4.6 per cent year-on-year. IP (Foundry) product revenues contributed 24 per cent of total revenues, down from 25 percent the previous quarter. The actual IP product revenue number seems to have declined 6.5 per cent sequentially, from $126.6m down to $118.4m.

The losses came from half a million dollars worth of legal bills relating to stock option back-dating, and much of the rest came from items related to the Foundry acquisition. The lower-than-hoped-for sales revenues meant that there wasn't enough income to cover these costs and make a profit.

Days sales outstanding, a measure of the time it takes for Brocade to get revenue from customers, has risen from 43 days in last year's third quarter to 56 days now, up from the prior quarter's 49 days. Customers held on to their money longer, and this did not help the profit figure.

Chief financial officer Richard Deranleau said in the earnings transcript: "The net impact of this increase in accounts receivable was approximately $52 million, and led to a lower than typical cash from operations of $16.6 million in what is normally a seasonally weaker cash flow quarter."

So there's $52m lost from income through this and $13m through the sequential revenue decline. If both of these things had been effectively countered then Brocade would have had another $65m income and the net loss could well have been a profit of $40m or so.

Deranleau said cost synergies from the Foundry acquisition were proceeding ahead of plan. He said the company was positioned well for growth in a market consolidating storage and LAN networking onto Ethernet, which is the message Brocade is pushing out with its products.

The company is seeing a bottom to the recession, with Deranleau saying: "Our planning assumption is that the current IT spending environment will remain the same through the balance of calendar 2009, due to the uncertain macroeconomic environment. We expect IT spending in general and the storage and IP market specifically to improve during 2010 and to return to normal historical growth rates by the second half of 2010." That is a welcome thought.

More specifically he said: "We believe we will maintain market share in our core SAN market. We believe directors and embedded switches will grow faster than fixed port switches in the overall SAN market, and we expect to be a leading supplier of HBAs and CNAs." However, if Brocade is going to achieve this then either Qlogic or Emulex or both must lose market share.

Turning to Ethernet he expects IBM to ship more of Brocade's Foundry products. His outlook for the full financial 2009 year is "revenues... in the range from $1.9bn - $2.0bn."

Overall, Brocade is positioned nicely for the future but appeared not to execute its business this quarter as well as Wall Street hoped it would. ®

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