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Brocade drops the Ethernet ball

Record quarterly results, but...

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Ethernet and storage networking supplier Brocade has dropped the Ethernet ball while recording record quarterly results.

For its first fiscal 2010 quarter ended January 30, revenues increased 25 per cent year-over-year to $539.5m and Brocade made a net profit of $51.1m, greatly up on the year-ago quarter's loss of $23.9m. All in all, good news, but Ethernet revenues soured the rosy picture.

The problem is Brocade's Ethernet revenues declined sequentially but its competitors did not. Cisco, HP/ProCurve, and Juniper (EX-series) all recorded better results over the same period.

Stifel analyst Aaron Rakers was blunt: "We are frustrated with Brocade's results, not just Government Ethernet switching, but also the clear market share losses in enterprise and persistent declines in service provider Ethernet switching, as well as what we consider a lack of definitive color with the company's strategic direction toward a recovery going forward."

Michael Klayko, Brocade's CEO, said the quarter "highlights the work ahead in building our Ethernet business to the levels we expect. Going forward, Brocade plans to re-energize our Ethernet business strategy, which targets opening hundreds of new direct enterprise Ethernet accounts each quarter."

The storage business was so-so. Brocade storage revenues of $350.68m were flat compared to the previous quarter but up from the year-ago quarter's $310.75m.

However, this growth was a percentage point or two below the overall storage market growth rate according to Rakers. Fibre Channel over Ethernet sales are not a big deal yet as the data centre class Ethernet isn't ready yet and iSCSI SANs are scooping all the Etherent storage business.

Brocade isn't making much if any headway with its host bus adapters (HBAs) against market leading incumbents Emulex and QLogic, and customers don't seem to be responding well to the improved quality of service claims Brocade makes concerning the pairing of its HBAs and Fibre Channel switches. Indeed, QLogic just won an OEM contract at HP for stackable edge switches.

So the storage side of Brocade's business is doing not great but OK, whereas Ethernet is not. Brocade, as much as anyone, says Ethernet is the future and here it is, dropping the Ethernet ball and falling behind its competitors.

The outlook for the full year is for revenues of $21.1bn - $2.2bn, a little lower than previous guidance of $2.25bn - $2.45bn. ®

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