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Cloud storage rains on '800lb Fibre Channel gorilla' Brocade

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Brocade results show its business flatlining with steady-ish revenues and profits, and growth dependent on a recovering market but no technology rabbits to pull out of its hat and drive growth higher.

Fourth quarter fiscal 2013 revenues were a chunky $559m, 3 per cent down on the same quarter last year, with profits of $64m, 19 per cent higher than a year ago, both beating the Wall Street analysts' expectations. The previous, third, quarter revenue was $536 million with profits of $119m.

Full 2013 year revenues were $2.22bn, down on 2012's $2.24bn which was the same as 2011's $2.24bn - flat-lining. Profits have risen over these three years though, from 2011's $50.6m, through 2012's $195.2m, to this year's $209m. The Brocade ship is being sailed more efficiently with effective cost-cutting.

Management talked of tough conditions and excellent performance, what else, with CEO Lloyd Carney saying: "Q4 was a quarter in which we executed successfully across many facets of our business strategy. We exceeded expectations for non-GAAP operating margin, non-GAAP EPS, and cash flow despite the US Federal budget issues and continued softness in the overall storage market."

Ah, those dratted Feds and the sequester, spoiling the business party.

Carney put on his cheerleader's hat and twirled his baton; "I am pleased with the focus and execution of our team and excited about building upon our success in fiscal year 2014 and beyond." So he should be. Having got through a shit year the only way is up, right? Well, yes and no.

Stifel Nicolaus MD Aaron Rakers thinks: "Brocade delivered a solid quarter amid a challenging demand backdrop."

Rakers summed up Brocade's segment performance this way:

  • F4Q13 SAN product revenue at $323.6M was -4.5 per cent year/year
  • 16Gbit/s Fibre Channel accounted for 69 per cent of total, up from 34 per cent in year ago quarter.
  • IP product revenue at $145M with Fed vertical -47 per cent year/year (+18 per vent sequentially).
  • Ethernet switch rev. at of $81.1M was +4 per cent sequentially., outperforming Juniper and Cisco at -7.5 per cent and -1.3 per cent. ... albeit under-performing on year/year basis.
  • Router revenue grew 28 per cent sequentially. at $54M vs. Juniper and Cisco at +5.4 per cent and -2.3 per cent sequentially in comparable quarters.

William Blair analyst Jason Ader looked at Brocade's overall situation and opined: "Some gas remains in the tank, but still no station in sight." In other words the 16Gbit/s Fibre Channel transition is underway and Brocade's Ethernet biz is stable under the weight of Cisco competition but where is Brocade going to go for growth?

Ader bluntly said: "While we concede that the SAN market has proved more resilient than we expected and the ongoing 16 gigabit upgrade cycle seems to be extending its life, we believe that the company has merely achieved a short reprieve, as we expect Fibre Channel to be a shrinking market over the next several years."

Storage revenues are expected to decline and Ethernet revenues won't grow to compensate for that and deliver growth. This is despite a prospective 16Gbit/s to 32Gbit/s Fibre Channel transition for faster SAN data access speeds.

The pessimistic Ader added this kicker: "The implication of three consecutive quarters of year-over-year revenue declines - and continued expectations of such - is inescapable and invariably drives our long-term view. Ultimately, the company will need to demonstrate that it is more than a cost-cutting story and is capable of growing the top line."

Brocade expects revenues of $540m - $550m next quarter, a decrease – the tough conditions are persisting.

A cloud is coming Brocade's way and that's what it has to escape from - the public cloud and declining Fibre Channel prospects, unless it can devise Fibre Channel pipes into cloud storage vaults. Another headwind is the trend to use InfiniBand links for storage arrays close to or even part of a server cluster complex; no need for Fibre Channel then.

Options?

  • Buy Mellanox
  • Get bought - but by who? Who wants a ship that's slowing down and doesn't have a destination in sight? Juniper maybe for product and channel consolidation?
  • Buy an HBA supplier, meaning Emulex or QLogic and use their new (Endace and Mt Rainier flash) technologies for growth.
  • Buy a cloud storage gateway supplier; Avere or Nasumi or Riverbed say. Stick a cloud storage gateway into its Fibre Channel directors maybe.

What do you think? ®

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