For its third fiscal quarter ended July 28, the SAN switch and director maker reported GAAP net income of $11m, down 56% year-on-year, on revenue of $328m, up 73% year-on-year.
That year-on-year percentage increase in revenue includes revenue gained from Brocade’s merger with its former rival McData, two quarters ago. The revenue that Brocade reported was in fact a miss on the guidance the company gave in May, when it predicted fiscal third quarter revenue of $330m to $340m, down slightly from its second fiscal revenue of $345m.
This is our slowest quarter and quite frankly given the macro environment that we’ve had to deal with – and which our partners and peers have also talked about – we did pretty well, said Brocade CFO Richard Deranleau.
Brocade said that another factor depressing its revenue was its decision to accelerate the winding down of some low-margin parts of McData’s business, such as its storage reselling and matrix switch activities. But that was relatively limited, as the company said it had planned to lower this business by $5m to $7m during the quarter, and instead did so by $8m.
We made some choices during the quarter, Deranleau said.
Another factor holding down revenue was that some former McData customer have delayed further purchases of SAN gear, Brocade said.
Some of them are expanding their networks more slowly, said Brocade CEO Mike Klayko. We believe this is a short term management issue, he added.
Brocade marketing vice president Tom Buiocchi said that the customers in question are simply waiting for the next generation of Brocade directors to ship. Slated for launch some time before April 2007, these converged directors will provide full support for existing networks powered by both Brocade and McData networks.
These customers are telling us that they like the look of the next generation product, and that they’ll buy whatever switches they need in the meantime, and wait for that next generation director, Buiocchi said.
Even before the merger with Brocade, the only other major player in the SAN switch and director market Cisco Systems had been gaining much market share mostly at the expense of McData, as Buiocchi admitted. In the run up to the merger the networking giant also had an opportunity to poach McData customers unnerved by Brocade’s acquisition.
Cisco did make significant gains while the merger was being contemplated, and before then when McData was vulnerable. But now we’ve stabilized our market share, he said.
That was a repeat of the assertion made during the earnings call by Deranleau and Klayko, that despite its flat revenue Brocade did not concede any market share to Cisco during its latest quarter.
Before the end of the month market researcher Dell’Oro is set to release its estimates of Brocade and Cisco’s market share. In the interim, alongside Brocade’s assertion that it has shut down Cisco’s poaching efforts there is Cisco’s assertion that for its latest quarter its SAN sales were up 20% year-on-year. That is still very healthy compared to Brocade’s flat performance, but it is less than half the 50% surge that Cisco claimed for the previous quarter.
JMP Securities’ managing director Sam Wilson said that his company has raised its rating for Brocade from market-perform to out-perform.
The worst is behind Brocade, he said. They’re two quarters into the merger, and I think they’ve got the bugs pulled back.
Their financial performance would have been so much better if they hadn’t been paying for the defense of Greg Reyes. That cost them $18m in the last quarter, he added. Reyes is the former CEO of Brocade who has just been convicted of fraudulently back-dating stock options for Brocade employees.
For its current fourth fiscal quarter, Brocade predicted revenue of $330m to $345m, with non-GAAP EPS of $0.12 to $0.13. Deranleau said that this forecast was made assuming continued slow spending on IT in North America. If there’s a turnaround, we’ll see an upside, he said.
