For its first fiscal quarter ended January 25 2003, the company reported results in line with the guidance it issued last November. Net loss on a GAAP basis was $6.9m, compared to a GAAP net income of $11.7m in the same period a year earlier. Net revenue was $123.1m, the same as it was a year earlier, but down 20% on the fourth quarter of Brocade’s fiscal year 2002. Against a background of booming sales at its rivals, last year’s warning of the sequential slump in Brocade’s revenue came as a shock to analysts. Brocade insisted at that time however that the coming slump was not associated with customer inventory levels that were too high.

This week the company said it had addressed the issue, and helped its OEM customers reduce their stock levels. Inventory is at a two year low, and we’re well positioned for quarter-on-quarter growth, said Tony Canova, Brocade CFO. Specifically, the company said that inventory levels usually stand at around three to four weeks, and had reached four weeks at the beginning of the fourth fiscal quarter.

Now, the inventory levels are below what they used to be, and represent around two weeks demand, Brocade said. Laura Coniglaro, analyst for Wall Street bank Goldman Sachs, asked Brocade whether the addition of inventory level as an extra factor affecting revenue in addition to customer demand might result in a revenue bounce-back anytime soon.

Even if end-customer sales do not increase, revenue might be improved if Brocade allows the channel to increase its inventory back up to the three-week level. Brocade CEO Greg Reyes appeared to rule this out when he said: We’re pretty comfortable with the [inventory] level, and we don’t expect any adjustment.

Brocade’s guidance for its current fiscal quarter is for a healthy sequential revenue growth of between 4% and 8% to between $128m and $133m. Gross margin will be between 53% and 55%, and earnings per share excluding the costs of the company’s recent acquisition of smart switching start-up Rhapsody will be break-even, Brocade predicted. Gross margin in the latest quarter was 53.7%.

Reyes said that during the quarter Brocade signed up 54 entirely new customers with the company’s high-end Silkworm 12000 64-port director-class core switch, with which Brocade is now competing head-on with arch-rival McData Corp. A number of those sales saw rivals – presumably McData or Inrange Technologies Corp – displaced, Reyes said with apparent pride.

Asked whether the inability of the 12000 to accept non-disruptive hot-code updates is affecting its sales – as analysts and rivals say it is – Reyes repeated Brocade’s claim that the issue is not important to customers, because most are using the 12000 in dual redundant networks.

The 12000 grew quarter-on-quarter last quarter, and it will again this quarter, he said. The operating system upgrade that will enable hot-code updates on the 12000 will be qualified by Brocade’s OEM customers this summer.

Source: Computerwire