Bill Snyder

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Brocade Lowballs Guidance

Bill Snyder

Brocade's(BRCD Quote) management issued a hasty clarification of the guidance it had given earlier Tuesday, and told skeptical investors to expect top-line growth of 14% to 17% next year, well above the original forecast.

The disappointing earlier guidance, coupled with a precipitous drop in earnings in the fourth quarter that the storage gear maker reported before the opening bell, sparked a sharp selloff in the stock.

At the close, shares were off 34 cents, or 7.5%, to $4.19 on heavy volume.

Punk Ziegel analyst Steve Berg says the clarification will likely result in a higher valuation; he raised his own to $5 a share. In recent after-hours trading, shares were up 2 cents.

Brocade earned $1.1 million, or nothing per share, in the November quarter, including a charge of $5 million to cover an internal probe related to an ongoing Securities and Exchange Commission inquiry. Brocade earned $20.3 million, or 8 cents a share, a year ago.

Fourth-quarter sales fell 6% from a year ago to $145.5 million but still beat estimates by about $1.2 million. Brocade trumpeted a 12% sequential rise in "sell-through" to end users via OEM and channel partners to $160.2 million in the quarter.

Brocade said that the difference between reported revenue and sell-through mainly reflects inventory reductions at its OEM partners. "During the fourth quarter, several of the company's OEM partners reduced inventory on-hand by nearly one week across its switch and director product categories," Brocade said. "The company believes that OEM inventories at the end of Q4 05 were approximately two and a half weeks."

The difference between revenue and sell-through is the source of the confusion about the company's guidance. Brocade told investors to expect revenue growth of 8% to 10% -- but the company didn't make clear that it was calculating the percentage off the base of the company's $611 million sell-through.

Investors and some analysts, said Berg, whose company does not have a banking relationship with Brocade, understandably thought that the guidance was based on the lower revenue figure of $574 million, and dinged the stock.

What the company meant to convey, then, was revenue ranging from $660 million to $672 million, well above the $620 million to $671 million the market first believed. Management did not give earnings guidance for the year.

For the current, or first quarter, the company forecast sales ranging from $156 million to $161 million; analysts were looking for $150 million. Management expects the company to earn a 5-cent profit, which is in line with Wall Street's expectations.