Hardware

Return to Article

Brocade a Stitch Closer to Cisco

James Rogers

Despite the recent slump in tech stocks, shares of storage equipment manufacturer Brocade(BRCD Quote) are creeping up after the firm clinched its $2.6 billion acquisition of switch specialist Foundry Networks(FDRY Quote) last month.

Like most tech firms, Brocade's shares took a severe pounding during the fall but have rallied recently as investors warmed to the Foundry deal. Brocade's stock rose Tuesday to close up 21 cents, or 6.33%, to $3.53, as the Nasdaq inched up 1.5%, although this is still well below the firm's 52-week high of $9.09.

Foundry's Ethernet technology is seen as boosting Brocade's ability to compete with networking giants Cisco(CSCO Quote) and Juniper Networks(JNPR Quote) , particularly in high-speed 10-Gbit/s Ethernet. With users looking to shift large volumes of data around their networks as quickly as possible, 10-Gbit/s Ethernet extends Brocade's reach beyond storage into data center networking.

"We believe the Foundry acquisition gives Brocade the much needed Ethernet technology," wrote Jefferies & Company analyst Munjal Shah, in a recent note, describing the deal as "the right strategic step."

With cash-strapped firms slowing their tech spending, many tech companies are now looking to diversify and target new revenue streams, from consumer storage to corporate networks. Even networking colossus Cisco, for example, is rumored to be building a blade server that would compete with Hewlett-Packard(HPQ Quote) and IBM(IBM Quote).

Brocade, which spent $713 million to acquire switch specialist McData in 2006, still faces plenty of challenges integrating Foundry, according to Jefferies & Company's Shah.

"We think Brocade is taking on a big project in uncertain economic times," he wrote, in his recent note. "While Brocade has a solid track record of integrating companies, we remain concerned in the near-term due to potential management changes at Foundry, sales channel conflicts and product integration challenges."

Foundry founder and CEO Bobby Johnson has not made the move over to Brocade, although the storage specialist recently appointed former Force 10 Networks CEO and Cisco veteran Marc Randall as senior vice president of products. Brocade also hired former Palo Alto Networks founder and CEO Dave Stevens to serve as chief technology officer.

Shares of another storage equipment specialist, Emulex(ELX Quote), also rose Tuesday after the firm pre-announced its second-quarter results late Monday.

Emulex now expects to report second-quarter revenue of between $107 million and $108 million, compared to its initial estimate of between $111 million and $116 million. Analysts had estimated revenue of $113.23 million.

On a non-GAAP basis, Emulex expects earnings of 20 cents a share, down from its initial estimate of between 20 cents and 23 cents a share. Analysts had estimated earnings of 21 cents a share.

"Given the current macroeconomic environment, we do not view the revenue shortfall as surprising", wrote Jayson Noland, an analyst at R.W. Baird, in a note Tuesday, and maintained his neutral rating on Emulex. "We do not see a meaningful near-term catalyst that would drive shares higher," he added.

The Costa Mesa, Calif.-based firm's stock nonetheless rose 28 cents, or 3.94%, to $7.39 in early trading.