Not only had the company floundered in the IT enterprise market where it competes with rivals like Cisco (CSCO - Get Report) and Juniper (JNPR), but Brocade, which just installed a new CEO, couldn't convince investors that operational changes would make a difference. On Tuesday, all of that was forgotten.
Helped by efficient cost controls, Brocade surprised the Street with a better-than-expected profit of $118.7 million. Excluding one-time items such as a legal settlement worth $77 million, the company earned 19 cents per share, beating last year's EPS by 36%. The stock responded by jumping more than 16%.
As we've seen from other hardware vendors, which have suffered due to weak IT spending, there now appears to be a meaningful recovery in enterprise capital expenditures.Companies no longer seem interested in starving themselves. In the case of Brocade, it is clear that demand in the storage market is recovering faster than the company had predicted, which supports my recent confidence in storage giant NetApp (NTAP). What's impressive about Brocade, though, is that the company's product portfolio appears strong across all areas of its business. And it's also encouraging that these products are driving industry transformation in emerging areas of growth including virtualized data center, cloud computing, and software-defined networking (SDN). Cisco, via its recent acquisitions, has been trying to build its capabilities in SDN I like Brocade's prospects. But I'm not going to pretend that this is a flawless company. The revenue situation hasn't been that impressive. I think it's a mistake, though, to judge Brocade solely on this basis. It's a popular bear argument. But this is a company that has produced solid free cash flow for eight consecutive years and strong margins. That the company continues to grow market share in its core storage area network, or SAN, business is also an indication that its strong technology is still highly regarded. To that end, while Brocade may be a tough matchup for, say, Cisco, Brocade is clearly outperforming Dell (DELL) and Hewlett-Packard (HPQ). This is even though Brocade reported a 3% decline in revenue, much of which was due to lower-than-expected sales to the U.S. federal government. Even so, the Street now seems pleased with the company's new direction and that management has shown that it can do more with less.