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Brocade Cuts Costs, Beats Tough Spending Climate

NEW YORK (TheStreet) - Brocade (BRCD - Get Report) shares surged during Tuesday trading, lifted by the gearmaker's better-than-expected fourth-quarter results in a tough spending climate.

The networking specialist's results came hot on the heels of rival Cisco's (CSCO) revenue miss last week, as the tech heavyweight felt the impact of weak U.S. federal and emerging market spending.

Brocade shares climbed 8.03% to $8.74 by midday as investors digested the company's numbers, particularly its earnings of 24 cents a share, a 41% increase from the same quarter in 2012. Analysts surveyed by Thomson Reuters were looking for earnings of 18 cents a share.

San Jose-based Brocade acknowledged U.S. federal budget issues and continued softness in the overall storage market, although Wall Street applauded the company's cost-cutting efforts. During its fourth quarter, Brocade met its goal of reducing annualized spending by $100 million, two quarters ahead of schedule.

Speaking during Brocade's earnings conference call, CEO Lloyd Carney said that these efforts, combined with expanding gross margins, contributed to the company's impressive earnings hike. Excluding items, Brocade's gross margin was 67.2%, up 240 basis points from the prior year's quarter and 160 basis points from the third quarter.

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"[The] company holds serve in tough environment," wrote Sterne Agee analyst Alex Kurtz, in a note released on Tuesday. "While the outlook for long-term growth remains challenging to outline, the company executed well during October quarter given Federal headwinds that have hit the company's key Storage OEMs and more severely its IP business."

Kurtz has a "neutral" rating on Brocade.

CEO Carney pointed to strength in the company's storage area network (SAN) products, where revenue increased sequentially thanks to strength in the Americas, EMEA and Asia-Pacific regions. "We continue to see new opportunities for SAN in high-growth markets like China and Eastern Europe, where SAN is used as key technology for new data center the build-outs," he said.

Carney also pointed to Brocade's Internet protocol networking products and its VDX switches, which enjoyed year-over-year revenue increases of 8% and 20%, respectively. Looking forward, the CEO sees opportunities in network virtualization and Software-Defined Networking, a set of techniques for managing network traffic flows through software.

For its fiscal first quarter, Brocade expects revenue between $540 million and $560 million and earnings between 19 cents and 21 cents a share. Analysts surveyed by Thomson Reuters were looking for sales of $559.82 million and 20 cents a share.

ISI Group analyst Brian Marshall believes that set against the backdrop of spending pressures and competition from Cisco, talk of growth acceleration at Brocade is premature. Nonetheless, the analyst sees potential.

"Following expense reductions (e.g., likely to have played out by early next year) and an increased commitment to capital return (e.g., ~60% of FCF biased towards repurchases), we believe growth prospects will come into greater focus for the next leg up in EPS power and share price," he wrote, in a note released on Monday.

Marshall, who has a 'buy' rating on the company, said that fiscal 2015 could offer mid-single digit growth and earnings "power" of $1 a share, assuming sales growth around 5%, operating margins around 24% and a share count reduction of around 4%.

--Written by James Rogers in New York.

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