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Brocade Beats by a Penny

Revenue rises almost 75% from a year ago on the McData buy.

Updated from 4:56 p.m. EDT

SAN FRANCISCO -- Data storage gearmaker

Brocade Communications

(BRCD)

said third-quarter profit and revenue fell, in line with the company's reduced forecast.

Brocade on Thursday reported net income of $10.7 million, or 3 cents a share, down from $24.5 million, or 9 cents a share, a year earlier.

But subtracting stock-based compensation expenses and one-time items, Brocade earned 12 cents a share, or 49.5 million, up from 11 cents last year and topping Thomson First Call analysts' average forecast by a penny.

Revenue rose 73% to $327.5 million, matching analysts' estimates. The increase partially reflects the added sales from the acquisition of McData, which closed earlier this year.

In late trading, shares were recently up 14 cents, or about 2%, to $7.10.

Adding McData helped diversify the company's revenue base. Brocade's three largest customers,

Hewlett-Packard

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,

EMC

(EMC)

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and

IBM

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, accounted for 64% of revenue, down from 67% a year earlier.

The company managed to strip out $13 million in sales of lower-margin products acquired through McData or from other third parties. As a result, Brocade's gross profit margin rose sequentially to 55%, excluding nonoperating costs, at the low end of the long-term target rate of 55% to 58%.

Brocade was also able to hold the line on prices better than historically, which also helped to hold the line on gross margins.

"In just two quarters, we have met or exceeded the vast majority of our target business metrics related to the acquisition of McData, and have strengthened our combined profitability and business fundamentals," said Chief Executive Michael Klayko in a statement.

Cash flow from operations rose 28% to $36.3 million despite an increase in outstanding accounts receivable.

Earlier in the month, the company warned that revenue would fall below its previous estimate of $330 million to $340 million.

In a conference call with analysts, Klayko said uncertainty over macroeconomic growth led to conservative corporate spending on information technology. This compounded a typical seasonal slowdown in tech purchases.

The weakness in sales came mostly from North American accounts.

But Klayko stressed that Brocade's customer surveys show that storage continues to be a top priority and that the fundamental need for storing, securing and managing data is growing with the consumption of digital entertainment and content.

Brocade is also benefiting from the trend in server "virtualization," which helps servers run more efficiently. Klayko said that companies attach network storage products like Brocade's to virtualized servers nearly 90% of the time vs. only 20% for traditional servers.

Chief Financial Officer Richard Deranleau forecast fourth-quarter earnings of 12 cents to 13 cents a share on revenue of $330 million to $340 million. These estimates are slightly below analysts' average estimate.

Both Klayko and Deranleau said this guidance was conservative and reflects a "cautious environment for IT spending."

Brocade shares were recently off 7 cents in after-hours trading to $6.89.