Brocade Exceeds Expectations

The storage hardware vendor posts revenue of $145 million and EPS of 3 cents.
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Updated from Feb. 11

Brocade

(BRCD)

grew fiscal first-quarter revenue by 18% year over year and bettered Wall Street's expectations for earnings by a penny, the storage hardware vendor said after the bell Wednesday.

The generally positive, albeit nondramatic, results got a good reception on Wall Street Thursday, with the stock trading as high as $7.20 intraday; recently, Brocade was up 12 cents, or 1.2%, to $6.90.

"We continue to believe that new products based on new chips combined with ongoing expense reductions will yield positive earnings revisions in 2004 and drive the stock higher over the course of the year," said Goldman Sachs analyst Brenden Smith. (Goldman Sachs does not have a current investment banking relationship with Brocade.)

Revenue in the January quarter was $145 million, up from $123.1 million in the same quarter a year ago, and 5% better on a sequential basis. Analysts polled by Thomson First Call were expecting revenue of $143.2 million. .

On a pro forma basis, the San Jose, Calif., company earned $8 million, or 3 cents a share.

But including charges for lease terminations and other items, the company posted a loss of $36.8 million, or 14 cents a share, according to generally accepted accounting principles. A year ago the company lost $6.9 million, or 3 cents a share.

Brocade, along with rivals

McData

(MCDTA)

and

Cisco Systems

(CSCO) - Get Report

, makes switches used in storage networks.

Looking forward, the company told investors to expect a fiscal second-quarter profit of 2 cents or 3 cents on a pro forma basis on sales ranging from $143 million to $147 million, on the high side of Wall Street expectations of a 2-cent profit on sales of $144 million.

Gross margins, the company said, will range from 53% to 55%.

"During the first quarter, we saw revenue growth across our entire business," Brocade Chairman and CEO Greg Reyes said in a prepared statement. "This represents our fourth quarter in a row of improved revenue, gross margin and operating margin.

Although sell-side analysts generally liked what they heard from Brocade, there was disagreement about how much upside the stock has at the moment. Smith, who replaced Laura Conigliaro as lead analyst on Brocade, has an $8 target over the intermediate term.

However, Jason Adler of Thomas Weisel Partners maintained his underperform rating, writing in a note to clients: "While better demand and solid execution have led to improved results at

Brocade, the jury is still out on new product introductions and pricing. We believe the stock's upside will be limited absent major leaps on the product front."

Adler noted Brocade trades at 2.9 times estimated 2004 revenue compared to 1.7 times for McData.

A key to the next few quarters will be the success of new product launches, scheduled to begin in April. "A highly successful new product cycle could render our estimates on Brocade overly conservative, at least near term," Adler added. (Thomas Weisel does not have a current investment banking relationship with Brocade.)

During a call with analysts after the announcement, Reyes acknowledged that networking giant Cisco reported significantly greater storage-related revenue in its most recent quarter than it has in the past. But Reyes said it wasn't clear if Cisco had merely reported backlog from the earlier quarter, or had actually grown its storage-switch business.

Cisco is a relatively new player in the network storage switch market and, until recently, it appeared that its success in the area

had been limited.