Updated from Feb. 12

Shares of network storage vendor

Brocade Communications

(BRCD)

were slumping Wednesday after posting a loss on a restructuring charge and giving guidance for only a slight upturn in the coming quarter.

Brocade was down 37 cents, or 8.7%, to $3.88 in recent trading.

On Wednesday, Brocade delivered news of a lackluster first-quarter financial performance, and told Wall Street not to expect more than a modest revenue bump in the next three months.

The company reported that revenue for the first quarter of fiscal 2003 was $123.1 million, flat with a year ago. The company lost $6.9 million, or 3 cents per share, according to generally accepted accounting principles. This compares with a GAAP profit of $11.7 million or 5 cents per share in the year-ago quarter.

The company broke even on a pro forma basis, which excluded a $10.1 million charge for restructuring. Brocade announced layoffs of 12% of its workforce at the end of 2002. Pro forma earnings and revenue were in line with Wall Street's expectations.

The company expects flat pro forma earnings in the current quarter and revenue growth ranging from 4% to 8%, both in line with the consensus of analysts polled by Thomson Financial/First Call.

Wednesday's call brought estimate cuts from several analysts -- and one upgrade based on valuation. A onetime highflier in storage that traded at $33.45 one year ago, Brocade has dropped nearly 25% in the last few weeks, as tech's early year rally faded.

However, inventory in the channel, at a worrisome four weeks in October, is down to two weeks, the company said.

"That's a key metric," said analyst Glen Ingalls, of SoundView Technology. "It gives them a chance to continue growing beyond the second quarter." SoundView does not provide investment banking services to Brocade.

Operating expenses, excluding items, were down by $12 million in the quarter, and software sales grew to 18% of revenue in the quarter, up 1% from the previous quarter.

Earlier in the week, FMR Corp., the parent company of the

Fidelity

family of mutual funds, disclosed that it has nearly doubled its stake in the company, bringing its holdings to 35.7 million shares as of Jan. 31, compared with 18.3 million shares on June 30.

Nevertheless, analyst John Anthony of Fulcrum Global Partners initiated his coverage of Brocade this week with a rather cautious note, giving the company a "neutral" rating.

Anthony, whose company does not have a banking relationship with Brocade, said he is concerned about the near-term dilution resulting from the acquisition of

Rhapsody

, and was not bullish about growth in the near future.

"Given the lack of a clear and concise market strategy, the uncertainty associated with the timing of a true director class product and the recent success of

McData

(MCDT)

in the fabric switch market, we believe that there are no near term catalysts that could outweigh these concerns and drive share price appreciation," Anthony wrote.