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Brocade Gets Ripped after Report

The stock slips a day after the company reports sales fall 10% from a year ago.

Updated from Nov. 20

Shares of

Brocade Communications


were falling steeply Friday, the day after the company reported slumping sales and profits.

Shares were down 99 cents, or 13.9%, to $6.16 in recent trading.

The storage-networking vendor reported sales of $137.8 million, in line with expectations but down 10% from the same quarter last year. Net income totaled $14.8 million, down 6% year over year. Earnings per share amounted to 6 cents.

On a pro forma basis, Brocade reported earnings of 2 cents per share, in line with consensus estimates. The pro forma figure excludes gains related to repurchases of convertible subordinated debt, a gain on the disposition of private strategic investments, a reduction of previously recorded restructuring costs, and deferred stock compensation expense related to the acquisition of Rhapsody Networks, Inc.

In the January quarter Brocade expects sales in the range of $140 million to $145 million with pro forma EPS of 2 cents to 3 cents.

That compares to consensus estimates for January quarter revenue of $141 million with EPS of 2 cents.

Looking out further, Brocade said revenue in the April quarter may be flat, noting it could see a seasonal downward trend as higher-end enterprise products become a bigger portion of the revenue mix. It said sales may also be constrained by new product roll-outs planned in the quarter. Finally, Chief Financial Officer Tony Canova said the company wanted to be "cautious about the economic environment that may exist then."

At Punk Ziegel, analyst Steve Berg noted the after-hours selloff took place despite Brocade's in-line guidance, which suggests expectations may have been unrealistically high.

In that vein, some analysts had been expecting Brocade to benefit from missteps by rivals


(CSCO) - Get Free Report

, which encountered production problems in its latest quarter, and



, which preannounced a revenue shortfall. But the fact that the company's results merely met expectations shows it didn't profit from others' misfortunes.

Berg has a sell rating on Brocade shares based on valuation. "Their market cap-to-sales ratio is around 3.6. You're paying 3.6 times sales for 13% top-line growth in

2004?" asked Berg rhetorically. "No way."

The company said today it has spent $106.8 million in cash to buy a San Jose, Calif. building which it formerly leased, estimating that directly owning the building should help reduce its operating expenses by $4 million to $6 million per year. Brocade will record a related nonrecurring charge of $75 million to $85 million in the first quarter of fiscal year 2004 for lease termination and facilities consolidation.

In the fourth quarter Brocade repurchased $107.1 million face value of its 2% convertible subordinated notes. It paid an average of 88 cents on each dollar of face value for a cash purchase price of $94.4 million, which resulted in a pretax gain of $11.1 million. The repurchases will reduce future quarterly interest expense and related amortization by about $0.7 million.

Brocade also reported today that revenue in its just ended fiscal year totaled $525.3 million, down 7% from 2002 levels. The company reported a net loss of $136.2 million or 54 cents a share, compared to a 2002 profit of $59.7 million or 25 cents a share.

Brocade sells switches and related software for storage area networks, or SANs.