Shares of storage company

Brocade

(BRCD)

plummeted Friday as investors reacted to the company's

first-quarter loss

and its ongoing attempts to swallow switch specialist

Foundry Networks

(FDRY)

.

The firm's shares lost 31 cents, or just over 9% of their value, to close at $3.07 Friday, outpacing the broader retreat in tech stocks that saw the Nasdaq fall 0.11%.

The San Jose, Calif.-based company, which recently

completed

its $2.6 billion purchase of Foundry, posted a loss of $26 million, compared to profit of $35.6 million in the same period last year.

Even solid first-quarter revenue, which grew 24% year over year to $431.6 million, did little to soothe jittery investors, as this figure came in well below analysts' estimate of $441.7 million.

Brocade CEO Michael Klayko said the Foundry integration is proceeding ahead of schedule, although analysts warned that a big merger-related question mark still hangs over the storage firm.

"The increased variability in Brocade's business model following its acquisition of Foundry heightens the risks in the story, particularly given the current spending climate," wrote Goldman Sachs analyst Min Park, in a note released Friday.

The analyst acknowledged that the firm's stock has an attractive valuation but warned that Brocade still needs to fully absorb Foundry.

"We do not think the stock will perform until the company begins to deliver on its integration targets, particularly given the leverage on its balance sheet, heading into a period of softer demand," he wrote.

The two firms' product and engineering teams have already finalized a combined roadmap, according to Klayko, and the company expects to keep its operating margin between 19% and 23%.

Brocade issued 2009 revenue guidance of between $1.9 billion and $2 billion, broadly in line with Wall Street's estimates, although Klayko predicted a tough year ahead.

"The current IT spending environment will remain adversely impacted by the current macroeconomic environment," he said, adding that this will not improve until the fourth quarter of 2009.

Against this difficult backdrop, at least one analyst feels that there are plenty of positives for Brocade, thanks largely to Foundry.

"The combined company is well positioned competitively and could open several new opportunities," wrote Munjal Shah, an analyst at Jefferies & Company, in a note Friday. "While management did not provide separate guidance for the two companies, we believe Foundry business is holding up relatively better."

Debt, however, remains an issue for Brocade, which

landed

a $1.2 billion loan to help fund its Foundry acquisition.

"Near-term, we expect Brocade to trade at a discount due to the large debt position," wrote Shah.

The analyst also acknowledged the challenges posed by the Foundry integration, but maintained his "hold" rating and $3.50 price target for Brocade's shares. "Considering

the seasonally weak second quarter, full year guidance implies a strong second-half ramp," he added.

Brocade, which competes with

Emulex

(ELX)

,

Cisco

(CSCO) - Get Report

and

QLogic

(QLGC)

says that it is seeing strong growth in its DCX Backbone for connecting servers and storage, as well as increasing acceptance of its 8-Gbit/s switches and sever blades.