If you wander in the desert long enough, sooner or later you'll come across an oasis like this.

Badly battered storage stocks of all stripes were rallying Friday afternoon after

Brocade Communications

(BRCD)

warned that a sluggish economy would cause its earnings and sales to

fall way short of expectations. None were flying like Brocade itself, lately up $3.71, or 11.8%, to $35.05.

Go figure. The company, which is set to post earnings in mid-May and had already

warned of a revenue shortfall in February, said its second-quarter earnings would come in at 5 cents to 6 cents a share, compared with the consensus estimate of 11 cents a share, according to

Thomson Financial/First Call

. The company also said that revenue would be about 30% lower than it was for the first quarter.

"We are sober about the effect that the economy has had on the enterprise technology marketplace and on our short-term business outlook," Brocade President and CEO Greg Reyes said in a press release.

Everyone Loves a Winner

Despite the repeated inability of every company in the storage infrastructure industry to forecast its performance, investors are taking the company's sobriety at face value. The feeling seems to be that Brocade has lowered the bar so far that it will easily be able to return to the practice that has made it such a beloved stock on Wall Street. That is, beating earnings estimates, again and again.

"It's unbelievable," said Joel Pitt of

SunTrust Equitable Securities

, echoing a point

TheStreet.com

addressed earlier Friday. "If you look at the way the market seems to be handling things now, the rule seems to be: If you preannounce, the cat's out of the bag, you've adjusted everything else, and it's cool, we'll start buying you again. Is that what I'd call rational behavior? I don't think so." (SunTrust hasn't done underwriting for Brocade.)

Brocade wasn't entirely without glad tidings this morning, though. The company said that despite the abrupt shortfall, it expected gross profit margins to "remain in the 60% range" for the next several quarters. Investors were surely pleasantly surprised by that news, considering that Brocade's gross margins hit an all-time peak of 60% in the first quarter.

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It's rare that a company endures a sharp drop in demand without seeing corresponding pressure on margins. It's rare enough to raise questions whether Brocade has been aware of the severity of the current slowdown for longer than it's letting on -- perhaps giving enough time to reduce production volumes accordingly. "If they were caught flat-footed, they'd have a gross-margin hit," agrees

A.G. Edwards

analyst Shebly Seyrafi. (A.G. Edwards hasn't done underwriting for Brocade.)

Quiet Period

If Brocade execs knew, they're just about the only ones who did, despite the conventional wisdom that today's warning was already priced into the stock. Surely the analyst community was unprepared for the scope of the slowdown that CEO Reyes predicted: sales growth of 58% for fiscal 2001 as a whole.

To meet that target, Brocade would need $520 million in sales. Brocade logged $165 million in its first quarter. A 30% decline from that figure (the company's guidance) equals second-quarter sales of $115 million. To get to the magic $520 million, most analysts will probably rework their models to show flattish sequential growth in the third quarter followed by a slight pickup in the fourth quarter -- say $115 million followed by $125 million. In sum, those numbers are about 25% below analysts' expectations as compiled by

Multex.com

.

In afternoon trading, storage infrastructure names like

EMC

(EMC)

,

Network Appliance

(NTAP) - Get NetApp, Inc. (NTAP) Report

and

Emulex

(EMLX)

were moving higher. All those companies have fallen at least 55% from their 52-week highs. All have already stumbled on sharp slowdowns.

For now, investors are making the leap of faith that these companies are finally close to calling the bottom. "Some of these guys are drawing absolute bottoms, in terms of what they know now, on where they're going to go," says SunTrust's Pitt. "For the most part they're trying to be conservative."