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Brocade Tops Bottom Line

The storage company beats on EPS on McData acquisition; also, it will pay $7 million backdating fine.

Updated from 4:56 p.m. EDT

Storage networking-gear maker



exceeded second-quarter EPS earnings expectations and nearly doubled revenue, aided by its acquisition of McData.

This was Brocade's first full quarter after closing the nearly $1 billion acquisition of its smaller rival in January.

But Brocade said Thursday that it earned $800,000, or break-even EPS, compared with income of $13.5 million, or 5 cents a share a year ago, including items and related income tax adjustments from the McData buy.

Excluding items, the company earned $46.6 million, or 11 cents a share, a 76% increase from last year, beating Thomson First Call analysts' consensus estimate of 9 cents a share and the company's own guidance.

On this basis, operating margins expanded slightly to 16.8%, above high end of Brocade's 13% to 15% projection, and in line with its long-term model target of 15%-20%.

The company attributed the results to accelerated cost savings from the merger with McData. Brocade said it achieved savings of $131 million in the quarter, ahead of its plans to save $125 million to $150 million by the end of the year.

Revenue grew 89% to $345.3 million from $182.7 million a year ago, reflecting products and services acquired through the acquisition, and matching consensus expectations.

"The fundamentals of our business remain strong, and I am extremely pleased with our execution this quarter," said Chief Executive Michael Klayko.

During the conference call, Klayko said that the trend to reduce the size and complexity of corporate data centers plays to Brocades strengths.

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The company's storage area network gear is two to three times more energy efficient than competitors' models, he said.

But Chief Financial Officer Richard Deranleau warned that third-quarter seasonal slowdown may be more pronounced this year because of an expected slowdown in sales of look for storage and server shipments.

Deranleau forecast sales of $330 million to 340 million, slightly below analysts' consensus estimate. Excluding non-recurring items, the company expects earnings per share between 10 cents and 12 cents, in line with analysts' views.

Acquiring McData left a relative duopoly between Brocade and

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

in the market for storage are network gear. According to market research firm Dell'Oro Group, Brocade now holds roughly 70% of the market, giving it additional pricing power.

In the third quarter, CFO Deranleau expects only single-digit declines in average selling prices, slower than normal.

After hours, shares were recently trading down 10 cents to $8.89.

The earnings report came out a few hours after Brocade confirmed that it will pay a $7 million civil penalty to the

Securities and Exchange Commission

to settle charges that executives backdated stock option grants.

The company said that the agreement closes the SEC's investigation and that it does not expect the Department of Justice to pursue a separate case.