Updated from Nov. 22

Brocade Communications

(BRCD)

performed slightly better than Wall Street had expected in the fourth quarter, and was rewarded with modest gains.

In recent trading on Tuesday, shares were up 21 cents, or 2.9%, to $7.36. The stock actually lost ground in after hours trading Monday evening following its earnings announcement, but was bolstered by a series of generally positive sell-side notes published Tuesday.

Brocade increased fourth-quarter revenue by 13% and beat Wall Street's earnings expectations by a penny, the company said.

The San Jose, Calif.-based maker of storage networking gear said its profit grew to $20.4 million, or 8 cents a share, from $14.7 million, or 6 cents a share, a year ago. Largely responsible for the EPS upside were margins that improved for the seventh straight quarter and lower costs, as well as a lackluster performance by its major rivals.

"Brocade had out-executed Cisco

(CSCO) - Get Report

in two out of the last three quarters and McData

(MCDTA)

for four quarters in a row, " Goldman Sachs analyst Brenden Smith said in a note to clients. "With short-term street expectations now back to reality, we would again look for opportunities to add to positions in Brocade." (Goldman has an investment banking relationship with Brocade.)

Similarly, Merrill Lynch upgraded the stock to "buy," and set a price target of $9.15.

Sales in Brocade's October quarter were $155.6 million compared with the company's guidance of about $150 million and Wall Street's expectations of $154 million.

On a pro forma basis, the company earned $18.6 million, or 7 cents a share; analysts polled by Thomson First Call were expecting 6 cents. On the same basis, the company earned $4.6 million, or 2 cents a share, last year.

Fourth-quarter gross margins increased to 57.6% from 57.2% in the preceding quarter on sales of higher-margin products, and cash flow from operations was $44.2 million, compared with $17 million a year ago.

"Fiscal 2004 was a good year for Brocade and I am very proud of our results," Greg Reyes, Brocade CEO said in a prepared statement.

"During the year we expanded and extended our product line, introduced new products in new segments, executed on our business strategy, achieved our financial model targets, and strengthened the overall position of the company," Reyes said.

For the full fiscal year 2004 which ended Oct. 30, revenue was $596.3 million, an increase of 14% from $525.3 million reported in fiscal 2003. Brocade narrowed its yearly loss to $1.3 million, or 1 cent per share, from $136.2 million, or 54 cents per share. Last year's loss included a $134.89 million writedown for the acquisition of Rhapsody.

Looking forward, the company projects first-quarter revenue of $157 million to $163 million, with a pro forma profit of 7 cents or 8 cents a share, essentially in line with analyst expectations of $160.13 million in sales and a profit of 7 cents a share.

Brocade makes switches and other hardware used on corporate storage networks. Its major competitors include

McData

(MCDTA)

and

EMC

(EMC)

.

Along with other storage vendors, Brocade derives significant revenue from sales to

Hewlett-Packard

(HPQ) - Get Report

and benefited from H-P's

recent rebound in storage, as well as from strong sales to

IBM

(IBM) - Get Report

and

EMC

(EMC)

, noted Punk Ziegel analyst Steve Berg. Brocade, he said, "is executing the best right now of the three major storage vendors." (His company does not have a banking relationship with Brocade.)