February 22, 2010
Brocade
Communications
Systems
Ethernet Issues Unlikely a
Quick Fix
Investment conclusion: We remain Equal-weight
BRCD and lower our FY10 EPS estimates to reflect
slower Ethernet revenue growth. The Ethernet revenue
miss was far worse than expected and will overshadow
share gains in storage until the Foundry business
returns to growth.
What's new: Weak Ethernet revenue offset stronger
than expected storage revenue resulting in a 2% F1Q10
top-line miss versus consensus. During F1Q,
aggressive operating expense management helped to
stabilize earnings despite the revenue miss and
non-GAAP EPS beat our forecast by $0.03. That said,
the push-out of US Federal spending largely explains
the F1Q revenue miss, but a slower ramp of new OEM
revenues (e.g. IBM, DELL) will require incremental sales
resources in the next few quarters. We lower our FY10
EPS forecast to reflect lower Ethernet revenues,
incremental sales force investments, and modestly
lower gross margin offset partially by lower tax rate and
share count.
What’s next: BRCD is a show-me story for at least the
next 2-3 quarters. To deliver improved stock
performance management must prove that: 1) Ethernet
revenues won't deteriorate further from here, 2) SAN
market share is sustainable in the 68-70% range even
as management focuses its efforts on the Ethernet
business, and 3) investments for growth won't surpass
expectations.
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