With Brian Graney (TMF Panic)
May 15, 2000

Founded in 1995 and based in San Jose, California, Brocade Communications Systems (Nasdaq: BRCD) is the market-share leader in providing Fibre Channel switches for enterprise storage area networks (SAN). We talked with President and CEO Greg Reyes about the company's competitive positioning and growth opportunities after Brocade reported its results for the fiscal second quarter, which featured 45% sequential growth in revenues and 82% sequential growth in net income.

TMF: Judging from the earnings release, it looks like you're not having any problems in demand for your business.

Reyes: No, we've got elegant problems.

TMF: And how is that?

Reyes: Just explosive growth.

TMF: When you look at the explosive results, what are the one or two things that really pop out at you about this quarter?

Reyes: That the company had accelerated revenue growth quarter-to-quarter.

TMF: And that was driven mostly by the high-margin products?

What's driving the market demand is exploding storage demand, and that's exacerbating performance and exacerbating a need for connectivity.

Reyes: Well, it was really across the board. There's incredible traction in the marketplace for this networking model for storage that Brocade brings.

TMF: For investors that might be new to Brocade and the whole idea of Fibre Channel, can you give us a quick rundown of what's really driving the demand for Fibre Channel right now?

Reyes: Sure. I wouldn't necessarily describe it that way. Fibre Channel is a protocol, like TCP/IP is a protocol. Brocade provides switching infrastructure that uses Fibre Channel as a protocol. What we make it possible to do is to provide very high-speed connectivity of servers to storage sub-systems. What's driving the market demand is exploding storage demand, and that's exacerbating performance and exacerbating a need for connectivity. At the very high-level, those are two major pinpoints that our product makes go away.

TMF: Given your leadership position in this space, what two or three things set Brocade apart and have helped you become the market-share leader?

Reyes: We've got 90-plus percent market share. What I think is different between us and our competitors is we envision people building large networks of interconnected servers with storage and we were first to market with a product offering that made that possible, that's simple to manage, and simple to administer. Our competitors really, for the most part, missed the boat and came to market with a hub technology. And, as we all know from data communications, the sweet spot of the market over time became the switching sweet spot that allowed a company like Cisco Systems (Nasdaq: CSCO) to emerge as a dominant force.

So, we've been in a unique position in that we were the first company to focus on Fibre Channel switching, where everybody else started out focusing on hubs. And, when the requirement for switching really became much more acute sooner, we were there with the best-in-class offering.

TMF: You brought up Cisco. Is it fair to compare the value proposition that your products offer in the SAN marketplace to the role Cisco's products play in the WAN, or is that a poor analogy?

Reyes: No, I think that's an ideal analysis.

TMF: Do you see the market in SANs evolving the way the market in WANs has evolved?

Reyes: They almost are evolving identically. What we talked about on our earnings call today was this concept of the four phases of the market's evolution. The first phase in storage area networks was what we call "homogenous SANs" -- so a single-vendor server is connected to a single-vendor storage dropping in an island of data. In the early days of PC networking or data communications networking, we saw islands of automation -- small numbers of PCs sharing file and print services. What we're experiencing in the SAN space is that these early islands of data are starting to grow into large campus networks. We see companies wanting to use storage area networks as the mechanism for interconnecting large numbers of servers with storage, much as in the early days of data communications [when] we saw these islands of automation grow into campus LANs.

Then the fourth phase of the market's evolution -- I skipped over the application phase -- is wanting to connect these local storage area networks over distance, providing for internetworking... using common-carrier infrastructure from companies like Cisco. So, just like in the early days of data communications, when we went from islands of automation to campus LAN enterprise networks, we're seeing exactly the same phenomenon here. And, we think it bodes really well for the company. It creates a huge market opportunity for us.

TMF: As you roll out new products and features, what are your customers asking for right now? What are their biggest needs?

With such a dominant market share position, we really are in a very unique position to be able to guarantee interoperability between multi-vendor servers and multi-vendor storage. It's turning into a real asset for the company.

Reyes: I'd say their biggest need right now is products that can literally just plug and play. With such a dominant market-share position, we really are in a very unique position to be able to guarantee interoperability between multi-vendor servers and multi-vendor storage. It's turning into a real asset for the company. It solves one of the top issues end-users have. They don't want to have to muddle through trial-and-error, trying to make multi-vendor products work together. That's a strong suit of Brocade.

TMF: Talking about plug-and-play technologies, how much of an effect does a development like network-attached storage have on your business?

Reyes: Well, it's interesting. The way to think of network-attached storage is that people buy network attached storage as an alternative to buying another server just to gain access to the storage attached to it... meaning, if all you need to do is gain access to storage, I don't need to buy an expensive server. That's where network-attached storage fits in. The storage area network fits in between the server or the network-attached storage filer in the back-end storage, providing a networking model for interconnecting servers with storage. So, we view them as being very complementary technologies.

TMF: What's the biggest threat to your leadership position right now? Is it another company coming along and stealing share, or is it missing some shift in technology?

Reyes: Well, that's a good question. You always have the risk of missing something in terms of a technology shift. But, I think we've got our radar screen up, if you will, and have a pretty good sense in terms of how the market's evolving. I think in a company like Brocade that's growing at the rate that we are, the biggest risk is execution risk. When you're adding 150 employees a quarter and your revenue is growing at 40-plus percent, you want to make sure that you take advantage of that growth opportunity rather than having a growth opportunity turn on you. That's another strong suit of Brocade.

TMF: So, we can assume that, day-to-day, you're focused mostly on the execution part of the business?

Reyes: Yes, absolutely. Strategy and execution.

TMF: Finally, what are some of the key elements that you use internally when you're thinking about valuing the business?

Reyes: Well, that's an interesting question. I've never had it asked before. I don't think we think about how we value the business. We try and do the best job that we can of helping investors understand the business and the market sets the valuation.

TMF: That's a fair answer. I appreciate you talking with us.

Reyes: Thank you for your time.


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