Brocade Communications Systems (Nasdaq: BRCD ) is dropping off a cliff today after reporting second-quarter results. In fact, the 10.4% drop makes Brocade the worst performer worth at least a billion dollars on the market. So what's going on here?
Sales added up to $501 million in the second quarter, a 1.1% year-over-year drop and slightly below analyst expectations. On the other hand, the company turned last year's $0.17-per-share loss into a $0.05-per-share profit this time. Brocade sold more Ethernet networking products than expected and less fiber channel storage handlers, which was a drastic and unexpected reversal from the previous quarter. Analysts everywhere bemoaned the lack of predictability in Brocade's results, and you know that Mr. Market hates to be surprised. Hence the drastic drop.
And I think he got it right this time. The management team here is making some strange decisions, you see.
Brocade has signed distribution deals with every heavyweight in the market, from Dell (Nasdaq: DELL ) and EMC (NYSE: EMC ) to IBM (NYSE: IBM ) and Hewlett-Packard (NYSE: HPQ ) . Some of these contracts have been running for years while others are brand-new sell-through opportunities. You'd think that Brocade would appreciate the sales opportunities this bouquet of respectable partners gives it, but I'm not sure management sees it that way.
Instead, when Sales and Marketing Vice President Ian Whiting was faced with a friendly question about the progress of those IBM and HP partnerships, he steered the question in a new direction and explained that Brocade was all about handling its own sales. "Our future and our destiny from an IP perspective is really all down to Brocade's direct selling and channel activities and expansion and that's where the bulk of the investment has been and will continue to be," he said.
I can see why the analyst crowd is losing patience with this company. Put your back into these partnerships and you might get some stability in your business. Hiring more salespeople is well and good, but not nearly as powerful as leveraging the assistance of the biggest boys in the entire IT industry.
Then again, mighty Cisco Systems (Nasdaq: CSCO ) has also decided to go its own way lately, leaving Juniper Networks (NYSE: JNPR ) most actively looking for fresh partnership opportunities. Is there something funky in the water in the networking lounge?