What's Wrong With Brocade?

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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?

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (3) | Recommend This Article (3)

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  • Report this Comment On May 21, 2010, at 8:11 PM, russfellows wrote:

    Good analysis. I agree, Brocade should do more to leverage their partnerships. Cisco has a near stranglehold on the IP switching market, and their reseller partners would like to develop some alternatives. With Cisco's latest entry into the server market, the opportunity was ripe for the HP, Dell and IBM's of the world to get closer to Brocade. Instead, Brocade has appeared to squander the opportunity. HP purchased 3Com (a good move), IBM is getting closer to several companies, including Juniper, and Dell is... well they're being Dell.

    Meanwhile Brocade is going it alone, and what's worse, the Ethernet side of the house doesn't appear to talk to the FC side of the house.

    Brocade built their company by not having a salesforce. The sudden change will be expensive, and is unlikely to pay off. I'm not sure what they're thinking.

    (Disclosure - I hold no position in any company I mentioned)

  • Report this Comment On May 23, 2010, at 9:20 PM, investwest wrote:

    Wrong assumption in the analysis. When Whiting said "from an IP perspective" that meant he's referring to the small portions of the Brocade product line that are not covered by OEM agreements. It's the FC (Fibre Channel) products that are OEM. The IP products (obtained from last year's purchase of Foundry) are direct and distributor. Brocade's sales and profits are overwhelmingly derived from FC, not IP. Brocade already dominates the OEM channel, so investment pretty much has go towards the direct/disti channel. You can question the wisdom of the purchase of Foundry, but not investing in the channel that sells IP products that Brocade got in the Foundry deal.

  • Report this Comment On June 07, 2010, at 8:50 PM, Netteligent09 wrote:

    Never digest more than you can chew...Outlook is not too rosy as it seems. Competition is high at full speed.

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