Looking at the year-to-date stock chart below for Brocade Communications Systems (Nasdaq: BRCD ) , you can clearly see a midyear nosedive in its stock price. Of course that was around the time of the Capitol Hill debt ceiling kerfuffle, when the whole market took a header. But notice the sinking blue line in the chart. That line represents the company's revenues, and so you can't blame investors for selling off their shares of Brocade on market panic alone.
So what happened?
Brocade manufactures equipment for data storage systems. That includes fiber channel and Ethernet switches, and host bus adapters. Though it is considered a market leader in storage switching devices, it is up against some strong competition, namely Cisco (Nasdaq: CSCO ) and Juniper Networks (Nasdaq: JNPR ) .
The company did have a strong second quarter, with revenue increases producing profit growth of 23%. That growth came from strong sales of its Ethernet products and storage-networking solutions. The company was doing well enough that there was even speculation that Dell (Nasdaq: DELL ) was considering buying it.
Dell did not end up buying Brocade; it bought Force10 Networks instead. This meant that
Dell would now be bypassing Brocade -- and Juniper, too -- as a supplier of networking gear. Brocade also lost out on the opportunity to resell its switches through Dell. This was not a deep cut in Brocade's revenue stream, but it would affect future growth for its Ethernet products, one of its weakest growth areas.
Black Friday for Brocade
On the morning of Friday, Aug. 5, Brocade shares fell 30% on Brocade announcing it would be missing its earnings forecast. The larger fear was that demand for IT services and equipment was weakening for all suppliers, especially from the industry's government clients.
Well, you can't say that Brocade didn't come with an interesting stopgap measure -- if not solution -- for that immediate threat. At the end of August, the company announced that it would allow some of its largest customers to get a free router and only pay a monthly fee for the number of ports it actually used. That customer would then not have to pay for more equipment than it needed, and -- very important for government agencies -- since this fee could be classified as a service, it would not affect shrinking capital expenditure budgets.
Brocade's fourth-quarter earnings were released last week, and revenues have climbed back up to where they were just before the August fall. Net income, on the other hand, has gone into negative territory, losing $4 million for the quarter. But free cash flow has more than doubled, to $352 million.
Brocade wasn't the only networking parts supplier that took hits in the second half of this year. But checking that stock price chart again, you can see that it -- and the company's revenue -- have been on the rebound.
Competition in the cloud-computing arena is heating up, and the big three -- Cisco, Juniper, and Brocade -- are gearing up for an intense battle for the hearts and minds of cloud-computing providers. I'll talk about that in the Brocade 2012 preview, coming up.
If you'd like to learn more about the disruptive potential of cloud computing, then watch this free video report on why even Bill Gates views it with trepidation: "The Two Words Bill Gates Doesn't Want You to Hear..."