4 Reasons Why Brocade Communications Systems, Inc. Is a Buy

Growth in data centers and networked storage has created a big opportunity for Brocade Communications

Jul 17, 2014 at 11:35AM

The growing deployment of data centers and networked storage has helped Brocade Communications (NASDAQ:BRCD) beat the market handsomely in the last year, clocking gains of more than 40%. The company has been delivering solid results, beating earnings estimates in each of the last four quarters. It aims to become the network provider of choice for data centers across the world, and is progressing well on this goal.

Brocade recently entered into a partnership with equipment provider Ciena (NYSE:CIEN) to boost its prospects, while the company's investments in other areas will continue driving its performance. Let's take a closer look at Brocade's moves and see why it is on track to deliver solid long-term growth.

Impressive progress
The company has witnessed year-over-year growth in the data center business through the first six months of this fiscal year by focusing on its Ethernet switch strategy. Looking ahead, Brocade will invest in software networking and fabric-based technology. It is capitalizing on data center growth in the emerging markets by managing its expenses and investing in Asia-Pacific, Eastern Europe, and Latin America.

Brocade's moves are already yielding results. The company has met more than half of its annual operating cash flow target for the fiscal year in the second quarter itself. It has also boosted its gross margin and operating margin expectations for the next two years. 

New products to drive growth
Product innovation will help Brocade tap the cloud and data center markets efficiently. The networking major recently announced its first 10-gigabit virtual router for carrier-class networks. It also deployed OpenFlow 1.3 support across its entire IT portfolio, along with multi-tenancy and 100-gigabit connectivity on its Ethernet fabric products. Brocade has also implemented a virtual load-balancer through its Vyatta NFV platform to improve the customer experience.

The company is witnessing significantly higher growth rates in the software-based application delivery controller market. As a result, Brocade decided to shift a larger portion of its ADX product development resources through its virtual solution, boosting its software networking offerings in the process. Looking ahead, Brocade expects its network functions virtualization and software-defined networking, or SDN, technologies to create opportunities in the networking industry.

Gaining traction with customers
The company already sees an improvement in customer engagement. Brocade has increased customer engagements with more than 30 top-tier customers across the globe. Management believes that the company has been able to outperform incumbent solutions at a fraction of the cost, thereby gaining more traction at these customers.

Brocade is implementing virtual sales site routing at a top mobile carrier where it plans to support content distribution and transloading services to optimize real-time delivery to the end user. Brocade also plans to improve the overall quality of experience by eliminating potential network congestion.

Key partnerships
Brocade is trying to build one of the most comprehensive portfolios of high-performance routers, advanced fabric-switches for both SAN and IP data center networks, and virtualized networking software for both NFV and SDN applications. As a result, it is partnering with the likes of Ciena and Aruba Networks (NASDAQ:ARUN) to enhance its offerings.

Recently, Ciena and Brocade together showcased a cloud solution to deliver advanced resource provisioning for cloud networking. This solution is based on Ciena's architecture, which enables data center and WAN orchestration over open application programming interfaces, or API. Ciena is trying to develop an ecosystem which will provide an on-demand experience to address the needs of a changing architecture. 

Ciena is building its expertise in on-demand networking, and believes that its architecture is specifically designed to enable network integration in data centers. Together, Ciena and Brocade's solution will allow networks to respond automatically to changes in traffic and application response times, thereby increasing network intelligence.

Brocade's strategic alliance with Aruba is focusing on the bring-your-own-device, or BYOD, and SDN markets. Aruba and Brocade are integrating wired and wireless solutions, allowing customers to eliminate vendor lock-in and enjoy a 50% drop in the cost of ownership. Aruba is bringing its mobile virtual enterprise, or MOVE, architecture to the table in this partnership. This architecture provides capabilities such as access control and application performance monitoring. 

Brocade and Aruba's solution is based on the open-standard platform, and saves customers from being locked-in to a particular equipment vendor such as Cisco

The bottom line
All in all, Brocade is pulling the right strings to improve its cloud and data center offerings. The company is investing in its products to drive organic growth, and partnering with well-known networking players such as Aruba and Ciena. Moreover, at a trailing P/E ratio of 16.6 and forward P/E of 10.4, Brocade looks enticing. The company has a relatively strong balance sheet with a robust liquidity position. The company looks like a good buy even after a strong run in the last year.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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