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Brocade: We're Not For Sale

Brocade (NASDAQ: BRCD) finished up its fiscal 2009 year on a strong note, though overall it proved a challenging year -- with the networking vendor facing the rigors of the global recession, new competitive challenges and rumors that it was putting itself up for sale.

As it turns out, those rumors are false, the company said, with executives reiterating that Brocade intends to stick to its own plans for growing the business.

During a call with analysts on Tuesday, Brocade CEO Michael Klayko refuted at point-blank the rumors of his company being up for sale, and challenged the notion that the recent acquisition of 3Com by HP is a competitive threat.

"We have got a very bright future," Klayko said. "The fact is that we spent the last five years planning and putting all the different pieces in place to execute on a very, very large infrastructure build-out opportunity going forward. [A sales effort] just doesn't make a lot of sense ... so I want to put that one to bed right upfront."

Brocade reported its fourth-quarter 2009 and full-year results this week, posting its first quarterly profit for the year on net income and revenue gains.

The company's revenue for its fourth fiscal quarter of 2009 came in at $521.8 million, an increase of 31 percent on a year-over-year basis. For the year, Brocade saw revenues of $1.95 billion, which is a 33 percent increase from a year ago.

The net income side of the books isn't as attractive, though the fourth quarter was a positive one for Brocade. The company reported quarterly income at $33.6 million, a decline from the $35.6 million it saw in the fourth quarter of 2008. On an annual basis, Brocade reported a loss of $76.6 million, a decline from the $167.1 million of net income reported for fiscal 2008.

Minus one-time charges, Brocade posted a $0.15 per-share profit -- ahead of Wall Street expectations of earnings of $0.13 per share, according to Thomson Reuters.

Shrugging off the HP-3Com threat

While Brocade now denies it had sought a suitor, rumors at the time had focused on one potential buyer in particular: HP.

As it happened, HP (NYSE: HPQ) earlier this month announced its intention to acquire networking vendor 3Com (NASDAQ: COMS). The turn of events now has some industry-watchers concerned that a new competitive threat had emerged for Brocade.

But Marc Randall, senior vice president of products and offerings at Brocade, said the competitive situation is only a little more complex with HP now in the mix than it had been when 3Com stood alone.

For instance, Randall said that little changes on the switching side as a result of HP's acquisition. Brocade has been competing against HP ever since Brocade acquired Foundry in 2008. Prior to the Foundry acquisition, Brocade had primarily been a storage vendor, while Foundry brought in switching and routing technologies.

There's also little reason to see the 3Com acquisition affecting another key area of Brocade's business.

"We have had a long partnership with HP in the storage area," Randall said. "They have been OEM partners with our directors and switches and we built embedded blades for them and Host BUS Adapter cards."

Despite the 3Com acquisition, Randall added that Brocade continues to believe its work with HP is "going to continue as a strong partnership going forward."

Foundry strength

In the meantime, Brocade has seen growing traction from its Foundry acquisition, adding customers and new products. Ian Whiting, Brocade's senior vice president of worldwide sales and marketing, said that the company had added over 500 new Ethernet customers in 2009.

Brocade CTO Dave Stevens also pointed out that the company has been refreshing and expanding the former Foundry product lines throughout 2009. Last week, Brocade announced a new, smaller router for edge of network applications. In May, Brocade announced new top-of-rack and application-delivery technology.

In terms of demand for Brocade's gear in 2010, Klayko is optimistic, though he noted that it's tough to show a trend based on what has been going on lately.

"Frankly, no one knows how to get to a handle on this incredible growth in digital data as well as the demand for network traffic as it continues to grow," Klayko said. "And so those two line items have been actually carved out and look very positive from a budget standpoint. But there's no real pattern."

Klayko added that buyer budgets vary widely depending on geography and market verticals. Still, he said, there are some positive drivers that he is seeing.

"We are actually seeing it around datacenter refresh activities, with more and more RFPs, RFQs, as well as early pilots and tests," Klayko said.