Brocade sees pent-up demand but cautious

SAN FRANCISCO Tue May 18, 2010 1:13pm EDT

John McHugh, CMO of Brocade Communications Systems, speaks during the Reuters Technology Summit in San Francisco, California May 17, 2010. REUTERS/Robert Galbraith

John McHugh, CMO of Brocade Communications Systems, speaks during the Reuters Technology Summit in San Francisco, California May 17, 2010.

Credit: Reuters/Robert Galbraith

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SAN FRANCISCO (Reuters) - Brocade Communications Systems Inc (BRCD.O) is optimistic that pent-up demand will fuel recovery in the tech sector although there are still reasons to be wary, a senior executive said on Monday.

Brocade's chief marketing officer John McHugh said the network equipment maker is not looking for a buyer and is in good financial health, even though analysts have cited its more than $1 billion in debt as a concern for a company with a market value of just $2.9 billion.

"There are a lot of good fundamentals that are starting to fall into place," McHugh told the Reuters Global Technology Summit in San Francisco. "There's a belief that there is pent-up demand, that people have been, for the last 12 months or so, sitting on capital budgets."

He said there are, however, various issues hindering more aggressive capital spending, warranting a measured stance.

Brocade reports its latest quarterly results on Thursday and McHugh declined to give more details.

Network equipment makers have suffered from components shortages as demand picked up but supply has been constrained by cutbacks during the downturn.

McHugh said the worst was likely over, but he did not expect significant hikes in supply in the near term.

"I think it will be tight belts until there are what I would consider more universally positive signs around the globe that it's worthwhile for the producers to take risks in adding excess capacity," he said.

M&A AND PARTNERSHIPS

McHugh, hired in March to oversee global marketing and strategic alliances, previously worked for Nortel Networks and helped divest its enterprise network solutions business. He also had worked at Hewlett-Packard Co (HPQ.N), and handled M&A deals at private equity firm Silver Lake Partners.

Analysts have cited McHugh's deals experience as an asset for Brocade if it were to consider a sale of the company to a big technology vendor.

Brocade is widely seen as having missed out on a buyout opportunity when Hewlett-Packard chose to buy 3Com Corp, but rumors have persisted that Brocade may still be looking for a buyer, with Dell Inc DELL.O and International Business Machines Corp (IBM.N) seen as possible bidders.

Driving such talk has been the push by large technology companies to expand product portfolios and become "one stop shops" for all of their customers' technology needs. Smaller manufacturers, on the other hand, are believed to be open to buyouts as a way to secure sales.

McHugh, however, reiterated Brocade's stance that it can survive as an independent company, even against much bigger industry leader Cisco Systems Inc (CSCO.O).

Brocade was well positioned to meet customers' needs, particularly after its acquisition of Foundry Networks, he said. The combined company sells fiber channel backbones switches and other network equipment that direct Web traffic.

McHugh called the trend toward convergence in the industry as something that is driven by the large tech vendors, and not their customers, who he said would benefit from choice.

DEBT LEVELS

Asked about the company's balance sheet following its 2008 acquisition of Foundry, McHugh denied that Brocade was at risk of breaching debt covenants. Some analysts have cited high interest expenses as a concern.

"This is not a company that is in a questionable financial state," he said.

For now, Brocade has emphasized partnerships as key to competing against Cisco, and investors have been hoping Brocade's expanded sales partnerships with IBM and Dell Inc DELL.O would help it gain more sales contracts.

But McHugh did not say when the partnerships would start boosting Brocade's sales. He pointed out that resale partners don't necessarily push Brocade products to their customers.

"Our partnership with them is very important and very strategic. At the same time you have to be realistic," he said. "Somebody who is a solutions integrator for the most part, they almost have the stated objective that they're not trying to drive technology and architectural agendas."

(Additional reporting by Bill Rigby, editing by Leslie Gevirtz, Gary Hill)

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