Brocade revenue falls short; shares drop

SAN FRANCISCO Thu May 20, 2010 6:27pm EDT

SAN FRANCISCO (Reuters) - Brocade Communications Systems Inc (BRCD.O) warned that prices for its main products would fall and reported a lower quarterly revenue that missed Wall Street expectations, sending its stock more than 9 percent lower on Thursday.

Investors had hoped for stronger performance from a company expected to benefit directly from a resurgence of corporate technology spending in 2010.

Analysts, noting dwindling cash flows, said investors were disappointed by a revenue slide at its storage area networking business -- more than half the company's sales. The company, warned that prices would continue to slip by mid-single-digit percentages going forward.

Shares in Brocade have fallen nearly 16 percent since the company, which makes routers and other network gear in competition with the likes of Cisco (CSCO.O), offered investors a lower-than-expected full-year outlook in February.

ThinkEquity analyst Rajesh Ghai highlighted that the company's Ethernet business had improved, but he remained cautious about Brocade's storage business.

"There was an expectation that the storage business would be stronger. Overall, it was expected that revenue would be a little bit stronger than it was," he said.

Brocade forecast its third-quarter sales would likely be flat to slightly higher and that full-year sales would be between $2.1 billion and $2.2 billion.

Analysts on average see Brocade's 2010 revenues at $2.118 billion, according to Thomson Reuters I/B/E/S. Their expectations for third-quarter sales on average have been nearly $520 million, an increase of nearly 4 percent over the second quarter.

Brocade's second-quarter figures were either generally in line or slightly weaker than Wall Street targets. It reported a net profit of $22.4 million, or 5 cents per share in its fiscal second quarter, compared with a loss of $66.1 million, or 17 cents a share, a year earlier.

Earnings, excluding items, were 13 cents a share versus 11 cents per share a year earlier. That was more than analysts' average estimate of 12 cents a share, according to Thomson Reuters I/B/E/S.

Revenue slipped 1.1 percent year-over-year to $501.0 million from $506.3 million. Wall Street had expected revenue of $503.2 million.

Brocade has been trying to compete against its rivals by forging closer partnerships with large technology vendors like IBM and Dell, although these alliances have been slow in producing meaningful growth in sales.

Operating margins in the fiscal second quarter slid to 20.5 percent from 26 percent in the previous quarter. Brocade warned in a statement it foresaw quarterly declines in average selling prices for its Ethernet networking business of mid-single-digit percentages.

Shares in Brocade fell 9.4 percent in after-hours trade to $5.32, after closing 3.14 percent lower on Nasdaq in a broad stock market decline. In the last six months, its share price has dropped more than 24 percent.

U.S. stocks dropped sharply on Thursday on growing fears that the euro zone's handling of its sovereign debt crisis could jeopardize the global economic recovery.

(Reporting by Noel Randewich; Editing by Richard Chang, Carol Bishopric and Leslie Gevirtz)

FILED UNDER: