UPDATE 2-Brocade forecasts lower margins, shares fall

* Brocade shares fall nearly 4 percent

* Company lowers margin targets in two-year model

* Ethernet margin outlook particularly weak

* Does not give FY 2011 earnings forecast

* 100 Gigabit Ethernet gear priced at fraction of rivals’ (Adds details on margin outlook, byline, updates share move)

By Ritsuko Ando

SAN FRANCISCO, Sept 15 (Reuters) - Brocade Communications Systems Inc BRCD.O forecast weaker margins as it cuts prices of its network equipment to better compete against Cisco Systems Inc CSCO.O, sending its shares down nearly 4 percent on Wednesday.

Brocade said it could not give profit forecasts for the next fiscal year, partly due to economic uncertainty, and instead presented a two-year business model in which it saw total gross margins around 55 percent to 57 percent, down from a previous target of 59 percent to 61 percent.

Brocade earlier told Reuters that it plans to price its new 100 Gigabit Ethernet gear at a fraction of that of its rivals'. The company competes with Cisco, Juniper Networks Inc JNPR.N and other network equipment makers that sell routers and switches that control Internet traffic.

It also forecast gross margins in its Ethernet business to be around 45 percent to 50 percent over the next two years, down from a prior target of 55 percent to 60 percent.

Margins next year will likely be at the low end of those ranges while it pursues revenue growth, it said.

Brocade shares closed down 23 cents, or 3.9 percent, at $5.67.

The lower margin forecast comes as Brocade’s customers have been demanding more efficient routers that help them limit the space, energy and hardware required to deal with the growing Internet traffic.

It also comes after the company last month gave a weaker-than-expected outlook for the fiscal fourth quarter.

Many analysts have said Brocade appears to be having trouble integrating Foundry Networks, which it bought for $2.6 billion in 2008.

M&A speculation has also been a factor behind the recent volatility in the company’s shares.

Before Wednesday, they were up about 20 percent from a month earlier on talk that it may attract a buyer after a bidding war between Dell Inc DELL.O and Hewlett-Packard Co HPQ.N for storage company 3PAR. HP won with an offer of over $2 billion.

Brocade has expertise in fiber channel and ethernet switching technologies, and analysts have said its lead in storage area networks makes it an attractive acquisition target.

The company is widely seen as having missed out on a buyout opportunity last year when HP last year chose to buy 3Com instead. (Reporting by Ritsuko Ando. Editing by Robert MacMillan)