Profits Fly High at Brocade on Sales, Margin Growth

Brocade Communications' fiscal third-quarter profit jumped 90 percent as a result of fast-growing sales of its new network switching products and professional services business.

The San Jose, Calif.-based company reported earnings of US$20.3 million on $365.7 million in revenue, compared to $10.7 million in earnings on $327.5 million in revenue during the same period in 2007.

Gross margin at Brocade, which had 2,842 employees at the end of the quarter, rose to 58.3 percent from 50.6 percent.

The company reported cash and cash equivalents of $595.1 million at the end of the quarter, down from $639.2 million during the same period in 2007.

Double-Digit Growth

"We're very pleased with the outstanding quarter," Brocade spokesperson John Noh told the E-Commerce Times. "We returned to double-digit revenue growth, set a new record for quarterly revenue and did so in what is normally a slow quarter for us."

Product revenue grew 7 percent in the third quarter while installation and maintenance services grew by a whopping 43 percent, year over year, Noh said.

"Our professional services business had a really nice quarter," he said. "Customers understand the value of the expertise we bring in terms of installation and maintenance of their data storage networks."

Brocade forecast fourth-quarter revenue of $375 million to $385 million.

Product Cycle Boost

Brocade is benefiting from being at the start of a new product cycle, Brent Bracelin, an equity analyst with Pacific Crest Securities, told the E-Commerce Times.

"What you're seeing is those new products starting to reposition the company for growth. It's their best organic growth rate in the past few years," he said.

However, Bracelin cautioned against using Brocade's latest financial results as an indicator of the overall health of the data storage market.

"Storage industry fundamentals have been healthy out of companies like IBM (NYSE: IBM) and Data Domain, even with tightening IT budgets," he said. "But Brocade has some company-specific factors helping them."

The amount of data that needs to be stored on servers and corporate networks is growing by 50 percent every two years, Bracelin said.

"This is a company that just reported 11.6 percent revenue growth," Bracelin said. "Doubling of information every two years as a reason to drive 11 percent growth is a bit of a stretch. It's helping, but the most important thing here is that they have a new product cycle."

Foundry Networks Acquisition

Late last month, Brocade announced the $3 billion acquisition of Santa Clara, Calif.-based competitor Foundry Networks. The move was made in an attempt to compete with networking giant Cisco Systems (Nasdaq: CSCO) and other data storage companies.

Together, the two companies can offer customers a wider range of data storage products and services, Brocade's Noh said.

"This was a very complementary deal in terms of technology," he said.

Foundry makes products and technologies that serve the corporate side of the network. Brocade makes products for data center networks, he said.

"This deal allows us to go after both sides of the server in terms of networking," Noh said. "It gives us a product portfolio spanning the Internet all the way into data centers."

Brocade and Foundry also complement one another in terms of the customers they serve.

"We also saw tremendous synergy opportunities in terms of customer segments," Noh said. "Foundry is very strong in the federal government sector. We're strong in the corporate sector."

Brocade is in the early stages of integrating the two companies. Noh said the company would share more information about that process at Brocade's financial analysts' day on Sept. 17.

The deal is expected to close sometime in the fourth quarter, he said.