Dain Rauscher Wessels
SYSTEM AREA NETWORKS
Robert Montague
BRCD:B-Aggr;BROCADE NABS FIRST EMBEDDED SWITCH WIN AT EMC
Brocade wins a foothold on EMC's symmetrix product. Numerous industry
contacts have confirmed that Brocade has secured the initial design win
for the embedded fibre channel switch for the current high-end symmetrix
storage system at EMC. As previously stated, we viewed this program as a response to the increased connectivity requirements of today's SAN deployments.
Sources indicate that McData's (Nasdaq: MCDTA; B-Agg; $29.75) submitted
configuration exceeded the available power in the symmetrix box, although within the original specification. Therefore, Brocade appears to have been awarded thisfirst generation application on its currently commercialized chip. We do notexpect a significant short-term volume ramp from this 1 Gbps fibre channel solution. The current symmetrix platform is due to be replaced near year end,and we believe the key battleground will be a 2 Gbps fibre channel switchblade for the next symmetrix product. Both companies are six months behind QLogic (Nasdaq: QLGC; B-Agg; $56.31) on a 2 Gbps offering, and therefore at acritical juncture in their product roadmaps.
This win is also important as it comes at a time when Brocade appears to
be giving some ground in the edge switch segment to McData in EMC's Clariion
business unit. A trend we are closely monitoring during the next couple of
quarters.
The real battle will focus on 2 Gbps later this year. Though we do not
view this initial design win as a large long-term revenue opportunity, it
does place Brocade in the pole position for the race to win the more
critical2 Gbps design in the next generation symmetrix platform. Sales of fibrechannel directors to EMC represent more than 60% of McData's revenue at
EMC,and nearly all of those are sold into symmetrix environments. Clearly a
victory at 2 Gbps would give Brocade a strong strategic position to
leverage as it rolls out the 12,000 core switch product next calendar year.
We view the 1 Gbps blade win as an important victory for Brocade as it
strives to retain dominance of the Fibre Channel switch market.
Nevertheless,the next two quarters will be critical phases as Brocade and McData strive to ship production 2 Gbps edge switch solutions to early adopter OEMs.Otherwise, both face potential market share dilution from QLogic (Nasdaq:QLGC; B-Agg; $56.31) in edge switches and InRange in director class
offerings.
Stock Opinion
We maintain our Buy-Aggressive rating on BRCD shares. Our $55 price target
for BRCD shares reflects a forward P/E of approximately 100x our 2002 EPS
estimate of $0.55, which is basically in line with the SAN switching
segment growth rate estimates. Based on the company's leadership position in thefibre channel switching space, we believe shares of the company's stock
should trade at a premium P/E. Also, as the company's core switch expandsits
offerings into the faster-growth director/core switch segment, we believe
the multiple will be compared to the segment's 100%-plus estimated growth
rate.
We recommend accumulation of BRCD shares as a leader in the SAN segment.
We continue to believe storage and storage networking will be among the firstmovers in the technology recovery. Storage networking is particularly wellpositioned due to the inherent capital and operational cost savings generated by pooled storage architectures. However, based on the continuing decline in the global leading indicators and a lack of channel evidence of a turn in
industry fundamental trends, we remain guarded in the short term. In
addition, we believe the completion of Brocade's 2 Gbps product is a
critical milestone as evidence of successfully transitioning to a new architecture,and must be achieved prior to our moving to a more aggressive stance. |
