.....Brocade Communications Systems, the leading- edge networking vendor, reported October year earnings of $2.8 million, or one cent. But if Brocade counted the cost of stock options, it would've shown a huge loss of $592 million, or $2.68 a share, and the trailing earnings multiple on Brocade's $30 shares would go from astronomical to incalculable. Tony Canova, Brocade's chief financial officer, says his firm's October 2001 year option awards were exceptionally large, with half issued to replace higher-priced options awarded when Brocade enjoyed a bubble market share price above 100. Brocade hired most of its employees before the stock market peaked, and Canova says Brocade issued new options in its October 2001 year to retain those workers.
Before & After
THE REACTIONARY, THE REVISIONIST AND THE UGLYYYYYYYYYY
Net Income Net Loss
(w/o cost of options) (w/ cost of options)
1999 $ 2.5M -$ 1.9M
2000 67.9M -$172.3M
2001 2.8M -$591.7M
As of 10/27/01, BRCD had total outstanding stock options of 80.7M options with a weighted average exercise price of $35.43. However, only 14.8M options with a weighted average exercise price of $33.23 were exercisable as of the end of Brocade's fiscal year. Brocade had around 222M shares outstanding as of 10/27/01 so the dilution to BRCD shareholders is considerable especially when you add the dilutive effect of the $500+M in convertible debt that is non-callable for 3 years.
Brocade insiders, however, were able to sell more than 6.1M shares during CY2001 with Reyes himself selling more than 3M shares. The joke going around in internet time is that McDATA's initial patent action signals the formal start of the sprint inside Brocade to see who can sell the most number of shares the fastest: Reyes and other insiders or their employees.<g>
biz.yahoo.com
Unfortunately for BRCD employees who still have to wait for most of their options to vest, Reyes already got off to a good start. He sold 85,600 shares as soon as the 2002 market opened despite selling more than 3M shares in 2001. I think that insider selling will continue to accelerate before key employee defections force the insiders to moderate their behavior and gut it out with their employees.
McDATA was smart to buy SANavigator since aside from providing it with a time-to-market advantage on advanced software that can manage Brocade and McDATA SANs, that Silicon Valley outpost now doubles as a recruiting outpost for disaffected Brocade employees who are now just beginning to understand the elaborate patent minefield that McDATA has laid out for Brocade at 2Gbps and how that is forcing BRCD's insiders to sell their shares like crazy.
To get some idea of why McDATA is playing this one very methodically, take a look at Lucent's latest patent-related moves in the iSCSI market. With the market continuing to act the way it is and Silicon Valley's cherised option programs under seige, is it any surprise that no one is in the mood for free luv.<g>
byteandswitch.com
Based on the 10K, Compaq accounted for 26% of BRCD's revenues in FY2001, or around $134M. EMC accounted for 20% ($103M) and IBM accounted for 10%.($51M) with about 35% to 40% coming from the channel. The growing tensions between Brocade and some of its biggest OEMs are well known. This patent action now gives them the excuse to cut Brocade down to very manageable size depending on what the patent law ultimately sez, of course.
Notice something else? EMC, IBM and Compaq now control more than 70% of the networked storage market. EMC, IBM and CPQ (via DEC StorageWorks) are long-time veterans of ESCON and VMS. That explains why the networked storage market is already a Big 3 market in a little over 4 years.
Just recently Dell indicated that its own storage biz is already at around $250M a quarter and that it now expects the cobranded EMC-DELL Clariion boxes to hit the $250M a quarter run rate by the end of 2002 so we'll have to wait and see if networked storage turns into a Big 4 market.
EXTERNAL RAID STORAGE
1998-2005
Gartner (1/2002)
DAS SAN NAS
1998 $21.6B $ 371M $ 349M
1999 23.2B 1.8B 579M
2000 23.1B 4.8B 1.4B
2001 18.7B 5.1B 1.6B
2002 17.5B 6.8B 1.9B
2003 15.2B 10.7B 2.7B
2004 13.4B 15.1B 3.6B
2005 11.9B 22.1B 4.8B
CAGR -11% 44% 31%
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