Hi Tim, I think you are right that BRCD does not want to lose that lawsuit to MCDT.
SSB was relatively upbeat today. Gross margins are 60%. the book to bill is over 1 and SSB suggests that penetration for SAN's is only 10% and could eventually expand out to 90%.
-------------------
Salomon Smith Barney ~ March 26, 2002
BROCADE Communications (BRCD)
BRCD: Expects to Meet or Beat Estimates. 1H (Buy, High Risk)
Silk12k in GA. Mkt Cap: $6,455.7 mil.
March 26, 2002 SUMMARY
* On 3/25, Brocade hosted an upbeat presentation at its
DATA STORAGE Vision event with approximately 150 analysts and press in
INFRASTRUCTURE attendance.
H. Clinton * Brocade expects to meet or exceed its original F2Q02
Vaughan guidance of $128 million in revenue, meet its EPS target
of $0.06, and continue gross margins of 60%. The company
noted the quarter is on track or ahead of plan,
Joseph Wana increasing visibility, a book-to-bill ratio greater than
1, and a strong pipeline for F3Q02. Software is expected
to account for greater than 10% of revenue this quarter
for the first time ever.
* Brocade announced General Availability (GA) of the
Silk12k to its OEM partners. It expects the 6 largest
OEMs to finish their own qualifications by the end of
June with mass availability in July. It estimates
shipments of over $10 million this quarter.
* We reiterate our 1H rating and $40 price target.
FUNDAMENTALS
P/E (10/02E) 92.9x
P/E (10/03E) NA
TEV/EBITDA (10/02E) NA
TEV/EBITDA (10/03E) NA
Book Value/Share (10/02E) NA
Price/Book Value NA
Dividend/Yield (10/02E) NA/NA
Revenue (10/02E) $545.4 mil.
Proj. Long-Term EPS Growth 40%
ROE (10/02E) NA
Long-Term Debt to Capital(a) NA
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (3/22/02) $26.01 Current Rating 1H
52-Week Range $53.26-$12.90 Prior Rating 1H
Shares Outstanding(a) 248.2 mil. Current Target Price $40.00
Convertible No Previous Target Price $40.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
10/01A Actual $0.13A $0.05A $0.05A $0.05A $0.28A
10/02E Current $0.05A $0.06E $0.08E $0.10E $0.28E
Previous $0.05A $0.06E $0.08E $0.10E $0.28E
10/03E Current NA NA NA NA NA
Previous NA NA NA NA NA
10/04E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 10/02E $0.28; 10/03E $0.53; 10/04E NA
Calendar Year EPS: 12/01A NA; 12/02E NA; 12/03E NA; 12/04E NA
OPINION
Valuation
---------
We reiterate our 1H rating and $40 price target.
As Brocade's investor meeting highlighted, we continue to
think the company's strong fundamentals and new product cycle
will enable it to continue its leadership in SAN networking
and think investors should view the recent pullback as a
buying opportunity.
We expect Brocade will announce General Availability (GA) of
the Silk12k at most major OEM partners within the next 3
months including Compaq, Dell, EMC, Hitachi Data Systems, IBM,
and Sun Microsystems.
The Silk12K opens up the higher-end market to Brocade and we
believe it will, therefore, command a higher ASP than its 16
port Silkworm switches, which could drive accelerating growth.
Also, the new chipset should drive better margins.
Brocade is also on the forefront of the migration to 2Gbps
from 1Gbps. We estimate that approximately 32% of Brocade's
F1Q02 revenue was from 2Gbps switches (i.e. the Silkworm
3800). Brocade's 2Gbps advantage should also provide it with
a pricing advantage. (Note: QLogic is also in GA with a 2Gbps
16-port switch.)
We continue to believe that SANs are very underpenetrated. We
estimate SANs are approximately 10% penetrated on the way to
90ish%, which should provide a lot of future growth.
Expects to Meet or Beat Estimates
---------------------------------
On 3/25, Brocade hosted an upbeat presentation at its Vision
event with approximately 150 analysts and press in attendance.
Brocade expects to meet or exceed its original F2Q02 (ending
April) guidance of $128 million in revenue, meet its EPS
target of $0.06, and continue gross margins of 60%. The
company noted the quarter is on track or ahead of plan,
increasing visibility, a book-to-bill ratio greater than 1,
and a strong pipeline for F3Q02. Software is expected to
account for greater than 10% of revenue this quarter for the
first time ever.
Brocade noted it is confident it will meet its guidance due to
1) a new product cycle, 2) feedback from its end-user direct
touch sales force and 3) a survey it conducted indicating
server/storage consolidation drives 59% of the migration to
SAN.
Product Roadmap
---------------
Brocade announced General Availability (GA) of the Silk12 to
its OEM partners. It expects the largest 6 OEMs to finish
their own qualifications by the end of June with mass
availability in July. Brocade estimates it will ship over $10
million of the Silk12 this quarter with a portion of this
amount being recognized as deferred revenue. Additionally,
Brocade expects 2Gbps product to represent greater than 60% of
revenue this quarter.
Brocade announced a product roadmap that includes the
following:
*2H02: 32-port mid-range switch
*1H03: Two products-
1) CIM-API (Common Information Model-Application Programming
Interface) which will simplify integration with applications
using the CIM standard.
2) Inter-Fabric Switching: Expected to improve the ability to
connect SAN islands by allowing one SAN to selectively use
devices in another.
*2H03: Three products-
1) Virtualization Switching: Placing virtualization
intelligence at the switch level, enabling wire-speed
performance and the use of third-party software.
2) End-to-end monitoring capability
3) Next Generation SAN security
*2004: Three products-
1) Protocol-agnostic switch
2) 10Gbps
3) Improved Intelligent QoS (Quality of Service) to allow
applications to prioritize, manage and optimize traffic flow.
SAN Market
----------
Brocade emphasized the large addressable market size of SANs.
Accenture estimates that 85% of storage is still on DAS
(Direct Attached Storage), representing a large opportunity
which can be further penetrated. Brocade estimates the SAN
market will grow to $17 billion by 2007.
Brocade conducted a survey of its users to determine the
primary reasons they migrated from DAS to SAN. The results
were 18% for backup and restore, 59% for server/storage
consolidation, and 23% for other. The company noted that
since a majority of its sales were a result of consolidation,
Brocade could still grow even in a potentially challenging
environment for servers and storage sales. Customers can
still migrate to SANs by purchasing switches while utilizing
existing hardware.
Capex Detail
------------
There has been recent speculation on the inclusion of demo
equipment in capital expenditures to improve results, but
Brocade explained the high capex is due rather to a new
product cycle.
Brocade indicated that its capital expenditure as a percentage
of revenue is high due to its practice of building new testing
labs before products transitions (in this case, 2 Gbps). Of
the $24.5 million in capex last quarter, approximately $12.5
million was spent on lab equipment that includes storage and
switches, $6.5 million on the completion of a new building, $4
million on computer equipment, and the rest on miscellaneous
items.
Brocade noted it loans some switches to customers for
evaluation, but does not give them away. These products are
booked as inventory and only represent approximately 2% of
fixed assets. Additionally, there is a high conversion rate
for customers to purchase these switches, which are then
accounted for as a normal sales transaction.
Companies mentioned:
Accenture (ACN-$27.05; 2H)
Compaq# (CPQ-$10.63; 1H)
Dell (DELL-$26.31; 3H)
EMC (EMC-$11.04; 1M)
Hitachi (HIT-$70.83; 3M)
IBM# (IBM-$103.56; 1M)
Qlogic (QLGC-$46.25; 2H)
Sun Micro# (SUNW-$8.57; 3H) |
