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Technology Stocks : The New QLogic (ANCR)

QLGC 16.07

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Aug 24 5:00 PM EST

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To: Lhn5 who wrote (21184)	3/20/1999 7:04:00 PM
From: eric sahlin	Read Replies (3) of 29386

General Observation: Brocades 1st qtr 1999 income statement: Operating expenses are about 5375 (000s) excluding amort of deferred revenue. Did I not hear correctly that Ancor is running about 1 mil per month in operating expenses (according to CEO in conf call). Operating expenses (4th quarter 98 were 3314; of course on only 3 mil sales). ANCR looks like it has a much better control on costs. We will have to see though once revenues ramp. Brocade ran a 58.5% gross margin for the recent 99 quarter and stll couldn't break-even (the Licensing revenue helped achieve the 58.5%). I also read in the managments discussion that they were not expecting licensing revenue to continue; and were not expecting to be profitable soon. BRCD management also commented that they had high fixed costs; IMO they are going to have to concentrate on cutting some costs to achieve profitability with a 40% to 45% gross margin. BRCD quarterly R&D was or is about 2x the amount of ANCRs (and in some peoples opinion, ANCR is still the tech leader). It can be seen how much the outsourcing to Solectron helped in reducing/controlling product costs; ANCR should be able to achieve the same with their contractor. In general; I didn't know much about the Brocade managment until I saw the S-1. I'm not a managment expert but I must say none of their biographies jumped out at me as being extremely impressive (the new CEOs especially). CFO is an accountant from an auditor...not usually the best type of CFOs; Just in my opinion, companies need CFOs who have backgrounds in organizing the financial organization around product strategy and cost control; thus CFOs with manufacturing and product development experience not strictly CPA auditing experience (wonder if all the R&D investment will be enough in getting cocoon out soon enough). With the average unit price of product dropping 26% as it did for Brocade, better get some tight cost control and product investment evaluation in place; this requires a seasoned CEO, CFO. Product revenues were down 1st qtr 1999 vs 1st qtr 1998, alot of accrued liabilities (what are these?). After a quick look at BRCD, ANCR breaking even at about 7.5 mil revenues per qtr seems good. Eric

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