Brocade busts out
By Sarah Lai Stirland
Redherring.com, February 22, 2000
Brocade Communications (Nasdaq: BRCD) is breaking out well ahead of the pack.
Shares of the storage networking company's stock soared Friday to a high of $284, before pulling back a little and ending the day at $275.88, up 13.2 percent. On Thursday evening, Brocade announced its second stock split and reported earnings of 12 cents a share for its first fiscal quarter of 2000, seven cents a share ahead of analysts' projections.
Brocade's surprisingly upbeat earnings stand in stark contrast to its competitors, many of which have seen their stock prices plunge following disappointing fourth-quarter earnings announcements. Pundits in the red-hot storage networking sector may take this as a sign that Brocade is consolidating its dominance.
FIBRE FRENZY
Brocade makes components called Fibre Channel hubs, and switches for storage area networks, an emerging system for storing vast amounts of data. Direct competitors in this space include Gadzoox Networks (Nasdaq: ZOOX), Atto Technology, Ancor Communications (Nasdaq: ANCR), Emulex (Nasdaq: EMLX), McData, and Vixel (Nasdaq: VIXL).
In late December, shares of Gadzoox lost almost a quarter of their value and fell to $50.56 when the company disappointed investors by meeting but not beating analysts' expectations. Similarly, shares of Vixel fell 32 percent to $21 around Christmas following a warning that the company would not meet analysts' estimates. For its fourth fiscal quarter ended January 2, Vixel said that it had lost $6 million, or 27 cents a share. Analysts had expected the company to lose 25 cents a share. Meanwhile, Ancor just met analysts' expectations by reporting a loss of eight cents a share. Shares of Vixel, Gadzoox, and Ancor have since declined, as Brocade's have gone up the past few months.
Market researchers such as IDC say that storage area networks are a huge and rapidly expanding market. In 1999, the research company projected that end-users will pay $1.6 billion in 2003 for Fibre Channel switches, up from $83 million in 1998. Those numbers are set to be revised in a few days as IDC gets ready to release updated figures. Though Robert Gray, research director for storage systems at IDC, wasn't ready to disclose those new numbers this week, he says that shipments of Fibre Channel hubs and switches this year far exceeded IDC's projections.
"The hub and switch market has just exploded," says Mr. Gray.
According to IDC's report released at the beginning of 1999, Brocade was the market leader with an 80 percent share. Its earnings this quarter indicate it is working hard to maintain that status. The company reported net revenues of $42.7 million, a 434 percent increase over the $8 million reported for the same period last year. Net income for the first quarter this year was $7.3 million, compared to its net loss of $1.8 million for the same fiscal period last year. Much of that growth was, and will continue to be, driven by deals with systems integrators, said Brocade's President and CEO Greg Reyes in a conference call with analysts Thursday evening.
"Brocade was very smart in their adoption of systems integrators," notes Steve Duplessie, founder of Enterprise Storage Group, a consulting company based in Milford, Massachusetts. "That's because SAN technology is so new and complex that clients often don't know how to configure the technology into their networks and need systems integrators' help."
IMPRESSIVE
Many Wall Street analysts were impressed with Brocade's earnings and upgraded their stock recommendations. Morgan Stanley Dean Witter (NYSE: MWD) upgraded its rating from Outperform to Strong Buy, and Bear Stearns (NYSE: BS) analyst Shaw Wu upgraded his earnings estimates and set his price target at $350.
"I think Brocade will continue to enjoy success as the leader in storage area networking," said Mr. Wu.
Jim Wade, a Deutsche Bank analyst, says companies are replacing legacy switches with Brocade's newer, low-end products. Higher-end customers are using Brocade's Silkworm product. Demand is also coming from customers such as Storagenetworks, which is an outsourced storage service. Other analysts have also predicted that SANs, as well as other forms of storage technology, will be in high demand as the business world reorients itself and gears up for e-commerce.
Though there are relatively few public companies in the field at the moment, many private companies, as profiled in Red Herring's March edition, are working on bringing storage solutions to market. Analysts and technologists alike are keen on SANs products because they can store vast amounts of data without clogging companies' regular networks. SANs are usually set up as separate, parallel networks exclusively for storage, which can then be hooked up with companies' regular networks. The area is still considered an emerging technology, with issues such as standards between vendors still having to be established.
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