To: Lizzie Tudor who wrote (13451 ) 8/15/2002 2:58:42 PM From: Bill Harmond Respond to Brocade Communications (BRCD) 15.91 +0.86: With the broader markets holding modestly lower this morning, names in the storage sector are largely higher. A well received third quarter report from Brocade Communications has contributed to the positive bias. Last night, the company reported third quarter earnings of $0.08 per share, which was in line with the Multex consensus estimate. At the same time, revenues came in at $151.2 million for the quarter, an increase of 30% over the $116.3 million reported in the year-ago period. While management did not guide higher going forward, it did reiterate its prior fourth quarter guidance. Specifically, it sees revenues between $160-165 million, gross margins in the ballpark of 60%, and projects earnings of $0.10 per share -- those numbers essentially match current consensus estimates (hence the term 'reiteration') which call for earnings of $0.10 per share on revenues of $162.8 million. It's notable that the company was successful in driving sales towards the high-end and workgroup segments of the market. In fact, with its push towards the high-end, software grew to 15% of sales, providing support for its fat 60% gross margins. Separately, management stated it experienced sequential growth across all OEM's and added that the quarter was not back-end loaded. The storage area network (SAN) market is projected to be as large as $10 billion by 2004, and Brocade believes it can retain, if not grow, its market lead. This means the real question becomes one of valuation -- the shares currently trade at 31.8x forward estimates. With a market leading position in a rapidly growing market, Brocade undoubtedly deserves a premium multiple. As the economy does begin to recover and as IT spending picks up -- you have to ask yourself whether that spending is going to spring up in the same spots, or whether the real ramp will occur in new places. We believe that Brocade is well positioned going forward and operates in an industry situated for significant growth going forward. As a consequence, we view the shares as attractive at current levels and view it as particularly suitable for longer-term investors willing to undertake the relative risk of this fluid technology. -- Mike Ashbaugh, Briefing.com
