Brocade Guides Down 3%, Stock Drops 5%

By David Gross

Brocade fell 5% in after hours trading Monday after guiding its revenue midpoint for next quarter down from $558 million, to $542 million.   The culprit behind the decline was the same as it was for Cisco - the government.   The company said it could see a drop in Federal Ethernet revenue of $20-$25 million due to delays in government contracts.   Now I remember when Foundry transformed its Reston, VA office from an AOL/Cable & Wireless/telecom focus, to a Federal focus in 2001 and 2002.  Almost seems like the tide is turning in the other direction now.   Nonetheless, Brocade still gets 23% of its revenue from the Federal government.   

Overall, revenue for its fiscal 4th quarter, which ended October 31st, was up 5% y/y to $550 million.   Ethernet revenue was up slightly to 26% of corporate revenue, compared to 25% a year ago.    The balance sheet remains unusually ugly for a network equipment manufacturer, with just over $330 million in cash and equivalents, but over $900 million in long-term debt, most of which came from financing the Foundry acquisition.    Nonetheless, the company is producing free cash, and its cash balance was up $40 million sequentially.   Moreover, gross margins were up 20% y/y to $325 million.

While I'm no fan of either Fibre Channel over Ethernet, or Brocade's all-things-to-everyone product strategy, this wasn't a bad quarter and there are plenty of other reasons to sell the stock besides a 3% drop in revenue guidance.