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Revenue warning sends Brocade sliding in after-hours

The maker of switches and other devices for storage area networks now sees fiscal second-quarter sales just slightly higher or flat compared to first-quarter revenue.

    Shares of Brocade Communications Systems crumbled in after-hours trading Wednesday after the company warned of flat revenue growth in the current quarter.

    During a conference call with analysts, Brocade CFO Michael Byrd said the company now sees fiscal second-quarter sales just slightly higher or flat compared to first-quarter revenue of $165 million. Analyst consensus was calling for second-quarter revenue of $192.4 million, according to earnings tracking firm First Call.

    Brocade shares traded at $36.20 after-hours on the Island ECN, following Brocade's conference call. The stock fell 19 cents to $44.69 in Wednesday's regular trading ahead of the news.

    Brocade makes networking switches and other devices for storage area networks (SANs), high-speed networks of shared storage devices.

    Customers have cut back purchases, Byrd told analysts.

    "We are seeing the effects of a softening economy," Byrd said. "Since the end of January, we have seen a decline in visibility from some of our customers, which is manifesting itself in lower order rates."

    Brocade is the latest company in the storage-networking field to reduce its near-term expectations. Brocade competitor Emulex earlier this month said it sees no revenue growth in the current quarter. Brocade supplier Finisar yesterday lowered financial targets for the fiscal year.

    Finisar cited customer problems as the reason for cutting estimates. "When Finisar put up their numbers last night, I knew Brocade was going to get smoked today," said Mark Kelleher, analyst with FAC/Equities. "Brocade is Finisar's biggest customer."

    Despite the Finisar warning, Brocade shares traded higher for most of Wednesday's regular session before slipping in late trading. Until recently investors have been reluctant to sell storage-networking stocks as much as other technology issues, said Brent A. Bracelin, analyst with Pacific Crest Securities.

    "As recently as January, the sentiment was that storage would be impacted by the macroeconomy," Bracelin said. "There was no evidence out there, despite the slowing economy, that the storage vendors were seeing a slowdown."

    Brocade executives predicted a rebound in the second half of the fiscal year. Brocade expects revenue to increase 19 percent sequentially in the third and fourth quarters. Full-year earnings should be about 60 cents per share, executives said. First Call consensus had been predicting 2001 earnings of 62 cents per share.

    "We've never seen our long-term funnel be fuller," said Greg Reyes, president and CEO. "We're seeing bigger deals. We're seeing a tremendous amount of activity from traditionally conservative customers."

    Several analysts wondered about Brocade's confidence in the last two quarters of the year. "That's a legitimate question," said Kelleher, who recently downgraded Brocade to "buy" from a "strong buy" rating. "If you can't see the April quarter well, why can you see the July and October quarters?"

    Many companies only recently started installing storage area networks, Brocade executives said. The company expects those new customers, as well as new products being introduced later this year, will fuel growth later in the third and fourth quarters, executives said.

    "We tend to rely on our forecasting process, (and) our forecasting process indicates that the second half of the year will be very, very strong," Byrd said. "We think we've provided a lot of conservatism."

    New products and new customers will increase Brocade's revenue in the second half of the fiscal year, Bracelin said. "But what magnitude of benefit will the company see? That's the million dollar question," he said.

    Brocade reported fiscal first-quarter net income of $32.5 million, or 13 cents per share, on revenue of $165 million. Analysts surveyed by First Call produced a consensus forecast calling for a profit of 12 cents per share on revenue of $162.5 million for Brocade's quarter ended Jan. 27.

    "Brocade's fundamentals continue to be robust," Reyes told analysts.

    First-quarter revenue increased 286 percent year-over-year and 25 percent sequentially. Deferred revenue increased to $9.1 million from $2 million at the end of the fourth quarter. The company ended the quarter with $211 million in cash, up $56 million from the end of October.

    Brocade said its revenue share of the market for storage area network infrastructure rose 2 percent to more than 61 percent. "They still have all the OEMs locked up," Kelleher said. "The market for what Brocade does is tremendous, and their position in that market is tremendous."

    Storage networking remains one of the fastest growing fields in the technology industry, but the stock prices of Brocade and its peers will stay down as long as the larger economy remains slow, analysts said.

    "Until some companies can start reporting some powerful numbers again, there's no bottom on the valuations here," Kelleher said.