Cisco and Brocade are Fed up

Sales to government vertical slowing for both in current quarter

The Feds have it in for Cisco this quarter... and for rival Brocade. After a pretty solid Q4, Brocade bombed with news that its Q1 would be flat to down some. It pinned the finger right where Cisco did in its Q2 guidance: at The Feds.

Federal sales make up about a quarter of Brocade's Ethernet revenue, which was 31% of Q4 sales - record Ethernet revenue for Brocade in a record setting revenue quarter. But Brocade guided to a Q1 of fiscal 2011 that's flat to down 3% from Q4 based partly on delayed bills going through Congress. According to Brocade CFO Richard Deranleau:

After the recent US elections and the current uncertainty in Congress with the FY 11 Federal appropriations bill, we are assuming that our Federal Ethernet business will decline sequentially in Q1 11 at a similar rate that we saw in Q1 10 (down 62%) when the FY 10 appropriation bill signing was delayed. This would result in a sequential decline of approximately $20M to $25M in revenue for our delayed Federal business, and offset expected sequential growth in our non-Federal Ethernet business. 

As you recall, Q1 saw Brocade's Ethernet revenue plummet not only on federal weakness but also on execution issues. It prompted the departure of Senior Vice President Marc Randall and the arrival of CMO John McHugh, a veteran of HP's Ethernet switching business. Cisco also singled out sales to the public sector, as well as service providers and Europe, as expected to be particularly weak in it fiscal Q2.

But Ethernet sales, including those to The Feds, were upbeat for Brocade in Q4. The company set an all-time high in Ethernet product and service sales in the quarter, with 14% growth over Q3 and 13% growth over Q4 2009. Ethernet product revenue represented 26% of total revenue versus 24% in Q3, and was up 11.0% from last year, and 16.8% sequentially. 

Sales to The Feds were up 7% sequentially in Q4. 

Brocade added almost 300 net new Ethernet accounts in Q4, giving the company a total of nearly 1,600 new Ethernet customers as it ends FY 10. The 1,100 new accounts added in FY 10 exceeded Brocade's internal target of 1,000. 

Ethernet business through OEM Dell was up 50% from Q3. Meanwhile, Brocade and IBM are building an embedded 10 GbE switch module and converged network adapter for IBM's BladeCenter server environments. 

But Q1 is not a case of sales lost to The Feds - just delayed spending. After Q1, Brocade and analysts like Ittai Kidron of Oppenheimer & Co. are bullish on the company's Ethernet business in 2011:

we feel the weakness doesn't reflect lost business, but rather a pushout in spending as budgets have yet to firm. In fact, demand in other verticals is expected to continue to rise QoQ suggesting Brocade's Ethernet recovery is starting to yield results. 

Some of that optimism may be due to the recent release of Brocade's new VDX data center switches. VDX revenue, while limited in Q1, is expected to ramp throughout the rest of Brocade's fiscal 2011.

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