Q1 results show poor execution on Foundry gear
Brocade is apparently having trouble selling that Foundry switching gear it bought almost two years ago for $2.6 billion. Poor execution and weak federal government sales led to disappointing first quarter results for the acquired product line.
Two analyst reports on Brocade’s FY Q1 2010 results, announced this week, state that Brocade management misfired on IP/Ethernet sales during the quarter. According to investment firm UBS, Brocade missed IP/Ethernet revenue targets “by a wide margin,” coming in at $97 million vs. UBS expectations of $134 million:
IP Products (Foundry) missed expectations by a wide margin…on government weakness, but mainly execution issues, in our view.
Brocade got no sympathy from Oppenheimer & Co. The company’s initial OEM sales strategy for IP/Ethernet didn’t work:
Replicating the SAN OEM model hasn’t worked and Brocade is revamping its IP/Ethernet sales strategy to become a bigger channel/more direct player, implying higher opex levels.
Federal sales, which make up a large portion of the IP/Ethernet business, didn’t help matters. Revenue from this vertical was down by almost $30 million in the quarter, according to Oppenheimer. Even though sales of the Foundry gear to enterprises grew 8% sequentially in Q1, overall sales were down 25.7% from Q4, the firm noted.
Overall, the quarter wasn’t bad – revenue of $539 million was only slightly below expectations, while earnings per share were about four or five cents better than forecasts. Storage was up 15% in the quarter, but the company lowered guidance going forward: fiscal 2010 is now expected to grow 8-12% over 2009, vs. previous guidance of about 15%-25%.
Analysts are lowering expectations accordingly and are quick to indicate caveats for FY 2010. In its bulletin on the quarter, UBS states:
Underlying performance…is likely a cause for concern. Growth drivers for Brocade’s core Storage business weakened, while the more promising growth area, IP Ethernet, faced execution challenges.
And Oppenheimer says Brocade will need to reassure its constituents:
We’re disappointed with Brocade’s mismanagement of its SAN and IP/Ethernet business and poor planning assumptions. An IP/Ethernet sales strategy overhaul is under way but restoring investor confidence will take time.
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