Brocade Reports Strong Q1, But Ethernet Business Disappoints


Brocade on Monday reported strong revenue and earnings growth for its fiscal first quarter, along with increased share in its core storage networking market.

However, the company said that its Ethernet business, which it picked up with its acquisition last year of Foundry Networks, has yet to meet expectations, and that it will invest resources into its OEM and indirect channels to drive demand in this part of the market.

Brocade said revenue for its first quarter, which ended January 30, reached $539.5 million, up 25 percent over the $431.6 million reported in same period last year.

The company also reported earning $51.0 million, or 12 cents per share, in the first fiscal quarter of 2010, up significantly from the loss of $23.9 million, or 6 cents per share, it reported for the same period of last year.

Despite the strong growth in total revenue and earnings, the company was disappointed in its Ethernet networking business so far, said CEO Mike Klayko, speaking to analysts during the company's earnings conference call.

"As a management team, we are all aware that we did not meet our internal plans for a fast-growing business, our Ethernet business," Klayko said.

Brocade, which has historically been focused on its storage networking business, got into the Ethernet networking switch business with its acquisition in late 2008 of Foundry Networks.

Brocade's Ethernet business was able to bring in over 700 new customers in the last year, but mainly "try-and-buy" accounts which are running between 10 percent and 20 percent lower in terms of closing deals than expected, said Ian Whiting, senior vice president of worldwide sales and marketing at Brocade.

Part of that success came from shifting a part of the Foundry sales force to focus on the Brocade's SAN business, Whiting said. "But at the same time, it was at the expense of our Ethernet business," he said. "And that was not intended."

Going forward, Whiting said, Brocade will be adding resources to the Ethernet side of Brocade's business, including "resources from our competitors," a likely reference to hiring employees from companies such as Cisco.

While it might be easy to blame the economy for the missed Ethernet business, Richard Deranleau, Brocade CFO, said that is not the case.

"I'm not going to blame the economy," Deranleau said. "We just need to do a better job of deploying our resources."

Klayko said that, going forward, Brocade will focus on building its Ethernet business, as well as its converged networking business. Converged networks, which start bringing storage and Ethernet networking into a single infrastructure, have a potential for changing the way data centers are built going forward.

"We're not going to have a maniacal focus on growing our SAN business," Klayko said. "That's going to happen naturally. We are going to have a maniacal focus on growing our converged networking business."

Brocade's push to increase its Ethernet networking and converged networking business comes at a time when its top competitor, Cisco, is pushing hard on its Unified Computing System, or UCS, strategy of converging Ethernet and storage networking and servers into a single platform.

Cisco's UCS strategy has resulted in a mixed bag for Brocade's networking strategy.

Brocade has traditionally depended on a few OEMs for the largest part of its business, including IBM, Hewlett-Packard, and Dell.

IBM last year said it will OEM storage and Ethernet networking switches from Brocade in part as a response to Cisco's decision to enter the server market. Prior to that, IBM was a major OEM customer of Cisco.

However, networking business HP has tapered off as HP, in response to Cisco's UCS, strategy, late last year said it plans to acquire Cisco and Brocade competitor 3Com and combine the 3Com business with its own ProCurve networking business.

One way Brocade plans to increase its networking business is to increase resources in a more direct touch with customers, especially in terms of driving customer demand, Whiting said.

"We need to take full control of our own destiny and do more with direct demand generation," he said. "Then we need to work hand-in-hand with OEM and channel partners."

Speaking with Channelweb.com after the conference call, Barbara Spicek, vice president of worldwide channels, said that the direct focus mentioned by Whiting and other executives referred to demand generation, and should not be interpreted as a move away from indirect channels as the primary go-to-market strategy for customers.

Brocade has always had a heritage of working with the channel, and nearly 100 percent of its storage networking revenue comes from channel partners, Spicek said.

However, the company also has traditionally had a high-touch focus with customers in terms of driving demand, while leaving the fulfillment to the channel, she said.

"'Direct touch' should not be taken to mean 'direct fulfillment,'" she said. "We should have done a better job of talking about it."