Brocade Runs Into Trouble, Still A Double? (BRCD, CSCO, IBM, DELL)

Brocade Communications Systems, Inc. (NASDAQ: BRCD) is one of the potential acquisition targets as I.T. and communications equipments giants look to consolidate their storage, networking, and data center offerings under one company.  It has been and continues to be a company that runs into trouble on its own in a world dominated by Cisco Systems Inc. (NASDAQ: CSCO), Hewlett-Packard Co. (NYSE: HPQ), IBM (NYSE: IBM), and Dell Inc. (NASDAQ: DELL).  The company’s guidance speaks for itself.  This is one we had noted as a possible double in the coming technology consolidation wave.  That is still possible, but the company better tweak its position or better find “strategic alternatives” that reward holders.

What is interesting is that Brocade actually beat expectations for its latest quarter with all-time record revenues.  Last night the storage and communications equipment provider said net income was down 27% to $23.4 million.  The non-GAAp picture was different and the earnings came to $0.14 EPS and revenues rose 5% to about $550 million.  Thomson Reuters had non-GAAP earnings at $0.13 EPS and revenues about $537 million.

The issue at hand is Brocade’s guidance.  It projected adjusted earnings of $0.09 to $0.10 and revenues of $535 to $550 million.  Thomson Reuters had estimates of $0.14 EPS and $557 million in revenues.

The situation has deteriorated in trading this morning.  Before the open the stock is down 9.1% at $5.18 on 7.5 million shares.  After the 6PM reading last night the stock was down less than 5% at $5.44 in the after-hours.

Brocade is one of those stocks that can still double from its lows.  A double would barely take it to a year high and valuations would not be extreme if it can manage its earnings and margins properly.  The problem here is that Brocade needs an acquirer to make that double and the world is such that providers either have to be ultra-niche-focused with the best technology that all buyers need OR they have to be larger and larger with broader one-stop solutions for the entire enterprise communications and data center operations.  Brocade is now actually the Foundry and Brocade amalgamation, which puts the company somewhere in between the two scenarios that will work.

JON C. OGG