Friday, November 19, 2010

Brocade Communications Systems (NASDAQ: BRCD): Q4 Earnings Preview 2010

Brocade Communications Systems, Inc. (NASDAQ: BRCD) is scheduled to report third quarter earnings after the closing bell on Monday, November 22, 2010. Analysts on average expect the company to report earnings of 13 cents per share on revenue of $536.59 million. In the year ago period, the company reported earnings of 15 cents per share on revenue of $521.76 million. 

Brocade Communications Systems, Inc. is a supplier of data center networking solutions that help enterprises connect and manage their information. The Company offers a line of data center networking hardware, software products and services. The company is organized in four operating units: The Data Center Infrastructure, The Server Edge and Storage, The Services, Support and Solutions and The Files.

In the preceding third quarter, the San Jose, California based company's net income $21.96 million, or 5 cents per share, compared to a loss of $23.49 million, or 6 cents per share, in the prior-year quarter. On an adjusted basis, the company earned 13 cent per share in the latest quarter. Revenue increased 2.07% to $503.51 million. Analysts, on average, expected the company to report earnings of 13 cents per share on revenue of $508.14 million. 

At its last earnings call in August, the company said that it expects fiscal fourth-quarter revenue in the range of $530 million to $550 million; and non-GAAP earnings per share in the range of 12 cents to 14 cents per share. For the full fiscal 2010, the company expects revenue in the range of $2.074 billion to $2.094 billion; and non-GAAP earnings per share in the range of 57 cents to 59 cents per share. 

Brocade is likely to benefit from a rebound in corporate technology spending. According to technology research firm Forrester, worldwide IT spending is expected to increase 8.1 percent in 2010.

The company has reorganized its sales force to focus on direct customers and the product channel.It has successfully integrated Foundry Networks, which it bought for $2.6 billion in 2008.. It has also expanded partnerships with large technology vendors such as IBM and Dell Inc to expand its customer base.

However, the company's margin has remained under pressure amid increased competition. In September,the company forecast weaker margins as it cuts prices of its network equipment to better compete against bigger rival Cisco (NASDAQ: CSCO). The company presented a two-year business model in which it saw total gross margins around 55 percent to 57 percent, down from a previous target of 59 percent to 61 percent. It also forecast gross margins in its Ethernet business to be around 45 percent to 50 percent over the next two years, down from a prior target of 55 percent to 60 percent. Margins next year will likely be at the low end of those ranges while it pursues revenue growth, it said.

Brocade has long been considered a takeover target. Some names that have been thrown around as potential suitors are Dell (NASDAQ: DELL), IBM (NYSE: IBM) and Oracle (NASDAQ: ORCL). Data Storage companies have been some of the more popular targets in the latest String of M&A activity in the tech sector. 

In terms of stock performance, Brocade shares have lost nearly 25% since the beginning of the year. 

Full Disclosure: None.
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