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Brocade Can Be Opted for Long

March 21, 2014 | About:
mitu77

mitu77

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Demand for data storage is rising exponentially with the rise in data. In the age of cloud-enabled application, Brocade Communications (BRCD) is steadily stepping up its offerings and catering to the need of various customers with its high-end solutions for Storage Area Networks (SAN). But the going has been tough of late and recovery might take some time.

The company recently posted its third-quarter results and its results came in better than analysts' estimates. It posted revenue of $552.6 million much against the expected 4% sequential growth but declined by 4% from the year ago quarter. The quarter ended with a healthy cash flow that touched $1 billion. This is the highest cash flow achieved in five years. More importantly, its non-GAAP EPS was $0.24; this is an increase by 41% over fourth quarter 2012 and 26% sequential growth.

The balance sheet of the company seems to be improving mainly in the use of working capital. A recent acquisition of Vyatta business is bolstering software networking capabilities. It is also focused on its share repurchase policy, keeping its investors satisfied.

Journey Ahead

The future of the storage market is bright. In 2013, it's anticipated that the storage market will be worth $23 billion with a forecast of $37 billion by 2017. Brocade seems to be confident about its growth. It anticipates revenue from SAN will also increase in the ongoing quarter. Also, SAN contributed heavily to total revenue which means that Brocade should benefit from the storage industry's growth as majority of its revenue comes from this segment.

International Development

Brocade experienced a setback in its European business mainly due to the economic recession. But as Europe recovers, Brocade should see better times in the future and be able to report revenue growth.

Brocade's business alliance with Net One Systems, the largest system integrator company in Japan, gives it access to new growth opportunities in data centers & service providers in Japan. As per market research firm IDC, the IT market in Japan is estimated to be around $110 billion every year which comprises of hardware, software and services. In the future, Brocade and Net One's alliance should result in impressive growth for Brocade.

Partnership with Qlogic

QLogic has recently announced its partnership with brocade. It also acquired Brocade’s Fibre channel and converged network adaptor business for $10.0 million

QLogic also has an in-depth portfolio of products for storage solutions and data center equipment. In third quarter 2014, it posted revenue of $119.4 million which was flat on a year over year basis but had a 6% sequential rise.

The weak revenue gowth was mainly due to weaker demand for advance connectivity platforms (server and storage connectivity) and legacy connectivity platforms (Fiber Channel Switches). These services are recent inclusions in the product portfolio of QLogic.

The management expected operating expense of $56.0 million. Although, company's operating expense of $58.8 million decreased (year over year) by 10.8%, but remained flat on a sequential basis. The decrease in the operating cost was mainly due to lower engineering and development cost.

As an OEM supplier for companies like IBM and HP, it estimates better growth but can face stringent competition from companies like Cisco.

Conclusion

Lately, the company has witnessed positive earnings estimates revisions. This can lead to a bullish trend. In the past two months three estimates have gone higher with no downward revision. Brocade has witnessed an increase in revenue but the company's cost-cutting moves and the opportunity in the storage industry could lead it to better days. For investors, the company’s stock prices have hit 52-week highs and have crossed the $10 barrier. The price momentum seems to be positive for Brocade. In 12 weeks, 18% price growth is recorded by Brocade.


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