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Brocade: Terrific Results and Cost-Cutting Strategies Make It a Buy

May 23, 2014 | About:
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Brocade Communications (BRCD) is expanding its product offerings in response to the increasing demand for data and storage. The company is specializing in the area of high-end solutions for Storage Area Networks. From core hardware components, the world is shifting to an era of virtualization and cloud computing. And Brocade has been making continuous efforts to tap this immense potential and cater to the needs of its customers. However, the company is facing many challenges and it would be a matter of time before it gets back on track.

Terrific Results

Brocade reported results which were above analysts' estimates. Its revenue for the quarter was $536.6 million, which was more than the consensus estimate of $519 million. It saw an extravagant increase in its net income at $118.7 million, which was 177% higher from a year ago period. Along with that, it generated an operating cash flow of $102 million. It reported an EPS of $0.26, which was again above the Street expectations of $0.12 and around three times more than the EPS of $0.19 from a year-ago period. In a bid to increase shareholder value, Brocade entered into a buy back of 18 million shares worth around $100 million in the quarter.

The company has made significant strides to improve its margins by reducing its expenditures. Consequently, it reported savings of around $15 million in its operating expenditures and further added $2 million in savings from non-strategic expenses. The company also managed to achieve an annual saving of $60 million for the fiscal. Looking forward, management expects to increase its total savings to $100 million.

Bright Prospects

In 2013, the storage market was estimated at $23 billion, and it is expected that this will grow to $37 billion by 2017. In line with the industrial growth, Brocade is confident about its future prospects. Its revenue guidance was in the range of $545 million-$565 million. Currently, storage area networks (SAN) contribute around 61% to the total revenue and going forward, the company expects revenue from SAN to increase 1% to 4% in the present quarter.

The company experienced slackness in the euro zone due to the economic recession. But as the market recovers, Brocade expects a turnaround in its situation and management is hopeful about bringing the company back on the growth trajectory.

Brocade has entered into an alliance with Net One Systems, which is the largest system integrator company in Japan. It will provide Brocade with new growth opportunities in data centers and service providers. According to the market research firm IDC, the IT market in Japan is estimated to be around $110 billion every year, which includes hardware, software and services. And with this alliance in place, Brocade expects to grow to new heights.

What's the Competition Doing?

QLogic is a competitor to Brocade and it has a wide assortment of products for storage and data center equipment. It reported revenue of $113.1 million last quarter, which is a 13.2% decline from a year-ago period. The company’s outlook for the ongoing quarter ranges from $108 million to $116 million.

This decline was mainly on account of a weak demand for advance connectivity platforms (server and storage connectivity) and legacy connectivity platforms (Fiber Channel Switches). These were recent additions in QLogic’s portfolio. Along with that, its operating expenses have increased on a year-over-year basis. However, the company is undergoing various restructuring programs, which accordingly will save around $20 million in operating expenses in fiscal 2014.

Conclusion

As an OEM supplier for companies like IBM and HP, Brocade expects better growth but has to face tough competition from companies such as QLogic. Although Brocade has witnessed a decline in its revenue, the company's cost-cutting strategies and its opportunity in the storage industry may provide it with the required growth momentum.


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