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Brocade Is Set to Benefit From Solid Growth in Networking Infrastructure

June 20, 2014 | About:

Networking infrastructure and solutions provider Brocade Communications (NASDAQ:BRCD) is performing robustly this year, however, the performance of the company in the recently reported first quarter wasn’t impressive at all. However, Brocade illustrated slight improvement in its performance for the quarter, which signifies that the company might face better times in the future. Here’s an analysis of the Brocade’s recent performance and its long-term prospects.

Robust performance

In the first quarter, Brocade earned revenue of $565 million which was a decrease of 4% from a year ago, but an increase of 1% sequentially and hence exceeding the company’s own expectations. The non-GAAP EPS of $0.24 also exceeded the analyst expectations. Non-GAAP operating margin was 27.9% in Q1, an increase of 440 basis points from last year.

Overall, Frontier delivered $109 million in operating cash flow and repurchased $144 million of its common stock in the first quarter. This is line with the execution of its plan to return a minimum of 60% of free cash flow to shareholders. The timing of variable compensation payments and interest payments on bonds is expected to increase the operating cash flow sequentially in the current quarter. Going forward, Brocade is expecting better financial performance on the back of several catalysts with several improvements seen in the business.

Strong demand ahead

The recovery in the storage market is illustrated by a healthy demand for SAN (Storage Area Networking) products in the previous quarter. Although, there was lower IP networking revenue as compared to last year, still it was within the outlook range. Further, there’s strong customer interest and sales activity in Ethernet fabric. The net Fabric sales for Brocade increased 61% from last year due to an increase in implementation of next generation networks by both enterprise and search customers to support their increasingly virtualized data centers.

The high-growth storage technology markets such as solid state drives, or SSDs are also driving strong demand for fiber channel. Silver OEMs coupled with other storage vendors, have released SSD-based storage arrays that include fiber channel connectivity. Fiber channel is the only technology which delivers high bandwidth capability, record data accessibility, and superior reliability which is critical to the optimization of SSDs usage. In addition, the fiber channel enabled superior availability and reduced cabling, complexity, and other management costs in comparison to fiber channel for Ethernets FCOE.

Brocade has collaborated closely with industry associations and vendors within the industry to strengthen its ecosystem. The Gen 6 fiber channel of Brocade is expected to be available in 2016 which could prove to be another growth driver.

Positive prospects

Brocade is continuously making progress toward its strategy to be a network provider of choice across data centers In the IT business. There’s a technology transition for Data center networking including fabrics, SDNs (Software Defined Networks), and NFVs (Network Function Virtualizations). These technologies continue to play vital role in the field of IP networking customers and offer new selling opportunities for Brocade.

The differentiated capabilities of Brocade in SDN and NFV are driving increasing customer engagement. Further, crucial vendor capabilities have been acquired by NFV and SDN at Tier 1 customers since providers accelerate new cloud-based technologies and reduce capital expenses.

Brocade has acquired new roles at prominent customers due to its leadership in NFV. Actually, it is currently working on this technology with five of the top 10 service providers worldwide. Through a continued focus on SDN and NFV, Brocade is enhancing its technology leadership. It is expanding its technology team and recruiting top engineering talent to increase its expertise in software networking. These technologies are believed to continuously evolve and Brocade is firmly committed on leading the NFV and SDN market.

Brocade has progressed brilliantly in driving efficiency and improved profitability in its business. This will allow it to deploy sources in strategic areas and would contribute to its growth and success.

Valuation and conclusion

According to Yahoo Finance, the forward P/E and trailing P/E ratios of 11.4 and 14.7 respectively indicates earnings growth. Thereby, the stock is cheap when compared to the industry average trailing P/E of 20. In addition, Brocade could be a good investment at a reasonable valuation looking at the earnings growth for the next five years at 10% per annum. Therefore, investors are advised to make the stock as a part of their investment portfolio and expect promising long term return. Moreover, the company has a lot of opportunities to grow the business and is also cheap in valuation.

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