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So, Does HP Buy Brocade Now?

Posted on Thursday, Mar 19th 2009

On February 19, Brocade Communications Systems, Inc. (NASDAQ:BRCD), a leading supplier of data center networking solutions with annual revenue of $1.5 billion, reported first quarter results that beat earnings estimates. This was the first quarter report since the company completed the $3 billion acquisition of Foundry in December. With the Foundry acquisition, Brocade offers strong competition to Cisco in the niche area of end-to-end data center solutions. Cisco has been active in this area recently with the introduction of the unified computing system. And IBM apparently wants to stall Cisco’s data center plans with a $7 billion acquisition of Sun.

Q1 revenue was up 24% y-o-y and 8% q-o-q to $431.6 million, short of analyst estimates of $442 million. Q1 revenue included about one month of Foundry revenue or $60 million and was largely driven by strong demand for the DCX platform, embedded switches for bladed servers and global service offerings. GAAP net loss was $26.0 million or $0.07 per share. Non-GAAP net income was $63.6 million or $0.15 per share versus analyst estimates of $0.13 per share. 

Non-GAAP gross margin was 59.7%. Cash flow from operations was about $46 million in the quarter. The outstanding acquisition term debt balance was $1.06 billion, net of debt discount of $44 million. Brocade ended the quarter with $190 million in cash and cash equivalents.

Brocade’s business is organized into four segments: Data Centre Infrastructure (DCI); Server Edge and Storage (SES) that includes host bus adapters (HBAs); Service, Support and Solutions (S3); and Files, which will probably be merged with some operations of Foundry. Its major OEM customers are EMC, HP, and IBM, which together accounted for about 65% of revenues in the quarter.

In the earnings call, Brocade said it would be focusing on three market segments this year: Enterprise Data Center Storage including HBAs, Enterprise LAN Campus, and Service Providers. Marc Randall, former CEO of Force 10, joined Brocade in December to head the newly-formed Products and Offerings Group.

Brocade expects IT spending to start improving in Q4 2009 and throughout fiscal 2010. However, in Q2 2009, it expects to see normal to greater than normal seasonal declines. It expects to maintain market share in its core SAN market, grow market share in the LAN markets and to be a leading supplier of HBAs. It also expects markets to return to normal growth rates in 2010. Quarterly ASP declines are expected to remain in the low single digits through 2010.

For the fiscal year 2009, Brocade expects annual revenue to be in a range of $1.9 to $2.0 billion and non-GAAP gross margin to be between 57.5% and 58.5%. It is currently trading around $3 with a market cap of about $1 billion. The stock hit a 52-week low of $2.05 on March 6. As the industry sharpens its focus on data centers, will Brocade and HP join hands to form the third front against Cisco and IBM?

Chart for Brocade Communications Systems, Inc. (BRCD)

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Hopefully the industry learned something from the abysmal EMC/McData merger many years ago. Let’s assume that HP does purchase Brocade, although the technology and business marriage might be very appealing on paper it would likely spell the end to Brocade as an industry player. Would IBM, EMC, and others continue to purchase Brocade products directly from a primary competitor in the storage and/or server market?? They would have to do some in order to maintain existing customer infrastructures and relationships but they will be looking elsewhere for solutions as often as possible. For those that have concerns with Cisco competing in the server arena they would likely turn to Qlogic for their SAN infrastructure and others would lean towards Cisco. Brocade and HP would, in my opinion, both lose out in any such merger!

Brian Monday, April 6, 2009 at 2:06 PM PT

well, definitevly HP will win in case of such merger. Buying Brocade means IBM out of source of Brocade solutions they offer today. From Hp’s perspective very good move – major competitor weakening in datacenter space. Now you can see head to head HP vs Cisco competition, in networking gear HP is very strong in medium segment buy very weak in enterprise segment… ex-Foundry in Brocade today will bring HP strength in enterprise networking, definitevely such merger puts HP on winning position, IBM is loser, Cisco finally gots strong competitor across many segments…

mickey Thursday, July 9, 2009 at 11:14 AM PT

[…] HP: The Wall Street Journal likes HP as an acquirer because it would enhance HP’s own line of networking gear, called ProCurve. HP has been striking deals left and right in an effort to boost its unified computing products in light of Cisco’s foray into its server domain, but so far these have focused more on software partnerships, with HP depending on its own gear for hardware. Sramana Mitra does a nice job of explaining why this combo is so appealing. […]

Who Will Buy Brocade? Monday, October 5, 2009 at 7:46 AM PT

With Larry Ellison declaring war against IBM with acquisition of SUN this space is going to be very hot. It is going to be clash of titans between CISCO+EMC IBM ORACLE+SUN HP

With SAN, LAN, Storage and server domains converging it looks like not only Brocade but even Juniper will be a good acquisition target. The question is does IBM really want to play hard in the network domain. Looks like they will have to bite the bullet

Murals Monday, October 12, 2009 at 1:26 PM PT