Posted by: Dave Raffo
Brocade is off to a great start in 2008 … if the vendor’s goal is to morph into a services company.
Brocade reported revenue from last quarter of $354.9 million Wednesday night. That’s up 3 percent from last year, and ahead of Brocade’s guidance and Wall Street expectations. But the increase comes largely from services revenue, which grew 32 percent over last year. Brocade’s product revenue actually dropped 2 percent from last year, with edge switches down sharply. <P>
Brocade execs point out that revenues usually fall in the first quarter of the year and this year’s drop was less than usual. But they also gave lower guidance than expected for this quarter, blaming it in part on the macroeconomic conditions that they played down a few quarters ago.
Perhaps that’s why on the day after its revenue upswing, Brocade’s stock price today opened 12 cents below yesterday’s close and analyst Shebly Seyrafi of Caris & Company downgraded the stock from Buy to Average.
Looking past the numbers, as the quarter ended there are questions about nearly all of Brocade’s most important current and future products.
Directors. Brocade says its new DCX Backbone director did better than they expected, and director revenue increased 19 percent from last year. Still, Brocade’s short-term success with the DCX could depend on how fast Fibre Channel over Etherenet (FCoE) ramps. Its rival Cisco is betting on customers going to FCoE sooner rather than later, with 8-gig switches not planned before the fourth quarter (Cisco will demo 8-gig cards for its MDS 9513, 9509, and 9506 directors next week at EMC World), while Brocade is counting on widespread adoption of 8-Gbps Fibre Channel well before FCoE. In any case, it might take customers a while to figure out their next move — which will delay sales.
Switches. Revenue from Brocade’s edge switches fell 2 percent from the previous quarter and 16 percent year over year. Did somebody say iSCSI? At least one financial analyst thinks the increase in director sales and decrease in switch sales shows customers are keeping FC for enterprise implementations but switching to iSCSI for smaller storage rollouts.
“We believe the low-end FC switching market could be under pressure from the rapid growth of the iSCSI market,” Kaushik Roy of Pacific Growth wrote in a note to clients today. “The iSCSI protocol seems to be a good enough solution at the present time for the low-end storage connectivity.”
HBAs. Brocade CEO Mike Klayman said one major OEM qualification (probably IBM or HP) of the new HBAs is coming soon, with significant revenue coming next year. Still, Brocade execs hedged when asked if they still expect HBAs to make up 10 percent of its revenue within a few years.
FCoE. Brocade walks a tightrope with FCoE, wanting to be seen as a technology leader without pushing the standard on customers too quickly and risk hurting its 8-gig sales. That’s why Klayko said Brocade had one design win for FCoE, then in the next breath added that it will cost more than FC at the start and everybody is cost-conscious these days. As for the design win, Klayko said, “We just wanted to make a statement we’re clearly in the market with competitive products.” In other words, Cisco/Nuova isn’t the only game in town for FCoE switches.