Klayko said last August that he would step down as soon as the board found a replacement, ending an eight-year tenure as Brocade’s CEO. During that time, Brocade acquired its main storage switch rival McData, outdueled Cisco for the top spot in storage networking revenue and spent $2.6 billion to get into the Ethernet market by acquiring Foundry Networks. But Klayko failed to attract a buyer for Brocade despite a great deal of speculation that the company was for sale several times over the past few years.

If you’re looking for hints on where Carney might take Brocade, two things about his resume stand out. First, he has little storage background and plenty of network experience. Second, he sold off two companies he ran – Xsigo Systems to Oracle last year and Micromuse to IBM in 2005.

Xsigo is the closest Carney has come to a storage company. Xsigo actually did I/O virtualization and was more of a networking play, but did work with storage gear. After Oracle bought Xsigo, it tried to recast its technology as software-defined networking. IBM acquired network management software vendor Micromuse for around $865 million, and Carney stayed with IBM for one year to run the Micromuse division.

He has also been COO at Juniper Networks, president of Nortel’s wireless internet division and a vice president at Bay Networks as well as CEO of his own angel investment firm. Carney obviously knows his way around Silicon Valley, which could help if Brocade puts itself up for sale again. If not, you can expect the vendor to continue its push to become an Ethernet network leader while holding on to the No. 1 Fibre Channel network spot for as long as that market remains lucrative.

There have been plenty of acquisition rumors around Brocade over the years, despite Klayko’s insistence in 2009 that the company was not for sale. Hewlett-Packard and Dell were believed to be considering buying Brocade before they acquired other networking companies, and there has also been talk of private investors buying Brocade.

Klayko Thursday revealed he would leave Brocade, pending the company’s successful search for a successor. The announcement coincided with the vendor’s solid earnings report for last quarter.

Klayko joined Brocade in 2003 when he sold Rhapsody Networks to his larger rival, and he replaced Greg Reyes as CEO in a 2005 shakeup that followed an internal audit into the company’s stock options policy. Reyes eventually was convicted and sent to prison for fraudulently backdating stock options.

Brocade’s revenue of $555.3 million last quarter beat the top end of its forecast by $10 million and increased 10% over the previous year. Its storage revenue rose 13% year-over-year to $377.6 million, and its profit was $43 million for the quarter.

Klayko said the good numbers make this an opportune time to step down.

“I’ve been doing this for a long time,” he said during the earnings call. “I think anytime you’re going to move on in an organization, you move on at a time of strength, not a time of weakness. And I think we’re very strong and we will continue to be strong.”

Klayko said he will stay on until Brocade finds a replacement. After that, he will also give up his position on the board and make a clean break from the company.

“I believe once you decide to make a transition, you make a complete transition,” he said.

Klayko’s tenure at Brocade was framed mainly by two acquisitions he made, followed by a failure to sell off the company after years of trying. Brocade acquired its main Fibre Channel (FC) switch rival McData for $713 million in 2006, giving it the lion’s share of the FC switch market and leaving Cisco as its only rival. Brocade then moved into the Ethernet networking space in 2006 when it spent $2.6 billion for Foundry Networks.

Following those deals, Brocade has remained on top in FC switching but has not had the success it hoped for in the Ethernet space.

Brocade has also been the subject of acquisition rumors over the past few years. Hewlett-Packard (HP) passed on buying Brocade when HP acquired 3Com in 2009, and Dell did the same when it bought Force10 last year. There were also talks to take Brocade private, but that hasn’t happened. It will be interesting to see if Klayko’s departure facilitates a deal with a larger vendor or private equity firms.

Former Brocade employees say Klayko has ruled the company with an iron fist, prompting a lot of turnover, including top executives. The most recent top departures include CFO Richard Deranleau in mid-2011 and VP of worldwide sales Ian Whiting in June.

Klayko, who headed Brocade sales before becoming CEO, has served as the interim sales VP since Whiting left.

“Decisions like these are never easy. It will be difficult to say goodbye,” Klayko said of his resignation. “Brocade has a great team of talented and dedicated professionals and is in a great position, both financially and in terms of our innovation portfolio. I’m therefore comfortable that this is a good time for me to move on.”

During the vendor’s earnings results call Monday evening, Brocade reported nearly $40 million in revenue from 16-gig directors and switches in the first full quarter of availability. Brocade’s total FC revenue was approximately $303 million last quarter. The total FC revenue grew about 10% from the previous quarter, although it was down about 4% from last year. Brocade execs pointed out that all of the major storage vendors have qualified their 16-gig FC gear while rival Cisco has yet to support 16-gig FC.

Brocade execs said server virtualization and PCIe-based flash are pushing customers to the higher performing FC. They also say customers are sticking to FC instead of moving to Fibre Channel over Ethernet (FCoE).

“We saw a faster-than-expected ramp of our 16-gig portfolio of products,” Brocade CEO Mike Klayko said on the call. “This is perhaps the fastest and smoothest qualification process [with OEM partners] of any new product portfolio among our OEMs.”

Jason Nolet, Brocade’s VP of data center and enterprise networking, said FC remains the “premier storage networking technology for mission-critical apps.” He said Brocade is selling FCoE in top-of-rack switches but there is “almost no take-up” in end-to-end FCoE implementations. “Because of that, Fibre Channel continues to enjoy that kind of premier place in the hierarchy of technologies for storage networking,” he said.

The Brocade executives also played up the monitoring and diagnostics built into their 16-gig switches, suggesting the vendor will make more of a push into this area. Brocade customers have turned to third-party tools for this, such as Virtual Instruments’ Performance Probe. But Virtual Instruments CEO John Thompson recently complained that Brocade has been telling its customers not to use Virtual Instruments products despite having a cooperative marketing relationship in the past. The management aspect of Brocade switches will be worth watching in the coming months.

Brocade showcased its 1860 Fabric Adaptor at Storage Networking World (SNW) in Orlando, Fla., this week, which gives customers the option to implement 16 Gbps Fibre Channel, 10 Gigabit Ethernet (10 GbE) or Fibre Channel over Ethernet (FCoE) connectivity. The company describes the adapter as “any I/O.” But Brocade product marketing manager James. D. Myers doesn’t see many companies  implementing FCoE so far.

“There isn’t a lot of adoption yet,” Myers said. “They are buying a lot of converged networks but they are not turning (FCoE) on yet. There are a few early adoptors. Most are hedging their bets.  I think it will take upwards of a decade for FCoE to be prevalent.”

Brocade hasn’t been a huge advocate for FCoE the way its rival Cisco Systems has been. But at least one SNW attendee confirms Myers’ thoughts.  Mitchel Weinberger, IT manager for the Seattle-based GeoEngineers,  said he researched FCoE and found the performance gain wasn’t significant enough to introduce a new technology into his infrastucture. The company uses an iSCSI SAN from Compellent that connects 10 GbE switches to virtual servers.

“We don’t see the benefit,” Weinberger said. “All the studies I’ve seen say the benefits are minimal. We really didn’t see enough advantage to put Fibre Channel over Ethernet. It’s another technology for us to learn, and we don’t have the staff.”

FCoE basically encapsulates Fibre Channel frames over Ethernet networks, and the benefits includes the reduction of I/O adapters, cables and switches in the data center. But the convergence of Fibre Channel and Ethernet means storage and network administrators must share management responsibilities, or one team must cede control to the other. That can be a big problem in organizations where the two groups don’t get along.

“It makes total sense,” said Howard Marks, chief scientist at DeepStorage.net. “Except for the politics.”

Brocade’s preliminary results call for revenue of about $333 million to $336 million in storage gear revenue, which is a five percent to six percent year-over-year decline instead of the three percent to five percent increase the vendor originally projected. The new figures also represent a drop of 14 percent to 15 percent from the previous quarter. Brocade’s FC sales usually decline no more than two percent for the quarter ending in July. Brocade’s Ethernet sales also missed expectation although they will still be up at least 12% from last year.

It’s hard to say exactly why Brocade missed its sales goals, but there are three possibilities: FC SAN sales have dropped n recent months, Cisco has picked up market share, or Brocade has internal problems that caused it to miss its forecast.

Part of the problem is because Brocade sells its products through OEM deals with storage vendors, it has less clear expectations of coming sales than vendors who sell directly. That makes it tougher to accurately forecast its revenue. Still, Brocade said its sales last quarter were hurt by “weaker-than-expected storage end-user demand, which was down slightly from the previous quarter.” But Brocade’s biggest storage partner, EMC, beat its expectations last quarter and other storage vendors did about as well as expected.

Brocade’s quarter runs through July while most others end in June, so perhaps sales fell off during July. We’ll get a better idea of this when Cisco (Wednesday), NetApp (Aug. 17) and Brocade (Aug. 18) report their earnings in the coming weeks. Those earnings reports could also help clarify if Cisco picked up share in FC switching.

Wall Street analyst Kaushik Roy of Merriman Capital maintains that the FC storage market remains strong, and that iSCSI and Fibre Channel over Ethernet (FCoE) haven’t made much of a dent in SANs.

“Considering the healthy SAN sales from EMC, IBM, NetApp/Engenio, Hewlett-Packard/3PAR, Dot Hill and others, we do not believe that the end markets for Fibre Channel SANs are converting to iSCSI or FCoE faster than expected,” Roy wrote in a research note issued today.

In the statement released last Friday, Brocade CEO Mike Klayko said he would give details on plans to grow revenue and “manage expenses” during its earnings call. By manage expenses, does he mean Brocade will follow Cisco’s recent heavy layoffs?

Industry sources say Brocade has been for sale for several years, with Hewlett-Packard and Dell looking at it before deciding to buy Ethernet switch vendors – HP bought 3Com in 2009 and Dell recently said it would acquire Force 10. Brocade has also had a lot of management turnover since it acquired Ethernet vendor Foundry in 2009, most recently losing CFO Richard Deranleau in June.

“Management’s credibility has sunk to the bottom and some current (and past) investors are wondering why the board is not acting on it,” Roy said. However, he added, “Brocade is still an attractive acquisition target for companies who want to enter the datacenter market” and listed Oracle and private equity firms as candidates to acquire the switch vendor.

Financial analysts have speculated and even prodded Dell to acquire Brocade as it tries to move up into an enterprise class vendor instead of a PC and server specialist. There have been whispers for at least a year that Dell was considering Brocade, but it instead followed Hewlett-Packard’s lead in going just for Ethernet switching. HP also looked at Brocade before buying 3Comm in 2009.

Apparently, system/storage vendors prefer to own their Ethernet technology while getting FC connectivity from Brocade and Cisco. The move to Ethernet for Dell and HP is motivated at least in part by Ethernet switch market leader Cisco’s getting into the server business with its Unified Computing System (UCS).

Price may also have been a factor for Dell. It did not disclose how much it will pay for Force10, but it is believed to be around $600 million to $800 million while Brocade would command billions of dollars.

Passing on Brocade doesn’t mean Dell won’t buy another storage company, though. It has picked up EqualLogic, Exanet, Ocarina and Compellent since 2008, and Dell executives including Michael Dell see storage as a major part of the company’s future.

Canacord Genuity financial analyst Paul Mansky raised the issue again today when he put out a report suggesting that Dell may be ready to drop as much as $5.5 billion on Brocade. Mansky wrote the acquisitions of EqualLogic, Compellent and Perot Systems gave Dell storage, servers and services but left it without the networking piece of the IT stack. Outside of some low-end Ethernet switches it develops, Dell gets most of its networking devices through OEM deals with Brocade and Juniper Networks.

Dell is looking to move from a PC-centric company to an enterprise player. “ … given [that] networking will most likely be among the most critical sources of intelligence helping to re-shape the horizontal/physical layers into a virtual/vertical stack, not owning this [networking] technology puts Dell at risk of simply hopping from one commoditized business into another,” Mansky wrote.

Mansky maintains Brocade is the right target for Dell because Juniper is mostly a service provider and that is not Dell’s business, while other alternatives such as Extreme Networks and Force 10 don’t have enough market share to be worthwhile. Brocade is also the only vendor among those to have a foothold in storage. “Brocade owns Fibre Channel (70% share), exceptionally tight support for which is a must (our view) in a converged world,” Mansky wrote. “Net, Fibre Channel is high ROI, legacy Ethernet is low investment and converged products (recently introduced) are the growth engine.”

Mansky believes Dell should act now as the PC market is expected to decline at a faster rate and Dell has $7 billion in cash. He said a price of $10 per share is possible for Brocade, bringing the deal to $5.5 billion.

There is a risk for any storage vendor that buys Brocade. Such a deal could prompt competitors to push sales of Cisco FC switches, taking away much of Brocade’s revenue. A year ago, that risk was less for Dell because its partner EMC could be counted on to continue to support Brocade as well as Cisco. But the EMC-Dell storage partnership has fallen apart and EMC is a close ally of Cisco. However, as Mansky pointed out, Cisco has angered IBM and Hewlett-Packard (as well as Dell) by getting into the server business. That makes those vendors more likely to stick with Brocade for its storage products, which make up most of its revenue.

But that didn’t stop at least one analyst from playing matchmaker. Kaushik Roy of Wedbush Securities sees Brocade as a good fit for Dell. Dell’s rival Hewlett-Packard bought Ethernet networking vendor 3Com earlier this year and then outbid Dell for storage systems vendor 3PAR. There has been a lot of speculation that Dell would look for another target after failing to match HP’s final $2.35 billion offer for 3PAR.

“We believe that Brocade is an attractive acquisition candidate and its stock is cheap,” Roy wrote in a research note today. “Dell is following on the footsteps of HP and we think that acquiring Brocade would give Dell access to storage and data networking, important components of the data center.”

Brocade would give Dell something HP lacks — its own Fibre Channel networking products. Dell and HP both sell devices from Brocade and Cisco through OEM and reseller deals. HP was believed to be a suitor for Brocade last fall until it bought 3Com, but is unlikely to chase Brocade now just for its FC business.