Rethink 50 outperforms Nasdaq, amid fears on storage OEM markets

Rethink IT, June, 2005

* The Rethink 50 this month rose 2% in value, a jump of around $47bn, compared with a 1.5% fall in Nasdaq pricing over the same period. But, as usual, at the top and bottom of our chart there were companies with very mixed fortunes.

Brocade Communications had nearly $500m wiped off its market value this month, one of the few companies that warned that it will miss its earnings. It was the biggest percentage faller in the Rethink 50, losing 28% of its value since the announcement in early May.

Its second quarter figures are not due out until after we go to press, but a statement said that it will miss revenue targets by as much as $10m to $12m for the quarter. The company said it expects to report net revenue in a range of $144m to $145m, which is more or less exactly what it did last year after offering guidance of $155m to $161m. The immediate past quarter was up at the $161m level.

BROCADE SUFFERS

Brocade said that the revenue shortfall was due to greater seasonality than usual and a lower level of corporate spending, and a lengthening of the sales cycle.

The new Brocade chief executive Michael Klayko said that April was fine, but the last two weeks in March were very weak. Klayko took over under difficult circumstances that have not yet been fully explained. The previous CEO, Greg Reyes, stepped down during January after the filing of the 10K form had been held up.

Auditors ordered a restatement of revenues going back to 2002 and 2003, relating to changes in how stock-based compensation was recorded. Or at least that's the official line.

Either way, with the new CEO settling in, perhaps some of the procedures for closing out business have changed, as Brocade no longer seems to be able to close quite so much, after a series of about 12 quarters where revenue has move inexorably upwards.

Almost as a distraction, Brocade announced the acquisition of Therion Software, for just $9.3m, which it says develops software management systems (which doesn't give us much clue really). Brocade says that it has been working with Therion for more than a year on technologies that will leverage SAN infrastructure in the enterprise.

The company also struck a deal with Tacit Networks, for Brocade to sell Tacit's Wide Area File Services (WAFS) to enterprise customers on Microsoft's Windows Server 2003 platform. Brocade will invest up to $7.5m for a minority ownership share in privately held Tacit, and will immediately add its WAFS system--built on Microsoft Windows Storage Server 2003--to its product line.

The idea behind WAFS systems is to move data back onto the data center server but allow remote office appliances fast access, while maintaining centralized management and backup facilities.

Brocade remains the leader in the storage switch market, but is being chased increasingly by Cisco, which also reported this month. Cisco is already way ahead with this WAFS concept, having already acquired the market leader Actona earlier this year.

The Cisco fortunes in reporting couldn't be more different from Brocade with recent analyst sentiment being turned on its head, as Cisco beat all estimates. Cisco's share price of late has suffered badly, with fears that it was going to be the next major tech stock to flounder, in the wake of IBM's poor results last month.

Instead, its third quarter came in at $6.2bn, compared with $5.6bn for the third quarter last year, up 10% and even up sequentially against $6.1 bn in its second quarter. Net income was $1.4bn, compared to $1.2bn last time. Both revenue and net income figures were Cisco's best for the past eight quarters.

Cisco puts it all down to an inevitable swing that the world is taking towards IP networks. John Chambers, CEO, said in the announcement, "Today's results are a clear indication that our integrated technology strategy is working. Customers are realizing the benefits of an intelligent network architecture. We are seeing service providers, in particular, realize the true power of IP networking in delivering comprehensive products and services to their end users, with Cisco as a key business partner every step of the way."

Cisco surprisingly got onto British Telecom's preferred supplier lists this quarter, to build its fully IP 21st Century Network, on which it will spend $18bn over the next five years.

Merrill Lynch said it would switch to Voice over IP for its 14,000 financial advisers in 600 Merrill offices, while Cisco subsidiary Linksys said it has now shipped over 1m VoIP ports in just six months, to the consumer market.

Also this quarter, both Sprint and Comcast have also selected Cisco as the lead supplier for their converged next generation IP networks.

Cisco said it added 10 new products in the quarter including new intrusion prevention, application firewall, SSL, VPN, and endpoint security.

During the quarter Cisco completed the acquisitions of Airespace and Protego Networks and announced a definitive agreement to acquire privately held Topspin Communications, which makes server fabric switches, this last deal taking Cisco more and more into Brocade's territory.