Brocade Communications: Starting Fresh


Brocade Communications: Starting Fresh

The maker of data storage systems has a new CEO, other new senior executives and new products, and says it's beyond its serious accounting problems.

There's a theory that if a stock collapses but finds a level (albeit at penny levels) and holds there for a while, it's "building a base." Putting that theory to the test is Brocade Communications, which makes data storage systems and switches that enable users to share storage networks. In its latest quarter, which ended at the end of January, Brocade's sales were up 5% over the same quarter a year ago but 17% higher than the immediately preceding quarter, a sign that this struggling company and business sector are picking up. Brocade's quarterly earnings of 5 cents a share don't sound like much, but it met analysts' expectations.

The stock (symbol BRCD), which peaked at more than $100 in 2000 and fell below $4 six months ago, has clambered its way back to $5.39 (the pennies matter when a stock trades at a single-digit price). Analysts and investors, who have been burned by Brocade several times, first by the tech-bubble burst and then by an accounting mess, are tentatively optimistic.

"There appear fewer reasons why the business should stumble from here," writes Laura Conigliaro of Goldman Sachs. She's one of several analysts who raised forecasts for Brocade's sales and earnings for the rest of this year and for 2007. Credit Suisse's team says that "Brocade is shaking off many of the issues that plagued results in 2005." These and other analysts are officially still neutral on the stock -- but neutral riding with a tailwind instead of against a headwind.

CEO Michael Klayko, who joined Brocade in the buyout of his former company, has been top man since January 2005. If Brocade is winning any hearts and minds, it's because of Klayko's themes of new products and a newly robust market for storage systems. Yesterday, speaking at a Morgan Stanley conference, he repeated these arguments and said Brocade's nearly all-new product line called Tapestry is a step or two ahead of the competition.


Self-serving? Well, maybe. But the stock of this largely new company trades at just 20 times estimated earnings of 27 cents per share for the fiscal year that ends in October. Plus, Klayko says Brocade is moving -- finally -- toward a better balance between hardware, which is unpredictable, to software and services, which are generally steadier and more profitable.

Better yet, the company is discussing a settlement with the Securities and Exchange Commission in a dispute over how Brocade previously reported its stock options. Among other things, this forced Brocade to restate four years of earnings, from 2001 through 2004.

--Jeffrey R. Kosnett