By David Gross
Brocade fell 5% in after hours trading Monday after guiding its revenue midpoint for next quarter down from $558 million, to $542 million. The culprit behind the decline was the same as it was for Cisco - the government. The company said it could see a drop in Federal Ethernet revenue of $20-$25 million due to delays in government contracts. Now I remember when Foundry transformed its Reston, VA office from an AOL/Cable & Wireless/telecom focus, to a Federal focus in 2001 and 2002. Almost seems like the tide is turning in the other direction now. Nonetheless, Brocade still gets 23% of its revenue from the Federal government.
Overall, revenue for its fiscal 4th quarter, which ended October 31st, was up 5% y/y to $550 million. Ethernet revenue was up slightly to 26% of corporate revenue, compared to 25% a year ago. The balance sheet remains unusually ugly for a network equipment manufacturer, with just over $330 million in cash and equivalents, but over $900 million in long-term debt, most of which came from financing the Foundry acquisition. Nonetheless, the company is producing free cash, and its cash balance was up $40 million sequentially. Moreover, gross margins were up 20% y/y to $325 million.
While I'm no fan of either Fibre Channel over Ethernet, or Brocade's all-things-to-everyone product strategy, this wasn't a bad quarter and there are plenty of other reasons to sell the stock besides a 3% drop in revenue guidance.