By David Gross
Was just reading through an article over at Investopedia on Brocade, and it was so off-base, I thought I would give a counterpoint here. The writer claimed that Brocade had great technology but poor ability to sell, that there was something wrong with posting non-GAAP earnings, that there was good reason to believe Brocade would take share, and that it would benefit from the market shift to Fibre Channel over Ethernet.
All four of these claims are either wrong or based on random speculation. But the strangest one is his point about great technology but poor ability to sell. If Brocade was so bad at selling, it wouldn't have OEM deals with IBM, HP, Hitachi, Oracle, Dell, and others. The company is fairly strong at sales. And its technology might be "great", but on the Ethernet side, it has to deal with proprietary Cisco technologies like VTP, ISL, and CDP which have long held Foundry/Brocade's Ethernet revenue in the $100-$150 million range per quarter, while Cisco's has soared past $3.5 billion.
As I've written here before, Wall Street simply doesn't seem to know about Cisco's proprietary routing and VLAN technologies, and has no idea how important they are to the business. It's understandable considering that Cisco IR and its executives rarely talk about them, and instead focus investor presentations on flashy marketing themes about e-learning, conferencing, "human" networks, and so forth, and I can't fault them if so many Wall Streeters are going to center their analysis on investor relations spin. Nonetheless, EIGRP, VTP, ISL, and other proprietary VLAN and routing protocols are to Cisco what Windows is to Microsoft.
While Cisco is setting up itself for mediocre returns by wasting capital on silly overdiversifications into conferencing and video, Brocade still hasn't been able to grow its Ethernet business as fast as Cisco has grown its Ethernet business, in spite of Cisco's being over 20 times larger. Cisco posted a 25% y/y revenue increase for its switch business in its most recent quarter, while Brocade posted just a 9% increase, and has been selling its Ethernet products at gross margins 30 points lower than Cisco's.
Now, at the end of the Investopedia article the writer says that perhaps Wall Street thinks Brocade's SAN switches could become irrelevant. But for the last three years, Brocade has acted like it thinks its SAN switches could become irrelevant, and has told a fancy tale about "convergence" and Fibre Channel-over-Ethernet that has made it seem like the company has no faith in the SAN market it dominates. And for that, you can't blame Wall Street.