Brocade's forecast for the fourth quarter also fell short of analyst expectations. The company says it expects to post earnings of 2 cents a share in its fourth fiscal quarter on revenues of between $134 million and $139 million. Wall Street has been forecasting earnings of 4 cents a share for the current quarter.
And while its earnings were in line with analysts' expectations, Brocade's revenues came in slightly under the $134.7 million that the Street had been expecting. More worrying, according to Kaushik Roy, an analyst with Susquehanna Financial Group, is that the company's results were at the low end of their guidance.
"Things were not as good as they were expecting," says Roy. "They know that they're losing share in the midrange to McData, and they know that Cisco is coming in."
Bear Stearns & Co. Inc. analyst Andrew Neff agrees. In a research note today he writes: "The larger issue for Brocade is that the competitive dynamics in the SAN market are likely to worsen, both between Brocade and McData and more importantly, with the presence of Cisco in the market." Neff says that McData is maintaining its strong position in the director segment -- an area Brocade viewed as a growth opportunity -- and that Brocade has significant "competitive challenges" in the low end of the SAN market from other vendors and new technologies such as iSCSI.
According to U.S. Bancorp Piper Jaffray analyst Ashok Kumar, the overall storage switch market has been flat over the last four quarters at about $250 million to $300 million. "Over the same time span, Brocade has lost 8 points of share (from 52% to 44%) to McData and more recently to Cisco," he writes in a note today. Kumar says he expects Cisco's launch of its midrange MDS 9100 switch to expand its estimated 5 percent share of the market ($15 million per quarter) to 10 percent by the end of the year. Cisco has not released any information about the 9100, but analysts expect it to be a fixed-port switch in the 20- to 40-port range.
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