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NEW YORK (TheStreet) --  TheStreet Ratings team rates Brocade Communications as a "buy" with a ratings score of B. Shares of Brocade Communications are higher by 5.71% to $9.73 on heavy volume in early afternoon trading on Tuesday.TheStreet...
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Brocade Communications Systems (NASDAQ: BRCD) sells hardware that lets data storage devices and computer servers communicate with each other and transmit hundreds of terabytes of data. Its customers are original equipment manufacturers, such as EMC, IBM and HP, that build Brocade's directors, switches and routers into their own data storage hardware. Therefore, the demand for Brocade's products is driven by the demand for data storage devices that use networks to connect computers that are far away. Corporations and government agencies are buying large data storage devices because of the increase in information stored electronically, from scientific advancements to population growth. In addition to high storage capacities, these institutions also demand products that keep their data safe, especially in a world where more and more confidential information is transferred through computer networks. Brocade's switches are used in hardware that protect sensitive data, and its software packages help companies minimize the cost of recovering from hardware theft or natural disasters. As an IT vendor, however, Brocade is especially susceptible to economic slumps, since many companies cut their IT budget during downturns.[1] The company earned $1.95 billion in revenue but incurred a net loss of $76 million in 2009.[2]

Company Overview

Products[3]

Ninety-five percent of Brocade's net product revenue comes from selling pieces of hardware that let servers and data storage devices communicate with each other through networks. Examples include directors, switches and routers. While they do not hold data themselves, they control the flow of terrabytes of data that are transferred from computers to data storage devices and between storage devices. Additionally, stand-alone operating systems performing complex tasks, such as redirecting network traffic, are built into Brocade's hardware.

Brocade also sells software used for data management, accounting for 5% of net product revenue. Brocade's software centralizes stored data, which makes a company's data accessible around the world, and recovers damaged data, which reduces the amount of money a company spends to absorb the damage.

  • Data Storage - 61% of net revenue
  • Ethernet Products - 21.7% of net revenue
  • Global Services - 17.3% of net rvenue

Business Growth

FY 2009 (ended October 31, 2009)[2]

  • Net revenues increased 33% to $1.95 billion. The increase reflects growth in sales of Ethernet Products and Global Services offerings. Data Storage product revenues for the period were slightly down and reflect a 3.3% decrease in the number of ports shipped from our director and switch products and a decrease in average selling price per port of 10.4%.
  • The company incurred a net loss of $76 million compared to a net gain of $167 million in the previous year.

Trends and Forces

Growth in the Amount of Data Stored Digitally Combined with Globalization mean Demand for Brocade's Hardware is Growing

The growth of information that is processed electronically creates high demand for high-end storage hardware and software: by some estimates, the growth rate of data needed to be stored has reached 100% a year. Sources of this growth include scientific advancements (such as genomic data in the field of bioengineering), higher standards for products/services (such as new categories of financial data kept by banks), and population growth (such as social security data). The challenge of managing large amounts of data is compounded by increased government regulations and more widespread regions where companies are conducting business. For example, in a survey of financial services companies, 88% of companies noted that data management for compliance and business growth as either "very important" or "important", and in this context, technological challenges are just as important as obtaining sufficient budget.[4] To address these issues, Brocade sells hardware that interconnect servers and storage devices and route data between them, making networked storage (many computers having access to centralized data) possible. This is especially useful in an increasingly global economy. For example, an employee in New York can access changes to a document or project made by an employee in Hong Kong, bypassing geographic and bureaucratic barriers. Effective data management lets a company spend less time/money on information technology and increases the productivity of the company's employees, especially those that are separated by distance. As more companies realize this and implement hardware to enable global corporate interactions, Brocade's business will grow.

Increased physical risks to devices storing confidential data lead to greater demand for data protection hardware

Limiting the risk of compromising confidential information is the number one reason corporations are investing in data management hardware and software, with 84% of corporations emphasizing its importance (see section above).[5] More and more pieces of sensitive information, ranging from social security numbers to numbers of credit cards, are being stored electronically. In light of this trend, geopolitical events such as terrorism, natural disasters such as hurricane season (both of which threaten to damage servers where data is physically stored), and laptop theft pose a challenge to the security of sensitive data. While Brocade sells data protection software, it is the company's hardware, accounting for most of its revenues, that enables vendors further down the supply change to develop features such as centrally administered encryption and data back-up bandwidth speed. These features minimize the cost of recovering from calamities, and as the value of a customer's data increases, so does the customer's demand for data protection products.

IT vendors such as Brocade are especially vulnerable to market conditions that affect their end users

While high-end data storage hardware and software improve the handling of a company's data, they are not an essential component of the company's business. Many companies see no need to purchase expensive, high-end data storage devices or spend money upgrading their preexisting data management systems. This rings especially true during times of recession, since IT is an easy place for companies to save money. For example, as a result of the credit crunch, banks that have suffered write downs, such as France's Société Générale, are opting out of inessential IT upgrades. Likewise, Brocade is also vulnerable to slow-downs in consumer confidence in the media & entertainment and telecommunications industries.

Competitors

Brocade's two main competitors are Cisco Systems and QLogic, which also manufacture switches and directors. Original equipment manufacturers use hardware components from multiple sellers, so competition is high. Brocade also makes products, such as its Tapestry software package, that compete with many IT vendors like NetApp and EMC, but it generally partners with these vendors since they are the company's hardware customers.

Cisco - Cisco sells switches and routers that compete directly with Brocade's products. Given its size, the company also has a stronger global presence, with international revenues accounting for 47.5% of net revenues.

Qlogic - Qlogic also sells switches and routers. Its biggest customers are HP, IBM, and Sun Microsystems.

Emulex - Emulex sells adapters and routers.

References

  1. BRCD 2009 10-K "General" pg. 4
  2. 2.0 2.1 BRCD 2009 10-K "Selected Financial Data" pg. 31
  3. BRCD 2009 10-K "Products and Services" pg. 4-6
  4. "Enterprise Data Management Market Intelligence" Golden Source
  5. "Enterprise Data Management Market Intelligence" Golden Source
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