Q4 Preview: Things Look Gloomy at Brocade (BRCD)

Investors are selling shares of Brocade Communications Systems Inc. (Nasdaq: BRCD) as the company is expected to report its fourth-quarter and full year 2011 results Monday following the closing bell. A conference call is scheduled for 5:30 pm EST.

The Wall Street consensus is for earnings of $0.10 per share on $527.38 million in sales. For the full year 2011, the Street sees $0.44 per share in earnings on $2.13 billion in total sales. During the fourth quarter of 2010, the company reported earnings of $0.14 per share on $550 million in total sales. Management offered earnings and sales guidance of $0.09-$0.11 per share and $520-$540 million for the third quarter of 2011.

Analysts rate shares of Brocade Communications Systems with 12 Buy ratings, 18 Hold ratings, and 3 Sell ratings. The average price target on shares of Brocade is $5 and ranges from $3.50 to $6.

Ahead of the quarter, Wells Fargo is bullish on shares of Brocade Communications and raised its valuation range from $3.50-$4.50 to $5.00-$6.00 while reaffirming its Market Perform rating. For the upcoming quarter, the firm is forecasting earnings of $0.10 per shares on $529 million in total sales. Wells Fargo sees gross and operating margins of 61.8 percent and 15.6 percent, respectively. The firm notes the upside will be due to US Federal strength, solid Ethernet demand, and healthy trends in the company's SAN business.

An analyst at the Wells Fargo comments on upcoming expectations, “With Brocade likely able to build backlog entering the seasonally strong January period, we think the company may guide Q1 sales in line to slightly above our/consensus estimates looking for $533 million. While historic seasonal sales trends may argue for additional upside potential, we think management is likely to forecast conservatively given the uncertain global demand outlook and the potential to see US Federal sales soften in Q1.”

For Q1 and FY12, the firm is estimating earnings of $0.11 per share and $0.44 per share. Wells Fargo highlights concerns over the company’s long-term outlook include the competitive landscape in switching, the slow growth outlook for the SAN business, and Federal headwinds beyond the current quarter.

During the quarter JPMorgan downgraded shares of Brocade to Underweight. The firm is more bearish going into results with earnings and sales estimates of $0.09 per share and $524.4 million, respectively.

Looking ahead into the first quarter of 2012, JPMorgan estimates Brocade Communications will continue to underperform the market’s expectations with only earnings of $0.10 per share on $514.6 million in total sales. The firm believes management still faces challenges such as muted long-term growth prospects and more competition in Ethernet based solutions.

An analyst at JPMorgan states “We believe Romley-based servers, expected in the first half of 2012, could bring additional pressure to Brocade’s growth profile. The additional compute power of the Romley platform, combined with other options, could drive lower demand for dedicated storage offload engines. Romley stands to help storage run more efficiently without as much reliance on a dedicated offload engine such as HBA or CNA, and thereby FC switches. We think that FC protocol share losses may accelerate in 2012.”

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