BOSTON -- Brocade Communications Systems Inc. told attendees at its fall Analyst Day that it plans to diversify its business over the next year in an effort to stay competitive against Cisco Systems Inc.
Saying it had heard investors' wishes for more transparency, Brocade officials gave a candid assessment of the company's current place in the market and pledged improvement. CEO Michael Klayko touched on the fact that the company's market capitalization has fallen 27% since the McData Corp. acquisition was finalized in March.
"We are not satisfied with regard to creating shareholder value [in the company] over the last six months," Klayko said.
Moving forward, Brocade officials said the company is looking to catch its existing customers as they come up on another refresh cycle, adding fabric-based services to its products, including data migration, encryption, continuous data protection, replication and Quality of Service (QoS). In the first half of 2008, the company will be releasing what it terms the Intelligent Server Adapter, which will mark its first foray into fabric intelligence, though officials declined to give further details on what the product will do.
By the second half of 2008 the company is also expecting to have a new, higher end director than its existing Silkworm 48000 in an effort to ride the server virtualization wave. Vice president of product development Don Jaworski predicted users will start demanding higher performing switches to support consolidated networks and virtualized applications, and said those requirements play to Brocade's strengths. "Enterprise-class data center products are what we've been doing for years," he said, pausing to take a shot at Cisco. "This isn't picking up networking products from another part of the data center."
Meanwhile, Cisco is already out in the market with network-based encryption and in recent weeks has begun new messaging around its VFrame data center automation product's support for virtualized applications. Host bus adapter (HBA) rival Emulex has a virtualized HBA product shipping, and Emulex and Cisco have also already joined forces to connect the virtual HBA to virtual fabrics.
Jaworski said Brocade plans to differentiate itself by giving users one throat to choke for both switching and HBAs. When it comes to VFrame, he said, "Cisco is trying to be the application layer, as well as the underlying fabric that supports it, and I wish them luck with that. Brocade plans to partner with companies already investing millions of dollars into application efficiencies and focus on developing the underlying fabric that will support them."
More acquisitions, new products coming
The new goal for the company, according to Klayko, is to get into a new market space at least once every year. Another new goal is to see 60% to 80% of revenue coming in from products no older than 18 months. Meanwhile, the company is still in an acquisitive mood, with some of its cash flow already specifically earmarked for further merger and acquisition to support its efforts.
Klayko was mum on exactly what new technology fields Brocade plans to get into, but he said diversification would probably focus first on strengthening file virtualization products, which still account for less than 5% of overall revenue, despite the fact that the company claims to have added hundreds of new customers this year. "That business as a whole is doing well, but I'd be lying to you if I said every individual product was doing well," Klayko said, stopping short of detailing exactly which products are lagging or how the company plans to strengthen them.
Proof is in the pudding for analysts
Brocade was sanguine in projecting total addressable market (TAM) for its planned diversification, especially in file virtualization where it estimated TAM at $1.4 billion. "I think they're a little bit too enthusiastic in that area," said Tony Asaro, senior analyst with the Enterprise Strategy Group (ESG), estimating the market at closer to the $200 million range.
Brocade officials had characterized iSCSI as seeing narrow adoption and instead said Ethernet was more likely to have a place in the data center as part of the new Fibre Channel over Ethernet (FCoE) standard being developed by networking vendors. "I think they're way off on iSCSI," Asaro said. Overall, the roadmap "sounds good, but it involves a level of integration and core competency that's a big leap for me to believe that they're going to be able to accomplish overnight."
Another ESG analyst, Bob Laliberte, was more optimistic, pointing to Brocade's execution so far since the McData acquisition as the reason for his vote of confidence. "So far they've done everything they've said they were going to do in terms of producing a roadmap for customers and integrating the companies together," he said.