Brocade reported a fiscal second-quarter profit of $22.4 million on revenue of $501 million, down 7.1% sequentially,...
down 1.1% year over year, and below Wall Street expectations of about $503 million. The company reported a rebound in its Ethernet business, which had been down 26% -- $97.1 million in revenue -- in the first quarter. That drop in Ethernet revenue in the first fiscal quarter was cited as the reason Brocade's overall revenue of $539.5 million fell below expectations, despite a 16% increase in revenue from its core Fibre Channel storage equipment business in its first fiscal quarter.
Now, a series of new initiatives to improve Ethernet sales resulted in "a strong recovery in our Ethernet business, particularly in the Federal sector, which grew over 160% sequentially," according to Brocade's earnings press release. Overall Ethernet sales were up 34% sequentially, but the company's prepared remarks also revealed "On a revenue recognition basis, SAN revenue was down 4% year-over-year and down 20% sequentially as OEMs reduced their inventory levels."
Meanwhile, last week, Cisco reported storage product revenue grew 100% year-over-year to $140 million last quarter. This prompted one Wall Street analyst, Wedbush Securities analyst Kaushik Roy, to conclude that Cisco won market share from Brocade in FC switching, crediting Cisco's role in the VCE alliance with VMware and EMC for the apparent share shift.
"Sell-through" refers to end-user purchases of inventory already transferred to an OEM or channel partner, as opposed to "sell-to" revenues, which correspond to revenues generated by an initial sale to that partner. Companies can choose to recognize revenue differently depending on the type of reseller relationship they are working with, and Brocade said OEMs decreased inventory in the second fiscal quarter – meaning they already had enough product from Brocade from the previous quarter and didn't need to order further product from Brocade.
But it's possible Brocade could have recognized those revenues when it delivered the product last quarter rather than when the product was bought by an end user. Then the question of whether Brocade lost market share to Cisco is less cut-and-dried than it might seem looking at revenue numbers.
Brocade execs didn't get that specific about their revenue recognition policies, but they did strongly deny they had lost share despite what revenues would seem to indicate."I think [market share] fluctuates quarter to quarter, but on average, I don't think we're losing any share at all," said Brocade CEO Mike Klayko. "It can sometimes get a little lumpy based on a few big deals ... but for the most part, no, we're not losing share."
Added Enterprise Strategy Group (ESG) senior analyst Brian Babineau, "Especially in a snapshot of three months, where you have three market players and everyone claims they gained and didn't lose, and at the same time nobody reports a consistent metric other than revenue, it's difficult -- if not impossible -- to tell where everybody ended up at the end of the quarter."