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Brocade's Foundry business flounders

It’s been a little over a year since Brocade completed its $2.6 billion acquisition of Foundry Networks, and the Ethernet thing isn’t working so well so far.

Brocade reported $97.1 million in revenue from Ethernet switches last quarter, down 26% from the previous quarter. That caused Brocade’s overall revenue of $539.5 million to fall below its previous forecast, despite a 16% increase in revenue from its core Fibre Channel storage equipment business.

The Ethernet sales dip came in a quarter when competitors Cisco, Juniper, and Hewlett-Packard’s ProCurve platform increased revenue in network switches.

Brocade executives blamed lower sales to the federal government and poorer sales through its new Ethernet OEM deals with IBM and Dell for the downfall. They said they will put more sales people on the Ethernet side to help drive demand, rather than leaving it to the OEMs.

“We don’t need to do a research project on what happened and why,” Brocade CEO Mike Klayko said during the vendor’s earnings call. “We know what to do and we’ve taken immediate actions to get our Ethernet business back on track. … Experience is a valuable teacher, and we’ve learned a valuable lesson here.”

Several Wall Street analysts downgraded Brocade’s stock price today, both because of the results and lack of confidence in the vendor’s plan to improve.

“We are frustrated with Brocade’s results, not just government Ethernet switching, but also the clear market share losses in enterprise and persistent declines in service provider Ethernet switching, as well as what we consider a lack of definitive color with the company’s strategic direction toward a recovery going forward,” Aaron Rakers of Stifel Nicolaus wrote today in a note to clients explaining his downgrade of Brocade.

For storage customers, the big issue is whether a concentration on Ethernet will cause a lapse of concentration on the Fibre Channel side. Brocade took share on the FC side from Cisco last quarter, but it’s storage growth was likely a bit below the industry at large and its HBA revenue is negligible more than a year after it moved into that product area. Klayko said on the earnings call that a concentration on Ethernet sales will likely cause “greater normal seasonal declines in our SAN business over the next few quarters.”

Still, Klayko says having an Ethernet switching portfolio has helped the storage business by letting customers lay a foundation for the converged networks expected to emerge over the next five years or so. He also says it’s mandatory for a storage networking vendor to have both Ethernet and Fibre Channel “or you are just going to get put into a box as a point solution.”

Overall, Brocade’s revenue increased increasing 3.4% sequentially and 25% year-over-year, and it earned $51.1 million in profit for the quarter.

Klayko says he has no regrets about the decision to spend billions on Foundry.

“Would I make the same decision today?” Klayko said. “The answer is yes. The customers we talk to today do want to have an end-to-end solution. There is a tremendous amount of change going on in the data center right now as customers are trying to figure out how to handle this explosive growth not only in just data, but in networking traffic. And if you don’t have the entire product portfolio, I think you are disadvantaged. And so strategically, it is the right decision.”

Not all financial analysts are down on Brocade. According to a note issued today by Wedbush analyst Kaushik Roy: “It may not happen overnight but we believe that the management will be able to fix the sales issues and put Foundry/IP business back on track. While it is true that Brocade lost market share in the IP/Ethernet market in the past quarter, we believe that the market share gain story is yet to be played out.”

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