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Strategic Vendor Series: Brocade

Brocade's performance has been up and down the past couple of years, but recent product introductions appear to be settling the company back into a position of strength.

SAN switch maker Brocade Communications Systems Inc. has had a rough couple of years losing revenue and market share to new entrant Cisco Systems Inc. and incumbent competitor McData Corp., but its fortunes appear to be returning -- if its current quarter earnings are anything to go by.

Brocade reported 2004 fourth-quarter revenue of $155.6 million and net income of $18.6 million, or 7 cents earnings per share, beating Thomson Financial First Call consensus estimates of $154 million and 6 cents. Meanwhile, Cisco's storage revenue dropped 2% over the last quarter.

New product rollouts appear to have helped the company overcome its slump. It began selling its Silkworm Multiprotocol Router, the first shipping iteration of its Rhapsody-developed Fabric Application Platform, through OEMs in the fourth quarter.

This product allows SAN islands to be linked together in a more useful way than was previously possible. Brocade said the router will be most cost effective for users with three or more SAN islands or fabrics. Connecting SAN islands together increases the flexibility with which storage can be allocated to different host servers, or backups routed to central tape libraries. It will also allow virtual or software-defined links to be altered at will.

In addition to the multiprotocol router, Brocade shipped its SilkWorm 2400 128-port director, and earlier in the year began rolling out low-end SAN switches, bundled with HP arrays.

For a more in-depth look at Brocade's recent performance and upcoming direction, analysts Nancy Hurley with Enterprise Strategy Group and Randy Kerns with the Evaluator Group shared their views.

Where is Brocade the strongest?

Hurley: Brocade has maintained its leadership position in entry-level SAN switches. It has a number of partnerships for low-cost blade switch solutions, which will help it retain leadership. It is also gaining momentum in the director space now that it has a truly competitive product there.

Kerns: Brocade has done very well in creating partnerships with the major vendors that are the primary sellers of storage networking equipment. Its early focus on switches, rather than hubs, paid off with Brocade being the dominant player in the switch marker.

Where is Brocade the weakest?

Hurley: Brocade has made a significant comeback in the past two years. It's actually hard to find a weak spot. In the past, its director-level switches were not technologically comparable to McData, CNT or Cisco, but the release of the 24000 brought them on par with the competition. Where they have faltered, however, is in the delivery of intelligent services in the network. Brocade has yet to deliver intelligent services on the Rhapsody platform that they acquired two years ago -- they really should have taken the lead here. Instead, Cisco was first to market with those solutions.

Kerns: Same analysis as Hurley.

What is Brocade's strategic direction?

Hurley: There are multiple threads to its ongoing strategy. First, it is looking to protect and grow its installed base through enhanced support and upgrade programs. The development of the SAN Health program is one example of this effort: Brocade provides a free service helping customers determine where the problems are in the overall SAN, making sure customers can pin down problems -- which helps alleviate a lot of finger pointing. The service also helps users tune their networks, increasing customer satisfaction. Brocade also plans to aggressively innovate. They will be enhancing the directors to support 256 ports and have already added 4G to the midrange switches. Expect intelligent services on the multiprotocol router (which is the Rhapsody platform) sometime next year. Finally, it intends to drive down costs by leveraging common ASICs and software across all of the platforms.

Kerns: Some of the other vendors have been a little quicker to introduce larger port count switches, IP connection capability and lower price entries in the past. This is a very competitive area, and Brocade has responded since then.

Where does Brocade have an edge over its competitors?

Hurley: It definitely has the edge with its extensive installed base. Eighty percent of all customers we survey want a single-switch vendor for all of the storage infrastructure requirements, which in turn means it is very difficult to displace the existing switch vendor (although certainly not impossible). Brocade has the upper hand with the installed base, even if its solutions are not always technologically superior. Users are more apt to want to stay with their installed vendor, and Brocade's current product offerings are definitely more than "good enough."

Kerns: Probably its install base gives them a significant advantage. Customers are very interested in buying a product that is managed with the same software they already have.

In which markets is Brocade most challenged in terms of growing or maintaining its market share?

Hurley: The director space is definitely the most competitive. Brocade is up against very strong solutions from switching giant Cisco and also faces stiff competition from the current market leader McData, which will be introducing its next-generation director in early Q1 (from the Sanera acquisition). It's very tough to unseat the installed base in this space, so McData has the upper hand there. However, Cisco has been making strong inroads. Storage administrators are often encouraged by its enterprise counterparts to evaluate the Cisco solutions so the company can standardize on a single-switch vendor. Brocade will need to leverage its installed base and consolidate the existing entry and midrange switches to director class.

Kerns: Moving down market will be very difficult. The margins are tough, and it is a different distribution channel.

Brocade in the news

Brocade users get free SAN checkup
Storage Clips: CNT, Brocade report contrasting earnings
Product Roundup: Switches
Brocade zones in on patents
Best Buy uses Brocade router to isolate SAN
User endures integration bump with Brocade blade switch
Brocade's 128-port switch drains less power
New director switch might be on the way from Brocade

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