Brocade SAN sales butchered by hyper-converged upstarts

Fibre Channel revenues flag as Broadcom acquisition spooks IP network buyers

It was a double whammy. Brocade saw hyper-converged infrastructure eat into its SAN networking sales as Broadcom acquisition-caused uncertainty drove IP Networking sales downwards too.

Revenues were $581m in Brocade’s first fiscal 2017 quarter, up by a sliver from the $574m reported a year ago but down 12 per cent from the final FY2016 quarter.

GAAP profits collapsed to a $6m loss – they were $94m a year ago and $67m a quarter ago. What screwed things up?

Brocade says both SAN and IP revenues went down. In the SAN (Fibre Channel) area, product revenue of $307m was down 12 per cent year-over-year because of competition from alternative storage networking technologies and architectures, and customer uncertainty surrounding the pending acquisition of Brocade by Broadcom for $800m. There were lower Fibre Channel director and embedded switch sales, which both declined 20 per cent year-over-year.

Alternative networking technologies is, we assume, code for Ethernet, and “architectures” refers, we believe, to hyper-converged infrastructure (HCI) where nodes interconnect, typically, across Ethernet.

This is the first SAN or external storage supplier revenue impact from HCI that we have seen. No doubt there will be more, and Broadcom won’t like to see more of this happening.

The company also saw lower IP networking wired switch and router revenue, although revenue from the Ruckus Wireless acquisition was added in. Collectively that meant IP Networking product revenue of $174 million, including the $72 million of product revenue from Ruckus Wireless, was up 30 per cent on the year-ago quarter. Sequentially, IP Networking product revenue decreased 32 per cent because of Broadcom acquisition-induced uncertainty.

This was exacerbated by Broadcom’s publicly announced post-closing plan to divest Brocade's IP Networking business. Indeed Arris Technologies is buying the Ruckus Wireless business plus Broadcom’s ICX campus switching products.

Stifel analyst and MD Aaron Rakers points out that “the fate of the remaining IP Networking assets remains unknown.” That will add to customer uncertainty and prompt a sales fall, if not halt.

There were also certain acquisition-related expenses that negatively impacted Brocade’s first 2017 quarter’s results.

In the light of the pending Broadcom acquisition, Brocade did not provide fiscal Q2 2017 guidance or have an earnings call. ®

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