Brocade Looks Like Another Typical Broadcom (Avago) Deal

Broadcom (NASDAQ:AVGO) (or more precisely, the company previously known as Avago) knows what it wants in M&A and is not afraid to go for it. Management loves to find companies with few competitors, stable revenue, cost synergy potential, and a product/market assortment that slots in opportunistically with the existing business. So even allowing for an ongoing shift away from fibre channel toward Ethernet, Brocade (NASDAQ:BRCD) checks the boxes that Broadcom looks for and looks like a solidly accretive deal.

The Brocade deal appears to add around $10/share to my fair value estimate for Broadcom, and even if Brocade's fibre channel SAN switch business should suffer even greater erosion from the adoption of Ethernet switches, Broadcom has strong existing products there as well. The biggest downside I see to this deal is that it limits Broadcom's short-term M&A options. A rival bid for NXP (NASDAQ:NXPI) (which was not too likely either way) now seems even less likely and likely so too a bid for a company like Xilinx (NASDAQ:XLNX) that could more meaningfully broaden Broadcom's horizons.

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Brocade Looks Like Another Typical Broadcom (Avago) Deal

Seeking Alpha: Brocade On Better Footing, But It Won't Be Getting Easier

A year ago I advised patience with Brocade (NASDAQ:BRCD), as I thought the Street was too bearish on the company's prospects for retaining high-margin SAN business and building up its IP networking operations. While the storage challenges are not going away, the company should be in position to benefit from the growing rift between EMC (NYSE:EMC) and Cisco (NASDAQ:CSCO) and growing deployments of all-flash arrays. On the networking side, the VDX line is doing well and the company is assembling a cogent collection of SDN/NFV pieces, but it remains to be seen if the company can grow share and monetize that opportunity.

With the shares up more than 40% over the past year, I'm calling it a day on the Brocade undervaluation call. Management has done a very commendable job with execution (particularly on margins), but now the questions are shifting more towards the company's real growth prospects and I'm not quite as confident about those as I was on the undervaluation a year ago. There are indeed opportunities for Brocade to outperform, but I need a better mix of growth and value here before getting more bullish.

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Brocade On Better Footing, But It Won't Be Getting Easier

Seeking Alpha: EMC Not Exactly Making Its Case

Several large tech players, including Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), and Hewlett-Packard (NYSE:HPQ), have gone through multi-year stretches where their shares underperformed due to persistent concerns about their long-term competitiveness and growth potential. To varying extents these companies have changed the tone around their businesses, but it doesn't automatically follow that EMC (NYSE:EMC) will be able to go that same route. While EMC has managed to do a credible job of keeping itself relevant within its core storage market, there are persistent concerns about whether that market is truly valuable anyway and whether EMC can reposition itself for future growth.

I'm increasingly on the "cautious yes" side of that question. EMC has historically done a good job of buying the pieces it needs to remain at the top of the market, as well as identifying assets like VMware (NYSE:VMW) and RSA that can grow the business. Expectations are not particularly demanding today, but then EMC's performance doesn't call for aggressive projections and there are increasing risks (in my view, at least) that the company will respond to the pressure its under with a larger acquisition.

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EMC Not Exactly Making Its Case

Seeking Alpha: Can Grantley Open The Gates For Mellanox's Growth?

It has been a pretty frustrating case of "hurry up and wait" at Mellanox (MLNX). While there is little doubt that Mellanox is the technology and market share leader in InfiniBand, the value of that leadership has come into question. Mellanox has seen growth improving in its storage and Web 2.0 markets, the high-performance computing market has been sitting on its hands ahead of a major new product cycle from Intel (INTC). If the Grantley cycle can do for Mellanox what the earlier Romley cycle did, Mellanox could finally live up to some of that growth potential, but a series of disappointments and more muted expectations for Grantley have made this more of a "show me" story.

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Can Grantley Open The Gates For Mellanox's Growth?

Seeking Alpha: The Storage Shakeout Is Tossing Brocade Around Too

Brocade's (BRCD) strong recovery rally ended on April Fool's Day, in large part due to growing pessimism about enterprise storage demand and the resulting demand for Brocade's fibre channel storage area network (or SAN) switches. Add to that some ongoing pessimism regarding the company's ability to compete in IP networking and whether there's much incremental leverage to squeeze from the business and Brocade is back to a "show me" story.

I continue to believe that Brocade shares are undervalued, but the market is notoriously unkind to low-growth free cash flow rich tech stories and the storage market is going to need a few more quarters to sort itself out. At a minimum, I think that means that readers considering Brocade for its potential value will need to be patient as it works through these challenges.

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The Storage Shakeout Is Tossing Brocade Around Too

Seeking Alpha: Brocade's SAN Business Showing Some Resilience

When I wrote up Brocade (BRCD) as a Top Pick in mid-August, a lot of my thesis was predicated on the Street underestimating the company's ability to cut costs and overestimating the threats to the company's SAN business. So far, that thesis is working as the shares are up more than 20% since that pick (versus approximately 15% and 8% moves for the S&P 500 and Nasdaq). I do believe that there are very relevant long-term concerns about Brocade's core SAN switch business, but even modest growth expectations support a fair value closer to $11 today.

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Brocade's SAN Business Showing Some Resilience

Seeking Alpha: A Beat's A Beat, But Brocade Still Needs More Growth

Tuesday night had to be satisfying for Brocade (BRCD) shareholders. The stock has been strong over the past three months (up almost 40%) despite a twitchy Nasdaq and at least two downgrades to "Underperform," and Brocade topped that off with a beat-and-raise fiscal third quarter.

Brocade is already making clear progress on its efforts to restructure and reduce operating costs. What's less clear is the growth trajectory of its storage and IP networking businesses. Better than expected performance in storage is encouraging, and predictions of the rapid demise of this business are likely premature, but the IP networking business still has a ways to go. All of that said, Brocade shares still appear quite cheap on a discounted cash flow basis - if the company can preserve or rejuvenate the storage business and find a better match between its IP networking technology and its targeted customer verticals, these shares could still do quite well from here.

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A Beat's A Beat, But Brocade Still Needs More Growth

Investopedia: F5 Networks On Its Heels, But Hasn't Fallen Down Yet

There are only a handful of tech companies that aren't seeing significant pressure on their revenue growth these days, so in that respect F5 (Nasdaq:FFIV) is in good company. What's more troubling about F5, though, is the prospect that the company's core market (and its position within that market) has begun to fade significantly. Although F5 is cash-rich and has opportunities to reignite growth with new products for new markets, investors need to appreciate the risk that growth stagnates during this reconstruction period and that valuation alone won't be enough to support the stock.

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Investopedia: Brocade's Uncertain New Direction

As Brocade (Nasdaq:BRCD) struggles to go anywhere, new management realizes that the company can't simply operate as it always has. But a new direction isn't particularly helpful if it is the wrong one, and I have real doubts about the company doubling-down and looking to compete with Cisco (Nasdaq:CSCO) in markets like data centers. While expectations for Brocade are shockingly low, it's hard to see this stock going anywhere without a real improvement in sales growth.

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Investopedia: Can Brocade Get Any Benefit Of The Doubt?

Apart from using it as a tether ball in pieces talking about rumored M&A in the tech sector, there aren't many sell-side analysts who seem to have much use for Brocade (Nasdaq:BRCD). Certainly some of this skepticism has been earned by the company through years of sub-optimal execution, not to mention the fact that the company goes up against major rivals like Cisco (Nasdaq:CSCO). That said, even minimal growth expectations point to real value here and patient investors (with an especially high frustration threshold) may want to consider the stock.

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Investopedia: Cisco Pays Dearly For Meraki

Acquisitions often make investors nervous, as the temptation/risk to overpay is so high and there are reams of research indicating that most deals destroy shareholder value for the acquirer. By the same token, sometimes M&A is the only way to fill a product/technology gap and position the company for future growth. While Cisco (Nasdaq:CSCO) shareholders are certainly going to hope that the deal for Meraki advances Cisco's software-defined networking (SDN) strategy, the price tag is going to cause more than a little wincing.

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Investopedia: Turnover At Top Could Mean Fresh Start For Brocade

The curious saga of Brocade (Nasdaq:BRCD) is about to take another interesting turn. The company's long-suffering Ethernet business looked quite strong this quarter, and new fabric products and the opportunities in software-defined networking could be significant longer-term contributors. More significantly, though, Brocade will soon have new leadership and with that, perhaps a new chance at living up to what seems like unfulfilled potential.

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Investopedia: Brocade's Ducks Still Not Queued Up

It's always something with Brocade (Nasdaq:BRCD). Although takeover speculation gave a little life to the stock, the ongoing problems in the ethernet business and the sluggishness of the underlying storage market have sapped a lot of that momentum. Although Brocade remains a tech stock that could deliver substantial returns if it got all of its ducks in a row, progress towards that goal seems inconsistent at best.

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Seeking Alpha: Ongoing Execution Inconsistency Clouds Brocade's Prospects

With networking equipment company Brocade (BRCD), it's always something. Although this small-tech company still holds an attractive market share in storage networking, the inconsistencies and execution issues in the ethernet business continue to limit the upside. While this remains a stock with significant long-term potential, investors buying in today have to have a lot of faith in a management team that doesn't necessarily deserve it.

Surprising Solid Results In A Challenging Quarter
This was not a great quarter for Cisco (CSCO), Juniper (JNPR), or Hewlett-Packard (HPQ), but Brocade did respectably well. Sequential growth of 2% was enough to drive a beat versus Wall Street analysts.

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Ongoing Execution Inconsistency Clouds Brocade's Prospects

Investopedia: Service Providers Disconnect Juniper's Momentum

While tech stocks often trade in tandem when there's news from the major players, not all networking is the same. In other words, the problems that Juniper Networks (NYSE:JNPR) is now facing are not necessarily directly translatable to Cisco Systems (Nasdaq:CSCO) or smaller vendors like F5 Networks (Nasdaq:FFIV) and Riverbed Technology (Nasdaq:RVBD). For Juniper, as for Alcatel-Lucent (NYSE:ALU) and Acme Packet (Nasdaq:APKT), the story today is about weak spending in North America from the large service providers. (For more, see Earning Forecasts: A Primer.)

A Disappointing End to the Year  
Juniper announced January 9, 2012, that fourth quarter results were not going to meet Wall Street expectations. Instead of the average estimates of $1.19 billion in revenue and 34 cents in earnings, Juniper announced that results were going to be on the order of $1.11 billion to $1.12 billion and 26 cents to 28 cents.

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Investopedia: Brocade Has More To Prove

Brocade (Nasdaq:BRCD) is another one of those small tech stocks beset by worries that the market is changing out from underneath them, and that the Goliaths of the tech space ((Cisco (Nasdaq:CSCO), Hewlett-Packard (NYSE:HPQ), Juniper (NYSE:JNPR) and Dell (Nasdaq:DELL)) are going to chew away their business. Certainly the recent performance of the company and the valuation of the stock suggest little optimism, but this may yet be a name to consider for aggressive turnaround investors. Although this quarter's beat and raise proves nothing, at least there are some positive marks in the ledger for 2011.

An Encouraging End to the Year  
Brocade's results for the fourth quarter were not all that impressive at first look. Revenue was basically flat with last year and up 9% on a sequential basis. Storage area network (SAN) revenue was down about 4% from last year, with the smaller IP business offsetting that with 11% growth. Still, Brocade beat the consensus guess of year-on-year revenue decline, and surpassed the high end of the range as well.

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Seeking Alpha: Brocade Not Completely Unraveled Yet

There's arguably no good time for a tech company to post a disappointing quarter, but this is clearly an especially bad time. With investors worried about tech stocks in general, and IT enterprise providers like Cisco (CSCO), Juniper (JNPR), and Riverbed (RVBD) more particularly, this was a dangerous time for Brocade (BRCD) to disappoint the Street.

A Tough Q3
But disappoint Brocade did, announcing that third quarter revenue was going to come in about 10% short of its guidance and the average analyst guess. Unfortunately, it looks like a broad miss. The storage business looks to be down about 5-6% as partners like EMC (EMC), Dell (DELL), and IBM (IBM) held less inventory and end-market demand has softened.

While the Ethernet business looks to be up 12-13%, the company cited weaker spending overall, and weaker federal spending in particular, as the prime sources of disappointment. Federal spending has been an odd topic of late – it seems intuitive that Federal spending would be weaker right now, but companies like Cisco, Juniper, Riverbed, and F5 (FFIV) have posted a wide range of results in this respect.

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Brocade Not Completely Unraveled Yet

Investopedia: Brocade Moves Two Steps Forward, One And A Half Back

Brocade (Nasdaq:BRCD) is not a turnaround situation from a financial standpoint, but the stock has not managed to break out above $10 (and hold it) in almost a decade. Investors once loved the stock, but worries about the company's ability to match yesterday's growth in storage networking and find an interesting path in Ethernet has capped their enthusiasm of late. Now, with fiscal second quarter earnings in hand, the picture is still murky as the company cannot seem to make progress in both businesses at the same time. 


Some Good, Some Not So Good in Fiscal Q2
Brocade made some progress in the second quarter, but not as much as investors might have hoped. Revenue rose 10% overall from last year, but was up less than 1% on a sequential basis. Growth was led by the SAN business, which grew 17% from last year, but contracted a bit on a sequential basis. Ethernet was up a bit sequentially, but basically flat on an annual basis.

While the SAN business was helped by good performance in backbones, switches and adapters, the Ethernet business was smacked by a big year-on-year decline in revenue from federal customers, as several deals got pushed out. That federal detail is curious, as the state of the public sector market really seems to be a company-by-company phenomenon; Cisco (Nasdaq:CSCO) is not doing well here either, but Aruba Networks (Nasdaq:ARUN) (not a competitor to Brocade) and Juniper (Nasdaq:JNPR) don't seem to be having the same sort of problems.



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Investopedia: Cisco - No Growth Today, Try Again Tomorrow

Value investors have a tough time with tech; the good, growing companies are often far too expensive, and the value-priced companies struggle to grow their businesses. Cisco (Nasdaq:CSCO) is a good case in point - the company looks cheap by many metrics, but most tech investors have washed their hands of this name until the company proves that it can shore up its switching and routing businesses, and find new growth opportunities.


A Mediocre Fiscal Third Quarter
Arguably the best that can be said about Cisco's fiscal third quarter is that it was not any worse than most people expected. Revenue rose almost 5% from the year-ago level to $10.87 billion, basically matching the averaged analyst guess. Within the top line figure, product revenue rose almost 3%, with switching down almost 10% year-on-year, routing rising more than 7%, and new product revenue growing about 15%. On a sequential basis, a different pattern emerges - switching was up a bit less than 5%, routing was up better than 11%, and new products were up a bit below 2%.

Profitability continues to be an issue. GAAP gross margin fell 260 basis points, though product gross margin rose almost four full points. Operating income fell 7% and operating margin contracted by 250 basis points. Though the non-GAAP figures are different, directionally they were the same. Although CSCO did not disappoint on the non-GAAP per-share earnings number, guidance for the fourth quarter revenue number was quite weak and that is likely to dominate a lot of discussion of this stock. 



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Investopedia: F5 - Is This The End Of The Beginning Or The Beginning Of The End?

If premarket indications are accurate, folks who bought shares of application delivery company F5 Networks (Nasdaq:FFIV) thinking that the mid-$90s would be a floor are going to see a decent return for stepping up to buy. That said, bears seem poised to portray this as more of a "less bad than feared" quarter, as opposed to real outperformance.


What's more, with weak sequential growth becoming more of a trend now, it is fair to wonder if the hot growth phase is over for F5. Clearly there is plenty of business yet to be won and the story is by no means over, but a shift to a less frenzied pace of growth will likely mean new multiples for this stock and perhaps a different shareholder base than before.

Fiscal Second Quarter Brings Growth and Relief  
F5's growth in its fiscal second quarter was either great or just okay, on the basis of which numbers an investor uses. Compared to last year, revenue jumped almost 35%. Sequential growth, though, was more on the order of 3% - suggesting that F5 has basically caught up with the IT capital equipment under-spend of the recession. Within the total revenue figure, product growth was 34% on an annual basis, while just a bit over 1% on a sequential comparison.

You can find the full piece at Investopedia:
http://stocks.investopedia.com/stock-analysis/2011/F5---Is-This-The-End-Of-The-Beginning-Or-The-Beginning-Of-The-End-FFIV-CSCO-RVBD-CTXS-BRCD0425.aspx