I attended Brocade's (NASDAQ:BRCD) shareholder meeting on April 12, 2010. The company offered shareholders coffee, tea, water, and some of the best chocolate chip cookies I've ever tasted.
At the front of the room were Tyler Wall, Dave House, Mike Klayko, and Richard Deranleau. This year, more Board members appeared in person, so the meeting seemed more fully attended. CEO Klayko delivered an oral presentation accompanied by a slideshow. Below are the main points from his presentation:
- Network traffic continues to increase.
- The amount of digital data is already massive--if printed in hard copy, it would form a line from Earth to Pluto and back twenty times.
- There are over 8,000 laws on data regulation, which is an excellent situation for storage and storage area networking companies. For example, by law, financial companies need to maintain several copies of all emails sent.
- People are afraid of the word, "delete," and will err on the side of keeping everything.
- By 2015, consumers are expected to own 15+ billion networking devices.
- Qzone is the Facebook of China and reaches more users than Facebook. [More consumers will be storing, publishing, and accessing information online not just in the United States, but worldwide.]
- Cloud computing appears to be a sustainable trend. Salesforce.com (NYSE:CRM) is a good fit for Brocade, and CRM also uses Brocade technology.
- 60 to 70% of business costs typically revolve around employees, which is why corporations laid off so many employees last year; however, the workload continues to grow, and at some point, companies must re-hire employees to keep up with demand.
- Brocade offers "unmatched simplicity, investment protection, non-stop networking, and optimization."
After the presentation, it occurred to me that Brocade had delivered an excellent presentation about the overall marketplace but not about its own company. For example, there was no information showing how Brocade would be able to effectively compete with larger players such as Cisco (NASDAQ:CSCO). The presentation didn't have information about Brocade's market share; specifics about Brocade's competitive advantages; new products; new streams of revenue; cost reductions, or anything else that would impact earnings per share.
I remarked that I thought the presentation was great, and I felt like running out and buying shares in the major players in the data business--such as IBM, H-P (NYSE:HPQ), and Cisco. In short, I didn't see why I should buy Brocade over Cisco or other technology companies that handle data. I also compared Brocade to the independent coffee-shop on the corner with Starbucks (NASDAQ:SBUX)/Cisco opening franchises left and right. How did Brocade plan on competing with Cisco?
CEO Klayko said that such comments had been made to him for the past ten years. He said that Cisco has been a "ten year conversation," and "we're still here." He then generally mentioned Brocade's "expanding product portfolio," and then briefly differentiated Brocade from Cisco by saying that Cisco believes in "vertical integration" while Brocade believes in "horizontal integration."
Another shareholder asked about Foundry Networks, a previous Brocade acquisition. He said that Brocade had a good product line, but sales and marketing needed improvements. He appeared to have information about sales in Europe, and he indicated that Cisco was hammering Brocade overseas. "Nobody knows about you," he remarked. CEO Klayko responded by saying that he agreed that Brocade needed better branding, and part of the failure was because Brocade was a Business-to-Business (BtoB) company, not a consumer company. He agreed that Brocade needed to build on sales, but also said that half of Brocade's business already comes from outside the United States.
And just like that, the meeting was over. I introduced myself to the shareholder who mentioned European sales, and he told me that Brocade dominated the storage area networking space. Brocade apparently has 75% market share compared to Cisco's 17%. Somehow, this gentleman realized how to sell Brocade more adeptly than the company's CEO.
Brocade seems to have positioned itself as the alternative to Cisco, which is a horrible sales pitch. Pepsi doesn't walk around saying, "Try us when you're tired of Coke." And if someone ever told Pepsi's CEO that she should market Pepsi as a cheaper, more simple version of Coke, she would probably open a Montgomery Burns style trapdoor while hissing, "Release the hounds."
Incredibly, Brocade's marketing strategy seems to be based on the idea that Cisco ought to have a competitor, so why shouldn't it be Brocade? Brocade's management and Board of Directors really ought to talk to Red Hat (NYSE:RHT) and other Linux-based operating systems purveyors. Ask them how that type of sales pitch worked against the Cisco of software, Microsoft (NASDAQ:MSFT).
How could a company be so clueless when it comes to basic marketing strategy, especially in an increasingly global environment? Well, I lost interest in Brocade stock after last year's annual meeting. (You can read my long-winded rationale here if you're interested.) I sold my shares, thinking that a potential buyout wasn't enough justification for holding onto Brocade shares. Now, it's quite possible that someone will eventually buy Brocade. About two years ago, Brocade removed its "poison pill" provision, basically alerting the world that it was open to a takeover. (Also, maybe Carl Icahn will show up. He did make some money on Yahoo (NASDAQ:YHOO), didn't he?)
Also, I like CEO Klayko--he's down-to-earth, diligent, not arrogant, and clearly a good guy. Yet, despite all of its good points, Brocade must realize that Wall Street will never give it any respect until it tries to position itself as a leader in the industry. No one wants to buy products from a company that positions itself as Cisco-lite and talks about its major competitor in respectful, almost hushed, tones. (Contrast Brocade's comments about Cisco with Salesforce.com's CEO's comments about its competitor, Oracle (NYSE:ORCL). Slight difference, no?)
If Brocade wants its stock price to increase, it needs to grow some cojones and improve diversity in the upper ranks. Right now, Brocade runs like a company that doesn't mind being in second place. Absent some major changes, Brocade will continue to be the nerd at the high school while Cisco struts around as the cool kid. Thus, Brocade can talk all it wants about how much better its products are from a techie standpoint, but at the end of the day, it's Cisco--with its massive cash, effective marketing, more aggressive management, and better management diversity--that will get the beautiful fans. If I had to give Brocade's CEO a pep talk, here's what I would tell him:
I don't want you to be the guy in the PG-13 movie everyone's really hoping makes it happen. I want you to be like the guy in the rated R movie, you know, the guy you're not sure whether or not you like yet. You're not sure where he's coming from, okay? You're a bad man. You're a bad man, Mikey. You're a bad man. You're a bad man.
Mr. Klayko: I'm really hoping you can make Brocade into the bad man on the block. You're so money, but you don't even know it.
Disclosure: I bought more BRCD shares after the meeting, but only because I expect IBM to buy out Brocade at some point.