Brocade Posts Sharp Drop in Q2 Profit

Data storage equipment manufacturer Brocade Communication Systems reported a 94% drop in Q2 profit Thursday on writedowns related to its $973 million acquisition of McData Corp. in January. Net income came in at $843,000 ($0.00/share) versus $13.5 million ($0.05) in the year-ago quarter. Excluding items, earnings were $46.6 million ($0.11), ahead of analyst expectations of $0.09. Revenue was up 89% to $345.3 million, in line with Street forecasts of $345.2 million. Brocade is forecasting Q3 EPS before items of $0.10-0.12 on revenue of $330-340 million. Analysts had been expecting $0.11 EPS on revenue of $348.0 million. In related news, the SEC reported Thursday that Brocade has agreed to pay a $7 million penalty to settle fraud charges. The company was accused of backdating "tens of millions" of stock options, manipulating compensation expenses and falsifying documents. The charges will be settled with the company neither admitting nor denying wrongdoing. Also Thursday, Brocade announced it is "introducing a new family of server connectivity products," including Host Bus Adapters and Intelligent Server Adapters, that are "designed to simplify the management and sharing of business-critical information." Shares were off 1.53% to $9.05 in AH trading.

Sources: Brocade Communications Systems F2Q07 Earnings Call Transcript, Press release, Reuters, Forbes, MarketWatch (I, II)
Commentary: Brocade Communications Systems: There's Still Time To Get In • Did Brocade Buy a Lemon in McData? • Nine Takeaways From Goldman Tech Conference
Stocks/ETFs to watch: Brocade Communications Systems, Inc. (BRCD). Competitors: Cisco Systems, Inc. (CSCO), Emulex Corp. (ELX), QLogic Corp. (QLGC). ETFs: PowerShares Dynamic Networking (PXQ), PowerShares Dynamic Aggressive Growth (PGZ), PowerShares Dynamic MagniQuant (PIQ)

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