Brocade Posts Drop in Q3 Net, But Edges Expectations

Brocade Communications, the world's biggest manufacturer of data storage switches, reported Thursday that Q3 earnings dropped 56% on costs related to the purchase of McData Corp. and legal expenses. Net income fell to $10.7 million ($0.03/share) from $24.5 million ($0.09) in the year-ago period. Sales rose 73% to $327.5 million, below an average Street forecast of $333.2 million. EPS excluding items came in at $0.12, just ahead of analysts' $0.11 estimate. In January, Brocade bought McDATA for $973 million. Costs related to that purchase were $4.06 million, and Brocade paid another $18 million in legal fees. R&D expenditures rose 27% to $54.1 million, while marketing costs shot up 61% to $57.2 million. The company forecast Q4 revenue at $330-345 million, below analysts' prior estimate of $352.3 million. Q4 EPS is forecast at $0.12-0.13 against analyst expectations of $0.13. "The potential for continued softness in North American enterprise accounts gives us some caution in our guidance,'' said CFO Richard Deranleau (see full earnings call transcript) . This month, Brocade's former CEO, Gregory Reyes, became the first CEO to be convicted of options backdating. He faces a possible sentence of up to 20 years in prison and plans to appeal. In May, the company paid $7 million in a settlement to the SEC over the backdating scandal.

Sources: Press release, Reuters, TheStreet.com, Dow Jones, Bloomberg
Commentary: Brocade Communications Systems: There's Still Time To Get In • Winning Stock Picks for the CNBC Portfolio Challenge
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