UPDATE: ISI Group Downgrades Brocade Communications Systems as Original Upgrade Thesis is Largely Played Out

In a report published Monday, ISI Group analyst Brian Marshall downgraded the rating on Brocade Communications Systems BRCD from Buy to Neutral, but reiterated the $9.00 price target. In the report, ISI Group noted, “Recall we upgraded BRCD to a BUY rating (from NEUTRAL) on June 6th based on our view the Street wasn't accurately modeling the new CEO's streamlining initiatives for the company (e.g., ~$100mil annual expense reduction program, etc.). With BRCD shares up ~65% since then (vs. the S&P 500's comparable return of ~11%) and all the company milestones achieved ahead of plan (e.g., opex reduction, gross margin improvement, share count reduction, etc.), we applaud BRCD's CEO Lloyd Carney and his team for their exemplary performance with respect to vision and execution (yes…we just made this statement about BRCD!). However, with expense reductions behind us, it is our view the next catalyst for BRCD to move higher (i.e., $10.00+) will be the return of revenue growth. Given the revenue ‘pruning' program in place (e.g., $80-100mil in annualized non-core revenues being exited in FY14), we believe overall top-line growth will be absent for another ~4 quarters. In the meantime, we prefer to watch from the sidelines and wait for more attractive levels to initiate new positions.” Brocade Communications Systems closed on Friday at $8.89.