RBC Downgrades Brocade, Proactively Lowers Hurdle For 2016

In a report published Monday, RBC Capital Markets analyst Mark Sue downgraded the rating on

from Outperform to Sector Perform, while reducing the price target from $13 to $12. Brocade Communications is a dominant player in the fiber channel and its growth is dependent on whether the FC technology will persist or be replaced by FCoE. "Our view is that for data-center requirements, FC may evolve from 16Gig to 32Gig with a long runway for future upgrades," analyst Mark Sue wrote. "The displacement technology for Fibre Channel (FC) has historically weighed on Brocade's multiple, yet we believe FC is likely to remain a necessary element for data-center SANs for the next 6–10 years," Sue added. Brocade Communications is taking steps to counter the pause in the demand for FC arising from mixed enterprise storage demand and OEM specific issues. In the report, RBC Capital Markets noted that the company was investing in software assets like Vyatta, SteelAPP, Vistapointe, but would need higher R&D and S&M investments to expand and monetize the same. "Incremental Services investments, software monetization improved data-center competitive positioning, combined with a dividend yield and proof-points towards higher software mix and opex leverage towards the 25-27% LT operating model may help investors get back into the stock," the report pointed out. The non-GAAP EPS estimate for 2016 has been reduced from $1.03 to $0.93 to reflect higher opex and an uncertain FC environment.