Rod Hall Sees Downside Risk In Brocade

• Shares of Brocade Communications Systems, Inc. BRCD have declined 19.54 percent over the past six months, trading close to their 52-week low on November 20.
• JP Morgan's Rod Hall has downgraded the company to Neutral, lowering the price target from $14 to $9.
• Although the company has a product pipeline for the latter half of 2016, Hall believes that there could be downside risk due to continued weakness in IT spending.

Analyst Rod Hall mentioned that the company report robust F4Q, although its FQ1 guidance was disappointing. With Brocade Communications reaching the end of a "lucrative product cycle," the full year guidance appears optimistic.

The gross margin guidance for FQ1 Is below the estimate, implying a quarter-on-quarter decline of 0.7 percentage points, even with a higher SAN mix. "We believe this may be driven by lower high-margin Fed revenue in FQ1, as well as campus/datacenter switching mix shifts," Hall said.

Hall believes that the miss on the revenue guidance for FQ1 was driven by weakening enterprise demand in the US, along with FX headwinds overseas.

However, Brocade Communications reported its FQ4 revenue 2 percent ahead of the estimate and the midpoint of the guidance range, driven by stronger than anticipated demand towards the end of the quarter.

According to the JP Morgan report, "Brocade’s management believes that the strong USD is hurting demand in the 5-6 percent range though this is difficult to quantify due to largely USD pricing."