Brocade Communications Reminds You Austerity Hurts Like Crazy
Brocade Communications Systems, Inc. (NASDAQ: BRCD) told you this morning what everyone already knows.
Austerity hurts and is extremely painful.
The company released preliminary third quarter earnings this morning, saying the company expects to earn 8 to 9 cents in the coming quarter, down from its previous view of 10 to 11 cents. It also cut its revenue forecast, going from $540-$560 million in revenues, to $500-$505 million. Wall Street had been expecting earnings of 11 cents per share on $550.9 million in revenues.
As such, the stock is down $1.37 as of the time of this writing to $3.52, a loss of just over 28%.
"In Q3, we grew revenue in our Ethernet business; however I am disappointed that we were not able to drive growth across all of our segments and geographies to meet our original expectations for the quarter," said Michael Klayko, CEO of Brocade. "Despite strong economic headwinds that developed in the quarter, we continue to see progress and acceptance of our Ethernet product portfolio. We remain focused on our strategy outlined in our FY11 Playbook discussed at our 2010 Analyst Day. We will provide more details on our third quarter results as well as our plans to grow revenue and how we plan to manage expenses going forward at our earnings call on August 18."
This part of the press release is arguable the most telling about how bad austerity is going to start hurting companies, if it has not already:
"In addition, this press release contains statements that are forward-looking in nature, including statements regarding Brocade's financial results for the third quarter of fiscal year 2011, changes in inventory levels, end-user demand, economic conditions, Brocade's Ethernet solutions, and business in the Federal sector. These statements are based on current expectations on the date of this press release and involve a number of risks and uncertainties which may cause actual results to differ significantly from such estimates. The risks include, but are not limited to, changes in IT spending levels in one or more of our target markets including the government and service provider sectors, and geographies, Brocade's ability to continue to successfully innovate new products and services on a timely basis and achieve widespread market acceptance, and the effect of increasing market competition and changes in the industry."
The company reports earnings on August 18, but not much is expected to change from today until then, given the quarter ended in July.
At 6 times forward earnings, sure shares are cheap at these levels, but if the company is losing market share, and experiencing negative revenue growth, that does not mean shares can not get cheaper. The company has more debt than cash on its book, and competes with companies like Cisco (NASDAQ: CSCO), Juniper (NASDAQ: JNPR), Riverbed (NASDAQ: RVBD) and others in the networking space.
There may be a time when ultimately one of these larger players decides that there is more value in the business then the market is reflecting, and take it out. That does not look to be anytime soon, as the sector itself is going through a strain.
Just a reminder here: austerity hurts.
ACTION ITEMS:
Bullish:
This is pretty much only bullish for austerity. There is not much that can thrive in times of slowdowns and spending cuts, except maybe soup kitchens and spending time doing home exercises.
Bearish:
This is bearish for everyone and every company that depends on federal spending as a significant portion of its revenues.
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