Summit: Brocade Still Just A 'Hold'

In their Summit Research report published Friday, WR Hambrecht analysts maintained a Hold rating on Brocade Communications Systems Inc (NASDAQ: BRCD), with a price target of $11.Brocade reported mixed F2Q15 results. While revenue was short, EPS was marginally ahead of expectations. The EPS outperformance was driven by higher gross margin from continued cost control.The company's FC product revenue came in at $314mln, down 11 percent Q/Q and down 2 percent Y/Y. The figure was at the low-end of the guidance of down 8-11 percent Y/Y, on account of by weak storage demand and "operational issues at certain OEM partners." Brocade's IP Networking product revenue was up 9 percent Q/Q and 19 percent Y/Y, well above the midpoint of the guidance of up 3-11 percent Q/Q. The strength in US Fed led to outperformance in the IP Networking revenue. "Brocade continues to execute well on what it can control and the company has made decent progress on executing on the IP front. But in our view, Brocades stock story is tied to the growth of its FC business and its ability to deliver EPS growth through leverage," the analysts mentioned."We believe the leverage story is pretty much done and the company would need to deliver revenue growth. With recent string of acquisitions, we are uncertain if the company can continue to deliver opex leverage," the analysts added.Brocade guided to 3Q15 revenue of $540-$560m and EPS of $0.21-$0.23. The EPS estimates for F2015 and F2016 have been raised from $0.93 to $0.96 and from $0.95 to $0.98, respectively.