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Tickers in this Article: BRCD, CSCO, FFIV, HPQ, IBM, QLGC, EMC
These are Dickensian times for the networking space; perhaps not the best of times for players like F5 (Nasdaq: FFIV), Meru (Nasdaq: MERU) and Aruba (Nasdaq: ARUN), but very strong all the same. On the other side of the ledger, a poor spending outlook at the federal government level led Cisco (Nasdaq: CSCO) to lower its guidance and now the same seems to be true for Brocade (Nasdaq: BRCD). Making matters worse, this quarter highlights that Brocade is still not able to deliver the sort of consistency that a lot of the Street really seems to crave right now.

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An Okay End to the Year
It is often wise to be wary of companies that boast of relatively meaningless accomplishments and the title of this quarter's earnings press release included mention of "all-time record revenue". Despite that yellow flag, revenue did grow more than 5% from the year-ago level, and better than 9% on a sequential basis.

Unfortunately for investors, Brocade is one of the many tech companies that muddies its financial reports with GAAP and non-GAAP reporting. On a non-GAAP basis, gross margins improved nicely on a sequential basis, as did operating margin - though the later was down on an annual comparison. At the bottom line, earnings were weaker whichever way an analyst wants to look - down 27% by GAAP math or 10% by non-GAAP calculations.

An Intriguing Future
Harsh as this analysis may sound so far, there are certainly reasons for optimism at Brocade. The company has formidable rivals in Cisco and QLogic (Nasdaq:QLGC), but solid technology. While it seems to be true that the company's sales efforts are not as good as its technology, that is a relatively better problem to have - a company's sales efforts can be updated and improved much more readily (and cheaply) than a surfeit of competitive technology.

Moreover, it is pretty clear that there is definite M&A interest in the tech sector these days, and storage-related concepts are among the hot areas. EMC (NYSE: EMC) recently announced a deal for Isilon (Nasdaq: ISLN), and Hewlett-Packard (NYSE: HPQ) won a tough battle for 3Par. Hewlett-Packard also happens to be a partner of Brocade (as well as IBM (NYSE: IBM)), and it is not unreasonable to think a deal could be possible.

With that in mind, then, investors may want to regard the fuss and furor over Brocade's short-term guidance as little more than noise. If Cisco is being straight with the Street, it is no great surprise that Brocade is seeing short-term troubles as well, as the federal government is a major customer (almost one-quarter of revenue). Longer term, though, there is a good reason to believe that Brocade can capture share in a growing and important market, as well as benefiting from potential market shifts toward technology like fiber-channel over ethernet (FCOE). (For related reading on guidance, take a look at Can Earnings Guidance Accurately Predict The Future?)

The Bottom Line
Rampant non-GAAP accounting and sketchy press release headlines may be annoyances, but they have little to do with inherent value. Right now, it seems as though the Street is really punishing Brocade for its inconsistencies and perhaps does not believe these SAN switches will remain relevant. Accordingly, the built-in growth expectations appear to be both low and surmountable for the company. This is a name with above-average risk, but some definite appeal to tech value hounds.

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