Brocade announces layoffs despite revenue uptick

Leading storage switch vendor Brocade Communications Systems Inc. Thursday announced an uptick in revenue for its fourth quarter and for 2002 overall, in line with lowered expectations. The company also said it has laid off 160 employees, or 12 percent of its workforce, as part of a restructuring to save money.

Brocade said net revenue rose 31 percent to US$153.1 million in its fourth quarter ending Oct. 26. That compares with a net loss of US$53.7 million for the same period a year ago. Net revenue for the full fiscal year was US$562.4 million, up US$153.1 million or 10 percent over last year.

The company's president and chief operating officer, Mike Byrd, also announced he would retire at the end of January to spend more time with his family.

Wall Street was quick to hammer Brocade in light of Byrd's departure and the announcement by Greg Reyes, Brocade chairman and CEO, that the company is lowering revenue projections for the current quarter. Brocade stock plummeted Friday, with shares at one point down 26.4 percent to US$5.36.

Salomon Smith Barney research analyst Clinton Vaughan said in a research note that, "We believe that Mr. Byrd was a key asset of the management team [and] is definitely a loss for Brocade."

"However, this is one more [executive] change on top of the head-count reduction and the overhaul of the senior VP management line over the past couple of weeks that has affected the services, sales and engineering divisions," Vaughan added.

He was referring to the resignations of Chief Technology Officer Morris Taradalsky, General Manager and Vice President of Global Services Rich Geruson and Vice President of Marketing Jeff Brooks.

Earlier this month, Brocade announced its first-ever acquisition, saying it would purchase Rhapsody Networks Inc. for about US$175 million in stock. Rhapsody makes multiprotocol switching technology such as Fibre Channel over IP and SCSI over IP.

Analysts at the time said the acquisition was a defensive measure against Cisco Systems Inc.'s purchase of San Jose-based Andiamo Systems Inc. in April 2001. That purchase led to Cisco's August announcement of a new Multilayer DataCenter Switch 9000 family of storage switches and directors.

"There's no question that at some level the Rhapsody team can help Brocade. It's expected that Reyes would want to leverage that team. And, if you're an existing Brocade executive and see the writing on the wall, maybe you leave," said Tony Prigmore, an analyst at Enterprise Storage Group Inc. in Milford, Mass.

Salomon Smith Barney Friday also downgraded Brocade due to "uncertain revenue growth, prolonged delivery of product features and risk associated with the integration of Rhapsody."

Brocade, with about 1,200 employees worldwide now, said the staff cuts and other cost savings measures will save it more than US$8 million in its first fiscal quarter 2003.

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