Networking Landscape: Major Changes Ahead?

Last week, Brocade missed its earnings estimates for the first time in four years while last month, Alcatel-Lucent posted its first profit in 11 quarters. Let’s take a closer look at their recent performances as well as that of F5.

On August 21, Brocade (NASDAQ:BRCD), a data center networking player with annual revenue of $1.5 billion, reported third quarter results. Q3 revenue grew 35% to $493.3 million. Net loss was $21 million or $0.05 per share compared to loss of $63.1 million last quarter and $20.3 million last year. Excluding such items as charges associated with Brocade’s late-2008 acquisition of Foundry Networks and legal fees associated with indemnification obligations to former directors and officers, net income was $55.4 million or $0.12 per share. Analysts estimated a loss of $0.11 per share on revenue of $503.7 million. Q2 analysis is available here.

Gross margin declined to 52.8% from 58.3%, while inventory has more than doubled since October. Total operating expenses grew 42%. Brocade ended the quarter with $250 million in cash, up $13 million from the last quarter. It paid $33 million of its debt in the quarter and total gross term debt was $992 million, before a debt discount of $38 million.

Brocade continues to do well in the storage networking market and is positioned to gain share in the IP Ethernet market. It was the first to market with 4- and 6-gigabit Fibre Channel. The Fibre Channel over Ethernet (FCoE) standard was approved recently, and Brocade has entered into reseller agreements with IBM, HP, and NetApp. With HP’s strategy leaning towards storage and data centers, Brocade could be an interesting acquisition prospect.

Last week, Brocade announced its partnership with NetOne Systems, the largest independent Japanese network integrator. It expects this agreement to help it expand its Asia Pacific presence and reach the $110-billion Japanese IT market.

Brocade expects the storage and IP market to improve during 2010 and to return to normal historical growth rates by the middle of 2010. The company reiterated its 2009 revenue outlook of $1.9 to $2.0 billion. However, it revised its earnings outlook to a range of $0.48 to $0.52 per share, up from the earlier $0.40 to $0.50 range. Yesterday, it was upgraded by Argus from Hold to Buy. The stock is currently trading around $8 with market cap of about $3 billion. It hit a 52-week high of $8.77 on July 21.

On July 30, Alcatel-Lucent SA (ALU), the Franco-American telecommunications equipment company with annual revenue of €16.98 billion ($24.31 billion), reported its second quarter results. Q2 revenue was down 4.8% y-o-y and up 8.5% q-o-q to €3.9 billion ($5.58 billion). Net income was €14 million ($20.04 billion) or €0.01 per share compared to a loss of €1.1 billion ($1.58 billion) last year. The swing in its fortunes is mainly a result of the €1.6 billion sale of its 20.8% stake in Thales. Analysts expected loss of €251 million ($359 million) on revenue of €3.83 billion ($5.48 billion). Q1 analysis is available here.

With the help of the Thales sale, Alcatel also improved its cash position. From a net debt of €841 million ($1.20 billion) last quarter, it has swung to a net cash position of €28 million ($40 million). The company estimates that it has achieved about 35% of its plan to cut costs by €750 million ($1.07 billion) in 2009. CEO Ben Verwaayen, who took the reins from Patricia Russo in September, implemented a cost-saving plan in December that aims to cut €2 billion ($1.43 billion) in expenses over two years.

By segment, Carrier revenues were down 10.3% y-o-y and up 7.4% q-o-q to €2.38 billion ($3.41 billion). Applications Software revenues were €260 million ($372 million), up 3.2% y-o-y and 2% q-o-q. Enterprise revenues were €258 million $369 million), down 15.7% y-o-y and up 5.3% q-o-q. Services revenue was €873 million ($1.25 billion), up 7.9% y-o-y and 9.5% q-o-q.

Another significant development is the announcement of Alcatel-Lucent’s plans to form a 10-year co-sourcing agreement with HP. This is expected to improve the efficiency of the former’s IS/IT infrastructure and boost its top line through an innovative joint go-to-market approach. The company also announced its plans to acquire CDN technology provider Velocix. While Alcatel might not be competing with Akamai in the CDN segment, it hopes that the acquisition will help provide solutions to service provider customers such as Verizon.

According to a recent Q109 report from Infonetics, Alcatel became the #1 vendor in the IP edge router market in the Europe, Middle East, and Africa (EMEA) region, with almost 31% market share. Worldwide, it has increased its market share to 20% and is at a strong No.2 while Cisco is No.1 and Juniper is at No.3.

The company has lost about €8.5 billion ($12.2 billion) since the merger of Alcatel and Lucent in 2006, but it now seems to be on track to becoming profitable by 2010. It reiterated its guidance for 2009 and said that the market for telecommunications equipment and related services will decline by 8% to 12% at constant exchange rates this year. The stock is currently trading around $3.5 with market cap of about $8 billion. It hit a 52-week high of $3.56 on August 13 but is still far from the $15 pre-merger levels of 2006. The stock hit a 52-week low of $1.16 on March 3.

On July 22, F5 Networks, (NASDAQ:FFIV), a leader in the niche of application delivery controller (ADC) market with annual revenue of $650 million, reported its third quarter results. Q3 revenue declined 4.4% y-o-y but grew 2.6% q-o-q to $158.2 million. Net income was $22.8 million or $0.29 per share, up from $19.1 million or $0.23 per share last year. Non-GAAP net income was $31.9 million or $0.40 per share, beating analyst estimates of $0.37 on revenue of $153.6 million. Q2 analysis is available here.

During the third quarter, F5 increased deferred revenue by 6% to $170 million and generated $46 million in cash flow from operations. It bought back shares for $15.9 million and ended the quarter with $538 million in cash and investments.

According to a 2008 Gartner magic quadrant report for Application Delivery Controllers, F5 is the leader in the space followed by Citrix and Radware while Cisco is placed in the Challenger quadrant. According to the report, end-user spending on Application Acceleration Equipment was $2.5 billion in 2008 and is expected to reach $7 billion by 2013. WAN optimization controller spending will likely overtake that of ADCs in 2008. Blue Coat and Riverbed dominate the WAN optimization market while Cisco and Juniper are still struggling to find a footing.

Based on its strong performance, F5 has for the fourth quarter set a revenue goal of $160 million to $164 million, an EPS target of $0.26 to $0.28, and a non-GAAP EPS target of $0.40 to $0.42. The stock is currently trading around $34 with market cap of about $2.7 billion. It hit a 52-week high of $37.25 on July 21.