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Brocade Shares Jump on Revised Earnings Outlook

Reuters
Wednesday, 8 Aug 2007 | 12:14 PM ET

Data storage equipment maker Brocade Communications Systems trimmed its revenue outlook but raised the lower bracket of its operating earnings forecast Wednesday, sending its share soaring 12 percent.

Brocade's comments also come after its rival Network Appliance last week said its revenue fell more than its previous pessimistic forecast amid slower spending by large customers in the United States and Europe. Its stock fell some 20 percent after the sales warning.

"Given the negative sentiment on Brocade, and the overall storage space ... over the past several weeks, we believe Brocade's announcement that July '07 revenue would fall modestly below the company's prior guidance range while gross and operating margin remained intact, could actually support modest upside to the shares in the near term," AG Edwards analyst Aaron Rakers wrote in a Wednesday note to clients.

For the third quarter, Brocade, which makes switches and software that connect server computers and data storage gear, said it now sees a profit before items of 11 cents to 12 cents per share, compared with its earlier forecast of 10 cents to 12 cents.

Analysts currently expect Brocade to post a profit of 11 cents per share, excluding items, on revenue of $337.0 million, according to Reuters Estimates. Brocade cut its revenue forecast to $325 million to $327 million, compared with an earlier view of $330 million to $340 million.

Brocade said it expects third-quarter net earnings of 2 cents to 3 cents per share. million. The company had earlier forecast net earnings of 3 to 5 cents a share.

It said it plans to report full financial results for the July quarter on Aug. 23, after the close of trading.

Brocade Chief Executive Michael Klayko said in a statement that he believes the company maintained its competitive position across its product lines and is optimistic as the San Jose, California-based company enters a seasonally stronger quarter than the one it just completed.

Rakers wrote that Brocade has been targeting an operating profit margin before items of 15 to 20 percent; and according to his estimates, Brocade had an operating profit margin before items of about 17 percent in the quarter ended in July.

Brocade's former chief executive, Gregory Reyes, was convicted on Tuesday on all 10 counts in the government's first criminal trial involving stock options backdating, including conspiracy to commit securities fraud; mail fraud; falsifying books, records and accounts; and making false statements.

The 44-year-old could face decades in jail and millions of dollars in fines. Legal experts said that the conviction could embolden prosecutors and regulators in their pursuit of similar cases. More than 170 U.S. companies have been touched by the scandal.

In May, Brocade agreed to pay a $7 million penalty to settle charges of fraudulent stock option backdating.

Shares of Brocade rose 77 cents, or 12.4 percent, to $6.96 in late morning trade on Nasdaq. Earlier, they rose as high as $7.02.

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