Brocade Communications Systems (BRCD): Out of Hibernation? QLGC, ELX & IGN

Mid cap networking solutions company Brocade Communications Systems, Inc (NASDAQ: BRCD) has pretty much been a sleeper for investors since the dot.com bust, but that has changed over the past year – meaning its worth revisiting the stock along with potential performance benchmarks like QLogic Corporation (NASDAQ: QLGC), Emulex Corporation (NYSE: ELX) and iShares North American Tech-Multimedia Networking ETF (NYSEARCA: IGN). I should mention that we have recently Brocade Communications Systems to our SmallCap Network Elite Opportunity (SCN EO) portfolio because the company has successfully transitioned from being a hardware company to supporting virtual networks via software and it continues to offer best-of-breed technology.

What is Brocade Communications Systems, Inc?

Mid cap Brocade Communications Systems is an industry leader in providing reliable, high-performance network solutions that help the world's leading organizations transition smoothly to a virtualized world where applications and information reside anywhere. With a complete family of Ethernet, storage, and converged networking solutions, Brocade Communications Systems helps organizations achieve their most critical business objectives through:

Unmatched simplicity to overcome today's complexity Non-stop networking to maximize business uptime Optimized applications to increase business agility and gain a competitive advantage Investment protection to provide a smooth transition to new technologies while leveraging existing infrastructure

The company has approximately 4000 employees worldwide and serves a wide range of industries and customers in more than 160 countries.

As for potential performance benchmarks, small cap QLogic Corporation is a global leader and technology innovator in high performance server and storage networking connectivity products; Emulex Corporation provides hardware and software solutions for global networks that support enterprise, cloud, government and telecommunications; and iShares North American Tech-Multimedia Networking ETF seeks to track the investment results of an index composed of North American equities in the multimedia and networking technology sectors through 25 holdings (including around a 4% stake in Brocade Communications Systems).

What You Need to Know or Be Warned About Brocade Communications Systems, Inc

Back in the latter half of May, Brocade Communications Systems reported second quarter revenue of $537 million that were flat year-over-year and down 5% quarter-over-quarter along with a net loss of $13,684M verses net income of $46,949M due to an $83 million non-cash goodwill impairment charge associated with the strategic repositioning of the ADX product family. The CEO commented:

"This was a solid quarter for Brocade in which our Storage Area Networking (SAN) revenue grew year-over-year and our refocused IP Networking business made good progress in the quarter. We see increasing customer interest in our software networking and Ethernet fabric technology as we drive innovation and disruption in data center networking. We are also pleased to report that our Board has approved the initiation of a quarterly cash dividend of $0.035 per share to be paid in Q3 2014."

Besides the new dividend, Brocade Communications Systems also repurchased $50 million worth of common stock during the quarter which reflects a commitment of returning a minimum of 60% of adjusted free cash flow to shareholders.

In the prepared comments for the earnings call (available here), the CEO commented:

"As an example of our increasing software focus, w e ha ve made a decision to shift a greater portion of our ADX product development resources to our virtual solution. Our decision to do this is an indicator of our growing expertise and commitment to software networking , increasing interest among our customer s, and significantly higher growth rates for the software version of the Application Deliver y Controller mar k et. This decision resulted in a non- cash good will impairment charge during the quarter , which is covered in more detail in Dan's commentary that follows."

And:

"At the half-way mark of our fiscal 2014, Brocade is on track to meet the operating model we communicated at our September 2013 Analyst Day . In addition, we have already achieved more than 50% of the operating cash flow estimate for fiscal 2014… Our technology leader ship and focus on the data center is continuing to drive ne w opportunities in our business. We will build on our #2 position in data center networking and focus on the world's largest enterprise, telco and cloud service provider customers."

In other words, Brocade Communications Systems is making steady progress.

Share Performance: Brocade Communications Systems, Inc vs QLGC, ELX & IGN

On Tuesday, mid cap Brocade Communications Systems rose 0.88% to $9.15 (BRCD has a 52 week trading range of $5.31 to $10.96 a share) for a market cap of $3.98 million plus the stock is up 4.3% since the start of the year, up 62.8% over the past year and up 22.5% over the past five years. Here is a look at the performance of Brocade Communications Systems verses that of QLogic Corporation, Emulex Corporation and the iShares North American Tech-Multimedia Networking ETF:

As you can see from the first chart, Brocade Communications Systems, QLogic Corporation, Emulex Corporation and the iShares North American Tech-Multimedia Networking ETF have all bounced around a bit since the end of the recession but BRCD has put in a good performance since the middle of last year. Nevertheless, investors who did not get out of it along with QLogic Corporation and Emulex Corporation before the dot.com bust did loose a lot of money.

Finally, here is a look at the latest technical charts for all four investments:

The Bottom Line. If you were one of many investors who got burned by stocks like Brocade Communications Systems after the dot.com bust, we feel your pain as well as your weariness to avoid a repeat. Nevertheless, the new and improved Brocade Communications Systems is worth taking a closer look at. 

SmallCap Network Elite Opportunity (SCN EO) has an open position in BRCD. To find out what other open positions SCN EO currently has, and to learn why so many traders and investors are relying on this premium subscription service, click here to find out more.