Why did Brocade Communications Systems, Inc. sink 11.5% $BRCD

Johnny HopkinsStocksLeave a Comment

On Monday, Brocade Communications Systems, Inc (NASDAQ: BRCD) reported preliminary financial results for its second fiscal quarter ended April 30, 2016.

Brocade is a supplier of networking hardware, software and services, including storage area networking (SAN) solutions, and Internet protocol (IP) networking solutions for businesses and organizations of various types and sizes.

The company now expects second fiscal quarter total revenue to be within the range of $518 million to $528 million, compared with the range of $542 million to $562 million previously provided in the planning assumptions and outlook for the quarter on February 17, 2016.

As a result, non-GAAP diluted earnings per share for the second fiscal quarter is expected to be within the range of $0.21 to $0.23, compared with the range of $0.22 to $0.24 in the planning assumptions and outlook for the quarter previously provided on February 17, 2016.

Brodcade CEO, Lloyd Carney said, “Consistent with the general softness in IT spending reported by many of our partners and peers, we expect revenue for the quarter to fall short of our original expectations.

This is largely the result of weaker than anticipated SAN revenue. In addition, IP Networking headwinds, noted on our fiscal Q1 2016 earnings call in February, continue to negatively impact our sales, particularly in our service provider and U.S. federal business.

We are addressing these near-term challenges by continuing our focus on sales execution in this weaker demand environment, maintaining prudent expense controls and managing our investments in line with our stated priorities.

We continue to execute on our strategy to build a pure-play networking company for the digital transformation era that expands our market reach, diversifies our revenue mix, and creates exciting, incremental opportunities for growth.”

Its been a tough 12 months for Brocade with its share price dropping almost 27% in that time.

(Source: Google Finance)

Brocade has been the news lately with its proposed acquisition of Ruckus Wireless. to Build a Networking Company for the Digital Transformation Era.

Brocade will acquire Ruckus Wireless, Inc. (NYSE: RKUS) in a cash and stock transaction. The acquisition will complement Brocade’s enterprise networking portfolio, adding Ruckus’ higher-growth, wireless products to Brocade’s market-leading networking solutions. It will also significantly strengthen Brocade’s strategic presence in the broader service provider space, with Ruckus’ market-leading Wi-Fi position. Brocade expects the transaction to be accretive to its non-GAAP earnings by its first quarter of fiscal 2017. The Ruckus organization will be led by current Ruckus CEO, Selina Lo, and report directly to Brocade CEO, Lloyd Carney.

Under the terms of the agreement, Ruckus stockholders will receive $6.45 in cash and 0.75 shares of Brocade common stock for each share of Ruckus common stock. Based on the closing price of Brocade’s stock on April 1, 2016, the transaction values Ruckus at a price of $14.43 per common share, or approximately $1.5 billion, and may fluctuate until close. Net of estimated cash acquired, the transaction value is approximately $1.2 billion. The cash portion of the purchase price will be funded through a combination of cash on hand and new bank term loan financing.

Brocade is currently at #12 in the Large Cap 1000 Screener. The company has an Enterprise Value of $2.8 billion and operating earnings of $477 million. That gives the company an Acquirer’s Multiple of 5.94. It’s currently trading on a price-to-earnings ratio of 11.72, and a Free Cash Flow to EV Yield of 14%. So, still representing great value.

The fact that the share price dropped by 11.5% on Monday presents contrarian investors, like me, with a great opportunity to add Brocade to their portfolio.

For more articles like this, check out our recent articles here.

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