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Brocade Communications Systems Inc. (NASDAQ: BRCD)

Brocade Communications Systems Inc. (BRCD) develops and provides storage area network and data center networking equipment.  The Company’s products include directors, switches, routers, fabric-based software, distance/extension products, management applications, utilities, host bus adapters and storage area network (SAN) switch modules, disaster recovery, data warehousing and data security.

Founded in 1995, the Company is headquartered in San Jose, California.

Source: Reuters.com, SEC Filings.

Financial Summary

Source: Reuters.com, SEC Filings.

Analyst Consensus

The mean of 27 analysts polled by Thomson Reuters rate shares of BRCD a “Outperform.”

Analyst Recommendations and Revisions

Source: Reuters.com, SEC Filings.

Investment Highlights

Overview

BRCD develops and provides storage area network and data center networking equipment.  The Company’s products include directors, switches, routers, fabric-based software, distance/extension products, management applications, utilities, host bus adapters and storage area network (SAN) switch modules, disaster recovery, data warehousing, and data security.   Founded in 1995, the Company is headquartered in San Jose, California.

The Company’s financial results are affected by the global recession, but have grown despite the slowdown in demand for information technology, including high-performance data networking solutions.  Historically, demand for information technology has declined during recessions or declining economic growth.  The Company is especially susceptible to economic slowdowns because the purchases of its products are discretionary.

As the world’s major economies emerge from steep declines in economic growth, sales domestically may grow more slowly as the United States follows significant economies of Asia and, possibly, Europe.  The Company’s domestic revenue accounts for between 56% and 69% or total revenue.  Overseas revenue is primarily derived from Europe, the economy of which is expected to emerge from recession late and well behind Asian countries.

Recent GDP data from the United States and Europe suggest that these two leading economies have stopped declining but have grown moderately instead.  The Company’s revenue may have received a bump during the past quarter of massive public spending in an effort to revive the world economy characterized by many economists as in free fall.  Private economists anticipate further declines in real economic growth as governments wind down spending, but caveat that further fiscal spending initiatives negates forecasts of further declines in U.S. and Europe GDP.

Gross Margin

The Company reported a significant decline in gross margin for the third quarter of 2009, primarily affected by the cost of revenue, average selling price per port, and volume of ports sold.  The Company will report later this month, with the expectation among analysts of a turnaround in gross margin which may be achieved through cost cutting measures of its manufacturing operations.  The Company warned in its latest 10-Q that its ability to increase gross margin is generally not within the control of management, as overall economic conditions and increased order volumes are the largest driver of gross margin rates.

The factors affecting gross margin for the period ended August 1 include: an increase in mix of IP products revenue (the primary cause due to lower gross margin of these products), a rise in stock-based compensation, and an increase in amortization of intangible assets due to the acquisition of Foundry Company.

In the first week of November, the Company announced that it expects to report fourth-quarter results on Tuesday, November 24, prior to the market open.  The Company will host a conference call at 8:00 a.m. (EST).

Technical Analysis

Source: http://stockcharts.com/h-sc/ui?s=BRCD

BRCD trades above its 13-day moving average. This bullish sign is significant because the stock has maintained its bullish pattern.

The MACD for BRCD currently indicates a bullish signal.  The MACD is above the signal line, a 9-day moving average of the MACD.  The MACD is above the critical level of 0, which implies the past price action had been positive.  Overall, the chart is bullish.

Comparative Analysis

Source: Thomson Financial

Insider Trading Activity

Source: Yahoo Finance

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