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Brocade Communications: CEO Overhang Lifted, But Uncertainties Remain

 January 17, 2013 02:56 PM
 


(By Mani) Brocade Communications Systems, Inc. (BRCD) concluded its CEO search, hiring Lloyd Carney to replace retiring CEO Michael Kalyko. Carney will also take a seat on Brocade's board.

Now, Brocade has put the CEO overhang behind it, it should allow investors to focus on execution. The news had a neutral effect on the shares and representing a mix of positives and negatives.

Positively, Carney knows software. He was previously the CEO of Micromuse, a network management software company. In addition, he was the CEO of Xsigo Systems, a privately held data center virtualization company acquired by Oracle in July, 2012.

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The experience at Xisgo Systems could complement Brocade's early stage development of a software-defined networking strategy and help Brocade achieve its goal of moving up the stack.

"We also like Mr. Carney's practical sense for creating shareholder value. He's proven that if the right offer comes along, he's not afraid to cash in his chips," Oppenheimer analyst Ittai Kidron wrote in a note to clients.

That said, Carney hasn't served as the leader of a large networking company despite executive positions at Juniper Networks (NASDAQ: JNPR) and Nortel. This could leave room for a tricky transition.

In addition, there are risks associated with hiring a CEO from the outside and executives who may have been in the running for CEO could depart. Last, Carney had been out of the public eye since his role as CEO of Micromuse ended when he sold the company to International Business Machines (NYSE: IBM) in 2005.

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"Overall, we see positives and negatives but believe filling the CEO spot allows for more focus on execution. And while recent quarters have been encouraging, we remain on the sidelines awaiting proof of a consistent turnaround," Kidron said.

Separately, Brocade priced its previously announced offering of $300 million in aggregate principal amount of 4.625 percent senior notes that will mature in 2023 at an issue price of 100 percent of the principal amount of the notes. The sale of the notes is expected to close on or about January 22, 2013.

Brocade intends to use the net proceeds of the offering, together with cash on hand, to redeem all of Brocade's outstanding 6.625 percent senior secured notes due 2018.

California-based Brocade, which provides Ethernet networking solutions, is expected to report its first-quarter earnings on Feb.21. Wall Street expects earnings of 16 cents a share on revenue of $575.84 million, according to analysts polled by Thomson Reuters.

Shares of Brocade are nearing its 50-day moving average of $5.50. They were trading between $4.18 and $6.44 for the past 52-weeks.

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