This syndicated post originally appeared at Zeus Kerravala's blog.

Brocade last week released its quarterly earnings and also announced that long time CEO Mike Klayko would be resigning his position at the company.  This ends a lengthy tenure for Klayko who joined Brocade in 2003, through the acquisition of Rhapsody, and then was named CEO in 2005.  

One of the questions I’ve been asked often is what kind of CEO should Brocade hire to replace the flamboyant Klayko?  I think the incoming CEO needs to be a nuts and bolts person with good operational strengths and also someone with a channel background to continue what Klayko put into motion.  Despite the flat stock price over the past several years, it’s hard to argue the company isn’t well positioned to take advantage of current trends such as cloud computing and virtualization. 

To understand why I feel that way, let’s look back at the Klayko tenure and the positives and negatives which put Brocade in the position it’s in now. 

The most notable achievement in the Klayko tenure is the acquisition and integration of Foundry Networks into Brocade.  While the FibreChannel business is a good, steady business, the growth for data center is clearly on the Ethernet networking side.  Brocade brought some much needed discipline to Foundry and the business has benefited as follow

— Structured product planning.  Foundry was the ultimate “fly by the seat of the pants” company.  If a customer yelled loud enough or threw dollars at Foundry, product direction would change on a dime.  This is one reason why the company had so many overlapping products and a somewhat haphazard product release cycle.  This worked OK for Foundry as it was growing but as it became bigger this style of product management is hard to scale. 

— Refreshed product line including:

— Release of the MLX-E which is the highest density and only cost effective 100 Gig-E solution.  The 100 Gig-E solution currently powers Internet 2 and a number of university environments.

— The complete rebuilding of the ADX (formerly Server Iron) line of application delivery controllers.  Brocade brought some needed focus to the ADC products.  Instead of trying to be all things to all people, the new ADX products are performance focused for service providers and high end enterprises.

— First to market with a shipping fabric.  Fabrics have been all the rage for the past few years and there has been a race among the network vendors to land grab for early adopter customers.  Brocade’s VDX was the first full fabric solution and the company now touts about 700+ VDX customers, of which 40-50% are being used for a production fabric.  Compare this to Juniper who announced QFabric well before Brocade but claims about 200 QFabric customers with only a handful using QFabric as a production fabric. 

— Revamped access products.  This was an area of weakness for Foundry, but over the past 24 months, Brocade has completely revamped the product line allowing it to compete on an end to end basis much more effectively.

In addition to beefing up the Ethernet business, the company has become the de facto market leader in the storage networking industry.  Prior to Klayko’s arrival, the storage networking market was a tight three-horse race between Brocade, McData and Cisco.  Brocade acquired McData which put Brocade into a dominant position in that market.  Additionally it rid the industry of the name “McData” – that alone should get Klayko some kudos.  Since then the company maintained a healthy competitive advantage over Cisco and was the first to release 8 GB FC and also 16 GB.   I would expect Brocade to maintain this lead into the foreseeable future. 

The one area that didn’t get addressed in Klayko’s tenure was building a channel that could move both product lines.  The storage infrastructure is moved through primarily an OEM channel and Foundry used a direct sales force.  The incoming CEO needs to make building a channel a priority and this will create the `one plus one equals three’ effect the company has been looking for.  The product is in good shape and now it’s time for the sales channel to execute. 

The other big question regarding Klayko’s departure is whether Brocade is now an acquisition target,  as they were rumored to be a few years ago.  My answer to this is that they’re no more or less an acquisition target than before.  In reality, every public company is for sale and if the CEO and board get an offer that is to the benefit of the shareholders, they really have to look at it.  If not, then pass on it.  Looking at the amount of investment Brocade has made in product, I would find it hard to imagine the board would sell the company on the precipice of cloud, SDN, fabric, etc., taking off.  These are natural accelerators for Brocade, assuming good execution, meaning it wouldn’t make sense to sell the company now regardless of who the CEO is.  Also, Brocade is in great financial shape and is a cash-generating machine.  The company generates over $100 million per quarter in cash so it doesn’t need to sell for an infusion of money.  Again, if someone like Dell were to significantly overpay for Brocade, then of course they would sell.  Barring that, I see Brocade remaining an independent company. 

So for Brocade, I don’t see much of a roadmap change for the company.  Data center, service provider and other demanding environments are where the company excels and where the company will focus.  The new CEO will need to build a channel that can leverage the quality products and take Brocade to the next level.

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Zeus Kerravala

Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his clients in the current business climate and long term strategic advice.
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