Brocade: Fiscal 3Q11 Financial Results

in US$ millions)	3Q10	3Q11	9 mo. 10	9 mo. 11
Revenues	504.3	502.9	1,543	1,597
*Growth*		-0%		3%
Net income (loss)	22.5	1.9	94.3

Brocade Communications Systems, Inc.reported financial results for its third fiscal quarter ended July 30, 2011.

Brocade reported quarterly revenue of $503 million, representing flat revenue performance year-over-year and resulting in breakeven diluted earnings per share (EPS) on a GAAP basis and $0.09 on a non-GAAP basis. The company’s reported third quarter revenue and non-GAAP EPS results are consistent with the anticipated ranges it provided on August 5, 2011.

Revenue for Brocade’s storage business, including product and services was $334.3 million in the third quarter, down 6% year-over-year. The lower revenue for storage reflects a reduction in the third quarter of approximately one-half week of Fibre Channel inventory held at the OEMs, representing approximately $24 million. In addition, the company experienced weaker-than-expected storage end-user demand, which was down approximately 1% from the previous quarter.

Revenue for Brocade’s Ethernet business was $168.5 million in the third quarter, an increase of 13% year-over-year. The year-over-year growth in Ethernet was driven primarily by Service Provider and Enterprise customers, with revenues from those customers up 28% from the prior year. The Federal Ethernet business was down 33% year-over-year, but up 32% sequentially, as Federal spending improved in the third quarter.

"Headwinds in the IT market, federal spending, and overall global economy made for a challenging quarter for the company," said Michael Klayko, CEO of Brocade. "While we are doing well in areas such as our Ethernet business including the adoption and deployment of Ethernet fabric solutions, we recognize that there are opportunities to optimize and improve our business. We have already taken, and will continue to take, important steps to generate growth, improve our profitability and make ourselves more efficient. Our goal is to ensure that our resources and priorities are well-aligned with our go-forward strategies for long-term success in the networking industry."

Q3 effective GAAP tax benefit was 123.2% and non-GAAP effective tax rate was 13.8%.

Q3 total SAN port shipments were approximately 1.0 million.

Comments

Abstracts of the earnings call transcript:

Michael Klayko, CEO:
"Brocade is again leading the storage industry and transitioning to the next-generation 16 gigabit per second technology, which bodes well for our long-term storage business. I'm excited to report that we're making excellent traction among our OEM partners in terms of qualifications and general availability. As of today, we have qualified and made 16-gig products generally available through HP, IBM, EMC, HDS and Fujitsu Technology Systems. We're also making great progress with qualifying our 16-gig products with our other key OEMs. Message is clear. We believe with that FC storage switching business is healthy and will continue to be healthy based on real data from our customers and partners."

Daniel Fairfax, CFO:
"Storage product revenue was down 6% year-over-year on lower switch revenues, while director and server revenues were up year-over-year. OEM inventory reduced to approximately 2 weeks supply exiting Q3, compared to approximately 2.5 weeks exiting Q2 '11 and Q3 '10, respectively. The reduction of approximately 0.5 week of inventory translates to approximately $24 million for the quarter and was made up of mostly switch and embedded products. From an end-user perspective, storage demand was down approximately 1% sequentially and up approximately 4% compared to Q3 '10. Storage product revenue represented 55% of total revenue in Q3, versus 60% in Q2.
"Total converged networking product revenue, including the Brocade 8000, FCoE blades for our flagship DCX storage chassis, VDX switches and CNAs, was up more than 390% year-over-year. Our VDX revenue was up over 50% sequentially in Q3 and we saw continued growth in new customers who have ordered our Ethernet fabric solutions.
"Looking at our storage business, including hardware and storage-based support and services, Q3 revenue was $334.3 million, down 5% from Q3 '10 and down 14% sequentially from a very strong Q2.
"Demand for storage products was weaker than expected and resulted in storage product revenue at $275.4 million in the quarter. The mix of our storage product shipments was consistent with the prior quarter.
"Our server product group, including embedded switches and server adapter products, HBAs and mezzanine cards, posted revenue of $44.2 million, up 12% year-over-year and down 9% from a strong Q2. Embedded switch revenue was up 12% year-over-year while our server adapter product revenue was up 10% year-over-year.
"In Q3, Brocade had three customers, EMC, HP and IBM, that each contributed revenue of at least 10% of the total company revenue. These three customers contributed 43% of revenue in Q3, down slightly from 44% in Q3 '10 when we had the same three 10% customers. You will recall that in Q2, we had four 10% customers that contributed 53% of revenue. Other OEMs represented 18% of revenues in Q3 versus 11% in Q2 when HDS was our fourth 10% customer for the quarter. Channel and direct were 39% of revenue in Q3, an increase from 36% in Q2, reflecting a mix shift from the OEMs to the channel, consistent with a stronger Ethernet contribution in the quarter.
"We expect quarterly ASP declines in our storage and Ethernet businesses to be in the low-single digits in Q4.
"Given those overall planning assumptions for Q4, we expect overall revenue to be: $520 million to $540 million."