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Brocade: Fiscal 2Q12 Financial Results

Storage business revenues up 3% Y/Y, down 2% sequentially

(in US$ million) 2Q11 2Q12  6 mo. 11   6 mo. 12
 Revenues 548 543 1,094  1,104
 Growth   -1%    1%
 Net income (loss)  26.1 39.3 53.0  97.9

Brocade Communications Systems, Inc. reported financial results for its second fiscal quarter ended April 28, 2012.

It reported second quarter revenue of $543.4 million, representing a decrease of 1% year-over-year and 3% quarter-over-quarter and resulting in diluted earnings per share of $0.08 on a GAAP basis and diluted earnings per share of $0.15 on a non-GAAP basis, up 58% and 24% year-over-year, respectively.

"We ended the quarter with revenue of $543 million, which came in at the high-end of our guidance, and exceeded our expectations for non-GAAP EPS, which was up 24% year-over-year. Our focus remains on driving profitability in the near-term as we invest in the business and position Brocade for long-term success. We will continue to drive innovation, leverage our investments and maintain spending discipline through the remainder of fiscal year 2012. We are committed to growing revenues with the goal of increasing profits faster than revenue this year and to driving shareholder value by continuing to execute our strategy," said Michael Klayko, CEO of Brocade.

Summary of Q2 2012 results:

  • Storage business revenue, including products and services, was $400.1 million, up 3% year-over-year and down 2% sequentially. Storage product revenue increased 4% year-over-year and decreased 3% sequentially, slightly better than expected in a seasonally soft quarter for our OEM partners. Brocade’s 16 Gbps FC portfolio, which includes the Brocade 6505 entry-level switch launched during Q2 2012, represented 23% of total director and switch revenue in the quarter. Excluding $5.1 million of revenue from the divested SBS business unit in Q2 2011, storage business revenue was up 4% year-over-year.
  • Ethernet business revenue, including products and services, was $143.4 million, down 10% year-over-year and down 7% quarter-over-quarter. Revenue performance for the Ethernet business was impacted by continued softness in Federal sales which was down 12% year-over-year and 20% quarter-over-quarter. Enterprise business revenue was down 22% year-over-year due in part to the transition to a two-tier distribution channel model that impacted sales and average selling prices. While Enterprise revenue did improve from the prior quarter, the company remains focused on driving higher revenue and profitability in this segment going forward. Service provider business revenue was up 18% year-over-year driven by growth in the number of customers, but was down quarter-over-quarter as these customers made fewer large purchases.
  • GAAP gross margin was 62.0% and non-GAAP gross margin was 64.8% in Q2 2012, compared to 59.9% and 63.4% in Q2 2011, respectively. The improvement in gross margin was driven by a favorable mix to higher margin Storage products and margin expansion in Global Services primarily from the sale of the SBS business unit that was completed in September 2011.
  • GAAP operating margin was 9.5% and non-GAAP operating margin was 18.6% in Q2 2012, compared to 8.4% and 18.0% in Q2 2011, respectively. The improvement in operating margin was driven by the higher gross margin partially offset by higher operating expenses in Q2 2012.
  • Operating cash flow was $140.3 million, in Q2 2012. During the quarter, the company reduced its term loan by $50.0 million resulting in the term loan balance of $70.0 million exiting the quarter. Interest expense was $12.7 million in Q2 2012, down 39% year-over-year, due to a reduction of the term loan principal by $182.3 million over the last 12 months and the refinancing of the loan in June 2011 which lowered the interest rate.
  • Non-GAAP EPS of $0.15 in Q2 2012 was up 24% year-over-year, which marks the third consecutive quarter of non-GAAP EPS year-over-year growth of nearly 20% or more. Non-GAAP EPS included a tax benefit of approximately $8.3 million from the closure of various tax audits in the United States during Q2 2012.
  • Average diluted shares outstanding exiting Q2 2012 were down 24.7 million shares from Q2 2011, principally from share repurchases during the past year including 4.4 million shares ($25 million) repurchased during Q2 2012. Brocade has already repurchased more than $30 million of shares during Q3 2012.

The Board of Directors recently approved an increase of $500 million to the authorized stock repurchase program which brings the remaining balance to approximately $624 million as of yesterday. With this action from the Board, Brocade plans to be more active with the company’s share repurchases.

"The company is always looking for ways to further enhance shareholder value. With the company’s improving debt position and strong cash flow, I am pleased with the Board’s decision to increase the authorization for Brocade’s stock repurchase program. The company remains diligent in its efforts to refine and enhance its strategies to appropriately evolve the business while driving growth and consistent profitability," said Klayko.

Additional Financial Information

  • Q2 2012 effective GAAP tax benefit was 1.8% and effective non-GAAP effective tax rate was 17.8%.
  • Q2 2012 total SAN port shipments were approximately 1.1 million.

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2) Ethernet Business revenues include product and global services revenues.

Comments

Abstracts of the earnings call transcript:

Mike Klayko, CEO:
"One of the highlights in Q2 was the strength of our storage business, which generated $400 million in total revenue, representing a 3% increase year-over-year in what is typically a seasonally soft quarter. A key driver was our 16-gig SAN portfolio, which accounted for 23% of director and switch storage product sales in Q2 and helped us gain market share.
" (…) we executed a number of strategic initiatives in our channel business to better align our sales and marketing efforts. The key change that we made was the appointment of Regan McGrath as VP of Global Channel Sales and Marketing. Regan brings more than 25 years of IT industry experience, most recently as that VP of America's Sales at Brocade, where he led the largest regional channel sales team for the company.
"Other key partner wins in Q2 include: NetApp becoming the first OEM in VDX switches as part of its unified storage architecture; the launch of the new Ethernet fabric embedded switch, the VDX 6746 or Hitachi blade servers, first of its kind; and then Fujitsu making the VDX switches available as part of its cloud and analytics solutions bundle.
"The key driver for this was the strength in our 16-gig SAN sales, which accounted for 23% of director and switch revenue in the quarter.
"As of Q2, all our major OEMs have made our expanded 16-gig switch portfolio generally available to their customers.
"In our annual customer survey published last fall, approximately 80% of our Brocade customers said they expect to maintain or increase FC spending over the next 3 years."


Dan Fairfax, CFO:
"In Q3, we are expecting total revenue between $525 million and $545 million, or growth of 4% to 8% year-over-year, and non-GAAP EPS of $0.11 to $0.13, or growth of 22% to 44% year-over-year.
"Data center server virtualization continues to be a catalyst for the growth of our storage products. And we expect the market for the full year 2012 to grow approximately 5%. Based on the rate of adoption of our 16-gig products and share gains, we now expect our growth rate for fiscal year '12 to be higher than the industry growth rate."

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