Brocade: Fiscal 2Q13 Financial Results

Brocade Communication Systems, Inc. reported financial results for its second fiscal quarter ended April 27, 2013.

Brocade reported second quarter revenue of $538.8 million, down slightly year-over-year and down 8% quarter-over-quarter. The company reported GAAP diluted earnings per share (EPS) of $0.10, up from $0.08 per diluted share in Q2 2012. Non-GAAP diluted EPS was $0.17, up from $0.15 in Q2 2012.

"Our SANing revenues did not meet our original expectations for Q2 due to short-term slowing in the storage market and execution challenges at certain of our large OEM partners. I believe the longer-term market opportunity for our SAN products continues to be favorable, supported by the fact that our Gen 5 (16Gbps) FC products exceeded 50% of our shipments of directors and switches in the quarter," said Lloyd Carney, CEO of Brocade. "Also in Q2, Brocade experienced strong year-over-year growth of our IP networking product sales highlighted by the performances of our Ethernet fabric, routing, and refreshed campus LAN portfolios. We were also able to increase profitability in a challenging environment."

Carney continued: "Following a thorough inspection of the business during my first four months as CEO, I believe that Brocade is well-positioned to be a leader in the new era of networking. To do so, we need to be more focused as a company and deliver consistent, profitable growth. We intend to improve our execution by aligning our business and focusing our team on fewer, but larger opportunities, such as data center networking, where we can leverage our expertise and reputation for innovation and quality. Our strategy is to deliver solutions that allow customers to increase returns from their information technology investments in traditional data center architectures as well as highly virtualized, cloud-enabled networks where enterprises and service providers are looking for improved performance at a lower cost of ownership. With a commitment to increasing profitability, managing expenses, and improving cash flow, I believe we can increase shareholder value."

Summary of Q2 2013 results:

• SANing (SAN) business revenue, including products and services, was $374.4 million, down 6% year-over-year and 10% sequentially due to soft demand in the overall storage market that impacted the company’s revenue from some of its OEM partners. SAN product revenue decreased 7% year-over-year and 12% sequentially. Although revenue was lower year-over-year for directors, switches, and embedded products, Brocade’s industry-leading Gen 5 (16Gbps) FC products represented approximately 52% of director and switch revenue in the quarter, higher than the 23% reported in Q2 2012 and 42% in Q1 2013.
• IP Networking business revenue, including products and services, was $164.4 million, up 15% year-over-year and down 4% quarter-over-quarter. The year-over-year growth was driven by solid growth in Ethernet switch revenue, up 13% year-over-year, and routing revenue, up 34% year-over-year, which offset lower sales of application delivery products. The sequential decline in IP Networking revenue was principally due to lower application delivery product revenue as well as lower Ethernet switch sales into the U.S. federal government, which is typical in the company’s second fiscal quarter.
• GAAP gross margin was 62.0% and non-GAAP gross margin was 65.1% in Q2 2013, compared with 62.0% and 64.8% in Q2 2012, respectively. The year-over-year improvement in non-GAAP gross margin was due in part to a more favorable product mix within the IP Networking segment. Gross margin declined quarter-over-quarter due to lower overall revenue and an unfavorable revenue mix to lower margin IP Networking segment products from SAN segment products.
• GAAP operating margin was 10.6% and non-GAAP operating margin was 19.0% in Q2 2013, compared with 9.5% and 18.6% in Q2 2012, respectively. The year-over-year improvement in operating margin was due to the higher gross margin noted above. Operating margin declined quarter-over-quarter due to lower revenue and gross margin. Non-GAAP operating expenses of $248.2 million were down slightly both year-over-year and quarter-over-quarter.
• Operating cash flow was $119.6 million in Q2 2013, down 15% from Q2 2012 and up 101% quarter-over-quarter in a seasonally strong quarter for cash generation. The lower operating cash flow year-over-year was due to a higher accounts receivable balance as shipments in Q2 2013 returned to more normal linearity. Operating cash flow was higher quarter-over-quarter as Q1 2013 included the payment of sales commissions and other employee variable compensation earned in the prior year as well as the semi-annual payment of the interest on our outstanding notes.
• GAAP diluted EPS was $0.10 in Q2 2013, up 22% year-over-year, and non-GAAP diluted EPS of $0.17 was up 10% year-over-year. The company recorded a tax benefit of approximately $0.02 per share resulting from the final resolution of various federal tax audits during the quarter.
• Average diluted shares outstanding for Q2 2013 were 466.9 million shares, down 2% year-over-year and up slightly quarter-over-quarter. The company repurchased 6.8 million shares for $38.6 million during Q2 2013. Subsequent to the end of Q2 2013, the company has repurchased an additional 9.3 million shares for $51.1 million and has approximately $411 million remaining in the board-authorized share repurchase program as of May 15, 2013.