SOURCE: Brocade

Brocade

August 16, 2012 16:05 ET

Brocade Reports Fiscal Q3 2012 Results

Revenue Growth of 10% and Improved Margins Drove Higher EPS Yr./Yr.

SAN JOSE, CA--(Marketwire - Aug 16, 2012) - Brocade® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended July 28, 2012. Brocade reported third quarter revenue of $555.3 million, representing an increase of 10% year-over-year and 2% quarter-over-quarter. The resulting GAAP diluted earnings per share of $0.09, was up from break-even EPS in Q3 2011, and non-GAAP diluted EPS of $0.14, was up 59% year-over-year.

"Fiscal Q3 was a great quarter for Brocade. With continued differentiation in our products and focused execution across our organization, we were able to overcome many issues in the current challenging macroeconomic environment. As a result, our financial performance in the quarter exceeded our expectations for revenue, operating margin and earnings per share," said Michael Klayko, CEO of Brocade.

Summary of Q3 2012 results:

  • Storage business revenue, including products and services, was $377.6 million, up 13% year-over-year and down 6% sequentially. Storage product revenue increased 17% year-over-year and decreased 6% sequentially, in a seasonally soft quarter for the company. Brocade's industry-leading 16 Gbps Fibre Channel products represented nearly 30% of director and switch revenue in the quarter.
  • Ethernet business revenue, including products and services, was $177.8 million, up 5% year-over-year and up 24% quarter-over-quarter. Revenue growth for the Ethernet business was driven by an increase in Federal sales, which were up 40% year-over-year and 108% quarter-over-quarter. Enterprise business revenue was up 2% year-over-year and up 21% quarter-over-quarter as the Brocade ICX products continue to ramp. Service provider business revenue was up slightly quarter-over-quarter and down 5% year-over-year. 
  • GAAP gross margin was 61.3% and non-GAAP gross margin was 63.7% in Q3 2012, compared to 61.0% and 61.8% in Q3 2011, respectively. The year-over-year improvement in gross margin was due to higher revenue, favorable product mix and lower fixed costs. Gross margin declined sequentially, as expected, driven by a greater mix of lower margin Ethernet revenue in Q3 2012.
  • GAAP operating margin was 12.6% and non-GAAP operating margin was 19.5% in Q3 2012, compared to 6.8% and 14.0% in Q3 2011, respectively. The year-over-year improvement in operating margin was due to higher revenue and expanded gross margin in Q3 2012. Operating margin improved quarter-over-quarter on higher revenue and lower operating expenses.
  • Operating cash flow was $113.1 million in Q3 2012. During the quarter, the Company reduced its term loan by $40.0 million. The remaining term loan balance was $30.0 million exiting the quarter.
  • GAAP EPS was $0.09 in Q3 2012, and non-GAAP EPS of $0.14 was up 59% year-over-year, which marks the fourth consecutive quarter of non-GAAP EPS year-over-year growth of nearly 20% or more.
  • Average diluted shares outstanding for Q3 2012 were lower by 40.0 million shares from Q3 2011, principally from share repurchases during the past year including 8.7 million shares ($45 million) repurchased during Q3 2012.

Brocade management will host a conference call to discuss fiscal third quarter results and fiscal fourth quarter outlook today at 2:30 p.m. PT (5:30 p.m. ET). To access the webcast please go to www.brcd.com/events.cfm. A replay of the conference call, prepared comments and slides as well as a written transcript, will be available at www.brcd.com.

Other Q3 2012 product, customer and partner announcements are available at http://newsroom.brocade.com/.

Brocade (www.brocade.com)
130 Holger Way, San Jose, CA. 95134
T. 408.333.8000 F. 408.333.8101

Financial Highlights and Additional Financial Information

                   
    Q3 2012     Q2 2012     Q3 2011  
Revenue   $ 555M     $ 543M     $ 503M  
GAAP net income   $ 43M     $ 39M     $ 2M  
Non-GAAP net income   $ 67M     $ 72M     $ 46M  
GAAP EPS -- diluted   $ 0.09     $ 0.08     $ 0.00  
Non-GAAP EPS -- diluted   $ 0.14     $ 0.15     $ 0.09  
GAAP gross margin     61.3 %     62.0 %     61.0 %
Non-GAAP gross margin     63.7 %     64.8 %     61.8 %
GAAP operating income   $ 70M     $ 52M     $ 34M  
Non-GAAP operating income   $ 108M     $ 101M     $ 70M  
GAAP operating margin     12.6 %     9.5 %     6.8 %
Non-GAAP operating margin     19.5 %     18.6 %     14.0 %
Adjusted EBITDA (1)   $ 131M     $ 123M     $ 91M  
Cash provided by operations   $ 113M     $ 140M     $ 11M  
                         
  • Q3 2012 effective GAAP tax rate was 25.7% and effective non-GAAP effective tax rate was 30.1%.
  • Q3 2012 total Storage Area Networking (SAN) port shipments were approximately 1.1 million.

Please see important note of explanation on Non-GAAP measures below, including a detailed reconciliation between GAAP and Non-GAAP information in the tables included herein.

                   
    Q3 2012     Q2 2012     Q3 2011  
As a % of total revenues                  
OEM revenues   67 %   70 %   61 %
Channel/Direct revenues   33 %   30 %   39 %
10% or greater customer revenues   55 %   58 %   43 %
Domestic revenues   64 %   65 %   61 %
International revenues   36 %   35 %   39 %
Data Storage Products Revenues   58 %   63 %   55 %
Ethernet Products Revenues   26 %   21 %   28 %
Global Services Revenue   16 %   16 %   18 %
Ethernet Business Revenues (2)   32 %   26 %   34 %
As a % of Ethernet Business Revenues:                  
Enterprise, excluding Federal   52 %   54 %   54 %
Federal   19 %   11 %   15 %
Service Provider   29 %   35 %   32 %
                   
                   
    Q3 2012   Q2 2012   Q3 2011
Cash, cash equivalents and short-term investments   $ 581M   $ 545M   $ 473M
Deferred revenues   $ 280M   $ 278M   $ 264M
Capital expenditures   $ 18M   $ 21M   $ 26M
Total debt, net of discount   $ 630M   $ 670M   $ 839M
Days sales outstanding     38 days     36 days     54 days
Employees at end of period     4,597     4,600     4,772
                   
1) Adjusted EBITDA is as defined in the Term Debt Credit Agreement.
2) Ethernet Business revenues include product and global services revenues.
   
   

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. In evaluating Brocade's performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.

Management believes that non-GAAP financial measures used in this press release allow management to gain a better understanding of Brocade's comparative operating performance both from period to period, and to its competitors' operating results. Management also believes these non-GAAP financial measures help indicate Brocade's baseline performance before gains, losses or charges that are considered by management to be outside ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations performance and the allocation of resources. Management believes these non-GAAP financial measures, when read in conjunction with Brocade's GAAP financials, provide useful information to investors by offering:

  • the ability to make more meaningful period-to-period comparisons of Brocade's ongoing operating results;
  • the ability to make more meaningful comparisons of Brocade's operating performance against industry and competitor companies;
  • the ability to better identify trends in Brocade's underlying business and to perform related trend analysis;
  • a better understanding of how management plans and measures Brocade's underlying business; and
  • an easier way to compare Brocade's most recent results of operations against investor and analyst financial models.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events or arise outside the ordinary course of Brocade's continuing operations. Management believes that it is appropriate to evaluate Brocade's operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include: (i) provision or benefit from certain pre-acquisition litigation (ii) legal fees associated with certain pre-acquisition litigation, (iii) legal fees associated with indemnification obligations and other related costs, net, (iv) acquisition and integration costs, (v) loss on sale of property, (vi) interest expense related to the adoption of new standards relating to convertible debt instruments, (vii) original issue discount and debt issuance costs of debt related to lenders that did not participate in refinancing, and (viii) loss on sale of a subsidiary.

Management also excludes the following non-cash charges in determining non-GAAP net income (i) stock-based compensation expense and (ii) amortization of purchased intangible assets. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Management believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for Brocade's newly acquired and long-held businesses.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above in order to present a more meaningful measure of non-GAAP net income.

Limitations These non-GAAP financial measures have limitations, however, because they do not include all items of income and expense that impact the Company. Management compensates for these limitations by also considering Brocade's GAAP results. The non-GAAP financial measures that Brocade uses are not prepared in accordance with, and should not be considered an alternative to measurements required by GAAP, such as operating income, net income and net income per share, and should not be considered measurements of Brocade's liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies.

Cautionary Statement
This press release contains statements that are forward-looking in nature, including statements regarding Brocade's strategy and its routes to market. These statements are based on current expectations on the date of this press release and involve a number of risks and uncertainties which may cause actual results to differ significantly from such estimates. The risks include, but are not limited to, changes in IT spending levels in one or more of our target markets including the government sector, Brocade's ability to capitalize on new Brocade sales and marketing initiatives, including expanded go-to-market activities in our Ethernet business, customer acceptance of Brocade's Ethernet fabric solutions, Brocade's ability to continue to successfully innovate new products and services on a timely basis and achieve widespread market acceptance, and the effect of increasing market competition and changes in the industry. Certain of these and other risks are set forth in more detail in our Form 10-Q for the fiscal quarter ended April 28, 2012 and in "Item 1A. Risk Factors" in Brocade's Annual Report on Form 10-K for the fiscal year ended October 29, 2011. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.

About Brocade

Brocade (NASDAQ: BRCD) networking solutions help the world's leading organizations transition smoothly to a world where applications and information reside anywhere. (www.brocade.com)

Brocade, the B-wing symbol, DCX, Fabric OS, and SAN Health are registered trademarks, and Brocade Assurance, Brocade NET Health, Brocade One, CloudPlex, MLX, VCS, VDX, and When the Mission Is Critical, the Network Is Brocade are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. Other brands, products, or service names mentioned are or may be trademarks or service marks of their respective owners.

©2012 Brocade Communications Systems, Inc. All Rights Reserved.

   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF INCOME  
(Unaudited)  
   
    Three Months Ended     Nine Months Ended  
    July 28,
2012
    July 30,
2011
    July 28,
2012
    July 30,
2011
 
    (In thousands, except per share amounts)  
Net revenues                                
  Product   $ 467,281     $ 414,298     $ 1,399,687     $ 1,328,822  
  Service     88,051       88,552       259,726       268,148  
    Total net revenues     555,332       502,850       1,659,413       1,596,970  
Cost of revenues                                
  Product     173,637       149,321       513,221       498,012  
  Service     41,217       47,002       123,863       142,939  
    Total cost of revenues     214,854       196,323       637,084       640,951  
Gross margin     340,478       306,527       1,022,329       956,019  
Operating expenses:                                
  Research and development     90,530       87,320       272,780       270,669  
  Sales and marketing     146,378       153,345       457,921       462,991  
  General and administrative     18,612       16,617       55,752       53,176  
  Legal fees associated with indemnification obligations and other related costs, net     --       --       --       124  
  Amortization of intangible assets     14,737       15,023       44,467       46,236  
    Total operating expenses     270,257       272,305       830,920       833,196  
Income from operations     70,221       34,222       191,409       122,823  
Interest expense     (12,029 )     (42,066 )     (37,804 )     (84,357 )
Interest and other income (loss), net     103       (519 )     (1,345 )     (160 )
Income (loss) before income tax     58,295       (8,363 )     152,260       38,306  
Income tax expense (benefit)     14,995       (10,300 )     11,080       (16,628 )
Net income   $ 43,300     $ 1,937     $ 141,180     $ 54,934  
Net income per share -- basic   $ 0.09     $ 0.00     $ 0.31     $ 0.12  
Net income per share -- diluted   $ 0.09     $ 0.00     $ 0.30     $ 0.11  
Shares used in per share calculation -- basic     457,147       483,744       455,727       474,020  
Shares used in per share calculation -- diluted     469,571       509,548       471,719       500,741  
                                 
                                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
    July 28,
2012
    October 29,
2011
 
    (In thousands, except par value)  
Assets                
Current assets:                
  Cash and cash equivalents   $ 580,626     $ 414,202  
  Short-term investments     808       774  
      Total cash, cash equivalents and short-term investments     581,434       414,976  
  Accounts receivable, net of allowances for doubtful accounts of $2,184 and $1,388 at July 28, 2012 and October 29, 2011, respectively     231,155       249,141  
  Inventories     74,200       74,172  
  Deferred tax assets     55,400       53,604  
  Prepaid expenses and other current assets     49,176       52,308  
      Total current assets     991,365       844,201  
Property and equipment, net     523,405       532,384  
Goodwill     1,626,754       1,630,967  
Intangible assets, net     134,715       214,697  
Non-current deferred tax assets     182,381       210,028  
Other assets     38,904       42,031  
      Total assets   $ 3,497,524     $ 3,474,308  
Liabilities and Stockholders' Equity                
Current liabilities:                
  Accounts payable   $ 116,469     $ 109,471  
  Accrued employee compensation     137,942       118,298  
  Deferred revenue     208,263       201,421  
  Current liabilities associated with facilities lease losses     868       1,456  
  Current portion of long-term debt     8,515       40,539  
  Other accrued liabilities     83,311       94,802  
      Total current liabilities     555,368       565,987  
Long-term debt, net of current portion     621,206       748,904  
Non-current liabilities associated with facilities lease losses     1,942       2,496  
Non-current deferred revenue     71,560       69,024  
Non-current income tax liability     46,366       63,593  
Other non-current liabilities     9,481       10,166  
      Total liabilities     1,305,923       1,460,170  
Commitments and contingencies                
Stockholders' equity:                
  Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding     --       --  
  Common stock, $0.001 par value, 800,000 shares authorized:                
    Issued and outstanding: 460,903 and 448,022 shares at July 28, 2012 and October 29, 2011, respectively     461       448  
Additional paid-in capital     2,028,305       1,984,830  
Accumulated other comprehensive loss     (19,204 )     (11,996 )
Retained earnings     182,039       40,856  
      Total stockholders' equity     2,191,601       2,014,138  
      Total liabilities and stockholders' equity   $ 3,497,524     $ 3,474,308  
                 
                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited)  
   
    Three Months Ended  
    July 28,
2012
    July 30,
2011
 
    (In thousands)  
Cash flows from operating activities:                
  Net income   $ 43,300     $ 1,937  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Excess tax benefits from stock-based compensation     (6 )     (796 )
    Depreciation and amortization     47,159       51,220  
    Loss on disposal of property and equipment     108       136  
    Amortization of debt issuance costs and original issue discount     1,141       2,729  
    Write-off of debt issuance costs and original issue discount on debt extinguishment     --       25,465  
    Net gains on investments     (11 )     (338 )
    Provision for doubtful accounts receivable and sales allowances     3,669       2,986  
    Non-cash compensation expense     13,069       20,969  
  Changes in assets and liabilities:                
    Accounts receivable     (16,986 )     (10,229 )
    Inventories     5,280       14,733  
    Prepaid expenses and other assets     2,375       2,838  
    Deferred tax assets     (11 )     53  
    Accounts payable     15,165       (21,621 )
    Accrued employee compensation     (3,089 )     (41,899 )
    Deferred revenue     1,720       (7,870 )
    Other accrued liabilities     363       (26,901 )
    Liabilities associated with facilities lease losses     (187 )     (2,354 )
      Net cash provided by operating activities     113,059       11,058  
Cash flows from investing activities:                
  Proceeds from maturities and sale of short-term investments     --       1,584  
  Purchases of property and equipment     (17,736 )     (26,086 )
      Net cash used in investing activities     (17,736 )     (24,502 )
Cash flows from financing activities:                
  Payment of principal related to the term loan     (40,000 )     (211,257 )
  Payment of fees related to the term loan     --       (1,090 )
  Proceeds from term loan     --       198,949  
  Payment of principal related to capital leases     (469 )     (443 )
  Common stock repurchases     (45,087 )     (10,044 )
  Proceeds from issuance of common stock     29,211       45,945  
  Excess tax benefits from stock-based compensation     6       796  
      Net cash provided (used) in financing activities     (56,339 )     22,856  
Effect of exchange rate fluctuations on cash and cash equivalents     (2,697 )     (415 )
Net increase in cash and cash equivalents     36,287       8,997  
Cash and cash equivalents, beginning of period     544,339       463,562  
Cash and cash equivalents, end of period   $ 580,626     $ 472,559  
                 
                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited)  
   
    Nine Months Ended  
    July 28,
2012
    July 30,
2011
 
    (In thousands)  
Cash flows from operating activities:                
  Net income   $ 141,180     $ 54,934  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Excess tax (benefits) detriments from stock-based compensation     (1,338 )     81  
    Depreciation and amortization     144,683       155,453  
    Loss on disposal of property and equipment     404       2,046  
    Amortization of debt issuance costs and original issue discount     3,767       11,924  
    Write-off of debt issuance costs and original issue discount on debt extinguishment     --       25,465  
    Net gains on investments     (35 )     (348 )
    Provision for doubtful accounts receivable and sales allowances     9,533       8,057  
    Non-cash compensation expense     58,746       63,405  
  Changes in assets and liabilities:                
    Accounts receivable     8,454       13,802  
    Inventories     (2,099 )     (2,931 )
    Prepaid expenses and other assets     2,675       (4,069 )
    Deferred tax assets     181       23  
    Accounts payable     8,476       (31,874 )
    Accrued employee compensation     5,554       (22,184 )
    Deferred revenue     9,377       13,299  
    Other accrued liabilities     (8,038 )     (38,877 )
    Liabilities associated with facilities lease losses     (1,142 )     (5,207 )
      Net cash provided by operating activities     380,378       242,999  
Cash flows from investing activities:                
  Purchases of short-term investments     --       (38 )
  Proceeds from maturities and sale of short-term investments     --       1,604  
  Proceeds from sale of subsidiary     35       --  
  Purchases of property and equipment     (56,005 )     (76,661 )
      Net cash used in investing activities     (55,970 )     (75,095 )
Cash flows from financing activities:                
  Payment of principal related to the term loan     (160,000 )     (309,897 )
  Payment of fees related to the term loan     --       (1,090 )
  Proceeds from term loan     --       198,949  
  Payment of principal related to capital leases     (1,389 )     (1,311 )
  Common stock repurchases     (70,153 )     (10,044 )
  Proceeds from issuance of common stock     76,472       93,333  
  Excess tax benefits (detriments) from stock-based compensation     1,338       (81 )
      Net cash used in financing activities     (153,732 )     (30,141 )
Effect of exchange rate fluctuations on cash and cash equivalents     (4,252 )     812  
Net increase in cash and cash equivalents     166,424       138,575  
Cash and cash equivalents, beginning of period     414,202       333,984  
Cash and cash equivalents, end of period   $ 580,626     $ 472,559  
                 
                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME  
(Unaudited)  
   
    Three Months Ended  
    July 28,
2012
    July 30,
2011
 
    (In thousands, except per share amounts)  
Net income on a GAAP basis   $ 43,300     $ 1,937  
Adjustments:                
  Stock-based compensation expense included in cost of revenues     3,074       4,235  
  Amortization of intangible assets expense included in cost of revenues     10,713       14,466  
  Benefit from certain pre-acquisition litigation     --       (14,334 )
  Legal fees expense (recovery) associated with certain pre-acquisition litigation     (414 )     92  
    Total gross margin adjustments     13,373       4,459  
  Stock-based compensation expense included in research and development     3,110       5,581  
  Stock-based compensation expense included in sales and marketing     4,483       8,670  
  Stock-based compensation expense included in general and administrative     2,402       2,483  
  Amortization of intangible assets expense included in operating expenses     14,737       15,023  
    Total operating expense adjustments     24,732       31,757  
      Total operating income adjustments     38,105       36,216  
  Original issue discount and debt issuance costs of debt related to lenders that did not participate in refinancing     --       25,465  
  Income tax effect of adjustments     (14,012 )     (17,657 )
Non-GAAP net income   $ 67,393     $ 45,961  
Non-GAAP net income per share -- basic   $ 0.15     $ 0.10  
Non-GAAP net income per share -- diluted   $ 0.14     $ 0.09  
Shares used in non-GAAP per share calculation -- basic     457,147       483,744  
Shares used in non-GAAP per share calculation -- diluted     469,571       509,548  
                 
                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME  
(Unaudited)  
   
    Nine Months Ended  
    July 28,
2012
    July 30,
2011
 
    (In thousands, except per share amounts)  
Net income on a GAAP basis   $ 141,180     $ 54,934  
Adjustments:                
  Stock-based compensation expense included in cost of revenues     12,045       11,262  
  Amortization of intangible assets expense included in cost of revenues     35,516       43,399  
  Benefit from certain pre-acquisition litigation     --       (14,334 )
  Legal fees expense (recovery) associated with certain pre-acquisition litigation     (465 )     385  
    Total gross margin adjustments     47,096       40,712  
  Legal fees associated with indemnification obligations and other related costs, net     --       124  
  Stock-based compensation expense included in research and development     13,741       14,975  
  Stock-based compensation expense included in sales and marketing     24,946       27,081  
  Stock-based compensation expense included in general and administrative     8,014       10,087  
  Amortization of intangible assets expense included in operating expenses     44,467       46,236  
    Total operating expense adjustments     91,168       98,503  
      Total operating income adjustments     138,264       139,215  
  Original issue discount and debt issuance costs of debt related to lenders that did not participate in refinancing     --       25,465  
  Income tax effect of adjustments     (47,015 )     (51,906 )
Non-GAAP net income   $ 232,429     $ 167,708  
Non-GAAP net income per share -- basic   $ 0.51     $ 0.35  
Non-GAAP net income per share -- diluted   $ 0.49     $ 0.33  
Shares used in non-GAAP per share calculation -- basic     455,727       474,020  
Shares used in non-GAAP per share calculation -- diluted     471,719       500,741  
                 
                 

Contact Information