Brocade Reports Fiscal Q3 2012 Results
Revenue Growth of 10% and Improved Margins Drove Higher EPS Yr./Yr.
"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
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
Other Q3 2012 product, customer and partner announcements are available at http://newsroom.brocade.com/.
Brocade (www.brocade.com)
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
About Brocade
Brocade, the B-wing symbol, DCX, Fabric OS, and
©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, July 30, July 28, July 30,
2012 2011 2012 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, October 29,
2012 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, July 30,
2012 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, July 30,
2012 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, July 30,
2012 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, July 30,
2012 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
=========== ===========
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BROCADE CONTACTS Public RelationsJohn Noh Tel: 408-333-5108 jnoh@brocade.com Investor RelationsRobert Eggers Tel: 408-333-8797 reggers@brocade.com
Source: Brocade
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