May 22, 2014

Brocade Reports Fiscal Q2 2014 Results

Board of Directors Initiates Cash Dividend

SAN JOSE, CA -- (Marketwired) -- 05/22/14 -- Brocade® (NASDAQ: BRCD) today reported financial results for its second fiscal quarter ended May 3, 2014. Brocade reported second quarter revenue of $537 million, flat year-over-year and down 5% quarter-over-quarter. The company reported a GAAP loss per share of $(0.03), compared with a profit of $0.10 per share in Q2 2013. The GAAP loss was due to an $83 million non-cash goodwill impairment charge associated with the strategic repositioning of the ADX product family. More information on this subject is provided in the highlights section below. Non-GAAP diluted EPS was $0.19, up from $0.17 in Q2 2013, principally due to higher gross margins and lower operating expenses.

"This was a solid quarter for Brocade in which our Storage Area Networking (SAN) revenue grew year-over-year and our refocused IP Networking business made good progress in the quarter," said Lloyd Carney, CEO of Brocade. "We see increasing customer interest in our software networking and Ethernet fabric technology as we drive innovation and disruption in data center networking. We are also pleased to report that our Board has approved the initiation of a quarterly cash dividend of $0.035 per share to be paid in Q3 2014."

Key Financial Metrics:
Q2 2014 Q1 2014 Q2 2013 Q2 2014 vs. Q1 2014 Q2 2014 vs. Q2 2013
Revenue $ 537 M $ 565 M $ 539 M (5 %) -- %
GAAP EPS--diluted $ (0.03 ) $ 0.18 $ 0.10 (118 %) (131 %)
Non-GAAP EPS--diluted $ 0.19 $ 0.24 $ 0.17 (19 %) 16 %
GAAP gross margin 66.0 % 66.0 % 62.0 % -- pts 4.0 pts
Non-GAAP gross margin 66.7 % 67.7 % 65.1 % (1.0) pts 1.6 pts
GAAP operating margin 3.8 % 21.5 % 10.6 % (17.7) pts (6.8) pts
Non-GAAP operating margin 23.2 % 27.9 % 19.0 % (4.7) pts 4.2 pts
Cash provided by operations $ 168 M $ 109 M $ 120 M 54 % 41 %
Share Repurchases $ 50 M $ 140 M $ 39 M (64 %) 30 %

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

Highlights:

  • SAN business revenue, including products and services, was $379 million, up 1% year-over-year and down 8% sequentially. The year-over-year growth was primarily due to higher sales within the switch and embedded products as well as increased support revenue. The sequential decline was slightly better than expected in a seasonally soft quarter for many OEM partners of Brocade.

  • IP Networking business revenue, including products and services, was $157 million, down 4% year-over-year and up 3% sequentially. The year-over-year decline was due to lower sales to the U.S. Federal government, the divestiture of the network adapter business, and the change in the Company's wireless business strategy. The sequential increase was principally due to higher sales of Ethernet switching products as well as increased support revenue. During Q2 2014, an estimated 57% of IP Networking product revenue came from data center customers, up 7 pts year-over-year and down 2 pts sequentially. The estimated percentage of revenue coming from data center IP Networking customers may fluctuate quarter-to-quarter due to the timing of large data center customer transactions.

  • As part of the Company's previously communicated strategy to focus on the data center and other key technology segments, the Company made a strategic shift during Q2 2014 to reduce investment in the hardware-based ADX products and to increase investment in the software-based ADX products for the Layer 4-7 market. As a result of this change in strategy, the Company expects hardware-based ADX and related support revenue to be negatively impacted by $20 million to $40 million on an annualized basis compared with fiscal 2013 results. The Company recognized a related $83 million non-cash goodwill impairment charge in Q2 2014.

  • The $83 million goodwill impairment charge is non-deductible for tax purposes resulting in the Company's effective GAAP tax provision rate being significantly higher in Q2 2014. In addition, the effective GAAP and non-GAAP tax provision rates for Q2 2014 were higher than Q2 2013 due to the R&D tax credit that expired on December 31, 2013 and has not been extended by Congress.

  • The Brocade Board of Directors has initiated a quarterly cash dividend of $0.035 per share of the Company's common stock. The first dividend payment will be made on July 2, 2014 to stockholders of record as of the close of market on June 10, 2014. Future dividend payments are subject to review and approval by the Board of Directors.

Brocade management will host a conference call to discuss the fiscal second quarter results and the fiscal third 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 Q2 2014 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
Q2 2014 Q1 2014 Q2 2013
Routes to market as a % of total net revenues:
OEM revenues 68 % 70 % 66 %
Channel/Direct revenues 32 % 30 % 34 %
10% or greater customer revenues 56 % 57 % 45 %
Geographic split as a % of total net revenues (1):
Domestic revenues 59 % 57 % 58 %
International revenues 41 % 43 % 42 %
Segment split as a % of total net revenues:
SAN product revenues 60 % 63 % 59 %
IP Networking product revenues 22 % 21 % 25 %
Global Services revenues 18 % 16 % 16 %
SAN business revenues (2) 71 % 73 % 69 %
IP Networking business revenues (2) 29 % 27 % 31 %
IP Networking Business Revenue by Use Category (3):
Data Center (4) 57 % 59 % 50 %
Enterprise Campus 37 % 34 % 36 %
Carrier Network (MAN/WAN) 6 % 7 % 14 %


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Copyright 2015 Brocade Communications Systems, Inc.

Additional information: Q2 2014 Q1 2014 Q2 2013
GAAP net income (loss) $ (14 M ) $ 81 M $ 47 M
Non-GAAP net income $ 87 M $ 109 M $ 78 M
GAAP operating income $ 20 M $ 121 M $ 57 M
Non-GAAP operating income $ 124 M $ 158 M $ 103 M
Adjusted EBITDA (5) $ 146 M $ 184 M $ 120 M
Effective GAAP tax provision (benefit) rate 225.1 % 27.1 % (0.4 %)
Effective Non-GAAP tax provision rate 24.6 % 26.1 % 15.9 %
Cash and cash equivalents $ 1,138 M $ 999 M $ 764 M
Deferred revenues $ 304 M $ 298 M $ 302 M
Capital expenditures $ 14 M $ 13 M $ 13 M
Total debt, net of discount $ 598 M $ 599 M $ 599 M
Cash, net of senior debt and capitalized leases $ 535 M $ 395 M $ 159 M
Days sales outstanding 35 days 35 days