SAN JOSE, CA — (Marketwired) — 05/16/13 — (NASDAQ: BRCD) today 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 storage area networking 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 (16 Gbps) Fibre Channel 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.”
Mr. 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.”
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Storage Area Networking (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 (16 Gbps) Fibre Channel 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.
Brocade management will host a conference call to discuss fiscal second quarter results and fiscal third quarter outlook today at 2:30 p.m. PT (5:30 p.m. ET). To access the Webcast please go to . A replay of the conference call, prepared comments and slides, as well as a written transcript, will be available at .
Other Q2 2013 product, customer and partner announcements are available at .
Brocade ()
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Q2 2013 effective GAAP tax benefit rate was (0.4)% and effective non-GAAP tax rate was 15.9%.
Q2 2013 total Storage Area Networking (SAN) port shipments were approximately 1.0 million.
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.
1) Adjusted EBITDA is as defined in the Term Debt Credit Agreement.
2) SAN and IP Networking business revenues include product, support and services revenues.
3) Q1 2013 restricted cash was used to redeem $300M of 2018 notes on February 21, 2013.
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 associated with 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) call premium cost and original issue discount and debt issuance costs of debt related to lenders that did not participate in refinancing, (viii) loss on sale of subsidiary, and (ix) specific non-cash and non-recurring tax benefits or detriments.
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 also 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.
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.
This press release contains statements that are forward-looking in nature, including statements regarding Brocade-s strategy, business prospects, organizational and business alignment, profitability, expense management, cash flow, and market conditions. 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 data center, federal government and service provider sectors, 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 “Item 1A. Risk Factors” in Brocade-s Quarterly Report on Form 10-Q for the fiscal quarter ended January 26, 2013 and in Brocade-s Annual Report on Form 10-K for the fiscal year ended October 27, 2012. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.
Brocade (NASDAQ: BRCD) networking solutions help the world-s leading organizations transition smoothly to a world where applications and information reside anywhere. ()
ADX, AnyIO, Brocade, Brocade Assurance, the B-wing symbol, DCX, Fabric OS, ICX, MLX, MyBrocade, OpenScript, VCS, VDX, and Vyatta are registered trademarks, and HyperEdge, The Effortless Network, and The On-Demand Data Center are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. Other brands, products, or service names mentioned may be trademarks of their respective owners.
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