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Brocade Reports Fiscal Q3 2015 Results

SAN JOSE, CA--(Marketwired - Aug 20, 2015) - Brocade ® ( NASDAQ : BRCD ) today reported financial results for its third fiscal quarter ended August 1, 2015. Brocade reported third quarter revenue of $552 million, up 1% year over year and up 1% sequentially. The Company reported GAAP diluted earnings per share (EPS) of $0.21, up from $0.20 in Q3 2014 and up from $0.18 in Q2 2015. Non-GAAP diluted EPS was $0.27 for Q3 2015, up from $0.23 in Q3 2014 and up from $0.22 in Q2 2015. Tax benefits recognized in Q3 2015 increased both GAAP and non-GAAP diluted EPS by approximately $0.02 in the quarter.

"I am pleased with our Q3 2015 financial results as we delivered improved profitability and higher revenue year over year," said Lloyd Carney, CEO of Brocade. "Our IP Networking revenue growth of 16% continues to outpace the market with strong performance from both service provider and U.S. federal customers. As the storage market evolves, our SAN business continues to demonstrate the vital role of Fibre Channel as customers connect both traditional disk storage and next-generation flash arrays. Brocade is well positioned with our customers, partners, and products heading into the final quarter of our fiscal year."

Key Financial Metrics:

                               
    Q3 2015     Q2 2015     Q3 2014     Q3 2015 vs. Q2 2015     Q3 2015 vs. Q3 2014  
Revenue   $ 552 M     $ 547 M     $ 545 M     1 %   1 %
GAAP EPS--diluted   $ 0.21     $ 0.18     $ 0.20     20 %   8 %
Non-GAAP EPS--diluted   $ 0.27     $ 0.22     $ 0.23     22 %   16 %
GAAP gross margin     67.4 %     68.1 %     66.3 %   (0.7 ) pts     1.1 pts  
Non-GAAP gross margin     68.6 %     68.8 %     67.2 %   (0.2 ) pts     1.4 pts  
GAAP operating margin     21.7 %     20.9 %     21.6 %   0.8 pts     0.1 pts  
Non-GAAP operating margin     26.9 %     24.6 %     25.7 %   2.3 pts     1.2 pts  
                                     

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

Highlights:

  • SAN product revenue was $309 million, down 5% year over year. The decline was primarily the result of softer demand for embedded and fixed-configuration Fibre Channel switches, partially offset by growth in director revenue. The sequential revenue decline of 1% was consistent with normal fiscal Q3 seasonality.

  • IP Networking product revenue was $154 million, up 16% year over year. The growth was across each product category with router sales up 35%, switch sales up 6%, and higher software networking revenue. The increased revenue year over year was primarily from service providers, up 43%, and U.S. federal, up 32%, partially offset by a decline in enterprise revenue of 3%. Sequentially, IP Networking revenue increased 6% due to higher switch revenue, which was up 26%, as well as higher software networking revenue, partially offset by lower routing revenue, which was down 23% primarily due to the timing of large service provider orders. Q3 2015 included a full quarter of revenue from the virtual application delivery software acquired in Q2 2015.

  • On June 17, 2015, Brocade hosted the fourth annual Federal Forum in Washington, D.C. The multi-vendor sponsored event has become the showcase for New IP technologies that can help transform government networks to significantly lower cost, improve service agility, and increase security. The event has continued to grow in size and influence, with approximately 1,000 attendees this year across a wide variety of federal agencies, and has become an important component in building brand preference to support Brocade's revenue growth strategy.

Board Declares Dividend:

  • The Brocade Board of Directors has declared a quarterly cash dividend of $0.045 per share of the Company's common stock. The dividend payment will be made on October 2, 2015 to stockholders of record at the close of market on September 10, 2015.

Brocade management will host a conference call to discuss the fiscal third quarter results and the 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 2015 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 2015     Q2 2015     Q3 2014  
Routes to market as a % of total net revenues:                  
  OEM revenues   62 %   63 %   67 %
  Channel/Direct revenues   38 %   37 %   33 %
  10% or greater customer revenues   43 %   49 %   48 %
Geographic split as a % of total net revenues (1) :                  
  Domestic revenues   57 %   56 %   56 %
  International revenues   43 %   44 %   44 %
Segment split as a % of total net revenues:                  
  SAN product revenues   56 %   57 %   60 %
  IP Networking product revenues   28 %   27 %   24 %
  Global Services revenues   16 %   16 %   16 %
  SAN business revenues (2)   66 %   67 %   70 %
  IP Networking business revenues (2)   34 %   33 %   30 %
IP Networking product revenues by use category (3) (4) :                  
  Data Center   52 %   62 %   55 %
  Enterprise Campus   40 %   30 %   39 %
  Carrier Network (MAN/WAN)   8 %   8 %   6 %
                     
Additional information:   Q3 2015     Q2 2015     Q3 2014  
  GAAP net income   $ 92 M     $ 77 M     $ 87 M  
  Non-GAAP net income   $ 115 M     $ 95 M     $ 102 M  
  GAAP operating income   $ 120 M     $ 114 M     $ 118 M  
  Non-GAAP operating income   $ 149 M     $ 134 M     $ 140 M  
  EBITDA   $ 142 M     $ 135 M     $ 138 M  
  Effective GAAP tax provision rate (5)     17.4 %     26.0 %     23.4 %
  Effective Non-GAAP tax provision rate (5)     20.1 %     25.7 %     21.9 %
  Cash and cash equivalents   $ 1,320 M     $ 1,367 M     $ 1,149 M  
  Deferred revenues   $ 301 M     $ 306 M     $ 299 M  
  Capital expenditures   $ 19 M     $ 18 M     $ 14 M  
  Total debt, net of discount (6)   $ 792 M     $ 788 M     $ 597 M  
  Cash, net of senior debt, convertible debt and capitalized leases   $ 444 M     $ 491 M     $ 547 M  
  Cash provided by operations   $ 55 M     $ 202 M     $ 106 M  
  Days sales outstanding     33 days       31 days       32 days  
  Employees at end of period     4,626       4,553       4,103  
  SAN port shipments     0.9 M       0.9 M       1.1 M  
  Share repurchases (7)   $ 103.1 M     $ 77.1 M     $ 112.1 M  
                           

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

(1) Revenues are attributed to geographic areas based on product delivery location. Since some OEM partners take delivery of Brocade products domestically and then ship internationally to their end users, the percentage of international revenues based on end-user location would likely be higher.

(2) SAN and IP Networking business revenues include hardware and software product, support, and services revenues.

(3) Product revenue by use category is estimated based on analysis of the information the Company collects in its sales management system. The estimated percentage of revenue by use category may fluctuate quarter-to-quarter due to seasonality and the timing of large customer orders.

(4) Each use category includes enterprise, service provider, and government revenues.

(5) The lower effective tax rates in Q3 2015 were, in part, due to various tax benefits recognized in the quarter including a domestic manufacturing deduction and releases of previously reserved tax provisions.

(6) Q3 2015 and Q2 2015 total debt, net of discount, includes the debt discount recorded for the conversion feature that is required to be separately accounted for as equity for the $575 million convertible debt, thereby reducing the carrying value of the debt. The unamortized debt discount for the conversion feature was $73 million as of August 1, 2015, and $77 million as of May 2, 2015.

(7) $1.3 million of the $77.1 million in shares repurchased in Q2 2015 were pending cash settlement as of May 2, 2015.

Non-GAAP Financial Measures

To supplement financial information presented on a GAAP basis, Brocade provides information presented on a non-GAAP basis. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, financial information presented on a GAAP basis. 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. The most directly comparable GAAP information and a reconciliation between the GAAP and non-GAAP amounts is provided in the tables at the end of this press release.

Management believes that the 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 relative to its competitors. These non-GAAP financial measures also help with the determination of Brocade's baseline performance before gains, losses or charges that are considered by management to be outside of ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations 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 relative to its competitors;

  • the ability to better identify trends in Brocade's underlying business and to perform related trend analyses; and

  • a better understanding of how management plans and measures Brocade's underlying business.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP financial measures that are the result of infrequent events or events that 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, but are not limited to: (i) acquisition and integration costs; (ii) restructuring, goodwill impairment and other related costs (benefits); and (iii) gain on sale of non-marketable equity investments.

Management also excludes the following non-cash charges in determining non-GAAP financial measures: (i) stock-based compensation expense; (ii) amortization of purchased intangible assets; and (iii) non-cash interest expense related to the convertible debt.

Management believes that the exclusion of stock-based compensation allows for more accurate comparisons of Brocade's operating results to Brocade's peer companies because of the varying use of valuation methodologies and subjective assumptions and the variety of award types. In addition, the exclusion of the expense associated with the amortization of acquisition-related intangible assets is appropriate because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives, and the exclusion of amortization expense allows comparisons of operating results that are consistent over time for Brocade's newly acquired and long-held businesses. In connection with the convertible debt, under the relevant accounting guidance, a non-cash interest expense is recognized for the convertible debt as an imputed interest expense for the conversion feature. Management believes excluding the non-cash interest expense related to the convertible debt from its non-GAAP financial measures is useful for investors because the expense does not represent a cash outflow and is not indicative of ongoing operating performance.

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 because they do not include all items of income and expense that impact the company. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies. Management compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. Management also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure, and management encourages investors to review carefully those reconciliations.

Forward-Looking Statements

This press release contains forward-looking statements including, but not limited to, statements regarding Brocade's financial results, goals, plans, strategy, business outlook and prospects. These statements are based on current expectations as of the date of this presentation and involve a number of risks, uncertainties and assumptions that may cause actual results to differ significantly. The risks, uncertainties and assumptions include, but are not limited to: the effect on Brocade of increasing market competition and changes in the industry; Brocade's ability to execute on its sales strategy and plans for future operations; the impact on Brocade of macroeconomic trends and events and changes in IT spending levels; Brocade's ability to introduce and achieve market acceptance of new products and support offerings on a timely basis; risks associated with Brocade's international operations; and integration and other risks associated with acquisitions, divestitures and strategic investments. These and other risks are set forth in more detail in Brocade's Form 10-Q for the fiscal quarter ended May 2, 2015, and in Brocade's Annual Report on Form 10-K for the fiscal year ended November 1, 2014. Brocade expressly assumes no obligation to update 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 )

ADX, Brocade, Brocade Assurance, the B-wing symbol, DCX, Fabric OS, HyperEdge, ICX, MLX, MyBrocade, OpenScript, The Effortless Network, VCS, VDX, Vplane, and Vyatta are registered trademarks, and Fabric Vision and vADX 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 others.

© 2015 Brocade Communications Systems, Inc. All Rights Reserved.

   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF INCOME  
(Unaudited)  
   
    Three Months Ended     Nine Months Ended  
    August 1,
 2015
    August 2,
 2014
    August 1,
 2015
    August 2,
 2014
 
    (In thousands, except per share amounts)  
Net revenues:                                
  Product   $ 463,200     $ 457,797     $ 1,407,681     $ 1,375,282  
  Service     88,619       87,667       266,952       271,627  
    Total net revenues     551,819       545,464       1,674,633       1,646,909  
Cost of revenues:                                
  Product     144,243       145,518       431,781       441,416  
  Service     35,672       38,233       109,056       116,818  
    Total cost of revenues     179,915       183,751       540,837       558,234  
Gross margin     371,904       361,713       1,133,796       1,088,675  
Operating expenses:                                
  Research and development     85,072       84,152       262,173       261,862  
  Sales and marketing     144,883       137,262       428,199       409,524  
  General and administrative     20,422       22,140       65,815       63,395  
  Amortization of intangible assets     889       131       1,654       10,145  
  Acquisition and integration costs     789       -       3,133       -  
  Restructuring, goodwill impairment, and other related costs (benefits)     -       131       (637 )     89,051  
  Gain on sale of network adapter business     -       -       -       (4,884 )
    Total operating expenses     252,055       243,816       760,337       829,093  
Income from operations     119,849       117,897       373,459       259,582  
Interest expense     (9,778 )     (9,176 )     (45,754 )     (27,606 )
Interest and other income, net     947       5,299       854       3,943  
Income before income tax     111,018       114,020       328,559       235,919  
Income tax expense     19,351       26,668       72,585       81,367  
Net income   $ 91,667     $ 87,352     $ 255,974     $ 154,552  
Net income per share-basic   $ 0.22     $ 0.20     $ 0.61     $ 0.35  
Net income per share-diluted   $ 0.21     $ 0.20     $ 0.59     $ 0.34  
Shares used in per share calculation-basic     417,299       432,448       422,184       436,396  
Shares used in per share calculation-diluted     427,518       441,789       433,303       448,596  
                                 
Cash dividends declared per share   $ 0.045     $ 0.035     $ 0.115     $ 0.035  
                                 
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(Unaudited)  
   
    Three Months Ended     Nine Months Ended  
    August 1,
 2015
    August 2,
 2014
    August 1,
 2015
    August 2,
 2014
 
    (In thousands)  
Net income   $ 91,667     $ 87,352     $ 255,974     $ 154,552  
Other comprehensive income and loss, net of tax:                                
  Unrealized gains (losses) on cash flow hedges:                                
    Change in unrealized gains and losses     (414 )     (155 )     (2,332 )     14  
    Net gains and losses reclassified into earnings     831       (218 )     2,544       (217 )
  Net unrealized gains (losses) on cash flow hedges     417       (373 )     212       (203 )
  Foreign currency translation adjustments     (492 )     (191 )     (5,781 )     284  
Total other comprehensive income (loss)     (75 )     (564 )     (5,569 )     81  
Total comprehensive income   $ 91,592     $ 86,788     $ 250,405     $ 154,633  
                                 
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
    August 1,
 2015
    November 1,
 2014
 
    (In thousands, except par value)  
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 1,319,671     $ 1,255,017  
  Accounts receivable, net of allowances for doubtful accounts of $1,843 and $80 as of August 1, 2015, and November 1, 2014, respectively     199,919       224,913  
  Inventories     40,496       38,718  
  Deferred tax assets     91,181       92,692  
  Prepaid expenses and other current assets     63,020       46,665  
    Total current assets     1,714,287       1,658,005  
Property and equipment, net     440,343       445,433  
Goodwill     1,617,136       1,567,723  
Intangible assets, net     79,401       26,658  
Other assets     52,898       35,856  
    Total assets   $ 3,904,065     $ 3,733,675  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable   $ 95,804     $ 93,705  
  Accrued employee compensation     103,417       169,018  
  Deferred revenue     229,557       239,993  
  Other accrued liabilities     63,345       84,592  null