UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): May 21, 2015
Brocade Communications Systems, Inc.
(Exact name of registrant as specified in its charter)
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| | | | |
Delaware | | 000-25601 | | 77-0409517 |
(State or other jurisdiction of incorporation) | | (Commission File Number) | | (I.R.S. Employer Identification Number) |
130 Holger Way
San Jose, CA 95134-1376
(Address, including zip code, of principal executive offices)
(408) 333-8000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02 Results of Operations and Financial Condition.
On May 21, 2015, Brocade Communications Systems, Inc. (the “Company”) issued a press release regarding financial results for the second quarter ended May 2, 2015. The Company also posted on its website (www.brcd.com) slides with accompanying prepared remarks regarding such financial results and forward-looking statements, including statements relating to the Company’s estimated financial results of the third and fourth quarters of fiscal year 2015. Copies of the press release and slides with accompanying prepared remarks by the Company are attached as Exhibits 99.1 and 99.2, respectively, and the information in Exhibits 99.1 and 99.2 is incorporated herein by reference.
The information in Item 2.02 and Item 9.01 in this Current Report on Form 8-K and the exhibits attached hereto shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
Exhibit
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Number | Description of Document |
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99.1 | Press release, dated May 21, 2015, regarding financial results of Brocade Communications Systems, Inc. for the second quarter ended May 2, 2015. |
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99.2 | Slides with accompanying prepared remarks of Brocade Communications Systems, Inc., dated May 21, 2015, regarding financial results of the second quarter ended May 2, 2015 and forward-looking statements, including statements relating to the Company’s estimated financial results of the third quarter of fiscal year 2015. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| | | | | BROCADE COMMUNICATIONS SYSTEMS, INC. |
| | | | | | | |
Date: | May 21, 2015 | | | | By: | | /s/ Daniel W. Fairfax |
| | | | | | | Daniel W. Fairfax |
| | | | | | | Senior Vice President and Chief Financial Officer |
Exhibit 99.1
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| | |
BROCADE CONTACTS | | |
Media Relations Kristy Campbell Tel: 408-333-4221 kcampbel@brocade.com | Investor Relations Michael Iburg Tel: 408-333-0233 miburg@brocade.com | |
Brocade Reports Fiscal Q2 2015 Results
Board Approves Third Quarter Dividend Increase
SAN JOSE, Calif., May 21, 2015 — Brocade® (NASDAQ: BRCD) today reported financial results for its second fiscal quarter ended May 2, 2015. Brocade reported second quarter revenue of $547 million, up 2% year over year and down 5% sequentially. The Company reported GAAP diluted Earnings Per Share (EPS) of $0.18, up from a loss of $0.03 per share in Q2 2014 and down from $0.20 in Q1 2015. The Q2 2014 GAAP loss was due to a non-cash goodwill impairment charge associated with the strategic repositioning of the Brocade ADX® product family. Non-GAAP diluted EPS was $0.22 for Q2 2015, up from $0.19 in Q2 2014 and down from $0.27 in Q1 2015.
“We significantly grew our IP Networking revenue year over year and closed the acquisitions of Connectem and the SteelApp assets, expanding our strong portfolio of virtual IP networking services,” said Lloyd Carney, CEO of Brocade. “These next-gen software-based technologies, together with our hardware products, allow us to build more strategic solutions for our customers and underscore our vision for the New IP.”
Key Financial Metrics:
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| | | | | | | | | | | | | | | | | |
| Q2 2015 | | Q1 2015 | | Q2 2014 | | Q2 2015 vs. Q1 2015 | | Q2 2015 vs. Q2 2014 |
Revenue | $ | 547 | M | | $ | 576 | M | | $ | 537 | M | | (5 | %) | | 2 | % |
GAAP EPS—diluted | $ | 0.18 |
| | $ | 0.20 |
| | $ | (0.03 | ) | | (11 | %) | | NMF* |
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Non-GAAP EPS—diluted | $ | 0.22 |
| | $ | 0.27 |
| | $ | 0.19 |
| | (19 | %) | | 14 | % |
GAAP gross margin | 68.1 | % | | 67.6 | % | | 66.0 | % | | 0.5 pts |
| | 2.1 pts |
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Non-GAAP gross margin | 68.8 | % | | 68.4 | % | | 66.7 | % | | 0.4 pts |
| | 2.1 pts |
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GAAP operating margin | 20.9 | % | | 24.2 | % | | 3.8 | % | | (3.3) pts |
| | 17.1 pts |
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Non-GAAP operating margin | 24.6 | % | | 28.5 | % | | 23.2 | % | | (3.9) pts |
| | 1.4 pts |
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*NMF = not meaningful
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:
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• | SAN product revenue was $314 million, down 2% year over year. The decline was primarily the result of softer storage demand and operational issues at certain OEM partners. The sequential revenue decline of 11% was at the low end of the Company’s outlook for the quarter and consistent with the last two years, where the fiscal second quarters have seen sequential revenue declines of 10% to 12%. |
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• | IP Networking product revenue was $145 million, up 19% year over year. The growth was primarily due to higher sales of routers (up 40%) and Ethernet switches (up 8%), as well as higher software networking revenue, which now includes SteelApp revenue from the date of closing of the acquisition in early March. The increased sales year over year were primarily due to service provider and U.S. federal customers. Sequentially, IP Networking revenue increased 9% due to higher routing and switching sales, as well as higher software networking revenue. |
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• | Global Services revenue was $88 million, down 7% year over year primarily due to the additional week of support revenue recognized in Q2 2014, which was a 14-week fiscal quarter for Brocade. Global Services revenue was down 2% sequentially due to the timing of certain large support renewal orders. |
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• | During the quarter, Brocade completed the previously announced acquisitions of Connectem Inc., a pioneer in the LTE virtual evolved packet core market, and the SteelApp assets from Riverbed Technology, Inc. |
Board Declares Dividend:
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• | Consistent with the Company’s philosophy of returning cash to shareholders, the Brocade Board of Directors has declared a quarterly cash dividend of $0.045 per share of the Company’s common stock, a 29% increase from the prior dividend of $0.035 per share. The dividend payment will be made on July 2, 2015, to stockholders of record at the close of market on June 10, 2015. |
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 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
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| | | | | | | | |
| Q2 2015 | | Q1 2015 | | Q2 2014 |
Routes to market as a % of total net revenues: | | | | | |
OEM revenues | 63 | % | | 67 | % | | 68 | % |
Channel/Direct revenues | 37 | % | | 33 | % | | 32 | % |
10% or greater customer revenues | 49 | % | | 44 | % | | 56 | % |
Geographic split as a % of total net revenues (1): | | | | | |
Domestic revenues | 56 | % | | 58 | % | | 59 | % |
International revenues | 44 | % | | 42 | % | | 41 | % |
Segment split as a % of total net revenues: | | | | | |
SAN product revenues | 57 | % | | 61 | % | | 60 | % |
IP Networking product revenues | 27 | % | | 23 | % | | 22 | % |
Global Services revenues | 16 | % | | 16 | % | | 18 | % |
SAN business revenues (2) | 67 | % | | 71 | % | | 71 | % |
IP Networking business revenues (2) | 33 | % | | 29 | % | | 29 | % |
IP Networking product revenues by use category (3): | | | | | |
Data Center (4) | 62 | % | | 53 | % | | 57 | % |
Enterprise Campus | 30 | % | | 34 | % | | 37 | % |
Carrier Network (MAN/WAN) | 8 | % | | 13 | % | | 6 | % |
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Additional information: | Q2 2015 | | Q1 2015 | | Q2 2014 |
GAAP net income (loss) | $ | 77 | M | | $ | 87 | M | | $ | (14 | )M |
Non-GAAP net income | $ | 95 | M | | $ | 118 | M | | $ | 87 | M |
GAAP operating income | $ | 114 | M | | $ | 139 | M | | $ | 20 | M |
Non-GAAP operating income | $ | 134 | M | | $ | 164 | M | | $ | 124 | M |
EBITDA | $ | 135 | M | | $ | 159 | M | | $ | 41 | M |
Effective GAAP tax provision rate | 26.0 | % | | 23.1 | % | | 225.1 | % |
Effective Non-GAAP tax provision rate | 25.7 | % | | 23.1 | % | | 24.6 | % |
Cash and cash equivalents | $ | 1,367 | M | | $ | 1,359 | M | | $ | 1,138 | M |
Restricted cash (5) | $ | — |
| | $ | 312 | M | | $ | — |
|
Deferred revenues | $ | 306 | M | | $ | 310 | M | | $ | 304 | M |
Capital expenditures | $ | 18 | M | | $ | 17 | M | | $ | 14 | M |
Total debt, net of discount (6) | $ | 788 | M | | $ | 1,084 | M | | $ | 598 | M |
Cash, net of senior debt, convertible debt and capitalized leases (7) | $ | 491 | M | | $ | 483 | M | | $ | 535 | M |
Cash provided by operations | $ | 202 | M | | $ | 10 | M | | $ | 168 | M |
Days sales outstanding | 31 days | | 38 days | | 35 days |
Employees at end of period | 4,553 | | 4,305 | | 4,061 |
SAN port shipments | 0.9 | M | | 1.1 | M | | 1.1 | M |
Share repurchases (8) | $ | 77.1 | M | | $ | 132.4 | M | | $ | 50.1 | 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.
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(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. |
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(2) | SAN and IP Networking business revenues include hardware and software product, support, and services revenues. |
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(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. |
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(4) | Data Center includes enterprise, service provider, and government data center revenues. |
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(5) | Q1 2015 restricted cash was used to redeem the $300 million principal of the 2020 senior secured notes and pay for the associated call premium and interest earned on February 13, 2015. |
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(6) | Q2 2015 and Q1 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 $77 million as of May 2, 2015, and $80 million as of January 31, 2015. |
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(7) | Q1 2015 cash, net of senior debt, convertible debt and capitalized leases excludes restricted cash of $312 million and the 2020 senior secured notes of $300 million that were redeemed on February 13, 2015. |
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(8) | $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. Management also believes these non-GAAP financial measures 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:
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• | the ability to make more meaningful period-to-period comparisons of Brocade’s ongoing operating results; |
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• | the ability to make more meaningful comparisons of Brocade’s operating performance relative to its competitors; |
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• | the ability to better identify trends in Brocade’s underlying business and to perform related trend analyses; and |
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• | 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) call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in our Q1 2015 debt refinancing; (ii) acquisition and integration costs; (iii) restructuring, goodwill impairment and other related costs (benefits); and (iv) specific non-cash and non-recurring tax benefits or detriments.
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. Management also believes that 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 January 31, 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 OPERATIONS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| May 2,
2015 | | May 3,
2014 | | May 2,
2015 | | May 3,
2014 |
| (In thousands, except per share amounts) |
Net revenues: | | | | | | | |
Product | $ | 458,243 |
| | $ | 442,280 |
| | $ | 944,481 |
| | $ | 917,485 |
|
Service | 88,332 |
| | 94,630 |
| | 178,333 |
| | 183,960 |
|
Total net revenues | 546,575 |
| | 536,910 |
| | 1,122,814 |
| | 1,101,445 |
|
Cost of revenues: | | | | | | | |
Product | 137,612 |
| | 142,271 |
| | 287,538 |
| | 295,898 |
|
Service | 36,754 |
| | 40,347 |
| | 73,384 |
| | 78,585 |
|
Total cost of revenues | 174,366 |
| | 182,618 |
| | 360,922 |
| | 374,483 |
|
Gross margin | 372,209 |
| | 354,292 |
| | 761,892 |
| | 726,962 |
|
Operating expenses: | | | | | | | |
Research and development | 91,870 |
| | 90,554 |
| | 177,101 |
| | 177,710 |
|
Sales and marketing | 143,078 |
| | 139,597 |
| | 283,316 |
| | 272,262 |
|
General and administrative | 20,722 |
| | 21,112 |
| | 45,393 |
| | 41,255 |
|
Amortization of intangible assets | 627 |
| | 131 |
| | 765 |
| | 10,014 |
|
Acquisition and integration costs | 2,344 |
| | — |
| | 2,344 |
| | — |
|
Restructuring, goodwill impairment, and other related costs (benefits) | (637 | ) | | 82,703 |
| | (637 | ) | | 88,920 |
|
Gain on sale of network adapter business | — |
| | — |
| | — |
| | (4,884 | ) |
Total operating expenses | 258,004 |
| | 334,097 |
| | 508,282 |
| | 585,277 |
|
Income from operations | 114,205 |
| | 20,195 |
| | 253,610 |
| | 141,685 |
|
Interest expense | (10,552 | ) | | (9,234 | ) | | (35,976 | ) | | (18,430 | ) |
Interest and other income (loss), net | 466 |
| | (20 | ) | | (93 | ) | | (1,356 | ) |
Income before income tax | 104,119 |
| | 10,941 |
| | 217,541 |
| | 121,899 |
|
Income tax expense | 27,079 |
| | 24,625 |
| | 53,234 |
| | 54,699 |
|
Net income (loss) | $ | 77,040 |
| | $ | (13,684 | ) | | $ | 164,307 |
| | $ | 67,200 |
|
Net income (loss) per share—basic | $ | 0.18 |
| | $ | (0.03 | ) | | $ | 0.39 |
| | $ | 0.15 |
|
Net income (loss) per share—diluted | $ | 0.18 |
| | $ | (0.03 | ) | | $ | 0.38 |
| | $ | 0.15 |
|
Shares used in per share calculation—basic | 420,718 |
| | 436,167 |
| | 424,627 |
| | 438,370 |
|
Shares used in per share calculation—diluted | 433,234 |
| | 436,167 |
| | 436,195 |
| | 451,999 |
|
| | | | | | | |
Cash dividends declared per share | $ | 0.035 |
| | $ | — |
| | $ | 0.07 |
| | $ | — |
|
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| May 2,
2015 | | May 3,
2014 | | May 2,
2015 | | May 3,
2014 |
| (In thousands) |
Net income (loss) | $ | 77,040 |
| | $ | (13,684 | ) | | $ | 164,307 |
| | $ | 67,200 |
|
Other comprehensive income and loss, net of tax: | | | | | | | |
Unrealized gains (losses) on cash flow hedges: | | | | | | | |
Change in unrealized gains and losses | (143 | ) | | 1,094 |
| | (1,918 | ) | | 170 |
|
Net gains and losses reclassified into earnings | 1,109 |
| | 32 |
| | 1,713 |
| | 1 |
|
Net unrealized gains (losses) on cash flow hedges | 966 |
| | 1,126 |
| | (205 | ) | | 171 |
|
Foreign currency translation adjustments | (1,068 | ) | | 1,298 |
| | (5,289 | ) | | 475 |
|
Total other comprehensive income (loss) | (102 | ) | | 2,424 |
| | (5,494 | ) | | 646 |
|
Total comprehensive income (loss) | $ | 76,938 |
| | $ | (11,260 | ) | | $ | 158,813 |
| | $ | 67,846 |
|
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
| May 2,
2015 | | November 1,
2014 |
| (In thousands, except par value) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,366,812 |
| | $ | 1,255,017 |
|
Accounts receivable, net of allowances for doubtful accounts of $1,676 and $80 at May 2, 2015, and November 1, 2014, respectively | 185,136 |
| | 224,913 |
|
Inventories | 41,379 |
| | 38,718 |
|
Deferred tax assets | 103,501 |
| | 92,692 |
|
Prepaid expenses and other current assets | 54,501 |
| | 46,665 |
|
Total current assets | 1,751,329 |
| | 1,658,005 |
|
Property and equipment, net | 439,789 |
| | 445,433 |
|
Goodwill | 1,617,171 |
| | 1,567,723 |
|
Intangible assets, net | 83,118 |
| | 26,658 |
|
Other assets | 49,217 |
| | 35,856 |
|
Total assets | $ | 3,940,624 |
| | $ | 3,733,675 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 91,900 |
| | $ | 93,705 |
|
Accrued employee compensation | 135,906 |
| | 169,018 |
|
Deferred revenue | 234,110 |
| | 239,993 |
|
Other accrued liabilities | 82,198 |
| | 84,592 |
|
Total current liabilities | 544,114 |
| | 587,308 |
|
Long-term debt, net of current portion | 787,554 |
| | 595,450 |
|
Non-current deferred revenue | 72,084 |
| | 71,746 |
|
Non-current income tax liability | 48,156 |
| | 39,647 |
|
Non-current deferred tax liabilities | 24,047 |
| | 27,153 |
|
Other non-current liabilities | 3,748 |
| | 4,310 |
|
Total liabilities | 1,479,703 |
| | 1,325,614 |
|
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: 417,886 and 431,470 shares at May 2, 2015, and November 1, 2014, respectively | 418 |
| | 431 |
|
Additional paid-in capital | 1,698,111 |
| | 1,774,197 |
|
Accumulated other comprehensive loss | (24,308 | ) | | (18,814 | ) |
Retained earnings | 786,700 |
| | 652,247 |
|
Total stockholders’ equity | 2,460,921 |
| | 2,408,061 |
|
Total liabilities and stockholders’ equity | $ | 3,940,624 |
| | $ | 3,733,675 |
|
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| May 2,
2015 | | May 3,
2014 |
| (In thousands) |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 77,040 |
| | $ | (13,684 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Excess tax benefits from stock-based compensation | (13,468 | ) | | (13,080 | ) |
Depreciation and amortization | 20,672 |
| | 21,173 |
|
Loss on disposal of property and equipment | 797 |
| | 830 |
|
Amortization of debt issuance costs and debt discount | 4,168 |
| | 285 |
|
Call premium cost related to lenders that did not participate in refinancing | (10,314 | ) | | — |
|
Provision for doubtful accounts receivable and sales allowances | 2,291 |
| | 1,961 |
|
Non-cash stock-based compensation expense | 16,075 |
| | 21,052 |
|
Goodwill impairment charge | — |
| | 83,382 |
|
Changes in assets and liabilities, net of acquisitions: | | | |
Restricted cash | 11,918 |
| | — |
|
Accounts receivable | 52,493 |
| | 22,495 |
|
Inventories | 1,853 |
| | 2,473 |
|
Prepaid expenses and other assets | (19,956 | ) | | (11,857 | ) |
Deferred tax assets | 9 |
| | (38 | ) |
Accounts payable | 2,616 |
| | 951 |
|
Accrued employee compensation | 37,036 |
| | 27,470 |
|
Deferred revenue | (6,959 | ) | | 5,987 |
|
Other accrued liabilities | 26,708 |
| | 22,869 |
|
Restructuring liabilities | (1,105 | ) | | (4,025 | ) |
Net cash provided by operating activities | 201,874 |
| | 168,244 |
|
Cash flows from investing activities: | | | |
Purchases of non-marketable equity and debt investments | (150 | ) | | (223 | ) |
Purchases of property and equipment | (17,577 | ) | | (14,429 | ) |
Net cash paid in connection with acquisitions | (95,278 | ) | | — |
|
Net cash used in investing activities | (113,005 | ) | | (14,652 | ) |
Cash flows from financing activities: | | | |
Decrease in restricted cash | 300,000 |
| | — |
|
Payment of principal related to senior secured notes | (300,000 | ) | | — |
|
Payment of debt issuance costs | (1,252 | ) | | — |
|
Payment of principal related to capital leases | (113 | ) | | (1,141 | ) |
Common stock repurchases | (79,278 | ) | | (50,052 | ) |
Proceeds from issuance of common stock | 939 |
| | 22,120 |
|
Payment of cash dividends to stockholders | (14,748 | ) | | — |
|
Excess tax benefits from stock-based compensation | 13,468 |
| | 13,080 |
|
Net cash used in financing activities | (80,984 | ) | | (15,993 | ) |
Effect of exchange rate fluctuations on cash and cash equivalents | (438 | ) | | 1,327 |
|
Net increase in cash and cash equivalents | 7,447 |
| | 138,926 |
|
Cash and cash equivalents, beginning of period | 1,359,365 |
| | 998,687 |
|
Cash and cash equivalents, end of period | $ | 1,366,812 |
| | $ | 1,137,613 |
|
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| May 2,
2015 | | May 3,
2014 |
| (In thousands) |
Cash flows from operating activities: | | | |
Net income | $ | 164,307 |
| | $ | 67,200 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Excess tax benefits from stock-based compensation | (29,570 | ) | | (27,415 | ) |
Depreciation and amortization | 40,247 |
| | 59,927 |
|
Loss on disposal of property and equipment | 1,241 |
| | 3,178 |
|
Gain on sale of network adapter business | — |
| | (4,884 | ) |
Amortization of debt issuance costs and debt discount | 5,224 |
| | 566 |
|
Write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing | 4,808 |
| | — |
|
Provision for doubtful accounts receivable and sales allowances | 4,694 |
| | 3,528 |
|
Non-cash stock-based compensation expense | 40,157 |
| | 39,640 |
|
Goodwill impairment charge | — |
| | 83,382 |
|
Changes in assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 35,237 |
| | 52,266 |
|
Inventories | 3,008 |
| | 4,570 |
|
Prepaid expenses and other assets | (25,702 | ) | | (8,371 | ) |
Deferred tax assets | 503 |
| | 57 |
|
Accounts payable | (6,160 | ) | | (7,126 | ) |
Accrued employee compensation | (39,997 | ) | | (11,738 | ) |
Deferred revenue | (9,149 | ) | | 573 |
|
Other accrued liabilities | 25,285 |
| | 33,324 |
|
Restructuring liabilities | (1,866 | ) | | (10,964 | ) |
Net cash provided by operating activities | 212,267 |
| | 277,713 |
|
Cash flows from investing activities: | | | |
Purchases of non-marketable equity and debt investments | (150 | ) | | (223 | ) |
Purchases of property and equipment | (34,091 | ) | | (27,395 | ) |
Purchase of intangible assets | (7,750 | ) | | — |
|
Net cash paid in connection with acquisitions | (95,278 | ) | | — |
|
Proceeds from collection of note receivable | 250 |
| | 250 |
|
Proceeds from sale of network adapter business | — |
| | 9,995 |
|
Net cash used in investing activities | (137,019 | ) | | (17,373 | ) |
Cash flows from financing activities: | | | |
Payment of principal related to senior secured notes | (300,000 | ) | | — |
|
Payment of debt issuance costs | (1,661 | ) | | — |
|
Payment of principal related to capital leases | (1,267 | ) | | (1,749 | ) |
Common stock repurchases | (208,244 | ) | | (190,432 | ) |
Proceeds from issuance of common stock | 21,975 |
| | 54,530 |
|
Payment of cash dividends to stockholders | (29,854 | ) | | — |
|
Proceeds from convertible notes | 565,656 |
| | — |
|
Purchase of convertible hedge | (86,135 | ) | | — |
|
Proceeds from issuance of warrants | 51,175 |
| | — |
|
Excess tax benefits from stock-based compensation | 29,570 |
| | 27,415 |
|
Net cash provided by (used in) financing activities | 41,215 |
| | (110,236 | ) |
Effect of exchange rate fluctuations on cash and cash equivalents | (4,668 | ) | | 512 |
|
Net increase in cash and cash equivalents | 111,795 |
| | 150,616 |
|
Cash and cash equivalents, beginning of period | 1,255,017 |
| | 986,997 |
|
Cash and cash equivalents, end of period | $ | 1,366,812 |
| | $ | 1,137,613 |
|
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
|
| | | | | | | | | | | |
| Three Months Ended |
| May 2,
2015 | | January 31,
2015 | | May 3,
2014 |
| (In thousands, except per share amounts) |
Non-GAAP adjustments | | | | | |
Stock-based compensation expense included in cost of revenues | $ | 1,986 |
| | $ | 3,816 |
| | $ | 3,474 |
|
Amortization of intangible assets expense included in cost of revenues | 1,857 |
| | 637 |
| | 396 |
|
Total gross margin impact from non-GAAP adjustments | 3,843 |
| | 4,453 |
| | 3,870 |
|
| | | | | |
Stock-based compensation expense included in research and development | 3,080 |
| | 4,933 |
| | 4,422 |
|
Stock-based compensation expense included in sales and marketing | 7,207 |
| | 9,843 |
| | 8,462 |
|
Stock-based compensation expense included in general and administrative | 3,802 |
| | 5,490 |
| | 4,694 |
|
Amortization of intangible assets expense included in operating expenses | 627 |
| | 138 |
| | 131 |
|
Acquisition and integration costs | 2,344 |
| | — |
| | — |
|
Restructuring, goodwill impairment, and other related costs (benefits) | (637 | ) | | — |
| | 82,703 |
|
Total operating income impact from non-GAAP adjustments | 20,266 |
| | 24,857 |
| | 104,282 |
|
| | | | | |
Call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing | — |
| | 15,122 |
| | — |
|
Convertible debt interest | 3,639 |
| | 678 |
| | — |
|
Income tax effect of non-tax adjustments | (5,823 | ) | | (9,499 | ) | | (3,685 | ) |
Total net income impact from non-GAAP adjustments | $ | 18,082 |
| | $ | 31,158 |
| | $ | 100,597 |
|
| | | | | |
Gross margin reconciliation | | | | | |
GAAP gross margin | $ | 372,209 |
| | $ | 389,683 |
| | $ | 354,292 |
|
Total gross margin impact from non-GAAP adjustments | 3,843 |
| | 4,453 |
| | 3,870 |
|
Non-GAAP gross margin | $ | 376,052 |
| | $ | 394,136 |
|
| $ | 358,162 |
|
GAAP gross margin, as a percentage of total net revenues | 68.1 | % | | 67.6 | % | | 66.0 | % |
Non-GAAP gross margin, as a percentage of total net revenues | 68.8 | % | | 68.4 | % | | 66.7 | % |
| | | | | |
Operating income reconciliation | | | | | |
GAAP operating income | $ | 114,205 |
| | $ | 139,405 |
| | $ | 20,195 |
|
Total operating income impact from non-GAAP adjustments | 20,266 |
| | 24,857 |
| | 104,282 |
|
Non-GAAP operating income | $ | 134,471 |
| | $ | 164,262 |
| | $ | 124,477 |
|
GAAP operating income, as a percentage of total net revenues | 20.9 | % | | 24.2 | % | | 3.8 | % |
Non-GAAP operating income, as a percentage of total net revenues | 24.6 | % | | 28.5 | % | | 23.2 | % |
| | | | | |
Net income (loss) and net income (loss) per share reconciliation | | | | | |
Net income (loss) on a GAAP basis | $ | 77,040 |
| | $ | 87,267 |
| | $ | (13,684 | ) |
Total net income impact from non-GAAP adjustments | 18,082 |
| | 31,158 |
| | 100,597 |
|
Non-GAAP net income | $ | 95,122 |
| | $ | 118,425 |
| | $ | 86,913 |
|
Non-GAAP net income per share—basic | $ | 0.23 |
| | $ | 0.28 |
| | $ | 0.20 |
|
Non-GAAP net income per share—diluted | $ | 0.22 |
| | $ | 0.27 |
| | $ | 0.19 |
|
Shares used in non-GAAP per share calculation—basic | 420,718 |
| | 428,536 |
| | 436,167 |
|
Shares used in non-GAAP per share calculation—diluted | 433,234 |
| | 439,156 |
| | 450,449 |
|
Q2 FY 2015 Earnings
Prepared Comments and Slides
May 21, 2015
Michael Iburg
Investor Relations
Phone: 408-333-0233
miburg@Brocade.com
Kristy Campbell
Media Relations
Phone: 408-333-4221
kcampbel@Brocade.com
NASDAQ: BRCD
Brocade Q2 FY 2015 Earnings 5/21/2015
Prepared comments provided by Michael Iburg, Investor Relations
Thank you for your interest in Brocade’s Q2 Fiscal 2015 earnings presentation, which includes prepared remarks, cautionary statements and disclosures, slides, and a press release detailing fiscal second quarter 2015 results. The press release, along with these prepared comments and slides, has been furnished to the SEC on Form 8-K and has been made available on the Brocade Investor Relations website at www.brcd.com. The press release will be issued subsequently via Marketwired.
© 2015 Brocade Communications Systems, Inc. Page 2 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
© 2015 Brocade Communications Systems, Inc. Page 3 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Today’s prepared comments include remarks by Lloyd Carney, Brocade CEO, regarding the company’s quarterly results, its strategy, and a review of operations, as well as industry trends and market/technology drivers related to its business; and by Dan Fairfax, Brocade CFO, who will provide a financial review.
A management discussion and live question and answer conference call will be webcast at
2:30 p.m. Pacific Time on May 21 at www.brcd.com and will be archived on the Brocade Investor Relations website.
© 2015 Brocade Communications Systems, Inc. Page 4 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Prepared comments provided by Lloyd Carney, CEO
© 2015 Brocade Communications Systems, Inc. Page 5 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Our achievements in the second quarter highlight the success of our data center-focused strategy and innovation in software-enabled networking. We grew our data center IP revenue, both sequentially and year over year, and continued to advance our product and technology roadmap in both storage and IP networking.
While SAN revenue was at the low end of our outlook for Q2 2015, growth in IP Networking revenue across our key markets was strong and above our long-term model of 8% to 12% growth. Furthermore, we achieved strong gross margin and operating margin performance in the quarter, and we are on track to meet our full-year FY15 operating margin goals.
We also generated cash well above our forecasted range in Q2, primarily through higher profits and working capital improvements. Brocade’s Board of Directors authorized a significant increase in our Q3 2015 dividend of 29%, in support of our ongoing commitment to return cash to our shareholders.
During the quarter, we completed the acquisitions of both the SteelApp assets from Riverbed Technology and Connectem, expanding our portfolio of virtual IP networking products and services to include some of the most advanced application delivery and evolved packet core technology in the industry. These acquisitions complement our industry-leading solutions for the New IP to further support cloud, mobile, and social initiatives.
We opened a state-of-the-art development center in Bangalore, India in April. We can now deliver from India proof-of-concepts and pilot projects for customers and partners worldwide.
Our Q2 product announcements also underscore our commitment to delivering solutions for the demands business-critical storage workloads place on IP networks. Leveraging Brocade’s 20 years of best-practice expertise in storage area networking, we introduced the industry’s broadest portfolio of storage class connectivity solutions.
We are driving strong alignment and Brocade preference throughout our partner ecosystem to bring our innovative products to market. Brocade is committed to delivering best-in-class storage and networking solutions that enable new business opportunities and add strategic value to our partners.
© 2015 Brocade Communications Systems, Inc. Page 6 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Q1 2015 was one of the strongest quarters in Brocade history for SAN revenue, yet sales in Q2 were seasonally softer and at the low end of our expectations. The SAN decline was primarily the result of softer storage demand and partner-specific issues that impacted the low-end switch and server blade revenue. We hope to recapture some of that opportunity over time. Aside from normal seasonality in Q3, we see several catalysts in the second half of the fiscal year.
IBM is currently ramping its new z13 mainframe and DS8870 storage systems that leverage our Gen 5 FICON and Fibre Channel technology in the durable mainframe environment.
Also, EMC’s refresh of its VMAX3 family is expected to drive sales in the coming quarters. Moreover, at EMC World, EMC launched a new VSPEX® 100K converged infrastructure solution that leverages Brocade Gen 5 Fibre Channel SAN switches and Brocade Fabric Vision monitoring and network diagnostic software.
In addition, all-flash array deployment continues to grow rapidly as enterprises move to managing both mission-critical and business-critical applications in consolidated, highly virtualized environments. Network performance is critical in high-performance deployments and Fibre Channel continues to be the predominant protocol attached to these flash storage technologies.
For example, our Fibre Channel and IP-based storage networking technologies will be deployed by EMC as a key component for customer solutions based on the new EMC XtremIO 4.0 all-flash storage arrays that were announced at EMC World. The combination of Brocade storage networking with EMC flash enables significant increases in performance and scale for hybrid and private cloud infrastructures.
© 2015 Brocade Communications Systems, Inc. Page 7 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Q2 was another solid quarter for IP Networking with strong revenue growth from U.S. federal customers, as well as router sales into the service provider market. Our sales results in the first half of the fiscal year, coupled with our expectations for Q3, indicate that we are on track to achieve our growth targets for fiscal 2015. Our portfolio of solutions is addressing the key trends in IP Networking – including the emerging IP storage market and the adoption of New IP technologies for cloud, social, and mobile requirements.
During the second quarter, we announced the industry’s first purpose-built IP storage connectivity portfolio for both data center and disaster recovery applications to help enterprise IT teams manage growth, mitigate risk, and reduce cost. These include IP storage switches for the data center, powered by Brocade VCS fabric technology, IP extension switches built for replication between data centers, and advanced management with Brocade Network Advisor and Fabric Vision technology. The result is a storage-class switching environment that enables resilient, high-performance networks for business-critical IP storage workloads.
In addition to the IP storage opportunity, we continue to expand our software-centric capabilities for the New IP through technology innovation and strategic acquisitions. Our acquisition of Connectem, a pioneer in the LTE virtual evolved packet core (vEPC) market, will provide mobile operators the capability to offer highly differentiated solutions. With unique architectural attributes that leverage cloud computing, network virtualization, and software networking technologies, Connectem delivers higher scale and efficiency on industry-standard x86-based servers. We believe this will be a key enabler for the Internet of Things, including machine-to-machine connectivity, industrial Internet, and enterprise mobile data services.
Connectem compliments our broad portfolio of SDN and NFV technologies, including our industry-leading Brocade Vyatta controller, virtual router, firewall, and VPN products, as well as our network visibility and analytics solutions and the SteelApp virtual application delivery controller solution that we recently acquired from Riverbed Technology. We are pleased with the current progress of integrating the SteelApp and Connectem products and technology into our software networking offerings.
© 2015 Brocade Communications Systems, Inc. Page 8 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
New IP networks are comprised of best-in-class hardware, software, and services based on open and open-source technologies. Within this context, the companies that will be successful are those that can create an ecosystem of technology, business, and go-to-market partners to penetrate new applications and verticals and gain early market share leadership. Brocade has built our business on strong business and technology partnerships, and, after 20 years, the Brocade partner ecosystem is stronger than ever.
As evidence, many of our solutions were featured at the recent Mobile World Congress event through a number of innovative partner collaborations, including simultaneous demonstrations with Intel, Dell, Red Hat, IBM, HP, Hitachi Data Systems, and Ciena. Our greatly expanded presence at this year’s conference demonstrates how integral Brocade is to the open NFV solutions being designed for the mobile service provider market.
In addition, we are successfully leveraging our long-standing SAN partnerships to provide another customer entry point for Brocade in a variety of IP Networking use cases. This quarter, we made several announcements with EMC that underscore this growing joint opportunity.
Similarly, Hitachi Data Systems now fully integrates Brocade Fibre Channel and IP networking into its customer offerings, and we are a critical component for its unified compute platform solutions, including virtualization with VMware, Microsoft Exchange, and SAP HANA. Our teams are working closely to combine Brocade solutions for the New IP with Hitachi’s Social Innovation solutions.
© 2015 Brocade Communications Systems, Inc. Page 9 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
In closing, Q2 highlighted our continued execution towards the strategic vision of the company, which is to grow our presence in the data center, affirm our position as storage networking experts, and be one of the best networking partners in the industry. We are coming to market with the right products at the right time to maximize our opportunity as both storage and IP networking evolve to accommodate new, increasingly demanding business imperatives.
We continue to invest in software-based technologies that enhance the value of our hardware solutions, allowing us to build more strategic relationships with our customers, and underscoring our vision for the New IP. And we are expanding our ecosystem of partners across our technology portfolio to deliver some of the most advanced networking solutions in the industry.
We are pursuing all of these objectives as well as our goal to drive profitable revenue growth and increase shareholder value. We look forward to reporting to you on our continued progress.
© 2015 Brocade Communications Systems, Inc. Page 10 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Prepared comments provided by Dan Fairfax, CFO
© 2015 Brocade Communications Systems, Inc. Page 11 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Fiscal Q2 15 followed a normal quarterly seasonal pattern, with a sequential decline in SAN revenue partially offset by an increase in IP Networking revenue.
Q2 15 revenue of $547M was up 2% Yr./Yr. due to increased IP Networking product revenue, which was up 19% Yr./Yr., primarily due to stronger router revenue and increased sales to both service provider and U.S. federal customers. The increase in IP Networking product revenue was partially offset by lower SAN product revenue, which was down 2% Yr./Yr. as both low-end switch and server blade revenue declined Yr./Yr., primarily the result of softer storage demand and operational issues at certain OEM partners. Director revenue was up 9% Yr./Yr.
Non-GAAP gross margin was 68.8% in Q2 15, up 210 basis points Yr./Yr. due to customer mix (higher sales to service provider and U.S. federal customers), product mix (higher percentage of director and router sales), and lower manufacturing period costs, some of which were one-time in nature. Non-GAAP operating margin was 24.6% in Q2 15, up 140 basis points from Q2 14 primarily due to higher revenue and gross margin.
Q2 15 non-GAAP diluted EPS was $0.22, up from $0.19 in Q2 14, primarily due to higher revenue and gross margin and a lower number of outstanding shares as a result of our share repurchase program.
Operating cash flow of $202M and adjusted free cash flow of $198M were very strong in the quarter and above our Q2 outlook range of $165M to 185M and $155M to 175M, respectively, as DSO decreased 7 days sequentially.
The Q2 15 effective non-GAAP tax rate was 25.7%, up 110 basis points Yr./Yr. and within our expected range.
© 2015 Brocade Communications Systems, Inc. Page 12 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Revenue from our total SAN business, including hardware products and SAN-based support and services, in Q2 15 was $366M, down 3% from Q2 14. The lower revenue was primarily the result of softer storage demand and operational issues at certain OEM partners, which impacted low-end switch and server blade revenue. In addition, Q2 14 was a 14-week quarter and included an additional week of support revenue.
Our SAN product revenue was $314M in the quarter, down 2% Yr./Yr. as switch and server sales were down 6% and 27% Yr./Yr., respectively, partially offset by higher director sales, which were up 9% Yr./Yr. Combining fiscal Q1 and Q2, first-half fiscal year 2015 director sales were up 3% Yr./Yr., and first-half fiscal year 2015 switch sales were up 1% Yr./Yr. First-half fiscal year 2015 server sales were down 25% Yr./Yr.
From a total revenue perspective, including SAN and IP Networking, our channels to market have shifted over time due to the growth of the IP Networking revenue and also reflect the seasonal change in segment mix. Total OEM revenue has declined Yr./Yr. to 63% from 68% of total revenue, while Channel/Direct sales have increased to 37% from 32% of total revenue for these reasons.
© 2015 Brocade Communications Systems, Inc. Page 13 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Revenue from our total IP Networking business, including hardware and IP-based support and services, was $180M, up 14% Yr./Yr.
Q2 15 IP Networking product revenue was $145M, up 19% Yr./Yr. due to strong Yr./Yr. growth in both routing (up 40%) and Ethernet switches (up 8%). Geographically, the Yr./Yr. revenue growth was primarily in the Americas (up 12%), U.S. federal (up 78%), and APAC (up 19%).
IP-based Global Services revenue was $35.5M, down 2% Yr./Yr. due to the 14-week quarter in Q2 14, which included an additional week of support revenue.
The SteelApp transaction closed on March 4, 2015, and the related product and support revenue recognized in the quarter was within the previously provided range of $2M to $3M.
The split of our IP Networking business based on customer use cases is an important measurement of the progress we are making on our data center strategy. Although it is difficult to identify all end users and their specific network deployments due to our two-tier distribution channel, we are providing estimates of the split of our IP Networking business. Our data center customers represented approximately 62% of IP Networking revenue in Q2 15, compared to 57% in Q2 14 and 53% in Q1 15.*
* 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 and minor changes to classification from improved visibility of actual customer deployments, as well as the seasonality of the public sector, including federal. Other use cases, such as enterprise campus and carrier networks (MAN/WAN) represent the balance of the business.
© 2015 Brocade Communications Systems, Inc. Page 14 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Looking forward to Q3 15, we considered a number of factors, including the following, in setting our outlook:
| |
• | For Q3 15, we expect SAN revenue to be down 2% to 6% Qtr./Qtr. We typically see weaker sequential buying patterns from our OEM partners in our fiscal Q3 and expect some of the Q2 market and partner challenges to continue into Q3. |
| |
• | We expect our Q3 15 IP Networking revenue to be up 9% to 13% Qtr./Qtr., principally driven by growth in the U.S. public sector, including federal, and our IP growth initiatives. |
| |
• | We expect our Global Services revenue to be within a range of up 1% to down 1% Qtr./Qtr. |
| |
• | Our forecast for SteelApp product and support revenue for the second half of FY15 remains unchanged. We anticipate Q3 and Q4 revenue to be in the range of $5M to $7M per quarter, which is included in the outlook ranges above. |
| |
• | We expect Q3 15 non-GAAP gross margin to be between 67% to 68%, and non-GAAP operating margin to be between 24.0% to 26.0%, primarily reflecting the expected mix of SAN and IP revenues. |
| |
• | At the end of Q2 15, OEM inventory was a little more than one and one-half weeks of supply based on SAN business revenue. We expect inventory to be between one to two weeks in Q3 15. |
© 2015 Brocade Communications Systems, Inc. Page 15 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Prepared comments provided by Michael Iburg, Investor Relations
That concludes Brocade’s prepared comments. At 2:30 p.m. Pacific Time on May 21, Brocade will host a webcast conference call at www.brcd.com.
Thank you for your interest in Brocade.
© 2015 Brocade Communications Systems, Inc. Page 16 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
© 2015 Brocade Communications Systems, Inc. Page 17 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
© 2015 Brocade Communications Systems, Inc. Page 18 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
Additional Financial Information:
|
| | | | | | |
| Q2 14 |
| Q1 15 |
| Q2 15 |
|
GAAP product gross margin | 67.8 | % | 69.2 | % | 70.0 | % |
Non-GAAP product gross margin | 68.3 | % | 69.7 | % | 70.6 | % |
| | | |
GAAP services gross margin | 57.4 | % | 59.3 | % | 58.4 | % |
Non-GAAP services gross margin | 59.2 | % | 61.4 | % | 59.6 | % |
© 2015 Brocade Communications Systems, Inc. Page 19 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
© 2015 Brocade Communications Systems, Inc. Page 20 of 21
Brocade Q2 FY 2015 Earnings 5/21/2015
© 2015 Brocade Communications Systems, Inc. Page 21 of 21
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