Brocade Communications Systems' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Brocade Communications Systems (BRCD)

Q1 2012 Earnings Call

February 21, 2012 5:30 pm ET

Executives

Robert Eggers -

Michael Klayko - Chief Executive Officer, Director And Chairman Of Corporate Development Committee

Daniel W. Fairfax - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Ian Whiting - Senior Vice President of Worldwide Sales and Marketing

Jason Nolet -

John P. McHugh - Chief Marketing Officer and Vice President

Dave Stevens - Former Chief Technology Officer

Analysts

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Jack Monti - UBS Investment Bank, Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Rajesh Ghai - ThinkEquity LLC, Research Division

Scott Schmitz - Morgan Stanley, Research Division

Erik Suppiger - JMP Securities LLC, Research Division

Jung Pak

Joanna Makris - Mizuho Securities USA Inc., Research Division

Stephen Patel - ISI Group Inc., Research Division

Presentation

Operator

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Good day, ladies and gentlemen. Thank you for standing by, and welcome to Brocade's First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And I would now like to turn the program over to our speaker, Rob Eggers, Vice President of Investor Relations of Brocade. Sir, please go ahead.

Robert Eggers

Thank you, Jamie. Good afternoon, and welcome to Brocade's Q1 Earnings Call. By now, you should have seen our press release and prepared comments, which are available on our website, brcd.com. The press release is also distributed by MarketWire and furnished to the SEC. Before we take your questions, investors should note our comments today may include forward-looking statements regarding Brocade's financial results, plans, market opportunities and business outlooks, which are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other risks are set forth in more detail on our Form 10-K for the fiscal year ended October 29, 2011.

These forward-looking statements reflect believes, assumptions, outlooks, estimates and predictions as of today, and Brocade expressly assumes no obligation to update any such forward-looking statements. In addition, this presentation may include various third-party estimates regarding the total available market for SAN and Ethernet, as well as other measures, which do not necessarily reflect the view of Brocade. Further, Brocade does not guarantee the accuracy or reliability of any such information or forecast.

This presentation includes non-GAAP financial measures. The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures are provided in our Q1 2012 press release, which has been furnished to the SEC on Form 8-K and in our slide presentation and prepared comments on our website, brcd.com.

Here to take your questions are Mike Klayko, Brocade's CEO; Dan Fairfax, CFO; John McHugh, CMO; Dave Stevens, CTO and VP of Corporate Development; Jason Nolet, VP of Data Center and Enterprise Networking; and Ian Whiting, Senior Vice President Worldwide Sales.

I will now turn the call over to CEO Mike Klayko. Mike?

Michael Klayko

Thanks, Rob. Before we start taking questions, I'd like to take a few minutes to provide some color on Q1. Dan will follow me with some comments of his own, including the assumptions that we are basing our Q2 outlook on.

Q1 was a record-setting quarter for Brocade across several key areas while continuing to build on good Q4 results. We continue to see strong momentum across many areas of our business, which resulted in Q1 revenues of $561 million, an all-time high for Brocade. We significantly increased profits with $0.20 of earnings per share on a non-GAAP basis and $0.12 on a GAAP basis. We improved both gross margin and operating margin in the quarter, exceeding our outlook for both measures, which resulted in strong operating cash flow.

In terms of business performance, Storage was clearly a highlight this quarter as we exceeded our expectations. The Storage business revenue, which includes products and services ended at $406 million, which was up 12% quarter-over-quarter. In terms of storage product revenue, we were up 17% sequentially, generating nearly $353 million.

We also saw the fast ramp of our next-generation 16-gig Fibre Channel products continuing in Q1. In fact, 16-gig products accounted for 27% of our total director sales in the quarter. There's no doubt that our decision to transition the SAN industry to 16 gig was well timed and is validated by strong customer demand. The major IT imperatives such as managing server virtualization, cloud computing, digital data growth and more application is becoming mission critical.

Another highlight in the quarter was the performance of our Service Provider business, which generated more than $64 million in revenue, another company record. Many of these customers are now upgrading their network infrastructure to enable the delivery of new services and capabilities such as cloud computing. This trend helped increase sales of key products that are optimized for the service provider market, including the Brocade MLX and MLXe family of routers, which saw revenue growth of 17% year-over-year and the Brocade ADX application delivery switches with 13% growth in revenue year-over-year.

The continued market adoption of our Ethernet fabric products was our third highlight. Sales of our VDX switches and VCS software were up 33% sequentially. We now have an installed base of more than 400 customers in many high-performing, data-intensive industries such as financial services, research networks and media and entertainment. Keep in mind that our Ethernet Fabric technology strategy is designed to allow our customers to scale over time, unlike the all or nothing designs of some of our competitors. Therefore, we expect many of our current customers to continue to build out their Ethernet Fabrics to keep pace with the growing demand of their data center networks.

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