Brocade Communications Systems (BRCD)

Q2 2010 Earnings Call

May 20, 2010 5:30 pm ET

Executives

Ian Whiting - Senior Vice President of Worldwide Sales and Marketing

Richard Deranleau - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Daniel Fairfax - Vice President of Global Services

Dave Stevens - Chief Technical Officer

Michael Klayko - Chief Executive Officer, Director and Chairman of Corporate Development Committee

Analysts

Keith Bachman - BMO Capital Markets U.S.

Nikos Theodosopoulos - UBS Investment Bank

Jason Ader - William Blair & Company L.L.C.

Jeffrey Evenson - Bernstein Research

Glenn Hanus - Needham & Company, LLC

Erik Suppiger - Signal Hill

Kaushik Roy - Wedbush Securities Inc.

Mark Sue - RBC Capital Markets Corporation

Paul Mansky - Canaccord Genuity

Rajesh Ghai - ThinkEquity LLC

Min Park - Goldman Sachs Group Inc.

Kathryn Huberty - Morgan Stanley

Presentation

Operator

Ladies and gentleman, we'll resume.

Question-and-Answer Session

Operator

[Operator Instructions] Our question comes from Nimrod Marcet [ph](23:20).

Jason Ader - William Blair & Company L.L.C.

Yes, hi. It’s Jason Ader. Can you hear me?

Michael Klayko

Yes, we can, Jason. This is Mike. Before we take any questions here, we must had a faulty bridge. We apologize that we wasted 15 minutes of your life, all you guys on the phone, and so we're going to stay as long -- we're going to make up that time on the back end if there’s more questions. So I do apologize for that. We got through the technical difficulty. But with that, Jason, please ask your question.

Jason Ader - William Blair & Company L.L.C.

Well I guess my question is on the guidance for Q3. You guided flat to slightly up. You talked about sell-through being very strong on the Fibre Channel side. Obviously, you had a very nice rebound on the Ethernet side. Judging by that guidance, in order to hit the full-year guidance, I mean, Q4 would have to be just absolute monster quarter. So I guess I'm struggling to see how you get to that implied Q4 guidance with the Q3 guidance being as such. And then just kind of connected to that, why wouldn't the Fibre Channel business be stronger in July, or much, much stronger in July, just given the inventory reduction that you saw in Q2?

Michael Klayko

Yes, let me start and then I’ll have Richard jump on top of that and add a few color comments. I think addressing Q4, it is seasonally stronger for SAN in Q4 than Q3, and so that's one area. That’s what you're going to hear at our Tech Day. We have some products that will also, I believe, generate some demand for us, and so that gets factored in. If we can get some OEM ramp in Q4, that could bridge a large piece of that. And then we've been hiring a lot of salespeople as Ian talked about, and they get online and they become more productive and so we should be able to benefit from that also in Q4. And we are continuing to gain momentum in the Ethernet business. As you've seen in some of the comments, we've almost, well in fact we have, we've achieved our full-year number of new accounts. And so those accounts that we've penetrated began to add more componentry and get more comfortable with our offerings and expansion of some of the projects. I think that also gives us some opportunity in Q4. So if you put all those together, I think there's an opportunity to get to the high end. Now in relationship to some of the inventory, I think question, well just -- we did give a range. It’s $2.1 million to $2.2 million for the full year, so it's a range, it's not a point guidance. I think if you look at the math, based on what we're saying, Q4 would be at the low end of the range. Q4 is basically SAN seasonality only. If you start layering in all of the things that Mike talked about, then I think you're looking at a -- kind of in the midpoint. And on the high end of the range, that assumes significant contributions and a quick ramp from the OEMs.

Richard Deranleau

Yes, on the inventory side, Jason, we’re just not -- we’ve kind of gotten out of the business of predicting when inventories are going to fall. You would think that our inventories would possibly raise a little bit as our partners go in to seasonally stronger quarters, but we’ve kind of taken that and then neutralized it because it goes down a little bit in Q3 and up a little bit in Q4, vice versa. That's one that -- we're more interested in the actual end-user demand and sell-through that we kind of monitor and really look at as the leading indicator.

Jason Ader - William Blair & Company L.L.C.

And do you think the IP side actually will be kind of in the same range as it was in the second quarter? Or do you think that, that could drop just based on the sort of Federal -- I mean, it seems like the Federal push-out in January kind of fell into April, and so you see a little bit of a drop-off in July, just based on that in the IP side.

Richard Deranleau

This is Richard, Jason. I think we’re looking for sequential gains in the Ethernet business in the second half of the year, and Federal is typically a strong in our Q4. Dan, did you have some more color?

Daniel Fairfax

Yes, I think in the Federal space, it's fairly predictable from a seasonality point of view. If you look at Q1 and Q2 combined, we were on track. We’re where we thought we’d be for the half even though Q1 was lower. Some of the deals did push out into the April quarter, but some of them were also, as we said, will take a little bit longer to come in. Q4 is when we will see the bigger growth in the Federal business, but overall, I would say across the board, our efforts around the channel expansion, the increased sales coverage that Mike referred to, the focus that we have now put back into the growing the net new customer base around IP, is all momentum and I think will see us through to a strong second half from an IP perspective.

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