Brocade Communications Systems Management Discusses Q3 2012 Results - Earnings Call Transcript

Brocade Communications Systems (BRCD)

Q3 2012 Earnings Call

August 16, 2012 5:30 pm ET

Executives

Robert Eggers

Michael A. 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

Jason Nolet

David B. Stevens - Former Chief Technology Officer

Analysts

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

Keith F. Bachman - BMO Capital Markets U.S.

Paul H. Mansky - Cantor Fitzgerald & Co., Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division

Erik Suppiger - JMP Securities LLC, Research Division

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

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

Kent Schofield - Goldman Sachs Group Inc., Research Division

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

Stephen Patel - ISI Group Inc., Research Division

Scott Schmitz - Morgan Stanley, Research Division

John Slack - Caris & Company, Inc., Research Division

Presentation

Operator

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

Robert Eggers

Thank you, Siobhan. Good afternoon, and welcome to Brocade's Q3 earnings call. By now you should've 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 outlook, 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 in our form 10-K for the fiscal year ended October 29, 2011, and in our form 10-Q for the quarter ended April 28, 2012. These forward-looking statements reflect beliefs, assumptions, outlook, 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 Q3 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; and Dave Stevens, CTO and VP of Corporate Developments; and Jason Nolet, VP Data Center and Networking.

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

Michael A. Klayko

Thanks, Rob. Good afternoon and thank you for joining us today. Fiscal Q3 was a great quarter for Brocade. We had tremendous differentiation in our product line and fantastic execution across our organization. We were able to overcome many of the issues that others are experiencing in this challenging environment. As a result, our financial performance exceeded our expected outlook for revenue, non-GAAP operating margin and earnings per share.

Revenue in the third quarter of 2012 increased by more than 10% from the prior year to $555 million, including healthy growth in both our Storage and Ethernet businesses. Storage revenue grew 16% year-over-year, driven by the strong ramp of our 16-gig products, which now accounts for nearly 30% of our total SAN revenue.

Ethernet product revenue in Q3 was the second highest in the company's history, with improved revenue from our Federal segment and our growth in the Enterprise customer segment, led by our new ICX products for the campus LAN.

We're also very pleased to report that our non-GAAP earnings per share in the third quarter were $0.14, increasing nearly 60% from the prior year and representing our fourth consecutive quarter of year-over-year EPS growth of 20% or more.

On the balance sheet, our improvements were extraordinary. With strong cash flows, we continue to pay down our debt and expect to exit the fiscal year in a net cash position 1 year earlier than previously communicated. Further, leveraging our cash generated from operations, we repurchased $45 million or roughly 8.7 million shares during the quarter. Over the past 12 months, we bought back 60 million shares, representing nearly 12% of the shares outstanding as of Q3 2011.

For the fourth quarter, we continue to see healthy demand across our product portfolio and remain highly focused on our profitability. But Dan will give you more specific details on our fourth quarter guidance in a moment. I can tell you that we're projecting that our full year revenues will grow by 3% to 4% and our EPS will increase by 26% to 28% from fiscal 2011.

Further, I firmly believe that the strength of our product line has never been better and our results show that great products can trump a difficult macro environment. We will continue to make investments in strategic areas such as Ethernet fabrics, storage area networking, software-defined networking and 100-gigabit Ethernet, and look forward to showing you where our portfolio can go from here.

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