Networking solutions provider Brocade Communications Systems, Inc. (BRCD) reported Monday a year-over-year decline in profit for the fourth quarter, hurt by drop in margins, despite a strong 31% quarterly revenue growth. Adjusted earnings, though down from last year, topped analysts' expectations by two cents. However, the company returned to a profit after reporting a loss in the previous quarter. The company also reiterated its earnings and revenue forecast for the full year 2010.
In a statement, chief executive officer, Michael Klayko said, "Fiscal 2009 was a transformational year as Brocade became one of only two end-to-end networking solutions providers in the industry. Brocade also delivered exceptionally strong year-over-year revenue growth and increased its account penetration in the Ethernet networking market while growing share in the storage networking market.
"In addition, Q4 saw tremendous momentum as we exceeded the Street's consensus non-GAAP EPS estimates for the seventeenth consecutive quarter, delivered the fastest sequential revenue growth of any large networking vendor, and generated strong cash flows," Klayko added.
The company also stated that it is now seeing some positive trends that bode well for the industry, while IT spending has been constrained in 2009. Research firm Gartner recently said that Global IT spending is expected to increase to $3.3 trillion in 2010, citing needs to address the aging infrastructure needs.
Fourth Quarter Results
The San Jose, California-based company reported net income of $33.60 million or $0.07 per share for the fourth quarter, down from $35.58 million or $0.09 per share in the prior-year quarter.
Excluding items, non-GAAP net income for the quarter declined to $73.36 million or $0.15 per share from $75.77 million or $0.20 per share in the year-ago quarter.
On average, 23 analysts polled by Thomson Reuters expected the company to earn $0.13 per share for the fourth quarter. Analysts' estimates typically exclude one-time charges and gains.
Total net revenues for the quarter surged 31% year-over-year to $521.76 million from $398.50 million in the same quarter last year, and topped analysts' consensus estimate of $521.09 million by a whisker. The growth was driven by strength in North America, Asia Pacific and Japan.
Peer Performance
Among Brocade's peers, San Jose, California-based Cisco Systems, Inc. (CSCO) reported earlier in the month that its first-quarter profit fell 19% from last year, hurt by lower sales and higher provision for income taxes. Net income declined to $1.8 billion or $0.30 per share from $2.2 billion or $0.37 per share in the year-ago quarter. Quarterly net sales declined 12.7% to $9.02 billion from $10.33 billion in the same quarter last year.
Another peer, Aliso Viejo, California-based QLogic Corp. (QLGC) reported in October a sharp decline in its second quarter profit as revenues dropped significantly, reflecting weak sales from all its product segments. Geographically, revenues from the US, Europe, Middle East and Africa were substantially weak, compared to Asia-Pacific and Japan regions.
Other Metrics
Segment wise, product revenues for the fourth quarter surged to $432.39 million from last year's $335.40 million, while services revenues grew to $89.36 million from $63.10 million in the prior-year quarter.
As a percentage of total revenues, OEM revenues for the quarter were 65%, while Channel/Direct revenues were 35%, compared to 88% and 12% respectively, in the prior-year quarter. Domestic revenues were 63%, while international revenues were 37%, compared to 64% and 36% respectively, in the year-ago quarter.
Income from operations for the fourth quarter declined to $47.07 million from $50.26 million in the year-ago quarter. Non-GAAP operating margin was 22.7%, declining from 26.2% in the prior-year quarter, while increasing from 20.3% in the third quarter.
Gross margin for the quarter rose to $270.85 million from $245.14 million in the year-ago quarter, while non-GAAP gross margin percentage dropped 460 basis points to 59.5% from last year's 64.1%, while it grew 130 basis points from the previous quarter.
Total operating expenses were $223.78 million, up from $194.88 million in the prior-year quarter. Operating expenses primarily include sales and marketing expenses of $103.45 million, up from $71.11 million in the prior-year quarter, and research and development expenses of $95.35 million, higher than $70.87 million in the year-ago quarter. Amortization of intangible assets increased to $17.05 million from last year's $7.82 million.
The company ended the fourth quarter with cash and cash equivalents of $334.19 million, compared to $453.88 million at end of the prior-year quarter.
Brocade recently expanded its strategic business alliance with Net One Systems, the largest independent network integrator in Japan, to help enable the two companies better address high-growth, emerging opportunities in the data center and service provider networking segments in Japan, particularly in the areas of virtualization and cloud computing. Brocade had also acquired Foundry Networks Inc. late last year.
Last month, reports were afloat that Brocade put itself up for sale with Hewlett-Packard Co. (HPQ) as the frontrunner to buy Brocade at some point, but HP recently announced it would buy network equipment maker 3Com Corp (COMS) instead. Oracle Corp. was also seen as a potential bidder for Brocade.
Full Year Highlights
For fiscal 2009, Brocade reported a net loss of $76.59 million or $0.19 per share, compared to net income of $167.07 million or $0.43 per share last year.
Excluding items, non-GAAP net income for the year declined to $239.42 million or $0.53 per share from $260.91 million or $0.67 per share in the previous year. Analysts expected the company to report full year 2009 earnings of $0.51 per share.
Total net revenues for the full year surged 33%to $1.95 billion from $1.47 billion posted in fiscal 2008. The Street was looking for revenues of $1.95 billion for fiscal 2009.
Outlook
Looking forward to fiscal 2010, Brocade reiterated its non-GAAP earnings forecast in a range of $0.56 to $0.61 per share, on total annual revenues between $2.25 billion and $2.45 billion. Non-GAAP gross margins for the full year are anticipated in the range of 59% to 60%. Analysts currently expect the company to report earnings of $0.61 per share for fiscal 2010, on revenues of $2.28 billion.
Stock Quote
BRCD closed Monday's regular trading session at $7.80, down $0.21 or 2.65% on a volume of 34.46 million shares, higher than the three-month average volume of 23.12 million shares. In the past 52-week period, the stock has been trading in a range of $2.05 to $9.84.
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