Storage area network equipment supplier Brocade Communications Systems Inc. (BRCD) said Wednesday morning that profit for the third quarter nearly doubled from last year results on higher margins and double-digit revenue growth, helped by strong performance at its services segment.
Brocade achieved record revenue and double-digit annual growth in a typically slower period. Earnings per share, excluding one-time items, increased and topped analysts' estimate by two cents, while quarterly revenues also beat consensus estimate.
In what is seen as a deal to compete with giant rival Cisco Networks Inc. (CSCO), Brocade last month agreed to buy Foundry Networks, Inc. (FDRY), a data networking solutions company, in a stock and cash deal valued at about $3 billion. The acquisition is expected to close in the fourth quarter of 2008. The transaction is expected to be accretive to Brocade's earnings on a non-GAAP basis in fiscal year 2009. The accretion is expected to accelerate in fiscal year 2010.
Following the acquisition announcement, JMP Securities downgraded Brocade shares to Market Perform from Market Outperform.
Third Quarter Results
The San Jose, California-based provider of data center networking solutions reported GAAP net income of $20.27 million or $0.05 per share, higher than $10.69 million or $0.03 per share in the prior-year quarter.
Among other things, results for both the quarters primarily included stock-based compensation expenses, amortization of intangible assets expense, legal fees, and acquisition and integration related costs.
Excluding one-time items, non-GAAP net income increased to $61.22 million or $0.16 per share from $49.49 million or $0.12 per share in the year-ago quarter, and breezed past the average estimate of thirteen analysts polled by First Call/Thomson Financial of $0.14 per share for the third quarter, with estimates ranging from $0.13 to $0.15 per share.
Total net revenues for the quarter increased to $365.70 million from $327.46 million in the same quarter last year, and topped fifteen Wall Street analysts' consensus estimate of $351.68 million for the third quarter, with estimates in a range of $347.60 million and $356.20 million.
Brocade's deferred revenues for the quarter rose to $148.5 million from $128.8 million in the third quarter of 2007.
Segmental Details
Product revenues for third quarter rose to $301.80 million from last year's $282.86 million, while Services revenues were $63.89 million or 17% of total revenues, higher than $44.60 million or 14% of total revenues, in the corresponding quarter a year ago.
As a percent of total revenues, OEM revenues were 86%, while Channel or Direct revenues were 14%, compared to 84% and 16% respectively, in the prior-year quarter. In the same way, Domestic revenues were 65%, while International revenues were 35%, compared to 58% and 42% respectively, in the year-ago quarter.
Other Metrics
Income from operations for the quarter climbed to $44.42 million from $12.0 million in the year-ago quarter, while total operating expenses were $168.78 million, up from $153.78 million in the comparable quarter last year.
Expenses primarily included, sales and marketing expenses of $70.04 million, up from $57.20 million in the prior-year quarter, and research and development expenses of $65.37 million, higher than $54.09 million in the year-ago quarter. Income tax provision for the quarter was $31.89 million, compared to last year's $10.78 million.
Total cost of revenues declined to $152.49 million from $161.67 million in the third quarter of 2007. Gross margin for the third quarter rose to $213.21 million from $165.79 million in the corresponding quarter a year ago, while non-GAAP gross margin, excluding items, rose 6.9 percentage points to 61.9% from last year.
Capital expenditure from the third quarter totaled $94.2 million, up from $14.0 million in the prior-year quarter. Cash and cash equivalents at end of the third quarter were $459.40 million, compared to $374.41 million at end of the prior-year quarter.
During the third quarter, Brocade repurchased $38.1 million worth of its common stock, representing 4.7 million shares. As of the end of the third quarter, the company had $414.1 million remaining under its $800 million in total stock buyback authorization.
Commenting on the results, chief executive officer Michael Klayko said, "We delivered record results this quarter as we returned to double-digit revenue growth through continued, outstanding operational execution. These results validate that our product roadmap and solutions address customer demand for high-performance, ultra-reliable networking in the next-generation data center. We believe that they also indicate that the fundamental market trends and customer demand drivers remain intact."
Nine-Month Highlights
For the first nine-months of 2008, Brocade reported GAAP net income of $131.49 million or $0.34 per share, sharply higher than $44.85 million or $0.12 per share in the prior-year period. Excluding one-time items, non-GAAP net income increased to $185.14 million or $0.47 per share from $145.54 million or $0.40 per share in the year-ago period.
Total revenues for the nine-month period advanced to $1.07 billion from $0.90 billion in the same period last year.
Stock Quote
In Thursday's regular trading session, BRCD is trading at $7.49, up $0.26 or 3.59% on a volume of 1.60 million shares. In the past 52-weeks, the stock has been trading in a range of $5.67 to $9.61.
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