Brocade Communications (BRCD, Financial) recently announced revenue of $545 million for the third fiscal quarter ended August 2, 2014, rising 2% on a year-over-year basis from revenue of $537 million in the third fiscal quarter of 2013 and increasing 2% quarter-over-quarter from revenue of $537 million in second fiscal quarter of 2014. Brocade released its fourth-quarter outlook with revenue forecast to be in the $550 million to $570 million range.
Earnings analysis
Brocade Communications reported non-GAAP diluted EPS of $0.23 for the third fiscal quarter of 2014, an increase from $0.19 in both the third fiscal quarter of 2013 representing a 23% increase and from second fiscal quarter of 2014 representing a 20% increase, mainly due to record revenue, impressive gross margin and decline in operating expenses. The company expects earnings per share to lie in the 21 cents to 23 cents range for the fourth quarter of fiscal 2014.
Outlook
The impressive third fiscal quarter financial results of Brocade Communications illustrate the substantial benefits of its focused strategy. During the quarter, it achieved SAN growth of 5% on year-over-year basis and similarly, IP networking growth of 6% on an adjusted year-over-year basis. Hence, Brocade is executing impressively in the main areas of its business delivery and in most of the cases exceeding the commitments made to its shareholders. This robust execution is illustrated by the company’s efforts to strengthen its already tough position in the datacenter markets due to its meaningful and focused differentiation, enhancing its leadership in the growing market for software networking by innovating and strengthening its superior partner base, furthering the shareholder value by returning a minimum of 60% of free cash flow back to investors.
These impressive results position Brocade quite well to benefit from the rapidly changing state of the network industry, which is believed to be generating new growth opportunities. Further, the market transition of the networking industry is developing disturbing opportunities particularly in the data center.
Brocade is also bound to benefit from the rising trend of customers in primary segments like Cloud service providers, mobile network operators and extensive enterprise data centers discovering ways to modify their networks, employing open, virtualized and simple features and technologies.
The Telco markets are believed to provide some key breakthrough in software networking which has been mastered by Brocade in the last few years. Brocade defined a few benchmarks for Telefonica (TEF, Financial) which is the sixth-largest mobile operator in the world and uses Brocade’s software networking products over Intel-based X-86 server. This illustrates the successful efforts of Brocade is addressing these growing opportunities.
Brocade recorded solid topline growth, greater profitability from expanding volumes, higher gross margins and reduction in operating expenses.
A desirable shift in the revenue mix towards more SAN products, a positive mix of customers in the IP networking business and decline in the overhead and manufacturing cost all combined for the year-over-year improvement in gross margin. The successive expansion in gross margin was mainly attributed to greater revenues along with decline in the manufacturing and overhead costs.
Going forward, Brocade is witnessing healthier buying activity from its OEM partners during fiscal fourth quarter of 2014.
The flexibility and strength of Brocade’s SAN business, coupled with its solid VDX sales, authenticate its calculated direction. The management continues to utilize its core competencies in hardware and software networking to put the company on the growth path, and it’s committed on delivering a superior customer experience in the increasingly competitive environments.
During the quarter, Brocade announced a quarterly cash dividend of $0.035 per share of its common stock and bought back 12.8 million shares for nearly $112 million.
Alex Kurtz and Amelia Harris, the analysts of Sterne Agee, maintained a neutral rating for the company owing to another robust quarter of higher revenue and margins being delivered by the company. This further helped in increasing its earnings above the high end of guidance.
Conclusion
Hence, Brocade is moving forward nicely with its strategies, and investors will do well to invest in the stock for the long run.
