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New IP Boosts Brocade, But Trouble Lies Ahead

Mitch Wagner
11/24/2015
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Gains in IP networking offset disappointing storage area networking (SAN) sales for Brocade, driving annual revenue to $2.263 billion, up 2% year-over-year, the company reported Monday. However, Brocade says it expects a downturn in networking and overall revenue in the first quarter of 2016.

Fourth-quarter revenue was $589 million, up 4% year-over-year and 6% sequentially, Brocade Communications Systems Inc. (Nasdaq: BRCD) said in its earnings report. Non-GAAP diluted earnings per share were $0.26 in the fourth quarter and $1.01 in the fiscal year, up 8% and 12% year over year. (See Brocade Reports $2.26B Revenue, up 2%, Driven by New IP.)

Fourth-quarter IP networking product revenue was $170 million, up 12% year-over-year and 10% sequentially, primarily driven by a 28% increase in Ethernet switch sales and improved software sales. The gains were partly offset by a 20% decline in router revenue.

Brocade's networking strategy is driven by the New IP, based on the open source OpenDaylight SDN controller, designed to help network operators improve agility and cut costs for customers and users.

The fiscal year 2015 IP networking product revenue was $601 million, up 14% year-over-year due to stronger switch, router and software sales.

SAN product revenue was $325 million in the fourth quarter, flat year-over-year and up 5% quarter-over-quarter. Annual SAN revenue was $1.301 billion, down 2% year-over-year.

So far so good. But Brocade expects a 16-22% quarter-over-quarter downturn in IP networking revenue in the first quarter of 2016 -- primarily driven by US federal seasonality and lower router sales, CFO Dan Fairfax said on an earnings call and in a presentation posted to the Brocade website.

And for the first quarter of 2016, Brocade expects SAN product revenue to be flat to up 3% quarter-over-quarter, as OEM partner buying typically gets stronger in the fiscal first quarter, Fairfax said.

Overall revenue for the first quarter of 2016 is projected to fall year-over-year to between $550 million and $570 million, with non-GAAP earnings per share of $0.23 to $0.25, compared with $576 million and $0.27 in the first quarter of 2015. (See IP Storage Attracts Attention as Brocade Boosts Its Margins.)

Brocade scored several significant data center IP wins in the fourth quarter, including a big deal with a "major automotive manufacturer," company CEO Lloyd Carney said in a prepared statement.

Carney noted AT&T as a marquee customer of Brocade SDN and NFV products for AT&T's Network on Demand service. (See AT&T Adds Brocade, Ciena, Cisco to Its SDN, NFV Program.)

Campus switching sales were strong in the fourth quarter in enterprise, education and healthcare, while sales to government rose by more than 25% year-over-year, Carney said.

The decline in routing revenue was caused by shipping fewer line cards into the installed base, but a line card refresh cycle in the fourth quarter led to 13% router revenue growth in 2015, and benefits will continue next year, Carney said.

Data center customers represent an increasing share of Brocade's IP networking business, comprising about 60% of revenue in the fourth quarter, up from 58% sequentially and 52% in the third quarter, Fairfax said.

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— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected]

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Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
11/24/2015 | 5:22:30 PM
Re: Datacenters
While some communications providers will build their own equipment from scratch, most will look to partners, making Brocade well-positioned. 

And even those building from scratch will look for partners. Likely they won't build from scratch end-to-end. 
danielcawrey
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danielcawrey,
User Rank: Light Sabre
11/24/2015 | 11:46:27 AM
Datacenters
With so many data centers being built to provide for the demand needed from consumer apps and cloud services, Brocade is in a good postion. 

But that may only be temporary. Some of these larger technology companies are interested in building their own components from scratch. And it's really hard to see what software will do to Brocade's business model right now, so there is some uncertainty. 
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