New IP

New IP Drives Quarterly Growth at Brocade

Brocade increased quarterly IP networking revenues by double-digits, offsetting a decline in the company's much larger SAN business, in earnings reported Thursday.

Brocade Communications Systems Inc. (Nasdaq: BRCD)'s IP networking product revenue is much smaller than its SAN revenue, but is growing fast. IP networking revenue reached $154 million in the third quarter of 2015, ending August 1, up 16% year-over-year. SAN product revenue hit $309 million, down 5% year-over-year

Brocade is targeting 8% to 12% growth for IP networking in the fiscal year 2015/15, and SAN product revenue is projected at 0% to 2% growth in 15/16.

Overall revenue was $552 million, up 1% year-over-year. Brocade reported $0.21 GAAP EPS, up from $0.20 in the third quarter of 2014, and $0.27 non-GAAP EPS, up 16% year-over-year. The non-GAAP gross margin was 68.6%, up 140 basis points year-over-year.

"Q3 was a solid quarter in which we delivered on our top-line outlook and exceeded our gross margin and operating margin expectations," CEO Lloyd Carney said on the company earnings call.

Brocade is well positioned to take advantage of demand for "third platform computing," which is driving the need for "open and scalable network architectures that make up the New IP," Carney said.

The Third Platform is an industry term adopted by Brocade to describe the emerging wave of applications involving mobile devices with billions of connections, requiring a cloud architecture for rapid application deployment and provisioning infrastructure. (Editor's note: The previous link goes to a brief Brocade video with a good explanation of the Third Platform, as well as several bad explanations, including one from an Elvis impersonator.)

The New IP is another industry term, also adopted by Brocade, to describe "radical transformation of closed, proprietary IP networks into open, software-driven innovation platforms" to revolutionize business, according to Brocade's website. New IP networks simplify and automate network processes to enable rapid service delivery and innovation, for businesses that take full advantage of mobility, cloud, social networking and big data technologies.

Light Reading CEO and founder Steve Saunders explains the New IP here: Introducing 'the New IP'.

Brocade outpaced market growth in IP networking in the third quarter, with strength in the service provider and federal markets. $154 million product revenue was up sequentially from $145 million.

For highlights of the quarter, Brocade touted customer success with CERN openlab, where it was selected to provide an SDN solution and strategy development, and Masergy Communications Inc. , where Brocade's vRouter is used in the company's Virtual f(n) platform. Brocade also cited its Light Reading Leading Lights Award for its SDN controller and vEPC. Also, Telekom Austria AG (NYSE: TKA; Vienna: TKA) was awarded the Leading Lights for Most Innovative NFV Deployment Strategy for Network/Data Center Operators for its Brocade-powered solution, the company noted. (See Masergy's Bold NFV Play Is Customer Driven and Leading Lights Awards 2015: The Winners.)

While other vendors cite tight demand from carriers, Brocade is seeing continued demand for next-generation networks, Carney said. Capex reduction is only a small part of the reason for the transition to the New IP; the major reason is restructuring the business for the future, he said.

Brocade is seeing early adopter demand for NFV from large service providers and hosting providers, Carney said. SDN and NFV are too complicated for the average enterprise.

In Brocade's storage business, Brocade is "maintaining an appropriately cautious view of the market near term" but is "encouraged with signs that market conditions are stabilizing, and we believe that our storage networking business will continue to provide healthy revenue and profits over the near term," Carney said.

Find out more about the New IP on Light Reading's The New IP Channel.

Increased interest in IP storage provides opportunities for Brocade's storage business.

"Historically, IP storage was typically confined to low-priority workloads such a file sharing and home directories. But today, it is being used as an incremental storage environment to support new business-critical workloads, including server virtualization and big data analytics," Carney said.

For the fourth quarter, Brocade is predicting revenue range of $565 million to $585 million, and a non-GAAP gross margin of $67.5% to 68.5%. It predicts IP networking to be up 6.5% to 11% quarter to quarter and SAN to be up 1% to 5%.

Brocade traded at $10.40, up 7%, after hours.


— 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]

Mitch Wagner 8/24/2015 | 2:05:20 PM
Staggering news When I posted a headline to this story on Twitter, someone in Brocade marketing mentioned that the company has finally secured the @Brocade handle. Previously, it was @BRCDcomm. Companies with names that are common English words often find their Twitter handles already taken; BRCDcomm was a ghastly workaround for that.

They said it was just a matter of the previous owner of @Brocade not using it and the handle lapsing. No money changed hands, and no other unusual circumstances. 

Somehow, Lloyd Carney neglected to mention this staggeringly important event on his earnings call. 
Mitch Wagner 8/21/2015 | 10:12:14 AM
Re: new ip The question for Brocade is whether the New IP can pull its finances up before declining SAN revenue can drag it down. 

The point about IP storage could prove significant in the future. Carney made a statement on the call that as long as customers keep buying storage, they'll buy either SAN or IP storage. That was all he said on the call, but there's an implication there that Brocade may believe that as long as organizations keep buying storage, Brocade will be fine. And it's hard to imagine organizations are going to stop buying storage, not with Big Data, the Internet of Things, and a bajillion people shooting pictures on their smartphones. 
Steve Saunders 8/20/2015 | 10:55:04 PM
new ip doesn't take a financial genius to see that New IP is the future for this company 
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