Highlights From Brocade Communications's (BRCD) Q4 Q&A Session; Reaffirms FY10 Outlook
Brocade Communications Systems, Inc. (NYSE: BRCD) reports Q4 EPS of $0.15, 2 cents better than the analyst estimate of $0.13. Revenue for the quarter was $521.8 million, which compares to the estimate of $272.50 million. The company reaffirmed their FY10 outlook
Highlights From BRCD's Q4 Q&A Session:
- The first question is from Brian Marshall of Broadpoint AmTech who asks for comments on the M&A rumors?
- (A)- Michael Klayko, Chief Executive Officer: Well, actually as we mentioned in the past we don't like to comment on rumors, in fact we've never commented on rumors and we don't and we'll continue that going forward that practice of not. We're very, very focused on what we're doing as a company on a long term vision, but I really do want to address some missed information that was out in the marketplace right now. Now that a lot of these rumors have died and that has to do that we were shopping our self and the fact of the matter is that is just false. We have not we never did, we've got a very bright future. The fact that we've spent the last five years planning and putting all the different pieces in place to execute on a very, very large infrastructure build out opportunity going forward, it just doesn't make a lot of sense and so I want to put that one to bed right upfront.
- Okay, Mark Sue followed up with a question about partnering and saying networking is influx, who will Brocade befriend and what does that mean today and what is Brocade's future a mid-sized company among giants?
- (A) - Michael Klayko, Chief Executive Officer: Well actually I think we got a great future. Going forward when you look at the fact that customers are demanding choice in our operating systems and that it's the largest, I mean by a long percentage part of the market of customers who like to build the most efficient solutions available, those customers are looking for value and choice that I think we stand to be in business for a very long time because we do satisfy a very broad ecosystem of not only partners and customers, but its going to continue for a long period.
- Okay, turning to recent M&A, a lot of people had questions about HP-3Com. In fact Mark Sue of RBC, Paul Silverstein of Credit Suisse, Kaushik Roy of Webush, Munjal Shah of Jefferies and Katy Huberty of Morgan Stanley asked how does the HP-3Com act, a merger impact Brocade?
- (A) - Marc Randall: Okay. This is Marc Randall speaking. So we've had a long partnership with HP in the storage area. We have been OEM in our directors and switches and we built embedded blades for them and host bus adapter cards and we believe that that's going to continue as a strong partnership going forward. On the IP side, we've been competing against HP in their ProCurve line ever since the two companies came together and Foundry competed against them as a standalone company. And we're looking at their portfolio, but we do see some areas that we believe that there is still going to continue to be weak in the major areas in data center applications. One of the areas that we've had a large initiative on is our convergence and that's a convergence of IP data storage together, that's a technology that's missing from their portfolio. And currently we don't see any presence in the data center space with their product lines. So we believe that we've got a real strong product from a density performance point of view. So we feel that we're in relatively good shape.
- There are other questions around that acquisition as well, such as how does HP-3Com come change Brocade's Ethernet sales strategy and execution? Does it impact your fiscal year 2010 revenue expectations or your blade switch opportunity?
- (A) - Ian Whiting: So first off, it doesn't change our strategy at all. I mean we are still competing primarily with Cisco in the data center. We didn't have any revenue associated with HP in our plan for 2010. So, there is really no impact to the revenue or to our current outlook. There is a different ecosystem in the Ethernet world. There are different partners outside of the traditional service storage vendors as well that we intend to work with to expand our opportunity and expand our coverage. So, as far as HP is concerned, they continue to be a strong and important partner - for us in the storage space and both in the blade switch and in the broader storage marketplace and we expect that to continue.
- Nikos Theodosopoulos of UBS asked for a question, actually asked for answers relating to HP's claims that 3Com's Ethernet products test best?
- (A) - Dave Stevens: So, I don't think its any surprise that that's what they would say when you're sponsoring the test. I think we've taken a pretty close look at the product lines and we're very, very comfortable that the products that we have in the marketplace today have very good advantages in terms of power and density and cooling. And the other thing I would say is that the product that we have in the marketplace today have been there for quite some time and they've been tested in some of the toughest environments in the world for the better part of a decade and that's a lot of things that tend to not show up on tests when you hook systems up to spiral testers and just test for our throughput. I think if you sort of compare the two product lines, the products lines that they're just getting ready to ship, we're roughly 2x in density in performance with our last generation of products relative to the products that they're just getting ready to ship. So, I think we're in good shape. I think we'll maintain that lead going forward. We're very; we're comfortable competing against that product line.
- Brian Marshall of Broadpoint AmTech asked storage area networking switching is an OEM business for Brocade, how does Brocade envision the importance of OEM partners to Ethernet switching over time with Ergo can OEM revenue be 50% plus of Ethernet revenues in three to five years?
- (A) - Ian Whiting: I'd like to refer back to some of the comments that we went through on Analyst Day again where we went into some detail about how we plan our reach-to-market for both Ethernet and storage. And one of the key differentiators for Brocade and one of the reasons why we've maintained the position we have and why we're growing in the Ethernet space is because we have this unique blend of products to market, OEM, distributor, VAR, global systems integrator and direct sales and each one of those is growing at different rates. One of the keys to our success has been our ability to leverage those different markets and to balance them based on the product segments and the market segments that we're pursuing. Compared to our competitors in this space, we have considerably more products to market then they do and we're very comfortable with that strategy because we're less dependent on one specific product being successful. So, it's balanced and it's the blend of those different products to market that I think is a unique asset to Brocade.
- Glenn Hanus of Needham asked a macro question, asked us for comment on budgets, data center refresh activity and EMEA?
- (A) - Michael Klayko, Chief Executive Officer: From a budget standpoint it's all over the map. We've got customers that are down, we have customers that I'll say that are up. I should say that the market survey and the research work we've done, however, in a couple of areas, one in storage purchases as well as network infrastructure those are both positive which is very good indicator for us. Frankly no one knows how to get a handle on this incredible growth on digital data as well as the demand for network traffic continues to grow and so those two line items have been actually carved out and look very positive from a budget standpoint. But there's no real pattern, its kind of a scatter map in terms of all the budgets depending upon geography, customer, different verticals and so forth, but there is a couple of unique characteristics and that happens to be around storage and networking. We're actually saying around data centers refresh activities more and more increased RFPs, RFQs as well as early pilots and tests in fact a tremendous number of new increase compared to say the last 12 months and so that refresh activity is clearly underway and from an EMEA its spotty. Again in terms of geography right now which we're seeing is you're seeing different countries and sectors in the EMEA marketplace growing at different rates. Some of the emerging opportunities and some of the central European countries are still doing quite well, but some of the larger ones are still more flattish but not down but more flattish at this point.(A) Yeah, just to add to Mike's comments, I think what we're starting to see now is some of the pent up demand and slowing down that we saw in new data center build outs in 2009 is starting to be released and what's interesting is from storage perspective its still all fibre channel, there is no fibre channel over Ethernet installations or implantations in any of the large new data center builds that we're seeing. But the message that resonates particularly well I think with customers is that we have built fibre channel, fibre channel over Ethernet readiness into our current generation of products which is ensuring that graceful migration capability that customers always look for in those next generation platforms that they're putting into their new data centers.
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