Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BRCD > SEC Filings for BRCD > Form 10-K on 16-Dec-2013All Recent SEC Filings

Show all filings for BROCADE COMMUNICATIONS SYSTEMS INC

Form 10-K for BROCADE COMMUNICATIONS SYSTEMS INC


16-Dec-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" above.
Overview
We are a leading supplier of networking equipment and software for businesses and organizations of many types and sizes, including global enterprises that use our products and services as part of their communications infrastructure, and service providers such as telecommunication firms, cable operators and mobile carriers who use our products and services as part of their production operations. Our business model is focused on two key markets: our Storage Area Networking ("SAN") business, where we offer Fibre Channel ("FC") SAN backbones, directors, fixed form factor switches and embedded switches, host bus adapters
("HBAs") and server virtualization solutions, and our Internet Protocol ("IP")
Networking business, where we offer modular and stackable solutions, IP routers, Ethernet switches, Ethernet fabrics, converged adapters, as well as application delivery, security and wireless solutions. We also provide product-related customer support and services.
We expect growth opportunities in the SAN market to be driven by key customer Information Technology ("IT") initiatives such as server virtualization, enterprise mobility, data center consolidation, migration to higher performance technologies, such as solid state storage and cloud computing initiatives. Our IP Networking business strategies are intended to increase new customer accounts and expand our market share through product innovation, such as our Ethernet fabric products, and the development of and expansion of our routes to market. The success of Ethernet fabrics, in particular, will depend on customers recognizing the benefits of upgrading their data center networks to fabric-based networking architectures, and our future success in this area would be negatively impacted if this technological transition does not occur at the anticipated rate or at all. We plan to continue to support our SAN and IP Networking growth plans by continuous innovation, leveraging the strategic investments we have made in our core businesses, developing emerging technologies, new product introductions, and enhancing our existing partnerships and forming new ones through our various distribution channels. We announced in the second quarter of fiscal year 2013 that we were making certain changes in our strategic direction by focusing on key technology segments, as well as investing in data center and public sector market opportunities. As part of this change in focus, we reduced cost of revenues and other operating expenses by $100 million on an annualized basis when comparing the fourth quarter to the first quarter of fiscal year 2013. We achieved our targeted cost reduction opportunities ahead of our previously announced schedule by focusing on the optimization of discretionary spending and rebalancing personnel resources. This change in focus will also result in a rebalancing of resources away from certain non-key areas of our business and may impact our ability to generate revenue from certain products, markets, geographies and customers, and may lower our revenue, in the near term, by $80 million to $100 million on an annualized basis.
We continue to face multiple challenges, including aggressive price discounting from competitors, new product introductions from competitors, rapid adoption of new technologies by customers, uncertainty in the worldwide macroeconomic climate and its impact on IT spending patterns globally, as well as uncertain federal government spending in the United States and the budget-related government shutdown. We are also cautious about the stability and health of certain international markets, including China and Europe, and current global and country-specific dynamics, including inflationary risks in China and the continuing sovereign debt risk, particularly in Europe. These factors may impact our business and that of our partners. While the diversification of our business model helps mitigate the effect of some of these challenges and we expect IT spending levels to generally rise in the long term, it is difficult to offset short-term reductions in IT spending, which may adversely affect our financial results and stock price.
We expect the number of SAN and IP Networking products we ship to fluctuate depending on the demand for our existing and recently introduced products, sales support for our products from our distribution and resale partners, as well as the timing of product transitions by our original equipment manufacturer ("OEM") partners. The average selling prices per port for our SAN and IP Networking products have typically declined over time, unless impacted favorably by a new product introduction or mix, and will likely decline in the future.


Table of Contents

Our plans for our operating cash flows are to provide liquidity for operations, to repurchase our stock to reduce the dilutive effects of our equity award programs and, from time to time, we may also opportunistically repurchase our stock under our previously announced stock repurchase programs. In addition, we may use our operating cash flows to strengthen our networking portfolios through acquisitions and strategic investments.
Results of Operations
We report our fiscal year on a 52/53-week period ending on the last Saturday in October. As is customary for companies that use the 52/53-week convention, every fifth year contains a 53-week year. Fiscal years 2013, 2012 and 2011 were 52-week fiscal years. Our next 53-week fiscal year will be fiscal year 2014, and our next 14-week quarter will be in the second quarter of fiscal year 2014. Our results of operations for the years ended October 26, 2013, October 27, 2012, and October 29, 2011, are reported in this discussion and analysis as a percentage of total net revenues, except for gross margin with respect to each segment, which is indicated as a percentage of the respective segment net revenues.
Revenues. Our revenues are derived primarily from sales of our SAN and IP Networking products, and support and services related to these products, which we call Global Services.
Our total net revenues are summarized as follows (in thousands, except percentages):

                                           Fiscal Year Ended
                        October 26,      % of Net     October 27,      % of Net     Increase/          %
                            2013         Revenues         2012         Revenues     (Decrease)      Change
SAN Products           $  1,318,509         59.3 %   $  1,356,099         60.6 %   $  (37,590 )       (2.8 )%
IP Networking Products      552,058         24.8 %        534,757         23.9 %       17,301          3.2  %
Global Services             352,297         15.9 %        346,914         15.5 %        5,383          1.6  %
Total net revenues     $  2,222,864        100.0 %   $  2,237,770        100.0 %   $  (14,906 )       (0.7 )%


                                           Fiscal Year Ended
                        October 27,      % of Net     October 29,      % of Net     Increase/          %
                            2012         Revenues         2011         Revenues     (Decrease)      Change
SAN Products           $  1,356,099         60.6 %   $  1,237,994         57.6 %   $  118,105          9.5  %
IP Networking Products      534,757         23.9 %        551,820         25.7 %      (17,063 )       (3.1 )%
Global Services             346,914         15.5 %        357,628         16.7 %      (10,714 )       (3.0 )%
Total net revenues     $  2,237,770        100.0 %   $  2,147,442        100.0 %   $   90,328          4.2  %

The decrease in total net revenues for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, reflects lower sales of our SAN products, partially offset by higher sales of our IP Networking products and Global Services offerings, as further described below:
The decrease in SAN product revenues was caused by a decrease in director and server product revenues due to weaker demand from our OEMs and weaker end-user demand in the high-end storage array market in fiscal year 2013. We continue to maintain a positive view of the long-term SAN market despite a soft storage market in the near term. The decrease in SAN product revenues was partially offset by the continued strong growth in sales of our Gen 5 Fibre Channel products. Our average selling price per port increased by 1.3% during the fiscal year ended October 26, 2013, which was offset by the 4.0% decrease in the number of ports shipped during the same period, resulting in lower SAN product revenues in fiscal year 2013;

The increase in IP Networking product revenues primarily reflects higher revenues from our IP routing and application delivery products. Based on our analysis of the information we collect in our sales management system, we estimate that revenues from our service provider and enterprise end customers have increased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, while revenues from our U.S. federal government end customers have decreased due to the current challenging federal budget environment and the budget-related government shutdown, which caused a delay in the orders for some funded projects. As the percentage of our IP Networking products being sold through two-tier distribution has increased, it has become increasingly difficult to quantify our revenues by end customer, and, therefore, these results are based solely on our estimates; and


Table of Contents

The increase in Global Services revenues was primarily attributable to an increase in the sales of initial support contracts and renewal support contracts for our IP Networking products, partially offset by a decrease in professional services revenues.

The increase in total net revenues for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, reflects higher sales of our SAN products, partially offset by lower revenues from our IP Networking products and Global Services offerings, as further described below:
The increase in SAN product revenues was driven by a shift in mix to our high-end, higher bandwidth director and switch products, including strong growth in sales of our Gen 5 Fibre Channel products. The number of ports shipped during the fiscal year ended October 27, 2012, increased by 3.5%, and average selling price per port increased by 5.7%;

The decrease in IP Networking product revenues reflects lower revenues from our IP routing and application delivery products while Ethernet switching product revenue was flat year-over-year. As more of our IP Networking products are being sold through our two-tier distribution channel, it has become increasingly difficult to consistently identify the customer split of our end users. Based on our analysis of the information we collect in our sales management system, we estimate that revenues from our enterprise customers decreased, partially offset by an increase in revenues from both service provider and U.S. federal government customers. Our IP Networking business was impacted by slower enterprise customer spending and the competitive enterprise environment. In addition, enterprise product revenue decreased in part due to our transition to a two-tier distribution channel model. This transition resulted in lower average selling prices through the distribution channel, which was not compensated by an increase in distribution channel sales volumes; and

The decrease in Global Services revenues was primarily attributed to the sale of Strategic Business Systems, Inc. ("SBS"), a wholly-owned subsidiary, in September 2011, partially offset by an increase in IP Networking support revenues.

Our total net revenues by geographical area are summarized as follows (in thousands, except percentages):

                                           Fiscal Year Ended
                        October 26,      % of Net     October 27,      % of Net     Increase/          %
                            2013         Revenues         2012         Revenues     (Decrease)      Change
United States          $  1,351,242         60.8 %   $  1,414,390         63.2 %   $  (63,148 )       (4.5 )%
Europe, the Middle
East and Africa (1)         552,734         24.9 %        493,979         22.1 %       58,755         11.9  %
Asia Pacific                181,461          8.1 %        186,244          8.3 %       (4,783 )       (2.6 )%
Japan                        97,259          4.4 %         99,887          4.5 %       (2,628 )       (2.6 )%
Canada, Central and
South America                40,168          1.8 %         43,270          1.9 %       (3,102 )       (7.2 )%
Total net revenues     $  2,222,864        100.0 %   $  2,237,770        100.0 %   $  (14,906 )       (0.7 )%

                                           Fiscal Year Ended
                        October 27,      % of Net     October 29,      % of Net     Increase/          %
                            2012         Revenues         2011         Revenues     (Decrease)      Change
United States          $  1,414,390         63.2 %   $  1,313,302         61.2 %   $  101,088          7.7  %
Europe, the Middle
East and Africa (1)         493,979         22.1 %        502,999         23.4 %       (9,020 )       (1.8 )%
Asia Pacific                186,244          8.3 %        212,636          9.9 %      (26,392 )      (12.4 )%
Japan                        99,887          4.5 %         75,542          3.5 %       24,345         32.2  %
Canada, Central and
South America                43,270          1.9 %         42,963          2.0 %          307          0.7  %
Total net revenues     $  2,237,770        100.0 %   $  2,147,442        100.0 %   $   90,328          4.2  %

(1) Includes net revenues of $339.1 million, $259.2 million and $257.5 million for the fiscal years ended October 26, 2013, October 27, 2012, and October 29, 2011, respectively, relating to the Netherlands.

Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM partners take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the practices of our OEM partners, but end-user location data indicate that international revenues comprise a larger percentage of our total net revenues than the attributed revenues above may indicate.


Table of Contents

International revenues for the fiscal year ended October 26, 2013, increased as a percentage of total net revenues compared to the prior year primarily due to a shift in the mix of SAN product sales to certain of our OEM partners from the United States region to the Europe, Middle East and Africa regions relative to total net revenues. International revenues for the fiscal year ended October 27, 2012, decreased as a percentage of total net revenues compared to the prior year primarily due to higher revenues from our SAN product sales to U.S. OEM partners, which strengthened U.S. revenues, as well as lower product sales in EMEA due to a weak macroeconomic environment.
A significant portion of our revenues are concentrated among a relatively small number of OEM customers. For the fiscal years ended October 26, 2013, October 27, 2012, and October 29, 2011, the same three customers each represented 10% or more of our total net revenues for a combined total of 46% (EMC Corporation ("EMC") with 18%, Hewlett-Packard Company ("HP") with 12% and International Business Machines Corporation ("IBM") with 16%), 47% (EMC with 16%, HP with 13% and IBM with 18%) and 43% (EMC with 15%, HP with 13% and IBM with 15%), respectively, of our total net revenues. We expect that a significant portion of our future revenues will continue to come from sales of products to a relatively small number of OEM partners and to the U.S. federal government and its individual agencies through our distributors and resellers. Therefore, the loss of, or a significant decrease in the level of sales to, or a change in the ordering pattern of any one of, these customers could seriously harm our financial condition and results of operations.
Gross margin. Gross margin as stated below is indicated as a percentage of the respective segment net revenues, except for total gross margin, which is stated as a percentage of total net revenues.
Gross margin is summarized as follows (in thousands, except percentages):

                                           Fiscal Year Ended
                        October 26,      % of Net     October 27,      % of Net     Increase/      % Points
                            2013         Revenues         2012         Revenues     (Decrease)      Change
SAN Products           $    963,121         73.0 %   $    993,491         73.3 %   $  (30,370 )       (0.3 )%
IP Networking Products      249,084         45.1 %        207,509         38.8 %       41,575          6.3  %
Global Services             196,674         55.8 %        182,019         52.5 %       14,655          3.3  %
Total gross margin     $  1,408,879         63.4 %   $  1,383,019         61.8 %   $   25,860          1.6  %


                                           Fiscal Year Ended
                        October 27,      % of Net     October 29,      % of Net     Increase/      % Points
                            2012         Revenues         2011         Revenues     (Decrease)      Change
SAN Products           $    993,491         73.3 %   $    881,981         71.2 %   $  111,510          2.1  %
IP Networking Products      207,509         38.8 %        230,637         41.8 %      (23,128 )       (3.0 )%
Global Services             182,019         52.5 %        170,916         47.8 %       11,103          4.7  %
Total gross margin     $  1,383,019         61.8 %   $  1,283,534         59.8 %   $   99,485          2.0  %

For the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, total gross margin increased in absolute dollars and as a percentage of total net revenues due to a combination of factors for our SAN products, IP Networking products and Global Services offerings, as further described below.
Gross margin percentage by reportable segment increased or decreased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, primarily due to the following factors (the percentages below reflect the impact on gross margin):
SAN gross margins relative to net revenues decreased due to a 1.4% increase in manufacturing overhead costs relative to net revenues primarily due to a decrease in our ports shipped versus our fixed overhead costs, partially offset by a 0.5% decrease in amortization of SAN-related intangible assets and a 0.4% decrease in discrete period costs, in each case, relative to net revenues;

IP Networking gross margins relative to net revenues increased primarily due to a 2.8% decrease in product costs, which is primarily due to a more favorable mix of IP Networking products, a 2.2% decrease in manufacturing overhead costs, and a 1.7% decrease in discrete period costs, which is primarily due to lower inventory revaluation and decreased warranty expense, in each case, relative to net revenues. These decreases were partially offset by the costs associated with certain Foundry pre-acquisition litigation, which caused a 0.6% increase in costs, relative to net revenues; and


Table of Contents

Global Services gross margins relative to net revenues increased primarily due to a 3.4% decrease in service and support costs relative to net revenues, primarily due to a decrease in period costs related to improved utilization of service inventory assets within our spares depot, as well as decreases in legal, IT and facilities expenses.

For the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, total gross margin increased in absolute dollars and percentage primarily due to an increase in margins on SAN products and Global Services offerings, and a favorable product mix resulting from a year-over-year increase in the relative percentage of SAN products sold, which yield higher gross margins. This was partially offset by a decrease in margins on IP Networking products.
Gross margin percentage by reportable segment increased or decreased for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, primarily due to the following factors (the percentages below reflect the impact on gross margin):
SAN gross margins relative to net revenues increased due to a 1.1% decrease in product costs relative to net revenues. Additionally, amortization of SAN-related intangible assets decreased by 0.9% relative to net revenues;

IP Networking gross margins relative to net revenues decreased due to a 4.3% increase in manufacturing costs, as well as a 1.1% increase in product costs relative to net revenues, which is primarily due to the impact of a decrease in average selling prices and an unfavorable mix due to an increase in the percentage of sales of our fixed form products, which yield lower gross margins. These increases were partially offset by a 2.6% decrease in other costs relative to net revenues, primarily by a decrease in inventory excess and obsolescence charges and warranty expense; and

Global Services gross margins relative to net revenues increased due to a 4.7% decrease in service and support costs relative to net revenues, primarily from decreased headcount as a result of the sale of SBS.

Research and development expenses. Research and development ("R&D") expenses consist primarily of compensation and related expenses for personnel engaged in engineering and R&D activities, fees paid to consultants and outside service providers, engineering expenses, which primarily consist of nonrecurring engineering charges and prototyping expenses related to the design, development, testing and enhancement of our products, depreciation related to engineering and test equipment, and expenses related to legal, IT, facilities and other shared functions.
R&D expenses are summarized as follows (in thousands, except percentages):

                                      October 26, 2013            October 27, 2012
                                                  % of Net                    % of Net      Increase/          %
Research and development expense:    Expense      Revenues       Expense      Revenues      (Decrease)      Change
Fiscal year ended                 $   378,521        17.0 %   $   363,090        16.2 %   $     15,431         4.2 %
                                      October 27, 2012            October 29, 2011
                                                  % of Net                    % of Net      Increase/          %
                                     Expense      Revenues       Expense      Revenues      (Decrease)      Change
Fiscal year ended                 $   363,090        16.2 %   $   354,401        16.5 %   $      8,689         2.5 %

R&D expenses increased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, due to the following (in thousands):

                                                                         Increase/
                                                                         (Decrease)
Salaries and other compensation                                       $     17,199
Depreciation and amortization expense                                        3,171
Engineering equipment expense                                                2,055
Various individually insignificant items                                       125
The increase in R&D expenses was partially offset by a decrease in
the following:
Expenses related to legal, IT, facilities and other shared functions        (7,119 )
Total change                                                          $     15,431


Table of Contents

Salaries and other compensation increased primarily due to an increase in salaries and incentive compensation for employees added from the Vyatta, Inc. ("Vyatta") acquisition, as well as merit-based increases in salaries and headcount growth related to other Brocade personnel. Depreciation and amortization expense increased due to additional equipment acquired for use in our engineering laboratories. In addition, engineering equipment expense increased primarily due to a physical write-off of scrapped equipment in fiscal year 2013. Expenses related to legal, IT, facilities and other shared functions allocated to research and development activities decreased primarily due to lower legal expenses due to recent litigation settlements, and lower IT expenses as part of our spending reduction plan.
R&D expenses increased for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, due to the following (in thousands):

                                                                         Increase/
                                                                         (Decrease)
Salaries and other compensation                                       $      6,999
Outside services expense                                                     4,143
Depreciation and amortization expense                                        1,905
Engineering expense                                                          1,187
The increase in R&D expenses was partially offset by decreases in the
following:
Engineering equipment expense                                               (3,615 )
Stock-based compensation expense                                            (1,007 )
Various individually insignificant items                                      (923 )
Total change                                                          $      8,689

Salaries and other compensation increased primarily due to an increase in our variable compensation due to improved financial results during fiscal year 2012. Outside services expense increased primarily due to increased certification and technical publication expenses as we penetrated new markets and fulfilled additional U.S. federal government customer testing requirements. In addition, depreciation and amortization expense increased due to additional depreciation expenses related to equipment for our laboratories. These increases were . . .

  Add BRCD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BRCD - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.