Brocade Communications Systems, Inc. :BRCD-US: Earnings Analysis: Q4, 2016 By the Numbers : December 21, 2016

Brocade Communications Systems, Inc. reports financial results for the quarter ended October 31, 2016.

We analyze the earnings along side the following peers of Brocade Communications Systems, Inc. – NetApp, Inc., Quantum Corporation, HP Inc., Western Digital Corporation, Cisco Systems, Inc. and Juniper Networks, Inc. (NTAP-US, QTM-US, HPQ-US, WDC-US, CSCO-US and JNPR-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 657.30 million, Net Earnings of USD 66.59 million.
  • Gross margins narrowed from 66.81% to 62.63% compared to the same period last year, operating (EBITDA) margins now 20.46% from 24.15%.
  • Year-on-year change in operating cash flow of -12.89% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-10-31 2016-07-31 2016-04-30 2016-01-31 2015-10-31
Relevant Numbers (Quarterly)
Revenues (mil) 657.3 590.72 523.31 574.28 588.83
Revenue Growth (%YOY) 11.63 7.05 -4.26 -0.34 4.34
Earnings (mil) 66.59 10.5 43.09 93.65 84.39
Earnings Growth (%YOY) -21.09 -88.55 -44.07 7.31 1.16
Net Margin (%) 10.13 1.78 8.23 16.31 14.33
EPS 0.16 0.02 0.11 0.23 0.2
Return on Equity (%) 10.64 1.69 6.86 14.88 13.48
Return on Assets (%) 5.43 0.95 4.36 9.43 8.5

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Market Share Versus Profits

Revenues History
Earnings History

BRCD-US‘s change in revenue this period compared to the same period last year of 11.63% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that BRCD-US is holding onto its market share. Also, for comparison purposes, revenues changed by 11.27% and earnings by 534.48% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 66.81% to 62.63%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 24.15% to 20.46% in this time frame. For comparison, gross margins were 59.45% and EBITDA margins were 12.04% in the previous period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

BRCD-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 129.90 days from 194.11 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

BRCD-US‘s change in operating cash flow of -12.89% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 20.38% to 13.86% and (2) one-time items that contributed to a decrease in pretax margins from 18.76% to 10.31%

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Brocade Communications Systems, Inc.

Company Profile

Brocade Communications Systems, Inc. engages in the provision of innovative network solutions. It supplies networking hardware and software, including Storage Area Networking solutions and Internet Protocol networking solutions for businesses and organizations worldwide. It operates through the following segments: Storage Area Networking Products, Internet Protocol Networking Products, and Global Services. The Storage Area Networking Products segments include infrastructure products and solutions that assist customers in the development and delivery of storage and server consolidation, disaster recovery and data security, and in meeting compliance issues regarding data management. These products are used to build storage area networks and are generally used in conjunction with servers and storage subsystems, Storage Area Networking interconnection components such as host bus adapters and server and storage management software applications and tools. The Internet Protocol Networking segments products include Layer 2 and Layer 3 Ethernet switches and routers that are designed to connect users over private and public networks, including local area, metro, and within & across global data centers. Global Services segment include break and fix maintenance, installation, consulting, network management and software maintenance, and post-contract customer support revenue. Brocade Communications Systems was founded by Paul R. Bonderson, Jr., Kumar Malavalli and Seth D. Nieman on August 24, 1995 and is headquartered in San Jose, CA.

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