Brocade Communications - Strong End To Its Fiscal 2012 Gives Confidence For The Future

| About: Brocade Communications (BRCD)

Shares of Brocade Communications (BRCD) rose more than 3% over the past trading week. The supplier of networking equipment reported its fourth quarter results last Monday which were well received by the market.

Fourth Quarter Results

Brocade Communications reported fourth quarter revenues of $578.3 million, up 5% on the year before. Revenues comfortably beat analysts consensus of $566 million.

Gross margins for the quarter rose 290 basis points to 62.4% on strong revenue growth, lower fixed costs and a favorable product mix. GAAP operating margins rose 500 basis points to 14.9% on higher gross margins and lower operating expenses.

The company reported GAAP net income of $54 million, compared to a loss of $4 million last year. GAAP earnings per share came in at $0.11 per share, compared to a loss of a penny last year. Non-GAAP earnings per share rose a penny to $0.17 per share, beating analysts consensus by three cents.

During the quarter, Brocade repurchased 11.2 million shares for a total consideration of $60 million.

CEO Michael Klayko commented on the results, "Q4 was an excellent quarter for Brocade and a strong ending for fiscal 2012 during which we established a number of company records including revenue, net income, and operating cash flow. Our product portfolio across all areas of our business is the strongest it has ever been and we are driving industry transformation in emerging areas of growth including virtualized data center, cloud computing, and software-defined networking."


Brocade ended its fiscal 2012 with $713 million in cash, equivalents and short term investments. The company operates with $601 million in short and long term debt, for a net cash position of $108 million.

Brocade generated annual revenues of $2.24 billion. On a GAAP basis, the company net earned $195 million, or $0.41 per diluted share.

The market currently values Brocade Communications at $2.58 billion, which values operating assets at $2.47 billion. This values the business at 1.1 times annual revenues and 12-13 times annual earnings.

Brocade currently does not pay a dividend.

Some Historical Perspective

Year to date, shares of Brocade Communications have returned almost 9%. Shares started the year around $5.20 per share and quickly advanced to $6 in February. Shares hit lows of $4.50 during the summer and are currently exchanging hands around $5.60 per share.

Trading as high as $10 in 2007, shares fell to lows just above the $2 mark in the beginning of 2009. Shares recovered all the way back to $9 later that year, but have fallen back ever since. Between its fiscal 2009 and 2012, Brocade reported total revenue growth of 15% to $2.24 billion. The company turned a $83 million loss in 2009 into a $195 million profit this year.

Investment Thesis

Brocade Communications continues to create shareholder value, even though long term shareholders have lost a quarter of their value over the past five years. Shares hardly spiked up this year, despite the fact that the company reported record annual revenues and earnings. The stronger balance sheet, allows the company to continue to repurchase shares, thereby driving earnings per share growth.

The combination of a stagnant share price and continued operational strength has brought earnings multiples down to 12-13 times annual earnings. In its earnings conference call, Brocade points out that the first quarter guidance is conservative. Brocade continues to see uncertainty in Europe and the US with the fiscal cliff discussions continuing to go on.

The strong operational performance and improving balance sheet strength, accompanied with fair valuation multiples makes shares more appealing with time. I think shares are conservatively valued, but a strong first quarter earnings beat could trigger an upside move.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.