Brocade Communications Systems Management Discusses Q4 2013 Results - Earnings Call Transcript

Nov.18.13 | About: Brocade Communications (BRCD)

Brocade Communications Systems (NASDAQ:BRCD)

Q4 2013 Earnings Call

November 18, 2013 5:30 pm ET

Executives

Ben Jones

Lloyd A. Carney - Chief Executive Officer, Director, Chairman of Corporate Development Committee and Chairman of Financing Committee

Daniel W. Fairfax - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Jason Nolet - Vice President of Data Center Switching and Routing

Jeffery P. Lindholm - Senior Vice President of Worldwide Sales & Field Operations

Ken K. Cheng - Chief Technology Officer and Vice President of Corporate Development & Emerging Business

Analysts

Brian Marshall - ISI Group Inc., Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Srini Nandury - Summit Research Partners, LLC

Kimberly Evers - Robert W. Baird & Co. Incorporated, Research Division

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Keith F. Bachman - BMO Capital Markets U.S.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Vijay Bhagavath - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Brocade's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

And now I would like to turn the program over to our speaker, Ben Jones, Senior Director of Investor Relations with Brocade. Sir, please go ahead.

Ben Jones

Thank you, Ron. Good afternoon, and welcome to Brocade's Fiscal Fourth Quarter 2013 Earnings Call. By now you should have seen our press release and prepared comments, which are available on our website, brcd.com. The press release was also furnished to the SEC and will be distributed by MarketWire.

Before we take your questions, investors should note our comments today may include forward-looking statements regarding Brocade's financial results, plans, market opportunities and business outlook, which are only predictions and involve risks and uncertainties, such that actual results may vary significantly. These and other risks are set forth in more detail in our Form 10-K for the fiscal year ended October 27, 2012, and in our Form 10-Q for the quarter ended July 27, 2013. These forward-looking statements reflect beliefs, assumptions, outlooks, estimates and predictions as of today, and Brocade expressly assumes no obligation to update any such forward-looking statement.

In addition, this presentation may include various third-party estimates regarding the total available market for SAN and IP Networking, as well as other measures, which do not necessarily reflect the views of Brocade. Further, Brocade does not guarantee the accuracy or reliability of any such information or forecast.

This presentation includes non-GAAP financial measures. The most directly comparable GAAP information, and a reconciliation between the non-GAAP and GAAP figures are provided in our Q4 2013 press release, which has been furnished to the SEC on Form 8-K, and in our slide presentation and prepared comments on our website, brcd.com.

Here to take your questions are Lloyd Carney, Brocade's CEO; Dan Fairfax, CFO; Jeff Lindholm, Senior VP, Worldwide Sales; Ken Cheng, CTO and VP of Corporate Development; and Jason Nolet, VP, Data Center Networking, Switching and Routing.

I will now turn the call over to CEO, Lloyd Carney. Lloyd?

Lloyd A. Carney

Thank you, Ben. Good afternoon, everyone, and thank you for listening to today's Q4 conference call.

Before we get into the quarter, I want to take a moment to review some of the accomplishments we have made in the past year: One, we improved our strategic focus and investments; two, solidified our position in software-based networking with our acquisition of Vyatta; three, reduced spending for a more efficient organization; four, grow [ph] record levels of probability; five, strengthened our balance sheet; six, announced greater commitment to returning cash to our shareholders; and seven, continue to build the proven leadership team.

I'm pleased with progress the team has made during fiscal 2013. However, our work is not done. It's really just getting started. This is a very exciting time for the networking industry. Change is in the air; fabrics, software-defined networking, network function virtualization, all ushering in new leaders. We at Brocade are embracing this change.

We're not going to be everything to everyone. We strive to be great in the markets we serve and bring real value to our customers. We are in the process of exiting some areas where we're also making deeper investments where we are focused for success. I'm pleased of the way the team is coming together, our product portfolio and our overall direction.

Now I'd like to speak about the quarter. Q4 was another solid quarter that brought to close a productive fiscal year for Brocade. We continue to innovate across our IP Networking portfolio in order to drive further differentiation in our offerings. During the fourth quarter, we made a number of significant product announcements in data center, campus and software networking, including native multi-tenancy to create virtual Ethernet fabrics; support of 100-gigabit Ethernet performance on Brocade VDX; the industry's fastest software-defined network virtual router, the Brocade 5600; industry's first gateway for VMware NFX, using Brocade VDX Ethernet fabric; and a new compact Ethernet switch, the Brocade ICX 6450, designed for public sector and U.S. Federal customers.

During the quarter, we also announced new SAN management capabilities; Brocade's SAN analytic management pack. It provides simplified and proactive management for SAN fabrics when integrated with VMware's cloud management software. This solution enables customers to manage the impact of SAN health, risk and efficiency on their virtual environments, leading to reduced troubleshooting time and better virtual machine performance management.

We'll continue to innovate in the development of Gen 6 Fibre Channel, incorporate a new set of capabilities including enhanced energy efficiency and lower latency for the rapid growth of solid-state drives in the data center. We believe the Gen 6 center will be finalized by early fiscal 2014 with products in the market approximately 2 years later.

Our performance in the quarter exceeded expectations for operating margin, non-GAAP EPS and cash flow. We achieved revenue of $559 million, down 3% from Q4 '12 and up 4% sequentially.

In terms of business highlights, we're pleased with our SAN results for the quarter. Our SAN product revenue was up sequentially, increasing in the Americas, EMEA and APAC, while lower in Japan. We continue to see new opportunities for SAN in high-growth markets like China and Eastern Europe, where SAN is used as key technology for new data center the build-outs. In addition, our Gen 5 products now represent approximately 69% of our SAN product shipments, underscoring our customers' requirements for additional features and performance in their Fibre Channel networks.

Our IP Networking product revenue grew 8% quarter-over-quarter, in line with our expectations. We saw growth with our data center and service provider customers in spite of the continued challenges that we and others are experiencing in the Federal market. Driving our growth for the quarter was strength in the non-Federal accounts across the Americas, EMEA and APAC.

Q4 revenue for our VDX products increased 20% year-over-year. Fiscal 2013 VDX revenue was nearly $70 million and up 57% year-over-year. A recently published Gartner report predicts that at least 25% of midsized and large data center will implement Ethernet fabrics by the end of 2015. Highly-virtualized servers require fabric, and Brocade has the best Ethernet fabric in the industry. The Gartner report is just one more validation of the importance of Ethernet fabrics for the modern data center.

I'm pleased to announce that in Q4, we met our goal of reducing our annualized spending by $100 million. This is 2 quarters ahead of our original plan and the result of commitment and discipline in every level of our company. These efforts improve our cost structure and efficiency, coupled with expanding gross margins, allowed us to achieve record non-GAAP EPS of $0.24, an increase of 41% from Q4 '12 and 26% from the prior quarter.

Our balance sheet also continues to improve with our business generating healthy cash flow. We ended the quarter with nearly $1 billion in cash, and our highest cash balance in 5 years.

Throughout fiscal 2013, we have been forming a strong executive leadership team that has allowed us to develop the competencies necessary to effectively compete in a rapidly evolving marketplace. I joined the company in January and I'm very pleased with the level of talent that we've been able to recruit for executive leadership positions in sales, marketing, operations and IT. I was also pleased to be able to promote key individuals in the organization to critical roles and to retain talented members of our executive leadership team who continue to contribute at a high level to our mission. This reshaping of our team correctly aligns our expertise through our stated strategic direction.

From a strategic perspective, we made an important decision earlier in the year to narrow our business focus around data center and public sector networking. This leverages our significant expertise, investment in our strong heritage of innovation. We recently gathered our key leaders to assess our progress and our strategy and to establish our priorities that we start this fiscal year. This was the third time we have held such meeting since February. And we continue to align towards our mission of becoming the network provider of choice for the world data centers. As indicated in our progress, data center customers represent an estimated 53% of IP Network revenue in Q4, compared with 45% in the prior year.

In summary, this year, we've delivered an aggressive product and technology road map, while creating a culture aimed at increasing efficiencies. For the quarter, we exceeded expectations for profitability and cash flow. And for the year, returned 60% of free cash flow to our shareholders. We believe networking is poised for significant change in the coming years. And we are strongly positioned to benefit from these new opportunities, through focused innovation, a differentiated portfolio and an optimized business strategy.

Now I'd like to turn the call over to Dan, who will give a brief financial review and discuss our planning assumptions and outlook for Q1. Dan?

Daniel W. Fairfax

Thanks, Lloyd. As I reflect back on fiscal 2013, it was a year of solid execution and improved financial results across a number of fronts. We made significant progress on our key objectives of improving profitability and cash flow: First, through improving the mix of higher-value and higher-margin products; second, by concentrating on a more focused strategy that has improved what management is spending across the company; and finally, we're seeing a continuation of the steady improvement in our balance sheet, particularly in the use of working capital. Mindful of delivering our total shareholder return, we made an important acquisition of Vyatta business last fall, bolstering our software networking capabilities, while at the same time, consistently returning excess cash to our shareholders through share repurchases. I remain quite pleased with our company's focus and ability to drive results during a year of significant transition.

Non-GAAP gross margin was 67.2% in the quarter, up 240 basis points from the fourth quarter of '12 and up 160 basis points quarter-over-quarter. The gross margin improvement in the quarter was the successful result of a number of initiatives. Of particular note was our IP switching and routing business, which saw our gross margin expand in the quarter.

Non-GAAP operating margin was 26.6% in Q4, up 410 basis points from Q4 of '12 and up 500 basis points quarter-over-quarter, due to our improved gross margins and lower spending. Q4 GAAP diluted earnings per share was $0.14, and non-GAAP diluted earnings per share was 24% -- $0.24 in the quarter. Both grew significantly year-over-year.

Finally, in Q4, we generated $170 million in operating cash flow and repurchased 7.8 million shares for $53 million during the fourth quarter. This brings our total fiscal 2013 repurchases to $240 million. Subsequent to Q4, we have repurchased an additional 8.1 million shares or $65 million and have approximately $935 million remaining in our board-authorized repurchase program as of November 18.

Looking forward to the first quarter of fiscal '14, we considered a number of factors, including the following, when setting our outlook. The current macro environment and economy continue to show uncertainty in the near term, specifically in the storage market and also in the U.S. Federal government, Europe and Asia.

For Q1 '14, we expect SAN revenue to be up 3% to 5% quarter-over-quarter as we're entering our strongest seasonal quarter of the fiscal year. We expect our Q1 '14 IP Networking revenue to be down 10% to 17% quarter-over-quarter, primarily driven by a seasonally soft quarter for the U.S. government vertical as well as other sequester-related disruptions in the broader marketplace.

We expect non-GAAP operating expenses to be flat to up 1% quarter-over-quarter. While we expect to see savings from a full quarter of reduced headcount as well as savings from our December shutdown, we expect to make focused investments in support of our strategic priorities.

At the end of Q4 '13, OEM inventories were just under 1.5 weeks of supply based on our SAN business revenues. That was slightly lower than the inventory levels exiting Q3 '13. While we expect inventory to between 1 to 2 weeks in the first quarter of '14, OEM inventory levels may fluctuate due to both seasonality and large end use order patterns at our OEMs.

From a tax rate perspective, we assume a structural non-GAAP tax rate of between 27% to 29% for the first quarter of '14. Discrete events can impact our tax rate from time to time, but we do not plan them to our planning guidance. Our guidance reflects the share repurchases already completed in the first quarter of '14.

We expect Q1 '14 cash flow to be down quarter-over-quarter due to the timing of the payment of variable compensation that was earned in the fourth quarter of fiscal 2013. We expect Q1 '14 non-GAAP gross margin to be between 66% and 67% and non-GAAP operating margin to be between 24% and 26%. Both are slightly above our 2-year target model range.

Lastly, as we look at fiscal 2014, we continue to plan our business in accordance with the operating model presented at September 2013 Analyst Day.

With those brief comments, I will turn the call back over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Brian Marshall of ISI Group.

Brian Marshall - ISI Group Inc., Research Division

This is the 13th quarter in a row of year-over-year improvement in gross margins. I think you're guiding for a 14th quarter in January. Can this trend actually continue into fiscal '14, if you assume $80 million to $100 million revenue coming up?

Lloyd A. Carney

Yes, we feel that -- Brian, this is Lloyd. We strongly feel that this trend will continue. You're seeing a shift to higher-margin products. You're seeing that we're getting traction across a broader IP portfolio. And you're seeing strength in the Ethernet fabric, which has margins similar to what we're used to in our SAN fabric. And so we're really pretty excited about the quarter we just had and the profits of the year going forward. We're fairly confident -- very confident that we can see that kind of gross margin expansion.

Brian Marshall - ISI Group Inc., Research Division

Great. And a quick question on the tax rate as well, obviously, kind of bumping up here in the January timeframe. Would you expect that to migrate back down to kind of more normalized levels as we progress throughout the fiscal year?

Daniel W. Fairfax

I'm sorry -- maybe I said sort of differently, Brian. But that story, kind of given your guidance and around the rate, there are discreet events that affect that as well as shift in business between domestic U.S. -- shift to locations versus offshore. And we're giving you our kind of best guess, which is that 27% to 29% range.

Operator

And we will take our next question from Mark Sue of RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

I just have a question on the SAN revenues, which were better than feared, and also better than those reported from your OEM partners. Does the near-term trends imply softness ahead, particularly, since we're past the big peak of the 16-gig upgrade cycle, was there...

Daniel W. Fairfax

Mark, Mark, we need to interrupt you, just a second. You're not coming through very clear. Maybe you could just start over, because we just couldn't...

Lloyd A. Carney

We hear like every other word from you, Mark.

Daniel W. Fairfax

It's been pretty sketchy.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay. Sorry about that. I'm just trying to get a sense of the SAN revenue. Was there a little bit of pull forward, considering that it's actually, the SAN environment, for you, is better than most companies. And just kind of -- how does -- the 16-gig cycle, which is happening a little bit faster, imply the 32-gig cycle, also happens a little bit faster as well?

Lloyd A. Carney

So I'll take a lot of things. So you asked if there was kind of pull forward in our SAN revenue because our SAN numbers are better than others. Actually, that's execution across the piece. I mean, we have a sales team here that partner better with anybody else that I've ever seen, and most data center will be coming through partners. And when one partner is down, another partner is up. And so you see that we got what we expected out of the SAN business over the quarter and we feel pretty good about going into the year with the profit for the SAN business. I heard you mentioned the 16-gig transition, if that bodes well also for the 32-gig transition? We actually believe it does. We believe we're in pretty strong position right now, as far as the 32-gig portfolio setting the standards. We're actually in better position where we are today with the 32-gig than we were with the 16-gig when the 16-gig standard was being evolved. If you remember back in the 16-gig days, everybody was pushing up CoE [ph] . They were saying, "Fibre Channel was dead." We're kind of a lone soldier in the 16-gig game. Now, everybody's onboard the 32-gig. Even though our main competitor, the most they have about their new chassis that is 32-gig ready. So everybody's onboard. We're excited about 32-gig process and expect to see the same kind of transition to 32-gig.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And then maybe just on the -- Dan, maybe why the receivables were up a little bit, sequentially, if you could help us understand that. And also OpEx, now that the heavy lifting of the OpEx is behind us, what else can we do in terms of maintaining a high level of operating margins if the revenues don't really re-accelerate, anything else you can give from an OpEx point of view?

Daniel W. Fairfax

Okay, so the first question I caught, Mark, was around the DSOs. And so DSOs were within the range we would normally plan on quarter-over-quarter or even a year-over-year basis. It had lengthened a little bit and it was directly related to the linearity of the quarter. Our fourth quarter of '13, we saw a little bit more back-end weighted than we had in the prior quarters. But again, 1 week is going to be fairly normal in terms of our modeling. So I don't think any cause for concern there. On the OpEx side, we certainly were pleased with, really, of the engagement across the company in terms of looking at the things we're doing and how we can become more efficient as we focused ourselves on these new strategic initiatives. And there's -- I would say, there's certainly more to come there. We're not in the business of slicing our company back without making reinvestments. And you can expect us to make continuous and smart investments in the future of the business, which, to [ph] Lloyd's earlier comment around operating -- sorry, gross margin expansion, we'd expect to deliver improved profitability at the product level as well as efficiency in the way we spend.

Operator

We will take our next question from Srini Nandury of Summit Research.

Srini Nandury - Summit Research Partners, LLC

Your VDX growth seems to have slowed down this -- somewhat in this quarter. Last quarter, you said that's going to be $100 million run rate. Can you provide us some color there?

Jason Nolet

Yes. Srini, this is Jason. So the positives, I think, in terms of VDX this quarter were that we shipped to a record number of customers, right, 362 customers, which is a high watermark for us. We're now above 1,500 production customers, which we believe, actually, now leads all the vendors in the Ethernet fabric category. And I would refer back to Lloyd's comment about continued analyst validation, where Gartner's now come out and said 25% of mid-sized and large data centers are expecting to move to an Ethernet fabric architecture by 2015. But to your point, we did see a little bit of a softening with respect to the revenue in the last quarter. And that's a function of 2 things: One is we introduced a new version of the fixed configuration switch in VDX portfolio, it's called the 6740. And we actually saw a faster transition to that platform than we had anticipated. And so we simply ran out of inventory and could not ship against demand for that product line. So that was kind of our planning miss on our part. The good news is, it's a faster transition than we thought to the new product line. The other thing I'd mention here is Federal, and you probably saw in the notes we released that, Federal was challenging for us. It was challenging across the board. It was certainly challenging in the VDX space as well. So that's what's going on there.

Srini Nandury - Summit Research Partners, LLC

All right, can have one more question?

Lloyd A. Carney

Go ahead.

Srini Nandury - Summit Research Partners, LLC

Yes. On your gross margins, you guided down roughly 70 basis points quarter-over-quarter, right? And then -- and you also said that you expect the quarter-over-quarter declines in Ethernet revenue to be more pronounced. So the question is that why are you guiding down gross margins when, I mean, you would expect the mix to be better, right? Am I missing something here?

Daniel W. Fairfax

No, I think you're reading the numbers correctly. What we took into account was the mix -- specifically, some changes in the mix that happened in Q4 for the Ethernet business, as well as quarterly impact from overhead costs, manufacturing overhead costs, that we didn't expect to -- benefits not to reoccur in the fourth quarter. So we planned those into our guidance and we think it's appropriate.

Operator

We will take our next question from Kimberly Evers of Robert W Baird.

Kimberly Evers - Robert W. Baird & Co. Incorporated, Research Division

This is Kim Evers for Jason Noland. Just a point of clarification on gross margin. Is it fair to say that it sounds like Ethernet mix, ala VDX, was driving the majority of the gross margin dip [ph] as opposed to the COGS reduction amount that you've provided on the last call?

Daniel W. Fairfax

Yes, probably more to the overhead side than the mix to VDX. We did see -- it wasn't just VDX alone in terms of positive mix in the quarter. You probably saw from what we've published, the routers, it actually hit a record level of revenue in the quarter, and tend to be one of our more profitable product lines as well.

Kimberly Evers - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's helpful. And then just one more, if I could. On Ethernet x Federal strength across geos, and then, particularly, nice performance in APAC. Can you comment at all, maybe on a high level, just how you find Brocade position there versus Cisco, especially with solid routing numbers?

Lloyd A. Carney

I think if you look at our portfolio, it is heavily leveraged towards products that are differentiated in the marketplace, starting with Jason's portfolio, the data center, particularly the Ethernet fabric. We have the premier Ethernet fabric in the marketplace. It's built upon an infrastructure and chipsets that have been around for 14 years, seventh generation. They're just a far superior product. Head-to-head, we just don't lose. So in the marketplace, where people are making technology decisions, not brand decisions, actually looking at testing a portfolio head-to-head, we do really well. And that happens to be -- saw what [ph] happens in the Asia-Pac marketplace. So we see that people building out data centers, and there's large data center build-ups happening across Asia-Pac, across EMEA. And when they're building out new data centers, they tend to look to the opportunities, to look at new ways of doing it. And we have refreshed our routing portfolio. We have the best fabric -- Ethernet fabric in the marketplace. So we're getting good traction. Where we get the opportunity to compete, we compete really well.

Operator

We will take our next question from Mark Moskowitz of JPMorgan.

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

Building off of Kim's question, just kind of curious, Lloyd or Jason, if you could talk more about Brocade and the kind of the RFP activity. Are you starting to be brought into more discussions that used to be restricted or limited more to the Ciscos and the Junipers and the HPs of the world because of your comments around technology at Brocade?

Lloyd A. Carney

Yes, I think without a doubt. I'll let Jason talk to that, because he's in the field at times [ph] , and make Jeff, our head of sales, comment also. But Jason?

Jason Nolet

Yes. So I think on VDX and Ethernet fabrics, in particular, we are seeing our ability to get into larger and larger deals with bigger and bigger customers. So that's actually quite promising for us, because I think, as we shared on previous calls, we've seated [ph] a lot of accounts, right. Now with 1,500 production customers, and some of those accounts were kind of mid-sized. But now we're getting a shot at much bigger customers with much bigger deployments. And that's going to be, obviously, quite material to the business when we land those things. So you're absolutely right, we're kind of climbing the ladder in terms of size and caliber of customer we're able to sell to.

Jeffery P. Lindholm

I would just add too, that, in many cases, we win these initial data center projects. And once proven out, oftentimes, there's a number of data centers behind that, that once we can improve our technology, we become the standard architecture. So there's -- I think, we'll start to see some good upside leverage and, basically, the deal magnitude increasing. And we're seeing that, actually, in the pipeline looking into this year.

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

If I could follow up, maybe Dan could weigh in. If this phenomenon continues, if you're able to sustain this incremental market penetration, deeper customer penetration, how should we think about the economics? Are these type of the bigger accounts and the repeat revenue to those accounts, can that be at or above corporate average per margin?

Daniel W. Fairfax

Certainly, I think from a modeling standpoint, where VDX would be the anchor platform for the switching infrastructure, we would say, definitely yes. We're -- and Lloyd made comments, we're very pleased with the product margins on that line of switches and the amount of intellectual property that we have designed into those devices. So that would clearly be the case. Now, you also have to remember that we're talking about moving into the data center in a much more significant way than we had in the past. So not only would it be VDX space but it would also -- our expectation would be we'd be selling a lot bigger proportion of routing into that than we would have otherwise competed on. Again, routing has a nice probability profile for us as well. That will be a portfolio play, and we have the products and the innovation to keep driving that.

Operator

And we will take our next question from Andrew Nowinski of Piper Jaffray.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Just it sounds like you're expecting your Ethernet gross margin to come down from the 56% range this quarter. I guess, what do you think the peak margins are for your Ethernet business?

Lloyd A. Carney

Sorry, you asked for what? a high watermark might be? is that -- sorry, Andy.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Yes, what do you think you could expand them to eventually, in 2014, perhaps?

Lloyd A. Carney

I see. Yes, I can defer this to the product manager for the product line. I have high expectations. I'm not sure if we could disclose that on the call today. But we're encouraged. We think there's more room to grow there. It doesn't happen, maybe next quarter, but we're very enthusiastic about our capabilities and the interest of customers in our products.

Jason Nolet

Yes. Let me give you one example of why there's reason to be bullish there. So we announced the upcoming shipment of 100-gigabit Ethernet on the VDX platform. So this is going to be used in a data center environment to connects to what we call a spine layer to the core layer. As you might guess, 100-gig is a premium kind of performance level today, and it carries with it premium pricing and premium margins. So the more we can stay out in front of some of these trends, like 100-gig in the data center, the better off we're going to be from a margin point of view.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Okay, got it. And then just last question for me, I guess. I'd like to get more detail on your SAN business. Despite the in-line Q4 results, I think you noted that there's still some softness in your OEM partners. So I guess given that you guided storage revenue below normal seasonality again, I guess, are you -- or is it fair to assume that you're not expecting an improvement in your OEMs again in the January quarter?

Lloyd A. Carney

Well, I'd say that if you look at our SAN projections, it really is intertwined with the overall state of the economy. Now, the U.S. economy is not going as well as we should, kind of stumbled there with the sequester going on in Federal space and the hostage-taking of the world economy that we went through there. The global economy is not going as well. You saw France, I think, actually retracted negative growth. So we're kind of -- we are being cautious. We know the demand is there, but we talk to the customers, they're reluctant to really spend this -- really they would like to, just based on trying to figure out where the overall trends are going in the global economy. So we feel strongly about the SAN, that we'll expect to see 2% to 5% SAN growth over next year, and we think that the demand is certainly there for that. We see a lot of interest and uptick in our 16-gig product and all the software piece and functionality that we've added to the 16-gig product portfolio. So we're being cautious. We're being prudent. But we absolutely reaffirm the 2% to 5% growth next year in the SAN space.

Operator

We'll take our next question from Keith Bachman of Bank of Montreal.

Keith F. Bachman - BMO Capital Markets U.S.

This is Keith. I have 2 questions, if I could. You mentioned that you're getting out of some products, specifically on the Ethernet side, to better focus your resources. I wondered if you could put any dimensions about what the impact of that was. Was it 5 million per quarter, 20 million per quarter, 25 million? And any kind of dimensions on what the impact of that was? And then I have a follow-up, please.

Lloyd A. Carney

Sure. So what we've said at Analyst Day was we'd expect that through the full fiscal '14 to see $80 million to $100 million worth of revenue related to these products. We didn't think we're in our strategic focus in order to come out of the model. So we started down that path in earnest. And in the quarter, we don't have any material to report to you. There was some shift in focus. We saw some impact. You could actually point more specifically to our announcement that we were partnering with Aruba on the wireless products. So there's been some impact, as we said, to execute on those moves, but not really material in the fourth quarter numbers.

Keith F. Bachman - BMO Capital Markets U.S.

Okay. But is there -- is the right dimension there is still that $80 million for the year, then?

Daniel W. Fairfax

Yes. We're not really changing that guidance at this time. So that would be our expectation.

Keith F. Bachman - BMO Capital Markets U.S.

Okay. Then going to OpEx, you mentioned a few times that you had -- excuse me, you had some more room there in terms of lowering your OpEx. How much are you thinking about, from this point on, in terms of opportunities, to further lower OpEx, and any kind of comments what the reinvestment rate might be against those incremental opportunities?

Lloyd A. Carney

Yes, so on that respect, having achieved what we wanted to see in terms of improvement and profitability by lowering our spend rate, we're pretty happy with the level we have right now. My comments would be more around, as we continue to evolve the business, we'll find areas that will become more efficient, that'll reduce the amount of spending we would have there. Our goal would be, as a team, to reinvest into the business. And so, I think, you kind of expect that the kind of modeling range we gave you, in terms of the guidance, both at Analyst Day and the forward guidance here, the spending level to stay in that range. The model -- but we should see expansion of profitability in the model, but we're not going to cut it back a lot more.

Operator

We will go next to Matt Robison of Wunderlich.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Dan, I was wondering, given the outlook you have now and some of the issues you mentioned if -- and your 14-week quarter this second quarter, are -- do you think we should still be thinking in the same kind of sequential pattern that you talked about back in September as it relates to that week? Or has there been some of the adjustments you are thinking there?

Daniel W. Fairfax

No, not really any adjustment from Analyst Day. So as you're building your models, that would be our -- we'd point you to that. We think that kind of sequential shifting that we guided to is the right one.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

And can you guys talk a little bit about what you -- the business model for the Vyatta, and what would -- how we should look at the fabric growth in '14?

Ken K. Cheng

So this is Ken Cheng. Let me just comment on Vyatta. So while the revenue is not yet material this time, we are seeing meaningful growth throughout FY '13, and we expect bookings growth continue in FY '14. We are seeing a lot of call [ph] service providers and telcos re-architecting their networks and services, leveraging SDN and NFV. And we are at that table and fully engaged in these architectural conversations. And we are laser-focused on capturing these type of strategic design wins.

Daniel W. Fairfax

And in terms of fabric growth, I think, it was the last part of your question. So I don't think we're publishing any numbers or forecasting anything specific to the product line right now. But I will reiterate, I think, what Lloyd said earlier, and that is we remain absolutely committed to this as a core growth product line for the company. We have an innovation and technology leadership position right now. I think we have an installed base leadership position as well. So you'll see us continue to invest very aggressively, both in terms of R&D as well as go-to-market with that technology. And I think we feel better than ever, given some of the competitive developments over the last month or 2, that we've got the right focus and the right value propositions and differentiation that's resonating with the marketplace. So we're going to continue to invest very aggressively.

Ken K. Cheng

One of the things we're seeing with our data center focus is, we're seeing customers looking at our fabric and saying, "Well, we need routing also." And they're buying our routers. And they're saying, "You know what? We also need some virtual routing." And they're buying our Vyatta virtual router. So we're actually seeing a bundling of the solutions that fit really nicely with where our portfolio is directed.

Jeffery P. Lindholm

This is Jeff again. One thing -- I may have mentioned this on the last call, but because we feel that the service provider market is going to be very much the early adopter here for SDN, NFV because there's a lot of business drivers for that in terms of revenue growth as well as cost savings, one of the things that we've done within my organization is, we've structured a global service provider sales team, so that we can consistently and at scale, have these kinds of at-the- table conversations that Ken mentioned. So, and that, I think, is already bearing fruit in terms of the caliber of the conversations and the scope and breadth of where we're having these conversations with the global service providers.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

What -- should we expect at some point that there'll be a trial period that will last and will have kind of a step function in the other revenue as -- isn't -- as it goes commercial?

Ken K. Cheng

Yes, so this is Ken Cheng again. We are indeed seeing a significant increase in evaluation, proof of concept testing, and also pure trial of our Vyatta products. And in fact, in many cases, our portfolio product -- set of products from Brocade. So at some point, we anticipate some of these proof of concepts and trials that's going to turn into revenue.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

I forward to seeing -- we're getting some more perspective on how we're be able to model that and last follow-up is the -- the 20% growth you saw on VDX, if you achieve that in 2014, would you view that to be successful?

Lloyd A. Carney

I'd expect that if we saw that we needed to be successful, but I actually I want to see more than that. And on to the other fronts, my direction to the team is that I need [indiscernible] landgrab in Vyatta. We're not focused on revenue. We're focused on footprint and customer wins and account wins. So it is all about grabbing as much market share as humanly possible, getting as many evaluations as possibly done, as many downloads as possibly done, because we have the right product and we just need to get as many people's hands as humanly possible.

Operator

We will take our next question from Aaron Rakers of Stifel.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

So I want to go back to the Fibre Channel market. You guys now are tapping on 70% of your Fibre Channel business being Gen 5. As you've gone through this process, I'd be curious to understand how you look at the, basically, the deployments of those 16-gig solutions, how much of that, to date, has been replacement of existing 8- or even 4-gig products versus new deployments? Or I guess, taken another way, how much of that installed base is still running solutions that should be upgraded over the coming years?

Jason Nolet

Yes. Aaron, this is Jason. So I don't know if we have the exact breakdown for you there in terms of new deployments versus replacements, but I'll tell you that the installed base is enormous, right? We've talked about it on previous calls, it dates back all the way back to acquisitions that the company did many years ago. So there's plenty of installed base to mine and in fact, one of the things that Jeff and Andy Lark [ph] are focused on is it doing just that, right, mining that installed base and focusing a lot of marketing and selling efforts against the opportunity to do upgrades. The other thing I'd mention is that we have, yet, to see the impact of all of our storage partners coming out with their Gen 5 enabled arrays, right? You're now going to see that out of EMC with their VMAX product, and then you'll see the other OEMs follow. That represents a great opportunity for us as well, because I think some customers may have been holding back their direct to upgrade until they were convinced that the arrays would come to market and support a Gen 5. So we have that to look forward to as well.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

I guess taken simply, would you say there were 50% of the installed base is upgraded or something less than that?

Lloyd A. Carney

I would say, it's less than that.

Jason Nolet

Yes, it's probably less than that. But hard to put a number on it quite yet.

Lloyd A. Carney

We'll try and get a look at that for the next call. We should have that number. One of the important things you just heard is that most of the customers are upgrading to 16-gig without having 16-gig storage. They're doing it because of all the benefits that we have in this new Gen 5 16-gig that's just above and beyond fees and fees [ph] . They're seeing performance enhancements in their data center by just going to 16-gig and connecting to the servers that aren't 16-gig. And we expect to see another little bit of uplift once the storage devices come out of 16-gig.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

And then as a final question for me, just looking -- I know that you have a $1 billion share repurchase authorization, but clearly very strong performance on the cash side this quarter. Just remind me how much cash you need or you believe you need to run the company? And how much of that cash existing today sits domestically versus held outside the U.S.?

Daniel W. Fairfax

Yes. So, let's call it, roughly a $1 billion of cash on the sheet, about [ph] 40% of it is cash in the U.S. and the balance, offshore as of the end of the last quarter. And it depends kind of quarter-to-quarter, we do have an efficient supply chain. Some of the questions about how much cash we're indeed available depends on the activity or funnel of acquisition candidates, et cetera. I think the last numbers we may have talked to were something around north of $200 million for just operating purposes and that's probably still a good number today.

Operator

We will go next to Glenn Hanus of Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

Maybe Dan, you were above model this quarter. You're guiding to above model. But then you also, I think, one of your last comments said, plan to be sort of consistent with the Analyst Day in the intermediate term here. Can you kind of reconcile those comments a little bit as we prepare our models going beyond this quarter?

Daniel W. Fairfax

Yes. So I think my comment was more -- can be more responsive to you if you're modeling top line in the quarter-over-quarter seasonality you might expect from the revenue development from 1 quarter to the other. It's probably more where I'd reflect back to the Analyst Day. And it's our belief that there's puts and takes in terms of the mix of business. We're changing where the sales team is focusing, where we do marketing. And of course in the summertime, we have the impact of 2 quarters that tend to be lower from a volume standpoint and that affects margins on those quarters. So the overall Analyst Day guidance we think is correct for -- your consistent models as you look forward, that the quarter-to-quarter seasonality impacts what you take into account, and that's probably where you're seeing a little disconnect in terms of my comments.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay, and on Federal, could you comment a little whether the -- what you're seeing there and whether you're adjusting your strategy, at all, your sort of diversification strategy within Federal, given what you're seeing, maybe you could just give us some color on what you're seeing and whether you're making any changes or how you're proceeding in light of the way things look now.

Lloyd A. Carney

No, we're continuing to strive in the Federal space, we continue to have good success in new projects, new design opportunities being bid by systems integrators. But we're holding the course, at some point in time, Federal government is still the largest IT budget of the world. Try to carve it up, we're probably 1, 2 and 3. And we continue to keep a strong focus of our great team, great leadership, great execs there. At some point in time, the sequester has to be resolved for. The weird thing is that with a sequester, they actually continue resolutions to buying the old crap that's inefficient. And the stuff they need to buy, our product, that will make the government more efficient, is on the sidelines for now. But eventually that will change. And so we're fully committed. We're underrepresented in the Federal space compared to any of the markets that we play in the world, even with our strongest portfolio of product. So we continue to see strong upside there and I'll let Jeff add few things.

Jeffery P. Lindholm

This is Jeff. I would just say I'm very proud of the sales organization and that when we saw the softness coming at us in the last quarter here, we were actually able to drive a lot of incremental upside in some of the other regions that really dampered that impact. So I think we see an ability to really drive our activities in the various theaters to kind of react to things like that. So I think that's why we saw a reasonably robust IT performance in the quarter despite the Federal condition.

Operator

And we will take our last question from Vijay Bhagavath of Deutsche Bank.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Question is on your fabric, which is based on TRILL. So as we head into calendar '14 with leaf and spine deployments and VXLAN overlays. I'd like to understand how your fabric architecture would complete the VXLAN overlay, a leaf and spine underlay 40-gig switching. I'd like your thoughts.

Jason Nolet

Yes, Vijay, this is Jason. So the good news for us is that we're not going to cause customers to have to choose between overlay technologies like VXLAN and other technologies like TRILL. We support both. We've been working with VMware for about 2 years now -- excuse me, in anticipation of their release of the NSX product. We were the first to market with VXLAN Gateway that's got a hardware support [indiscernible] ASIC connect capability. So customers have the choice of deploying an overlay model through a VMware NSX, and our VDX fabric fits in there their beautifully. All of the attributes and value propositions of the Ethernet fabric are complementary to what the overlay does. And for those customers who say, "Look, I'm not a VMware shop, where I don't like the overlay architectural approach. I'd rather have native network virtualization." We offer that as well in VCS. So for us, it's about customer choice and supporting both overlay models and network native models for network virtualization.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Yes. And then just a quick follow-on on the 16-gig Fibre Channel and 32-gig, how should we view the 16-gig Fibre Channel waterfalling into next year? When would it start tapering down and then 32-gig started to ramp?

Jason Nolet

Well, this is -- this is Jason again. So 32-gig is a ways off, right. The Gen 6 technology, I think, as we've commented in our notes, product would ship for us in early calendar year '16. So it's going to be about Gen 5 here for a while. And we are tracking to the transition with Gen 5 that we saw with previous generational transitions. And so if you just looked at what happened between 4-gig and 8-gig and 8-gig and 16-gig or Gen 5, you see that we're tracking pretty much to that same transition. And so that's how I would think about that.

Vijay Bhagavath - Deutsche Bank AG, Research Division

So would there be an impact from 40-gig Ethernet switching versus 16-gig Fibre Channel heading into next year?

Jason Nolet

No, not really. Because it's not about bandwidth. If you look at why customers are adopting Gen 5, it's all about the embedded services capability that we've included in the products, right, whether it's around diagnostics or visibility or long distance extension. These are things that have little to do with the speed bump and more to do with the innovations that we've included in that switch and director class products. So we expect 40-gig as the pure kind of bandwidth play, will have limited impact, if any, on Fibre Channel -- continuous Fibre Channel deployment.

Lloyd A. Carney

Okay. Well, this is Lloyd and thank you again for your time and attention on our call today. Exciting time for investors or customers in Brocade. We continue to execute well in delivering a world-class portfolio of software and hardware products for data center networking. We believe that we're ready to seize the opportunity in front of with a focused strategy and strong team. We look forward to share more with you about our strategic plans and accomplishments in the months to come. And again, thank you. We had a great year, a great quarter and even better things lie ahead. Thanks again.

Operator

And this does conclude today's conference call. Once again, we would like to thank everyone for your participation and have a wonderful day.

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