Brocade Communications Systems' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

| About: Brocade Communications (BRCD)

Brocade Communications Systems, Inc. (NASDAQ:BRCD)

F1Q 2014 Results Earnings Conference Call

February 13, 2014 05:30 PM ET

Executives

Ben Jones, Senior Director of IR

Lloyd Carney - Chief Executive Officer

Dan Fairfax - Chief Financial Officer

Jeff Lindholm - SVP, Worldwide Sales

Ken Cheng - CTO and VP of Corporate Development

Jason Nolet - VP, Data Center Networking

Analysts

Mark Sue - RBC Capital Markets

Jason Noland - Robert Baird

Aaron Rakers - Stifel Nicolaus & Company

Mark Moskowitz - JP Morgan

Andrew Nowinski - Piper Jaffray

Matthew Robison - Wunderlich

Amitabh Passi - UBS

Stephen Patel - ISI Group

Srini Nandury - Summit Research

Kent Schofield - Goldman Sachs

Vijay Bhagavath - Deutsche Bank

Jess Lubert - Wells Fargo Securities

Keith Bachman - Bank of Montreal

Kim Watkins - Citi

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Brocade's First 2014 Earnings Conference Call. As a reminder, this conference call 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, (inaudible). Good afternoon, and welcome to Brocade's fiscal first quarter 2014 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, strategy, targets, planning assumptions, business outlook, tax rate, cash, stock buybacks, OEM inventory, OEM partnerships, worldwide SAN and IP networking demand, customer segment uncertainty and IP sending, 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 26, 2013. These forward-looking statements reflect beliefs, assumptions, outlook, estimates and predictions as of today and Brocade expressly assumes no obligation to update any such forward-looking statements whether as a result of new developments or otherwise.

In addition, this presentation includes various third-party estimates regarding market share and 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 Q1 2014 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.

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

Lloyd Carney

Thank you, Ben. Good afternoon everyone, and thank you for listening today's Q1 conference call. This is a solid quarter for Brocade in which we achieved revenue of $565 million and non-GAAP earnings per share of $0.24 exceeding our expectations in both periods. Non-GAAP gross margin and non-GAAP operating margin were both company records. With strong cash flow in the quarter we repurchased $144 million of our common stock. Executing the plan that we outlined at our Analyst Day and Technology Day last September a plan to return of minimum of 60% of free cash flow to shareholders.

We saw healthy demand for our SAN products in the quarter underscoring the you recovery in the storage market. IP networking revenue was lower year-over-year but within the range of our outlook. We continue to see growth in our Ethernet Fabric sales where customers interest and sales activity remained high.

Brocade’s net Fabric sales were up 61% year-over-year as both enterprise and search provider customers implement next generation networks to support their increasingly virtualized data centers.

We are also seeing fiber channel momentum in high growth storage technology markets namely solid state discs or SSDs. Silver OEMs as well as other storage vendors have released SSD based storage arrays that includes fiber channel connectivity. Fiber channel uniquely delivers high bandwidth capability record data accessibility and superior reliability which are all critical requirements to optimize the use of SSDs. This is validated by recent published report by the evaluator group which testing how to utilize SSD storage environment perform their highest levels of fiber channel connectivity. Additionally fiber channel delivered superior availability while reducing cabling, complexity and other management costs compared to fiber channel for Ethernets FCOE.

We continue strength (inaudible) ecosystem by collaborating closely with industry associations and vendors within the industry. For example this week the fiber channel industry association FCIA provide an update on the industry’s progress on Gen 6 fiber channel, preferring to this technology’s next general of fiber channel designed to address performance, reliability and scalability requirements for hyper scale virtualization SSD storage technology and new data center architectures.

The FCIA also announced that solutions are expected to broadly available in 2016. Looking at our IT business we continue to make progress towards our strategy of being a network provider choice at the world data centers. During the quarter an 59% of our IT network revenue came from data center related deployment adding piece of the mix of IT business from estimated 53% in Q4, ‘13 and 40% in Q1, 13. This represented growth of approximately 5% year-over-year on an absolute dollar basis from our area of focus data center networking.

Data center networking is undergoing the technology transition that included fabrics, soft defined networks, SDNs and network function virtualizations, NFVs. These technologies are playing an increasing important role in the (inaudible) of IP networking customers and offer new selling opportunities for Brocade.

We begin to see increased customer engagement as a result of our open and differentiated capabilities in SDN and NFV. In addition NFV and SDN have become crucial vendor capabilities at Tier 1 providers accelerate earnings for new technologies a naming adoptions of a more cloud based architecture while reducing capital expenses.

With our leadership in NFV located in (inaudible) response numerous archives providing new roles into larger prominent customers. In fact we are currently working with five of the top 10 service providers worldwide on our (inaudible). With an emphasis in disruptive technologies this (inaudible) provide a more level plain in field where incumbent strength is neutralized.

The core (inaudible) to is vacancies announcement last September of the new supply domain (inaudible) which highlights to open us the new players and new technologies like SDN and NFV. With our continuing focus on SDN and NFV we expect to expand our technology leadership. We are investing to increase our expertise in software networking by expanding our technology team and recruiting top engineering challenge. We believe that these technologies will continuously evolve and we are firmly committed to leading the NFV and SDN market.

In summary we continue to execute on our data center focused strategy and to build our expertise in emerging technologies. We believe in a long journey of our expand business underscored by continued software adoption of our Gen 5 solutions and use of cyber channel technology in emerging core technology such as SSD-based [portrays]. We’re the market leader in data center fabrics, software networking and architectures. And these technologies are beginning to play in more prominent role in purchasing decisions in IP network.

We have made great progress in driving efficiency and improved profitability in our business. This will continue to allow us to deploy sources in the strategic areas, while contribute to our growth and success.

And now I’d like to turn the call over to Dan who will give a brief financial review of Q1 and FY2014 and those are final assumptions and outlook for Q2. Dan?

Dan Fairfax

Thanks Lloyd. I’d like to now turn your attention to some of the key financial highlights for Q1. I was pleased with our execution in Q1 and the improvements we are driving in our business model. We achieved both record gross margin and operating margin during the quarter and returned 126% of our Q1 free cash flow to shareholders, more than twice amount we committed to it.

In Q1, Brocade reported revenue of $565 million, which was a decrease of 4% year-over-year, but an increase of 1% sequentially. For our total SAN business including hardware products and SAN-based important services, Q1 ‘14 revenue was $412 million, down 1% on Q1 ‘13 and up 8% sequentially.

Our business result and we saw strength in our SAN product revenue in the quarter from recent storage off to very product launches from our OEM partners. Our Gen 5 products represented 71% of director and switch revenue during the quarter compared with 59% in Q4 ‘13 and 42% in Q1 ‘13.

For our total IP networking business, including however and IP-based support and services, Q1 ‘14 revenue was $153 million, down 11% year-over-year and down 15% sequentially. Our first quarter is a seasonally down quarter due to the fact that our U.S. federal customers placed more of their orders during the fiscal third and fourth quarter. Our federal revenue was approximately $13 million in the quarter, down 44% quarter-over-quarter and 49% year-over-year.

At our September 2014 Analyst Day, we explained our strategic focus on the data center and guided investors to anticipate an annualized reduction in revenue of $80 million to$100 million. The recent sale of our network adapter business and are shifting focus to the data center have now resulted in approximately $15 million reduction in revenue from our quarterly run rate. Q1 ‘14 revenues were negatively impacted by approximately $5 million from the historical run rate.

Non-GAAP gross margin was a record 67.7%, up 170 basis points from Q1 ‘13 and up 50 basis points quarter-over-quarter. The year-over-year improvement in gross margin was due to a favorable revenue mix shift for more SAN products, available product and customer mix within the IP networking business and lower manufacturing and overhead cost. A sequential improvement in gross margin was primarily due to a more favorable mix to SAN products.

Non-GAAP operating margin was 27.9% in Q1, also a record up 440 basis points in Q1 ‘13 and up 130 basis points quarter-to-quarter due to the improved gross margins and lower spending. Q1 GAAP diluted EPS was $0.18 and non-GAAP diluted EPS was $0.24 in the quarter, both up year-over-year.

Finally, in Q1 we generated $109 million in operating cash flow and repurchased 16.7 million shares for $140 million during the quarter. Subsequent to Q1, we have repurchased an additional 3.3 million shares for $31 million and have approximately $829 million remaining in our board authorized repurchase program as of February 13.

Looking forward to Q2 ‘14, we considered a number of factors including the following in setting our outlook. For Q2 ‘14 revenue planning we took into account the expected impact from the divestiture of the network adaptor business, a discontinuation of the wireless business, as well as the de-emphasis of the other product lines.

The estimated total revenue impact of these actions was $15 million compared with Q2 of fiscal ‘13. FY14 is a 53 week year and Q2 ‘14 is a 14 week quarter, which we expect to incur an extra week of spending.

For Q2 ‘14 we expect SAN revenue to be down 10% to 13% quarter-over-quarter. The strength in our Q1 ‘14 SAN revenue, coupled with the public commentary from the storage array vendors need us to guide our Q2 SAN revenue lower than typical seasonality. However, the first half of fiscal 2014 SAN product revenue, which is our first quarter of ‘14 actually results plus our Q2 ‘14 outlook is within the fiscal ‘14 operating model we have presented at our Analyst Day.

We expect our Q2 ‘14 IP networking revenue to be flat to up 7% quarter-over-quarter as we expect a modest improvement in the Americas region including U.S. federal. We expect non-GAAP operating expenses to be at 2% to 3% quarter-over-quarter, which is reflective of the impact of an extra week of expense for this 14 new quarter.

At the end of Q1 ‘14, OEM inventory was approximately 1.4 weeks of supply is on SAN business revenue. While we expect inventory to be between one to two weeks in Q2 ‘14, OEM inventory levels may fluctuate due to both seasonality and large end user order patterns at the OEMs.

From a tax rate perspective, we assume a structural non-GAAP tax rate of 26% to 28% for Q2 ‘14. Of course discreet events can impact our tax rate from time-to-time. We expect Q2 ‘14 operating cash flow to be higher sequentially due to the timing of variable compensation payments and interest payments on the bonds.

We expect Q2 ‘14 non-GAAP gross margin to be 65.5%, 66% within our two year target model range and non-GAAP operating margin to be 21.5% to 23%, slightly lower than our two year target model range. As we look at the full fiscal year 2014, we continue to plan our business in accordance with the operating and cash flow model represented at our September 2013 Analyst Day.

With that I will turn the call back over to Camille to begin the question-and-answer session. Camille?

Question-and-Answer Session

Operator

Thank you (Operator Instructions). We do have our first question from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets

Thank you. Good afternoon, gentlemen. If I look at the fiber channel revenues, it seems to imply some share gains both on switches on directors, if you could help us understand the dynamics in that market near-term, is Cisco just seeding market share? And perhaps you can tie in those comments with what your customers are saying about longevity of fiber channel? At the moment you seem to be getting a push in merchant markets but also what's happening in mature markets, are your customers planning future builds for fiber channel and on most of these mature market customers, considering 32k?

Jason Nolet

Hey Mark this is Jason. Great question, so let me talk about why we think we’re seeing such good momentum. It has to do with a couple of dynamics. One is the fabric vision technology that we introduced as part of Gen 5 continues to resonate very strongly, both with existing customers and with prospects. This is all about improving manageability diagnostic’s visibility is to what's happening in the storage network. And then the continued rapid adoption of (inaudible) disk is also playing very favorably for fiber channel as Lloyd described in his opening comments. In order to have the full benefit of flash technology, SSD technology, you have to have a network that can deliver very low latency, very high performance on a lot of those environments. And that's exactly what fiber channel uniquely does.

So with more SSD deployment, we see more fiber channel deployment. In fact one of the things that we did is launched a solid state ready program to work with all of the emerging solid state array vendors in the industry to make sure their solutions are qualified with our fiber channel gear.

And we think in collaboration with or in addition to the work we do with our existing OEM that that helps us extend our reach for fiber channel as those new SSD products come out. In terms of the longevity, the one technology, I’d repeat what we said on previous calls that is this is a very sticky technology, because it is uniquely positioned in the absolute heart of every data center, I mean there is no other technology that can displace it.

So we continue to see customers with new build outs, data center consolidation projects and they continue to adopt fiber channel for the most mission critical applications.

Unidentified Company Representative

Mark, Lloyd Carney. There is also a great article that yesterday that Steve (inaudible) covers the whole Gen 6 vertical on (inaudible) applicable, and really holding on the need for fiber channel, the fact that it’s not going anytime sooner and it actually is poised to see some growth.

Mark Sue - RBC Capital Markets

That’s helpful. And then if I could turn to the IP networking side, it’s still down year-over-year. As you look at your planning assumptions for this segment, should we think about a potential reacceleration in this business or do you rather see it as a more margin and cash flow contribution segment and it’s really the fabric what concentrating the growth on and directly Ethernet is more stable?

Lloyd Carney

Well, you see where our data center IP growth year-over-year at about 5% growth there and you see where on the fiber itself 6% growth again year-over-year. So the years that we’re focusing on as we aligned our strategy last year and communicated it in the analyst meeting in September, we’re succeeding where we’re focusing. And you should expect to see us continue to exceed in those areas and (inaudible) we’re seeing also some of the most excessive deployments are on the Ethernet Fabric also brings along our rest of our portfolio. You’re seeing NFD, SDN kind of solutions there, you’re seeing routing solutions being bundled with those. So, we’re seeing the entire portfolio moving and especially again where we’re focused around the data center IP we’re seeing a lot of good success there.

Mark Sue - RBC Capital Markets

That’s helpful. Dan, a financial question for you. the strong progress with reducing manufacturing overhead and cost reductions, if we look at what’s the specific progress to be harder to reduce cost from here and also are there any residual expenses related to the discontinued operations that can also potentially come out on a going forward basis?

Dan Fairfax

Yes, so kind of point you back to what we have been doing over the last year or so. We’ve had a steady focus on looking at our business, adapting it to where we are focused and that allows us to really drive continued efficiencies. And even I think when declared victory against our initial target of reducing annualized spend by 100 million, we said that wasn’t sufficient, there is other places that we can reduce spend to get that energy into investments as we look how to grow the business further. So there is continued opportunities there; I would say wouldn’t accept a model that is all dropping to the bottom line because we see a lot of opportunity to expand the business to take a look movement into SDN, NFD, as Lloyd was referring to.

Mark Sue - RBC Capital Markets

Okay…

Lloyd Carney

Thank you, Mark. Operator, next -- I am sorry Mark, say again.

Mark Sue - RBC Capital Markets

I was just wondering is there any incremental OpEx that comes out of discontinuing operation.

Dan Fairfax

So we model that in for the HBA, the -- business which we announced, so the rest of it will be within the guidance we provided in the operating model from the Analyst Day, it’s already baked in there, Mark.

Operator

And our next question comes from Jason Noland with Robert Baird.

Jason Noland - Robert Baird

I wanted to ask about network function virtualization, you mentioned some RFIs, some top service provider partners worldwide, could you talk about the products that would be involved from Brocade and pace of adoption you expect in this market?

Ken Cheng

Hi, Jason this is Ken Cheng. We are actually seeing a spectrum of applications for [NAV] and frequently people associated [NAV] with areas and service providers. We are actually seeing a broad adoption even in enterprise. So, some of the typical deployment that we have seen and participated include typical edge consolidation where a customer will consult a multiple appliances onto a cost platform using software virtualization.

We also see a lot of areas as service providers attempting to virtualize typical closed and proprietary [out for seven] appliances into a virtualized cost platform. And we certainly are also participating in many of the infrastructure virtualization, which is just turning to emerge including the virtual evolved packet for us.

So we have seen a lot of traction. And typically people look at Brocade’s Vyatta virtual routing platform for both virtual infrastructures as well as virtual network functions and typically the conversations go from there and go into using the Ethernet fabric as the physical underlay for these deployments.

Lloyd Carney

This is Lloyd. So a good proof point of the strategy is if you are going to Mobile World Congress next year, (inaudible) a year before, we are going to presence from this year, we are demonstrating at NEC, Hitachi data systems in Intel and remotely Ericsson and showcasing our SDN, NFV products along with our Ethernet (inaudible) products. So if you want to see where (inaudible) coming a year and the impact of what we are doing and that needing technologies, mobile world congress and those guys spending more money than anybody else right now that's where we are.

Jason Noland - Robert Baird

Okay. Thank you, and there is a follow-up maybe for Dan. Gross margin mid 70s in SAN that's a well above the most recent guide I believe, are we sustainable at these levels and then on the IP side, mix (inaudible) should we expect that's a drift higher with strength fn BDS?

Dan Fairfax

Yes so first the SAN. And so SAN gross margin has been very stable. We see some shift whether it’s a strong direct to quarter, switch quarter if that's having modest impact, but those have been very durable. And we haven’t seen any significant price impact, but we haven’t been able to compensate with by lower earning, our product cost. So very stable mode there.

On the IP side, we made some comments from prepared remarks that we published really the strength of portfolio is helping and that's driven by the focus on the business, but as we shift more of our attention to the datacenter to a mix of products it will include the routers, the VDX family some of our multi-margin switches. We have seen gross margins improve there and as we move some of our attention away from campus opportunities particular and areas where the competition was for having price discussion, we've seen improvements. And we would expect that to continue as the data center focus (inaudible) largest share of our revenues come from data center accounts.

Jason Noland - Robert Baird

Thanks guys.

Ben Jones

Thank you, Jason. Operator, next question please.

Operator

Our next question comes from Aaron Rakers with Stifel Nicolaus and Company.

Aaron Rakers - Stifel Nicolaus & Company

Yes thank you for taking the questions. The first question from me, I want to touch on the guidance and in particular your SAN guidance as it pertains to this current quarter. I think your logic has made a reference that the HBA business that they were acquiring was about $2 million revenue impact for the quarter. If I do the math and I look at what you’re guiding at down 10% to 13% sequentially then also factoring what you’ve previously said about seasonality given the extra week in this quarter it would appear to me that you’re guiding anywhere from a $20 million to $30 million lower than seasonal expectation in the fiscal second quarter. So is that true and how do we think about that again in the context of what you would be assuming in terms of growth looking into the second half of the year to hit your full year fiscal ‘14 numbers?

Lloyd Carney

So let me, so I don’t want to get into the margin, but (inaudible) logic in our conference call. The way we would guide you around adaptor divestiture is about the $15 million I mentioned has now come out of our run rate on a year-over-year basis, roughly half of that would be related to the adaptor business. And if that number, approximately half of that would relate to fiber channel business.

I don’t know if that should help you with your guidance. And then we did make some comments as said that we feel good about where we are against the full first half of fiscal ‘14 based on what we expected coming into the fiscal year we had a good strong Q1 and we pay attention to what our partners are telling us. And we think they made a (inaudible) in Q1 we’re taking that into account the guidance we didn’t give for Q2. We don’t see changing our overall view of how the full year ‘14 will develop before we get back where we are.

Aaron Rakers - Stifel Nicolaus & Company

Okay. And then just my second question would be as, it was touched on a little bit earlier about the operating expense structure you’re still reporting a headcount that include 224 people you have to come out of the organization. So I am curious that how we should think about that? When did those employees come out of the operating expense line and how do we think about that in terms of the impact, you reinvest half of that, you reinvest all of that in terms of the operating expense that you are assuming.

Lloyd Carney

Yes, sorry that somehow became confusing. What we reported was we took restructuring charge for the personnel actions in the fourth quarter, but those employees who are notified were actually in our headcount because they had enough for the business but the charges were all taken in the fourth quarter. They are now all terminated, they no longer workout.

Aaron Rakers - Stifel Nicolaus & Company

Okay thank you.

Ben Jones

Alright. Thank you Aaron. Operator next question please.

Operator

Our next question is from Mark Moskowitz with JP Morgan.

Mark Moskowitz - JP Morgan

Yes, thank you. Good afternoon, just two question here if I could go around some of your earlier ones. We have heard a variety of different companies talk about the month of December being challenging and some saying the month of January. Yet your quarter was explosive both of those months and you came out with real nice print, I think to guide maybe is up for the conservatism will have you. But just trying to get a sense of in terms of how much is related to your market share or new penetration if you will in terms of providing the offset here, because it seems like this is definitely Brocade as an outlier and just want to see it what are the major factors and if you could rank or order and then how sustainable?

Lloyd Carney

Well I think what just happened here is that is we said out last year in the product strategy can we go with business strategy and where did you get any of these strategies. And we have brought a new leadership so work with the existing leadership here, so we have a brand new team in place, a lot of energy within the sales organization (inaudible) border on sales we brought on board sales leaders in EMEA, and Asia Pac now for a month or so ago.

The strategy of focusing on the data center is to be the right strategy. If you look at where the money is been spent, it is been spent in large area center build outs and we are being expensive with service provider. And service provider is not just traditional mobile categories, an entity or [AT&T], means Yahoo, Google one of the top sales execs last year was our Google sales exec, right.

So we are aligned to where the growth is in the IP space and we are seeing the benefit of that and we have the team to focus on the right products and we expect to see continued good results there. And then on the fiber channels side of the house. We are well positioned we gained 5% market shares, as you’ve the 4%, 5% last year. And we have the right products and we have 16 gig products portfolio of the (inaudible).

(Inaudible) and now we are going to be the market nobody else on Gen 6. So it’s a combination of having the right strategy, the right team in place and we are executing pretty well.

Mark Moskowitz - JP Morgan

Okay, I appreciate the color, and good effort. The other thing I want to talk about was really just turnaround displacement. Can you talk about where you think kind of your market coverage and focus display some of these other competitors or beating them out. I mean what is the type of profiles there, are they U.S. based companies, is it Asia based companies from a networking perspective, just kind of curious in terms of (inaudible) Cisco and Juniper or is it more (inaudible) or other?

Lloyd Carney

I would say that our main competitor because of the size of that footprint is always the big (inaudible) right. And we are really against them because we have a solution that is superior, with eyes on operation cost, eyes on capital cost. And we are winning where customers make technical decisions. Where customer actually takes our products and do a proof of concept put your hands and test versus our competitors, whoever our competitor is, we win because we have a superior technical capability. And so more customers were buying brand or buying based on what they’ve been buying before than we don’t do very well. But we can convince a customer to say look, you’ve been buying this for the past year from vendor X and it’s been costing you Y. Tell you what, we’re going to guarantee this is going to cost you half of Y and you’re going to have more capability, why don’t you give us a try? We would only do that.

So, it is across the board in all regions, I mean EMEA did great for us, overachieved last year, the U.S. almost move their number out, emerging markets, some people have trouble in emerging markets, we have double-digit growth in China, we have double-digit growth in Russia. So, where we apply ourselves and we get in front of right people, we win.

Mark Moskowitz - JP Morgan

Okay. Thank you. Keep it up.

Dan Fairfax

Yes. And from a sales perspective, the team is really gotten focused and its gotten focused on the data center IP objective and that's had a lot of good outcomes, one of which is for example, as I look at the pipeline going forward, the composition of that pipeline being larger size deals and starting to take shape, which I think is a good health indicator. And the other if you recall couple of quarters ago, we talked about creating a global service provider group focused on really bringing our solutions to those customers with the deeper focus in conviction. And like some of these other regions Lloyd mentioned, service provider group had a quite good quarter, this past quarter. And I think the focus is paying off of data center and things like service provider.

Lloyd Carney

Thanks, Mark. Operator if we could get to next question please?

Operator

Our next question is from Andrew Nowinski with Piper Jaffray.

Andrew Nowinski - Piper Jaffray

Hey good afternoon. I just want to go back to your Ethernet revenue again. So, if we normalize the federal impact and say you would have captured federal revenues flat on a year-over-year basis this quarter, your Ethernet revenues still would have been down about 9% which is below the low-end of normal seasonality for the January quarter. So I guess can you provide any color in terms of which verticals or segments of the market are impacting that growth and where are you seeing competitive pressure?

Jason Nolet

We saw some, this is Jason. We saw some lumpiness in the routing business. This is our high-end Emulex router. And so, we did quite well. And as Jeff said some of the service provider accounts and Web 2.0 accounts, but we saw weakness in enterprise, we saw weakness across the couple of the goes. That business can tend to be a little lumpy based on the type of customer that we sell to and I think in this quarter we just didn’t see the number of design wins that we would like to have seen. So, that’s inclusive of federal, but some of that is independent and federal.

Lloyd Carney

And just to add to that, we’re pretty excited about some -- we’ve made significant change in leadership in Asia Pacific in one of the areas where I think we’ll get some warranty going forward is really seeing APac to contribute at sort of the revenue level it could be as an element of the overall company’s revenue.

Andrew Nowinski - Piper Jaffray

Okay. And then you noted that you expect the modest recovery in the U.S. federal markets. Is that some pent up demand now that the sequestration is all the way, are those comments more reflective of deals that you have in the pipeline are specific to Brocade?

Lloyd Carney

Well, we’re getting more confidence in the deals in the pipeline and there certainly were a number of deals that have been carried forward in the subsequent quarters as a result of the challenges in federal, so it actually takes a little of both. And I think maybe the similar, from the commentary we’ve seen from some other companies also confirmed now the business into federal government taking a while post the continue resolution and the budget really for the spending to actually trickle down and orders to get placed. But we feel that the money is starting to flow and we can see the target.

Andrew Nowinski - Piper Jaffray

Okay great. Thanks very much.

Lloyd Carney

Thank you. Operator next question please.

Operator

Our next question is from Matt Robison with Wunderlich.

Matthew Robison - Wunderlich

Hey thank you for taking the question. Dan, just a little more on the -- you are actually weak in the current quarter, you seem to focus on expenses, but I don’t understand why the revenue wouldn’t be in step for the expenses and something to do with the way your OEM business fixed products or do you actually factor in actually -- this probably will get in?

Dan Fairfax

So, it’s an interesting question, Matt. So, last year as we were looking at our planning for ‘14 my team was quite excited on the finance side of cycle, okay we’ll get sack the weaker revenue. As we started to appeal back would actually net-net we can see it in the service and support area because those are readily recognized contractual arrangement. So, I think you can take that to the bank.

On the rest of the business the team largely is not different from any other high-tech companies; they are working out lot of frequently to get orders procurement and landed. So we look at it and we went back historically and said what’s happened in prior years where we had a 14th week, we just couldn’t see a major impact in terms of product revenues. And so we haven’t factored that into the guidance. Expenses however are also real and until we know there will be an extra week of spending and that’s goes beyond the run rate.

Matthew Robison - Wunderlich

Okay. And also just curious if you could give your thoughts on where we are in terms of installed base?

Dan Fairfax

That’s Gen 5 at this point.

Jason Nolet

Yes, this is Jason. So, Gen 5 we think on the director side is probably about at 30% penetration of the overall installed base of directors and approximately 10% of the overall installed base of switches. And the switches lag because the directors are typically leading product with respect to the new technology and new generations. So, the net of that is we think we have plenty of installed base to continue to work and to upgrade the Gen 5.

Matthew Robison - Wunderlich

Yes, sounds like good. Do you think with this focus on fiber channel for Flash you could see some fair way of new growth about market growth in order to provision this kind of situation or is this going to be steady state for the Board?

Jason Nolet

Yes. I think we stay with our guidance on that, it is a real dynamic in the industry right now and we are attaching ourselves to that wherever we can, but I don’t think we would change our guidance at this point.

Lloyd Carney

It’s too early to tell Matt.

Ben Jones

All right, thanks Matt. Next question please.

Operator

(Operator Instructions). And our next question is from Amitabh Passi with UBS.

Amitabh Passi - UBS

Hi, thank you. And Lloyd first question for you, I was curious what do you make of the recently announced (inaudible) partnership is a potentially new competitive threat to the industry and to you and your networking business?

Lloyd Carney

We don’t see the -- from recently announced relationship in the quarter. Our strategy right now is; one, we have the number one (inaudible) in the marketplace so the $1.3 million downloads, we have finish the downloads in the last quarter, we had the quarter before, we are so far ahead any one of them in the stage right now that it’s up (inaudible) execution. We are positioned well with major carriers with the major enterprises, with our solution set and we see that the kind of people we brought on board to the team, the kind of our resources that we are applying for that this is our competitor right now is Brocade, it is up to us to execute and to execute well, we’re going to continue to be the dominant player there. And Ken, you may want to add something else.

Ken Cheng

Yes, this is Ken. I just want to add that with target market of enterprise and service providers and carriers, what we believe is that Vyatta platform and the carrier class and solutions that these organizations are looking for both in terms of performance, reliability and scalability. So, like Lloyd said, we not concerned, we really believe that if execute, we’re going to win.

Amitabh Passi - UBS

And then maybe just as a quick follow-up, Lloyd I was a little confused, I didn’t quite understand, you said your data center business grew 5%. I think the market is growing significantly fast and I didn’t know if there offset. So I was hoping may be you could just drill down a little bit in terms of Wi-Fi percent and is it to sort of accelerate that growth rate one in the data center?

Unidentified Company Representative

So, data and IP business number reflected that growth year-over-year and it is one where we expect to see better performance this year. We crossed our sales teams together for the first time for sales kick off in over five years. There is a lot of retraining going on, refocusing going on, and we’re now seeing a benefit of that. But you can see the pipeline, see the quality of the deal, the size of the deals that we’re engaged in and our success rate when we do engage. So, we’re confident, we’re going to see improved performance in our business in IP space, it’s one where we as a company are aligned and focused across the board.

Amitabh Passi - UBS

Okay. Thank you. I’ll jump back in queue.

Unidentified Company Representative

Okay. Thank you. Operator, next question please.

Operator

Our next question comes from Brian Marshall with ISI Group.

Stephen Patel - ISI Group

Hi, thanks. This is Stephen Patel calling in for Brian. I want to follow-up on your Vyatta comment. Can you talk a little bit about the customer feedback and pricing model for that on the 5600 data and then how you intend to monetize Vyatta longer-term?

Ken Cheng

So, this is Ken. Let me just answer your questions. We have 5600 out for few trial in many of the Tier 1 carriers and our service providers. And I would say the number one feedback is the performance characteristic has been very impressive and people really delighted by the performance, we believe that it is about 40x that of the nearest competitor. And so over the long-term, we are really going to focus on addressing infrastructure virtualization needs of the carriers. We are going to provide a true Vyatta platform, integrated services in addition to virtual routing capability and also leverage Vyatta to address edge consolidation such as in the enterprises as well as in the federal space.

Stephen Patel - ISI Group

Okay. And then…

Lloyd Carney

On the pricing model, the focus right now is on market’s care. I totally seen this next year 18 months, it’s about getting as (inaudible) possible, getting as many people as possible because (inaudible) 50 applications. Once you use our Vyatta, our RFP and the option, and it’s something that your low could change from because again the performance capabilities of it and flexibility of it and the overall efficiency that brings to your market place. So, we are not making a big push on focusing on the pricing model right now, it’s all about as many hands as possible, get this product in their hands because it is definitely the door opener for us it makes a big differentiator for us and it helps to pull our other products to the portfolio also.

Stephen Patel - ISI Group

Okay thanks. And then a follow up on VDX it look like you had a nice rebound in growth this quarter, can you discuss what drove that and how much of that growth is coming from new versus existing customers and which verticals you are seeing the most traction in?

Jason Nolet

Yes, sure. Stephen, this is Jason. So you are right we had a very strong VDX quarter, primarily on the product side driven by two things, one is the ramp of our new top of rack VDX 6740, this is a next generation product that we released just about four or five months and we are now starting to see that ramp very quickly. And then we are also seeing deals where our 8770 chassis product is starting to play more significantly. And that product of course is higher end product that drives more revenue and good margins for us.

In terms of the segments, we continue to see pretty broad appeal of the product, cloud service provider, a variety of enterprise verticals, anybody who wants a more automated, more efficient and more optimized data center network is interested in the technology. And we expect to see a continuation good balance between new name to counts and returning customers. This past quarter 55% were new customers and 45% were returning customers which is just about the balance that we want to see and I think we have seen that now for a quarter or so. So pretty happy with that mix.

Stephen Patel - ISI Group

Great, thanks.

Ben Jones

All right. Thank you, Stephen. Operator, next question please.

Operator

We have Srini Nandury with Summit Research.

Srini Nandury - Summit Research

Thank you for taking my call. I like your growth rates in your fiber channel business this quarter but it kind of disagrees that what OEMs you are putting now. So I am just trying to understand that why your growth is diverged from what the OEMs are putting on the storage?

Unidentified Company Representative

Yeah, I think sometimes, we talked about this on previous calls where people have highlighted that difference. Sometimes we see SAN infrastructure upgrade that are independent of storage upgrades, where somebody might be doing a consolidation of a large chassis based fabric with our new 8510 they can consolidate that down, they don’t necessarily have to be buying new arrays to do that and sometimes will deploy Gen 5 in the core but not necessarily out to the edges.

So there is a dynamic there with respect to driving SAN upgrades that are sometimes independent of the array of business.

Unidentified Company Representative

The other thing I (inaudible) Jason is that -- this is Lloyd, the customers who are (inaudible) with the new feature in Gen 5, and their upgrades of Gen 5, expecting what their targets are because of the functionality that you put out there.

Srini Nandury - Summit Research

Okay, I got one more question. We have seen reports in the news regarding [Daffodil] business is trying to extra or more into cloud and cloud service providers which are (inaudible) in Amazon. How much of your federal weakness comes from those instances or do you thinks it’s federal, moving to cloud, is any fact at all?

Unidentified Company Representative

Well, the good news for us is both our people and companies (inaudible) and Amazon. So, they are moving that benefit to us. But there definitely is focus of moving the federal space over there, as you know the Amazon guys, they secure (inaudible) government network for that purpose. But think we have, we are still one of our representative right now traditionally in the federal space because of focus on narrow market there. Our focus now has been on a broader segment off the federal space and getting into more agencies and having representation across some broad spectrum.

So we have a lot of upsides in the federal space and I think we’re well positioned to see the event of that come the end of the fiscal year for the federal government.

Srini Nandury - Summit Research

All right thank you guys.

Ben Jones

Okay. Thanks Srini. Next question please.

Operator

Next we have Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs

Great thank you. A little bit of a clarification and then I may actually believe the same question, but you’ve talked about the $15 million revenue impact from the divestiture of the adapter business as well as the discontinuation of the wireless business. How does that relate to the 80 million to 100 million? You talked about wanting to remove from the business, during the fiscal year and as affect of that when you talk about 59% of your IP networking coming from data center deployments is that around where you like that to be, is that a number that we should expectations go higher, if you can talk a little bit about that?

Lloyd Carney

I think may be to the second one, we haven’t set any specific target for the business in terms of whether it’s 58%, 59%, 75%. But one thing as we do model the business, clearly we can see that portfolio approach to those customers will drive higher profitability for our business. And it’s also testing to (inaudible) the innovation a dynamic that you have running from engineering whether it’s going to be a software networking element running on a [WiFi] server or whether it would be the (inaudible) routers. It will be good for Brocade, no matter what, we also believe that there will be consistent and steady growth there in the range we are currently see. And we project it would be around 10% we don’t see that changing at all. And so we believe that that’s where the activity is and we have made some specific comments around that.

And Kent what was the first question? I have been quite (inaudible).

Okay. And so we’re trying to give you guidance that there would be a direct correlation, originally we were looking at $80 million to $100 million likely from a historical run rate on an annualized basis coming out of the business just what we’re (inaudible) is $60 million of it’s been identified and we’ll give you model and guidance to take that out.

Kent Schofield - Goldman Sachs

Okay. And so there is more to come or not?

Lloyd Carney

I mean we’re aligned right now with our strategy we feel comfortable with this investment we’ve made. I think we’re still looking at potential opportunities to bring on more technologies through acquisitions. We are looking at efficiencies, but we’re pretty aligned right now with the strategy and the model we shared with you in September.

Kent Schofield - Goldman Sachs

Okay, great. And then you talked a little bit on the call and then the deck about doing some hiring, how should we think about that given some of the cuts that you’ve made. Should we expect flattish growth in headcount, are we starting to see some reinvestment and growth in that line item?

Lloyd Carney

Well, we’ve never stopped hiring. The full process, if was realign the strategy. We focus earlier on the SDN, NFV space and the data center (inaudible) space. And we continue to invest and hire people along those lines. I am focused on the headcount, but back to the model operational model (inaudible) last September. We will deliver on the free cash flow numbers that we committed to you then and then the operating model there. So we’re on track to do that. So, the headcount is kind of same when we look at because if we are hiring people in [India] versus here, it doesn’t, it’s not apples-and-apples. So, I’d [punch] you back to the model and we are ahead of where we thought we’d be in leasing that model. And we will be ahead come six month mark from a free cash flow standpoint we will ahead -- we will be on track from the one year mark on the commit we made to you.

Kent Schofield - Goldman Sachs

Okay. Thank you.

Ben Jones

All right thank you. Operator next question please.

Operator

From Vijay Bhagavath with Deutsche Bank.

Vijay Bhagavath - Deutsche Bank

Yes. Thanks guys, it’s Vijay on behalf of Brian Modoff, two questions if I may. The first question is on OpEx, Lloyd your view is your OpEx strategy has it pretty much laid out to your business or is there more to come? That’s the first question.

Lloyd Carney

We commit to the 100 and we took out about 120 roughly, we did it two quarters early. We are continuing to invest in the right businesses right opportunities. Other opportunities might present themselves and we will continue to the team now, it’s in our DNA to be efficient and to be prudent how we spend the shareholders’ money. But I would again just send you back to the model. We are doing to deliver the free cash flow we committed to you back in September. And we are ahead of that right now and where there is opportunity for us to invest in certain new technologies, we will take, if there is opportunity to find more efficiencies, we will take it, but at the end of the day we are going to be aligned to the model we gave you back in September.

Vijay Bhagavath - Deutsche Bank

Yes thanks. The second question is pretty much every day on LinkedIn I see a job post calling for people with expertise at the end of the year. So like to understand how should we view from a modeling point of view in terms of incremental to your -- out of your growth rates, so let’s take 2015, ‘16. How would some of the software-oriented initiatives play out in your models from incremental to you and your current growth point of view? Thanks.

Lloyd Carney

It’s just the model, but I’d say the number one indicator for you though is we are getting invited for the dance, before we can (inaudible) even though they’re going to be buying my SAN fabric or my MLX router, similar to my SDN and every strategy because to go there -- yet they are willing to rollout SDN solutions, but they want to know that the vendor they’re going to buy their router from today, the Ethernet router from today is going to be able to transition them to that world when they’re ready to get the order two three years from now.

So it is -- if we did not have that strategy, we’d be in very top share with the company. This is the number enabler for us right now, we’d be able to take our customers show them where the world is going and that they are safe in our hands and getting to that mute point. So, it is -- there is so much guide to, I’ve never looked that forward. I really ever see an opportunity for SDN and it doesn’t include our routers or our fabric. It really is a key enabler for us and that’s why the focus really is on at the land grab, because people start looking this.

And we have pricing model and the pricing model show that from a performance standpoint, price performance we exceed everybody else in that marketplace, but the focus is land grab, land grab, land grab.

Vijay Bhagavath - Deutsche Bank

Yes thanks. And then one final question is around the Web 2.0 and cloud data centers clearly moving to (inaudible) equal cost was the bad architecture. So my question is, do you play in those sort of Layer 3 [lease and spine] fabric opportunities, are you focused more on Layer 2 fabric?

Jason Nolet

Yes Vijay, this is Jason. So we are focused on addressing both of those deployment models and both of those used cases. We started with Layer 2, but we've evolved -- meeting that fabric product to have Layer 3 capability and you will see us get richer and richer with that as time goes by.

Vijay Bhagavath - Deutsche Bank

Thank you.

Ben Jones

Okay. Thanks Vijay. We’ll look to get through a whole list here, so maybe we keep it to two questions each and I think we’ll get home. So, operator next question please.

Operator

We have Jess Lubert from Wells Fargo Securities.

Jess Lubert - Wells Fargo Securities

Hi guys, a couple of questions and a clarification, maybe just a clarification, I didn’t hear the revenue run rate for the BDX portfolio, can you give us that?

Dan Fairfax

So we didn’t break that out specifically and we actually would rather have our investors and the analyst community focused on the data center, a key metric that we’ve given you because that was an important product certainly over the last year, as Jason and Llyod have both made comments, anchors are -- it is going to portfolio, but it’s not the only product that we’re working with customers on.

Jason Nolet

And Jess, I would just add to that to say that we did have a record quarter for BDX, a record in terms of revenue, record in terms of the number of new customers acquired, a record in terms of the number of million dollar plus customers that we acquired, so we’re very, very happy with the progress that we saw in the quarter that on.

Lloyd Carney

And then I must add open for enabled router deployments are also at a record level for us. So, (inaudible) ladders employment and also a record level for us. So again, I think it’s a better metric (inaudible) number.

Jess Lubert - Wells Fargo Securities

Okay. That's helpful. And then on the enterprise IT business that was weak, do you expect that to grow sequentially next quarter or is that improvement expected to come from federal and carrier? And I was hoping you could comment on the competitive landscape in the data center switching business and to what degree the pending launch of Cisco’s ACI product or the evaluation of white box alternatives maybe impacting customer decision timelines at the moment? Has that frozen the market to any degree?

Jason Nolet

Yes. This is Jason. Let me take the Cisco ACI question. So, I think the feedback that we’ve heard from our customers and our prospects with respect to ACI is that it’s essentially more of the SAN from Cisco, it’s a fully integrated locked in solution that has a proprietary aspects to it. And so, I think there is a fair bit of hesitation within the customer base about reaping in that kind of a model especially given how the fashion those architectures have become especially in the service provider and the Web 2.0 customer base.

So we’re pretty confident that our fabric technology and the things that Lloyd and Dan talked about a lot, NFV and evolving our SDN strategies are going to be strongly competitive in those environments.

Jess Lubert - Wells Fargo Securities

And on the growth…

Jeff Lindholm

Yes, this is Jeff. As far as the growth, we totally expect it to be consistent with the operating plans into the back half of the year. The areas where we’re going to focus to make sure we’re establishing the healthy pipeline to accomplish that as we talked about is continued strong focus on service provider, continued focus on data center IP which get that footprints and opportunities of the larger scale and creates growth. And then there are certainly other opportunities as well.

Historically our Asia Pacific business if you compare the contribution there versus other companies in high-tech it’s not where it needed to be. We’ve made the changes I think to earn that corner and I would expect that we’ll see some of the results from that before the years out.

Jess Lubert - Wells Fargo Securities

And then just last one for me, you talked about leading SDN and NFV and I just wanted to understand what that might mean for your M&A strategy going forward. Should we expect you to be more accusative and can you maybe just talk about the attributes to the types of companies you might look to acquire?

Ken Cheng

Yes. So if you go back to Lloyd’s comments, a couple of conference calls before and we really had a focused strategy around data center and NAV and SDN, both primarily a data center phenomena although now looking to expand into the wire network and the campus. So Lloyd talked about our M&A strategy, really focused on more tuck-in technology deals and also going to be software centric. So, if you think about what we probably want to look at is how do we add services so that we can integrate into the Vyatta platform, so that would be one area of focus. And also how can we enhance our data center portfolio adding more value from the standpoint of analytics and the ability for upper layer control and in office space.

Jess Lubert - Wells Fargo Securities

Al right. Thanks guys.

Ben Jones

Thank you. Operator, next question please.

Operator

Our next question is from Keith Bachman with Bank of Montreal.

Keith Bachman - Bank of Montreal

Hi guys, on the SAN storage side, over the last if I take your guidance for April, your revenues will be down on average 3% year-over-year for five straight quarters. Do you guys think you are expanding your install base given some of the comments that you made about more workloads on flash need the connectivity associated with SAN or if you could make any comment on how that installed base is either growing or not growing or is this primarily replacements?

Jason Nolet

Yeah, this is Jason. So there are some new named accounts every quarter for us. Bu0t I will say that a fair bit of revenue comes from the existing installed based. Those are expansion activities, those are consolidation activities in some cases, sometimes it’s just a refresh, but there is no doubt that there is a very strong and large installed base as I mentioned earlier in the call for us to be taking advantage of and so we do -- work with those customers very close, so they keep them going on Gen 5 and ultimately Gen 6 when it is ready.

Keith Bachman - Bank of Montreal

And so you think about your potential growth going forward is still primarily leveraging that installed, because it’s a name in new accounts, I presume you are also dropping some accounts but I am just trying to get real specific of the installed base going flat or declining?

Unidentified Company Representative

I think it depends by geo, as said Lloyd, something about China, the installed base is growing, picking up new customers every day, in Russia same thing as they look to build out their banking infrastructure (inaudible) what we did here in our financial institutions, so they are building out fans and even infrastructures just ass how American Express or CD did.

So, it absolutely picking customers in emerging markets. And we are seeing some customer pick up especially with the SSC array but it is so new because SSC arrays are fresh to market. So we are picking up customers and we are seeing customers in consolidation. So brazil big customer, one of the largest roll out that we’re seeing, brand new customer in Brazil on the SAN type. So there are opportunities that we are seeing emerging, brining new customers, existing market, mature market is really mining.

But remember in the existing markets, we have therefore every customer you can name, I mean with kind of market share we have in the existing market, we have the who’s who of customers.

Keith Bachman - Bank of Montreal

Okay. Maybe I’ll move to my second question then on gross margin. If I take your revenue guidance and assume gross margins are relatively flat on a like-for-like, it’s really hard to fit in the envelope. In other words, you come out above the gross margins guidance you are giving of 65.5 to 66, is there something changing on like-for-like gross margins between the product families in particular services, or is it perhaps some embedded conservatism in there?

Lloyd Carney

It’s probably more around the extra week of spending because that will hit our operating teams and be part of gross margin.

Keith Bachman - Bank of Montreal

Okay. So you will -- let's for your comment previously, probably won’t pick up some revenue but you have some incremental overhead that you carrying gross margin?

Lloyd Carney

That will be correct, yes.

Keith Bachman - Bank of Montreal

All right thanks guys.

Ben Jones

Hey thanks Keith, operator we’ll take last question please.

Operator

Our last question is from Kim Watkins with Citi.

Kim Watkins - Citi

Just wanted to first clarify -- question for you Dan in response to Ken’s question about where we’re at in 80 to 100, I think you’ve said it was 15 million impact this quarter, but I thought that you said that was 5 last quarter, so are we at 20 on a quarterly basis, which puts us at 80 on an annual or are we at 60 and I misunderstood?

Dan Fairfax

So, 15, on a quarterly basis, the historical runrate, so right now what we are seeing 60 annualized.

Kim Watkins - Citi

Okay. So, you don’t’ add those, it was 5 and now 15.

Dan Fairfax

No, we won’t add, we just, we try to give, reflect some what do we take -- what do we actually see in the quarter and that was part of our guidance for Q1 with 5 million.

Kim Watkins - Citi

Got it, okay. And then second question is my understanding and I think you guys have talked about this before, is that most of the storage OEM introduced 16 gig arrays. As there is energy, so I wanted to just get your thoughts on how you expect that to impact revenue growth? And then specifically on pricing, if I look at some of the markets data that’s out there, the pricing for 16 gig currently is about double that of 8. And looking back historically, what 8 gig was compared to 4 gig where we were about almost two years into the deployment, they were about a parity. And so the question, there is two questions and the second question is with the 16 gig arrays and coming out and now just going to marketplace with the 16 gig solution, what extent are you baking in some pricing pressure into your guidance and kind of what is the shape of pricing look like going forward?

Jason Nolet

Yeah. So this is Jason, Kim. So with respect to the additional arrays coming to market that’s clearly goodness for us. So where customers may have deployed 16 gig or Gen 5, we should say in the core now they can deploy end-to-end, so we’ve got Gen 5 HBAs and Gen 5 arrays and the SAN in the middle. So that obviously is positive development for us. And as you pointed out not only the existing OEMs coming out with Gen 5 enabled arrays, but as we talked about earlier the SSV startup community is also doing the same. You’ll hear from many of those start-ups that the vast majority of their SSD arrays are connected to fiber channel, not other network technologies.

With respect to the pricing premium on Gen 5, we think we’ve added enough value in our product with things like Fabric Vision and some of the other technologies that we’ve shipped but we’re not seeing pricing pressure right now. And I am not expecting to see it any time soon. So I think steady as you go on that right now.

Kim Watkins - Citi

Okay. Thanks very much.

Operator

And that does conclude our question-and-answer session. I’d like to turn the call back over to our speakers for any closing comments.

Unidentified Company Representative

Okay. Thank you again for your time and attention on our call today. This continues to be a very exciting time for Brocade and our customers. We’re in a midst of significant change in data center networking and are in an excellent position to capitalize on the opportunities that lie ahead. We have some of the right leadership team and organization to achieve the strategic goals that we laid out over the past year. We look forward to sharing more with you about our specific plans and accomplishments in the months to come. Thank you again and good bye.

Operator

And once again that does conclude our conference. We appreciate your participation.

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