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Brocade Communications Systems (NASDAQ:BRCD)

Q2 2010 Earnings Call

May 20, 2010 5:30 pm ET

Executives

Ian Whiting - Senior Vice President of Worldwide Sales and Marketing

Richard Deranleau - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Daniel Fairfax - Vice President of Global Services

Dave Stevens - Chief Technical Officer

Michael Klayko - Chief Executive Officer, Director and Chairman of Corporate Development Committee

Analysts

Keith Bachman - BMO Capital Markets U.S.

Nikos Theodosopoulos - UBS Investment Bank

Jason Ader - William Blair & Company L.L.C.

Jeffrey Evenson - Bernstein Research

Glenn Hanus - Needham & Company, LLC

Erik Suppiger - Signal Hill

Kaushik Roy - Wedbush Securities Inc.

Mark Sue - RBC Capital Markets Corporation

Paul Mansky - Canaccord Genuity

Rajesh Ghai - ThinkEquity LLC

Min Park - Goldman Sachs Group Inc.

Kathryn Huberty - Morgan Stanley

Operator

Ladies and gentleman, we'll resume.

Question-and-Answer Session

Operator

[Operator Instructions] Our question comes from Nimrod Marcet [ph](23:20).

Jason Ader - William Blair & Company L.L.C.

Yes, hi. It’s Jason Ader. Can you hear me?

Michael Klayko

Yes, we can, Jason. This is Mike. Before we take any questions here, we must had a faulty bridge. We apologize that we wasted 15 minutes of your life, all you guys on the phone, and so we're going to stay as long -- we're going to make up that time on the back end if there’s more questions. So I do apologize for that. We got through the technical difficulty. But with that, Jason, please ask your question.

Jason Ader - William Blair & Company L.L.C.

Well I guess my question is on the guidance for Q3. You guided flat to slightly up. You talked about sell-through being very strong on the Fibre Channel side. Obviously, you had a very nice rebound on the Ethernet side. Judging by that guidance, in order to hit the full-year guidance, I mean, Q4 would have to be just absolute monster quarter. So I guess I'm struggling to see how you get to that implied Q4 guidance with the Q3 guidance being as such. And then just kind of connected to that, why wouldn't the Fibre Channel business be stronger in July, or much, much stronger in July, just given the inventory reduction that you saw in Q2?

Michael Klayko

Yes, let me start and then I’ll have Richard jump on top of that and add a few color comments. I think addressing Q4, it is seasonally stronger for SAN in Q4 than Q3, and so that's one area. That’s what you're going to hear at our Tech Day. We have some products that will also, I believe, generate some demand for us, and so that gets factored in. If we can get some OEM ramp in Q4, that could bridge a large piece of that. And then we've been hiring a lot of salespeople as Ian talked about, and they get online and they become more productive and so we should be able to benefit from that also in Q4. And we are continuing to gain momentum in the Ethernet business. As you've seen in some of the comments, we've almost, well in fact we have, we've achieved our full-year number of new accounts. And so those accounts that we've penetrated began to add more componentry and get more comfortable with our offerings and expansion of some of the projects. I think that also gives us some opportunity in Q4. So if you put all those together, I think there's an opportunity to get to the high end. Now in relationship to some of the inventory, I think question, well just -- we did give a range. It’s $2.1 million to $2.2 million for the full year, so it's a range, it's not a point guidance. I think if you look at the math, based on what we're saying, Q4 would be at the low end of the range. Q4 is basically SAN seasonality only. If you start layering in all of the things that Mike talked about, then I think you're looking at a -- kind of in the midpoint. And on the high end of the range, that assumes significant contributions and a quick ramp from the OEMs.

Richard Deranleau

Yes, on the inventory side, Jason, we’re just not -- we’ve kind of gotten out of the business of predicting when inventories are going to fall. You would think that our inventories would possibly raise a little bit as our partners go in to seasonally stronger quarters, but we’ve kind of taken that and then neutralized it because it goes down a little bit in Q3 and up a little bit in Q4, vice versa. That's one that -- we're more interested in the actual end-user demand and sell-through that we kind of monitor and really look at as the leading indicator.

Jason Ader - William Blair & Company L.L.C.

And do you think the IP side actually will be kind of in the same range as it was in the second quarter? Or do you think that, that could drop just based on the sort of Federal -- I mean, it seems like the Federal push-out in January kind of fell into April, and so you see a little bit of a drop-off in July, just based on that in the IP side.

Richard Deranleau

This is Richard, Jason. I think we’re looking for sequential gains in the Ethernet business in the second half of the year, and Federal is typically a strong in our Q4. Dan, did you have some more color?

Daniel Fairfax

Yes, I think in the Federal space, it's fairly predictable from a seasonality point of view. If you look at Q1 and Q2 combined, we were on track. We’re where we thought we’d be for the half even though Q1 was lower. Some of the deals did push out into the April quarter, but some of them were also, as we said, will take a little bit longer to come in. Q4 is when we will see the bigger growth in the Federal business, but overall, I would say across the board, our efforts around the channel expansion, the increased sales coverage that Mike referred to, the focus that we have now put back into the growing the net new customer base around IP, is all momentum and I think will see us through to a strong second half from an IP perspective.

Operator

Our next question in queue comes from Paul Mansky with Canaccord.

Paul Mansky - Canaccord Genuity

I wanted to go back to the kind of the OEM inventory comment from a moment ago. It looked like you probably hit [audio gap](28:39) trough of one-a-half weeks or so in the belly of the proverbial beast last year. We bounced back to 2 1/2 or so, I guess, last quarter, which is still kind of framed as certainly on the more attractive side. I mean, when you kind of think about what's going on with the OEMs, what's going on or just some of the trepidations around Europe, et cetera, et cetera, do you view that inventory number as a tailwind for you? Or are you actually a little bit more concerned vis-a-vis OEMs might be pulling in their horns a bit here as we head into the summer? And then maybe within that context, can you give us what your -- kind of a ballpark of what inventory levels are typically headed into the summer months?

Richard Deranleau

Sure, this is Richard. I would say that the inventory position for the year is neutral from a revenue perspective. Typically, the seasonality is the OEMs build inventories in the fall building up to year end, and then after Q1, they begin to start thinning them out. That's what they typically do. Again, I think last year was a little bit different because of what I said, the economy, and also the concern about the supply chain. So frankly, I -- right now we’re at about roughly two and a half weeks, and I think as it modulates around that, that's probably the natural level that the OEMs carry.

Paul Mansky - Canaccord Genuity

And then if I could follow up specifically on the service provider side of the house, 22% of the mix, roughly $29 million, by my math, that's the best quarter you guys have put up since post the combination of the two companies. Can you maybe spend a few minutes talking about what went right there this quarter?

Richard Deranleau

Ian, you want to take that?

Ian Whiting

Yes, sure. So I think a combination of things. One of them is we saw the results of some investments and some momentum, people on the ground focusing on our Tier 1, Tier 2, Tier 3 Service Provider accounts. I think the other thing that happened in Q2 is we’ve had a product transition to a new higher density blade for our flagship MLX chassis, which was in high demand from some of the key Internet service providers, metro Internet carriers and so forth. So I think we got the benefit of that, and those products are now in the market. We also have an active dialogue with our Service Provider customers around transition to 100-gig, which is getting a lot of attention and a lot of interest. So I think overall, the dynamics around the Service Provider marketplace in terms of the need for high-performance networks, more scalable networks, is helping there, but also the focus from a sales perspective and a strong product position is certainly bolstering that part of our business.

Operator

Our next question in queue comes from Katy Huberty with Morgan Stanley.

Kathryn Huberty - Morgan Stanley

Are you expecting above seasonal revenue growth in both July and October, just a clarification.

Richard Deranleau

Sure, this is Richard, Katy. The guidance that we’d given is for Q3 to be flat to slightly up, and that implies Q4 would be up. There was a question from Jason Ader, and what I walked through with him was, if you look at our full-year guidance, if you look at the low end of the range, that is typical SAN seasonality only. If you look at continued growth in Ethernet, that gets you kind of the midpoint, and again for the high point, that assumes a significant contribution in Q4 for Ethernet from the OEMs.

Kathryn Huberty - Morgan Stanley

So if we think about July, I believe normal would be about flat, maybe slightly down. So it sounds like you’re looking for normal to maybe a little better than normal. EMC; Dell, tonight; HP, earlier this week, have all talked about sort of normal at best. So what are the company-specific factors that potentially cause you to grow faster than the market? I imagine there’s some possibility of the inventories coming back, and sounds like you think you can gain some momentum at OEMs, which would be company specific. Anything else that I'm missing?

Michael Klayko

Katy, we got a couple of products. This is Mike. We got some products that we spent the last 18 months building, and we're going to talk about them at Tech Day, and so we should be able to -- that will help us some. There is some deployments that we've been working on in both -- not just Ethernet but on SAN side that are fairly well balanced that now are starting to build out. And so it’s -- Q3, there's a lot of variables in the world, too, with Europe and so forth, but on balance, when we take a look at our pipeline and such, it's a whole series of things that we have going on. And frankly, I think with some of our product sets we’re going to take some share in IP also.

Kathryn Huberty - Morgan Stanley

Yes, and then, Mike, just as a follow-up to that, is it possible that the inventory reductions on the SAN side were ahead of new product launches? Do you think that was really was just seasonal? I guess in this environment with growth in front of us in the back half, I would have expected folks to be hanging onto a little more inventory to make sure they meet demand.

Michael Klayko

Katy, that’s a tough one. I don't think so, but that’s a real tough one. I actually think there was -- if you wind the clock back nine months ago, six to nine months ago, there was a lot of concern around product availability and so forth and that caused us certain reactions. And I think that some of the supply chains right now have done a much better job of reacting to demand on a shorter time period. And so I think there’s just more of a comfort level and so forth. And we’ve done a good job at working with our partners. And so I don’t try to read too much into it.

Kathryn Huberty - Morgan Stanley

Yes, so from your perspective, the component availability has improved noticeably over the last three to six months?

Michael Klayko

It has.

Kathryn Huberty - Morgan Stanley

For your own products?

Michael Klayko

For our products. That’s correct, Katy.

Operator

Our next question in queue comes from Min Park with Goldman Sachs.

Min Park - Goldman Sachs Group Inc.

Richard, you noted that your sell-in numbers for SAN this quarter was lower due to OEM channel inventories getting depleted. I just wondered if you can just give us what your sell-through numbers were for SAN this quarter and maybe just give us a context, like give us a sequential year-over-year growth for sell-through, so we can recognize how strong Q2 was?

Richard Deranleau

Yes, Min, this is Richard. I’d just say that, like I said before, when we talked last quarter and last call, they were in the high-2s. We took a bet -- we did. And the OEMs about half a week out of inventory. That puts us right approximately at about two and a half weeks, a little bit less.

Min Park - Goldman Sachs Group Inc.

And then, Mike, I know Richard just noted that in order to achieve the high end of your target range, that you need better contribution from your Ethernet OEMs, but I thought you noted that when you reset your top line targets last quarter, the entire range was achievable without incremental support from your Ethernet OEMs. So I'm just wondering if I misunderstood you or if something has changed since then?

Richard Deranleau

I’m going to jump in, Min. This is Richard. I’m not sure that's exactly the way we were characterizing it. In last quarter, we gave the same range. We’re giving the same range now. And I think -- and I think, Ian, you and I talked about a lot of good -- to get the high end of the range, a lot of good things had to happen and -- well I think Mike even at your conference indicated we weren’t planning on a lot of contribution from the OEMs. But again, I would go back to what we've already said, if you look at the range we gave, at the low end, all that is, is just normal seasonality. Anything toward the mid-range is some performance on Ethernet and some other things. To get to the very highest end of the range, hey, a lot of good things have to happen, but that's why we give you ranges.

Operator

Our next question in queue comes from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets Corporation

So Mike, do you feel you're losing Fibre Channel market share, yes or no?

Michael Klayko

Well I think it fluctuates quarter to quarter a bit on average. I don't think we’re losing any share at all. I think that from a standpoint that a lot of the share, if you look at it just on a quarterly basis or -- can get a little lumpy just on a few big deals. But for the most part, no, we're not losing share.

Mark Sue - RBC Capital Markets Corporation

Seasonality aside, and channel inventory aside, is there an increased commitment for booking Fibre Channel products from your OEM partners, do you feel, or even for new or existing products? Just any color there about commitment on their part.

Michael Klayko

Sure. How about -- I'll turn it around to a little bit of a technology question. And since Dave’s here I'll ask Dave to kind of talk, because he...

Dave Stevens

Sure. I’ve been spending a lot of time on customers. I don't think we're seeing any decline in the demand for Fibre Channel solutions, the customer base that's committed to that technology continues to buy, continues to expand it. As Mike has mentioned a couple of times, the growth in data is continuing to drive those networks. We haven't seen any migration mentally away from it, from any of the OEM partners in terms of technologies or attached storage, or product developments, or anything. We are, as I think we said last year, and we'll continue to reiterate this year, we're continuing to invest in the technology. We're going to continue to drive to the next higher speed. We're releasing higher density products going forward and continuing to invest in the platform. So we don't really see any slowdown on it.

Mark Sue - RBC Capital Markets Corporation

Yes, and likewise, you don't see anyone moving away from Fibre Channel any faster than before?

Dave Stevens

No, not at all. In fact, I think one of the questions that have come up before about -- is the impact of the adoption of FCOE on the Fibre Channel business. And I would just comment that the impact today is zero. The FCOE ports that are being sold in the market from ourselves and from other people are in replacement of standard Ethernet ports, and they're being sold as future proof enhanced Ethernet ports. And then the Fibre Channel business in parallel to that continues to basically run unabated.

Mark Sue - RBC Capital Markets Corporation

Lastly, Richard, we're seeing quite some dramatic price stimulation on Ethernet. When does that subside?

Richard Deranleau

Could you repeat that last part of the question, Mark?

Mark Sue - RBC Capital Markets Corporation

Sure. We're seeing a lot of price stimulation on the Ethernet switches. When does that subside and wind down, so we have actual normal pricing on the Ethernet side?

Richard Deranleau

Yes, that’s actually is a good question, and I'll just give you my thoughts, and Ian may want to jump in. But as Mike said, we’re in the position right now where we are moving into new accounts. We are growing our revenue, and so I think we're going to see that kind of environment not only from ourselves but others in the industry through the end of the year. I would hope that as we create this position at these new accounts, that as we've become the incumbent that, that mitigates some point. But that's my perspective.

Ian Whiting

Yes, I would agree with that. And one of the key metrics that we set ourselves, as Mike has referred to, is we want to continuously double and grow the number of new customers, because for us, it's about taking market share in an established marketplace. We had the largest number of customers buy IP products from us in the history of both pre-Foundry and Brocade in Q2, so that's an indication that the customer base is getting broader. But there is a cost of customer acquisition that’s reflected in [ph] (41:08) the pricing dynamic.

Dave Stevens

This is Dave. One other comment I would just make on the product standpoint is we do monitor the average selling prices of the different port speeds and configurations in the marketplace, and we make adjustments in the development priorities to accommodate those. I think over the next couple of years, you are going to see probably more pressure on 10-gig pricing, and we’re pretty well positioned to participate and get our fair share of that business and probably less on some of the other technologies. But overall, I think from a product perspective, we're in pretty good shape to have the right products there at the right price points to support the sales organization.

Operator

Our next question in queue comes from Kaushik Roy with Wedbush.

Kaushik Roy - Wedbush Securities Inc.

The good thing is that the IP business has stabilized. Your SAN sell-through was the highest, but revenues were down 20% sequentially. Cisco’s SAN revenues were up 100% year-over-year. You're down 4%. It cannot be all due to OEM inventory coming down. EMC is pushing more Cisco now. The question is, what do you do to check the share loss to Cisco? And then I have a follow-up on gross margins.

Ian Whiting

This is Ian. So first of all, I think you got to compare the -- you got to look at the comparisons, right, from this year to last year, but I’ll let you work that one through. I think that our competitor, like us, we have -- we have quarters where we get some significant large deals, which can spike the revenues, and that happens to us and it happens to our competitors. I think your comment about EMC, I would just challenge because our relationship with EMC has probably reached a new high point as reflected in our participation at EMC World just a few weeks ago. The relationship is on very solid ground on a number of levels, both a development and integration perspective, and as importantly as ever in the field where our teams combine very well to win large customers together. So I think EMC is one of our biggest strategic assets of the company going forward as a data center, and I think if you cross-referenced that with EMC, you’d hear a similar story. So overall, you've heard a lot about the dynamics in the industry, but from a product position, we've never been in a stronger position, technically and with the capabilities we have, our partnerships are all in great shape and the go-to-market models, I think, I think are continuing to bear fruit.

Richard Deranleau

This is Richard. I’d just put an exclamation point on that. In terms of self-reported share at EMC, I will tell you categorically, we have not lost share this quarter at EMC in Fibre Channel, and that’s just -- that’s based on their self-reporting.

Kaushik Roy - Wedbush Securities Inc.

And on gross margins, your guidance for full-year is still 57% to 58%, but Q2 gross margins were below 57%. So how do you get the gross margins higher for the next couple of quarters?

Richard Deranleau

Well, some of that is going to be mix, right? You can see -- and in the prepared remark, you can see the leverage from a gross margin perspective on mix.

Operator

Our next question in queue comes from Glenn Hanus with Needham.

Glenn Hanus - Needham & Company, LLC

Maybe you could just give us some update on how you feel the ramp that IBM and HP are starting to percolate and how you're doing in cultivating Internet demand on your own?

Ian Whiting

Yes, this is Ian. Let me take that one. So first of all, let me kind of clarify the whole go-to-market strategy. I think we’ve said consistently that our future and our destiny from an IP perspective is really all down to Brocade’s direct selling and channel activities in expansion, and that's where the bulk of the investment has been and will continue to be. Mike alluded to the number of new employees. I think it was 131. Most of those are in sales and in R&D and we have plans to continue that expansion. So we are directly driving the demand creation and the selling activity around our IP business, and that's starting to bear significant fruit. The OEM opportunities are more of a end of ’10, ‘11 statement but the way to think about that is really -- it’s a solution sell. I don't think we or our OEMs have ever thought of OEMs being in the business of selling end-to-end Ethernet networks, but the opportunities that we have today, particularly with IBM and the Systemax Server Group, is really a clothing opportunity. They sell tens of thousands of servers every quarter, and networking is a natural add-on to that solution sell. And that's the selling motion that we're focused on with IBM going forward, which is different to how it started out through the storage group, which continues to be part of the strategy but is more of a longer-term play. And with EMC, the announcements we made at EMC's annual user conference last week was very similar. IP networking products from Brocade being sold as part of a bundled package or solution with their iSCSI products with data domain, with land backup solutions, where they are now able to participate in the IP networking component of that solution through Brocade. So it is an important part of our go-to-market strategy, but the goal is for Brocade ultimately to drive the sale and to drive the demand for our products, and our OEMs will supplement and complement that activity and hopefully drive some significant upside for us in the future.

Glenn Hanus - Needham & Company, LLC

You had a good quarter, sequential growth on the server product CNA HBA mezz card. Could you maybe give us some qualitative commentary on where that growth really came from in the product and your outlook on that side of the business?

Richard Deranleau

Yes, this is Richard, Glenn. I would say that we had some good strength in the HBA CNAs.

Glenn Hanus - Needham & Company, LLC

And any commentary going forward?

Richard Deranleau

Going forward, I think we expect to continue to grow. I mean, we have a very compelling product and I think that we are getting some small traction. We've been at this for a while. It's nice to see it starting to bear fruit. We’re committed to this business. We expect to see the business continue to grow in a sequential basis. And, Dave, did you have a thought?

Dave Stevens

Well I can just comment on the importance of the product set within the broader portfolio. It's obviously a good revenue opportunity for us, but the products, the embedded switches, the CNAs, the adapter business, whatever form those are in, whether they’re in LOMs or mezz cards or stand-up adapters, they form a pretty strategic and critical component in our ability to go deliver big, converged, virtualized data centers. A lot of this, we’ll talk about at Technology Day a little bit. But they’re an important part of that strategy. We continue to invest in them, and it's important that we continue to get those placed into servers, and as Richard said, we’re getting good traction in getting that done.

Operator

Our next question in queue comes from Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos - UBS Investment Bank

On the gross margin, can you elaborate why the Ethernet gross margin fell sequentially, given that you had a big sequential increase in revenue, and the predominance of that revenue was from the Federal business, which should not have a lot of changes in the gross margin?

Richard Deranleau

Sure, Nikos. This is Richard. It's driven by two things. One is that if you look at our prepared remarks, we had a shift from chasses towards stackables, so it was a mix issue. And then, I don't know if you were on, but Ian and Mike talked about some of the pricing dynamics. So it was a combination of pricing action as well as a mix shift from chasses towards stackables.

Nikos Theodosopoulos - UBS Investment Bank

On the tax rate, can you kind of give us some sense of what it’ll be in the last couple of quarters of the year?

Richard Deranleau

Yes, it's going to be in the 24% to 25% range for the full year. I think that works out to be about right around 25% in the second half.

Operator

Our next question in queue comes from Erik Suppiger with Signal Hill.

Erik Suppiger - Signal Hill

So your top three OEMs, the revenues declined about 24% sequentially, and you’re suggesting that your end-user demand was very good, and you've only reduced your inventory by a half a week, which might be $10 million. I guess I'm trying to understand why we wouldn't have seen a bigger reduction in your OEM inventory. Or why is it down so much?

Richard Deranleau

Yes, I think what you're looking at is a little bit of apples and oranges. I think if you look at the mix of products, then you realize that from a company perspective, the OEM is today the primary market for SAN and direct in channel is the primary go-to-market for Ethernet. When you have a shift from SAN toward Internet, that's going to reduce the impact on the OEMs, and I think that's the part you need to consider.

Erik Suppiger - Signal Hill

So are you suggesting that you're moving away from distribution through your OEMs?

Richard Deranleau

No, just to reset. Right now, the OEMs are the prime. If you go to Brocade prior to the acquisition of Foundry, the OEM as a percent of revenue was extremely high because they were the primary go-to-market. Now as you go in, that's still the case. We are building an Ethernet OEM business, but it's not significant at this point in time. So the -- as it was with Foundry, prior acquisition, the primary go-to-market for Ethernet is direct in channel. So if you have a mix shift from SAN, which is primarily OEM, to Ethernet, the mathematics of it will simply reduce the OEM content. It's just a mix shift, that's all it is.

Erik Suppiger - Signal Hill

Well let me ask this: The reduction in inventory, was it concentrated at any one of the OEMs? Or was it broad-based across your three primary OEMs?

Richard Deranleau

Broad-based across our OEM.

Erik Suppiger - Signal Hill

And again, you continue to believe that EMC, the SAN business with EMC is at least holding in terms of market share?

Richard Deranleau

Absolutely.

Operator

Our next question in queue comes from Keith Bachman with Bank of Montreal.

Keith Bachman - BMO Capital Markets U.S.

Number 1, is there any metrics in place that the board has on management as it relates to revenue growth, or consistency of revenue growth? Or has there been any discussions along those lines?

Richard Deranleau

Yes, Keith, this is Richard. Yes, from an -- in term -- there are many, many metrics, obviously revenue growth, that we share with the board, from a compensation perspective, if that's your real question...

Keith Bachman - BMO Capital Markets U.S.

Yes, sorry.

Richard Deranleau

Then, yes, it is a measure of senior management for delivery of both revenue as -- a component is revenue growth. A component is operating profit.

Keith Bachman - BMO Capital Markets U.S.

And then the second question, Richard, I had, relates to that. You’re raising EPS guidance a little bit from the last call, and again, if this was already discussed, I apologize in advance. But what was the driver of that? Was it tax rate? Or was there something on the EPS increase?

Richard Deranleau

Well, if you look at it, there's a couple of things. I mean, one factor is half the year is over. We have more confidence in our ranges. We did some over-performance this quarter. We have some tax rate benefits, and we have more confidence in running our business.

Operator

Our next question in queue comes from Rajesh Ghai with ThinkEquity.

Rajesh Ghai - ThinkEquity LLC

Just following up on the last question. You're taking your EPS guidance up slightly but reduced your operating cash flow guidance. Also, I noticed that their receivables are up despite a sequential decline in revenue. I just want to understand what you’re thinking over there.

Richard Deranleau

The short answer is, the Ethernet business is -- it’s really it’s a mix issue. The Ethernet business is less linear than the SAN business, therefore DSOs go up as Ethernet becomes a bigger part of the business. So that just answers that aspect. And if you look at the full year guidance, it's on the cash flow. As Ethernet continues to build as a percent of our revenue, it's going to affect our DSO. That's the primary driver.

Rajesh Ghai - ThinkEquity LLC

And you talked about a buildup of -- well actually a depletion of inventory this quarter, of OEMs. Is that something that we can assume that there was a buildup of inventory last quarter when your SAN revenue was very strong?

Richard Deranleau

Yes, the OEMs, as I think we talked -- the OEMs have been building inventory for the last several quarters, really since the depths of the recession, when they were down to one and a half weeks, and they’ve built up since that point. This is the first quarter where you're really seeing them reduce their inventories, and we talked early in the call about really, I think, a confidence in the supply chain.

Rajesh Ghai - ThinkEquity LLC

And one last question on the cash. So you bought back stock this quarter and still have a lot of debt left on your balance sheet. So I just wanted to understand your priority in terms of cash going forward, in terms of buying stock and retiring your debt.

Richard Deranleau

Sure, the short story is that we've continued to want to pay down the debt as quickly as possible. However, we're going to act opportunistically with respect to buying stock back. We do have nearly $400 million remaining authorization in the program and we'll be -- stock repurchase program -- and we'll be executing on that on an opportunistic basis.

Operator

Our next question in queue comes from Jeff Evenson with Sanford Bernstein.

Jeffrey Evenson - Bernstein Research

You were very strong in Federal and Carrier Ethernet spending this quarter. Wondering if you could give us some insight on to what happened to year-over-year growth in the non-Federal and non-Carrier business.

Ian Whiting

This is Ian. I think, again, you’ve got to look at a little bit by geography. I think the overall business in the Americas for the Enterprise market in general has also shown some very solid signs of growth as well, so that's outside of just Service Provider and Carrier and Federal business. I think we didn't see the same growth in Europe. I think for reasons which most people would understand, there are some challenges economically in Europe, which I think we’re all facing. So again, our goal is still to take market share, so market growth is one issue, but our focus is really on taking market share. Japan, which has been an area of focus for us, however, was up. That, again, really is a function of the fact that we invested with some very strong leadership in that region. We’ve added significant resources to Japan. We anchored ourselves with one major strategic alliance partner in the form of a company called Net One, and that again has started to bear some fruit. So with the exception of Europe, which I think it’s more of an economics statement, I think we saw a very solid performance across the board, with, obviously, Federal as the standout, and also the Service Provider segment within the overall Americas organization.

Jeffrey Evenson - Bernstein Research

Ian, I heard you say earlier that you had the most number of customers in the history of either Foundry separately, or the combined business this quarter. What's going on with sales per customer, and how should we think about that?

Ian Whiting

Yes, so we're very focused, as you’ve heard us on several calls now, on new customer acquisition and the way that we do that. So that is a metric that we measure religiously. And that number did hit an all-time record in Q2. Overall, the average price per transaction has shown signs of growth as well, as our product at the high end has got stronger, particularly with our flagship MLX product, more density, with an 8x10 gigabit blade. It’s giving us a stronger foothold in some of the larger account opportunities. And I think that growth has just led to a higher overall deal size, and that is the trajectory we certainly hope will continue going forward.

Jeffrey Evenson - Bernstein Research

It's hard to do the math in real time, but if you had the most new customers ever given your revenue and the deal dollars per transaction have gone up, I would wonder what's happening in your old customers who are -- number of old customers who are repurchasing.

Ian Whiting

Well yes. Well you’d have to do the math just to look at the actual numbers, so it’s -- there is a steady growth in the average deal size, I would say. But the focus is on getting footprint and also your footprint in, say, Europe or in Asia is substantially smaller in terms of dollar size, than it would be, for example, in a large company organization in the United States. So when you blend them together, the overall number is positive, but the #1 focal point for us is just footprint, because ultimately networks are annuity streams, and as we get more footprints, that becomes a repeatable business for us.

Operator

Our next question in queue comes from Paul Mansky with Canaccord.

Paul Mansky - Canaccord Genuity

I just wanted to circle back on the SAN side. It's been exactly two years time-to-market lead that you’ve had versus Cisco in 8-gig fabric switch. Given that they just rolled out their product, how are you thinking internally about ASP decline, sequential ASP declines into the back half of the year on that side of the business?

Richard Deranleau

Paul, this is Richard. What we would expect -- and this is kind of an 8-gig story, right?

Paul Mansky - Canaccord Genuity

Yes.

Richard Deranleau

Is that ASPs will remain in the low-single digits from a SAN perspective.

Paul Mansky - Canaccord Genuity

So you think no material change vis-à-vis competitive dynamic now that they’re out with a full product suite at the 8-gig point?

Richard Deranleau

Right. So they now add -- and Dave has a thought here -- they now add kind of --at least their speed is equal?

Paul Mansky - Canaccord Genuity

Right.

Richard Deranleau

But -- if again, there is an OEM influence on the sale, and we are not looking to -- we don't think they're going to be successful in accelerating the ASP decline. But Dave, did you have a thought?

Dave Stevens

Yes, Paul, the other comment I would make, and thank you for the observation that we came out on the market two years ahead on 8-gig. And I think we've been continuing to invest. We haven’t been standing still, and I think our intention is to continue to lead that space in terms of density and overall throughput and performance, power efficiency. And our expectation is that we'll make the next speed jump in advance of our major competitors as well.

Richard Deranleau

Again we’ll be -- Paul, we're going to highlight some of this again. You’re spot-on to the question because we're going to be talking about this at Tech Day again.

Paul Mansky - Canaccord Genuity

Just given that it came up a moment ago, we know you obviously break out your international mix on a roll-up basis, but what is Europe specifically as a percentage of revenue?

Richard Deranleau

If you -- high orders of math, it’s about twice as big as APEC and Japan together. That's a rough number but...

Paul Mansky - Canaccord Genuity

And I imagine the rest of the world is a nominal figure at best?

Richard Deranleau

Yes.

Operator

I'm showing no other questions in the queue at this time. I'd like to turn the program back over to you.

Michael Klayko

I want to thank everybody and I apologize for the early technical glitch. We got that worked out, so thank you for staying with us throughout the call. If you have any other questions, you can send them in through our IR website that we have set up, and we’ll do the best we can to get back to you as soon as possible. I look forward to seeing, if not all of you at our Tech Day on June 9 in New York City. With that, operator, we will end the call.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation. You may now disconnect.

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