Brocade Communications Systems maintains silky smooth computer network operations. A leading supplier of data center networking products, Brocade makes Fibre Channel switches and related software for connecting corporate storage systems and servers. Its products are used in storage area networks (SANs), which pool storage resources across enterprises for easier management and more efficient asset use. Brocade's products support internet connectivity and enterprise mobility, as well as key technologies such as software defined networking (SDN), network function virtualization (NFV), and cloud computing. It generates about half of its sales in the US. Brocade agreed to sell to Broadcom for $5.9 billion in 2016.
Change in Company Type
Broadcom, a maker of communications-related computer chips, agreed to pay $5.9 billion for Brocade. The addition of Brocade's networking gear to Broadcom's networking chips should help Broadcom better compete for business generated by data centers, cloud computing, and the internet of things. As part of the deal, Brocade's Ruckus Wireless, which was acquired in 2016, would be sold. Consummation of the transaction is expected in 2017.
Brocade's products are made by such contract electronics manufacturers as Hon Hai Precision (Foxconn Electronics), Accton, Motorola, and Quanta Computer. The company also relies on Flextronics International for service repair.
Storage Area Netwiork (SAN) products -- which include switches, directors, and other products used for data storage -- account for a bit more than half of sales. Internet Protocol (IP) networking products (Ethernet switches and routers for network connectivity) and global services (maintenance, installation, consulting, and other assistance) contribute about 30% and 17%, respectively.
The US is the company's largest market, accounting for about 50% of sales. Outside the US, it gets about 30% of sales from the EMEA region and about 14% from the Asia/Pacific region. On its own, Japan supplies 4% of Brocade's sales.
Sales and Marketing
Brocade sells directly, as well as through systems integrators, OEMs, distributors, and value-added resellers. EMC, Hewlett Packard Enterprise, and IBM together account for about 40% of the company's sales.
With help from the acquisition of Ruckus, Brocade reported a 4% revenue increase to $2.3 billion in 2016 (ended October). The inclusion of Ruckus revenue boosted the IP Networking segment as did a change in the way Brocade recognizes revenue from distributors. Sales inthe company's SAN product business dropped 6% in 2016 because of a weaker demand for storage in general and operational issues at some of its OEM partners. Although Brocade shipped fewer units, the average selling price increased about 4% with the introduction of the Gen 6 Fibre Channel product and higher density configurations.
Brocade's profit tumbled 37% to $214 million in 2016 as it dealt with higher costs associated with acquisitions. Ruckus Wireless and another deal brought increased spending on research and development and sales and marketing, due in part, to compensation. Brocade also incurred expenses related to the acquisition and integration of Ruckus into operations.
The company generated about $410 million in cash from operations in 2016 (down from $447 million in 2015). Cash flow consisted of net income offset by cash used for changes in assets and liabilities
As networking technology relies less on hardware, Brocade is building up its software portfolio especially in Software-Defined Networking (SDN) and Network Function Virtualization (NFV). Smarter software is taking on the role of switching and balancing networks loads, a job that had been handled by hardware. The company has reduced spending on its hardware-based application delivery controller product line and boosted investment in its software-based application delivery controller products. The release of the Gen 6 Fibre Channel technology in boosted 2016 revenue and the company expects that to continue in 2017. The technology was picked up by OEMs Dell Technologies (including EMC), Fujitsu, Hitachi Data Systems, and NetApp.
Beyond its in-house research Brocade is adding software capabilities through acquisitions.
The challenge for Brocade is to ramp up its IP Networking product line to generate more revenue before its hardware-oriented SAN product line loses too much steam.
The acquisition by Broadcom, expected to close 2017, should open new markets for Brocade. As part of the deal, however, the IP Networking segment (including Ruckus Wireless), the fastest growing part of the company, is to be sold to satisfy regulatory concerns.
Mergers and Acquisitions
In 2016 Brocade closed its acquisition of Ruckus Wireless, which makes products for large-scale WiFi connectivity, for $1.5 billion. Brocade will move to sell its networking products to customers of Ruckus ($373 million in revenue in 2015). It will also open its markets to Ruckus products.
On March 29, 2016, Brocade completed its acquisition of a privately held developer of software for data center automation. The deal accelerates Brocade's efforts to deliver scalable, open source fabric automation.
In 2015 Brocade bought Connectem Inc., a developer of Long-Term Evolution (LTE) technology, to broaden its software-based mobile networking portfolio. Also in 2015 Brocade acquired the SteelApp business unit from Riverbed Technology. The SteelApp product line strengthens Brocade's software networking portfolio for IP data center deployments.