Some excerpts from Brocade S-1 :
Product revenue is recognized when products are shipped to customers,
unless at the time of shipment product returns cannot be estimated or
significant support services are required to successfully launch the customer's
products. In the three months ended January 31, 1999, several of our customers
were implementing SAN solutions, including our product, for their end-users for
the first time. Given the recent adoption of the SAN model and Brocade's
solution by these OEMs and because substantial Brocade services were required to
support these OEMs' product launches, the revenue related to shipments to these
OEM customers has been deferred. The deferred revenue will be recognized on a
customer-by-customer basis as each customer successfully completes its product
launch. Similarly, revenue is deferred for new products that have not completed
the beta test phase. For the three months ended January 31, 1999, $3.4 million
of revenue was deferred. It is expected that this deferred revenue will be
recognized in fiscal 1999. We believe that, as the SAN market matures, this
revenue deferral method for new customers may not be necessary. We do not
provide our customers with product return programs. We provide a reserve for
warranty returns based on our warranty history. License revenue is
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recognized when collection is reasonably assured. We do not anticipate
significant licensing revenues in the future.
From fiscal 1997 to fiscal 1998 our average unit selling price decreased
26.0% primarily due to the introduction of the SilkWorm Express, a lower port
count product. We expect continued declines in our average unit selling price
due to anticipated increases in per customer sales volume, the impact of
competitive pricing pressures and new product introductions.
Our gross margins will be affected by declines in average unit selling
prices, fluctuations in manufacturing volumes and component costs, the mix of
products sold and the introduction of new products. Additionally, our gross
margins may be impacted by the mix of distribution channels through which our
products are sold.
In July 1998, we outsourced our manufacturing and the majority of our
supply chain management operations. Accordingly, a significant portion of our
cost of revenues consists of payments to our contract manufacturer, Solectron.
We conduct quality assurance, manufacturing engineering, documentation control
and repairs at our facility in San Jose, California.
In fiscal 1998, we initiated a plan to reduce our operating expenses by
restructuring our operations. In connection with this plan, we recorded a $3.2
million restructuring charge allocated among various expense categories.
In connection with the grant of certain stock options to employees during
fiscal 1998 and the three months ended January 31, 1999, we recorded deferred
compensation of $307,000 and $3.4 million, respectively, representing the
difference between the deemed value of our common stock for accounting purposes
and the option exercise price of these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders' equity and amortized
ratably over the vesting period of the applicable options. We expensed $1.2
million of deferred compensation during the three months ended January 31, 1999.
We will expense the balance ratably over the remainder of the vesting period of
the options. See note 6 to our financial statements.
THREE MONTH PERIODS ENDED JANUARY 31, 1998 AND 1999
Revenues. Total revenues increased by 1.3% from $7.9 million for the three
months ended January 31, 1998 to $8.0 million for the three months ended January
31, 1999. This increase was due to license revenue of $1.6 million in the three
months ended January 31, 1999. There was no significant license revenue in the
comparable three month period in fiscal 1998 and we do not anticipate
significant licensing revenues in the future. This increase was substantially
offset by a decrease in product revenue of $1.4 million primarily due to the
deferral of $3.4 million of product revenue in connection with shipments to new
customers, In addition, product revenue was adversely affected by a decline in
average unit selling prices resulting from the introduction of the SilkWorm
Express, a lower port count product.
Gross profit. Gross profit increased from $3.2 million for the three months
ended January 31, 1998 to $4.7 million for the three months ended January 31,
1999. Gross margin increased from 40.2% for the three months ended January 31,
1998 to 58.5% for the three months ended January 31, 1999. The increases were
due to lower manufacturing costs and the recognition of $1.6 million in
non-recurring license revenue for the three months ended January 31, 1999, which
had no related direct cost of revenues.
General and administrative expenses. General and administrative expenses
increased by 16.0% from $639,000 for the three months ended January 31, 1998 to
$741,000 for the three months ended
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January 31, 1999. This increase was due primarily to increased legal expenses
related to pending litigation. See "Business -- Legal Proceeding."
Sales and marketing expenses. Sales and marketing expenses increased by
60.9% from $1.1 million for the three months ended January 31, 1998 to $1.7
million for the three months ended January 31, 1999. This increase was due
primarily to an increase in personnel. Sales and marketing personnel totalled 17
and 30 for the three months ended January 31, 1998 and 1999, respectively.
Research and development expenses. Research and development expenses
increased by 2.4% from $2.8 million for the three months ended January 31, 1998
to $2.9 million for the three months ended January 31, 1999. The increase
primarily resulted from the increased cost of prototype materials.
Amortization of deferred compensation. During fiscal 1998 and the three
months ended January 31, 1999, we recorded total deferred compensation of $3.7
million in connection with stock option grants. We are amortizing this amount
over the vesting periods of the applicable options, resulting in amortization
expense of $1.2 million for the three months ended January 31, 1999.
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
Revenues. We shipped our first commercial product in the second quarter of
fiscal 1997, generating revenues of $8.5 million for the year. Total revenues
increased by 185.0% to $24.2 million in fiscal 1998 reflecting the ramp-up of
sales to a significant OEM customer, the introduction of the SilkWorm Express
product and the recognition of $1.8 million in license revenue. Unit shipments
of SilkWorm increased by 242.0% from fiscal 1997 to fiscal 1998. However,
average unit selling prices decreased by 26.0% in fiscal 1998, due primarily to
the introduction of SilkWorm Express, a lower port count product.
Gross Profit. Gross profit increased from $1.8 million in fiscal 1997 to
$8.5 million in fiscal 1998. Gross margin increased from 21.3% in fiscal 1997 to
35.0% in fiscal 1998. Fiscal 1997 cost of revenues included higher component and
manufacturing costs associated with the lower initial production volumes, as
well as overhead costs which were applied to a relatively low number of units
produced. In fiscal 1998, cost of revenues was also reduced as a result of the
decision to outsource all manufacturing activities during the year. In addition,
there were no significant costs associated with $1.8 million of license revenue
in fiscal 1998, resulting in an overall gross margin increase. However, this
increase was somewhat offset by a $1.3 million restructuring charge resulting
from a change in contract manufacturers.
General and administrative expenses. General and administrative expenses
increased from $575,000 for fiscal 1996 to $1.5 million for fiscal 1997 and to
$3.8 million for fiscal 1998. These increases were primarily due to increased
staffing and associated expenses necessary to manage and support our increased
scale of operations. Fiscal 1998 expenses were also affected by costs related to
a business restructuring which totaled $1.2 million, primarily related to
headcount reduction and severance arrangements for our former Chief Executive
Officer.
Sales and marketing expenses. Sales and marketing expenses increased from
$152,000 in fiscal 1996 to $2.1 million in fiscal 1997 and to $5.2 million in
fiscal 1998. The increases reflect the hiring of additional sales and marketing
personnel. Sales and marketing personnel totaled 12 and 24 at the end of fiscal
1997 and fiscal 1998, respectively.
Research and development expenses. Research and development expenses
increased from $3.1 million in fiscal 1996 to $7.7 million in fiscal 1997 and to
$14.7 million in fiscal 1998. These increases reflect significant research and
development efforts required to bring the SilkWorm and SilkWorm Express products
to market and to begin development of second generation products. The
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increase in fiscal 1998 expenses also reflects restructuring costs associated
with the cancellation of a development project.
Amortization of deferred compensation. During fiscal 1998 and the three
months ended January 31, 1999, we recorded total deferred compensation of $3.7
million in connection with stock options grants. We are amortizing this amount
over the vesting periods of the applicable options, resulting in amortization
expense of $7,000 in fiscal 1998.
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