Californian taxman robs Brocade of all its profits

Californian tax law change sees vendor make $21m loss in Q1, but new incentives promised for the channel

California-based storage and networking vendor Brocade has blamed a change in the state's law for a first-quarter loss of $21m (£13.5m).

The Proposition 39 law, which was voted in last November, sees Californian companies with multi-state operations no longer get a choice in how to pay their taxes to the state, resulting in Brocade absorbing a $78.2m non-cash tax charge last quarter.

For the three months to 26 January, Brocade made a non-GAAP year-on-year net loss of $21m, on sales which rose five per cent to $589m over the same period.

Despite the huge tax payment, Brocade's newly appointed chief executive Lloyd Carney, who joined last month, said that in his first 30 days at Brocade, he has been impressed with what he has seen and is pleased with the firm's results.

The vendor's product revenue for the first quarter jumped five per cent to $502m annually, while its services sales grew three per cent to $86m over the same period.

Annual investment in research and development rose nine per cent to $98m but sales the marketing spend fell by two per cent to $149m.

Carney pledged channel programme improvements in 2013, claiming that although it has come on a lot since last year, more needs to be done.

Speaking on an earnings call transcribed by Seeking Alpha, Carney promised more effective channel incentives.

"The channel programme has shown great improvements over the past year. There has been a renewed focus here at Brocade on the channel and channel partners; the MDF programmes, the attention that we give to the channel partners [and] how we monitor and measure their performance.

"But it takes more than a year to get it to where you need it to be. So we should expect to see continued improvements in the channel programme and monitoring. You should see incentives; we need to fine-tune some incentives to make sure they are more effective than they are today," he said, adding that he was pleased with the progress that has been made so far.

The vendor's chief financial officer Daniel Fairfax said that for the next quarter, he expects total revenue to rise to between $555m and $575m, adding that economic uncertainty in Europe and the US had been factored into the outlook.