If you know of Brocade Communications Systems, the first thing that comes to mind may be that it’s a multibillion-dollar vendor of networking hardware for data centers. Less positively, you might also recall that the company’s former CEO, Gregory Reyes, was the first U.S. executive sent to prison (some say unfairly) for illegal accounting of backdated stock options.
But Brocade is years removed from that unhappy turn of events, and indeed the company is now turning the page in another big way. Brocade is partway into a market-driven shift to deliver networking functionality via software running on a proprietary hardware platform.
The December 2012 acquisition of Vyatta, a software-based networking technologies firm, will help in executing the transformation. Still, some fundamental changes to Brocade’s operations and culture will be required.
Dan Fairfax, Brocade’s CFO, came to the company in December 2008 upon its purchase of Foundry Networks, where he had been the finance chief. He was assigned to the role of vice president of business operations and, later, vice president of global services before his promotion to CFO in July 2011. He previously ran finance and held other senior-executive roles for a string of technology companies over 25 years.
Fairfax recently met with CFO to discuss Brocade’s transformation, its unusual customer financing model, its recent performance and the highly competitive market it plays in. An edited transcript of the conversation follows.
What was it like taking on the operational roles at Brocade after you’d already been a CFO several times?
It was the second time in my career that I had stepped off the finance track to do an operating job. It was incredibly rewarding. One aspect was the opportunity to “walk a mile in [the operating person's] shoes.” You pick up a lot of empathy for your peers, seeing what they have to deal with day in and day out.
Is it good for a CFO to have empathy? Aren’t you supposed to be, you know, ruthless?
My bias would be toward empathy. Thinking about how I conduct myself and how my team conducts business in the company, I have three mantras: be proactive, provide insight and deliver value to the business. I think all three can be done better with a little empathy for what your peers are facing.
Where does the company stand in its drive to deliver software products?
We’ve already had great success with designing software-based systems that run on a proprietary hardware package. It’s pretty clear a fair bit of our marketplace will be served with [those kinds of offerings].
Our number one challenge with that is a human dynamic, and I’ll call it, simply, inertia. How you do contracts with your customers, how revenue recognition is done, how engineering is done, testing, the partner ecosystem by which you go to market — all of that changes in some very fundamental ways. There are biases stacked up against that, and you have to break down the inertia to get people to open up to new ideas and take risks that might not be naturally comfortable for them.
What are you doing to stimulate that result?
I’m fortunate, because I spent about 10 years as a CFO for software companies, so I have a very good understanding of the dynamics of a software business. I bring to the company the scars on my back from having dealt with the issues a software company sees. I can speak with direct experience and anecdotal evidence to both my peers and my team about what we need to do to be ready.
Tell us about your customer-financing model.
It’s unique for our industry. We’re providing capital equipment and services, so it’s going to be a cash purchase off a customer’s balance sheet. It’ll be a traditional lease, structured as either an operating lease or a capital lease. But instead of financing with a committed term, like you get with a financed lease, we feel so strongly about our products and their relevance to your business that you can essentially rent them with no committed term.
If you want an upgrade, tell us, and we’ll help you upgrade to the next-generation gear, and if it’s still working fine you can continue to rent [the older products]. Or if you want, we’ll help you convert to a fixed-term lease or a buyout.
In a market where we have some very strong and entrenched competition, the flexible financing has allowed us to enter the dialogue with customers in a much different way. Part of our value proposition is helping customers future-proof their investment in our equipment and services.
The company’s financial results were a lot better in 2012 and 2013 than they had been for many years. Was that driven by the market or by your internal growth strategies?
There were several aspects to that. For example, we looked hard at the balance sheet and made a lot of improvement with the leverage we had taken on to acquire Foundry Networks.
Probably the most significant thing was our change in leadership 14 months ago. Our new CEO, Lloyd Carney, has been a catalyst for breaking down the inertia that I mentioned, helping leaders understand that while there may be certain things they deeply believe in, they’re no longer relevant for us. We’ve been able to reduce our spending by 10 percent, or $100 million. We actually saved more than that but have reinvested those resources in areas that will drive the business forward.
As you mentioned, you’re in a very competitive market. How do the players in your niche differentiate themselves?
It’s about innovating to benefit the customer and doing it faster than your peers. Earlier in our history it was about improving the speed and capacity of the products. Today, while speed and capacity are important, the software functionality has become even more important.
Using our analogy, it’s similar to an iPad — when you take it out of the box, you don’t look for the manual so you can configure it. You turn it on, find the nearest WiFi hot spot and you’re downloading apps. Our view of the network is essentially the same. We’ve automated a lot of the configuration to avoid human error when rolling out networks. We’ve simplified the network structure so that customers can eliminate devices, which reduces their capital costs and network administrative costs.
As noted in your most recent 10-K, 46 percent of Brocade’s revenue comes from three customers: Hewlett-Packard, IBM and EMC. And both IBM and HP, along with another customer, Dell, all recently acquired companies that sell networking products. What’s your strategy for dealing with that?
It’s a quite interesting dynamic. We sell our networking storage products though [original-equipment-manufacturer] agreements with those companies, which resell them under their own brands. If you can partner strongly with companies that you’re also competing with, it’s a real testimony.
[Internally those kinds of companies need to use] products with the kind of features and quality we offer. That builds a strong, durable relationship. Also, while HP, for instance, owns a large data networking business and we may compete with them for a large enterprise account, they can’t sell products to that type of account as easily as we can.
Another thing is that 15 to 20 percent of our business is with the federal government. A lot of our competitors’ products are both engineered in and sourced from China, and the United States tends to not buy foreign-engineered and manufactured product.