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Brocade Reports Q3 FY 2009 Results

Revenue Up 35 Percent Year-Over-Year

SAN JOSE, Calif.--(BUSINESS WIRE)--Aug. 20, 2009-- Brocade® (NASDAQ:BRCD) today reported financial results for its third fiscal quarter, which ended August 1, 2009. Brocade reported Q3 revenues of $493.3 million, reflecting 35 percent year-over-year growth.

Commenting on Brocade's third quarter financial results, Michael Klayko, Brocade CEO, said:

“We are very pleased with our financial performance which delivered a 35 percent year-over-year revenue growth and a healthy sequential increase in gross margins during a seasonally and economically challenging quarter. The traction Brocade has made in both new and existing partnerships, the opportunities we see in our core markets, combined with our continued product and technology innovation all demonstrate that we are executing on our well-defined strategy and make us optimistic for both the near- and long-term future.”

Recent Business Highlights

Partnership Announcements

  • Brocade announced that it has expanded its strategic business alliance with Net One Systems, the largest independent network integrator in Japan, to help enable the two companies to better address high-growth, emerging opportunities in the data center and service provider networking segments in Japan, particularly in the areas of virtualization and cloud computing.
  • Brocade announced that the Brocade 4 and 8 Gbps Fibre Channel (FC) host bus adapters (HBAs) have been successfully tested on the HP ProLiant server platform, and the HP StorageWorks Modular Storage Array (MSA) and Enterprise Virtual Array (EVA) disk storage platforms. The new Brocade 8000 Fibre Channel over Ethernet (FCoE) switch, which enables the consolidation of storage and IP networking ports at the server edge, will also be offered by HP to its customers.
  • Brocade announced it had completed testing and interoperability qualification of its server connectivity solutions, or HBAs, by all leading storage manufacturers, including HP, EMC, IBM, Hitachi Data Systems, LSI Corporation and Xiotech.
  • Brocade announced a global Alliance Partner Network channel program designed to attract storage and IP networking channel resellers with a more selective, profitable alternative to existing channel programs.
  • Brocade announced two strategic North American distribution partners, Avnet Technology Solutions and Tech Data Corporation, to help expand its existing data center distribution network to enterprise IP networking products via channel reseller partners.
  • Brocade announced a Server Connectivity Certification Program for Assured Compatibility of Brocade HBAs in Multi-Vendor, Heterogeneous Environments.

Product Introductions

  • Brocade introduced a number of new products and features at Interop that span all layers of the network, reinforcing Brocade’s commitment to continuous IP networking innovation. Specifically, Brocade announced the:

Executive Leadership

Customer Wins

Third Fiscal Quarter 2009 Financial Highlights and Additional Financial Information

  • Revenue of $493.3 million, reflecting 35% year-over-year growth and a 3% sequential decline.
  • GAAP net loss of $21.0 million or $(0.05) per share diluted, and net income of $55.4 million or $0.12 per share diluted on a non-GAAP basis.
  • Total quarterly SAN ports shipped was approximately 0.9 million.
  • SAN Average Selling Price (ASP) declines were in the mid single digits.
  • Net stock-based compensation expense was $43.3 million.
  • Effective GAAP tax rate was (1,977)%; non-GAAP effective tax-rate was 29.2%.
   

Q3 2009

   

Q2 2009

   

Q3 2008

Revenue $493.3 M $506.3 M $365.7 M
GAAP net income (loss) $(21.0) M $(63.1) M $20.3 M
Non-GAAP net income $55.4 M $47.1 M $61.2 M
GAAP EPS – diluted ($0.05) $(0.16) $0.05
Non-GAAP EPS – diluted $0.12 $0.11 $0.16
Non-GAAP gross margin 58.2% 56.2% 61.9%
Non-GAAP operating margin 20.3% 18.8% 22.6%
Cash provided by operations $16.6 M $107.3 M $71.7 M
 

Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

As a % of total revenues    

Q3 2009

   

Q2 2009

   

Q3 2008

OEM revenues 63% 62% 86%
Channel/Direct revenues 37% 38% 14%
10% or greater customer revenues 46% 43% 62%
Domestic revenues (1) 64% 69% 65%
International revenues (1) 36% 31% 35%
Data Storage Revenue 58% 58% 82%
IP Products Revenue 24% 25% 1%
Stackable % of IP Revenues (2) 26% 26% 28%
Chassis % of IP Revenues (2) 74% 74% 72%
Enterprise % of IP Revenues (2) 83% 78% 82%
Service Providers % of IP Revenues (2) 17% 22% 18%
Global Services Revenue 18% 17% 17%
 
   

Q3 2009

   

Q2 2009

   

Q3 2008

Cash, cash equivalents and investments $249.9 M $236.9 M $764.2 M
Deferred revenues $230.1 M $244.4 M $148.5 M
Capital expenditures – non-campus related $ 20.0 M $ 15.7 M $ 14.0 M
Capital expenditures – campus related $ 24.8 M $ 21.9 M $ 80.2 M
Total debt, net of discount $1,139 M $1,169 M $169.1 M
Days sales outstanding 56 days 49 days 43 days
Employees at end of period 3,866 3,845 2,842
 

1) Based on Brocade estimates of adjustment for OEMs taking delivery of internationally bound shipments in the United States, end-user demand was 52% domestic and 48% international.
2) On an “As If” combined Brocade basis with respect to Q3 2008.
3) Q3 2009 is the second full quarter of combined operations post acquisition of Foundry.

Non-GAAP Financial Measures

This press release and the related conference call contain non-GAAP financial measures. In evaluating Brocade’s performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.

Management believes that non-GAAP net income and other non-GAAP financial measures used in this press release allow management to gain a better understanding of Brocade’s comparative operating performance from period-to-period and to its competitors' operating results. Management also believes these non-GAAP financial measures help indicate Brocade’s baseline performance before gains, losses or charges that are considered by management to be outside ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations performance and the allocation of resources. Management believes these non-GAAP financial measures, when read in conjunction with Brocade’s GAAP financials, provide useful information to investors by offering:

  • the ability to make more meaningful period-to-period comparisons of Brocade’s ongoing operating results;
  • the ability to better identify trends in Brocade’s underlying business and perform related trend analysis;
  • a better understanding of how management plans and measures Brocade’s underlying business; and
  • an easier way to compare Brocade’s most recent results of operations against investor and analyst financial models.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events or arise outside the ordinary course of our continuing operations. Management believes that it is appropriate to evaluate Brocade’s operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include: (i) legal fees associated with indemnification obligations to former directors and officers and other related costs, (ii) provision for class action lawsuit, (iii) acquisition and integration costs (in connection with the Foundry acquisition), (iv) in-process research and development charges (in connection with the Foundry acquisition), (v) loss on sale of investments, and (vi) acquisition-related financing charges (in connection with the Foundry acquisition).

Management also excludes the following non-cash charges in determining non-GAAP net income: (i) stock-based compensation expense, (ii) amortization of purchased intangible assets, (iii) costs/benefits associated with restructuring costs and facilities lease losses and (iv) goodwill and acquisition-related intangible assets impairment. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Management believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for Brocade’s newly acquired and long-held businesses. Management also believes that the expense associated with the goodwill and acquisition-related intangible assets impairment is appropriate to be excluded because we do not believe that this charge is indicative of future operating results and we believe that investors benefit from an understanding of our operating results without giving effect to it.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above in order to present a more meaningful measure of non-GAAP net income.

Limitations. These non-GAAP financial measures have limitations, however, because they do not include all items of income and expense that impact the Company. Management compensates for these limitations by also considering Brocade’s GAAP results. The non-GAAP financial measures that Brocade uses are not prepared in accordance with, and should not be considered an alternative to, measurements required by GAAP, such as operating income, net income (loss) and net income (loss) per share, and should not be considered measures of Brocade’s liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measures reported by other companies.

Third Fiscal Quarter 2009 Conference Call and Webcast Information

Brocade management will host a conference call to discuss third quarter 2009 results on Thursday, August 20, 2009, at 2:00 p.m. Pacific Time. To access the live webcast, please visit Brocade's website at http://www.brcd.com at least 20 minutes prior to the call to download any necessary audio or plug-in software. A telephone replay will be available approximately two hours after the conference ends and will be available until 5:00 p.m. Pacific Time on August 27, 2009. A replay of the conference call will be available via webcast at http://www.brcd.com for approximately twelve months.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding Brocade’s market positioning and opportunities, including potential benefits of new or expanded partner relationships, and the integration of the Foundry acquisition. These statements are based on current expectations on the date of this press release and involve a number of risks and uncertainties which may cause actual results to differ significantly from such estimates. The risks include, but are not limited to, the impact of the economic slowdown across geographies and the effect of changes in IT spending levels, Brocade’s ability to realize the anticipated benefits from new and expanded partnership relationships, and the acquisition of Foundry, Brocade’s ability to successfully introduce new products and services on a timely basis, market competition, and Brocade’s ability to manage its business effectively in a rapidly evolving market. Certain of these and other risks are set forth in more detail in "Item 1A. Risk Factors" in Brocade's Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2009. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.

About Brocade

Brocade® (NASDAQ: BRCD) develops extraordinary networking solutions that enable today’s complex, data-intensive businesses to optimize information connectivity and maximize the business value of their data. For more information, visit www.brocade.com.

Brocade, the B-wing symbol, BigIron, DCX, Fabric OS, FastIron, IronPoint, IronShield, IronView, IronWare, JetCore, NetIron, SecureIron, ServerIron, StorageX and TurboIron are registered trademarks, and DCFM, Extraordinary Networks and SAN Health are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. All other brands, products, or service names are or may be trademarks or service marks of, and are used to identify, products or services of their respective owners.

© 2009 Brocade Communications Systems, Inc. All Rights Reserved.

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
   
Three Months Ended Nine Months Ended
August 1,   July 26, August 1,   July 26,
2009 2008 2009 2008
 
Net revenues
Product $ 402,483 $ 301,804 $ 1,183,117 $ 895,333
Services   90,797     63,892     248,054     173,107  
Total net revenues 493,280 365,696 1,431,171 1,068,440
Cost of revenues
Product 185,347 111,072 535,912 345,476
Services   47,488     41,419     132,606     107,728  
Total cost of revenues   232,835     152,491     668,518     453,204  
Gross margin 260,445 213,205 762,653 615,236
Operating expenses:
Research and development 94,718 65,368 259,464 184,704
Sales and marketing 103,640 70,039 281,703 203,200
General and administrative 23,070 17,577 62,753 43,260
Legal fees associated with indemnification obligations and other related costs, net (561 ) 7,951 38,553 22,399
Provision for class action lawsuit — — — 160,000
Amortization of intangible assets 17,052 7,846 51,666 23,664
Acquisition and integration costs 1,450 — 4,794 —
Restructuring costs and facilities lease loss (benefits), net — — 2,329 (477 )
In-process research and development — — 26,900 —
Goodwill and acquisition-related intangible assets impairment   —     —     53,306     —  
Total operating expenses   239,369     168,781     781,468     636,750  
Income/(loss) from operations 21,076 44,424 (18,815 ) (21,514 )
Interest and other income/(expense), net 809 8,872 (2,912 ) 27,663
Interest expense (22,845 ) (1,103 ) (70,600 ) (4,384 )
(Loss) on investments, net   (52 )   (36 )   (576 )   (6,985 )
Income/(loss) before provision/(benefit) for income taxes (1,012 ) 52,157 (92,903 ) (5,220 )
Income tax provision/(benefit)   20,021     31,891     17,280     (136,709 )
Net income/(loss) $ (21,033 ) $ 20,266   $ (110,183 ) $ 131,489  
 
Net income/(loss) per share – Basic $ (0.05 ) $ 0.05   $ (0.28 ) $ 0.35  
Net income/(loss) per share – Diluted $ (0.05 ) $ 0.05   $ (0.28 ) $ 0.34  
Shares used in per share calculation – Basic   406,916     371,345     390,087     376,455  
Shares used in per share calculation – Diluted   406,916     392,586     390,087     396,445  
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
   
August 1, October 25,
2009 2008
Assets
Current assets:
Cash and cash equivalents $ 244,179 $ 453,884
Short-term investments   5,731     152,741  
Total cash, cash equivalents and short-term investments 249,910 606,625
Accounts receivable, net 301,787 158,935
Inventories 55,674 21,362
Deferred tax assets 86,690 104,705
Prepaid expenses and other current assets   75,723     49,931  
Total current assets 769,784 941,558
 
Long-term marketable equity securities — 177,380
Long-term investments — 36,120
Restricted cash — 1,075,079
Property and equipment, net 409,914 313,379
Goodwill 1,668,102 268,977
Intangible assets, net 505,822 220,567
Non-current deferred tax assets 179,792 227,795
Other assets   29,790     37,793  
Total assets $ 3,563,204   $ 3,298,648  

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 150,616 $ 167,660
Accrued employee compensation 112,193 107,994
Deferred revenue 170,695 103,372
Current liabilities associated with facilities lease losses 13,435 13,422
Liability associated with class action lawsuit — 160,000
Revolving credit facility 14,050 —
Current portion of long-term debt 41,545 43,606
Convertible subordinated debt 171,282 —
Purchase commitments 23,447 17,332
Other accrued liabilities   75,607     88,472  
Total current liabilities 772,870 701,858
 
Long-term debt, net of current portion 912,568 1,011,399
Non-current convertible subordinated debt — 169,660
Non-current liabilities associated with facilities lease losses 13,319 15,007
Non-current deferred revenue 59,374 37,869
Non-current income tax liability 108,746 67,497
Other non-current liabilities 10,112 13,118
 
Stockholders’ equity
Common stock 1,828,162 1,393,299
Accumulated other comprehensive loss (6,585 ) (85,877 )
Accumulated deficit   (135,362 )   (25,182 )
Total stockholders’ equity   1,686,215     1,282,240  
Total liabilities and stockholders’ equity $ 3,563,204   $ 3,298,648  
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended August 1, 2009 and July 26, 2008
(in thousands)
(unaudited)
 
Three Months Ended
August 1,   July 26,
2009 2008
Cash flows from operating activities:
Net income (loss) $ (21,033 ) $ 20,266
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Excess tax benefit from employee stock plans — (3,589 )
Depreciation and amortization 50,956 30,121
Loss on disposal of property and equipment 218 133
Amortization of debt issuance costs 5,156 —
Net losses on investments and marketable equity securities 52 41
Provision for doubtful accounts receivable and sales allowances 4,184 1,605
Non-cash compensation expense 43,313 11,874
Capitalization of interest cost (2,311 ) —
Changes in assets and liabilities:
Accounts receivable (51,734 ) (7,828 )
Inventories 10,092 (1,951 )
Prepaid expenses and other assets (14,279 ) 2,936
Deferred tax assets — (10,073 )
Accounts payable 6,770 17,988
Accrued employee compensation (15,792 ) (6,123 )
Deferred revenue (14,370 ) 7,683
Other accrued liabilities 17,775 10,940
Liabilities associated with facilities lease losses   (2,366 )   (2,372 )
Net cash provided by operating activities   16,631     71,651  
 
Cash flows from investing activities:
Purchases of property and equipment (44,826 ) (94,218 )
Purchases of short-term investments (61 ) (65,388 )
Proceeds from maturities and sale of short-term investments   8,466     42,393  
Net cash used in investing activities   (36,421 )   (117,213 )
 
Cash flows from financing activities:
Payment of principal related to the term loan (33,141 ) —
Common stock repurchases — (38,112 )
Excess tax benefit from employee stock plans — 3,589
Proceeds from issuance of common stock, net   73,094     27,103  
Net cash provided by (used in) financing activities   39,953     (7,420 )
 
Effect of exchange rate fluctuations on cash and cash equivalents   1,390     (1,152 )
 
Net increase (decrease) in cash and cash equivalents 21,553 (54,134 )
Cash and cash equivalents, beginning of period   222,626     513,533  
Cash and cash equivalents, end of period $ 244,179   $ 459,399  
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended August 1, 2009 and July 26, 2008
(in thousands)
(unaudited)
 
Nine Months Ended
August 1,   July 26,
2009 2008
Cash flows from operating activities:
Net income (loss) $ (110,183 ) $ 131,489
Adjustments to reconcile net income (loss) to net cash provided by/(used in) operating activities:
Release of valuation allowance — (185,176 )
Excess tax benefit from employee stock plans 986 (2,505 )
Depreciation and amortization 145,087 89,645
Loss on disposal of property and equipment 1,369 1,328
Amortization of debt issuance costs 11,856 —
Net losses on investments and marketable equity securities 570 6,488
Provision for doubtful accounts receivable and sales allowances 9,533 4,914
Non-cash compensation expense 101,505 31,521
Capitalization of interest cost (6,356 ) —
In-process research and development 26,900 —
Non-cash facilities lease loss benefit (339 ) (477 )
Asset impairment charge 53,306 —
Changes in assets and liabilities:
Accounts receivable (75,786 ) 3,758
Inventories 43,898 3,648
Prepaid expenses and other assets 6,929 (19,032 )
Deferred tax assets 651 (9,808 )
Accounts payable (41,867 ) 1,196
Accrued employee compensation (56,110 ) (3,526 )
Deferred revenue 21,078 17,671
Other accrued liabilities (5,426 ) 46,003
Liabilities associated with facilities lease losses (7,391 ) (7,213 )
Liability associated with class action lawsuit   (160,000 )   160,000  
Net cash provided by /(used in) operating activities   (39,790 )   269,924  
 
Cash flows from investing activities:
Purchases of property and equipment (118,278 ) (125,468 )
Purchases of short-term investments (116 ) (166,963 )
Proceeds from sale of marketable equity securities and equity investments — 9,926
Proceeds from maturities and sale of short-term investments 154,931 340,838
Purchases of long-term investments — (37,731 )
Proceeds from maturities and sale of long-term investments 30,173 22,483
Decrease in restricted cash 1,075,079 —
Net cash paid in connection with acquisitions   (1,297,482 )   (43,554 )
Net cash used in investing activities   (155,693 )   (469 )
 
Cash flows from financing activities:
Payment of senior underwriting fees related to the term loan (30,525 ) —
Payment of principal related to the term loan (108,141 ) —
Common stock repurchases — (168,293 )
Excess tax benefit from employee stock plans (986 ) 2,505
Proceeds from issuance of common stock, net 110,280 41,803
Proceeds from revolving credit facility   14,050     —  
Net cash used in financing activities   (15,322 )   (123,985 )
 
Effect of exchange rate fluctuations on cash and cash equivalents   1,100     (1,826 )
 
Net increase (decrease) in cash and cash equivalents (209,705 ) 143,644
Cash and cash equivalents, beginning of period   453,884     315,755  
Cash and cash equivalents, end of period $ 244,179   $ 459,399  
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS)
(in thousands, except per share amounts)
(unaudited)
 

Three Months Ended

August 1,   July 26,

2009

2008

 
Net income (loss) on a GAAP basis $ (21,033 ) $ 20,266
Adjustments:
Stock-based compensation expense included in cost of revenues 8,459 2,638
Amortization of intangible assets expense included in cost of revenues 17,950 8,780
Legal fees associated with certain pre-acquisition litigation   —     1,860
Total gross margin adjustments   26,409     13,278
Legal fees associated with indemnification obligations and other related costs, net (561 ) 7,951
Stock-based compensation expense included in research and development 12,444 2,788
Stock-based compensation expense included in sales and marketing 15,013 3,195
Stock-based compensation expense included in general and administrative 7,397 3,253
Amortization of intangible assets expense included in operating expenses 17,052 7,846
Acquisition and integration costs   1,450     —
Total operating expense adjustments   52,795     25,033
Total operating income adjustments 79,204 38,311
Income tax effect of adjustments   (2,795 )   2,643
Non-GAAP net income $ 55,376   $ 61,220
Non-GAAP net income per share – basic $ 0.14   $ 0.16
Non-GAAP net income per share – diluted $ 0.12   $ 0.16
Shares used in non-GAAP per share calculation – basic   406,916     371,345
Shares used in non-GAAP per share calculation – diluted   476,888     392,586
 

See explanation of non-GAAP information included herein.

BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS)
(in thousands, except per share amounts)
(unaudited)
 
Nine Months Ended
August 1,   July 26,
2009 2008
 
Net income (loss) on a GAAP basis $ (110,183 ) $ 131,489
Adjustments:
Stock-based compensation expense included in cost of revenues 18,593 7,501
Amortization of intangible assets expense included in cost of revenues 47,905 28,620
Legal fees associated with certain pre-acquisition litigation   —     2,319  
Total gross margin adjustments   66,498     38,440  
Legal fees associated with indemnification obligations and other related costs, net 38,553 22,399
Provision for class action lawsuit — 160,000
Stock-based compensation expense included in research and development 30,115 7,939
Stock-based compensation expense included in sales and marketing 35,886 8,327
Stock-based compensation expense included in general and administrative 16,911 7,755
Amortization of intangible assets expense included in operating expenses 51,666 23,664
Acquisition and integration costs 4,794 —
Restructuring costs and facilities lease losses (benefits), net 2,329 (477 )
In-process research and development 26,900 —
Goodwill and acquisition-related intangible assets impairment   53,306     —  
Total operating expense adjustments   260,460     229,607  
Total operating income adjustments 326,958 268,047
Loss on sale of investments, net — 6,004
Acquisition-related financing charges 4,366 —
Income tax effect of adjustments   (55,084 )   (220,399 )
Non-GAAP net income $ 166,057   $ 185,141  
 
Non-GAAP net income per share – basic $ 0.43   $ 0.49  
Non-GAAP net income per share – diluted $ 0.38   $ 0.47  
Shares used in non-GAAP per share calculation – basic   390,087     376,455  
Shares used in non-GAAP per share calculation – diluted   441,666     396,445  
 

See explanation of non-GAAP information included herein.

Source: Brocade Communications Systems, Inc.

Brocade Communications Systems, Inc.
Public Relations
John Noh, 408-333-5108
jnoh@brocade.com
Investor Relations
Peter Ausnit, 408-333-4000
pausnit@brocade.com