Brocade Communications Systems, Inc.
Aug 18, 2010

Brocade Reports Fiscal Q3 Results

Strong Performance in Storage Area Networking Led the Way to Year-over-Year Growth in Revenue

SAN JOSE, Calif., Aug 18, 2010 (BUSINESS WIRE) -- Brocade(R) (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended July 31, 2010. Brocade recorded quarterly revenues of $504 million for an increase of two percent year-over-year, resulting in a diluted earnings per share (EPS) of $0.05 on a GAAP basis and $0.13 on a non-GAAP basis.

"Q3 was another solid quarter for Brocade in which we achieved better-than-expected results from our storage area networking business and continued to make progress in our Ethernet go-to-market initiatives," said Michael Klayko, CEO of Brocade.

Klayko continued: "As we look to Q4, we expect a strong finish to our fiscal 2010. Despite operating in a challenging global economy with variable IT spending patterns, we are confident that our sales and marketing strategies as well as our product portfolio are aligned well with customer imperatives."

In addition to this press release, Brocade management has posted prepared comments and slides on its Fiscal Q3 results and outlook at Brocade will host a live webcast conference call to answer questions from investors and analysts today at 2:30 p.m. Pacific time. Questions may also be submitted in advance to

Other Q3 product, customer and partner announcements are available at

Financial Highlights and Additional Financial Information

Q3 2010

Q2 2010

Q3 2009

Revenue $504M $501M $493M
GAAP net income (loss) (1) $22M $22M $(23)M
Non-GAAP net income $64M $63M $55M
GAAP EPS - diluted (1) $0.05 $0.05 $(0.06)
Non-GAAP EPS - diluted $0.13 $0.13 $0.12
Non-GAAP gross margin 54.1% 56.7% 58.2%
Non-GAAP operating margin 17.3% 20.5% 20.3%
Adjusted EBITDA (2) $102M $116M $119M
Cash provided by operations $55M $68M $17M

Please see important note of explanation on Non-GAAP measures below, including a detailed reconciliation between GAAP and Non-GAAP information in the tables included herein.

As a % of total revenues

Q3 2010

Q2 2010

Q3 2009

OEM revenues 64% 63% 63%
Channel/Direct revenues 36% 37% 37%
10% or greater customer revenues 44% 44% 46%
Domestic revenues 64% 65% 64%
International revenues 36% 35% 36%
Data Storage Revenues 58% 56% 58%
Ethernet Products Revenues 24% 26% 24%
Federal % of Ethernet Revenues (3) 25% 28% 21%
Stackable % of Ethernet Revenues (3) 35% 36% 26%
Chassis % of Ethernet Revenues (3) 65% 64% 74%
Enterprise % of Ethernet Revenues (3) 84% 78% 83%
Service Providers % of Ethernet Revenues (3) 16% 22% 17%
Global Services Revenue 18% 18% 18%

Q3 2010

Q2 2010

Q3 2009

Cash, cash equivalents and investments $295.7M $290.4M $249.9M
Deferred revenues $247.9M $246.7M $230.1M
Capital expenditures - non-campus related $23.1M $19.7M $20.0M
Capital expenditures - campus related $23.5M $42.4M $24.8M
Total debt, net of discount (1) $957M $981M $1,134M
Days sales outstanding 54 days 54 days 56 days
Employees at end of period 4,520 4,245 3,866

1) Retrospectively adjusted as a result of applying new standard that changed the accounting for convertible debt instruments.

2) Adjusted EBITDA is as defined in the Term Debt Credit Agreement.

3) Ethernet revenues include product and support revenues.

Non-GAAP Financial Measures

This press release contains 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 financial measures used in this press release allow management to gain a better understanding of Brocade's comparative operating performance both 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:

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 Brocade's 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) provision for certain pre-acquisition litigation, (ii) legal fees associated with certain pre-acquisition litigation, (iii) legal fees associated with indemnification obligations to former directors and officers and other related costs, net, (iv) acquisition and integration costs (in connection with the Foundry acquisition), (v) restructuring costs and facilities leases losses (vi) in-process research and development charges (in connection with the Foundry acquisition), (vii) goodwill and acquisition related intangibles impairment, (viii) loss on sale of property, (ix) acquisition-related financing charges, and (x) interest expense related to adoption of new standard relating to convertible debt instruments.

Management also excludes the following non-cash charges in determining non-GAAP net income (i) stock-based compensation expense and (ii) amortization of purchased intangible assets. 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.

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 measurements 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 measurements reported by other companies.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding Brocade's expected financial performance, including sales and marketing strategies and product positioning. 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 effect of changes in IT spending levels in one or more of our target markets, market competition and changes in the industry, Brocade's ability to successfully introduce new products and services on a timely basis, capitalize on new Brocade sales and marketing initiatives, including expanded go-to-market activities, 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 1, 2010. 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(R) (NASDAQ GS: 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

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.

© 2010 Brocade Communications Systems, Inc. All Rights Reserved.

(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 31, Aug 1, July 31, Aug 1,
2010 2009 (1) 2010 2009 (1)
Net revenues
Product $ 414,702 $ 402,483 $ 1,273,672 $ 1,183,117
Service 88,811 90,797 270,316 248,054
Total net revenues 503,513 493,280 1,543,988 1,431,171
Cost of revenues
Product 204,844 185,347 585,804 535,912
Service 47,668 47,488 146,456 132,606
Total cost of revenues 252,512 232,835 732,260 668,518
Gross margin 251,001 260,445 811,728 762,653
Operating expenses:
Research and development 85,884 94,718 265,317 259,464