August 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 www.BRCD.com. 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 ir@brocade.com.

Other Q3 product, customer and partner announcements are available at http://newsroom.brocade.com/.

Financial Highlights and Additional Financial Information

  • Q3 revenue was $504 million, increasing approximately 1% sequentially and 2% year-over-year.
  • Q3 GAAP EPS (diluted) was $0.05, sequentially level, and increasing from a loss in Q3 2009.
  • Q3 non-GAAP EPS (diluted) was $0.13, sequentially level, and increasing 8% year-over-year.
  • Q3 non-GAAP operating margin was 17.3% versus 20.5% in Q2 2010 and 20.3% in Q3 2009.
  • Q3 effective GAAP tax rate was (220)%; non-GAAP effective tax rate was 0.2%.
  • Q3 Adj. EBITDA was $102 million, down from $116 million in Q2 2010 and $119 million in Q3 2009.
  • Q3 total Storage Area Networking (SAN) port shipments were approximately 1.0 million.

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:

  • the ability to make more meaningful period-to-period comparisons of Brocade's ongoing operating results;
  • the ability to make more meaningful comparisons of Brocade's operating performance against industry and competitor companies;
  • the ability to better identify trends in Brocade's underlying business and to 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 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 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.

© 2010 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
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
Sales and marketing 101,112 103,640 291,289 281,703
General and administrative

17,540

23,070

49,719

62,753
Legal fees associated with indemnification obligations and other related costs (74 ) (561 ) 504 38,553
Amortization of intangible assets 16,190 17,052 49,433 51,666
Acquisition and integration costs -- 1,450 204 4,794
Restructuring costs and facilities lease loss benefit, net -- -- -- 2,329
In-process research and development -- -- -- 26,900

Goodwill and acquisition related intangible assets impairment

-- -- -- 53,306
Total operating expenses 220,652 239,369 656,466 781,468
Income (loss) from operations 30,349 21,076 155,262 (18,815 )
Interest income and other loss, net (1,399 ) 809 (2,231 ) (2,912 )
Interest expense (22,061 ) (24,875 ) (63,656 ) (76,528 )

Loss on sale of investments and property, net

(24 ) (52 ) (8,599 ) (576 )

Income (loss) before provision for (benefit from) income taxes

6,865 (3,042 ) 80,776 (98,831 )
Income tax provision (benefit) (15,096 ) 20,452 (14,660 ) 14,655
Net income (loss) $ 21,961 $ (23,494 ) $ 95,436 $ (113,486 )
Net income (loss) per share - basic $ 0.05 $ (0.06 ) $ 0.22 $ (0.29 )
Net income (loss) per share - diluted $ 0.05 $ (0.06 ) $ 0.20 $ (0.29 )
Shares used in per share calculation - basic 449,489 406,916 443,795 390,087
Shares used in per share calculation - diluted 481,863 406,916 481,764 390,087

(1) As adjusted due to changes to the accounting for convertible debt instruments.

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
July 31, October 31,
2010 2009 (1)
Assets
Current assets:
Cash and cash equivalents $ 292,537 $ 334,193
Short-term investments 3,155 4,678
Restricted cash -- 12,502
Total cash, cash equivalents and short-term investments and restricted cash 295,692 351,373
Accounts receivable, net 296,530 297,819
Inventories 87,524 72,152
Deferred tax assets 77,904 84,629
Prepaid expenses and other current assets 57,615 79,302
Total current assets 815,265 885,275
Property and equipment, net 516,650 442,408
Goodwill 1,653,445 1,659,934
Intangible assets, net 374,657 470,872
Non-current deferred tax assets 191,781 184,713
Other assets 48,850 28,218
Total assets $ 3,600,648 $ 3,671,420
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 146,001 $ 181,249
Accrued employee compensation 79,380 160,832
Deferred revenue 185,536 174,870
Current liabilities associated with facilities lease losses 7,366 10,769
Current portion of capital lease obligations 1,683 --
Revolving credit facility -- 14,050
Current portion of term loan 26,312 38,822
Convertible subordinated debt -- 169,332
Other accrued liabilities 96,170 105,263
Total current liabilities 542,448 855,187
Non-current capital lease obligations, net of current portion 6,950 --
Term loan, net of current portion 327,239 860,114
Senior Secured Notes 595,270 --
Non-current liabilities associated with facilities lease losses 4,495 10,150
Non-current deferred revenue 62,412 60,575
Non-current income tax liability 59,812 92,276
Other non-current liabilities 8,154 15,114
Total liabilities 1,606,780 1,893,416
Stockholders' equity
Common stock 452 434
Additional paid-in capital 2,028,908 1,901,238
Accumulated other comprehensive loss (13,180 ) (5,920 )
Accumulated deficit (22,312 ) (117,748 )
Total stockholders' equity 1,993,868 1,778,004
Total liabilities and stockholders' equity $ 3,600,648 $ 3,671,420

(1) As adjusted due to changes to the accounting for convertible debt instruments.

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended July 31, 2010 and Aug 1, 2009
(in thousands)
(unaudited)
Three Months Ended
July 31, Aug 1,
2010 2009 (1)
Cash flows from operating activities:
Net income (loss) $ 21,961 $ (23,494 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Change in excess tax benefits or detriments from share-based compensation

(5,255 ) --
Depreciation and amortization 50,493 50,956
Loss on disposal of property and equipment 379 218
Amortization of debt issuance costs and original issue discount 4,635 7,186
Net (gains) losses on investments and marketable equity securities (7 ) 52
Provision for doubtful accounts receivable and sales allowances 2,840 4,184
Non-cash compensation expense 24,682 43,313
Capitalization of interest cost (720 ) (2,311 )
Changes in assets and liabilities:
Accounts receivable (1,831 ) (51,734 )
Inventories (10,705 ) 10,092
Prepaid expenses and other assets 6,071 (13,848 )
Accounts payable 38,522 6,770
Accrued employee compensation (49,490 ) (15,792 )
Deferred revenue 1,229 (14,370 )
Other accrued liabilities (24,188 ) 17,775
Liabilities associated with facilities lease losses (3,356 ) (2,366 )
Net cash provided by operating activities 55,260 16,631
Cash flows from investing activities:
Purchases of property and equipment (46,582 ) (44,826 )
Purchases of short-term investments (17 ) (61 )
Proceeds from maturities and sale of short-term investments -- 8,466
Net cash used in investing activities (46,599 ) (36,421 )
Cash flows from financing activities:
Payment of fees related to Senior Secured Notes (664 ) --
Payment of principal related to the term loan (30,564 ) (33,141 )
Payment of capital lease related to principal (494 ) --

Change in excess tax benefits or detriments from share-based compensation

5,255 --
Proceeds from issuance of common stock, net 30,064 73,094
Common stock repurchases (5,000 ) --
Net cash provided by (used in) financing activities (1,403 ) 39,953
Effect of exchange rate fluctuations on cash and cash equivalents (1,954 ) 1,390
Net increase in cash and cash equivalents 5,304 21,553
Cash and cash equivalents, beginning of period 287,233 222,626
Cash and cash equivalents, end of period $ 292,537 $ 244,179

(1) As adjusted due to changes to the accounting for convertible debt instruments.

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended July 31, 2010 and Aug 1, 2009
(in thousands)
(unaudited)
Nine Months Ended
July 31, Aug 1,
2010 2009 (1)
Cash flows from operating activities:
Net income (loss) $ 95,436 $ (113,486 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Change in excess tax benefits or detriments from share-based compensation

(5,318 ) 986
Depreciation and amortization 148,106 145,087
Loss on disposal of property and equipment 9,838 1,369
Amortization of debt issuance costs and original issue discount 16,419 17,784
Net (gains) losses on investments and marketable equity securities (224 ) 570
Provision for doubtful accounts receivable and sales allowances 8,706 9,533
Non-cash compensation expense 76,351 101,505
Capitalization of interest cost (7,755 ) (6,356 )
Asset impairment charge -- 53,306
In-process research and development -- 26,900
Non-cash facilities lease loss benefit -- (339 )

Changes in assets and liabilities, net of acquired assets and assumed liabilities:

Restricted cash 12,502 --
Accounts receivable (7,419 ) (75,786 )
Inventories (15,373 ) 43,898
Prepaid expenses and other assets 16,629 4,304
Deferred tax assets -- 651
Accounts payable (30,122 ) (41,867 )
Accrued employee compensation (97,970 ) (56,110 )
Deferred revenue 12,503 21,078
Other accrued liabilities (31,387 ) (5,426 )
Liabilities associated with facilities lease losses (8,832 ) (7,391 )
Liability associated with class action lawsuit -- (160,000 )
Net cash provided by (used in) operating activities 192,090 (39,790 )
Cash flows from investing activities:
Purchases of property and equipment (155,970 ) (118,278 )
Purchases of short-term investments (41 ) (116 )
Proceeds from maturities and sale of short-term investments 1,788 154,931
Proceeds from maturities and sale of long-term investments -- 30,173
Proceeds from sale of property 30,185 --
Decrease in restricted cash -- 1,075,079
Net cash paid in connection with acquisitions -- (1,297,482 )
Net cash used in investing activities (124,038 ) (155,693 )
Cash flows from financing activities:
Payment of convertible subordinated debt (172,500 )

--

Payment of fees related to Senior Secured Notes (3,665 )

--

Payment of senior underwriting fees related to term loan

--

(30,525

)

Payment related to the term loan (552,808 ) (108,141 )

Change in excess tax benefits or detriments from share-based compensation

5,318 (986 )
Payment of revolving credit facility (14,050 ) --
Payment of capital lease related to principal (494 ) --
Proceeds from issuance of common stock, net 69,883 110,280
Common stock repurchases (25,004 ) --
Proceeds from issuance of bonds 587,968 --
Proceeds from revolving credit facility -- 14,050
Net cash used in financing activities (105,352 ) (15,322 )
Effect of exchange rate fluctuations on cash and cash equivalents (4,356 ) 1,100
Net decrease in cash and cash equivalents (41,656 ) (209,705 )
Cash and cash equivalents, beginning of period 334,193 453,884
Cash and cash equivalents, end of period $ 292,537 $ 244,179
Supplemental Schedule of non-cash investing activities:

Fair value of stock options and unvested awards assumed in exchange for acquired Foundry assets

$ -- $ 254,312

(1) As adjusted due to changes to the accounting for convertible debt instruments.

BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
July 31, Aug 1,
2010 2009 (1)
Net income (loss) on a GAAP basis $ 21,961 $ (23,494 )
Adjustments:
Stock-based compensation expense included in cost of revenues 5,518 8,459
Amortization of intangible assets expense included in cost of revenues 14,466 17,950
Provision for certain pre-acquisition litigation 1,604 --
Legal fees associated with certain pre-acquisition litigation 13 --
Total gross margin adjustments 21,601 26,409
Legal fees associated with indemnification obligations and other related costs (74 ) (561 )
Stock-based compensation expense included in research and development 6,392 12,444
Stock-based compensation expense included in sales and marketing 8,776 15,013
Stock-based compensation expense included in general and administrative 3,996 7,397
Amortization of intangible assets expense included in operating expenses 16,191 17,052
Acquisition and integration costs -- 1,450
Total operating expense adjustments 35,281 52,795
Total operating income adjustments 56,882 79,204
Interest expense related to adoption of new standards relating to convertible debt instruments -- 2,030
Income tax effect of adjustments (15,217 ) (2,364 )
Non-GAAP net income $ 63,626 $ 55,376
Non-GAAP net income per share - basic $ 0.14 $ 0.14
Non-GAAP net income per share - diluted $ 0.13 $ 0.12
Shares used in non-GAAP per share calculation - basic 449,489 406,916
Shares used in non-GAAP per share calculation - diluted 481,863 476,888

(1) As adjusted due to changes to the accounting for convertible debt instruments.

See explanation of non-GAAP information included herein.

BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(in thousands, except per share amounts)
(unaudited)
Nine Months Ended
July 31, Aug 1,
2010 2009 (1)
Net income (loss) on a GAAP basis $ 95,436 $ (113,486 )
Adjustments:
Stock-based compensation expense included in cost of revenues 16,377 18,593
Amortization of intangible assets expense included in cost of revenues 46,783 47,905
Provision for certain pre-acquisition litigation 1,604 --
Legal fees associated with certain pre-acquisition litigation 330 --
Total gross margin adjustments 65,094 66,498
Legal fees associated with indemnification obligations and other related costs 504 38,553
Stock-based compensation expense included in research and development 21,508 30,115
Stock-based compensation expense included in sales and marketing 27,809 35,886
Stock-based compensation expense included in general and administrative 10,657 16,911
Amortization of intangible assets expense included in operating expenses 49,433 51,666
Acquisition and integration costs 203 4,794
Restructuring costs and facilities lease losses -- 2,329
In-process research and development -- 26,900
Goodwill and acquisition related intangibles impairment -- 53,306
Total operating expense adjustments 110,114 260,460
Total operating income adjustments 175,208 326,958
Loss on sale of property 8,737 --
Acquisition-related financing charges -- 4,366
Interest expense related to adoption of new standards relating to convertible debt instruments 2,490 5,928
Income tax effect of adjustments (61,501 ) (57,709 )
Non-GAAP net income $ 220,370 $ 166,057
Non-GAAP net income per share - basic $ 0.50 $ 0.43
Non-GAAP net income per share - diluted $ 0.45 $ 0.38
Shares used in non-GAAP per share calculation - basic 443,795 390,087
Shares used in non-GAAP per share calculation - diluted 486,500 441,666

(1) As adjusted due to changes to the accounting for convertible debt instruments.

See explanation of non-GAAP information included herein.

SOURCE: Brocade

BROCADE
Public Relations
John Noh, 408-333-5108
jnoh@brocade.com
or
Investor Relations
Robert Eggers, 408-333-8797
reggers@brocade.com

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