February 14, 2013

Brocade Reports Fiscal Q1 2013 Results

Achieves Record Revenue and Expanding Margins in First Quarter

SAN JOSE, CA -- (Marketwire) -- 02/14/13 -- Brocade® (NASDAQ: BRCD) today reported financial results for its first fiscal quarter ended January 26, 2013. Brocade reported record first quarter revenue of $588.7 million, representing an increase of 5% year-over-year and 2% quarter-over-quarter. The company reported a GAAP loss per share of $(0.05), down from a profit of $0.12 per diluted share in Q1 2012. The Q1 2013 net loss was principally due to a non-cash tax charge, which reduced the company's deferred tax assets as a result of a recent change in the California tax code. On a comparative basis, non-GAAP diluted EPS was $0.21, up from $0.20 in Q1 2012.

"Brocade achieved record revenue in Q1 based on strong performances in both our storage and IP networking businesses," said Lloyd Carney, CEO of Brocade. "As the new CEO, it is my top priority to ensure that the company continues to execute well in our core businesses to drive growth and shareholder value. Looking forward, I see new opportunities emerging in the networking industry due to disruptive IT market trends that are challenging the capabilities of today's networks. It is clear that customers are looking for new technologies and approaches in networking to meet these challenges. I am excited and honored to navigate the company forward, delivering on these customer requirements in a way that drives top-line revenue through both innovation and operational efficiency."

Summary of Q1 2013 results:

  • Storage Area Networking (SAN) business revenue, including products and services, was a record $416.9 million, up 3% year-over-year and up 6% sequentially. SAN product revenue increased 3% year-over-year and increased 7% sequentially, led by higher switch and director product sales, in a seasonally strong quarter for the company. Brocade's industry-leading Gen 5 (16 Gbps) Fibre Channel products represented approximately 42% of director and switch revenue in the quarter.

  • IP Networking business revenue, including products and services, was $171.8 million, up 11% year-over-year and down 7% quarter-over-quarter. The year-over-year growth was driven by solid performances across all three IP Networking product groups and led by Ethernet switch revenue, which was up 18% year-over-year. Routing revenue was up 5% year-over-year and other IP Networking revenue was up 25% year-over-year driven by higher sales of the Brocade ADX® Series of application delivery products. The sequential decline in IP Networking revenue was principally due to lower Ethernet switch sales into the U.S. federal government, which is typical in the company's first fiscal quarter.

  • GAAP gross margin was 63.5% and non-GAAP gross margin was 66.0% in Q1 2013, compared to 61.5% and 64.8% in Q1 2012, respectively. The year-over-year improvement in gross margin was due in part to higher overall revenue and a more favorable Ethernet product mix. The sequential improvement in gross margin was due in part to higher overall revenue, with a more favorable revenue mix to SAN products, and lower manufacturing overhead spending.

  • GAAP operating margin was 15.8% and non-GAAP operating margin was 23.5% in Q1 2013, compared to 12.4% and 21.5% in Q1 2012, respectively. The year-over-year improvement in operating margin was due to higher revenue, expanded gross margin, and lower operating expenses as a percentage of revenue in Q1 2013. Operating margin improved quarter-over-quarter due to higher revenue and improved gross margin.

  • Operating cash flow was $59.5 million in Q1 2013. During the quarter, the company completed its acquisition of Vyatta, Inc. and refinanced $300.0 million of senior secured notes, extending the maturity date of the notes from 2018 to 2023 and reducing the annual cash interest rate from 6.625% to 4.625%.

  • GAAP loss per share was $(0.05) in Q1 2013, and non-GAAP diluted EPS of $0.21 was up 7% year-over-year. The GAAP loss per share included a non-cash tax charge of $78.2 million, or $(0.17) per share, due to the passage of Proposition 39 by the voters of California and the related reduction in the company's deferred tax assets, which was previously disclosed in November 2012. The company also took a one-time charge of $15.3 million, or $(0.02) per share after tax impact, related to the unamortized original issuance costs and call premium on the 2018 notes that were refinanced during the quarter.

  • Average diluted shares outstanding for Q1 2013 were 466.3 million shares, down slightly year-over-year. The company repurchased 8.7 million shares ($47.5 million) during Q1 2013.

Brocade management will host a conference call to discuss fiscal first quarter results and fiscal second quarter outlook today at 2:00 p.m. PT (5:00 p.m. ET). To access the Webcast please go to www.brcd.com/events.cfm. A replay of the conference call, prepared comments and slides, as well as a written transcript, will be available at www.brcd.com.

Other Q1 2013 product, customer and partner announcements are available at http://newsroom.brocade.com/.

Financial Highlights and Additional Financial Information




                                             Q1 2013    Q4 2012    Q1 2012

                                            ---------  ---------  ---------

Revenue                                     $    589M  $    578M  $    561M

GAAP net income (loss)                      $    (21M) $     54M  $     59M

Non-GAAP net income                         $     99M  $     78M  $     93M

GAAP EPS -- diluted                         $   (0.05) $    0.11  $    0.12

Non-GAAP EPS -- diluted                     $    0.21  $    0.17  $    0.20

GAAP gross margin                                63.5%      62.4%      61.5%

Non-GAAP gross margin                            66.0%      64.8%      64.8%

GAAP operating income                       $     93M  $     86M  $     69M

Non-GAAP operating income                   $    138M  $    130M  $    120M

GAAP operating margin                            15.8%      14.9%      12.4%

Non-GAAP operating margin                        23.5%      22.5%      21.5%

Adjusted EBITDA (1)                         $    162M  $    153M  $    140M

Cash provided by operations                 $     59M  $    210M  $    127M



  • Q1 2013 effective GAAP tax rate was 131.7% and effective non-GAAP effective tax rate was 22.3%.
  • Q1 2013 total Storage Area Networking (SAN) port shipments were approximately 1.2 million.

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.

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

Financial Highlights and Additional Financial Information (Continued)




                                                Q1 2013   Q4 2012   Q1 2012

                                               --------  --------  --------

As a % of total revenues

OEM revenues                                         67%       65%       69%

Channel/Direct revenues                              33%       35%       31%

10% or greater customer revenues                     46%       46%       48%

Domestic revenues                                    62%       63%       61%

International revenues                               38%       37%       39%

SAN product revenues                                 61%       59%       63%

IP Networking product revenues                       24%       26%       22%

Global Services revenue                              15%       15%       15%

SAN business revenues (2)                            71%       68%       72%

IP Networking business revenues (2)                  29%       32%       28%

Estimates as a % of IP Networking Business

 Revenues:

Enterprise, excluding Federal                        47%       45%       45%

Federal                                              15%       24%       13%

Service Provider                                     38%       31%       42%





                                                Q1 2013   Q4 2012   Q1 2012

                                               --------- --------- ---------

Cash, cash equivalents and short-term

 investments                                   $    684M $    713M $    485M

Restricted cash (3)                            $    312M $      -- $      --

Deferred revenues                              $    296M $    293M $    278M

Capital expenditures                           $     18M $     17M $     18M

Total debt, net of discount (3)                $    900M $    601M $    720M

Days sales outstanding                           34 days   37 days   36 days

Employees at end of period                         4,604     4,536     4,542



2) SAN and IP Networking business revenues include product and global services revenues.
3) Q1 2013 restricted cash will be used to redeem $300M of 2018 notes on February 21, 2013.

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 or benefit from certain pre-acquisition litigation (ii) legal fees associated with certain pre-acquisition litigation, (iii) legal fees associated with indemnification obligations and other related costs, net, (iv) acquisition and integration costs, (v) loss on sale of property, (vi) interest expense related to the adoption of new standards relating to convertible debt instruments, (vii) original issue discount and debt issuance costs of debt related to lenders that did not participate in refinancing as well as debt call premium cost, (viii) loss on sale of a subsidiary, and (ix) specific non-cash and non-recurring tax benefits or detriments.

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 and net income 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 strategy, business prospects, and its routes to market. 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, changes in IT spending levels in one or more of our target markets including the government sector, Brocade's ability to capitalize on new Brocade sales and marketing initiatives, including expanded go-to-market activities in our Ethernet business, customer acceptance of Brocade's Ethernet fabric solutions, Brocade's ability to continue to successfully innovate new products and services on a timely basis and achieve widespread market acceptance, and the effect of increasing market competition and changes in the industry. Certain of these and other risks are set forth in more detail in "Item 1A. Risk Factors" in Brocade's Annual Report on Form 10-K for the fiscal year ended October 27, 2012. 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) networking solutions help the world's leading organizations transition smoothly to a world where applications and information reside anywhere. (www.brocade.com)

ADX, AnyIO, Brocade, Brocade Assurance, the B-wing symbol, DCX, Fabric OS, ICX, MLX, MyBrocade, OpenScript, VCS, VDX, and Vyatta are registered trademarks, and HyperEdge, The Effortless Network, and The On-Demand Data Center are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. Other brands, products, or service names mentioned may be trademarks of their respective owners.

© 2013 Brocade Communications Systems, Inc. All Rights Reserved.








                    BROCADE COMMUNICATIONS SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                (Unaudited)



                                                     Three Months Ended

                                                 --------------------------

                                                 January 26,   January 28,

                                                     2013          2012

                                                 ------------  ------------

                                                  (In thousands, except per

                                                       share amounts)

Net revenues

  Product                                        $    502,247  $    476,302

  Service                                              86,482        84,340

                                                 ------------  ------------

    Total net revenues                                588,729       560,642

                                                 ------------  ------------

Cost of revenues

  Product                                             174,375       175,407

  Service                                              40,429        40,466

                                                 ------------  ------------

    Total cost of revenues                            214,804       215,873

                                                 ------------  ------------

Gross margin                                          373,925       344,769

Operating expenses:

  Research and development                             97,690        89,319

  Sales and marketing                                 149,011       152,688

  General and administrative                           19,077        18,350

  Amortization of intangible assets                    14,856        14,993

                                                 ------------  ------------

    Total operating expenses                          280,634       275,350

                                                 ------------  ------------

Income from operations                                 93,291        69,419

Interest expense                                      (26,368)      (13,046)

Interest and other income (loss), net                      66          (996)

                                                 ------------  ------------

Income before income tax                               66,989        55,377

Income tax expense (benefit)                           88,244        (3,207)

                                                 ------------  ------------

Net income (loss)                                $    (21,255) $     58,584

                                                 ============  ============

Net income (loss) per share -- basic             $      (0.05) $       0.13

                                                 ============  ============

Net income (loss) per share -- diluted           $      (0.05) $       0.12

                                                 ============  ============

Shares used in per share calculation -- basic         454,843       452,494

                                                 ============  ============

Shares used in per share calculation -- diluted       454,843       468,738

                                                 ============  ============







                    BROCADE COMMUNICATIONS SYSTEMS, INC.

                   CONDENSED CONSOLIDATED BALANCE SHEETS

                                (Unaudited)



                                                   January 26,  October 27,

                                                       2013         2012

                                                   -----------  -----------

                                                     (In thousands, except

                                                          par value)

Assets

Current assets:

  Cash and cash equivalents                        $   683,616  $   713,226

  Restricted cash                                      311,926           --

  Accounts receivable, net of allowances for

   doubtful accounts of $798 and $827 at January

   26, 2013 and October 27, 2012, respectively         216,706      233,139

  Inventories                                           59,891       68,179

  Deferred tax assets                                   64,981       91,539

  Prepaid expenses and other current assets             53,839       49,496

                                                   -----------  -----------

      Total current assets                           1,390,959    1,155,579

Property and equipment, net                            510,282      518,940

Goodwill                                             1,648,722    1,624,089

Intangible assets, net                                 108,948      109,265

Non-current deferred tax assets                         80,420      136,175

Other assets                                            32,851       37,213

                                                   -----------  -----------

      Total assets                                 $ 3,772,182  $ 3,581,261

                                                   ===========  ===========

Liabilities and Stockholders' Equity

Current liabilities:

  Accounts payable                                 $   101,808  $   117,350

  Accrued employee compensation                        114,593      182,597

  Deferred revenue                                     218,303      216,283

  Current liabilities associated with facilities

   lease losses                                            936          976

  Current portion of long-term debt                    302,198        1,977

  Other accrued liabilities                             90,328       91,285

                                                   -----------  -----------

      Total current liabilities                        828,166      610,468

Long-term debt, net of current portion                 597,440      599,203

Non-current liabilities associated with facilities

 lease losses                                            1,455        1,606

Non-current deferred revenue                            77,739       76,907

Non-current income tax liability                        57,171       55,387

Other non-current liabilities                            1,928        1,870

                                                   -----------  -----------

      Total liabilities                              1,563,899    1,345,441

                                                   -----------  -----------

Commitments and contingencies

Stockholders' equity:

  Preferred stock, $0.001 par value, 5,000 shares

   authorized, no shares issued and outstanding             --           --

  Common stock, $0.001 par value, 800,000 shares

   authorized:

    Issued and outstanding: 455,874 and 456,913

     shares at January 26, 2013 and October 27,

     2012, respectively                                    456          457

  Additional paid-in capital                         2,003,544    2,009,190

  Accumulated other comprehensive loss                 (10,499)      (9,864)

  Retained earnings                                    214,782      236,037

                                                   -----------  -----------

      Total stockholders' equity                     2,208,283    2,235,820

                                                   -----------  -----------

      Total liabilities and stockholders' equity   $ 3,772,182  $ 3,581,261

                                                   ===========  ===========







                    BROCADE COMMUNICATIONS SYSTEMS, INC.

              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (Unaudited)



                                                      Three Months Ended

                                                   ------------------------

                                                   January 26,  January 28,

                                                       2013         2012

                                                   -----------  -----------

                                                        (In thousands)

Cash flows from operating activities:

  Net income (loss)                                $   (21,255) $    58,584

  Adjustments to reconcile net income to net cash

   provided by operating activities:

    Excess tax benefits from stock-based

     compensation                                       (2,192)      (1,147)

    Non-cash tax charges                                78,206           --

    Depreciation and amortization                       49,394       50,105

    Loss on disposal of property and equipment           1,989          256

    Amortization of debt issuance costs and

     original issue discount                               397        1,234

    Call premium cost and original issue discount

     and debt issuance costs related to lenders

     that did not participate in refinancing            15,299           --

    Net gains on investments                                --          (12)

    Provision for doubtful accounts receivable and

     sales allowances                                    2,354        2,700

    Non-cash compensation expense                       19,150       21,819

  Changes in assets and liabilities:

    Restricted cash                                    (11,926)          --

    Accounts receivable                                 14,250       27,078

    Inventories                                          9,625       (6,826)

    Prepaid expenses and other assets                   (1,702)       1,611

    Deferred tax assets                                    165           22

    Accounts payable                                   (14,960)      (9,556)

    Accrued employee compensation                      (72,570)     (13,013)

    Deferred revenue                                     1,519        8,010

    Other accrued liabilities                           (8,062)     (13,059)

    Liabilities associated with facilities lease

     losses                                               (191)        (755)

                                                   -----------  -----------

      Net cash provided by operating activities         59,490      127,051

                                                   -----------  -----------

Cash flows from investing activities:

  Proceeds from sale of subsidiary                          --         (215)

  Purchases of property and equipment                  (18,486)     (17,556)

  Net cash paid in connection with acquisitions        (44,629)          --

                                                   -----------  -----------

      Net cash used in investing activities            (63,115)     (17,771)

                                                   -----------  -----------

Cash flows from financing activities:

  Proceeds from senior unsecured notes                 296,250           --

  Payment of principal related to the term loan             --      (70,000)

  Payment of principal related to capital leases          (484)        (456)

  Common stock repurchases                             (47,530)          --

  Proceeds from issuance of common stock                23,812       31,941

  Excess tax benefits from stock-based

   compensation                                          2,192        1,147

  Increase in restricted cash                         (300,000)          --

                                                   -----------  -----------

      Net cash used in financing activities            (25,760)     (37,368)

                                                   -----------  -----------

Effect of exchange rate fluctuations on cash and

 cash equivalents                                         (225)      (1,875)

                                                   -----------  -----------

Net increase (decrease) in cash and cash

 equivalents                                           (29,610)      70,037

Cash and cash equivalents, beginning of period         713,226      414,202

                                                   -----------  -----------

Cash and cash equivalents, end of period           $   683,616  $   484,239

                                                   ===========  ===========







                    BROCADE COMMUNICATIONS SYSTEMS, INC.

            RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME

                                (Unaudited)



                                                      Three Months Ended

                                                   ------------------------

                                                   January 26,  January 28,

                                                       2013         2012

                                                   -----------  -----------

                                                     (In thousands, except

                                                      per share amounts)



Net income (loss) on a GAAP basis                  $   (21,255) $    58,584

Adjustments:

  Stock-based compensation expense included in

   cost of revenues                                      3,946        4,375

  Amortization of intangible assets expense

   included in cost of revenues                         10,780       14,090

  Legal fees recovery associated with certain pre-

   acquisition litigation                                   --          (51)

                                                   -----------  -----------

  Total gross margin adjustments                        14,726       18,414

                                                   -----------  -----------

  Stock-based compensation expense included in

   research and development                              4,685        5,028

  Stock-based compensation expense included in

   sales and marketing                                   8,145        9,776

  Stock-based compensation expense included in

   general and administrative                            2,374        2,640

  Amortization of intangible assets expense

   included in operating expenses                       14,856       14,993

                                                   -----------  -----------

    Total operating expense adjustments                 30,060       32,437

                                                   -----------  -----------

      Total operating income adjustments                44,786       50,851

  Call premium cost and original issue discount

   and debt issuance costs related to lenders that

   did not participate in refinancing                   15,299           --

  Tax provision impact from passage of California

   Proposition 39 - Single Sales Factor

   apportionment                                        78,206           --

  Income tax effect of non-tax adjustments             (18,287)     (16,623)

                                                   -----------  -----------

Non-GAAP net income                                $    98,749  $    92,812

                                                   ===========  ===========

Non-GAAP net income per share -- basic             $      0.22  $      0.21

                                                   ===========  ===========

Non-GAAP net income per share -- diluted           $      0.21  $      0.20

                                                   ===========  ===========

Shares used in non-GAAP per share calculation --

 basic                                                 454,843      452,494

                                                   ===========  ===========

Shares used in non-GAAP per share calculation --

 diluted                                               466,321      468,738

                                                   ===========  ===========

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BROCADE CONTACTS



Public Relations

John Noh

Tel: 408-333-5108

jnoh@brocade.com



Investor Relations

Robert Eggers

Tel: 408-333-8797

reggers@brocade.com



Source: Brocade

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