August 21, 2014

Brocade Reports Fiscal Q3 2014 Results

Strength in SAN and Ethernet Switching Drives Improved Profit Margins

SAN JOSE, CA -- (Marketwired) -- 08/21/14 -- Brocade® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended August 2, 2014. Brocade reported third quarter revenue of $545 million, up 2% year-over-year and up 2% quarter-over-quarter. The Company reported GAAP diluted earnings per share (EPS) of $0.20, down from $0.26 in Q3 2013, and up from a loss per share of $(0.03) in Q2 2014. During Q3 2013, the Company recognized a gain of $77 million related to the litigation settlement with A10 Networks, which increased GAAP EPS by $0.13 in that quarter. During Q2 2014, the Company incurred a $83 million non-cash goodwill impairment charge associated with the strategic repositioning of the Brocade ADX® product family, which decreased GAAP EPS by $0.19 in that quarter. Non-GAAP diluted EPS was $0.23 for Q3 2014, up from $0.19 in both Q3 2013 and Q2 2014, primarily due to higher revenue, improved gross margin, and lower operating expenses.

"With another solid quarter behind us, we are seeing the tangible benefits of our data center focused strategy," said Lloyd Carney, CEO of Brocade. "The resilience and durability of our SAN business, along with strong Brocade VDX® sales, validate our strategic direction. We continue to leverage our core competencies in hardware and software networking to position the company for growth, and we remain focused on delivering a world-class customer experience, even in the most demanding environments."

Key Financial Metrics:

Q3 2014 Q2 2014 Q3 2013 Q3 2014 vs. Q2 2014 Q3 2014 vs. Q3 2013
Revenue $ 545 M $ 537 M $ 537 M 2 % 2 %
GAAP EPS--diluted $ 0.20 $ (0.03 ) $ 0.26 N/A (23 %)
Non-GAAP EPS--diluted $ 0.23 $ 0.19 $ 0.19 20 % 23 %
GAAP gross margin 66.3 % 66.0 % 63.0 % 0.3 pts 3.3 pts
Non-GAAP gross margin 67.2 % 66.7 % 65.6 % 0.5 pts 1.6 pts
GAAP operating margin 21.6 % 3.8 % 13.9 % 17.8 pts 7.7 pts
Non-GAAP operating margin 25.7 % 23.2 % 21.6 % 2.5 pts 4.1 pts
Cash provided by operations $ 106 M $ 168 M $ 102 M (37 %) 4 %
Share repurchases $ 112 M $ 50 M $ 101 M 124 % 11 %

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

Highlights:

  • SAN business revenue, including products and services, was $380 million, up 3% year-over-year and flat sequentially. The year-over-year improvement was the result of 4% growth in SAN product revenue due to higher switch and director sales, partially offset by lower embedded product sales and the revenue impact from the divestiture of the HBA business during Q1 2014. The revenue performance was better than expected in a typically soft demand quarter.

  • IP Networking business revenue, including products and services, was $166 million, down 1% year-over-year and up 5% sequentially. The sequential increase was primarily due to higher sales of Ethernet switching products to the U.S. Federal government and strong Brocade VDX sales to data center customers, partially offset by lower routing sales to service provider customers and lower support revenue. Q3 2014 IP Networking product revenue was $133 million, down 1% year-over-year and up 9% sequentially. Ethernet switch revenue increased 17% year-over-year and 27% sequentially. Routing product revenue decreased 19% year-over-year and 20% sequentially, primarily due to a pause in some customer orders in anticipation of new products scheduled for release in fiscal Q4 2014.

  • During the quarter, the Company initiated a quarterly cash dividend of $0.035 per share of the Company's common stock and repurchased 12.8 million shares for $112 million.

Board Declares Dividend:

  • The Brocade Board of Directors has declared a quarterly cash dividend of $0.035 per share of the Company's common stock. The dividend payment will be made on October 2, 2014 to stockholders of record at the close of market on September 10, 2014.

Brocade management will host a conference call to discuss the fiscal third quarter results and the fiscal fourth quarter outlook today at 2:30 p.m. PT (5:30 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 Q3 2014 product, customer, and partner announcements are available at http://newsroom.brocade.com/.

Brocade (www.brocade.com)
130 Holger Way, San Jose, CA 95134
T. 408.333.8000 F. 408.333.8101

Financial Highlights and Additional Financial Information

Q3 2014 Q2 2014 Q3 2013
Routes to market as a % of total net revenues:
OEM revenues 67 % 68 % 66 %
Channel/Direct revenues 33 % 32 % 34 %
10% or greater customer revenues 48 % 56 % 47 %
Geographic split as a % of total net revenues (1):
Domestic revenues 56 % 59 % 61 %
International revenues 44 % 41 % 39 %
Segment split as a % of total net revenues:
SAN product revenues 60 % 60 % 59 %
IP Networking product revenues 24 % 22 % 25 %
Global Services revenues 16 % 18 % 16 %
SAN business revenues (2) 70 % 71 % 69 %
IP Networking business revenues (2) 30 % 29 % 31 %
IP Networking business revenues by use category (3):
Data Center (4) 55 % 57 % 48 %
Enterprise Campus 39 % 37 % 40 %
Carrier Network (MAN/WAN) 6 % 6 % 12 %
Additional information: Q3 2014 Q2 2014 Q3 2013
GAAP net income (loss) $ 87 M $ (14 M ) $ 119 M
Non-GAAP net income $ 102 M $ 87 M $ 87 M
GAAP operating income $ 118 M $ 20 M $ 74 M
Non-GAAP operating income $ 140 M $ 124 M $ 116 M
Adjusted EBITDA (5) $ 165 M $ 146 M $ 213 M
Effective GAAP tax provision rate 23.4 % 225.1 % 16.3 %
Effective Non-GAAP tax provision rate 21.9 % 24.6 % 18.2 %
Cash and cash equivalents $ 1,149 M $ 1,138 M $ 790 M
Deferred revenues $ 299 M $ 304 M $ 300 M
Capital expenditures $ 14 M $ 14 M $ 10 M
Total debt, net of discount $ 597 M $ 598 M $ 599 M
Cash, net of senior debt and capitalized leases $ 547 M $ 535 M $ 186 M
Days sales outstanding 32 days 35 days

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