Brocade Reports First Quarter Fiscal Year 2008 Results

SAN JOSE, Calif., Feb. 14 /PRNewswire-FirstCall/ -- Brocade(R) (NASDAQ: BRCD) , the leader in data center networking solutions that help enterprises connect and manage their information, today reported financial results for its first fiscal quarter, which ended January 26, 2008.

Commenting on the Company's first quarter financial results, Michael Klayko, Brocade CEO, said, "We are pleased with Brocade's continued operational execution and performance. In the quarter, we recorded top line growth, improvements in our margins, and continued our strong cash flow generation. We extended our market leadership position and launched our new DCX Backbone ahead of schedule in January, which we believe will afford us a strong advantage in the marketplace."

    First Fiscal Quarter 2008 Business Highlights    --  The Company had a record revenue quarter with its enterprise director        family, led by strong demand for the Brocade 48000.    --  In addition, Brocade achieved a record quarter in sales of its bladed        switch products, which enable SAN connectivity for bladed servers in        enterprises.    --  On January 22, Brocade introduced the Brocade DCX(TM) Backbone, the        first in a new class of high-performance data center networking        products designed to address the demanding requirements of the        evolving data center.  The DCX supports up to 8 times the number of        virtual servers as competitive products, while delivering 5 times the        bandwidth and 10 times the power efficiency of competitive offerings.        The DCX has already been recognized with industry awards, winning the        top product honors in the Enterprise category at the recent Nikkei        ITpro EXPO 2008 in Tokyo, Japan.    --  Two OEM partners have committed to qualify and resell Brocade's        upcoming HBA products. Hitachi Data Systems will be among the first to        qualify the Company's new HBAs, and Fujitsu-Siemens in Europe has        stated that they will qualify and include Brocade's HBA products in        certain segments of their server portfolio.    --  Certification Magazine named Brocade Certification Training as the #1        most valuable among all IT certifications worldwide.

Revenues for Q1 08 were $347.8 million, up 55% from the same period a year ago. Reporting on a GAAP basis, net income for Q1 08 was $19.8 million, $0.05 per share diluted. This represents a 38% decrease from GAAP net income of $32.0 million, or $0.08 per share diluted from the prior quarter, which included a one time gain of $11 million.

Non-GAAP net income for Q1 08 was $64.2 million or $0.16 per share diluted. This represents a 3% decrease from non-GAAP net income of $66.5 million, $0.16 per share diluted in Q4 07, reflecting a sequential increase in the Company's effective non-GAAP tax rate and a 30% increase from non-GAAP net income of $49.4 million, $0.17 per share diluted in Q1 07. 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.

Note: Periods prior to Q2 07 referenced in this press release do not include McDATA results.

First Fiscal Quarter 2008 Financial Highlights and Additional Financial Information

    --  Q1 08 non-GAAP gross margin was 60.5%, compared to non-GAAP gross        margin of 58.5% in Q4 07 and 63.7% in Q1 07.    --  Q1 08 non-GAAP operating margin was 23.8%, compared to non-GAAP        operating margin of 23.3% in Q4 07 and 26.1% in Q1 07.    --  In Q1 08, as a percent of total, OEM revenues were 88% and        Channel/Direct were 12%. This compares to 85% and 15%, respectively in        Q4 07 and 92% and 8%, respectively in Q1 07. Three OEM customers, EMC,        HP, and IBM, each accounted for 10% or more of total revenues and        together represented approximately 66% of total revenues in Q1 08. The        same three customers each accounted for 10% or more of total revenues        and together represented approximately 67% of total revenues in Q4 07        and 72% in Q1 07.    --  In Q1 08, as a percent of total, domestic revenue was 62% and        international was 38%. This compares to 60% and 40%, respectively in        Q4 07 and 59% and 41%, respectively, in Q1 07.    --  Service revenue accounted for 14% of total revenue in Q1 08, compared        with 16% of total revenue in Q4 07 and 8% of total revenue in Q1 07.    --  The Company's total installed base of SAN ports is approximately        16.2 million.    --  Sequential Average Selling Price (ASP) declines were in the low single        digits in Q1 08.    --  In Q1 08 net stock-based compensation expense was $8.5 million and has        been excluded from the Company's non-GAAP results.    --  Q1 08 cash flow from operations was $79.2 million, compared to $54.5        million in Q4 07 and $33.3 million in Q1 07.    --  Cash and cash equivalents and investments at the end of Q1 08, net of        the Company's convertible debt, were $614.9 million, compared to        $625.8 million at the end of Q4 07 and $631.7 million at the end of        Q1 07.    --  In Q1 08, the Company repurchased $80.0 million of its common stock,        representing 11.1 million shares, compared with $50.0 million spent in        Q4 07 to repurchase 6.6 million shares. As of the end of Q1 08, the        Company had $502 million remaining under its $800 million in total        stock buyback authorization.    --  Effective GAAP tax rate in Q1 08 was 62.6%.    --  Day sales outstanding in accounts receivable for Q1 08 were 40 days,        compared to 47 days in Q4 07 and 38 days in Q1 07.    --  Q1 08 deferred revenue was $136.6 million, compared to $130.9 million        in Q4 07 and $69.2 million in Q1 07.    --  Q1 08 capital expenditures were $17.2 million. This compares to        $15.0 million in Q4 07 and $13.4 million in Q1 07.    --  As of January 26, 2008, the Company had 2,457 employees, compared with        2,368 employees as of October 27, 2007 and 1,532 employees as of        January 27, 2007.

Non-GAAP Financial Measures

This press release and the related conference call contain non-GAAP financial measures. In evaluating the Company'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 measures used in this press release allow management to gain a better understanding of the Company's comparative operating performance from period-to-period and to its competitors' operating results. Management also believes these non-GAAP measures help indicate the Company's baseline performance before gains, losses or charges that are considered by management to be outside on-going operating results. Accordingly, management uses these non-GAAP 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 earnings measures, when read in conjunction with the Company's GAAP financials, provide useful information to investors by offering:

    --  the ability to make more meaningful period-to-period comparisons of        the Company's on-going operating results;    --  the ability to better identify trends in the Company's underlying        business and perform related trend analysis;    --  a better understanding of how management plans and measures the        Company's underlying business; and    --  an easier way to compare the Company'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 the Company'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 employees and other related costs, (ii) acquisition and integration costs, and (iii) gain/loss on sale of investments.

Management also excludes the following non-cash charges in determining non-GAAP net income: (i) stock-based compensation 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. Further, management believes that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity-based awards were not required to be reflected on our income statement. 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 both the Company'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 on non-GAAP net income.

Limitations. These non-GAAP 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 the Company's GAAP results. The non-GAAP financial measures the Company 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 income per share, and should not be considered measures of the Company'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.

First Quarter Fiscal 2008 Conference Call and Web Cast Information

Brocade management will host a conference call to discuss first quarter 2008 results on Thursday, February 14, 2008 at 1:30 p.m. Pacific Time. To access the live Web Cast, please visit Brocade's Website at http://www.brocade.com/investors 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 12:00 p.m. Pacific Time on February 21, 2008. A replay of the conference call will be available via the Web Cast at http://www.brocade.com/investors for approximately twelve months. To access the replay, please dial 888-203-1112 for domestic access and 719-457-0820 for international callers; the access code for the telephone replay is #1833841.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding the Company's profitability, and product and service offerings for the evolving data center 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, the degree of market adoption of the Company's new product and service offerings; market competition; the effect of changes in IT spending levels; the Company's ability to anticipate future OEM and end-user product needs and to accurately forecast end-user demand; dependence on strategic partners; and the Company'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 Annual Report on Form 10-K for the fiscal year ended October 27, 2007. 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 is the leading provider of data center networking solutions that help enterprises connect and manage their information. Organizations that use Brocade products and services are better able to optimize their IT infrastructures and ensure compliant data management. For more information, visit the Brocade Web site at http://www.brocade.com or contact the company at info@brocade.com.

Brocade, Brocade B weave logo, Fabric OS, File Lifecycle Manager, McDATA, MyView, Secure Fabric OS, SilkWorm, and StorageX are registered trademarks and the Brocade B-wing logo and Tapestry are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. FICON is a registered trademark of IBM Corporation in the U.S. and 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.

                     BROCADE COMMUNICATIONS SYSTEMS, INC.               GAAP CONDENSED CONSOLIDATED STATEMENTS OF INCOME                    (in thousands, except per share data)                                 (unaudited)                                                      Three Months Ended                                                  January 26,     January 27,                                                     2008            2007    Net revenues        Product                                     $297,946        $207,216        Services                                      49,903          16,940          Total net revenues                         347,849         224,156    Cost of revenues        Product                                     $117,777         $72,311        Services                                      33,495          10,479          Total cost of revenues                     151,272          82,790              Gross margin                           196,577         141,366    Operating expenses:        Research and development                      58,206          42,391        Sales and marketing                           63,174          38,587        General and administrative                    12,366           7,404        Legal fees associated with indemnification         obligations and other related costs           9,659           5,228          Acquisition and integration costs                -           7,433          Amortization of intangible assets            7,909             910            Total operating expenses                 151,314         101,953    Income from operations                            45,263          39,413    Interest and other income, net                    11,485           7,456    Interest expense                                  (1,521)             (4)    Loss on investments                               (2,225)              -    Income before provision for income taxes          53,002          46,865    Income tax provision                              33,157          13,547    Net income                                       $19,845         $33,318    Net income per share - Basic                       $0.05           $0.12    Net income per share - Diluted                     $0.05           $0.12    Shares used in per share calculation -     Basic                                           383,194         272,855    Shares used in per share calculation -     Diluted                                         403,279         285,137                     BROCADE COMMUNICATIONS SYSTEMS, INC.                  GAAP CONDENSED CONSOLIDATED BALANCE SHEETS                                (in thousands)                                 (unaudited)                                                     January 26,   October 27,                                                        2008          2007    Assets    Current assets:        Cash and cash equivalents                     $386,590      $315,755        Short-term investments                         267,687       325,846          Total cash, cash equivalents, and           short-term investments                      654,277       641,601         Marketable equity securities                    3,785        14,205        Accounts receivable, net                       152,364       175,755        Inventories                                     15,355        18,017        Prepaid expenses and other current assets       63,892        62,622          Total current assets                         889,673       912,200    Long-term investments                              124,894       137,524    Property and equipment, net                        208,807       204,052    Goodwill                                           364,650       384,376    Intangible assets, net                             253,414       272,652    Other assets                                        17,357        19,296          Total assets                              $1,858,795    $1,930,100    Liabilities and Stockholders' Equity    Current liabilities:        Accounts payable                               $78,527      $108,810        Accrued employee compensation                   55,881        76,017        Deferred revenue                                97,931        94,533        Current liabilities associated with lease         losses                                         11,834        12,807         Purchase commitments                           24,132        23,176        Other accrued liabilities                       60,911        94,358          Total current liabilities                    329,216       409,701    Convertible subordinated debt                      168,038       167,498    Non-current liabilities associated with lease     losses                                             24,239        25,742    Non-current liabilities - deferred tax              22,476        22,781    Non-current deferred revenue                        38,652        36,344    Other non-current liabilities                       42,875         1,376    Stockholders' equity        Common stock                                 1,410,041     1,463,169        Accumulated other comprehensive loss            (4,335)       (1,180)        Accumulated deficit                           (172,407)     (195,331)        Total stockholders' equity                   1,233,299     1,266,658          Total liabilities and stockholders'           equity                                   $1,858,795    $1,930,100                     BROCADE COMMUNICATIONS SYSTEMS, INC.             GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS       For the Three Months Ended JANUARY 26, 2008 and JANUARY 27, 2007                                (in thousands)                                 (unaudited)                                                        Three Months Ended                                                      January 26, January 27,                                                          2008        2007    Cash flows from operating activities:        Net income                                       $19,845     $33,318        Adjustments to reconcile net income to net         cash provided by operating activities:           Excess tax benefit from employee stock            plans                                         (3,925)     (6,314)           Depreciation and amortization                  30,888       8,513           Loss on disposal of property and equipment        629         148           Net (gains) losses on investments and            marketable equity securities                   1,667           -           Non-cash compensation expense                   8,472       6,725           Provision for doubtful accounts receivable and            sales returns                                  1,688         127           Changes in operating assets and liabilities:           Accounts receivable                            21,702       3,862           Inventories                                     2,662        (958)           Prepaid expenses and other assets               3,311      (5,091)           Accounts payable                              (30,282)     (3,171)           Accrued employee compensation                 (16,116)    (14,757)           Deferred revenue                                5,706       8,325           Other accrued liabilities                      35,430       4,050           Liabilities associated with lease losses       (2,476)     (1,446)             Net cash provided by operating activities    79,201      33,331    Cash flows from investing activities:        Purchases of property and equipment              (17,178)    (13,362)        Purchases of short-term investments              (74,919)   (117,700)        Proceeds from sale of marketable equity         securities and equity investments                 5,803           -        Proceeds from maturities and sale of         short-term investments                          177,301      92,603        Purchases of long-term investments               (29,456)    (52,176)        Proceeds from maturities and sale of long-term         investments                                         152       3,697         Cash paid in connection with acquisitions, net        -      (7,706)          of cash acquired        Net cash provided by (used in) investing         activities                                       61,703     (94,644)    Cash flows from financing activities:         Common stock repurchases                        (80,012)          -        Excess tax benefit from employees stock plans      3,925       6,314        Proceeds from issuance of common stock, net        7,824      30,507          Net cash provided by (used in) financing           activities                                    (68,263)     36,821    Effect of exchange rate fluctuations on cash and     cash equivalents                                     (1,806)        (69)    Net increase (decrease) in cash and cash     equivalents                                          70,835     (24,561)    Cash and cash equivalents, beginning of period       315,755     274,368    Cash and cash equivalents, end of period            $386,590    $249,807                     BROCADE COMMUNICATIONS SYSTEMS, INC.             RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME                    (in thousands, except per share data)                                 (unaudited)                                                 Three Months Ended                                         January 26,  October 27,  January 27,                                             2008         2007        2007    Net income on a GAAP basis             $19,845      $32,020      $33,318    Adjustments:      Stock-based compensation expense       included in cost of revenues          2,492        4,065        1,441      Amortization of intangible assets       expense included in cost of       revenues                             11,328       11,328            -         Total gross margin adjustments     13,820       15,393        1,441      Legal fees associated with       indemnification obligations and       other related costs                   9,659        7,811        5,228      Stock-based compensation expense       included in research and development  2,625        3,649        1,998      Stock-based compensation expense       included in sales and marketing       1,986        3,163        1,386      Stock-based compensation expense       included in general and       administrative                        1,371        1,622          653      Amortization of intangible assets       expense included in operating       expenses                              7,909        7,909          910      Acquisition and integration costs          -          302        7,433        Total operating expense         adjustments                        23,550       24,456       17,608          Total operating income           adjustments                      37,370       39,849       19,049      Loss/ (Gain) on investments            1,815      (10,869)           -      Income tax effect of adjustments       5,206        5,518       (2,936)    Non-GAAP net income                    $64,236      $66,518      $49,431    Non-GAAP net income per share -     Basic                                   $0.17        $0.17        $0.18    Non-GAAP net income per share -     Diluted                                 $0.16        $0.16        $0.17    Shares used in non-GAAP per share    calculation - Basic                    383,194      387,400      272,855    Shares used in non-GAAP per share    calculation - Diluted                  403,279      408,844      285,137    See explanation of non-GAAP information included herein.