Brocade Reports Fiscal Q1 2013 Results

SAN JOSE, CA--(Marketwire - Feb 14, 2013) - 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, 2013				January 28, 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, 2013				October 27, 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, 2013				January 28, 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, 2013				January 28, 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