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Brocade Reports Fiscal Q1 2013 Results

Brocade Reports Fiscal Q1 2013 Results 
Achieves Record Revenue and Expanding Margins in First Quarter 
SAN JOSE, CA -- (Marketwire) -- 02/14/13 --   Brocade(R) (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(R)
    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. 
Copyright 2013 Brocade Communications Systems, Inc. All Rights
Reserved. 


 
                                                                            
                                                                            
                                                                            
                    BROCADE COMMUNICATIONS SYSTEM
S, 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 
                                                   ===========  =========== 

  
BROCADE CONTACTS 
Public Relations
John Noh
Tel: 408-333-5108
jnoh@brocade.com 
Investor Relations
Robert Eggers
Tel: 408-333-8797
reggers@brocade.com 
 
 
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