SOURCE: Brocade

Brocade

August 24, 2017 18:29 ET

Brocade Reports Fiscal Q3 2017 Results

SAN JOSE, CA--(Marketwired - Aug 24, 2017) - Brocade® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter, ended July 29, 2017. Brocade reported third quarter revenue of $549 million, down 7% year-over-year and down 1% quarter-over-quarter. The Company reported a GAAP diluted loss per share of $0.05, down from GAAP diluted earnings per share (EPS) of $0.02 in Q3 2016 and down from a GAAP diluted loss per share of $0.03 in Q2 2017. The year-over-year and sequential decline in GAAP diluted EPS was due in part to lower revenue, estimated losses related to completed and pending divestitures of certain software product lines, higher acquisition and divestiture-related expenses, and restructuring expenses associated with a voluntary separation plan for certain eligible employees implemented in Q3 2017. Non-GAAP diluted EPS was $0.16 for Q3 2017, down from non-GAAP diluted EPS of $0.21 in Q3 2016 and up from non-GAAP diluted EPS of $0.10 in Q2 2017. The year-over-year decline in non-GAAP diluted EPS was primarily due to lower revenue, while the sequential improvement was primarily due to lower operating expenses resulting from lower headcount.

In light of the pending acquisition of Brocade by Broadcom Limited, Brocade will not provide fiscal Q4 2017 guidance and will not hold a conference call to discuss these financial results.

Key Financial Metrics:

                               
    Q3 2017     Q2 2017     Q3 2016     Q3 2017 vs. Q2 2017     Q3 2017 vs. Q3 2016  
Revenue   $ 549 M     $ 553 M     $ 591 M     (1 %)   (7 %)
GAAP earnings (loss) per share--diluted   $ (0.05 )   $ (0.03 )   $ 0.02     74 %   (296 %)
Non-GAAP EPS--diluted   $ 0.16     $ 0.10     $ 0.21     58 %   (23 %)
GAAP gross margin     63.9 %     62.0 %     60.4 %   1.9 pts     3.5 pts  
Non-GAAP gross margin     66.8 %     65.3 %     66.5 %   1.5 pts     0.3 pts  
GAAP operating margin     (3.6 )%     (1.1 %)     3.5 %   (2.5) pts     (7.1) pts  
Non-GAAP operating margin     16.2 %     11.1 %     19.5 %   5.1 pts     (3.3) pts  
                                     

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

Highlights:

  • SAN product revenue of $276 million was down 2% year-over-year. The decline was primarily the result of lower fixed-configuration and embedded switch sales, which declined 6% and 7%, respectively, partially offset by higher director sales, which increased 5% year-over-year. The year-over-year revenue performance was impacted by competition from alternative storage networking technologies and architectures, and customer uncertainty surrounding the pending acquisition of Brocade by Broadcom. Sequentially, SAN product revenue decreased 2%, consistent with historical seasonal revenue trends, with an 11% decline in director sales being partially offset by increased fixed-configuration and embedded switch sales of 3% and 14%, respectively.

  • IP Networking product revenue of $174 million, including $85 million of product revenue from Ruckus Wireless, was down 17% year-over-year. The decrease was primarily due to lower wired switch and router revenue partially offset by higher wireless revenue associated with the May 27, 2016 acquisition of Ruckus Wireless. The year-over-year increase in wireless revenue was primarily due to including only approximately two months of wireless revenue in the prior-year period. Sequentially, IP Networking product revenue was flat as higher wireless revenue was offset by lower wired switch and router revenue. The year-over-year and sequential declines in wired switch and router revenue were due, in part, to Broadcom's planned divestiture of Brocade's IP Networking business.

Board Declares Dividend:

  • The Brocade Board of Directors has declared a regular fourth fiscal quarter cash dividend of $0.055 per share of the Company's common stock. The dividend payment will be made on October 3, 2017, to stockholders of record at the close of market on September 11, 2017.

Other Q3 2017 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 2017     Q2 2017     Q3 2016  
Routes to market as a % of total net revenues:                        
  OEM revenues     55 %     55 %     54 %
  Channel/Direct revenues     45 %     45 %     46 %
                           
  10% or greater customer revenues     37 %     27 %     23 %
Geographic split as a % of total net revenues (1):                        
  Domestic revenues     52 %     50 %     52 %
  International revenues     48 %     50 %     48 %
Segment split as a % of total net revenues:                        
  SAN product revenues     50 %     51 %     48 %
  IP Networking product revenues     32 %     31 %     35 %
  Global Services revenues     18 %     18 %     17 %
                         
  SAN business revenues (2)     60 %     60 %     57 %
  IP Networking business revenues (2)     40 %     40 %     43 %
                         
Additional information:   Q3 2017     Q2 2017     Q3 2016  
  GAAP net income (loss) attributable to Brocade   $ (20M )   $ (11M )   $ 10M  
  Non-GAAP net income attributable to Brocade   $ 69M     $ 43M     $ 92M  
  GAAP operating income (loss)   $ (20M )   $ (6M )   $ 21M  
  Non-GAAP operating income   $ 89M     $ 61M     $ 115M  
  GAAP effective tax rate     41.1 %     44.2 %     (20.8 %)
  Non-GAAP effective tax rate     14.1 %     16.1 %     14.2 %
  Cash and cash equivalents   $ 1,179M     $ 1,300 M     $ 1,153M  
  Capital expenditures   $ 9M     $ 8M     $ 17M  
  Cash provided by (used in) operations   $ (61M )   $ 108M     $ 28M  
  Days sales outstanding     48 days       43 days       43 days  
  Employees at end of period     4,979       5,524       5,948  
  SAN port shipments     0.8M       0.8M       0.9M  
  Share repurchases   $ --     $ --     $ 661M  
  Loss on sale and held for sale software product lines (3)   $ 24M     $ --     $ --  
                         

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

(1)   Revenues are attributed to geographic areas based on known product delivery location. Since some OEM partners take delivery of Brocade products domestically and then ship internationally to their end users, the percentage of international revenues based on end-user location would likely be higher.
     
(2)   SAN and IP Networking business revenues include hardware and software product, support, and services revenues.
     
(3)   During the third quarter of fiscal year 2017, the Company committed to divest certain portions of its IP Networking business. The Company completed the divestiture of its virtual router product line, and signed purchase agreements to divest its virtual application delivery controller ("vADC") and virtual evolved packet core ("vEPC") product lines, which, in aggregate, resulted in an estimated loss of $24.3 million. The vADC and vEPC divestitures were not completed in the third quarter of fiscal year 2017, so the assets and liabilities associated with those divestitures were classified as held for sale on the Condensed Consolidated Balance Sheet as of July 29, 2017, at fair value less costs to sell through the date of sale, as summarized in the following table (in thousands):
   
  July 29,
2017
Total current assets held for sale $ 26,279
Total current liabilities held for sale $ 8,421
     

Non-GAAP Financial Measures
To supplement financial information presented on a GAAP basis, Brocade provides information presented on a non-GAAP basis. These non-GAAP financial measures include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP tax rate, non-GAAP net income, and non-GAAP EPS. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, financial information presented on a GAAP basis. 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. The most directly comparable GAAP information and a reconciliation between the GAAP and non-GAAP amounts is provided in the tables at the end of this press release.

Management believes that the 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 relative to its competitors. These non-GAAP financial measures also help with the determination of Brocade's baseline performance before gains, losses or charges that are considered by management to be outside of ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations 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 relative to its competitors;

  • the ability to better identify trends in Brocade's underlying business and to perform related trend analyses; and

  • a better understanding of how management plans and measures Brocade's underlying business.

In determining non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP tax rate, non-GAAP net income and non-GAAP EPS, management excludes certain gains or losses and benefits or costs that are the result of events that 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, but are not limited to: (i) impact to cost of revenues from purchase accounting adjustments to inventory; (ii) acquisition, divestiture, and integration costs; (iii) the losses recognized or expected to be recognized in connection with certain software product line divestitures that were completed or became subject to binding divestiture agreements during the third fiscal quarter of 2017; (iv) restructuring charges; (v) certain costs associated with settlement of a Delaware Chancery Court appraisal proceeding commenced by a dissenting former stockholder of Ruckus Wireless, Inc.; and (vi) asset impairment charges associated with certain equity investments in non-publicly traded companies.

Management also excludes the following non-cash charges in determining these non-GAAP financial measures: (i) stock-based compensation expense; (ii) amortization of purchased intangible assets; and (iii) non-cash interest expense related to the convertible debt.

Management believes that the exclusion of stock-based compensation allows for more accurate comparisons of Brocade's operating results to Brocade's peer companies. This is due to the varying use of valuation methodologies and subjective assumptions and the variety of award types. In addition, the exclusion of the expense associated with the amortization of acquisition-related intangible assets is appropriate because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives, and the exclusion of amortization expense allows comparisons of operating results that are consistent over time for Brocade's newly acquired and long-held businesses. In connection with the convertible debt, under the relevant accounting guidance, a non-cash interest expense is recognized for the convertible debt as an imputed interest expense for the conversion feature. Management believes excluding the non-cash interest expense related to the convertible debt from its non-GAAP financial measures is useful for investors because the expense does not represent a cash outflow in the respective reporting periods and is not indicative of ongoing operating performance.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above and (i) tax charges and benefits related to unusual or infrequent intercompany transactions; (ii) tax charges or benefits that are a result of the implementation of restructuring plans; and (iii) tax charges resulting from the integration of intellectual property assets from acquisitions. Management believes that the exclusion of these items from its non-GAAP tax provision provides a more meaningful measure of Brocade's operational performance of non-GAAP net income and non-GAAP EPS.

Limitations: These non-GAAP financial measures have limitations because they do not include all items of income and expense that impact the company. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies. Management compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. Management also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure, and management encourages investors to review carefully those reconciliations.

Forward-Looking Statements
This press release contains forward-looking statements including, but not limited to, statements regarding Brocade's financial results, goals, plans, strategy, business outlook and prospects. These statements are based on current expectations as of the date of this press release and involve a number of risks, uncertainties and assumptions that may cause actual results to differ significantly. The risks, uncertainties and assumptions include, but are not limited to: the effect on Brocade of increasing market competition and changes in the industry; the impact on Brocade of conditions in the market for Storage Area Networking products; Brocade's ability to execute on its sales strategy and plans for future operations; the impact on Brocade of macroeconomic trends and events and changes in IT spending levels; Brocade's ability to introduce and achieve market acceptance of new products and support offerings on a timely basis; risks associated with Brocade's international operations; and integration and other risks associated with acquisitions, divestitures and strategic investments. The risks, uncertainties and assumptions also include, but are not limited to: the risk that the proposed acquisition by Broadcom may not be completed in a timely manner or at all, which may adversely affect Brocade's business and the price of the common stock of Brocade; the failure to satisfy any of the conditions to the consummation of the proposed transaction, including the receipt of certain governmental and regulatory approvals; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; the effect of the announcement or pendency of the proposed transaction on Brocade's business relationships, operating results and business generally; risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the proposed transaction; risks related to diverting management's attention from Brocade's ongoing business operations; the outcome of legal proceedings that have been and may in the future be instituted against Brocade related to the merger agreement or the proposed transaction; and unexpected costs, charges or expenses resulting from the proposed transaction. Certain of these and other risks are set forth in more detail in Brocade's Form 10-Q for the fiscal quarter ended April 29, 2017, and in Brocade's Annual Report on Form 10-K for the fiscal year ended October 29, 2016. 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 turn their networks into platforms for business innovation. With solutions spanning public and private data centers to the network edge, Brocade is leading the industry in its transition to the New IP network infrastructures required for today's world of digital business. (www.brocade.com)

Brocade and the B-wing symbol are registered trademarks of Brocade Communications Systems, Inc., in the United States and many other countries. Other brands, products, or service names mentioned herein may be trademarks of Brocade or others. Additional information about Brocade's trademarks is available at: http://www.brocade.com/en/legal/brocade-Legal-intellectual-property/brocade-legal-trademarks.html.

© 2017 Brocade Communications Systems, Inc. All Rights Reserved.

   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited)  
   
    Three Months Ended     Nine Months Ended  
    July 29,
2017
    July 30,
2016
    July 29,
2017
    July 30,
2016
 
    (In thousands, except per share amounts)  
Net revenues:                                
  Product   $ 449,549     $ 490,995     $ 1,385,273     $ 1,400,355  
  Service     99,717       99,726       298,209       287,956  
    Total net revenues     549,266       590,721       1,683,482       1,688,311  
Cost of revenues:                                
  Product     154,760       188,492       486,153       464,797  
  Service     43,361       45,330       136,301       127,489  
    Total cost of revenues     198,121       233,822       622,454       592,286  
Gross margin     351,145       356,899       1,061,028       1,096,025  
Operating expenses:                                
  Research and development     117,116       114,996       360,164       297,516  
  Sales and marketing     153,712       167,983       506,228       468,743  
  General and administrative     27,614       32,960       92,127       78,180  
  Settlement with dissenting stockholder of Ruckus Wireless, Inc.     8,528       --       8,528       --  
  Amortization of intangible assets     5,822       5,498       20,998       7,302  
  Acquisition, divestiture, and integration costs     13,246       14,868       49,519       20,625  
  Restructuring charges (benefits)     17,801       --       17,801       (566 )
  Impairment of equity investments     2,870       --       2,870       --  
  Loss on sale and held for sale software product lines     24,315       --       24,315       --  
    Total operating expenses     371,024       336,305       1,082,550       871,800  
Income (loss) from operations     (19,879 )     20,594       (21,522 )     224,225  
Interest expense     (15,875 )     (13,462 )     (47,317 )     (33,282 )
Interest and other income, net     2,580       1,557       5,136       3,317  
Income (loss) before income tax     (33,174 )     8,689       (63,703 )     194,260  
Income tax expense (benefit)     (13,622 )     (1,806 )     (27,275 )     47,034  
Net income (loss)   $ (19,552 )   $ 10,495     $ (36,428 )   $ 147,226  
Less: Net loss attributable to noncontrolling interest   $ (46 )   $ --     $ (274 )   $ --  
Net income (loss) attributable to Brocade Communications Systems, Inc.   $ (19,506 )   $ 10,495     $ (36,154 )   $ 147,226  
Net income (loss) per share--basic attributable to Brocade Communications Systems, Inc. stockholders   $ (0.05 )   $ 0.02     $ (0.09 )   $ 0.36  
Net income (loss) per share--diluted attributable to Brocade Communications Systems, Inc. stockholders   $ (0.05 )   $ 0.02     $ (0.09 )   $ 0.35  
Shares used in per share calculation--basic     411,898       426,671       408,494       411,709  
Shares used in per share calculation--diluted     411,898       434,416       408,494       419,416  
                                 
Cash dividends declared per share   $ 0.055     $ 0.055     $ 0.165     $ 0.145  
                                 
                                 
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  
(Unaudited)  
   
    Three Months Ended     Nine Months Ended  
    July 29,
2017
    July 30,
2016
    July 29,
2017
    July 30,
2016
 
    (In thousands)  
Net income (loss)   $ (19,552 )   $ 10,495     $ (36,428 )   $ 147,226  
Other comprehensive income and loss, net of tax:                                
  Unrealized gains (losses) on cash flow hedges:                                
    Change in unrealized gains and losses     209       (700 )     376       (1,035 )
    Net gains and losses reclassified into earnings     363       482       799       1,831  
  Net unrealized gains (losses) on cash flow hedges     572       (218 )     1,175       796  
  Foreign currency translation adjustments     1,972       (1,628 )     2,635       (1,760 )
Total other comprehensive income (loss)     2,544       (1,846 )     3,810       (964 )
Total comprehensive income (loss)   $ (17,008 )   $ 8,649     $ (32,618 )   $ 146,262  
Less: Net loss attributable to noncontrolling interest     (46 )     --       (274 )     --  
Less: Total other comprehensive income (loss) attributable to noncontrolling interest     40       --       (32 )     --  
Total comprehensive income (loss) attributable to Brocade Communications Systems, Inc.   $ (17,002 )   $ 8,649     $ (32,312 )   $ 146,262  
                                 
                                 
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
    July 29,
2017
    October 29,
2016
 
    (In thousands, except par value)  
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 1,179,369     $ 1,257,075  
  Accounts receivable, net of allowances for doubtful accounts of $1,818, and $1,736 as of July 29, 2017, and October 29, 2016, respectively     291,989       284,344  
  Inventories     70,511       69,355  
  Prepaid expenses and other current assets     87,128       62,236  
  Current assets held for sale     26,279       --  
    Total current assets     1,655,276       1,673,010  
Property and equipment, net     416,181       455,326  
Goodwill     2,255,326       2,295,184  
Core/developed technology intangible assets, net     193,959       248,938  
Other intangible assets, net     159,041       200,840  
Non-current deferred tax assets     40,057       12,736  
Other assets     41,591       53,777  
    Total assets   $ 4,761,431     $ 4,939,811  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable   $ 97,074     $ 128,685  
  Accrued employee compensation     144,622       154,165  
  Deferred revenue     198,704       221,940  
  Current portion of long-term debt     76,725       76,692  
  Other accrued liabilities     69,517       113,170  
  Current liabilities held for sale     8,421       --  
    Total current liabilities     595,063       694,652  
Long-term debt, net of current portion     1,457,602       1,502,063  
Non-current deferred revenue     85,055       90,051  
Non-current income tax liability     92,582       102,100  
Other non-current liabilities     4,330       5,370  
    Total liabilities     2,234,632       2,394,236  
Commitments and contingencies                
Stockholders' equity:                
Brocade 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: 413,745 and 401,748 shares as of July 29, 2017, and October 29, 2016, respectively     414       402  
  Additional paid-in capital     1,596,008       1,514,730  
  Accumulated other comprehensive loss     (23,603 )     (27,413 )
  Retained earnings     951,592       1,055,194  
    Total Brocade stockholders' equity     2,524,411       2,542,913  
Noncontrolling interest     2,388       2,662  
    Total stockholders' equity   $ 2,526,799     $ 2,545,575  
    Total liabilities and stockholders' equity   $ 4,761,431     $ 4,939,811  
                 
                 
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
    Nine Months Ended  
    July 29,
 2017
    July 30,
 2016
 
    (In thousands)  
Cash flows from operating activities:                
  Net income (loss)   $ (36,428 )   $ 147,226  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
    Excess tax benefits from stock-based compensation     --       (1,778 )
    Depreciation and amortization     118,365       80,979  
    Loss on disposal of property and equipment     3,506       458  
    Loss on sale and held for sale software product lines     24,315       --  
    Net gain on sale of investments     --       (122 )
    Amortization of debt issuance costs and debt discount     15,571       13,493  
    Provision (recovery) for doubtful accounts receivable and sales allowances     8,914       (1,946 )
    Non-cash purchase accounting adjustments to inventory     5,853       20,775  
    Non-cash stock-based compensation expense     94,471       88,805  
    Impairment of equity investments     2,870       --  
  Changes in assets and liabilities, net of acquisitions and divestitures:                
    Accounts receivable     (16,558 )     988  
    Inventories     (6,044 )     5,601  
    Prepaid expenses and other assets     (16,029 )     (9,725 )
    Deferred tax assets     63       (109 )
    Accounts payable     (27,370 )     5,519  
    Accrued employee compensation     (56,803 )     (57,520 )
    Deferred revenue     (20,900 )     5,359  
    Other accrued liabilities     (48,799 )     (43,874 )
    Restructuring liabilities     (365 )     (1,223 )
      Net cash provided by operating activities     44,632       252,906  
Cash flows from investing activities:                
  Purchases of non-marketable equity and debt investments     --       (2,000 )
  Proceeds from maturities and sale of short-term investments     --       150,323  
  Purchases of property and equipment     (28,618 )     (59,810 )
  Net cash paid in connection with acquisitions     --       (564,888 )
  Proceeds from collection of note receivable     250       250  
  Net proceeds from sale of software product line     31,769       --  
      Net cash provided by (used in) investing activities     3,401       (476,125 )
Cash flows from financing activities:                
  Payment of principal related to the term loan     (60,000 )     --  
  Payment of debt issuance costs     --       (891 )
  Payment of principal related to capital leases     --       (282 )
  Payment of accrued merger consideration to dissenting stockholder of Ruckus Wireless, Inc.     (41,280 )     --  
  Common stock repurchases     --       (841,562 )
  Proceeds from issuance of common stock     41,283       49,195  
  Payment of cash dividends to stockholders     (67,448 )     (61,706 )
  Proceeds from term loan     --       787,255  
  Proceeds from noncontrolling interest     --       2,550  
  Excess tax benefits from stock-based compensation     --       1,778  
      Net cash used in financing activities     (127,445 )     (63,663 )
  Effect of exchange rate fluctuations on cash and cash equivalents     1,706       (926 )
  Net decrease in cash and cash equivalents     (77,706 )     (287,808 )
  Cash and cash equivalents, beginning of period     1,257,075       1,440,882  
  Cash and cash equivalents, end of period   $ 1,179,369     $ 1,153,074  
                 
                 
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
 
    Three Months Ended  
    July 29,
 2017
    April 29,
 2017
    July 30,
 2016
 
    (In thousands, except per share amounts)  
Non-GAAP adjustments                        
  Stock-based compensation expense included in cost of revenues   $ 3,233     $ 3,234     $ 5,965  
  Amortization of intangible assets expense included in cost of revenues     10,612       12,679       8,922  
  Purchase accounting adjustments to inventory     1,932       2,384       20,775  
    Total gross margin impact from non-GAAP adjustments     15,777       18,297       35,662  
                           
  Stock-based compensation expense included in research and development     6,340       6,631       9,206  
  Stock-based compensation expense included in sales and marketing     8,503       9,779       17,756  
  Stock-based compensation expense included in general and administrative     5,709       6,645       11,716  
  Settlement with dissenting stockholder of Ruckus Wireless, Inc.     8,528       --       --  
  Amortization of intangible assets expense included in operating expenses     5,822       7,582       5,498  
  Acquisition, divestiture, and integration costs     13,246       18,236       14,868  
  Restructuring charges     17,801       --       --  
  Impairment of equity investments     2,870       --       --  
  Loss on sale and held for sale software product lines     24,315       --       --  
    Total operating income impact from non-GAAP adjustments     108,911       67,170       94,706  
                           
  Convertible debt interest     4,068       4,018       3,871  
  Effects of certain intercompany transactions on the tax provision     --       --       7,436  
  Income tax effect of non-GAAP adjustments     (24,875 )     (17,029 )     (24,506 )
    Total net income impact from non-GAAP adjustments   $ 88,104     $ 54,159     $ 81,507  
                         
Gross margin reconciliation                        
  GAAP gross margin   $ 351,145     $ 342,760     $ 356,899  
  Total gross margin impact from non-GAAP adjustments     15,777       18,297       35,662  
    Non-GAAP gross margin   $ 366,922     $ 361,057     $ 392,561  
  GAAP gross margin, as a percentage of total net revenues     63.9 %     62.0 %     60.4 %
  Non-GAAP gross margin, as a percentage of total net revenues     66.8 %     65.3 %     66.5 %
                         
Operating income reconciliation                        
  GAAP operating income (loss)   $ (19,879 )   $ (5,934 )   $ 20,594  
  Total operating income impact from non-GAAP adjustments     108,911       67,170       94,706  
    Non-GAAP operating income   $ 89,032     $ 61,236     $ 115,300  
  GAAP operating income (loss), as a percentage of total net revenues     (3.6 )%     (1.1 )%     3.5 %
  Non-GAAP operating income, as a percentage of total net revenues     16.2 %     11.1 %     19.5 %
                         
Net income (loss) and net income (loss) per share attributable to Brocade reconciliation                        
  Net income (loss) attributable to Brocade on a GAAP basis   $ (19,506 )   $ (10,967 )   $ 10,495  
  Total net income impact from non-GAAP adjustments     88,104       54,159       81,507  
    Non-GAAP net income attributable to Brocade   $ 68,598     $ 43,192     $ 92,002  
                           
  GAAP net income (loss) per share--basic attributable to Brocade   $ (0.05 )   $ (0.03 )   $ 0.02  
  Total impact on net income (loss) per share--basic from non-GAAP adjustments     0.22       0.14       0.20  
    Non-GAAP net income per share--basic attributable to Brocade   $ 0.17     $ 0.11     $ 0.22  
                           
  GAAP net income (loss) per share--diluted attributable to Brocade   $ (0.05 )   $ (0.03 )   $ 0.02  
  Total impact on net income (loss) per share--diluted from non-GAAP adjustments     0.21       0.13       0.19  
    Non-GAAP net income per share--diluted attributable to Brocade   $ 0.16     $ 0.10     $ 0.21  
                           
  Shares used in GAAP and non-GAAP per share calculation--basic     411,898       408,589       426,671  
  Shares used in GAAP per share calculation--diluted     411,898       408,589       434,416  
  Shares used in non-GAAP per share calculation--diluted     421,381       419,614       434,416  
                         
Effective tax rate reconciliation                        
  GAAP income (loss) before income tax     (33,174 )     (19,785 )     8,689  
  Total operating income impact from non-GAAP adjustments     108,911       67,170       94,706  
  Convertible debt interest     4,068       4,018       3,871  
    Non-GAAP income before income tax     79,805       51,403       107,266  
                           
  GAAP income tax benefit     (13,622 )     (8,753 )     (1,806 )
  Effects of certain intercompany transactions on the tax provision     --       --       (7,436 )
  Income tax effect of non-GAAP adjustments     24,875       17,029       24,506  
    Non-GAAP income tax expense     11,253       8,276       15,264  
                           
  GAAP income (loss) before income tax     (33,174 )     (19,785 )     8,689  
  GAAP income tax benefit     (13,622 )     (8,753 )     (1,806 )
  GAAP effective tax rate     41.1 %     44.2 %     (20.8 )%
                           
  Non-GAAP income before income tax     79,805       51,403       107,266  
  Non-GAAP income tax expense     11,253       8,276       15,264  
  Non-GAAP effective tax rate     14.1 %     16.1 %     14.2 %
                         

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