SOURCE: Brocade

Brocade

November 21, 2016 18:49 ET

Brocade Reports Fourth Quarter and Fiscal 2016 Earnings

SAN JOSE, CA--(Marketwired - Nov 21, 2016) - Brocade® (NASDAQ: BRCD) today reported financial results for its fourth quarter and full fiscal year 2016 ended October 29, 2016. Brocade reported fourth quarter revenue of $657 million, an increase of 12% year-over-year and 11% quarter-over-quarter. Revenue for fiscal year 2016 was $2,346 million, up 4% year-over-year. GAAP diluted earnings per share (EPS) was $0.16 for the fourth quarter and $0.51 for fiscal year 2016, down 19% and down 35% year-over-year, respectively. Non-GAAP diluted EPS was $0.33 for the fourth quarter and $1.04 for fiscal year 2016, up 27% and up 3% year-over-year, respectively.

"Fiscal 2016 was a year of significant accomplishment," said Lloyd Carney, CEO. "We delivered record revenue and expanded our market reach to address critical requirements at the network edge through our acquisition of Ruckus Wireless. In addition, we provided our customers with significant innovations across our product portfolio, including Gen 6 Fibre Channel, data center automation, Ruckus Cloud Wi-Fi, and next-generation data center routing. With a range of new IP Networking solutions expected to launch in the first quarter of fiscal 2017, we continue to advance our roadmap and help our customers transform their networks for digital business."

Quarterly Key Financial Metrics: (1)

    Q4 2016   Q3 2016   Q4 2015   Q4 2016 vs.
Q3 2016
  Q4 2016 vs.
Q4 2015
Revenue   $ 657 M   $ 591 M   $ 589 M   11 %   12 %
GAAP EPS--diluted   $ 0.16     $ 0.02     $ 0.20     575 %   (19 %)
Non-GAAP EPS--diluted   $ 0.33     $ 0.21     $ 0.26     54 %   27 %
GAAP gross margin     63.9 %     60.4 %     67.0 %   3.5  pts   (3.1 ) pts
Non-GAAP gross margin     68.2 %     66.5 %     67.9 %   1.7  pts   0.3  pts
GAAP operating margin     12.6 %     3.5 %     20.2 %   9.1  pts   (7.6 ) pts
Non-GAAP operating margin     24.4 %     19.5 %     25.0 %   4.9  pts   (0.6 ) pts

(1) Full fiscal year financial metrics are detailed in the financial statements and schedules presented below.

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:

  • Revenue for both the fourth quarter and the full fiscal year was positively impacted by $14.4 million, or 2.2% and 0.6%, respectively, due to a change in channel revenue recognition methodology implemented in the fourth quarter as described under "Financial Highlights and Additional Financial Information" below.
  • Q4 2016 SAN product revenue was $303 million, down 7% year-over-year and up 8% quarter-over-quarter. The Q4 year-over-year revenue decline was due to an 18% decrease in director sales and a 13% decrease in embedded switch sales, partially offset by a 7% increase in fixed-configuration switch sales. For fiscal year 2016, SAN product revenue was $1,229 million, down 6% year-over-year, primarily due to certain partner business transitions and a challenging storage spending environment, leading to lower director and embedded switch sales.
  • Q4 2016 IP Networking product revenue was $256 million, up 51% year-over-year and up 22% quarter-over-quarter. The Q4 year-over-year increase was primarily driven by the inclusion of $96 million of Ruckus Wireless product revenue, following the acquisition in fiscal Q3 2016. This was partially offset by lower service provider sales and lower sales into the education market. For fiscal year 2016, IP Networking product revenue was $730 million, up 21% year-over-year, primarily due to the inclusion of five months of revenue from Ruckus Wireless, partially offset by lower service provider and U.S. federal sales.
  • In fiscal year 2016, Brocade's full-year GAAP gross margin was 64.6%, down 290 basis points from fiscal year 2015. The gross margin decline was primarily due to a shift in product mix primarily from SAN to IP Networking, and the purchase accounting adjustment to inventory related to the Ruckus Wireless acquisition. Fiscal 2016 full-year GAAP operating margin was 13.1%, down 870 basis points, primarily due to lower gross margins, higher acquisition-related costs, and higher operating expenses primarily associated with Ruckus Wireless. GAAP diluted EPS in fiscal year 2016 was $0.51, down 35% from the prior year, due primarily to acquisition-related costs and higher operating expenses associated with Ruckus Wireless, partially offset by a favorable jurisdictional mix of earnings resulting in a lower effective tax rate.
  • In fiscal year 2016, Brocade's full-year non-GAAP gross margin was 67.9%, down 50 basis points from fiscal year 2015. The non-GAAP gross margin decline was primarily due to a shift in product mix primarily from SAN to IP Networking. Fiscal 2016 full-year non-GAAP operating margin was 23.1%, down 320 basis points, primarily due to lower gross margin and higher operating expenses resulting from the acquisition of Ruckus Wireless. Non-GAAP diluted EPS in fiscal year 2016 was $1.04, up 3% from the prior year, due primarily to higher revenue and a favorable jurisdictional mix of earnings resulting in a lower effective tax rate, partially offset by higher operating expenses.

Board Declares Dividend

  • The Brocade Board of Directors has declared a quarterly cash dividend of $0.055 per share of the Company's common stock. The dividend payment will be made on January 4, 2017 to shareholders of record at the close of market on December 12, 2016.

On November 2, 2016, Brocade announced that it had entered into a definitive agreement under which Brocade would be acquired by Broadcom Limited. In light of the pending acquisition, Brocade will not provide fiscal Q1 2017 guidance and will not hold a conference call to discuss these financial results.

Other Q4 2016 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
Prior to fiscal Q4 2016, Brocade recognized revenue from sales to distributors on a "sell-through" basis after the distributor resold Brocade's products to its end customers. Due to improvements made to Brocade's systems and processes for capturing channel sales data, Brocade is now able to reliably estimate rebates, discounts, and sales returns. As a result, beginning in the fourth quarter of fiscal year 2016, Brocade began recognizing revenue to distributors on a "sell-in" basis at the time of shipment to the distributor. Accordingly, during the fourth quarter of fiscal year 2016, Brocade recorded corresponding adjustments to recognize revenue that would have been deferred under our previous revenue recognition model. The net effect was a $14.4 million increase in revenue, of which $6.3 million was attributable to the Ruckus Wireless business, $7.7 million was attributable to the remainder of the IP Networking business, and $0.4 million was attributable to the SAN business, and a $4.0 million increase in cost of revenues. These adjustments resulted in a net increase in GAAP and non-GAAP operating income of $10.4 million, representing a $0.02 increase in Q4 2016 fully diluted GAAP and non-GAAP EPS.

                       
    Q4 2016       Q3 2016       Q4 2015  
Routes to market as a % of total net revenues:                      
  OEM revenues   58 %     54 %     62 %
  Channel/Direct revenues   42 %     46 %     38 %
                       
  10% or greater customer revenues   12 %     23 %     29 %
Geographic split as a % of total net revenues (1):                      
  Domestic revenues   47 %     52 %     54 %
  International revenues   53 %     48 %     46 %
Segment split as a % of total net revenues:                      
  SAN product revenues   46 %     48 %     55 %
  IP Networking product revenues   39 %     35 %     29 %
  Global Services revenues   15 %     17 %     16 %
                       
  SAN business revenues (2)   54 %     57 %     65 %
  IP Networking business revenues (2)   46 %     43 %     35 %
           
Additional information: Q4 2016   Q3 2016   Q4 2015
  GAAP net income attributable to Brocade $ 67 M   $ 10 M   $ 84 M
  Non-GAAP net income attributable to Brocade $ 134 M   $ 92 M   $ 108 M
  GAAP operating income $ 83 M   $ 21 M   $ 119 M
  Non-GAAP operating income $ 160 M   $ 115 M   $ 147 M
  GAAP effective tax rate   1.6 %     (20.8 )%     23.6 %
  Non-GAAP effective tax rate   10.3 %     14.2 %     24.2 %
  Cash and cash equivalents $ 1,257 M   $ 1,153 M   $ 1,441 M
  Capital expenditures $ 17 M   $ 17 M   $ 16 M
  Cash provided by operations $ 159 M   $ 28 M   $ 180 M
  Days sales outstanding   39 days     43 days     36 days
  Employees at end of period   5,960     5,948     4,640
  SAN port shipments   0.9 M     0.9 M     1.0 M
  Share repurchases $ --     $ 660.7 M   $ 31.1 M

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 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.

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) call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in Brocade's debt refinancings; (iii) acquisition and integration costs; and (iv) restructuring and other related benefits.

Management also excludes the following non-cash charges in determining 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 because of 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 infrequent 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.

Additional Information and Where to Find It
This communication is being made in respect of the proposed transaction involving Brocade Communications Systems, Inc. ("Brocade") and Broadcom Limited ("Broadcom"). In connection with the proposed transaction, Brocade intends to file relevant materials with the Securities and Exchange Commission (the "SEC"), including a preliminary proxy statement on Schedule 14A. Promptly after filing its definitive proxy statement with the SEC, Brocade will mail the definitive proxy statement and a proxy card to each stockholder of Brocade entitled to vote at the special meeting relating to the proposed transaction. INVESTORS AND SECURITY HOLDERS OF BROCADE ARE URGED TO READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE PROPOSED TRANSACTION THAT BROCADE WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT BROCADE AND THE PROPOSED TRANSACTION. The definitive proxy statement, the preliminary proxy statement and other relevant materials in connection with the proposed transaction (when they become available), and any other documents filed by Brocade with the SEC, may be obtained free of charge at the SEC's website (http://www.sec.gov) or at Brocade's website (http://www.brcd.com) or by contacting Brocade's Investor Relations at (408) 333-6208 or scoli@brocade.com.

Participants in the Solicitation
Brocade and its directors and executive officers may be deemed to be participants in the solicitation of proxies from Brocade's stockholders with respect to the proposed transaction. Information about Brocade's directors and executive officers and their ownership of Brocade's common stock is set forth in Brocade's proxy statement on Schedule 14A filed with the SEC on February 25, 2016, and Brocade's Annual Report on Form 10-K for the fiscal year ended October 31, 2015, which was filed on December 22, 2015. Information regarding the identity of the potential participants, and their direct or indirect interests in the proposed transaction, by security holdings or otherwise, will be set forth in the proxy statement and other materials to be filed with the SEC in connection with the proposed transaction.

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 presentation 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; 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 adoption of the merger agreement by the stockholders of Brocade and 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 any legal proceedings that may be instituted against us 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 July 30, 2016, and in Brocade's Annual Report on Form 10-K for the fiscal year ended October 31, 2015. Brocade expressly assumes no obligation to update 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 era 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.

© 2016 Brocade Communications Systems, Inc. All Rights Reserved.

   
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
   
    Three Months Ended   For the Year Ended  
    October 29,
 2016
  October 31,
 2015
  October 29,
 2016
  October 31,
 2015
 
    (In thousands, except per share amounts)  
Net revenues:                          
  Product   $ 559,241   $ 494,720   $ 1,959,596   $ 1,902,401  
  Service     98,058     94,107     386,014     361,059  
    Total net revenues     657,299     588,827     2,345,610     2,263,460  
Cost of revenues:                          
  Product     192,364     155,734     657,161     587,515  
  Service     44,621     38,816     172,110     147,872  
    Total cost of revenues     236,985     194,550     829,271     735,387  
Gross margin     420,314     394,277     1,516,339     1,528,073  
Operating expenses:                          
  Research and development     115,720     94,547     413,236     356,720  
  Sales and marketing     172,660     157,031     641,403     585,230  
  General and administrative     32,447     21,808     110,627     87,623  
  Amortization of intangible assets     8,359     902     15,661     2,556  
  Acquisition and integration costs     8,297     809     28,922     3,942  
  Restructuring and other related benefits     (37 )   (41 )   (603 )   (678 )
    Total operating expenses     337,446     275,056     1,209,246     1,035,393  
Income from operations     82,868     119,221     307,093     492,680  
Interest expense     (16,045 )   (9,824 )   (49,327 )   (55,578 )
Interest and other income, net     955     1,095     4,272     1,949  
Income before income tax     67,778     110,492     262,038     439,051  
Income tax expense     1,077     26,104     48,111     98,689  
Net income   $ 66,701   $ 84,388   $ 213,927   $ 340,362  
Less: Net income attributable to noncontrolling interest     (112 )   --     (112 )   --  
Net income attributable to Brocade Communications Systems, Inc.   $ 66,589   $ 84,388   $ 213,815   $ 340,362  
Net income per share--basic attributable to Brocade Communications Systems, Inc. stockholders   $ 0.17   $ 0.20   $ 0.52   $ 0.81  
Net income per share--diluted attributable to Brocade Communications Systems, Inc. stockholders   $ 0.16   $ 0.20   $ 0.51   $ 0.79  
Shares used in per share calculation--basic     401,103     414,769     409,058     420,331  
Shares used in per share calculation--diluted     410,123     422,315     417,093     430,556  
                           
Cash dividends declared per share   $ 0.055   $ 0.045   $ 0.20   $ 0.16  
 
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
  Three Months Ended   For the Year Ended  
  October 29,
 2016
  October 31,
 2015
  October 29,
 2016
  October 31,
 2015
 
  (In thousands)  
Net income $ 66,701   $ 84,388   $ 213,927   $ 340,362  
Other comprehensive income and loss, net of tax:                        
  Unrealized gains (losses) on cash flow hedges:                        
    Change in unrealized gains and losses   (918 )   (1,055 )   (1,953 )   (3,387 )
    Net gains and losses reclassified into earnings   790     1,211     2,621     3,755  
  Net unrealized gains (losses) on cash flow hedges   (128 )   156     668     368  
  Foreign currency translation adjustments   (1,319 )   (775 )   (3,079 )   (6,556 )
Total other comprehensive loss   (1,447 )   (619 )   (2,411 )   (6,188 )
Total comprehensive income   65,254     83,769     211,516     334,174  
Less: Net income attributable to noncontrolling interest   (112 )   --     (112 )   --  
Less: Total other comprehensive loss attributable to noncontrolling interest   35     --     35     --  
Total comprehensive income attributable to Brocade Communications Systems, Inc. $ 65,177   $ 83,769   $ 211,439   $ 334,174  
 
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
    October 29, 2016     October 31, 2015  
    (In thousands, except par value)  
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 1,257,075     $ 1,440,882  
  Accounts receivable, net of allowances for doubtful accounts of $3,660 and $1,838 as of October 29, 2016, and October 31, 2015, respectively     284,344       235,883  
  Inventories     69,355       40,524  
  Deferred tax assets     --       78,675  
  Prepaid expenses and other current assets     64,401       56,235  
      Total current assets     1,675,175       1,852,199  
Property and equipment, net     455,326       439,224  
Goodwill     2,295,184       1,617,161  
Core/developed technology intangible assets, net     248,938       30,925  
Other intangible assets, net     200,840       44,698  
Non-current deferred tax assets     8,114       813  
Other assets     53,777       51,133  
      Total assets   $ 4,937,354     $ 4,036,153  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable   $ 128,685     $ 98,143  
  Accrued employee compensation     154,165       142,075  
  Deferred revenue     221,940       244,622  
  Current portion of long-term debt     76,692       298  
  Other accrued liabilities     113,170       77,226  
      Total current liabilities     694,652       562,364  
Long-term debt, net of current portion     1,502,063       793,779  
Non-current deferred revenue     90,051       72,065  
Non-current income tax liability     102,100       47,010  
Non-current deferred tax liabilities     --       24,024  
Other non-current liabilities     5,370       3,376  
      Total liabilities     2,394,236       1,502,618  
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: 401,748 and 413,923 shares as of October 29, 2016, and October 31, 2015, respectively     402       414  
  Additional paid-in capital     1,512,273       1,632,984  
  Accumulated other comprehensive loss     (27,413 )     (25,002 )
  Retained earnings     1,055,194       925,139  
      Total Brocade stockholders' equity     2,540,456       2,533,535  
Noncontrolling interest   $ 2,662     $ --  
      Total stockholders' equity   $ 2,543,118     $ 2,533,535  
      Total liabilities and stockholders' equity   $ 4,937,354     $ 4,036,153  
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
    For the Year Ended  
    October 29,
 2016
    October 31,
 2015
 
    (In thousands)  
Cash flows from operating activities:                
  Net income   $ 213,927     $ 340,362  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Excess tax benefits from stock-based compensation     (7,182 )     (48,943 )
    Depreciation and amortization     124,346       84,807  
    Loss on disposal of property and equipment     607       3,163  
    Amortization of debt issuance costs and debt discount     18,875       13,715  
    Write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing     --       4,808  
    Net gain on sale of investments     (122 )     --  
    Provision for doubtful accounts receivable and sales allowances     2,234       5,173  
    Non-cash purchase accounting adjustments to inventory     30,565       --  
    Non-cash stock-based compensation expense     126,335       88,528  
  Changes in assets and liabilities, net of acquisitions:                
    Accounts receivable     (9,355 )     (15,989 )
    Inventories     3,638       (1,805 )
    Prepaid expenses and other assets     12,827       (15,844 )
    Deferred tax assets     (6,108 )     234  
    Accounts payable     15,819       107  
    Accrued employee compensation     (43,687 )     (59,703 )
    Deferred revenue     (27,984 )     1,345  
    Other accrued liabilities     (40,904 )     50,366  
    Restructuring liabilities     (1,434 )     (2,825 )
      Net cash provided by operating activities     412,397       447,499  
Cash flows from investing activities:                
  Purchases of non-marketable equity and debt investments     (2,410 )     (2,150 )
  Proceeds from sale of non-marketable equity investments     --       1,489  
  Proceeds from maturities and sale of short-term investments     150,323       --  
  Purchases of property and equipment     (77,049 )     (68,743 )
  Purchase of intangible assets     --       (7,750 )
  Net cash paid in connection with acquisitions     (564,888 )     (95,452 )
  Proceeds from collection of note receivable     250       250  
      Net cash used in investing activities     (493,774 )     (172,356 )
Cash flows from financing activities:                
  Payment of principal related to senior secured notes     --       (300,000 )
  Payment of principal related to the term loan     (20,000 )     --  
  Payment of debt issuance costs     (1,154 )     (1,718 )
  Payment of principal related to capital leases     (298 )     (1,818 )
  Common stock repurchases     (841,562 )     (343,686 )
  Proceeds from issuance of common stock     49,491       51,376  
  Payment of cash dividends to stockholders     (83,760 )     (67,470 )
  Proceeds from term loan     787,255       --  
  Proceeds from convertible notes     --       565,656  
  Purchase of convertible note hedge     --       (86,135 )
  Proceeds from issuance of warrants     --       51,175  
  Proceeds from noncontrolling interest     2,550       --  
  Excess tax benefits from stock-based compensation     7,182       48,943  
      Net cash used in financing activities     (100,296 )     (83,677 )
Effect of exchange rate fluctuations on cash and cash equivalents     (2,134 )     (5,601 )
Net increase (decrease) in cash and cash equivalents     (183,807 )     185,865  
Cash and cash equivalents, beginning of year     1,440,882       1,255,017  
Cash and cash equivalents, end of year   $ 1,257,075     $ 1,440,882  
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
 
   
    Three Months Ended  
    October 29,
 2016
    July 30,
 2016
    October 31,
 2015
 
    (In thousands, except per share amounts)  
Non-GAAP adjustments                        
  Stock-based compensation expense included in cost of revenues   $ 4,481     $ 5,965     $ 3,189  
  Amortization of intangible assets expense included in cost of revenues     13,518       8,922       2,598  
  Purchase accounting adjustment to inventory     9,790       20,775       --  
    Total gross margin impact from non-GAAP adjustments     27,789       35,662       5,787  
                         
  Stock-based compensation expense included in research and development     9,493       9,206       5,475  
  Stock-based compensation expense included in sales and marketing     13,471       17,756       10,689  
  Stock-based compensation expense included in general and administrative     10,085       11,716       4,581  
  Amortization of intangible assets expense included in operating expenses     8,359       5,498       902  
  Acquisition and integration costs     8,297       14,868       809  
  Restructuring and other related benefits     (37 )     --       (41 )
    Total operating income impact from non-GAAP adjustments     77,457       94,706       28,202  
                         
  Convertible debt interest     3,919       3,871       3,730  
  Effects of certain intercompany transactions on the tax provision     6,759       7,436       --  
  Income tax effect of non-GAAP adjustments     (21,104 )     (24,506 )     (8,363 )
    Total net income impact from non-GAAP adjustments   $ 67,031     $ 81,507     $ 23,569  
                         
Gross margin reconciliation                        
  GAAP gross margin   $ 420,314     $ 356,899     $ 394,277  
  Total gross margin impact from non-GAAP adjustments     27,789       35,662       5,787  
    Non-GAAP gross margin   $ 448,103     $ 392,561     $ 400,064  
  GAAP gross margin, as a percent of total net revenues     63.9 %     60.4 %     67.0 %
  Non-GAAP gross margin, as a percent of total net revenues     68.2 %     66.5 %     67.9 %
                         
Operating income reconciliation                        
  GAAP operating income   $ 82,868     $ 20,594     $ 119,221  
  Total operating income impact from non-GAAP adjustments     77,457       94,706       28,202  
    Non-GAAP operating income   $ 160,325     $ 115,300     $ 147,423  
  GAAP operating income, as a percent of total net revenues     12.6 %     3.5 %     20.2 %
  Non-GAAP operating income, as a percent of total net revenues     24.4 %     19.5 %     25.0 %
Net income and net income per share attributable to Brocade reconciliation                        
  Net income attributable to Brocade on a GAAP basis   $ 66,589     $ 10,495     $ 84,388  
  Total net income impact from non-GAAP adjustments     67,031       81,507       23,569  
    Non-GAAP net income attributable to Brocade   $ 133,620     $ 92,002     $ 107,957  
                         
  GAAP net income per share--basic attributable to Brocade   $ 0.17     $ 0.02     $ 0.20  
  Total impact on net income per share--basic from non-GAAP adjustments     0.16       0.20       0.06  
    Non-GAAP net income per share--basic attributable to Brocade   $ 0.33     $ 0.22     $ 0.26  
                         
  GAAP net income per share--diluted attributable to Brocade   $ 0.16     $ 0.02     $ 0.20  
  Total impact on net income per share--diluted from non-GAAP adjustments     0.17       0.19       0.06  
    Non-GAAP net income per share--diluted attributable to Brocade   $ 0.33     $ 0.21     $ 0.26  
                         
  Shares used in non-GAAP per share calculation--basic     401,103       426,671       414,769  
  Shares used in non-GAAP per share calculation--diluted     410,123       434,416       422,315  
                         
Effective tax rate reconciliation                        
  GAAP income before income tax   $ 67,778     $ 8,689     $ 110,492  
  Total operating income impact from non-GAAP adjustments     77,457       94,706       28,202  
  Convertible debt interest     3,919       3,871       3,730  
    Non-GAAP income before income tax   $ 149,154     $ 107,266     $ 142,424  
                         
  GAAP income tax expense (benefit)   $ 1,077     $ (1,806 )   $ 26,104  
  Effects of certain intercompany transactions on the tax provision     (6,759 )     (7,436 )     --  
  Income tax effect of non-GAAP adjustments     21,104       24,506       8,363  
    Non-GAAP income tax expense   $ 15,422     $ 15,264     $ 34,467  
                         
  GAAP income before income tax   $ 67,778     $ 8,689     $ 110,492  
  GAAP income tax expense (benefit)   $ 1,077     $ (1,806 )   $ 26,104  
  GAAP effective tax rate     1.6 %     (20.8 )%     23.6 %
                         
  Non-GAAP income before income tax   $ 149,154     $ 107,266     $ 142,424  
  Non-GAAP Income tax expense   $ 15,422     $ 15,264     $ 34,467  
  Non-GAAP effective tax rate     10.3 %     14.2 %     24.2 %
   
   
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
 
   
    For the Year Ended  
    October 29,
 2016
    October 31,
 2015
 
    (In thousands, except per share amounts)  
Non-GAAP adjustments                
  Stock-based compensation expense included in cost of revenues   $ 16,882     $ 12,946  
  Amortization of intangible assets expense included in cost of revenues     28,787       7,641  
  Purchase accounting adjustment to inventory     30,565       --  
    Total gross margin impact from non-GAAP adjustments     76,234       20,587  
                 
  Stock-based compensation expense included in research and development     29,298       18,714  
  Stock-based compensation expense included in sales and marketing     53,357       38,340  
  Stock-based compensation expense included in general and administrative     31,469       18,528  
  Amortization of intangible assets expense included in operating expenses     15,661       2,556  
  Acquisition and integration costs     28,922       3,942  
  Restructuring and other related benefits     (603 )     (678 )
    Total operating income impact from non-GAAP adjustments     234,338       101,989  
                 
  Call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing     --       15,122  
  Convertible debt interest     15,390       11,731  
  Effects of certain intercompany transactions on the tax provision     27,865       --  
  Income tax effect of non-GAAP adjustments     (57,709 )     (33,179 )
    Total net income impact from non-GAAP adjustments   $ 219,884     $ 95,663  
                 
Gross margin reconciliation                
  GAAP gross margin   $ 1,516,339     $ 1,528,073  
  Total gross margin impact from non-GAAP adjustments     76,234       20,587  
    Non-GAAP gross margin   $ 1,592,573     $ 1,548,660  
  GAAP gross margin, as a percent of total net revenues     64.6 %     67.5 %
  Non-GAAP gross margin, as a percent of total net revenues     67.9 %     68.4 %
                 
Operating income reconciliation                
  GAAP operating income   $ 307,093     $ 492,680  
  Total operating income impact from non-GAAP adjustments     234,338       101,989  
    Non-GAAP operating income   $ 541,431     $ 594,669  
  GAAP operating income, as a percent of total net revenues     13.1 %     21.8 %
  Non-GAAP operating income, as a percent of total net revenues     23.1 %     26.3 %
Net income and net income per share attributable to Brocade reconciliation                
  Net income attributable to Brocade on a GAAP basis   $ 213,815     $ 340,362  
  Total net income impact from non-GAAP adjustments     219,884       95,663  
    Non-GAAP net income attributable to Brocade   $ 433,699     $ 436,025  
                 
  GAAP net income per share--basic attributable to Brocade   $ 0.52     $ 0.81  
  Total impact on net income per share--basic from non-GAAP adjustments     0.54       0.23  
    Non-GAAP net income per share--basic attributable to Brocade   $ 1.06     $ 1.04  
                 
  GAAP net income per share--diluted attributable to Brocade   $ 0.51     $ 0.79  
  Total impact on net income per share--diluted from non-GAAP adjustments     0.53       0.22  
    Non-GAAP net income per share--diluted attributable to Brocade   $ 1.04     $ 1.01  
                 
  Shares used in non-GAAP per share calculation--basic     409,058       420,331  
  Shares used in non-GAAP per share calculation--diluted     417,093       430,556  
                 
Effective tax rate reconciliation                
  GAAP income before income tax   $ 262,038     $ 439,051  
  Total operating income impact from non-GAAP adjustments     234,338       101,989  
  Call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing     --       15,122  
  Convertible debt interest     15,390       11,731  
    Non-GAAP income before income tax   $ 511,766     $ 567,893  
                 
  GAAP income tax expense   $ 48,111     $ 98,689  
  Effects of certain intercompany transactions on the tax provision     (27,865 )     --  
  Income tax effect of non-GAAP adjustments     57,709       33,179  
    Non-GAAP income tax expense   $ 77,955     $ 131,868  
                 
  GAAP income before income tax   $ 262,038     $ 439,051  
  GAAP income tax expense   $ 48,111     $ 98,689  
  GAAP effective tax rate     18.4 %     22.5 %
                 
  Non-GAAP income before income tax   $ 511,766     $ 567,893  
  Non-GAAP Income tax expense   $ 77,955     $ 131,868  
  Non-GAAP effective tax rate     15.2 %     23.2 %

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