SOURCE: Brocade

Brocade

November 24, 2014 17:56 ET

Brocade Reports Fourth Quarter and Fiscal Year 2014 Earnings

Strong Profitability Driven by Focused Execution

SAN JOSE, CA--(Marketwired - Nov 24, 2014) -  Brocade® (NASDAQ: BRCD) today reported financial results for its fourth quarter and full fiscal year 2014 ending November 1, 2014. Brocade reported fourth quarter revenue of $564 million, representing an increase of 1% year-over-year and an increase of 3% quarter-over-quarter. Revenue for fiscal year 2014 was $2,211 million, down 1% year-over-year due to the divestiture and repositioning of certain product lines. The resulting GAAP diluted earnings-per-share (EPS) was $0.19 for Q4 and $0.53 for fiscal year 2014, up 36% and 18% year-over-year, respectively. Non-GAAP diluted EPS was $0.24 for Q4, unchanged year-over-year, and $0.90 for fiscal year 2014, up 12% from fiscal year 2013.

"We delivered another strong quarter, highlighted by above-market growth of 9% in IP Networking product revenue and 2% SAN product revenue growth, on continuing products," said Lloyd Carney, CEO of Brocade. "Our focus is on helping customers migrate to the New IP, accelerating data center innovation, building on our software networking leadership, and delivering a world-class customer experience."

 
Key Financial Metrics:
                     
    Q4 2014   Q3 2014   Q4 2013   Q4 2014 vs. Q3 2014   Q4 2014 vs. Q4 2013
Revenue   $ 564 M   $ 545 M   $ 559 M   3 %   1 %
GAAP EPS - diluted   $ 0.19     $ 0.20     $ 0.14     (5 %)   36 %
Non-GAAP EPS - diluted   $ 0.24     $ 0.23     $ 0.24     2 %   (1 %)
GAAP gross margin     66.8 %     66.3 %     64.9 %   0.5 pts   1.9 pts
Non-GAAP gross margin     67.7 %     67.2 %     67.2 %   0.5 pts   0.5 pts
GAAP operating margin     22.4 %     21.6 %     15.0 %   0.8 pts   7.4 pts
Non-GAAP operating margin     26.8 %     25.7 %     26.6 %   1.1 pts   0.2 pts
Cash provided by operations   $ 158 M   $ 106 M   $ 170 M   49 %   (7 %)
Share repurchases   $ 33 M   $ 112 M   $ 53 M   (71 %)   (38 %)
                                     

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

Highlights:

  • Q4 2014 SAN product revenue was $325 million, flat year-over-year and quarter-over-quarter. The SAN year-over-year product revenue performance reflects improvement in director and switch product sales offset by lower server product sales. Fiscal year 2014 SAN product revenue was $1,327 million, up 1% year-over-year. Excluding the divestiture of the HBA business, Q4 and fiscal year 2014 SAN product revenue were both up 2% year-over-year.

  • Q4 2014 IP Networking product revenue was $152 million, up 5% year-over-year and 15% quarter-over-quarter. The year-over-year increase was primarily driven by stronger switch and router sales into the U.S. Federal government and router sales into the service provider market. Fiscal year 2014 IP Networking product revenue was $525 million, down 5% year-over-year. Adjusting for the discontinuation of the wireless and network adapter products, and the repositioning of the Brocade ADX® product line, Q4 and fiscal year 2014 IP Networking product revenue grew 9% and 1%, respectively.

  • In fiscal year 2014, Brocade's full-year GAAP gross margins and operating margins were 66.3% and 17.5%, respectively. Non-GAAP gross margins and operating margins reached 67.3% and 25.9%, respectively. Full-year operating cash flow was $542 million, a 20% increase over fiscal year 2013. During fiscal year 2014, the Company repurchased $335 million of stock, or 38 million shares, and paid $30 million in dividends. This return of capital to shareholders represents 66% of adjusted free cash flow for the year.

  • During Q4, Brocade acquired the network visibility and analytics technology assets from privately-held Vistapointe in an all cash transaction. The Vistapointe technologies are software-based, carrier-grade network visibility and analytics solutions for mobile operators. This acquisition expands Brocade's capabilities in the strategic area of software networking and enables the Company to address the emerging opportunities and requirements of mobile service provider customers.

Board Declares Dividend
The Brocade Board of Directors has declared a quarterly cash dividend of $0.035 per share of the Company's common stock. The dividend payment will be made on January 2, 2015, to shareholders of record at the close of market on December 10, 2014.

Brocade management will host a conference call today at 2:30 p.m. PT (5:30 p.m. ET) to discuss Q4 and fiscal year 2014 results, as well as a Q1 2015 outlook. To access the webcast please go to www.brcd.com/events.cfm. A replay of the conference call and the prepared comments and slides will be available at www.brcd.com.

Other Q4 2014 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
             
    Q4 2014   Q3 2014   Q4 2013
Routes to market as a % of total net revenues:                  
  OEM revenues     63 %     67 %     65 %
  Channel/Direct revenues     37 %     33 %     35 %
  10% or greater customer revenues     44 %     48 %     46 %
Geographic split as a % of total net revenues (1):                        
  Domestic revenues     61 %     56 %     62 %
  International revenues     39 %     44 %     38 %
Segment split as a % of total net revenues:                        
  SAN product revenues     58 %     60 %     58 %
  IP Networking product revenues     27 %     24 %     26 %
  Global Services revenues     15 %     16 %     16 %
  SAN business revenues (2)     67 %     70 %     68 %
  IP Networking business revenues (2)     33 %     30 %     32 %
IP Networking business revenues by use category (3):                        
  Data Center (4)     58 %     55 %     53 %
  Enterprise Campus     34 %     39 %     38 %
  Carrier Network (MAN/WAN)     8 %     6 %     9 %
                         
Additional information:   Q4 2014   Q3 2014   Q4 2013
  GAAP net income   $ 83 M   $ 87 M   $ 64 M
  Non-GAAP net income   $ 104 M   $ 102 M   $ 109 M
  GAAP operating income   $ 127 M   $ 118 M   $ 84 M
  Non-GAAP operating income   $ 151 M   $ 140 M   $ 148 M
  Adjusted EBITDA (5)   $ 172 M   $ 165 M   $ 149 M
  Effective GAAP tax provision rate     29.1 %     23.4 %     14.2 %
  Effective Non-GAAP tax provision rate     26.6 %     21.9 %     21.6 %
  Cash and cash equivalents   $ 1,255 M   $ 1,149 M   $ 987 M
  Deferred revenues   $ 312 M   $ 299 M   $ 303 M
  Capital expenditures   $ 14 M   $ 14 M   $ 10 M
  Total debt, net of discount   $ 597 M   $ 597 M   $ 599 M
  Cash, net of senior debt and capitalized leases   $ 653 M   $ 547 M   $ 382 M
  Days sales outstanding     36 days     32 days     41 days
  Employees at end of period     4,161       4,103       4,169  
  SAN port shipments     1.1 M     1.1 M     1.1 M
                         

Please see important note of explanation on 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 product, support, and services revenues.
(3) Business revenue by use category is estimated based on analysis of the information the Company collects in its sales management system. The estimated percentage of revenue by use category may fluctuate quarter-to-quarter due to seasonality and the timing of large customer orders.
(4) Data Center includes enterprise, service provider, and government data center revenues.
(5) Adjusted EBITDA is as defined in the Company's credit agreement.
   

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 relative to its competitors' operating results. Management also believes these non-GAAP financial measures help with the determination of 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 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 its 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 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) legal provision associated with certain pre-acquisition litigation, (ii) call premium cost and write-off of original issue discount and debt issuance costs related to lenders that did not participate in refinancing, (iii) settlement gain associated with certain pre-acquisition-related litigation, (iv) restructuring, goodwill impairment, and other related costs, (v) gain on sale of network adapter business, (vi) gain on sale of non-marketable equity investment, and (vii) 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 use of 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 also believes that the exclusion of 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.

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, operational performance and prospects for revenue growth. 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, Brocade's ability to execute on its sale strategy, 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 Quarterly Report on Form 10-Q for the fiscal quarter ended August 2, 2014, and Brocade's Annual Report on Form 10-K for the fiscal year ended October 26, 2013. 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, Brocade, Brocade Assurance, the B-wing symbol, DCX, Fabric OS, HyperEdge, ICX, MLX, MyBrocade, OpenScript, VCS, VDX, and Vyatta are registered trademarks, and 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 others.

© 2014 Brocade Communications Systems, Inc. All Rights Reserved.

   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF INCOME  
(Unaudited)  
   
    Three Months Ended     For the Year Ended  
    November 1,
 2014
    October 26,
 2013
    November 1,
 2014
    October 26,
 2013
 
    (In thousands, except per share amounts)  
Net revenues:                                
  Product   $ 476,905     $ 468,581     $ 1,852,187     $ 1,870,567  
  Service     87,453       90,219       359,080       352,297  
    Total net revenues     564,358       558,800       2,211,267       2,222,864  
Cost of revenues:                                
  Product     151,025       158,947       592,441       658,362  
  Service     36,215       37,213       153,033       155,623  
    Total cost of revenues     187,240       196,160       745,474       813,985  
Gross margin     377,118       362,640       1,465,793       1,408,879  
Operating expenses:                                
  Research and development     83,687       89,433       345,549       378,521  
  Sales and marketing     144,991       134,090       554,515       567,637  
  General and administrative     21,546       16,878       84,941       74,518  
  Amortization of intangible assets     135       13,125       10,280       54,256  
  Restructuring, goodwill impairment, and other related costs     229       25,464       89,280       25,464  
  Gain on sale of network adapter business     -       -       (4,884 )     -  
    Total operating expenses     250,588       278,990       1,079,681       1,100,396  
Income from operations     126,530       83,650       386,112       308,483  
Interest expense     (9,151 )     (9,214 )     (36,757 )     (55,261 )
Interest and other income, net     323       458       4,266       77,239  
Income before income tax     117,702       74,894       353,621       330,461  
Income tax expense     34,283       10,661       115,650       121,838  
Net income   $ 83,419     $ 64,233     $ 237,971     $ 208,623  
Net income per share - basic   $ 0.19     $ 0.14     $ 0.55     $ 0.46  
Net income per share - diluted   $ 0.19     $ 0.14     $ 0.53     $ 0.45  
Shares used in per share calculation - basic     431,843       444,642       435,258       450,516  
Shares used in per share calculation - diluted     441,649       460,237       446,859       463,705  
                                 
Cash dividends declared per share   $ 0.035     $ -     $ 0.07     $ -  
                                 
                                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(Unaudited)  
   
    Three Months Ended     For the Year Ended  
    November 1,
 2014
    October 26,
 2013
    November 1,
 2014
    October 26,
 2013
 
    (In thousands)  
Net income   $ 83,419     $ 64,233     $ 237,971     $ 208,623  
Other comprehensive income and loss, net of tax:                                
  Unrealized gains (losses) on cash flow hedges:                                
    Change in unrealized gains and losses     (1,953 )     1,250       (1,939 )     (1,748 )
    Net gains and losses reclassified into earnings     (18 )     (162 )     (235 )     (376 )
  Net unrealized gains (losses) on cash flow hedges     (1,971 )     1,088       (2,174 )     (2,124 )
  Foreign currency translation adjustments     (3,480 )     2,156       (3,196 )     (1,456 )
Total other comprehensive income (loss)     (5,451 )     3,244       (5,370 )     (3,580 )
Total comprehensive income   $ 77,968     $ 67,477     $ 232,601     $ 205,043  
                                 
                                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
    November 1, 2014     October 26, 2013  
    (In thousands, except par value)  
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 1,255,017     $ 986,997  
  Accounts receivable, net of allowances for doubtful accounts of $80 and $575 at November 1, 2014, and October 26, 2013, respectively     224,913       249,598  
  Inventories     38,718       45,344  
  Deferred tax assets     92,692       98,018  
  Prepaid expenses and other current assets     46,665       42,846  
      Total current assets     1,658,005       1,422,803  
Property and equipment, net     445,433       472,940  
Goodwill     1,567,723       1,645,437  
Intangible assets, net     26,658       40,258  
Non-current deferred tax assets     605       1,585  
Other assets     35,251       38,368  
      Total assets   $ 3,733,675     $ 3,621,391  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable   $ 93,705     $ 88,218  
  Accrued employee compensation     169,018       145,996  
  Deferred revenue     239,993       226,696  
  Other accrued liabilities     84,592       99,753  
      Total current liabilities     587,308       560,663  
Long-term debt, net of current portion     595,450       596,208  
Non-current deferred revenue     71,746       76,426  
Non-current income tax liability     39,647       38,680  
Non-current deferred tax liabilities     27,153       -  
Other non-current liabilities     4,310       2,601  
      Total liabilities     1,325,614       1,274,578  
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: 431,470 and 445,285 shares at November 1, 2014, and October 26, 2013, respectively     431       445  
  Additional paid-in capital     1,774,197       1,915,152  
  Accumulated other comprehensive loss     (18,814 )     (13,444 )
  Retained earnings     652,247       444,660  
      Total stockholders' equity     2,408,061       2,346,813  
      Total liabilities and stockholders' equity   $ 3,733,675     $ 3,621,391  
                       
                       
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited)  
   
    Three Months Ended  
    November 1,
 2014
    October 26,
 2013
 
    (In thousands)  
Cash flows from operating activities:                
  Net income   $ 83,419     $ 64,233  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Excess tax (benefits) detriments from stock-based compensation     (26,865 )     3,720  
    Depreciation and amortization     20,277       45,109  
    Loss on disposal of property and equipment     1,788       2,679  
    Amortization of debt issuance costs and original issue discount     295       277  
    Net gain on sale of investment     (50 )     -  
    Provision for doubtful accounts receivable and sales allowances     2,043       2,324  
    Non-cash stock-based compensation expense     23,700       16,527  
  Changes in assets and liabilities:                
    Accounts receivable     (35,140 )     (33,459 )
    Inventories     1,869       5,258  
    Prepaid expenses and other assets     (6,188 )     3,016  
    Deferred tax assets     (934 )     4,481  
    Accounts payable     6,748       (7,118 )
    Accrued employee compensation     26,754       24,598  
    Deferred revenue     12,672       2,649  
    Other accrued liabilities     48,198       20,026  
    Restructuring liabilities     (733 )     15,449  
      Net cash provided by operating activities     157,853       169,769  
Cash flows from investing activities:                
  Proceeds from sale of non-marketable equity investment     50       -  
  Purchases of property and equipment     (13,559 )     (10,422 )
  Proceeds from collection of note receivable     -       70,000  
  Net cash paid in connection with acquisition     (16,900 )     -  
      Net cash provided by (used in) investing activities     (30,409 )     59,578  
Cash flows from financing activities:                
  Payment of principal related to capital leases     (103 )     (91 )
  Common stock repurchases     (32,820 )     (52,640 )
  Proceeds from issuance of common stock     2,701       21,913  
  Payment of cash dividends to stockholders     (15,114 )     -  
  Excess tax benefits (detriments) from stock-based compensation     26,865       (3,720 )
      Net cash used in financing activities     (18,471 )     (34,538 )
Effect of exchange rate fluctuations on cash and cash equivalents     (3,343 )     2,095  
Net increase in cash and cash equivalents     105,630       196,904  
Cash and cash equivalents, beginning of period     1,149,387       790,093  
Cash and cash equivalents, end of period   $ 1,255,017     $ 986,997  
                 
                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited)  
   
    For the Year Ended  
    November 1,
 2014
    October 26,
 2013
 
    (In thousands)  
Cash flows from operating activities:                
  Net income   $ 237,971     $ 208,623  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Excess tax benefits from stock-based compensation     (64,563 )     (3,189 )
    Write-off of original issue discount and debt issuance costs related to lenders that did not participate in refinancing     -       5,360  
    Depreciation and amortization     100,647       184,114  
    Loss on disposal of property and equipment     5,118       6,709  
    Gain on sale of network adapter business     (4,884 )     -  
    Amortization of debt issuance costs and original issue discount     1,151       1,214  
    Net gain on sale of investments     (5,292 )     -  
    Provision for doubtful accounts receivable and sales allowances     7,563       9,221  
    Non-cash stock-based compensation expense     84,914       73,618  
    Non-cash tax charges     -       78,206  
    Goodwill impairment charge     83,382       -  
  Changes in assets and liabilities:                
    Accounts receivable     17,121       (25,509 )
    Inventories     6,626       24,173  
    Prepaid expenses and other assets     (10,984 )     (66,001 )
    Deferred tax assets     (887 )     4,825  
    Accounts payable     2,339       (28,862 )
    Accrued employee compensation     (11,382 )     (57,859 )
    Deferred revenue     8,652       8,599  
    Other accrued liabilities     96,376       12,944  
    Restructuring liabilities     (12,271 )     14,843  
      Net cash provided by operating activities     541,597       451,029  
Cash flows from investing activities:                
  Purchases of non-marketable equity investments     (223 )     -  
  Proceeds from sale of non-marketable equity investments     10,798       -  
  Purchases of property and equipment     (54,734 )     (52,371 )
  Proceeds from collection of note receivable     250       70,000  
  Proceeds from sale of network adapter business     9,995       -  
  Net cash paid in connection with acquisitions     (16,900 )     (44,629 )
      Net cash used in investing activities     (50,814 )     (27,000 )
Cash flows from financing activities:                
  Payment of debt issuance costs related to senior unsecured notes     -       (992 )
  Payment of principal related to senior secured notes     -       (300,000 )
  Payment of principal related to capital leases     (2,485 )     (1,627 )
  Common stock repurchases     (335,380 )     (240,000 )
  Proceeds from issuance of common stock     83,994       93,771  
  Payment of cash dividends to stockholders     (30,384 )     -  
  Proceeds from senior unsecured notes     -       296,250  
  Excess tax benefits from stock-based compensation     64,563       3,189  
      Net cash used in financing activities     (219,692 )     (149,409 )
Effect of exchange rate fluctuations on cash and cash equivalents     (3,071 )     (849 )
Net increase in cash and cash equivalents     268,020       273,771  
Cash and cash equivalents, beginning of year     986,997       713,226  
Cash and cash equivalents, end of year   $ 1,255,017     $ 986,997  
                 
                 
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES  
(Unaudited)  
   
    Three Months Ended  
    November 1,
 2014
    August 2,
 2014
    October 26,
 2013
 
    (In thousands, except per share amounts)  
Non-GAAP adjustments                        
  Stock-based compensation expense included in cost of revenues   $ 4,225     $ 4,121     $ 3,174  
  Amortization of intangible assets expense included in cost of revenues     600       552       9,650  
    Total gross margin impact from non-GAAP adjustments     4,825       4,673       12,824  
                         
  Stock-based compensation expense included in research and development     5,527       4,350       4,304  
  Stock-based compensation expense included in sales and marketing     8,832       7,592       6,104  
  Stock-based compensation expense included in general and administrative     5,116       5,511       2,945  
  Amortization of intangible assets expense included in operating expenses     135       131       13,125  
  Restructuring and other related costs     229       131       25,464  
    Total operating income impact from non-GAAP adjustments     24,664       22,388       64,766  
                         
  Gain on sale of non-marketable equity investment     -       (5,242 )     -  
  Income tax effect of non-tax adjustments     (3,587 )     (2,005 )     (19,506 )
    Total net income impact from non-GAAP adjustments   $ 21,077     $ 15,141     $ 45,260  
                         
Gross margin reconciliation                        
  GAAP gross margin   $ 377,118     $ 361,713     $ 362,640  
  Total gross margin impact from non-GAAP adjustments     4,825       4,673       12,824  
    Non-GAAP gross margin   $ 381,943     $ 366,386     $ 375,464  
  GAAP gross margin, as a percent of total net revenues     66.8 %     66.3 %     64.9 %
  Non-GAAP gross margin, as a percent of total net revenues     67.7 %     67.2 %     67.2 %
                         
Operating income reconciliation                        
  GAAP operating income   $ 126,530     $ 117,897     $ 83,650  
  Total operating income impact from non-GAAP adjustments     24,664       22,388       64,766  
    Non-GAAP operating income   $ 151,194     $ 140,285     $ 148,416  
  GAAP operating income, as a percent of total net revenues     22.4 %     21.6 %     15.0 %
  Non-GAAP operating income, as a percent of total net revenues     26.8 %     25.7 %     26.6 %
                         
Net income and net income per share reconciliation                        
  Net income on a GAAP basis   $ 83,419     $ 87,352     $ 64,233  
  Total net income impact from non-GAAP adjustments     21,077       15,141       45,260  
    Non-GAAP net income   $ 104,496     $ 102,493     $ 109,493  
  Non-GAAP net income per share - basic   $ 0.24     $ 0.24     $ 0.25  
  Non-GAAP net income per share - diluted   $ 0.24     $ 0.23     $ 0.24  
  Shares used in non-GAAP per share calculation - basic     431,843       432,448       444,642  
  Shares used in non-GAAP per share calculation - diluted     441,649       441,789       460,237  
                         
                         
   
BROCADE COMMUNICATIONS SYSTEMS, INC.  
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES  
(Unaudited)  
   
    For the Year Ended  
    November 1,
 2014
    October 26,
 2013
 
    (In thousands, except per share amounts)  
Non-GAAP adjustments                
  Stock-based compensation expense included in cost of revenues   $ 14,962     $ 14,519  
  Amortization of intangible assets expense included in cost of revenues     8,010       39,731  
  Legal provision associated with certain pre-acquisition litigation     -       3,460  
    Total gross margin impact from non-GAAP adjustments     22,972       57,710  
                 
  Stock-based compensation expense included in research and development     18,635       17,509  
  Stock-based compensation expense included in sales and marketing     31,651       29,425  
  Stock-based compensation expense included in general and administrative     19,666       12,165  
  Amortization of intangible assets expense included in operating expenses     10,280       54,256  
  Restructuring, goodwill impairment, and other related costs     89,280       25,464  
  Gain on sale of network adapter business     (4,884 )     -  
    Total operating income impact from non-GAAP adjustments     187,600       196,529  
                 
  Call premium cost and original issue discount and debt issuance costs related to lenders that did not participate in refinancing     -       15,299  
  Gain on A10 litigation settlement, net     -       (76,816 )
  Gain on sale of non-marketable equity investment     (5,242 )     -  
  Tax provision impact from passage of California Proposition 39 - Single Sales Factor apportionment     -       78,206  
  Income tax effect of non-tax adjustments     (17,643 )     (48,891 )
    Total net income impact from non-GAAP adjustments   $ 164,715     $ 164,327  
                 
Gross margin reconciliation                
  GAAP gross margin   $ 1,465,793     $ 1,408,879  
  Total gross margin impact from non-GAAP adjustments     22,972       57,710  
    Non-GAAP gross margin   $ 1,488,765     $ 1,466,589  
  GAAP gross margin, as a percent of total net revenues     66.3 %     63.4 %
  Non-GAAP gross margin, as a percent of total net revenues     67.3 %     66.0 %
                 
Operating income reconciliation                
  GAAP operating income   $ 386,112     $ 308,483  
  Total operating income impact from non-GAAP adjustments     187,600       196,529  
    Non-GAAP operating income   $ 573,712     $ 505,012  
  GAAP operating income, as a percent of total net revenues     17.5 %     13.9 %
  Non-GAAP operating income, as a percent of total net revenues     25.9 %     22.7 %
                 
Net income and net income per share reconciliation                
  Net income on a GAAP basis   $ 237,971     $ 208,623  
  Total net income impact from non-GAAP adjustments     164,715       164,327  
    Non-GAAP net income   $ 402,686     $ 372,950  
  Non-GAAP net income per share - basic   $ 0.93     $ 0.83  
  Non-GAAP net income per share - diluted   $ 0.90     $ 0.80  
  Shares used in non-GAAP per share calculation - basic     435,258       450,516  
  Shares used in non-GAAP per share calculation - diluted     446,859       463,705  
                   

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