Current Report





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): August 21, 2014
 
Brocade Communications Systems, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
000-25601
 
77-0409517
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification Number)
130 Holger Way
San Jose, CA 95134-1376
(Address, including zip code, of principal executive offices)
(408) 333-8000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))






Item 2.02 Results of Operations and Financial Condition.
On August 21, 2014 , Brocade Communications Systems, Inc. (the “Company”) issued a press release regarding financial results for the third quarter ended August 2, 2014 . The Company also posted on its website (www.brcd.com) slides with accompanying prepared remarks regarding such financial results and forward-looking statements, including statements relating to the Company’s estimated financial results of the fourth quarter of fiscal year 2014 . Copies of the press release and slides with accompanying prepared remarks by the Company are attached as Exhibits 99.1 and 99.2, respectively, and the information in Exhibits 99.1 and 99.2 is incorporated herein by reference.
The information in Item 2.02 and Item 9.01 in this Current Report on Form 8-K and the exhibits attached hereto shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.

Exhibit
Number
Description of Document
99.1
Press release, dated August 21, 2014 , regarding financial results of Brocade Communications Systems, Inc. for the third quarter ended August 2, 2014 .
99.2
Slides with accompanying prepared remarks of Brocade Communications Systems, Inc., dated August 21, 2014 , regarding financial results of the third quarter ended August 2, 2014 and forward-looking statements, including statements relating to the Company’s estimated financial results of the fourth quarter of fiscal year 2014 .






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
 
 
 
 
 
 
 
 
Date:
August 21, 2014
 
 
 
By:
 
/s/ Daniel W. Fairfax
 
 
 
 
 
 
 
Daniel W. Fairfax
 
 
 
 
 
 
 
Chief Financial Officer and Vice President, Finance




Exhibit 99.1
BROCADE CONTACTS
 
 
Public Relations
John Noh
Tel: 408-333-5108
jnoh@brocade.com
Investor Relations
Steve Coli
Tel: 408-333-6208
scoli@brocade.com
Brocade Reports Fiscal Q3 2014 Results
Strength in SAN and Ethernet Switching Drives Improved Profit Margins
SAN JOSE, Calif., August 21, 2014 — Brocade ® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended August 2, 2014 . Brocade reported third quarter revenue of $545 million , up 2% year-over-year and up 2% quarter-over-quarter. The Company reported GAAP diluted earnings per share (EPS) of $0.20 , down from $0.26 in Q3 2013 , and up from a loss per share of $ (0.03) in Q2 2014. During Q3 2013, the Company recognized a gain of $77 million related to the litigation settlement with A10 Networks, which increased GAAP EPS by $0.13 in that quarter. During Q2 2014, the Company incurred a $83 million non-cash goodwill impairment charge associated with the strategic repositioning of the Brocade ADX ® product family, which decreased GAAP EPS by $0.19 in that quarter. Non-GAAP diluted EPS was $0.23 for Q3 2014, up from $0.19 in both Q3 2013 and Q2 2014 , primarily due to higher revenue, improved gross margin, and lower operating expenses.

“With another solid quarter behind us, we are seeing the tangible benefits of our data center focused strategy,” said Lloyd Carney, CEO of Brocade. “The resilience and durability of our SAN business, along with strong Brocade VDX ® sales, validate our strategic direction. We continue to leverage our core competencies in hardware and software networking to position the company for growth, and we remain focused on delivering a world-class customer experience, even in the most demanding environments.”

Key Financial Metrics:
 
Q3 2014
 
Q2 2014
 
Q3 2013
 
Q3 2014 vs. Q2 2014
 
Q3 2014 vs. Q3 2013
Revenue
$
545
M
 
$
537
M
 
$
537
M
 
2
%
 
2
%
GAAP EPS—diluted
$
0.20

 
$
(0.03
)
 
$
0.26

 
N/A

 
(23
%)
Non-GAAP EPS—diluted
$
0.23

 
$
0.19

 
$
0.19

 
20
%
 
23
%
GAAP gross margin
66.3
%
 
66.0
%
 
63.0
%
 
0.3 pts

 
3.3 pts

Non-GAAP gross margin
67.2
%
 
66.7
%
 
65.6
%
 
0.5 pts

 
1.6 pts

GAAP operating margin
21.6
%
 
3.8
%
 
13.9
%
 
17.8 pts

 
7.7 pts

Non-GAAP operating margin
25.7
%
 
23.2
%
 
21.6
%
 
2.5 pts

 
4.1 pts

Cash provided by operations
$
106
M
 
$
168
M
 
$
102
M
 
(37
%)
 
4
%
Share repurchases
$
112
M
 
$
50
M
 
$
101
M
 
124
%
 
11
%
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:
SAN business revenue, including products and services, was $380 million , up 3% year-over-year and flat sequentially. The year-over-year improvement was the result of 4% growth in SAN product revenue due to higher switch and director sales, partially offset by lower embedded product sales and the revenue impact from the divestiture of the HBA business during Q1 2014. The revenue performance was better than expected in a typically soft demand quarter.
IP Networking business revenue, including products and services, was $166 million , down 1% year-over-year and up 5% sequentially. The sequential increase was primarily due to higher sales of Ethernet switching products to the U.S. Federal government and strong Brocade VDX sales to data center customers, partially offset by lower routing sales to service provider customers and lower support revenue. Q3 2014 IP Networking product revenue was $133 million , down 1% year-over-year and up 9% sequentially. Ethernet switch revenue increased 17% year-over-year and 27% sequentially. Routing product revenue decreased 19% year-over-year and 20% sequentially, primarily due to a pause in some customer orders in anticipation of new products scheduled for release in fiscal Q4 2014.

Page 1 of 11


During the quarter, the Company initiated a quarterly cash dividend of $0.035 per share of the Company’s common stock and repurchased 12.8 million shares for $112 million .

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 October 2, 2014 to stockholders of record at the close of market on September 10, 2014.

Brocade management will host a conference call to discuss the fiscal third quarter results and the fiscal fourth quarter outlook today at 2:30 p.m. PT (5:30 p.m. ET). To access the webcast please go to www.brcd.com/events.cfm . A replay of the conference call, prepared comments and slides, as well as a written transcript, will be available at www.brcd.com .
Other Q3 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

Page 2 of 11


Financial Highlights and Additional Financial Information
 
Q3 2014
 
Q2 2014
 
Q3 2013
Routes to market as a % of total net revenues:
 
 
 
 
 
OEM revenues
67
%
 
68
%
 
66
%
Channel/Direct revenues
33
%
 
32
%
 
34
%
10% or greater customer revenues
48
%
 
56
%
 
47
%
Geographic split as a % of total net revenues (1) :
 
 
 
 
 
Domestic revenues
56
%
 
59
%
 
61
%
International revenues
44
%
 
41
%
 
39
%
Segment split as a % of total net revenues:
 
 
 
 
 
SAN product revenues
60
%
 
60
%
 
59
%
IP Networking product revenues
24
%
 
22
%
 
25
%
Global Services revenues
16
%
 
18
%
 
16
%
SAN business revenues (2)
70
%
 
71
%
 
69
%
IP Networking business revenues (2)
30
%
 
29
%
 
31
%
IP Networking business revenues by use category (3) :
 
 
 
 
 
Data Center (4)
55
%
 
57
%
 
48
%
Enterprise Campus
39
%
 
37
%
 
40
%
Carrier Network (MAN/WAN)
6
%
 
6
%
 
12
%
Additional information:
Q3 2014
 
Q2 2014
 
Q3 2013
GAAP net income (loss)
$
87
M
 
$
(14
)M
 
$
119
M
Non-GAAP net income
$
102
M
 
$
87
M
 
$
87
M
GAAP operating income
$
118
M
 
$
20
M
 
$
74
M
Non-GAAP operating income
$
140
M
 
$
124
M
 
$
116
M
Adjusted EBITDA (5)
$
165
M
 
$
146
M
 
$
213
M
Effective GAAP tax provision rate
23.4
%
 
225.1
%
 
16.3
%
Effective Non-GAAP tax provision rate
21.9
%
 
24.6
%
 
18.2
%
Cash and cash equivalents
$
1,149
M
 
$
1,138
M
 
$
790
M
Deferred revenues
$
299
M
 
$
304
M
 
$
300
M
Capital expenditures
$
14
M
 
$
14
M
 
$
10
M
Total debt, net of discount
$
597
M
 
$
598
M
 
$
599
M
Cash, net of senior debt and capitalized leases
$
547
M
 
$
535
M
 
$
186
M
Days sales outstanding
32 days
 
35 days
 
37 days
Employees at end of period
4,103
 
4,061
 
4,565
SAN port shipments
1.1
M
 
1.1
M
 
1.0
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.


Page 3 of 11


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 or recovery 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.

Page 4 of 11


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 May 3, 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.


Page 5 of 11


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
August 2,
2014
 
July 27,
2013
 
August 2,
2014
 
July 27,
2013
 
(In thousands, except per share amounts)
Net revenues:
 
 
 
 
 
 
 
Product
$
457,797

 
$
447,993

 
$
1,375,282

 
$
1,401,986

Service
87,667

 
88,558

 
271,627

 
262,078

Total net revenues
545,464

 
536,551

 
1,646,909

 
1,664,064

Cost of revenues:
 
 
 
 
 
 
 
Product
145,518

 
160,441

 
441,416

 
499,415

Service
38,233

 
37,908

 
116,818

 
118,410

Total cost of revenues
183,751

 
198,349

 
558,234

 
617,825

Gross margin
361,713

 
338,202

 
1,088,675

 
1,046,239

Operating expenses:
 
 
 
 
 
 
 
Research and development
84,152

 
92,969

 
261,862

 
289,088

Sales and marketing
137,262

 
139,220

 
409,524

 
433,547

General and administrative
22,140

 
18,526

 
63,395

 
57,640

Amortization of intangible assets
131

 
13,124

 
10,145

 
41,131

Restructuring, goodwill impairment, and other related costs
131

 

 
89,051

 

Gain on sale of network adapter business

 

 
(4,884
)
 

Total operating expenses
243,816

 
263,839

 
829,093

 
821,406

Income from operations
117,897

 
74,363

 
259,582

 
224,833

Interest expense
(9,176
)
 
(9,247
)
 
(27,606
)
 
(46,047
)
Interest and other income, net
5,299

 
76,684

 
3,943

 
76,781

Income before income tax
114,020

 
141,800

 
235,919

 
255,567

Income tax expense
26,668

 
23,104

 
81,367

 
111,177

Net income
$
87,352

 
$
118,696

 
$
154,552

 
$
144,390

Net income per share—basic
$
0.20

 
$
0.26

 
$
0.35

 
$
0.32

Net income per share—diluted
$
0.20

 
$
0.26

 
$
0.34

 
$
0.31

Shares used in per share calculation—basic
432,448

 
449,446

 
436,396

 
452,474

Shares used in per share calculation—diluted
441,789

 
461,344

 
448,596

 
464,861

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.035

 
$

 
$
0.035

 
$


Page 6 of 11


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
August 2,
2014
 
July 27,
2013
 
August 2,
2014
 
July 27,
2013
 
(In thousands)
Net income
$
87,352

 
$
118,696

 
$
154,552

 
$
144,390

Other comprehensive income and loss, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains and losses
(155
)
 
(1,000
)
 
14

 
(2,998
)
Net gains and losses reclassified into earnings
(218
)
 
(10
)
 
(217
)
 
(214
)
Net unrealized gains (losses) on cash flow hedges
(373
)
 
(1,010
)
 
(203
)
 
(3,212
)
Foreign currency translation adjustments
(191
)
 
(1,470
)
 
284

 
(3,612
)
Total other comprehensive income (loss)
(564
)
 
(2,480
)
 
81

 
(6,824
)
Total comprehensive income
$
86,788

 
$
116,216

 
$
154,633

 
$
137,566


Page 7 of 11


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
August 2,
2014
 
October 26,
2013
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,149,387

 
$
986,997

Accounts receivable, net of allowances for doubtful accounts of $531 and $575 at August 2, 2014, and October 26, 2013, respectively
191,816

 
249,598

Inventories
40,586

 
45,344

Deferred tax assets
113,133

 
98,018

Prepaid expenses and other current assets
47,238

 
42,846

Total current assets
1,542,160

 
1,422,803

Property and equipment, net
448,195

 
472,940

Goodwill
1,556,361

 
1,645,437

Intangible assets, net
22,703

 
40,258

Non-current deferred tax assets
792

 
1,585

Other assets
31,679

 
38,368

Total assets
$
3,601,890

 
$
3,621,391

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
84,242

 
$
88,218

Accrued employee compensation
132,107

 
145,996

Deferred revenue
225,353

 
226,696

Current restructuring liabilities
2,670

 
16,418

Current portion of long-term debt
1,817

 
2,996

Other accrued liabilities
58,245

 
80,339

Total current liabilities
504,434

 
560,663

Long-term debt, net of current portion
595,420

 
596,208

Non-current restructuring liabilities
3,218

 
1,008

Non-current deferred revenue
73,714

 
76,426

Non-current income tax liability
45,271

 
38,680

Non-current deferred tax liabilities
41,679

 

Other non-current liabilities
1,553

 
1,593

Total liabilities
1,265,289

 
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: 432,664 and 445,285 shares at August 2, 2014, and October 26, 2013, respectively
433

 
445

Additional paid-in capital
1,765,589

 
1,915,152

Accumulated other comprehensive loss
(13,363
)
 
(13,444
)
Retained earnings
583,942

 
444,660

Total stockholders’ equity
2,336,601

 
2,346,813

Total liabilities and stockholders’ equity
$
3,601,890

 
$
3,621,391


Page 8 of 11


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
August 2,
2014
 
July 27,
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
87,352

 
$
118,696

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Excess tax benefits from stock-based compensation
(10,283
)
 
(1,469
)
Depreciation and amortization
20,443

 
45,647

Loss on disposal of property and equipment
152

 
984

Amortization of debt issuance costs and original issue discount
290

 
272

Net gain on sale of investment
(5,242
)
 

Provision for doubtful accounts receivable and sales allowances
1,992

 
2,337

Non-cash compensation expense
21,574

 
18,769

Changes in assets and liabilities:
 
 
 
Accounts receivable
(5
)
 
18,511

Inventories
187

 
2,310

Prepaid expenses and other assets
3,575

 
(67,303
)
Deferred tax assets
(10
)
 
22

Accounts payable
2,717

 
(7,052
)
Accrued employee compensation
(26,398
)
 
(28,294
)
Deferred revenue
(4,593
)
 
(1,974
)
Other accrued liabilities
14,854

 
887

Restructuring liabilities
(574
)
 
(188
)
Net cash provided by operating activities
106,031

 
102,155

Cash flows from investing activities:
 
 
 
Proceeds from sale of non-marketable equity investment
10,748

 

Purchases of property and equipment
(13,780
)
 
(10,381
)
Net cash used in investing activities
(3,032
)
 
(10,381
)
Cash flows from financing activities:
 
 
 
Payment of debt issuance costs related to senior unsecured notes

 
(443
)
Payment of principal related to capital leases
(633
)
 
(561
)
Common stock repurchases
(112,128
)
 
(101,181
)
Proceeds from issuance of common stock
26,763

 
35,959

Payment of cash dividends to stockholders
(15,270
)
 

Excess tax benefits from stock-based compensation
10,283

 
1,469

Net cash used in financing activities
(90,985
)
 
(64,757
)
Effect of exchange rate fluctuations on cash and cash equivalents
(240
)
 
(1,222
)
Net increase in cash and cash equivalents
11,774

 
25,795

Cash and cash equivalents, beginning of period
1,137,613

 
764,298

Cash and cash equivalents, end of period
$
1,149,387

 
$
790,093



Page 9 of 11


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
August 2,
2014
 
July 27,
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
154,552

 
$
144,390

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Excess tax benefits from stock-based compensation
(37,698
)
 
(6,909
)
Non-cash tax charges

 
78,206

Depreciation and amortization
80,370

 
139,005

Loss on disposal of property and equipment
3,330

 
4,030

Gain on sale of network adapter business
(4,884
)
 

Amortization of debt issuance costs and original issue discount
856

 
937

Call premium cost and write-off of original issue discount and debt issuance costs related to lenders that did not participate in refinancing

 
5,360

Net gain on sale of investment
(5,242
)
 

Provision for doubtful accounts receivable and sales allowances
5,520

 
6,897

Non-cash compensation expense
61,214

 
57,091

Goodwill impairment charge
83,382

 

Changes in assets and liabilities:
 
 
 
Accounts receivable
52,261

 
7,950

Inventories
4,757

 
18,915

Prepaid expenses and other assets
(4,796
)
 
(69,017
)
Deferred tax assets
47

 
344

Accounts payable
(4,409
)
 
(21,744
)
Accrued employee compensation
(38,136
)
 
(82,457
)
Deferred revenue
(4,020
)
 
5,950

Other accrued liabilities
48,178

 
(7,082
)
Restructuring liabilities
(11,538
)
 
(606
)
Net cash provided by operating activities
383,744

 
281,260

Cash flows from investing activities:
 
 
 
Purchases of non-marketable equity investments
(223
)
 

Proceeds from sale of non-marketable equity investment
10,748

 

Purchases of property and equipment
(41,175
)
 
(41,949
)
Net cash paid in connection with acquisition

 
(44,629
)
Proceeds from collection of note receivable
250

 

Proceeds from sale of network adapter business
9,995

 

Net cash used in investing activities
(20,405
)
 
(86,578
)
Cash flows from financing activities:
 
 
 
Proceeds from senior unsecured notes

 
296,250

Payment of principal related to senior secured notes

 
(300,000
)
Payment of debt issuance costs related to senior unsecured notes

 
(992
)
Payment of principal related to capital leases
(2,382
)
 
(1,536
)
Common stock repurchases
(302,560
)
 
(187,360
)
Proceeds from issuance of common stock
81,293

 
71,858

Payment of cash dividends to stockholders
(15,270
)
 

Excess tax benefits from stock-based compensation
37,698

 
6,909

Net cash used in financing activities
(201,221
)
 
(114,871
)
Effect of exchange rate fluctuations on cash and cash equivalents
272

 
(2,944
)
Net increase in cash and cash equivalents
162,390

 
76,867

Cash and cash equivalents, beginning of period
986,997

 
713,226

Cash and cash equivalents, end of period
$
1,149,387

 
$
790,093


Page 10 of 11


BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
 
Three Months Ended
 
August 2,
2014
 
May 3,
2014
 
July 27,
2013
 
(In thousands, except per share amounts)
Non-GAAP adjustments
 
 
 
 
 
Stock-based compensation expense included in cost of revenues
$
4,121

 
$
3,474

 
$
3,858

Amortization of intangible assets expense included in cost of revenues
552

 
396

 
9,650

Total gross margin impact from non-GAAP adjustments
4,673

 
3,870

 
13,508

 
 
 
 
 
 
Stock-based compensation expense included in research and development
4,350

 
4,422

 
4,020

Stock-based compensation expense included in sales and marketing
7,592

 
8,462

 
7,164

Stock-based compensation expense included in general and administrative
5,511

 
4,694

 
3,727

Amortization of intangible assets expense included in operating expenses
131

 
131

 
13,124

Restructuring, goodwill impairment, and other related costs
131

 
82,703

 

Total operating income impact from non-GAAP adjustments
22,388

 
104,282

 
41,543

 
 
 
 
 
 
Gain on A10 litigation settlement, net

 

 
(76,816
)
Gain on sale of non-marketable equity investment
(5,242
)
 

 

Income tax effect of non-tax adjustments
(2,005
)
 
(3,685
)
 
3,716

Total net income impact from non-GAAP adjustments
$
15,141

 
$
100,597

 
$
(31,557
)
 
 
 
 
 
 
Gross margin reconciliation
 
 
 
 
 
GAAP gross margin
$
361,713

 
$
354,292

 
$
338,202

Total gross margin impact from non-GAAP adjustments
4,673

 
3,870

 
13,508

Non-GAAP gross margin
$
366,386

 
$
358,162


$
351,710

GAAP gross margin, as a percent of total net revenues
66.3
%
 
66.0
%
 
63.0
%
Non-GAAP gross margin, as a percent of total net revenues
67.2
%
 
66.7
%
 
65.6
%
 
 
 
 
 
 
Operating income reconciliation
 
 
 
 
 
GAAP operating income
$
117,897

 
$
20,195

 
$
74,363

Total operating income impact from non-GAAP adjustments
22,388

 
104,282

 
41,543

Non-GAAP operating income
$
140,285

 
$
124,477

 
$
115,906

GAAP operating income, as a percent of total net revenues
21.6
%
 
3.8
%
 
13.9
%
Non-GAAP operating income, as a percent of total net revenues
25.7
%
 
23.2
%
 
21.6
%
 
 
 
 
 
 
Net income (loss) and net income (loss) per share reconciliation
 
 
 
 
 
Net income (loss) on a GAAP basis
$
87,352

 
$
(13,684
)
 
$
118,696

Total net income impact from non-GAAP adjustments
15,141

 
100,597

 
(31,557
)
Non-GAAP net income
$
102,493

 
$
86,913

 
$
87,139

Non-GAAP net income per share—basic
$
0.24

 
$
0.20

 
$
0.19

Non-GAAP net income per share—diluted
$
0.23

 
$
0.19

 
$
0.19

Shares used in non-GAAP per share calculation—basic
432,448

 
436,167

 
449,446

Shares used in non-GAAP per share calculation—diluted
441,789

 
450,449

 
461,344


Page 11 of 11









Q3 FY 2014 Earnings




Prepared Comments and Slides

August 21, 2014






Steve Coli
Investor Relations
Phone: 408-333-6208
scoli@brocade.com

John Noh
Senior Director, Public Relations
Phone: 408-333-5108
jnoh@brocade.com

NASDAQ: BRCD




Brocade Q3 FY 2014 Earnings    8/21/2014



Prepared comments provided by Steve Coli, Investor Relations

Thank you for your interest in Brocade’s Q3 Fiscal 2014 earnings presentation, which includes prepared remarks, safe harbor, slides, and a press release detailing fiscal third quarter 2014 results. The press release, along with these prepared comments and slides, has been furnished to the SEC on Form 8-K and has been made available on the Brocade Investor Relations website at www.brcd.com . The press release will be issued subsequently via Marketwired.

© 2014 Brocade Communications Systems, Inc.     Page 2 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014

 



© 2014 Brocade Communications Systems, Inc.     Page 3 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Today’s prepared comments include remarks by Lloyd Carney, Brocade CEO, regarding the company’s quarterly results, its strategy, and a review of operations, as well as industry trends and market/technology drivers related to its business; and by Dan Fairfax, Brocade CFO, who will provide a financial review.

A management discussion and live question and answer conference call will be webcast at
2:30 p.m. PT on August 21 at www.brcd.com and will be archived on the Brocade Investor Relations website.


© 2014 Brocade Communications Systems, Inc.     Page 4 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Prepared comments provided by Lloyd Carney, CEO


© 2014 Brocade Communications Systems, Inc.     Page 5 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



With another positive quarter behind us, the company continues to move in the right direction. Many of our financial metrics exceeded expectations, a good example of our focus and execution.
In terms of our business performance, we achieved sequential revenue growth in both SAN and IP Networking. SAN performance was led by strength in international markets and Gen 5 Fibre Channel migration. Our IP Networking revenue was driven by record Brocade VDX® sales in the data center, and strong contribution from our campus networking business. Software continues to be a key differentiator across our core products with Brocade Fabric Vision and Brocade VCS technology playing a strategic role in major customer wins.
Our investments in software are also providing us with incremental opportunities for market disruption and leadership. During Q3, we launched the Brocade Vyatta Platform, an open and modular architecture to deliver virtualized, cloud-ready software networking products. Our technology leadership in network functions virtualization (NFV) and software-defined networking (SDN), including our commitment to an open architecture, is being validated through an increasing number of proof-of-concept trials in large carrier and enterprise data centers.
As a result of our positive operating performance, we generated strong cash flow in the quarter and made good progress in returning cash to our shareholders. We paid the company’s first dividend and repurchased nearly 13 million shares of common stock. Through the first three quarters of FY14 we have returned more than 80% of adjusted free cash flow to shareholders.



© 2014 Brocade Communications Systems, Inc.     Page 6 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



SAN product revenue exceeded our outlook for the quarter, growing both sequentially and year-over-year. Data center modernization and SAN refresh projects in international markets were growth drivers. In fact, one of our largest customer wins of the year was a major financial institution in Brazil where we displaced the incumbent as a result of our superior performance and key software feature differentiation.
We are also seeing new opportunities in emerging storage technologies, such as flash, which require high levels of scalability, reliability, and deterministic performance. Our Gen 5 Fibre Channel delivers on these requirements, and as a result, our flash partners are reporting high attach rates. In Q3, the flash market added new products with EMC announcing disk and flash storage solutions that leverage Brocade Gen 5 technology. In addition, we are developing market preference for Gen 5 technology through a broad network of flash partners using the Brocade Solid State Ready Program. We expect to have more news on this program at VMworld in late August.
Finally, in Q3 we announced a collaboration with VMware to provide expanded analytics for Fibre Channel SANs supporting cloud environments. This collaboration allows for more efficient management of cloud-based storage.


© 2014 Brocade Communications Systems, Inc.     Page 7 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



IP Networking revenue was in-line within our expectations, growing sequentially and down slightly year-over-year. Much of the sequential increase was driven by strong performance in our Ethernet switching products, highlighted by record Brocade VDX sales and a strong contribution from campus networking. Customer wins for VDX in Q3 included VMware and Avnet Technology Solutions, both for their internal data centers. These wins are significant because they highlight the value of our VCS Fabric technology as the foundation for virtualized data centers and as an underlay for SDN.
Across our portfolio, strategic investments in software technology are enhancing and creating opportunities for our IP networking products. We are making strides in our existing software networking portfolio through leading innovation and commitment to open architectures. We delivered on this commitment in Q3 by announcing the Brocade Vyatta® Platform that delivers an open and modular networking architecture for cloud and mobile service providers.
This strategy is being validated through an increasing number of proof-of-concept trials, including five of the top 10 mobile providers. We recently announced the results of one of these trials with Telefónica, the sixth largest mobile operator in the world. Under the Telefónica NFV Reference Lab framework, Brocade and Telefónica established new benchmarks for software networking performance and deployment using an Intel®-based x86 server.


© 2014 Brocade Communications Systems, Inc.     Page 8 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



In summary, we remain focused on our core strategies and the exciting opportunities for both our hardware and software products. Storage networking continues to generate a healthy base of revenue and contribute positively to our financial model. Our IP Networking business is growing, driven by improved execution in key geographies and customer segments. We continue to make strategic investments in software that provide differentiation and additional market opportunities.
We remain focused on our commitments to our shareholders and we are ahead of plan to return at least 60% of our free cash flow.
On September 24 we will host an Investor Day event in New York City. At that time, we will provide further details about our progress, take you through our market opportunities, and provide an updated financial model. I encourage you to attend in person or participate virtually, and look forward to speaking with you soon.







© 2014 Brocade Communications Systems, Inc.     Page 9 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Prepared comments provided by Dan Fairfax, CFO


© 2014 Brocade Communications Systems, Inc.     Page 10 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



In Q3 14, revenue was $545M , up 2% Yr./Yr. and up 2% Qtr./Qtr. SAN product revenue was $325M , an increase of 4% Yr./Yr. and 1% Qtr./Qtr. in what is typically a seasonally soft quarter. Revenue from our IP Networking products in Q3 14 was $133M , down 1% Yr./Yr. and up 9% Qtr./Qtr. Q3 14 Global Services revenue was $88M , down 1% Yr./Yr. and down 7% sequentially. The sequential decrease was primarily due to Q2 14 having 14 weeks of amortized support revenue compared to 13 weeks in Q3 14.

Non-GAAP gross margin was 67.2% in Q3 14, up 160 basis points from Q3 13 and up 50 basis points from Q2 14. The improvement in gross margin was due to higher revenues combined with lower manufacturing and overhead costs. Non-GAAP operating margin was 25.7% in Q3, up 410 basis points from Q3 13 and up 250 basis points from Q2 14, primarily due to higher revenue and lower spending.

Q3 14 GAAP earnings per share (EPS) was $0.20 , down from EPS of $0.26 in Q3 13, which included the A10 Networks litigation settlement payment of $77M (increased EPS by $0.13), and up from a loss per sha re of $0.03 in Q2 14, which included a $83M non-cash goodwill impairment charge (decreased EPS by $0.19 ) associated with the strategic repositioning of the Brocade ADX® product family. Non-GAAP diluted EPS was $0.23 in the quarter, up from $0.19 in Q3 13 and up from $0.19 in Q2 14.

In Q3 14, the effective GAAP tax rate was 23.4% and the effective non-GAAP tax rate was 21.9% . The effective GAAP and non-GAAP tax rates for Q3 14 were higher year-over-year due to the benefit of the federal R&D tax credit last year as well as tax reserve releases in Q3 13 associated with the final settlement of certain disputed tax assessments.

In Q3 14, we generated $106M in operating cash flow, up 4% Yr./Yr. and down 37% Qtr./Qtr. The year-to-year increase in operating cash flow was primarily due to lower days sales outstanding (DSOs), increased operating profits, offset by an increase in the excess tax benefit from stock-based compensation. The decrease in operating cash flow from Q2 14 was due to the timing of variable compensation and long-term debt interest payments, which are both paid semi-annually. Average diluted shares outstanding for Q3 14 was 442 million shares, down 4% Yr./Yr. and 2% Qtr./Qtr.

© 2014 Brocade Communications Systems, Inc.     Page 11 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014

    

Revenue from our total SAN business, including hardware products and SAN-based support and services, in Q3 14 was $380M , up 3% from Q3 13 and flat sequentially.

Our SAN product revenue in the quarter saw strong performance in our switch and director product families. SAN product revenue was $325M in the quarter, up 4% Yr./Yr. and up 1% sequentially. When adjusted for the sale of the network adapter business that occurred in Q1 14, SAN product revenue was up 5% Yr./Yr.

Looking at the SAN product families, director revenue was up 5% Yr./Yr. and up 2% sequentially due to strength in international markets and continued customer migration to Gen 5. SAN switch revenue was up 9% Yr./Yr. and up 4% Qtr./Qtr. due to Gen 5 migration and growth in high-end switch sales. Our Server product group, including embedded switches and server adapter products, was down 17% Yr./Yr. and down 11% Qtr./Qtr. When adjusted for the sale of the network adapter business, Server product group revenue was down 11% Yr./Yr. and down 11% sequentially due to softness in APAC and lower seasonal revenue from some OEM partners, as well as certain OEM specific operational factors.

SAN-based support and services revenue was $55M in the quarter, down 1% Yr./Yr. and down 7% sequentially due to Q2 14 having 14 weeks of amortized support revenue compared to 13 weeks in Q3 14.


© 2014 Brocade Communications Systems, Inc.     Page 12 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Revenue from our total IP Networking business, including hardware and IP-based support and services, in Q3 14 was $166M , down 1% Yr./Yr. and up 5% sequentially. The sequential increase was principally due to higher sales to the U.S. Federal government and strong VDX sales to data center customers, partially offset by lower routing sales to service provider customers. Our Federal revenue was approximately $23M in the quarter, up 16% Yr./Yr. and up 74% Qtr./Qtr.

Q3 14 IP Networking product revenue was $133M , down 1% Yr./Yr. and up 9% sequentially. The year-over-year decline was primarily due to lower routing product revenue, the divestiture of the network adapter business and the changes in the wireless and Brocade ADX business strategies, which offset growth in Ethernet switching revenue. Excluding network adapters, wireless, and ADX hardware products, the IP Networking product revenue grew 6% Yr./Yr. on an adjusted basis. The sequential increase was due to higher sales of Ethernet switching products, primarily to the U.S Federal government, and strong VDX sales, partially offset by lower routing sales.

As we look at the product splits for IP Networking in the quarter, our Ethernet switch revenue, which includes products for the data center and campus LAN environments, was $91M , up 17% Yr./Yr. and 27% Qtr./Qtr. Our switch revenue includes Brocade VDX products, which were up 38% Yr./Yr. and up 37% Qtr./Qtr. Our routing products generated $34M in revenue, down 19% Yr./Yr. and down 20% Qtr./Qtr due to a pause in customer orders in anticipation of new products scheduled for release in fiscal Q4 14.

Other IP Networking revenue of $7M was down 47% Yr./Yr. and up 14% Qtr./Qtr. The year-over-year decrease was due to the divestiture of the network adapter business as well as lower Brocade ADX sales. IP Networking-based support and services revenue was $33M in the quarter, down 1% Yr./Yr. and down 9% sequentially due to Q2 14 having 14 weeks of amortized support revenue compared to 13 weeks in Q3 14.

The split of our IP Networking business based on customer use cases is an important measurement of the progress we are making on our data center strategy. Although it is difficult to identify all end users and their specific network deployments due to our two-tier distribution channel, we are providing estimates of the split of our IP Networking business. Our data center customers represented approximately 55% of IP Networking revenue in Q3 14, compared with 57% in Q2 14 and 48% in Q3 13. The estimated percentage of revenue coming from data center IP Networking customers may fluctuate quarter-to-quarter due to the timing of large data center customer transactions, minor changes to classification from improved visibility of actual customer deployments, as well as the seasonality of the public sector, including Federal. Other use cases, such as enterprise campus and carrier networks (MAN/WAN) represent the balance of the business.

Looking at revenue geographically from a ship-to location, the Americas region (excluding Federal) was down approximately 11% Yr./Yr., the EMEA region was up 6% Yr./Yr., the APAC region was up 2% Yr./Yr., and the Japan region was down 2% Yr./Yr. On a sequential basis, the Americas region (excluding Federal) was down 6% , EMEA was flat , APAC was down 2% , and Japan was up 3% .

© 2014 Brocade Communications Systems, Inc.     Page 13 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



In Q3 14, three customers (EMC, HP , and IBM) each contributed at least 10% of total Company revenue. Our 10% customers collectively contributed 48% of revenue in Q3 14, down 8% from Q2 14 and up 1% from Q3 13. All other OEMs represented 19% of revenue in Q3 14, unchanged from Q3 13 and up 7% from Q2 14 when HDS was a 10% customer. Channel and direct routes to market contributed 33% of revenue in Q3 14, up 1% from Q2 14 and down 1% from Q3 13.

The mix of business based on ship-to location was 56% domestic and 44% international in the quarter, a lower domestic share compared to 59% in Q2 14 and 61% in Q3 13. Since some of our OEMs take delivery of our products domestically and then ship internationally to their end users, the percentage of international revenue based on end-user location would be higher.



© 2014 Brocade Communications Systems, Inc.     Page 14 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Q3 14 non-GAAP company gross margin of 67.2% exceeded our original guidance range for the
quarter primarily due to a higher mix of SAN sales.

Q3 14 non-GAAP product gross margin was 68.8% , above our FY14 target model range of 66.0% to 68.0%. This represents an increase of approximately 50 basis points from Q2 14 and an increase of approximately 210 basis points from Q3 13. The sequential improvement was primarily due to higher revenue and lower manufacturing and overhead costs. The year-over-year increase was due to a favorable revenue mix shift to more SAN products, a favorable product and customer mix within the IP Networking business, and lower manufacturing and overhead costs.

Q3 14 non-GAAP SAN product gross margin percentage was in the mid-70’s , slightly better quarter-over-quarter and year-over-year. Q3 14 non-GAAP IP Networking product gross margin percentage was in the mid-50’s , slightly up quarter-over-quarter and up over the prior year.

Non-GAAP Global Services gross margin was 58.8% in Q3 14, down 40 basis points quarter-over-quarter primarily due to lower revenue when compared to the 14-week second quarter. Non-GAAP Global Services gross margin was down 80 basis points year-over-year on lower support revenue.


© 2014 Brocade Communications Systems, Inc.     Page 15 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Non-GAAP gross margin was 67.2% in Q3 14, higher than our FY14 target model of 65.0% to 66.0%. The over-performance was due to higher revenue, favorable mix shift to more SAN products, and lower manufacturing and overhead costs.

On a non-GAAP basis, total operating expenses of $226M , or 41.5% of revenues in Q3 14, were within our FY14 target model range of 40.0% to 42.0%.

Non-GAAP operating margin was 25.7% in Q3 14, an improvement of 410 basis points compared with Q3 13 and a 250 basis points improvement compared with Q2 14. The increase was primarily due to higher revenue, improved gross margins, and lower overall spending.

Ending headcount was 4,103 in Q3 14, up 42 from 4,061 in Q2 14, and down 462 from 4,565 in Q3 13.



© 2014 Brocade Communications Systems, Inc.     Page 16 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Operating cash flow was $106M in Q3 14, up 4% Yr./Yr. and down 37% sequentially. The increase in cash flow from the prior year was primarily due to lower DSOs as well as increased non-GAAP net income. The sequential decrease in cash from operations was primarily due to the timing of variable compensation and long-term debt interest payments, which are both paid semi-annually. We saw better shipment linearity in Q3 14, resulting in DSOs of 32.0 days, a solid improvement from 35.4 days in Q2 14 and 37.1 days in Q3 13.

The excess tax benefit from stock-based compensation resulted in a decrease of operating cash flow and an offsetting increase in cash flows from financing activities for Q3 14 of $10M as compared with a decrease of $13M in Q2 14 and a decrease of $1M in Q3 13. We describe the free cash flow impact of the excess tax benefit from stock-based compensation in the appendix.

Total capital expenditures in the quarter were $14M . Cash and cash equivalents were $1,149M in Q3 14, up $12M from Q2 14 and up $359M from Q3 13. The U.S. cash balance was $382M at the end of Q3 14.

In Q3 14, we initiated a quarterly cash dividend of $0.035 per share of common stock and
repurchased $112M of common stock at an average purchase price of $8.77 . Year to date, we have repurchased $303M of common stock as of the end of Q3 14. Combined with the dividend, this represents a return to our shareholders of more than 80% of adjusted free cash flow over the first nine months of FY14. In Q4 14, we have repurchased $7M of common stock as of the close of market on August 20, 2014.

© 2014 Brocade Communications Systems, Inc.     Page 17 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014


Looking forward to Q4 14, we considered a number of factors, including the following, in setting our outlook:
 
For Q4 14, we expect SAN revenue to be down 1% to up 2% Qtr./Qtr. Typically we see stronger buying patterns from our OEM partners in our fiscal Q4. However, we considered the potential impact of the geo-political environment in certain emerging markets and business transitions within certain OEM partners in our outlook.

We expect our Q4 14 IP Networking revenue to be up 6% to 15% Qtr./Qtr., principally driven by growth in our service provider revenue with the launch of new high-density routing products and a seasonally stronger quarter for our U.S. Federal customers.

We expect our Global Services revenue to be up 2% Qtr./Qtr.

We expect non-GAAP operating expenses to be flat to up 2% Qtr./Qtr.

At the end of Q3 14, OEM inventory was approximately 1.4 weeks of supply based on SAN business revenue. We expect inventory to be between one to two weeks in Q4 14, as OEM inventory levels may fluctuate due to both seasonality and large end-user order patterns at the OEMs.

We have assumed a structural non-GAAP tax rate of 25% to 27% for Q4 14.

We expect Q4 14 operating cash flow to be higher sequentially due to the timing of variable compensation and bond interest payments, offset by higher DSOs.

We expect Q4 14 non-GAAP gross margin to be between 66.0% to 67.0%, better than our two-year target model range, and non-GAAP operating margin to be between 25.0% to 26.5%, also above our two-year target model range.

© 2014 Brocade Communications Systems, Inc.     Page 18 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Prepared comments provided by Steve Coli, Investor Relations

That concludes Brocade’s prepared comments. At 2:30 p.m. Pacific Time on August 21 , Brocade will host a webcast conference call at www.brcd.com .

Thank you for your interest in Brocade.

© 2014 Brocade Communications Systems, Inc.     Page 19 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014





© 2014 Brocade Communications Systems, Inc.     Page 20 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



Additional Financial Information:
 
Q3 13

Q2 14

Q3 14

GAAP gross margin
63.0
%
66.0
%
66.3
%
Non-GAAP gross margin
65.6
%
66.7
%
67.2
%
 
 
 
 
GAAP product gross margin
64.2
%
67.8
%
68.2
%
Non-GAAP product gross margin
66.7
%
68.3
%
68.8
%
 
 
 
 
GAAP services gross margin
57.2
%
57.4
%
56.4
%
Non-GAAP services gross margin
59.6
%
59.2
%
58.8
%
 
 
 
 
GAAP operating margin
13.9
%
3.8
%
21.6
%
Non-GAAP operating margin
21.6
%
23.2
%
25.7
%


© 2014 Brocade Communications Systems, Inc.     Page 21 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014



© 2014 Brocade Communications Systems, Inc.     Page 22 of 25


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© 2014 Brocade Communications Systems, Inc.     Page 23 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014





© 2014 Brocade Communications Systems, Inc.     Page 24 of 25


Brocade Q3 FY 2014 Earnings    8/21/2014




© 2014 Brocade Communications Systems, Inc.     Page 25 of 25