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Brocade Reports Second Quarter Fiscal Year 2007 Results

SAN JOSE, Calif., May 31 /PRNewswire-FirstCall/ -- Brocade(R) (Nasdaq: BRCD), the leader in networked storage solutions that help enterprises connect and manage their information, today reported financial results for its second quarter of fiscal year 2007 (Q2 07), which ended April 28, 2007. Revenues for Q2 07 were $345.3 million. Revenues for Q2 07 increased 54% from $224.2 million reported in the first quarter of fiscal year 2007 (Q1 07) and increased 89% from $182.7 million reported in the second quarter of fiscal year 2006 (Q2 06). Q2 07 results include products and services acquired through the McDATA transaction which closed on January 29, 2007.

SAN JOSE, Calif., May 31 /PRNewswire-FirstCall/ — Brocade(R) (Nasdaq: BRCD), the leader in networked storage solutions that help enterprises connect and manage their information, today reported financial results for its second quarter of fiscal year 2007 (Q2 07), which ended April 28, 2007. Revenues for Q2 07 were $345.3 million. Revenues for Q2 07 increased 54% from $224.2 million reported in the first quarter of fiscal year 2007 (Q1 07) and increased 89% from $182.7 million reported in the second quarter of fiscal year 2006 (Q2 06). Q2 07 results include products and services acquired through the McDATA transaction which closed on January 29, 2007.

Commenting on the Company's second quarter results, CEO Michael Klayko said, "The fundamentals of our business remain strong and I am extremely pleased with our execution this quarter. We will continue to execute on our strategy of growth and diversification and we remain committed to delivering exceptional results."

Reporting on a GAAP basis, net income for Q2 07 was $0.8 million, or $0.00 per share basic and diluted. This reflects a decrease in GAAP net income of 98% from $33.3 million, or $0.12 per share basic and diluted in Q1 07, and a decrease of 94% from GAAP net income of $13.5 million, or $0.05 per share basic and diluted in Q2 06. The decrease quarter to quarter reflects the impact of non-cash amortization of purchased intangibles and related income tax adjustments from the McDATA acquisition.

Non-GAAP net income for Q2 07 was $46.6 million or $0.12 per share basic and $0.11 per share diluted. This reflects a decrease of 6% from non-GAAP net income of $49.4 million, or $0.18 per share basic and $0.17 per share diluted in Q1 07, and an increase of 77% from non-GAAP net income of $26.4 million, or $0.10 per share basic and diluted in Q2 06. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Q2 07 Financial Highlights — In Q2 07, as a percent of total, service revenue exceeded 10% for the first time. — In Q2 07, as a percent of total, OEM revenues were 85% and Channel/Direct were 15%. This compares to 92% and 8%, respectively in Q1 07 and 93% and 7%, respectively, in Q2 06. Three OEM customers, EMC, HP, and IBM, each accounted for 10% or more of total revenues and together represented approximately 67% of total revenues. The same three customers each accounted for 10% or more of total revenues and together represented approximately 72% in Q1 07 and 70% in Q2 06 of total revenues. — In Q2 07, as a percent of total, domestic revenue was 65% and international was 35%. This compares to 59% and 41%, respectively in Q1 07 and 63% and 37%, respectively, in Q2 06. — Q2 07 port growth was 63% from Q1 07, reflecting the addition of McDATA product offerings. This brings the Company's total installed base to approximately 13.2 million installed SAN ports. — Q2 07 sequential Average Selling Price (ASP) declines were again in the low single digits. — Q2 07 non-GAAP operating margin was 16.8%, compared to non-GAAP operating margin of 26.1% in Q1 07 and non-GAAP operating margin of 16.6% in Q2 06. — Q2 07 cash flow from operations was $46.2 million, compared to $33.3 million in Q1 07 and $55.7 million in Q2 06. — Cash and cash equivalents and investments, including restricted short-term investments, net of the Company's convertible debt at the end of Q2 07 were $674.5 million compared to $631.7 million at the end of Q1 07 and $502.1 million at the end of Q2 06. — In Q2 07, the Company repurchased $60 million of its common stock, representing 6.3 million shares. The Company has $192.9 million remaining under the outstanding stock buyback authorizations. — Day sales outstanding in accounts receivable for Q2 07 were 40 days, compared to 38 days in Q1 07 and 38 days in Q2 06. — Q2 07 capital expenditures were $14.2 million. This compares to $13.4 million in Q1 07 and $7.3 million in Q2 06. — As of April 28, 2007, the Company had 2,440 employees, compared with 1,532 employees as of January 27, 2007 and 1,316 employees as of April 29, 2006. The increase in employees reflects the acquisition of McDATA Corporation, which closed during Q2 07. — Q2 07 results include a full quarter of McDATA results. Prior periods do not include McDATA results. — In Q2 07, the Company executed exceptionally well on its McDATA integration plan. The Company achieved annualized synergies of $131 million, within its upwardly revised target range of $125 to $150 million, three quarters earlier than the original commitment. The transaction was accretive to the Company's acquisition model presented at its analyst meeting in September 2006, three quarters earlier than the original commitment. Finally, on a non-GAAP basis, the Company achieved its target operating margin model of 15-20%.

Business Highlights:

Today, Brocade also announced its strategy to further broaden its data center solution portfolio with a new family of server connectivity products. The new Brocade offerings, Host Bus Adapters (HBAs) and Intelligent Server Adapters, are designed to simplify the management and sharing of business- critical information, and are a natural extension of the company's family of industry-leading Brocade Storage Area Network (SAN) solutions. The total market for Host Bus Adapters is estimated to be approximately $1.1 billion (USD) in 2007, according to market research firm Dell'Oro Group. Refer to "Brocade Broadens Data Center Networking Solutions, Enters Billion-dollar Server Connectivity Market" press release for more information.

Additionally, on May 29, 2007, Brocade announced a wide range of new product and service enhancements that enable greater efficiencies in enterprise data centers and branch offices. The new capabilities provide advancements in the areas of performance, data protection, security, and virtualization, and span the company's SAN, FAN, and Professional Services offerings. Refer to "Brocade Increases Enterprise Data Center Efficiencies with Latest SAN and FAN Enhancements" press release for more information.

Brocade completed a multi-region technology conference series throughout North America and Asia-Pacific from February 27 through March 29. The "Brocade Fusion" tour brought together Brocade experts with local customers and partners to discuss the company's comprehensive vision for Storage Area Network (SAN), File Area Network (FAN), mainframe technology, and services offerings.

Brocade announced the general availability of Brocade Access Gateway for HP's BladeSystem product family. Access Gateway enables interoperability between Brocade blade SAN switches and products from other SAN switch and director manufacturers, while also improving SAN management and reducing costs.

Brocade joined The Green Grid, a non-profit consortium dedicated to advancing energy efficiency in data centers and business computing ecosystems. The Green Grid is the first industry initiative chartered to take a holistic view of the computing ecosystem, with a focus on addressing the pressing issues facing data center users. The Company joined The Green Grid to share its expertise and actively work with like-minded companies to meet future challenges around improving energy efficiency.

Brocade customer announcements included NewYork-Presbyterian Hospital, Swiss Re, one of the world's leading reinsurance companies, Dyer, Riddle, Mills & Precourt, Inc. (DRMP), ranked as one of the Top 500 Design Firms in the U.S. by Engineering News-Record, East Coast systems integrator Razor Technology, and San Diego Supercomputer Center (SDSC), a world-acclaimed research center, all of which have achieved benefits of Brocade technologies.

Non-GAAP Financial Measures

This press release and the related conference call contain non-GAAP financial measures. In evaluating the Company's performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.

Management believes that the non-GAAP net income measure used in this press release allows management to gain a better understanding of the Company's comparative operating performance from period-to-period and to its competitors' operating results. Management also believes these non-GAAP measures help indicate the Company baseline performance before gains, losses or charges that are considered by management to be outside on-going operating results. Accordingly, management uses these non-GAAP measures for planning and forecasting of future periods and in making decisions regarding operations performance and the allocation of resources. Management believes these non- GAAP earnings measures, when read in conjunction with the Company's GAAP financials, provide useful information to investors by offering:

— the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results; — the ability to better identify trends in the Company's underlying business and perform related trend analysis; — a better understanding of how management plans and measures the Company's underlying business; and — an easier way to compare the Company's most recent results of operations against investor and analyst financial models.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events, or arise outside the ordinary course of our continuing operations. Management believes that it is appropriate to evaluate the Company's operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include: (i) acquisition and integration costs, (ii) facilities lease losses and (iii) legal fees associated with indemnification obligations to former employees and other related costs.

Management also excludes the following non-cash charges in determining non-GAAP net income: (i) stock-based compensation and (ii) amortization of purchased intangible assets. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Further, management believes that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity-based awards were not required to be reflected on our income statement. Management believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both the Company'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 on non-GAAP net income.

Limitations. These non-GAAP 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 the Company's GAAP results. The non-GAAP financial measures the Company 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 income per share, and should not be considered measures of the Company'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 measures reported by other companies.

Second Quarter Fiscal 2007 Conference Call and Web Cast Information

Brocade management will host a conference call to discuss second quarter fiscal 2007 results on Thursday, May 31, 2007 at 1:30 p.m. Pacific Time. To access the live Web Cast, please visit Brocade's Website at http://www.brocade.com/investors at least 20 minutes prior to the call to download any necessary audio or plug-in software. A telephone replay will be available after 6:00 p.m. Pacific Time today and will be available until 6:00 p.m. Pacific Time on June 7, 2007. A replay of the conference call will be available via the Web Cast at http://www.brocade.com/investors for approximately twelve months. To access the replay, please dial 888-286-8010 for domestic access and +617-801-6888 for international callers; the access code for the telephone replay is #55422585.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding the Company's product and service offerings and market opportunities. 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, the degree of market adoption of the Company's new product and service offerings; the effect of changes in IT spending levels; the Company's ability to anticipate future OEM and end-user product needs or to accurately forecast end-user demand; dependence on strategic partners; expected synergies of the Company's acquisitions and anticipated cost savings; the ability to successfully combine product, service and support offerings and customer acceptance of combined offerings; market competition; and the Company's ability to manage its business effectively in a rapidly evolving market. 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 January 27, 2007. 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 is the leading provider of networked storage solutions that help organizations connect, share, and manage their information. Organizations that use Brocade products and services are better able to optimize their IT infrastructures and ensure compliant data management. For more information, visit the Brocade Web site at http://www.brocade.com or contact the company at info@brocade.com.

Brocade, Brocade B weave logo, McDATA, Fabric OS, File Lifecycle Manager, MyView, Secure Fabric OS, SilkWorm, and StorageX are registered trademarks and the Brocade B wing logo and Tapestry are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. FICON is a registered trademark of IBM Corporation in the U.S. and other countries. All other brands, products, or service names are or may be trademarks or service marks of, and are used to identify, products or services of their respective owners.

BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended April 28, April 29, April 28, April 29, 2007 2006 2007 2006 Net revenues Product $300,438 $168,668 $507,654 $325,968 Services 44,830 14,074 61,771 26,856 Total net revenues 345,268 182,742 569,425 352,824 Cost of revenues Product 129,652 69,119 201,964 130,989 Services 33,440 8,479 43,918 15,990 Total cost of revenues 163,092 77,598 245,882 146,979 Gross margin 182,176 105,144 323,543 205,845 Operating expenses: Research and development 58,303 40,725 100,694 79,467 Sales and marketing 59,364 34,313 97,951 65,181 General and administrative 13,570 7,296 20,975 15,097 Legal fees associated with indemnification obligations and other related costs 15,234 3,160 20,462 7,189 Acquisition and integration costs 7,564 — 14,997 — Provision for SEC settlement — — — 7,000 Amortization of intangible assets 19,305 518 20,215 518 Facilities lease losses — 3,775 — 3,775 Total operating expenses 173,340 89,787 275,294 178,227 Income from operations 8,836 15,357 48,249 27,618 Interest and other income, net 10,788 7,206 18,244 14,236 Interest expense (2,054) (1,838) (2,058) (3,615) Income before provision for income taxes 17,570 20,725 64,435 38,239 Income tax provision 16,727 7,212 30,273 15,066 Net income $843 $13,513 $34,162 $23,173 Net income per share – Basic $0.00 $0.05 $0.10 $0.09 Net income per share – Diluted $0.00 $0.05 $0.10 $0.08 Shares used in per share calculation – Basic 395,574 270,564 334,215 269,982 Shares used in per share calculation – Diluted 411,989 274,393 348,563 273,247 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) April 28, October 28, 2007 2006 Assets Current assets: Cash and cash equivalents $363,838 $274,368 Short-term investments 391,694 267,694 Total cash, cash equivalents, and short-term investments 755,532 542,062 Accounts receivable, net 151,595 98,394 Inventories 26,406 8,968 Prepaid expenses and other current assets 46,687 43,365 Total current assets 980,220 692,789 Long-term investments 80,981 40,492 Property and equipment, net 201,303 104,299 Goodwill 419,704 41,013 Intangible assets, net 311,976 15,465 Other assets 29,370 6,660 Total assets $2,023,554 $900,718 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $77,797 $56,741 Accrued employee compensation 91,885 62,842 Deferred revenue 87,705 52,051 Current liabilities associated with lease losses 13,943 4,931 Other accrued liabilities 201,848 87,991 Total current liabilities 473,178 264,556 Convertible subordinated debt 161,970 — Non-current liabilities associated with lease losses 26,354 11,105 Non-current deferred revenue 38,283 8,827 Other non-current liabilities 1,513 — Stockholders' equity Common stock 1,547,688 889,250 Accumulated other comprehensive loss 12,610 (817) Accumulated deficit (238,042) (272,203) Total stockholders' equity 1,322,256 616,230 Total liabilities and stockholders' equity $2,023,554 $900,718 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (in thousands) (unaudited) Six Months Ended April 28, April 29, 2007 2006 Cash flows from operating activities: Net income $34,161 $23,173 Adjustments to reconcile net income to net cash provided by operating activities: Excess tax benefit from employee stock plans (161) (6,587) Depreciation and amortization 40,802 18,551 Loss on disposal of property and equipment 203 200 Amortization of debt issuance costs — 851 Non-cash compensation expense 14,729 14,899 Provision for doubtful accounts receivable and sales returns 3,241 744 Provision for SEC settlement — 7,000 Non-cash facilities lease loss expense — 3,775 Changes in operating assets and liabilities: Accounts receivable 52,156 (6,180) Inventories (4,585) 2,807 Prepaid expenses and other assets (8,997) (2,915) Accounts payable (20,938) 10,463 Accrued employee compensation (22,272) 11,013 Deferred revenue 12,274 10,163 Other accrued liabilities and long-term debt (18,385) 2,156 Liabilities associated with lease losses (2,653) (2,419) Net cash provided by operating activities 79,575 87,694 Cash flows from investing activities: Purchases of property and equipment (27,587) (15,473) Purchases of short-term investments (290,890) (138,184) Purchases of restricted short-term investments — (3,309) Proceeds from maturities and sale of short-term investments 377,833 135,484 Purchases of long-term investments (91,801) (12,568) Proceeds from maturities and sale of long-term investments 5,847 — Proceeds from the maturities of restricted short-term investments — 2,909 Purchases of non-marketable minority equity investments — (4,575) Cash paid in connection with acquisitions, net of cash acquired (7,704) (59,887) Decrease in restricted cash 5,839 — Cash acquired on merger with McDATA 147,407 — Net cash provided (used) in investing activities 118,944 (95,603) Cash flows from financing activities: Excess tax benefit from employee stock plans 161 6,587 Payments on capital lease obligations (706) — Common stock repurchase program (59,874) — Redemption of outstanding convertible debt (124,185) — Proceeds from issuance of common stock, net 75,700 15,162 Net cash provided (used) by financing activities (108,904) 6,819 Effect of exchange rate fluctuations on cash and cash equivalents (145) 98 Net increase (decrease) in cash and cash equivalents 89,470 (992) Cash and cash equivalents, beginning of period 274,368 182,001 Cash and cash equivalents, end of period $363,838 $181,009 BROCADE COMMUNICATIONS SYSTEMS, INC. RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (in thousands, except per share data) (unaudited) Q2 07 Q1 07 Q2 06 Net income on a GAAP basis $843 $33,318 $13,513 Adjustments: Stock-based compensation expense included in cost of revenues 2,236 1,441 2,007 Total gross margin adjustments 2,236 1,441 2,007 Legal fees associated with indemnification obligations and other related costs 15,234 5,228 3,160 Stock-based compensation expense included in research and development 2,056 1,998 2,698 Stock-based compensation expense included in sales and marketing 1,682 1,386 1,543 Stock-based compensation expense included in general and administrative 944 653 681 Amortization of intangible assets 19,305 910 518 Facilities lease loss — — 3,775 Acquisition and Integration costs 7,564 7,433 585 Total operating expense adjustments 46,785 17,608 12,960 Total operating income adjustments 49,021 19,049 14,967 Income tax effect of adjustments (3,250) (2,936) (2,068) Non-GAAP net income $46,614 $49,431 $26,412 Non-GAAP net income per share – Basic $0.12 $0.18 $0.10 Non-GAAP net income per share – Diluted $0.11 $0.17 $0.10 Shares used in non-GAAP per share calculation – Basic 395,574 272,855 270,564 Shares used in non-GAAP per share calculation – Diluted 411,989 285,137 274,393 See explanation of non-GAAP information included herein.

SOURCE Brocade Communications Systems, Inc.

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