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Brocade Reports Fourth Quarter and Full Fiscal Year 2007 Results

SAN JOSE, Calif., Nov. 29 /PRNewswire-FirstCall/ -- Brocade(R) (Nasdaq: BRCD), the leader in data center networking solutions that help enterprises connect and manage their information, today reported financial results for its fourth fiscal quarter and full fiscal year 2007, which ended October 27, 2007. Revenues for Q4 07 were $340.0 million, up 63% from the same period a year ago. Revenues for fiscal year 2007 were $1,236.9 million, up 65% from the Company's fiscal 2006 revenue of $750.6 million.

SAN JOSE, Calif., Nov. 29 /PRNewswire-FirstCall/ — Brocade(R) (Nasdaq: BRCD), the leader in data center networking solutions that help enterprises connect and manage their information, today reported financial results for its fourth fiscal quarter and full fiscal year 2007, which ended October 27, 2007. Revenues for Q4 07 were $340.0 million, up 63% from the same period a year ago. Revenues for fiscal year 2007 were $1,236.9 million, up 65% from the Company's fiscal 2006 revenue of $750.6 million.

Commenting on the Company's fourth quarter and fiscal year 2007 results, Michael Klayko, Brocade CEO, said, "We are very pleased with our Q4 results. Brocade continues to execute exceptionally well and we have further strengthened both our profitability and business fundamentals. During fiscal year 2007, we continued to drive the key growth initiatives that will keep us at the forefront of the evolving data center market."

Reporting on a GAAP basis, net income for Q4 07 was $32.0 million, or $0.08 per share basic and diluted. This represents a 200% increase from GAAP net income of $10.7 million, or $0.03 per share basic and diluted in Q3 07, and a 60% increase from GAAP net income of $20.0 million, or $0.07 per share basic and diluted in Q4 06.

Non-GAAP net income for Q4 07 was $66.5 million, or $0.17 per share basic and $0.16 per share diluted. This represents a 34% increase from non-GAAP net income of $49.5 million, or $0.13 per share basic and $0.12 per share diluted in Q3 07, and a 69% increase from non-GAAP net income of $39.4 million, or $0.15 per share basic and $0.14 per share diluted in Q4 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.

Note: Periods prior to Q2 07 referenced in this press release do not include McData results.

Fourth Fiscal Quarter 2007 Financial Highlights and Additional Financial Information

— Q4 07 non-GAAP gross margin was 58.5%, compared to non-GAAP gross margin of 55.0% in Q3 07 and 62.1% in Q4 06. — Q4 07 non-GAAP operating margin was 23.3%, compared to non-GAAP operating margin of 19.2% in Q3 07 and 21.5% in Q4 06. — In Q4 07, as a percent of total, OEM revenues were 85% and Channel/Direct were 15%. This compares to 84% and 16%, respectively in Q3 07 and 91% and 9%, respectively in Q4 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 in Q4 07. The same three customers each accounted for 10% or more of total revenues and together represented approximately 64% of total revenues in Q3 07 and 74% in Q4 06. — In Q4 07, as a percent of total, domestic revenue was 60% and international was 40%. This compares to 58% and 42%, respectively in Q3 07 and 63% and 37%, respectively, in Q4 06. — Service revenue accounted for 16% of total revenue in Q4 07, compared with 14% of total revenue in Q3 07 and 8% of total revenue in Q4 06. — The Company's total installed base of SAN ports is approximately 15.1 million. — Sequential Average Selling Price (ASP) declines were in the low single digits in Q4 07. — In Q4 07 net stock-based compensation expense was $12.4 million and has been excluded from the Company's non-GAAP results. — Q4 07 cash flow from operations was $54.5 million, compared to $36.3 million in Q3 07 and $52.8 million in Q4 06. — Cash and cash equivalents and investments at the end of Q4 07, net of the Company's convertible debt, were $625.8 million, compared to $639.2 million at the end of Q3 07 and $582.6 million at the end of Q4 06. — In Q4 07, the Company repurchased $50.0 million of its common stock, representing 6.6 million shares, compared with $81 million spent in Q3 07 to repurchase 9.4 million shares. The Company's Board of Directors authorized an additional $500 million for the repurchase of the Company's common stock. This brings the total authorization by the Board of Directors to $800 million. As of the end of Q4 07, the Company had $583 million remaining under its $800 million in total stock buyback authorization. — Day sales outstanding in accounts receivable for Q4 07 were 47 days, compared to 45 days in Q3 07 and 43 days in Q4 06. — Q4 07 capital expenditures were $15.0 million. This compares to $14.0 million in Q3 07 and $7.5 million in Q4 06. — As of October 27, 2007, the Company had 2,368 employees, compared with 2,376 employees as of July 28, 2007 and 1,440 employees as of October 27, 2006. Fourth Fiscal Quarter 2007 Business Highlights — The Company had a record quarter from its director product family, driven by strong demand for the Brocade 48K director and better than expected results on M Class directors. — Brocade announced an industry first during the fourth fiscal quarter, with the addition of 8 Gbit/sec Fibre Channel performance levels and expanded interoperability for its flagship 48K director. — The Company announced that both IBM and HDS will adopt and resell Brocade's StorageX File Virtualization products, further validating the potential in the emerging File Area Network (FAN) market. — In its services business, Brocade announced strong growth in the number of on-site, resident consultants and direct support agreements with end-user customers, further validating the value of the Company's expertise and experience in the evolving data center. — In Q4 07, Brocade announced the Brocade Data Center Fabric (DCF) architecture, an innovative Data Center networking architecture, which responds to the urgent needs of businesses to make their data centers more efficient, reliable, and adaptable. — The Company also announced that it recently reorganized its management structure to provide more dedicated focus on the Company's growth opportunities, as well as allow the Company to more easily accommodate and assimilate future acquisitions and new business initiatives. The new structure is organized around four distinct Business Units, each with its own general manager.

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 non-GAAP net income and other non-GAAP measures 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) legal fees associated with indemnification obligations to former employees and other related costs, (ii) SEC investigation and other related costs, (iii) acquisition and integration costs, (iv) gain on sale of investments, (v) costs associated with facilities lease losses, (vi) gain on termination of an interest rate swap agreement and (vii) call premium on debt redemption.

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.

Fourth Quarter Fiscal 2007 Conference Call and Web Cast Information

Brocade management will host a conference call to discuss fourth quarter and full fiscal year 2007 results on Thursday, November 29, 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 approximately two hours after the conference ends and will be available until 12:00 p.m. Pacific Time on December 6, 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 #44627068.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding the Company's profitability, growth opportunities and product and service offerings. 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; market competition; the effect of changes in IT spending levels; the Company's ability to anticipate future OEM and end-user product needs and to accurately forecast end-user demand; dependence on strategic partners; 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 July 28, 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 data center networking solutions that help enterprises connect 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 atinfo@brocade.com.

Brocade, Brocade B weave logo, Fabric OS, File Lifecycle Manager, McDATA, 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 Twelve Months Ended October 27, October 28, October 27, October 28, 2007 2006 2007 2006 Net revenues Product $286,020 $192,763 $1,076,529 $692,940 Services 53,964 16,058 160,334 57,652 Total revenues 339,984 208,821 1,236,863 750,592 Cost of revenues Product 125,824 71,216 470,977 269,430 Services 30,750 9,956 104,474 35,754 Total cost of revenues 156,574 81,172 575,451 305,184 Gross margin 183,410 127,649 661,412 445,408 Operating expenses Research and development 58,530 43,427 213,311 164,843 Sales and marketing 56,018 38,752 211,168 139,434 General and administrative 13,470 7,566 46,980 31,089 Legal fees associated with indemnification obligations and other related costs, net 7,811 3,475 46,257 13,654 Acquisition and integration costs 302 9,061 19,354 9,646 Provision for SEC settlement – – – 7,000 Amortization for intangible assets 7,909 888 24,719 2,294 Facilities lease losses – – – 3,775 Total operating expenses 144,040 103,169 561,789 371,735 Income from operations 39,370 24,480 99,623 73,673 Interest and other income, net 9,937 6,705 38,501 29,098 Interest expense (1,673) (1,604) (6,414) (7,082) Gain on investments 11,373 – 13,205 2,663 Income before provision for income taxes 59,007 29,581 144,915 98,352 Income tax provision 26,987 9,624 68,043 30,723 Net income $32,020 $19.957 $76,872 $67,629 Net income per share — Basic $0.08 $0.07 $0.21 $0.25 Net income per share — Diluted $0.08 $0.07 $0.21 $0.25 Shares used in per share calculation — Basic 387,400 269,027 362,070 269,602 Shares used in per share calculation — Diluted 408,844 276,113 377,558 274,142 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) October 27, October 28, 2007 2006 Assets Current assets: Cash and cash equivalents $315,755 $274,368 Short-term investments 325,846 267,694 Total cash, cash equivalents, and short-term investments 641,601 542,062 Marketable equity securities 14,205 – Accounts receivable, net 175,755 98,394 Inventories 18,017 8,968 Prepaid expenses and other current assets 62,622 43,365 Total current assets 912,200 692,789 Long-term investments 137,524 40,492 Property and equipment, net 204,052 104,299 Goodwill 384,376 41,013 Intangible assets, net 272,652 15,465 Other assets 19,296 6,660 Total assets $1,930,100 $900,718 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $108,810 $56,741 Accrued employee compensation 76,017 62,842 Deferred revenue 94,533 52,051 Current liabilities associated with lease losses 12,807 4,931 Purchase commitments 23,176 6,104 Income tax payable – 39,076 Other accrued liabilities 94,358 42,811 Total current liabilities 409,701 264,556 Convertible subordinated debt 167,498 – Non-current liabilities associated with lease losses 25,742 11,105 Non-current liabilities – deferred tax 22,781 – Non-current deferred revenue 36,344 8,827 Other non-current liabilities 1,376 – Stockholders' equity Common stock 1,463,169 889,250 Accumulated other comprehensive loss (1,180) (817) Accumulated deficit (195,331) (272,203) Total stockholders' equity 1,266,658 616,230 Total liabilities and stockholders' equity $1,930,100 $900,718 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW For the Three Months Ended October 27, 2007 and October 28, 2006 (in thousands) (unaudited) Three Months Ended October 27, October 28, 2007 2006 Cash flows from operating activities: Net income $32,020 $19,957 Adjustments to reconcile net income to net cash provided by operating activities: Excess tax benefit from employee stock plans 9,197 (6,982) Depreciation and amortization 31,856 7,658 Loss on disposal of property and equipment 400 129 Amortization of debt issuance costs – 133 Net (gains) losses on investments and marketable equity securities (11,694) – Non-cash compensation expense 12,499 8,040 Provision for doubtful accounts receivable and sales allowance 1,204 861 Changes in operating assets and liabilities: Accounts receivable (12,857) (20,092) Inventories 3,430 191 Prepaid expenses and other assets 5,600 (6,551) Accounts payable (22,440) 20,839 Accrued employee compensation 228 16,684 Deferred revenue 2,061 3,592 Other accrued liabilities 5,555 9,667 Liabilities associated with lease losses (2,520) (1,283) Net cash provided by operating activities 54,539 52,843 Cash flows from investing activities: Purchases of property and equipment (15,013) (7,480) Purchases of short-term investments (173,494) (66,621) Purchases of marketable equity securities (15,930) Proceeds from sale of marketable equity securities and equity investments 11,694 – Proceeds from maturities and sale of short-term investments 176,780 118,418 Purchases of long-term investments (47,637) (27,014) Purchases of restricted short-term investment – 3,358 Proceeds from maturities and sale of long-term investments 1,752 – Proceeds from the maturities of restricted short-term investments – 277,412 Net cash provided by (used in) investing activities (61,848) 298,073 Cash flows from financing activities: Payments on capital lease obligations (23) – Common stock repurchases (50,410) – Redemption of outstanding convertible debt – (278,883) Excess tax benefit from employees stock plans (9,197) 6,982 Proceeds from issuance of common stock, net 9,968 10,927 Net cash used in financing activities (49,662) (260,974) Effect of exchange rate fluctuations on cash and cash equivalents (1,682) (58) Net increase (decrease) in cash and (58,653) 89,884 cash equivalents Cash and cash equivalents, beginning of period 374,408 184,484 Cash and cash equivalents, end of period $315,755 $274,368 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW For the Twelve Months Ended October 27, 2007 and October 28, 2006 (in thousands) (unaudited) Twelve Months Ended October 27, October 28, 2007 2006 Cash flows from operating activities: Net income $76,872 $67,629 Adjustments to reconcile net income to net cash provided by operating activities: Excess tax benefit from employee stock plans 77 (15,792) Depreciation and amortization 101,416 34,731 Loss on disposal of property and equipment 1,213 438 Amortization of debt issuance costs – 1,430 Net (gains) losses on investments and marketable equity securities (11,694) (2,685) Non-cash compensation expense 36,942 31,407 Provision for doubtful accounts receivable and sales allowance 4,318 3,526 Provision for SEC settlement – 7,000 Non-cash facilities lease loss expense – 3,775 Changes in operating assets and liabilities: Accounts receivable 28,497 (31,244) Inventories 3,481 2,062 Prepaid expenses and other assets 3,523 (19,839) Accounts payable 10,075 32,963 Accrued employee compensation (37,473) 25,080 Deferred revenue 17,162 15,390 Other accrued liabilities (55,967) 15,858 Liabilities associated with lease losses (8,039) (4,869) Net cash provided by operating activities 170,403 166,860 Cash flows from investing activities: Purchases of property and equipment (56,538) (30,430) Purchases of short-term investments (571,357) (325,884) Purchases of marketable equity securities (15,930) Proceeds from sales of 1,336 – property and equipment Proceeds from sale of marketable equity securities and equity investments 11,694 10,185 Proceeds from maturities of restricted short-term investments – 281,414 Proceeds from maturities and sale of short-term investments 764,939 363,873 Purchases of long-term investments (200,239) (40,267) Proceeds from maturities and sale of long-term investments 12,614 – Purchases of non- marketable minority equity investments (5,000) (4,575) Cash paid in connection with acquisitions, net of cash acquired (7,704) (59,887) Increase/Decrease in restricted cash 12,422 – Cash acquired on merger with McDATA 147,407 – Net cash provided by investing activities 93,644 194,429 Cash flows from financing activities: Payments on capital lease obligations (735) – Common stock repurchases (191,293) (40,206) Termination of interest swap (4,989) – Redemption of outstanding convertible debt (124,185) (278,883) Excess tax benefit from employees stock plans (77) 15,792 Proceeds from issuance of common stock, net 100,638 34,255 Net cash used in financing activities (220,641) (269,042) Effect of exchange rate fluctuations on cash and cash equivalents (2,019) 120 Net increase in cash and cash equivalents 41,387 92,367 Cash and cash equivalents, beginning of period 274,368 182,001 Cash and cash equivalents, end of period $315,755 $274,368 BROCADE COMMUNICATIONS SYSTEMS, INC. RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (in thousands, except per share data) (unaudited) Three Months Ended October July October 27, 28, 28, 2007 2007 2006 Net income on a GAAP basis $32,020 $10,690 $19,957 Adjustments: Stock-based compensation expense included in cost of revenues 4,065 3,128 2,117 Amortization of intangible assets expense included in cost of revenues 11,328 11,328 – Total gross margin adjustments 15,393 14,456 2,117 Legal fees associated with indemnification obligations and other related costs, net 7,811 17,984 – SEC investigation and other related costs – – 3,475 Stock-based compensation expense included in research and development 3,649 2,992 2,519 Stock-based compensation expense included in sales and marketing 3,163 2,453 1,682 Stock-based compensation expense included in general and administrative 1,622 1,139 688 Amortization of intangible assets expense included in operating expenses 7,909 7,924 888 Acquisition and integration costs 302 4,055 9,061 Total operating expense adjustments 24,456 36,547 18,313 Total operating income adjustments 39,849 51,003 20,430 Gain on termination of swap – (367) – Call premium on redeemed debt – – 1,115 Gain on investments (10,869) (895) – Income tax effect of adjustments 5,518 (10,937) (2,076) Non-GAAP net income $66,518 $49,494 $39,426 Non-GAAP net income per share — Basic $0.17 $0.13 $0.15 Non-GAAP net income per share — Diluted $0.16 $0.12 $0.14 Shares used in non-GAAP per share calculation — Basic 387,400 392,450 269,027 Shares used in non-GAAP per share calculation — Diluted 408,844 407,113 276,113 BROCADE COMMUNICATIONS SYSTEMS, INC. RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (in thousands, except per share data) (unaudited) Twelve Months Ended October 27, October 28, 2007 2006 Net income on a GAAP basis $76,872 $67,629 Adjustments: Stock-based compensation expense included in cost of revenues 10,870 7,616 Amortization of intangible assets expense included in cost of revenues 33,985 – Total gross margin adjustments 44,855 7,616 Legal fees associated with indemnification obligations and other related costs, net 46,257 13,654 SEC investigation and other related costs – 7,000 Stock-based compensation expense included in research and development 10,696 10,709 Stock-based compensation expense included in sales and marketing 8,685 6,313 Stock-based compensation expense included in general and administrative 4,358 2,911 Amortization of intangible assets expense included in operating expenses 24,719 2,294 Acquisition and integration costs 19,354 9,646 Facilities lease loss adjustments and restructuring – 3,775 Total operating expense adjustments 114,069 56,302 Total operating income adjustments 158,924 63,918 Gain on termination of swap (367) – Call premium on redeemed debt – 1,115 Gain on investments (11,619) (2,685) Income tax effect of adjustments (11,645) (7,220) Non-GAAP net income $212,165 $122,757 Non-GAAP net income per share — Basic $0.59 $0.46 Non-GAAP net income per share — Diluted $0.56 $0.45 Shares used in non-GAAP per share calculation — Basic 362,070 269,602 Shares used in non-GAAP per share calculation — Diluted 377,558 274,142 See explanation of non-GAAP information included herein.

SOURCE Brocade

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