Form 8-K BROCADE COMMUNICATIONS For: Nov 24

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November 24, 2014 4:04 PM EST


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): November�24, 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
(Registrants 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 November�24, 2014, Brocade Communications Systems, Inc. (the Company) issued a press release regarding financial results for the fourth quarter and fiscal year ended November�1, 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 Companys estimated financial results of the first quarter of fiscal year 2015. 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 November�24, 2014, regarding financial results of Brocade Communications Systems, Inc. for the fourth quarter and fiscal year ended November�1, 2014.
99.2
Slides with accompanying prepared remarks of Brocade Communications Systems, Inc., dated November�24, 2014, regarding financial results of the fourth quarter and fiscal year ended November�1, 2014, and forward-looking statements, including statements relating to the Companys estimated financial results of the first quarter of fiscal year 2015.





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:
November�24, 2014
�
�
�
By:
�
/s/ Daniel W. Fairfax
�
�
�
�
�
�
�
Daniel W. Fairfax
�
�
�
�
�
�
�
Chief Financial Officer and Vice President, Finance




Exhibit 99.1
BROCADE CONTACTS
�
�
Public Relations
Katie Bromley
Tel: 408-333-0429
Investor Relations
Michael Iburg
Tel: 408-333-0233
Brocade Reports Fourth Quarter and Fiscal Year 2014 Earnings
Strong Profitability Driven by Focused Execution
SAN JOSE, Calif., November�24, 2014  Brocade� (NASDAQ: BRCD) today reported financial results for its fourth quarter and full fiscal year 2014 ending November�1, 2014. Brocade reported fourth quarter revenue of $564 million, representing an increase of 1% year-over-year and an increase of 3% quarter-over-quarter. Revenue for fiscal year 2014 was $2,211 million, down 1% year-over-year due to the divestiture and repositioning of certain product lines. The resulting GAAP diluted earnings-per-share (EPS) was $0.19 for Q4 and $0.53 for fiscal year 2014, up 36% and 18% year-over-year, respectively. Non-GAAP diluted EPS was $0.24 for Q4, unchanged year-over-year, and $0.90 for fiscal year 2014, up 12% from fiscal year 2013.
We delivered another strong quarter, highlighted by above-market growth of 9% in IP Networking product revenue and 2% SAN product revenue growth, on continuing products, said Lloyd Carney, CEO of Brocade. Our focus is on helping customers migrate to the New IP, accelerating data center innovation, building on our software networking leadership, and delivering a world-class customer experience.

Key Financial Metrics:
�
Q4 2014
�
Q3 2014
�
Q4 2013
�
Q4 2014 vs. Q3 2014
�
Q4 2014 vs. Q4 2013
Revenue
$
564
M
�
$
545
M
�
$
559
M
�
3
%
�
1
%
GAAP EPSdiluted
$
0.19

�
$
0.20

�
$
0.14

�
(5
%)
�
36
%
Non-GAAP EPSdiluted
$
0.24

�
$
0.23

�
$
0.24

�
2
%
�
(1
%)
GAAP gross margin
66.8
%
�
66.3
%
�
64.9
%
�
0.5 pts

�
1.9 pts

Non-GAAP gross margin
67.7
%
�
67.2
%
�
67.2
%
�
0.5 pts

�
0.5 pts

GAAP operating margin
22.4
%
�
21.6
%
�
15.0
%
�
0.8 pts

�
7.4 pts

Non-GAAP operating margin
26.8
%
�
25.7
%
�
26.6
%
�
1.1 pts

�
0.2 pts

Cash provided by operations
$
158
M
�
$
106
M
�
$
170
M
�
49
%
�
(7
%)
Share repurchases
$
33
M
�
$
112
M
�
$
53
M
�
(71
%)
�
(38
%)
Please see important note of explanation on non-GAAP financial measures below, including a detailed reconciliation between GAAP and non-GAAP information in the tables included herein.
Highlights:
"
Q4 2014 SAN product revenue was $325 million, flat year-over-year and quarter-over-quarter. The SAN year-over-year product revenue performance reflects improvement in director and switch product sales offset by lower server product sales. Fiscal year 2014 SAN product revenue was $1,327 million, up 1% year-over-year. Excluding the divestiture of the HBA business, Q4 and fiscal year 2014 SAN product revenue were both up 2% year-over-year.
"
Q4 2014 IP Networking product revenue was $152 million, up 5% year-over-year and 15% quarter-over-quarter. The year-over-year increase was primarily driven by stronger switch and router sales into the U.S. Federal government and router sales into the service provider market. Fiscal year 2014 IP Networking product revenue was $525 million, down 5% year-over-year. Adjusting for the discontinuation of the wireless and network adapter products, and the repositioning of the Brocade ADX� product line, Q4 and fiscal year 2014 IP Networking product revenue grew 9% and 1%, respectively.
"
In fiscal year 2014, Brocades full-year GAAP gross margins and operating margins were 66.3% and 17.5%, respectively. Non-GAAP gross margins and operating margins reached 67.3% and 25.9%, respectively. Full-year operating cash flow was $542 million, a 20% increase over fiscal year 2013. During fiscal year 2014, the Company repurchased $335 million of stock, or 38 million shares, and paid $30 million in dividends. This return of capital to shareholders represents 66% of adjusted free cash flow for the year.

Page 1 of 13

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

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

Brocade management will host a conference call today at 2:30 p.m. PT (5:30 p.m. ET) to discuss Q4 and fiscal year 2014 results, as well as a Q1 2015 outlook. To access the webcast please go to www.brcd.com/events.cfm. A replay of the conference call and the prepared comments and slides will be available at www.brcd.com.
Other Q4 2014 product, customer, and partner announcements are available at http://newsroom.brocade.com/.
Brocade (www.brocade.com)
130 Holger Way, San Jose, CA 95134
T. 408.333.8000 F. 408.333.8101


Page 2 of 13

Financial Highlights and Additional Financial Information
�
Q4 2014
�
Q3 2014
�
Q4 2013
Routes to market as a % of total net revenues:
�
�
�
�
�
OEM revenues
63
%
�
67
%
�
65
%
Channel/Direct revenues
37
%
�
33
%
�
35
%
10% or greater customer revenues
44
%
�
48
%
�
46
%
Geographic split as a % of total net revenues (1):
�
�
�
�
�
Domestic revenues
61
%
�
56
%
�
62
%
International revenues
39
%
�
44
%
�
38
%
Segment split as a % of total net revenues:
�
�
�
�
�
SAN product revenues
58
%
�
60
%
�
58
%
IP Networking product revenues
27
%
�
24
%
�
26
%
Global Services revenues
15
%
�
16
%
�
16
%
SAN business revenues (2)
67
%
�
70
%
�
68
%
IP Networking business revenues (2)
33
%
�
30
%
�
32
%
IP Networking business revenues by use category (3):
�
�
�
�
�
Data Center (4)
58
%
�
55
%
�
53
%
Enterprise Campus
34
%
�
39
%
�
38
%
Carrier Network (MAN/WAN)
8
%
�
6
%
�
9
%
Additional information:
Q4 2014
�
Q3 2014
�
Q4 2013
GAAP net income
$
83
M
�
$
87
M
�
$
64
M
Non-GAAP net income
$
104
M
�
$
102
M
�
$
109
M
GAAP operating income
$
127
M
�
$
118
M
�
$
84
M
Non-GAAP operating income
$
151
M
�
$
140
M
�
$
148
M
Adjusted EBITDA (5)
$
172
M
�
$
165
M
�
$
149
M
Effective GAAP tax provision rate
29.1
%
�
23.4
%
�
14.2
%
Effective Non-GAAP tax provision rate
26.6
%
�
21.9
%
�
21.6
%
Cash and cash equivalents
$
1,255
M
�
$
1,149
M
�
$
987
M
Deferred revenues
$
312
M
�
$
299
M
�
$
303
M
Capital expenditures
$
14
M
�
$
14
M
�
$
10
M
Total debt, net of discount
$
597
M
�
$
597
M
�
$
599
M
Cash, net of senior debt and capitalized leases
$
653
M
�
$
547
M
�
$
382
M
Days sales outstanding
36 days
�
32 days
�
41 days
Employees at end of period
4,161
�
4,103
�
4,169
SAN port shipments
1.1
M
�
1.1
M
�
1.1
M
Please see important note of explanation on non-GAAP financial measures below, including a detailed reconciliation between GAAP and non-GAAP information in the tables included herein.
(1)
Revenues are attributed to geographic areas based on product delivery location. Since some OEM partners take delivery of Brocade products domestically and then ship internationally to their end users, the percentage of international revenues based on end-user location would likely be higher.
(2)
SAN and IP Networking business revenues include product, support, and services revenues.
(3)
Business revenue by use category is estimated based on analysis of the information the Company collects in its sales management system. The estimated percentage of revenue by use category may fluctuate quarter-to-quarter due to seasonality and the timing of large customer orders.
(4)
Data Center includes enterprise, service provider, and government data center revenues.
(5)
Adjusted EBITDA is as defined in the Companys credit agreement.



Page 3 of 13

Non-GAAP Financial Measures
This press release contains non-GAAP financial measures. In evaluating Brocades 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 Brocades 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 Brocades 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 Brocades GAAP financials, provide useful information to investors by offering:
"
the ability to make more meaningful period-to-period comparisons of Brocades ongoing operating results;
"
the ability to make more meaningful comparisons of Brocades operating performance against its industry and competitor companies;
"
the ability to better identify trends in Brocades underlying business and to perform related trend analysis;
"
a better understanding of how management plans and measures Brocades underlying business; and
"
an easier way to compare Brocades 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 Brocades continuing operations. Management believes that it is appropriate to evaluate Brocades operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include, but are not limited to: (i) legal provision associated with certain pre-acquisition litigation, (ii) call premium cost and write-off of original issue discount and debt issuance costs related to lenders that did not participate in refinancing, (iii) settlement gain associated with certain pre-acquisition-related litigation, (iv) restructuring, goodwill impairment, and other related costs, (v) gain on sale of network adapter business, (vi) gain on sale of non-marketable equity investment, and (vii) specific non-cash and non-recurring tax benefits or detriments.
Management also excludes the following non-cash charges in determining non-GAAP net income (i) stock-based compensation expense and (ii) amortization of purchased intangible assets. Because of varying use of valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Management also believes that the exclusion of expense associated with the amortization of acquisition-related intangible assets is appropriate because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and the exclusion of amortization expense allows comparisons of operating results that are consistent over time for Brocades 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 Brocades 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 Brocades 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 13

Cautionary Statement
This press release contains statements that are forward-looking in nature, including statements regarding Brocades 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, Brocades 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 Brocades Quarterly Report on Form 10-Q for the fiscal quarter ended August 2, 2014, and Brocades 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 worlds 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 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
�
Three Months Ended
�
For the Year Ended
�
November�1,
2014
�
October�26,
2013
�
November�1,
2014
�
October�26,
2013
�
(In thousands, except per share amounts)
Net revenues:
�
�
�
�
�
�
�
Product
$
476,905

�
$
468,581

�
$
1,852,187

�
$
1,870,567

Service
87,453

�
90,219

�
359,080

�
352,297

Total net revenues
564,358

�
558,800

�
2,211,267

�
2,222,864

Cost of revenues:
�
�
�
�
�
�
�
Product
151,025

�
158,947

�
592,441

�
658,362

Service
36,215

�
37,213

�
153,033

�
155,623

Total cost of revenues
187,240

�
196,160

�
745,474

�
813,985

Gross margin
377,118

�
362,640

�
1,465,793

�
1,408,879

Operating expenses:
�
�
�
�
�
�
�
Research and development
83,687

�
89,433

�
345,549

�
378,521

Sales and marketing
144,991

�
134,090

�
554,515

�
567,637

General and administrative
21,546

�
16,878

�
84,941

�
74,518

Amortization of intangible assets
135

�
13,125

�
10,280

�
54,256

Restructuring, goodwill impairment, and other related costs
229

�
25,464

�
89,280

�
25,464

Gain on sale of network adapter business


�


�
(4,884
)
�


Total operating expenses
250,588

�
278,990

�
1,079,681

�
1,100,396

Income from operations
126,530

�
83,650

�
386,112

�
308,483

Interest expense
(9,151
)
�
(9,214
)
�
(36,757
)
�
(55,261
)
Interest and other income, net
323

�
458

�
4,266

�
77,239

Income before income tax
117,702

�
74,894

�
353,621

�
330,461

Income tax expense
34,283

�
10,661

�
115,650

�
121,838

Net income
$
83,419

�
$
64,233

�
$
237,971

�
$
208,623

Net income per sharebasic
$
0.19

�
$
0.14

�
$
0.55

�
$
0.46

Net income per sharediluted
$
0.19

�
$
0.14

�
$
0.53

�
$
0.45

Shares used in per share calculationbasic
431,843

�
444,642

�
435,258

�
450,516

Shares used in per share calculationdiluted
441,649

�
460,237

�
446,859

�
463,705

�
�
�
�
�
�
�
�
Cash dividends declared per share
$
0.035

�
$


�
$
0.07

�
$



Page 6 of 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
�
Three Months Ended
�
For the Year Ended
�
November�1,
2014
�
October�26,
2013
�
November�1,
2014
�
October�26,
2013
�
(In thousands)
Net income
$
83,419

�
$
64,233

�
$
237,971

�
$
208,623

Other comprehensive income and loss, net of tax:
�
�
�
�
�
�
�
Unrealized gains (losses) on cash flow hedges:
�
�
�
�
�
�
�
Change in unrealized gains and losses
(1,953
)
�
1,250

�
(1,939
)
�
(1,748
)
Net gains and losses reclassified into earnings
(18
)
�
(162
)
�
(235
)
�
(376
)
Net unrealized gains (losses) on cash flow hedges
(1,971
)
�
1,088

�
(2,174
)
�
(2,124
)
Foreign currency translation adjustments
(3,480
)
�
2,156

�
(3,196
)
�
(1,456
)
Total other comprehensive income (loss)
(5,451
)
�
3,244

�
(5,370
)
�
(3,580
)
Total comprehensive income
$
77,968

�
$
67,477

�
$
232,601

�
$
205,043




Page 7 of 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
�
November�1, 2014
�
October�26, 2013
�
(In�thousands,�except�par�value)
ASSETS
�
�
�
Current assets:
�
�
�
Cash and cash equivalents
$
1,255,017

�
$
986,997

Accounts receivable, net of allowances for doubtful accounts of $80 and $575 at November 1, 2014, and October 26, 2013, respectively
224,913

�
249,598

Inventories
38,718

�
45,344

Deferred tax assets
92,692

�
98,018

Prepaid expenses and other current assets
46,665

�
42,846

Total current assets
1,658,005

�
1,422,803

Property and equipment, net
445,433

�
472,940

Goodwill
1,567,723

�
1,645,437

Intangible assets, net
26,658

�
40,258

Non-current deferred tax assets
605

�
1,585

Other assets
35,251

�
38,368

Total assets
$
3,733,675

�
$
3,621,391

LIABILITIES AND STOCKHOLDERS EQUITY
�
�
�
Current liabilities:
�
�
�
Accounts payable
$
93,705

�
$
88,218

Accrued employee compensation
169,018

�
145,996

Deferred revenue
239,993

�
226,696

Other accrued liabilities
84,592

�
99,753

Total current liabilities
587,308

�
560,663

Long-term debt, net of current portion
595,450

�
596,208

Non-current deferred revenue
71,746

�
76,426

Non-current income tax liability
39,647

�
38,680

Non-current deferred tax liabilities
27,153

�


Other non-current liabilities
4,310

�
2,601

Total liabilities
1,325,614

�
1,274,578

Commitments and contingencies
�
�
�
Stockholders equity:
�
�
�
Preferred stock, $0.001�par value, 5,000�shares authorized, no shares issued and outstanding


�


Common stock, $0.001�par value, 800,000�shares authorized:
�
�
�
Issued and outstanding: 431,470 and 445,285�shares at November 1, 2014, and October 26, 2013, respectively
431

�
445

Additional paid-in capital
1,774,197

�
1,915,152

Accumulated other comprehensive loss
(18,814
)
�
(13,444
)
Retained earnings
652,247

�
444,660

Total stockholders equity
2,408,061

�
2,346,813

Total liabilities and stockholders equity
$
3,733,675

�
$
3,621,391



Page 8 of 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
�
Three Months Ended
�
November�1,
2014
�
October�26,
2013
�
(In thousands)
Cash flows from operating activities:
�
�
�
Net income
$
83,419

�
$
64,233

Adjustments to reconcile net income to net cash provided by operating activities:
�
�
�
Excess tax (benefits) detriments from stock-based compensation
(26,865
)
�
3,720

Depreciation and amortization
20,277

�
45,109

Loss on disposal of property and equipment
1,788

�
2,679

Amortization of debt issuance costs and original issue discount
295

�
277

Net gain on sale of investment
(50
)
�


Provision for doubtful accounts receivable and sales allowances
2,043

�
2,324

Non-cash stock-based compensation expense
23,700

�
16,527

Changes in assets and liabilities:
�
�
�
Accounts receivable
(35,140
)
�
(33,459
)
Inventories
1,869

�
5,258

Prepaid expenses and other assets
(6,188
)
�
3,016

Deferred tax assets
(934
)
�
4,481

Accounts payable
6,748

�
(7,118
)
Accrued employee compensation
26,754

�
24,598

Deferred revenue
12,672

�
2,649

Other accrued liabilities
48,198

�
20,026

Restructuring liabilities
(733
)
�
15,449

Net cash provided by operating activities
157,853

�
169,769

Cash flows from investing activities:
�
�
�
Proceeds from sale of non-marketable equity investment
50

�


Purchases of property and equipment
(13,559
)
�
(10,422
)
Proceeds from collection of note receivable


�
70,000

Net cash paid in connection with acquisition
(16,900
)
�


Net cash provided by (used in) investing activities
(30,409
)
�
59,578

Cash flows from financing activities:
�
�
�
Payment of principal related to capital leases
(103
)
�
(91
)
Common stock repurchases
(32,820
)
�
(52,640
)
Proceeds from issuance of common stock
2,701

�
21,913

Payment of cash dividends to stockholders
(15,114
)
�


Excess tax benefits (detriments) from stock-based compensation
26,865

�
(3,720
)
Net cash used in financing activities
(18,471
)
�
(34,538
)
Effect of exchange rate fluctuations on cash and cash equivalents
(3,343
)
�
2,095

Net increase in cash and cash equivalents
105,630

�
196,904

Cash and cash equivalents, beginning of period
1,149,387

�
790,093

Cash and cash equivalents, end of period
$
1,255,017

�
$
986,997


Page 9 of 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
�
For the Year Ended
�
November�1,
2014
�
October�26,
2013
�
(In thousands)
Cash flows from operating activities:
�
�
�
Net income
$
237,971

�
$
208,623

Adjustments to reconcile net income to net cash provided by operating activities:
�
�
�
Excess tax benefits from stock-based compensation
(64,563
)
�
(3,189
)
Write-off of original issue discount and debt issuance costs related to lenders that did not participate in refinancing


�
5,360

Depreciation and amortization
100,647

�
184,114

Loss on disposal of property and equipment
5,118

�
6,709

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


Amortization of debt issuance costs and original issue discount
1,151

�
1,214

Net gain on sale of investments
(5,292
)
�


Provision for doubtful accounts receivable and sales allowances
7,563

�
9,221

Non-cash stock-based compensation expense
84,914

�
73,618

Non-cash tax charges


�
78,206

Goodwill impairment charge
83,382

�


Changes in assets and liabilities:
�
�
�
Accounts receivable
17,121

�
(25,509
)
Inventories
6,626

�
24,173

Prepaid expenses and other assets
(10,984
)
�
(66,001
)
Deferred tax assets
(887
)
�
4,825

Accounts payable
2,339

�
(28,862
)
Accrued employee compensation
(11,382
)
�
(57,859
)
Deferred revenue
8,652

�
8,599

Other accrued liabilities
96,376

�
12,944

Restructuring liabilities
(12,271
)
�
14,843

Net cash provided by operating activities
541,597

�
451,029

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


Proceeds from sale of non-marketable equity investments
10,798

�


Purchases of property and equipment
(54,734
)
�
(52,371
)
Proceeds from collection of note receivable
250

�
70,000

Proceeds from sale of network adapter business
9,995

�


Net cash paid in connection with acquisitions
(16,900
)
�
(44,629
)
Net cash used in investing activities
(50,814
)
�
(27,000
)
Cash flows from financing activities:
�
�
�
Payment of debt issuance costs related to senior unsecured notes


�
(992
)
Payment of principal related to senior secured notes


�
(300,000
)
Payment of principal related to capital leases
(2,485
)
�
(1,627
)
Common stock repurchases
(335,380
)
�
(240,000
)
Proceeds from issuance of common stock
83,994

�
93,771

Payment of cash dividends to stockholders
(30,384
)
�


Proceeds from senior unsecured notes


�
296,250

Excess tax benefits from stock-based compensation
64,563

�
3,189

Net cash used in financing activities
(219,692
)
�
(149,409
)
Effect of exchange rate fluctuations on cash and cash equivalents
(3,071
)
�
(849
)
Net increase in cash and cash equivalents
268,020

�
273,771

Cash and cash equivalents, beginning of year
986,997

�
713,226

Cash and cash equivalents, end of year
$
1,255,017

�
$
986,997


Page 10 of 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
�
Three Months Ended
�
November�1,
2014
�
August�2,
2014
�
October�26,
2013
�
(In thousands, except per share amounts)
Non-GAAP adjustments
�
�
�
�
�
Stock-based compensation expense included in cost of revenues
$
4,225

�
$
4,121

�
$
3,174

Amortization of intangible assets expense included in cost of revenues
600

�
552

�
9,650

Total gross margin impact from non-GAAP adjustments
4,825

�
4,673

�
12,824

�
�
�
�
�
�
Stock-based compensation expense included in research and development
5,527

�
4,350

�
4,304

Stock-based compensation expense included in sales and marketing
8,832

�
7,592

�
6,104

Stock-based compensation expense included in general and administrative
5,116

�
5,511

�
2,945

Amortization of intangible assets expense included in operating expenses
135

�
131

�
13,125

Restructuring and other related costs
229

�
131

�
25,464

Total operating income impact from non-GAAP adjustments
24,664

�
22,388

�
64,766

�
�
�
�
�
�
Gain on sale of non-marketable equity investment


�
(5,242
)
�


Income tax effect of non-tax adjustments
(3,587
)
�
(2,005
)
�
(19,506
)
Total net income impact from non-GAAP adjustments
$
21,077

�
$
15,141

�
$
45,260

�
�
�
�
�
�
Gross margin reconciliation
�
�
�
�
�
GAAP gross margin
$
377,118

�
$
361,713

�
$
362,640

Total gross margin impact from non-GAAP adjustments
4,825

�
4,673

�
12,824

Non-GAAP gross margin
$
381,943

�
$
366,386

�
$
375,464

GAAP gross margin, as a percent of total net revenues
66.8
%
�
66.3
%
�
64.9
%
Non-GAAP gross margin, as a percent of total net revenues
67.7
%
�
67.2
%
�
67.2
%
�
�
�
�
�
�
Operating income reconciliation
�
�
�
�
�
GAAP operating income
$
126,530

�
$
117,897

�
$
83,650

Total operating income impact from non-GAAP adjustments
24,664

�
22,388

�
64,766

Non-GAAP operating income
$
151,194

�
$
140,285

�
$
148,416

GAAP operating income, as a percent of total net revenues
22.4
%
�
21.6
%
�
15.0
%
Non-GAAP operating income, as a percent of total net revenues
26.8
%
�
25.7
%
�
26.6
%
�
�
�
�
�
�
Net income and net income per share reconciliation
�
�
�
�
�
Net income on a GAAP basis
$
83,419

�
$
87,352

�
$
64,233

Total net income impact from non-GAAP adjustments
21,077

�
15,141

�
45,260

Non-GAAP net income
$
104,496

�
$
102,493

�
$
109,493

Non-GAAP net income per sharebasic
$
0.24

�
$
0.24

�
$
0.25

Non-GAAP net income per sharediluted
$
0.24

�
$
0.23

�
$
0.24

Shares used in non-GAAP per share calculationbasic
431,843

�
432,448

�
444,642

Shares used in non-GAAP per share calculationdiluted
441,649

�
441,789

�
460,237


Page 11 of 13

BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
�
For the Year Ended
�
November 1,
2014
�
October 26,
2013
�
(In thousands, except per share amounts)
Non-GAAP adjustments
�
�
�
Stock-based compensation expense included in cost of revenues
$
14,962

�
$
14,519

Amortization of intangible assets expense included in cost of revenues
8,010

�
39,731

Legal provision associated with certain pre-acquisition litigation


�
3,460

Total gross margin impact from non-GAAP adjustments
22,972

�
57,710

�
�
�
�
Stock-based compensation expense included in research and development
18,635

�
17,509

Stock-based compensation expense included in sales and marketing
31,651

�
29,425

Stock-based compensation expense included in general and administrative
19,666

�
12,165

Amortization of intangible assets expense included in operating expenses
10,280

�
54,256

Restructuring, goodwill impairment, and other related costs
89,280

�
25,464

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


Total operating income impact from non-GAAP adjustments
187,600

�
196,529

�
�
�
�
Call premium cost and original issue discount and debt issuance costs related to lenders that did not participate in refinancing


�
15,299

Gain on A10 litigation settlement, net


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


Tax provision impact from passage of California Proposition 39 - Single Sales Factor apportionment


�
78,206

Income tax effect of non-tax adjustments
(17,643
)
�
(48,891
)
Total net income impact from non-GAAP adjustments
$
164,715

�
$
164,327

�
�
�
�
Gross margin reconciliation
�
�
�
GAAP gross margin
$
1,465,793

�
$
1,408,879

Total gross margin impact from non-GAAP adjustments
22,972

�
57,710

Non-GAAP gross margin
$
1,488,765

�
$
1,466,589

GAAP gross margin, as a percent of total net revenues
66.3
%
�
63.4
%
Non-GAAP gross margin, as a percent of total net revenues
67.3
%
�
66.0
%
�
�
�
�
Operating income reconciliation
�
�
�
GAAP operating income
$
386,112

�
$
308,483

Total operating income impact from non-GAAP adjustments
187,600

�
196,529

Non-GAAP operating income
$
573,712

�
$
505,012

GAAP operating income, as a percent of total net revenues
17.5
%
�
13.9
%
Non-GAAP operating income, as a percent of total net revenues
25.9
%
�
22.7
%
�
�
�
�
Net income and net income per share reconciliation
�
�
�
Net income on a GAAP basis
$
237,971

�
$
208,623

Total net income impact from non-GAAP adjustments
164,715

�
164,327

Non-GAAP net income
$
402,686

�
$
372,950


Page 12 of 13

Non-GAAP net income per sharebasic
$
0.93

�
$
0.83

Non-GAAP net income per sharediluted
$
0.90

�
$
0.80

Shares used in non-GAAP per share calculationbasic
435,258

�
450,516

Shares used in non-GAAP per share calculationdiluted
446,859

�
463,705


Page 13 of 13











Q4 FY 2014 Earnings




Prepared Comments and Slides

November�24, 2014






Michael Iburg
Investor Relations
Phone: 408-333-0233

Katie Bromley
Public Relations
Phone: 408-333-0429

NASDAQ: BRCD



Brocade Q4 FY 2014 Earnings����11/24/2014



Prepared comments provided by Michael Iburg, Investor Relations

Thank you for your interest in Brocades Q4 fiscal year 2014 earnings presentation, which includes prepared remarks, safe harbor, slides, and a press release detailing fiscal fourth quarter and fiscal year 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 27

Brocade Q4 FY 2014 Earnings����11/24/2014

�



� 2014 Brocade Communications Systems, Inc. ����Page 3 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Todays prepared comments include remarks by Lloyd Carney, Brocade CEO, regarding the companys quarterly and full-year 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 November�24 at www.brcd.com and will be archived on the Brocade Investor Relations website.


� 2014 Brocade Communications Systems, Inc. ����Page 4 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Prepared comments provided by Lloyd Carney, CEO


� 2014 Brocade Communications Systems, Inc. ����Page 5 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


Demonstrating our focus and ability to deliver on the commitments we have made, in Q4 we achieved year-over-year growth in both SAN and IP Networking product revenue, including a 14% increase in data center IP revenue based on use case.�We increased profitability through both gross margin expansion and greater operational efficiency. We also generated cash well above our targeted range in Q4, primarily through higher profits and better-than-expected use of working capital.
�
Turning to the fiscal year, 2014 was the most profitable year in the companys history, reflecting a strong focus on efficiency and delivering on the leverage in our business model. We completed the divestment and strategic shift of the non-core businesses we identified last year, focusing our energy and investment in growth areas. We also exceeded our commitment to return at least 60% of free cash flow to shareholders, including the payment of Brocades first dividend. From a product perspective, we expanded our data center and campus portfolios, providing differentiated solutions designed to help our customers transform their networks into strategic assets.�

We are rapidly emerging as a leader for the New IP technologies, and are aligning our focus, investment, and innovation with the evolving cloud, social, and mobile requirements. We are confident in our strategy to enable open, software-driven, agile, and secure network architectures and are excited by the expanding business opportunity the New IP creates for Brocade.

We believe we are well positioned for continued growth and success in our strategic markets, with a strong financial model, appropriately focused resources, and a proven and dedicated team.



� 2014 Brocade Communications Systems, Inc. ����Page 6 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


In FY14, we gained SAN market share through solid execution, growth in emerging markets, and the successful migration of customers to our industry-leading Gen 5 Fibre Channel technology. Our continued innovation in storage fabrics is driving new levels of performance and efficiency for our customers. For example, during Q4 we announced the Brocade 7840 Extension Switch that enables enterprises to achieve faster replication and data recovery times to help support always-on operations. We also extended our Fabric Vision technology to allow customers to automate monitoring, increase insight, and simplify troubleshooting between data centers.
The scalability, reliability, and deterministic performance of Fibre Channel is well aligned to the increasingly rigorous demands of todays storage networks. In fact, market research indicates that Fibre Channel-attached storage capacity is expected to grow at a 34% CAGR for the next several years. We continue to see strong attach rates from emerging storage technologies, such as Solid State Disk (SSD), as Fibre Channel can enable the full benefit of these arrays in application performance. We believe that growth in the deployment of emerging storage technologies is contributing to Brocade Gen 5 (16 Gbps) adoption and will also be a key factor in the industry migration to Gen 6 (32+ Gbps) beginning in the first half of calendar 2016.

We continue to work closely with both our existing OEM storage partners and the SSD startup community to test and certify these new storage arrays with our Fibre Channel SAN technology. During the fourth quarter, we expanded the scope of our Solid State Ready program to better support the efforts of SSD vendors in helping their customers achieve seamless deployment and optimum performance of solid-state storage.




� 2014 Brocade Communications Systems, Inc. ����Page 7 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


Fiscal year 2014 was a productive year for our IP Networking business. We grew our data center IP revenue, demonstrating solid execution in this strategic area. We also expanded our data center and campus product portfolios, enabling differentiated capabilities that support the strategic goals of our customers. We extended our leadership in software networking through innovation and active engagement with Tier-1 service providers and cloud service providers. Finally, we completed the divestment of non-core businesses, enabling us to focus our investment in strategic growth areas.

Turning to our fourth quarter performance, we achieved 9% year-over-year revenue growth from continuing IP Networking products. Routing was a strong contributor to this growth, with record revenue driven by the launch of new high-density, feature-enhanced 10 Gbps and 100 Gbps modules for the Brocade MLXe platform.
Another important contributor to our growth in Q4 was the Brocade VDX� data center switch product line, which grew 66% year-over-year. This switch features Brocade VCS Fabric technology and provides customers with an optimal underlay for virtualization and SDN. We were pleased to announce this quarter that Yahoo! Japan completed the deployment of a Brocade Ethernet fabric solution as the network foundation for an enterprise-wide Big Data project. Our solution, which replaced a competitors legacy network, enables hundreds of servers to support Hadoop-based analytics across the entire enterprise. Yahoo! Japan is representative of the increased adoption of our Ethernet fabric switches supporting enterprise Big Data initiatives.

And finally, our U.S. Federal business, which had been a challenge for our IP Networking growth earlier this fiscal year, continued to recover in Q4. During the quarter, Brocade co-sponsored the third annual Federal Forum and I was particularly encouraged by the discourse surrounding emerging network technologies, open standards, and multivendor networks as the building blocks for government network infrastructure modernization. We are increasingly seeing agencies embrace industry-leading networking standards and best practices in order to achieve their missions.

� 2014 Brocade Communications Systems, Inc. ����Page 8 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014

Brocade continues to lead the industry in the development of open, software-driven programmable networks for the New IP-based data center. This focus is a guiding principle of our product and technology roadmap, as well as our acquisition strategy.
During Q4, we introduced the Brocade Vyatta Controller, based on the OpenDaylight open source project, which underscores our commitment to an open networking platform. This groundbreaking controller enables customers to simplify the control of Layer 2 through 7 networks, whether the components are physical or virtual, from Brocade or other vendors. We are already experiencing active interest from Tier-1 service providers and early enterprise adopters, who are building application development and deployment platforms for the New IP.
Moreover, we continue to enhance our data center and campus portfolios for the New IP requirements. For example, we are enabling support for OpenFlow 1.3 across the Brocade VDX, ICX and MLXe product families. During Q4, we began shipping high-density Brocade MLXe modules featuring significant software enhancements. Leveraging the Brocade Vyatta Controller and Hybrid OpenFlow ports on the Brocade MLX, we will enable SDN applications throughout the coming year that deliver concrete business value for large enterprise and service provider customers. The first of these applications will help to address the constant denial-of-service attacks that virtually all large customers see at the edge of their networks. We are actively developing extensions to this application to assist customers in the management of bandwidth-hungry flows for optimal use of network capacity.
�
Through targeted technology investments, we are building upon our software networking capabilities and employing our cash for strategic opportunities. During Q4, we acquired the carrier-grade network visibility and analytics technology assets from Vistapointe. This acquisition enables Brocade to address the emerging opportunities and requirements of global Mobile Network Operators (MNOs) as they navigate the significant transitions occurring in their industry. Through enhanced network visibility and analytics, these customers will be better equipped to classify, visualize, manage, and secure subscriber data traffic to deliver a superior mobile user experience as well as generate new revenue opportunities. The Vistapointe acquisition directly complements the existing Brocade MLX-based network packet broker solution to provide MNOs with an end-to-end solution that leverages a New IP-based architecture that is virtualized through Network Functions Virtualization (NFV), and is open and programmable with SDN.
Finally, we were pleased to collaborate with Dell and Intel on Dells new open-standard NFV platform that leverages the high-performance Brocade Vyatta 5600 vRouter. This is a great example of the innovation that is possible with open platforms and the value of industry partnerships in the creation of best-of-breed solutions. This platform is designed to accelerate NFV adoption by providing telecommunication service providers a complete open system.


� 2014 Brocade Communications Systems, Inc. ����Page 9 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


In closing, the disruptive effect of the network transition to the New IP is creating exciting and incremental growth opportunities for Brocade. Open, software-enabled network architectures are allowing innovative technology solutions and flexible product acquisition models to unseat entrenched competitors.
We have been focused on the opportunity created by this network transition in making key decisions regarding our product portfolio, sales approach, partnerships, leadership appointments, corporate identity, and utilization of financial resources this past year. We are proud of the results we delivered in FY14 and remain focused on those areas in which we can further improve.
As we begin FY15, our goals include:
"
Maintain our innovation leadership in SAN while executing on opportunities to drive growth and achieve market share gains
"
Grow our overall IP networking business at twice the market rate, with an emphasis on the critical data center market
"
Extend our early market leadership in the emerging SDN/NFV spaces through innovation and by converting software networking proof-of-concept trials into revenue accounts
"
Use our strong cash generation to enhance shareholder value
"
Achieve the FY15 Target Financial Model from our September Investor Day
"
Deliver a world-class customer experience

I want to finish by thanking our customers, partners, and investors for their ongoing support of Brocade. I also want to credit our tremendous base of employees worldwide and my executive team for the successes we have achieved this past year, and to thank them for their dedication to our continued progress in fiscal year 2015.

� 2014 Brocade Communications Systems, Inc. ����Page 10 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Prepared comments provided by Dan Fairfax, CFO


� 2014 Brocade Communications Systems, Inc. ����Page 11 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014

In Q4 14, revenue was $564M, up 1% Yr./Yr. and up 3% Qtr./Qtr. SAN product revenue was $325M, flat both Yr./Yr. and sequentially. Revenue from our IP Networking products in Q4 14 was $152M, up 5% Yr./Yr. and up 15% Qtr./Qtr. Q4 14 Global Services revenue was $87M, down 3% Yr./Yr. and flat sequentially.

Non-GAAP gross margin was 67.7% in Q4 14, up 50 basis points from both Q4 13 and Q3 14. The improvement in gross margin was due to higher revenues combined with lower overhead costs. Non-GAAP operating margin was 26.8% in Q4, up 20 basis points from Q4 13 and up 110 basis points from Q3 14. The sequential increase was primarily due to higher gross margins and lower spending as a percent of revenue.

Q4 14 GAAP earnings per share (EPS) was $0.19, up $0.05 Yr./Yr., and down $0.01 Qtr./Qtr. Non-GAAP diluted EPS was $0.24 in the quarter, essentially flat Yr./Yr. and up $0.01 Qtr./Qtr.

In Q4 14, the effective GAAP tax rate was 29.1% and the effective non-GAAP tax rate was 26.6%. The effective GAAP and non-GAAP tax rates for Q4 14 were higher year-over-year primarily due to a higher mix of domestic revenue and the benefit of the federal R&D tax credit in calendar year 2013, which has not been reinstated for calendar year 2014.

In Q4 14, we generated $158M in operating cash flow, down 7% Yr./Yr. and up 49% Qtr./Qtr. The year-over-year decrease in operating cash flow was primarily due to an increase in the reported excess tax benefit from stock-based compensation. The increase in operating cash flow from Q3 14 was due to the timing of variable compensation and long-term debt interest payments, which are both paid semi-annually in fiscal Q1 and Q3. Average diluted shares outstanding for Q4 14 was 442 million shares, down 4% Yr./Yr. and flat Qtr./Qtr.


� 2014 Brocade Communications Systems, Inc. ����Page 12 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


Revenue from our total SAN business, including hardware products and SAN-based support and services, in Q4 14 was $379M, flat Yr./Yr. and sequentially. SAN product revenue was $325M in the quarter, flat Yr./Yr. and sequentially. When adjusted for the divested HBA business, our SAN product revenue from continuing products grew 2% year-over-year due to strong performance in our switch and director product families, partially offset by a decrease in our server product family.

Looking at SAN revenue by product family, director revenue was up 5% Yr./Yr. and flat sequentially. The year-over-year growth was due to continued customer migration to Gen 5. SAN switch revenue was up 6% Yr./Yr. and flat Qtr./Qtr., similar to our Director revenue performance. Our Server product group, including embedded switches and server adapter products, was down 27% Yr./Yr. and down 2% Qtr./Qtr. The year-over-year decline was due to certain OEM specific operational factors and a shift in end-user buying patterns, as well as the divestiture of the HBA business in Q1 14. SAN-based support and services revenue was $54M in the quarter, down 4% Yr./Yr. and down 1% sequentially.


� 2014 Brocade Communications Systems, Inc. ����Page 13 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


Revenue from our total IP Networking business, including hardware and IP-based support and services, in Q4 14 was $185M, up 4% Yr./Yr. and 12% sequentially. The increase was principally due to higher sales to the U.S. Federal government and a rebound in router sales, including the shipment of new Brocade MLXe high density, feature-enhanced modules. Our Federal revenue was approximately $33M in the quarter, up 38% Yr./Yr. and 43% Qtr./Qtr.

Q4 14 IP Networking product revenue was $152M, up 5% Yr./Yr. and 15% sequentially. Excluding network adapters, wireless, and Brocade ADX�hardware products, the IP Networking product revenue grew 9% Yr./Yr. and 17% Qtr./Qtr. The year-over-year improvement was due to higher sales of Ethernet switching products, primarily to the U.S. Federal government, and stronger router sales into both federal and service provider customers.

As we look at the product mix for IP Networking in the quarter, our Ethernet switch revenue, which includes products for the data center and campus LAN environments, was $86M, up 7% Yr./Yr. and down 6% Qtr./Qtr. The Yr./Yr. increase was due to strong Brocade VDX sales, up 66% Yr./Yr., offset by lower campus LAN revenue. The sequential decline was due to seasonal buying patterns of our educational customers and a mix shift from switches to routers within federal. Our routing products generated $60M in revenue, up 12% Yr./Yr. and 77% Qtr./Qtr. due to the mix shift in federal and pent-up demand for the new Brocade MLXe modules released in fiscal Q4 14. IP Networking-based support and services revenue was $34M in the quarter, down 1% Yr./Yr. and up 1% sequentially.

The split of our IP Networking product revenue 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 product revenue. Our data center customers represented approximately 58% of IP Networking product revenue in Q4 14, compared with 55% in Q3 14 and 53% in Q4 13. The estimated percentage of revenue coming from data center IP Networking customers may fluctuate quarter-to-quarter due to the timing of large 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.


� 2014 Brocade Communications Systems, Inc. ����Page 14 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



In Q4 14, three customers (EMC, HP , and IBM) each contributed at least 10% of total Company revenue. Our 10% customers collectively contributed 44% of revenue in Q4 14, down 4% from Q3 14 and down 2% from Q4 13. All other OEMs represented 19% of revenue in Q4 14, flat from both Q4 13 and Q3 14. Channel and direct routes to market contributed 37% of revenue in Q4 14, up 4% from Q3 14 and up 2% from Q4 13.

The mix of business based on ship-to location was 61% domestic and 39% international in the quarter, a higher domestic share compared with 56% in Q3 14 and down 1% compared with Q4 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.

As a further breakdown of our IP Networking business revenue based on ship-to location, the Americas region (excluding U.S. Federal) was 53% of total IP Networking business revenue, a decrease of 2% Yr./Yr. but up 4% sequentially. Federal was 18% of total IP Networking business revenue, an increase of 4% Yr./Yr and up 4% sequentially. International was 29% of total IP Networking business revenue, a decrease of 2% Yr./Yr. and down 7% sequentially, both primarily driven by EMEA.


� 2014 Brocade Communications Systems, Inc. ����Page 15 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Q4 14 non-GAAP company gross margin of 67.7% exceeded our original guidance range for the quarter primarily due to a favorable product mix and lower overhead spending. Q4 14 non-GAAP product gross margin was 68.9%, above our FY14 target model range of 66.0% to 68.0%. This represents an increase of approximately 10 basis points from Q3 14 and an increase of approximately 40 basis points from Q4 13. The year-over-year and sequential improvement was primarily due to favorable product and customer mix within the IP Networking business.

Q4 14 non-GAAP SAN product gross margin percentage was in the mid-70s, slightly better
quarter-over-quarter and year-over-year. Q4 14 non-GAAP IP Networking product gross margin percentage was in the mid-50s, slightly up quarter-over-quarter and up over the prior year.

Non-GAAP Global Services gross margin was 61.0% in Q4 14, up 40 basis points year-over-year and up 220 basis points quarter-over-quarter primarily due to improved efficiencies and lower overhead spending.


� 2014 Brocade Communications Systems, Inc. ����Page 16 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Non-GAAP gross margin was 67.7% in Q4 14 and was 67.3% for the fiscal full year, higher than our FY14 target model range of 65.0% to 66.0%. The over-performance in fiscal Q4 was due to higher revenue, favorable mix shift to higher margin products within both the SAN and IP product families, and lower manufacturing overhead costs.

On a non-GAAP basis, total operating expenses of $230.7M, or 40.9% of revenues in Q4 14, were within our FY14 target model range of 40.0% to 42.0%. Total operating expenses were 41.4% of revenues in FY14, in the middle of our target range.

Non-GAAP operating margin was 26.8% in Q4 14, an improvement of 20 basis points compared with Q4 13 and a 110 basis-point improvement compared with Q3 14. The sequential increase was primarily due to higher revenue, improved gross margins, and lower spending as a percent of revenue. For the full fiscal year, non-GAAP operating margin was 25.9%, higher than the FY14 target model range of 23.0% to 25.0%.

Ending headcount was 4,161 in Q4 14, up 58 from 4,103 in Q3 14, and down 8 from 4,169
in Q4 13.


� 2014 Brocade Communications Systems, Inc. ����Page 17 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Operating cash flow was $158M in Q4 14, down 7% Yr./Yr. and up 49% sequentially. The decrease in operating cash flow from the prior year was primarily due to an increase in the reported excess tax benefit from stock-based compensation. We describe the free cash flow impact of the excess tax benefit from stock-based compensation in the appendix. The sequential increase in cash from operations was primarily due to the timing of variable compensation and long-term debt interest payments, which are both paid semiannually in fiscal Q1 and Q3. We saw good shipment linearity in Q4 14, resulting in DSOs of 36 days, a solid improvement from 41 days in Q4 13.

Total capital expenditures in the quarter were $14M. Cash and cash equivalents were $1,255M in Q4 14, up $106M from Q3 14 and up $268M from Q4 13. The U.S. cash balance was $495M at the end of Q4 14.
�
In Q4 14, we continued our quarterly cash dividend of $0.035 per share of common stock and repurchased $33M of common stock at an average purchase price of $9.95. For fiscal year 2014, we repurchased $335M of common stock. Combined with the dividends paid during the year, this represents a total return to our shareholders of 66% of adjusted free cash flow for FY14.


� 2014 Brocade Communications Systems, Inc. ����Page 18 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014


Reflecting back on FY14, it was a year of improved financial results. Non-GAAP EPS for FY14 increased 12% Yr./Yr. This was largely driven by improvements in gross margins, reductions in operating expenses, and share repurchases.

We reported strong non-GAAP gross margin of 67.3% for FY14, an increase of 130 basis points year-over-year and 280 basis points from FY12. The increase in gross margin was the result of improvements in the cost structure of our IP Networking products, increased revenue contribution from Ethernet fabrics products, and lower manufacturing and service overhead.

We accelerated our share repurchase program in FY14, up 40% Yr./Yr., retiring 38 million shares. We also initiated the first dividend in company history.

Lastly, our ending cash balance exiting FY14 was $1,255 million, an increase of 27% Yr./Yr. Increased profitability, focused attention on working capital, and improvements in our operational efficiency all contributed to the increase in cash.





� 2014 Brocade Communications Systems, Inc. ����Page 19 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Looking forward to Q1 15, we considered a number of factors, including the following, in setting our outlook:
" For Q1 15, we expect SAN revenue to be up 5% to 7% Qtr./Qtr. Typically we see stronger buying patterns from our OEM partners in calendar Q4.

" We expect our Q1 15 IP Networking revenue to be down 8% to 14% Qtr./Qtr., principally driven by lower federal and service provider revenue, as well as normal seasonal enterprise spending patterns.

" We expect our Global Services revenue to be up 1% to 3% Qtr./Qtr. and service gross margins to decline slightly as we make investments in our support and service infrastructure.

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

" At the end of Q4 14, OEM inventory was approximately 1.1 weeks of supply based on SAN business revenue. We expect inventory to be between one to two weeks in Q1 15, 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 FY15.

" We expect Q1 15 operating cash flow to be lower sequentially due to the timing of variable compensation and bond interest payments.

" We expect Q1 15 non-GAAP gross margin to be within or slightly above our recently introduced FY15-16 two-year target model range of 66.0% - 67.0%, and non-GAAP operating margin to be within our recently introduced FY15-16 two-year target model range of 25.0% to 27.0%.


� 2014 Brocade Communications Systems, Inc. ����Page 20 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Prepared comments provided by Michael Iburg, Investor Relations

That concludes Brocades prepared comments. At 2:30 p.m. Pacific Time on November 24, Brocade will host a webcast conference call at www.brcd.com.

Thank you for your interest in Brocade.

� 2014 Brocade Communications Systems, Inc. ����Page 21 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014




� 2014 Brocade Communications Systems, Inc. ����Page 22 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014



Additional Financial Information:
�
Q4 13

Q3 14

Q4 14

GAAP gross margin
64.9
%
66.3
%
66.8
%
Non-GAAP gross margin
67.2
%
67.2
%
67.7
%
�
�
�
�
GAAP product gross margin
66.1
%
68.2
%
68.3
%
Non-GAAP product gross margin
68.5
%
68.8
%
68.9
%
�
�
�
�
GAAP services gross margin
58.8
%
56.4
%
58.6
%
Non-GAAP services gross margin
60.6
%
58.8
%
61.0
%
�
�
�
�
GAAP operating margin
15.0
%
21.6
%
22.4
%
Non-GAAP operating margin
26.6
%
25.7
%
26.8
%


� 2014 Brocade Communications Systems, Inc. ����Page 23 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014






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Brocade Q4 FY 2014 Earnings����11/24/2014





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Brocade Q4 FY 2014 Earnings����11/24/2014





� 2014 Brocade Communications Systems, Inc. ����Page 26 of 27

Brocade Q4 FY 2014 Earnings����11/24/2014





� 2014 Brocade Communications Systems, Inc. ����Page 27 of 27

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