Form 8-K BROCADE COMMUNICATIONS For: Aug 25

August 25, 2016 4:03 PM

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): August 25, 2016

Brocade Communications Systems, Inc.

(Exact name of registrant as specified in its charter)



Delaware	000-25601	77-0409517
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification Number)

130 Holger Way

San Jose, CA 95134-1376

(Address, including zip code, of principal executive offices)

(408) 333-8000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):



¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)



¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)



¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))



¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On August 25, 2016, Brocade Communications Systems, Inc. (the “Company”) issued a press release regarding financial results for the third fiscal quarter ended July 30, 2016. The Company also posted on its website (www.brcd.com) slides with accompanying prepared remarks regarding such financial results and forward-looking statements, including statements relating to the Company’s financial outlook. 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 this Item 2.02 and in Exhibits 99.1 and 99.2 attached to this Current Report on Form 8-K 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.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

Exhibit


Number	Description of Document


99.1	Press release, dated August 25, 2016, regarding financial results of Brocade Communications Systems, Inc. for the third fiscal quarter ended July 30, 2016.


99.2	Slides with accompanying prepared remarks of Brocade Communications Systems, Inc., dated August 25, 2016, regarding financial results for the third fiscal quarter ended July 30, 2016, and forward-looking statements, including statements relating to the Company’s financial outlook.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



		BROCADE COMMUNICATIONS SYSTEMS, INC.

Date:	August 25, 2016	By:	/s/ Daniel W. Fairfax
			Daniel W. Fairfax
			Senior Vice President and Chief Financial Officer

Exhibit 99.1



BROCADE CONTACTS
Media Relations Ed Graczyk Tel: 408-333-1836 [email protected]	Investor Relations Michael Iburg Tel: 408-333-0233 [email protected]

Brocade Reports Fiscal Q3 2016 Results

SAN JOSE, Calif., August 25, 2016 — Brocade^® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended July 30, 2016. These results include approximately two months of financial results from Ruckus Wireless, which was acquired on May 27, 2016. Brocade reported third quarter revenue of $591 million, up 7% year-over-year and up 13% quarter-over-quarter. The Company reported GAAP diluted earnings per share (EPS) of $0.02, down from $0.21 in Q3 2015 and from $0.11 in Q2 2016. The year-over-year and sequential declines in GAAP EPS were primarily the result of acquisition-related items, including the lower gross margin associated with acquired inventory and deferred revenue, acquisition and integration costs, and increases in the amortization of intangible assets and stock-based compensation. These items were partially offset by the favorable resolution of a tax audit. Non-GAAP diluted EPS was $0.21 for Q3 2016, down 21% year-over-year and down 2% quarter-over-quarter. The year-over-year decline in non-GAAP EPS was primarily due to the acquisition-related purchase accounting adjustments, unfavorable revenue mix, and higher operating expenses.

“Against the backdrop of a mixed macro environment, we posted solid results, with total revenue at the high end of our outlook range,” said Lloyd Carney, CEO of Brocade. “During Q3, we also continued the momentum of new product innovations across our portfolio, building a solid foundation for business growth and expansion of our addressable markets. Furthermore, with the successful completion of our acquisition of Ruckus Wireless in the quarter, we are pleased to welcome this talented and committed team to the Brocade family. Our combined strengths open up new opportunities and distinguish Brocade as a pure-play networking company for the digital transformation era.”

Key Financial Metrics:



	Q3 2016			Q2 2016			Q3 2015			Q3 2016 vs. Q2 2016		Q3 2016 vs. Q3 2015
Revenue	$	591	M	$	523	M	$	552	M	13	%	7	%
GAAP EPS—diluted	$	0.02		$	0.11		$	0.21		(77	%)	(89	%)
Non-GAAP EPS—diluted	$	0.21		$	0.22		$	0.27		(2	%)	(21	%)
GAAP gross margin	60.4		%	66.9		%	67.4		%	(6.5) pts		(7.0) pts
Non-GAAP gross margin	66.5		%	68.2		%	68.6		%	(1.8) pts		(2.1) pts
GAAP operating margin	3.5		%	15.8		%	21.7		%	(12.3) pts		(18.2) pts
Non-GAAP operating margin	19.5		%	22.4		%	26.9		%	(2.9) pts		(7.4) pts

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

Highlights:


•	On May 27, 2016, Brocade completed the acquisition of Ruckus Wireless, Inc., enhancing Brocade’s position as a pure-play networking company with solutions spanning from the heart of the data center to the wireless network edge.

•

SAN product revenue of $282 million was down 9% year-over-year. The year-over-year decline was primarily the result of lower Fibre Channel director sales, which decreased 23%, partially offset by fixed-configuration switch sales which increased 3%. Sequentially, SAN product revenue decreased 5%, with directors declining 20%, partially offset by fixed-configuration and embedded switch sales growing 7% and 8%, respectively. The year-over-year and sequential declines in our SAN director revenue were primarily the result of a longer time to closure for many large deals, while the improvement in our switch revenue was primarily due to pull-through demand from all-flash array deployments. Overall, the decline in our SAN product revenue is consistent with commentary from many of our OEM partners regarding the weaker storage demand environment.

Page 1 of 12

•

During the quarter, Brocade launched the Brocade X6 Director, the industry’s first Gen 6 Fibre Channel director for mission-critical storage connectivity. This highly reliable, high-performance, low-latency solution is specifically designed for all-flash data centers. It extends the company’s leadership in offering the industry’s most innovative and widely deployed Fibre Channel storage networking solutions.

•

IP Networking product revenue of $209 million, including $73 million of product revenue from Ruckus Wireless, was up 36% year-over-year. The increase was due to the acquisition of Ruckus Wireless, partially offset by lower U.S. federal revenue, which was down 26% year-over-year, primarily due to the timing of large orders. Sequentially, IP Networking product revenue increased 59% due primarily to the inclusion of Ruckus revenue.

Board Declares Dividend:


•	The Brocade Board of Directors has declared a regular third fiscal quarter cash dividend of $0.055 per share of the Company’s common stock. The dividend payment will be made on October 3, 2016, to stockholders of record at the close of market on September 9, 2016.

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

Other Q3 2016 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 12

Financial Highlights and Additional Financial Information



	Q3 2016		Q2 2016		Q3 2015
Routes to market as a % of total net revenues:
OEM revenues	54	%	63	%	62	%
Channel/Direct revenues	46	%	37	%	38	%

10% or greater customer revenues	23	%	30	%	43	%
Geographic split as a % of total net revenues ⁽¹⁾:
Domestic revenues	52	%	53	%	57	%
International revenues	48	%	47	%	43	%
Segment split as a % of total net revenues:
SAN product revenues	48	%	57	%	56	%
IP Networking product revenues	35	%	25	%	28	%
Global Services revenues	17	%	18	%	16	%

SAN business revenues ⁽²⁾	57	%	67	%	66	%
IP Networking business revenues ⁽²⁾	43	%	33	%	34	%



Additional information:	Q3 2016			Q2 2016			Q3 2015
GAAP net income	$	10	M	$	43	M	$	92	M
Non-GAAP net income	$	92	M	$	89	M	$	115	M
GAAP operating income	$	21	M	$	83	M	$	120	M
Non-GAAP operating income	$	115	M	$	117	M	$	149	M
GAAP effective tax rate	(20.8		%)	41.6		%	17.4		%
Non-GAAP effective tax rate	14.2		%	20.8		%	20.1		%
Cash and cash equivalents	$	1,153	M	$	1,428	M	$	1,320	M
Deferred revenues	$	345	M	$	305	M	$	301	M
Capital expenditures	$	17	M	$	19	M	$	19	M
Cash provided by operations	$	28	M	$	112	M	$	55	M
Days sales outstanding	43 days			36 days			33 days
Employees at end of period	5,948			4,724			4,626
SAN port shipments	0.9		M	0.8		M	0.9		M
Share repurchases	$	660.7	M	$	36.4	M	$	103.1	M

Please see important note of explanation about the use of 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 known 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 hardware and software product, support, and services revenues.

Page 3 of 12

Non-GAAP Financial Measures

To supplement financial information presented on a GAAP basis, Brocade provides information presented on a non-GAAP basis. These non-GAAP financial measures include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP tax rate, non-GAAP net income, non-GAAP EPS and adjusted free cash flow. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, financial information presented on a GAAP basis. 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. The most directly comparable GAAP information and a reconciliation between the GAAP and non-GAAP amounts is provided in the tables at the end of this press release.

Management believes that the non-GAAP financial measures used in this press release allow management to gain a better understanding of Brocade’s comparative operating performance, both from period to period and relative to its competitors. These non-GAAP financial measures also help with the determination of Brocade’s baseline performance before gains, losses or charges that are considered by management to be outside of ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations and the allocation of resources.

Management believes these non-GAAP financial measures, when read in conjunction with Brocade’s GAAP financials, provide useful information to investors by offering:


•	the ability to make more meaningful period-to-period comparisons of Brocade’s ongoing operating results;


•	the ability to make more meaningful comparisons of Brocade’s operating performance relative to its competitors;


•	the ability to better identify trends in Brocade’s underlying business and to perform related trend analyses; and


•	a better understanding of how management plans and measures Brocade’s underlying business.

In determining non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP tax rate, non-GAAP net income and non-GAAP EPS, management excludes certain gains or losses and benefits or costs that are the result of infrequent events or events that arise outside the ordinary course of Brocade’s continuing operations. Management believes that it is appropriate to evaluate Brocade’s operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include, but are not limited to: (i) impact to cost of revenues from purchase accounting adjustments to inventory; (ii) acquisition and integration costs; (iii) restructuring and other related benefits; and (iv) effects of certain intercompany transactions on the tax provision.

Management also excludes the following non-cash charges in determining these non-GAAP financial measures: (i) stock-based compensation expense; (ii) amortization of purchased intangible assets; and (iii) non-cash interest expense related to the convertible debt.

Management believes that the exclusion of stock-based compensation allows for more accurate comparisons of Brocade’s operating results to Brocade’s peer companies because of the varying use of valuation methodologies and subjective assumptions and the variety of award types. In addition, the exclusion of the expense associated with the amortization of acquisition-related intangible assets is appropriate because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives, and the exclusion of amortization expense allows comparisons of operating results that are consistent over time for Brocade’s newly acquired and long-held businesses. In connection with the convertible debt, under the relevant accounting guidance, a non-cash interest expense is recognized for the convertible debt as an imputed interest expense for the conversion feature. Management believes excluding the non-cash interest expense related to the convertible debt from its non-GAAP financial measures is useful for investors because the expense does not represent a cash outflow in the respective reporting periods and is not indicative of ongoing operating performance.

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 and non-GAAP EPS.

Page 4 of 12

Limitations: These non-GAAP financial measures have limitations because they do not include all items of income and expense that impact the company. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies. Management compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. Management also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure, and management encourages investors to review carefully those reconciliations.

Forward-Looking Statements

This press release contains forward-looking statements including, but not limited to, statements regarding Brocade’s financial results, goals, plans, strategy, business outlook and prospects. These statements are based on current expectations as of the date of this press release and involve a number of risks, uncertainties and assumptions that may cause actual results to differ significantly. The risks, uncertainties and assumptions include, but are not limited to: the effect on Brocade of increasing market competition and changes in the industry; the impact on Brocade of conditions in the market for Storage Area Networking products; Brocade’s ability to execute on its sales strategy and plans for future operations; the impact on Brocade of macroeconomic trends and events and changes in IT spending levels; Brocade’s ability to introduce and achieve market acceptance of new products and support offerings on a timely basis; risks associated with Brocade’s international operations; and integration and other risks associated with acquisitions, divestitures and strategic investments. These and other risks are set forth in more detail in Brocade’s Form 10-Q for the fiscal quarter ended April 30, 2016, and in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015. Brocade does not assume any obligation to update or revise any such forward-looking statements whether as the result of new developments or otherwise.

About Brocade

Brocade (NASDAQ: BRCD) networking solutions help the world’s leading organizations turn their networks into platforms for business innovation. With solutions spanning public and private data centers to the network edge, Brocade is leading the industry in its transition to the New IP network infrastructures required for today’s era of digital business. (www.brocade.com)

Brocade and the B-wing symbol are registered trademarks of Brocade Communications Systems, Inc., in the United States and many other countries. Other brands, products, or service names mentioned herein may be trademarks of Brocade or others. Additional information about Brocade’s trademarks is available at: http://www.brocade.com/en/legal/brocade-Legal-intellectual-property/brocade-legal-trademarks.html.

Page 5 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended						Nine Months Ended
	July 30, 2016			August 1, 2015			July 30, 2016			August 1, 2015
	(In thousands, except per share amounts)
Net revenues:
Product	$	490,995		$	463,200		$	1,400,355		$	1,407,681
Service	99,726			88,619			287,956			266,952
Total net revenues	590,721			551,819			1,688,311			1,674,633
Cost of revenues:
Product	188,492			144,243			464,797			431,781
Service	45,330			35,672			127,489			109,056
Total cost of revenues	233,822			179,915			592,286			540,837
Gross margin	356,899			371,904			1,096,025			1,133,796
Operating expenses:
Research and development	114,996			85,072			297,516			262,173
Sales and marketing	167,983			144,883			468,743			428,199
General and administrative	32,960			20,422			78,180			65,815
Amortization of intangible assets	5,498			889			7,302			1,654
Acquisition and integration costs	14,868			789			20,625			3,133
Restructuring and other related benefits	—			—			(566		)	(637		)
Total operating expenses	336,305			252,055			871,800			760,337
Income from operations	20,594			119,849			224,225			373,459
Interest expense	(13,462		)	(9,778		)	(33,282		)	(45,754		)
Interest and other income, net	1,557			947			3,317			854
Income before income tax	8,689			111,018			194,260			328,559
Income tax expense (benefit)	(1,806		)	19,351			47,034			72,585
Net income	$	10,495		$	91,667		$	147,226		$	255,974
Net income per share—basic	$	0.02		$	0.22		$	0.36		$	0.61
Net income per share—diluted	$	0.02		$	0.21		$	0.35		$	0.59
Shares used in per share calculation—basic	426,671			417,299			411,709			422,184
Shares used in per share calculation—diluted	434,416			427,518			419,416			433,303

Cash dividends declared per share	$	0.055		$	0.045		$	0.145		$	0.115

Page 6 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended						Nine Months Ended
	July 30, 2016			August 1, 2015			July 30, 2016			August 1, 2015
	(In thousands)
Net income	$	10,495		$	91,667		$	147,226		$	255,974
Other comprehensive income and loss, net of tax:
Unrealized gains (losses) on cash flow hedges:
Change in unrealized gains and losses	(700		)	(414		)	(1,035		)	(2,332		)
Net gains and losses reclassified into earnings	482			831			1,831			2,544
Net unrealized gains (losses) on cash flow hedges	(218		)	417			796			212
Foreign currency translation adjustments	(1,628		)	(492		)	(1,760		)	(5,781		)
Total other comprehensive loss	(1,846		)	(75		)	(964		)	(5,569		)
Total comprehensive income	$	8,649		$	91,592		$	146,262		$	250,405

Page 7 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	July 30, 2016			October 31, 2015
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	1,153,074		$	1,440,882
Accounts receivable, net of allowances for doubtful accounts of $3,836 and $1,838 as of July 30, 2016, and October 31, 2015, respectively	278,180			235,883
Inventories	81,182			40,524
Deferred tax assets	—			78,675
Prepaid expenses and other current assets	86,922			56,235
Total current assets	1,599,358			1,852,199
Property and equipment, net	459,812			439,224
Goodwill	2,324,315			1,617,161
Intangible assets, net	434,921			75,623
Non-current deferred tax assets	3,918			813
Other assets	51,441			51,133
Total assets	$	4,873,765		$	4,036,153
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	121,093		$	98,143
Accrued employee compensation	134,471			142,075
Deferred revenue	257,460			244,622
Current portion of long-term debt	76,627			298
Other accrued liabilities	111,559			77,226
Total current liabilities	701,210			562,364
Long-term debt, net of current portion	1,516,761			793,779
Non-current deferred revenue	87,875			72,065
Non-current income tax liability	100,208			47,010
Non-current deferred tax liabilities	—			24,024
Other non-current liabilities	6,908			3,376
Total liabilities	2,412,962			1,502,618
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: 400,679 and 413,923 shares as of July 30, 2016, and October 31, 2015, respectively	401			414
Additional paid-in capital	1,475,709			1,632,984
Accumulated other comprehensive loss	(25,966		)	(25,002		)
Retained earnings	1,010,659			925,139
Total stockholders’ equity	2,460,803			2,533,535
Total liabilities and stockholders’ equity	$	4,873,765		$	4,036,153

Page 8 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	July 30, 2016			August 1, 2015
	(In thousands)
Cash flows from operating activities:
Net income	$	147,226		$	255,974
Adjustments to reconcile net income to net cash provided by operating activities:
Excess tax benefits from stock-based compensation	(1,778		)	(41,981		)
Depreciation and amortization	80,979			62,569
Loss on disposal of property and equipment	458			1,620
Net gain on sale of investments	(122		)	—
Amortization of debt issuance costs and debt discount	13,493			9,443
Write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing	—			4,808
Provision (recovery) for doubtful accounts receivable and sales allowances	(1,946		)	7,189
Non-cash purchase accounting adjustments to inventory	20,775			—
Non-cash stock-based compensation expense	88,805			64,594
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	988			17,959
Inventories	5,601			(1,778		)
Prepaid expenses and other assets	(9,725		)	(20,854		)
Deferred tax assets	(109		)	531
Accounts payable	5,519			2,266
Accrued employee compensation	(57,520		)	(94,852		)
Deferred revenue	5,359			(14,220		)
Other accrued liabilities	(43,874		)	16,478
Restructuring liabilities	(1,223		)	(2,514		)
Net cash provided by operating activities	252,906			267,232
Cash flows from investing activities:
Purchases of non-marketable equity and debt investments	(2,000		)	(2,150		)
Proceeds from maturities and sale of short-term investments	150,323			—
Proceeds from sale of non-marketable equity investment	—			1,489
Purchases of property and equipment	(59,810		)	(53,142		)
Purchase of intangible assets	—			(7,750		)
Net cash paid in connection with acquisitions	(564,888		)	(95,452		)
Proceeds from collection of note receivable	250			250
Net cash used in investing activities	(476,125		)	(156,755		)

Page 9 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued (Unaudited)

	Nine Months Ended
	July 30, 2016			August 1, 2015
	(In thousands)
Cash flows from financing activities:
Payment of principal related to senior secured notes	—			(300,000		)
Payment of debt issuance costs	(891		)	(1,718		)
Payment of principal related to capital leases	(282		)	(1,677		)
Common stock repurchases	(841,562		)	(312,601		)
Proceeds from issuance of common stock	49,195			51,345
Payment of cash dividends to stockholders	(61,706		)	(48,819		)
Proceeds from term loan	787,255			—
Proceeds from convertible notes	—			565,656
Purchase of convertible note hedge	—			(86,135		)
Proceeds from issuance of warrants	—			51,175
Proceeds from noncontrolling interests	2,550			—
Excess tax benefits from stock-based compensation	1,778			41,981
Net cash used in financing activities	(63,663		)	(40,793		)
Effect of exchange rate fluctuations on cash and cash equivalents	(926		)	(5,030		)
Net increase (decrease) in cash and cash equivalents	(287,808		)	64,654
Cash and cash equivalents, beginning of period	1,440,882			1,255,017
Cash and cash equivalents, end of period	$	1,153,074		$	1,319,671

Page 10 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC. RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES (Unaudited)

	Three Months Ended
	July 30, 2016			April 30, 2016			August 1, 2015
	(In thousands, except per share amounts)
Non-GAAP adjustments
Stock-based compensation expense included in cost of revenues	$	5,965		$	3,531		$	3,955
Amortization of intangible assets expense included in cost of revenues	8,922			3,193			2,549
Purchase accounting adjustments to inventory	20,775			—			—
Total gross margin impact from non-GAAP adjustments	35,662			6,724			6,504

Stock-based compensation expense included in research and development	9,206			5,123			5,226
Stock-based compensation expense included in sales and marketing	17,756			11,052			10,601
Stock-based compensation expense included in general and administrative	11,716			5,083			4,655
Amortization of intangible assets expense included in operating expenses	5,498			902			889
Acquisition and integration costs	14,868			5,757			789
Total operating income impact from non-GAAP adjustments	94,706			34,641			28,664

Convertible debt interest	3,871			3,824			3,684
Effects of certain intercompany transactions on the tax provision	7,436			13,670			—
Income tax effect of non-GAAP adjustments	(24,506		)	(6,329		)	(9,494		)
Total net income impact from non-GAAP adjustments	$	81,507		$	45,806		$	22,854

Gross margin reconciliation
GAAP gross margin	$	356,899		$	350,311		$	371,904
Total gross margin impact from non-GAAP adjustments	35,662			6,724			6,504
Non-GAAP gross margin	$	392,561		$	357,035		$	378,408
GAAP gross margin, as a percentage of total net revenues	60.4		%	66.9		%	67.4		%
Non-GAAP gross margin, as a percentage of total net revenues	66.5		%	68.2		%	68.6		%

Operating income reconciliation
GAAP operating income	$	20,594		$	82,665		$	119,849
Total operating income impact from non-GAAP adjustments	94,706			34,641			28,664
Non-GAAP operating income	$	115,300		$	117,306		$	148,513
GAAP operating income, as a percentage of total net revenues	3.5		%	15.8		%	21.7		%
Non-GAAP operating income, as a percentage of total net revenues	19.5		%	22.4		%	26.9		%

Net income and net income per share reconciliation
Net income on a GAAP basis	$	10,495		$	43,085		$	91,667
Total net income impact from non-GAAP adjustments	81,507			45,806			22,854
Non-GAAP net income	$	92,002		$	88,891		$	114,521

GAAP net income per share—basic	$	0.02		$	0.11		$	0.22
Total impact on net income per share—basic from non-GAAP adjustments	0.20			0.11			0.05
Non-GAAP net income per share—basic	$	0.22		$	0.22		$	0.27

Page 11 of 12

BROCADE COMMUNICATIONS SYSTEMS, INC. RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES—Continued (Unaudited)

	Three Months Ended
	July 30, 2016			April 30, 2016			August 1, 2015
	(In thousands, except per share amounts)
GAAP net income per share—diluted	$	0.02		$	0.11		$	0.21
Total impact on net income per share—diluted from non-GAAP adjustments	0.19			0.11			0.06
Non-GAAP net income per share—diluted	$	0.21		$	0.22		$	0.27

Shares used in GAAP and non-GAAP per share calculation—basic	426,671			400,554			417,299
Shares used in GAAP and non-GAAP per share calculation—diluted	434,416			408,748			427,518

Effective tax rate reconciliation
GAAP effective tax rate	(20.8		)%	41.6		%	17.4		%
Tax impact from effects of certain intercompany transactions on the tax provision	(15.2		)%	(38.7		)%	—
Tax impact from non-GAAP adjustments	50.2		%	17.9		%	2.7		%
Non-GAAP effective tax rate	14.2		%	20.8		%	20.1		%

Page 12 of 12

Q3 FY 2016 Earnings

Prepared Comments and Slides

August 25, 2016

Michael Iburg

Investor Relations

Phone: 408-333-0233

[email protected]

Ed Graczyk

Media Relations

Phone: 408-333-1836

[email protected]

NASDAQ: BRCD

Brocade Q3 FY 2016 Earnings 8/25/2016

Prepared comments provided by Michael Iburg, Investor Relations

Thank you for your interest in Brocade’s Q3 Fiscal 2016 earnings presentation, which includes prepared remarks, cautionary statements and disclosures, slides, and a press release detailing fiscal third quarter 2016 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.

Brocade Q3 FY 2016 Earnings 8/25/2016

Brocade Q3 FY 2016 Earnings 8/25/2016

Brocade Q3 FY 2016 Earnings 8/25/2016

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

A management discussion and live question and answer conference call will be webcast at

2:30 p.m. Pacific Time on August 25 at www.brcd.com and will be archived on the Brocade Investor Relations website.

Brocade Q3 FY 2016 Earnings 8/25/2016

Prepared comments provided by Lloyd Carney, CEO

Brocade Q3 FY 2016 Earnings 8/25/2016

Q3 was a productive quarter for Brocade. Against the backdrop of a mixed macro environment, we posted solid results, with total revenue at the high end of our guidance range. In addition, we closed our acquisition of Ruckus Wireless, continued a strong year of new product introductions across our portfolio, and established a strategic joint venture in China with Guiyang High-Tech Industrial Investment Group.

Our SAN business performed in line with the Q3 outlook provided with our Q2 16 results, and we achieved a significant milestone with the launch of the industry’s first Gen 6 Fibre Channel director portfolio, which we have already begun shipping for revenue. Brocade’s continued leadership in Fibre Channel storage provides customers with a robust and long-term technology upgrade path from the industry’s most trusted name in Fibre Channel storage networking. Strong interest in this technology is driving faster development of the Gen 6 partner ecosystem than we have seen in previous generations.

In IP Networking, while sales into the U.S. federal market were below our expectations in Q3, we exceeded our overall revenue outlook largely due to the strong contribution from Ruckus Wireless, following the completion of our acquisition on May 27, 2016.

We are progressing well with the integration, and our sales teams are already working collaboratively to optimize near-term opportunities. We are excited to bring together the full benefits of our combined portfolios for the network edge, data center and service provider markets. Underscoring our synergies, earlier this week Brocade was named a leader in the IHS WLAN scorecard, which cited the strategic benefits of combining Ruckus’s high performance WLAN offering and Brocade’s extensive switching portfolio. As a networking pure-play addressing the core of the data center to the wireless edge, we are well positioned to expand our market reach, diversify our revenue mix, and drive incremental opportunities for growth.

Brocade Q3 FY 2016 Earnings 8/25/2016

Q3 was an important quarter for our SAN business as we launched the industry’s first Gen 6 Fibre Channel director, the Brocade X6. This new family of products extends our technology leadership and expands upon our portfolio of Gen 6 solutions, including the Brocade G620 switch that we launched in March.

Widespread enthusiasm for Brocade Fibre Channel Gen 6 technology was echoed in our announcement by more than twenty partners and industry analysts, who affirmed the value of our portfolio and roadmap. Moreover, the rapid development of the Gen 6 ecosystem is a strong indication of market readiness for this technology. Today, three of our OEM partners are shipping our Gen 6 directors, with most others expected to launch within the next several months. Further, by early 2017, several of our partners will have 32 Gbps storage arrays in the market, and HBA vendors are already shipping Gen 6 adapters, a meaningful contrast to the launch of Gen 5 several years ago.

Recent industry reports from Gartner and others confirm our long-standing expectation that Fibre Channel will continue to be the protocol of choice for storage area networks for the foreseeable future. Fibre Channel is generally accepted as the lowest latency and most reliable protocol on the market, and these attributes are more critical than ever as the industry moves to adopt high performance, flash-based storage. Legacy networks and lower performance protocols can produce bottlenecks, minimizing the efficacy and economic benefits of all-flash arrays. Further, today’s faster internal interconnect protocols, such as non-volatile memory express (NVMe), similarly require high-throughput storage networks in order to achieve their optimal performance.

During the quarter, SAN revenue was in line with the Q3 outlook provided with our Q2 16 results, declining 9% year-over-year. Director sales declined primarily due to a longer time to closure for many large deals. This was partially offset by stronger switch sales, which were driven largely by pull-through demand from all-flash array deployments. Overall, our SAN results reflect the sluggish storage environment reported by many of our partners. However, we were encouraged by the early demand for Gen 6 directors from a number of our leading-edge customers.

Finally, this week we announcement new capabilities for the Brocade Analytics Monitoring Platform, which we expect to provide incremental revenue opportunities from our current installed base and provide additional incentive for customers to move to the latest generations of Brocade Fibre Channel technology.

Brocade Q3 FY 2016 Earnings 8/25/2016

We exceeded our fiscal Q3 IP Networking revenue outlook provided with our Q2 results, largely due to the strong contribution from our Ruckus Wireless portfolio, which offset softness in the U.S. federal market.

Ruckus product line strength was primarily driven by better than expected linearity during July, as well as a lower than anticipated adverse revenue impact associated with the purchase accounting-driven fair value adjustments, commonly referred to as purchase price adjustments (PPA), following the completion of our acquisition.

We continued to see increasing demand for the Ruckus ZoneFlex R710 access point, consistent with the emerging industry upgrade cycle to 802.11ac Wave 2. Approximately 15% of our access point revenue came from Wave 2 products in the quarter. In addition, our low-price entry-level R310 802.11ac access point also continues to gain traction. With less than one third of our access point installed base having upgraded to this latest generation today, we believe that this cycle and the growing demand for Wave 2 should continue to provide a long-term growth opportunity.

In terms of the wired IP Networking business, sales into the enterprise and service provider markets came in largely within our expectations. However, weakness in the U.S. federal market in Q3 extended a disappointing year for this vertical. We are hopeful that an improved business environment and our expanded portfolio that now includes wireless solutions will provide greater opportunity in the coming fiscal year. In addition, we saw a decrease in E-rate deal flow, consistent with market commentary relating to funding, timing, and administrative challenges.

During Q3, we were pleased to announce that the Brocade Virtual Application Delivery Controller (vADC) became available on the Microsoft Azure Marketplace, further broadening our market reach. We continue to see active interest in our innovative software technologies from customers that recognize the imperative to transform old, legacy networks to New IP architectures. As a result, our software revenue has continued to grow, however, the market as a whole is not evolving as quickly as we had expected.

Brocade Q3 FY 2016 Earnings 8/25/2016

Fiscal 2016 has been a significant year for product innovation, demonstrating the strong execution of our product and technology teams. Over the last several quarters, we have brought to market groundbreaking new products in strategic areas such as IP fabrics, mobility, automation and network visibility.

During Q3, we continued this momentum with the announcement of the Brocade Workflow Composer, a new server-based platform that provides end-to-end automation of cross-functional IT workflows. Furthering Brocade’s long-standing heritage of network automation leadership, this solution enables greater business agility through a DevOps-style solution for IT operational improvement.

In addition, in keeping with Ruckus’s stated 2016 growth initiatives, we are aggressively expanding our portfolio of indoor and outdoor wireless access points. During the quarter, we began shipping two new offerings in the highly successful Ruckus ZoneFlex™ family, the outdoor T710 and mid-range R510. Expansion of this portfolio extends our market reach and provides further opportunity to continue Ruckus’s track record of outpacing market growth.

We also announced the general availability of Ruckus Cloud Wi-Fi, a wireless local area network (WLAN) management-as-a-service offering, powered by the new Ruckus public cloud platform. Leveraging this platform, we expect to deliver integrated solutions that simplify the configuration, monitoring and troubleshooting of both wired and wireless networks.

Brocade Q3 FY 2016 Earnings 8/25/2016

In closing, we continue to demonstrate a commitment to market leadership across our portfolio. In storage networking, we have successfully advanced our technology roadmap with the launch of the Brocade Fibre Channel Gen 6 portfolio and additional enhancements to the Brocade Analytics Monitoring Platform. While we are maintaining an appropriately conservative view of the SAN market, we believe that our storage networking business will continue to provide us with long-term revenue opportunity and strong profit contribution.

In IP Networking, we continue to invest strategically, with New IP innovations that are closely aligned with major industry trends. We expect to make additional announcements in our fiscal fourth quarter and believe that we are building a solid foundation for business growth and TAM expansion in the coming years.

Finally, with the successful completion of our acquisition of Ruckus Wireless, we are pleased to welcome this talented and committed team to the Brocade family. Our combined strengths open up new opportunities, and distinguish Brocade as a pure-play networking company for the digital transformation era.

At our Investor Day event on September 21 in New York City, we will provide further details about our progress, take you through our market opportunities, and provide an updated financial model. I encourage you to attend in person or participate virtually and look forward to speaking with you soon.

Brocade Q3 FY 2016 Earnings 8/25/2016

Prepared comments provided by Dan Fairfax, CFO

Brocade Q3 FY 2016 Earnings 8/25/2016

On May 27, 2016, Brocade completed the acquisition of Ruckus Wireless, and the results presented here include approximately two months of Ruckus financial results. In addition, our two-year target model provided at last year’s Investor Day did not contemplate the Ruckus acquisition, therefore we have removed it from this page and will provide a new two-year target model at our upcoming Investor Day on September 21, 2016.

Q3 16 revenue of $591M was up 7% Yr./Yr. primarily driven by Ruckus, which achieved higher than expected revenue. This was primarily due to better than expected linearity during July and lower than expected PPA. SAN product revenue declined 9% Yr./Yr., but was above the midpoint of our outlook range. IP Networking product revenue increased 36% Yr./Yr. primarily due to strong Ruckus Wireless revenue offset by weaker sales to U.S. federal customers.

Non-GAAP gross margin was 66.5% in Q3 16, down 210 basis points year-over-year due to lower SAN revenue, customer mix, and deferred revenue PPA, which lowered Ruckus’s services revenue. Non-GAAP operating margin was 19.5% in Q3 16, down 740 basis points from Q3 15 primarily due to higher operating expenses and lower gross margin.

Q3 16 non-GAAP diluted EPS was $0.21, down 21% year-over-year. Although down year-over-year, non-GAAP EPS exceeded our outlook of $0.14 - $0.17 due to higher revenue, higher operating margins, a lower non-GAAP tax rate, and a lower than anticipated share count due to aggressive share repurchases in the quarter.

Operating cash flow and adjusted free cash flow were below the Brocade-only outlook ranges of $45-55M and $25-35M, respectively, primarily due to payments made related to the Ruckus acquisition and DSOs extending out by 7 days sequentially.

Brocade Q3 FY 2016 Earnings 8/25/2016

Revenue from our total SAN business, including products and SAN-based support and services, in Q3 16 was $338M, down 7% from Q3 15 as overall product revenue was down 9% and global services revenue was up 7%.

Our SAN product revenue was $282M in the quarter, down 9% Yr./Yr., as director revenue decreased 23%, while fixed switch revenue increased 3% and embedded server revenue was flat. The SAN product revenue decline reflects sluggish storage demand across most partners and geographies as well as the longer time to closure for many large director deals.

During the quarter we experienced encouraging interest in our newly launched Gen 6 directors and, as of today, three of our OEM partners have qualified the platform, and most others are expected to do so over the next several months.

SAN-based global services revenue was $56M, up 7% Yr./Yr. due to several large catch-up renewals in the quarter.

Brocade Q3 FY 2016 Earnings 8/25/2016

Revenue from our total IP Networking business, including products and IP-based support and services, was $253M, up 33% Yr./Yr., primarily due to the acquisition of Ruckus Wireless, which contributed a total of $78M in the quarter.

Q3 16 IP Networking product revenue was $209M, up 36% Yr./Yr. Ruckus product revenue in the quarter was $73M, above our outlook range primarily due to better than expected linearity during July and lower than expected impact from the deferred revenue PPA. Ruckus’s strength was primarily driven by healthy product demand for indoor and outdoor wireless access points and managed services platforms.

Excluding Ruckus revenue, Brocade IP Networking product revenue was $136M, below the outlook range of $141M to $150M, due primarily to lower than anticipated sales to the U.S. federal market. From a product perspective, Ethernet switches sales were down 10% year-over-year primarily due to lower U.S. federal sales, and router sales were down 14% year-over-year due primarily to lower service provider sales.

IP-based Global Services revenue was $44M, up 21% Yr./Yr., primarily due to incremental service volume from Ruckus of $5M, which was below the historical run-rate due to the deferred revenue PPA, and represents the inclusion of approximately two months of Ruckus service revenue.

Brocade Q3 FY 2016 Earnings 8/25/2016

The outlook provided on this page is for the combined company incorporating Ruckus Wireless.

For Q4 16, we have set the following outlook:


•	For Q4 16, we expect SAN product revenue to be up 1% to 4% Qtr./Qtr. as we expect a seasonal improvement in our SAN revenue although not as strong as we typically experience.


•	We expect Q4 16 IP Networking product revenue to be up 17% to 22% Qtr./Qtr. as we will have a full quarter of wireless revenue and anticipate a partial recovery in our U.S. federal revenue.


•	We expect our Global Services revenue to be up 1% to 2% Qtr./Qtr.


•	We expect Q4 16 non-GAAP gross margin to be between 66.5% to 67.5%, and non-GAAP operating margin to be between 19.0% and 20.5%, primarily due to higher spending as we include three months of Ruckus operating expenses and lower gross margins due to the expected mix of SAN and IP revenues.


•	Operating cash flow is expected to be in the range of $140M - $160M in fiscal Q4 16. We expect DSOs to be in the high-30’s to low-40s for the next several quarters.


•	At the end of Q3 16, OEM SAN inventory dollars were down 4% year-over-year and was approximately 1.8 weeks of supply based on SAN business revenue. We expect inventory to be between one to two weeks in Q4 16.

Brocade Q3 FY 2016 Earnings 8/25/2016

Prepared comments provided by Michael Iburg, Investor Relations

That concludes Brocade’s prepared comments. At 2:30 p.m. Pacific Time on August 25, Brocade will host a webcast conference call at www.brcd.com.

Thank you for your interest in Brocade.

Brocade Q3 FY 2016 Earnings 8/25/2016

Brocade Q3 FY 2016 Earnings 8/25/2016

Brocade Q3 FY 2016 Earnings 8/25/2016

Additional Financial Information:



	Q3 15		Q2 16		Q3 16
GAAP product gross margin	68.9	%	69.1	%	61.6	%
Non-GAAP product gross margin	69.8	%	70.2	%	68.2	%

GAAP services gross margin	59.7	%	57.1	%	54.5	%
Non-GAAP services gross margin	62.3	%	59.3	%	58.0	%

Actual and Forecasted Purchase Accounting Adjustments:



	Q3 16 Actual			Q4 16 Fcst			Q1 17 Fcst			Q2 17 Fcst			Q3 17 Fcst			Q4 17 Fcst
Inventory ⁽¹⁾	$	(21	)M	$	(19	)M	$	—		$	—		$	—		$	—
Revenue ⁽²⁾	$	(6	)M	$	(2	)M	$	(2	)M	$	(1	)M	$	(1	)M	$	(1	)M

⁽¹⁾ Gross margin impact of purchase accounting adjustments to inventory (excluded from non-GAAP results).

⁽²⁾ Gross margin impact of purchase accounting adjustments to deferred revenue (included in non-GAAP results).

Brocade Q3 FY 2016 Earnings 8/25/2016

Brocade Q3 FY 2016 Earnings 8/25/2016

Brocade Q3 FY 2016 Earnings 8/25/2016

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