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Brocade Reports Fiscal Q3 2013 Results

SAN JOSE, CA — (Marketwired) — 08/13/13 — ® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended July 27, 2013. Brocade reported third quarter revenue of $536.6 million, down 3% year-over-year and down slightly quarter-over-quarter. The company reported GAAP diluted earnings per share (EPS) of $0.26, which includes the A10 Networks litigation settlement, up from $0.09 per diluted share in Q3 2012. Non-GAAP diluted EPS was $0.19, up from $0.14 per diluted share in Q3 2012.

“In Q3, Brocade exceeded our guidance for revenue, non-GAAP operating margin, non-GAAP EPS, and cash flow,” said Lloyd Carney, CEO of Brocade. “The storage market is recovering more quickly than we had anticipated entering our third quarter and, coupled with continued strong adoption of Gen 5 Fibre Channel, contributed to good Storage Area Networking (SAN) revenue results. In IP Networking, our Federal sales were disappointing while Brocade VDX switch revenue showed continued strong growth in Q3, underscoring our leadership in Ethernet fabrics. We are making great progress toward our spending-reduction goal, and are already seeing the benefits in our financial results and cash flow.”


SAN business revenue, including products and services, was $369.2 million, down 2% year-over-year and 1% sequentially. In a continuing soft storage market that began in Q2 2013, end-user demand showed improvement in the third fiscal quarter. The quarter-over-quarter SAN revenue performance was better than expected. Gen 5 (16 Gbps) Fibre Channel products represented approximately 64% of director and switch revenue in the quarter, higher than the 29% reported in Q3 2012 and 52% in Q2 2013.

IP Networking business revenue, including products and services, was $167.3 million, down 6% year-over-year and up 2% quarter-over-quarter. The year-over-year decline was due to lower sales into the U.S. federal government as some expected orders moved out of the third fiscal quarter in a challenging budget environment. Estimated Federal revenue was $19.9 million in the quarter, down 42% year-over-year and 5% quarter-over-quarter. Non-Federal IP Networking revenue, including data center, enterprise and service provider customers, was $147.4 million in the third quarter, up 3% year-over-year and 3% quarter-over-quarter.

GAAP gross margin was 63.0% and non-GAAP gross margin was 65.6% in Q3 2013, compared with 61.3% and 63.7% respectively, in Q3 2012. The year-over-year improvement in gross margin was due in part to a more favorable product mix within the IP Networking segment and lower spending. Gross margin improved quarter-over-quarter, primarily due to lower spending.

GAAP operating margin was 13.9% and non-GAAP operating margin was 21.6% in Q3 2013, compared with 12.6% and 19.5% respectively, in Q3 2012. The year-over-year improvement in operating margin was due to the higher gross margin noted above and lower operating expenses as the Company made progress on reducing spending in non-strategic areas. Non-GAAP operating expenses of $235.8 million were down 4% year-over-year and 5% quarter-over-quarter. Using Q1 2013 as a baseline, the Company has now reduced quarterly spending by more than $15 million, or more than $60 million on an annualized basis, and is on track to realize $100 million of annualized savings by February 2014. Operating margin also increased quarter-over-quarter due to higher gross margin and lower operating expenses.

Operating cash flow was $102.2 million in Q3 2013, down 10% year-over-year and 15% quarter-over-quarter in a seasonally softer quarter for cash generation. The lower operating cash flow year-over-year and quarter-over-quarter, respectively, was due to the payment of employee incentive compensation earned through the first half of fiscal 2013 in Q3 2013, while no payment was made in Q3 2012 or Q2 2013.

During Q3 2013, the Company recognized a gain of $76.8 million in Other Income related to the litigation settlement with A10 Networks, which increased GAAP EPS by $0.13 in the quarter. The settlement includes a $5.0 million cash payment received during Q3 2013, $70.0 million in notes receivable that are payable on or before January 2014, and the value of licensing rights granted to Brocade.

GAAP diluted EPS was $0.26 in Q3 2013, up 179% year-over-year, and non-GAAP diluted EPS of $0.19 was up 32% year-over-year. The company recorded a tax benefit of approximately $0.02 per share resulting from the final resolution of various tax audits and assessments during the quarter.

Average diluted shares outstanding for Q3 2013 were 461.3 million shares, down 2% year-over-year and 1% quarter-over-quarter. The company repurchased 17.9 million shares for $101.2 million at an average price of $5.64 during Q3 2013. Subsequent to the end of Q3 2013, the company has repurchased an additional 7.8 million shares for $52.6 million and has approximately $308 million remaining in the Board-authorized share repurchase program as of August 12, 2013.

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

Other Q3 2013 product, customer and partner announcements are available at .

Brocade ()
130 Holger Way
San Jose, CA. 95134
T. 408.333.8000
F. 408.333.8101

This press release contains non-GAAP financial measures. In evaluating Brocade-s performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.

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

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

the ability to make more meaningful comparisons of Brocade-s operating performance against industry and competitor companies;

the ability to better identify trends in Brocade-s underlying business and to perform related trend analysis;

a better understanding of how management plans and measures Brocade-s underlying business; and

an easier way to compare Brocade-s most recent results of operations against investor and analyst financial models.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events or arise outside the ordinary course of Brocade-s continuing operations. Management believes that it is appropriate to evaluate Brocade-s operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include, but are not limited to: (i) legal provision or recovery associated with certain pre-acquisition litigation, (ii) call premium cost and original issue discount and debt issuance costs of debt related to lenders that did not participate in refinancing, (iii) settlement gain associated with certain pre-acquisition related litigation and (iv) 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 available valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Management also believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for Brocade-s newly acquired and long-held businesses.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above in order to present a more meaningful measure of non-GAAP net income.

These non-GAAP financial measures have limitations, however, because they do not include all items of income and expense that impact the Company. Management compensates for these limitations by also considering Brocade-s GAAP results. The non-GAAP financial measures that Brocade uses are not prepared in accordance with, and should not be considered an alternative to measurements required by GAAP, such as operating income, net income and net income per share, and should not be considered measurements of Brocade-s liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies.

This press release contains statements that are forward-looking in nature, including statements regarding Brocade-s strategy, business prospects, organizational and business alignment, profitability, expense management, cash flow, and market conditions. 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 including the data center, federal government and service provider sectors, customer acceptance of Brocade-s Ethernet fabric solutions, Brocade-s ability to continue to successfully innovate new products and services on a timely basis and achieve widespread market acceptance, and the effect of increasing market competition and changes in the industry. Certain of these and other risks are set forth in more detail in “Item 1A. Risk Factors” in Brocade-s Quarterly Report on Form 10-Q for the fiscal quarter ended April 27, 2013 and in Brocade-s Annual Report on Form 10-K for the fiscal year ended October 27, 2012. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.

Brocade (NASDAQ: BRCD) networking solutions help the world-s leading organizations transition smoothly to a world where applications and information reside anywhere. ()

ADX, AnyIO, Brocade, Brocade Assurance, the B-wing symbol, DCX, Fabric OS, ICX, MLX, MyBrocade, OpenScript, VCS, VDX, and Vyatta are registered trademarks, and HyperEdge, 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 their respective owners.

© 2013 Brocade Communications Systems, Inc. All Rights Reserved.

Public Relations
John Noh
Tel: 408-333-5108

Investor Relations
Robert Eggers
Tel: 408-333-8797

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