Brocade Reports Q4 and Fiscal Year 2008 Results
Achieves Record Revenues in Q4 with 17 Percent Growth Year-over-Year;
Ends FY 08 on Strong Note and Plans for Additional Growth through Acquisition of Foundry Networks
SAN JOSE, Calif., Nov. 20 -- Brocade(R) (NASDAQ:BRCD)
today reported financial results for its fourth fiscal quarter and full fiscal year, which ended October 25, 2008. Brocade reported Q4 revenues of $398.5 million, GAAP net income of $38 million or $.10 per share, and net income of $75.8 million or $.20 per share on a non-GAAP basis.
Commenting on the Brocade's fourth quarter and full fiscal year financial results, Michael Klayko, Brocade CEO, said:
"Q4 was another outstanding quarter for Brocade, where we achieved record revenues and better-than-expected profitability fueled by our product and innovation advantages in our target markets. Our strong performance in Q4 accentuates an overall outstanding fiscal 2008, in which we achieved double-digit growth, expanded our margin and announced exciting plans to expand into additional, larger markets through our planned acquisition of Foundry Networks."
Fourth Fiscal Quarter 2008 Business Highlights
-- Brocade announced the availability of a new family of fabric-based encryption platforms that helps customers by encrypting critical corporate data with high performance and centralized management. This solution offers integration with several management products including NetApp Lifetime Key Management and RSA(R) Key Manager for the Datacenter.
-- Brocade unveiled the Data Center Fabric Manager 10.0, a management application that helps customers secure the flow of data within and across multiple fabrics to increase productivity, scalability and operational efficiency. The solution integrates easily with existing third-party storage, server, and data center infrastructure management frameworks.
-- Brocade announced in September that Brocade 415/425 and 815/825 host bus adapters (HBAs) had been certified for VMware ESX, allowing Brocade to release device drivers independently of VMware's own product releases.
-- Brocade introduced the Brocade 8 Gbit/sec Storage Area Network (SAN) Switch for the HP BladeSystem c-Class portfolio, the industry's highest-performance embedded switch. The combined solution increases the network bandwidth of the HP BladeSystem c-Class technology and increases flexibility while reducing costs.
-- Brocade announced continued collaboration with Oracle to help optimize Oracle applications and databases running Oracle(R) Enterprise Linux and Oracle VM, with advanced capabilities delivered through Brocade's Data Center Fabric (DCF) architecture and its broad portfolio of data center networking products.
-- Brocade furthered its partnership with Microsoft, demonstrating a new server-to-storage area network (SAN) management productivity solution for Microsoft System Center that gives customers end-to-end data center fabric and host bus adapter (HBA) management capabilities, and provides recommendations for optimizing their system performance.
Fourth Fiscal Quarter 2008 Financial Highlights and Additional Financial Information
-- Revenue for fiscal year 2008 was $1,466.9 million, a growth of 19% over fiscal year 2007.
-- In Q4 08, Brocade achieved record revenue, 9% quarter on quarter growth and 17% year on year growth.
-- Brocade's total installed base of SAN ports was approximately 19.4 million.
-- In Q4 08, Average Selling Price (ASP) declines were in the low single digits compared to Q3 08.
-- In Q4 08, net stock-based compensation expense was $7.5 million and has been excluded from Brocade's non-GAAP results.
-- As of the end of Q3 08, Brocade suspended its share repurchase program in connection with the Foundry Acquisition. Therefore, in Q4 08, Brocade made no repurchases. As of the end of Q4 08, Brocade had $414.1 million remaining under its $800 million total stock buyback program authorization. Since Q4 07, Brocade reduced the total number of shares outstanding by over 15.5 million net, or by 4%.
-- Brocade's GAAP tax rate was 2.9%, and its non-GAAP effective tax-rate was 26.4% in Q4 08.
Q4 2008 Q3 2008 Q4 2007
Revenue $398.5 M $365.7 M $340.0 M
GAAP net income $38.0 M $20.3 M $32.0 M
GAAP EPS - diluted $0.10 $0.05 $0.08
Non-GAAP net income $75.8 M $61.2 M $66.5 M
Non-GAAP EPS - diluted $0.20 $0.16 $0.16
Non-GAAP gross margin 64.1% 61.9% 58.5%
Non-GAAP operating margin 26.2% 22.6% 23.3%
Cash flow from operations $168.6 M $71.7 M $54.5 M
Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.
As a % of total revenues Q4 2008 Q3 2008 Q4 2007
OEM revenues 88% 86% 85%
Channel/Direct revenues 12% 14% 15%
10% or greater customer revenues 65% 62% 67%
Domestic revenues 64% 65% 60%
International revenues (1) 36% 35% 40%
Service revenues 16% 17% 16%
Q4 2008 Q3 2008 Q4 2007
Cash, cash equivalents, and
investments, net of
convertible debt $650.5 M $595.1 M $625.8 M
Deferred revenues $141.2 M $148.5 M $130.9 M
Capital expenditures (2) $18.6 M $94.2 M $15.0 M
Stock repurchases (in dollars) None $38.1 M $50.0 M
Stock repurchases (in shares) None 4.7 M 6.6 M
Days sales outstanding 36 days 43 days 47 days
Employees at end of period 2,834 2,842 2,368
(1) Based on Brocade estimates Brocade product demand was 41% domestic and 59% international.
(2) In Q4 08, capital expenditures included approximately $4.7 million related to the construction of the Company's new campus. In Q3 08, capital expenditures included approximately $80.2 million related to the construction of the Company's new campus.
Non-GAAP Financial Measures
This press release and the related conference call contain non-GAAP financial measures. In evaluating the Company's performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.
Management believes that non-GAAP net income and other non-GAAP financial measures used in this press release allow management to gain a better understanding of the Company's comparative operating performance from period-to-period and to its competitors' operating results. Management also believes these non-GAAP financial measures help indicate the Company'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 the Company's GAAP financials, provide useful information to investors by offering:
-- the ability to make more meaningful period-to-period comparisons of the Company's ongoing operating results;
-- the ability to better identify trends in the Company's underlying business and perform related trend analysis;
-- a better understanding of how management plans and measures the Company's underlying business; and
-- an easier way to compare the Company's most recent results of operations against investor and analyst financial models.
Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events or arise outside the ordinary course of our continuing operations. Management believes that it is appropriate to evaluate the Company's operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include: (i) legal fees associated with indemnification obligations to former employees and other related costs, net, (ii) acquisition and integration costs (in connection with the Foundry and McDATA acquisition), (iii) legal fees associated with certain pre-acquisition litigation (in connection with the McDATA acquisition), (iv) provision for class action lawsuit, (v) gain on termination of interest rate swap, (vi) gain/loss on sale of investments, (vii) loss on impairment of portfolio investments and (viii) acquisition-related financing charges.
Management also excludes the following non-cash charges in determining non-GAAP net income: (i) stock-based compensation expense, (ii) amortization of purchased intangible assets, and (iii) costs/benefits associated with restructuring costs and facilities lease losses. 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 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 the Company's newly acquired and long-held businesses.
Finally, management believes that it is appropriate to exclude the tax effects of the items noted above as well as the release of the valuation allowance 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 the Company's GAAP results. The non-GAAP financial measures the Company uses are not prepared in accordance with, and should not be considered an alternative to, measurements required by GAAP, such as operating income, net income and net income per share, and should not be considered measures of the Company's liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measures reported by other companies.
Fourth Quarter Fiscal 2008 Conference Call and Webcast Information
Brocade management will host a conference call to discuss fourth quarter and full fiscal year 2008 results on Thursday, November 20, 2008, at 2:00 p.m. Pacific Standard Time. To access the live webcast, please visit Brocade's website at http://www.brcd.com/ at least 20 minutes prior to the call to download any necessary audio or plug-in software. A telephone replay will be available approximately two hours after the conference ends and will be available until 5:00 p.m. Pacific Standard Time on November 27, 2008. A replay of the conference call will be available via webcast at http://www.brcd.com/ for approximately twelve months.
Cautionary Statement
This press release contains statements that are forward-looking in nature, including statements regarding market dynamics, customer demand for the Company's product and service offerings and the proposed acquisition of Foundry Networks, Inc. These statements are based on current expectations on the date of this press release and involve a number of risks and uncertainties which may cause actual results to differ significantly from such estimates. The risks include, but are not limited to, the degree of market adoption of the Company's product and service offerings, market competition, the effect of changes in IT spending levels, the Company's ability to anticipate future OEM and end-user product needs and to accurately forecast end-user demand, dependence on strategic partners, the risk that the proposed acquisition of Foundry may not close; our ability to realize anticipated benefits from the proposed acquisition of Foundry Networks, Inc., and the Company's ability to manage its business effectively in a rapidly evolving market. Certain of these and other risks are set forth in more detail in "Item 1A. Risk Factors" in Brocade's Quarterly Report on Form 10-Q for the fiscal quarter ended July 26, 2008. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.
About Brocade
Brocade is the leading provider of data center networking solutions that help enterprises connect and manage their information. Organizations that use Brocade products and services are better able to optimize their IT infrastructures and ensure compliant data management. For more information, visit Brocade's website at http://www.brocade.com/ or contact the Company at info at brocade.com.
Brocade, the B-wing symbol, DCX, Fabric OS, File Lifecycle Manager, MyView and StorageX are registered trademarks, and DCFM and SAN Health are trademarks of Brocade Communications Systems, Inc. in the United States and/or in other countries. All other brands, products or service names are or may be trademarks or service marks of, and are used to identify, products or services of their respective owners.
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Twelve Months Ended
October 25, October 27, October 25, October 27,
2008 2007 2008 2007
Net revenues
Product $335,403 $286,020 $1,230,737 $1,076,529
Services 63,095 53,964 236,200 160,334
Total net revenues 398,498 339,984 1,466,937 1,236,863
Cost of revenues
Product 114,374 125,824 459,850 470,977
Services 38,987 30,750 146,715 104,474
Total cost of
revenues 153,361 156,574 606,565 575,451
Gross margin 245,137 183,410 860,372 661,412
Operating expenses:
Research and
development 70,867 58,530 255,571 213,311
Sales and marketing 71,112 56,018 274,311 211,168
General and
administrative 14,912 13,470 58,172 46,980
Legal fees associated
with indemnification
obligations and other
related costs, net 22,274 7,811 44,673 46,257
Provision for class
action lawsuit - - 160,000 -
Acquisition and
integration costs 682 302 682 19,354
Amortization of
intangible assets 7,820 7,909 31,484 24,719
Restructuring costs
and facilities lease
losses (benefits), net 3,208 - 2,731 -
Total operating
expenses 190,875 144,040 827,624 561,789
Income from operations 54,262 39,370 32,748 99,623
Interest and other
income, net (796) 9,937 26,867 38,501
Interest expense (5,684) (1,673) (10,068) (6,414)
Gain (loss) on
investments, net 111 11,373 (6,874) 13,205
Loss on impairment of
portfolio investments (8,751) - (8,751) -
Income before provision
for income taxes 39,142 59,007 33,922 144,915
Income tax provision
(benefit) 1,149 26,987 (135,560) 68,043
Net income $37,993 $32,020 $169,482 $76,872
Net income per share -
basic $0.10 $0.08 $0.45 $0.21
Net income per share -
diluted $0.10 $0.08 $0.44 $0.21
Shares used in per share
calculation - basic 371,845 387,400 375,303 362,070
Shares used in per share
calculation - diluted 389,477 408,844 394,703 377,558
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
October 25, October 27,
2008 2007
Assets
Current assets:
Cash and cash equivalents $453,884 $315,755
Short-term investments 152,741 325,846
Total cash, cash equivalents and short-term
investments 606,625 641,601
Marketable equity securities 177,380 14,205
Accounts receivable, net 158,935 175,755
Inventories 21,362 18,017
Deferred tax assets 132,246 22,781
Prepaid expenses and other current assets 49,931 39,841
Total current assets 1,146,479 912,200
Long-term investments 36,120 137,524
Restricted cash 1,075,079 -
Property and equipment, net 313,379 204,052
Goodwill 268,977 384,376
Intangible assets, net 220,567 272,652
Non-current deferred tax assets 198,665 167
Other assets 37,794 19,129
Total assets $3,297,060 $1,930,100
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $167,660 $108,810
Accrued employee compensation 107,994 76,017
Deferred revenue 103,372 94,533
Current liabilities associated with facilities
lease losses 13,422 12,807
Liability associated with class action lawsuit 160,000 -
Current portion of long-term debt 43,606 -
Purchase commitments 17,332 23,176
Other accrued liabilities 88,472 94,358
Total current liabilities 701,858 409,701
Long-term debt, net of current portion 1,011,399 -
Convertible subordinated debt 169,660 167,498
Non-current liabilities associated with
facilities lease losses 15,007 25,742
Non-current liabilities - deferred taxes - 22,781
Non-current deferred revenue 37,869 36,344
Non-current income tax liability 67,497 -
Other non-current liabilities 9,118 1,376
Stockholders' equity
Common stock 1,393,299 1,463,169
Accumulated other comprehensive loss (85,877) (1,180)
Accumulated deficit (22,770) (195,331)
Total stockholders' equity 1,284,652 1,266,658
Total liabilities and stockholders'
equity $3,297,060 $1,930,100
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended October 25, 2008 and October 27, 2007
(in thousands)
(unaudited)
Three Months Ended
October 25, October 27,
2008 2007
Cash flows from operating activities:
Net income $37,993 $32,020
Adjustments to reconcile net income to net
cash provided by operating activities:
Excess tax benefit from employee stock plans (13,641) 9,197
Depreciation and amortization 30,533 31,856
Loss on disposal of property and equipment 1,853 400
Amortization of debt issuance costs 319 -
Net (gains) losses on investments and
marketable equity securities 8,839 (11,694)
Provision for doubtful accounts receivable
and sales allowances 1,700 2,287
Non-cash compensation expense 7,515 12,499
Non-cash facilities lease loss benefit (105) -
Capitalization of interest cost (970) -
Changes in assets and liabilities:
Accounts receivable 13,386 (13,940)
Inventories (6,993) 3,430
Prepaid expenses and other assets 44,232 28,409
Deferred tax assets (46,708) (22,809)
Accounts payable 39,353 (22,440)
Accrued employee compensation 33,768 228
Deferred revenue (7,486) 2,061
Other accrued liabilities 27,308 5,555
Liabilities associated with facilities
lease losses (2,325) (2,520)
Net cash provided by operating activities 168,571 54,539
Cash flows from investing activities:
Purchases of property and equipment (18,603) (15,013)
Purchases of short-term investments (2,053) (173,494)
Purchases of marketable equity securities (248,431) (15,930)
Proceeds from sale of marketable equity
securities and equity investments - 11,694
Proceeds from maturities and sale of
short-term investments 107,547 176,780
Purchases of long-term investments - (47,637)
Proceeds from maturities and sale of
long-term investments - 1,752
Purchases of non-marketable minority equity
investments (1,436) -
Increase in restricted cash (1,075,079) -
Cash paid in connection with pending
acquisition of Foundry (1,000) -
Net cash used in investing activities (1,239,055) (61,848)
Cash flows from financing activities:
Payments on capital lease obligations - (23)
Common stock repurchases - (50,410)
Excess tax benefit from employee stock plans 13,641 (9,197)
Proceeds from issuance of common stock, net 615 9,968
Proceeds from term loan 1,054,425 -
Net cash provided by (used in) financing
activities 1,068,681 (49,662)
Effect of exchange rate fluctuations on cash and
cash equivalents (3,712) (1,682)
Net decrease in cash and cash equivalents (5,515) (58,653)
Cash and cash equivalents, beginning of period 459,399 374,408
Cash and cash equivalents, end of period $453,884 $315,755
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Twelve Months Ended October 25, 2008 and October 27, 2007
(in thousands)
(unaudited)
Twelve Months Ended
October 25, October 27,
2008 2007
Cash flows from operating activities:
Net income $169,482 $76,872
Adjustments to reconcile net income to net
cash provided by operating activities:
Release of valuation allowance (185,176) -
Excess tax benefit from employee stock plans (16,146) 77
Depreciation and amortization 120,178 101,416
Loss on disposal of property and equipment 3,181 1,213
Amortization of debt issuance costs 319 -
Net (gains) losses on investments and
marketable equity securities 15,327 (11,694)
Provision for doubtful accounts receivable
and sales allowances 6,614 5,401
Non-cash compensation expense 39,036 36,942
Non-cash facilities lease loss benefit (582) -
Capitalization of interest cost (970) -
Changes in assets and liabilities:
Accounts receivable 17,143 27,414
Inventories (3,345) 3,481
Prepaid expenses and other assets 25,200 26,429
Deferred tax assets (56,516) (22,906)
Accounts payable 40,550 10,075
Accrued employee compensation 30,242 (37,473)
Deferred revenue 10,185 17,162
Other accrued liabilities 73,311 (55,967)
Liabilities associated with facilities
lease losses (9,538) (8,039)
Liability associated with class action
lawsuit 160,000 -
Net cash provided by operating activities 438,495 170,403
Cash flows from investing activities:
Purchases of property and equipment (144,071) (56,538)
Purchases of short-term investments (169,016) (571,357)
Purchases of marketable equity securities (248,431) (15,930)
Proceeds from sale of property and equipment - 1,336
Proceeds from sale of marketable equity
securities and equity investments 9,926 11,694
Proceeds from maturities and sale of
short-term investments 448,385 764,939
Purchases of long-term investments (37,731) (200,239)
Proceeds from maturities and sale of
long-term investments 22,483 12,614
Purchases of non-marketable minority equity
investments (1,436) (5,000)
(Increase) decrease in restricted cash (1,075,079) 12,422
Cash paid in connection with pending
acquisition of Foundry (1,000) -
Net cash acquired (paid) in connection with
acquisitions (43,554) 139,703
Net cash provided by (used in) investing
activities (1,239,524) 93,644
Cash flows from financing activities:
Payments on capital lease obligations - (735)
Common stock repurchases (168,293) (191,293)
Termination of interest rate swap - (4,989)
Redemption of outstanding convertible debt - (124,185)
Excess tax benefit from employee stock plans 16,146 (77)
Proceeds from issuance of common stock, net 42,418 100,638
Proceeds from term loan 1,054,425 -
Net cash provided by (used in) financing
activities 944,696 (220,641)
Effect of exchange rate fluctuations on cash and
cash equivalents (5,538) (2,019)
Net increase in cash and cash equivalents 138,129 41,387
Cash and cash equivalents, beginning of period 315,755 274,368
Cash and cash equivalents, end of period $453,884 $315,755
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
October 25, July 26, October 27,
2008 2008 2007
Net income on a GAAP basis $37,993 $20,266 $32,020
Adjustments:
Stock-based compensation expense
included in cost of revenues 1,616 2,638 4,065
Amortization of intangible assets
expense included in cost of
revenues 8,780 8,780 11,328
Legal fees associated with certain
pre-acquisition litigation 20 1,860 -
Total gross margin adjustments 10,416 13,278 15,393
Legal fees associated with
indemnification obligations and
other related costs, net 22,274 7,951 7,811
Stock-based compensation expense
included in research and
development 2,385 2,788 3,649
Stock-based compensation expense
included in sales and marketing 2,325 3,195 3,163
Stock-based compensation expense
included in general and
administrative 1,189 3,253 1,622
Amortization of intangible assets
expense included in operating
expenses 7,820 7,846 7,909
Acquisition and integration costs 682 - 302
Restructuring costs and facilities
lease losses (benefits), net 3,208 - -
Total operating expense
adjustments 39,883 25,033 24,456
Total operating income
adjustments 50,299 38,311 39,849
Loss (gain) on investments, net - - (10,869)
Loss on impairment of portfolio
investments 8,751 - -
Acquisition-related financing
charges 4,736 - -
Income tax effect of adjustments (26,014) 2,643 5,518
Non-GAAP net income $75,765 $61,220 $66,518
Non-GAAP net income per share -
basic $0.20 $0.16 $0.17
Non-GAAP net income per share -
diluted $0.20 $0.16 $0.16
Shares used in non-GAAP per share
calculation - basic 371,845 371,345 387,400
Shares used in non-GAAP per share
calculation - diluted 389,477 392,586 408,844
See explanation of non-GAAP information included herein.
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(in thousands, except per share amounts)
(unaudited)
Twelve Months Ended
October 25, October 27,
2008 2007
Net income on a GAAP basis $169,482 $76,872
Adjustments:
Stock-based compensation expense included in
cost of revenues 9,117 10,870
Amortization of intangible assets expense
included in cost of revenues 37,400 33,985
Legal fees associated with certain
pre-acquisition litigation 2,339 -
Total gross margin adjustments 48,856 44,855
Legal fees associated with indemnification
obligations and other related costs, net 44,673 46,257
Provision for class action lawsuit 160,000 -
Stock-based compensation expense included in
research and development 10,324 10,696
Stock-based compensation expense included in
sales and marketing 10,652 8,685
Stock-based compensation expense included in
general and administrative 8,944 4,358
Amortization of intangible assets expense
included in operating expenses 31,484 24,719
Acquisition and integration costs 682 19,354
Restructuring costs and facilities lease losses
(benefits), net 2,731 -
Total operating expense adjustments 269,490 114,069
Total operating income adjustments 318,346 158,924
Gain on termination of interest rate swap - (367)
Loss (gain) on investments, net 6,004 (11,619)
Loss on impairment of portfolio investments 8,751 -
Acquisition-related financing charges 4,736 -
Income tax effect of adjustments (246,413) (11,645)
Non-GAAP net income $260,906 $212,165
Non-GAAP net income per share - basic $0.70 $0.59
Non-GAAP net income per share - diluted $0.67 $0.56
Shares used in non-GAAP per share calculation -
basic 375,303 362,070
Shares used in non-GAAP per share calculation -
diluted 394,703 377,558
See explanation of non-GAAP information included herein.
