EXHIBIT 99.1
[BROCADE LOGO]
BROCADE CONTACTS
MEDIA RELATIONS INVESTOR RELATIONS
Leslie Davis Shirley Stacy
Tel: 408.333.5260 Tel: 408.333.5752
lmdavis@brocade.com sstacy@brocade.com
BROCADE REPORTS Q3 04 RESULTS, EXCEEDS EXPECTATIONS
WITH OPERATING MARGIN OF 12.5% AND EPS OF $0.06
ANNOUNCES $100 MILLION SHARE REPURCHASE PROGRAM
SAN JOSE, CALIF. -- AUGUST 18, 2004 -- Brocade Communications Systems, Inc.
(Brocade) (Nasdaq: BRCD) reported today financial results for its third quarter
of fiscal year 2004 (Q3 04) which ended July 31, 2004. Net revenues for Q3 04
were $150.0 million, an increase of three percent from $145.6 million reported
in the second quarter of fiscal year 2004 (Q2 04) and an increase of 12 percent
from $133.5 million reported in the third quarter of fiscal 2003 (Q3 03).
Non-GAAP net income for Q3 04 was $15.2 million, or $0.06 per share, as compared
to non-GAAP net income of $8.1 million, or $0.03 per share, reported in Q2 04
and non-GAAP net income of $2.1 million, or $0.01 per share, reported in Q3 03.
Non-GAAP net income for Q3 04 excludes deferred stock compensation expense
related to Rhapsody Networks, Inc. (Rhapsody), gains related to repurchases of
the Company's convertible subordinated debt, and gains on the disposition of
private strategic investments. Non-GAAP net income for Q2 04 excludes
restructuring charges, settlement cost of a claim associated with the
acquisition of Rhapsody, deferred stock compensation expense related to
Rhapsody, and gains on the disposition of private strategic investments.
Non-GAAP net income for Q3 03 excludes restructuring charges, deferred stock
compensation expense related to the acquisition of Rhapsody, and gains on the
disposition of private strategic investments. A reconciliation between GAAP and
non-GAAP net income (loss) is contained in the tables below.
Reporting on a GAAP basis, net income for Q3 04 was $17.0 million, or $0.06 per
share diluted, $0.07 per share basic. This compares to GAAP net loss for Q2 04
of $2.0 million, or $(0.01) per share basic and diluted, and GAAP net income for
Q3 03 of $1.9 million, or $0.01 per share basic and diluted.
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"I'm pleased to report another quarter of strong execution towards achieving our
long-term strategy. The positive affects of our operational excellence program
are clearly accelerating the improvement in our business model objectives," said
Greg Reyes, Brocade Chairman and CEO. "During the quarter, we continued the
rollout of our refreshed and expanded product lines, achieved broad adoption
with key OEM partners, and experienced a growing number of Director-class SAN
wins within the enterprise market segment."
Brocade also announced today that its board of directors has approved a share
repurchase program for up to $100 million of its common stock. Purchases may be
made, from time to time, in the open market and will be funded from available
working capital. The number of shares to be purchased and the timing of
purchases will be based on the level of Brocade's cash balances, general
business and market conditions, and other factors, including alternative
investment opportunities.
Q3 04 FINANCIAL HIGHLIGHTS
- Q3 04 net revenues of $150.0 million, an increase of 3% from Q2 04
and an increase of 12% from Q3 03
- Q3 04 gross margin increased to 57.2%, an improvement from 55.3% in
Q2 04 and 54.1% in Q3 03
- Q3 04 operating margin increased to 12.5% from negative 5.4% in Q2
04.
- Q3 04 operating expenses were $67.1 million compared to $88.4
million in Q2 04.
- Non-GAAP earnings per share (EPS) was $0.06 for Q3 04, an
improvement from $0.03 in Q2 04 and $0.01 in Q3 03
- Excluding the impact of cash used for prior quarter restructuring,
Q3 04 cash flow from operations was $22.3 million, compared to $36.5
million in Q2 04.
- Cash and investments as of the end of Q3 04 totaled $757.3 million.
- Cash and investments, net of our convertible debt and unsettled debt
repurchase of $26.3 million was $348.9 million in Q3 04 compared to
$331.6 million in Q2 04.
- Q3 04 day sales outstanding in accounts receivable were 55 days,
compared with 53 days in Q2 04 and 52 days in Q3 03
- Deferred revenue was $29.0 million in Q3 04 compared to $28.4
million in Q2 04.
During Q3'04, Brocade purchased on the open market $47.4 million face value of
its two percent convertible subordinated notes. Brocade paid an average of
$0.915 on each dollar of face value for an aggregate cash purchase price of
$43.4 million, which resulted in a pre-tax gain of $3.5 million. As of July 31,
2004, the remaining convertible debt outstanding was $386.3 million.
PAGE 3
Q3 04 BUSINESS HIGHLIGHTS
In announcements made during the quarter, Brocade showed significant progress in
executing on its strategy to serve the entry- mid-range and enterprise segments
of the SAN market by expanding its product line and offering new capabilities to
its customers. Highlights of these announcements include:
- Collaboration with EMC Corporation to bring to market a
pre-configured, entry-level networked storage solution based on the
new EMC CLARiiON AX100 storage system and Brocade SilkWorm 3250
8-port Fibre Channel switch.
- Availability of a Brocade SAN Switch Module for the IBM eServer
Blade Center. This high-performance, 16-port fabric switch enables
seamless integration of high-density bladed servers into computing
environments.
- General availability of the SilkWorm Multiprotocol Router, an
intelligent switching platform service that provides unique routing
services for local and long-distance connectivity and data sharing
across separate SANs.
- Several Director-class switch installations with international
customers, including upgraded and expanded SANs with Dassault
Aviation, ItecPlus GmbH, Vodafone Information Systems, and ZF
Friedrichshafen AG.
- Selection of Brocade SAN products for use in the four U.S. Microsoft
Technology Centers, used by Microsoft customers to develop, test
and validate the deployment of SAN enabled, Windows(R) .Net
solutions.
Brocade also announced the addition of two members to its Board of Directors,
Sanjay Vaswani, a partner at the Center for Corporate Innovation and William K.
O'Brien, CEO of Enterasys Networks; achieved listing in the "Leaders Quadrant"
of the Storage Area Network Fibre Channel Switch Magic Quadrant report published
by Gartner, Inc.; and received two U.S. patents for Fibre Channel technology
innovations.
CONFERENCE CALL
Brocade will host a conference call on Wednesday, August 18, 2004, at 2:00 p.m.
Pacific Time, 5:00 p.m. Eastern Time to discuss its third quarter of fiscal year
2004 results. The conference call will be webcast live via the Internet at
www.brocade.com/investors. A replay of the conference call will be available via
webcast for twelve months at www.brocade.com/investors.
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ABOUT BROCADE COMMUNICATIONS SYSTEMS, INC.
Brocade (Nasdaq: BRCD) offers the industry's leading intelligent platform for
networking storage. The world's leading systems, applications, and storage
vendors have selected Brocade to provide a networking foundation for their SAN
solutions. The Brocade SilkWorm family of fabric switches and software is
designed to optimize data availability and storage and server resources in the
enterprise. Using Brocade solutions, companies can simplify the implementation
of storage area networks, reduce the total cost of ownership of data storage
environments, and improve network and application efficiency. For more
information, visit the Brocade website at www.brocade.com or contact the company
at info@brocade.com.
The non-GAAP, formerly pro forma, information provided in this press release is
a supplement to, and not a substitute for, our financial results presented in
accordance with GAAP. The non-GAAP results exclude certain expenses and income
to provide what we believe is a more complete understanding of our underlying
operational results and trends. Specifically, we believe the non-GAAP results
provide useful information to both management and investors by excluding certain
gains, including the gain related to repurchases of our convertible subordinated
debt, net gains on the disposition of private strategic investments, and certain
costs, including settlement cost of an acquisition-related charge, certain
expenses relating to our acquisition of Rhapsody, and the restructuring of
business operations, that we believe are not indicative of our core operating
results. Further, these non-GAAP results are one of the primary indicators
management uses for planning and forecasting of future periods. Brocade
management refers to these non-GAAP financial measures in making decisions
regarding operational performance and to facilitate internal comparisons to
historical operating results and to competitors' operating results. 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.
CAUTIONARY STATEMENT
This press release contains forward-looking statements, as defined under Federal
Securities Laws. These forward-looking statements include the extent to which
Brocade's operational excellence program will accelerate business model
improvement. These statements are just predictions and involve risks and
uncertainties, such that actual results may differ significantly. These risks
include, but are not limited to, our ability to manage the transition between
new and older products; our ability to achieve market acceptance of the Silkworm
Fabric Application Platform product family; our ability to develop new and
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enhanced products that achieve widespread market acceptance; the loss of our
third-party contract manufacturers; our failure to accurately forecast demand
for our products; our ability to manage the production of our products; our
ability to retain key personnel and to continue to recruit qualified personnel;
quarterly and annual fluctuations in our revenues and operating results;
increased market competition and pricing pressure; our dependence on OEM
partners; declines in the prices of our products and our revenues and gross
margins; the effect of changes in IT spending levels; our failure to manage
distribution channels and other customer relationships; our dependence on sole
source and limited source suppliers for certain key components including ASICs,
microprocessors, logic chips and programmable logic devices; our failure to
manage our business effectively in a rapidly evolving market; the effect of
future acquisitions on our business operations; our ability to attain
profitability; international political instability; increased international
sales activity; seasonal fluctuations and uneven sales patterns; the existence
of undetected errors in our products; and our ability to protect our
intellectual property and defend against infringement claims. These and other
risks are set forth in more detail in the Company's reports on Form 10-K for the
fiscal year ended October 25, 2003 and Form 10-Q for the fiscal quarter ended
May 1, 2004. Brocade expressly assumes no obligation to update any such
forward-looking statements.
###
Brocade, the Brocade B weave logo, Secure Fabric OS, Fabric OS, SilkWorm, and
SilkWorm Express are registered trademarks of Brocade Communications Systems,
Inc., in the United States and/or in other countries. FICON is a registered
trademark of IBM Corporation in the U.S. and other countries. All other brands,
products, or service names are or may be trademarks or service marks of, and are
used to identify, products or services of their respective owners.
PAGE 6
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
JULY 31, JULY 26, JULY 31, JULY 26,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net revenues $ 150,040 $ 133,458 $ 440,659 $ 387,520
Cost of revenues 64,143 61,226 194,698 178,511
--------------- --------------- --------------- ---------------
Gross margin 85,897 72,232 245,961 209,009
Operating expenses:
Research and development 36,164 37,158 111,872 105,576
Sales and marketing 24,573 27,526 78,123 90,249
General and administrative 6,226 5,539 18,022 15,805
Settlement of an acquisition-related claim -- -- 6,943 --
Amortization of deferred stock
compensation 119 213 430 494
In-process research and development -- -- -- 134,898
Restructuring costs -- (15) 10,093 20,991
Lease termination charge and other, net -- -- 75,591 --
--------------- --------------- --------------- --------------
Total operating expenses 67,082 70,421 301,074 368,013
--------------- --------------- --------------- ---------------
Income (loss) from operations 18,815 1,811 (55,113) (159,004)
Interest and other income, net 5,248 4,301 14,416 14,202
Interest expense (2,786) (3,417) (8,352) (10,129)
Gain on repurchases of convertible
subordinated debt 3,498 -- 4,019 --
Gain on investments, net 40 (11) 436 518
--------------- ---------------- --------------- ---------------
Income (loss) before provision for (benefit
from) income taxes 24,815 2,684 (44,594) (154,413)
Income tax provision (benefit) 7,787 773 (22,885) (3,417)
--------------- --------------- --------------- ---------------
Net income (loss) $ 17,028 $ 1,911 $ (21,709) $ (150,996)
=============== =============== =============== ===============
Net income (loss) per share - Basic $ 0.07 $ 0.01 $ (0.08) $ (0.61)
=============== =============== =============== ===============
Net income (loss) per share - Diluted $ 0.06 $ 0.01 $ (0.08) $ (0.61)
=============== =============== =============== ===============
Shares used in per share calculation - Basic 261,481 255,873 259,514 248,486
=============== =============== =============== ===============
Shares used in per share calculation - Diluted 263,540 259,444 259,514 248,486
=============== =============== =============== ===============
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BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Q3 04 Q2 04 Q3 03
--------------- --------------- ---------------
Net income (loss) on a GAAP basis $ 17,028 $ (1,978) $ 1,911
Adjustments:
Settlement of an acquisition-related claim -- 6,943 --
Amortization of deferred stock
compensation 119 127 213
Restructuring costs -- 10,461 (15)
--------------- --------------- ----------------
Total operating income adjustments 119 17,531 198
Gain on repurchases of convertible
subordinated debt (3,498) -- --
Gain on investments, net (40) (396) 11
Income tax effect 1,582 (7,076) (66)
--------------- --------------- ---------------
Non-GAAP net income $ 15,191 $ 8,081 $ 2,054
=============== =============== ===============
GAAP net income (loss) per share - diluted $ 0.06 $ (0.01) $ 0.01
=============== =============== ===============
Non-GAAP net income per share - diluted $ 0.06 $ 0.03 $ 0.01
=============== =============== ===============
Shares used in non-GAAP per share calculation - diluted 263,540 263,607 259,444
=============== =============== ===============
The non-GAAP, formerly pro forma, information provided in this press release is
a supplement to, and not a substitute for, our financial results presented in
accordance with GAAP. The non-GAAP results exclude certain expenses and income
to provide what we believe is a more complete understanding of our underlying
operational results and trends. Specifically, we believe the non-GAAP results
provide useful information to both management and investors by excluding certain
gains, including the gain related to repurchases of our convertible subordinated
debt, net gains on the disposition of private strategic investments, and certain
costs, including settlement cost of an acquisition-related claim, certain
expenses relating to our acquisition of Rhapsody, and the restructuring of
business operations, that we believe are not indicative of our core operating
results. Further, these non-GAAP results are one of the primary indicators
management uses for planning and forecasting of future periods. Brocade
management refers to these non-GAAP financial measures in making decisions
regarding operational performance and to facilitate internal comparisons to
historical operating results and to competitors' operating results. 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.
PAGE 8
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JULY 31, OCTOBER 25,
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 201,286 $ 360,012
Short-term investments 347,784 57,971
--------------- ---------------
Total cash, cash equivalents, and short-term investments 549,070 417,983
Accounts receivable, net 90,142 74,935
Inventories, net 5,957 3,961
Deferred tax assets, net 27,238 29,569
Prepaid expenses and other current assets 16,759 14,593
--------------- ---------------
Total current assets 689,166 541,041
Long-term investments 208,239 417,582
Property and equipment, net 133,605 124,274
Deferred tax assets, net 266,889 231,203
Convertible subordinated debt issuance costs 4,149 6,288
Other assets 2,184 3,558
--------------- ---------------
Total assets $ 1,304,232 $ 1,323,946
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,771 $ 33,913
Accrual of unsettled debt repurchase 26,304 9,029
Accrued employee compensation 26,875 30,546
Deferred revenue 28,974 19,892
Current liabilities associated with lease losses 5,985 7,759
Other accrued liabilities 72,648 64,963
--------------- ---------------
Total current liabilities 201,557 166,102
Non-current liabilities associated with lease losses 17,916 16,518
Convertible subordinated debt 386,279 442,950
Stockholders' equity:
Common stock 752,637 725,511
Deferred stock compensation (1,220) (872)
Accumulated other comprehensive income 832 5,797
Accumulated deficit (53,769) (32,060)
--------------- ---------------
Total stockholders' equity 698,480 698,376
--------------- ---------------
Total liabilities and stockholders' equity $ 1,304,232 $ 1,323,946
=============== ===============