Q4 05 Revenue Increases 19% Sequentially
SAN JOSE, Calif., Dec. 6 - Brocade Communications Systems, Inc. (Brocade(R)) (Nasdaq: BRCD) today reported financial results for its fourth quarter of fiscal year 2005 (Q4 05), which ended October 29, 2005. Net revenues for Q4 05 were $145.5 million, consistent with the Company's preliminary results announced on November 16, 2005. Revenues for the quarter increased 19 percent from $122.3 million reported in the third quarter of fiscal year 2005 (Q3 05) and decreased six percent from $155.6 million reported in the fourth quarter of fiscal year 2004 (Q4 04). Net revenues for fiscal year 2005 (FY 05) were $574.1 million, a decrease of four percent from $596.3 million reported in fiscal year 2004 (FY 04).
Company sell-through, a measurement of OEM and channel partner sales to end-users, was approximately $160.2 million for the fourth quarter, an increase of 12% from approximately $143.2 million in Q3 05, and consistent with the Company's preliminary estimate of $157 to $160 million. The Company's management refers to sell-through information to make decisions regarding operational performance including planning and forecasting of future periods.
Reporting on a GAAP basis, net income for Q4 05 was $1.1 million, or $0.00 per share basic and diluted. This compares to GAAP net loss for Q3 05 of $7.2 million, or $(0.03) per share basic and diluted, and GAAP net income for Q4 04 of $20.3 million, or $0.08 per share basic and diluted.
Non-GAAP net income for Q4 05 was $19.0 million, or $0.07 per share basic and diluted, as compared to non-GAAP net income for Q3 05 of $2.8 million, or $0.01 per share basic and diluted, and non-GAAP net income for Q4 04 of $20.8 million, or $0.08 per share basic and diluted. Non-GAAP net income for Q4 05 excludes net stock-based compensation expenses (benefit), deferred stock compensation expense related to the acquisitions of Rhapsody Networks, Inc. (Rhapsody) and Therion Software Corporation (Therion), costs associated with the completed internal review and ongoing SEC investigation, a reduction of previously recorded restructuring costs, taxes and other fees in connection with the repatriation of foreign earnings, loss on investments primarily associated with the defeasance of the Company's 2% Convertible Notes, and associated tax effects of non-GAAP adjustments. Non-GAAP net income for Q3 05 excludes in-process research and development expense related to the acquisition of Therion, stock-based compensation expenses, deferred stock compensation expense related to the acquisitions of Rhapsody and Therion, costs associated with the then ongoing internal review and continuing SEC investigation, a gain on disposition of a strategic investment, and associated tax effects of non-GAAP adjustments. Non-GAAP net income for Q4 04 excludes stock-based compensation expense, deferred stock compensation expense related to the acquisition of Rhapsody, and gains related to repurchases of convertible subordinated debt. A reconciliation between GAAP and non-GAAP information is contained in the tables below.
The difference between the Company's reported revenue and sell through principally represents the reduction in inventory at its OEM partners. During the fourth quarter, several of the Company's OEM partners reduced inventory on-hand by nearly one week across its switch and director product categories. The Company believes that OEM inventories at the end of Q4 05 were approximately two and a half weeks.
"Our GAAP revenue and reported sell-through were better than we planned and I'm very pleased with our overall performance this quarter," said Michael Klayko, Brocade Chief Executive Officer. "Strong demand, solid gross margins and some one-time expense savings led to increased profitability and helped generate $39 million in cash from operations."
Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.
Q4 05 Financial Highlights
* Q4 05 cash flow from operations was $39.0 million, compared to $2.8
million in Q3 05 and $44.2 million in Q4 04.
* Cash and investments, net of the Company's convertible debt as of
the end of Q4 05 was $485.5 million compared to $454.9 million as of
the end of Q3 05.
* Day sales outstanding in accounts receivable for Q4 05 were 44 days,
compared with 59 days in Q3 05 and 56 days in Q4 04.
* For Q4 05, three customers, EMC, HP, and IBM, each accounted for 10
percent or more of total revenues and in total represented 71
percent of total revenues.
* As of October 29, 2005, the Company had 1,160 employees, compared
with 1,121 employees as of July 30, 2005 and 1,038 employees as of
October 30, 2004.
Q4 05 Business Highlights
During the quarter, Brocade announced a number of new products and programs contributing to broadened availability of the company's platforms and enhanced customer support, including:
* Availability of Brocade Tapestry Data Migration Manager, a turnkey
solution enabling data center managers to easily perform volume
migrations across heterogeneous storage arrays, and enhancements to
the Brocade Multiprotocol Router that are designed to support
interoperability with McData SANs. Fujitsu also announced plans for
US availability of its Eternus storage virtualization application,
which is based on the Brocade Fabric Application Platform.
* Hitachi Data Systems, HP, IBM and Silicon Graphics qualified the new
Brocade SilkWorm 48000 Director and 200E entry-level switch for
general availability. Fujitsu Siemens Computers added a Brocade
embedded SAN switch module to its bladed server portfolio and, in
mid-November, IBM qualified a new Brocade 4Gbit/sec embedded SAN
module for its bladed servers.
* The Brocade SilkWorm 200E and 4100 received Microsoft's "Simple SAN
for Windows Server" designation and Brocade Tapestry WAFS was
certified as compatible with the next generation of Windows Storage
Server.
* Brocade added four professional services offerings to its portfolio,
including: SAN Design and Architecture Assessment, WAFS Design and
Integration, MetaSAN Integration, and SAN Life.
The Company also announced the first nine resellers to qualify for its Brocade Tapestry Solutions partner program, upgraded its popular SAN Health analysis tool so that it can now report on both McDATA and Brocade infrastructure, and continued to upgrade its customer education program, which has issued more than 5,000 Brocade SAN professional certifications.
Conference Call
Brocade will host a conference call on Tuesday, December 6, 2005 at 5:30 a.m. PT (8:30 a.m. ET) to discuss its fourth quarter and fiscal year 2005 results. The call will be audio webcast live via the Internet at http://www.brocade.com/investors. A telephone replay of the conference call will be available approximately two hours after the conference call concludes or 8:30 a.m. PT (11:30 a.m. ET). To access the telephone replay, dial (800) 642-1687 or (706) 645-9291, passcode: 2525657. A replay of the conference call will also be available via webcast at http://www.brocade.com/investors for twelve months.
Non-GAAP Information
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 (losses), including the gain related to repurchases of our convertible subordinated debt, gain from the disposition of marketable investment and gain (loss) from disposition of strategic or portfolio investment, and certain costs or benefits, including stock-based compensation expense (benefit), certain expenses relating to our acquisitions of Rhapsody and Therion, including in-process research and development expense, internal review and SEC investigation costs, the restructuring of business operations, and expenses related to repatriation of foreign earnings that we believe are not indicative of our core operating results. The associated tax effects of the non-GAAP adjustments represent a pro rata adjustment to the GAAP income tax provision. 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, including statements regarding the Company's financial results for the fourth quarter and fiscal year ended October 29, 2005, customer demand for the Company's products, levels of partner inventory, new product and service offerings, and the Company's overall product strategy. 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, adjustments resulting from the quarter and year-end close process and audit by the Company's independent auditors of the financial results for fiscal year 2005; market acceptance of the Company's new product and service offerings, including the rate of customer adoption of such products and services; the ongoing SEC and DOJ investigation, which may result in further changes to the Company's historical financial results and accounting practices; the Company's ability to manage inventory levels and distribution channels through the product line transition; the effect of competition, including pricing pressure; the effect of changes in IT spending levels and the Company's ability to anticipate future OEM and end-user product needs or to accurately forecast end-user demand; dependence on limited number of OEM partners; and the Company's ability to manage its business effectively in a rapidly evolving market. These and other risks are set forth in more detail in the section entitled "Risk Factors" under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's quarterly report on Form 10-Q for the quarter ended July 30, 2005. Brocade assumes no obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.
About Brocade Communications Systems, Inc.
Brocade delivers the industry's leading platforms and solutions for intelligently connecting, managing, and optimizing IT resources in shared storage environments. The world's premier systems, server, and storage providers offer the Brocade SilkWorm family of fabric switches and software as the foundation for SAN solutions in organizations of all sizes. In addition, the Brocade Tapestry(TM) family of application infrastructure solutions extends the ability to proactively manage and optimize application and information resources across the enterprise. Using Brocade solutions, organizations are better positioned to reduce cost, manage complexity, and satisfy business compliance requirements through optimized use and management of their application infrastructures. For more information, visit the Brocade Web site at http://www.brocade.com or contact the company at info@brocade.com.
NOTE: Brocade, the B weave logo and SilkWorm are registered trademarks of Brocade Communications Systems, Inc. or its subsidiaries in the United States 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. All products, plans, and dates are subject to change without notice.
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Year Ended
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
Net revenues $145,516 $155,606 $574,120 $596,265
Cost of revenues 64,949 68,724 251,161 268,974
Gross margin 80,567 86,882 322,959 327,291
Operating expenses:
Research and
development 34,388 36,177 130,936 141,998
Sales and marketing 26,285 23,261 101,202 102,445
General and
administrative 6,866 6,513 25,189 24,593
Internal review and
SEC investigation
costs 5,201 -- 14,027 --
Settlement of an
acquisition-related
claim -- -- -- 6,943
Amortization of deferred
stock compensation 680 107 1,512 537
Restructuring costs (533) (1,127) (670) 8,966
In-process research
and development -- -- 7,784 --
Lease termination
charge and other, net -- -- -- 75,591
Total operating
expenses 72,887 64,931 279,980 361,073
Income (loss) from
operations 7,680 21,951 42,979 (33,782)
Interest and other
income, net 6,054 4,370 22,656 18,786
Interest expense (1,997) (2,325) (7,693) (10,677)
Gain on repurchases of
convertible subordinated
debt -- 1,594 2,318 5,613
Gain (loss) on
investments, net (5,178) -- (5,062) 436
Income (loss) before
provision for income
taxes 6,559 25,590 55,198 (19,624)
Income tax provision 5,503 5,302 12,077 14,070
Net income (loss) $1,056 $20,288 $43,121 $(33,694)
Net income (loss) per
share - Basic $0.00 $0.08 $0.16 $(0.13)
Net income (loss) per
share - Diluted $0.00 $0.08 $0.16 $(0.13)
Shares used in per
share calculation
- Basic 269,679 263,242 268,176 260,446
Shares used in per
share calculation
- Diluted 270,311 265,194 270,260 260,446
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
Q4 05 Q3 05 Q4 04
Net income (loss) on a
GAAP basis $1,056 $(7,235) $20,288
Adjustments:
Stock-based compensation
expense (benefit) included
in cost of revenues (83) 52 614
Total gross margin
adjustments (83) 52 614
In-process research and
development -- 7,784 --
Internal review and SEC
investigation costs 5,201 3,722 --
Stock-based compensation expense
included in research and
development 2 86 1,673
Stock-based compensation expense
included in sales and marketing 42 111 493
Stock-based compensation expense
included in general and
administrative 18 40 393
Professional fees related to
repatriation of foreign earnings
included in general and
administrative 384 -- --
Amortization of acquisition
related deferred stock
compensation 680 701 107
Restructuring costs (533) -- (1,127)
Total operating expense
adjustments 5,794 12,444 1,539
Total operating income
adjustments 5,711 12,496 2,153
Gain on repurchases of
convertible subordinated debt -- -- (1,594)
(Gain) loss on investments 5,178 (20) --
Income tax related to
repatriation of foreign
earnings 4,334 -- --
Income tax effect of
adjustments 2,673 (2,392) --
Non-GAAP net income $18,952 $2,849 $20,847
Non-GAAP net income per share
- basic $0.07 $0.01 $0.08
Non-GAAP net income per share
- diluted $0.07 $0.01 $0.08
Shares used in non-GAAP per
share calculation - basic 269,679 268,765 263,242
Shares used in non-GAAP per
share calculation - diluted 270,311 269,419 265,194
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 (losses), including the gain related to repurchases of our convertible subordinated debt, gain from disposition of marketable investment and gain (loss) from disposition of strategic or portfolio investment, and certain costs or benefits, including stock-based compensation expense (benefit), certain expenses relating to our acquisitions of Rhapsody and Therion, including in-process research and development expense, internal review and SEC investigation costs, the restructuring of business operations, and expenses related to repatriation of foreign earnings that we believe are not indicative of our core operating results. The associated tax effects of the non-GAAP adjustments represent a pro rata adjustment to the GAAP income tax provision. 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.
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
October 29, October 30,
2005 2004
Assets
Current assets:
Cash and cash equivalents $182,001 $79,375
Short-term investments 209,865 406,933
Total cash, cash equivalents, and
short-term investments 391,866 486,308
Restricted cash 277,230 --
Accounts receivable, net 70,104 95,778
Inventories 11,030 5,597
Prepaid expenses and other current assets 23,859 19,131
Total current assets 774,089 606,814
Long-term investments 95,306 250,600
Property and equipment, net 108,118 124,701
Other assets 8,168 5,267
Total assets $985,681 $987,382
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $23,778 $38,791
Accrued employee compensation 37,762 33,330
Deferred revenue 45,488 34,886
Current liabilities associated with
lease losses 4,659 5,677
Other accrued liabilities 73,783 59,968
Convertible subordinated debt 278,883 --
Total current liabilities 464,353 172,652
Non-current liabilities associated with
lease losses 12,481 16,799
Convertible subordinated debt -- 352,279
Stockholders' equity
Common stock 855,833 832,919
Deferred stock compensation (3,180) (5,174)
Accumulated other comprehensive income (loss) (3,974) 860
Accumulated deficit (339,832) (382,953)
Total stockholders' equity 508,847 445,652
Total liabilities and stockholders'
equity $985,681 $987,382
BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(in thousands)
(unaudited)
Year Ended
October 29, October 30,
2005 2004
Cash flows from operating activities:
Net income (loss) $43,121 $(33,694)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Tax benefit from employee stock plans 2,571 --
Depreciation and amortization 45,853 52,162
Loss on disposal of property and equipment 1,879 8,510
Amortization of debt issuance costs 1,366 1,929
Net (gains) loss on investments and marketable
equity securities 5,178 (202)
Gain on repurchases of convertible subordinated
debt (2,318) (5,613)
Non-cash compensation expense 377 5,008
Provision for doubtful accounts receivable and
sales returns 2,979 3,406
In-process research and development 7,784 --
Non-cash restructuring charges -- 4,995
Settlement of an acquisition-related claim -- 6,943
Changes in operating assets and liabilities:
Accounts receivable 21,288 (24,249)
Inventories (5,433) (1,636)
Prepaid expenses and other assets (4,196) 1,089
Accounts payable (15,082) 4,874
Accrued employee compensation 4,432 2,784
Deferred revenue 10,602 14,994
Other accrued liabilities and long-term debt 10,359 6,595
Liabilities associated with lease losses (5,245) (5,910)
Net cash provided by operating activities 125,515 41,985
Cash flows from investing activities:
Purchases of property and equipment (27,267) (53,758)
Purchases of short-term investments (247,042) (98,126)
Proceeds from maturities of short-term
investments 610,813 72,025
Purchases of long-term investments (202,764) (288,436)
Purchases of other investments, net (3,498) (500)
Proceeds from maturities of long-term
investments 178,428 118,078
Funds held in restricted account (275,995) --
Cash paid in connection with acquisition, net (7,185) --
Net cash provided by (used in) investing
activities 25,490 (250,717)
Cash flows from financing activities:
Purchases of convertible subordinated debt (70,485) (84,366)
Settlement of repurchase obligation -- (9,029)
Proceeds from issuance of common stock, net 29,720 21,207
Common stock repurchase program (7,050) --
Net cash used in financing activities (47,815) (72,188)
Effect of exchange rate fluctuations on cash
and cash equivalents (564) 283
Net increase (decrease) in cash and cash
equivalents 102,626 (280,637)
Cash and cash equivalents, beginning of period 79,375 360,012
Cash and cash equivalents, end of period $182,001 $79,375
