SAN JOSE, Calif. (Map) - SAN JOSE, Calif., May 14 /PRNewswire-FirstCall/ -- - Brocade(R) (Nasdaq: BRCD), the leader in data center networking solutions that help enterprises connect and manage their information, today reported financial results for its second fiscal quarter, which ended April 26, 2008.

Commenting on the Company's second quarter financial results, Michael Klayko, Brocade CEO, said, "It was another very good quarter for Brocade as we continued our excellent operational execution and performance. Our financial results were better than the Company expected, we added to the momentum of our aggressive product cycle, and we acquired Strategic Business Systems, Inc. (SBS), a privately held provider of data center-focused professional services, which significantly broadens our services offerings and expertise in the evolving data center market."

Second Fiscal Quarter 2008 Business Highlights -- Sales of the Company's new DCX Backbone exceeded revenue expectations and contributed to a record revenue quarter of the Company's Director-class products. -- Brocade augmented its growing services business with the acquisition of SBS. SBS has deep skill sets and experience in several data center disciplines, including networking, security, storage, and virtualization. -- The Company started shipping the Brocade File Management Engine, or FME, in late Q2. This breakthrough product offers a number of industry firsts, most notably the ability to migrate files while they are in use, which helps customers avoid costly downtime. -- During the quarter, the Company finalized the development of a family of new 8Gbit/sec fabric switches that complement the DCX Backbone. These new switches, announced on May 13th, 2008, double the performance of previous models while consuming 40% less energy. The Company expects the majority of its major OEM partners to be in the market with these new switches in Brocade's Q3, beginning with IBM and Sun. -- On May 13th, 2008 the Company also announced the availability of its new server HBA products that, when combined with Brocade's new 8Gb/sec switches, directors and DCX Backbone, deliver a new level of end-to-end data center networking performance. The new Brocade HBAs are expected to be generally available in June.

Second Fiscal Quarter 2008 Financial Highlights and Additional Financial Information

-- Brocade's non-GAAP effective tax-rate was 30.7% in Q2 08, and its GAAP tax rate was -272%. The GAAP rate includes a P&L benefit of $167M due to the release of the valuation allowance previously recorded against the Company's deferred tax assets. The Company has determined that it is more likely than not that it will realize the benefits of the deferred tax assets and the valuation allowance was released accordingly. -- In Q2, the Company achieved record revenue in its director product line, its embedded blade switch product line, and its services business. In addition, Brocade generated more cash from operations in Q2 08 than any previous quarter in the company's history. -- The Company's total installed base of SAN ports was approximately 17.3 million. -- In Q2 Average Selling Price (ASP) declines were in the low single digits compared to Q1 08. -- Net stock-based compensation expense was $11.2 million and has been excluded from the Company's non-GAAP results. -- In Q2, the Company repurchased approximately 6.9 million shares of the Company's common stock for approximately $50.2 million. As of the end of Q2 08, the Company had $452.3 million remaining under its $800 million total stock buyback program. Q2 2008 Q1 2008 Q2 2007 Revenue $354.9 M $347.8 M $345.3 M GAAP net income $184.8 M $19.8 M $0.8 M GAAP EPS - diluted $0.47 $0.05 $0.00 Non-GAAP net income $59.7 M $64.2 M $46.6 M Non-GAAP EPS - diluted $0.15 $0.16 $0.11 Non-GAAP gross margin 61.1 % 60.5 % 53.4 % Non-GAAP operating margin 22.9 % 23.8 % 16.8 % Cash flow from operations $111.0 M $79.2 M $46.2 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 Q2 2008 Q1 2008 Q2 2007 OEM revenues 86 % 88 % 85 % Channel/Direct revenues 14 % 12 % 15 % 10% or greater customers revenues (3) 65 % 66 % 67 % Domestic revenues 62 % 62 % 65 % International revenues 38 % 38 % 35 % Service revenues 17 % 14 % 13 % Q2 2008 Q1 2008 Q2 2007 Cash equivalents and investments, net of convertible debt $627.9 M $614.9 M $674.5 M Deferred revenues $140.9 M $136.6 M $126.0 M Capital expenditures $14.1 M $17.2 M $14.2 M Stock repurchases (in dollars) $50.2 M $80.0 M $60.0 M Stock repurchases (in shares) 6.9 M 11.1 M 6.3 M Days sales outstanding 43 days 40 days 40 days Employees at end of period 2,759 2,457 2,440

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 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 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 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 earnings 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, (ii) acquisition and integration costs, and (iii) legal fees associated with certain pre-acquisition litigation, (iv) facilities lease loss and (v) gain/loss on sale of investments.

Management also excludes the following non-cash charges in determining non-GAAP net income: (i) stock-based compensation and (ii) amortization of purchased intangible assets, and (iii) facilities lease loss. 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. Further, management believes that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity-based awards were not required to be reflected on our income statement. 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 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 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.

Second Quarter Fiscal 2008 Conference Call and Web Cast Information

Brocade management will host a conference call to discuss second quarter 2008 results on Wednesday, May 14, 2008 at 2:00 p.m. Pacific Time. To access the live Web Cast, 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 Time on May 21, 2008. A replay of the conference call will be available via the Web Cast at http://www.brcd.com for approximately twelve months. To access the replay, please dial 888-203-1112 for domestic access and 719-457-0820 for international callers; the access code for the telephone replay is #6776943.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding the Company's new product offerings and market adoption. 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 new product and service offerings; market competition; the effect of changes in IT spending levels; our ability to realize anticipated benefits from acquisitions; the Company's ability to anticipate future OEM and end-user product needs and to accurately forecast end-user demand; dependence on strategic partners; 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 January 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 the Brocade Website at http://www.brocade.com or contact the company at info@brocade.com.

Brocade, Brocade B weave logo, Fabric OS, File Lifecycle Manager, McDATA, MyView, Secure Fabric OS, SilkWorm, and StorageX are registered trademarks and the Brocade B-wing logo and Tapestry 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 data) (unaudited) Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2008 2007 2008 2007 Net revenues Product $295,584 $300,438 $593,529 $507,654 Services 59,311 44,830 109,214 61,771 Total net revenues 354,895 345,268 702,743 569,425 Cost of revenues Product 116,628 140,980 234,404 213,292 Services 32,814 33,440 66,309 43,918 Total cost of revenues 149,442 174,420 300,713 257,210 Gross margin 205,453 170,848 402,030 312,215 Operating expenses: Research and development 61,131 58,303 119,336 100,694 Sales and marketing 69,985 59,364 133,160 97,951 General and administrative 13,316 13,570 25,683 20,975 Legal fees associated with indemnification obligations, SEC investigation and other related costs 4,789 15,234 14,448 20,462 Acquisition and integration costs - 7,564 - 14,997 Amortization of intangible assets 7,909 7,977 15,818 8,887 Facilities lease losses (477) - (477) - Total operating expenses 156,653 162,012 307,968 263,966 Income from operations 48,800 8,836 94,062 48,249 Interest and other income, net 7,306 10,788 18,791 18,244 Interest expense (1,760) (2,054) (3,281) (2,058) Loss on investments, net (4,725) - (6,949) - Income before provision for income taxes 49,621 17,570 102,623 64,435 Income tax provision/(benefit) (135,167) 16,727 (102,010) 30,273 Net income $184,788 $843 $204,633 $34,162 Net income per share - Basic $0.49 $0.00 $0.54 $0.10 Net income per share - Diluted $0.47 $0.00 $0.52 $0.10 Shares used in per share calculation - Basic 374,827 395,574 379,010 334,215 Shares used in per share calculation - Diluted 393,471 411,989 398,375 348,563 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) April 26, October 27, 2008 2007 Assets Current assets: Cash and cash equivalents $513,533 $315,755 Short-term investments 195,566 325,846 Total cash, cash equivalents and short-term investments 709,099 641,601 Marketable equity securities - 14,205 Accounts receivable, net 167,879 175,755 Inventories 12,418 18,017 Deferred tax asset 64,502 22,781 Prepaid expenses and other current assets 45,985 39,841 Total current assets 999,883 912,200 Long-term investments 87,392 137,524 Property and equipment, net 210,872 204,052 Goodwill 306,637 384,376 Intangible assets, net 253,793 272,652 Deferred tax asset 153,767 167 Other assets 16,872 19,129 Total assets $2,029,216 $1,930,100 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $91,898 $108,810 Accrued employee compensation 78,885 76,017 Deferred revenue 102,990 94,533 Current liabilities associated with lease losses 13,941 12,807 Purchase commitments 27,238 23,176 Other accrued liabilities 63,072 94,358 Total current liabilities 378,024 409,701 Convertible subordinated debt 168,579 167,498 Non-current liabilities associated with lease losses 19,290 25,742 Non-current liabilities - deferred taxes - 22,781 Non-current deferred revenue 37,875 36,344 Other non-current liabilities 42,893 1,376 Stockholders' equity Common stock 1,371,825 1,463,169 Accumulated other comprehensive loss (1,650) (1,180) Accumulated deficit 12,380 (195,331) Total stockholders' equity 1,382,555 1,266,658 Total liabilities and stockholders' equity $2,029,216 $1,930,100 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended APRIL 26, 2008 and APRIL 28, 2007 (in thousands) (unaudited) Three Months Ended April 26, April 28, 2008 2007 Cash flows from operating activities: Net income $184,788 $843 Adjustments to reconcile net income to net cash provided by operating activities: Release of valuation allowance (166,508) - Excess tax benefit from employee stock plans (3,105) 6,153 Depreciation and amortization 28,635 32,289 Loss on disposal of property and equipment 567 55 Net losses on investments and marketable equity securities 4,780 - Non-cash compensation expense 11,176 8,004 Non-cash facilities lease loss benefit (477) - Provision for doubtful accounts receivable and sales returns 1,620 1,535 Changes in operating assets and liabilities: Accounts receivable (10,116) 49,873 Inventories 2,937 (3,627) Prepaid expenses and other assets (5,694) (3,906) Accounts payable 13,491 (17,767) Accrued employee compensation 18,713 (7,515) Deferred revenue 4,282 3,949 Other accrued liabilities 28,235 (22,435) Liabilities associated with lease losses (2,365) (1,207) Net cash provided by operating activities 110,959 46,244 Cash flows from investing activities: Purchases of property and equipment (14,072) (14,225) Purchases of short-term investments (26,656) (173,190) Proceeds from sale of marketable equity securities and equity investments 4,123 - Proceeds from maturities and sale of short-term investments 121,145 285,230 Purchases of long-term investments (8,275) (39,625) Proceeds from maturities and sale of long-term investments 22,331 2,150 Cash acquired (paid) in connection with acquisitions, net of cash paid (acquired) (43,554) 2 Decrease in restricted cash - 5,839 Cash acquired on merger with McDATA - 147,407 Net cash provided by investing activities 55,042 213,588 Cash flows from financing activities: Payments on capital lease obligations - (706) Common stock repurchases (50,170) (59,874) Excess tax benefit from employees stock plans 3,105 (6,153) Redemption of outstanding convertible debt - (124,185) Proceeds from issuance of common stock, net 6,876 45,193 Net cash used in financing activities (40,189) (145,725) Effect of exchange rate fluctuations on cash and cash equivalents 1,131 (76) Net increase in cash and cash equivalents 126,943 114,031 Cash and cash equivalents, beginning of period 386,590 249,807 Cash and cash equivalents, end of period $513,533 $363,838 BROCADE COMMUNICATIONS SYSTEMS, INC. GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended APRIL 26, 2008 and APRIL 28, 2007 (in thousands) (unaudited) Six Months Ended April 26, April 28, 2008 2007 Cash flows from operating activities: Net income $204,633 $34,161 Adjustments to reconcile net income to net cash provided by operating activities: Release of valuation allowance (166,508) - Excess tax benefit from employee stock plans (7,030) (161) Depreciation and amortization 59,524 40,802 Loss on disposal of property and equipment 1,196 203 Net losses on investments and marketable equity securities 6,447 - Non-cash compensation expense 19,647 14,729 Non-cash facilities lease loss benefit (477) - Provision for doubtful accounts receivable and sales returns 3,309 1,662 Changes in operating assets and liabilities: Accounts receivable 11,586 53,735 Inventories 5,599 (4,585) Prepaid expenses and other assets (2,383) (8,997) Accounts payable (16,792) (20,938) Accrued employee compensation 2,597 (22,272) Deferred revenue 9,988 12,274 Other accrued liabilities 63,665 (18,385) Liabilities associated with lease losses (4,841) (2,653) Net cash provided by operating activities 190,160 79,575 Cash flows from investing activities: Purchases of property and equipment (31,251) (27,587) Purchases of short-term investments (101,575) (290,890) Proceeds from sale of marketable equity securities and equity investments 9,926 - Proceeds from maturities and sale of short-term investments 298,446 377,833 Purchases of long-term investments (37,731) (91,801) Proceeds from maturities and sale of long-term investments 22,483 5,847 Cash paid in connection with acquisitions, net of cash acquired (43,554) (7,704) Decrease in restricted cash - 5,839 Cash acquired on merger with McDATA - 147,407 Net cash provided by investing activities 116,744 118,944 Cash flows from financing activities: Payments on capital lease obligations - (706) Common stock repurchases (130,181) (59,874) Excess tax benefit from employees stock plans 7,030 161 Redemption of outstanding convertible debt - (124,185) Proceeds from issuance of common stock, net 14,699 75,700 Net cash used in financing activities (108,452) (108,904) Effect of exchange rate fluctuations on cash and cash equivalents (674) (145) Net increase in cash and cash equivalents 197,778 89,470 Cash and cash equivalents, beginning of period 315,755 274,368 Cash and cash equivalents, end of period $513,533 $363,838 BROCADE COMMUNICATIONS SYSTEMS, INC. RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (in thousands, except per share data) (unaudited) Three Months Ended April 26, January 26, April 28, 2008 2008 2007 Net income on a GAAP basis $184,788 $19,845 $843 Adjustments: Stock-based compensation expense included in cost of revenues 2,371 2,492 2,236 Amortization of intangible assets expense included in cost of revenues 8,512 11,328 11,328 Legal fees associated with certain pre-acquisition litigation 458 - - Total gross margin adjustments 11,341 13,820 13,564 Legal fees associated with indemnification obligations, SEC investigation and other related costs 4,789 9,659 15,234 Stock-based compensation expense included in research and development 2,528 2,625 2,056 Stock-based compensation expense included in sales and marketing 3,146 1,986 1,682 Stock-based compensation expense included in general and administrative 3,131 1,371 944 Amortization of intangible assets expense included in operating expenses 7,909 7,909 7,977 Acquisition and integration costs - - 7,564 Facilities lease losses (477) - - Total operating expense adjustments 21,026 23,550 35,457 Total operating income adjustments 32,367 37,370 49,021 Loss on investments 4,189 1,815 - Income tax effect of adjustments (161,658) 5,206 (3,250) Non-GAAP net income $59,686 $64,236 $46,614 Non-GAAP net income per share - Basic $0.16 $0.17 $0.12 Non-GAAP net income per share - Diluted $0.15 $0.16 $0.11 Shares used in non-GAAP per share calculation - Basic 374,827 383,194 395,574 Shares used in non-GAAP per share calculation - Diluted 393,471 403,279 411,989 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 data) (unaudited) Six Months Ended April 26, April 28, 2008 2007 Net income on a GAAP basis $204,633 $34,161 Adjustments: Stock-based compensation expense included in cost of revenues 4,863 3,677 Amortization of intangible assets expense included in cost of revenues 19,841 11,328 Legal fees associated with certain pre-acquisition litigation 458 - Total gross margin adjustments 25,162 15,005 Legal fees associated with indemnification obligations, SEC investigation and other related costs 14,448 20,462 Stock-based compensation expense included in research and development 5,152 4,054 Stock-based compensation expense included in sales and marketing 5,132 3,068 Stock-based compensation expense included in general and administrative 4,502 1,597 Amortization of intangible assets expense included in operating expenses 15,818 8,887 Acquisition and integration costs - 14,997 Facilities lease losses (477) - Total operating expense adjustments 44,575 53,065 Total operating income adjustments 69,737 68,070 Loss on investments 6,004 - Income tax effect of adjustments (156,451) (6,186) Non-GAAP net income $123,922 $96,045 Non-GAAP net income per share - Basic $0.33 $0.29 Non-GAAP net income per share - Diluted $0.32 $0.28 Shares used in non-GAAP per share calculation - Basic 379,010 334,215 Shares used in non-GAAP per share calculation - Diluted 398,375 348,563 See explanation of non-GAAP information included herein.