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Brocade Reports Fiscal Q3 2014 Results

Strength in SAN and Ethernet Switching Drives Improved Profit Margins

SAN JOSE, CA -- (Marketwired) -- 08/21/14 -- Brocade® (NASDAQ: BRCD) today reported financial results for its third fiscal quarter ended August 2, 2014. Brocade reported third quarter revenue of $545 million, up 2% year-over-year and up 2% quarter-over-quarter. The Company reported GAAP diluted earnings per share (EPS) of $0.20, down from $0.26 in Q3 2013, and up from a loss per share of $(0.03) in Q2 2014. During Q3 2013, the Company recognized a gain of $77 million related to the litigation settlement with A10 Networks, which increased GAAP EPS by $0.13 in that quarter. During Q2 2014, the Company incurred a $83 million non-cash goodwill impairment charge associated with the strategic repositioning of the Brocade ADX® product family, which decreased GAAP EPS by $0.19 in that quarter. Non-GAAP diluted EPS was $0.23 for Q3 2014, up from $0.19 in both Q3 2013 and Q2 2014, primarily due to higher revenue, improved gross margin, and lower operating expenses.

"With another solid quarter behind us, we are seeing the tangible benefits of our data center focused strategy," said Lloyd Carney, CEO of Brocade. "The resilience and durability of our SAN business, along with strong Brocade VDX® sales, validate our strategic direction. We continue to leverage our core competencies in hardware and software networking to position the company for growth, and we remain focused on delivering a world-class customer experience, even in the most demanding environments."

Key Financial Metrics:

                                                      Q3 2014     Q3 2014
                                                       vs. Q2      vs. Q3
                        Q3 2014   Q2 2014   Q3 2013     2014        2013
                       --------  --------  --------  ---------   ---------
Revenue                $  545 M  $  537 M  $  537 M          2%          2%
GAAP EPS--diluted      $   0.20  $  (0.03) $   0.26        N/A         (23%)
Non-GAAP EPS--diluted  $   0.23  $   0.19  $   0.19         20%         23%
GAAP gross margin          66.3%     66.0%     63.0%   0.3 pts     3.3 pts
Non-GAAP gross margin      67.2%     66.7%     65.6%   0.5 pts     1.6 pts
GAAP operating margin      21.6%      3.8%     13.9%  17.8 pts     7.7 pts
Non-GAAP operating
 margin                    25.7%     23.2%     21.6%   2.5 pts     4.1 pts
Cash provided by
 operations            $  106 M  $  168 M  $  102 M        (37%)         4%
Share repurchases      $  112 M  $   50 M  $  101 M        124%         11%

Please see important note of explanation on non-GAAP financial measures below, including a detailed reconciliation between GAAP and non-GAAP information in the tables included herein.

Highlights:

  • SAN business revenue, including products and services, was $380 million, up 3% year-over-year and flat sequentially. The year-over-year improvement was the result of 4% growth in SAN product revenue due to higher switch and director sales, partially offset by lower embedded product sales and the revenue impact from the divestiture of the HBA business during Q1 2014. The revenue performance was better than expected in a typically soft demand quarter.

  • IP Networking business revenue, including products and services, was $166 million, down 1% year-over-year and up 5% sequentially. The sequential increase was primarily due to higher sales of Ethernet switching products to the U.S. Federal government and strong Brocade VDX sales to data center customers, partially offset by lower routing sales to service provider customers and lower support revenue. Q3 2014 IP Networking product revenue was $133 million, down 1% year-over-year and up 9% sequentially. Ethernet switch revenue increased 17% year-over-year and 27% sequentially. Routing product revenue decreased 19% year-over-year and 20% sequentially, primarily due to a pause in some customer orders in anticipation of new products scheduled for release in fiscal Q4 2014.

  • During the quarter, the Company initiated a quarterly cash dividend of $0.035 per share of the Company's common stock and repurchased 12.8 million shares for $112 million.

Board Declares Dividend:

  • The Brocade Board of Directors has declared a quarterly cash dividend of $0.035 per share of the Company's common stock. The dividend payment will be made on October 2, 2014 to stockholders of record at the close of market on September 10, 2014.

Brocade management will host a conference call to discuss the fiscal third quarter results and the fiscal fourth quarter outlook today at 2:30 p.m. PT (5:30 p.m. ET). To access the webcast please go to www.brcd.com/events.cfm. A replay of the conference call, prepared comments and slides, as well as a written transcript, will be available at www.brcd.com.
Other Q3 2014 product, customer, and partner announcements are available at http://newsroom.brocade.com/.

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

Financial Highlights and Additional Financial Information

                                                       Q3      Q2      Q3
                                                      2014    2014    2013
                                                     ------  ------  ------
Routes to market as a % of total net revenues:
  OEM revenues                                           67%     68%     66%
  Channel/Direct revenues                                33%     32%     34%
  10% or greater customer revenues                       48%     56%     47%
Geographic split as a % of total net revenues (1):
  Domestic revenues                                      56%     59%     61%
  International revenues                                 44%     41%     39%
Segment split as a % of total net revenues:
  SAN product revenues                                   60%     60%     59%
  IP Networking product revenues                         24%     22%     25%
  Global Services revenues                               16%     18%     16%
  SAN business revenues (2)                              70%     71%     69%
  IP Networking business revenues (2)                    30%     29%     31%
IP Networking business revenues by use category (3):
  Data Center (4)                                        55%     57%     48%
  Enterprise Campus                                      39%     37%     40%
  Carrier Network (MAN/WAN)                               6%      6%     12%

Additional information:                      Q3 2014    Q2 2014    Q3 2013
                                            ---------  ---------  ---------
  GAAP net income (loss)                    $    87 M  $   (14 M) $   119 M
  Non-GAAP net income                       $   102 M  $    87 M  $    87 M
  GAAP operating income                     $   118 M  $    20 M  $    74 M
  Non-GAAP operating income                 $   140 M  $   124 M  $   116 M
  Adjusted EBITDA (5)                       $   165 M  $   146 M  $   213 M
  Effective GAAP tax provision rate              23.4%     225.1%      16.3%
  Effective Non-GAAP tax provision rate          21.9%      24.6%      18.2%
  Cash and cash equivalents                 $ 1,149 M  $ 1,138 M  $   790 M
  Deferred revenues                         $   299 M  $   304 M  $   300 M
  Capital expenditures                      $    14 M  $    14 M  $    10 M
  Total debt, net of discount               $   597 M  $   598 M  $   599 M
  Cash, net of senior debt and capitalized
   leases                                   $   547 M  $   535 M  $   186 M
  Days sales outstanding                      32 days    35 days    37 days
  Employees at end of period                    4,103      4,061      4,565
  SAN port shipments                            1.1 M      1.1 M      1.0 M

Please see important note of explanation on non-GAAP financial measures below, including a detailed reconciliation between GAAP and non-GAAP information in the tables included herein.

 (1) Revenues are attributed to geographic areas based on product delivery
     location. Since some OEM partners take delivery of Brocade products
     domestically and then ship internationally to their end users, the
     percentage of international revenues based on end-user location would
     likely be higher.
 (2) SAN and IP Networking business revenues include product, support, and
     services revenues.
 (3) Business revenue by use category is estimated based on analysis of the
     information the Company collects in its sales management system. The
     estimated percentage of revenue by use category may fluctuate quarter-
     to-quarter due to seasonality and the timing of large customer orders.
 (4) Data Center includes enterprise, service provider, and government data
     center revenues.
 (5) Adjusted EBITDA is as defined in the Company's credit agreement.

Non-GAAP Financial Measures

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 relative to its competitors' operating results. Management also believes these non-GAAP financial measures help with the determination of 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 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 its 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 events that 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 write-off of original issue discount and debt issuance costs related to lenders that did not participate in refinancing, (iii) settlement gain associated with certain pre-acquisition-related litigation, (iv) restructuring, goodwill impairment, and other related costs, (v) gain on sale of network adapter business, (vi) gain on sale of non-marketable equity investment, and (vii) 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 use of 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 exclusion of expense associated with the amortization of acquisition-related intangible assets is appropriate because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and the exclusion of 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.

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 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.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding Brocade's strategy, operational performance and prospects for revenue growth. 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, Brocade's ability to execute on its sale strategy, 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 May 3, 2014, and Brocade's Annual Report on Form 10-K for the fiscal year ended October 26, 2013. 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 (NASDAQ: BRCD) networking solutions help the world's leading organizations transition smoothly to a world where applications and information reside anywhere. (www.brocade.com)

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

© 2014 Brocade Communications Systems, Inc. All Rights Reserved.

                    BROCADE COMMUNICATIONS SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                 (Unaudited)

                             Three Months Ended        Nine Months Ended
                           ----------------------  ------------------------
                            August 2,   July 27,    August 2,     July 27,
                               2014        2013        2014         2013
                           ----------  ----------  -----------  -----------
                               (In thousands, except per share amounts)
Net revenues:
  Product                  $  457,797  $  447,993  $ 1,375,282  $ 1,401,986
  Service                      87,667      88,558      271,627      262,078
                           ----------  ----------  -----------  -----------
    Total net revenues        545,464     536,551    1,646,909    1,664,064
                           ----------  ----------  -----------  -----------
Cost of revenues:
  Product                     145,518     160,441      441,416      499,415
  Service                      38,233      37,908      116,818      118,410
                           ----------  ----------  -----------  -----------
    Total cost of revenues    183,751     198,349      558,234      617,825
                           ----------  ----------  -----------  -----------
Gross margin                  361,713     338,202    1,088,675    1,046,239
Operating expenses:
  Research and development     84,152      92,969      261,862      289,088
  Sales and marketing         137,262     139,220      409,524      433,547
  General and
   administrative              22,140      18,526       63,395       57,640
  Amortization of
   intangible assets              131      13,124       10,145       41,131
  Restructuring, goodwill
   impairment, and other
   related costs                  131          --       89,051           --
  Gain on sale of network
   adapter business                --          --       (4,884)          --
                           ----------  ----------  -----------  -----------
    Total operating
     expenses                 243,816     263,839      829,093      821,406
                           ----------  ----------  -----------  -----------
Income from operations        117,897      74,363      259,582      224,833
Interest expense               (9,176)     (9,247)     (27,606)     (46,047)
Interest and other income,
 net                            5,299      76,684        3,943       76,781
                           ----------  ----------  -----------  -----------
Income before income tax      114,020     141,800      235,919      255,567
Income tax expense             26,668      23,104       81,367      111,177
                           ----------  ----------  -----------  -----------
Net income                 $   87,352  $  118,696  $   154,552  $   144,390
                           ==========  ==========  ===========  ===========
Net income per share--
 basic                     $     0.20  $     0.26  $      0.35  $      0.32
                           ==========  ==========  ===========  ===========
Net income per share--
 diluted                   $     0.20  $     0.26  $      0.34  $      0.31
                           ==========  ==========  ===========  ===========
Shares used in per share
 calculation--basic           432,448     449,446      436,396      452,474
                           ==========  ==========  ===========  ===========
Shares used in per share
 calculation--diluted         441,789     461,344      448,596      464,861
                           ==========  ==========  ===========  ===========

Cash dividends declared
 per share                 $    0.035  $       --  $     0.035  $        --
                           ==========  ==========  ===========  ===========



                    BROCADE COMMUNICATIONS SYSTEMS, INC.
          CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (Unaudited)

                                  Three Months Ended     Nine Months Ended
                                 --------------------  --------------------
                                 August 2,   July 27,  August 2,   July 27,
                                    2014       2013       2014       2013
                                 ---------  ---------  ---------  ---------
                                               (In thousands)
Net income                       $  87,352  $ 118,696  $ 154,552  $ 144,390
Other comprehensive income and
 loss, net of tax:
  Unrealized gains (losses) on
   cash flow hedges:
    Change in unrealized gains
     and losses                       (155)    (1,000)        14     (2,998)
    Net gains and losses
     reclassified into earnings       (218)       (10)      (217)      (214)
                                 ---------  ---------  ---------  ---------
  Net unrealized gains (losses)
   on cash flow hedges                (373)    (1,010)      (203)    (3,212)
  Foreign currency translation
   adjustments                        (191)    (1,470)       284     (3,612)
                                 ---------  ---------  ---------  ---------
Total other comprehensive income
 (loss)                               (564)    (2,480)        81     (6,824)
                                 ---------  ---------  ---------  ---------
Total comprehensive income       $  86,788  $ 116,216  $ 154,633  $ 137,566
                                 =========  =========  =========  =========



                    BROCADE COMMUNICATIONS SYSTEMS, INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (Unaudited)

                                                    August 2,   October 26,
                                                       2014         2013
                                                   -----------  -----------
                                                     (In thousands, except
                                                          par value)
ASSETS
Current assets:
  Cash and cash equivalents                        $ 1,149,387  $   986,997
  Accounts receivable, net of allowances for
   doubtful accounts of $531 and $575 at August 2,
   2014, and October 26, 2013, respectively            191,816      249,598
  Inventories                                           40,586       45,344
  Deferred tax assets                                  113,133       98,018
  Prepaid expenses and other current assets             47,238       42,846
                                                   -----------  -----------
    Total current assets                             1,542,160    1,422,803
Property and equipment, net                            448,195      472,940
Goodwill                                             1,556,361    1,645,437
Intangible assets, net                                  22,703       40,258
Non-current deferred tax assets                            792        1,585
Other assets                                            31,679       38,368
                                                   -----------  -----------
    Total assets                                   $ 3,601,890  $ 3,621,391
                                                   ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                 $    84,242  $    88,218
  Accrued employee compensation                        132,107      145,996
  Deferred revenue                                     225,353      226,696
  Current restructuring liabilities                      2,670       16,418
  Current portion of long-term debt                      1,817        2,996
  Other accrued liabilities                             58,245       80,339
                                                   -----------  -----------
    Total current liabilities                          504,434      560,663
Long-term debt, net of current portion                 595,420      596,208
Non-current restructuring liabilities                    3,218        1,008
Non-current deferred revenue                            73,714       76,426
Non-current income tax liability                        45,271       38,680
Non-current deferred tax liabilities                    41,679           --
Other non-current liabilities                            1,553        1,593
                                                   -----------  -----------
    Total liabilities                                1,265,289    1,274,578
                                                   -----------  -----------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.001 par value, 5,000 shares
   authorized, no shares issued and outstanding             --           --
  Common stock, $0.001 par value, 800,000 shares
   authorized:
    Issued and outstanding: 432,664 and 445,285
     shares at August 2, 2014, and October 26,
     2013, respectively                                    433          445
  Additional paid-in capital                         1,765,589    1,915,152
  Accumulated other comprehensive loss                 (13,363)     (13,444)
  Retained earnings                                    583,942      444,660
                                                   -----------  -----------
    Total stockholders' equity                       2,336,601    2,346,813
                                                   -----------  -----------
    Total liabilities and stockholders' equity     $ 3,601,890  $ 3,621,391
                                                   ===========  ===========



                    BROCADE COMMUNICATIONS SYSTEMS, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)

                                                       Three Months Ended
                                                     ----------------------
                                                      August 2,   July 27,
                                                         2014        2013
                                                     ----------  ----------
                                                         (In thousands)
Cash flows from operating activities:
  Net income                                         $   87,352  $  118,696
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Excess tax benefits from stock-based
     compensation                                       (10,283)     (1,469)
    Depreciation and amortization                        20,443      45,647
    Loss on disposal of property and equipment              152         984
    Amortization of debt issuance costs and original
     issue discount                                         290         272
    Net gain on sale of investment                       (5,242)         --
    Provision for doubtful accounts receivable and
     sales allowances                                     1,992       2,337
    Non-cash compensation expense                        21,574      18,769
  Changes in assets and liabilities:
    Accounts receivable                                      (5)     18,511
    Inventories                                             187       2,310
    Prepaid expenses and other assets                     3,575     (67,303)
    Deferred tax assets                                     (10)         22
    Accounts payable                                      2,717      (7,052)
    Accrued employee compensation                       (26,398)    (28,294)
    Deferred revenue                                     (4,593)     (1,974)
    Other accrued liabilities                            14,854         887
    Restructuring liabilities                              (574)       (188)
                                                     ----------  ----------
      Net cash provided by operating activities         106,031     102,155
                                                     ----------  ----------
Cash flows from investing activities:
  Proceeds from sale of non-marketable equity
   investment                                            10,748          --
  Purchases of property and equipment                   (13,780)    (10,381)
                                                     ----------  ----------
      Net cash used in investing activities              (3,032)    (10,381)
                                                     ----------  ----------
Cash flows from financing activities:
  Payment of debt issuance costs related to senior
   unsecured notes                                           --        (443)
  Payment of principal related to capital leases           (633)       (561)
  Common stock repurchases                             (112,128)   (101,181)
  Proceeds from issuance of common stock                 26,763      35,959
  Payment of cash dividends to stockholders             (15,270)         --
  Excess tax benefits from stock-based compensation      10,283       1,469
                                                     ----------  ----------
      Net cash used in financing activities             (90,985)    (64,757)
                                                     ----------  ----------
Effect of exchange rate fluctuations on cash and
 cash equivalents                                          (240)     (1,222)
                                                     ----------  ----------
Net increase in cash and cash equivalents                11,774      25,795
Cash and cash equivalents, beginning of period        1,137,613     764,298
                                                     ----------  ----------
Cash and cash equivalents, end of period             $1,149,387  $  790,093
                                                     ==========  ==========



                    BROCADE COMMUNICATIONS SYSTEMS, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)

                                                        Nine Months Ended
                                                     ----------------------
                                                      August 2,   July 27,
                                                         2014        2013
                                                     ----------  ----------
                                                         (In thousands)
Cash flows from operating activities:
  Net income                                         $  154,552  $  144,390
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Excess tax benefits from stock-based
     compensation                                       (37,698)     (6,909)
    Non-cash tax charges                                     --      78,206
    Depreciation and amortization                        80,370     139,005
    Loss on disposal of property and equipment            3,330       4,030
    Gain on sale of network adapter business             (4,884)         --
    Amortization of debt issuance costs and original
     issue discount                                         856         937
    Call premium cost and write-off of original
     issue discount and debt issuance costs related
     to lenders that did not participate in
     refinancing                                             --       5,360
    Net gain on sale of investment                       (5,242)         --
    Provision for doubtful accounts receivable and
     sales allowances                                     5,520       6,897
    Non-cash compensation expense                        61,214      57,091
    Goodwill impairment charge                           83,382          --
  Changes in assets and liabilities:
    Accounts receivable                                  52,261       7,950
    Inventories                                           4,757      18,915
    Prepaid expenses and other assets                    (4,796)    (69,017)
    Deferred tax assets                                      47         344
    Accounts payable                                     (4,409)    (21,744)
    Accrued employee compensation                       (38,136)    (82,457)
    Deferred revenue                                     (4,020)      5,950
    Other accrued liabilities                            48,178      (7,082)
    Restructuring liabilities                           (11,538)       (606)
                                                     ----------  ----------
      Net cash provided by operating activities         383,744     281,260
                                                     ----------  ----------
Cash flows from investing activities:
  Purchases of non-marketable equity investments           (223)         --
  Proceeds from sale of non-marketable equity
   investment                                            10,748          --
  Purchases of property and equipment                   (41,175)    (41,949)
  Net cash paid in connection with acquisition               --     (44,629)
  Proceeds from collection of note receivable               250          --
  Proceeds from sale of network adapter business          9,995          --
                                                     ----------  ----------
      Net cash used in investing activities             (20,405)    (86,578)
                                                     ----------  ----------
Cash flows from financing activities:
  Proceeds from senior unsecured notes                       --     296,250
  Payment of principal related to senior secured
   notes                                                     --    (300,000)
  Payment of debt issuance costs related to senior
   unsecured notes                                           --        (992)
  Payment of principal related to capital leases         (2,382)     (1,536)
  Common stock repurchases                             (302,560)   (187,360)
  Proceeds from issuance of common stock                 81,293      71,858
  Payment of cash dividends to stockholders             (15,270)         --
  Excess tax benefits from stock-based compensation      37,698       6,909
                                                     ----------  ----------
      Net cash used in financing activities            (201,221)   (114,871)
                                                     ----------  ----------
Effect of exchange rate fluctuations on cash and
 cash equivalents                                           272      (2,944)
                                                     ----------  ----------
Net increase in cash and cash equivalents               162,390      76,867
Cash and cash equivalents, beginning of period          986,997     713,226
                                                     ----------  ----------
Cash and cash equivalents, end of period             $1,149,387  $  790,093
                                                     ==========  ==========



                    BROCADE COMMUNICATIONS SYSTEMS, INC.
         RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
                                 (Unaudited)

                                                   Three Months Ended
                                            -------------------------------
                                            August 2,    May 3,    July 27,
                                               2014       2014       2013
                                            ---------  ---------  ---------
                                            (In thousands, except per share
                                                        amounts)
Non-GAAP adjustments
  Stock-based compensation expense included
   in cost of revenues                      $   4,121  $   3,474  $   3,858
  Amortization of intangible assets expense
   included in cost of revenues                   552        396      9,650
                                            ---------  ---------  ---------
    Total gross margin impact from non-GAAP
     adjustments                                4,673      3,870     13,508

  Stock-based compensation expense included
   in research and development                  4,350      4,422      4,020
  Stock-based compensation expense included
   in sales and marketing                       7,592      8,462      7,164
  Stock-based compensation expense included
   in general and administrative                5,511      4,694      3,727
  Amortization of intangible assets expense
   included in operating expenses                 131        131     13,124
  Restructuring, goodwill impairment, and
   other related costs                            131     82,703         --
                                            ---------  ---------  ---------
    Total operating income impact from non-
     GAAP adjustments                          22,388    104,282     41,543

  Gain on A10 litigation settlement, net           --         --    (76,816)
  Gain on sale of non-marketable equity
   investment                                  (5,242)        --         --
  Income tax effect of non-tax adjustments     (2,005)    (3,685)     3,716
                                            ---------  ---------  ---------
    Total net income impact from non-GAAP
     adjustments                            $  15,141  $ 100,597  $ (31,557)
                                            =========  =========  =========

Gross margin reconciliation
  GAAP gross margin                         $ 361,713  $ 354,292  $ 338,202
  Total gross margin impact from non-GAAP
   adjustments                                  4,673      3,870     13,508
                                            ---------  ---------  ---------
    Non-GAAP gross margin                   $ 366,386  $ 358,162  $ 351,710
                                            =========  =========  =========
  GAAP gross margin, as a percent of total
   net revenues                                  66.3%      66.0%      63.0%
  Non-GAAP gross margin, as a percent of
   total net revenues                            67.2%      66.7%      65.6%

Operating income reconciliation
  GAAP operating income                     $ 117,897  $  20,195  $  74,363
  Total operating income impact from non-
   GAAP adjustments                            22,388    104,282     41,543
                                            ---------  ---------  ---------
    Non-GAAP operating income               $ 140,285  $ 124,477  $ 115,906
                                            =========  =========  =========
  GAAP operating income, as a percent of
   total net revenues                            21.6%       3.8%      13.9%
  Non-GAAP operating income, as a percent
   of total net revenues                         25.7%      23.2%      21.6%

Net income (loss) and net income (loss) per
 share reconciliation
  Net income (loss) on a GAAP basis         $  87,352  $ (13,684) $ 118,696
  Total net income impact from non-GAAP
   adjustments                                 15,141    100,597    (31,557)
                                            ---------  ---------  ---------
    Non-GAAP net income                     $ 102,493  $  86,913  $  87,139
                                            =========  =========  =========
  Non-GAAP net income per share--basic      $    0.24  $    0.20  $    0.19
                                            =========  =========  =========
  Non-GAAP net income per share--diluted    $    0.23  $    0.19  $    0.19
                                            =========  =========  =========
  Shares used in non-GAAP per share
   calculation--basic                         432,448    436,167    449,446
                                            =========  =========  =========
  Shares used in non-GAAP per share
   calculation--diluted                       441,789    450,449    461,344
                                            =========  =========  =========


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