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Brocade Communications Systems, Inc. Q105 Financial Results
February 16, 2005
Q1 05 Conference Call & Audio Web Cast
Speakers– Michael Klayko, CEO– Tony Canova, Vice President, Administration and CFO
Moderator– Shirley Stacy, Director of Investor Relations
Replay Information– Telephone – (800) 642-1687 or (706) 645-9291
• Passcode 3829891
– Website – www.brocade.com/investors
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 3
Securities Litigation Reform Act –Safe Harbor
This presentation includes forward-looking statements regarding Brocade's business outlook. These statements are only predictions and are subject to risks and uncertainties. Brocade's actual results may differ materially from the results discussed in these forward-looking statements as a result of the risks set forth in our SEC filings, including our most recent Form 10-K for the fiscal year ended October 30, 2004. Brocade assumes no obligation to update these forward-looking statements.This presentation includes non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures is provided in our Q1 05 press release which has been furnished to the SEC on Form 8K and in the Q1 05 slide presentation posted on our website at www.brocade.com.Please note that certain reclassifications have been made to prior year balances in order to conform to the current year presentation.
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 4
Q1 05 Earnings Call Agenda
IntroductionQuarterly HighlightsQ1 05 Business OverviewQ1 05 FinancialsQ2 05 OutlookQ&A
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 5
Introduction and Business Overview
Michael Klayko CEO
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 6
Q1 05 Results
$138
$145 $146$150
$156
$162
130
140
150
160
170
Q403 Q104 Q204 Q304 Q404 Q105
Operating Income $M*$6 $9 $10
Revenue $M Q1 HIGHLIGHTS
• Q1 revenue grew by 4% sequentially & 11% year over year
• 8th consecutive quarter of revenue growth
• 7th consecutive quarter of increased operating income
• Diluted EPS* of $0.10 vs. $0.08 in Q404 and $0.03 in Q104$19 $31$24
Diluted EPS *$.03 $.07 $.04 $.08$.02 $.10
•Non-GAAP; prior quarters amounts are as restated
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 7
New release of Brocade Fabric OS, Fabric Manager, advanced
software services, management, and distance support
Enhanced & Expanded Product Portfolio
SilkWorm 12000
SilkWorm Multiprotocol Router
NEW
NEW
SilkWorm 24000
NEW
SilkWorm 3850
SilkWorm 3250
NEW
NEW
SilkWorm 3900
NEWFICON
SilkWorm 3800
NEW
IBM BladeCenter Switch
SilkWorm 4100
NEW
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 8
The SAN Market is Segmenting
Application Complexity
Strategic Customer
Value
“Utility” Computing
SMB, Entry-Level and Departmental• Simplicity• Value priced• Solutions Focused
Enterprise• Consolidation• Utilization• Continuous
availability• Disaster recovery• Open systems
data migration
Midrange–Enterprise• Consolidation• Utilization• Availability• Reduced backup• Consolidated
Management
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 9
SilkWorm 4100 NEW
Highest-performance midrange fabric switch available: – First-to-market with a 4 Gbit/sec Fibre Channel switch– 16, 24, or 32 ports (on demand) for instant scalability– Backward compatible with 1Gbit/2Gbit
Suitable for small SAN (core) and large SAN (edge) applications:– Full FICON/CUP support with intermix mode for heterogeneous environments– ISL Trunking bandwidth up to 32 Gbit/sec for core-to-edge configurations
EMC, IBM, HP and HDS have announced general availability
Also available through distributors and master resellers
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 10
Bladed Servers are Booming
01,0002,0003,0004,0005,0006,000
2003 2004 2005 2006 2007 2008
Worldwide FC Connections by Server Class
High-end Servers (>$250 K) Mid-range Servers ($25K to $250K)Volume Servers (<$25K) Blade Servers
Bladed Servers168% CAGR
Source: IDC 2004
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 11
SilkWorm Multiprotocol RouterINFOWORLD 2004 Product of the Year!
“Best Storage Router”INFOWORLD, January 2005
SilkWorm Multiprotocol Router
“The SilkWorm Multiprotocol Router is the unrivaled leader. The price isn't trivial, but is offset by the savings from improved storage
device utilization and simplified management.”
INFOWORLD, November 2004
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 12
Unparalleled Investment ProtectionInvestment Protection for Entire Brocade Director Installed Base
SilkWorm24000
SilkWorm12000
• 128 Ports• Single Domain• Enhanced RAS• Lower Power & Weight• FICON with CUP• 12000 port blade support• Dual switch domains
• 4Gb/10Gb• 256 ports• MultiProtocol Router• Fabric Apps Blade• Updated Technology• Additional Functionality
• 128 Ports• Two Domains• Installed Base• Core to edge• CUP support
NEW!NEW!
Upgrade Path via Blades
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 13
Q1 Fiscal 2005Financial Review
Tony Canova VP Finance and CFO
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 14
Results of Q105 vs. Our Long Term Business Model• As of Q105 have achieved or exceeded all of our long term business model goals
$600K
15.5%
40.7%
56.2%
Q4’04 Act
$558K
12.6%
43.5%
56.1%
Q3’04 Act
$623K
19.1%
39.8%
58.8%
Q1’05 Act
$500-600K
Rev/Employee
15-20%Op Margin
38-40%Op Expense
55-58%Gross Margin
’05 Model Goals
* All numbers are as restated and based on non-GAAP Income Statements
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 15
Q1 Fiscal 2005 Financial Results *
Revenue $ million
$120$125$130$135$140$145$150$155$160$165
Q303 Q403 Q104 Q204 Q304 Q404 Q105
EPS - diluted* $0.01 $0.02
$133.5
$0.03
$137.8$145.0
$0.07
* Non-GAAP; prior quarters amounts are as restated
$150.0
$0.08
$145.6
$0.10
$155.6$161.6
$0.04
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 16
Q1 Fiscal 2005 Operating Results*
Revenue $161.6M $ 155.6M $145.0MGross Margin 58.8% 56.2% 53.5%Operating Expense $64.2M $63.4M $68.3MOperating Income $30.8M $24.1M $9.4MOperating Margin 19.1% 15.5% 6.5%Net Income $28.3M $20.8M $7.5MNon-GAAP EPS - diluted $0.10 $0.08 $0.03
Q105* Q404* Q104*
*Non-GAAP; prior quarters information are as restated
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 17
Q105 Net Income GAAP to Non-GAAP Reconciliation
($ in 000’s, except EPS) Q105 Q404* Q104*Net Income (Loss) on a GAAP basis $27,943 $20,384 $(68,809)Adjustments:
Variable stock-based compensation expense(benefit) included in cost of revenues (237) 575 222
Warranty benefit included in cost of revenues (1,853) _--- _---Total gross margin adjustments (2,090) 575 222
Internal review cost 3,741 --- ---Variable stock-based compensation expense
(benefit) included in R&D (688) 1,590 788Variable stock-based compensation expense
(benefit) included in S&M (221) 565 244Variable stock-based compensation expense
(benefit) included in G&A (167) 347 192Amortization of acquisition related deferred
stock compensation 107 107 184Restructuring costs --- (1,127) (368)Lease termination charge and other, net _--- _--- 75,591
Total operating income adjustments 2,772 1,482 76,631
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 18
Q105 Net Income GAAP to Non-GAAP Reconciliation (Continued)
($ in 000’s, except EPS) Q105 Q404* Q104*
Gain on repurchase of convertible debt (150) (1,594) (521) Income tax effect of adjustments (145) ____--- ___---Non-GAAP net income $28,330 $20,847 $7,523
Non-GAAP net income per share – basic $0.11 $0.08 $0.03Non-GAAP net income per share – diluted $0.10 $0.08 $0.03Shares used in non-GAAP per share calculation - basic 266,218 263,242 257,796Shares used in non-GAAP per share calculation - diluted 271,767 265,467 261,688
* Prior quarters amounts are as restated
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 19
Q105 Gross Margin GAAP to Non-GAAP Reconciliation
($ thousands) Q105 Q404* Q104*
Gross margin on a GAAP basis $97,172 $86,921 $77,420Adjustments:
Variable stock-based compensation expense(benefit) included in cost of revenues (237) 575 222
Warranty benefit included in cost of revenues (1,853) _--- _---Total gross margin adjustments (2,090) 575 222
Gross margin on a non-GAAP basis $95,082 $87,496 $77,642
*Amounts as restated
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 20
Q105 Operating Expenses and Income GAAP to Non-GAAP Reconciliation
($ thousands) Q105 Q404* Q104* Operating expenses on a GAAP basis $67,010 $64,874 $144,898Adjustments:
Internal review cost (3,741) --- ---Variable stock-based compensation expense
(benefit) included in R&D 688 (1,590) (788)Variable stock-based compensation expense
(benefit) included in S&M 221 (565) (244)Variable stock-based compensation expense
(benefit) included in G&A 167 (347) (192)Amortization of acquisition related deferred
stock compensation (107) (107) (184)Restructuring costs --- 1,127 368Lease termination charge and other, net ___--- ___--- (75,591)
Total operating expenses on a non-GAAP basis $64,238 $63,392 $68,267
Gross margin on a non-GAAP basis $95,082 $87,496 $77,642Less: Total opex on a non-GAAP basis 64,238 63,392 68,267Income from operations on a non-GAAP basis $30,844 $24,104 $9,375Operating margin on a non-GAAP basis 19.1% 15.5% 6.5%
*Amounts are as restated
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 21
Balance Sheet HighlightsQ1 05 vs. Q4 04
Cash & Investments $778.0M $ 736.9MNet cash & investments $429.9M $ 384.6MCurrent assets $618.0M $ 606.8M PP&E $119.0M $ 124.7M Total assets $1,030.9M $ 987.4M Current liabilities $175.2M $ 172.7M Convertible debt $348.1M $ 352.3M Stockholders’ equity $491.9M $ 445.7M Total liabilities & stockholders’ equity $1,030.9M $ 987.4M
Q105 Q404*
Q404 amounts are as restated
© 2004 Brocade Communications Systems, Inc. All Rights Reserved. 22
Q2 Fiscal 2005 Guidance
Q&A