8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): February 22, 2010

BROCADE COMMUNICATIONS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	000-25601	77-0409517
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification Number)

1745 Technology Drive

San Jose, CA 95110

(Address, including zip code, of principal executive offices)

(408) 333-8000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On February 22, 2010, Brocade Communications Systems, Inc. (the “Company”) issued a press release regarding financial results for the first quarter ended January 30, 2010. The Company also posted on its website (www.BRCD.com) slides with accompanying prepared remarks regarding such financial results and forward-looking statements relating to the Company’s estimated fiscal year 2010 financial results and market opportunities. Copies of the press release and slides with accompanying prepared remarks by the Company are attached as Exhibits 99.1 and 99.2, respectively, and the information in Exhibits 99.1 and 99.2 is incorporated herein by reference.

The information in Item 2.02 and Item 9.01 in this Current Report on Form 8-K and the exhibits attached hereto shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

Exhibit Number	Description of Document
99.1	Press release, dated February 22, 2010, regarding financial results of Brocade Communications Systems, Inc. for the first quarter ended January 30, 2010.
99.2	Slides with accompanying prepared remarks of Brocade Communications Systems, Inc., dated February 22, 2010, regarding financial results of the first quarter ended January 30, 2010 and estimated fiscal year 2010 financial results and market opportunities.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	BROCADE COMMUNICATIONS SYSTEMS, INC.
Dated: February 22, 2010	By:	/s/ Richard Deranleau
		Richard Deranleau
		Chief Financial Officer and Vice President, Finance

EX-99.1

Exhibit 99.1

BROCADE CONTACTS
Public Relations John Noh Tel: 408-333-5108 jnoh@brocade.com	Investor Relations Peter Ausnit Tel: 408-333-4000 pausnit@brocade.com

Brocade Delivers Record Fiscal Q1 Results

Strong Storage Networking Performance Drives 25% Year-over-Year Revenue Growth

SAN JOSE, Calif., Feb. 22, 2010 — Brocade^® (NASDAQ: BRCD) today reported financial results for its first fiscal quarter ended January 30, 2010. Brocade’s quarterly revenues increased 25 percent year-over-year to $539.5 million.

“Brocade’s Q1 performance exceeded consensus non-GAAP EPS expectations for the 18th consecutive quarter thanks to the balance and diversity of our business model, our highly variable cost structure and our ability to execute,” said Michael Klayko, CEO of Brocade.

Klayko continued: “At the same time, Q1 highlights the work ahead in building our Ethernet business to the levels we expect. Going forward, Brocade plans to reenergize our Ethernet business strategy, which targets opening hundreds of new direct enterprise Ethernet accounts each quarter. As one of two end-to-end networking companies worldwide, we believe Brocade is well-positioned and are optimistic about our ability to take advantage of the expected worldwide growth of networking spending in 2010 and beyond.”

In addition to this press release, Brocade management has posted prepared comments and slides on its Fiscal Q1 results and outlook at www.BRCD.com. Brocade will host a live webcast conference call to answer questions from investors and analysts at 2:30 p.m. Pacific time. Questions may also be submitted in advance to ir@brocade.com.

Other Q1 product, customer and partner announcements are available at http://newsroom.brocade.com/.

Financial Highlights and Additional Financial Information

• Q1 revenue was $539.5 million, increasing 3.4% sequentially and 25% year-over-year.

• Q1 GAAP EPS (diluted) was $0.11, increasing 57% sequentially and from a loss in Q1 2009.

• Q1 non-GAAP EPS (diluted) was $0.19, increasing 27% sequentially and year-over-year.

• Q1 non-GAAP operating margin was 26.0% versus 22.7% in Q4 and 26.1% in Q1 2009.

• Q1 effective GAAP tax rate was 2.4%; non-GAAP effective tax-rate was 22.0%.

• Q1 Adj. EBITDA was $154.7 million, up from $130.0 million in Q4 and $136.7 million in Q1 2009.

• Q1 total Storage Area Networking (SAN) port shipments were approximately 1.2 million.

	Q1 2010			Q4 2009			Q1 2009
Revenue	$	539.5 M		$	521.8 M		$	431.6 M
GAAP net income (loss) (1)	$	51.1 M		$	32.1 M		$	(23.9) M
Non-GAAP net income	$	94.0 M		$	73.4 M		$	63.6 M
GAAP EPS – diluted (1)	$	0.11		$	0.07		$	(0.06	)
Non-GAAP EPS – diluted	$	0.19		$	0.15		$	0.15
Non-GAAP gross margin		59.3	%		59.5	%		59.7	%
Non-GAAP operating margin		26.0	%		22.7	%		26.1	%
Adjusted EBITDA (2)	$	154.7 M		$	130.0 M		$	136.7 M
Cash provided by operations	$	69.1 M		$	155.3 M		$	(163.8) M

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

Brocade

1745 Technology Dr., San Jose, CA 95110

T. 408.333.8000  F. 408.333.8101

www.brocade.com

	Q1 2010 (5)		Q4 2009		Q1 2009
As a % of total revenues
OEM revenues	71	%	65	%	76	%
Channel/Direct revenues	29	%	35	%	24	%
10% or greater customer revenues	54	%	46	%	56	%
Domestic revenues (3)	63	%	63	%	64	%
International revenues (3)	37	%	37	%	36	%
Data Storage Revenue	65	%	58	%	72	%
Ethernet Products Revenue	18	%	25	%	12	%
Stackable % of Ethernet Revenues (4)	39	%	30	%	27	%
Chassis % of Ethernet Revenues (4)	61	%	70	%	73	%
Enterprise % of Ethernet Revenues (4)	84	%	86	%	74	%
Service Providers % of Ethernet Revenues (4)	16	%	14	%	26	%
Global Services Revenue	17	%	17	%	16	%

	Q1 2010		Q4 2009		Q1 2009
Cash, cash equivalents and investments	$	501.1M	$	338.9 M	$	215.9M
Deferred revenues	$	236.4M	$	235.4 M	$	226.7M
Capital expenditures – non-campus related	$	16.7M	$	16.7 M	$	12.6M
Capital expenditures – campus related	$	30.6M	$	27.8 M	$	23.2M
Total debt, net of discount (1)	$	1,176M	$	1,082 M	$	1,232M
Days sales outstanding		47 days		52 days		52 days
Employees at end of period		4,114		4,070		3,950

1) Retrospectively adjusted as a result of applying new standard that changed the accounting for convertible debt instruments with cash settlement features.

2) Adjusted EBITDA is as defined in the Term Debt Credit Agreement.

3) Based on Brocade estimates of adjustment for partners taking delivery of internationally bound shipments in the United States, end-user demand was 48% domestic and 52% international.

4) On an “As If” combined Brocade basis with respect to Q1 2009.

5) Q1 2010 is the fourth full quarter of combined operations post acquisition of Foundry.

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 to its competitors’ operating results. Management also believes these non-GAAP financial measures help indicate 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 performance 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 industry and competitor companies;

• the ability to better identify trends in Brocade’s underlying business and 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.

Page 2 of 7

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 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: (i) legal fees associated with certain pre-acquisition litigation, (ii) legal fees associated with indemnification obligations to former directors and officers and other related costs, net, (iii) acquisition and integration costs (in connection with the Foundry acquisition), (iv) in-process research and development charges (in connection with the Foundry acquisition), (v) loss on sale of real estate, (vi) acquisition-related financing charges, and (vii) interest expense related to adoption of new standard relating to convertible debt instruments.

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 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. 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 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 (loss) and net income (loss) 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 market positioning and opportunities, including continued growth in storage networking and success of our Ethernet products. 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 effect of changes in IT spending levels, market competition and changes in the industry, Brocade’s ability to successfully introduce new products and services on a timely basis and capitalize on current or past investments in technologies and go-to-market opportunities, and Brocade’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 Annual Report on Form 10-K for the fiscal year ended October 31, 2009. 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 GS: BRCD) develops extraordinary networking solutions that enable today’s complex, data-intensive businesses to optimize information connectivity and maximize the business value of their data. For more information, visit www.brocade.com.

# # #

Brocade, the B-wing symbol, BigIron, DCX, Fabric OS, FastIron, IronPoint, IronShield, IronView, IronWare, JetCore, NetIron, SecureIron, ServerIron, StorageX and TurboIron are registered trademarks, and DCFM, Extraordinary Networks and SAN Health 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.

© 2010 Brocade Communications Systems, Inc. All Rights Reserved.

Page 3 of 7

BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended
	January 30, 2010			January 24, 2009 (1)
Net revenues
Product	$	449,086		$	362,600
Service		90,406			68,991
Total net revenues		539,492			431,591
Cost of revenues
Product		192,572			151,191
Service		49,477			37,985
Total cost of revenues		242,049			189,176
Gross margin		297,443			242,415
Operating expenses:
Research and development		90,081			68,451
Sales and marketing		90,366			73,166
General and administrative		16,239			18,388
Legal fees associated with indemnification obligations and other related costs, net		301			19,299
Amortization of intangible assets		17,052			13,229
Acquisition and integration costs		204			953
In-process research and development		—			26,900
Total operating expenses		214,243			220,386
Income from operations		83,200			22,029
Interest income and other loss, net		72			(3,811	)
Interest expense		(22,073	)		(23,279	)
Loss on sale of investments and property, net		(8,828	)		(864	)
Income (loss) before provision for income taxes		52,371			(5,925	)
Income tax provision		1,276			17,973
Net income (loss)	$	51,095		$	(23,898	)
Net income (loss) per share – basic	$	0.12		$	(0.06	)
Net income (loss) per share – diluted	$	0.11		$	(0.06	)
Shares used in per share calculation – basic		439,080			376,202
Shares used in per share calculation – diluted		484,262			376,202

(1) As adjusted due to changes to the accounting for convertible debt instruments.

Page 4 of 7

BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	January 30, 2010			October 31, 2009 (1)
Assets
Current assets:
Cash and cash equivalents	$	496,583		$	334,193
Short-term investments		4,533			4,678
Restricted cash		12,500			12,502
Total cash, cash equivalents and short-term investments		513,616			351,373
Accounts receivable, net		276,671			297,819
Inventories		72,753			72,152
Deferred tax assets		75,691			84,629
Prepaid expenses and other current assets		61,874			79,302
Total current assets		1,000,605			885,275
Property and equipment, net		439,642			442,408
Goodwill		1,658,060			1,659,934
Intangible assets, net		435,970			470,872
Non-current deferred tax assets		196,230			184,713
Other assets		46,283			28,218
Total assets	$	3,776,790		$	3,671,420
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	139,186		$	181,249
Accrued employee compensation		101,838			160,832
Deferred revenue		175,851			174,870
Current liabilities associated with facilities lease losses		9,474			10,769
Revolving credit facility		14,050			14,050
Current portion of long-term debt		18,539			38,822
Convertible subordinated debt		172,015			169,332
Other accrued liabilities		114,958			105,263
Total current liabilities		745,911			855,187
Long-term debt, net of current portion		376,184			860,114
Senior Secured Notes		595,070			—
Non-current liabilities associated with facilities lease losses		8,983			10,150
Non-current deferred revenue		60,528			60,575
Non-current income tax liability		89,729			92,276
Other non-current liabilities		15,528			15,114
Total liabilities		1,891,933			1,893,416
Stockholders’ equity
Common stock		443			434
Additional paid-in capital		1,962,279			1,901,238
Accumulated other comprehensive loss		(11,215	)		(5,920	)
Accumulated deficit		(66,650	)		(117,748	)
Total stockholders’ equity		1,884,857			1,778,004
Total liabilities and stockholders’ equity	$	3,776,790		$	3,671,420

(1) As adjusted due to changes to the accounting for convertible debt instruments.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended January 30, 2010 and January 24, 2009

(in thousands)

(unaudited)

	Three Months Ended
	January 30, 2010			January 24, 2009 (1)
Cash flows from operating activities:
Net income (loss)	$	51,095		$	(23,898	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Excess tax benefit from employee stock plans		—			336
Depreciation and amortization		51,012			39,754
Loss on disposal of property and equipment		8,813			558
Amortization of debt issuance costs and debt discount		6,663			3,545
Net losses on investments and marketable equity securities		168			860
Provision for doubtful accounts receivable and sales allowances		3,043			2,271
Non-cash compensation expense		21,523			18,080
Capitalization of interest cost		(3,315	)		(2,043	)
In-process research and development		—			26,900
Changes in assets and liabilities:
Restricted cash		2			—
Accounts receivable		18,104			(12,044	)
Inventories		(601	)		14,397
Prepaid expenses and other assets		4,982			(2,228	)
Accounts payable		(39,735	)		(64,080	)
Accrued employee compensation		(67,155	)		(47,057	)
Deferred revenue		935			17,681
Other accrued liabilities		16,036			26,521
Liabilities associated with facilities lease losses		(2,463	)		(3,321	)
Liability associated with class action lawsuit		—			(160,000	)
Net cash provided by (used in) operating activities		69,107			(163,768	)
Cash flows from investing activities:
Purchases of property and equipment		(47,317	)		(35,818	)
Purchases of short-term investments		(24	)		—
Proceeds from maturities and sale of short-term investments		1			136,297
Proceeds from sale of property		30,185			—
Proceeds from maturities and sale of long-term investments		—			30,058
Decrease in restricted cash		—			1,075,079
Net cash paid in connection with acquisitions		—			(1,297,482	)
Net cash used in investing activities		(17,155	)		(91,866	)
Cash flows from financing activities:
Payment of senior underwriting fees related to the term loan		—			(30,525	)
Payment of principal related to the term loan		(506,545	)		—
Proceed from senior secured notes		587,968			—
Excess tax benefit from employee stock plans		—			(336	)
Proceeds from issuance of common stock, net		30,031			8,548
Proceeds from revolving credit facility		—			14,050
Net cash provided by (used in) financing activities		111,454			(8,263	)
Effect of exchange rate fluctuations on cash and cash equivalents		(1,016	)		51
Net increase (decrease) in cash and cash equivalents		162,390			(263,846	)
Cash and cash equivalents, beginning of period		334,193			453,884
Cash and cash equivalents, end of period	$	496,583		$	190,038
Supplemental Schedule of non-cash investing activities:
Fair value of stock options and unvested awards assumed in exchange for acquired Foundry assets	$	—		$	254,312

(1) As adjusted due to changes to the accounting for convertible debt instruments.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended
	January 30, 2010			January 24, 2009 (1)
Net income (loss) on a GAAP basis	$	51,095		$	(23,898	)
Adjustments:
Stock-based compensation expense included in cost of revenues		4,517			3,308
Amortization of intangible assets expense included in cost of revenues		17,850			11,968
Legal fees associated with certain pre-acquisition litigation		299			—
Total gross margin adjustments		22,666			15,276
Legal fees associated with indemnification obligations and other related costs		301			19,299
Stock-based compensation expense included in research and development		6,183			5,341
Stock-based compensation expense included in sales and marketing		8,096			6,190
Stock-based compensation expense included in general and administrative		2,727			3,242
Amortization of intangible assets expense included in operating expenses		17,052			13,229
Acquisition and integration costs		204			953
In-process research and development		—			26,900
Total operating expense adjustments		34,563			75,154
Total operating income adjustments		57,229			90,430
Loss on sale of property		8,783			—
Acquisition-related financing charges		—			4,366
Interest expense related to adoption of new standards relating to convertible debt instruments		2,142			1,922
Income tax effect of adjustments		(25,239	)		(9,265	)
Non-GAAP net income	$	94,010		$	63,555
Non-GAAP net income per share – basic	$	0.21		$	0.17
Non-GAAP net income per share – diluted	$	0.19		$	0.15
Shares used in non-GAAP per share calculation – basic		439,080			376,202
Shares used in non-GAAP per share calculation – diluted		496,346			415,781

(1) As adjusted due to changes to the accounting for convertible debt instruments.

See explanation of non-GAAP information included herein.

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EX-99.2

Q1 FY 2010

Earnings

Prepared Comments and Slides

February 22, 2010

Peter Ausnit

Senior Director, Investor Relations

Phone: 408-333-4000

pausnit@brocade.com

John Noh

Senior Director, Public Relations

Phone: 408-333-5108

jnoh@brocade.com

NASDAQ: BRCD

Exhibit 99.2

Q1 FY 2010 EARNINGS

February 22, 2010

Prepared comments provided by Peter Ausnit, Sr. Director, Investor Relations

Thank you for your interest in Brocade’s Q1 Fiscal 2010 Earnings Presentation, which includes prepared remarks, slides, and a

press release detailing fiscal first quarter 2010 financial results. The press release was issued shortly after 1:00 p.m. Pacific time

on February 22, 2010, via Business Wire and First Call. The press release, along with these prepared comments and slides, has

been made available on Brocade’s Investor Relations website at www.BRCD.com and has been furnished to the SEC on Form 8-K.

© 2010 Brocade Communications Systems, Inc.

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Cautionary Statements and Disclosures

This presentation includes forward-looking statements regarding Brocade’s

financial results, cash and debt positions, plans and business outlook, which are

only predictions and involve risks and uncertainties such that actual results may

vary significantly. These and other risks are set forth in more detail in our Form

10-K for the fiscal year ended October 31, 2009. These forward-looking

statements reflect beliefs, assumptions, outlook, estimates and predictions as of

today, and Brocade expressly assumes no obligation to update any such forward-

looking statements.

In addition, this presentation includes various third party estimates regarding the

total available market and other measures, which do not necessarily reflect the

view of Brocade. Further, Brocade does not guarantee the accuracy or reliability of

any such information or forecast.

This presentation includes non-GAAP financial measures. The most directly

comparable GAAP information and a reconciliation between the non-GAAP and

GAAP figures are provided in our Q1 10 press release, which has been furnished

to the SEC on Form 8-K, and in this slide presentation.

Please see risk factors on Form 10-K for the year ended 10/31/09

The information in Brocade’s prepared comments includes forward-looking statements, including without limitation, statements

about Brocade's financial results, cash and debt positions, plans and business outlook. These forward-looking statements are only

predictions and involve risks and uncertainties such that actual

results may vary significantly. These and other risks are set forth in

more detail in Brocade’s Form 10-K for the fiscal year ended October 31, 2009. These forward-looking statements reflect beliefs,

assumptions, outlook, estimates and predictions as of today, and

Brocade expressly assumes no obligation to update any such

forward-looking statements.

Certain financial information is presented on a non-GAAP basis. The most directly comparable GAAP information and a

reconciliation between the non-GAAP and GAAP figures are provided in the accompanying press release, which has been furnished

to the SEC on Form 8-K and posted on Brocade’s website, and is included in the appendix to this presentation.

©

2010 Brocade Communications Systems, Inc.

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Agenda

Prepared comments followed by live Q&A call

Richard Deranleau

CFO

Mike Klayko

CEO

Today’s prepared comments include remarks by Mike Klayko, Brocade’s CEO, regarding the company’s quarterly results, its strategy

and a review of operations, as well as industry trends and market/technology drivers related to its business; and by Richard

Deranleau, Brocade’s CFO, who will provide a financial review.

A live question-and-answer conference call will be web cast beginning at 2:30 p.m. Pacific time on February 22

nd

at www.BRCD.com

and will be archived on Brocade’s Investor Relations website for approximately 12 months. Participants are invited to submit

questions via email at ir@brocade.com

up to 30 minutes prior to the conference call and to ask live questions during the call.

©

2010 Brocade Communications Systems, Inc.

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Fiscal 2010: Q1 Earnings

Mike Klayko, CEO

CEO Mike Klayko’s

prepared comments

©

2010 Brocade Communications Systems, Inc.

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Executive Overview

Q1 results

•

$539.5M revenues

•

59.3% non-GAAP gross margin*

•

$0.19 non-GAAP EPS*

•

$154.7M adjusted EBITDA

Storage

•

Strong growth, increasing share

•

Strategic and financial platform

Ethernet

•

Focus on direct account

acquisition and penetration:

over 750 new accounts to date

Balanced business model enables continued execution

** Note: Q1 2010 is the fourth full quarter of combined

operations post-Foundry acquisition

**

* Note: Non-GAAP, please see GAAP reconciliation in

appendix

Quarterly Revenues

$432M

$506M

$493M

$522M

$539M

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

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Brocade reported Q1 revenues of $539.5M, with non-GAAP EPS of $0.19, adjusted EBITDA of $154.7M and non-GAAP gross margins of

59.3%. Q1 was the 18th consecutive quarter that Brocade exceeded non-GAAP EPS consensus expectations, demonstrating the successful

execution of our strategy that leverages operational excellence and a diversified business model across geographies, market segments and

go-to-market routes. 

This business model is driven by our two key markets, namely our core Storage Networking business and our newer Ethernet business,

which we acquired in Fiscal 2009. During the quarter our Storage Networking business grew a very healthy 16.3% sequentially. We believe

our success in Storage Networking provides a robust strategic and financial platform for our Ethernet business as we build upon our

product portfolio and account penetration in that market. The high level of customer satisfaction and our reputation in Storage Networking

helps open doors to accounts at the highest levels and provides us with new opportunities to sell our Ethernet product portfolio along with

the resources to build out our distribution model to increase share in this multi-billion dollar market. 

It is clear, however, that we have some work to do in growing our Ethernet business to the levels we expect. In short, our Ethernet business

did not meet our revenue expectations, largely due to lower-than-expected revenues from Federal customers and slower-than-anticipated

development in our go-to-market routes. However, we have focused on the issues behind these results and have taken immediate steps to

rectify them. We faced and successfully overcame similar challenges when we entered the Fibre Channel business more than a decade ago.

At that time, we recognized that product superiority and channel presence alone are not sufficient to drive revenues. We needed and

established customer intimacy by evangelizing our technologies, solutions and expertise to customers and channel decision makers. 

Leveraging this experience, Brocade is accelerating its strategy and redeploying resources to drive direct account acquisition and

penetration in our Ethernet business. Our stated strategy is to focus on new account penetration and to have 1000 new Ethernet accounts

by the end of 2010. As we exited Q1, we are on track to exceed this goal. Building share requires sustained effort; and we expect success to

take time, but we have planted flags throughout the Global 2000, and are confident in our resources, vision and commitment to succeed.  

I will discuss the lessons of the quarter and our go-forward strategies in more depth but first I would like to provide more details about the

quarter.

Increasing Storage Networking Market Share

Reputation, performance, 8 Gbps, and Fibre

Channel drive results

Source: Brocade estimates

Looking a bit deeper into our performance in Storage Networking,

it was clear that we continued to accelerate that business,

reaching an estimated 70.1% market share in Q1 FY 2010, up from 66.8% in Q1 FY 2009. Market share tends to fluctuate, but our

remarkably consistent gains in the last dozen quarters reflect customer loyalty, earned by delivering the most reliable products

in

the data center—bar none. Customers regularly cite our reliability, which is paramount to their success, as their key decision criteria.

In addition, they also value our openness, product density, speed, and power/cooling efficiency, and overall best value.

Our success in Storage Networking aligns with increasing demand for Fibre

Channel, which accounts for over 90% of current RFPs

we are involved with and continues to grow because Fibre

Channel is the solution of choice to manage ever-growing storage needs

thanks to proven reliability, superior scalability and significant price/performance advantages. Brocade's strategy allows customers

to invest in our current Fibre

Channel portfolio with confidence, knowing that we have a well-developed, standards-based roadmap

to emerging technologies and architectures. These attributes enable customers to choose when and how to evolve their data center

infrastructures.

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Increasing Storage Demand

8 Gbps Fibre Channel TAM

$1.2B

$2.0B

2009

2010

Accelerating in 2010 following introduction of native 8 Gbps

arrays

Percent of CIOs Stating

When They Plan to Increase

Storage Spending

2011 or

Later,

9%

1H

2010,

10%

2H

2010,

62%

Source: Dell’Oro Group

Source: Morgan Stanley CIO Survey, January 2010, n=90-150

No

Expectation,

18%

Accelerating Storage Networking demand aligns with our view of the strengthening of the entire IT market, corroborated by

Forrester Research, which, in January, predicted that global IT spending will grow by an estimated to 8.1% in 2010, up from 4.9%

previously.

Looking at our Storage Networking mix, our strong performance is

fueled by the continuing migration to 8 Gigabit Fibre

Channel,

reflected by the fact that our 8 Gig Fibre

Channel revenues more than doubled on a sequential basis. Analysts agree that the

transition to 8 Gig Fibre

Channel is in full ramp. For example, the Dell’Oro

Group estimates that 8 Gig Fibre

Channel spending will

increase sharply in 2010, reaching $2.0B, up from $1.2B in 2009.

Additionally, TheInfoPro

recently surveyed Storage Networking

end-users at Fortune 1000 firms who ranked 8 Gig Fibre

Channel as one of the highest priority budget items in 2010, with 46%

of these respondents indicating plans to increase spending on 8 Gig Fibre

Channel this year. The good news for Brocade is that

customers view us as the vendor-of-choice in 8 Gig Fibre

Channel. Fibre

Channel momentum also continues among our partners

with the recent and planned introductions of native 8 Gig Fibre

Channel arrays from major OEMs including EMC, HDS and IBM.

As strong as Storage Networking was in Q1, we believe that the second half outlook continues to improve based on indications

from partners, feedback from our field sales force, and from analysts covering the space. Morgan Stanley recently reported that

storage utilization is unsustainably high. Additionally, their January survey of CIOs

indicated that over 60% expect to increase

storage spending in the second half of 2010, in part driven by the resumption of delayed projects. This is a sharp increase from

the October survey results. Similarly, The Enterprise Strategy Group (ESG) reported that enterprise customers expect to

significantly increase spending on both storage and networking hardware in 2010 versus 2009. Specifically, ESG is predicting

that customers will increase network hardware spend by 17% and storage hardware spend by 16%. Lastly, the Federal

government is looking to achieve IT productivity comparable to levels found in the private sector, and has announced plans to

consolidate a meaningful number of its more than 1000 data centers in the coming year.

These spending trends bode well for Brocade and our partners.

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Data Center Convergence

Enables access to Enterprise Data Center and Campus Ethernet

Campus

Data Center

Ethernet

Ethernet

Fibre

Channel

Ethernet

Fibre

Channel over Ethernet

Enterprise

Future

Converged 

Networks

Today’s

Dedicated

Networks

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Looking forward, Brocade believes that converged architectures will assume a role in the Next-Generation Data Center, supporting higher

levels of virtualization that will drive scale, efficiencies and performance. Interestingly, the Gartner Group supports Brocade's view that Fibre

Channel will continue to play a significant role as a technology of choice in Next-Generation Data Center architectures. In a survey of

attendees at Gartner’s December 2009 Data Center Conference, two-thirds cited Fibre Channel as the "most important" data center

networking technology for virtualized data centers. Gartner attributed this to IT professionals' preference for proven, high-performance

technologies. 

When converged networking technologies mature and are widely considered proven, they promise customers both capital and operating cost

advantages that can be leveraged to cost effectively meet higher Service Level Agreements. Achieving these efficiencies will require higher

levels of virtualization, which will require higher bandwidth and higher storage-attach rates. 

Today, Brocade is a leader in bringing converged networking technologies to market and offers several interoperable convergence products,

including the Brocade 8000 FCoE Switch, 10 Gigabit Ethernet converged network adapters, and modular options for our DCX Backbones and

MLX Series Routers. Customers understand and appreciate our industry-leading, multi-year roadmap of converged data center storage

products and regularly rely on Brocade to help future-proof their networks. 

Data Center customers who are interested in our converged networking products are having discussions around openness, availability, cost,

performance, standards, interoperability and our roadmap. This opens Next-Generation Data Center Networking discussions, which in turn,

highlights their Enterprise LAN/Campus Ethernet needs. These discussions come with a sense of urgency due to their aging Enterprise

networks and rising data and network-traffic growth. Customers are seeking guidance from trusted sources to manage bandwidth, device, and

virtual machine growth, which is taxing legacy architectures. 

Enterprise accounts, large and small, drive three-fourths of total campus Ethernet spending and, as a leading Data Center Networking

provider, with the trust and confidence of Global 2000 Enterprise customers, Brocade is being invited to compete for both our share of Next-

Generation Data Center Networking opportunities and an increasing share of Enterprise Campus opportunities. 

Brocade expects to gain Ethernet share in Next-Generation Data Centers based on our leadership position bringing open, converged

networking solutions to the market. However, penetrating this segment will take time. 

New Ethernet Account Growth

Securing footholds, moving from lab trials to applications

As mentioned, new Enterprise Ethernet account penetration is a cornerstone of our growth strategy. Discussions in Fiscal 2009

led to over 500 new direct Ethernet accounts, many of which are engaged in proof-of-concepts and lab trials at deal sizes that

have been smaller than initially expected. As of Q1, we have now

opened over 750 such new accounts, many of which are

conducting trials that we expect to move out of labs and into production, targeting a single application as a first step. These

migrations typically take 6 to 9 months per phase, again somewhat longer than initially expected. Our end goal is to be

positioned as an approved vendor after 12 to 18 months. Once validated, we expect to see strong traction in these accounts

through choice and value in terms of price, performance and feature sets.

Some say “experience is the greatest teacher”

and Q1 highlighted several lessons that now shape our go-forward Ethernet sales

strategy:

First, Brocade must drive demand via customer intimacy, whether that demand is fulfilled directly, via the channel, or an OEM

partner. 

Second, OEM partners continue to ramp; however, more slowly than

previously expected.  Going forward, Brocade will prioritize

driving end-customer demand for our OEM partners directly.

Third, lengthy Enterprise sales cycles are a fact-of-life, and we must be prepared to go the distance.  We are.

Fourth, Brocade must maintain focus on traditional, “Classic Foundry”

accounts, and is investing in demand-generation and

inside sales-programs tailored to these accounts. 

Finally, executing a more direct sales model will require additional direct sales resources which we have begun deploying.

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Ethernet Customer Announcements

M Resort Las Vegas

UMS-Wright Prep School

BOK Center

Province of Bergamo

Grass Roots Group

Royal College of Physicians

Hostway

Savannah College of Art & Design

Innovative companies and organizations choose Brocade

Brocade’s Enterprise account acquisition and penetration strategy is ongoing and has already translated into key wins in some

of the most innovative deployments of networking technology today, including the M Resort, which has positioned itself as the

most technologically advanced resort in Las Vegas by having rolled out quad play (video, voice, data, mobility) services over a

Brocade network that touches virtually every one of the resort's

business operations. Another example is the 10 Gigabit Ethernet

deployment at the UMS-Wright Preparatory School, which has leveraged Brocade networking technologies to become one of the

most technologically ambitious educational institutions in the United States.

These are clear indications that smart, innovative companies and

organizations are turning to Brocade to help transform and

enhance their businesses and operations by leveraging the full potential of cutting-edge networking technologies, which gives

me great optimism for our Ethernet business going forward.

And with recent reports from Goldman Sachs and TheInfoPro

showing that an increasing percentage of CIOs

and other senior IT

executives will be looking to refresh their aging network hardware some time in 2010, we believe we're well positioned to win

many more deals that demonstrate the value of Brocade's networking technologies and expertise.

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Ethernet Innovation

Market-leading performance

ServerIron

®

ADX Series Application

Delivery Controllers

•Secure, high-performance

e-commerce transactions

FCX

®

Series Switch

•Price/performance leader in category

NetIron

®

CER 2000 Series MPLS Router

•Double the capacity of competing products

Brocade/McAfee Partnership

•Fully interoperable end-to-end

network security solution

BROCADE

We continue to support our Ethernet growth plans through continuous innovation and new product introductions. An example of

this was our introduction of the NetIron

®

CER 2000 Series MPLS Router, which has double the routing capacity and triple the

performance capabilities of competing products. More recently, we introduced the latest version of the ServerIron

®

ADX Series

application delivery controllers, which feature twice the performance of competing products in a key application used in secure,

high-speed e-commerce transactions. In addition, recently, we announced a strategic partnership with McAfee, the worldwide

leader in IT security, to deliver a broad set of fully interoperable end-to-end network security solutions.  Lastly, we introduced a

data center version of the FCX Series Switches, which establishes it as the price/performance leader in its category.

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Other Achievements

•

Restructured balance

sheet

•

Optimizing capital structure

•

Increased operating

flexibility

•

Cited as one of Fortune’s

100 Best Companies

•

Confidence, satisfaction,

trust and pride

•

Retention, recruiting, and

productivity benefits

Executing towards long-term

goals

Beyond innovations, customer wins and financial success, Brocade

also achieved two major milestones: First, we successfully

accessed the debt market, which diversified our funding sources and significantly moved Brocade towards its optimal, long-term

capital

structure.

Second,

we

were

recognized

as

one

of

the

“100

Best

Companies

to

Work

For”,

ranking

61

st

on

Fortune

Magazine’s list, which reflects our employees’

confidence, satisfaction, trust and pride in Brocade. Being nationally recognized by

Fortune Magazine comes after being recognized last May as the best technology company to work for in Silicon Valley by the

Silicon Valley Business Journal.

These and other data-points are measures of the health of our ecosystem and our workforce, which is our most valuable asset

and the critical determinant of the long-term success of any organization.

Developing talent and creating the conditions and resources to succeed requires long-term vision and commitment. Year in and

year out, Brocade both anticipates and adapts to change while running its playbook. To do so, we have invested and continue to

invest across the board: in innovation, distribution, brand building and our employees, who operate within a pragmatic, disciplined

culture that wins against larger competitors who have more resources and larger customer-install bases. Brocade employees are

justifiably proud of their achievements, but by no means complacent, and understand that the quarter just ended demonstrated

both our strengths as well as areas where we need to step up to achieve the milestones ahead of us. 

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CEO Summary

•

1 of 2 end-to-end networking

companies worldwide

•

Robust demand drives

stronger-than-expected storage

performance and outlook

•

Diversified, balanced business

model

•

Executing towards long-term

vision

•

Strong financial results

Compelling opportunity

As one of only two end-to-end networking vendors, Brocade’s growth opportunity is compelling. More than ever, Brocade moves

forward focused on execution by meeting our customers’

needs, enabling choice and bringing innovation to networking markets

worldwide. Brocade’s financial performance remains strong affording opportunities to invest, both to maintain storage

leadership, and to grow our Ethernet business.

Based on the last few quarters, Brocade is taking a pragmatic view of the current year and now targets revenue growth of 8-12%

in 2010 driven by (1) IT spending growth, especially in storage,

(2) increasing our focus on Ethernet account acquisition, and (3) our ability to innovate, all of which are expected to contribute to

strong second half results. Our outlook reflects healthy growth over fiscal year 2009 based on robust demand and our ability to

execute our diversified, balanced business model and growth strategies.

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Q1 FY 2010 Financials

Richard Deranleau, CFO

Prepared comments provided by Richard Deranleau, CFO

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Q1 Financial Highlights

•

Revenues

•

Storage networking grew 16.3% seq., partially offsetting lower

Ethernet revenues

•

Sequential growth in EMEA and Americas

•

Strong performance from storage OEMs

•

Margins within or exceeding long-term model

•

Non-GAAP gross margins of 59.3%*, operating margin of 26%*

•

Strengthening balance sheet

•

Operating cash flows and adjusted EBITDA remain strong

•

Lower net debt

•

Restructured balance sheet with amended debt covenants

that provide greater flexibility

Balanced model, high margins, and highly variable cost structure

* Note: Non-GAAP, please see GAAP reconciliation in

appendix

In Q1 Brocade benefited from its diversified model, high margins

and highly-variable cost structure to turn in record Adjusted

EBITDA and strong EPS (both Non-GAAP and GAAP) ahead of consensus.

Turning first to revenues, Q1 revenues increased $17.7M sequentially, or 3.4%, reaching $539.5M, and were up 25% year to year. 

We saw significant demand in our Storage Networking business, which grew 16.3% sequentially, and partially offset sequentially

lower Ethernet revenues, which decreased 25.7% quarter to quarter.

Non-GAAP Gross Margins of 59.3% were within our Long Term Model. The

sequential decrease was driven by one-time charges in

our Global Services supply chain.

Non-GAAP Operating Margins of 26% exceeded our Long Term Model reflecting once again the operating leverage in our model. 

Brocade’s balance sheet continues to strengthen, thanks to continuing strong cash flows from operations and record Adjusted

EBITDA. These cash flows, and the sale of our Skyport

property, helped reduce net debt again in the quarter. In addition, Brocade

restructured its balance sheet and amended its Term Debt Covenants to provide greater flexibility and lower our cost of capital.

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Key Financial Metrics

Strong profitability

* Note: Non-GAAP, please see GAAP reconciliation in appendix

** Note: Adjusted due to new accounting standards relating to convertible debt instruments

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Revenue

$431.6M

$506.3M

$493.3M

$521.8M

$539.5M

Non-GAAP gross margin*

59.7%

56.2%

58.2%

59.5%

59.3%

Non-GAAP EPS*—diluted

$0.15

$0.11

$0.12

$0.15

$0.19

GAAP EPS—diluted**

($0.06)

($0.17)

($0.06)

$0.07

$0.11

Our Key Financial Metrics show continued strong revenue, non-GAAP gross margin, and non-GAAP and GAAP EPS performance.

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Revenue: Storage, Ethernet, and Services*

Services

16%

17%

18%

17%

17%

Ethernet

12%

25%

24%

25%

18%

Storage

72%

58%

58%

58%

65%

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Storage increases to 65% of revenues

* Note: Q1 2010 is the fourth full quarter of combined operations post-Foundry acquisition

*

Turning to revenues by business unit…

Storage strengthened to 65% of revenues in Q1 versus 58% in Q4.

The

storage

portfolio

performed

very

well,

both

from

a

product

and

channel

perspective

with

strength

across

the

board.

Migration

to

8

Gig

Fibre

Channel

continued

to

accelerate

during

the

quarter,

with

identifiable

8

Gig

Fibre

Channel

Director

shipments

increasing

over

145%

sequentially

and

now

representing

77%

of

identifiable

Director

shipments.

For

Switches,

identifiable

8

Gig

shipments

increased

82%

and

now

represent

54%

of

total

Identifiable

Switch

shipments.

For

reference,

identifiable

shipments

are

those

shipments

where

Brocade

ships

Optics

with

the

director/switch units.

Data Storage ASP sequential declines were in the low single digits.

Our server product group, consisting of CNA’s, Embedded Switches, HBA’s, and Mezzanine Cards, grew strongly and generated over $45.7M in

the

quarter,

up

22%

sequentially

from

$37.5M

in

Q4,

driven

by

strong

performance

in

embedded

switches,

while

HBA/CNA

revenues

where

roughly flat.

Our Ethernet business declined 25.7% sequentially and represented 18% of revenues in the quarter, versus 25% in Q4.

Ethernet Revenues performance was mixed. On a positive note, US Enterprise (non-Government) revenues increased 8% quarter over quarter,

including

services,

to

$75

million.

Also,

our

Stackable

products,

which

are

typically

sold

into

LAN/Campus

environments,

were

also

up

by

7%

quarter over quarter, including services, to $48.3 million. 

However, our revenues from our US Federal business were significantly down sequentially by $26.7 million quarter-over-quarter, including

services. The Federal under performance was due in part to delays to the US Defense appropriations bill, which was signed in mid-December

instead

of

late

November

as

previously

expected.

Additionally,

our

Data

Center

Ethernet

revenues

did

not

grow

as

anticipated

for

the

reasons

noted by Mike earlier.

Separately, our Services business represented 17% of revenues, versus 16% in the prior year’s first quarter. On a sequential basis, Services

grew 1% and grew 31% year-over-year.

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Revenue: 10% Customers,

Other OEM, Channel/Direct

Increasing share from large OEM partners

* Note: Q1 2010 is the fourth full quarter of combined operations post-Foundry acquisition

*

10% customers, in the aggregate, remained consistent with prior quarters, with EMC, IBM and HP all contributing more than 10% of

revenues individually. Collectively, our top 3 OEMs contributed 54% of revenues in Q1 versus 46% in Q4. Other OEMs were 17%

revenues in Q1 versus 19% in Q4. Channel and Direct were 29% of revenues in Q1 versus 35% in Q4. The primary driver of the mix

shift towards OEM revenues was higher Storage Networking revenues as a percentage of total revenues.

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Domestic and International

Reported Revenue vs. Demand

Stronger non-US demand

Reported Revenue

on a Ship-to Basis

Demand by Estimated

End User Location

* Note: Q1 2010 is the fourth full quarter of combined operations post-Foundry acquisition

Turning to geography…

As reported, on a ship-to basis, the US represented 63% of revenues in Q1 10, consistent with 63% in

Q4 09 and down slightly from 64% in Q1 09.

On an estimated end-user basis adjusting for those partners who take delivery of internationally bound products in the US, the

US declined to 48% of total revenues in Q1 10, down from 53% in Q4 09, and up from 46% in Q1 09.

EMEA was in line with our expectations, showing a 6.1% sequential improvement, APAC and Japan were slightly below our

expectations, and in total, APAC/Japan was down slightly on a sequential basis.

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Non-GAAP Gross Margin and Gross Profit

Strong margins and profitability

* Note: Non-GAAP, please see GAAP reconciliation in appendix

** Note: Q1 10 is  the fourth full quarter of combined operations post-Foundry acquisition

**

Gross margin, on a non-GAAP basis, remained strong at 59.3% in Q1 10, consistent with 59.5% in Q4 09. Gross margin

was positively impacted by higher Storage Networking mix and negatively impacted by reduced Ethernet volumes. 

Global Services margins were 47.6% in Q1 10, down from 50.7% in Q4 09, mainly reflecting a one-time charge in the

Services supply chain.

Gross Profits continue to increase due to revenue growth and stable gross margins.

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Operating Expenses and Margins

Expense controls drive sequential margin expansion

½

Qtr.

Foundry

Full Qtr.

Foundry

Long-term model operating

margin range: 20–23%

Non-GAAP Operating Margins*

Non-GAAP Operating Expenses*

as a Percentage of Revenues

½

Qtr.

Foundry

Full Qtr.

Foundry

Long-term model operating expense range: 38–39%

* Note: Non-GAAP, please see GAAP reconciliation in appendix

** Note: Q1 2010 is the fourth full quarter of combined operations post-Foundry acquisition

**

Mindful of the current economic environment, we continue to work

to control operating expenses, which were 33.3% of

revenues in Q1 10 versus 36.9% in Q4 09 on a non-GAAP basis. Operating expenses were better than our Long Term Model of

38% to 39% of revenues. At the same time, Brocade continues to selectively invest in its business and added 44 new

employees during the quarter, primarily in R&D.

Non-GAAP operating margins improved significantly on a sequential basis to 26% in Q1 from 22.7% in Q4, thanks to top line

growth, which generated operating leverage, more than offsetting

slight Gross Margin contraction. Non-GAAP Operating

Margins exceeded our Long Term Model of 20-23% in the quarter. 

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Balance Sheet and Cash Flow

Highlights as of January 30, 2010

Cash flows enable de-leveraging and reinvestment

* Note: As defined in the term debt credit agreement

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Cash from operations

($163.8M)

$107.3M

$16.6M

$155.3M

$69.1M

Campus capital expenditures

$23M

$22M

$25M

$28M

$31M

Operating capital expenditures

$13M

$16M

$20M

$17M

$17M

Free cash flow

$(200M)

$69M

$(28M)

$110M

$22M

Cash and equivalents

$214M

$237M

$250M

$339M

$501M

Debt payments

$0M

$75.0M

$33.1M

$57.9M

$506.5M

Senior secured debt

$1.11B

$1.04B

$1.01B

$0.95B

$1.04B

Adjusted EBITDA*

$136.7M

$119.9M

$119.3M

$130.0M

$154.7M

Senior secured leverage ratio

2.07x

1.96x

1.94x

1.87x

1.99x

Covenant

2.3x

2.3x

2.3x

2.3x

2.5x

Cash from operations was $69.1M in Q1, which is quite strong from a seasonal perspective, as Q1 and Q3 are typically weaker

cash flow quarters.  This strength reflected strong profitability and strong working capital management, particularly in our

receivable collection performance. Capital Expenditures in the quarter were $48M, composed of $31M for the campus, which is

expected to be completed and occupied during Q3, and $17M for operations. Free Cash Flow was $21.8M in the quarter, which

is again, a strong seasonal performance. As a reminder, the bulk

of our San Jose leases will mature by October of 2010, at

approximately the same time as we occupy the new campus. Once those leases mature, our cash flow will increase by

$4M/quarter from reduced lease payments. 

Cash and equivalents reached $501M. Excluding the sale of our Skyport

property, and the recent notes offering, cash would

have been $377M, an increase of $38M sequentially. Debt payments

in the quarter totaled $506.5M. Net debt decreased by

$69M in the quarter; however Senior Secured Debt increased to $1.04B due to the issuance of new debt ahead of the

repayment of the McDATA

convert, which occurred on February 16th, 2010.

Adjusted EBITDA in the quarter was a record $154.7M, again, reflecting continued strength of the business. The Sr. Secured

Leverage Ratio increased to 1.99x due to the refinancing of a portion of the term loan with longer term notes. The Sr. Secured

Debt Coverage Ratio covenant relating to the coverage ratio was amended and relaxed and is now 2.5x, leaving us comfortably

in compliance with our term credit agreement.   

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Net Debt: Defined as

Total Debt Less Total Cash

Net debt continues to decline steadily

Since acquiring Foundry last year, Brocade has steadily reduced net debt, defined as Total Debt less Total Cash and Equivalents.

Net Debt has declined from $1.073B at the end of Q1 2009 to $713M at the end of Q1 2010, a $360M reduction. 

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Repaid McDATA Convert on February 16,

2010

Post-quarter cash and debt update

* Note: Estimates based on assumptions, including prepayments of

term debt and line of credit

** Note: Non-GAAP, please see GAAP reconciliation in appendix

($ Millions, except as noted)

Jan. 24, 2009

Jan. 31, 2010

April 30, 2010*

Cash and short-term invest:

214

501

Approx. 300

Debt:

McDATA convert

173

173

–

Revolver

14

14

–

Term debt

1,100

427

Approx. 335

8 yr. notes

–

300

300

10 yr. notes

–

300

300

Net debt:

1.1B

0.7B

Approx. 0.6B

Quarterly interest expense**

22.9

19.3

19.2

Note rating

Ba2/BB+

Ba2/BBB-

As shown on Slide 24, post the McDATA

convertible repayment, which occurred on February 16th, 2010, the balance sheet has

improved dramatically from January 2009, immediately after we financed the Foundry acquisition, in terms of both amounts and

timing of maturities. This validates the strength of the Brocade

business model to generate cash. 

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Restructured Balance Sheet

•

Closed $600M long-term notes on January 20, 2010

•

2 

debt

transaction,

notes

are

investment-rated

“BBB-”

by

S&P

and

“Ba2”

by

Moody’s

•

10-year sr. notes yield 7%, 8-year sr. notes yield 6.75%

•

Brocade corporate and debt ratings upgraded by S&P

•

Flexible, balanced capital structure

•

Term debt remaining: $427M*

•

No pre-payment penalty

•

Target repaying entire term debt within 8–10 quarters

•

Fixed and floating rate debt with staggered maturities

•

Covenants loosened to allow subordinated debt, higher debt/EBITDA ratios,

and limited share buybacks

•

Sale/leaseback transaction

•

Monetized low-yielding non-strategic real estate asset located in San Jose,

generating $30M

•

Reduced higher-yield term debt while retaining operational flexibility

Continuing accelerated term debt repayments, which are accretive

* Note: As of January 30, 2010

nd

Turning

to

the

details

of

the

Debt

transaction…

Brocade

restructured

its

balance

sheet,

replacing

approximately

$150M

of

McDATA

Convertible Debt due in February and $435M of Term Debt with $600M of long term fixed notes, which were broken

into two tranches with $300M maturing in 2018 and $300M maturing

in 2020. The new notes were rated BBB-

investment-

grade by S&P and Ba2 by Moody’s, and yield 6.75% and 7%, respectively.

Thanks to this transaction, Brocade now has the balanced, flexible capital structure initially targeted when planning the

Foundry acquisition. At that time Brocade targeted long term debt, composed of notes, totaling approximately 1x EBITDA with

flexible term debt representing the remainder of the transaction. Now, thanks to progress repaying term debt during the last

year, along with the restructured notes, Brocade moves forward with $427M remaining on the term as of January 30, 2010,

and $600M of long term notes.

The debt transaction and related Term Debt Amendment substantially reduce covenant related risks, including an increase in

the Sr. Secured Debt to Adjusted EBITDA ratio, which increased from 2.3x to 2.5x through Q4 2011, 2.25 in FY 2012 and 2.0

in FY 2013, and also staggers debt maturities, allowing the company to build cash to retire debt in manageable amounts

over many years, and opens the door for more strategic options for the company, such as greater investment in the business,

increased pay down of debt, limited stock repurchases and other strategic uses.

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Restructured Balance Sheet

Highly manageable repayment schedule

$0M

$100M

$200M

$300M

$400M

$500M

$600M

$700M

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Current, post-January 20, 2010, Maturity Schedule

Pre-January 20, 2010, Maturity Schedule

The new debt maturity schedule is highly manageable over the next decade with much lower near term required debt payments

and two relatively distant $300M payments. This compares favorably with the almost $600M maturing in October, 2013 under

the prior structure.

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Selected Metrics

Continuing ROIC, ROE, and DSO improvement 

Return on Invested Capital continued to increase during the year, and in the quarter reached 17.2%. Return on Equity also

improved to 5.0%. Days Sales Outstanding (DSO) were 47 days, down from 52 days in Q4, reflecting strong collections. DSO are

now within our long term model of 45-50 days. Inventories turned 13 times versus 14 times in Q4. Lower turns are attributed to

lower Ethernet product revenues.

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FY 2010 Planning Assumptions

•

IT market conditions

•

Increasing IT spending, driving higher storage and Ethernet

networking spending

•

Improving Enterprise spending throughout the year

•

ASP trends

•

Low-to-mid-single digit declines in Storage Networking

•

Mid-single digit declines in Ethernet

•

Taxes

•

Improved during the year due to discrete items in Q1,

assuming no change to geographic or segment mix, and the

extension of the investment tax credit

Stronger-than-expected Storage Networking demand

Now, as we look forward, here are some things to consider in developing your financial models:

Our primary planning assumption, which appears solidly on track,

is for global IT spending, and for Storage and Ethernet

Networking spending in particular, to continue to recover during

the first half of 2010 and to approach normalcy in the

second half of 2010.

We expect quarterly ASP declines on the Storage Networking side to remain in the low-

to mid-single digits. Declines on the

Ethernet side are expected to be in the mid-single digits.

Brocade benefited from discrete items in the quarter, which will

positively impact our Non-GAAP tax rate for the rest of the

year, assuming no change to either our geographic revenue mix or

our Storage/Ethernet mix for the remainder of the Fiscal

Year and an extension of the R&D Tax Credit.

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FY 2010 Financial Outlook

As of February 22, 2010

* Note: Non-GAAP, please see GAAP reconciliation in appendix,

** Note: Equates to FY 2010 Revenues ranging from $2.1B to $2.2B

Revenue growth

8–12% over FY 2009**

Non-GAAP gross margin*

57–58%

Non-GAAP operating expenses*

Better than model

Non-GAAP operating margin*

In model

Non-GAAP tax rate*

25–26%

Fully diluted shares outstanding

495M–505M

Non-GAAP EPS*

$0.54–$0.58

Operating cash flow

$375M–$400M

Operating capital expenditures

$80M–$85M

Campus capital expenditures

$120M–$125M

Free cash flow

$170M–$195M

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Given these considerations, we expect:

• Full fiscal year 2010 revenue growth of 8-12%, year-over-year;

• Full fiscal year Non-GAAP gross margins for the full year to be between 57% and 58%;

• Full fiscal year Operating expenses to be better than Model; 

• Full fiscal year Operating margins to be in Model;

• Full fiscal year non-GAAP tax rate ranging from 25-26%;

• Full fiscal year diluted shares outstanding to be in a range of 495M to 505M shares;

• Full fiscal year Non-GAAP EPS to be in a range from 54 cents to 58 cents;

• Full fiscal year Operating Cash Flow of $375M-$400M;

• Full fiscal year Operational Capital Expenditures of $80M to $85M;

• Full fiscal year Campus Capital Expenditures of $120M to $125M;

• Full fiscal year Free Cash Flow of $170M to $195M.

Financial Summary

Richard Deranleau, CFO

So, to summarize from a financial perspective, we made progress during the quarter which we expect will serve us well during

the remainder of the fiscal year. We saw better-than-anticipated strength across our Storage Networking business. We saw

acceleration in the adoption of 8 Gig Fibre Channel. While we did see weakness in the Ethernet business, we did see growth in

US Commercial and our Stackable products. In addition, we made significant improvements on our balance sheet and liquidity

positions, as we continued to grow both Adjusted EBITDA and Cash Flows.

Now, in closing, and as Mike has discussed, Brocade moves forward focused on growing our Ethernet business and looks forward

to your questions this afternoon.

© 2010 Brocade Communications Systems, Inc.

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Live Q&A Call

February 22, 2010, 2:30PM Pacific Time

Richard

Deranleau

CFO

Marc Randall

SVP Products

& Offerings

Ian Whiting

SVP WW Sales

& Marketing

Dave Stevens

CTO

Mike Klayko

CEO

Prepared comments provided by Peter Ausnit, Sr. Director, Investor Relations

That concludes Brocade’s prepared comments. At 2:30 p.m. Pacific Time on February 22

Brocade will host a web cast

conference call at www.BRCD.com

primarily devoted to answering questions submitted via email to ir@brocade.com

and taken

live from participants via telephone.

Thank you for your interest in Brocade.

© 2010 Brocade Communications Systems, Inc.

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nd

Appendix and Reconciliations

59–61%

Long-Term Financial Model

High margins, strong profitability

* Note: Sources are Dell’Oro

Group, Infonetics

and Brocade estimates

** Note: Non-GAAP, please see GAAP reconciliation in appendix

Storage

Ethernet

Services

Brocade

Non-GAAP 3-year TAM CAGR*

18.6%

11.7%

12–15%

12–17%

Non-GAAP gross margin**

60–63%

55–60%

45–50%

Non-GAAP operating expense**

37–39%

38–40%

20–25%

38–39%

Non-GAAP operating margin**

21–26%

15–22%

20–30%

20–23%

Sequential Income Statement* Comparison

Margin expansion from operating leverage

* Note: Non-GAAP, please see GAAP reconciliation in

appendix

Quarterly Net Income (Loss)

GAAP/Non-GAAP Reconciliation

* Adjusted as a result of adoption of new accounting standard relating to convertible debt instruments

(In Thousands)

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Net income (loss) on a GAAP basis*

(23,898)

(66,093)

(23,494)

32,101

51,095

Adjustments:

Legal fees associated with indemnification obligations

and other related expenses, net

19,299

19,814

(561)

(14,612)

301

Stock-based compensation expense

18,081

40,111

43,313

35,715

21,523

Amortization of intangible assets

25,197

39,372

35,002

34,950

34,902

Acquisition and integration costs

953

2,391

1,450

333

204

Loss on sale of property

–

–

–

–

8,783

Legal fees associated with certain pre-acquisition litigation

–

–

–

546

299

Provision for certain pre-acquisition litigation

–

–

–

14,335

–

Interest due to adoption of new standard*

1,922

1,976

2,030

2,085

2,142

In-process research and development

26,900

–

–

–

–

Restructuring costs and facilities lease losses

–

2,329

–

–

–

Goodwill and acquisition related intangibles impairment

–

53,306

–

–

–

Acquisition related financing charges

4,366

–

–

–

–

Income tax effect of adjustments

(9,265)

(46,080)

(2,364)

(32,091)

(25,239)

Non-GAAP net income

63,555

47,126

55,376

73,362

94,010

Capital Expenditures

Cumulative campus spending: $214M to date out of $330M total

$100M

Campus

-

$80M

$5M

$23M

$22M

$25M

$28M

$31M

Operating

$14M

$14M

$14M

$13M

$16M

$20M

$17M

$17M

Q2  08

Q3  08

Q4  08

Q1  09

Q2  09

Q3  09

Q4 09

Q1 10

$10M

$30M

$50M

$70M

$90M

-

$20M

$40M

$60M

$80M

EBITDA and Sr. Secured Leverage Ratio

As defined in the term credit agreement

Consolidated Senior Secured Leverage Ratio

Q1 FY09

Q2 FY09

Q3 FY09

Q4 FY09

Q1 FY10

$ Thousand

Consolidated Net Income

($26,031)

($63,118)

($21,034)

$33,597

$51,095

plus

(i) Consolidated Interest Charges

$21,357

$26,398

$22,845

$20,681

$22,073

(ii) Provision for Federal, state, local and foreign income taxes payable

$22,028

$20,021

$0

$1,277

(iii) Depreciation and amortization expense

$39,754

$54,377

$50,956

$51,486

$51,012

(iv) Any cash restructuring charges and integration costs in connection with the

Acquisition, in an aggregate amount not to exceed $75,000,000

$5,319

$4,720

$1,450

$333

$204

(v) Non-cash restructuring charges incurred in connection with the Transaction, all

as approved by Arrangers

$18,400

$19,972

$5,840

$2,097

$1,502

(vi) Other non-recurring expenses reducing such Consolidated Net Income which

do not represent a cash item in such period or any future period

(in each case of or by the Borrower and its Subsidiaries for such Measurement

Period)

$26,900

$53,304

$0

$0

$8,783

(vii) Any non-cash charges for stock compensation expense in compliance with

FAS 123R and amortization of the fair value of unvested options under the

Acquired Business’

employee stock option plan assumed by

the Borrower

$18,080

$40,111

$43,313

$35,714

$21,523

(viii)

Legal fees and expenses relating to the Borrower’s indemnification obligations

for the benefit of its former officers and directors in connection with its historical

stock option litigation

$13,740

$11,778

($561)

$0

$250

minus

(i)

Federal, state, local and foreign income tax credits

$0

($24,769)

$0

($6,707)

$0

(ii)

All non-cash items increasing Consolidated Net Income (in each case of or by

the Borrower and its Subsidiaries for such Measurement Period)

($2,877)

($2,899)

($3,511)

($7,216)

($3,036)

Consolidated EBITDA

$136,670

$119,874

$119,319

$129,985

$154,683

4 Quarter Trailing Consolidated EBITDA

$537,081

$531,304

$518,002

$505,848

$523,861

Consolidated Senior Secured Debt

$1,114,050

$1,039,050

$1,005,909

$948,028

$1,041,483

Consolidated Senior Secured Leverage Ratio

2.07

1.96

1.94

1.87

1.99

Q1 FY10 Cash and Debt Covenant

Continuing high adjusted EBITDA supports strong liquidity

Strong Adj. EBITDA Performance…

Improving Cash Balance…

Stronger Capital Structure…

Well Within Our Debt Covenant…

$214M

$237M

$250M

$339M

$501M

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Ending Cash Balance

$137M

$120M

$119M

$130M

$155M

$537M

$531M

$518M

$506M

$524M

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Quarter

Trailing 12 Months

2.07

1.96

1.94

1.87

1.99

2.3

2.3

2.3

2.3

2.5

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Senior Debt Leverage

Ratio

Covenant

$1,114M

$1,039M

$1,006M

$948M

$1,041M

$441M

Q2 09

Q3 09

Total Secured Debt

Q1 09

Q4 09

Q1 10

Term Debt plus Revolver

Thank You

www.BRCD.com