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): November 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)

130 Holger Way

San Jose, CA 95134

(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 November 22, 2010, Brocade Communications Systems, Inc. (the “Company”) issued a press release regarding financial results for the fourth quarter and fiscal year ended October 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 financial results of the first quarter of fiscal year 2011. 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 November 22, 2010, regarding financial results of Brocade Communications Systems, Inc. for the fourth quarter and fiscal year ended October 30, 2010.
99.2	Slides with accompanying prepared remarks of Brocade Communications Systems, Inc., dated November 22, 2010, regarding financial results of the fourth quarter and fiscal year ended October 30, 2010 and estimated financial results of the first quarter of fiscal year 2011.

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: November 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 Robert Eggers Tel: 408-333-8797 reggers@brocade.com

Brocade Reports All-Time Record Revenue for Company in Fiscal Q4 10

Performance Driven by Record Revenue for Ethernet Business

SAN JOSE, Calif., Nov. 22, 2010 — Brocade^® (NASDAQ: BRCD) today reported financial results for its fourth fiscal quarter and full fiscal year ended October 30, 2010. Brocade recorded quarterly revenues of $550 million, an all-time record for the company in terms of revenue, representing an increase of over nine percent quarter-over-quarter, resulting in diluted earnings per share (EPS) of $0.05 on a GAAP basis and $0.14 on a non-GAAP basis.

Brocade attributed the record performance to a number of factors including an all-time company high in revenue for its Ethernet business which is composed of products and services. On a quarterly basis, Brocade also experienced strong sequential revenue growth in its storage networking business as well as solid performances from its Americas and Asia Pacific operations.

“We are pleased with our Q4 performance which drove record revenues, growth in our Ethernet business and a strong finish to fiscal 2010,” said Michael Klayko, CEO of Brocade. “Looking forward to FY11, we are particularly excited about Brocade’s successful launch of the industry’s first Ethernet fabric products and technologies, which we believe will serve as a catalyst for customers to rapidly migrate to virtualized data centers and cloud-optimized networks.”

In addition to this press release, Brocade management has posted prepared comments and slides on its Fiscal Q4 results and outlook at www.brcd.com. Brocade will host a live webcast conference call to answer questions from investors and analysts today at 2:30 p.m. Pacific time. Questions may also be submitted in advance to ir@brocade.com.

Other Q4 product, customer and partner announcements are available at http://newsroom.brocade.com/.

Financial Highlights and Additional Financial Information

• Q4 revenue was $550 million, increasing 9.3% sequentially and 5.5% year-over-year.

• Q4 GAAP EPS (diluted) was $0.05, sequentially level, and decreasing from $0.07 in Q4 2009.

• Q4 non-GAAP EPS (diluted) was $0.14, sequentially increasing $0.01, and decreasing $0.01 year-over-year.

• Q4 non-GAAP gross margin was 62.3% verses 60.4% in Q3 2010. 2010 gross margins now exclude system engineer costs which have been reclassified as operating expense (see footnote #2).

• Q4 non-GAAP operating margin was 20.4% versus 17.3% in Q3 2010 and 22.7% in Q4 2009.

• Q4 effective GAAP tax rate was 20.4%; non-GAAP effective tax rate was 23.2%.

• Q4 Adjusted EBITDA was $128 million, increasing from $102 million in Q3 2010 and roughly flat from $130 million in Q4 2009.

• Q4 total Storage Area Networking (SAN) port shipments were approximately 1.1 million.

• Q4 ending headcount was 4,651, up 581 or 14.3% compared to Q4 2009.

	Q4 2010			Q3 2010			Q4 2009
Revenue	$	550M		$	504M		$	522M
GAAP net income (1)	$	23M		$	22M		$	32M
Non-GAAP net income	$	66M		$	64M		$	73M
GAAP EPS – diluted (1)	$	0.05		$	0.05		$	0.07
Non-GAAP EPS – diluted	$	0.14		$	0.13		$	0.15
Non-GAAP gross margin (2)		62.3	%		60.4	%		59.5	%
Non-GAAP operating margin		20.4	%		17.3	%		22.7	%
Adjusted EBITDA (3)	$	128M		$	102M		$	130M
Cash provided by operations	$	106M		$	55M		$	155M

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

130 Holger Way, San Jose, CA. 95134

T. 408.333.8000 F. 408.333.8101

www.brocade.com

	Q4 2010			Q3 2010			Q4 2009
As a % of total revenues
OEM revenues		61	%		64	%		65	%
Channel/Direct revenues		39	%		36	%		35	%
10% or greater customer revenues		44	%		44	%		46	%
Domestic revenues		65	%		64	%		63	%
International revenues		35	%		36	%		37	%
Data Storage Revenues		57	%		58	%		58	%
Ethernet Products Revenues		26	%		24	%		25	%
Global Services Revenue		17	%		18	%		17	%
Ethernet Business Revenues (4)		31	%		30	%		29	%
As a % of Ethernet Business Revenues (4):
Enterprise, including Federal (5)		75	%		79	%		82	%
Federal only		23	%		25	%		29	%
Service Provider (5)		25	%		21	%		18	%
	Q4 2010			Q3 2010			Q4 2009
Cash, cash equivalents and investments	$	336M		$	296M		$	339M
Deferred revenues	$	251M		$	248M		$	235M
Capital expenditures – non-campus related	$	24M		$	23M		$	17M
Capital expenditures – campus related	$	22M		$	24M		$	28M
Total debt, net of discount (1)	$	930M		$	957M		$	1,082M
Days sales outstanding		54 days			54 days			52 days
Employees at end of period		4,651			4,520			4,070

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

2) During Q4 2010, we reviewed the classification of our system engineer (‘SE’) costs. The SE’s primary role has migrated over time from assisting with customer support to primarily performing pre-sales activity to generate future business. As a result of this review, we have reclassified the SE costs within our Consolidated Statements of Operations starting in 2010. These costs are now presented within sales and marketing expenses, as opposed to cost of revenues. This reclassification did not impact revenue, income from operations, net income, or earnings per share for 2010. Non-GAAP gross margins for Q4 2010 and Q3 2010 reflect the new cost classification for SEs. Prior period numbers have not been updated for the new cost classification implemented in 2010. For comparison purposes, had the Company affected the reclassification for Q4 2009, the adjusted non-GAAP gross margin would have been 65.6% reflecting a reduction of total cost of revenues by $31.6M, and sales and marketing expenses would have been higher by this same amount.

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

4) Ethernet Business revenues include product and support revenues.

5) In prior periods, Service Provider (“SP”) revenue was determined based on the customer “Bill-to” identification. As more SP revenue has gone through Brocade Channels, customer “Ship-to” information has become more representative of Service Provider revenue than “Bill-to” information, as previously reported. Beginning this quarter we have based Service Provider revenue on “Ship-to” information and a defined list of customers who have been historically identified in the Service Provider market. Service Provider revenue for Q3 2010 and Q4 2009 has been reclassified to be consistent with this definition. All other revenue not specifically identified as Service Provider is included in Enterprise.

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.

Page 2 of 10

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 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 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) provision for certain pre-acquisition litigation, (ii) legal fees associated with certain pre-acquisition litigation, (iii) legal fees associated with indemnification obligations to former directors and officers and other related costs, net, (iv) acquisition and integration costs (in connection with the Foundry acquisition), (v) restructuring costs and facilities leases losses (vi) in-process research and development charges (in connection with the Foundry acquisition), (vii) goodwill and acquisition related intangibles impairment, (viii) loss on sale of property, (ix) acquisition-related financing charges, and (x) 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 expected financial performance, and diversified business model and strength in innovation. 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, Brocade’s ability to continue to successfully innovate new products and services on a timely basis and achieve widespread market acceptance, the effect of changes in IT spending levels in one or more of our target markets and geographical regions, increasing market competition and changes in the industry, and Brocade’s ability to capitalize on new Brocade sales and marketing initiatives, including expanded go-to-market activities in our Ethernet business. 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 July 31, 2010. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.

Page 3 of 10

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 4 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Fiscal Year Ended
	Oct 30, 2010			Oct 31, 2009 (1) (2)			Oct 30, 2010 (2)			Oct 31, 2009 (1) (2)
Net revenues
Product	$	458,352		$	432,394		$	1,732,024		$	1,615,511
Service		92,023			89,361			362,339			337,415
Total net revenues		550,375			521,755			2,094,363			1,952,926
Cost of revenues
Product		181,276			203,442			683,486			739,354
Service		44,079			47,466			176,547			180,072
Total cost of revenues		225,355			250,908			860,033			919,426
Gross margin		325,020			270,847			1,234,330			1,033,500
Operating expenses:
Research and development		88,943			95,345			354,260			354,809
Sales and marketing		145,586			103,452			534,458			385,155
General and administrative		18,129			22,209			67,848			84,962
Legal fees associated with indemnification obligations and other related costs, net		(666	)		(14,612	)		(163	)		23,941
Amortization of intangible assets		16,190			17,052			65,623			68,718
Acquisition and integration costs		—			333			204			5,127
Restructuring costs and facilities lease loss		1,059			—			1,059			2,329
In-process research and development		—			—			—			26,900
Goodwill and acquisition-related intangible assets impairment		—			—			—			53,306
Total operating expenses		269,241			223,779			1,023,289			1,005,247
Income from operations		55,779			47,068			211,041			28,253
Interest and other income (loss), net		(4,222	)		530			(6,452	)		(2,382	)
Interest expense		(22,202	)		(22,766	)		(85,858	)		(99,294	)
Gain (loss) on sale of investments and property, net		49			(27	)		(8,551	)		(602	)
Income (loss) before income tax provision (benefit)		29,404			24,805			110,180			(74,025	)
Income tax provision (benefit)		5,988			(7,296	)		(8,672	)		7,359
Net income (loss)	$	23,416		$	32,101		$	118,852		$	(81,384	)
Net income (loss) per share – basic	$	0.05		$	0.08		$	0.27		$	(0.20	)
Net income (loss) per share – diluted	$	0.05		$	0.07		$	0.25		$	(0.20	)
Shares used in per share calculation – basic		456,597			425,530			446,996			398,948
Shares used in per share calculation – diluted		485,672			480,091			482,741			398,948

(1) As adjusted due to adoption of update to ASC 470-20 relating to accounting for convertible debt instruments.

(2) Fiscal year 2010 is as adjusted due to the reclassification of system engineer costs from cost of revenue to sales and marketing expenses. Q4 2009 and fiscal year 2009 have not been updated for the new cost classification implemented in 2010. For comparison purposes, had the Company affected the reclassification for 2009, the total cost of revenues would have been lower by $34.3M for Q4 2009 and $120.5M for fiscal year 2009, and sales and marketing expenses would have been higher by these amounts respectively. There would have been no impact on revenue, income from operations, net income, or earnings per share for fiscal year 2009.

Page 5 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	Oct 30, 2010			Oct 31, 2009 (1)
Assets
Current assets:
Cash and cash equivalents	$	333,984		$	334,193
Short-term investments		1,998			4,678
Restricted cash		—			12,502
Total cash, cash equivalents and short-term investments and restricted cash		335,982			351,373
Accounts receivable, net		329,564			297,819
Inventories		76,808			72,152
Deferred tax assets		67,080			84,629
Prepaid expenses and other current assets		65,017			79,302
Total current assets		874,451			885,275
Property and equipment, net		539,117			442,408
Goodwill		1,644,950			1,659,934
Intangible assets, net		344,000			470,872
Non-current deferred tax assets		203,454			184,713
Other assets		48,203			28,218
Total assets	$	3,654,175		$	3,671,420
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	147,130		$	181,249
Accrued employee compensation		91,688			160,832
Deferred revenue		185,623			174,870
Current liabilities associated with facilities lease losses		5,992			10,769
Current portion of capital lease obligations		1,761			—
Revolving credit facility		—			14,050
Current portion of term loan		28,779			38,822
Convertible subordinated debt		—			169,332
Other accrued liabilities		108,310			105,263
Total current liabilities		569,283			855,187
Non-current capital lease obligations, net of current portion		6,782			—
Term loan, net of current portion		297,118			860,114
Senior Secured Notes		595,373			—
Non-current liabilities associated with facilities lease losses		3,984			10,150
Non-current deferred revenue		65,242			60,575
Non-current income tax liability		61,421			92,276
Other non-current liabilities		8,671			15,114
Total liabilities		1,607,874			1,893,416
Stockholders’ equity:
Common stock		461			434
Additional paid-in capital		2,047,563			1,901,238
Accumulated other comprehensive loss		(2,830	)		(5,920	)
Retained earnings (Accumulated deficit)		1,107			(117,748	)
Total stockholders’ equity		2,046,301			1,778,004
Total liabilities and stockholders’ equity	$	3,654,175		$	3,671,420

(1) As adjusted due to adoption of update to ASC 470-20 relating to accounting for convertible debt instruments.

Page 6 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended Oct 30, 2010 and Oct 31, 2009

(in thousands)

(unaudited)

	Three Months Ended
	Oct 30, 2010			Oct 31, 2009 (1)
Cash flows from operating activities:
Net income	$	23,416		$	32,101
Adjustments to reconcile net income to net cash provided by operating activities:
Change in excess tax benefits and detriments from share-based compensation		3,157			(192	)
Depreciation and amortization		51,531			51,486
Loss on disposal of property and equipment		574			110
Amortization of debt issuance costs and original issue discount		4,681			6,267
Net (gains) losses on investments and marketable equity securities		(299	)		27
Provision for doubtful accounts receivable and sales allowances		3,105			3,148
Non-cash compensation expense		25,274			35,714
Non-cash facilities lease loss expense		513			—
Capitalization of interest cost		—			(2,737	)
Changes in assets and liabilities:
Restricted Cash		—			(12,502	)
Accounts receivable		(35,039	)		821
Inventories		10,716			(18,560	)
Prepaid expenses and other assets		(2,973	)		(3,305	)
Deferred tax assets		4,216			2,440
Accounts payable		3,701			30,815
Accrued employee compensation		(2,856	)		27,425
Deferred revenue		2,917			5,376
Other accrued liabilities		16,187			(118	)
Liabilities associated with facilities lease losses		(2,399	)		(3,004	)
Net cash provided by operating activities		106,422			155,312
Cash flows from investing activities:
Purchases of short-term investments		(12	)		(22	)
Purchases of non-marketable minority equity investments		(200	)		—
Proceeds from maturities and sale of short-term investments		1,467			1,056
Proceeds from maturities and sale of long-term investments		—			—
Purchases of property and equipment		(45,651	)		(44,491	)
Net cash used in investing activities		(44,396	)		(43,457	)
Cash flows from financing activities:
Payment of principal related to the term loan		(30,221	)		(57,881	)
Payment of principal related to capital leases		(679	)		—
Proceeds from issuance of common stock, net		11,710			35,375
Change in excess tax benefits and detriments from share-based compensation		(3,157	)		192
Net cash used in financing activities		(22,347	)		(22,314	)
Effect of exchange rate fluctuations on cash and cash equivalents		1,768			473
Net increase in cash and cash equivalents		41,447			90,014
Cash and cash equivalents, beginning of period		292,537			244,179
Cash and cash equivalents, end of period	$	333,984		$	334,193

(1) As adjusted due to adoption of update to ASC 470-20 relating to accounting for convertible debt instruments.

Page 7 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.

GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For Fiscal Year Ended Oct 30, 2010 and Oct 31, 2009

(in thousands)

(unaudited)

	Fiscal Year Ended
	Oct 30, 2010			Oct 31, 2009 (1)
Cash flows from operating activities:
Net income (loss)	$	118,852		$	(81,384	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in excess tax benefits and detriments from share-based compensation		(2,161	)		794
Depreciation and amortization		199,637			196,573
Loss on disposal of property and equipment		10,412			1,478
Amortization of debt issuance costs and original issue discount		21,100			24,051
Net (gains) losses on investments and marketable equity securities		(523	)		597
Provision for doubtful accounts receivable and sales allowances		11,811			12,681
Non-cash compensation expense		101,625			137,219
Non-cash facilities lease loss benefit		513			(339	)
Capitalization of interest cost		(7,755	)		(9,093	)
Intangible asset impairment charge		—			53,306
In-process research and development		—			26,900
Changes in assets and liabilities, net of acquired assets and assumed liabilities:
Restricted cash		12,502			(12,502	)
Accounts receivable		(42,458	)		(74,965	)
Inventories		(4,657	)		25,338
Prepaid expenses and other assets		13,657			999
Deferred tax assets		4,216			3,091
Accounts payable		(26,421	)		(11,052	)
Accrued employee compensation		(100,826	)		(28,685	)
Deferred revenue		15,420			26,454
Other accrued liabilities		(15,200	)		(5,543	)
Liabilities associated with facilities lease losses		(11,231	)		(10,394	)
Liability associated with class action lawsuit		—			(160,000	)
Net cash provided by operating activities		298,513			115,524
Cash flows from investing activities:
Purchases of short-term investments		(53	)		(138	)
Purchases of non-marketable minority equity investments		(200	)		—
Proceeds from maturities and sale of short-term investments		3,255			155,986
Proceeds from maturities and sale of long-term investments		—			30,173
Purchases of property and equipment		(201,621	)		(162,770	)
Proceeds from sale of property and equipment		30,185			—
Decrease in restricted cash		—			1,075,079
Net cash paid in connection with acquisitions		—			(1,297,482	)
Net cash used in investing activities		(168,434	)		(199,152	)
Cash flows from financing activities:
Payment of senior underwriting fees related to term loan		—			(30,525	)
Payment of convertible subordinated debt		(172,500	)		—
Payment of fees related to issuance of bonds		(3,666	)		—
Payment of principal related to the term loan		(583,029	)		(166,022	)
Payment of principal related to the revolving credit facility		(14,050	)		—
Payment of principal related to capital leases		(1,173	)		—
Common stock repurchases		(25,004	)		—
Proceeds from issuance of common stock, net		81,593			145,655
Proceeds from revolving credit facility		—			14,050
Proceeds from Senior Secured Notes		587,968			—
Change in excess tax benefits and detriments from share-based compensation		2,161			(794	)
Net cash used in financing activities		(127,700	)		(37,636	)
Effect of exchange rate fluctuations on cash and cash equivalents		(2,588	)		1,573
Net decrease in cash and cash equivalents		(209	)		(119,691	)
Cash and cash equivalents, beginning of year		334,193			453,884
Cash and cash equivalents, end of year	$	333,984		$	334,193
Supplemental disclosure of cash flow information
Cash paid for interest		59,549			83,397
Cash paid for (refunded from) income taxes	$	8,801		$	(20,000	)
Supplemental Schedule of non-cash investing activities:
Fair value of stock options and unvested awards assumed in exchange for acquired Foundry assets	$	—		$	254,312
Acquisition of property and equipment through capital leases	$	9,716		$	—

(1) As adjusted due to adoption of update to ASC 470-20 relating to accounting for convertible debt instruments.

Page 8 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.

RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended
	Oct 30, 2010			Oct 31, 2009 (1)
Net income on a GAAP basis	$	23,416		$	32,101
Adjustments:
Stock-based compensation expense included in cost of revenues		3,179			7,062
Amortization of intangible assets expense included in cost of revenues		14,466			17,898
Provision for certain pre-acquisition litigation		—			14,335
Legal fees associated with certain pre-acquisition litigation		243			546
Total gross margin adjustments		17,888			39,841
Legal fees associated with indemnification obligations and other related costs		(666	)		(14,612	)
Stock-based compensation expense included in research and development		6,287			10,251
Stock-based compensation expense included in sales and marketing		11,420			12,934
Stock-based compensation expense included in general and administrative		4,389			5,468
Amortization of intangible assets expense included in operating expenses		16,190			17,052
Acquisition and integration costs		—			333
Restructuring costs and facilities lease losses, net		1,059			—
Total operating expense adjustments		38,679			31,426
Total operating income adjustments		56,567			71,267
Interest expense related to adoption of new standards relating to convertible debt instruments		—			2,085
Income tax effect of adjustments		(13,974	)		(32,091	)
Non-GAAP net income	$	66,009		$	73,362
Non-GAAP net income per share – basic	$	0.14		$	0.17
Non-GAAP net income per share – diluted	$	0.14		$	0.15
Shares used in non-GAAP per share calculation – basic		456,597			425,530
Shares used in non-GAAP per share calculation – diluted		485,672			492,174

(1) As adjusted due to adoption of update to ASC 470-20 relating to accounting for convertible debt instruments.

See explanation of non-GAAP information included herein.

Page 9 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.

RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME

(in thousands, except per share amounts)

(unaudited)

	Fiscal Year Ended
	Oct 30, 2010			Oct 31, 2009 (1)
Net income (loss) on a GAAP basis	$	118,852		$	(81,384	)
Adjustments:
Stock-based compensation expense included in cost of revenues		13,552			25,654
Amortization of intangible assets expense included in cost of revenues		61,249			65,803
Provision for certain pre-acquisition litigation		1,604			14,335
Legal fees associated with certain pre-acquisition litigation		573			546
Total gross margin adjustments		76,978			106,338
Legal fees associated with indemnification obligations and other related costs		(163	)		23,941
Stock-based compensation expense included in research and development		27,795			40,365
Stock-based compensation expense included in sales and marketing		45,233			48,820
Stock-based compensation expense included in general and administrative		15,046			22,380
Amortization of intangible assets expense included in operating expenses		65,623			68,718
Acquisition and integration costs		204			5,127
Restructuring costs and facilities lease losses		1,059			2,329
In-process research and development		—			26,900
Goodwill and acquisition related intangibles impairment		—			53,306
Total operating expense adjustments		154,797			291,886
Total operating income adjustments		231,775			398,224
Loss on sale of property		8,737			—
Acquisition-related financing charges		—			4,366
Interest expense related to adoption of new standards relating to convertible debt instruments		2,490			8,013
Income tax effect of adjustments		(75,475	)		(89,800	)
Non-GAAP net income	$	286,379		$	239,419
Non-GAAP net income per share – basic	$	0.64		$	0.60
Non-GAAP net income per share – diluted	$	0.59		$	0.53
Shares used in non-GAAP per share calculation – basic		446,996			398,948
Shares used in non-GAAP per share calculation – diluted		486,293			454,293

(1) As adjusted due to adoption of update to ASC 470-20 relating to accounting for convertible debt instruments.

See explanation of non-GAAP information included herein.

Page 10 of 10

EX-99.2

Q4 FY 2010 EARNINGS

November 22, 2010

Exhibit 99.2

Page 1 of 51

©

2010 Brocade Communications Systems, Inc.

Prepared comments provided by Rob Eggers, Investor Relations

Thank you for your interest in Brocade’s Q4 Fiscal 2010 earnings presentation, which includes prepared remarks, slides,

and a press release detailing fiscal fourth quarter 2010 financial results. The press release was issued shortly after 1:00

p.m. Pacific time on November 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.

Cautionary Statements and Disclosures

This presentation includes forward-looking statements regarding Brocade’s financial

results,

plans

and

business

outlook

as

well

as

worldwide

and

Federal

government

spending, 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-Q for the fiscal quarter ended July 31, 2010 and 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.

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.

Please see risk factors on Forms 10-K and 10-Q filed with the SEC

Page 2 of 51

©

2010 Brocade Communications Systems, Inc.

Agenda

Prepared comments followed by live Q&A call

Richard Deranleau

CFO

Mike Klayko

CEO

Page 3 of 51

©

2010 Brocade Communications Systems, Inc.

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 webcast beginning at 2:30 p.m. Pacific time on November 22 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 60 minutes prior to the conference call and to ask live

questions during the call.

Fiscal 2010: Q4 Earnings

Mike Klayko, CEO

*

*

*

*

*

*

*

*

*

Page 4 of 51

©

2010 Brocade Communications Systems, Inc.

Prepared comments provided by Mike Klayko, CEO

Q4 Executive Summary

Q4 Results

•

$550.4M record revenues, up 9%

Qtr./Qtr.

•

$0.14 non-GAAP EPS* (diluted)

Business Highlights

•

Record Ethernet business revenue

(including support) of $171M up

14% Qtr./Qtr.

•

SAN product revenue grew 8%

Qtr./Qtr. driven by Director/Server

•

Americas and APAC were up 11%

and 9% Qtr./Qtr. respectively

Page 5 of 51

©

2010 Brocade Communications Systems, Inc.

Brocade reported Q4 revenues of $550.4M, an all-time record in our 15-year history, up more than 9% quarter-over-

quarter (Qtr./Qtr.) and more than 5% year-over-year (Yr./Yr.). We also reported non-GAAP EPS (diluted) of $0.14 and

GAAP EPS (diluted) of $0.05 for the quarter. 

The highlight of the quarter was record revenue performance in our Ethernet business, which includes products and

services. It was an all-time company high with 14% growth Qtr./Qtr. and 13% growth Yr./Yr. I’ll cover the Ethernet

business in greater detail in the next section but we believe this quarter’s results is a positive sign for this focus and

investment area of our business. 

We also saw revenue growth in our SAN products in Q4 with 8% growth Qtr./Qtr. and 4% growth Yr./Yr. in what is a

seasonally strong quarter for that business. This growth was led by our performance in the SAN director business, which

is another indication that Fibre Channel is as healthy as ever. We believe this segment of our business will continue to

perform well, driven by the requirements of key IT initiatives such as server virtualization, data center consolidation and

the migration to higher-performance technologies. These initiatives also positively impacted our server connectivity

business, particularly the HBA business, which was up more than 150% in Q4 Yr./Yr. and up more than 200% in FY 10

versus FY 09.

Looking at Q4 in terms of revenue performance by geography and vertical markets, we saw several areas of strength

including Americas with 11% growth Qtr./Qtr. and 9% growth Yr./Yr.  The Americas business was bolstered by strength in

both the Enterprise and Service Provider business segments as well as growth in the Federal business, which was up 7%

Qtr./Qtr. Additionally, Asia Pacific continued its momentum with 9% sequential growth and 22% growth Yr./Yr. Both EMEA

and Japan were both up slightly sequentially but were down Yr./Yr.

In general, I am very pleased with our Q4 performance, which provided a strong finish to our fiscal year. The Q4 results

exemplify the value of maintaining a well-balanced, highly diversified business model across geographies, technology

segments and go-to-market routes as strength in multiple areas of the business enabled us to achieve record

performance.

Ethernet Initiatives Update

•

Added 1600 net new accounts

since Foundry acquisition

•

Added ~300 new accounts in Q4

•

Highest revenue contribution since

Foundry acquisition

•

Grew our key vertical segments

•

Captured Service Provider

design wins

•

Realized strong Channel/Direct

ROI with increased deals

Strong performance drives growth

Cumulative New

Ethernet Accounts

Page 6 of 51

©

2010 Brocade Communications Systems, Inc.

Continuing on a theme we started earlier in FY 10, I will now provide an update on the key initiatives that we have

implemented to help drive both immediate and long-term growth in our Ethernet business. 

First, the growth of our number of net new Ethernet accounts continues to track nicely. In Q4 we added almost 300 net

new accounts, giving us a total of nearly 1600 new Ethernet customers as we end FY 10.  The 1100 new accounts added

in FY 10 exceeded our internal target of adding 1000 net new Ethernet accounts for the year.

We believe there are other positive signs that our Ethernet business initiatives are starting to generate significant returns

on our investment. For example, Q4 was another record quarter in terms of revenue contribution from net new accounts,

building on the momentum from the previous quarter. We also saw great results for our Ethernet products among our key

vertical segments with Healthcare and Federal showing strong sequential growth. We also had several Service Provider

customer designs wins, which we believe should help augment that part of our business in the future.  

Finally, we believe it’s significant that we are securing an increasing number of these deals through both our direct, high-

touch sales efforts and through our channel partners. It is another sign that our focus and investment in these routes-to-

market are paying off now and we are optimistic that it will generate even more lucrative returns in the future.

Q4 Partnership Highlights

Creating excitement around Ethernet fabrics

Page 7 of 51

©

2010 Brocade Communications Systems, Inc.

We also ended FY 10 on a high note in terms of partnership momentum with a very busy Q4. I begin with a focus on our

strategic partnerships with leading virtualization hypervisor partners. Virtualization is no longer a buzzword in IT; it is now

a customer imperative. For Brocade, we believe virtualization also presents a huge market opportunity for our existing and

emerging networking solutions. 

It is also the reason we have included the enhancement of our partnerships with these virtualization companies as one of

our company’s key initiatives for FY 11. The vision and technologies of these companies and Brocade are aligned to

address this rapidly expanding part of the market. I’ll cover this further in an upcoming section.

Q4 Partnership Momentum

Converged Networking

Converged Networking

Server Connectivity

Server Connectivity

Channel Partner Programs

Channel Partner Programs

350 Elite

350 Elite

and Premier

and Premier

Partners

Partners

New

New

New

New

Page 8 of 51

©

2010 Brocade Communications Systems, Inc.

Next, some OEM highlights in Q4, which include an uptick in activity around our server connectivity business for both

converged network and host bus adapters. This reinforces the importance of server virtualization in today’s data center

network solutions available through our OEM partners. Specifically, in Q4 we announced:

•

IBM and Brocade are partnering to build the first fully converged embedded 10 GbE switch module and CNA

designed specifically for IBM BladeCenter server environments. This is an important design win for Brocade that

provides IBM BladeCenter customers with multiprotocol support that consolidates their IP and Fibre Channel I/O

needs into a single switch;

•

Dell is offering the Brocade 815/825 Fibre Channel HBAs and Brocade 1020 CNAs as factory-installed options in

Dell’s existing portfolio of Brocade storage networking solutions. This enables Dell customers to deploy an end-to-

end storage networking architecture featuring Brocade products through an easy-to-select purchase option. One

side note about Dell, we saw good traction in the Ethernet business through Dell in Q4, representing more than

50% growth sequentially.  

In terms of Q4 channel momentum, Brocade was able to recruit an additional 24 Elite and Premier partners to our

Alliance Partner Network (APN) giving us a total of almost 350 globally. To drive channel partner loyalty and to help them

become more profitable, Brocade announced enhanced APN programs that place greater emphasis on driving expertise

and skill sets within the channel. Brocade also unveiled a channel-focused Professional Services Program (PSP) as well

as a Support Delivery Program (SDP), which are designed to attract storage and Ethernet channel resellers with more

selective and profitable professional services, support, and warranty offerings.

FY 2010 Innovation Highlights

*

*

*

*

*

*

*

*

*

Page 9 of 51

©

2010 Brocade Communications Systems, Inc.

We recognize that innovation is a significant factor to a company’s differentiation to the market and a foundation for future

growth. 

•

•

Unmatched simplicity

Unmatched simplicity

•

•

Non-stop networking

Non-stop networking

•

•

Investment protection

Investment protection

•

•

Application optimization

Application optimization

Brocade One

Brocade One

©

2010 Brocade Communications Systems, Inc.

Page10 of 51

Earlier this year we introduced the Brocade One™ vision that clearly outlined how we would align our innovation

strategies around four core value propositions, namely: unmatched simplicity, non-stop networking, investment protection

and application optimization. In Q4, Brocade had an exceptional quarter in terms of innovation by taking key leadership

positions with respect to product innovations across multiple technology segments. 

Brocade VCS

™

Technology and Ethernet Fabrics

Simplify, automate, and scale virtualized and cloud data centers

Core

Servers with 10 Gbps

Connections

Servers with 10 Gbps

Connections

Classic Hierarchical Ethernet Architecture

Ethernet Fabric Architecture

Scalability

Page 11 of 51

©

2010 Brocade Communications Systems, Inc.

One of the most exciting and disruptive technologies that we introduced in FY 10 is virtual cluster switching (VCS)

technology that we unveiled at our Technology Day in June. We believe that Brocade VCS™ Technology is a game-

changer that forms the basis of “Ethernet fabrics” through cloud-optimized networking that will advance the adoption of

fully virtualized, cloud-enabled data centers.  If you are building a private or public cloud, then we believe our Ethernet

fabric products based on flat, simplified, and highly intelligent networks will be at the foundation of your architecture.

Brocade VDX

™

6720 Switches

First switch in the industry to deliver Ethernet fabrics

11/22/2010

©

2010 Brocade Communications Systems, Inc. Company Proprietary Information

Sixth-Generation ASIC

All Brocade VDX switches

are built on a proven

operating system and

ASIC technology

Sixth-Generation ASIC

All Brocade VDX switches

are built on a proven

operating system and

ASIC technology

Brocade VCS Technology

All Brocade VDX switches

are capable of running

Brocade VCS Technology

to build Ethernet fabrics

Brocade VCS Technology

All Brocade VDX switches

are capable of running

Brocade VCS Technology

to build Ethernet fabrics

Brocade VDX 6720-24 Switch

Brocade VDX 6720-60 Switch

Page 12 of 51

©

2010 Brocade Communications Systems, Inc.

Last week we introduced the Brocade VDX™ 6720 Data Center Switch, the first switching platform based on Brocade

VCS Technology. Our approach to building these technologies is consistent with our core values in that it is based on an

open architecture that is hypervisor agnostic, supporting all the major virtualization software available today including

VMware, Microsoft, Citrix and Oracle.

I will cover Brocade VCS Technology, Brocade VDX switches, and Ethernet fabrics in greater detail in the FY 11

innovation focus section.

Brocade MLXe

Core Routers

Quenching the thirst for bandwidth in Service Provider

and Data Center networks

Brocade MLXe

chassis with

100 GbE

Brocade was the only vendor who

could build a bridge towards 100

GbE

while leveraging the existing

infrastructure—this was a key factor

in our decision-making process…

The Brocade MLXe

provides the

platform and Brocade has given us

a blueprint for the future.

”

“

—Henk

Steenman, CTO at AMS-IX

Page 13 of 51

©

2010 Brocade Communications Systems, Inc.

Another highlight in Q4 and FY 10 was our introduction of the Brocade MLXe Core Router and the two-port 100 Gigabit

Ethernet module. Through these products, Brocade introduced the world’s most powerful 100 Gigabit Ethernet router that

is designed to tackle the massive growth in both network traffic and digital data that our customers are dealing with today.

The Brocade MLXe has already garnered public recognition as a highly innovative platform with LightReading.com

naming it as a “Leading Lights” finalist. But more importantly, we received enthusiastic endorsements from existing and

prospective customers, resulting in a number of wins.

A case in point is AMS-IX, one of the world’s largest Internet Exchange Points (IXPs).  AMS-IX manages almost a terabit

of Internet traffic every second in support of approximately 365 of its member companies, which include leading Internet

service providers, telecommunications providers, content providers, content delivery networks, hosting and application

providers as well as mobile networks. AMS-IX’s network traffic growth rates have doubled every 18 months and that pace

is expected to accelerate going forward. 

To address this, AMS-IX has deployed seven Brocade MLXe routers to complement its existing network infrastructure of

Brocade MLX-8, MLX-16, and MLX-32 routers. AMS-IX has deployed the new 8×10 Gigabit Ethernet modules, which

Brocade introduced in Q3, with plans to migrate to the 100 Gigabit Ethernet modules to achieve even greater scale and

performance. We are pleased that AMS-IX publicly recognized Brocade as “the only vendor who could build a bridge

towards higher densities of 100 GbE ports while leveraging the existing infrastructure.”  

The AMS-IX example demonstrates why the world’s top five IXPs run on Brocade networks.

Brocade 16 Gbps

Fibre

Channel Portfolio

Expected to be industry’s first end-to-end 16 Gbps

product portfolio

•

Unmatched Simplicity: Integrated

compression, encryption, and routing

•

Investment Protection: Upgrade

existing SAN infrastructure

•

Non-Stop Networking: Field-proven

“five nines”

availability

8-slot and 4-slot

Backbones

48-port 1U

16 Gbps

Fabric Switch

Mezzanine

16 Gbps

HBAs

Page 14 of 51

©

2010 Brocade Communications Systems, Inc.

Another innovation highlight in Q4 was our public commitment for 16-gigabit Fibre Channel technology that was recently

ratified by the ANSI T11 Technical Committee. Our commitment is not only important to our install base but is critical to

the Fibre Channel industry overall, as we are the undisputed leader in terms of market share, innovation, and thought

leadership. I want to reiterate what I’ve heard our customers say: Fibre Channel continues to be a key technology no

and will continue to be a critical interconnect technology for the future.

Fibre Channel is the de facto networking technology that connects servers and applications to storage systems and

protects the most important digital data in the world today. Additionally, one customer survey after another indicates that

Fibre Channel is the most popular storage networking technology in the all-important server virtualization environment. As

a leading innovator, Brocade plans to be first-to-market with a full portfolio of 16-gigabit Fibre Channel products in the nex

calendar year. By doing so, we believe that Brocade will continue its industry leadership through every Fibre Channel

technology cycle, including the evolution from 1, 2, 4, 8, and now 16-gigabit technologies.

We expect to begin shipping our complete 16-gigabit Fibre Channel solutions in calendar year 2011, while supporting an

investment protection and migration path to allow Brocade customers to purchase current technology.

Brocade World-Class Data Center

Real-world innovation and technology

Page 15 of 51

©

2010 Brocade Communications Systems, Inc.

Finally, I believe innovation is not only defined through product and technology introductions but also through how

technologies are applied in the real world. In this regard, Brocade demonstrated its innovation know-how this quarter by

showcasing our world-class data center to hundreds of visitors that included customers, partners, press, industry/financial

analysts as well as dozens of other invited guests and dignitaries such as US Commerce Secretary Gary Locke. In

October, we also hosted the third annual Data Center Efficiency Summit, an industry-wide event that attracted more than

500 leading experts in data center facilities management and IT operations who share Brocade’s passion about improving

data center efficiencies and performance.

We are justifiably proud of our state-of-the-art and energy-efficient data center that is emblematic of our data center

heritage and expertise. Our data center is a centerpiece of our LEED-certified facility and is the result of a consolidation

project involving three legacy data centers that:

•

decreases the physical footprint requirement by 30 percent 

•

reduces data center energy consumption by 37 percent

•

eliminates 4,450 tons of CO² emissions per year

•

enables Brocade to decommission approximately 133 kilowatts (kW) worth of equipment, translating to $200,000 in

yearly savings and helping Brocade qualify for $2 million+ rebate from Pacific Gas & Electric, the largest in the

history of its data center rebate program.

Our data center is also a showcase for our and our partners’ end-to-end networking solutions. Our customers who have

toured the facility have reacted very positively, as reducing energy and operational costs are key IT initiatives for them

and the impetus for many data center modernization projects that are taking place now. In fact, many of you were able to

tour our data center during our recent Analyst Day and have seen our innovation in action.

FY 2010 Summary: Key Initiatives

Ethernet Account/

Revenue Growth

•

Slow start in Q1 10

•

Exceeded new account goal

•

Strong finish to the year

Maintaining SAN

Leadership

•

Technology leadership—16 Gbps

commitment

•

Share gains in 2H 10

•

Virtualization driving growth

Enhancing Our

Partnership Ecosystem

•

OEM partner stability

•

Channel partner growth

•

Open architectures for customer choice

Innovation

•

8 “Product of the Year”

awards

•

Brocade One vision and strategy

•

First true Ethernet fabrics

Employer of Choice

•

Fortune 100 “Best Companies to Work For”

•

“Best Place to Work for in the SF Bay Area”

•

~600 net new hires in FY 10

Page 16 of 51

©

2010 Brocade Communications Systems, Inc.

Before

we

look

ahead

to

our

priorities

for

Q1

and

the

rest

of

FY

11,

I

wanted

to

take

a

look

back

on

our

overall

performance

in

FY

10

according

to

a

number

of

key

initiatives.

Specifically,

I

will

look

at

growing

Ethernet

accounts/revenue,

maintaining

SAN leadership, enhancing our partnership ecosystem, continuing innovation, and positioning Brocade as an employer of

choice.

Growing Ethernet Accounts/Revenue:

While we admittedly had a slow start in Q1, we closed the year strong and we

believe our outlook is bright in this area of the business. We believe we have a stronger foundation for growth in FY 11.

Maintaining SAN Leadership:

Our focus on the SAN business remains strong as is our commitment to work with our

customers

through

the

next

technology

transition:

the

migration

to

16-gigabit

Fibre

Channel

technology.

I

am

pleased

that

we ended FY 10 as the industry thought leader and clear market share leader in this area of business. 

Enhancing Our Partnership Ecosystem:

Partnerships are inherent to Brocade’s DNA. Enhancing our existing

partnerships and forming new ones was a core focus area for us in FY 10, especially with key partners aligned in our

advancement of cloud-optimized networks.

Continuing

Innovation:

Innovation

is

key

competitive

differentiator

for

Brocade.

FY

10

was

a

successful

year

for

us

with

some significant product and technology introductions that were recognized and rewarded through 13 product awards

including

eight

“Product

of

the

Year”

awards.

We

also

introduced

the

Brocade

One

unifying

vision

and

strategy

that

will

set

the framework and priorities for future innovations.

Positioning Brocade as Employer of Choice:

Brocade is a destination of choice for talented individuals from all over the

world. In FY 10 our recruiting efforts were bolstered by the important milestone of Brocade being named as one of the

Fortune 100 “Best Companies to Work For”

as well as Brocade being named the “Best Place to Work in the San Francisco

Bay Area”

by the publishers of the San Francisco Business Times/Silicon Valley Business Journal. Specifically, we added

nearly 600 new employees in FY 10 including 124 to our University Development Program, which has now expanded to our

United Kingdom and India operations.

Virtualization

Virtualization

Cloud

Cloud

Computing

Computing

Ethernet

Ethernet

Fabrics

Fabrics

FY 2011 Innovation Focus

Page 17 of 51

©

2010 Brocade Communications Systems, Inc.

The innovation theme is a useful way for me to frame the discussion of our FY 11 outlook. I do this because I believe that

the networking industry, particularly in Ethernet, has just begun a new innovation cycle that will carry us through the next

decade. This innovation boom follows a long period in the Ethernet market characterized by relatively limited and

incremental advancements, mostly around density and performance. That dynamic has been altered completely.

The drivers that necessitate this accelerated pace of innovation are virtualization and cloud computing, two very familiar

concepts in the IT world today. The networking industry has responded to these IT imperatives by inventing a new

technology category—Ethernet fabrics, which are purpose-built for highly virtualized and cloud-optimized data centers. I

am confident that Brocade will be among the leaders, if not the leader, in this category by being first to offer the most

innovative architectures, technologies, and solutions.

Let me now cover the virtualization, cloud computing and Ethernet fabric opportunities in greater depth.

FY 2011 Innovation Focus

* Source: IDC

Virtualization

Virtualization

•

•

A top IT imperative today

A top IT imperative today

•

•

70% of IT workloads will

70% of IT workloads will

run on VMs

run on VMs

by 2013*

by 2013*

•

•

Tremendous business

Tremendous business

opportunity

opportunity

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Server virtualization has been around for years but it has never captured the IT industry’s mindshare as it has recently.

The reality is that server virtualization more than lives up to its hype. Practically every customer I’ve spoken with lately

places virtualization among the very top initiatives for that organization. More importantly, these customers tell me that

although virtualization has significantly saved server resources, it has actually created significant complexity at the

networking level that needs to be addressed through new technologies and architectures. 

The complexity will only increase with time. I’ve seen recent market research from IDC that indicates that just about half of

all IT workloads will run on virtual machines by the end of this year, with that number climbing to beyond 70% by the end

of 2013. Brocade IT is actually outpacing the industry as we are already at 70% virtual workloads in our new data center.

To accommodate for this, we have architected and deployed a flat, high-performance and highly scalable data center

network that leverages products from our own portfolio. Our ability to do the same for our customers as they scale their

virtual environments will present tremendous business opportunities for Brocade in FY 11 and beyond.

FY 2011 Innovation Focus

Cloud

Cloud

Computing

Computing

•

•

Networking fundamental

Networking fundamental

to building high-functioning

to building high-functioning

clouds

clouds

•

•

Support today’s and

Support today’s and

tomorrow’s applications

tomorrow’s applications

•

•

Brocade One

Brocade One

™

™

vision

vision

for cloud-optimized networks

for cloud-optimized networks

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Building virtual data centers is just the first step in a far more ambitious journey that places a premium on highly flexible

and agile architectures, all to enable “as a service”, “on-demand” IT models. For lack of a better name, the IT industry call

this concept “cloud computing”. Call it what you will, I believe that a proper network infrastructure is fundamental to

building high-functioning clouds—public, private, hybrid, etc. This is what our Brocade One vision and strategy is about. 

Brocade recognizes that the journey to cloud IT models is inevitable but will take time, especially for enterprises. The four

Brocade One value propositions map perfectly to this reality:

•

Unmatched

simplicity:

Reducing

complexity

and

associated

costs

are

key

IT

initiatives

and

principal

motivators for moving to cloud architectures.

•

Non-stop networking:

The networks that support cloud architectures have to be high-performance and

highly reliable in order to meet the stringent service level agreements of today’s enterprises.

•

Investment

protection:

The

return

on

investment

for

moving

to

cloud

architectures

will

take

too

long

if

the

only option is to “rip and replace”

everything customers have already deployed.

•

Application optimization:

Cloud architectures need to support current and emerging applications to be

useful.

In FY 11, you can expect to hear and see a lot of announcements and messaging from us about our “cloud optimized”

technologies and products

.

FY 2011 Innovation Focus

Ethernet

Ethernet

Fabrics

Fabrics

•

•

Game-changer for

Game-changer for

virtualization

virtualization

•

•

Start of a 10-year innovation

Start of a 10-year innovation

cycle

cycle

•

•

First-to-market with Brocade

First-to-market with Brocade

VDX

VDX

™

™

6720 and Brocade

6720 and Brocade

VCS

VCS

™

™

Technology

Technology

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Both virtualization and cloud computing have created tremendous complexity in the networking environment. You might

even characterize the complexity as chaotic. However, there is a well-known saying, “out of chaos comes opportunity”.

That is how I view our investment in building new technologies, solutions, and products toward the establishment of

Ethernet fabrics. For us this has been more than a three-year process that has involved significant R&D resources. I

believe that the market opportunity in Ethernet fabrics justifies this resource investment. If we execute properly, this

market will sustain the growth of our company for many, many years. 

My confidence is largely based on the quality of our offering. That is, I flat out believe that the Brocade VDX 6720

powered by virtual cluster switching technology is best-in-class in the Ethernet fabric category. The reason for this is

simple. Ethernet fabric is highly dependent on Brocade’s core technology expertise—the building of large, always-on, any-

to-any, ultra-reliable and very high-performance networks inside data centers. Building these fabrics has made Brocade a

great company for the last 15 years, trusted by thousands of companies around the world to network and protect their

mission-critical applications and data. The same technological and business dynamics apply to the Ethernet fabric

opportunity. 

It is little wonder then why we have received such enthusiastic responses from customers we have spoken with about the

Brocade VDX 6720 and VCS technology. In fact, we have generated strong interest and have already taken orders from

some of the largest financial, energy, service provider, and high performance computing companies.

Brocade Business Fundamentals

•

Differentiate through innovation

•

Grow Ethernet business

•

Maintain SAN leadership

•

Generate more awareness

•

Continue to be top employer

of choice

•

Grow top line profitably

FY 2011 playbook for growth

* * * * * * * * * * * * * * * * * * * * * * * *

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In addition to tackling these emerging opportunities, Brocade will continue to improve on the fundamentals of our overall

business according to the FY 11 Playbook we discussed at Analyst Day. These include:

•

Differentiating

through

innovation,

a

theme

I

have

highlighted

throughout

these

comments;

•

Growing

our

Ethernet

business

by

increasing

our

foothold

in

new

customer

accounts.

With

the

new

products we have introduced in FY 10, we believe we have the opportunity to grow our share;

•

Maintaining

SAN

leadership

through

continued

innovation

and

catering

to

our

very

large

install

base.

We

believe our commitment to 16-gigabit Fibre

Channel technology should give our customers the confidence

to know that Brocade’s focus and interest in this very important business is as strong as ever;

•

Generating

more

awareness

through

marketing,

public

relations

and

social

media

for

Brocade

as

a

complete networking solutions provider in all major customer segments and across all major networking

technologies;

•

Continuing

to

be

an

employer

of

choice

through

aggressive

recruiting

efforts

of

top

talent

all

around

the

world;

•

Growing

top-line

revenue

profitably

by

accelerating

the

productivity

and

ramp

of

new

sales

resources

as

well as deploying new sales enablement programs.

In

general,

I

do

recognize

that

there

are

challenges

ahead

of

us

both

within

and

outside

of

our

control.

For

the

challenge areas within our control, I am extremely confident about our ability to execute and succeed. I for one am

looking forward to what lies ahead.

Q4 FY 2010 Financials

Richard Deranleau, CFO

****** * * * * * * * * * * * * * * * * * *** * * * * * * * * * *

****** * * * * * * * * * * * * * * * * * *** * * * * * * * * * *

****** * * * * * * * * * * * * * * * * * *** * * * * * * * * * *

****** * * * * * * * * * * * * * * * * * *** * * * * * * * * * *

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2010 Brocade Communications Systems, Inc.

Prepared comments provided by Richard Deranleau, CFO

Financial Highlights

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

Q4 10 execution drives improved performance

Q4 10

FY 10

Revenues

Overall revenue

$550M +9% Qtr./Qtr.

$2,094M +7% Yr./Yr.

SAN revenue

+8% Qtr./Qtr.

+4% Yr./Yr.

Ethernet revenue

+17% Qtr./Qtr.

+15% Yr./Yr.

Profitability

Non-GAAP EPS* (diluted)

$0.14 +$.01 Qtr./Qtr.

$0.59 +$.06 Yr./Yr.

GAAP EPS (diluted)

$0.05 unchanged

Qtr./Qtr.

$0.25 vs. loss of $0.20

in FY 09

Generating Cash/Reducing Debt

Operating cash flow

$106M

$299M

Non-mandatory debt payments

$25M

$125M

Term loan down to $351M at end of Q4 10

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Brocade executed well in Q4, growing revenues 9.3% Qtr./Qtr. and 5.5% Yr./Yr. to an all-time record $550M. Ethernet

revenues were also an all-time record in Q4, led by growth in the Americas and APAC regions. The growth in revenues

resulted in improving gross margins and operating margins for the quarter on a sequential basis. Non-GAAP earnings per

share on a diluted basis was $0.14 for Q4. We also generated $106M in operating cash flow that we used to pay down

our term loan and to build our cash balance.

For FY 10, we grew revenues 7.2% achieving record annual revenues of $2.094B, resulting in non-GAAP EPS of $0.59

and generating nearly $300M in cash from operations. I am also pleased with recent awards given to our team by the

Association for Financial Professionals including the 2010 Pinnacle Grand Prize which recognizes excellence in treasury

and finance. I’ll expand on all these points in my remarks today.

Key Financial Metrics

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

FY 09

FY 10

Revenue

$522M

$539M

$501M

$504M

$550M

$1,953M

$2,094M

Sequential growth

5.8%

3.4%

(7.1)%

.5%

9.3%

Year-over-year growth

30.9%

(2)

25.0%

(2)

(1.1)%

2.1%

5.5%

33.1%

7.2%

Non-GAAP gross margin*

(1)

65.6%

64.9%

62.7%

60.4%

62.3%

64.1%

62.6%

Non-GAAP operating margin*

22.7%

26.0%

20.5%

17.3%

20.4%

21.8%

21.1%

Non-GAAP EPS*—diluted

$0.15

$0.19

$0.13

$0.13

$0.14

$0.53

$0.59

GAAP EPS—diluted**

$0.07

$0.11

$0.05

$0.05

$0.05

($0.20)

$0.25

(1)

Adjusted to reflect the reclassification of system engineer costs from cost of revenues to sales and marketing expenses

(2)

Acquisition of Foundry in December 2008

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

** Note: Adjusted due to adoption of update to ASC 470-20 relating to convertible debt instruments

Record revenue in Q4 and FY 10 drive EPS growth

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Turning first to revenues, Q4 revenues were $550.4M in a quarter where we experienced strong demand across all of our business segments.

Revenues came in at the high end of the guidance we provided on our Q3 earnings call. 

SAN product revenues were up 7.9% sequentially driven by higher director and server sales, which were up 13.7% and 17.8% respectively. Ethernet

product revenues were up 16.8% sequentially driven by growth in the Americas and APAC regions. As Mike mentioned, we continue to be pleased

with the performance and growth in our new accounts, specifically in the Americas and APAC regions. Global Services revenues were up 3.6%

sequentially driven by higher support and maintenance revenues. OEM inventory levels exiting the quarter were up slightly as OEMs prepared for the

end of the calendar year. Based on forward looking demand, we estimate that our partners’ weeks-on-hand inventory is currently at just under 2.5

weeks exiting Q4. 

Non-GAAP gross margins of 62.3% were up 190 basis points sequentially. The increase in gross margins was principally driven by the increase in

revenues and lower period costs in the quarter. Our reported gross margins in Q4 10 and for FY 10 now reflect the change in reporting of System

Engineering (SE) spending as discussed at our Analyst Day on September 15.  During Q4 10, we reviewed our cost classification, primarily related to

our SE costs that were previously classified within cost of revenues. The SE’s primary role has over time migrated from assisting with customer

support to primarily performing pre-sales activity to generate future business. As a result of this review, we have reclassified the SE costs within our

Consolidated Statements of Operations starting in FY 10. These costs are now presented within sales and marketing expenses, as opposed to cost of

revenues. This reclassification did not impact revenue, income from operations, net income, or earnings per share for FY 10. This should also help in

peer comparison analysis of non-GAAP gross margin. We will provide a detailed gross margin bridge for Q4 10 and FY 10 by segment later in the

presentation.

Non-GAAP operating margins were 20.4%. The sequential improvement in operating margin was driven by higher gross margins and operating

leverage as we achieved the high end of our revenue guidance for the quarter. Non-GAAP operating expenses grew slower than revenue in Q4 and

were down slightly as a percentage of revenue to 41.9%. The increase in operating expense dollars in the quarter was primarily driven by our

investments in Ethernet sales and marketing. We hired approximately 130 incremental employees during the quarter.

The Q4 10 effective non-GAAP tax rate was 23.2% and effective GAAP tax rate was 20.4%. The FY 10 effective non-GAAP tax rate was 18.9% and

effective GAAP tax benefit was negative 7.9%. Both full-year tax rates reflect the benefit that we received in Q3 as we completed various tax audits

with the US Federal Government and the State of California, which resulted in a more favorable outcome than expected in our tax reserve position. 

Looking to the Balance Sheet, Brocade repaid $30.2M of our senior secured debt, of which $25.0M was in excess of the mandatory amount due,

bringing our acquisition term debt down to approximately $350M. Total diluted shares were within our expected range for Q4 at 485.7M shares. We

did not repurchase any stock during the quarter.

Revenue: SAN, Ethernet, and Global Services

Diversified business model will help enable long-term growth

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Turning to revenues by business unit, we saw growth across all segments in Q4.  Our SAN product revenue was $315.8M

in the quarter, an improvement of 3.9% Yr./Yr. and up 7.9% sequentially. SAN represented 57% of revenues in Q4 versus

58% in Q3. 

Our Ethernet product revenue was $142.6M in the quarter, an improvement of 11.0% Yr./Yr. and up 16.8% sequentially.

Ethernet product revenue represented 26% of total revenue versus 24% in Q3. 

Our Global Services revenue was $92.0M in the quarter, and represented 17% of revenues, down slightly versus 18% in

Q3. Global Services revenue was up 3.0% Yr./Yr. and was up 3.6% sequentially. 

Total Ethernet Business Revenue

Record revenue in Q4 10 Ethernet business

$151.0

$124.6

$156.7

$149.5

$170.5

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Looking at our Ethernet business, including hardware and Ethernet based support and services, Q4 revenue of $170.5M

grew 12.9% Yr./Yr. and was up 14.1% from Q3.  Again, this was an all-time record quarter for our Ethernet business.

The Ethernet business growth was driven by strong sequential performances in our Americas and APAC regions, with

Japan remaining flat and EMEA down slightly. Both Americas and APAC regions saw Ethernet product revenue growth

greater than 20% sequentially. We saw good growth in our new accounts with both initial sales in the quarter as well as

new customers from previous quarters returning and buying again. Revenue from our net new Ethernet accounts,

including repeat customers, exceeded $30M in the quarter.  

From an Ethernet product standpoint, we saw strong demand for our Brocade MLX/MLXe products with 22% sequential

growth and for our FastIron CX products with 27% growth compared to Q3.  We are pleased with the ramp of the Brocade

MLXe and 8 x 10 GbE blades and our manufacturing capacity was sufficient to meet the demand for these new products

in the quarter.  

Ethernet ASP sequential declines were in the low single-digits, better than the Q4 guidance.

Total Ethernet Business Revenue

By customer segment

$151.0

$124.6

$156.7

$149.5

$170.5

Q4 10 and FY 10 saw good growth across all Ethernet segments

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2010 Brocade Communications Systems, Inc.

We were also very pleased with our Service Provider performance and Enterprise growth in Q4 and in FY 10. Customers

that we have identified as service providers grew to now represent 25% of total Ethernet business and grew 32%

sequentially and 32% in FY 10 compared to FY 09.  Enterprise customers, excluding Federal, also saw double-digit

sequential growth in Q4 as well as 17% growth in FY 10 versus FY 09. Federal Ethernet business was up 7% sequentially

in a typically strong quarter.

Total SAN Business Revenue

Fibre

Channel market remains healthy

$370.8

$414.8

$344.3

$354.0

$379.9

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Looking at our SAN business, including hardware and SAN based support and services, Q4 revenue of $379.9M grew

2.5% Yr./Yr. and was up 7.3% from Q3. 

Our SAN product revenue was $315.8M in the quarter, an improvement of 3.9% Yr./Yr. and up 7.9% sequentially.

Demand for our leading SAN products was strong in what is typically a seasonally strong quarter. Increases in revenue

across our director and server product families drove the overall SAN increase Qtr./Qtr. Based on our internal analysis,

we believe we gained share in Q4.

Our Server product group, consisting of embedded switches, HBAs, CNAs, and mezzanine cards, posted revenue of

$46.6M which was up 24% Yr./Yr. and up 18% from our Q3. Embedded switches were up 18% sequentially while our of

CNAs, HBAs and mezzanine cards were up 154% Yr./Yr. CNAs represented more than 10% of our adapter products

revenue.

SAN ASP sequential declines were in the low single-digits, consistent with the prior quarter.

Revenue: 10% Customers,

Other OEM, Channel/Direct

Increases in Channel/Direct reflect investments and focus

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2010 Brocade Communications Systems, Inc.

In Q4, consistent with the prior quarter, Brocade had three customers that had revenue greater than 10%. EMC, IBM and

HP all contributed more than 10% of revenues individually. Collectively, our top 3 OEMs contributed 44% of revenues in

Q4, no change versus Q3, and down from 46% in Q4 09. Other OEMs represented 17% of revenues in Q4 versus 20% in

Q3. Channel and Direct were 39% of revenues in Q4, an increase from 36% in Q3 as we continue to build out our channel

and direct sales teams. 

Company Non-GAAP Gross Margins*

Brocade gross margins excluding SE spending

(1)

Adjusted to reflect the reclassification of system engineer costs from cost of revenues to sales and marketing expenses

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

Q4 10 shows initial steps in long-term gross margin expansion plan

(1)

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2010 Brocade Communications Systems, Inc.

As we mentioned at our Analyst Day in September, we planned to make a change in reporting our SE costs in November.

The adjustment to COGS in FY 10 is consistent with the sizing we provided at our Analyst Day.

Non-GAAP gross margins in Q4 were 62.3%, which were up approximately 190 basis points Qtr./Qtr. and reflected

improvements in gross margins across all of our business segments.

FY 10 non-GAAP gross margins were 62.6%, consistent with our previous guidance, and were down 150 basis points

compared to FY 09. The reduction in company gross margins in FY 10 is reflective of a mix of revenue towards lower

margin Ethernet products of 40 basis points and increased discounting and period cost of 110 basis points.

The SE adjustment does not impact revenue, operating margin or EPS for the current or any of the previously reported

periods.

Revenue and gross margins up sequentially across all segments

Segment Revenues and

Gross Margin Snapshot

Q4 vs. Q3 revenue mix and non-GAAP gross margin*

(1) Adjusted to reflect the reclassification of system engineer costs from cost of revenues to sales and marketing expenses

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

Q3 10

Q4 10

SE Spending

Revenues by Segment ($M)

Non-GAAP Gross Margin*

by Segment

65.4%

39.4%

49.5%

8.9%

3.9%

5.9%

63.5%

35.5%

48.9%

4.2%

(1)

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2010 Brocade Communications Systems, Inc.

Q4 SAN gross margins, were 71.4% up from 69.4% in Q3. The higher SAN gross margins were driven by a higher

volumes and a higher mix of Director products in the quarter. The impact of higher SAN gross margins on overall

company gross margins was approximately +115 basis points in Q4. This was partially offset by higher mix of Ethernet

products at an overall company level which decreased margins by approximately 25 basis points. 

Q4 Ethernet non-GAAP gross margins were 47.8%, up from 44.4% in Q3. The higher Ethernet gross margins were

primarily driven by higher volumes and lower inventory reserve charges in the quarter. The impact of higher Ethernet

gross margins on overall company gross margins was approximately +90 basis points in Q4. 

Global Services non-GAAP gross margins were 53.7% in Q4, an improvement versus 52.8% in Q3.

Ethernet Non-GAAP Gross Margin* Detail

Qtr./Qtr. bridge

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

** New product costs impact includes all product cost savings and mix impact

Q3 10

Q4 10

Pricing

Volumes

Inventory

Mgmt

New

Product 

Costs**

+2.2%

+1.3%

+1.6%

-1.7%

Making progress towards Ethernet gross margin expansion plan

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2010 Brocade Communications Systems, Inc.

Ethernet product gross margins, on a non-GAAP basis, were 47.8% in Q4. Ethernet gross margins were higher

sequentially driven primarily by lower inventory reserves taken in Q4 (2.2 pts) and higher volumes which improved the

fixed cost absorption (1.6 pts). Impact to gross margins due to pricing was offset by cost takedowns in the quarter. 

We are pleased with improvement in the Ethernet non-GAAP gross margins in Q4 and feel that we have made some

positive strides on our gross margin initiatives outlined during our Analyst Day. We would expect the volume benefit to be

slightly lower in Q1 11 as the Federal business is seasonally down from Q4 to Q1, which offsets expected growth in our

other Ethernet segments.

Operating Expenses and Margins

Non-GAAP Operating Margins*

Non-GAAP Operating Expenses*

(1)

as a Percentage of Revenues

2 Yr target operating expense range: 43–44%

Leveraged model delivered operating margins above Target Model in Q4 10

2 Yr target operating

margin range: 17–20%

(1)  Adjusted to reflect the reclassification of system engineer costs from cost of revenues to sales and marketing expenses

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

©

2010 Brocade Communications Systems, Inc.

Page 33 of 51

While increasing our investment in sales headcount, we continued to focus on controlling spending in non-sales functional

areas. On a non-GAAP basis, total operating expenses were 41.9% of revenues in Q4 versus 43.1% in Q3. Operating

expenses were better than our 2-year target model of 43% to 44% of revenues. The dollar increase in operating expense

sequentially reflects the investment in our sales organization made in Q3 as well as Q4. We added approximately 130

headcount in Q4, of which the majority was in sales. 

Non-GAAP operating margins increased on a sequential basis to 20.4% in Q4 from Q3 operating margins of 17.3%,

primarily due to our higher gross margins and operating leverage from the higher revenue.

Balance Sheet and Cash Flow Highlights

as of October 30, 2010

Cash flows enable de-leveraging and reinvestment

* Note: Adjusted EBITDA is as defined in the term debt credit agreement

** Note: Giving effect to the McDATA

convertible debt of $173M repaid on February 16, 2010

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Cash from operations

$155.3M

$69.1M

$67.7M

$55.3M

$106.4M

Campus capital expenditures

$28M

$31M

$42M

$24M

$22M

Operating capital expenditures

$17M

$17M

$20M

$23M

$24M

Free cash flow

$110M

$22M

$6M

$9M

$61M

Cash, equivalents, and

short term investments

$339M

$328M**

$290M

$296M

$336M

Debt payments

$57.9M

$506.5M

$202.2M

$30.6M

$30.2M

Senior secured debt

$0.95B

$1.04B

$1.01B

$0.99B

$0.96B

Adjusted EBITDA*

$130.0M

$154.7M

$116.4M

$101.5M

$127.7M

Stock repurchase

$0

$0

$20M

$5M

$0

Senior secured leverage ratio

1.87x

1.99x

1.95x

1.97x

1.92x

Covenant

2.3x

2.5x

2.5x

2.5x

2.5x

Fixed charge coverage ratio

2.1x

2.0x

1.8x

1.7x

1.7x

Covenant

1.25x

1.25x

1.25x

1.25x

1.25x

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2010 Brocade Communications Systems, Inc.

Cash from operations was $106M in Q4, which is typically a strong seasonal quarter for cash generation. Total capital

expenditures in the quarter were $46M, composed of $22M for the campus, which was completed and occupied during

Q3, and $24M for operations. Free cash flow was $61M in the quarter. With the exception of some small payments

remaining in FY 11, the campus project is complete. As a result, we expect an incremental cash generation of

approximately $125 million in FY 11 compared to FY 10 via capital expenditures and rent expense savings. 

For FY 10, we generated $299M in cash from operations. Some of the primary uses of the cash flow this year were payin

off the $173M McData convertible bonds in February, paying down $148M of the term debt associated with the Foundry

acquisition, and repurchasing $25M of stock.

Adjusted EBITDA in the quarter was $127.7M, which was up from the Q3 level of $101.5M. The Sr. Secured Leverage

Ratio of 1.92 x and the Fixed Charge Coverage Ratio of 1.68 x are both well within the covenant requirements of our term

credit agreement. 

Brocade did not repurchase stock during the quarter.

Net Debt:

Defined as Total Debt Less Total Cash

Net-debt decreased by $158M year-over-year

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2010 Brocade Communications Systems, Inc.

Cash and equivalents grew to $336M, up from $296M in Q3. In Q4, we reduced our debt principal by $30.2M including

$25.0M in excess of the mandatory payment.

Since acquiring Foundry last year, Brocade has steadily reduced Net Debt, defined as total debt less total cash,

equivalents and short-term investments. Net Debt has declined from $1,073M at the end of Q1 09 to $624M at the end of

Q4 10, a $449M reduction. Our term debt loan balance is now down to nearly $350M.

Selected Metrics

* Note: Return on Equity = Non-GAAP net income/total stockholders equity

Please see Non-GAAP reconciliation in appendix

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Return on Equity was 3.2%, flat with Q3. Days Sales Outstanding (DSO) was 54 days, unchanged from Q3. Inventories

turned 14 times, which was an improvement from Q3 turns of 12.

Q1 2011 Planning Assumptions

IT market conditions

•

Macro economic challenges; GDP outlook has come down

•

Continued recovery in US but cautious regarding international IT

spending

(EMEA, Japan, and possibly China)

•

Federal spending and budget timing uncertainty

•

Expect to grow with market in SAN

•

Expect to grow at least with market in Ethernet

ASP trends

•

Low single-digit declines in SAN pricing

•

Low to mid single-digit declines in Ethernet pricing

Taxes

•

Rates return to blended worldwide statutory rate for FY 11

•

Rate does not assume R&D tax credit, which could result in ~3% benefit if passed

OEM inventories

•

Expect to come down slightly exiting Q1, consistent with seasonal trends

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Now, as we look forward to Q1 11, here are some things to consider in developing your financial models:

•

We continue to look at GDP and IT spending forecasts for next quarter and next year. Our current GDP growth

assumptions have not changed since Analyst Day. The World Bank assumes that the global GDP growth will be

3.3% in 2011, but called out risk specifically in international economies.

•

We continue to monitor the health of international markets, specifically Europe, Japan, and China.

•

We are cognizant of the change in leadership in the US Congress and the potential impacts on the timing and size

of the appropriation bills for this year. We believe that this uncertainty will create gridlock and have a negative

affect on our Federal business for our Q1 11, consistent with the negative impact we experienced in Q1 10 when

the Federal budget was delayed.

•

We anticipate that the new Brocade VDX and VCS products will have a minimal impact to revenue/gross margin in

Q1 as they were launched on November 15.

•

We expect quarterly ASP declines in our SAN business to remain in the low single-digits. ASP declines in our

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

•

From a tax rate perspective, we do not forecast discrete events due to the inherent uncertainty of their timing. Our

current tax rate outlook does not include the Federal R&D tax credit that is pending Congressional approval.

•

Regarding OEM inventory, we would expect OEM inventory levels to decline slightly in absolute dollar terms exiting

Q1 11, given that we would be heading into our seasonally weak Q2. 

Q1 2011 Financial Outlook: Revenue

As of November 22, 2010

Continued growth in non-Federal business; Federal budget uncertainty

Q4 10

Q1 11

Qtr./Qtr. Growth

Revenue

$550M

$535M–$550M

-3% to Flat

Revenue (excluding  

Federal Ethernet)

$511M

$520M–$530M

2% to 4%

Federal Ethernet

$39M

$15M–$20M

-62% to -50%

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After the recent US elections and the current uncertainty in Congress with the FY 11 Federal appropriations bill, we are

assuming that our Federal Ethernet business will decline sequentially in Q1 11 at a similar rate that we saw in Q1 10

(down 62%) when the FY 10 appropriation bill signing was delayed. This would result in a sequential decline of

approximately $20M to $25M in revenue for our Federal business, and offset expected sequential growth in our non-

Federal Ethernet business.  

Regarding OEM SAN inventories, we would normally expect to see OEMs reduce their inventories as they approach the

Q2/Q3 seasonally slow period of the year.  As you may recall, due to overall industry concerns about supply chain

constraints in the January 2010 time frame, we saw our OEM postpone their seasonal adjustment of SAN inventory until

our fiscal Q2 10. This year as there are no supply chain capacity concerns, we would expect our OEMs to seasonally

adjust their SAN inventories at the end our fiscal Q1, which will reduce our sequential growth rates below our historical

seasonality of 6% to 8%.  

Based on these assumptions we anticipate our total company revenue in Q1 11 to be in the range of $535M to $550M,

roughly flat to down 3% Qtr./Qtr. Excluding the impact of the Federal business, our revenue outlook in Q1 11 would be up

2% to 4% Qtr./Qtr. and would be similar to the historical seasonality of up 6% to 8% from a sell through perspective.   

Q1 2011 Financial Outlook: Other

As of November 22, 2010

* Note: Non-GAAP estimates assume exclusion of the same category of items excluded from Q4 10 non-GAAP results

Q1 11

Non-GAAP gross margin*

61.5%–62.0%

Non-GAAP operating expenses*

46%–47%

Non-GAAP operating margin*

15%–16%

Other income/other expense

($20M–$21M)

Non-GAAP tax rate*

27%–28%

Fully diluted shares outstanding

490M–493M

Non-GAAP EPS*

$0.09–$0.10

Operating cash flow

$60M–$70M

Capital expenditures

$32M–$34M

Free cash flow

$28M–$36M

Investing to drive top line growth

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Given these  planning assumptions, in Q1 11 we expect: 

•

Non-GAAP gross margins to be 61.5% to 62.0% 

•

Non-GAAP operating expenses to be 46% to 47%

•

Non-GAAP operating margins to be 15% to 16%

•

Other income/expense net to be ($20M) to ($21M) 

•

Non-GAAP tax rate to be 27% to 28% 

•

Diluted shares outstanding to be in a range of 490M to 493M shares

•

Non-GAAP EPS to be in a range from 9 cents to 10 cents 

•

Operating cash flow of $60M to $70M

•

Capital expenditures of $32M to $34M

•

Free cash flow of $28M to $36M

Financial Summary

Richard Deranleau, CFO

*

*

*

*

*

*

*

*

*

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To summarize from a financial perspective, we are pleased with a very strong Q4 performance and improving profitability

as we exit FY 10. The expansion in Ethernet revenues is the result of our refocused Ethernet go-to-market strategy. We

continue to strengthen our balance sheet by reducing our debt at a faster rate than outlined by our credit agreement. 

Our goals for FY 11 are:

•

Drive top line company revenue profitably 

•

Gain market share in Ethernet

•

Improve Ethernet gross margins

•

Maintain SAN leadership

•

Operate within financial model

We are looking forward to answering your questions in the Q&A session of our conference call.

Jason Nolet

VP Data Center

and Enterprise

Networking

Live Q&A Call

November 22, 2010, 2:30PM Pacific Time

Richard

Deranleau

CFO

John McHugh

CMO

Ian Whiting

SVP WW Sales

Mike Klayko

CEO

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Prepared comments provided by Rob Eggers, Investor Relations

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

Brocade will host a webcast 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.

Appendix and Reconciliations

*

*

*

*

*

*

*

*

*

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Non-GAAP Gross Margin* Bridge

Breakout by Business Unit by Quarter

Adjustment for SEs

in 2010

(1)

(1)

Adjusted to reflect the reclassification of system engineer costs from cost of revenues to sales and marketing expenses

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

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Quarterly Net Income

GAAP/Non-GAAP Reconciliation

* Adjusted as a result of adoption of update to ASC 470-20 relating to accounting for convertible debt instruments

(In Thousands)

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Net income on a GAAP basis*

32,101

51,095

22,380

21,961

23,416

Adjustments:

Legal fees associated with indemnification obligations

and other related expenses, net

(14,612)

301

277

(74)

(666)

Stock-based compensation expense

35,715

21,523

30,146

24,682

25,275

Amortization of intangible assets

34,950

34,902

30,657

30,657

30,657

Acquisition and integration costs

333

204

–

–

–

Loss on sale of property

–

8,783

(47)

–

–

Restructuring costs and facilities lease loss

–

–

–

–

1,059

Legal fees associated with certain pre-acquisition litigation

546

299

17

13

243

Provision for certain pre-acquisition litigation

14,335

–

–

1,604

–

Interest due to adoption of new standard*

2,085

2,142

348

–

–

Income tax effect of adjustments

(32,091)

(25,239)

(21,044)

(15,217)

(13,975)

Non-GAAP net income

73,362

94,010

62,734

63,626

66,009

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Capital Expenditures

* Note: Excludes furniture and equipment leases of approximately

$13M

Forecast

Campus completed, remaining capital spend in FY 11 expected to be nominal

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Adjusted EBITDA and Sr. Secured Leverage Ratio

As defined in the term credit agreement

Consolidated Senior Secured Leverage Ratio

Q1 FY 10

Q2 FY 10

Q3 FY 10

Q4 FY 10

$ Thousand

Actual

Actual

Actual

Actual

Consolidated Net Income

$51,095

$22,380

$21,961

$23,416

plus

(i) Consolidated Interest Charges

$22,073

$19,522

$22,061

$22,202

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

$1,277

$0

$0

$5,988

(iii) Depreciation and amortization expense

$51,012

$46,600

$50,493

$51,532

(iv) Fees, costs and expenses incurred on or prior to the Acquisition Closing Date in connection

with the Acquisition and the financing thereof

–

–

$0

$0

(v) Any cash restructuring charges and integration costs in connection with the Acquisition, in an

aggregate amount not to exceed $75,000,000

$204

$0

$0

$0

(vi) Non-cash restructuring charges incurred in connection with the Transaction, all as approved

by Arrangers

$1,502

$1,084

$1,006

$930

(vii) 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)

$8,783

($47)

$0

$574

(viii) 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

$21,523

$30,146

$24,682

$25,275

(ix)

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

$250

724

376

$22

minus

(i)

Federal, state, local and foreign income tax credits

$0

($840)

($15,096)

$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)

($3,036)

($3,127)

($4,026)

($2,212)

Consolidated EBITDA

$154,683

$116,442

$101,457

$127,727

4 Quarter Trailing Consolidated EBITDA

$523,861

$520,429

$502,567

$500,309

Consolidated Senior Secured Debt

$1,041,483

$1,015,957

$989,803

$959,491

Consolidated Senior Secured Leverage Ratio

1.99

1.95

1.97

1.92

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Q4 FY 2010 Cash and Debt Covenant

Adjusted EBITDA* Performance

(In Millions)

Strong Capital Structure

(In Millions)

Within Debt Covenant

Cash Balance**

(In Millions)

* Note: Adjusted EBITDA is as defined in the term debt credit agreement              ** Cash, equivalents and short term investments

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2010 Share Repurchases

•

Company has remaining Board authorization of $389M

•

Brocade can repurchase an additional $75M under the terms of the

Term Debt Agreement if the Senior Secured Leverage Ratio is under 2.0

Amount

Shares

Total repurchases in 2010

$25M

4.4M

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Domestic and International

Reported Revenue

Reported revenue on a ship-to basis

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Segment Revenue Detail

Product segment as a percent of revenue

Q4 10

Q3 10

Q4 09

SAN Business

Directors

37%

35%

42%

Switches

48%

51%

46%

Server

15%

14%

12%

Ethernet Business

Chassis

63%

65%

70%

Stackables

37%

35%

30%

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Thank You

www.brcd.com

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