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Brocade Communications Systems, Inc. (Brocade) reported today financial results for its third quarter of fiscal year 2004 (Q3 04) which ended July 31, 2004. Net revenues for Q3 04 were $150.0 million, an increase of three percent from $145.6 million reported in the second quarter of fiscal year 2004 (Q2 04) and an increase of 12 percent from $133.5 million reported in the third quarter of fiscal 2003 (Q3 03). Non-GAAP net income for Q3 04 was $15.2 million, or $0.06 per share, as compared to non-GAAP net income of $8.1 million, or $0.03 per share, reported in Q2 04 and non-GAAP net income of $2.1 million, or $0.01 per share, reported in Q3 03. Non-GAAP net income for Q3 04 excludes deferred stock compensation expense related to Rhapsody Networks, Inc. (Rhapsody), gains related to repurchases of the Company's convertible subordinated debt, and gains on the disposition of private strategic investments. Non-GAAP net income for Q2 04 excludes restructuring charges, settlement cost of a claim associated with the acquisition of Rhapsody, deferred stock compensation expense related to Rhapsody, and gains on the disposition of private strategic investments. Non-GAAP net income for Q3 03 excludes restructuring charges, deferred stock compensation expense related to the acquisition of Rhapsody, and gains on the disposition of private strategic investments. A reconciliation between GAAP and non-GAAP net income (loss) is contained in the tables below. Reporting on a GAAP basis, net income for Q3 04 was $17.0 million, or $0.06 per share diluted, $0.07 per share basic. This compares to GAAP net loss for Q2 04 of $2.0 million, or $(0.01) per share basic and diluted, and GAAP net income for Q3 03 of $1.9 million, or $0.01 per share basic and diluted. "I'm pleased to report another quarter of strong execution towards achieving our long-term strategy. The positive affects of our operational excellence program are clearly accelerating the improvement in our business model objectives," said Greg Reyes, Brocade Chairman and CEO. "During the quarter, we continued the rollout of our refreshed and expanded product lines, achieved broad adoption with key OEM partners, and experienced a growing number of Director-class SAN wins within the enterprise market segment." Brocade also announced today that its board of directors has approved a share repurchase program for up to $100 million of its common stock. Purchases may be made, from time to time, in the open market and will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the level of Brocade's cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Q3 04 Financial Highlights * Q3 04 net revenues of $150.0 million, an increase of 3% from Q204 and an increase of 12% from Q3 03 * Q3 04 gross margin increased to 57.2%, an improvement from 55.3% in Q204 and 54.1% in Q3 03 * Q3 04 operating margin increased to 12.5% from negative 5.4% in Q2 04. * Q3 04 operating expenses were $67.1 million compared to $88.4 million in Q2 04. * Non-GAAP earnings per share (EPS) was $0.06 for Q3 04, an improvement from $0.03 in Q2 04 and $0.01 in Q3 03 * Excluding the impact of cash used for prior quarter restructuring, Q3 04 cash flow from operations was $22.3 million, compared to $36.5 million in Q2 04. * Cash and investments as of the end of Q3 04 totaled $757.3 million. * Cash and investments, net of our convertible debt and unsettled debt repurchase of $26.3 million was $348.9 million in Q3 04 compared to $331.6 million in Q2 04 * Q3 04 day sales outstanding in accounts receivable were 55 days, compared with 53 days in Q2 04 and 52 days in Q3 03 * Deferred revenue was $29.0 million in Q3 04 compared to $28.4 million in Q2 04. During Q3'04, Brocade purchased on the open market $47.4 million face value of its two percent convertible subordinated notes. Brocade paid an average of $0.915 on each dollar of face value for an aggregate cash purchase price of $43.4 million, which resulted in a pre-tax gain of $3.5 million. As of July 31, 2004, the remaining convertible debt outstanding was $386.3 million. Q3 04 Business Highlights In announcements made during the quarter, Brocade showed significant progress in executing on its strategy to serve the entry- mid-range and enterprise segments of the SAN market by expanding its product line and offering new capabilities to its customers. Highlights of these announcements include: * Collaboration with EMC Corporation to bring to market a pre-configured, entry-level networked storage solution based on the new EMC CLARiiON AX100 storage system and Brocade SilkWorm 3250 8-port Fibre Channel switch. * Availability of a Brocade SAN Switch Module for the IBM eServer Blade Center. This high-performance, 16-port fabric switch enables seamless integration of high-density bladed servers into computing environments. * General availability of the SilkWorm Multiprotocol Router, an intelligent switching platform service that provides unique routing services for local and long-distance connectivity and data sharing across separate SANs. * Several Director-class switch installations with international customers, including upgraded and expanded SANs with Dassault Aviation, ItecPlus GmbH, Vodafone Information Systems, and ZF Friedrichshafen AG. * Selection of Brocade SAN products for use in the four U.S. Microsoft Technology Centers, used by Microsoft customers to develop, test and validate the deployment of SAN enabled, Windows(R) .Net solutions. Brocade also announced the addition of two members to its Board of Directors, Sanjay Vaswani, a partner at the Center for Corporate Innovation and William K. O'Brien, CEO of Enterasys Networks; achieved listing in the "Leaders Quadrant" of the Storage Area Network Fibre Channel Switch Magic Quadrant report published by Gartner, Inc.; and received two U.S. patents for Fibre Channel technology innovations. Conference Call Brocade will host a conference call on Wednesday, August 18, 2004, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time to discuss its third quarter of fiscal year 2004 results. The conference call will be webcast live via the Internet at www.brocade.com/investors. A replay of the conference call will be available via webcast for twelve months at www.brocade.com/investors.