BROCADE COMMUNICATIONS SYSTEMS INC - FORM 10-Q

BROCADE COMMUNICATIONS SYSTEMS INC - FORM 10-Q - March 4, 2016

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Attached files

BROCADE COMMUNICATIONS SYSTEMS INC Reports

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EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER - BROCADE COMMUNICATIONS SYSTEMS INC	brcd-10qxfy16q1xex321.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - BROCADE COMMUNICATIONS SYSTEMS INC	brcd-10qxfy16q1xex312.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - BROCADE COMMUNICATIONS SYSTEMS INC	brcd-10qxfy16q1xex311.htm
EX-10.2 - FORM OF 2009 STOCK PLAN RESTRICTED STOCK UNIT AGREEMENT FY16 PERFORMANCE STOCK - BROCADE COMMUNICATIONS SYSTEMS INC	brcd-10qxfy16q1xex102.htm
EX-10.1 - AMENDMENT NUMBER 50 TO SOW NUMBER 1 OF THE GOODS AGREEMENT WITH IBM - BROCADE COMMUNICATIONS SYSTEMS INC	brcd-10qxfy16q1xex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-25601

Brocade Communications Systems, Inc.

(Exact name of registrant as specified in its charter)



Delaware		77-0409517
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

130 Holger Way

San Jose, CA 95134-1376

(408) 333-8000

(Address, including zip code, of principal

executive offices and registrant’s telephone

number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as of February 26, 2016, was 400,629,143 shares.

BROCADE COMMUNICATIONS SYSTEMS, INC.

FORM 10-Q

For the Quarter Ended January 30, 2016

TABLE OF CONTENTS



		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Statements of Income for the Three Months Ended January 30, 2016, and January 31, 2015	1

	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended January 30, 2016, and January 31, 2015	2

	Condensed Consolidated Balance Sheets as of January 30, 2016, and October 31, 2015	3

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended January 30, 2016, and January 31, 2015	4

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

SIGNATURES		54

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and future results. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding future revenue, margins, expenses, tax provisions, tax treatment, earnings, cash flows, benefit obligations, debt repayments, stock repurchases, or other financial items; any statements of the plans, strategies, and objectives of management for future operations, including planned investments or acquisitions; any statements concerning expected development, performance, success, market conditions, or market share relating to products or services; any statements regarding future economic conditions or performance; any statements regarding pending litigation, including claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Words such as “expects,” “anticipates,” “assumes,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which Brocade operates, and the beliefs and assumptions of management. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II—Other Information, Item 1A. Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Furthermore, Brocade undertakes no obligation to revise or update any forward-looking statements for any reason.

Additional Information

Brocade and the B-wing symbol are registered trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. Other brands, products, or service names mentioned may be trademarks of Brocade or others.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended
	January 30, 2016			January 31, 2015
	(In thousands, except per share amounts)
Net revenues:
Product	$	481,167		$	486,238
Service	93,117			90,001
Total net revenues	574,284			576,239
Cost of revenues:
Product	144,097			149,926
Service	41,372			36,630
Total cost of revenues	185,469			186,556
Gross margin	388,815			389,683
Operating expenses:
Research and development	93,257			85,231
Sales and marketing	151,827			140,238
General and administrative	22,429			24,671
Amortization of intangible assets	902			138
Restructuring and other related benefits	(566		)	—
Total operating expenses	267,849			250,278
Income from operations	120,966			139,405
Interest expense	(9,865		)	(25,424		)
Interest and other income (loss), net	669			(559		)
Income before income tax	111,770			113,422
Income tax expense	18,124			26,155
Net income	$	93,646		$	87,267
Net income per share—basic	$	0.23		$	0.20
Net income per share—diluted	$	0.23		$	0.20
Shares used in per share calculation—basic	407,902			428,536
Shares used in per share calculation—diluted	415,085			439,156

Cash dividends declared per share	$	0.045		$	0.035

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended
	January 30, 2016			January 31, 2015
	(In thousands)
Net income	$	93,646		$	87,267
Other comprehensive income and loss, net of tax:
Unrealized gains (losses) on cash flow hedges:
Change in unrealized gains and losses	(2,300		)	(1,774		)
Net gains and losses reclassified into earnings	626			603
Net unrealized losses on cash flow hedges	(1,674		)	(1,171		)
Foreign currency translation adjustments	(2,203		)	(4,221		)
Total other comprehensive loss	(3,877		)	(5,392		)
Total comprehensive income	$	89,769		$	81,875

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	January 30, 2016			October 31, 2015
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	1,392,009		$	1,440,882
Accounts receivable, net of allowances for doubtful accounts of $1,741 and $1,838 as of January 30, 2016, and October 31, 2015, respectively	174,757			235,883
Inventories	42,586			40,524
Deferred tax assets	—			78,675
Prepaid expenses and other current assets	51,708			56,235
Total current assets	1,661,060			1,852,199
Property and equipment, net	442,158			439,224
Goodwill	1,617,041			1,617,161
Intangible assets, net	71,290			75,623
Non-current deferred tax assets	68,968			813
Other assets	48,378			51,133
Total assets	$	3,908,895		$	4,036,153
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	74,019		$	98,143
Accrued employee compensation	112,951			142,075
Deferred revenue	228,582			244,622
Other accrued liabilities	69,287			77,524
Total current liabilities	484,839			562,364
Long-term debt, net of current portion	798,103			793,779
Non-current deferred revenue	74,571			72,065
Non-current income tax liability	47,651			47,010
Non-current deferred tax liabilities	—			24,024
Other non-current liabilities	2,538			3,376
Total liabilities	1,407,702			1,502,618
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $0.001 par value, 800,000 shares authorized:
Issued and outstanding: 402,556 and 413,923 shares as of January 30, 2016, and October 31, 2015, respectively	403			414
Additional paid-in capital	1,529,313			1,632,984
Accumulated other comprehensive loss	(28,879		)	(25,002		)
Retained earnings	1,000,356			925,139
Total stockholders’ equity	2,501,193			2,533,535
Total liabilities and stockholders’ equity	$	3,908,895		$	4,036,153

See accompanying Notes to Condensed Consolidated Financial Statements.

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

	Three Months Ended
	January 30, 2016			January 31, 2015
	(In thousands)
Cash flows from operating activities:
Net income	$	93,646		$	87,267
Adjustments to reconcile net income to net cash provided by operating activities:
Excess tax benefits from stock-based compensation	(7,352		)	(16,102		)
Depreciation and amortization	22,812			19,575
Loss on disposal of property and equipment	207			444
Amortization of debt issuance costs and debt discount	4,325			1,056
Call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing	—			15,122
Provision for doubtful accounts receivable and sales allowances	(96		)	2,403
Non-cash stock-based compensation expense	24,044			24,082
Changes in assets and liabilities, net of acquisitions:
Restricted cash	—			(11,918		)
Accounts receivable	61,222			(17,256		)
Inventories	(2,000		)	1,155
Prepaid expenses and other assets	609			(5,746		)
Deferred tax assets	16			494
Accounts payable	(23,859		)	(8,776		)
Accrued employee compensation	(38,993		)	(77,033		)
Deferred revenue	(13,535		)	(2,190		)
Other accrued liabilities	(7,991		)	(1,423		)
Restructuring liabilities	(855		)	(761		)
Net cash provided by operating activities	112,200			10,393
Cash flows from investing activities:
Purchases of property and equipment	(23,839		)	(16,514		)
Purchase of intangible assets	—			(7,750		)
Proceeds from collection of note receivable	250			250
Net cash used in investing activities	(23,589		)	(24,014		)

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

	Three Months Ended
	January 30, 2016			January 31, 2015
	(In thousands)
Cash flows from financing activities:
Payment of debt issuance costs	—			(409		)
Payment of principal related to capital leases	(83		)	(1,154		)
Common stock repurchases	(144,490		)	(128,966		)
Proceeds from issuance of common stock	19,482			21,036
Payment of cash dividends to stockholders	(18,429		)	(15,106		)
Proceeds from convertible notes	—			565,656
Purchase of convertible note hedge	—			(86,135		)
Proceeds from issuance of warrants	—			51,175
Excess tax benefits from stock-based compensation	7,352			16,102
Increase in restricted cash	—			(300,000		)
Net cash provided by (used in) financing activities	(136,168		)	122,199
Effect of exchange rate fluctuations on cash and cash equivalents	(1,316		)	(4,230		)
Net increase (decrease) in cash and cash equivalents	(48,873		)	104,348
Cash and cash equivalents, beginning of period	1,440,882			1,255,017
Cash and cash equivalents, end of period	$	1,392,009		$	1,359,365
Supplemental disclosures of cash flow information:
Cash paid for interest	$	10,891		$	17,333
Cash paid for income taxes	$	4,798		$	13,128

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Brocade Communications Systems, Inc. (“Brocade” or the “Company”) has prepared the accompanying Condensed Consolidated Financial Statements pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company’s Condensed Consolidated Balance Sheet as of October 31, 2015, was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

The accompanying Condensed Consolidated Financial Statements are unaudited but, in the opinion of the Company’s management, reflect all adjustments—including normal recurring adjustments—that management considers necessary for a fair presentation of these Condensed Consolidated Financial Statements. The results for the interim periods presented are not necessarily indicative of the results for the full fiscal year or any other future period.

The Company’s fiscal year is a 52- or 53-week period ending on the last Saturday in October or the first Saturday in November, respectively. As is customary for companies that use the 52/53-week convention, every fifth year is a 53-week year. Fiscal year 2016 is a 52-week fiscal year and fiscal year 2015 was a 52-week fiscal year. The Company’s next 53-week fiscal year will be fiscal year 2019 and its next 14-week quarter will be the second quarter of fiscal year 2019.

The Company’s Condensed Consolidated Financial Statements include the accounts of Brocade and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in Preparation of Condensed Consolidated Financial Statements

The preparation of the Company’s condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances and programs, allowance for doubtful accounts, stock-based compensation, acquisition purchase price allocations, warranty obligations, inventory valuation and purchase commitments, restructuring costs, incentive compensation, facilities lease losses, impairment of goodwill and other indefinite-lived intangible assets, litigation, income taxes, and investments. Actual results may differ materially from these estimates.

2. Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies for the three months ended January 30, 2016, as compared to those disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

New Accounting Pronouncements or Updates Recently Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, and ASC 360, Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under this update, a discontinued operation may include a component of an entity or a group of components of an entity, a business, or nonprofit activity. Only those disposals of components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. This update should be applied prospectively. The Company adopted this update in the first quarter of fiscal year 2016. There was no material impact on the Company’s financial position, results of operations, or cash flows.

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In April 2015, the FASB issued an update to ASC 835, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Under this update, debt issuance costs are required to be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. This update should be applied retrospectively to all prior periods presented in the financial statements. The Company adopted this update in the first quarter of fiscal year 2016. There was no material impact on the Company’s financial position, results of operations, or cash flows.

In September 2015, the FASB issued an update to ASC 805, Business Combinations: Simplifying the Accounting Measurement-Period Adjustments. This update simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Under this update, the adjustments are recognized in the reporting period in which the adjustment amounts are determined. This update should be applied prospectively. The Company adopted this update in the first quarter of fiscal year 2016. There was no material impact on the Company’s financial position, results of operations, or cash flows.

In November 2015, the FASB issued an update to ASC 740, Income Taxes: Balance Sheet Classification of Deferred Taxes. This update simplifies the presentation of current and noncurrent deferred tax liabilities and assets. Under this update, the deferred tax liabilities and assets are classified as noncurrent on the balance sheet. The update does not impact the current requirement that deferred tax liabilities and assets be offset and presented as a single amount. This update may be applied either prospectively or retrospectively. The Company adopted this update in the first quarter of fiscal year 2016 and has elected to apply this update prospectively. There was no material impact on the Company’s financial position, results of operations, or cash flows.

Recent Accounting Pronouncements or Updates That Are Not Yet Effective

In May 2014, the FASB issued an update to ASC 606, Revenue from Contracts with Customers, that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. This update should be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment recorded in retained earnings. In August 2015, the FASB issued an update to defer the effective date of this update by one year. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is not permitted for reporting periods before the first quarter of fiscal year 2018. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In April 2015, the FASB issued an update to ASC 350, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in Cloud Computing Arrangement. This update provides guidance on the accounting for fees paid in a cloud computing arrangement if the arrangement was determined to include a software license. This update will not change U.S. GAAP for a customer’s accounting for service contracts. This update may be applied either prospectively or retrospectively and will be adopted by the Company in the first quarter of fiscal year 2017. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.

In July 2015, the FASB issued an update to ASC 330, Inventory: Simplifying the Measurement of Inventory. Under this update, measurement of inventory is based on the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and disposal. This update does not apply to inventory that is measured using last-in, first-out or the retail inventory method. This update should be applied prospectively and will be adopted by the Company in the first quarter of fiscal year 2018. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued an update to ASC 825, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This update consists of eight provisions that provide guidance on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and prospectively for equity investments without readily determinable fair values. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted for two of the eight provisions. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued an update to ASC 842, Leases, that will supersede the existing lease guidance, including on-balance sheet recognition of operating leases for lessees. This update should be applied using a modified retrospective approach and will be adopted by the Company in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

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Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash and cash equivalents are primarily maintained at five major financial institutions. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits.

A majority of the Company’s accounts receivable balance is derived from sales to original equipment manufacturer (“OEM”) partners in the computer storage and server industry. As of January 30, 2016, one customer individually accounted for 10% of total accounts receivable and no other customers individually accounted for more than 10% of total accounts receivable. As of October 31, 2015, one customer individually accounted for 17% of total accounts receivable and no other customers individually accounted for more than 10% of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable balances. The Company has established reserves for credit losses and sales allowances.

For the three months ended January 30, 2016, two customers individually accounted for 20% and 14% of the Company’s total net revenues for a combined total of 34% of total net revenues. For the three months ended January 31, 2015, three customers individually accounted for 20%, 14%, and 10% of the Company’s total net revenues for a combined total of 44% of total net revenues.

The Company currently relies on single and limited sources for multiple key components used in the manufacture of its products. Additionally, the Company relies on multiple contract manufacturers (“CMs”) for the production of its products, including Hon Hai Precision Industry Co., Ltd. and Accton Technology Corporation. Although the Company uses standard parts and components for its products where possible, the Company’s CMs currently purchase, on the Company’s behalf, several key components used in the manufacture of products from single or limited supplier sources.

3. Acquisitions

In March 2015, the Company completed its acquisition of two businesses to strengthen its software networking portfolio. The total aggregate purchase price of the acquisitions was $96.1 million, consisting of $95.5 million in cash consideration, which is gross of $0.1 million of cash acquired as part of the acquisitions, and $0.5 million in non-cash consideration. No direct acquisition costs or integration costs were recorded for the three months ended January 30, 2016, or the three months ended January 31, 2015.

The results of operations for both acquisitions are included in the Company’s Condensed Consolidated Statements of Income from the respective dates of acquisition. The Company does not consider these acquisitions to be significant, individually or in the aggregate, to its results of operations or financial position. Therefore, the Company is not presenting pro-forma financial information of combined operations.

In connection with these acquisitions, the Company allocated the total purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition dates.

In conjunction with the acquisitions, the Company granted restricted stock unit (“RSU”) awards and cash awards to transferring or continuing employees of the acquired businesses. These awards require the employees to continue providing services to the Company for the duration of the vesting or payout periods.

The RSUs are accounted for as stock-based compensation expense and reported, as applicable, within “Cost of revenues,” “Research and development,” “Sales and marketing,” and “General and administrative” on the Company’s Condensed Consolidated Statements of Income. For the three months ended January 30, 2016, the Company recognized $0.5 million of stock-based compensation expense related to these RSU awards.

The cash awards are accounted for as employee compensation expense and reported within “Research and development” on the Company’s Condensed Consolidated Statements of Income. For the three months ended January 30, 2016, the Company recognized $1.3 million of compensation expense related to these cash awards.

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4. Goodwill and Intangible Assets

The following table summarizes goodwill activity by reportable segment during the three months ended January 30, 2016 (in thousands):



	Storage Area Networking (“SAN”) Products			Internet Protocol (“IP”) Networking Products			Global Services		Total
Balance at October 31, 2015
Goodwill	$	176,325		$	1,414,634		$	155,416	$	1,746,375
Accumulated impairment losses	—			(129,214		)	—		(129,214		)
	176,325			1,285,420			155,416		1,617,161
Tax adjustments ⁽¹⁾	(4		)	—			—		(4		)
Translation adjustments	—			(116		)	—		(116		)
Balance at January 30, 2016
Goodwill	176,321			1,414,518			155,416		1,746,255
Accumulated impairment losses	—			(129,214		)	—		(129,214		)
	$	176,321		$	1,285,304		$	155,416	$	1,617,041


⁽¹⁾	The goodwill adjustments were primarily a result of tax benefits from the exercise of stock awards of acquired companies.

The Company conducts its goodwill impairment test annually, as of the first day of the second fiscal quarter, and whenever events occur or facts and circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For the annual goodwill impairment test, the Company uses the income approach, the market approach, or a combination thereof to determine each reporting unit’s fair value. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). The market approach provides an estimate of fair value by applying various observable market-based multiples to the reporting unit’s operating results and then applying an appropriate control premium. For the fiscal year 2015 annual goodwill impairment test, the Company used a combination of approaches to estimate each reporting unit’s fair value. At the time that the fiscal year 2015 annual goodwill impairment test was performed, the Company believed that the income approach and the market approach were equally representative of a reporting unit’s fair value.

Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of its reporting units using the income approach include, among other inputs:


•	The Company’s operating forecasts;


•	The Company’s forecasted revenue growth rates; and


•	Risk-commensurate discount rates and costs of capital.

The Company’s estimates of revenues and costs are based on historical data, various internal estimates, and a variety of external sources, and are developed as part of the Company’s regular long-range planning process. The control premium used in market or combined approaches is determined by considering control premiums offered as part of the acquisitions that have occurred in market segments that are comparable with the Company’s reporting units.

Based on the results of the annual goodwill impairment analysis performed during the second fiscal quarter of 2015, the Company determined that no impairment needed to be recorded. As of January 30, 2016, no new events had occurred nor had any facts or circumstances changed since the annual goodwill impairment analysis performed during the second quarter of fiscal year 2015 that indicated that the fair values of the reporting units may be less than their current carrying amounts.

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Intangible assets other than goodwill are amortized on a straight-line basis over the following estimated remaining useful lives, unless the Company has determined these lives to be indefinite. The Company did not incur costs to renew or extend the term of any acquired finite-lived intangible assets during the three months ended January 30, 2016.

The following tables present details of the Company’s intangible assets, excluding goodwill (in thousands, except for weighted-average remaining useful life):



	January 30, 2016
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
Finite-lived intangible assets:
Trade names	$	1,090	$	471	$	619	4.23
Core/developed technology ^{(1) (2)}	51,750		11,719		40,031		3.70
Patent portfolio license ⁽³⁾	7,750		1,125		6,625		17.49
Customer relationships	23,110		3,233		19,877		6.94
Non-compete agreements	1,050		744		306		0.93
Patents with broader applications	1,040		58		982		14.13
Total finite-lived intangible assets	85,790		17,350		68,440		6.12
Indefinite-lived intangible assets, excluding goodwill:
In-process research and development (“IPR&D”) ⁽¹⁾	2,850		—		2,850
Total indefinite-lived intangible assets, excluding goodwill	2,850		—		2,850
Total intangible assets, excluding goodwill	$	88,640	$	17,350	$	71,290

	October 31, 2015
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
Finite-lived intangible assets:
Trade names	$	1,090	$	415	$	675	4.36
Core/developed technology ⁽²⁾	40,530		9,605		30,925		3.49
Patent portfolio license ⁽³⁾	7,750		849		6,901		17.74
Customer relationships	23,110		2,484		20,626		7.18
Non-compete agreements	1,050		664		386		1.17
Patents with broader applications	1,040		40		1,000		14.38
Total finite-lived intangible assets	74,570		14,057		60,513		6.55
Indefinite-lived intangible assets, excluding goodwill:
IPR&D ⁽¹⁾	15,110		—		15,110
Total indefinite-lived intangible assets, excluding goodwill	15,110		—		15,110
Total intangible assets, excluding goodwill	$	89,680	$	14,057	$	75,623

⁽¹⁾

Acquired IPR&D are intangible assets accounted for as indefinite-lived assets until the completion or abandonment of the associated research and development efforts. If the research and development efforts associated with the IPR&D are successfully completed, then the IPR&D intangible assets will be amortized over the estimated useful lives to be determined as of the date the efforts are completed. During the three months ended January 30, 2016, research and development efforts were completed on $12.3 million of the IPR&D intangible assets, and the completed IPR&D intangible assets are being amortized as Core/developed technology over an estimated useful life of five years. The research and development efforts associated with the remaining IPR&D intangible assets are expected to be completed in the second quarter of fiscal year 2016.

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⁽²⁾	During the three months ended January 30, 2016, $1.0 million of finite-lived intangible assets became fully amortized and, therefore, were removed from the balance sheet.

⁽³⁾

The patent portfolio license was assigned an estimated useful life that reflects the Company’s consumption of the expected defensive benefits related to this license to certain patents. The method of amortization for the patent portfolio license reflects the Company’s estimate of the pattern in which these expected defensive benefits will be used by the Company and is primarily based on the mix of expiration patterns of the individual patents included in the license.

The Company conducts the IPR&D impairment test annually, as of the first day of the second fiscal quarter, or when events occur or facts and circumstances indicate that it is more likely than not that the IPR&D is impaired. For the annual IPR&D impairment test, the Company elects the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the IPR&D assets is less than the carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the IPR&D assets is less than the carrying amount, then the Company conducts a quantitative analysis to determine the fair value of the IPR&D assets. If the carrying amount of the IPR&D assets exceeds the fair value, then the Company recognizes an impairment loss equal to the difference.

Based on the results of the annual IPR&D impairment analysis performed during the second fiscal quarter of 2015, the Company determined that no impairment needed to be recorded. As of January 30, 2016, no new events had occurred nor had any facts or circumstances changed since the annual IPR&D impairment analysis performed during the second quarter of fiscal year 2015 that indicated that the fair value of the IPR&D assets may be less than the current carrying amount.

The amortization of finite-lived intangible assets is included in the following line items of the Company’s Condensed Consolidated Statements of Income as follows (in thousands):



	Three Months Ended
	January 30, 2016		January 31, 2015
Cost of revenues	$	3,154	$	637
General and administrative ⁽¹⁾	277		—
Amortization of intangible assets	902		138
Total	$	4,333	$	775


⁽¹⁾	The amortization is related to the $7.8 million of perpetual, nonexclusive license to certain patents purchased during the fiscal year ended October 31, 2015.

The following table presents the estimated future amortization of finite-lived intangible assets as of January 30, 2016 (in thousands):



Fiscal Year	Estimated Future Amortization
2016 (remaining nine months)	$	12,894
2017	16,757
2018	12,238
2019	8,709
2020	7,620
Thereafter	10,222
Total	$	68,440

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5. Balance Sheet Details

The following tables provide details of selected balance sheet items (in thousands):



	January 30, 2016		October 31, 2015
Inventories:
Raw materials	$	18,433	$	18,788
Finished goods	24,153		21,736
Inventories	$	42,586	$	40,524



	January 30, 2016			October 31, 2015
Property and equipment, net:
Gross property and equipment
Computer equipment	$	16,262		$	14,820
Software	68,456			67,625
Engineering and other equipment ⁽¹⁾	417,183			407,342
Furniture and fixtures ⁽¹⁾	32,262			31,028
Leasehold improvements	35,776			33,986
Land and building	385,539			385,415
Total gross property and equipment	955,478			940,216
Accumulated depreciation and amortization^{(1), (2)}	(513,320		)	(500,992		)
Property and equipment, net	$	442,158		$	439,224


⁽¹⁾	Engineering and other equipment, furniture and fixtures, and accumulated depreciation and amortization include the following amounts under capital leases as of January 30, 2016, and October 31, 2015 (in thousands):



	January 30, 2016			October 31, 2015
Cost	$	1,312		$	1,312
Accumulated depreciation	(939		)	(857		)
Property and equipment, net, under capital leases	$	373		$	455


⁽²⁾	The following table presents the depreciation of property and equipment included on the Company’s Condensed Consolidated Statements of Income (in thousands):



	Three Months Ended
	January 30, 2016		January 31, 2015
Depreciation expense	$	18,479	$	18,800

6. Fair Value Measurements

The Company applies fair value measurements for both financial and non-financial assets and liabilities. The Company does not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis as of January 30, 2016.

The fair value accounting guidance permits companies to elect fair value measurement for many financial instruments and certain other items that are not required to be accounted for at fair value. The Company did not elect fair value measurement for any eligible financial instruments or other assets.

Fair Value Hierarchy

The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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During the three months ended January 30, 2016, the Company had no transfers between levels of the fair value hierarchy of its assets and liabilities measured at fair value.

Assets and liabilities measured and recorded at fair value on a recurring basis as of January 30, 2016, were as follows (in thousands):



			Fair Value Measurements Using
	Balance as of January 30, 2016		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds ⁽¹⁾	$	1,115,461	$	1,115,461	$	—	$	—
Derivative assets	212		—		212		—
Total assets measured at fair value	$	1,115,673	$	1,115,461	$	212	$	—
Liabilities:
Derivative liabilities	$	2,638	$	—	$	2,638	$	—
Total liabilities measured at fair value	$	2,638	$	—	$	2,638	$	—


⁽¹⁾	Money market funds are reported within “Cash and cash equivalents” on the Company’s Condensed Consolidated Balance Sheets.

Assets and liabilities measured and recorded at fair value on a recurring basis as of October 31, 2015, were as follows (in thousands):



			Fair Value Measurements Using
	Balance as of October 31, 2015		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds ⁽¹⁾	$	1,184,410	$	1,184,410	$	—	$	—
Derivative assets	709		—		709		—
Total assets measured at fair value	$	1,185,119	$	1,184,410	$	709	$	—
Liabilities:
Derivative liabilities	$	1,125	$	—	$	1,125	$	—
Total liabilities measured at fair value	$	1,125	$	—	$	1,125	$	—


⁽¹⁾	Money market funds are reported within “Cash and cash equivalents” on the Company’s Condensed Consolidated Balance Sheets.

7. Restructuring and Other Related Benefits

The following table provides details of “Restructuring and other related benefits” on the Company’s Condensed Consolidated Statements of Income (in thousands):



	Three Months Ended
	January 30, 2016		January 31, 2015
Lease loss reserve and related benefits	(566	)	—

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The following table provides a reconciliation of the Company’s beginning and ending restructuring liability balances (in thousands):



	Fiscal 2013 Fourth Quarter Restructuring Plan						Other Restructuring Plans
	Severance and Benefits			Lease Loss Reserve and Related Costs			Lease Loss Reserve and Related Costs			Total
Restructuring liabilities at October 31, 2015	$	110		$	1,811		$	408		$	2,329
Restructuring and other related benefits	—			(566		)	—			(566		)
Cash payments	—			(161		)	(91		)	(252		)
Translation adjustment	(2		)	(34		)	—			(36		)
Restructuring liabilities at January 30, 2016	$	108		$	1,050		$	317		$	1,475

Current restructuring liabilities at January 30, 2016	$	108		$	405		$	317		$	830
Non-current restructuring liabilities at January 30, 2016	$	—		$	645		$	—		$	645

Fiscal 2013 Fourth Quarter Restructuring Plan

During the fiscal year ended October 26, 2013, and the first quarter of fiscal year 2014, the Company restructured certain business operations and reduced the Company’s operating expense structure. The restructuring plan included a workforce reduction, as well as the cancellation of certain nonrecurring engineering agreements and exits from certain leased facilities. The restructuring plan was substantially completed in the first quarter of fiscal year 2014.

Other Restructuring Plans

The Company also recorded charges related to estimated facilities lease losses, net of expected sublease income, due to consolidation of real estate space as a result of acquisitions.

Cash payments for facilities that are part of the Company’s lease loss reserve are expected to be paid over the respective lease terms through fiscal year 2021.

General

The Company reevaluates its estimates and assumptions on a quarterly basis and makes adjustments to the restructuring liabilities balance if necessary. During the three months ended January 30, 2016, the Company reversed $0.6 million of charges related to estimated facilities lease losses due to a change in lease terms for a certain facility.

8. Borrowings

The following table provides details of the Company’s long-term debt (in thousands, except years and percentages):



			January 30, 2016					October 31, 2015
	Maturity	Stated Annual Interest Rate	Amount			Effective Interest Rate		Amount			Effective Interest Rate
Convertible Senior Unsecured Notes:
2020 Convertible Notes	2020	1.375%	$	575,000		4.98	%	$	575,000		4.98	%
Senior Unsecured Notes:
2023 Notes	2023	4.625%	300,000			4.83	%	300,000			4.83	%
Capital lease obligations	2016	4.625%	215			4.63	%	298			4.63	%
Total gross long-term debt			875,215					875,298
Unamortized discount			(74,962		)			(79,196		)
Unamortized debt issuance costs			(1,935		)			(2,025		)
Current portion of long-term debt			(215		)			(298		)
Long-term debt, net of current portion			$	798,103				$	793,779

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Convertible Senior Unsecured Notes

On January 14, 2015, the Company issued $575.0 million in aggregate principal amount of 1.375% convertible senior unsecured notes due 2020 (the “2020 Convertible Notes”) pursuant to an indenture, dated as of January 14, 2015, between the Company and Wells Fargo Bank, National Association, as the trustee (the “Offering”). Net of an original issue discount, the Company received $565.7 million in proceeds from the Offering. Concurrently with the closing of the Offering, the Company called for redemption its outstanding 6.875% senior secured notes due 2020 (the “2020 Notes”) and irrevocably deposited a portion of the net proceeds from the Offering with the trustee to discharge the 2020 Indenture as described below under “Senior Secured Notes.”

The 2020 Convertible Notes bear interest payable semiannually on January 1 and July 1 of each year, beginning on July 1, 2015. No payments were made toward the principal of the 2020 Convertible Notes during the three months ended January 30, 2016.

The Company separately accounts for the liability and equity components of the 2020 Convertible Notes. The fair value of the liability component, used in the allocation between the liability and equity components as of the date of issuance, was based on the present value of cash flows using a discount rate of 4.57%, the Company’s borrowing rate for a similar debt instrument without the conversion feature. The carrying values of the liability and equity components of the 2020 Convertible Notes are as follows (in thousands):



	January 30, 2016			October 31, 2015
Principal	$	575,000		$	575,000
Unamortized discount of the liability component	(72,161		)	(76,311		)
Net carrying amount of liability component	$	502,839		$	498,689
Carrying amount of equity component	$	66,988		$	70,765

As of January 30, 2016, the remaining period of amortization for the discount is 3.92 years. The amount of interest cost recognized for amortization of the discount and for the contractual interest coupon for the 2020 Convertible Notes was $4.2 million and $2.0 million, respectively, during the three months ended January 30, 2016. The amount of interest cost recognized for amortization of the discount and for the contractual interest coupon for the 2020 Convertible Notes was $0.7 million and $0.4 million, respectively, during the three months ended January 31, 2015.

As of January 30, 2016, and October 31, 2015, the fair value of the 2020 Convertible Notes was approximately $532.8 million and $568.0 million, respectively, which was estimated based on broker trading prices.

The 2020 Convertible Notes mature on January 1, 2020, unless repurchased or converted in accordance with their terms prior to such date. The 2020 Convertible Notes are not callable prior to their maturity. The 2020 Convertible Notes are convertible into shares of common stock of the Company under the circumstances described below. The initial conversion rate is 62.7746 shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to 36.1 million shares at an initial conversion price of approximately $15.93 per share.

The 2020 Convertible Notes contain provisions where the conversion rate is adjusted upon the occurrence of certain events, including if the Company pays a regular, quarterly cash dividend in an amount greater than $0.035 per share. During the first fiscal quarter of 2016, the Board of Directors of the Company declared and paid a cash dividend in the amount of $0.045 per share. Accordingly, as of December 8, 2015, the conversion rate was adjusted to a rate of 62.9573 shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to 36.2 million shares at a conversion price of approximately $15.88 per share. However, because the adjustment resulted in a change to the conversion rate of less than 1%, as is allowed by the terms of the indenture governing the 2020 Convertible Notes, the Company elected to defer the administration and noteholder notification of such adjustment until the occurrence of (i) a subsequent adjustment to the conversion rate that results in a cumulative adjustment of at least 1% of the current conversion rate, (ii) the conversion of any 2020 Convertible Note, or (iii) certain other events requiring the adjustment to be made under the indenture governing the 2020 Convertible Notes.

Holders of the 2020 Convertible Notes may convert all or a portion of their notes prior to the close of business on the business day immediately preceding September 1, 2019, in multiples of $1,000 principal amount, only under the following circumstances:

•

During any fiscal quarter commencing after the fiscal quarter ending on May 2, 2015 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the notes on each applicable trading day;

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•	During the five-business-day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of the notes for each trading day of that 10 consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the notes on each such trading day; or


•	Upon the occurrence of certain corporate events as specified in the terms of the indenture governing the 2020 Convertible Notes.

On or after September 1, 2019, to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes regardless of the foregoing conditions.

As of January 30, 2016, the circumstances for conversion had not been triggered, and the 2020 Convertible Notes were not convertible. The if-converted value of the 2020 Convertible Notes as of January 30, 2016, did not exceed the principal amount of the 2020 Convertible Notes.

If a fundamental change, as specified in the terms of the indenture governing the 2020 Convertible Notes, occurs prior to the maturity date, holders of the notes may require the Company to repurchase the 2020 Convertible Notes at a repurchase price equal to 100% of the principal amount of the 2020 Convertible Notes repurchased, plus accrued and unpaid interest, if any, up to the repurchase date. As of January 30, 2016, a fundamental change had not occurred and the 2020 Convertible Notes were not re-purchasable.

Convertible Note Hedge and Warrants Related to the Convertible Senior Unsecured Notes

In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge transactions with certain financial institutions (the “counterparties”) with respect to its common stock. Upon conversion of the 2020 Convertible Notes, the convertible note hedge transactions give the Company the right to acquire from the counterparties, subject to anti-dilution adjustments substantially similar to those in the 2020 Convertible Notes, initially approximately 36.1 million shares of the Company’s common stock at an initial strike price of $15.93 per share. Because a dividend in an amount greater than $0.035 per share was declared and paid effective beginning in the third fiscal quarter of 2015, the strike price under the convertible note hedge transactions has been adjusted to approximately $15.88 per share as of December 8, 2015. The convertible note hedge transactions are expected generally to reduce the potential common stock dilution and/or offset potential cash payments in excess of the principal amount of converted notes upon conversion of the notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions. The convertible note hedge transactions will be terminated on the maturity date of the 2020 Convertible Notes or earlier under certain circumstances. The $86.1 million cost of the convertible note hedge transactions has been accounted for as an equity transaction.

Separately from the convertible note hedge transactions, the Company entered into warrant transactions with the counterparties, pursuant to which the Company sold warrants to the counterparties to acquire, subject to customary anti-dilution adjustments, up to 36.1 million shares in the aggregate at an initial strike price of $20.65 per share. The primary reason the Company entered into these warrant transactions was to partially offset the cost of the convertible note hedge transactions. The warrants mature over 60 trading days, commencing on April 1, 2020, and are exercisable solely on the maturity dates. The warrants are subject to net share settlement; however, the Company may elect to cash settle the warrants. The Company received gross proceeds of $51.2 million from the warrant transactions, which have been accounted for as an equity transaction.

Under the terms of the warrants, the strike price and number of shares to be acquired by the holders of the warrants are adjusted if the Company pays a regular, quarterly cash dividend in an amount greater than $0.035 per share. Accordingly, the terms of the warrants were adjusted to reflect the payment of a cash dividend in the amount of $0.045 per share beginning in the third fiscal quarter of 2015, and, as of December 8, 2015, the holders of the warrants have the right to acquire up to approximately 36.2 million shares of the Company’s common stock at a strike price of approximately $20.59 per share.

See Note 15, “Net Income per Share,” of the Notes to Condensed Consolidated Financial Statements for further discussion of the dilutive impact of the 2020 Convertible Notes and the convertible note hedge and warrant transactions.

Senior Unsecured Notes

In January 2013, the Company issued 4.625% senior unsecured notes in the aggregate principal amount of $300.0 million due 2023 (the “2023 Notes”) pursuant to an indenture, dated as of January 22, 2013 (the “2023 Indenture”), between the Company, certain domestic subsidiaries of the Company that have guaranteed the Company’s obligations under the 2023 Notes, and Wells Fargo Bank, National Association, as the trustee. The guarantees of the 2023 Notes were released upon the termination of the Senior Secured Credit Facility and discharge of the 2020 Indenture in the first fiscal quarter of 2015.

The 2023 Notes bear interest payable semiannually on January 15 and July 15 of each year. No payments were made toward the principal of the 2023 Notes during the three months ended January 30, 2016.

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As of January 30, 2016, and October 31, 2015, the fair value of the 2023 Notes was approximately $289.0 million and $293.9 million, respectively, which was estimated based on broker trading prices.

On or after January 15, 2018, the Company may redeem all or part of the 2023 Notes at the redemption prices set forth in the 2023 Indenture, plus accrued and unpaid interest, if any, up to the redemption date. At any time prior to January 15, 2018, the Company may redeem all or a part of the 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes, plus an applicable premium and accrued and unpaid interest, if any, up to the redemption date. In addition, at any time prior to January 15, 2016, the Company may redeem up to 35% of the principal amount of the 2023 Notes, using the net cash proceeds of one or more sales of the Company’s capital stock, at a redemption price equal to 104.625% of the principal amount of the 2023 Notes redeemed, plus accrued and unpaid interest, if any, up to the redemption date.

If the Company experiences a specified change of control triggering event, it must offer to repurchase the 2023 Notes at a repurchase price equal to 101% of the principal amount of the 2023 Notes repurchased, plus accrued and unpaid interest, if any, up to the repurchase date.

The 2023 Indenture contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to:


•	Incur certain liens and enter into certain sale-leaseback transactions;


•	Create, assume, incur, or guarantee additional indebtedness of the Company’s subsidiaries without such subsidiaries guaranteeing the 2023 Notes on a pari passu basis; and


•	Enter into certain consolidation or merger transactions, or convey, transfer, or lease all or substantially all of the Company’s or its subsidiaries’ assets.

These covenants are subject to a number of limitations and exceptions as set forth in the 2023 Indenture. The 2023 Indenture also includes customary events of default, including cross-defaults to other debt of the Company and its subsidiaries.

Senior Secured Notes

In January 2010, the Company issued $300.0 million in aggregate principal amount of the 2020 Notes pursuant to an indenture, dated as of January 20, 2010, between the Company, certain domestic subsidiaries of the Company, and Wells Fargo Bank, National Association, as the trustee (the “2020 Indenture”). Interest on the 2020 Notes was payable semiannually on January 15 and July 15 of each year. The Company’s obligations under the 2020 Notes were previously guaranteed by certain of the Company’s domestic subsidiaries and secured by a lien on substantially all of the Company’s and the subsidiary guarantors’ assets.

On January 14, 2015, the Company called the 2020 Notes for redemption at a redemption price equal to 103.438% of the principal amount of the 2020 Notes, and irrevocably deposited $322.2 million with the trustee for the 2020 Notes to discharge the 2020 Indenture. Due to the deposit and discharge, the guarantees provided by certain of the Company’s domestic subsidiaries, and the liens granted by the Company and the subsidiary guarantors to secure their obligations with respect to the 2020 Notes, were released as of the date of the deposit.

The amount deposited with the trustee included $300.0 million to repay the principal amount of the 2020 Notes, $10.3 million representing the difference between the redemption price and the principal amount of the 2020 Notes (“Call Premium”), $10.3 million for accrued interest through January 15, 2015, and $1.6 million of interest payable up to the redemption date of February 13, 2015. The trustee redeemed the 2020 Notes on February 13, 2015, using the deposited amount, extinguishing the Company’s $300.0 million liability for the principal amount of the 2020 Notes.

In accordance with the applicable accounting guidance for debt modification and extinguishment, and for interest costs accounting, the Company expensed the Call Premium, remaining debt issuance costs, and remaining original issue discount relating to the 2020 Notes in the first quarter of fiscal year 2015, which totaled $20.4 million. The Company reported this expense within “Interest expense” on the Company’s Condensed Consolidated Statements of Income for the three months ended January 31, 2015.

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Debt Maturities

As of January 30, 2016, the Company’s aggregate debt maturities based on outstanding principal were as follows (in thousands):



Fiscal Year	Principal Balances
2016 (remaining nine months)	$	215
2017	—
2018	—
2019	—
2020	575,000
Thereafter	300,000
Total	$	875,215

9. Commitments and Contingencies

Product Warranties

The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the three months ended January 30, 2016, and January 31, 2015 (in thousands):



	Accrued Warranty
	Three Months Ended
	January 30, 2016			January 31, 2015
Beginning balance	$	7,599		$	7,486
Liabilities accrued for warranties issued during the period	978			1,262
Warranty claims paid and used during the period	(1,144		)	(1,114		)
Changes in liability for pre-existing warranties during the period	(225		)	(446		)
Ending balance	$	7,208		$	7,188

In addition, the Company has defense and indemnification clauses contained within its various customer contracts. As such, the Company indemnifies the parties to whom it sells its products with respect to the Company’s products, both alone and in certain circumstances when in combination with other products and services, for infringement of any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product. As of January 30, 2016, there have been no known events or circumstances that have resulted in a material customer contract-related indemnification liability to the Company.

Manufacturing and Purchase Commitments

Brocade has manufacturing arrangements with its CMs under which Brocade provides product forecasts and places purchase orders in advance of the scheduled delivery of products to Brocade’s customers. The required lead time for placing orders with the CMs depends on the specific product. Brocade issues purchase orders, and the CMs then generate invoices based on prices and payment terms mutually agreed upon and set forth in those purchase orders. Although the purchase orders Brocade places with its CMs are cancellable, the terms of the agreements require Brocade to purchase all inventory components not returnable, usable by, or sold to other customers of the CMs. In addition, Brocade has an arrangement with one of its CMs regarding factory capacity that can be used by the Company. Under this arrangement, the Company receives a credit for exceeding the planned utilization of factory capacity and, conversely, is required to pay additional fees for under-utilizing the planned capacity.

As of January 30, 2016, the Company’s aggregate commitment to its CMs for inventory components used in the manufacture of Brocade products was $174.0 million, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of $1.4 million, which is reported within “Other accrued liabilities” on the Company’s Condensed Consolidated Balance Sheet as of January 30, 2016. The Company’s purchase commitments reserve reflects the Company’s estimate of purchase commitments it does not expect to utilize in normal ongoing operations.

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Income Taxes

The Company is subject to several ongoing income tax audits and has received notices of proposed adjustments or assessments from certain tax authorities. For additional discussion, see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements. The Company believes it has adequate reserves for all open tax years.

Legal Proceedings

From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including claims of alleged infringement of patents and/or other intellectual property rights and commercial and employment contract disputes. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already accrued by the Company.

10. Derivative Instruments and Hedging Activities

In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk. The Company currently does not manage its exposure to credit risk by entering into derivative instruments. However, the Company manages its exposure to credit risk through its investment policies. As part of these investment policies, the Company generally enters into transactions with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty based on its analysis of that counterparty’s relative credit standing.

The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which a counterparty’s obligations exceed the Company’s obligations with that counterparty.

Foreign Currency Exchange Rate Risk

A majority of the Company’s revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies. The Company is primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar, of which the most significant to its operations for the three months ended January 30, 2016, were the British pound, the euro, the Indian rupee, the Chinese yuan, the Singapore dollar, the Swiss franc, and the Japanese yen. The Company has established a foreign currency risk management program to protect against the volatility of future cash flows caused by changes in foreign currency exchange rates. This program reduces, but does not eliminate, the impact of foreign currency exchange rate movements.

The Company utilizes a rolling hedge strategy for the majority of its foreign currency derivative instruments to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. All of the Company’s foreign currency forward contracts are single delivery, which are settled at maturity involving one cash payment. The Company’s foreign currency risk management program includes foreign currency derivatives with a cash flow hedge accounting designation that utilizes foreign currency forward and option contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally have a maturity of less than 15 months. For these derivatives, the Company initially reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive loss in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings. The tax effect allocated to cash flow hedge-related components of other comprehensive loss was not significant for the three months ended January 30, 2016, and January 31, 2015.

Ineffective cash flow hedges are included in the Company’s net income as part of “Interest and other income (loss), net.” The amount recorded on ineffective cash flow hedges was not significant for the three months ended January 30, 2016, and January 31, 2015.

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Net losses relating to the effective portion of foreign currency derivatives recorded in the Company’s Condensed Consolidated Statements of Income are as follows (in thousands):



	Three Months Ended
	January 30, 2016			January 31, 2015
Cost of revenues	$	(94	)	$	(136	)
Research and development	(199		)	(35		)
Sales and marketing	(374		)	(454		)
General and administrative	(27		)	(58		)
Total	$	(694	)	$	(683	)

Alternatively, the Company may choose not to hedge the foreign currency risk associated with its foreign currency exposures if the Company believes such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or if the currency is difficult or too expensive to hedge.

The net foreign currency exchange gains and losses recorded as part of “Interest and other income (loss), net” were losses of $0.3 million and $1.0 million for the three months ended January 30, 2016, and January 31, 2015, respectively.

As of January 30, 2016, the Company had gross unrealized loss positions of $2.6 million and gross unrealized gain positions of $0.2 million included in “Other accrued liabilities” and “Prepaid expenses and other current assets,” respectively.

Volume of Derivative Activity

All derivatives are designated as hedging instruments as of January 30, 2016, and October 31, 2015. Total gross notional amounts, presented by currency, are as follows (in thousands):



	Derivatives Designated as Hedging Instruments
In U.S. dollars	January 30, 2016		October 31, 2015
British pound	$	32,080	$	46,330
Euro	30,249		40,961
India rupee	25,837		35,647
Chinese yuan	10,954		15,129
Singapore dollar	9,830		13,745
Swiss franc	6,708		9,265
Japanese yen	6,592		8,809
Total	$	122,250	$	169,886

11. Stock-Based Compensation

Stock-based compensation expense, net of estimated forfeitures, is included in the following line items of the Company’s Condensed Consolidated Statements of Income as follows (in thousands):



	Three Months Ended
	January 30, 2016		January 31, 2015
Cost of revenues	$	2,905	$	3,816
Research and development	5,476		4,933
Sales and marketing	11,078		9,843
General and administrative	4,585		5,490
Total stock-based compensation expense	$	24,044	$	24,082

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The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):



	Three Months Ended
	January 30, 2016		January 31, 2015
Stock options	$	729	$	1,356
RSUs, including restricted stock units with market conditions	19,793		17,934
Employee stock purchase plan (“ESPP”)	3,522		4,792
Total stock-based compensation expense	$	24,044	$	24,082

The following table presents the unrecognized compensation expense, net of estimated forfeitures, by grant type and the related weighted-average periods over which this expense is expected to be recognized as of January 30, 2016 (in thousands, except for the weighted-average period):



	Unrecognized Compensation Expense		Weighted- Average Period (In years)
Stock options	$	1,820	0.99
RSUs, including restricted stock units with market conditions	$	121,904	1.99
ESPP	$	10,009	1.08

The following table presents details on grants made by the Company for the following periods:



	Three Months Ended
	January 30, 2016			January 31, 2015
	Granted (Shares in thousands)	Weighted-Average Grant Date Fair Value		Granted (Shares in thousands)	Weighted-Average Grant Date Fair Value
Stock options	—	$	—	1,117	$	3.09
RSUs, including stock units with market conditions	3,476	$	7.96	3,641	$	10.87

The total intrinsic value of stock options exercised for the three months ended January 30, 2016, and January 31, 2015, was $0.1 million and $1.0 million, respectively.

12. Stockholders’ Equity

Dividends

During the three months ended January 30, 2016, the Company’s Board of Directors declared the following dividends (in thousands, except per share amounts):

Declaration Date

Dividend per Share

Record Date

Total Amount Paid

Payment Date

November 22, 2015

0.045

December 10, 2015

18,429

January 4, 2016

Future dividends are subject to review and approval on a quarterly basis by the Company’s Board of Directors or a committee thereof.

Convertible Note Hedge and Warrants Related to the Convertible Senior Unsecured Notes

In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge and warrant transactions with certain financial institutions with respect to its common stock. See Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements for further discussion.

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Accumulated Other Comprehensive Loss

The components of other comprehensive loss and related tax effects for the three months ended January 30, 2016, and January 31, 2015, are as follows (in thousands):



	Three Months Ended
	January 30, 2016									January 31, 2015
	Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount
Unrealized gains (losses) on cash flow hedges:
Change in unrealized gains and losses, foreign exchange contracts	$	(2,413	)	$	113		$	(2,300	)	$	(2,179	)	$	405		$	(1,774	)
Net gains and losses reclassified into earnings, foreign exchange contracts ⁽¹⁾	694			(68		)	626			683			(80		)	603
Net unrealized gains (losses) on cash flow hedges	(1,719		)	45			(1,674		)	(1,496		)	325			(1,171		)
Foreign currency translation adjustments	(2,203		)	—			(2,203		)	(4,221		)	—			(4,221		)
Total other comprehensive loss	$	(3,922	)	$	45		$	(3,877	)	$	(5,717	)	$	325		$	(5,392	)


⁽¹⁾	For Condensed Consolidated Statements of Income classification of amounts reclassified from accumulated other comprehensive loss, see Note 10, “Derivative Instruments and Hedging Activities,” of the Notes to Condensed Consolidated Financial Statements.

The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended January 30, 2016, and January 31, 2015, are as follows (in thousands):



	Three Months Ended
	January 30, 2016									January 31, 2015
	Losses on Cash Flow Hedges			Foreign Currency Translation Adjustments			Total Accumulated Other Comprehensive Loss			Losses on Cash Flow Hedges			Foreign Currency Translation Adjustments			Total Accumulated Other Comprehensive Loss
Beginning balance	$	(1,539	)	$	(23,463	)	$	(25,002	)	$	(1,907	)	$	(16,907	)	$	(18,814	)
Change in unrealized gains and losses	(2,300		)	(2,203		)	(4,503		)	(1,774		)	(4,221		)	(5,995		)
Net gains and losses reclassified into earnings	626			—			626			603			—			603
Net current-period other comprehensive loss	(1,674		)	(2,203		)	(3,877		)	(1,171		)	(4,221		)	(5,392		)
Ending balance	$	(3,213	)	$	(25,666	)	$	(28,879	)	$	(3,078	)	$	(21,128	)	$	(24,206	)

13. Income Taxes

In general, the Company’s provision for income taxes differs from the tax computed at the U.S. federal statutory tax rate due to state taxes, the effect of non-U.S. operations being taxed at rates lower than the U.S. federal statutory tax rate, nondeductible stock-based compensation expense, tax credits, and adjustments to unrecognized tax benefits. Earnings of the Company’s subsidiaries outside of the United States primarily relate to its European and Asia Pacific businesses.

The effective tax rate for the three months ended January 30, 2016, was lower than the U.S. federal statutory tax rate of 35% and lower compared with the three months ended January 31, 2015, primarily due to the benefits from the domestic manufacturing deduction, which was not available for the three months ended January 31, 2015, and the federal research and development tax credit, which was permanently reinstated retroactive to January 1, 2015, by the passage of the Protecting Americans from Tax Hikes Act of 2015. The Company recorded a discrete benefit related to the research and development credit which reduced the Company’s effective tax rate for the three months ended January 30, 2016, and a benefit reducing the effective annual tax rate for fiscal year 2016.

The Company’s total gross unrecognized tax benefits, excluding interest and penalties, were $126.6 million as of January 30, 2016. If the total gross unrecognized tax benefits as of January 30, 2016, were recognized in the future, approximately $87.4 million would decrease the Company’s effective tax rate.

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The IRS and other tax authorities regularly examine the Company’s income tax returns. In October 2014, the IRS issued a Revenue Agent’s Report related to its field examination of the Company’s federal income tax returns for fiscal years 2009 and 2010. The IRS is contesting certain assumptions used to support the Company’s transfer pricing with its foreign subsidiaries. In November 2014, the Company filed a protest to challenge the proposed adjustment, and in March 2015, the issue was moved to the Office of Appeals. In addition, in October 2014, the Geneva Tax Administration issued its final assessments for fiscal years 2003 to 2012, disputing certain of the Company’s transfer pricing arrangements. In November 2014, the Company filed a protest to challenge the final assessments. The Company believes that reserves for unrecognized tax benefits are adequate for all open tax years. The timing of income tax examinations, as well as the amounts and timing of related settlements, if any, are highly uncertain. Before the end of fiscal year 2016, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. After the Company reaches settlement with the tax authorities, the Company expects to record a corresponding adjustment to its unrecognized tax benefits. Taking into consideration the inherent uncertainty as to settlement terms, the timing of payments, and the impact of such settlements on the uncertainty in income taxes, the Company estimates the range of potential decreases in underlying uncertainty in income tax is between $0 and $4 million in the next 12 months.

14. Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Financial decisions and the allocation of resources are based on the information from the Company’s internal management reporting system. Currently, the Company’s CODM is its Chief Executive Officer.

Brocade is organized into three operating segments, each of which is an individually reportable segment: SAN Products, IP Networking Products, and Global Services. These reportable segments are organized principally by product category.

At this time, the Company does not track its operating expenses by operating segments because management does not consider this information in its measurement of the performance of the operating segments. The Company also does not track all of its assets by operating segments. The majority of the Company’s assets as of January 30, 2016, were attributable to its U.S. operations.

Summarized financial information by reportable segment for the three months ended January 30, 2016, and January 31, 2015, based on the internal management reporting system, is as follows (in thousands):



	SAN Products		IP Networking Products		Global Services		Total
Three months ended January 30, 2016
Net revenues	$	347,058	$	134,109	$	93,117	$	574,284
Cost of revenues	81,204		62,893		41,372		185,469
Gross margin	$	265,854	$	71,216	$	51,745	$	388,815
Three months ended January 31, 2015
Net revenues	$	353,399	$	132,839	$	90,001	$	576,239
Cost of revenues	85,725		64,201		36,630		186,556
Gross margin	$	267,674	$	68,638	$	53,371	$	389,683

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15. Net Income per Share

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):



	Three Months Ended
	January 30, 2016		January 31, 2015
Basic net income per share
Net income	$	93,646	$	87,267
Weighted-average shares used in computing basic net income per share	407,902		428,536
Basic net income per share	$	0.23	$	0.20
Diluted net income per share
Net income	$	93,646	$	87,267
Weighted-average shares used in computing basic net income per share	407,902		428,536
Dilutive potential common shares in the form of stock options	1,332		1,734
Dilutive potential common shares in the form of other share-based awards	5,851		8,886
Weighted-average shares used in computing diluted net income per share	415,085		439,156
Diluted net income per share	$	0.23	$	0.20
Antidilutive potential common shares in the form of: ⁽¹⁾
Warrants issued in conjunction with the 2020 Convertible Notes ⁽²⁾	36,200		7,140
Stock options	1,874		577
Other share-based awards	984		—


⁽¹⁾	These amounts are excluded from the computation of diluted net income per share.

⁽²⁾

In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge and warrant transactions as described in Note 8, “Borrowings.” The 2020 Convertible Notes have no impact on diluted earnings per share until the average quarterly price of the Company’s common stock exceeds the adjusted conversion price of $15.88 per share. If the common stock price exceeds this adjusted conversion price, then, prior to conversion, the Company will calculate the effect of the additional shares that may be issued using the treasury stock method. If the average price of the Company’s common stock exceeds $20.59 per share for a quarterly period, the Company’s weighted-average shares used in computing diluted net income per share will be impacted by the effect of the additional potential shares that may be issued related to the warrants using the treasury stock method. The convertible note hedge is not considered for purposes of the diluted earnings per share calculation, as its effect would be antidilutive.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report filed on Form 10-K with the Securities and Exchange Commission on December 22, 2015. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “expects,” “anticipates,” “assumes,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “should,” “could,” and variations of such words and similar expressions. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” below.

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Overview

We are a leading supplier of networking hardware, software, and services for businesses and organizations of various types and sizes. Our end customers include global enterprises and other organizations that use our products and services as part of their communications infrastructure and service providers, such as telecommunication firms, cable operators, and mobile carriers that use our products and services as part of their commercial operations. Our business model is focused on two key markets: Storage Area Networking (“SAN”), where we offer our SAN products, including modular directors, fixed-configuration and embedded switches, as well as network management and monitoring capabilities; and Internet Protocol (“IP”) Networking, where we offer IP routers, Ethernet switches, network security, analytics, and monitoring, as well as products used to manage application delivery. Our IP Networking products are available in modular and fixed hardware-based form factors and can be deployed in both traditional network and next-generation fabric designs. Our IP Networking products also include a range of virtualized network software offerings, including a virtual routing software suite and application delivery controller and load balancer offerings. In addition, for mobile service providers, our products include a virtual evolved packet core (“vEPC”) solution and a software analytics probe and application monitoring application. We also provide product-related customer support and services in both our SAN business and IP Networking business.

Key customer information technology (“IT”) initiatives, such as virtualization, enterprise mobility, data center consolidation, cloud computing, and migration to higher-performance technologies, such as solid state storage, continue to rely on our mission-critical SAN-based solutions. We are known as a storage networking innovator and have a leading SAN market share position. Our SAN business strategy is to continue to expand and diversify our partner base and introduce new, innovative solutions for both our large installed base and potential new customers. During the past fiscal year, we added several new SAN partners, expanded relationships with existing partners, and introduced new products, such as the Brocade Analytics Monitoring Platform. This new platform provides customers the ability to improve operational performance, stability, and security within their storage environments.

Our IP Networking business strategies are intended to increase new customer accounts and expand our current market share through product innovations, such as our Ethernet fabric switches and virtualized software networking products (also known as software-defined networking (“SDN”), network functions virtualization (“NFV”), and network visibility and analytics (“NVA”)), and the development and expansion of our routes to market. Success of our IP Networking business, in particular, will depend on customers recognizing the benefits of upgrading their data center networks to fabric-based networking architectures, and our future success in this area would be negatively impacted if this technological transition does not occur at the anticipated rate or at all. While our software networking product revenues have not been material to date, there is customer interest in software networking products, and we believe that customers prefer to buy networking products from suppliers that offer a portfolio of solutions that address their current and future needs. We plan to continue to support our growth strategy with continuous innovation, leveraging the strategic investments we have made in our core businesses, developing emerging technologies such as SDN, NFV, and NVA, introducing new products, making strategic acquisitions, and enhancing our existing partnerships and forming new partnerships through our various distribution channels.

We continue to face multiple challenges, including aggressive price discounting from competitors, new product introductions from competitors, and rapid adoption of new technologies by customers, as our industry transitions from network architectures based solely on specialized networking hardware to new architectures based on software, servers, and a mix of proprietary and commodity networking hardware. We also continue to be affected by worldwide macroeconomic conditions, and face the possibility that these conditions could deteriorate and create a more cautious capital spending environment in the IT sector. In addition, U.S. federal customers are important to our business, and spending by the U.S. government can be variable and difficult to predict. We are also cautious about the stability and health of certain international markets and current global and country-specific dynamics, such as the drop in the value of the euro and the Chinese yuan versus the U.S. dollar in the past fiscal year, slowing economic growth in China, and Russia-related geopolitical uncertainty. These factors may impact our business and those of our partners. Our diversified portfolio of products helps mitigate the effect of some of these challenges, and we expect IT spending levels to generally rise in the long term. In addition, we are making investments in software offerings and people with software-oriented skill sets to adapt as the market transitions. However, it is difficult for us to offset the effects of short-term reductions in IT spending.

We expect our SAN and IP Networking revenues to fluctuate depending on the demand for our existing and future products and services, and the quality of the sales support for our products and services from our distribution and reseller partners, as well as the timing of product transitions by our original equipment manufacturer (“OEM”) partners. The average selling prices per port for our SAN and IP Networking products have typically declined over time, unless impacted favorably by a new product introduction or product mix, and will likely decline in the future.

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We continue to expand our software networking capabilities through technology innovation and strategic acquisitions. In September 2014, we completed an acquisition that enhances our leadership in NFV technology and gives us a new market to address with visibility and analytics solutions for mobile operators. In March 2015, we completed two acquisitions, in which we acquired a virtual application delivery controller (“vADC”) software product line and a vEPC software product line, respectively. The acquired vADC software expands our NFV portfolio and addresses the needs of service providers and enterprise accounts. The acquired vEPC software, which has formed the basis for a mobility platform for building open, next-generation networks, primarily addresses emerging mobile applications and services, including advanced mobile virtual network operators and enterprise mobile services, like mobile virtual private networks. In addition to these acquisitions, in April 2015, we launched a portfolio of IP Networking products designed specifically to support IP storage deployments.

Our plans for our operating cash flows are to provide liquidity for operations, capital investment, and other strategic initiatives, including investments and acquisitions to strengthen our networking portfolios, and to return capital to stockholders in the form of stock repurchases and cash dividends. In September 2015, we reconfirmed our intent to return at least 60% of our annual adjusted free cash flow to stockholders in the form of stock repurchases or dividends. We define adjusted free cash flow as operating cash flow, adjusted for the impact of the excess tax benefits from stock-based compensation, less capital expenditures. In the first quarter of fiscal year 2016, our Board of Directors declared and paid a quarterly cash dividend of $0.045 per share of our common stock for a total of $18.4 million. On February 16, 2016, our Board of Directors declared a quarterly cash dividend of $0.045 per share of our common stock to be paid on April 4, 2016, to stockholders of record as of the close of market on March 10, 2016. Future dividend payments are subject to review and approval on a quarterly basis by our Board of Directors.

Overview of Financial Results

The following table provides an overview of some of our financial results (in thousands, except percentages):



	Three Months Ended
	January 30, 2016			January 31, 2015
Total net revenues	$	574,284		$	576,239
Gross margin	$	388,815		$	389,683
Gross margin, as a percentage of total net revenues	67.7		%	67.6		%
Income from operations	$	120,966		$	139,405
Income from operations, as a percentage of total net revenues	21.1		%	24.2		%
Net income	$	93,646		$	87,267

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Results of Operations

Our results of operations for the three months ended January 30, 2016, and January 31, 2015, are reported in this discussion and analysis as a percentage of total net revenues, except for gross margin with respect to each reportable segment, which is indicated as a percentage of the respective reportable segment net revenues.

Revenues. Our revenues are derived primarily from sales of our SAN and IP Networking products and support and services related to these products, which we call Global Services.

Our total net revenues are summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Net Revenues		% of Net Revenues		Net Revenues		% of Net Revenues		Increase/(Decrease)			% Change
SAN Products	$	347,058	60.4	%	$	353,399	61.3	%	$	(6,341	)	(1.8	)%
IP Networking Products	134,109		23.4	%	132,839		23.1	%	1,270			1.0	%
Global Services	93,117		16.2	%	90,001		15.6	%	3,116			3.5	%
Total net revenues	$	574,284	100.0	%	$	576,239	100.0	%	$	(1,955	)	(0.3	)%

The decrease in total net revenues for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, reflects lower sales for our SAN products, partially offset by higher sales for our Global Services offerings and IP Networking products, as further described below.

•

The decrease in SAN product revenues was caused by a decrease in embedded and fixed-configuration switch product revenues, primarily due to softer industry storage demand, partially offset by an increase in director product revenues primarily due to continued demand for modular directors, which provide higher performance, port density, and scalability than fixed-configuration switches. The number of ports shipped decreased by 8.4% during the three months ended January 30, 2016, due to the decrease in embedded and fixed-configuration switch sales, the effect of which was partially offset by a 7.2% increase in the average selling price per port due to a shift in product mix towards more feature-rich director products;

•

The increase in IP Networking product revenues primarily reflects higher revenues from our campus switching products, partly due to the increased revenue generated by the U.S federal government funding technology improvements for schools, commonly known as the E-Rate program, as well as higher software networking revenues. This increase was partially offset by a decrease in data center routing and switching product revenues primarily due to weaker demand from large network carrier and federal customers. Software networking revenues increased due to the vADC software product line acquired in the second quarter of fiscal year 2015 and increased usage of our virtual routers by cloud service providers; and


•	The increase in Global Services revenues was primarily due to an increase in initial and renewal support contracts related to our vADC software product line acquired in the second quarter of fiscal year 2015, an increase in renewal support contracts for our SAN products, and an increase in IP Networking professional services revenues.

Our total net revenues by geographic area are summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Net Revenues		% of Net Revenues		Net Revenues		% of Net Revenues		Increase/(Decrease)			% Change
United States (“U.S.”)	$	316,351	55.1	%	$	331,094	57.5	%	$	(14,743	)	(4.5	)%
Europe, the Middle East and Africa ⁽¹⁾	153,055		26.6	%	160,568		27.9	%	(7,513		)	(4.7	)%
Asia Pacific	66,578		11.6	%	54,925		9.5	%	11,653			21.2	%
Japan	24,585		4.3	%	20,332		3.5	%	4,253			20.9	%
Canada, Central and South America	13,715		2.4	%	9,320		1.6	%	4,395			47.2	%
Total net revenues	$	574,284	100.0	%	$	576,239	100.0	%	$	(1,955	)	(0.3	)%


⁽¹⁾	Includes net revenues of $104.2 million and $110.8 million for the three months ended January 30, 2016, and the three months ended January 31, 2015, respectively, relating to the Netherlands.

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Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM partners take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the logistics practices of our OEM partners, but the end-user location data that is available does indicate that international revenues comprise a larger percentage of our total net revenues than the attributed revenues above indicate.

International revenues for the three months ended January 30, 2016, increased to 44.9% as a percentage of total net revenues compared with 42.5% for the three months ended January 31, 2015, primarily due to a shift in OEM customer mix for our SAN products.

A significant portion of our revenues is concentrated among a relatively small number of OEM customers. For the three months ended January 30, 2016, two customers individually accounted for 20% and 14% of our total net revenues for a combined total of 34% of total net revenues. For the three months ended January 31, 2015, three customers individually accounted for 20%, 14%, and 10% of our total net revenues for a combined total of 44% of total net revenues. We expect that a significant portion of our future revenues will continue to come from sales of products to a relatively small number of OEM partners and to the U.S. federal government and its individual agencies through our distributors and resellers. Therefore, the loss of, or significant decrease in the level of sales to, or a change in the ordering pattern of any one of these customers could seriously harm our financial condition and results of operations.

Gross margin. Gross margin as stated below is indicated as a percentage of the respective reportable segment net revenues, except for total gross margin, which is stated as a percentage of total net revenues.

Gross margin is summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Gross Margin		% of Net Revenues		Gross Margin		% of Net Revenues		Increase/(Decrease)			% Points Change
SAN Products	$	265,854	76.6	%	$	267,674	75.7	%	$	(1,820	)	0.9	%
IP Networking Products	71,216		53.1	%	68,638		51.7	%	2,578			1.4	%
Global Services	51,745		55.6	%	53,371		59.3	%	(1,626		)	(3.7	)%
Total gross margin	$	388,815	67.7	%	$	389,683	67.6	%	$	(868	)	0.1	%

The changes in gross margin percentage for each reportable segment for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, were primarily due to the following factors (the percentages below reflect the impact on gross margin):


•	SAN gross margins relative to net revenues increased 0.7% due to product cost reductions, as well as a more favorable mix of SAN products as the mix shifted towards director products, which, being more feature-rich, carry a higher product margin than embedded and fixed-configuration switch products;

•

IP Networking gross margins relative to net revenues increased 3.4% due to product cost reductions, a favorable shift towards higher margin software networking products, and favorable product transitions on campus switching products. The increases in IP Networking gross margins were partially offset by a 1.9% increase relative to net revenues related to amortization of IP Networking-related intangible assets acquired in the second quarter of fiscal year 2015. In addition, IP Networking gross margins also decreased 0.3% relative to net revenues primarily due to higher excess and obsolete inventory charges; and


•	Global Services gross margins relative to net revenues decreased primarily due to higher salaries for increased staffing related to our continued focus on customer satisfaction and our software business, as well as higher variable incentive compensation.

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Research and development expenses. Research and development (“R&D”) expenses consist primarily of compensation and related expenses for personnel engaged in engineering and R&D activities, fees paid to consultants and outside service providers, engineering expenses, which primarily consist of nonrecurring engineering charges and prototyping expenses related to the design, development, testing, and enhancement of our products, depreciation related to engineering and test equipment, and allocated expenses related to legal, IT, facilities, and other shared functions.

R&D expenses are summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Expense		% of Net Revenues		Expense		% of Net Revenues		Increase		% Change
R&D expenses	$	93,257	16.2	%	$	85,231	14.8	%	$	8,026	9.4	%

R&D expenses increased for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, primarily due to the following (in thousands):



	Increase/(Decrease)
Salaries and other compensation	$	9,213
Outside services expense	(506		)
Various individually insignificant items	(681		)
Total change	$	8,026

Salaries and other compensation increased primarily due to increased personnel from the acquisitions that occurred in fiscal year 2015 and from the growth in our engineering staffing due to the expanded focus on our software product lines, higher variable incentive compensation, annual merit-based increases in salaries, and an increase in the cost of employment-related benefits. Outside services expense decreased primarily due to a decrease in outside engineering services for software networking product development as much of this work is now being performed by our engineering workforce.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in sales and marketing functions, costs associated with promotional and marketing programs, travel and entertainment expenses, and allocated expenses related to legal, IT, facilities, and other shared functions.

Sales and marketing expenses are summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Expense		% of Net Revenues		Expense		% of Net Revenues		Increase		% Change
Sales and marketing expenses	$	151,827	26.4	%	$	140,238	24.3	%	$	11,589	8.3	%

Sales and marketing expenses increased for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, primarily due to the following (in thousands):



	Increase/(Decrease)
Salaries and other compensation	$	9,531
Stock-based compensation expense	1,235
Outside services and other marketing expense	1,053
Various individually insignificant items	(230		)
Total change	$	11,589

Salaries and other compensation increased primarily as a result of increased personnel associated with the acquired vADC software product line, annual merit-based increases in salaries, an increase in the cost of employment-related benefits, and higher variable incentive compensation. Stock-based compensation expense increased primarily due to higher grant date per-unit fair values of restricted stock units granted to employees in the recent years. Outside services and other marketing expense increased primarily due to increased investment in the go-to-market strategy for our software business.

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General and administrative expenses. General and administrative (“G&A”) expenses consist primarily of compensation and related expenses for corporate management, finance and accounting, human resources, legal, IT, facilities, and investor relations, as well as recruiting expenses, professional fees, and other corporate expenses, less certain expenses allocated to cost of revenue, R&D, and sales and marketing.

G&A expenses are summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Expense		% of Net Revenues		Expense		% of Net Revenues		Decrease			% Change
G&A expenses	$	22,429	3.9	%	$	24,671	4.3	%	$	(2,242	)	(9.1	)%

G&A expenses decreased for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, primarily due to the following (in thousands):



	Decrease
Stock-based compensation expense	$	(905	)
Salaries and other compensation	(620		)
Various individually insignificant items	(717		)
Total change	$	(2,242	)

Stock-based compensation expense decreased primarily due to lower expense related to our performance-based restricted stock units granted to employees. Salaries and other compensation decreased primarily as a result of lower bonuses related to our software business initiative.

Amortization of intangible assets. Amortization of intangible assets is summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Expense		% of Net Revenues		Expense		% of Net Revenues		Increase		% Change
Amortization of intangible assets	$	902	0.2	%	$	138	—	%	$	764	553.6	%

The increase in amortization of intangible assets for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, was primarily due to the addition of intangible assets in connection with our acquisitions completed in the second fiscal quarter of 2015 (see Note 4, “Goodwill and Intangible Assets,” of the Notes to Condensed Consolidated Financial Statements).

Restructuring and other related benefits. Restructuring and other related benefits are summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016					January 31, 2015
	Benefit			% of Net Revenues		Benefit		% of Net Revenues		Increase			% Change
Restructuring and other related benefits	$	(566	)	(0.1	)%	$	—	—	%	$	(566	)	*

* Not meaningful

Restructuring and other related benefits for the three months ended January 30, 2016, were primarily due to a favorable change in lease terms for a certain facility. We did not incur any restructuring and other related benefits for the three months ended January 31, 2015 (see Note 7, “Restructuring and Other Related Benefits,” of the Notes to Condensed Consolidated Financial Statements).

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Interest expense. Interest expense primarily represents the interest cost associated with our senior secured notes, senior unsecured notes, and convertible senior unsecured notes (see Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements).

Interest expense is summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016					January 31, 2015
	Expense			% of Net Revenues		Expense			% of Net Revenues		Decrease		% Change
Interest expense	$	(9,865	)	(1.7	)%	$	(25,424	)	(4.4	)%	$	15,559	61.2	%

In January 2015, we issued $575.0 million in aggregate principal amount of 1.375% convertible senior unsecured notes due 2020 (the “2020 Convertible Notes”) in a private placement. The proceeds from this offering were used to redeem all of the outstanding 6.875% senior secured notes due 2020 (the “2020 Notes”), which had a higher interest rate, and for general corporate purposes. Interest expense decreased for the three months ended January 30, 2016, compared with the three months ended January 31, 2015, primarily due to the $15.1 million expense that we recorded in the first quarter of fiscal year 2015 for the call premium, debt issuance costs, and original issue discount relating to the redemption of our 2020 Notes. The decrease in interest expense was also due to the refinancing of the 2020 Notes at a lower interest rate.

Interest and other income (loss), net. Interest and other income (loss), net, is summarized as follows (in thousands, except percentages):



	Three Months Ended
	January 30, 2016				January 31, 2015
	Income		% of Net Revenues		Loss			% of Net Revenues		Increase		% Change
Interest and other income (loss), net	$	669	0.1	%	$	(559	)	(0.1	)%	$	1,228	219.7	%

Interest and other income, net, for the three months ended January 30, 2016, was primarily related to an increase in interest income for our money market funds due to an increase in interest rates. Interest income and other loss, net, for the three months ended January 31, 2015, was primarily related to foreign currency exchange losses as a result of the weakening of foreign currencies against the U.S. dollar.

Income tax expense. Income tax expense and the effective tax rates are summarized as follows (in thousands, except effective tax rates):



	Three Months Ended
	January 30, 2016			January 31, 2015
Income tax expense	$	18,124		$	26,155
Effective tax rate	16.2		%	23.1		%

In general, our provision for income taxes differs from the tax computed at the U.S. federal statutory tax rate due to state taxes, the effect of non-U.S. operations being taxed at rates lower than the U.S. federal statutory tax rate, nondeductible stock-based compensation expense, tax credits, and adjustments to unrecognized tax benefits. Earnings of our subsidiaries outside of the United States primarily relate to our European and Asia Pacific businesses.

The effective tax rate for the three months ended January 30, 2016, was lower than the U.S. federal statutory tax rate of 35% and lower compared with the three months ended January 31, 2015, primarily due to the benefits from the domestic manufacturing deduction, which was not available for the three months ended January 31, 2015, and the federal research and development tax credit, which was permanently reinstated retroactive to January 1, 2015, by the passage of the Protecting Americans from Tax Hikes Act of 2015. We recorded a discrete benefit related to the research and development credit which reduced our effective tax rate for the three months ended January 30, 2016, and a benefit reducing the effective annual tax rate for fiscal year 2016.

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Our income tax provision could change as a result of many factors, including the effects of changing tax laws and regulations or changes to the mix of IP Networking versus SAN products, which have different gross margins, and changes to the mix of domestic versus international profits. Many of these factors are largely impacted by the buying behavior of our OEM and channel partners. As estimates and judgments are used to project such domestic and international earnings, the impact to our tax provision could vary if the current planning or assumptions change. In addition, we do not forecast discrete events, such as settlement of tax audits with governmental authorities, due to their inherent uncertainty. Such settlements have in the past, and could in the future, materially impact our tax expense.

For further discussion of our income tax provision, see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements.

Liquidity and Capital Resources



	January 30, 2016			October 31, 2015			Decrease
	(In thousands)
Cash and cash equivalents	$	1,392,009		$	1,440,882		$	(48,873	)
Percentage of total assets	36		%	36		%

We use cash generated by operations as our primary source of liquidity. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues, the timing of product shipments during the quarter, accounts receivable collections, inventory and supply chain management, the timing and amount of tax, and other payments or receipts. For additional discussion, see “Part II—Other Information, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Based on past performance and current expectations, we believe that internally generated cash flows and cash on hand will be generally sufficient to support business operations, capital expenditures, stock repurchases, cash dividends, contractual obligations, and other liquidity requirements, including our debt service requirements, associated with our operations for at least the next 12 months. We may also use our operating cash flows or access sources of capital, or a combination thereof, to strengthen our networking portfolios through acquisitions and strategic investments. There are no other transactions, arrangements, or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity of, availability of, or our requirements for, capital resources.

Financial Condition

In September 2015, we reconfirmed our intent to return at least 60% of our annual adjusted free cash flow to stockholders in the form of stock repurchases or cash dividends. Adjusted free cash flow is operating cash flow, adjusted for the impact of the excess tax benefits from stock-based compensation, less capital expenditures. In the third quarter of fiscal year 2014, our Board of Directors initiated a quarterly cash dividend of $0.035 per share of our common stock. Beginning in the third quarter of fiscal year 2015, our Board of Directors increased our quarterly cash dividend to $0.045 per share of our common stock. Dividends of $0.045 per share were declared and paid in the first quarter of fiscal year 2016. On February 16, 2016, our Board of Directors declared a quarterly cash dividend of $0.045 per share of our common stock to be paid on April 4, 2016, to stockholders of record as of the close of market on March 10, 2016. Future dividends are subject to review and approval on a quarterly basis by our Board of Directors.

For the three months ended January 30, 2016, we generated $112.2 million in cash from operating activities, which was due to our net income excluding non-cash items, partially offset by cash used for changes in assets and liabilities.

Net cash used in investing activities for the three months ended January 30, 2016, totaled $23.6 million and was primarily the result of $23.8 million in purchases of property and equipment.

Net cash used in financing activities for the three months ended January 30, 2016, totaled $136.2 million and was primarily the result of $144.5 million in stock repurchases and $18.4 million in cash dividend payments, partially offset by the $19.5 million in proceeds from the issuance of common stock from Employee Stock Purchase Plan purchases and stock option exercises, and $7.4 million in excess tax benefits from stock-based compensation. For the three months ended January 30, 2016, we repurchased 15.4 million shares of our common stock pursuant to our stock repurchase program.

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Net proceeds from the issuance of common stock in connection with employee participation in our equity compensation plans have historically been a significant component of our liquidity. The extent to which we receive proceeds from these plans can increase or decrease based upon changes in the market price of our common stock, and from the amount and type of awards granted. For example, we have changed the mix of restricted stock unit and stock option awards granted towards granting fewer stock option awards in recent years, which reduces the net proceeds from the issuance of common stock in connection with participation in our equity compensation plans. As a result, our cash flow resulting from the issuance of common stock in connection with employee participation in our equity compensation plans has varied over time.

A majority of our accounts receivable balance is derived from sales to our OEM partners. We perform ongoing credit evaluations of our customers and generally do not require collateral or security interests on accounts receivable balances. We have established reserves for credit losses and sales allowances. While we have not experienced material credit losses in any of the periods presented, there can be no assurance that we will not experience material credit losses in the future.

Three Months Ended January 30, 2016, Compared to Three Months Ended January 31, 2015

Operating Activities. Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

Net cash provided by operating activities increased by $101.8 million primarily due to increased accounts receivable collections and lower payments with respect to employee variable incentive compensation.

Investing Activities. Net cash used in investing activities decreased by $0.4 million primarily due to $7.8 million of cash used in the first quarter of fiscal year 2015 for the purchase of a license to certain patents to strengthen our portfolio of defensive patents, partially offset by an increase of $7.3 million of cash used to purchase property and equipment during the three months ended January 30, 2016.

Financing Activities. Net cash provided by financing activities decreased by $258.4 million. The decrease was primarily due to the proceeds received in the first quarter of fiscal year 2015 from the issuance of the 2020 Convertible Notes and related warrants, net of the increase in restricted cash to redeem the 2020 Notes in February 2015 and the cash used for the purchase of convertible hedge options in connection with the issuance of the 2020 Convertible Notes. The decrease was also due to a $15.5 million increase in common stock repurchases in the first quarter of fiscal year 2016 as compared with the first quarter of fiscal year 2015.

Liquidity

Manufacturing and Purchase Commitments. We have manufacturing arrangements with contract manufacturers under which we provide 12-month product forecasts and place purchase orders in advance of the scheduled delivery of products to our customers. Our purchase commitments reserve reflects our estimate of purchase commitments we do not expect to utilize in normal operations in accordance with our policy (see Note 9, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements).

Income Taxes. We intend to indefinitely reinvest all current and accumulated earnings of our foreign subsidiaries for expansion of our business operations outside the United States. Therefore, we do not currently accrue U.S. income taxes on the earnings of our foreign subsidiaries.

Our existing cash and cash equivalents totaled $1,392.0 million as of January 30, 2016. Of this amount, approximately 69% was held by our foreign subsidiaries. We do not currently anticipate a need for these funds held by our foreign subsidiaries for our domestic operations, and our intent is to indefinitely reinvest such funds outside of the United States. Under current tax laws and regulations, if these funds are distributed to any of our U.S. entities in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

The IRS and other tax authorities regularly examine our income tax returns (see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements). We believe we have adequate reserves for all open tax years.

Senior Unsecured Notes. In January 2013, we issued $300.0 million in aggregate principal amount of the 2023 Notes. We used the proceeds and cash on hand to redeem all of the outstanding principal amount of senior secured notes due 2018 in the second quarter of fiscal year 2013.

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Convertible Senior Unsecured Notes. In January 2015, we issued $575.0 million in aggregate principal amount of the 2020 Convertible Notes. Net of an original issue discount, we received $565.7 million in proceeds from the offering of the 2020 Convertible Notes. We used a portion of the net proceeds to discharge the 2020 Indenture and redeem all of the outstanding principal amount of the 2020 Notes, pay $35.0 million for the cost of the convertible note hedge transactions, net of the proceeds from the issuance of warrants, and to repurchase approximately 4.1 million shares of our common stock for $48.9 million at a purchase price of $11.80 per share, which was the closing price on January 8, 2015, the date of the pricing of the 2020 Convertible Notes. We intend to use the remaining net proceeds of $159.6 million for general corporate purposes, including potential acquisitions and other business development activities. The 2020 Convertible Notes are unsecured and have a significantly lower interest rate of 1.375% compared to 6.875% for the 2020 Notes. Interest is payable on January 1 and July 1 of each year, beginning on July 1, 2015. See Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements.

Covenant Compliance—Senior Unsecured Notes Covenants. The 2023 Notes were issued pursuant to an indenture, dated as of January 22, 2013, among the Company, the subsidiary guarantors named therein, and Wells Fargo Bank, National Association, as trustee (the “2023 Indenture”). The 2023 Indenture contains covenants that, among other things, restrict our ability and the ability of our subsidiaries to:


•	Incur certain liens and enter into certain sale-leaseback transactions;


•	Create, assume, incur, or guarantee additional indebtedness of our subsidiaries without such subsidiaries guaranteeing the 2023 Notes on a pari passu basis; and


•	Enter into certain consolidation or merger transactions, or convey, transfer, or lease all, or substantially all of our or our subsidiaries’ assets.

These covenants are subject to a number of other limitations and exceptions as set forth in the 2023 Indenture. We were in compliance with all applicable covenants of the 2023 Indenture as of January 30, 2016.

Stock Repurchase Program. As of January 30, 2016, our Board of Directors had authorized a total of approximately $2.7 billion for the repurchase of our common stock since the inception of the program in August 2004. The purchases may be made, from time to time, in the open market or by privately negotiated transactions, and are funded from available working capital. The number of shares to be purchased and the timing of purchases are based on the level of our cash balances, general business and market conditions, the trading price of our common stock, and other factors, including alternative investment opportunities. For the three months ended January 30, 2016, we repurchased 15.4 million shares for an aggregate purchase price of $144.5 million. Approximately $876.4 million remained authorized for future repurchases under this program as of January 30, 2016.

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Contractual Obligations

The following table summarizes our contractual obligations, including interest expense, and commitments as of January 30, 2016 (in thousands):



	Total		Less Than 1 Year		1–3 Years		3–5 Years		More Than 5 Years
Contractual Obligations:
Convertible senior unsecured notes due 2020⁽¹⁾	$	605,952	$	7,906	$	15,813	$	582,233	$	—
Senior unsecured notes due 2023⁽¹⁾	396,706		13,875		27,750		27,750		327,331
Non-cancellable operating leases ⁽²⁾	72,730		20,148		18,530		13,147		20,905
Non-cancellable capital leases ⁽¹⁾	218		218		—		—		—
Purchase obligations ⁽¹⁾	17,636		3,221		4,275		4,056		6,084
Purchase commitments, gross ⁽³⁾	175,409		175,409		—		—		—
Total contractual obligations	$	1,268,651	$	220,777	$	66,368	$	627,186	$	354,320
Other Commitments:
Standby letters of credit	$	141	n/a		n/a		n/a		n/a
Unrecognized tax benefits and related accrued interest ⁽⁴⁾	$	129,424	n/a		n/a		n/a		n/a


⁽¹⁾	Amount reflects total anticipated cash payments, including anticipated interest payments.


⁽²⁾	Amount excludes contractual sublease income of $7.7 million, which consists of $7.1 million to be received in less than one year, $0.4 million to be received in one to three years, and $0.1 million to be received in three to five years.


⁽³⁾	Amount reflects total gross purchase commitments under our manufacturing arrangements with a third-party contract manufacturer. Of this amount, we have accrued reserves of $1.4 million for estimated purchase commitments that we do not expect to utilize in normal operations within the next 12 months, in accordance with our policy.


⁽⁴⁾	As of January 30, 2016, we had a gross liability for unrecognized tax benefits of $126.6 million and an accrual for the payment of related interest and penalties of $2.8 million.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities,” which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of January 30, 2016, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission (“SEC”) Regulation S-K.

Critical Accounting Policies and Estimates

There have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our condensed consolidated financial statements during the three months ended January 30, 2016, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

For a description of recently adopted accounting pronouncements on our condensed consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies,” of the Notes to Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies,” of the Notes to Condensed Consolidated Financial Statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we are exposed to market risks related to changes in interest rates, foreign currency exchange rates, and equity prices that could impact our financial position and results of operations. Our risk management strategy with respect to these three market risks may include the use of derivative financial instruments. We use derivative contracts only to manage our existing underlying exposures. Accordingly, we do not use derivative contracts for speculative purposes. Our risks and risk management strategy are outlined below. Actual gains and losses in the future may differ materially from the sensitivity analysis presented below based on changes in the timing and level of interest rates and our actual exposures and hedges.

Interest Rate Risk

Our exposure to market risk due to changes in the general level of U.S. interest rates relates primarily to our cash equivalents. Our cash and cash equivalents are primarily maintained at five major financial institutions. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk. We had $1.1 billion invested in money market funds as of January 30, 2016, which were not materially sensitive to changes in interest rates due to the short duration of these investments.

Our material borrowings bear interest at fixed rates, and therefore, we did not have any material borrowings as of January 30, 2016, that were sensitive to changes in interest rates. We were not subject to material interest rate risk in geographical areas outside of the United States as a substantial portion of our cash and cash equivalents is invested in money market funds in U.S. dollars that have a fixed share price.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies. We are primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar, of which the most significant to our operations for the three months ended January 30, 2016, were the British pound, the euro, the Indian rupee, the Chinese yuan, the Singapore dollar, the Swiss franc, and the Japanese yen. Because we report in U.S. dollars and we have a net expense position in foreign currencies, we benefit from a stronger U.S. dollar and may be adversely affected by a weaker U.S. dollar relative to the foreign currency. We use foreign currency forward and option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted operating expenses denominated in certain currencies other than the U.S. dollar. We recognize the gains and losses on foreign currency forward contracts in the same period as the remeasurement losses and gains of the related foreign currency denominated exposures.

We also may enter into other non-designated derivatives that consist primarily of forward contracts to minimize the risks associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and any associated outstanding forward contracts are marked-to-market, with realized and unrealized gains and losses included in earnings.

Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures if we believe such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or if the currency is difficult or too expensive to hedge. As of January 30, 2016, the gross notional amount of our cash flow derivative instruments was $122.3 million, and we had hedges in place through October 13, 2016.

We have performed a sensitivity analysis as of January 30, 2016, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analysis covers all of our foreign currency contracts offset by the underlying exposures. The foreign currency exchange rates we used were based on market rates in effect on January 30, 2016. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would not result in a material foreign exchange loss as of January 30, 2016.

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Equity Price Risk

From time to time, we have made equity investments in companies that develop technology or provide services that are complementary to, or broaden the markets for, our products or services and further our business objectives. We had no investments in publicly traded equity securities as of January 30, 2016. The aggregate cost of our equity investments in non-publicly traded companies was $2.5 million as of January 30, 2016. We monitor our equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value, and we determine the decline in value to be other than temporary, we reduce the carrying value to its current fair value. Generally, we do not attempt to reduce or eliminate our market exposure on these equity securities. We do not purchase our equity securities with the intent to use them for speculative purposes.

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “BRCD.” On January 29, 2016, the last business day of our first fiscal quarter of 2016, the last reported sale price of our common stock on the NASDAQ Global Select Market was $7.98 per share.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”).

The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures are effective such that the information required to be disclosed in the reports we file or submit under the Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Act, that occurred during the quarter ended January 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Disclosure Controls and Procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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Item 1A. Risk Factors

Failure to successfully compete in the networking market could prevent Brocade from increasing or maintaining revenue, profitability, and cash flows with respect to its networking solutions.

The networking market, particularly the data center market, is highly competitive and is undergoing significant transitions due to the adoption of new technologies, such as cloud computing, virtualization, software networking, and infrastructure-as-a-service. For example, companies such as Amazon Web Services, Inc., Microsoft Corporation, and more recently both Cisco Systems, Inc. (“Cisco”) and Hewlett Packard Enterprise Company (“HPE”) offer cloud computing services for the enterprise market, and some customers may choose the alternative to procure networking as a service rather than implement in-house networking solutions. Cisco and Microsoft Corporation have also collaborated on data center and cloud computing initiatives involving sales, marketing, and research and development (“R&D”). Additionally, Dell Inc. (“Dell”) recently announced an agreement to acquire EMC Corporation (“EMC”), and if that acquisition is completed, the resulting company’s technology may compete directly with some of Brocade’s solutions. Also, Juniper Networks, Inc. (“Juniper”) and HPE have launched new offerings, including “whitebox” switches, which those companies have promoted as a low-cost option for networking equipment purchasers. These and other market dynamics, as well as further commoditization of networking products, could negatively impact Brocade’s business and financial results.

Other shifts in the networking market are also creating competitive challenges for Brocade. For example, data center buying patterns are shifting to converged infrastructures in which computer, network, and storage systems are sold as bundled solutions. If Brocade is unsuccessful in having its products included in those bundled solutions, Brocade’s market share could be adversely affected. In addition, the market for campus networking products is increasingly based on the use of wireless campus technologies, which are not included in Brocade’s current product portfolio. The success of Brocade’s wireline campus business is due in part to the partner relationships it has developed with wireless campus vendors. Those partnerships have been adversely affected, and may continue to be adversely affected, by the fact that some of those vendors compete with Brocade in other market segments or have been acquired, or may in the future be acquired, by other companies with their own wireline products.

Cisco maintains a dominant position in the networking market; however, customers also have many choices in both traditional and emerging networking technology and networking providers. These other competitors in the networking market include A10 Networks, Inc.; Alcatel-Lucent (recently acquired by Nokia Corporation); Arista Networks, Inc.; Avaya Inc.; Extreme Networks, Inc.; F5 Networks, Inc.; Huawei Technologies Co. Ltd.; Juniper; and QLogic Corporation (“QLogic”). Many of Brocade’s competitors have longer operating histories; greater financial, technical, sales, marketing, and other resources; more name recognition; and larger customer installed bases than Brocade. These companies’ businesses may have better economies of scale, and therefore these companies could also adopt more aggressive pricing policies than Brocade. Some of these companies’ brands are better known by end users than Brocade’s brand, and channel partners often prefer to sell well-known brands to end user accounts. In addition, these companies have in the past, and could in the future, enhance their business models through divestitures and acquisitions, which could impact Brocade’s partner ecosystem and Brocade’s go-to-market model. Also, any one of these competitors could devote more resources to develop, promote, and sell their products, and, therefore, could respond more quickly to changes in customer or market requirements and adopt more aggressive pricing policies. Brocade’s failure to successfully compete in the networking market would harm its business and financial results.

Conditions in the Storage Area Networking (“SAN”) market could adversely affect Brocade’s business, financial results, and growth prospects.

Approximately two-thirds of Brocade’s fiscal year 2015 revenue was generated from its SAN business. As such, Brocade’s business, financial results, and growth prospects may be impacted significantly by SAN market conditions. For example, the overall size of the SAN market contracted in 2015 from a revenue perspective due to, among other factors, the increasing efficiency of SAN products, the adoption of other networking protocols, changes in data center architectures, hyper-converged solutions and other new storage technologies, and the other competitive factors described in the risk factor above.

Revenue generated from sales of Brocade’s SAN products is also impacted by the amount of storage capacity deployed by its SAN customers. While the amount of storage capacity deployed is growing, the rate of that growth has declined in recent years.

In addition, revenue generated from sales of Brocade’s SAN products is impacted by the average selling price for those products. While the overall average selling price for Brocade’s SAN products has increased in recent periods, that increase has been largely due to the introduction of new products. Accordingly, that trend may not be sustained if we are unable to continue to successfully introduce and obtain customer acceptance of new SAN products at the same rate, or at all.

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If Brocade fails to successfully address these SAN market conditions, Brocade’s business, financial results, and growth prospects may be adversely affected.

A limited number of major OEM partners comprise a significant portion of Brocade’s revenues; the loss of revenue from, or decreased inventory levels held by, any of these major OEM partners could significantly reduce Brocade’s revenues and adversely affect its financial results.

Brocade’s SAN business depends on recurring purchases from a limited number of large OEM partners for a substantial portion of its revenues, specifically EMC, HPE, and IBM. As a result, revenues from these large OEM partners have a significant impact on Brocade’s quarterly and annual financial results. For fiscal years 2015, 2014, and 2013, these three OEM partners each represented 10% or more of Brocade’s total net revenues, for a combined total of 41%, 46%, and 46% of total net revenues, respectively. Brocade’s agreements with its OEM partners are typically cancellable, nonexclusive, and have no minimum or specific timing requirements for purchases. Brocade’s OEM partners could increase the amount purchased from Brocade’s competitors, introduce their own technology, or experience lower demand for Brocade SAN products from their end customers.

Also, one or more of Brocade’s OEM partners could elect to divest certain lines of business, split their business, or consolidate or enter into a strategic partnership with one of Brocade’s competitors, such as IBM’s sale of certain lines of business to Lenovo Group Limited, HPE recently becoming a separate public company, and Dell’s announced agreement to acquire EMC, which could reduce or eliminate Brocade’s future revenue opportunities with that OEM partner. In addition, business execution or other operating performance issues experienced by our OEM partners may adversely affect Brocade’s revenue and financial results. Brocade anticipates that a significant portion of its revenues and operating results from its SAN business will continue to depend on sales to a relatively small number of OEM partners. Brocade’s business and financial results could be harmed by the loss of any one significant OEM partner, a decrease in the level of sales to any one such partner, a change in any one such partner’s go-to-market strategy, or an unsuccessful negotiation on key terms, conditions, or timing of purchase orders placed during a quarter.

Uncertainty about or a slowdown in the domestic and/or international economies has adversely affected, and may increasingly adversely affect, Brocade’s operating results and financial condition.

In recent years, the rate of economic growth in the United States and in certain other countries, including China, has declined. In addition, uncertainty exists about the future growth of the domestic and international economies. Such uncertainty and slowdowns have resulted in, and may again result in, lower growth or a decline in information technology (“IT”)-related spending, and, consequently, lead to lower growth or a decline in the networking market (including high-performance data networking solutions). Historically, IT spending has declined as general economic and market conditions have worsened due to geopolitical uncertainty. In addition, IT spending by international customers may decline as the value of the local currencies weaken against the U.S. dollar. Brocade is particularly susceptible to reductions in IT spending because the purchase of networking solutions is often discretionary and may involve a significant commitment of capital and other resources. The loss or delay of orders from any of Brocade’s more significant customers, such as individual branches or agencies within the U.S. federal government (including the Department of Defense or certain intelligence agencies where Brocade’s revenue is concentrated), or customers within the service provider, financial services, education (including technology improvements for schools funded by the U.S. federal government commonly known as the E-Rate program), and health sectors, could also cause Brocade’s revenue and profitability to suffer. For example, Brocade’s revenue and operating results could be negatively impacted if the U.S. federal government experiences delays in procurement due to longer decision-making time frames and/or a shift in IT procurement priorities. Economic uncertainty has caused—and may cause further—reductions in Brocade’s revenue, profitability, and cash flows, along with increased price competition, increased operating costs, and longer fulfillment cycles. Moreover, economic uncertainty may exacerbate many other risks noted elsewhere in this Form 10-Q, which could adversely affect Brocade’s business operations and financial condition.

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The prices of Brocade’s IP Networking products have declined in the past and Brocade expects the prices of its products to decline in the future, which could reduce Brocade’s revenues, gross margins, and profitability.

The average selling price for Brocade’s IP Networking products has typically declined in the past and will likely decline in the future as a result of competitive pricing pressures, broader macroeconomic factors, product mix, new product introductions by Brocade or competitors, the entrance of new competitors, and other factors. In particular, if economic conditions deteriorate and create a more cautious capital spending environment in the IT sector, Brocade and its competitors could pursue more aggressive pricing strategies in an effort to maintain or increase revenues. If Brocade is unable to offset a decline in the average selling price of Brocade’s IP Networking products by increasing the volume of products shipped and/or reducing product manufacturing costs, including key components such as optics, Brocade’s revenues, gross margins, and profitability could be adversely affected.

Brocade’s future revenue growth depends on its ability to successfully introduce and achieve market acceptance of new products, services, and support offerings on a timely basis.

Developing new products, services (including software networking), and support offerings requires significant up-front investments that may not result in revenues for an extended period of time, if at all. Brocade must achieve market acceptance of its new product and support offerings on a timely basis in order to realize the benefits of its investments. However, the market for networking solutions, driven in part by the growth and evolution of the Internet and adoption of new technologies, such as software-defined networking (“SDN”) and network functions virtualization (“NFV”), is characterized by rapidly changing technology, accelerated product introduction cycles, changes in customer requirements, and evolving industry standards. In addition, many of Brocade’s new products, services, and support offerings will be directed towards customers, including hyperscale cloud providers and large service providers, with which Brocade does not have strong existing sales relationships. Sales to these customers can be challenging because sales are often based on long-term relationships and network incumbency and the complex system environments maintained by these customers often require interoperation with a variety of other vendors and back office applications. Brocade’s future success depends largely upon its ability to address the rapidly changing needs of both new and existing customers by: allowing connectivity to other devices and partnering effectively; keeping pace with technological developments and emerging industry standards; and delivering high-quality, reliable, and cost-effective products, product enhancements, and services and support offerings on a timely basis.

Other factors that may affect Brocade’s successful introduction of new products, services, and support offerings include, but are not limited to, Brocade’s ability to:


•	Properly predict the market for new products, services, and support offerings, including features, cost-effectiveness, scalability, and pricing—all of which can be particularly challenging for initial product offerings in new markets;


•	Differentiate Brocade’s new products, services, and support offerings from its competitors’ offerings;


•	Address the interoperability complexities of Brocade’s products with its OEM partners’ server and storage products and Brocade’s competitors’ products;


•	Determine which route(s) to market will be most effective; and


•	Manage product transitions, including forecasting demand, managing excess and obsolete inventories, addressing product cost structures, and managing different sales and support requirements.

Failure to successfully introduce competitive products, services, and support offerings on a timely basis may harm Brocade’s business and adversely affect Brocade’s financial results.

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If Brocade is unable to successfully transition from older products and corresponding support and service offerings to new products and corresponding support and service offerings on a timely basis, its business and financial results could be adversely affected.

As Brocade introduces new or enhanced products, it must successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories, maintain existing support revenue streams, and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of Brocade’s existing products or replace the sales of some of Brocade’s current products, thereby offsetting the benefit of a successful product introduction. When Brocade introduces new or enhanced products, it faces numerous risks related to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new or enhanced products. In addition, any customer uncertainty regarding the timeline for rolling out new products, or Brocade’s plans for future support of existing products, may cause customers to delay purchase decisions or to purchase competing products, which would adversely affect Brocade’s business and financial results.

Brocade’s failure to execute on its overall sales strategy or successfully leverage its channel and direct sales capabilities could significantly reduce its revenues and negatively affect its business, financial results, and growth prospects.

Brocade offers networking solutions through a multipath distribution strategy, including distributors, resellers, a direct sales force, and original equipment manufacturers (“OEMs”). However, Brocade’s efforts to increase sales through this multipath distribution strategy may not generate incremental revenue opportunities. Several of Brocade’s major OEM customers, including Dell, International Business Machines Corporation (“IBM”), HPE, and Oracle Corporation, have acquired companies that offer Internet Protocol (“IP”) Networking solutions that are competitive with Brocade offerings. A loss of, or significant reduction in, revenue through one of Brocade’s paths to market would negatively impact its business and financial results.

As the networking industry continues to evolve, partners with which Brocade does not have long-standing relationships, such as cloud service providers that provide routing and infrastructure-as-a-service and global systems integrators that provide complete solutions to end users interested in upgrading to more modern architectures, may become increasingly important. In addition, as more enterprises purchase infrastructure-as-a-service offerings from hyperscale cloud providers and large service providers, sales through some of Brocade’s existing paths to market could decline. If Brocade fails to build or grow successful relationships with these partners and service providers, Brocade’s business and financial results could be adversely affected.

Brocade’s failure to successfully develop new and/or maintain its current channel partner relationships, or the failure of these partners to sell Brocade’s products, could reduce Brocade’s growth prospects significantly. In addition, Brocade’s ability to respond to the needs of its distribution and reseller partners in the future may also depend on third parties producing complementary products and applications for Brocade products to enable these partners to be competitive in the market. In addition, Brocade may not successfully achieve its expanded go-to-market objectives, which include effectively maintaining or expanding sales through its distribution channels and successfully managing distribution and reseller partner relationships. If Brocade fails to respond successfully to the needs of these distribution and reseller partners and their customers, Brocade’s business and financial results could be adversely affected.

Brocade may not realize the anticipated benefits of past or future acquisitions, divestitures, and strategic investments, and the integration of acquired companies or technologies or divestiture of businesses may negatively impact Brocade’s business and financial results.

Brocade has acquired—or made strategic investments in—other companies, products, or technologies, and Brocade expects to make additional acquisitions and strategic investments in the future. In the second quarter of fiscal year 2015, Brocade acquired Connectem Inc. and Riverbed Technology, Inc.’s SteelApp^TM product line and related assets. In the fourth quarter of fiscal year 2014, Brocade acquired the Vistapointe, Inc. business. The ability of Brocade to realize the anticipated benefits of its acquisitions and strategic investments involves numerous risks, including, but not limited to, the following:


•	Difficulties in successfully integrating the acquired businesses and realizing any expected synergies;


•	Failure to communicate to customers the capabilities of the combined company;


•	Unanticipated costs, litigation, and other contingent liabilities, including liabilities associated with acquired intellectual property;

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•	Diversion of management’s attention from Brocade’s daily operations and business;


•	Adverse effects on existing business relationships with suppliers and customers, including delays or cancellations of customer purchases, as well as revenue attrition in excess of anticipated levels if existing customers alter or reduce their historical buying patterns;


•	Risks associated with entering into markets in which Brocade has limited or no prior experience, including the potential for a lower level of understanding of specific market dynamics;


•	Inability to attract and retain key employees;


•	Inability to successfully develop new products and services on a timely basis to address the market opportunities of the combined company;


•	Inability to compete effectively against companies already serving the broader market opportunities expected to be available to the combined company;


•	Inability to qualify the combined company’s products with OEM partners on a timely basis, or at all;


•	Inability to successfully integrate financial reporting and IT systems;


•	Inability to develop software-oriented back office systems and processes necessary to sell and support a variety of software-based offerings;


•	Failure to successfully manage additional business locations, including the infrastructure and resources necessary to support and integrate such locations;


•	Assumption or incurrence of debt and contingent liabilities and related obligations to service such liabilities and potential limitations on Brocade’s operations in order to satisfy financial and other negative operating covenants;

•

Additional costs, such as increased costs of manufacturing and service; costs associated with excess or obsolete inventory; costs of employee redeployment, relocation, and retention, including salary increases or bonuses; accelerated amortization of deferred equity compensation, severance payments, reorganization, or closure of facilities; taxes; advisor and professional fees; and termination of contracts that provide redundant or conflicting services;


•	Incurrence of acquisition- and integration-related costs, goodwill or in-process research and development impairment charges, or amortization costs for acquired intangible assets, that could negatively impact Brocade’s operating results and financial condition; and


•	The target market for the acquired products may not develop within the expected time frame or may evolve in a different technical direction.

Brocade may also divest certain businesses or product lines from time to time. For example, Brocade sold its network adapter business to QLogic during the first quarter of fiscal year 2014. Such divestitures involve risks, such as difficulty separating out portions of or entire businesses, distracting employees, incurring potential loss of revenue, negatively impacting margins, and potentially disrupting customer relationships. Brocade may also incur significant costs associated with exit or disposal activities, related impairment charges, or both.

Cyberattacks and data security breaches could disrupt Brocade’s operations, negatively impact Brocade’s reputation, and erode customers’ trust.

Cyberattacks and other malicious attacks could lead to data breaches, computer break-ins, malware, viruses, and unauthorized tampering with Brocade’s computer systems, intellectual property, and confidential information about its customers, and partners. These attacks could disrupt Brocade’s operations, negatively impact Brocade’s reputation, and erode customers’ trust. Brocade may not successfully limit attacks by malicious third parties if they attempt to undermine or disrupt Brocade’s cybersecurity, despite implementation of cybersecurity measures.

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Additionally, if an actual or perceived cyberattack or data security breach occurs in Brocade’s network or in one of Brocade’s customer’s network, regardless of whether the breach is attributable to Brocade’s products, the market perception of the effectiveness of Brocade’s products could be harmed. Brocade may suffer reputational harm and Brocade’s customers’ trust may be eroded as a result of a data security breach involving customers’ or employees’ information, either or both of which could negatively impact profitability and/or increase expenses. Customers have become increasingly sensitive to government-sponsored surveillance and may believe that, as a U.S.-based manufacturer, Brocade’s equipment contains “backdoor” code that would allow customer data to be compromised by either governmental bodies or other third parties. As a result, customers may choose not to deploy Brocade networking products, which could negatively impact Brocade’s business and financial results.

Brocade has a substantial amount of acquired intangible assets, goodwill, and deferred tax assets on its balance sheet, and if Brocade is required to record impairment charges for these assets, such impairment charges could adversely affect Brocade’s financial results.

Brocade has a substantial amount of acquired intangible assets, goodwill, and deferred tax assets on its balance sheet related to Brocade’s prior acquisitions. Brocade’s determination of the fair value of its long-lived assets relies on management’s assumptions of future revenues, operating costs, and other relevant factors. Brocade’s estimates with respect to the useful life or ultimate recoverability of Brocade’s carrying basis of assets, including acquired intangible assets, could change as a result of changes in management’s assumptions. If management’s estimates of future operating results change or if there are changes to other assumptions, such as the discount rate applied to future cash flows, then the estimated fair value of Brocade’s reporting units could change significantly, which could result in goodwill impairment charges. For example, due to a strategic shift of focus to software-based application delivery offerings, Brocade recognized an $83.4 million goodwill impairment charge during the second quarter of fiscal year 2014. For a sensitivity analysis that quantifies the impact of key assumptions used by Brocade on certain reporting units’ fair value estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in Part I, Item 2 of this Form 10-Q. If future impairment tests should result in a charge to earnings, Brocade’s financial results would be adversely affected.

Brocade has determined that, more likely than not, it will realize its deferred tax assets based on positive evidence of its historical operations and projections of future income, except for the deferred tax assets related to California and remaining capital loss carryforwards for which a valuation allowance has been applied. In the event that future income by jurisdiction is less than what is currently projected, Brocade may be required to apply a valuation allowance to these deferred tax assets in jurisdictions where realization of such assets is no longer more likely than not, which could result in a charge to earnings that would adversely affect Brocade’s financial results.

If Brocade loses key employees or is unable to hire additional qualified employees, its business may be negatively impacted.

Brocade’s success depends, to a significant degree, upon the continued contributions of its employees, including executive officers, engineering, sales, and others, many of whom would be difficult to replace. Departures, appointments, and changes in roles and responsibilities of officers or other key members of management may disrupt Brocade’s business and adversely affect Brocade’s operating results.

Brocade believes its future success depends, in large part, upon its ability to attract highly skilled employees and operate effectively in geographically diverse locations. Brocade has relied heavily on equity awards in the form of stock options and restricted stock units as one means for recruiting and retaining highly skilled employees. The number of shares available for issuance under Brocade’s 2009 Stock Plan is limited, and any increase in the number of shares available under that plan must be approved by Brocade’s stockholders. The extent to which Brocade is able to obtain such stockholder approval depends on a variety of factors, including assessments by stockholders and proxy advisory firms of Brocade’s historical equity award granting practices. The effectiveness of these equity awards in recruiting and retaining employees could be reduced if Brocade has to reduce the size of the equity awards granted to its employees or if there is a sustained decline in the trading price of Brocade’s shares. There are also limited qualified employees in each of Brocade’s markets, and competition for such employees is very aggressive. In particular, Brocade operates in various locations with highly competitive labor markets, including Bangalore, India, and San Jose, California. Brocade may experience difficulty in hiring key management and qualified employees with skills in nearly all areas of Brocade’s business and operations.

The loss of the services of any of Brocade’s key employees, the inability to attract or retain qualified employees in the future, or delays in hiring required employees—particularly sales and engineering employees—could delay the development and introduction of Brocade’s products or services and/or negatively affect its ability to sell products or services.

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Failure to accurately forecast demand for Brocade’s products, or failure to successfully manage the production of its products, could increase Brocade’s product cost and adversely affect its margins and profitability.

Brocade provides product forecasts to its contract manufacturers (“CMs”) and places purchase orders with them in advance of the scheduled delivery of products to Brocade’s customers. In preparing sales and demand forecasts, Brocade relies largely on input from its sales force, partners, resellers, and end-user customers. If Brocade is unable to accurately forecast demand, or if Brocade fails to effectively communicate with its distribution partners about end-user demand or other time-sensitive information, Brocade’s ability to successfully manage production could be negatively impacted. Brocade’s ability to accurately forecast demand also may become increasingly limited as Brocade introduces new or enhanced products, begins phasing out certain products, or acquires other companies or businesses. If these forecasts are inaccurate, Brocade may be unable to obtain adequate manufacturing capacity from its CMs to meet customers’ delivery requirements, or Brocade may accumulate excess inventories or incur costs associated with excess manufacturing capacity. If excess inventories accumulate, Brocade’s gross margins may be negatively impacted by write-downs for excess and/or obsolete inventory. In addition, Brocade will experience higher fixed costs as it expands its CMs’ capabilities for forecasted demand, which could negatively affect Brocade’s margins if demand decreases suddenly and Brocade is unable to reduce these fixed costs.

Additionally, most of Brocade’s manufacturing overhead and expenses are fixed in the short term or incurred in advance of receipt of corresponding revenue, and Brocade may not be able to reduce such expenses sufficiently to offset declining product prices. As a result, Brocade’s gross margins may be adversely affected by fluctuations in manufacturing volumes, component costs, foreign currency exchange rates, the mix of product configurations sold, and the mix of distribution channels through which its products are sold. Brocade’s gross margins may also be adversely affected if product or related warranty costs associated with Brocade’s products are greater than previously experienced.

Brocade has extensive international operations, which expose its business and operations to additional risks.

Brocade has significant international operations, and a significant portion of Brocade’s sales occurs in international jurisdictions. In addition, Brocade’s CMs have significant operations in China and other locations outside the United States. Brocade’s international sales of its IP Networking solutions have primarily depended on its distributors and resellers. Maintenance or expansion of international sales or international operations involves inherent risks that Brocade may not be able to control, including, but not limited to, the following:


•	Compliance with U.S. and other applicable government regulations prohibiting certain end-uses and restricting trade with embargoed or sanctioned countries, such as Iran and Russia, and with denied parties;


•	Difficulty in conducting due diligence with respect to business partners in certain international markets;


•	Exposure to economic instability or fluctuations in international markets, such as China, that could cause reductions in IT spending;


•	Exposure to inflationary risks and/or wage inflation in certain countries, such as India;


•	Increased exposure to foreign currency exchange rate fluctuations, including currencies such as the British pound, the euro, the Indian rupee, the Chinese yuan, the Japanese yen, the Singapore dollar, and the Swiss franc;


•	Exposure to sovereign debt risk and political and economic instability in certain regions of Europe, including Russia, and certain emerging countries, including China and Brazil;


•	Multiple potentially conflicting and changing governmental laws, regulations, and practices, including differing environmental, data privacy, export, import, trade, manufacturing, tax, labor, and employment laws;


•	Compliance with U.S. and other applicable government regulation of exports and imports, and associated licensing requirements, particularly in the area of encryption technology;


•	Reduced or limited protection of intellectual property rights, particularly in jurisdictions that have less developed intellectual property regimes, such as China and India;


•	Commercial laws and business practices that favor local competition;


•	In certain international regions, particularly those with rapidly developing economies, it may be common to engage in business practices that are prohibited by anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act;

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•	Increased complexity, time, and costs of managing international operations;


•	Managing research and development and sales teams in geographically diverse locations, including teams divided between the United States, the United Kingdom, and India;


•	Effective communications across multiple geographies, cultures, and languages;


•	Recruiting sales and technical support personnel with the skills to design, manufacture, sell, and support Brocade’s products in international markets;


•	Longer sales cycles and manufacturing lead times;


•	Increased complexity and cost of providing customer support and maintenance for international customers;


•	Difficulties in collecting accounts receivable;


•	Increased complexity of logistics and distribution arrangements; and


•	Increased complexity of accounting rules and financial reporting requirements.

Any of these factors could negatively impact Brocade’s business, revenues, and profitability.

Brocade’s revenues, operating results, and cash flows may fluctuate from period to period due to a number of factors, which makes predicting financial results difficult.

IT spending is subject to cyclical and uneven fluctuations, which could cause Brocade’s financial results to fluctuate unevenly and unpredictably. For example, the U.S. federal budget for government IT spending can be highly seasonal and subject to delays, reductions, and uncertainty due to changes in the political and legislative environment. It can be difficult to predict the degree to which end-customer demand and the seasonality and uneven sales patterns of Brocade’s OEM partners or other customers will affect Brocade’s business in the future, particularly as Brocade releases new or enhanced products. While Brocade’s first and fourth fiscal quarters are typically stronger quarters for SAN products and Brocade’s third and fourth fiscal quarters are typically stronger quarters for IP Networking solutions, future buying patterns may differ from historical seasonality. If the mix of revenue changes, it may also cause results to differ from historical seasonality. Accordingly, Brocade’s quarterly and annual revenues, operating results, cash flows, and other financial and operating metrics may vary significantly in the future, and the results of any prior periods should not be relied upon as an indication of future performance.

If product orders are received late in a fiscal quarter, Brocade may be unable to recognize revenue for these orders in the same quarter, which could adversely affect quarterly financial results.

Brocade’s IP Networking business typically experiences significantly higher levels of customer orders toward the end of a fiscal period. Customer orders received toward the end of the period may not ship within the period due to a lack of available inventory and manufacturing lead times. The inability to ship within the quarter in which the customer orders are received could negatively impact Brocade’s financial results in a particular quarter.

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Brocade is subject to—and will continue to be subject to—intellectual property infringement claims and litigation that are costly to defend and/or settle, which could result in significant damages and other costs to Brocade and limit Brocade’s ability to use certain technologies in the future.

Brocade competes in markets in which companies are frequently subject to claims and related litigation regarding patent and other intellectual property rights. Third parties have from time to time asserted patent, copyright, trade secret, and/or other intellectual property-related claims against Brocade and/or employees of Brocade. These claims may be, and have been in the past, made against Brocade’s products and services, subcomponents of its products, methods performed by its products or a combination of products, including third-party products, methods used in its operations, or uses of its products by its customers. The claimant may seek various remedies against Brocade, such as money damages, disgorgement of profits, injunctions barring sales of infringing goods, or exclusion orders barring imports of product into the U.S., among other possible remedies. Moreover, these claims may concern Brocade’s hiring of a former employee of the third-party claimant. Brocade and companies acquired by Brocade have in the past incurred, and will likely incur in the future, substantial expenses to defend against such third-party claims. Brocade’s suppliers and customers also may be subject to third-party intellectual property claims with respect to their own products, which could negatively impact the suppliers’ ability to supply Brocade with components or customers’ willingness to purchase products from Brocade. In addition, Brocade may be subject to claims, defenses, and indemnification obligations with respect to third-party intellectual property rights pursuant to Brocade’s agreements with suppliers, OEM and channel partners, or customers. If Brocade refuses to indemnify or defend such claims, for instance, even in situations where the allegations are meritless, then suppliers, partners, or customers may refuse to do business with Brocade. Parties that assert such intellectual property claims may be unreasonable in their demands, or may simply refuse to settle, which could lead to prolonged periods of litigation, additional burdens on employees or other resources, distraction from Brocade’s business operations, component supply stoppages, expensive settlement payments, and lost sales. Furthermore, there is little or no information publicly available concerning market or fair values for licenses and/or settlement fees, which can lead to overpayment of license or settlement fees. Any of the above scenarios could have an adverse effect on Brocade’s financial position, financial results, cash flows, and future business prospects.

Undetected software or hardware errors could increase Brocade’s costs, reduce its revenues, and delay market acceptance of its products.

Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. As Brocade continues to expand its product portfolio to include software-centric products, which may include software licensed from third parties, errors may be found from time to time in these products. In addition, through its acquisitions, Brocade has assumed—and may in the future assume—products previously developed by an acquired company that have not been through the same level of product development, testing, and quality control processes used by Brocade, and may have known and/or undetected errors. Some types of errors may not be detected until the product is installed in a user environment. In addition, Brocade products are often combined with other products, including software from other vendors, and these products often need to interoperate. For IT products that have different specifications, utilize multiple protocol standards, or may be procured from other vendors, it may be difficult to identify the source of any problems. Identifying the source of and remediating these problems may cause Brocade to incur significant warranty and repair costs, divert the attention of engineering personnel from product development efforts, and cause significant customer relations problems, resulting in lower profitability from increased costs and/or decreased revenue. Moreover, the occurrence of hardware and software errors, whether caused by Brocade products or another vendor’s products, could delay market acceptance of new or enhanced Brocade products.

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Brocade’s supply chain is dependent on sole-source and limited-source suppliers and a limited number of major CMs, either one or both of which may significantly impact Brocade’s financial results.

Although Brocade uses standard parts and components for its products where possible, Brocade’s CMs currently purchase, on Brocade’s behalf, several key components used in the manufacture of its products from single or limited supplier sources. Brocade’s single-source components include, but are not limited to, its application-specific integrated circuits (commonly referred to as “ASICs”). Brocade’s principal limited-source components include memory, certain oscillators, microprocessors, certain connectors, certain logic chips, power supplies, programmable logic devices, printed circuit boards, certain optical components, packet processors, and switch fabric components. Brocade generally acquires these components through purchase orders and has no long-term commitments regarding supply or pricing with such suppliers. If Brocade is unable to obtain these and other components when required, or if Brocade’s suppliers experience component defects, Brocade may not be able to deliver its products to customers in a timely manner and may be required to repair or retrofit products previously delivered to customers, at significant expense to Brocade. In addition, a challenging economic or industry environment could cause some of these sole-source or limited-source suppliers to delay or halt production, go out of business, or be acquired by third parties, which could result in a disruption in Brocade’s supply chain. Brocade’s supply chain could also be disrupted in a variety of other circumstances that may impact its suppliers and partners, including adverse results from intellectual property litigation or natural disasters. Any manufacturing disruption by these sole-source or limited-source suppliers could severely impair Brocade’s ability to fulfill orders and may significantly impact its financial results.

In addition, the loss of any of Brocade’s major CMs, or portions of their capacity, could significantly impact Brocade’s ability to produce its products for an indefinite period of time. Qualifying a new CM and commencing volume production is typically a lengthy and expensive process. A CM may move the production lines for Brocade’s products to new locations or factories, and this may result in delays or disruptions. If Brocade changes any of its CMs or if any of its CMs experience unplanned delays, disruptions, capacity constraints, component parts shortages, or quality control problems in their manufacturing operations, shipment of Brocade’s products to customers could be delayed and result in loss of revenues.

Brocade’s intellectual property rights may be infringed upon or misappropriated by others, and Brocade may not be able to protect or enforce its intellectual property rights.

Brocade’s intellectual property rights may be infringed upon or misappropriated by others, including by competitors, partners, former employees, foreign governments, or other third parties. In some cases, such infringement or misappropriation may be undetectable, or enforcement of Brocade’s intellectual property rights may be impractical. Brocade has filed, and may in the future file, lawsuits against third parties in an effort to enforce its intellectual property rights. Intellectual property litigation is expensive and unpredictable. There can be no assurance that Brocade will prevail in such assertions or enforcement efforts, either on the merits, or with respect to particular relief sought, such as damages or an injunction. Nor can there be any assurance that any awarded damages ultimately will be paid to Brocade. Furthermore, the opposing party may attempt to prove that the asserted intellectual property rights are invalid or unenforceable, and, if successful, may seek recompense for its attorneys’ fees and costs or countersue Brocade as part of its defense. Finally, there can be no assurance that any attempt by Brocade to enforce its intellectual property rights, even if successful in court, will improve Brocade’s sales, diminish the defendant’s sales, or stop the defendant’s allegedly unfair competition.

Brocade relies on a combination of patent, copyright, trademark, and trade secret laws, along with measures such as physical and operational security and contractual restrictions, to protect its intellectual property rights in its proprietary technologies, but none of these methods of protection may be entirely appropriate or adequate to address all risks that could result in a loss of intellectual property rights. Loss or violation of Brocade’s intellectual property rights could adversely affect Brocade’s business and operating results, through a loss of revenue or an increase in expenses.

Brocade relies on licenses from third parties, and the loss or inability to obtain any such license could adversely affect its business.

Many Brocade products are designed to include software or other intellectual property licensed from third parties. There can be no assurance that the necessary licenses will be available on acceptable terms, if at all. Brocade’s inability to obtain certain licenses or other rights on favorable terms could have an adverse effect on Brocade’s business, operating results, and financial condition, including its ability to continue to distribute or support affected products.

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In addition, if Brocade has failed, or in the future fails to, adequately manage the use of commercial or “open source” software in Brocade’s products, or if companies acquired by Brocade fail in such regard, Brocade may be subject to copyright infringement litigation or other claims. Furthermore, Brocade may be required, for commercially licensed software, to pay penalties or undergo costly audits pursuant to the license agreement. In the case of open-source software, Brocade may be required to license proprietary portions of its products on a royalty-free basis, disclose proprietary parts of source code, or commence costly product redesigns that could result in a loss of intellectual property rights, product performance degradation, or a delay in shipping products to customers and result in loss of revenue.

Business interruptions could adversely affect Brocade’s business operations.

Brocade’s business operations and the operations of its suppliers, CMs, and customers are vulnerable to interruptions caused by acts of terrorism, fires, earthquakes, tsunamis, nuclear reactor leaks, hurricanes, power losses, telecommunications failures, and other events beyond Brocade’s control. For example, a substantial portion of Brocade’s facilities, including its corporate headquarters, are located near major earthquake faults. Brocade does not have multiple-site capacity for all of its services in the event of a business disruption. In the event of a major earthquake, Brocade could experience business interruption resulting from destruction of facilities or other infrastructure and from loss of life. Brocade carries a limited amount of earthquake insurance, which may not be sufficient to cover earthquake-related losses, and has not set aside funds or reserves to cover other potential earthquake-related losses. Additionally, major public health issues, such as an outbreak of a pandemic or epidemic, may interrupt business operations of Brocade, its CMs, its customers, or its suppliers in those geographic regions affected by that particular health issue. In addition, one of Brocade’s CMs has a major facility located in an area that is subject to hurricanes, and Brocade’s suppliers could face other natural disasters, such as floods, earthquakes, extreme weather, and fires. In the event that a business interruption occurs that affects Brocade, its suppliers, CMs, or customers, shipments could be delayed or cancelled, and Brocade’s business operations and financial results could be harmed.

In addition, Brocade may suffer reputational harm and may not carry sufficient insurance to compensate for financial losses that may occur as a result of any of these events. Any such event could have an adverse effect on Brocade’s business, operating results, and financial condition, and could expose Brocade to significant third-party claims of liability and damages.

Any failure by Brocade to meet its current capital return objectives could have an adverse effect on its reputation and stock price.

Brocade reconfirmed its intent to return at least 60% of its annual adjusted free cash flow to stockholders in the form of stock repurchases or dividends. Brocade’s ability to return at least 60% of its annual adjusted free cash flow to stockholders is limited by, among other things, Delaware law. In addition, Brocade’s plans and expectations relating to its return of capital to stockholders may change due to, among other things, the need to allocate capital to other priorities. If Brocade is unable to meet its intended capital return objective, or if the Board of Directors decides to alter the capital return objective, Brocade’s reputation and its stock price may be adversely affected.

Brocade’s business is subject to increasingly complex and changing legal and regulatory requirements that could adversely affect its business, financial results, and stock price.

Brocade is subject to the changing rules and regulations of federal and state governments as well as the stock exchange on which Brocade’s common stock is listed. These entities, including the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission, the Internal Revenue Service (the “IRS”), the Financial Industry Regulatory Authority, Inc., and the NASDAQ Stock Market LLC (“NASDAQ”), have issued a significant number of new regulations over the last several years and continue to develop additional regulations and requirements. Further, Brocade is subject to various rules and regulations of certain foreign jurisdictions. Brocade’s efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

For example, The Sarbanes-Oxley Act of 2002 requires Brocade to furnish a report by Brocade’s management on internal control over financial reporting. This report contains, among other matters, an assessment of the effectiveness of internal control over financial reporting as of the end of the fiscal year. This assessment includes disclosure of any material weaknesses in internal control over financial reporting identified by management. If the assessment does not assert that internal control over financial reporting is effective (or if Brocade’s independent registered public accounting firm is unable to express an opinion on the effectiveness of Brocade’s internal control over financial reporting), Brocade’s stockholders could lose confidence in the accuracy and completeness of Brocade’s financial reports, which could have an adverse effect on Brocade’s stock price.

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Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that public companies disclose whether certain minerals, commonly known as “conflict minerals,” are necessary to the functionality or production of a product manufactured or contracted to be manufactured by those companies, and, if so, if those minerals originated in the Democratic Republic of the Congo or an adjoining country. These requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of certain components that are incorporated in Brocade products. In addition, Brocade’s supply chain is complex, so Brocade may face reputational challenges with its partners, customers, stockholders, and other stakeholders if the origins of the conflict minerals used in its products cannot be verified sufficiently.

Similarly, Brocade is subject to environmental and other regulations governing product safety, materials usage, packaging, and other environmental impacts in the countries where Brocade products are sold. For example, many Brocade products are subject to laws and regulations that restrict the use of certain substances such as lead, mercury, hexavalent chromium, and cadmium, and that require Brocade to assume responsibility for collecting, treating, recycling, and disposing of products when they have reached the end of their useful life. For example, in Europe, environmental restrictions apply to products sold in that region, and certain Brocade partners require compliance with these or other more stringent requirements. In addition, recycling, labeling, and related requirements apply to Brocade products sold in Europe and China. If Brocade products do not comply with local environmental laws, Brocade could be subject to fines, civil and criminal sanctions, and contract damage claims. In addition, Brocade could be prohibited from shipping noncompliant products into certain jurisdictions and required to recall and replace any noncompliant products already shipped, which would disrupt the ability to ship products and result in reduced revenue, increased warranty expense, increased obsolete or excess inventories, and harm to Brocade’s business and customer relationships.

In addition, Brocade is subject to laws, rules, and regulations in the United States and other countries relating to the collection, use, and security of personal information and data. Brocade has incurred, and will continue to incur, expenses to comply with privacy and security standards, protocols, and obligations imposed by applicable laws, regulations, industry standards, and contracts. In addition, such data privacy laws, regulations, and other obligations may negatively impact Brocade’s ability to execute transactions and pursue business opportunities. The privacy and data protection-related laws, rules, and regulations applicable to Brocade are also subject to significant change. For example, in October 2015, the Court of Justice of the European Union invalidated a safe harbor framework that allowed Brocade and other U.S. companies to meet certain European legal requirements for transferring personal data from Europe to the United States. Brocade is in the process of evaluating and considering changes to its data handling practices as a result of this court decision. Additionally, the European Commission is considering adopting a new data protection regulation that would impose more stringent data protection requirements and provide for greater penalties for noncompliance. Any inability to comply with applicable privacy or data protection laws, regulations, or other obligations, could result in significant cost and liability, damage Brocade’s reputation, and adversely affect its business.

Changes to Brocade’s provision for income taxes or unfavorable outcomes of tax audits could adversely impact Brocade’s financial condition or results.

Brocade is subject to income and other taxes in the United States, including those required by both state and federal governmental agencies such as the IRS, and numerous foreign jurisdictions. Brocade’s provision for income taxes could be increased due to changes in tax laws in the jurisdictions in which Brocade does business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense. In this regard, the United States, countries in the European Union, and other countries where Brocade operates have enacted or are proposing changes to relevant tax, accounting, and other laws, regulations, and interpretations, including fundamental changes to tax laws applicable to multinational corporations. In addition, future effective tax rates could be subject to volatility or adversely affected by changes in the geographic mix of earnings in countries with differing statutory rates, changes in the valuation of deferred tax assets and liabilities, and tax effects of stock-based compensation. These potential changes could increase Brocade’s effective tax rate or result in other costs in the future.

Brocade is subject to periodic audits or other reviews by such governmental agencies, and is currently under examination by the IRS and several state and foreign tax jurisdictions for various years. Audits by the IRS and other governmental tax agencies are subject to inherent uncertainties and could result in unfavorable outcomes, including potential fines or penalties. While Brocade regularly assesses the likely outcomes of these audits in order to determine the appropriateness of its tax provision, the occurrence of an unfavorable outcome in any specific period could have an adverse effect on Brocade’s financial condition or results for that period or future periods. The expense of defending and resolving such an audit may be significant.

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Brocade is exposed to various risks related to legal proceedings or claims that could adversely affect its financial condition or results.

Brocade is a party to lawsuits in the normal course of its business. Litigation in general can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits brought against Brocade, or legal actions initiated by Brocade, can often be expensive and time-consuming. Unfavorable outcomes from these claims and/or lawsuits could adversely affect Brocade’s business, financial results, or financial condition, and Brocade could incur substantial monetary liability and/or be required to change its business practices. In view of the uncertainties, potential risks, and expenses of litigation, Brocade may, from time to time, settle such disputes, even where Brocade had meritorious claims or defenses, by agreeing to settlement agreements that, depending on their terms, may significantly impact Brocade’s financial condition or results.

Brocade’s stock price may fluctuate, which could cause the value of an investment in Brocade’s shares to decline.

Brocade’s stock price has fluctuated in the past and may be subject to wide fluctuations in the future in response to various factors. Brocade does not have the ability to influence or control many of these factors. In addition to the factors discussed elsewhere in this “Risk Factors” section, factors that could affect Brocade’s stock price include, among others:


•	Actual or anticipated changes in Brocade’s operating results;


•	Whether Brocade’s operating results or forecasts meet the expectations of securities analysts or investors;


•	Actual or anticipated changes in the expectations of securities analysts or investors;


•	Recommendations by securities analysts or changes in their earnings estimates;


•	The announcement or timing of announcement of Brocade’s quarterly or annual operating results;


•	Announcements of actual or anticipated operating results by Brocade’s competitors, Brocade’s OEM partners, and other companies in the IT industry;


•	Speculation, coverage or sentiment in the media or the investment community about, or actual changes in, Brocade’s business, strategic position, competitive position, market share, operations, prospects, future stock price performance, or Brocade’s industry in general;


•	The announcement of new, planned, or contemplated products; services; commercial relationships; technological innovations; acquisitions; divestitures; or other significant transactions by Brocade or its competitors;


•	Adverse changes to Brocade’s relationships with any of its OEM partners;


•	Changes in the business strategy or execution of any of Brocade’s OEM partners;


•	Departures of key employees;


•	Litigation or disputes involving Brocade, Brocade’s industry, or both;


•	General economic conditions and trends;


•	Sales of Brocade’s stock by Brocade’s officers, directors, or significant stockholders; and


•	The timing and amount of dividends and stock repurchases.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Accordingly, broad market and industry factors may adversely affect Brocade’s stock price regardless of Brocade’s operating performance. In addition, Brocade’s stock price might also fluctuate in reaction to events that affect other companies in Brocade’s industry even if these events do not directly affect or involve Brocade.

If Brocade’s stock price fluctuates widely, Brocade may become the target of securities litigation. Securities litigation could result in substantial costs and divert Brocade’s management’s attention and resources from Brocade’s business.

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Brocade has incurred substantial indebtedness that may decrease its business flexibility, access to capital, and/or increase its borrowing costs, which may adversely affect Brocade’s operations and financial results.

As of January 30, 2016, Brocade had approximately $875 million in principal amount of outstanding indebtedness, including $575 million of indebtedness under the 1.375% convertible senior unsecured notes due 2020 (the “2020 Convertible Notes”) and $300 million of unsecured indebtedness under the 4.625% senior notes due 2023 (the “2023 Notes”) (see Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q). The indenture governing the 2023 Notes contains several negative covenants that restrict the incurrence of debt by Brocade’s subsidiaries, restrict the incurrence of liens on principal properties, and restrict Brocade and its subsidiaries from engaging in certain sale-leaseback transactions. In addition, the indentures governing both the 2020 Convertible Notes and the 2023 Notes impose covenants that restrict Brocade’s ability to effect certain mergers, consolidations, or sales of assets and require Brocade to offer to repurchase the notes upon the occurrence of certain “fundamental changes” or “change of control triggering events.” These covenants could have the effect, among other things, of reducing Brocade’s flexibility to respond to changing business and economic conditions and increasing borrowing costs, should further debt financing be desired, and may adversely affect Brocade’s operations and financial results. Brocade’s failure to comply with these covenants would result in a default under the applicable indenture, which could permit the holders to accelerate such debt or demand payment in exchange for a waiver of such default. A default under one of the indentures could also result in cross-defaults under Brocade’s other debt instruments, negatively impact the price and liquidity of Brocade’s debt and equity securities, negatively impact Brocade’s credit ratings, and impair Brocade’s ability to access sources of capital. If any of Brocade’s debt is accelerated, Brocade may not have sufficient funds available to repay such debt.

Agencies rating Brocade’s debt securities may lower Brocade’s credit rating. This could further negatively impact the price and liquidity of Brocade’s debt and equity securities. If Brocade’s credit rating is lowered, it could also negatively impact Brocade’s ability to access sources of capital.

Although interest rates have remained at low levels in recent years, they may increase for various reasons, including an increase in inflation, Federal Reserve Board actions, domestic or international fiscal policies, or domestic or international events impacting financial or capital markets. Higher interest rates or an increase in the credit spread for Brocade’s rating could negatively impact Brocade’s ability to raise additional debt or refinance existing debt.

The occurrence of a “Fundamental Change” with respect to the 2020 Convertible Notes or a “Change of Control Triggering Event” with respect to the 2023 Notes or a conversion of the 2020 Convertible Notes could negatively impact Brocade’s cash flows and financial position.

Holders of the 2020 Convertible Notes have the right to require Brocade to repurchase their convertible notes upon the occurrence of a “Fundamental Change” and holders of the 2023 Notes have the right to require Brocade to repurchase their senior notes upon the occurrence of a “Change of Control Triggering Event,” in each case at a repurchase price equal to 100% of the principal amount of the applicable notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the 2020 Convertible Notes, Brocade will be required to make cash payments up to the full conversion value in respect of the convertible notes being converted, unless Brocade elects to only deliver shares of its common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share). It is Brocade’s current intent and policy to settle conversions of the 2020 Convertible Notes through the delivery of cash up to the principal amount of converted convertible notes, together with shares of common stock to satisfy any conversion obligation in excess of such specified dollar amount. However, if Brocade elects to settle conversions of the 2020 Convertible Notes solely in shares of common stock, such settlement would result in additional dilution to Brocade’s stockholders and could result in more dilutive accounting treatment for the 2020 Convertible Notes. The 2020 Convertible Notes may be converted at the option of the holders during certain periods as a result of, among other things, fluctuations in Brocade’s stock price.

If Brocade is required to make repurchases of the 2020 Convertible Notes or the 2023 Notes or make cash payments in respect of conversions of the 2020 Convertible Notes, Brocade may not have enough available cash or be able to obtain financing on acceptable terms (or at all) at the time. Further, these obligations would negatively impact Brocade’s cash flows and could limit its ability to use its available cash and cash flow for other liquidity needs, including working capital, capital expenditures, acquisitions, investments, and other general corporate purposes. Brocade’s ability to repurchase the notes or to pay cash upon conversions of the 2020 Convertible Notes may also be limited by law, by regulatory authority, or by agreements governing its future indebtedness.

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Provisions in Brocade’s charter documents, customer agreements, and Delaware law could discourage, delay, or prevent a change in control of Brocade, which could hinder stockholders’ ability to receive a premium for Brocade’s common stock and adversely affect the value of Brocade’s convertible notes.

Provisions of Brocade’s certificate of incorporation and bylaws may discourage, delay, or prevent a merger or mergers that a stockholder may consider favorable. These provisions include, but are not limited to:


•	Authorizing the issuance of preferred stock without stockholder approval;


•	Prohibiting cumulative voting in the election of directors;


•	Limitations on who may call special meetings of stockholders and when special meetings of stockholders may be called; and


•	Prohibiting stockholder actions by written consent.

Certain provisions of Delaware law also may discourage, delay, or prevent someone from acquiring or merging with Brocade, and Brocade’s agreements with certain Brocade customers require that Brocade give prior notice of a change of control and grant certain manufacturing rights following a change of control. Brocade’s various change of control provisions could prevent or delay a change in control of Brocade, which could hinder stockholders’ ability to receive a premium for Brocade’s common stock and could adversely affect the value of Brocade’s convertible notes.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the three months ended January 30, 2016.

Issuer Purchases of Equity Securities

The following table summarizes stock repurchase activity for the three months ended January 30, 2016 (in thousands, except per share amounts):



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program ⁽¹⁾	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program ⁽¹⁾
November 1, 2015 to November 28, 2015	6,169	$	9.88	6,169	$	959,997
November 29, 2015 to December 26, 2015	5,343	$	9.06	5,343	$	911,600
December 27, 2015 to January 30, 2016	3,875	$	9.07	3,875	$	876,444
Total	15,387	$	9.39	15,387

⁽¹⁾

As of January 30, 2016, Brocade’s Board of Directors had authorized a stock repurchase program for an aggregate amount of up to approximately $2.7 billion (consisting of an original $100 million authorization on August 18, 2004, plus subsequent authorizations of an additional $200 million on January 16, 2007, $500 million on November 29, 2007, $500 million on May 16, 2012, $692 million on September 25, 2013, and $700 million on September 25, 2015), which was used for determining the amounts in these columns. The number of shares purchased and the timing of purchases are based on the level of the Company’s cash balances, general business and market conditions, the trading price of the Company’s common stock, and other factors, including alternative investment opportunities.

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Item 6. Exhibits

EXHIBIT INDEX



Exhibit Number		Description of Document

3.1		Amended and Restated Bylaws of Brocade Communications Systems, Inc., effective as of February 8, 2016 (incorporated by reference to Exhibit 3.1 from Brocade’s current report on Form 8-K filed on February 9, 2016)

10.1†		Amendment Number 50, dated January 20, 2016, with an effective date of January 26, 2016, to Statement of Work Number 1 of the Goods Agreement between IBM and Brocade

10.2*		Form of Restricted Stock Unit Agreement for Performance Stock Units under the 2009 Stock Plan

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

†		Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission.

*		Indicates management compensatory plan, contract, or arrangement.

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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, thereunto duly authorized.



		Brocade Communications Systems, Inc.

Date:	March 4, 2016	By:	/s/ Daniel W. Fairfax
			Daniel W. Fairfax Senior Vice President and Chief Financial Officer

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