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Article by DailyStocks_admin    (10-27-08 02:39 AM)

The Daily Magic Formula Stock for 10/27/2008 is Brocade Communications Systems Inc. According to the Magic Formula Investing Web Site, the ebit yield is 21% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

General

Brocade is the leading supplier of storage area network equipment and a leading provider of data center networking solutions that help enterprises connect and manage their information. The Company offers a comprehensive line of data center networking products, software and services that enable businesses to make their data centers more efficient, reliable and adaptable.

Brocade products and services are designed to help information technology (“IT”) organizations manage their data assets in an efficient, cost-effective manner. The Brocade family of Storage Area Network (“SAN”) infrastructure products and solutions includes directors, switches, routers, embedded switches for blade servers, fabric-based software applications, as well as management applications and utilities to centralize data management. The Brocade family of File Area Network (“FAN”) solutions includes software offerings for more effectively managing file data and storage resources. Brocade also offers services that assist customers with consulting and support in designing, implementing, deploying and managing data center enterprise solutions. Together, Brocade’s products and services simplify IT infrastructure, increase resource utilization, ensure availability of mission critical applications and serve as a platform for corporate data back up and disaster recovery.

Brocade products and services are marketed, sold and supported worldwide to end-user customers through distribution partners, including original equipment manufacturers (“OEMs”), distributors, systems integrators, value-added resellers and by Brocade directly.

Brocade was incorporated in California on August 24, 1995 and re-incorporated in Delaware on May 14, 1999. Brocade’s mailing address and executive offices are located at 1745 Technology Drive, San Jose, California 95110. Brocade’s telephone number is (408) 333-8000. Brocade’s corporate website is www.brocade.com. Brocade’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on Brocade’s website when such reports are available on the Securities and Exchange Commission (“SEC”) website. The public may read and copy any materials filed by Brocade with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, Brocade’s references to the URLs for these websites are intended to be inactive textual references only.

Products and Services

Brocade’s products and services are designed to help companies reduce the cost and complexity of managing business information within a shared data storage environment while enabling high levels of availability of mission critical business applications. In addition, its products and services assist companies in the development and delivery of storage and server consolidation, disaster recovery and data security and in meeting compliance issues regarding data management. Brocade’s products are generally used in conjunction with servers and storage subsystems, SAN interconnection components such as host bus adapters and storage management software applications and tools. By utilizing a shared storage, or networked storage solution, companies can more easily share and consolidate server and storage resources; centralize and simplify data management; scale and provision storage resources more effectively; and improve application efficiency, performance and availability. As a result, companies are able to better utilize information technology assets, improve productivity of information technology personnel, reduce capital and operational expenditures, and more reliably and securely store, manage, and administer business information.

Brocade believes that as the need for data storage continues to grow, companies will look to further simplify the tasks of storing, managing and administering their data, while looking to maximize their information technology investments and reduce both capital and operational expenditures. SANs provide a platform that helps companies



optimize their information technology assets and support future data growth and have been installed at many of the world’s leading companies since the mid-1990s. Brocade also believes companies will continue to expand the size and scope of their SANs and data center networks and the number and types of applications that these networks support.

Since its inception, Brocade has been a pioneer and innovator in developing the market for shared storage solutions and has grown to be a market leader in storage networking infrastructure. Brocade believes that the future evolution of the storage networking and data center management markets will be led by the providers of products and services that simplify the management of heterogeneous server and storage environments and maximize end-users’ information technology investments on an ongoing basis. Brocade also believes that storage networking and data center infrastructure solutions will evolve to provide increased capabilities that enable new types of storage management applications that simplify storage management, increase operational efficiencies and reduce operating expense. As a result, many of Brocade’s initiatives and investments are aimed at expanding the capabilities enabled by storage networks, increasing end-to-end interoperability, protecting end-user investments in existing and new information technology resources and making it easier for Brocade and its partners to deliver solutions that provide efficiencies in managing large, complex and growing enterprise data center environments.

Storage Networking Solutions

Brocade’s family of SAN directors, switches and bladed switch products provide interconnections, bandwidth and high-speed routing of data between servers and storage devices. Product models range from entry-level 8-port fabric switches to 512-port directors with multiple blade options, addressing the needs of small departments and global enterprises alike. Based predominantly on the Fibre Channel protocol, these high-performance solutions are available to support requirements both for open systems and mainframe operations. All switches and directors support key applications such as data backup, remote mirroring and high-availability clustering as well as high-volume transaction processing applications such as enterprise resource planning (ERP) and data warehousing. They have been designed to meet the storage networking needs of end-users in environments ranging from small and medium-size businesses to large enterprises with SAN fabrics that scale to thousands of ports, spread across multiple locations around the world.

The Brocade Fabric Operating System, or Fabric OS, is the operating system that provides the core infrastructure for deploying SANs. As the foundation for Brocade’s family of SAN products, Fabric OS helps ensure the reliable and high-performance data transport which is critical for scalable SAN fabrics interconnecting multiple servers and storage devices. Brocade’s SAN management operating system also includes a common set of optional advanced software services that build upon the foundation of Fabric OS and help improve performance, availability, scalability and the overall functionality of the network. These software services include the ability to proactively monitor the health and performance of the SAN, the ability to aggregate bandwidth between switches to deliver higher performance for storage applications and the ability to securely control data access in multi-vendor SAN environments. In addition, Brocade offers management tools that enable end-users to manage and administer their SANs. Brocade believes that its Fabric OS provides it with an advantage in the storage networking market, enabling differentiation and increasing optional licensable features and services.

File Data Management Solutions

With the acquisition of NuView in March of 2006, Brocade introduced a family of file data management solutions to market which are designed to help organizations consolidate access to file data while simplifying the availability and recovery of that data as part of a strategic FAN. As a result, these solutions help optimize server and storage assets, increase operational flexibility and significantly reduce overall data management and storage costs. These solutions include the following:


• Brocade StorageX is an integrated suite of applications designed to logically aggregate distributed file data across heterogeneous environments, providing administrators with policies to better manage and automate distributed file data;

• Brocade File Lifecycle Manager (“FLM”), provides a powerful way to automatically move files across tiers of storage based on company or administrative policies. Brocade FLM helps to meet compliance requirements, while driving lower overall storage costs;

• Brocade MyView is a resource access management solution that provides personalized, secure access to Windows file resources across the enterprise, improving data security and compliance practices; and

• Brocade UNC Update helps support non-disruptive storage migration by accurately reporting and updating interdependent references in files.

Server Connectivity Solutions

In late fiscal year 2007, Brocade outlined its plans to deliver innovative next-generation server connectivity products, commonly referred to as host bus adapters (“HBAs”) in today’s market. Brocade began shipping its first HBA products in May 2007, with availability of next-generation products expected beginning in the first half of 2008. These future offerings are expected to include 8 Gbit/sec Fibre Channel and 10 Gigabit Ethernet technologies and to dovetail with evolving SAN standards and virtualization solutions.

Brocade Services

Brocade offers a range of professional and support services to facilitate customer projects, to assist customers in the design, implementation, management and operation of their SAN and to provide extended customer support. These services address a number of customer risk factors that must be managed during the life cycle of a storage network or data center infrastructure and are valued because they bring valuable experience and expertise to a customer challenge. Brocade services may be delivered directly to end-user customers, or via partners as a component of a broader service and support offering.

Industry Initiatives and Standards Development

Brocade works with industry-leading companies to facilitate the development of standards, technologies, products, and services that focus on the simplification of data center infrastructure management, and the implementation and management of storage networking environments. Brocade has an open approach to standards works with nearly every leading provider of server, storage and SAN management applications and technologies.

Brocade is continuing this commitment with regard to its file data management products. Brocade is actively involved with key file management product partners and competitors to develop an industry-based technical working group to deliver common architecture definitions for the FAN sector.

Brocade’s has a long history of being a major contributor to the evolution of industry standards ranging from Fibre Channel communication technology to SAN interoperability to storage and SAN management. Brocade contributes to related industry standards committees and has authored or co-authored the majority of the Fibre Channel protocol standards in existence today. As Brocade continues to expand its leadership presence in the new markets the Company’s participation in associated standards groups continues to grow. The Company in the past fiscal year has added membership in the Green Grid, SNIA Green Working Group, Ethernet Alliance and Fibre Channel over Ethernet (“FCoE”) organizations.

Storage Networking Environment Interoperability

As SANs have increased in size and comprise more and different types of server, storage and interconnection devices, the need for interoperability among those devices has similarly increased. Brocade has invested a significant amount of resources for purposes of providing interoperability among Brocade solutions and the servers, storage and storage management applications that run in the Brocade environment, as well as in driving standards for interoperability among SAN interconnection devices. Brocade also certifies its solutions in operational storage environments through its testing programs, its partners’ testing and qualification initiatives, and through certification programs for third party products, which it offers as a resource to its application and technology partners. Through Brocade’s testing initiatives, Brocade also certifies interoperability configurations of common customer environments, such as remote data backup in a multi-vendor server and storage environment.

Application Interoperability

An important aspect of managing storage environments is the management software used to administer, manage and provision storage resources and data. Brocade products offer advanced capabilities that allow third-party developers of storage software applications to gain additional functionality and simplify the development of their applications.

CEO BACKGROUND

John W. Gerdelman has served as director since February 2007 when he was appointed to the Board in connection with Brocade’s acquisition of McDATA Corporation. Since January 2004, Mr. Gerdelman has been the Chairman of Intelliden Corporation, a company which he co-founded that provides software solutions that enable networks to operate more intelligently by automating network change management and enforcing business policy in network operations. From April 2002 to December 2003, Mr. Gerdelman was the Chief Executive Officer for Metromedia Fiber Networks during its bankruptcy reorganization. From January 2000 until March 2002, Mr. Gerdelman worked with several new ventures as Managing Member of Mortonsgroup LLC. From April 1999 to December 1999, he served as the President and CEO of USA.NET. From 1986 until 1999, Mr. Gerdelman held various positions with MCI Communications Corporation in Sales, Marketing, Sales Operations, Network Operations and Information Technology, including President of the Network and Information Technology Division and served as CEO of Long Lines Limited, a startup call center company. Before joining MCI, Mr. Gerdelman was with Baxter Travenol Corporation in Sales Operations and served in the U.S. Navy as a Naval Aviator. He received his B.S. degree in chemistry from the College of William and Mary, where he now serves on the Board of Visitors. Mr. Gerdelman also currently serves as a director of Sycamore Networks, Inc., an optical switching company, APAC Customer Services, Inc., a call center company, and Proxim Wireless Corporation (formerly, Terabeam Corporation) a broadband provider. Mr. Gerdelman serves on Brocade’s Compensation Committee.

Glenn C. Jones has served as director since April 2006. Mr. Jones has served as a business consultant to technology companies since 1998. Mr. Jones previously served as Chief Financial Officer of Cirrus Logic, Inc. as well as Chief Financial Officer of PMC-Sierra, Inc. Prior to these public company roles, he was Chief Financial Officer for Metaphor Computer Systems, Inc. and served as General Manager of Metaphor’s computer systems business which was acquired by IBM Corporation. He also was the founding Chief Financial Officer and Vice President of Operations for Gain Computer Systems, which was acquired by Sybase Corp. Mr. Jones, a CPA, holds a B.S. in Accounting from the University of Illinois and an M.B.A. from Golden Gate University. Mr. Jones serves on Brocade’s Audit Committee.

Michael Klayko has served as our Chief Executive Officer and as a director since January 2005. Prior to that, he served as Vice President, Worldwide Sales from May 2004 until January 2005. From April 2003 until May 2004, Mr. Klayko served as Vice President, Worldwide Marketing and Support, and from January 2003 until April 2003, he was Vice President, OEM Sales. From May 2001 to January 2003, Mr. Klayko was Chief Executive Officer and President of Rhapsody Networks, a privately held technology company acquired by Brocade. From December 1998 to April 2001, Mr. Klayko served as Executive Vice President of McDATA Corporation, a storage networking company. From March 1995 to November 1998, Mr. Klayko was Senior Vice President for North American Sales at EMC Corporation, a provider of information storage systems products. Mr. Klayko also held various executive sales and marketing positions at Hewlett-Packard Company and IBM Corporation. Mr. Klayko received a B.S. in Electronic Engineering from Ohio Institute of Technology, in Columbus, Ohio. Mr. Klayko is the Chairman of our Corporate Development Committee.

David L. House has served as director since 2004 and as the Chairman of our Board of Directors since December 2005. From January 2005 through December 2005, he served as Executive Chairman of the Board. Mr. House has served as the Chairman of the Board of Directors of Credence Systems Corporation since December 2007 and a director since December 2005 and served as the Executive Chairman of the Board of Credence Systems Corporation from December 2005 until December 2007. Mr. House served as Chairman and Chief Executive Officer of Allegro Networks from January 2001 until April 2003. Prior to that, he served as President of Nortel Networks Corp. from August 1998 until August 1999. Mr. House joined Nortel Networks Corp. when it was merged with Bay Networks, Inc., where he served as Chairman of the Board, President and Chief Executive Officer from October 1996 until August 1998. Mr. House served in senior management positions at Intel Corporation for 23 years. Mr. House received a B.S.E.E. degree from Michigan Technological University and an M.S.E.E. degree from Northeastern University of Boston. Mr. House serves on our Compensation, Nominating and Corporate Governance and Corporate Development Committees.

L. William Krause has served as director since 2004. Mr. Krause has been President of LWK Ventures, a private investment firm since 1991. In addition, Mr. Krause served as Chairman of the Board of Caspian Networks, Inc., an IP networking systems provider, from April 2002 to September 2006 and as Chief Executive Officer from April 2002 until June 2004. From September 2001 to February 2002, Mr. Krause was Chairman and Chief Executive Officer of Exodus Communications, Inc., which he guided through Chapter 11 Bankruptcy to a sale of assets. He also served as President and Chief Executive Officer of 3Com Corporation, a global data networking company, from 1981 to 1990, and as its Chairman from 1987 to 1993 when he retired. Mr. Krause currently serves as director of Core-Mark Holdings, Inc., a distributor of packaged consumer goods, Packeteer, Inc., a provider of application traffic management systems, Sybase, Inc., a provider of enterprise and mobile software solutions for information management, development and integration, and Trizetto Group, Inc., a supplier of software and services to the healthcare industry. Mr. Krause holds a B.S. degree in electrical engineering and received an honorary Doctorate of Science from The Citadel. Mr. Krause serves on our Compensation Committee and as Chairman of our Nominating and Corporate Governance Committee.

Michael J. Rose has served as director since April 2006. Mr. Rose is the retired Executive Vice President and Chief Information Officer of Royal Dutch Shell plc where he served from 2001 to December 2005. Prior to Royal Dutch Shell, Mr. Rose worked for 23 years in a wide range of positions at Hewlett Packard, including controller for various business groups. In 1997, he was named Hewlett Packard’s Chief Information Officer, and in 2000 he was elected an officer by the Board of Directors of Hewlett Packard. He was named the company’s Controller in 2001. Mr. Rose currently serves as a director of Juniper Networks, a network infrastructure company. He holds a B.A. in Economics from the State University of New York at Genesee, N.Y. Mr. Rose serves on Brocade’s Audit and Corporate Development Committees.

Renato (Renny) A. DiPentima has served as director since February 2007 when he was appointed to the Board in connection with Brocade’s acquisition of McDATA Corporation. Dr. DiPentima is the retired President and Chief Executive Officer of SRA International, a provider of technology and strategic consulting services and solutions, where he served from January 2005 until March 2007. From November 2003 to January 2005, he served as SRA’s President and Chief Operating Officer. Prior to that, Dr. DiPentima served as Senior Vice President and President of SRA’s consulting and systems integration division since the division’s formation in January 2001. From July 1997 to January 2001, he served as President of SRA’s government sector, overseeing government business, projects, and contracts. From July 1995 to July 1997, Dr. DiPentima served as Vice President and as SRA’s Chief Information Officer. Prior to joining SRA, Dr. DiPentima held several senior management positions in the U.S. federal government, most recently serving as deputy commissioner for systems at the Social Security Administration, from May 1990 to June 1995. Dr. DiPentima is a director of SRA International. Dr. DiPentima is also currently serving on several governmental and corporate advisory boards. Dr. DiPentima received a B.A. from New York University, an M.A. from George Washington University and a Ph.D. from the University of Maryland. He has also completed the program for Senior Managers at the John F. Kennedy School of Government at Harvard University. Dr. DiPentima serves on Brocade’s Nominating and Corporate Governance Committee.

Sanjay Vaswani has served as a director since April 2004. Mr. Vaswani has been a managing partner of the Center for Corporate Innovation, Inc. since 1990. From 1987 to 1990 he was with McKinsey & Company. Prior to that, Mr. Vaswani was employed by Intel Corporation. Mr. Vaswani serves as a director of Blue Star Infotech Ltd., an Indian publicly traded software services firm. Mr. Vaswani earned a bachelor’s degree from the University of Texas at Austin and an M.B.A. from the Wharton School of Business at the University of Pennsylvania. Mr. Vaswani serves on our Compensation and Nominating and Corporate Governance Committees.

Robert R. Walker has served as a director since April 2005. Mr. Walker is the retired Executive Vice President and Chief Financial Officer for Agilent Technologies, Inc., an electronic instrument company, where he served from May 2000 until December 2001. From May 1999 until May 2000, he was Senior Vice President and Chief Financial Officer. During 1997 and 1998, Mr. Walker served as Vice President and General Manager of Hewlett-Packard’s Professional Services Business Unit. From 1993 to 1997, he led Hewlett-Packard’s information systems function,including as Vice President and Chief Information Officer from 1995 to 1997. Mr. Walker is also a director of Electro Scientific Industries, a company that designs and manufactures microelectronics production equipment. He received both a B.S. in electrical engineering and an M.B.A. from Cornell University. Mr. Walker is the Chairman of our Audit Committee.

We expect that one of the current directors of the Company will join the Audit Committee immediately following the Annual Meeting to fill the vacancy created by Mr. Walker’s departure from the Audit Committee.

MANAGEMENT DISCUSSION FROM LATEST 10K

Results of Operations

We report our fiscal year on a 52/53-week period ending on the last Saturday in October of each year. Accordingly, the fiscal year ends for fiscal years 2007, 2006 and 2005 were October 27, 28 and 29, respectively. As is customary for companies that use the 52/53-week convention, every 5th year contains a 53-week fiscal year. As a result, our fiscal year 2004 was a 53-week fiscal year. Also as a result, our second quarter of fiscal year 2004 included one extra week and was 14 weeks in length. Fiscal years 2007, 2006 and 2005, were 52-week fiscal years.

Revenues. Our revenues are derived primarily from sales of our family of SAN products and our service and support offerings related to those products. Our fabric switches and directors, which range in size from 8 ports to 512 ports, connect our customers’ servers and storage devices creating a SAN.

The increase in net revenues for the year ended October 27, 2007 as compared with net revenues for the year ended October 28, 2006 reflects growth in sales of both product and services offerings. The increase in product revenues for the period reflected a 60 percent increase in the number of ports shipped, due to our acquisition of McDATA in January 2007, partially offset by an 8 percent decline in average selling price per port. The increase in service revenues is a result of the McDATA acquisition as well as the continued expansion of our installed base.

The increase in net revenues for the year ended October 28, 2006 as compared with net revenues for the year ended October 29, 2005 reflects growth in sales of both products and services offerings. The increase in product revenues for the period reflected a 47 percent increase in the number of ports shipped, partially offset by a 12 percent decline in average selling price per port. The increase in service revenues is a result of the expansion of our installed base and continued recognition of support revenue.

For both the year ended October 27, 2007 and October 28, 2006, the declines in average selling prices are the result of a continuing competitive pricing environment and change in product mix. We believe the increase in the number of ports shipped reflects higher demand for our products due in part to expansion of our installed base as a result of the McDATA acquisition as well as higher market demand as end-users continue to consolidate storage and servers infrastructures using SANs, expand SANs to support more applications and deploy SANs in new environments.

Going forward, we expect the number of ports shipped to fluctuate depending on the demand for our existing and recently introduced products as well as the timing of product transitions by our OEM customers. We also expect that average selling prices per port will likely decline at rates consistent with historical rates, unless they are adversely affected by accelerated pricing pressures, new product introductions by us or our competitors, or other factors that may be beyond our control. Historically, Brocade’s first and fourth fiscal quarters are seasonally stronger quarters than its second and third fiscal quarters.

Historically, domestic revenues have accounted for between 60 percent and 75 percent of total revenues. International revenues primarily consist of sales to customers in Western Europe and the greater Asia Pacific region. For the year ended October 27, 2007 as compared to the year ended October 28, 2006, international revenues increased as a percentage of total revenue primarily as a result of faster growth in international regions. Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM customers 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 practices of our OEM customers, but we believe international revenue is a larger percent of our total revenue than the attributed revenues may indicate.

A significant portion of our revenue is concentrated among a relatively small number of OEM customers. For the years ended 2007, 2006 and 2005, three customers each represented ten percent or more of our total revenues for a combined total of 68 percent, 73 percent and 71 percent, respectively, of our total 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 customers. Therefore, the loss of, or a 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.

Cost of Goods Sold. Cost of goods sold consists of product costs, which typically vary with volume and manufacturing operations costs, which do not change directly with volume.

Gross margin for the year ended October 27, 2007 was 53.5 percent, a decrease of 5.8 percentage points from 59.3 percent for the year ended October 28, 2006. For the year ended October 27, 2007, product costs relative to net revenues increased by 2.2 percent as compared to the year ended October 28, 2006. This is primarily the result of the McDATA acquisition which resulted in an increase of $50.8 million in headcount related expenses and $34.0 million of amortization of intangible assets included in product costs for the year ended October 27, 2007 compared with no amortization of intangible assets included in product costs in the year ended October 28, 2006. In addition, cost for outside services rose by $20.5 million, engineering costs related to sustaining existing products increased by $20.3 million, and Facilities and IT expenses increased by $19.8 million in fiscal year 2007 compared to fiscal year

2006. Service operations costs increased by $29.6 million primarily due to increased headcount, as the service and support organizations were expanded as a result of the McDATA acquisition.

Gross margin for the year ended October 28, 2006 was 59.3 percent, an increase of 3 percentage points from 56.3 percent for the year ended October 29, 2005. For the year ended October 28, 2006, product costs relative to net revenues decreased as compared to the year ended October 29, 2005 due to the transition from 2 Gbit products to 4 Gbit products and relatively stable pricing, more efficient production with higher volumes and a favorable mix of products shipped. Manufacturing operation costs and service operation costs decreased by 0.4 percent relative to net revenues primarily due to the increase in revenue partially offset by an increase in headcount and higher sustaining engineering charges, as products transitioned from the development phase to the engineering phase. In addition, stock-based compensation expense for the year ended October 28, 2006 increased by 1.2 percent relative to net revenues primarily as a result of our adoption of SFAS 123R.

Gross margin is primarily affected by average selling price per port, number of ports shipped and cost of goods sold. As described above, we expect that average selling prices per port for our products will continue to decline at rates consistent with historical rates, unless they are further affected by accelerated pricing pressures, new product introductions by us or our competitors, or other factors that may be beyond our control. We believe that we have the ability to partially mitigate the effect of declines in average selling price per port on gross margins through our product and manufacturing operations cost reductions. However, the average selling price per port could decline at a faster pace than we anticipate. If this dynamic occurs, we may not be able to reduce our costs fast enough to prevent a decline in our gross margins. In addition, we must continue to increase the current volume of ports shipped to maintain our current gross margins. If we are unable to offset future reductions of average selling price per port with reductions in product and manufacturing operations costs, or if as a result of future reductions in average selling price per port our revenues do not grow, our gross margins would be negatively affected.

We recently introduced several new products and expect to introduce additional new products in the near future. As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. Our gross margins would likely be adversely affected if we fail to successfully manage the introductions of these new products. However, we currently anticipate that fluctuations in cost of goods sold related expenses will be consistent with fluctuations in revenue.

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

For the year ended October 27, 2007, R&D expenses increased by $48.5 million, or 29.4 percent, to $213.3 million, compared with $164.8 million, for the year ended October 28, 2006. This increase is primarily due to a $31.1 million increase in salaries and headcount related costs as a result of the McDATA and Silverback acquisitions, as well as an increase of $12.5 million in additional outside service related expenses related to product development. In addition, prototypes and non-recurring engineering expenses increased by $6.8 million as more products were developed and certified in fiscal year 2007. Depreciation expense increased by $5.2 million due to a larger asset pool as a result of the McDATA acquisition, offset by a $20.3 million increase in engineering costs due to more products being transitioned from the development phase into the sustaining phase in fiscal year 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Revenues. Our revenues are derived primarily from sales of our DCI products, particularly our family of SAN products, and our service and support offerings related to those products. Our fabric switches and directors, which range in size from 8 ports to 896 ports, connect our customers’ servers and storage devices creating a SAN.

The increase in total net revenues for the three months ended July 26, 2008 as compared to total net revenues for the three months ended July 28, 2007 reflects growth in sales of DCI products, S3 offerings and other products. The increase in DCI product revenues reflects a 12.9 percent increase in the number of ports shipped, partially offset by a 7.9 percent decrease in average selling price per port. S3 revenues increased as a result of the continued expansion of our installed base and expansion in professional services as a result of our acquisition of Strategic Business Systems, Inc. (“SBS”) in March 2008, as well as a $3.9 million reduction in the purchase price accounting adjustment related to the McDATA acquisition. Other revenues increased due to a 31.7 percent increase in the number of ports shipped as a result of our continued growth in the embedded switch market, partially offset by a 0.5 percent decrease in the average selling price per port.
For the three months ended July 26, 2008 and July 28, 2007, the declines in average selling prices were the result of a continuing competitive pricing environment offset by a mix shift to higher port density and price per port products. We believe the increase in the number of ports shipped reflects higher demand for our products as well as higher market demand as end-users continue to consolidate storage and server infrastructures using SANs, expand SANs to support more applications, and deploy SANs in new environments.

The increase in total net revenues for the nine months ended July 26, 2008 as compared to total net revenues for the nine months ended July 28, 2007 reflects growth in sales of DCI products, S3 offerings and other products. The increase in DCI product revenues for the period reflects a 12.3 percent increase in the number of ports shipped due to our acquisition of McDATA in January 2007 and mix shift from lower port density switch products to higher port density director products, partially offset by a 1.2 percent decrease in average selling price per port. The increase in S3 revenues was a result of the continued expansion of our installed base and the McDATA and SBS acquisitions as well as the $5.1 million reduction in the purchase price accounting adjustment related to the McDATA acquisition. Other revenues increased due to a 35.6 percent increase in the number of ports shipped as a result of our continued growth in the embedded switch market, partially offset by a 0.5 percent decrease in average selling price per port.
For the nine months ended July 26, 2008 and July 28, 2007, the declines in average selling prices were the result of a continuing competitive pricing environment offset by a mix shift to higher port density and price per port products. We believe the increase in the number of ports shipped reflects higher demand for our products due in part to expansion of our installed base as a result of the McDATA acquisition as well as higher market demand as end-users continue to consolidate storage and server infrastructures using SANs, expand SANs to support more applications, and deploy SANs in new environments.
Going forward, we expect the number of ports shipped to fluctuate depending on the demand for our existing and recently introduced products as well as the timing of product transitions by our OEM customers. We also expect that average selling prices per port will likely decline at rates consistent with historical rates, unless they are adversely affected by accelerated pricing pressures, new product introductions by us or our competitors, or other factors that may be beyond our control. Historically, our first and fourth fiscal quarters are seasonally stronger quarters from a revenue perspective than our second and third fiscal quarters.

Historically, domestic revenues have accounted for between 58 percent and 75 percent of total net revenues. International revenues primarily consist of sales to customers in Western Europe and the greater Asia Pacific region. For the three and nine months ended July 26, 2008 as compared to the three and nine months ended July 28, 2007, international revenues decreased as a percentage of total net revenues primarily as a result of stronger sales in the North America region. Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM customers 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 practices of our OEM customers, but we believe that international revenues comprise a larger percent of our total net revenues than the attributed revenues may indicate.
A significant portion of our revenue is concentrated among a relatively small number of OEM customers. For the three months ended July 26, 2008, three customers each represented ten percent or more of our total net revenues for a combined total of 62 percent of our total net revenues. For the three months ended July 28, 2007, the same three customers each represented ten percent or more of our total net revenues for a combined total of 64 percent of our 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 customers. Therefore, the loss of, or a 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.
A majority of our trade receivable balance is derived from sales to OEM partners in the computer storage and server industry. As of July 26, 2008, four customers accounted for 17 percent, 15 percent, 14 percent and 13 percent of total accounts receivable. As of October 27, 2007, three customers accounted for 21 percent, 17 percent and 13 percent of total accounts receivable. We perform ongoing credit evaluations of our customers and generally do not require collateral on accounts receivable balances. We have established reserves for credit losses, sales allowances, and other 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.

Gross margin for the three months ended July 26, 2008 was 58.3 percent, an increase of 7.7 percentage points from 50.6 percent for the three months ended July 28, 2007. For the three months ended July 26, 2008, DCI product costs relative to net revenues decreased by 10.0 percent as compared to the three months ended July 28, 2007. This was primarily the result of a 10.6 percent decrease in product costs due to a mix shift from legacy McDATA director and switch products for the three months ended July 28, 2007 toward higher margin Brocade director and switch products for the three months ended July 26, 2008, and a reduction in intangibles amortization included in DCI as a percent of revenue by 1.3 percent, partially offset by a 1.9 percent increase in manufacturing costs as a percent of revenue. S3 operations costs decreased by 2.0 percent relative to net revenues primarily due to continued revenue growth from the installed base and increased revenue contributions from SBS, as well as a reduced purchase price accounting adjustment, offset by slower operating costs growth as a percent of revenue for the three months ended July 26, 2008 relative to the three months ended July 28, 2007. Other product costs decreased by 7.6 percent relative to net revenues primarily due to an 11.7 percent decrease in product costs from favorable sales product mix, partially offset by a 4.0 percent increase in manufacturing costs primarily due to payroll related expenses related to increased headcount for the three months ended July 26, 2008 relative to the three months ended July 28, 2007.

Gross margin for the nine months ended July 26, 2008 was 57.6 percent, an increase of 4.3 percentage points from 53.3 percent for the nine months ended July 28, 2007. For the nine months ended July 26, 2008, DCI product costs relative to net revenues decreased by 4.9 percent as compared to the nine months ended July 28, 2007. This was primarily the result of a 6.5 percent decrease in product costs due to a mix shift from switch products for the nine months ended July 28, 2007 toward higher margin director products for the nine months ended July 26, 2008, partially offset by a 0.4 percent increase in intangibles amortization as well as a 1.1 percent increase in manufacturing costs due to increased headcount resulting from the McDATA acquisition. S3 operations costs decreased by 7.1 percent relative to net revenues primarily due to a 62.7% increase in revenues, offset by increases in headcount and outside services as the organization was expanded as a result of the McDATA acquisition. Other product costs decreased by 5.3 percent relative to net revenues primarily due to an 8.6 percent decrease in product costs from favorable sales product mix, partially offset by a 3.3% increase in manufacturing costs primarily due to payroll expenses related to increased headcount for the nine months ended July 26, 2008 relative to the nine months ended July 28, 2007.
Gross margin is primarily affected by average selling price per port, number of ports shipped and cost of revenues. As described above, we expect that average selling prices per port for our products will continue to decline at rates consistent with historical rates, unless they are further affected by accelerated pricing pressures, new product introductions by us or our competitors, or other factors that may be beyond our control. We believe that we have the ability to partially mitigate the effect of declines in average selling price per port on gross margins through our product and manufacturing operations cost reductions. However, the average selling price per port could decline at a faster pace than we anticipate. If this dynamic occurs, we may not be able to reduce our costs fast enough to prevent a decline in our gross margins. In addition, we must continue to increase the current volume of ports shipped to maintain our current gross margins. If we are unable to offset future reductions in average selling price per port with reductions in product and manufacturing operations costs, or if as a result of future reductions in average selling price per port our revenues do not grow, our gross margins would be negatively affected.

We recently introduced several new products and expect to introduce additional new products in the near future. As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. Our gross margins would likely be adversely affected if we fail to successfully manage the introductions of these new products. However, we currently anticipate that fluctuations in cost of revenues will be consistent with fluctuations in revenue.
Research and development expenses. Research and development (“R&D”) expenses consist primarily of salaries and related expenses for personnel engaged in engineering and R&D activities, fees paid to consultants and outside service providers, nonrecurring engineering charges, prototyping expenses related to the design, development, testing and enhancement of our products, depreciation related to engineering and test equipment, and IT and facilities expenses.

R&D expenses increased for the three months ended July 26, 2008 as compared to the three months ended July 28, 2007. This increase was primarily due to a $6.4 million increase in salaries and wages due to headcount growth of 144 employees, a $1.4 million increase due to headcount shift from sustaining development to new development projects, and a $2.2 million increase due to IT and facilities related expenses. R&D expenses increased 1.4 percentage points as a percent of total net revenues in the three months ended July 26, 2008 compared with the three months ended July 28, 2007.

R&D expenses increased in absolute dollars for the nine months ended July 26, 2008 as compared to the nine months ended July 28, 2007. This increase was primarily due to a $12.4 million increase in salaries and wages as a result of the McDATA and Silverback Systems, Inc. (“Silverback”) acquisitions and continued headcount growth, $2.7 million in additional outside service expenses related to product development including our recent introduction of our 8 Gigabit switch family, $3.0 million in prototypes and nonrecurring engineering charges, a $10.8 million increase in expenses related to IT, facilities and other shared functions, and a $3.1 million increase due to headcount shift from sustaining development to new development projects, partially offset by a $5.2 million decrease in acquisition and engineering related bonuses. R&D expenses were relatively unchanged as a percent of total net revenues in the nine months ended July 26, 2008 compared with the nine months ended July 28, 2007.
We currently anticipate that R&D expenses, as a percent of revenue, for the three months ending October 25, 2008 will be relatively consistent with the three months ended July 26, 2008.

CONF CALL

Alex Lenke

Joining me today from Brocade are Michael Klayko, CEO, and Richard Deranleau, CFO. Before we begin let me cover some housekeeping items.

Brocade issued a press release today detailing its third quarter fiscal 2008 financial results via PRNewswire and First Call. The Q3 press release is available on our website at www.brcd.com. A copy of the slide presentation will be posted just after the conference call concludes.

This conference call is being webcast and will be archived on our website for approximately 12 months. In addition, a telephone replay will be made available at approximately 8:00 a.m. Pacific Time today through 8:00 a.m. Pacific Time August 20th. To access the telephone replay, dial 888-286-8010 or 617-801-6888. The pass code is 99608062.

As a reminder, the information the presenters discuss today will include forward-looking statements, including, without limitation, statements about Brocade’s financial results, business outlook, guidance and the proposed acquisition of Foundry Networks. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other risks are set forth in more detail in our Form 10-Q for the fiscal quarter ended April 26, 2008 and Form 10-K for the fiscal year ended October 27, 2007.

These forward-looking statements reflect beliefs, estimates and predictions as of today and Brocade expressly assumes no obligation to update any such forward-looking statements.

Certain financial information that we review on today’s conference call is presented on a non-GAAP basis. The most directly comparable GAAP information and a reconciliation between the nonGAAP and GAAP figures is provided in our fiscal Q3 press release, which has been furnished to the SEC on Form 8-K and in the corresponding slide presentation on our website.

Before turning the call over to Mike, I would like to note that this call will focus primarily on Brocade’s operational results for its fiscal Q3 and that further detail regarding the Foundry Networks acquisition will be provided at our upcoming analyst's day on September 17th in San Jose.

With that, I will now turn the call over to Mike.

Mike Klayko

Q3 was an outstanding quarter as Brocade returned to double-digit revenue growth, setting a new company record for quarterly revenue in what is typically a seasonally slower period. Our continued operational execution drove significantly better than expected financial performance in Q3.

We exceeded the Street EPS estimates for the 12th consecutive quarter and achieved sequential margin expansion despite a seasonally mixed shift towards our switch and embedded products. And as Richard will discuss, our cash flow and balance sheet metrics remain robust.

From a product perspective, Q3 saw continued strong performance of our new DCX backbone, record revenues in our switch business, and the third consecutive record revenue quarter of our embedded switches for the bladed server market. An increase in professional services helped drive record revenue in our services business as customers increasingly turned to Brocade as the trusted expert in the evolution of their data center networks.

In addition, several new products that helped drive our organic growth in Q3 are expected to continue to deliver growth for the company over time. For example, our industry leading DCX backbone, in only its second full quarter of shipment, continues to exceed our expectations. In particular, we are very pleased to see increased DCX acceptance this quarter from our customers whose networks are based on traditional MEG data technology. We firmly expect that the DCX backbone will continue to ramp as customers realize its performance, density and power efficiency advantages.

Our record switch business was driven by a combination of strong worldwide demand for our 4gig products and the initial acceptance of our new, 8gig switch family. These new switches were introduced by all of our major OEMs in our Q3, and once again set new benchmarks in the industry for performance, density and power efficiency. We anticipate an expanded market adoption of these industry leading switches in their first full quarter of shipment in our Q4 and continuing into 2009.

In Q3 we also began shipping our new 8gig HBA products into key strategic accounts. The initial customer feedback has been very positive with early trials clearly highlighting our performance and integrated feature set advantages. We anticipate that this customer feedback will help drive growth in our new HBA business in 2009 as strategic OEM qualifications are completed later this year.

These are just a few examples of the continuing product cycle that we believe has further widened our competitive advantage in our core markets, and it has helped to bolster our confidence for increasing momentum as we enter into complementary market segments.

Our performance in Q3, when considered alongside the solid results of many of our enterprise partners, also indicates that the fundamental market trends and customer demand drivers remain intact. Our product road map and solutions addressed customer demands for high performance, [alter] reliable networking in a next generation data center. Customers are also relying on us for better virtualization deployments, new data management strategies, data center efficiencies and green initiatives.

Increasingly, customers are reaching the conclusion that our data center fabric strategy is the most relevant and pragmatic approach in the industry to solve their evolving data center management and networking needs. These consistent, fundamental market drivers, along with our broad and growing product advantages, give us growing confidence in the health of our target markets and in our ability to compete and win in both the short and long term.

With that, I’d like to turn the call over to Richard for more detail on our Q3 results and outlook going forward. Then I will return for a few concluding remarks.

Richard Deranleau

We are very pleased with our third fiscal quarter, where we delivered excellent results in what is typically a seasonally weaker quarter. Let’s look at our Q3 financial results in detail beginning with the income statement.

Q3 revenues were $365.7 million, up 3% sequentially and up 12% year-over-year. We are very pleased with this performance given that our fiscal Q3 is a seasonally weaker quarter and historically flat to down 3% sequentially from our fiscal Q2. The record revenues in Q3 were driven by strong performance in our core infrastructure products, especially switches, our embedded switches for bladed servers, and also in our Services business.

On a geographic basis, we saw particular strength in North America. In Q3 our international revenue percentage, normalizing for those large OEMs who take delivery of internationally destined product within the U.S., was approximately 60%, down from the 62% in Q2.

Moving on to our Business segment, in our core data center infrastructure business, our data center infrastructure revenues were up 1% quarter-over-quarter and up 4% year-over-year. Our DCX backbone continues to be a significant contributor, representing over 30% of our overall director sales in Q3, and we had a solid demand for the 48K director. Total director revenues were down quarter-over-quarter as is seasonally expected for our Q3, but were up 3% year-over-year.

Switch revenue was up 12% quarter-over-quarter and up 5% year-over-year. We have seen a rebound in our Switch business, helped by the introduction and initial ramp of our 8gig switches.

In our Services business, we had record revenues, which were up a healthy 8% quarter-over-quarter and 43% year-over-year. The revenue growth was driven primarily by an increase in our Professional Services business, which is important strategically but which also carries a lower gross margin than our support and maintenance offerings. On a non-GAAP basis, overall Service gross margins were 37.5%, at the low end of our Services target model of 38% to 45%, due to the higher mix of Professional Services.

The impact of the purchase accounting adjustment related to the acquisition on McData in Q3 was a $1.9 million reduction.

In our Files business, revenues from our FME product were not material in the quarter, but early deployments have been well received by new customers. Overall, revenue in our Files business was down quarter-over-quarter and down year-over-year.

In our Server Connectivity business, in our embedded switch product line, we had our third consecutive record quarter with revenues up 12% quarter-over-quarter and 39% year-over-year. We are on track and began revenue shipments of our new 8-gig HBAs via channel partners this quarter. We expect to see more significant revenue contributions from our new HBA products in fiscal year ’09 as our OEM partners complete their qualification testing.

On a non-GAAP basis, gross margin for Q3 was 61.9%, higher than our previously expected range of 59% to 60% and above our long-term target model range of 57% to 60%. The upside in gross margins was driven by higher revenues and an improvement in our product cost structure. In Q3 the pricing environment remained stable and sequential like-for-like ASP percentage declines were again in the low single digits.

Q3 non-GAAP operating expenses were $143.7 million, slightly above the higher end of our prior outlook of $138 million to $142 million, driven primarily by the variable costs from the higher revenue levels. Non-GAAP operating margin for Q3 was 22.6%, exceeding our prior outlook of 19% to 20% and at the high end of our long-term model of 18% to 22% of revenues.

Our effective non-GAAP tax rate in Q3 was 32.3%, slightly above our expected rate of 30% to 31%. Our effective GAAP tax rate in Q3 was 61.1%. The difference between GAAP and nonGAAP net income are reconciled in today’s press release and in today’s webcast slides.

Moving on to our operating results, on an earnings per share basis, Q3 non-GAAP diluted EPS was $0.16, above our guidance of $0.13 to $0.14, driven primarily by the higher revenues. NonGAAP EPS also reflected a benefit of approximately $0.007 cents from a onetime foreign exchange gain of approximately $4.1 million.

Reporting on a GAAP diluted basis, Q3 EPS was $0.05.

Now turning to our cash flow and balance sheet, our cash and investment balance at the end of the quarter was $764 million. Net of convertible debt, the balance was $595 million, slightly down from last quarter. Cash flow from operations in the third quarter was $71.7 million, significantly above our expected range of $50 to $60 million, reflecting the strong cash generation power of the company’s business model.

In Q3 we used approximately $38 million to repurchase approximately 4.7 million shares of Brocade common stock. Stock repurchases during Q3 were executed under our corporate 10b51 automatic stock purchase plan. To date, we have purchased a total of 50.5 million shares of Brocade stock for a total of approximately $386 million.

During Q3 we suspended our share buyback program due to the impending Foundry acquisition. At the end of Q3 we had approximately $414 million remaining available under our total stock buyback authorizations, but plan to prioritize our use of cash for debt repayments following the expected close of the acquisition.

Now turning to our outlook for Q4, here are some assumptions for you to consider. While our continued assumption is that the macroeconomic environment will continue to be challenging until the beginning of calendar year 2009, we expect that IT spending on our core business will continue to show the same level of strength we have experienced in the first three quarters of our fiscal 2008.

Our best visibility continues to be at the enterprise level, which primarily impacts our director products. Because of our OEM model, our visibility into the mid-range space which primarily impacts our switch products - is more limited.

With this as a backdrop, we plan to continue carefully managing our expenses and head count growth. While our core markets remain very competitive, we believe that our new product introductions and our installed base advantage keeps us in a uniquely strong, competitive position. DCX continues to make a significant impact, and the initial ramp of our new 8gig switch family looks promising. From a pricing perspective, we expect quarterly ASP declines to remain in the low single digits.

Typically, Q4 is a stronger seasonal quarter. However, in the current macroeconomic environment, we are expecting Q4 revenue midpoint to be up 4% sequentially and up 11% year-over-year. Historically we would expect Q4 to have a higher mix of directors versus switches than in Q3, which would put slight sequential upward pressure on our gross margins in Q4.

Now, taking all of these factors into consideration, our outlook is as follows: We expect our revenue in Q4 to be in a range of $375 million to $385 million, a percentage range of up 2.5% to 5.3% sequentially and an increase of 10.3% to 13.2% year-over-year. We expect non-GAAP Q4 gross margin to be between 61% and 61.5% above our targeted long term model range of 57% to 60%.

For Q4 we expect total non-GAAP operating expenses to be in a range of $146 million to $149 million. While we expect to be disciplined in our spending, we plan to make additional investments in strategic R&D and marketing and sales programs in order to maintain our product cycle momentum and our strong position within the market. At the same time, we plan to manage non-strategic spending very carefully.

We expect our Q4 non-GAAP operating margin to be in a range of 20% to 22% which is within our long term target model. We expect non-GAAP other income-other expense net in Q4 to be approximately $2 to $3 million.

Regarding our tax rate, we expect our Q4 and annual non-GAAP tax rate will be approximately 31%, although there may be some level of volatility in the non-GAAP tax rate. We expect our GAAP tax rate will be 61% to 62%, reflecting the McData acquisition-related intercompany purchase of IP into our international tax structure and the non-deductibility of the amortization of purchased intangible assets.

We expect diluted shares outstanding to be in a range of 392 to 396 million shares, including the diluted impact of the McData convertible debt. Based on these factors, we expect Q4 '08 nonGAAP diluted EPS in a range of $0.15 to $0.16. We expect Q4 ’08 GAAP diluted EPS in a range of $0.04 to $0.05. And we expect the differences between non-GAAP and GAAP results in Q4 will consist primarily of the same items as in Q3. You can find the GAAP to non-GAAP reconciliation slides on our website.

Now turning to our balance sheet and cash flows, we expect capital expenditures in Q4 to be in the $12 million to $16 million range, plus expenditures for the new campus in a range of $20 to $25 million. We expect DSOs in Q4 to remain within our target range of 40 to 50 days and on hand inventory to be in a range of 15 to 20 million. We expect to generate cash from operations in Q4 of approximately $60 to $80 million.

In summary, in Q3 ’08 we had an excellent quarter financially, bucking typical seasonal trends and regaining the double-digit, year-on-year growth that we expect our core businesses to deliver. We executed well across all of our business fundamentals, including a strong rebound in our switch business, and continued growth in our embedded and service businesses. We retained and extended our strong market advantage with additional new products in our current product cycle.

We continued to make the necessary investments to maintain and improve our market position, while continuing to deliver on the improved business model targets that we outlined at our September, 2007 analyst's day. Going forward, we will continue to balance the need for strategic investments against the ongoing discipline in our operational spending, and we remain committed to continue optimizing our growth initiatives, our business model and return to shareholders.

Thank you everyone. And with that, I will now turn the call back to Mike.

Mike Klayko

We had an excellent Q3. We are executing very well on both strategic and the operational aspects of our business. Our customers and partners increasingly support our strategy, and our products and services are clearly aligned with theirs.

Let me put our Q3 performance into a more, long-term strategic context, specifically with respect to our announced acquisition of Foundry Networks. We clearly understand that in order to meet our long-term objectives, we must be able to generate healthy organic growth and margins in our respective core businesses.

Our Q3 performance and Foundry’s recent Q2 results are strong indicators that we are both on the right track to drive that ongoing, organic growth. And when you add this healthy core growth to our stated expectations regarding the acquisition and integration of Foundry, such as first, several potential sources of revenue leverage; second, the anticipated cost synergies; third, broad product and technology advantages; and finally, a more comprehensive and strategic position in a much larger market, well, you can understand why we are very excited about the future.

We will spend more time on the various aspects of the Foundry acquisition and on our preliminary expectations for 2009 at our analyst's day in San Jose on September 17th. We hope to see you there, and thank you again for joining us today.

Now we would like to open up the call to take any questions you might have.

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