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Reversals of Fortune

Reversals of Fortune McData has been surging - and now Cisco's No. 1 target is Mickey D, not Brocade

What a difference a year makes. Early last year McData Corp. (Nasdaq: MCDTA) was zooming downhill faster than an inebriated wombat on skis.

It was late to market with 2-Gbit/s Fibre Channel. Its sales were stalling. And it was forced to issue two earnings warnings for the first quarter (on March 5 and April 4, 2002). Because of an inventory writeoff, McData posted a gross margin of 21.5 percent for the quarter a truly gross gross margin (see McData Lowers Guidance and McData Meets Lower Expectations).

It seemed clear McData was getting desperate when it sued archrival Brocade Communications Systems Inc. (Nasdaq: BRCD), alleging patent infringement; the case remains in arbitration (see McData Fires Lawsuit at Brocade and Smart or Desperate?).

Fast-forward 12 months: McData is in full bloom. It's profitable! Analysts credit its low-cost Sphereon 4500 with successfully chewing into Brocade's dominant position in FC fabric switches. And while it's not certain yet whether McData is in full turnaround or whether it's just had a few good quarters, clearly, things have been clicking for the kids in Broomfield (see McData Switches on McProfit).

McData's convalescence is even more dramatic when you consider what's happened to Brocade over the same time period. True, Brocade still holds the overall lead in the Fibre Channel marketplace. But it has suffered serious wounds, some of them self-inflicted. It has laid off 275 employees, nearly 20 percent of its work force. CEO Greg Reyes effectively purged half his senior management team late last year. And in the most recent quarter, Brocade was nailed with a sizeable loss because of a $135 million charge related to its acquisition of Rhapsody Networks (see Brocade Hit With Q2 Loss, Brocade Chops More Heads, and Brocade Cleans House).

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