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McData Post-Mortem

4:30 PM -- McData's earnings report Thursday held few surprises because the switch vendor had already warned of a poor quarter, plus its execs weren't talking about any integration issues from its impending sale to Brocade. But the numbers did shed some light on what went wrong in Broomfield, causing it to sell out to its rival for $713 million earlier this month. (See McData Announces Earnings and Brocade Bags McData For $713M.)

It became clear last quarter that McData's traditional strengths had become weaknesses. The long-time leader in the director market, McData's director revenue took a big dip last quarter from the previous quarter and last year. It didn't say exactly how much it declined, but overall product revenue fell 15 percent year over year and 13 percent sequentially while revenue from smaller switches increased. McData blamed part of its sagging director sales on an industry-wide slowdown in high-end storage, but Brocade and Cisco both had strong growth in director revenue. (See Cisco Rattles Storage Sabre and Brocade Reports Earnings.)

Also, McData was losing business through its traditionally strongest ally and former owner, EMC. Revenue from EMC fell 27 percent from the previous year and 17 percent from the previous quarter.

IBM now drives more revenue for McData than EMC. Still, it appears unlikely that McData could generate enough new business through IBM to make up what it lost from EMC. And it couldn't count on Hewlett-Packard, which apparently read the handwriting on the wall and was getting ready to dump McData. (See HP May Dump McData, Sources Say.)

CFO Scott Berman, who handled the earnings call while CEO John Kelley took a pass, admits a good part of McData's problems was self-inflicted. It was too slow to adopt 4-Gbit/s gear, especially directors. And its European sales slipped badly due to changes in the salesforce "and internal issues with respect to that transition."

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