McData Still Waiting for Upswing

More than halfway through 2005, McData Corp. (Nasdaq: MCDTA) is still waiting to get the big boost from new products it counted on at the start of the year (see McData's Ready for Rollout and McData Goes on Offensive).

Overall, McData performed well in its second quarter, compared to the competition (see McData Reports Q2). Its $165.3 million in revenue and $0.03 earnings per share were higher than analysts expectations. Analysts expected $160 million and $0.01, according to Thomson First Call.

A closer look shows much of McData’s gains came from revenue from products it acquired by purchasing CNT in June (see McData Bags CNT for $235M). Factoring in combined revenue from both companies compared to previous quarters, McData’s revenue was about flat sequentially and up around 3 to 4 percent from last year.

That still puts it ahead of Brocade Communications Systems Inc. (Nasdaq: BRCD), which reported a 16 percent sequential drop and 19 percent year-over-year drop in revenue for last quarter. McData’s other main rival, Cisco Systems Inc. (Nasdaq: CSCO), also reported a sequential decline in Fibre Channel switch revenue recently.

McData CEO John Kelley estimates his company gained market share in the director space with sales of its i10K last quarter, but admits sales of the new director won’t fulfill expectations until top customer EMC Corp. (NYSE: EMC) qualifies and OEMs it (see McData Announces Intrepid i10K and McData Cuts & Shuffles).On a conference call Tuesday night, Kelley refused to give specific numbers on the i10K, but he said: “It would have been even better if it had been out through EMC, and I’ll leave it at that." The director, which started shipping earlier this year, has been qualified by Hitachi Data Systems (HDS) and IBM Corp. (NYSE: IBM). But EMC is selling it only to customers that request it.

Kelley doesn’t expect full EMC qualification until October. Sources say the director has performance issues under extreme heat, forcing McData to issue new firmware to EMC.

“We have a couple of small obstacles we should be overcoming,” Kelley says. “I believe we’ll meet our commitment to deliver that product to EMC through their customer base this quarter. I’m a bit frustrated that we haven’t gotten it through there now, but we’re working diligently with EMC, and I’m personally involved with that.”

In the fabric switch space, Kelley said revenue and ports were down sequentially, although up slightly year-over-year. “We believe our fabric switch revenue was negatively impacted by an aggressive push at one of our competitors to reduce 2-gig inventory at OEM partners."

That competitor is Brocade, which blamed poor sales last quarter on too much 2-Gbit/s inventory during its transition to 4-Gbit/s products (see Blunt Blades Bloody Brocade).Although Brocade has had a 4-Gbit/s switch available since last November and has a 4-Gbit/s director out -- while McData doesn’t expect one until next year -- Kelley says he doesn’t think McData is late to the 4-Gbit/s party.

"The marketing hype around 4-gig has been out there for some time,” he says. “It’s a culmination of 4-gig, 4-gig, 4-gig being out there in the press. But we think [4-gig switches] will have a nice ramp the rest of this year and next year.” McData announced Tuesday that EMC, Hitachi, and IBM have qualified its new 4-Gbit/s Spherion switches.

McData also reports revenue from its Eclipse SAN router declined sequentially in the second quarter, and blade server switches have yet to take off, although strong growth is still expected.

McData sells its blade switches in partnership with QLogic Corp. (Nasdaq: QLGC). Kelley notes Dell Computer Corp. (Nasdaq: DELL), Hewlett-Packard Co. (NYSE: HPQ), and IBM are shipping the switches with their blades, but “this market is not ramping as quickly as we expected." (See McData Hops on QLogic Blades.) Still, he says, “blade switches are expected to be the fastest growing Fibre Channel switch product in the foreseeable future, and we expect to benefit from this growth.”

— Dave Raffo, Senior Editor, Byte and Switch0