McData Finishes With a Flourish

As it prepares to slip away and become part of its rival, McData says it actually increased revenues last quarter.

That's good news for its acquirer Brocade, which is working towards closing a $713 million deal to form a company some industry insiders are fondly, if awkwardly, calling BrocData. (See Brocade Bags McData For $713M.) McData lost money in the quarter but any customer it keeps or gains will stay under the Brocade banner and away from its vaunted rival Cisco following the acquisition. (See Users Ponder Life Under Brocade.)

In a report released Wednesday night after the markets closed, McData said it expects to report revenues of $155 million to $157 million. That's way down from its $168.5 million in the same quarter last year, but up from the $150.1 million in the previous quarter.

"Our higher-end product offerings showed particular strength this quarter, with solid revenue contribution from our Fibre Channel director, extension, and FICON product offerings," McData CEO John Kelley said in a statement. Kelley also said McData hit a record in services revenue, driven by a services business it picked up when it acquired CNT Networks last year.

McData will officially announce its earnings Nov. 30.So why does a company preparing to be acquired give a preliminary earnings report when it never gave guidance for the quarter? In this case, it's to reassure customers of McData and Brocade, as well as investors, that McData is doing better than people expected. That's good for Brocade and bad for rival Cisco, which may have hoped to use this transition period to win business away from BrocData.

"I guess they didn't want the stock prices to get hurt based on chatter that McData revenues are falling off the cliff," says one Wall Street analyst.

Brocade has worked hard to try and convince customers it will support McData products and have an orderly transition, and even ran a full page ad in The Wall Street Journal saying so. McData also pledged to put up nearly $4 million to pay Kelley and other top executives to stick around after the deal closes. (See Kelley Gets 1.1M Reasons to Stay.)

Analysts say they were surprised by Kelley's revelation that McData did well with its directors. McData has steadily lost share there since rolling out its flagship I-10K director last year, with Cisco moving past McData into the lead, according to at least one market research firm. (See Unknown Document 110845.)

Analyst Dan Renouard of R.W. Baird speculates the uptick was driven more by sales patterns of McData's storage system partners, but he says the news is probably good for Brocade."Given many investors feared a fairly meaningful shortfall in McData revenue this quarter, we believe this news could be met with some relief," Renouard wrote today in a note to clients. "However, we believe much of the relative revenue strength was due to IBM and EMC improving after product cycle issues earlier in the year versus any fundamental improvement."

Aaron Rakers of A.G. Edwards issued a research note calling McData's quarter "somewhat impressive given our expectations of a more meaningful disruption associated with the pending acquisition by Brocade."

Brocade will announce its earnings from last quarter next Tuesday. If it meets its guidance of $200 million to $205 million -- compared to $189 million last year -- it would be up in the high teens percentage-wise from last quarter. Cisco said its storage revenue increased in the midteens last week during its earnings call. (See Cisco's Storage Slows.)

Brocade expects to close the acquisition by early 2007, pending regulatory approval. Despite McData's report, the share prices of both companies dropped a bit in early trading today.

Dave Raffo, News Editor, Byte and Switch