McData Trails Switch Rivals

McData lagged its major competitors in the Fibre Channel switch market last quarter, declining in revenues from last quarter, for which Brocade and Cisco posted solid increases.

McData today announced earnings of $168.3 million for net income of $6.1 million or $0.04 earnings per share (EPS), down from $181.8 million, $12.6 million, and $0.08 EPS last quarter. Its revenue increased from $98.9 million in the same quarter last year -- but the year-ago number was before it completed its acquisition of rival Computer Network Technology (CNT). (See McData Completes CNT Acquisition and McData Bags CNT for $235M.)

McData's results weren't much of a surprise. The company revealed on May 5 that it expected to come in at the low end of its previous guidance of $167 million to $177 million in revenue and $0.03 to $0.05 EPS. (See McData Gives Preliminaries.) But both if its main competitors have since reported positive results.

Brocade's revenue of $182.7 million increased 26 percent from last year and 7 percent from last quarter. (See Brocade Boasts Big Quarter.) Cisco's storage revenue isn't as clear because it doesn't break out SAN revenue, but the company claimed Fibre Channel sales rose more than 20 percent from last year, and Wall Street analysts estimate it crept up in double-digits sequentially. (See Cisco Storage Rebounds.) In contract, McData's revenue decreased 7 percent sequentially.

Analysts believe Brocade benefited from having 4-Gbit/s gear on the market first. McData began shipping 4-Gbit/s switches last fall -- nearly a year behind Brocade -- and has yet to release 4-Gbit/s directors. Brocade started selling 4-Gbit/s directors last August and Cisco's hit the market last month. (See Cisco Goes 4-Gig & Big.)McData CEO John Kelley today said 70 percent of McData's switch revenue last quarter came from 4-Gbit/s gear. "We're optimistic we will see a strong ramp in four-gig director sales," he added, pointing out the 140-port Intrepid 6140 will be 4-Gbit/s-ready "in the very near term" and the i10K will support it later this year.

Apparently, McData has yet to see a bump from the long-awaited qualification of its i10K director from EMC. EMC finally qualified McData's flagship director in March, 14 months after McData launched the i10K. (See Qualified Response, McData's Qualification Quagmire, and McData Takes a Direct Hit.)

COO Todd Oseth says the outlook is bright for the new director now that EMC has qualified it, and production problems have been fixed. "Life is looking pretty good on the i10K," Oseth said.

Although Kelley tried painting a rosy picture on McData's earnings this quarter he admits there is a lot of room for improvement. "I'm optimistically predicting you will see a different McData exiting 2006 than you are seeing now," he says.

Kelley says McData will increasingly focus on services primarily acquired from CNT – and its remote office products acquired through OEM deals with FalconStor and Riverbed. (See McData Hits Remote Control.)For this quarter, McData gave revenue guidance of $170 million to $180 million.

— Dave Raffo, News Editor, Byte and Switch

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