McData to keep new i10K and kill off CNT's successful director after completing acquisition

May 10, 2005

4 Min Read
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The marriage of McData Corp. (Nasdaq: MCDTA) and Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) will combine McDatas switches, directors, and software with CNT’s SAN extension and services -- but not CNT's director, McData CEO John Kelley said today.

In anticipation of gaining shareholder approval May 24, Kelley and CNT CEO Tom Hudson held a conference call to provide a product roadmap for the combined companies for the first time since McData announced its intention to acquire CNT in January (see McData Bags CNT for $235M).

The major product decision concerns director switches, and McData stuck with its Intrepid 10,000 (i10K) at the expense of CNT’s UltraNet Multi-service Director (UMD). By doing so, McData elected to keep the technology it gained by spending $102 million on Sanera Systems in 2003 (see McData Completes Sanera Acquisition).

The i10K is barely out of the starting gate from its January rollout, while UMD got off to a strong start in generating sales for CNT (see McData's Ready for Rollout).

“This eliminates any redundancy across the McData and CNT product line,” Kelley says. “The UMD has done well on the market, but the i10K is an equally good product.”More went into the decision than simply which director is superior. McData has a larger installed base, and the i10K is built to work with other McData products while it would've taken months to make the UMD work with McData switches and directors. Also, the i10K has already been qualified by Hitachi Data Systems (HDS) and IBM Corp. (NYSE: IBM)and is in the process of getting EMC Corp. (NYSE: EMC) qualification.

CNT planned to build its business around the UMD last August after suffering heavy financial losses (see CNT Stakes Claim on New Director and CNT Takes a Hit). The UMD was well received, driving two strong quarters of sales before trailing off following news of the acquisition (see CNT Gets UMD Bounce and CNT, McData Mull Product Conundrum).

Kelley says sales of both directors suffered last quarter because customers weren’t sure which would remain after the deal closes. Kelley blamed customer confusion, fueled when “our competitors took this two- to three-month window to create all the FUD they could.”

Despite a slow ramp for the i10K, McData today forecasted it would hit the low end of previous guidance, coming in with revenue of $98 million to $99 million and earnings per share (EPS) of $0.02 to $0.03 last quarter (see McData Updates Forecast). Its previous guidance was for $98 million to $103 million in revenue and $0.01 to $0.03 EPS. Kelley said he was happy with the numbers, considering other storage companies -- including switch rival Brocade Communications Systems Inc. (Nasdaq: BRCD) -- missed their targets last quarter (see Brocade Bungles Quarter).

CNT today gave a revenue forecast of $81 million to $86 million for last quarter. CNT gave no previous guidance for the quarter, but the revenue will take a sharp sequential drop from $103.9 million in the previous quarter. Product revenue is expected to fall sequentially from $72.4 million to between $51 million and $54 million.“There was some caution around buying at the end,” said Hudson, who will join McData's board and after the sale (see CNT CEO Eyes $3M Payout). “Customers wanted to know the rest of the story.”

McData will retain its Spherion switches and Eclipse routers, and expects OEM qualification of its new 4-Gbit/s Spherion switches this quarter. McData will also keep its management software. Enterprise Fabric Connectivity Manager (EFCM) 9.0 is due by the end of the year, with capabilities to manage hardware from switch rivals Brocade, Cisco Systems Inc. (Nasdaq: CSCO), and QLogic Corp. (Nasdaq: QLGC). Kelley says future EFCM versions will integrate CNT software.

CNT’s UltraNet Edge router, UltraNet Storage Director - eXtended (USD-X, and UltraNet Replication Appliance (URA) all made the cut for SAN exenstion, along with its professional services and consulting operation. The UltraNet products will become part of McData’s Eclipse SAN router brand. “I believe one plus one equals more than two at the combined CNT and McData,” Hudson says. [Ed. note: Math alert. No surprise CNT had to refile its 2004 financial statements -- see CNT Drags Its Feet on Earnings.]

Other details revealed today:

  • McData plans to reduce headcount of the combined companies by 25 percent, from around 2,100 now to around 1,500 or 1,600 by the end of the year.

  • CNT will operate as a wholly owned subsidiary of McData, but all products and services will have the McData brand.

  • If shareholders from both companies approve the sale May 24, Kelley expects the sale to close June 1.

  • Hudson will not join McData as a senior executive as previously announced, but is negotiating to stay on as a consultant during the transition.

  • Executives don’t expect a shareholders’ class action lawsuit filed against CNT directors in March challenging the sale to affect the closing date. “We view it as without merit,” Kelley says (see Shareholders Sue CNT).

— Dave Raffo, Senior Editor, Byte and Switch0

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