Brocade & McData's Paths Diverge

NEW YORK -- Listening to Brocade Communications Systems Inc. (Nasdaq: BRCD) and McData Corp. (Nasdaq: MCDTA)hold forth at an analyst conference today made it clear the Fibre Channel director leaders are headed for different sectors of the market.

Brocade CFO Tony Canova spent much of his presentation here at the RBC Capital Markets SAN Conference talking about the fertile entry-level market, while McData CEO John Kelley discussed fending off Cisco Systems Inc. (Nasdaq: CSCO) on the high end.

We’ve really just begun to see expansion in the entry level,” Canova says. Later, he called the low-end “a market that’s massively under-penetrated.”

One analyst has already upgraded Brocade’s stock rating on the basis of its upcoming low-end switch, expected this spring. Susquehanna Financial Group

expects the new switch to cost 30 percent to 40 percent less than the existing Silkworm 3800 and 3900 switches -- which prompted the firm to upgrade Brocade from Neutral to Positive last week. Susquehanna’s storage analyst Kaushik Roy says the new switch won’t raise Brocade’s revenue, but it will lower its costs.

Going low-end could be a double-edged sword, though. “It seems to me they’re out of the director level game at this point,” Roy says. “It will be hard for Brocade to be a leader at the director level.”By all accounts, McData remains the leader in the director market, but Kelley says Cisco is his main competitor there, not Brocade. And he's bullish on the status of the fight.

Although Kelley offered no update to previously disappointing guidance for the current quarter, he told analysts at the RBC conference that McData has taken Cisco’s best shot.

“We’re winning,” Kelley says. “Cisco’s got some victories, but we’ve survived a year of Cisco’s marketing, sales channel, and trial activity. We haven’t thrown a no-hitter; we haven’t shut them out; but we’re doing quite nicely. They’ve found we’re quite tough and very good at what we do.”

Kelley said he expects McData’s 2003 acquisitions of Nishan Systems and Sanera Systems to pay off this year (see McData Completes Sanera Acquisition and McData Closes Nishan Acquisition). McData is shipping Nishan multiprotocol switches and expects third-quarter revenue from Sanera switches that offer partitioning features.

In contrast, Brocade's Canova downplays Cisco’s role, accusing Cisco of expecting customers to make massive changes to accommodate their gear: "No customer constantly wants to rip and replace. Rip and replace is something end-user customers have no appetite for."Canova also maintains the pricing pressures that began in the market after Cisco entered last year were Brocade’s doing and not attributable to Cisco's appearance as a switch vendor.

“Much has been Brocade self-induced,” he says. “It’s about us bringing our products to price parity. It’s not about a new entrant into the market driving down prices.”

— Dave Raffo, Senior Editor, Byte and Switch