McData Blows Doors Off Q4

McData Corp. (Nasdaq: MCDTA) raised its guidance for the fourth quarter of 2002 by $20 million this morning, crediting unexpectedly strong sales of its new midrange and high-end Fibre Channel switches.

McData says it now expects revenues to be between $104 million and $106 million for the quarter ending December 31, 2002, compared with its previous guidance of $84 million to $86 million. It also expects fourth-quarter pro forma earnings to be 6 to 8 cents per share, excluding non-cash deferred compensation and amortization charges, compared with its previous guidance that it would break even. McData also said it expects to be profitable -- on a pro forma basis -- for the full year 2002 (see McData Ups Q4 Guidance).

"McData's preliminary fourth-quarter performance reflected a very strong ramp-up in orders for our recently introduced new products and strong demand across all channels," said John Kelley, CEO and president of McData, in a prepared statement. "Revenue for both the Intrepid 6000 series 140-port director and the Sphereon 4500 fabric switch was more than double our expectations for the fourth quarter." (See McData Lowers Boom on Brocade and McData Hits 140 Ports.)

Analysts say the evidence suggests McData is beating its chief rival, Brocade Communications Systems Inc. (Nasdaq: BRCD), in both midrange and high-end segments of the SAN switch market. Brocade warned that its fiscal fourth quarter 2002 and first quarter 2003 earnings would fall below expectations (see Market Spanks Brocade Hard and Brocade Eats Crow).

McData's revised quarter "is in the realm of a blowout," says Jason Ader, an analyst at Thomas Weisel Partners. "This explains in some ways why there was a disconnect between what we were hearing from the OEMs and what we were hearing from Brocade... You have to look at it as a negative for Brocade in terms of market share shift."Shebly Seyrafi, an analyst at A.G. Edwards, says the largest factor is that McData's Intrepid 6140 and 6064 directors are easily beating the Brocade SilkWorm 12000 in the market. "Brocade has simply lost some of its luster," he says. Seyrafi owns shares of McData, and A.G. Edwards makes a market in the stock.

Seyrafi adds that McData appears to have had strong sales throughout the whole fourth quarter, not just at the end of December. "It wasn't just some year-end deals that they closed at the last minute," he says.

Shares of McData were up 13.3 percent in mid-morning trading, at $9.52. Its upward guidance also boosted other storage networking stocks, including:

But one Wall Street analyst, who requested anonymity, cautioned that McData could be seeing just a one-quarter pop rather than any long-term momentum. "It's a little concerning to see a company beat numbers by this much. The question is, in Q1 and Q2, will there be some letdown?"

Moreover, Cisco Systems Inc.'s (Nasdaq: CSCO) push into the FC switch market is dangling over McData (see The Cisco Hammer)."From an investor standpoint, you have to be a bit concerned about the impact of Cisco, whether it's perception or reality," says Weisel's Ader. But at the same time, he adds, "this market is immature enough where McData may be able to stay ahead of Cisco on engineering."

McData did not disclose specific first quarter 2003 guidance. But in a statement, Kelley said: "While we expect typical industry seasonality in the first quarter of 2003, we have seen continued demand early in January." In terms of IT spending, the first three months of the year are usually softer than other quarters.

The company expects to report its fourth quarter 2002 results on January 23.

Todd Spangler, US Editor, Byte and Switch
http://www.byteandswitch.com