McData, Emulex Rake It In

McData Corp. (Nasdaq: MCDTA) and Emulex Corp. (NYSE: ELX) both turned in solid year-end quarterly results yesterday, each putting up double-digit growth in sales for the last three months of the year.

However, analysts cautioned that various factors will keep each of these Fibre Channel players from sustaining those growth levels through 2003. The stock prices of each company were down in midafternoon trading today. McData was down 9.4 percent, to $8.06, and Emulex was down 3.4 percent, to $20.65, amid a general decline in the markets.

McData reported $105.5 million in sales and net income of $8.6 million -- in line with its previously raised guidance -- for the quarter ended Dec. 31, 2002 (see McData Posts Record Q4 Sales and McData Blows Doors Off Q4).

Leading its top-line growth were sales of director-class switches, which were $75.7 million, up 30 percent sequentially. McData also showed strong growth in its fabric switches product, with revenues of $16.3 million, up 40 percent compared with the previous quarter. Analysts say McData clearly took some share away from Brocade Communications Systems Inc. (Nasdaq: BRCD), with particular strength in the high-end segment.

The company credited its new Sphereon 4500 midrange switch and high-end Intrepid 6140 director for the bump in sales. "More than 20 percent of revenue last quarter was derived from new products, reflecting strong demand and market share gain," said John Kelley, McData's CEO and president, on a conference call with investors yesterday.McData's largest OEM customer, EMC Corp. (NYSE: EMC), represented 54 percent of overall revenue in the quarter, down from 56 percent last quarter, while IBM Corp. (NYSE: IBM) accounted for 26 percent, up from 20 percent in the prior quarter.

"We believe McData's revenue engine is hitting on all cylinders," writes Robert Montague, an analyst with RBC Capital Markets, in a research note. However, he notes, competitive threats to McData will increase: Cisco Systems Inc. (Nasdaq: CSCO) will have entered the market with a full range of SAN switches by midyear. In addition, also next quarter, Brocade is expected to add hot-code load activation to its SilkWorm 12000 core switches, which will make it more competitive with McData's directors.

Kelley downplayed the threat posed by Cisco. "Last quarter, there was buzz about new entrants in the SAN industry, but none of the customers I spoke with were ready to be early adopters of IP channel crossover," he said.

McData said it expects a slight dip in revenues for the current quarter, reflecting typical seasonal softness, projecting $92 million to $97 million for the quarter ending April 30, 2003.

Emulex, meanwhile, reported revenues of $76.4 million, up 9 percent from the prior quarter, and net income of $15.5 million. The company's 11 percent quarter-over-quarter growth in Fibre Channel host bus adapter (HBA) revenues outstripped that of its primary competitor, QLogic Corp. (Nasdaq: QLGC) (see Emulex Q2 Sales Rise on FC Growth and QLogic Keeps on Truckin').Emulex also announced a single-chip Fibre Channel controller, code-named Thor, which analysts said looks poised to go head-to-head with a similar offering from QLogic (see Emulex Debuts 'Thor' and QLogic Touts Next-Gen Controller).

"Thor significantly increases Emulex's TAM [total addressable market], positioning the company to provide ASICs for blade servers, target arrays, and SAN appliances," writes Jason Ader, an analyst with Thomas Weisel Partners. "While our cautious long-term thesis on the companys HBA growth prospects (because of likely share gain exhaustion) remains intact, we may adopt a more positive posture if Emulex’s push into adjacent markets gains traction."

However, analysts noted the overall HBA market is relatively flat with growth primarily through share gains. The combined Emulex and QLogic share of the HBA market has expanded from 53 percent in 2000 to an estimated 75 percent at the end of 2002, according to U.S. Bancorp Piper Jaffray