McData Merely Mediocre

Wait ‘til next year” remains the McData Corp. (Nasdaq: MCDTA) rallying cry in the wake of another lackluster quarter while waiting for new products to roll out.

McData today reported its revenue last quarter was basically flat with the previous quarter, rising a piddling $300,000 to $98.5 million -- barely making the low end of its guidance and falling below analysts’ expectations. According to Reuters, industry analysts expected $99.9 million in revenue.

McData reported income of $4.6 million or $0.04 earnings per share, which was higher than expected but included about $3.1 million or $0.03 EPS of benefit from better than expected tax credits and deductions. Without the tax items, McData’s income met its guidance and analysts’ consensus. McData’s income last quarter was $2 million or $0.02 EPS, and it reported income of $2.7 million or $0.02 in the same quarter last year.

McData’s revenue grew 4 percent from last year, and its modest sequential gain at least put it ahead of rival Cisco Systems Inc. (Nasdaq: CSCO), which earlier this month reported a 2 percent decline from last quarter for its storage business (see Cisco Storage Slips). The other major Fibre Channel switch vendor, Brocade Communications Systems Inc. (Nasdaq: BRCD), reports earnings Monday.

McData CEO John Kelley calls the last period “a seasonally slow quarter.” Product revenue fell 2 percent sequentially and 9 percent from last year to $73.2 million, despite a 13 percent sequential and 16 percent year-over-year increase in ports sold. Director revenue fell sequentially while switch revenue rose. Software revenue also slipped 2 percent from last quarter.As he did last quarter, Kelley used his earnings conference call with analysts to emphasize his company’s upcoming product rollout. By the end of the year, McData expects to ship a new 256-port Intrepid 10K director and its Eclipse 2640 SAN router. McData’s OEM partners are qualifying both products. McData also plans to ship its first 4-Gbit/s and 10-gig switches next year.

The new products are based on technology McData gained by acquiring Nishan Systems and Sanera Systems last year (see McData Sweeps Up Nishan, Sanera and McData Goes on Offensive). Kelly says: "2004 has been a year of integration and we look toward 2005 as a year of growth." And while McData was integrating, Brocade rolled out a host of new switches and directors this year.

Although McData hopes to have OEM qualification for the Intrepid 10K and Eclipse 2640 SAN router next month, it isn't counting on significant revenue from those products this quarter. McData gave guidance of revenue from $102 million to $106 million and EPS of $0.04 to $0.06, but the EPS also includes $0.02 in tax benefits. Even if McData hits the high end of its guidance, revenue will drop significantly from the $114 million reported in the same quarter last year.

Kelley didn't give guidance for next year, but quickly answered "yes" when asked if he expected more than 10 percent growth for fiscal year 2005.

— Dave Raffo, Senior Editor, Byte and Switch0