McData Stays Out of the Red

McData Corp. (Nasdaq: MCDTA) has avoided the money-losing quarter expected of it. Market share appears to be another matter, though.

McData today reported revenue of $98.2 million for last quarter, up 1 percent from the previous quarter but down from the $107 million reported in the comparable period last year. Its net income was $2 million or $0.02 per share, up from $1.1 million and $0.01 sequentially but way below its $11.5 million net income and $0.10 earnings per share in the same quarter last year.

Still, McData CEO John Kelley claimed victory because the company came in within its revenue guidance of $92 million to $100 million and beat its EPS guidance of break-even to minus $0.02 (see McData Sees Another Quarter Pounding). McData also beat Thomson First Call estimates of $96.2 million and minus $0.01.

Our positive results for the quarter demonstrate that we are meeting the needs of an expanding market,” Kelley said on a conference call with analysts.

Yet there’s little chance that McData’s market share is expanding. Its two main SAN switch rivals reported higher growth last quarter. Brocade Communications Systems Inc.’s (Nasdaq: BRCD) revenue was up 3 percent from the previous quarter and 12 percent from the same period last year. Cisco Systems Inc. (Nasdaq: CSCO), still a distant third in market share, said its SAN switch share increased 41 percent sequentially and 180 percent from last year (see Brocade Cautious About Growth and Cisco Storage Stays Mysterious). Even worse for McData was that much of its rivals’ gains came in the director space where McData is strongest.Like Brocade, McData guided for little growth this quarter. It forecast revenue of $98 million to $102 million and net income of break-even to $0.01.

McData’s switch product revenue actually shrank 6 percent sequentially to $74.9 million, but its software revenue grew 13 percent to $14.8 million, and services revenue increased 7 percent to $4.6 million. The software growth indicates that at least McData’s strategy of differentiating itself among switch makers with its SANavigator storage management software is working (see VP Details McData Software Makeover ).

Kelley said he's also encouraged by sales of the new Eclipse 1620 SAN router (see EMC, McData Make a Connectrix and IBM Certifies McData SAN Router). Based on technology acquired from Nishan last year, the SAN Router lets customers distribute data from Fibre Channel SANs over IP networks -- primarily for disaster recovery (see McData Sweeps Up Nishan, Sanera). Kelley says he was surprised at how many SAN routers optimized for iSCSI that McData sold. "This part of the market is just starting to heat up," he said.

McData’s reliance on its largest OEM, EMC Corp. (NYSE: EMC), also grew last quarter. Revenue through EMC increased 4 percent from the previous quarter, and EMC nudged up from 45 percent of McData’s sales to 47 percent. Sales through IBM Corp. (NYSE: IBM) grew 7 percent as IBM inched from 25 percent to 26 percent of McData’s revenue.

Kelley says McData plans to strengthen its product line with several rollouts by the end of the year, including an Intrepid 10,000 director switch based on Sanera technology. Kelley says the 256-port device can be partitioned to act as four switches, and can transfer data up to 1,200 miles at 1-gig per second. McData sees the switch used in disaster recovery and grid computing scenarios. It will go to OEMs for certification this quarter.McData also plans to launch a 10-gig blade that fits into its director slots, another member of the SAN router family, and upgrades to the SANtegrity security software suite by the end of the year.

— Dave Raffo, Senior Editor, Byte and Switch