Cisco's Elbowing McData, Report Says

Cisco Systems Inc. (Nasdaq: CSCO) is on pace to pass McData Corp. (Nasdaq: MCDTA) and become second in SAN switch market share this year, according to a research report by investment firm Goldman Sachs & Co.

Goldman Sachss quarterly switch tracking report says Cisco remains in third place behind Brocade Communications Systems Inc. (Nasdaq: BRCD) and McData, but is picking up chunks of share from McData. According to the firm's estimates, Cisco had 21.2 percent market share for last quarter and 16.8 percent for all of 2004, while McData’s market share stood at 23.2 percent for the quarter and 25.7 percent for the year.

In 2004, Cisco gained 9.2 percent market share and McData lost 9 percent. Perhaps more disappointing for McData, its market share has dropped eight straight quarters from an estimated high of 41.1 percent in January of 2003 when Brocade was its only major rival.

“At its current pace Cisco is only one or two quarters away from surpassing McData in total market share for the first time,” analyst Brenden Smith writes in the report.

Brocade remains the SAN switch leader with 50.3 percent market share in January and 52.2 percent for the year. Brocade lost 0.5 percent share for the year, but it gained share last quarter on a year-to-year basis for the first time since Cisco entered the market in early 2003. Goldman Sachs attributed Brocade’s gain to success with its blade server switches and new Silkworm 2400 128-port director (see Brocade & HP: Blade Brothers, IBM, Brocade Tie SAN Knot, and Brocade Launches Meteor).QLogic Corp. (Nasdaq: QLGC) remained in fourth place among vendors included in the report. QLogic’s share changed little from the previous year. It stayed at 5.3 percent for the quarter while edging from 5 percent to 5.2 percent for the year. The report says QLogic might register a small gain this year from the embedded blade server switch deal it signed with McData last November (see McData Hops on QLogic Blades).

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Goldman Sachs says the revenue estimates came from its own research and the vendors' filings. Although other market research firms and the switch vendors’ revenue figures also show Cisco gaining and McData declining, Goldman's numbers seem optimistic for Cisco (see Dell’Oro Says Director Sales Grew and McData Wraps Rocky Year). It estimates $68 million in revenue for Cisco last quarter. While Cisco doesn’t reveal its exact storage numbers, the consensus among analysts was around $56 million last quarter (see Cisco Storage Spikes).

Also, the report emphasizes product revenue rather than overall storage revenue, which includes other items such as services and software. When all the extras are taken into account, McData fares a bit better: Its share was 30 percent for the last quarter and 31.5 percent for the year, if all services and support are included, while Cisco’s total storage market share was 19.3 percent for the quarter and 15.5 percent for the year.Smith, however, disagrees with throwing everything in. He writes that items such as service revenue from an OEM deal with IBM Corp. (NYSE: IBM) and software licenses “skew McData’s results in a way that is not representative of real-time industry trends.” (See IBM, McData Strike OEM Deal.)

McData executives say they expect a lift this year from shipments of a new Intrepid 10000 (i10K) director and the pending acquisition of Computer Network Technology Corp. (CNT) (Nasdaq: CMNT). (See McData Announces Intrepid i10K and McData Bags CNT for $235M.) Goldman's Smith isn’t so sure of that. “While normally we would expect the pending launch of McData’s new Intrepid 10000 director to drive incremental share gains into 2005, uncertainties surrounding the proposed CNT merger increase the likelihood of both Brocade and Cisco digging deeper into McData’s installed base,” he writes.

Goldman Sachs did not track CNT because not enough information is available about its product revenue is available.

— Dave Raffo, Senior Editor, Byte and Switch