McData McDownsized

In an ominous sign that the general uptick in storage revenue has bypassed Fibre Channel switch makers, McData Corp. (Nasdaq: MCDTA)has cut its workforce by 92 employees -- roughly 9 percent of staff (see McData Cuts Staff).

McData, locked in a battle with Brocade Communications Systems Inc. (Nasdaq: BRCD) and Cisco Systems Inc. (Nasdaq: CSCO) in the price-sensitive FC switch market, now has about 982 employees.

A McData spokeswoman said the company closed a 34-person engineering office in Toronto and cut a few employees in Santa Clara, Calif.: the rest of the layoffs were spread across several departments at its Broomfield, Colo., headquarters. The layoffs did not affect employees who came to McData when it acquired Nishan and Sanera last year. Those divisions have been fully integrated into McData this quarter. The company said the reductions were made to keep operating expenses flat for fiscal 2004 with the current quarter, which ends Saturday.

McData, which will announce fourth-quarter earnings on Feb. 26, will take charges related to the cuts and Toronto closure for the next two quarters. But analysts dont expect McData to change its previous guidance of between $108 million and $116 million in revenue and earnings of $0.00 or $0.01 per share this quarter. The staff reduction does cast doubt on whether McData will make good on its forecast of 15 percent revenue growth in 2004.

“They’re trying to cut down on operating expenses, and you have to ask, ‘Why now?’ ” says analyst Kaushik Roy of Susquehanna Financial Group. “It appears that they may be a little concerned about their growth rate for the whole year.”Since McData last gave guidance in December, its market share has been threatened by increased competition from Cisco in the high-end director switch class. In the midrange, a switch from Brocade appears to be looming (see Brocade & McData's Paths Diverge).

“Cisco has picked up the battle with McData,” Roy says. “Cisco will still sell in the midrange, but its focus is on McData in the director class. McData was doing well with the midrange Sphereon 4500, but Brocade will come out with the Dazzler product and price it very low. McData has felt those two changes.”

McData reported a quarterly loss of $50 million last December due mainly to money spent on Nishan and Sanera and pricing pressures blamed on Cisco’s entry into the market (see McData Maudlin Over Price Pressure). It has since gone through personnel changes. CEO John Kelley took on the chairman’s position after co-founder Jack McDonnell retired, and Gary Gysin moved up from head of its software division to chief sales executive (see McData Names Kelley as Chairman and McData Promotes Gysin).

A research note written by analyst Brenden Smith of Goldman Sachs & Co. today predicts more changes.

“Beyond the pending facilities consolidation in Northern California, with CEO John Kelley now able to operate with a free hand, the odds of more meaningful change versus the status quote have gone up,” Smith writes.Perhaps Cisco will shed light on the Fibre Channel switch market Tuesday when it announces its quarterly earnings. Cisco has not broken out its storage revenue in the past, but some analysts believe it may do so this time. Cisco CEO John Chambers has identified storage as a $1 billion market for the company, and storage company revenues have generally been high in the current reporting season (see Storage: A Cisco Billion Dollar Play). CEOs have also been optimistic about spending patterns in 2004 (see Storage Bigs Brash on Budgets).

Although McData's stock price was down most of the day, it rallied to rise $0.04 to $8.79 by late afternoon.

— Dave Raffo, Senior Editor, Byte and Switch