McData Post-Mortem

4:30 PM -- McData's earnings report Thursday held few surprises because the switch vendor had already warned of a poor quarter, plus its execs weren't talking about any integration issues from its impending sale to Brocade. But the numbers did shed some light on what went wrong in Broomfield, causing it to sell out to its rival for $713 million earlier this month. (See McData Announces Earnings and Brocade Bags McData For $713M.)

It became clear last quarter that McData's traditional strengths had become weaknesses. The long-time leader in the director market, McData's director revenue took a big dip last quarter from the previous quarter and last year. It didn't say exactly how much it declined, but overall product revenue fell 15 percent year over year and 13 percent sequentially while revenue from smaller switches increased. McData blamed part of its sagging director sales on an industry-wide slowdown in high-end storage, but Brocade and Cisco both had strong growth in director revenue. (See Cisco Rattles Storage Sabre and Brocade Reports Earnings.)

Also, McData was losing business through its traditionally strongest ally and former owner, EMC. Revenue from EMC fell 27 percent from the previous year and 17 percent from the previous quarter.

IBM now drives more revenue for McData than EMC. Still, it appears unlikely that McData could generate enough new business through IBM to make up what it lost from EMC. And it couldn't count on Hewlett-Packard, which apparently read the handwriting on the wall and was getting ready to dump McData. (See HP May Dump McData, Sources Say.)

CFO Scott Berman, who handled the earnings call while CEO John Kelley took a pass, admits a good part of McData's problems was self-inflicted. It was too slow to adopt 4-Gbit/s gear, especially directors. And its European sales slipped badly due to changes in the salesforce "and internal issues with respect to that transition."Berman pointed out McData expects to have 4-Gbit/s support for its flagship i10K director this quarter, and has made changes in its sales force to beef up North America and European sales. You can put those tidbits in the "too little, too late" file, but they might have figured in Brocade's decision to buy McData instead of letting it die a slow death.

"As we suspected, McData had a horrendous quarter and was not likely to reach stated operating margin guidance for the year, hence the willingness to sell out," analyst Tom Curlin of RBC Capital Markets wrote in a research note today. "Meanwhile, though Brocade's upside execution continued, the competitive outlook was tightening, hence Brocade's willingness to do the deal at a time when some investors might feel it is no longer necessary."

Dave Raffo, News Editor, Byte and Switch