McData Slashes Guidance - Again

In what is becoming a quarterly ritual, McData Corp. (Nasdaq: MCDTA) delivered bad news as its earnings report approaches (see McData Sales Down).

McData CEO John Kelley says the SAN switch vendor will miss its revenue targets by a long shot when it announces first-quarter earnings on May 20. McData now forecasts revenue of between $94 million and $104 million, down from its previous estimate of between $108 million and $115 million. The new earnings forecast ranges from a loss of $0.01 per share to a gain of $0.02 per share, a small move from previous guidance between breakeven and $0.02.

This raises the question: Are competitors Brocade Communications Systems Inc. (Nasdaq: BRCD) and Cisco Systems Inc. (Nasdaq: CSCO) stealing share, or did McData shoot too high in the first place?

"We anticipated normal industry seasonality in the first quarter of 2004, but we had nonetheless expected to maintain revenue at approximately the level of our very strong fourth quarter," Kelley said in a statement. "Revenues have been somewhat slower to ramp than we expected and more typical of our first-quarter experience historically. We believe this is related to timing rather than underlying demand."

Considering that the strong fourth-quarter Kelley referred to produced $114 million in sales, previous guidance for the first quarter seems overly optimistic. Analyst Brenden Smith of Goldman Sachs & Co. wrote in a note today that McData probably couldnt have hit its previous estimates “without catching some breaks along the way.” Smith notes that McData would have had to secure additional OEM wins while holding share in the director switch market to reach its estimates.McData has now lowered guidance twice in the last three quarters. The first time came after EMC Corp. (NYSE: EMC) used Cisco’s entry into the SAN market to squeeze McData on price (see EMC Playing Hardball With McData? and McData Maudlin Over Price Pressure).

Challenges have continued since then. Though McData’s earnings were decent last quarter, a round of layoffs proved all was not rosy (see McData Struggles to Keep Pace and McData McDownsized). On the competitive front, Cisco finally started gaining traction in the high-end director switch market last quarter, while Brocade recently launched new switches that gained OEM wins from Hewlett-Packard Co. (NYSE: HPQ) and Hitachi Data Systems (HDS) (see Cisco Storage Growing Up and SAN Snacks From SNW).

Analysts speculate it was gains by the competition that caused McData to falter on revenues this quarter.

“Specifically, we believe McData is facing additional pressures from Cisco’s continued success at IBM on the high end and Brocade’s product cycle on the low end,” analyst Paul Mansky of ThinkEquity Partners wrote in a note today.

McData is also caught between product cycles. It recently announced a low-end switch to compete with Brocade’s latest offering. In the second half of the year, McData is expected to issue products based on its 2003 acquisition of Sanera, gear based on technology acquired from Aarohi Inc., and new 4-Gbit/s switches (see John Kelley, President, CEO & Chairman, McData Corp. and McData Completes Sanera Acquisition).“When you have new stuff coming out, end users tend to not buy the old stuff. They wait for the new stuff,” says analyst Steve Berg of Punk Ziegel & Co.

— Dave Raffo, Senior Editor, Byte and Switch