McData Switches on McProfit

McData Corp. (Nasdaq: MCDTA) posted a 60 percent increase in its first-quarter revenues compared with the year-ago quarter, beating its already raised guidance (see McData Posts Q1 Results).

The company said its revenues rose to $103.2 million from $64.54 million the first quarter of 2003. McData raised its revenue guidance earlier this month to between $102 million and $103 million (see McData Raises Q1 Guidance).

"We have continued to execute very well, and the long-term future continues to look right for McData," said John Kelley, McData's CEO and president, on a conference call today. "SANs are on a roll."

The storage switch maker also reported net income in line with the guidance it issued earlier this month, posting a profit of $5.3 million, or 5 cents a share, for the quarter, which ended on April 30. That's up from a net loss of $17.1 million, or 15 cents a share, from its first quarter of 2002. McData rolled its fiscal year back a month at the beginning of 2003, so the first quarter of 2002 ended on March 31.

The results continued McData's winning streak, and, although sales were down slightly sequentially, Kelley noted that seasonality and the war in Iraq had less effect than the company had expected. For the quarter ended Dec. 31, 2002, it reported $105.5 million in sales and net income of $8.6 million (see McData, Emulex Rake It In).More impressive than its growing earnings and revenues, according to Punk Ziegel & Co. analyst Steve Berg, were McData's reported gross margins for the quarter. The company saw its margins more than double to 56.8 percent from 21.5 percent for the first quarter of 2002. "That's just fantastic progress," Berg says. The increase, according to McData, was driven by an inventory write-off in the first quarter of 2002, as well as strong volumes and product mix.

For the current quarter, which ends on July 31, the company says it expects to report profits of 6 to 7 cents a share on revenues in the range of $106 million to $110 million. The question, observers say, is whether that will be enough to justify McData's soaring stock price over the past months. The company has seen its shares skyrocket approximately 57 percent this year, closing at $10.99 today, up from $7.69 at the beginning of January. "Will it support the way the stock has already moved?" Berg asks. "It's a little early to say."

Judging by the stock's 7 percent hike in after-hours trading today, investors seem to think so.

McData said its fabric switch revenues grew to $23.7 million during the quarter, jumping 46 percent sequentially and 177 percent year-over-year. McData said sales of its Sphereon 4500 switch more than doubled during the quarter (see McData Lowers Boom on Brocade). Meanwhile, sales of its directors dropped 11 percent sequentially, to $67.6 million.

EMC Corp. (NYSE: EMC) accounted for 61 percent of McData's revenue during the quarter, while IBM Corp. (NYSE: IBM) accounted for 17 percent. The company also added three new channel partners during the quarter: Dell Computer Corp. (Nasdaq: DELL), Storage Technology Corp. (StorageTek) (NYSE: STK), and Sun Microsystems Inc. (Nasdaq: SUNW) (see Sun to Resell McData Gear and McData Fans Out).As for mounting competitive pressure from Cisco Systems Inc. (Nasdaq: CSCO), Kelley said he feels sure McData can stand its ground. "This company is very respectful of that entity, [but] we're not scared," he said.

McData also disclosed today in an 8K filing with the Securities and Exchange Commission (SEC) that on May 5, 2003, it was named as a defendant in a patent infringement lawsuit filed by Raytheon Co. against several storage companies. McData said it intends "to defend the action vigorously."

In January 2003, Raytheon sued Brocade Communications Systems Inc. (Nasdaq: BRCD), Oracle Corp. (Nasdaq: ORCL), Veritas Software Corp. (Nasdaq: VRTS), and five other companies, alleging that they infringe Raytheon's U.S. Patent No. 5,412,791, "Mass Data Storage Library." (See Raytheon Sues Eight Tech Vendors.)

Eugénie Larson, Reporter, Byte and Switch