McData fights for a return to glory

While the overall storage area network (SAN) market has been gathering pace, competition in its fibre channel switch segment has been open warfare, with one of the sectors’ pioneers, McData, taking on the mighty Cisco.

Some commentators had believed that Cisco’s entry into the market – not to mention its size and deep pockets – would result in it delivering a fatal blow to McData or one of the other smaller rival suppliers. And indeed Cisco’s interest in the high end, where McData has traditionally generated most of its revenues, made it look particularly vulnerable.

Throughout 2003 and into 2004, the impact on McData was only too evident: Its financial performance stuttered; a spate of senior executive left for other jobs; and company founder and chairman Jack McDonald was quietly retired in early 2004.

But after 18 months of bruising competition, new CEO John Kelley is bullish about the company’s future prospects: “We’ve now got all the pieces we need for growth; now it’s all about execution.”

McData may be well placed to do so, says Hamish Macarthur, head of storage analyst house Macarthur Stroud. The threat of Cisco has galvanised McData into broadening its product portfolio, he says. It has added SAN router capabilities from its $80 million acquisition of Nishan and beefed up its SAN management software.

“There’s still the opportunity for tremendous growth in the deployment of SANs. And McData’s ability to partner with [resellers] will play a big role in getting into end user accounts,” says Macarthur.

Historically, McData has had strong links with EMC. The switch specialist was bought up by EMC in 1995, before being spun out again in 2001. Indeed, 40% of McData’s revenues still come through its relationship with EMC.

But McData is keen to expand its reach. IBM has agreed to re-badge its storage fabric switches and directors under the TotalStorage brand. But HP is a more difficult nut to crack. “Historic-ally, we’ve not done a good job with HP,” says Gary Gysin, senior VP of global sales and service at McData.

And while the competition from Cisco is likely to remain intense, McData has a strong customer base in the mainframe environment, where it will maintain its strength, says Phil Goodwin analyst at Meta. McData is not out of the woods yet. In its second quarter, revenues fell 8% to $98.2 million with loses of $5.4 million compared to a profit of $9.1 million in the year-ago quarter.

US financial analyst Smith Barney says that makes McData ripe for acquisition, and recent investments from two Wall Street brokers, hedge-fund guru Paul Tudor Jones and investor Jonathan Gallen (both notable for buying shares of ‘distressed’ companies) have made the rumours fly faster.

For its part, the management team at McData remains sanguine about the prospects of being acquired. “My job is to ensure we continue to grow revenues and control costs,” says CFO Ernest Sampias. With analyst firm IDC expecting sales of SAN hardware to outstrip direct attached storage for the first time in 2005, demand for SAN switches is higher than ever. McData has to make sure it can get back on that rising curve.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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