McData Slides on Weak Guidance - TheStreet

McData Slides on Weak Guidance

The data-storage vendor beat third-quarter earning estimates but revenue guidance is weak.
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Updated from Dec. 1

Data-storage vendor

McData

(MCDTA)

hit its reduced target for third-quarter revenue, but its guidance for the fourth quarter was weaker than expected.

After the close Monday, the company said it expects pro forma earnings to range from break even to 1 cents a share in the January quarter on sales ranging from $108 million to $116 million. Analysts polled by Thomson First Call by were expecting a profit of 3 cents a share and revenue of $116 million.

Shares started to slide after the announcment Monday, and on Tuesday the stock was off $1.09, or 10% to $9.50.

In the third quarter, the Broomfield, Colo., company lost $50 million, or 44 cents a share, compared to a year-ago profit of $2.3 million or 2 cents a share, according to generally accepted accounting principles. Pro forma net income was $2.1 million, or 2 cents a share. Analysts had expected a break-even quarter on a pro forma basis.

As expected, revenue in the October quarter was $94.7 million, an increase of 17% from the prior year, but well under the company's guidance prior to its warning.

Last month, McData lowered its third-quarter revenue forecast by more than 15% because of a contract dispute with

EMC

(EMC)

its largest OEM customer. The market punished the company with a quick 7% decline, although share prices had recently recovered.

McData did not give EPS guidance at the time.

Like other component and subsystem suppliers, McData has been squeezed by OEM customers demanding lower prices. EMC's demand was not unusual; the surprise was that McData resisted, a move that was generally applauded by analysts even though the company took a hit in the October quarter.

McData CEO John Kelley said during a conference call that McData has reached agreement with EMC, but gave no details of the settlement.

However, industry sources suggested that McData may have not gotten many pricing concessions from EMC: Lending credence to that thinking was the company's announcement that margins in the current quarter are likely to slip to the mid-50s from 58%. Still, sources speculate McData was able to fend off demands that it slow software development that could be competitive with EMC's offerings.

More positively, Kelley said that the integration of recent acquisitions Nishan Systems and Sanera Systems was ahead of schedule. Nishan contributed $2.6 million in revenue during the October quarter, the high end of company expectations.

Kelley said the competitive environment remains difficult, and without mentioning

Cisco Systems

(CSCO) - Get Report

by name, indicated that the networking giant has been actively competing for sales of high-end storage switches. But McData he said, has actually increased its win rate in that market.

Cisco has been shipping storage switches for about nine months, but

has yet to gain acceptance in that complex market.

Separately, Alain Andreoli, the company's executive vice president of worldwide sales and service, announced last week that he will resign effective Dec. 1, to pursue another business opportunity. Kelley will fill in until a replacement is found. McData has gone through a number of people in that position in the last few years, and Andreoli, industry sources say, apparently "lacked the chemistry" needed to work with the rest of the management team.