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SOURCE: McDATA Corporation
McDATA Reports Second Quarter Results
Revenue Up 44 Percent Over Prior Year, Pro Forma EPS of $.04, Results In Line with Guidance
BROOMFIELD, Colo., July 18 /PRNewswire/ -- McDATA Corporation® (Nasdaq: MCDTA - news, MCDT - news), a global leader in open storage networking solutions, reported a 44 percent increase in revenue to $81.3 million for its second quarter ending June 30, 2001. These results were driven by solid demand for recently-introduced high-availability Switch products and continued strong sales of its market-leading, high-end enterprise Director products, which together provide storage area network (SAN) solutions for the entire enterprise.
Pro forma net income for the second quarter 2001, excluding non-cash charges related to stock options, declined 24 percent to $5.0 million, compared to pro forma second quarter 2000 net income of $6.6 million. Pro forma diluted earnings per share (EPS) were $.04 in second quarter 2001, compared to $.07 in the second quarter of 2000. EPS was consistent with the lower end of the company's guidance range for the quarter, which primarily reflected production constraints and continued costs related to the manufacturing ramp-up of its new multi-product line.
``Our revenue performance was strong, at the high end of our guidance range, despite a difficult market environment,'' said Jack McDonnell, Chairman and CEO of McDATA. ``We were particularly pleased with the increased traction evidenced by our major new product introductions in the storage area network (SAN) market. This includes strong demand for McDATA's fifth generation, 64-port 6000 Series Director, as well as our new high-availability Switch products, which together provide us with the most complete SAN hardware product suite in our market. McDATA's Switch revenue in the second quarter exceeded $10 million. ''
Second Quarter Details
McDATA's revenue from products reached $72.4 million in the second quarter, a 43 percent increase over the same period in 2000. Revenue from software and professional services totaled $4.8 million, increasing 210 percent over second quarter 2000. Other revenue was $4.1 million, down six percent from a year-ago due to an expected decline in ESCON service fees. On a channel basis, McDATA's largest customer, EMC, represented 68 percent of total revenue in the second quarter of 2001, IBM accounted for 16 percent and other OEMs, resellers and systems integrators represented 13 percent, with service fees accounting for the remaining three percent.
Pro forma gross margins were 42.6 percent for the second quarter of 2001, compared to 51.9 percent in the second quarter of 2000, and 45.7 percent in the first quarter of 2001. Gross margins continue to be adversely affected by higher manufacturing costs related to the introduction of McDATA's new generation of SAN products. McDATA has launched a new product in each of the last four quarters, including the 6000 Series Director during the second quarter of 2001, and three new fabric Switch products in the preceding quarters.
``McDATA is the only company in its sector that has introduced four new products in the last four quarters,'' said McDonnell. ``While we have effectively diversified our product line as well as our revenue streams, these product introductions have resulted in higher-than-expected manufacturing costs, including component and production costs, which have compressed our gross margins. Our most important priority for the remainder of this year is to improve manufacturing efficiency and margins, so we can fully pursue the opportunities in our market as the economy and IT spending improve. We anticipate gross margins to improve in each of the next two quarters, driven in part by the achievement of process maturity for our new products during the third quarter.''
Reported net income declined 28 percent to $3.4 million for the second quarter of 2001, compared to $4.7 million in the prior year. McDATA's balance sheet remained solid with no debt, and cash and investment securities totaling $356 million at quarter-end, compared to $364 million at March 31, 2001.
For the first six months of 2001, McDATA revenue totaled $164.3 million, up 58.6 percent from the comparable period in 2000. Pro forma net income for the first six months totaled $14.5 million, or $.12 per share, an increase of 11.6 percent from the first half of 2000. Reported net income totaled $10.9 million, an increase of 14.2 percent from the first six months of 2000.
Executive Management Additions
During the second quarter, McDATA strengthened its senior management team to position the company for its next stage of growth, with the addition of Bob Finley as vice president of manufacturing (most recently vice president, business programs management -- global accounts at SMTC Manufacturing), Richard Search as vice president of marketing (more than 15 years marketing experience in the storage industry with companies including IBM, Hitachi Data Systems and Digital Equipment), Rich Carlson as vice president of lifecycle operations (most recently the vice president of quality and customer support at McDATA) and Linda Dill Dellett as vice president of investor relations (formerly vice president, investor relations for Requisite Technology, Corporate Express and TCI Communications). In addition, John Kelley, formerly executive vice president, Qwest Communications International, will join McDATA on August 27, 2001 as president and chief operating officer, as announced yesterday.
Other Highlights
Other highlights from the second quarter of 2001 include:
-- Introduction of McDATA's fifth-generation, Series 6000 Director
product, the only single-stage 64-port Director and the foundation of
the company's Core-to-Edge SAN platform.
-- Expansion of the company's OEM agreement with EMC to sell and
distribute McDATA's expanded family of products, including its new
Director (under the Connectrix ED-64M brand name) and fabric switch
products.
-- An OEM agreement with Hewlett-Packard to sell and distribute McDATA's
new Director (under the SureStore brand name) worldwide through both
direct and indirect channels.
-- A new solution that provides expanded "E-Port" interoperability across
industry switch vendors and the first release of open code for
multi-vendor interoperability, providing users with the first
cost-effective migration path to high-availability Core-to-Edge SAN
solutions.
-- A new solution developed with Tivoli Systems Inc. that provides a local
area network (LAN)-free backup solution.
-- A worldwide reseller agreement with Data Systems International (DSI)
for McDATA's Core-to-Edge line of Fibre Channel connectivity products.
-- An agreement with HiTRON Systems to resell McDATA's Core-to-Edge
product line within the Korean market.
-- A partnership with ACAL to resell McDATA's Core-to-Edge family of
products and software in the Pan-European market.
-- Global expansion with the opening of new McDATA offices in Seoul and
Zurich and expanded operations in London.
-- A leadership role in the development of the Storage Networking Industry
Association's (SNIA) initiatives to provide storage product customers
with the first qualified cross-vendor, interoperable storage networking
solutions.
-- Confirmation by market research firm IDC that McDATA maintained the
largest portion of the fastest growing storage area networking segment,
representing more than 94 percent of the fibre channel Director class
switch unit shipments in 2000. Their research shows that Director
class switches are expected to be the fastest growing portion of the
Fibre Channel hub and switch market, and that Director class products
will account for more revenue than any other segment of the market by
2004.
-- Early in the third quarter, McDATA announced the recent deployment of
McDATA's Enterprise Operating System (E/OS), the world's first and most
advanced Core-to-Edge Fibre Channel Operating System. Among other
features, McDATA's E/OS provides advanced enterprise security,
unrivalled high availability through non-disruptive firmware downloads
and activation including seamless integration of upgrades and
feature-enablement into existing SAN environments.
Outlook
McDATA has revised its forward-looking guidance to anticipate revenues in a range of $82 to $86 million for the third quarter ending September 30, 2001, which represents year-to-year growth of 23 to 29 percent, and a range of 35 to 45 percent revenue growth for the full year, compared to previously estimated growth of 50 to 60 percent, based on continued market uncertainty surrounding the protracted economic slowdown and its effect on customers and end-users. The company's guidance continues to be dependent on factors such as continued market growth and other industry trends. As was true in the first quarter, McDATA believes it would be helpful in this environment to provide investors with a best-guess range of EPS guidance. On that basis, current revised guidance is for pro forma fully diluted EPS to be in a range of $.03 to $.05 in the third quarter, and $.25 to $.30 for the full year 2001. Further guidance on assumptions will be provided on the company's conference call today.
``I believe McDATA is positioned better than ever to fully implement our Core-to-Edge strategy, realize our vision of global market leadership in open SAN solutions, and increase value for our shareholders,'' said McDonnell. ``We are ready to capitalize on the long-term anticipated growth in the SAN build-out, which is still in its early stage. Our solutions remain mission-critical to the companies that use them, and our customers continue to demonstrate strong demand for our products, despite the economic slowdown. As the only storage area network vendor to provide a complete family of Core-to-Edge enterprise solutions, McDATA continues to lead the market at the enterprise level and compete in every segment of the switch market. We expect to continue the increase in market penetration with our full family of products, develop additional customer-focused solutions and expand our distribution channel to meet our customers' needs in the future.''
McDATA will hold a conference call to discuss second quarter 2001 results today, July 18, 2001, at 3:00 p.m. MDT. The conference call will be simultaneously Web cast on the company's Web site and will be archived for future review. The Web cast presentation will include slides containing additional detailed information of interest to investors.
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