McDATA Reports Third Quarter Results
Achieves Record Revenue Results -- Up 30 Percent Over Prior Year, Pro Forma EPS of $.03, Excluding One-Time Charges
BROOMFIELD, Colo., Oct. 17 /PRNewswire/ -- McDATA Corporation (Nasdaq: MCDTA - news, MCDT - news), a global leader in open storage networking solutions, reported record revenue results of $86.6 million for its third quarter ending September 30, 2001, a 30 percent year-over-year increase, and at the high end of the company's revenue guidance.
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Pro forma net income for the third quarter of 2001 was $3.0 million, compared to pro forma third quarter 2000 net income of $10.8 million. Pro forma diluted earnings per share (EPS) were $.03 in third quarter 2001, compared to $.10 in the third quarter of 2000. This was in line with the company's revised guidance range for the quarter of $.01 to $.03 per share. The company's third-quarter pro forma results exclude non-cash charges related to deferred compensation, and one-time charges related to inventory and the SANavigator, Inc. acquisition.
``McDATA's strong revenue performance reflected solid growth in demand for McDATA's suite of core-to-edge enterprise solutions, including both hardware and software,'' said Jack McDonnell, Chairman and CEO of McDATA. ``We continued to gain solid market traction with our recently-introduced Galaxy-class 6000 Series Director and 3000 Series switch products -- selling record units of each in the quarter.''
McDATA generated positive operating cash flow in the third quarter and its balance sheet remained strong with no debt, cash and marketable securities totaling $300 million, and cash and total investment securities totaling $330 million at quarter-end. In addition, the company demonstrated its commitment to maintaining a strong balance sheet by lowering its total days' sales outstanding (DSO) to 63 days from 84, reported last quarter.
Third Quarter Details
McDATA's revenue from products reached $76.0 million in the third quarter, a 26 percent increase over the same period in 2000. Revenue from software and professional services totaled $6.1 million, increasing 111 percent over third quarter 2000. Other revenue was $4.5 million, up 19 percent from a year-ago. On a channel basis, McDATA's largest customer, EMC, represented 68 percent of total revenue in the third quarter of 2001, IBM accounted for 14 percent and other OEMs, resellers and systems integrators represented 16 percent, with service fees accounting for the remaining two percent.
Pro forma gross margins were 43.2 percent for the third quarter of 2001, compared to 54.2 percent in the third quarter of 2000, and 42.6 percent in the second quarter of 2001. Gross margins continue to be adversely affected by higher-than-standard manufacturing costs related to the introduction of McDATA's new generation of SAN products, as well as the impact of channel and product mix variances. McDATA launched four new products between April 2000 and April 2001, including the 6000 Series Director during the second quarter of 2001, two 3000 Series Fabric Switch products and the 1000 Series Loop Switch in the preceding quarters. In addition, relative to the company's expectation in the third quarter, it sold more of these products -- in particular, the 6000 Series Director -- through channels where margins are lower, which adversely affected gross margins.
``While we are pleased with the traction for our new products in our existing channels, we remain focused on expanding and diversifying our newer distribution channels to broaden the reach for McDATA products,'' said McDonnell. ``As we have previously indicated, it is our goal to add one additional OEM partner before the end of this year. We are confident that we will achieve this important step, which will further expand and strengthen our distribution.''
``In addition, we are driving the implementation of a new ''outsourcing- focused`` manufacturing model, allowing McDATA to focus on its core competency -- developing leading open storage networking technologies and solutions,'' added McDonnell. ``We made significant progress on our manufacturing initiatives in the third quarter, including the completion of a thorough review of operations, reorganization of our factory layout, consolidation of a key supplier relationship, outsourcing of the manufacturing of our switch products and strengthening of strategic partnerships with our major suppliers.'' Based on the operational review, the company incurred a one-time inventory-related charge of $14.7 million pre-tax in the third quarter.
In addition, the company also incurred one-time transaction charges of $2.1 million pre-tax in the third quarter relating to McDATA's acquisition of SANavigator. The company expects the balance of these charges -- approximately $200,000 to $300,000 -- to be incurred in the fourth quarter of 2001, resulting in total one-time transaction charges of $2.3 to $2.4 million, slightly below the previously announced range of $2.5 to $3.0 million. In addition, the company incurred a one-time, non-cash charge of approximately $7.2 million pre-tax in the third quarter related to the portion of the SANavigator purchase price allocated to in-process R&D, which is primarily comprised of future software product enhancements that are under development.
On a reported basis, the company incurred a net loss of $13.6 million for the third quarter of 2001, compared to reported net income of $9.0 million in the prior year. As shown in the following table, McDATA's third-quarter pro forma results exclude non-cash charges related to deferred compensation, and one-time charges related to inventory and the SANavigator acquisition.
Reconciliation of Reported and Pro Forma Results
(unaudited)
Three Months Ended September 30, 2001 $ in millions
Reported Loss $(13.6)
Deferred Compensation, pre-tax (non-cash) $2.0
Inventory-related Charge, pre-tax (one-time) * $14.7
SANavigator: Acquisition-related Costs, pre-tax (one-time) $2.1
SANavigator: In-process Allocation, pre-tax (one-time) $7.2
Income Tax $(9.4)
Pro Forma Earnings $3.0
* Of this charge, approximately $8.9 million represents an inventory
write-down, while the remaining $5.8 million represents cash charges
primarily related to cancelled component orders.
For the first nine months of 2001, McDATA revenue totaled $250.9 million, up 47 percent from the comparable period in 2000. Pro forma net income for the first nine months totaled $17.5 million, or $.15 per share, a decrease of 27 percent from the first nine months of 2000. Reported net loss totaled $2.7 million, compared to net income of $18.5 million in the first nine months of 2000.
SANavigator Acquisition Strengthens Software Solution
The acquisition of SANavigator underscores McDATA's commitment to provide customers with complete, open storage networking solutions, including best-in-class networking devices and integrated software solutions that simplify and optimize their core-to-edge enterprise storage networks. With the acquisition of SANavigator, McDATA takes a leading position in offering storage network management software that provides visibility and discovery in a multi-vendor fabric environment, and remains committed to partnering with companies such as EMC, VERITAS and Tivoli to provide customers with the most comprehensive management solutions.
Depository Trust & Clearing Corporation (DTCC), the world's largest securities depository and clearinghouse for the settlement of securities trading activity, recently selected the SANavigator software product to manage its storage network. By using SANavigator's feature-rich software solution, the DTCC is able to better optimize its open storage network through advanced discovery and performance monitoring capabilities.
McDATA acquired substantially all of the assets of SANavigator, Inc., including its SAN management software, for $29.75 million in cash. The transaction was completed in late September. The SANavigator business unit is expected to be accretive to McDATA's earnings in the first quarter of 2003, excluding amortization related to intangible SANavigator assets.
Other Highlights
Other highlights from the third quarter of 2001 include:
-- An extended partnership with VERITAS Software to allow customers to
integrate VERITAS's SANPoint Control(TM) with McDATA's best-in-class
Director and switch products.
-- A groundbreaking alliance with GiantLoop Network, Inc. to extend the
scalability and performance benefits of SANs over all-optical
metropolitan area networks (MANs).
-- The launching of a fully tested, standards-based interoperability
solution with Hewlett-Packard Company.
-- The announcement that McDATA's 6000 Series Director provides FICON
support for IBM's mainframes, Enterprise Storage Server (ISS) and the
Magstar 3590 A60 tape controller, achieving the first complete FICON
network capability. The announced FICON capabilities mark the
initiation of a new market opportunity by enabling the migration to
FICON from ESCON.
-- McDATA reinforced its commitment to interoperability, announcing its
charter membership in the Storage Networking Industry Association's
(SNIA) Supported Solutions Forum (SSF). SNIA's Supported Solutions
Forum is aimed at developing multi-vendor storage networking solutions
that are jointly qualified and mutually supported, and is viewed as a
major industry step in achieving heterogeneous enterprise-wide storage
networking solutions.
-- The opening of a sales office in Paris, expanding McDATA's European
market presence.
-- John Kelley, who joined McDATA as its president and chief operating
officer in August, was named to McDATA's board of directors.
Outlook
McDATA anticipates revenues in a range of $80 to $90 million for the fourth quarter ending December 31, 2001, which represents year-to-year growth of 2 to 15 percent for the quarter and a range of $331 to $341 million, or 33 to 37 percent revenue growth, for the full year. Pro forma fully diluted EPS is expected to be approximately breakeven to slightly positive in the fourth quarter, excluding the expected $.02 per share cash dilution from the SANavigator acquisition. Accordingly, we would expect full year 2001 pro forma EPS to be $.14 to $.18 per share, excluding the expected $.02 per share SANavigator cash dilution. The fourth quarter and full year 2001 pro forma EPS estimates exclude non-cash deferred compensation charges, non-cash amortization charges related to intangible SANavigator assets and the remaining one-time charges associated with the SANavigator acquisition. Further guidance on assumptions will be provided on the company's conference call today.
``Demand remains strong for SANs and McDATA's comprehensive core-to-edge storage networking and management solutions. However, the events of September 11 and the corresponding economic retraction are resulting in the delay of some deployments and longer average sales cycles, which could adversely affect fourth quarter sales. While we are cautious in our current outlook, we believe that McDATA is well-positioned in this early-stage SAN market, a position that should only strengthen as the economy stabilizes and SAN growth accelerates,'' said McDonnell.
McDATA will hold a conference call to discuss third quarter 2001 results today, October 17, 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.
About McDATA (www.mcdata.com)
McDATA (Nasdaq: MCDTA - news, MCDT - news) is the worldwide leader in open storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. McDATA's core-to-edge enterprise SAN solutions improve the reliability and availability of data to simplify SAN management and reduce the total cost of ownership. McDATA extensively pre-tests its solutions to provide IT organizations with the comprehensive tools, methodologies and support essential to robust SAN implementation. McDATA distributes its products through its OEMs, network of resellers and Elite Solution Partners. McDATA and the McDATA logo are registered trademarks, and SANavigator is a trademark of McDATA Corporation.
Forward-Looking Statements
This press release contains statements about expected future events that are forward-looking and subject to risks and uncertainties. Readers are urged to consider statements that include the terms ``believes,'' ``belief,'' ``expects,'' ``plans,'' ``objectives,'' ``estimates,'' ``anticipates,'' ``intends,'' ``targets,'' or the like to be uncertain and forward-looking. Factors that could cause actual results to differ and vary materially from expectations include, but are not limited to, our ability to quickly integrate SANavigator and ramp sales, our relationship with EMC Corporation and IBM and the level of their orders, the impact of the general economic slowdown and the recent terrorist attacks on purchasing decisions by customers and capital spending, our ability to complete the manufacturing review plan and the successful implementation (which will require contract modifications with our contract manufacturer) of an ``outsourcing-focused'' manufacturing model, our ability to expand sales into higher margin channels through system integrators and distributors, a loss of any of our key customers (or our OEMs' key customers), distributors, resellers or our contract manufacturer, our ability to expand our product offerings and any transition to new products, component quality and availability, the impact and uncertainty of typically having most of the sales volume occur in the last month and a significant amount in the last two weeks of the fiscal quarter, the development of the storage area network and switch markets, competition in the storage area network and switch markets, one-time events and other important risk factors disclosed previously and from time to time in our filings at the U.S. Securities and Exchange Commission. These cautionary statements by us should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by us. We cannot always predict or determine after the fact what factors would cause actual results to differ materially from those indicated by the forward-looking statements or other statements. All cautionary statements should be read as being applicable to all forward-looking statements wherever they appear. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
For further information, please contact: investors, Linda Dellett, +1-303-460-4474, investor_relations@mcdata.com, or media, Kathleen Sullivan, +1-303-460-4435, or cell, +1-720-480-5501, kathleen.sullivan@mcdata.com, both of McDATA Corporation.
McDATA CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
Revenue $66,760 $86,600 $170,355 $250,924
Cost of revenue 31,099 63,787 81,363 156,552
Gross profit 35,661 22,813 88,992 94,372
Operating expenses:
Research and
development 10,650 13,411 27,844 34,863
Selling, general
and administrative 11,223 23,237 28,121 61,020
Acquired in-process
research & development
and other acquisition
-related costs -- 9,291 -- 9,291
Amortization of
deferred compensation 1,621 1,729 4,622 5,111
Operating expenses 23,494 47,668 60,587 110,285
Income (loss)
from operations 12,167 (24,855) 28,405 (15,913)
Interest income, net 3,119 3,296 3,158 11,676
Income (loss) before
income taxes 15,286 (21,559) 31,563 (4,237)
Income tax expense
(benefit) 6,328 (7,977) 13,050 (1,568)
Net income (loss) $8,958 $(13,582) $18,513 $(2,669)
Basic net income
(loss) per share $0.09 $(0.12) $0.19 $(0.02)
Shares used in
computing basic net
income (loss)
per share 102,902 111,658 96,721 111,226
Diluted net income
(loss) per share $0.08 $(0.12) $0.18 $(0.02)
Shares used in
computing diluted
net income (loss)
per share 112,357 111,658 104,514 111,226
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, September 30,
2001 2001
Assets
Cash and short term investments $278,086 $219,046
Accounts receivable, net 75,381 59,170
Inventories, net 45,700 36,592
Other current assets 17,132 24,982
Total current assets 416,299 339,790
Property and equipment, net 36,220 40,471
Long-term investments 52,226 80,955
Other assets, net 27,067 53,514
Total assets $531,812 $514,730
Liabilities and Stockholders' Equity
Current liabilities $54,380 $47,958
Obligations under capital leases and other 1,557 1,048
Stockholders' equity 475,875 465,724
Total liabilities and
stockholders' equity $531,812 $514,730
McDATA CORPORATION
CONDENSED PROFORMA CONSOLIDATED INCOME STATEMENTS (Note 1)
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
Revenue $66,760 $86,600 $170,355 $250,924
Cost of revenue
(Note 1) 30,599 49,206 79,927 140,979
Gross profit 36,161 37,394 90,428 109,945
Operating expenses:
Research and
development 10,650 13,411 27,844 34,863
Selling, general
and administrative 11,223 22,864 28,121 60,647
Acquired in-process
research & development
and other acquisition-
related costs (Note 1) -- -- -- --
Amortization of
deferred compensation
(Note 1) -- -- -- --
Operating expenses 21,873 36,275 55,965 95,510
Income from operations 14,288 1,119 34,463 14,435
Interest income, net 3,119 3,296 3,158 11,676
Income before
income taxes 17,407 4,415 37,621 26,111
Income tax expense
(Note 1) 6,606 1,457 13,817 8,617
Net income $10,801 $2,958 $23,804 $17,494
Basic net income
per share $0.10 $0.03 $0.25 $0.16
Shares used in
computing basic net
income per share 102,902 111,658 96,721 111,226
Diluted net income
per share $0.10 $0.03 $0.23 $0.15
Shares used in
computing diluted net
income per share 112,357 114,078 104,514 116,288
Note (1) - The condensed pro forma consolidated income statements for all periods presented are for illustrative purposes only and are not prepared in accordance with generally accepted accounting principles. These pro forma statements show the operating results of the Company, excluding the following items:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
Inventory-related
charge $-- $14,680 $-- $14,680
Acquired in-process
research & development -- 7,200 -- 7,200
Acquisition-related
costs -- 2,091 -- 2,091
Deferred compensation 2,121 2,003 6,058 6,376
Subtotal 2,121 25,974 6,058 30,347
Income tax (278) (9,434) (767) (10,184)
After-tax impact of
pro forma
adjustments $1,843 $16,540 $5,291 $20,163
SOURCE: McDATA Corporation |
