SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Technology Stocks : Son of SAN - Storage Networking Technologies
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: Douglas Nordgren who started this subject1/28/2002 3:28:28 AM
From: Gus  Read Replies (2) of 4808
 
When EMC acquired McDATA in late 1995 for 13.5M of EMC stock then worth around $250M, McDATA was in the process of booking $148M in 1995 sales and net income of $42M or a net margin of 28%! IBM awarded the exclusive OEM contract to McDATA in 1994.

IBM has probably booked around $2.5B in total ESCON-related revenues since 1995. EMC has booked around $1B in total ESCON-related revenues since 1995. McDATA has booked around $150M in service fees since 1995. It is a substantial installed base that has been obscured by the mainframe-is-dead rhetoric of the 90s.

Under the 1997 reorganization, EMC agreed to let McDATA execs and employees buy back into the new McDATA (MCDT A common). It also decided to keep all ESCON revenues as well as Cost of Goods Sold while McDATA received around 15% of those sales for continuing to manufacture the ESCON directors and to fund its Fibre Channel R&D effort.

Below is a table of McDATA's directors:

1st generation ESCON director           64 port (1994)
2nd generation ESCON director          128 port (1996)
3rd generation ESCON director          248 port (1998)
4th generation FICON/FC director        32 port (1999)
5th generation FICON/FC director        64 port (2001)
6th generation FICON/FC director       128 port (2002)

Below are my estimates of the total number of ESCON ports that become available for migration to FICON once these ports are fully depreciated. Directors are engineered to last 7 years, but most non-tech companies typically depreciate these big ticket items over 5 years so the simplifying assumption here is that these ESCON directors will only migrate to FICON once fully depreciated together.

Note that a little over half of the installed ESCON ports become available for migration to FICON during the next 2 years. McDATA's decision to reduce FC director prices by a reported 35% during 3Q01 and to take the subsequent hit on gross margins may be a calculated decision to protect its FICON upgrade cycle and to use the FICON directors to capture the Open SAN contract. Open Systems SANs are expanding much faster than Mainframe FICON SANs notwithstanding that 2001 was the first year that IBM increased mainframe sales (+15%) since 1989.

FICON OPPORTUNITY
1995 to 2001 

                                           FICON    FICON
   % of TOTAL   EMC   No. of ESCON   MCDTA Upside   Upside
   ESCON REVS. ESCON   ESCON   to    TOTAL $1k REV  $3K REV
        95-01 Revenue  Ports FICON   REVS. per port per port

1995     15%   $148M   148k    -     $ 34M    -        -
1996     15%    179M   179k    -       32M    -        -
1997     15%    189M   189k    -       33M    -        -
1998     14%    178M   178k    -       37M    -        -
1999     12%    143M   143k    -       95M    -        -
2000     14%    102M   102k    -      249M    -        -
2001*     9%     95M    95k   37k     344M  $ 37M    $ 37M

Total   100%   $1.0B   1.0M   37K      -    $ 37M    $ 37M

2002     -       -      -     45k      -      45M     135M
2003     -       -      -     47k      -      47M     141M
2004     -       -      -     45k      -      45M     135M
2005     -       -      -     36k      -      36M     108M
2006     -       -      -     26k      -      26M      78M
2007     -       -      -     24M      -      24M      72M

Other assumptions:

1) ESCON to FICON conversion ratio - 4 ESCON to 1 FICON

2) FICON GA - 9/28/2001

3) FICON revenue upside of $1k per port assumes that McDATA
only sells the FICON directors.

4) FICON revenue upside of $3k per port assumes that McDATA sells the FICON directors AND also captures the Open System SAN account using any combination of FC directors and FC switches. FICON director ports are around $1+k per port while FC director ports are around $2+k per port.

5) A more conservative assumption is that only 50% to 70% of ESCON installed base migrates to FICON. The incremental revenue cushion is still significant.

McDATA guided to 2002 revenue growth of 11% to 22%. Note, however, the impact of additonal sales volume on McDATA's margins. This analysis assumes that reductions in the fixed cost component of Cost of Goods Sold offset the rise in SG&A associated with increased sales so the absolute amounts of SG&A and R&D are kept constant.

In 2001, McDATA booked about $250M in director sales, $50M
in switch sales, $28M in sofware/services and $17M in ESCON Service Fees.

2002 MCDTA
Margin Analysis

                     11%       22%      33%     
                    Sales     Sales    Sales    
                   Growth    Growth   Growth   

Sales ($)          $383M     $420M    $458M    
Sales (%)           100%      100%     100%     
Gross Margin         49%       49%      49%     

SG&A                 28%       25%      23%      
R&D                  16%       15%      13%

Operating 
Margin                7%        9%      13%
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News