Did Brocade Buy a Lemon in McData?

Includes: BRCD, MCDTA
by: Tiernan Ray

Last week, on the occasion of better-than-expected fourth quarter results from Brocade (NASDAQ:BRCD), a maker of networking devices that connect data storage equipment, Eric noted that most analysts were concerned about the company’s task of combining its operations with McData (MCDTA), a competitor Brocade is acquiring.

To add fat to the fire, tonight’s financial results from McData (.pdf) for the third quarter ended Oct. 31 are a disappointment, and Brocade shares are responding accordingly. McData had sales of $156.1 million, below analysts’ estimates of $157.2 million, according to Thomson Financial/First Call, and its loss of 3 cents a share, which excludes some one-time charges and the cost of stock-options grants, wasn’t the penny-a-share profit analysts were expecting.

Brocade, which has almost 50% of the market for so-called storage area network switches, is buying McData to try and put even more distance between itself and Cisco Systems (NASDAQ:CSCO), whose market share has been rising into the mid-20% range for some quarters now. McData’s market share has been declining for some time, according to data from market researchers Dell’Oro Group, so it’s not clear whether tonight’s soggy results from the company are merely more of the same, or if they spell increased trouble for Brocade’s strategy.

Brocade shares are off about half a percent at $9.21 in after-hours trading after falling slightly during the day, while McData shares are off .6% at $6.27.