McDATA Announces Second Quarter 2004 Results; Exceeds Non-GAAP EPS Estimates and Records 8th Consecutive Quarter of Positive Cash Flow

Business Wire,  August 19, 2004  

Tags: non-GAAP

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BROOMFIELD, Colo. -- McDATA Corporation (Nasdaq: MCDTA)(Nasdaq:MCDT) today reported results for the second quarter ended July 31, 2004. Revenue totaled $98.2 million, an increase of one percent over the first quarter ended April 30, 2004. The GAAP net loss for the second quarter of 2004 was $(5.4) million, or $(0.05) per basic and diluted share, compared to second quarter 2003 net income of $9.1 million, or $0.08 per basic and diluted share. On a non-GAAP basis, net income for the second quarter of 2004 totaled $2.0 million, or $0.02 per basic and diluted share, compared to first quarter 2004 non-GAAP net income of $1.1 million, or $0.01 per basic and diluted share.

McDATA's non-GAAP results exclude charges relating to the amortization of deferred compensation, certain restructuring charges and amortization of purchased intangible assets. In addition, the company recorded its share of the operating loss associated with McDATA's investment in Aarohi, which was excluded for the purpose of the non-GAAP results.

"Our positive results for the quarter demonstrate that we are meeting the needs of an expanding market," said John Kelley, McDATA's CEO and chairman of the board. "Customers want on-demand data access and seamless solutions that simplify their diverse, multi-vendor environments. McDATA is uniquely able to deliver these solutions to our customers."

Second Quarter Details

Total port growth in the second quarter was up seven percent versus the prior quarter, driven by strong demand for McDATA's Intrepid Directors, FlexPort-enabled Sphereon switches and Eclipse SAN routing products. Revenue from products totaled $74.9 million in the second quarter, representing a six percent decline from the first quarter of 2004. Software revenue, which includes license and maintenance revenue, was $14.8 million, an increase of 13 percent sequentially. Software revenues were driven by another solid quarter for SANavigator sales, as well as sales of value-added software such as SANtegrity Security Suite and OpenTrunking software. Services revenue, which includes professional services and upgraded hardware warranty and maintenance revenue, was $4.6 million, up seven percent. Other revenue, which consists of service fees and product revenue from the ESCON business, was $4.0 million.

The sequential increase in Other revenue was driven primarily by the completion of an ESCON management agreement with EMC. This agreement reflects a change, beginning in July, whereby McDATA assumes the ESCON business, and records the full impact of the business in its results. Included in Other revenue in the second quarter is a one-time benefit of $1.6 million to record a previously deferred ESCON service fee increase that was part of the agreement with EMC.

Factors affecting product revenue for the second quarter 2004 included a subdued IT spending environment and a continued competitive marketplace. These factors were moderated by an increasing demand for McDATA's Eclipse 1620 SAN Router and continued demand for McDATA's portfolio of software management tools.

On a channel basis, McDATA's largest customer, EMC, represented 47 percent of total revenue in the second quarter of 2004, up four percent sequentially in revenue, and up slightly as a percentage of sales from 45 percent in the first quarter of 2004. IBM accounted for 26 percent of revenue, up seven percent in absolute dollars, and up as a percentage of sales from 25 percent in the first quarter of 2004. Other OEMs, resellers, systems integrators, and the ESCON service fee accounted for 27 percent of total revenue, compared to 30 percent in the prior quarter. Included in Other OEMs revenue, HDS represented approximately 10 percent of total revenue, and revenues through Dell increased 79 percent over the prior quarter.

Reported gross margin was 55.8 percent in the second quarter of 2004, compared to 56.3 percent in the first quarter of 2004. Non-GAAP gross margin was 55.9 percent, down sequentially from 56.4 percent. Non-GAAP gross margins exclude charges related to amortization of deferred compensation.

GAAP operating expenses were $60.7 million, down from $64.6 million in the first quarter of 2004, driven by the same factors affecting the change in non-GAAP expenses as well as by lower deferred compensation and no restructuring charges. Non-GAAP operating expenses were down approximately two percent sequentially at $53 million, driven primarily by lower R&D expenses. The lower expenses were a result of the company reaching some important product development milestones, which caused software capitalization to be higher than expected by approximately $1.5 million. As mentioned previously, McDATA's non-GAAP results exclude charges for the amortization of deferred compensation, certain restructuring charges and purchased intangible assets.

The non-GAAP results are a supplement to financial statements based on accounting principles generally accepted in the United States of America (GAAP). McDATA believes this presentation provides investors with additional insight into underlying operating results and business trends. A reconciliation of GAAP and non-GAAP net income is provided in the financial statements attached to this news release.