MCDT Mcdata

McDATA Corporation (Nasdaq: MCDTA)(Nasdaq: MCDT) today reported results for the second quarter (Q2 06) ended July 31, 2006. Net revenues for Q2 06 totaled $150.1 million, compared to $168.3 million in the first quarter of fiscal year 2006 (Q1 06) and $165.3 million in the second quarter of fiscal year 2005 (Q2 05). The net loss for Q2 06 on a generally accepted accounting principles (GAAP) basis was ($20.5) million, or ($0.13) per share basic and diluted. This compares to a GAAP net loss of ($9.5) million, or ($0.06) per share basic and diluted in Q1 06, and a GAAP net loss of ($25.5) million, or ($0.18) per share basic and diluted in Q2 05. Non-GAAP net income for Q2 06 totaled $1.2 million, or $0.01 per diluted share. This compares to non-GAAP net income of $6.1 million, or $0.04 per diluted share in Q1 06, and non-GAAP net income of $3.8 million, or $0.03 per diluted share in Q2 05. McDATA's non-GAAP net income excludes charges related to the amortization of purchased intangible assets, certain restructuring and severance costs, amortization of debt discount, and the impact of stock compensation expense following the adoption of SFAS 123R beginning Q1 06. In addition to the exclusions listed above, McDATA's Q2 06 non-GAAP net income also excludes charges related to the impairment write down of a single product line and separate note receivable, both obtained in the CNT acquisition; and McDATA's Q1 06 non-GAAP net income excludes a one-time RoHS inventory accrual. Non-GAAP results are a supplement to GAAP financial statements and exclude certain expenses to provide what McDATA believes is a more complete understanding of our underlying operational trends. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. A reconciliation of GAAP and non-GAAP net income is provided in the financial statements attached to this news release. "McDATA's second quarter was characterized by encouragement and disappointment," said John Kelley, chairman, president and CEO. "We were encouraged with the traction we are seeing for 4 Gb/s and 10 Gb/s support on the McDATA 6140 Director, and revenue from our 4 Gb/s Fabric Switches grew sequentially. Given this trend, we are optimistic that availability of 4 Gb/s capability on the McDATA 10000 (i10k) in our third fiscal quarter will drive increased demand for our director platforms." Kelley continued: "While the Asia-Pacific geography continued to be an area of growth for McDATA, Europe and certain regions of North America displayed disappointing results. We have implemented changes within these geographies to increase our sales performance, and we are optimistic that these adjustments will have a positive impact in the second half of the year." Q2 06 Business and Customer Highlights -- Recognized by Gartner as one of the top ten storage services providers for 2005 -- Announced general availability of the non-disruptive and seamlessly upgradeable 4Gb/s Blade for McDATA 6140 Directors -- Added Medmark as a distributor of McDATA's Fibre Channel, IP and Remote Office Consolidation (ROC) products in Middle East countries -- The Internet Engineering Task Force approved an industry standard management information base (MIB) for Virtual Fabrics authored by McDATA engineers and other industry peers -- PETCO deployed McDATA 6140 Directors and 4500 Fabric Switches to consolidate its retail systems and optimize inventory processes, enabling PETCO to analyze more than 250,000 daily sales transactions overnight -- Worldwide steel producer Pohang Iron & Steel Co (POSCO) standardized on a McDATA solution incorporating McDATA's i10k and 6140 Directors, Eclipse SAN Router, and SANavigator Management Software to consolidate three data centers, build a backup and recovery solution, and reduce the cost of its Enterprise Resource Planning, Enterprise Portal, Data Warehouse and other critical business applications Conference Call and Webcast McDATA will host a conference call to discuss Q2 06 financial results today, August 24, 2006, at 3 p.m. MDT. The conference call will be webcast live at www.mcdata.com. About McDATA (www.mcdata.com) McDATA (Nasdaq: MCDTA)(Nasdaq: MCDT) is the leading provider of data access solutions, helping customers build, globally connect, optimize and centrally manage data infrastructures across SAN, MAN and WAN environments. With nearly 25 years' experience developing SAN products, services and solutions, McDATA is the trusted partner in the world's largest data centers, connecting more than two-thirds of all networked data. 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, McDATA's relationships with EMC, IBM and Hitachi Data Systems and the level of their orders, aggressive price competition by numerous other SAN and IP switch suppliers, OEM qualification of our new products -- such as the Intrepid 10000 Director, integration of CNT's sales and marketing functions, manufacturing constraints, constraints in obtaining third party product for resale and other risk factors that are disclosed in McDATA's filings with the Securities and Exchange Commission. These cautionary statements by McDATA should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by McDATA. All cautionary statements should be read as being applicable to all forward-looking statements wherever they appear. McDATA does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -0- *T McDATA CORPORATION CONDENSED REPORTED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1) (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended ------------------- ------------------- July 31, July 31, July 31, July 31, 2005 2006 2005 2006 --------- --------- --------- --------- Revenue: Product $139,139 $118,134 $231,409 $253,443 Service 26,170 31,996 32,768 64,999 --------------------------------------- Total revenue 165,309 150,130 264,177 318,442 Cost of revenue: Product 66,644 66,720 107,171 137,928 Service 16,349 21,464 21,262 41,371 Restructuring charges 692 - 692 - ------------------- ------------------- Total cost of revenue 83,685 88,184 129,125 179,299 ------------------- ------------------- Gross profit 81,624 61,946 135,052 139,143 Operating expenses: Research and development 31,387 25,761 52,319 52,320 Selling and marketing 38,256 36,198 62,304 73,510 General and administrative (includes amortization of intangibles) 18,616 19,700 29,769 40,652 Amortization of deferred compensation 3,257 - 3,960 - Restructuring costs and impairment charges 9,752 4,481 9,752 5,360 ------------------- ------------------- Total operating expenses 101,268 86,140 158,104 171,842 Loss from operations (19,644) (24,194) (23,052) (32,699) Interest and other income, net 134 3,342 1,101 3,967 ------------------- ------------------- Loss before income taxes (19,510) (20,852) (21,951) (28,732) Income tax expense (benefit) 6,008 (343) 6,424 1,320 --------------------------------------- Net loss $(25,518) $(20,509) $(28,375) $(30,052) =================== =================== Basic net loss per share $(0.18) $(0.13) $(0.22) $(0.20) =================== =================== Shares used in computing basic net loss per share 139,130 154,221 127,302 153,436 =================== =================== Diluted net loss per share $(0.18) $(0.13) $(0.22) $(0.20) =================== =================== Shares used in computing diluted net loss per share 139,130 154,221 127,302 153,436 =================== =================== *T -0- *T McDATA CORPORATION CONDENSED NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended ------------------- ------------------- July 31, July 31, July 31, July 31, 2005 2006 2005 2006 --------- --------- --------- --------- Revenue: Product $139,139 $118,134 $231,409 $253,443 Service 26,170 31,996 32,768 64,999 --------------------------------------- Total revenue 165,309 150,130 264,177 318,442 Cost of revenue: Product 66,513 60,063 107,019 129,383 Service 16,349 21,193 21,262 40,746 Restructuring charges - - - - ------------------- ------------------- Total cost of revenue 82,862 81,256 128,281 170,129 ------------------- ------------------- Gross profit 82,447 68,874 135,896 148,313 Operating expenses: Research and development 31,280 25,545 51,912 51,778 Selling and marketing 38,257 35,509 62,266 72,182 General and administrative 8,152 7,470 13,731 16,057 Amortization of deferred compensation - - - - Restructuring costs and impairment charges - - - - ------------------- ------------------- Total operating expenses 77,689 68,524 127,909 140,017 Income from operations 4,758 350 7,987 8,296 Interest and other income, net 681 1,495 1,648 2,940 ------------------- ------------------- Income before income taxes 5,439 1,845 9,635 11,236 Income tax expense 1,686 627 2,861 3,914 ------------------- ------------------- Net income $3,753 $1,218 $6,774 $7,322 =================== =================== Basic net income per share $0.03 $0.01 $0.05 $0.05 =================== =================== Shares used in computing basic net income per share 139,130 154,221 127,302 153,436 =================== =================== Diluted net loss per share $0.03 $0.01 $0.05 $0.05 =================== =================== Shares used in computing diluted net income per share 140,176 155,049 128,181 154,569 =================== =================== *T -0- *T McDATA CORPORATION RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS) (Note 2) (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 2005 2006 2005 2006 --------- --------- --------- --------- GAAP net loss $(25,518) $(20,509) $(28,375) $(30,052) Adjustments: Amortization of deferred compensation and acquisition-related compensation 3,679 - 4,746 - Amortization of intangible assets 9,537 11,060 15,107 22,119 Inventory reserve - RHOS 1,873 SFAS 123R stock based compensation 2,440 5,065 Other severance 952 138 952 441 Restructuring costs 10,234 148 10,234 739 Impairment of Matrix product line - 9,676 - 9,676 Impairment of CNT note receivable - 1,082 - 1,082 Amortization of discount on convertible debt 547 820 547 1,640 Income tax expense (benefit) 4,322 (970) 3,563 (2,594) Sale of equity investment - (2,667) - (2,667) ------------------- ------------------- Non-GAAP net income $3,753 $1,218 $6,774 $7,322 GAAP net loss per share - basic and diluted $(0.18) $(0.13) $(0.22) $(0.20) Non-GAAP net income per share - diluted $0.03 $0.01 $0.05 $0.05 Shares used in non-GAAP per share calculation - diluted 140,176 155,049 128,181 154,569 Note (1) -- Certain prior period amounts have been reclassified to conform to the fiscal 2006 presentation. Note (2) -- The condensed non-GAAP consolidated income statements for all periods presented are for illustrative purposes only and are not prepared in accordance with generally accepted accounting principles. *T -0- *T The following is provided as a supplement to the non-GAAP reconciliation above: Three Months Six Months Ended Ended ----------------- ----------------- Non-GAAP Adjustments July 31, July 31, July 31, July 31, 2005 2006 2005 2006 ---------------------------------- -------- -------- -------- -------- Cost of revenue: Deferred compensation and acquisition-related compensation $131 $- $152 $- SFAS 123R stock based compensation 271 625 Impairment of Matrix product line 6,563 6,563 Amortization associated with FAS 123R software capitalization 94 94 Inventory reserve - RHOS 1,873 Restructuring costs 692 - 692 15 ----------------- ----------------- Total cost of revenue subtotal 823 6,928 844 9,170 ----------------- ----------------- Operating expenses: Research and development: Acquisition-related compensation 256 - 556 - SFAS 123R stock based compensation - 216 542 Other severance 35 - 35 - Selling and marketing Acquisition-related compensation 18 - 57 - SFAS 123R stock based compensation - 689 - 1,328 General and administrative Acquisition-related compensation 17 - 21 - Amortization of intangible assets 9,537 11,060 15,107 22,119 SFAS 123R stock based compensation - 1,170 - 2,476 Other severance 917 - 917 - Restructuring costs and impairment charges Restructuring costs 9,542 148 9,542 724 Impairment of Matrix product line - 3,113 - 3,113 Severance - 138 - 441 CNT note receivable - 1,082 - 1,082 Amortization of deferred compensation 3,257 - 3,960 - ----------------- ----------------- Operating expenses subtotal 23,579 17,616 30,195 31,825 ----------------- ----------------- Amortization of discount on convertible debt 547 820 547 1,640 ----------------- ----------------- Sale of equity investment (2,667) (2,667) ----------------- ----------------- Total non-GAAP Adjustments 24,949 22,697 31,586 39,968 Income tax expense (benefit) 4,322 (970) 3,563 (2,594) ----------------- ----------------- After-tax impact of non-GAAP adjustments $29,271 $21,727 $35,149 $37,374 ================= ================= *T -0- *T CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) January 31, July 31, ----------- ----------- 2006 2006 ----------- ----------- Assets Cash, cash equivalents and short term investments $310,193 $334,159 Securities lending collateral 62,555 86,212 Accounts receivable, net 126,106 94,878 Inventories, net 33,100 35,646 Other current assets 13,423 16,685 ----------------------- Total current assets 545,377 567,580 Property and equipment, net 109,118 105,652 Long-term investments 31,884 25,036 Goodwill 266,141 263,473 Restricted cash 10,697 11,659 Intangible assets, net 123,694 98,554 Other assets, net 59,798 59,251 ----------------------- Total $1,146,709 $1,131,205 ======================= Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $137,514 $121,239 Securities lending collateral 62,555 86,212 Current portion of deferred revenue 61,242 59,832 Current portion of convertible debt - 120,610 Current portion of notes payable and capital leases 2,977 2,212 ----------------------- Total current liabilities 264,288 390,105 Notes payable and capital leases, less current portion 11,085 2,756 Deferred revenue, less current portion 31,380 28,294 Convertible subordinate debt 285,889 172,500 Other long-term liabilities 1,844 8,592 ----------------------- Total liabilities 594,486 602,247 Stockholders' equity 552,223 528,958 ----------------------- Total liabilities and stockholders' equity $1,146,709 $1,131,205 ======================= *T -0- *T CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited) Six Months Ended July 31, July 31, 2005 2006 ---------- --------- Net cash provided (used) by operating activities $(6,783) $33,634 ==================== Cash flows from investing activities: Net purchases of property and equipment $(4,516) $(9,849) Net purchases and sales of investments 9,871 (26,938) Cash recognized on merger with CNT, net 40,395 - Decrease in restricted cash related to interest rate swap 3 (4,852) -------------------- Net cash provided (used) by investing activities $45,753 $(41,639) ==================== Cash flows from financing activities: Payments on notes payable and capital leases $(1,059) $(1,542) Cash paid for treasury stock (4,552) - Retirement of convertible debt - (1,979) Proceeds from the issuance of common stock 267 1,343 -------------------- Net cash (used) by financing activities $(5,344) $(2,178) ==================== Effects of exchange rate changes $(376) $(352) ==================== Net increase (decrease) in cash and cash equivalents $33,250 $(10,535) ==================== *T