Things aren't looking so hot at SAN switch vendor McData Corp. Not only are its results disappointing but its sales and marketing offices appear to have the exit door stuck open:
-- Senior VP of marketing and sales Mike Gustafson left this month to become president of super-NAS box builder BlueArc Corp.
-- McData VP world-wide sales and service Alain Andreoli departed in November to become president and CEO of SAN array supplier XIOtech Corp.
-- Kevin Langan, VP for EMC sales has joined Brocade Communications Systems Inc. this week, to work, naturally, on Brocade's EMC efforts
-- Greg Fahey, another VP who led McData's IBM sales team, joins Brocade to work on, yes, Brocade's IBM sales efforts
-- Ric Pepe, VP worldwide OEM and channel development, left to help increase Brocade's non-OEM sales
That's five top salesmen gone. But why? A source close to McData told us: "There was nowhere for Andreoli and Gustafson to progress in the company. They've left to go on to better things." John Kelley, McData chairman and president as well as CEO, must be concerned -- but has his policy of awarding himself all the top positions and power in the company contributed to the exodus?
There is bound to be some tension in sales and marketing as McData's first quarter results for this year showed a six percent fall in revenue year-on-year and product revenues down 16 percent compared to the last quarter of 2003. However, if it is down to the sales teams doing a poor job, how come competitor Brocade is poaching the staff?
On one accounting measure, McData lost $9.8 million compared to the year-ago quarter's positive income of $5.3 million. The reasons given were: restructuring charges; a loss associated with an acquisition; longer sales cycles at the high end; delays in product distribution agreements; and lower than expected volume shipments and sales, due to the time of year. Kelley admitted that McData had had "a very challenging quarter". But this comes at a time when IDC and others are reporting that the storage market is expanding.
The latest departures make McData look vulnerable though. Over 80 percent of its revenues come from just two customers: EMC Corp. and IBM Corp. Not only has two of its lead sales staff for these companies left, they have also moved to the company's rival.
At the same time, Brocade is looking to expand its OEM sales. The Fibre Channel switch market is having a tough time and Brocade recently laid off 100 staff and lost $2 million. Poaching McData sales staff will help it squeeze further into the OEM market. Brocade, probably like McData, thinks SAN switch sales, both Fibre Channel and iSCSI, will increasingly become OEM in nature.
Meanwhile, McData's other main rival, Cisco Systems Inc., is continuing its SAN switch efforts. A Dell'Oro Group Inc. market research finding said McData lost seven percent of its switch revenue last quarter. Brocade grew two percent and Cisco, 18 percent. But only the year before, in an IDC report on the 2002-2003 Fibre Channel switch market, McData had actually increased revenue share from 29.7 to 34.4 percent.
Could the departures also be related to the expansion of its European selling efforts with, for example, the opening of a new Madrid office -- a possibly unusual move when the company needs to shore up its existing business? Our source said that Europe represents 30 percent of McData revenue but only six percent of its headcount. The new office should feed money through to the bottom line.
At this rate, McData could simply be too small to survive. A bigger storage market means bigger storage fish and big fish, like Cisco and Storage Technology Corp. might find McData a tasty morsel. Whether that happens will depend on Kelley, who holds all the reins of power at McData, and what he does from now.