McData will probably find it impossible to reverse recent pricing declines. It made substantial concessions to EMC -- its biggest customer, and former owner -- of between 12 percent and 15 percent, according to ThinkEquity Partners. It will probably have to make similar concessions to its other main customers, IBM Corp. (NYSE: IBM) and Hitachi Data Systems (HDS). Kelley forecast gross margins in the low 50 percent range next quarter -- down from 58 percent in the third quarter.
"Pricing pressure is a forever fact of life now," Berg says, "unless somebody leaves the market."
McData was less reliant on sales to EMC last quarter. EMC accounted for 54 percent of McDatas sales, down from 62 percent in the previous quarter. Kelley said he expects sales to EMC to rise again next quarter as they improve their relationship. But the lower margin guidance suggests prices wont rise.
"We've been working with EMC a long time, and they with us," Kelley said. "It was unfortunate that we got in the position that we did, and Ill take ownership of a lot of the problem."
Kelley is also temporarily taking ownership of the company's top sales position, vacated last week by Alain Andreoli (see McData Sales Boss McExits). Kelley said Andreoli left for a better opportunity and expects him to become CEO of another company. Andreoli told Byte and Switch he expects to announce his new employer on Wednesday.
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