Aug. 23 (Bloomberg) -- Brocade Communications Systems Inc., the world's largest maker of switches for data-storage networks, said third-quarter profit fell 56 percent on expenses from the purchase of McData Corp. and legal fees.

Net income declined to $10.7 million, or 3 cents a share, from $24.5 million, or 9 cents, a year earlier, San Jose, California-based Brocade said today in a statement. Sales rose 73 percent to $327.5 million in the period ended July 28.

Brocade bought McData in January for $973 million, giving the combined company about 70 percent of the market for data- storage switches, which connect devices on computer networks. The company, whose biggest competitor is Cisco Systems Inc., forecast sales and profit for the fourth quarter that may miss analysts' estimates.

``The potential for continued softness in North American enterprise accounts gives us some caution in our guidance,'' Chief Financial Officer Richard Deranleau said on a conference call. Some customers are ``cautious'' because of turmoil in the subprime mortgage market, he said.

Brocade shed 1 cent to $6.95 in extended trading. The stock fell 32 cents to $6.96 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have fallen 15 percent this year.

Profit excluding expenses such as stock-based compensation was 12 cents share, beating the 11-cent average estimate in a Bloomberg survey. Sales missed the $333.2 million anticipated by analysts.

Costs related to the McData acquisition were $4.06 million, while the company paid $18 million in legal fees. The company doesn't breakout legal costs, spokeswoman Leslie Davis said.

Marketing Costs

Profit was also curbed in the quarter by higher marketing and research expenses. Research and development spending rose 27 percent to $54.1 million. Marketing costs climbed 61 percent to $57.2 million.

Fourth-quarter revenue will be $330 million to $345 million, Deranleau said. Analysts on average estimated revenue of $352.3 million. Profit excluding some costs will be 12 cents to 13 cents a share, compared with the 13-cent profit predicted by analysts.

Chief Executive Officer Michael Klayko said a credit crunch shouldn't hurt Brocade too much, even though the company has a ``large presence'' at financial institutions.

``With all this crisis going on, the data hasn't stopped growing,'' Klayko said in an interview. ``Even though there may be an issue in one area, one industry, it has little effect on us.''

Options Backdating

Gregory Reyes, Brocade's former chief executive officer, this month became the first CEO to be convicted by a jury in a crackdown on backdating stock option grants. Reyes, facing as many as 20 years in prison on the most serious of the 10 counts against him, plans to appeal.

In May, Brocade agreed to pay $7 million as part of a settlement with the U.S. Securities and Exchange Commission over stock-option backdating.

The market for storage-switches, which connect devices on computer networks, grew about 19 percent to $1.6 billion in 2006 from the previous year, according to researcher Dell'Oro Group in Redwood City, California. Brocade and McData had a combined 68.4 percent of the market at the end of the fourth quarter, compared with Cisco's 28.3 percent, the researcher said.

To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net.

Last Updated: August 23, 2007 19:45 EDT