Project Hunt: Emulex Corp. EMLX
Who They Are
(From Yahoo): Emulex Corporation is a designer, developer, and supplier of a broad line of fibre channel host adapters, hubs, ASICs and software products that enhance access to, and storage of, electronic data and applications. The Company's products, which are based on internally developed ASIC technology and are deployable across a variety of heterogeneous network configurations and operating systems, support increasing volumes of stored data. The Company is also a supplier of some traditional networking products that include printer servers and network access products. Emulex sells its products worldwide to OEMs and end users, as well as through other distribution channels including value-added resellers, systems integrators, industrial distributors and resellers.
Emulex is located in Costa Mesa, CA. They have 132 employees. Their website is available at emulex.com
For the purposes of this report, I will be focusing on the Fibre Channel aspects of this company. The printer servers and network access products account for 16% of their revenue, and is declining year-on-year, per their latest quarterly report.
The Market
Fibre channel is a new input/output (IO) technology that host and device manufacturers are implementing to replace SCSI device connections. Fibre Channel has many advantages over SCSI: speed, distance, addressing, and networking. Fibre Channel is a discontinuous innovation in and of itself. Fibre Channel is the enabling protocol for Storage Area Networks, or SANs. SANs provide shared, networked storage for heterogeneous environments. This is analagous to an ethernet LAN that has file and print sharing capabilities. The major difference between LANs and SANs is the speed of the network and the protocol used to access it. SANs operate at 100MBytes/second, and use native IO protocols to acheive 90-95% efficiency.
What They Do
Emulex is the only company in the fibre channel market space that produces two of the core components of a fibre channel network. Those products are host bus adapters and hubs.
- Host Bus Adapters (HBAs) for fibre channel are analagous to network interface cards for ethernet networks. The HBA is plugged into a server, and attaches to some other fibre channel device, such as a hub or a switch or a router. HBAs have driver software that are installed as part of the operating system. These drivers are written and maintained by Emulex for each operating system they support.
- Fibre channel hubs on a fibre channel network are analagous to an ethernet hub on an ethernet network. They implement a protocol called Fibre Channel-Arbitrated Loop, or FC-AL. Both hosts and devices (known as nodes) attach to hubs in order to pass data from one to the other. All nodes attached to a hub share the bandwidth of fibre channel (100MBytes/second.)
Emulex sells four different HBAs. They can be divided into high-end, mid-range, and low-end. They support the following operating systems:
- Solaris, AIX, UnixWare, NetWare, and WinNT.
They support the following processors:
- x86, SPARC, PowerPC, and Alpha.
They support only the PCI internal bus connection.
Emulex sells two different hubs:
- LH5000: this is their high-end hub. It has 10 ports for device connections. It is manageable via ethernet, does digital retiming, and can isolate faulty devices. This last feature stops one bad device from causing the entire loop to stop functioning.
- LH1005: this is their starter hub. It has 5 ports for device connections. None of the important features of the LH5000 are available on the LH1005.
The Competition
HBA competition comes from three manufacturers: QLogic (QLGC), JNI (JNIC), and Interphase (INTC). The main technical differentiator in the HBA market is the support of S-bus for Sun/Solaris. JNIC is the only announced provider of S-bus connectivity. QLGC also produces SCSI HBAs and peripheral controllers. Interphase also produces a raft of network interface cards for ATM, ISDN, Ethernet, and FDDI. Of the four companies, only EMLX and JNIC are focused 100% on Fibre Channel HBAs. All of the companies produce their own Fibre Channel ASIC for use on the HBA.
Hub competition comes from two manufacturers: Vixel (VIXL) and Gadzoox (ZOOX). Hubs are losing technical mind-share in the FC/SAN market space, due to their shared bandwidth model. FC Switches, which provide full bandwidth to all attached nodes, are becoming the primary competition to all hub manufacturers. The primary switch competitors are Ancor (ANCR), Brocade (BRCD), Vixel (VIXL). Gadzoox sells a hybrid hub/switch that is gaining in popularity, too. All of these companies produce their own Fibre Channel ASIC for use in their hubs and switches.
Gorilla and King Characteristics
The Big Questions
A. Is there a discontinuous innovation, or a proprietary open architecture?
- Emulex does not have either. Both of their products are standards-based, and interchangable with their competitors.
B. Does it have the potential to grow into a mass market phenomenon, become a standard?
- Emulex is part of the horizontal market for FC SANs. Emulex must adhere to standards that they do not own in order to grow both their HBA and hub business.
C. Are there high barriers to entry and high switching costs?
- There are high barriers to entry, if you consider their Fibre Channel ASIC development. However, three other companies have already developed their own ASIC for use in the HBA market, and are actively selling them. Additionally, FC ASICs are available from HP.
- There are low switching costs, due to the standards that are enforced for their HBA and hub market. Additionally, their hub product offers no innovations that would cause a buyer to stick with Emulex, like Gadzoox does with their hybrid hub/switch.
D. Have value chains developed?
- Emulex has developed a value chain that consists of OEMs, VARs, partners and end-users. The primary component, and strongest link, of their value chain is their OEM relationships. Their last quarter reported showed sales to Compaq (23%), EMC -- including McDATA and DG (21%), Avnet (15%), and IBM -- including Sequent (11%).
Emulex has developed another part of the value chain by including VARs, who resell Emulex products. VARs are a weak link in the chain, as they usually do not have exclusivity or non-compete agreements. VARs will typically carry at least one of their competitors' products in addition to Emulex.
Emulex does have some sales directly to end-users, but these are a small portion of their revenue. End-users will typically buy their SAN components from a VAR or OEM.
E. Have they crossed the chasm?
Emulex has crossed the chasm, and is currently in the bowling alley. There is not a real niche market for their products, though. There is a large horizontal market in Fortune 1000 and Global 2000 data centers for Fibre Channel and SANs, as they try to drive down storage costs through consolidation and sharing. There are signs that the "pragmatist herd" is about to cave in, given that all major storage manufacturers have endorsed FC, and all platform vendors have SAN initiatives either in place and functioning or have stated their intentions to do so.
F. Existance of hypergrowth?
Emulex is in the bowling alley, therefore there is no hypergrowth.
Emulex Financials
Yearly Revenues
12mos 12mos 1999 1998 1997 1996
Rev ($M) 101.2 68.5 59.5 64.8 51.3
% Growth 15% (9%) 26%
Quarterly Comparisons
Date(Qtr) 9912(2) 9909(1) 9906(4) 9903(3)
Revenue ($M) 33.6 28.9 20.5 18.2
% Growth 16% 40% 11%
Market Data
$4.508 Billion Market Cap
35.39MM shares outstanding
46% held by 188 institutions
52-week Hi/Low
6 5/8 -- 170 1/4
Summary
Emulex is a Prince, at best. The markets that they are selling to demand interoperability and adherence to standards. These standards are not under control of Emulex. However, based on their wide acceptance in the marketplace, they could grow to be a King or one of two Strong Princes. Emulex is competing for and winning OEM contracts. They are also winning approvals from major storage manufacturs like EMC, and platform vendors like Sun. I expect that when the FC SAN market space enters the Tornado, that Emulex will prosper quite nicely.
My humble thanks to Eric Jacobson, whose HLIT project was my guiding light (translation: I cadged most of it.) I bow in deference, and hope that I have not insulted him by invoking his name in this report. |
