Ancor history:
Going back a few years, it is my understanding that Fibre Channel was invented by Ancor (Paul Anderson, the AN in Ancor). In the 95-96 time frame, Ancor envisioned FC displacing ethernet in the LAN. FC had the ability to transmit data at 10x the speed of ethernet, but at higher cost. Of course, the ethernet industry didn't just sit and watch FC take over. Within a few months gigabit ethernet came out and established a strong defensive wall around the LAN since it was so much cheaper to implement. The sudden loss of this market had a severe impact on Ancor as their revenue stream all but dried up (perhaps a good example of not crossing the chasm).
Further compounding their problems, they had a contract with Sequent Computer, where their switches would be using Class I to link several (I believe 4)NUMA computers together which would give the performance of a mainframe at a much lower cost. As it turned out, the Tachyon chip developed by HP used in the FC adaptors (the board in each computer to which the FC cable attached), had a flaw which prevented them from being able to be used with the Ancor switches. The contract was cancelled and Ancor was on the way to disaster. The immediate need for operating capital resulted in the issuance of around $11MM in floorless convertible preferred stock, also known as "death-spiral" convertible preferred. The funds who bought the preferred shares used them as collateral in 97 and 98 to short Ancor. The price of the stock plummeted under the continued barrage of shorting to $1 by the 2nd half of 1998. The exercise of the preferred shares over that time, ballooned the shares outstanding from around 11MM to around 23MM, so in essence, they issued around 11MM new shares of stock at $1 each. The management at the time was ousted and a new managment team was brought in who had a great deal of experience in the storage industry. The nascent storage network industry was rapidly identified as a sector which could benefit from Ancor's FC expertise using Class II and III connections rather than the Class I (always connected) which they had pushed for the LAN.
In 1999, they were able to win a very lucrative contract with Sun, wherein over a period of about 28 months, Sun would buy switches from Ancor for their storage systems. As part of the contract, rather than offer a significant volume discount, Ancor offered Sun 1.5MM warrants at the exercise price of $7.60 (the price of Ancor stock the day the contract was signed). The warrants were to be vested at the rate of 1 warrant for every $67 Sun spent or a total of $100MM. Sun has until Sept 2001 to exercise the warrants and must spend a minimum of $10MM before any warrants can be exercised. These warrants have turned out for whatever reason to be very controversial and caused no end of discussion as to whether they are a good thing or a bad thing for Ancor. At the time, with the $11MM convertible preferred offering still relatively fresh in everyone's minds, selling stock for $74.60 ($7.60 +$67) seemed to be a great deal. In essence they were getting $100MM for about a 5% dilution vs. $11MM for a 50% dilution. The controversy arises due to the surprising increase of the price of Ancor stock. At the point that the stock price exceeds around $74, due to, I believe, GAAP rules, they must account for a higher stock price as a negative sales margin. Those who have a low opinion of Ancor spin this as saying that they are giving their switches away. Those who have a more positive opinion of Ancor say that they are more than willing, for a 5% dilution, to have an appreciation in the stock from $7.60 at the time, to a price today in the $50's. It should be kept in mind also, that even though they get all of the $100MM from Sun, the value of the warrants is determined on a quarterly basis using the Black-Scholes pricing model. The value of the warrants is tax deductable. In essence, once the stock is at around $74 or above, even though they are getting the cash, they can show zero profit. From my biased point of view, this sounds pretty good to me as an Ancor shareholder.
In December, Intel signed an agreement with Ancor, giving them around $14MM in exchange for 280,000 shares of Ancor stock. Forgetting accounting for a second, I view this as the estimated amount Ancor will spent over the next 1 1/2-2 years on their Infiniband initiative, sort of paid up front for a negligible (<1%) dilution. While they have the money in the bank, the quarterly earnings statements will be negatively impacted since they will show increased overhead and expenses associated with the additional engineers to be hired for this project, without a concomitant influx of cash, so there will probably be a penny or three lower net than would have been reported in the absence of the Intel investment.
That pretty much brings us up to date although there are of course many details which might be overlooked when trying to value Ancor vis a vis Brocade. One such small point is that while Vixel, Gadzoox and Ancor all ended their last quarter at the end of December, Brocade ended their quarter at the end of January. The first three showed disappointing earnings whereas Brocade had an upside surprise. The question to ask, is how much revenue came in after the first of the year, once Y2K was behind them. I have heard, for example that Ancor had major sales in the first few says of January (over $1MM) which would have given them a positive surprise rather than a negative (revenues fell short by $0.5MM in the 4th Q).
Regarding NTAP, and OEM's in general, I have heard rumors of Ancor having agreements with EMC, HP, NTAP, IBM, etc., etc. To my way of thinking, these don't mean anything until they are publically announced, and even then not much until we see revenues resulting. My opinion is that all of these as well as Brocades's important OEM's Dell and Compaq will probably dual source since they generally hate to be tied to one supplier, and let their customers decide which switch they want. This is another reason why I think we might not have a gorilla, since with the exception of Sun, both switch makers will probably have agreements with most major OEM's making it harder to achieve a clear advantage. I would think that this could prevent exclusive value chains from forming. But I'm a novice at GG, so please correct me if I'm wrong. For example, I can see the currently superior marketing demonstrated by Brocade generating a "mindshare" which could make them the de facto market leader if Ancor does not respond in kind. |
