Inrange Challenges McData with More Than a Billion Bits Served
Miami, FL, October 16 /SHfn/ -- Inrange Technologies [INRG] made a splash with its September 22 IPO, but this data networking firm could generate an even bigger wave over the next few sessions. Inrange began shipping a storage switch last month that competes with those from rivals McData Corporation [MCDT] and Brocade Communications Systems [BRCD], which have been showered with attention since their public debuts. Certainly, Wall Street will be awaiting Inrange's earnings report in late October, but the company's emergence from its quiet period on October 17 should move INRG a little closer to its highflying peers. Since going public, INRG has traded as high as $65-3/8, and now sits lower, opening at $45 Monday.
Stock prices commonly run up ahead of quiet-period expirations. Take McData, for example. The storage-networking peer to Inrange went public in August. On September 5, MCDT reached the end of its quiet period. Several of its investment bankers initiated coverage with "buy" ratings that day, providing a 3.6% boost to its stock price. In the six sessions preceding the expiration, the stock surged 41%, while the NASDAQ, the benchmark for the broader tech market, gained only 2.4%. It would not be a surprise to see lead underwriter Salomon Smith Barney, or any of the other 13 investment banks involved with the IPO, initiate coverage of INRG with a "buy" rating this week.
Inrange, McData and Brocade design and build switches used to manage storage area networks (SANs), an architecture for data storage and management that's rapidly growing in popularity. Switches connect the channels of a storage network with storage hardware devices and servers. The need to transmit copious data at high speeds has prompted the evolution of storage switches to a technology called Fiber Channel, capable of throughput in excess of one gigabit, or one billion bits, each second.
In this lucrative space, Brocade claims the majority of the market. Its trailing P/E of more than 600 speaks to its dominance. While Brocade operates in the small-switch segment of the market, it's making a move into high-end switches, called director class or enterprise switches, where McData and Inrange have placed their bets. Research firm IDC projects the high-end switch segment will grow more quickly than any other Fiber Channel segment, increasing at a CAGR of 129% to reach $1.4 billion by 2003, from a piddling $52 million in 1999.
Ron Johnson, senior partner of the Evaluator Group, a storage industry analyst organization, believes Inrange and McData both offer excellent switch products. He says that the market opportunity for the enterprise-class switch is sizable. But Johnson notes that large switches don't suit all architectures.
In its short history as a public company, McData trades at a trailing P/E of over 1,000, while Inrange trades in the 100 P/E area. The disparity in their P/Es is remarkable. Inrange reported revenue of $52.2 million in the quarter ended June 30, while McData saw a top line of $56.5 million.
Inrange's storage networking products accounted for roughly 50% of its revenue of $200.6 million in 1999. The remainder was derived from data networking, telecommunications networking and from services. Revenue from storage products grew by $9.6 million in 1999. Investors should watch that number continue to increase as the company funnels resources into this emerging high-growth market, and expands its indirect sales through new OEM partners.
Last Tuesday, INRG announced an interoperability alliance with the storage management software firm Tivoli, an IBM [IBM] subsidiary. On Wednesday, the company announced that IBM would resell INRG's new FC 9000 switch in its servers and Open Systems Fibre Channel SANs.
With a port count of 64, the FC 9000 is the highest capacity Fibre Channel director switch. McData's switches top out at a port count of 32. Says Johnson, "There is an advantage to Inrange today in that they have a higher port count (than McData)" he said. "But I expect that to be neglected by some upcoming announcements by McData anyway."
Earnings for the September-ended quarter are eagerly anticipated in late October, and investors will surely be watching sales figures of the FC 9000 switch. A strong uptake of the switch will likely fuel Inrange's stock price higher. With a P/E that's just one-tenth of McData's, there is much room for the stock to run before it becomes valued as a viable switch player. Additionally, investors may see a near-term boost ahead of the earnings report, when the company's quiet period expires this Tuesday.
Investors should take caution in the longer term however, as INRG's parent company, SPX, eventually sells off shares into the market. SPX sold off only 9% of Inrange at the time of the initial offering. And with a current float of 7.6 million shares, out of a total of 83.3 million shares outstanding, additional volatility is certain. |
