Tmaster, It sounds like NTAP did worse than EMC. Here is the DN post that would be worth reading again....
Picking up the Pieces
Yesterday, March 7th, Robert Montague of Morgan Keegan adjusted earnings across the board for the SAN sector as a result of doing some homework. Today SSB's H. Clinton Vaughn followed suit, echoing much of Montague's research. Others will likely line up with their "adjustments."
SSB report -
Message 15467458
TSC article -
rd.yahoo.com*http:/...
To paraphrase the gist of both reports - the inventory issues that began to surface early in calendar 2001 are more extensive than we previously estimated.
SSB says "In our opinion, many of our companies have been executing flawlessly and have great management teams with a huge secular trend ahead. We continue to believe that the trend to network storage is forthcoming and only just
beginning to unfold. We note that many of our companies' current pauses are related to macroeconomic conditions, not poor execution. We See These Companies Exiting The Pullback Even Stronger."
MOKE says "Longer-term we continue to believe the
storage networking theme will be a compelling growth investment, and we will continue to opportunistically focus on names such as QLogic that have strong management teams, strong balance sheets and critical market share.
While I agree that the macro conditions certainly have affected inventory levels in the SAN/NAS sector, I hesitate to foist the entire blame for the glut on macro economic shoulders. Even though management may be executing their plans flawlessly, some plans may be fraught with perils and pitfalls of their own making.
Both Brocade and NetApp screamed to the top of the charts and cornered market share primarily on their First-Mover advantage and momentum. When you think about it, these are the two horses the early NAS/SAN industry rode in on to garner Wall Street prominance and adulation. Brocade swept the entry-level and midrange workgroup SAN market as NetApp did the same with the NAS market. It seems that the Market presumed that they could extend their dominance further as they moved up into the high-end glass houses. Wait a minute, isn't the high-end already occupied with incumbent and entrenched power? Aye, and therein lies the rub.
Both Brocade and NetApp entries into the high-end stalled on longer product sales cycles and data center extensive qualification periods. Also, their current product lines do not adequately service the more stringent high-end market: High Availability and Failover for NTAP, and Interoperability for Brocade.
NTAP's product line is being reengineered and repackaged for this market and given that NAS itself is beginning to become more prevalent in glass houses, they should be able to garner market share down the road. In the near term they face stiff competition from incumbents EMC, IBM, HWP and HDS, and a host of startups. They may experience erosion of market share at the entry level and midrange markets while facing a squeeze-out at the high-end. How they will fare in this highly competitive NAS/SAN environment should not be a matter of faith, whether in their success or failure.
Brocade's plan is more problematic and requires flawless execution at every step of a multi-phase strategy (TBA in a future post after some more pieces come into my hands). From the outset, Brocade's plan has been to gain SAN market dominance and control of the pace of technological change. Well, they certainly have gained the lion's share of the nascent switch market, but their efforts to dominate and control have led, in part, to their own undoing.
Brocade's CEO Greg Reyes often repeats the mantra that at the end-user level, switch Interoperability is a non-issue. That may be true for the entry-level and midrange markets that they sell to, but that is most definitely not the case for the high-end SAN market. Brocade knows this, of course, and is actively promoting their own FC switch as the de facto standard to the standards body. Their problem is that, not wanting other switch vendors to be able to sell into their installed base, they must prolong the standards process until they can bring their next "carrier class" products into the market to compete with McData and InRange who have already paved significant inroads into the markets Brocade covets. Greg Reyes can say to his buddy James Cramer that InRange is a "cockroach" (he also once called Ancor an "ankle-biter") but I think he really means InRange is an "encroacher."
In the meantime, Brocade's respun ASIC, upon which their next generation 2-Gig product rests, just came back from fab in late January for pre-production qualification. They are expecting it to be in customer hands sometime in the Fall. The OEM testing and qualification may take up to another six months after that. They will try to push it to market sooner via reseller partners (resellers generally move product faster with less stringent qualification regimens).
Meanwhile, 2-Gig product from QLGC is in customer hands undergoing qualification. One could make the argument that the 2-Gig platform has not arrived yet, but you can't have a 2-Gig platform without product to build on.
Brocade has had many go-arounds with its OEM customers regarding switch Interoperability. But their interest in preserving their standards based but proprietary switch technology has now extended to one of its partners, Cisco. Brocade was to deliver and standards-based FC E_Port for Cisco's Catalyst blade. But what they have done is given Cisco their own standards based but proprietary E_Port with the rationale that their E_Port is the "predominant standard" based upon over 750,000 FC ports they have already sold. Cisco questions the value proposition of a Catalyst that can connect only to other Brocade SAN islands. Enter iSCSI.
The real question on Brocade is whether they can stall standards adoption long enough to extend their first mover advantage into the next phase of SAN deployment. Greg Reyes is fond of portraying Brocade as the "Pioneer" of SAN development, but right now they're looking more like a "Homesteader" clearing land and hunkering down to breed, while Indigenies are gathering in the woods.
The SNIA and FCIA industry groups have combined interoperability intitiatives with a resulting HBA standard and are now working towards inter-switch ratification. Brocade is an important and integral participant in the process. Whether their end-users understand that they need it or not, it is clear that their OEM customers are demanding it and pushing towards that Interoperability regardless of whose standard it ends up becoming. If it is not a Brocade-based standard, they stand to lose their first-mover advantage by being saddled with a large installed base that will require upgrading. If it is to be a Brocade-based standard, it needs to be delivered and ratified ASAP before Major SAN Implementations can occur.
Anyone who has followed this thread is familiar with the two primary forces that will drive the SAN Industry going forward: Software and Interoperability. Whether Brocade can remain in the driver's seat or becomes another passenger in the car pool remains to be seen.
There are other far-reaching developments that are coming into play in the SAN/NAS industry that suggest that some of the companies in the SNAX may become much different companies 3-4 years from now. More on that in due course.
Aside from macro conditions, the diligent investor needs to investigate the intrinsic value propositions of these companies going forward. I have my opinions, but think it best, given the radar visibility of this thread, to ask readers to weight the future heavily since past performance is no guarantee of future success.
The whole sector is being punished undeservedly IMO as the result of BRCD and NTAP having butted up against the high-end. That SAN/NAS market is just beginning, and it's not clear yet whether BRCD or NTAP can extend their market dominance into that realm.
Douglas |
