Good article from IBD...sounds like FC is the place to put some cash!
EMULEX CORP. Costa Mesa, California At Forefront Of A Faster Network Standard
Date: 8/23/99
Author: Philip Michaels
Companies that depend on data are feeling the need for speed.
Internet service providers, electronic retailers and wired businesses need a better way for storage devices, clients and peripherals to talk with each other.
Bring it on, says Emulex Corp.
The company makes host bus adapters and hubs, gadgets used in a communication technology standard called fibre channel. Emulex sells its products to makers of network equipment, which build them into their own products to enhance access to and storage of electronic data.
There's already a sizable market for fibre channel. But its biggest growth is yet to come, says analyst Steve Denegri of Morgan Keegan & Co.
The global market for fibre channel hubs, which hit $120 million last year, should top $826 million in 2002, says Robert Gray, research director for storage systems at International Data Corp. Throw in host bus adapters, says EMF Associates, and you've got a $384 million market in 1998 - and a $2.4 billion market in 2002.
'We've got a situation where Emulex is well positioned and well entrenched with the (manufacturers) that are bringing storage area networks into the corporate environment,' Denegri said.
What's driving fibre channel's growth? The rising volume of stored data is putting constraints on traditional communication technology like small computer systems interface, or SCSI.
SCSI has limited speed and connection points. It can connect to servers and workstations in only a small area. So when data start flying fast and furious, bottlenecks occur.
That's where fibre channel comes in. It has a larger bandwidth, which lets it process data faster than SCSI. It's also more flexible, connecting to more devices. And fibre channel can connect to devices over a wide area - up to 10 kilometers compared with 12 meters for SCSI.
The result? A clear speed benefit over existing standards, says analyst Ashok Kumar of U.S. Bancorp Piper Jaffray.
Emulex is counting on fibre channel's advantages to carve out a market for its products. And those efforts seem to be paying off, analysts say.
'Emulex has the adapter of choice for many companies looking for high- quality, thorough engineering and, more importantly, high throughput and performance,' IDC's Gray said.
Today, 70% of fibre channel components are made in-house by network equipment manufacturers, Kumar says. But that's changing. Outside vendors, such as Emulex and Qlogic Corp., could capture 60% of the business by 2003.
'That's a key driver of growth for Emulex,' Kumar said.
Fibre channel's momentum has fueled the company's sales. In the fiscal fourth quarter ended June 30, Emulex saw a 213% rise in shipments of host adapters and hubs over last year. The fibre channel business now makes up 69% of Emulex's revenue.
That's good, because sales of the company's traditional networking products continue to fall. Emulex makes printer servers, wide area network adapters and networking software. Sales in that sector dipped 32% in the quarter.
Still, overall sales jumped 46% to $20.4 million. Emulex earned 39 cents a share, up from 3 cents a year ago. And thanks to its shift toward fibre channel products, Emulex's operating margin rose to 13%, up from 8% in the fiscal third quarter.
For the year, the company earned 75 cents, vs. a loss of $1.77 in fiscal 1998. Sales rose 15% to $68.5 million. Those numbers don't reflect a 2-for-1 stock split set for Aug. 30. Emulex trades as EMLX near 113.
The company is phasing out its networking products business. Within a year, Denegri says, virtually all of its sales will come from fibre channel.
That should drive profit gains. Analysts expect earnings to climb 76% to $1.32 a share in fiscal 2000 and 30% to $1.71 in 2001, First Call says.
The key to Emulex's success? Its strong ties with leading network equipment makers. The company has contracts with 70% of the world's top 30 server manufacturers, Kumar says. Most of those clients have only now begun to ship products in volume.
'The design-win cycle (for fibre channel) is very long,' Kumar said. 'It's not like PCs where you're designed in for two months and designed out in a similar amount of time.'
Emulex's clients include Compaq Computer Corp., IBM Corp., EMC Corp. and Data General Corp.
Still, dealing with these companies carries some risks, namely the inability to forecast volumes. If orders get delayed or scaled back, that hurts Emulex's results.
Another risk is that the booming forecasts for fibre channel's growth don't materialize. But analysts say the chances of that happening are slight.
'It doesn't feel to us like there's any slowing at all,' Denegri said.
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(C) Copyright 1999 Investors Business Daily, Inc.
Metadata: EMLX QLGC |
