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Strategies & Market Trends : Rande Is . . . HOME -- Ignore unavailable to you. Want to Upgrade?

To: Rande Is who wrote (18868)	1/18/2000 1:12:00 PM
From: Joe Smith	Read Replies (1) \| Respond to of 57584

ANCR looks like a great Spirit type play. Bounced hard off of 35 this morning. Competitor with BRCD. Maker of FC switches for SANs. Some controversy whether this is truly a leading edge tech or a dead end, but it seems to be fast-growing. Very nice run at end of 99. Can't see why it wouldn't duplicate that run again... Has taken a haircut after disappointing on 1/10. Best rundown is a Piper Jaffray report from November.... * U.S. Bancorp Piper Jaffray * U.S. Bancorp Piper Jaffray *** Ancor Communications, Inc. (ANCR - 55 3/16) November 22, 1999 Ashok Kumar, CFA, 612-342-6461, akumar02@pjc.com Paul H. Mansky, 612-342-6474, pmansky@pjc.com Shifting Sans Rating: Buy, Aggressive (#) Price: $55 3/16 52-Week Range $73 3/8 - $2 9/16 FY End:December Shares Out (Mil) 26.3 EPS 1998 1999E 2000E Market Cap (Mil) $1,451 Mar ($0.23) ($0.09)A ($0.02) Average Daily Vol (000) 756 Jun ($0.61) ($0.07)A $0.00 Book Value $2.68 Sept ($0.23) ($0.07)A $0.03 Dividend Nil Dec ($0.28) ($0.05)E $0.07 Debt/Total Cap 0.2% FY ($1.35) ($0.27)E $0.08 3-5 Year EPS Growth Rate 45% P/E NM NM NM Mkt. Cap./FY99 Revenue 102x Mkt. Cap./FY00 Revenue 32x Revs ($Mil)1998 1999E 2000E 00 PE to Growth 15x Mar $1.0 $1.5A $6.9 Jun $0.1 $3.6A $9.8 Sept $0.2 $4.0A $12.4 Dec $3.0 $5.0E $16.0 Quarter End December 31, 1999 FY $4.4 $14.1E $45.0 Reporting Date January 2000 *Fully taxed EPS. Tables may not add due to rounding. Highlights The massive deployment of storage area networks (SANs) has been instrumental in the explosive growth in Fibre Channel (FC) components. FC is more of an extension to server storage than networking technology. Today most of the FC deployments are at the front-end (host-to-subsystem) while the back-end connection from the subsystem controller to the disc drive remains UltraSCSI. This is because PCI bus bandwidth becomes a bottleneck before limits of SCSI throughput are reached. But long-term, we expect FC to displace SCSI at the back end as it offers better scalability, manageability, and reliability. Once the interoperability issues at both the hardware and SAN management levels are addressed, the SAN market should explode. A recent Gilder report indicated that the SAN is a fad and most if not all the implementation will converge on GbE. GbE, which is a store and forward architecture, exhibits 50x more latency than a FC switch. SAN is analogous to building a superhighway network behind the network. E-commerce vendors like E-Bay and Amazon are spending significant IT dollars on FC SAN versus GbE. In FC implementation all the processing is in the hardware versus GbE over IP, where the processing and decoding is in the software. Most of the applications including data mining require virtual interfaces and cannot tolerate the GbE latency. In essence, the overhead caused by inserting a FC hub or switch in a data path between server and storage subsystem is small compared to the overall response time. A well-designed SAN topology will deliver the native throughput of a storage subsystem. As such we forecast the FC switch market, the largest opportunity in FC components, to grow from $150M this year to over a billion dollars by 2001 and exhibit a CAGR (98-03) of 160%. Forecasts by "seers" predicting the demise of the SAN market have no better accuracy than divining the future by reading animal entrails. While ANCR was late in refocusing from LAN to SAN, on the strength of their product offering they have established themselves as a credible competitor to Brocade. ANCR would like to argue that their distributed memory architecture offers lower latency and better scalability than Brocade's central architecture. We believe that there is no measurable difference in latencies (5-10% maximum) moreover, when the switches are cascaded, the data does not stop at the F_port but flows through from one memory pool to another. Bottom line is we expect Ancor and Brocade to control dominant share in the mainstream switch market. The losers will be Vixel and Gadzooks. However, when we get to a director class product, 64-port solutions, a single backplane (Ancor) is a superior solution to a cascade (Brocade). We expect large installations to be aggregated on 64-port rather than 16 port modules. Ancor recently announced that they will begin marketing Inrange's 64-port solution by summer. Furthermore the incumbent in this segment, EMC (McData) has a director product that is a weak approximation to a FC switch. It does not feature any E_ or FL_ports. Ancor is well positioned to gain share at the high end. Furthermore, we expect the director class product to represent over half the FC switch revenue market by 2003. Fibre Channel Market $M 1999E 2000E 2001E 2002E 2003E CAGR (98- 03) FC $565 $1,075 $1,985 $2,680 $3,480 65% HBA/NIC FC Hubs $110 $190 $290 $395 $495 55% FC $150 $355 $1,095 $3,020 $5,650 160% Switches Short-term, the biggest problem for Ancor is for Sun Microsystems to get its act together. The issues converge around implementing the right adapter board. Sun is adamant on using its own S-bus boards, which do not work well. Also it would behoove Sun to utilize Emulex and JNI for the higher end solutions rather then QLogic. Ancor's switches work well with Emulex and JNI's boards. We believe, in aggregate, that these issues are addressable. FC SANs have barely penetrated the addressable compute and storage segment. Switches, which feature the highest bandwidth/port will demonstrate the fastest growth rate. A modest 15% share in 2001, would translate to $150M which is 2x our current forecast for Ancor. Reference companies for valuation trade at 15-65x projected CY00 revenues, with Ancor trading in the middle. Applying a midpoint 40 multiple to the potential revenue opportunity of $150M translates to a market cap of $6B.