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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (18697)	2/25/2000 3:24:00 AM
From: Bruce Brown	Respond to of 54805

RE: fiber channel switch tornado... Mike wrote: Not necessarily. The first thing that has to happen is a tornado has to form. If no tornado forms, it will be a game of proprietary architectures with no gorilla. Let's see, without digging up the latest quarterly exact figures, here's an approximation of y/y latest Q: - Gadzoox had y/y revenue increase over 100% - Ancor had y/y revenue increase over 54% (For the year ended December 31, 1999, Ancor reported gross revenues of approximately $13,718,000, up 212 percent from $4,393,000 in 1998.) - Brocade had y/y revenue increase of 434% (previous quarter was 450+% y/y) - Vixel had y/y revenue increase of around 24% How would we interpret some of the above growth? BB Here's a report I received this AM in my box: Brocade Communication (BRCD, $267) reported Q100 earnings of $7 million, or $0.12 per share, blowing out estimates of $0.07 per share. Revenue grew 42% over 4Q99 to $43 million, driving income up 105% and earnings per share (EPS) up 100%. Operating income increased from 8.5% of revenues in 4Q99 to 19% in 1Q00. Margins improved to 53%, up from 51% in the previous quarter. The company also announced another two for-one stock split, the second since its IPO in May 1999. Brocade remains a market leader in storage area networking products, and company executives said the wholesale deployment of storage area networks (SANs) will continue to gain momentum. The company made progress on its goals of expanding original equipment manufacturer (OEMs) agreements, accelerating the product roadmap and expanding value-added systems integration channels. It said its latest product line, Silkworm2000, went from conception to production in seven months and the OEMs successfully transferred from the 1000 series. Brocade says storage will become a virtual business resource, and it foresees a linking of SAN data islands over high-speed networks to create a single business information network. Brocade's numbers continue to impress. Its inventory turns over every nine days -- that is 41 times per year. Return on equity increased from 17% in 4Q99 to 31% in 1Q00. Most notably, the all-important EPS has doubled in each of the last three quarters. This quarter's results back our opinion that the SAN space is only getting larger. Brocade should have at least 75% share of a market expected to be $3.3 billion in 2003 (Source: IDC). We therefore believe the company would be a fair value at $338.

To: Mike Buckley who wrote (18697)	2/25/2000 9:37:00 AM
From: Triffin	Read Replies (2) \| Respond to of 54805

Mike .. Project Hunt thoughts If no other switch vendor appears are Brocade and Ancor immediately crowned Gorillas (or whatever the investing procedure is) in their respective games? Not necessarily. The first thing that has to happen is a tornado has to form. If no tornado forms, it will be a game of proprietary architectures with no gorilla. Mike .. help me out here .. shouldn't we be trying to identify 'markets in tornado' as a source of potential 'gorillas' .. rather than proposing various stocks to do reports on (ie) a logical first cut for a project Hunt candidate would be wether or not it is a participant in a currently tornadoing market ???????? Jim in CT .. Edit: I meant for this to be a PM, sorry ..

To: Mike Buckley who wrote (18697)	2/25/2000 11:34:00 AM
From: Greg Hull	Read Replies (2) \| Respond to of 54805

RE: FC Switch Market Mike, <<What would be an example of a Monkey? AMD. Monkeys make Gorilla-compatible products that compete with the Gorilla purely on price.>> Sorry, I did not make my point clear. I was asking for a possible Monkey in the 2 Gorilla Game scenario ( 8/16 port market and Director market) you mentioned. <<If shared memory is a proprietary process that vendor would be an additional gorilla candidate in the gorilla game. If it licensed Brocade's proprietary processes, it would be playing the monkey role in the gorilla game. If shared memory is a non-proprietary process which Brocade dominates, the other vendor would play either the serf or prince role, depending on relative market share.>> Shared-memory is a common architecture outside of FC switch applications, but perhaps the particular implementation in Brocade's products has a proprietary twist. This takes more intimate knowledge of their design than I possess. <<The first thing that has to happen is a tornado has to form. If no tornado forms, it will be a game of proprietary architectures with no gorilla. If no tornado forms, it's because neither company formed a strong enough value chain; tornados don't form without such a value chain rallying around at least one product.>> This is the part that caused me to conclude that the FC switch market would be a royalty game. How can a switch company control the value chain? This would be analogous, it seems to me, to hard disk vendors controlling their value chain (box makers). Why would the SAN companies say "I gotta have Brand X switch, and not that Brand Y switch"? You brought up the necessity of a tornado to have a Gorilla. Bruce was then kind enough to give some year over year revenue growth for Ancor, Brocade, Gadzoox, and Vixel. My question on this is, which tornado are we trying to observe? The Fibre Channel tornado? In which case we should add a few more companies like Emulex and Q-Logic and others that buck wrote about. The Fibre Channel switch tornado? In which case we would have to back out the hub revenues from Vixel and Gadzoox - the majority of their reported revenue. The SAN switch tornado? In which case we would have to back out the sales to Sequent (now IBM) from Brocade's revenues (a very big chunk in 98 and 99) and almost all of Ancor's revenues prior to the last half of 99. Ashok Kumar (I never followed the box makers so I don't know what credibility he has with others on this thread) expects 160% CAGR from 1998 to 2003 for SAN switches. This sounds to me that a tornado is expected. Of course, the tornado may come without a Gorilla emerging. It seems to me that it will take at least another year to decide if there is a Gorilla in the SAN FC switch market. Anybody agree or disagree? Greg