RE: SAN...
Greg Hull wrote:
It has been a while since there has been any discussion of SANs around here (speaking of which, where is buck? we haven't heard from him in a month or two).
You're right. Not much SAN discussion since you were here for the last discussion in February:
Message 12791473
Part of the reason that the discussion is not carried out on this thread is that the criteria leans toward games that have already been decided. This raises the annual revenue requirements from the companies discussed and is designed to create a more risk averse environment for investing. However, since I am one that does invest in early games, I will happily discuss with you the little bit that I know. My apologies to the thread for discussing a game that is early in the technology adoption life cycle.
I hesitate to respond to your post using words from Ashok Kumar for a couple of reasons. Ashok Kumar is not an analyst I respect highly for a variety of reasons over the past decade. I made a lot of money over the past years in spite of comments and anti-sentiment from Kumar on some of my investments. Credibility is an important element in the professional analyst community. Therefore, I must take his words and thoughts as just another opinion based on past performance. That doesn't mean I ignore them, but it also means I look elsewhere for other's opinions in the community as well. I could easily provide the thoughts of six or seven other analysts which I admire who have perhaps drawn different conclusions to those of Kumar's. So when Kumar says something like "However it is dangerous to extrapolate the numbers we have seen so far to say that it will be a large market" - I have to try to approach the space from a gorilla gaming point of view combined with the projected market numbers which all the vendors and IDC have projected (which the players are saying are too low).
I also hesitate to respond because I know where you, as well as Kumar, stand on Ancor as an investment. What has happened in the space since the last discussion in February?
-hardware/software is still at the core of the issue of the game
-QLogic announces they will acquire Ancor
-Brocade maintains 90% of the FC switching market share
-Vendors and industry analysts announce that previous future growth projections are too low
-Brocade reports a profit for the fourth consecutive quarter while the other three players have yet to record a profit
-Brocade management says to expect triple digit growth going forward
Revenues for most recent quarter
Brocade - $62,100,000
Gadzoox - $15,079,000
Vixel - $7,777,000
Ancor - $6,884,867
Totals - $91,840,867 (roughly 37% sequential quarterly growth)
Revenues for previous quarter
Brocade - $42,740,000
Gadzoox - $12,561,000
Vixel - $7,865,000
Ancor - $3,820,000
Totals - $66,986,000 (roughly 24% sequential quarterly growth)
Revenues for September quarter
Brocade - $30,094,000
Gadzoox - $11,081,000
Vixel - $8,903,000
Ancor - $4,012,000
Total - $54,090,000
In response to Kumar's comments about early adopters and where in the technology adoption life cycle SAN and fiber channel switching is for the space, let's go back to one recent game in the past decade to talk about tornado growth and what the authors of the gorilla game say in retrospect. Maybe I am off my rocker, but I would rather rely on the author's study of technology adoption life cycles than Kumar's study of the subject. To say that I am partial to Paul Johnson as an analyst over Ashok Kumar is obvious because he authored the book. This doesn't mean I should be blind and accept anything as gospel, but it does mean that I should at least attempt to study previous games and their outcomes to use as a reference.
The game we will look at is Cisco and the Network Hardware technology adoption life cycle. I reference some information from the revised manual in Case Study #2 beginning on page 217. I think that for a lot of reasons, this game offers a closer parallel to the SAN switching market than the CRM case study, but the CRM is an interesting study as well in terms of revenues, tornado and how those numbers developed.
When Cisco went public, they had roughly 85% of the market for network routers. Wellfleet Communciations (precursor to Bay Networks) had roughly the other 15%. We could compare this to the game of Brocade and others today. Brocade has roughly 90% of the fiber channel switching market today and the other players hold the rest of the market share.
What do the authors say about a situation like this?
"Market-share dominance of this type at the very outset of a market could signal either a gorilla game or a royalty (king/prince/serf) game. The persistence of such an imbalance over time, however, virtually always means the market leader has proprietary architectural control with high switching costs. Such was certainly the case with Cisco. When routers route to other routers, they typically use a proprietary protocol, such that Wellfleets can talk to Wellfleets, and Ciscos to Ciscos, but Cisco cannot talk to Wellfleet, or vice versa. In addition, each vendor used different network management, making a multivendor environment exceedingly difficult to manage. Once a company or sector starts down the path with one of these vendors, it becomes increasingly unlikely that it will even consider the other one. Since tornadoes always distribute their market shares asymmetrically, once Cisco had the lead, which they did in part due to their first mover advantage, the game was over really even before it picked up full steam." - page 222
What about tornadoes?
"When year-to-year growth approaches or exceeds 100%, and when quarter-to-quarter growth also is rapidly accelerating, a tornado has begun" - page 223
What kind of quarterly growth did Cisco have in 1989/1990?
Beginning in the June quarter of 1989 and going through the December quarter of 1990, the quarterly growth numbers are as follows:
33.6%, 37.4%, 14%, 11.2%, 22%, 50.4%, 34.2%
What about Wellfleet? Beginning in the December quarter of 1989 and going through the December quarter of 1990, the quarterly growth numbers are as follows:
45.4%, 29.5%, 28.7%, 40.5%, 44.8%
There are obviously a lot more variables to consider between the Cisco/Wellfleet game and the Brocade/others game (such as Cisco's intelligent hub game at the same time). However, I just wanted to point out what the authors have given us for study in a game that involves hardware/software. According to the y/y hypergrowth figures of 169.6% for routers and 143.8% for intelligent hubs back in 1990, the authors signal that this tornado evidence meant that buying in the second quarter of 1990 would have been the time to buy.
What kind of y/y growth do we have in the fiber channel switching market?
Brocade's latest quarter was:
* 489% y/y revenue growth
* 45% sequential revenue growth
* 82% increase over Q1 '00 net income (that's One Quarter Ago!)
Ancor's latest quarter was:
*374% y/y revenue growth (before discounts)
*57% sequential revenue growth (before discounts)
*still operating at a loss
Latest quarter for Gadzoox was:
*99% y/y revenue growth
*20% sequential revenue growth
*still operating at a loss
We could also go back and study a recent game or two in SFA/CRM to 1996/1997 to compare revenue growth and where the tornado presented itself. However, it is in the bowling alley where application software vendors have been recommended for purchase. Hence, there is no point in using that as a reference, but a read of Case Study #3 in Chapter 10 which begins on page 253 gives plenty of insight into revenues, bowling alley and tornado confirmation.
Those are just a few of my thoughts from a gorilla gaming standpoint and not from a breakdown of the various technologies in development from Brocade, Ancor, Gadzoox, etc... . I obviously have made an investment in Brocade and did so back in 1999 based on the revenue growth and market share. As of yet, I see nothing to alter my selection with that investment choice. However, I will continue to monitor the space to see if any alterations need to be made. I made similar investments in i2 and Siebel back in 1998 for revenue growth and market share reasons as well - yet I'm not trying to compare any application software vendor game with the FC switching space.
A little humor:
Tom Gardner wrote of an interesting type of TA chart analysis in his book Rule Breakers/Rule Makers. He claims I owe him a dime if I mention the chart, so this is going to cost me. However, on page 176 of that book, Ancor is displayed in one of four charts which Tom calls a "Branding Bird-Flip" historical graph. What does this graph mean?
Here's Tom's explanation:
"In addition to being my favorite form of technical analysis, it's also a highly proprietary theory (that's why I owe him a dime). Gaze at the graph and behold management extending its right middle finger to shareholders. On the right of the chart, the pinky and ring finger are down, to the left, the thumb has tucked the index finger snugly into the palm. Down the center, the middle finger is raised, encapsulating management's primary message to long-term shareholders. I apologize for the vulgarism, but isn't it far more offensive to suffer the investment consequences of betting on a low-grade, self-promotional management team?" - page 174
Keep in mind that this was for the time period back in 1996, but I still get a kick out of it when I read that passage in the Fool's book. Not to mention, we pretty much all gave ourselves the 'bird' if you look at a chart of the Nasdaq or any stock trading that we follow - or at least the market gave us the 'bird'.
BB |
