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Technology Stocks : The New QLogic (ANCR) -- Ignore unavailable to you. Want to Upgrade?

To: jim g. who wrote (21726)	5/12/1999 9:26:00 PM
From: George Dawson	Read Replies (5) \| Respond to of 29386

Shareholder's Meeting May 12, 1999 The annual shareholder's meeting occurred today at the Marriott City Center from 3:30 to about 4:40. The room was much bigger than last year, but the crowd was about the same - I counted about 70 people. After the official business was dispensed with Ken Hendrickson presented the basic business plan and the Ancor advantages that he thought were consistent with future success. Ron and Greg were also there and will hopefully be able to correct any of my false memories and post their own impressions. The management team was there except for Paul Pasqua (with a customer) and Carla Kennedy (at N + I). 1. The theme of the presentation was "enhancing the migration path" for current and future customers. Last year's them was focusing on the SAN and abandoning the LAN business. He had a very good slide showing Ancor 8 and 16 port switches between a line of servers and various storage devices (JBOD, RAID, and tape). He said that Ancor probably did lose part of the early market by providing FC technology that was too advanced for their customers' needs. As we all know Brocade had a private rather than public loop implementation early on that he said was "less sophisticated but better for migration". He said Ancor has taken corrective action by providing this migration path and better software. The focus was clearly on customer needs. He summed up the early FC competition with Brocade using the following metaphor: "The first lap of a 20 lap race." He was quite frank about Brocade winning the first lap. 2. He listed the various segments of the SAN market including Enterprise, UNIX, NT, and Mac. He also described the various advantages of FC storage as opposed to other forms. In the Q & A Cal Nelson added that disks are going to be FC and whether the NGIO initiative pans out for storage won't be know for another couple of years. He pointed out that if NGIO does take off "we will be there". 3. Ken H. had a marketing research slide showing the per port cost of FC switches and total sales as a function of time in years. The cumulative annual growth rate of the FC market was estimated as 112% with the per port switch cost down to $750/port by 2002. I think I have a previous post here that the per port cost at OEM discounts may be at this level already. During the Q & A, Ken H. was asked if their cash flow would be adversely affected by declining margins. He said that Ancor's level of integration has buffered that and allowed them to maintain margins while lowering costs to very competitive levels. His impression was that the market growth is potentially so brisk that it would more than make up for the decreased per port cost. 4. During the Q & A, the first issue brought up was the options repricing. The shareholder said he had been at 12 meetings and he was upset about the fact that it appeared that management was being rewarded for poor performance. At one point he turned to his broker who was also in the audience and asked rhetorically if he could get shares directly from his broker at a comparable discount. I thought I heard his broker answer the question. Ken H. pointed out that at the time 3COM were actively recruiting their engineers and managers and that any of these folks could go to Silicon Valley and immediately make a better salary. It was a Board decision required to retain key staff. 5. The issue of refinancing was discussed briefly. They did not get too specific, but said that it would be easier to get money. In fact, Ken H. said he got 2 - 3 calls/ from people who want to give him money. They also emphasized the structure of the deals would be better. That there seemed to be disdain for more convertibles and there was an overhang of two convertibles that made things difficult last year. They suggested an equity financing deal could be possible, but did not indicate anything specific. 6. Pemstar was brought up. Ken H. described it as a first rate manufacturing company and that several of their customers had toured the facility and were very satisfied with it. He was confident that they could ramp up with the switch business. 7. On the technical side there were some clarifications. Ron asked about the ATM<->FC and GE<->FC interfaces. Ken H. talked about some things in and out of development being under NDA. Cal Nelson then jumped in and said that neither of these devices was under development by Ancor, but that several other companies were probably making these devices. He said that Ancor does some engineering and prototyping work in this area essentially to enhance the interoperability of their switches. For example, they will work with companies developing these devices so that those companies know what type of information an Ancor switch needs to see in order to work properly. I asked about the current deployment of switches in cascaded rather than multistaged configurations. Cal Nelson clarified that most current SAN applications including Ancor's are cascaded rather than multistaged. He also developed the theme that as customers bandwidth requirements increase there is a logical migration to switches and a logical need to build bigger switch configurations. He pointed out (and it was pointed out in the formal presentation) that Ancor still has the largest single FC switch installation and it is a multi-staged fabric of over 100 switches. 8. Somebody asked about CNT and Ken H. said that they were a direct competitor of Inrange, so that when the deals were sealed with Inrange it ruled them out as a customer. 9. Ken H. mentioned his prior statements about eventually getting 30 - 50% of the switch market and he said he has taken some flack because of the statement but could stand by it. My overall impression was that management is confident in the technology, their competitiveness, and their probability of success. I think that some important points were clarified and I am looking forward to an interesting year. George D.