Emulex Corp. Prospects Still Look Cloudy : Management: Co-founder Fred Cox’s surrender of CEO’s post leaves skeptics unconvinced that the slumping computer peripherals firm can reposition itself in a changing market.
If there was any doubt that Emulex Corp. is in transition, it was made clear when company co-founder Fred B. Cox said he would surrender his title as chief executive officer in a surprise announcement two weeks ago.
But whether the changes will bring the decade-old maker of computer peripherals consistently higher earnings or a fizzling financial performance is another question.
To skeptical outside observers, the timing of Cox’s decision suggested that he was taking the blame for a failed strategy that caused Emulex operating losses of $3.1 million in its third quarter ended April 1, the worst financial slump since in the firm’s history.
But Cox says Costa Mesa-based Emulex is bound for recovery as a diversified technology company, and he said his voluntary decision to step down from day-to-day management was needed to prepare Emulex for a successor and growth in the 1990s.
“There’s nothing sinister here,” said Cox, 56, who will remain chairman and retain the CEO title while searching for a successor. “I feel good about the decision. I don’t have any retirement in mind. I’m trying to make a selective and controlled transition.”
But skeptics who know Cox’s management style say that he is a typical entrepreneur who has ruled Emulex with an iron fist and that it is unlike him to give up any control of the company without a bitter fight with the company’s board of directors.
“I’m not surprised about the downturn of the firm under Fred’s leadership,” said Steven W. Frankel, president of Emulex from December, 1984, to January, 1988. “Fred should retire and a new chief executive should be given leeway to rebuild the company’s place in the market.”
Frankel, recruited as Cox’s heir-apparent, left Emulex after a power struggle in which he felt he was made a scapegoat for Emulex’s lackluster performance. Now chief operating officer with a Santa Monica software firm, Frankel feels vindicated.
“This is a repeat performance,” he said. “They’re moving in circles.”
Cox’s interim replacement, David W. Hanna, said the company hasn’t suffered irreversible damage in its latest downturn. But he acknowledges that Emulex has had a tough year in 1990 and that the company is in the midst of challenging period of change.
Emulex derives its name from trying to “emulate” Digital Equipment Corp., for whom it first made minicomputer storage products. Despite several attempts to diversify, Emulex became known as the premiere third-party supplier in the DEC aftermarket.
While DEC storage products accounted for 36.2% of sales last year, the company now also makes networking support equipment for DEC computers, add-on equipment for IBM-compatible computers, custom computer products, and microchips based on the increasingly popular Small Computer System Interface standard.
Only a year ago, strong performance in each of its businesses produced record net income of $13.3 million on revenue of $148.6 million for the fiscal year ended July 2, 1989, compared to net income of $9.1 million on revenue of $125.1 million in fiscal 1988.
But times change quickly in the computer industry:
The minicomputer market, which Emulex depends upon for 60% of its sales, is shrinking, and market leader DEC is slashing prices to compete with networks of increasingly powerful personal computers. That means Emulex must forage for new sales in a flat market where the industry leader is axing profit margins.
The market competition is more fierce now. One fast-growing competitor, Anaheim-based Micro Technology Inc., has built a $54-million business in three years by focusing on higher-growth product niches than Emulex in the high-end DEC storage business, according to industry observers. Even Cox says he admires Micro Technology’s success.
Meanwhile, Emulex was hobbled this year by false starts in diversification. It withdrew a VME bus product from the market and canceled the development of another product at a cost of $1.2 million. It also suffered from a transition from a generation of high-profit SCSI computer boards to a new generation low-profit computer chips.
“They spent a lot of money on research and development that hasn’t come to fruition,” said Mike Vizard, news director for Digital Review, a DEC trade journal in Newton, Mass. “They haven’t introduced anything technically spectacular in a while.”
The company reported lower earnings in the first half of the fiscal year and an operating loss of $3.1 million for its third quarter ended April 1. During the quarter, the company restructured and wrote off more than $1.8 million in assets.
“On Wall Street, this stock is considered a fallen angel,” said Michael Woods, editor of OTC Review Special Situations, an investment advisory newsletter in Philadelphia. “The company is past its period of skyrocketing growth, and it must find new ways to grow.”
Some analysts think it will. Candace King Weir, an analyst with C.L. King & Associates in Albany, N.Y., believes that Emulex is poised for a turnaround in fiscal 1991, based on the growth potential of the company’s non-DEC businesses.
She estimates that the company will earn $7.5 million on revenue of $155 million for the year ending June 30, 1991, contrasted with an expected loss of $1.6 million on revenue of $120 million for the year ended June 30, 1990.
But Vizard at Digital Review said he would be surprised if Emulex performs that well. Aside from a significant custom-manufacturing contract, he expects little change in the company’s revenues because of overall flat sales and stiff competition in its market segments.
Hanna said DEC has such a large installed base that it will survive any minicomputer shakeout; thus Emulex can depend on the DEC market for sales growth, especially in the area of networking products. And although the DEC products market remains competitive, it is comfortably free of foreign competitors, he said.
On the non-DEC side, Hanna said Emulex is introducing more products that allow computers to communicate, and the SCSI-chip business is blossoming. The company has also landed a contract for custom-manufacturing a product for an unidentified computer firm that could bring it up to $20 million in revenues during fiscal 1991, contrasted with $3 million expected for fiscal 1990.
Hanna said the company has kept its engineering team intact and made multimillion-dollar investments in key manufacturing technology. Cox said the company rebounded in its fourth quarter ended June 30 and expects to report profits for the period. Hanna predicted that the company would continue to be profitable in the first quarter of fiscal 1991.
“We’ve had a tough year, but we’re past the bottom,” Cox said. “We’ve got the revenue turnaround, we have a lot of cash, no debt, a stronger balance sheet, world-class manufacturing and the same good engineering team.”
Cox said he plans to remain active in the company as chairman and retain his large share of stock in the corporation, and he will take his time to find the right successor this time. He expects the search to be completed by the end of the year.
“This has been a tough decision,” Cox said. “But I would not take a hike and leave this company at a point when it needed me.”
While Cox said he has the full support of the company’s board of directors, some observers believe that the restructured board, which still has one empty position, will play an increasingly important role in Emulex’s future.
P. Andrews McLane, a partner with the venture capital firm TA Associates in Boston, raised eyebrows among skeptics when he rejoined Emulex’s board in March after a five-year hiatus. Skeptics took that as a sign that TA Associates, which owns 13% of Emulex, was concerned about the problems at Emulex and that McLane was maneuvering to remove Cox from the company.
But McLane, whose company provided start-up capital for Emulex in 1979, said he rejoined Emulex’s board at Cox’s invitation. He said he removed himself from the board earlier only because TA Associates was considering a takeover of Emulex in the fall of 1988.
Hanna, a turnaround manager who has been involved with a dozen companies since 1982, also has McLane’s blessing. He wants to make Emulex a market-driven company instead of a technology-driven company.
Hanna said that could mean a closer relationship with DEC than in the past, a possible acquisition in the networking products market, more emphasis on marketing campaigns at trade shows, and a new focus on international sales, which account for 40% of business.
“The real transition (at Emulex) is not related to management changes, but to new markets,” Hanna said. “We’ve cleaned up the balance sheet and we’re shifting into a new way of doing business.”
EMULEX CORP. AT A GLANCE Top Executive: Fred B. Cox, chairman, president, chief Executive Interim CEO: David W. Hanna Business: Computer enhancement products for DEC and IBM-compatible computers, microchips, ;and custom manufacturing. Employees: 850 Headquarters: Costa Mesa
