QLogic: A Spinoff Sensation


All company spinoffs should go as well as QLogic Corp.'s.

Four years ago, the Costa Mesa developer of high-performance links between computer systems and data storage devices left its parent, Emulex Corp., to follow its own path in the data storage market. Emulex continued developing its printer server and networking businesses.

Since then, however, the offspring has grown larger than the parent, posting higher earnings and sales. QLogic’s stock also has emerged as one of the hottest in Orange County this year, surging more than 300%.

The companies are headquartered in adjacent buildings on Harbor Boulevard. They share a courtyard and training room.


But now, the evolution of technology has turned them into competitors in at least one segment of the market.

“It’s definitely an interesting twist on the business; you don’t know which way things are going to go,” said Michael Rockenbach, chief financial officer of Emulex. “When we were spinning them off, we were definitely in very different businesses.”

They still mostly are in different businesses. But they are beginning to overlap, and when they eye the future, they have each other in their sights.

Their common battleground involves technology, called fibre channel, that speeds the transmission of data among computer components. While microprocessors get much of the attention when it comes to measuring a computer’s speed, transmission of data between, say, the disk drive and the processor can be critical as well.

Fibre channel has been tapped by many in the industry as the successor to the older technology--small computer systems interface (SCSI, or “scuzzy”)--because it can handle more devices simultaneously, is faster and can be used over longer distances, up to 10 kilometers.

SCSI remains the incumbent and is the largest part of QLogic’s business, but both have fibre channel-based products and believe that’s where the future lies.

Although fibre channel has been emerging for several years, only recently have major vendors begun to adopt it, and industry watchers expect it to come into its own next year.

The expectation has lifted the stocks of both QLogic and Emulex. Since its low in January, QLogic’s stock has gone from $24.88 to as high as $127.63 this month, closing Wednesday at $126.75. Emulex’s stock has risen even more dramatically in recent months, from a low of $5.63 in June to $34.25 on Wednesday.


Last month, QLogic’s board approved a 2-for-1 stock split in an effort to make the shares more appealing to a larger number of investors. The proposal is awaiting stockholder approval.

Although industry watchers like both companies, many are unsure that the stock prices are justified.

QLogic “has a great product, good management and good partners, and they’re going to do well, as will Emulex,” said Robert Gray, a storage systems analyst with International Data Corp.

“Now, the market has pounced,” he added. “Nobody has shown me how the current prices can be sustained on any kind of fundamentals.”


Relatively small companies dominate the fibre channel market, with each specializing in different segments, industry analysts said. While most of their products address different segments, the underlying technologies are similar, and as the market matures, QLogic and Emulex will be going after the same customers.

At this stage, capturing contracts with computer equipment manufacturers is seen as the key, and both Emulex and QLogic have won their share. QLogic has signed agreements with NCR Corp., IBM Corp. and Siemens Nixdorf, while Seagate Technology Inc., IBM and Hitachi Ltd. are among the companies choosing to build Emulex’s technology into their products.

“It’s easier to develop the retail market after you already have the equipment managers signed on, because by then you’ve developed a name,” said H.K. Desai, president and chief executive of QLogic.

Orange County is a hub for fibre channel development. Vixell Corp. of Bothell, Wash., and Gadzoox Networks Inc. and Brocade Communications Systems Inc., both of San Jose, have research development operations in the county. Indeed, Emulex has been working on the technology for more than five years.


Like many new technologies that replace existing ones, whether it’s compact discs taking over from albums or television for radio, it will take time for fibre channel to take over for SCSI. So it’s likely that SCSI will not disappear for quite some time.

Fibre channel sales make up less than a sixth of QLogic’s revenues. At Emulex, fibre channel became the largest source of revenue for the first time in the most recent quarter, accounting for 40% of sales while consuming 70% of the research and development budget.

Emulex is more keen than ever to move into fibre channel areas because its other businesses, network access and printer servers, are facing tough competition and lower margins.

“Before the end of June, it will be half our business,” Rockenbach said.


For now, anyway, the two companies remain friendly neighbors, but it may just be a matter of time before things heat up.

“It’s still a very, very large market and there’s a lot of space for both of us,” Rockenbach said. “But there’s definitely competition, too.”


Stock Sensations


Both QLogic and its parent company, Emulex, have rewarded stockholders this year with spectacular increases. Here’s a look at the companies, both of which manufacture computer networking products, and how their stocks have performed since the beginning of the year:


QLogic Emulex Chairman Gary E. Liebl Fred B. Cox Chief executive H.K. Desai Paul F. Folino Headquarters Costa Mesa Costa Mesa Employees 225 193 1998 sales* $81.4 million $59.5 million 1998 earnings* $13.4 million -$10.8 million



* QLogic’s fiscal year ended in March, Emulex’s in June


Weekly Closing Prices



QLogic Emulex Jan. 2 $29.75 $14.25 Jan. 9 $26.38 $14.75 Jan. 16 $24.88 $14.13 Jan. 23 $26.75 $13.00 Jan. 30 $32.38 $11.88 Feb. 6 $35.00 $12.63 Feb. 13 $36.38 $11.63 Feb. 20 $38.50 $11.75 Feb. 27 $40.13 $11.88 March 6 $37.75 $11.13 March 13 $38.25 $11.00 March 20 $38.38 $11.50 March 27 $37.50 $8.88 April 3 $38.50 $9.38 April 10 $38.88 $8.38 April 17 $40.13 $8.19 April 24 $43.00 $7.94 May 1 $44.75 $8.88 May 8 $46.06 $7.75 May 15 $44.75 $8.06 May 22 $44.00 $7.25 May 29 $40.50 $7.25 June 5 $42.63 $7.00 June 12 $39.50 $6.63 June 19 $38.13 $5.88 June 26 $37.38 $5.63 July 3 $34.00 $5.75 July 10 $32.00 $6.38 July 17 $50.50 $10.25 July 24 $58.25 $9.63 July 31 $57.88 $8.19 Aug. 7 $58.50 $10.50 Aug. 14 $61.75 $10.00 Aug. 21 $58.00 $12.13 Aug. 28 $51.00 $9.94 Sept. 4 $54.25 $11.00 Sept. 11 $56.88 $10.50 Sept. 18 $70.50 $11.25 Sept. 25 $69.00 $13.50 Oct. 2 $67.00 $13.50 Oct. 9 $62.38 $11.44 Oct. 16 $78.94 $15.75 Oct. 23 $84.75 $18.75 Oct. 30 $92.38 $19.50 Nov. 6 $100.00 $22.69 Nov. 13 $96.50 $23.13 Nov. 20 $110.25 $27.38 Nov. 27 $114.06 $27.50 Dec. 4 $112.25 $25.38 Dec. 11 $112.38 $24.75 Dec. 18 $127.63 $28.88 Dec. 25 $126.75 $34.25 Wednesday close: $126.75 $34.25


Source: Bloomberg News