High-Tech Rivalry Unfolds for 2 Once-United Firms

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 around 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 are still mostly in different businesses. But they are beginning to overlap in one technological arena called fiber channel, which 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.

Fiber 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.

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

While fiber channel has been emerging for several years, only recently have major vendors begun to adopt it. Industry watchers expect it to come into its own next year.

The expectation has lifted the shares of both firms. Since its low in January, QLogic’s stock has gone from $24.88 to as high as $127.63, closing Wednesday at $126.75 on Nasdaq. Emulex’s stock has also risen dramatically, from a low of $5.63 in June to $34.25 on Wednesday, also on Nasdaq.

While 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 said. “Nobody has shown me how the current prices can be sustained on any kind of fundamentals.”

Relatively small companies dominate the fiber 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.

Like many new technologies that replace existing ones, whether it’s compact discs taking over from record albums or television for radio, it will take time for fiber channel to supplant SCSI.

Fiber channel sales now account for less than a sixth of QLogic’s revenue. At Emulex, fiber 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.

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