Emulex Hoax Just the Latest Event in a Seesaw Year of Highs and Lows
The hoax that sent Emulex Corp.’s stock gyrating Friday was just the latest stomach-churning twist in a drama-laden year of new highs and perilous skids.
The 21-year-old Costa Mesa firm has ridden the expanding market for high-speed data transfer products to record revenue and profit.
But at the same time, investors’ confidence in the company and its volatile industry sector has seesawed, sending Emulex shares from their peak of $209 in February to below $50 in April, then back up to $105.75 at the close of Nasdaq trading Friday.
Emulex also has been overshadowed at times by QLogic Corp., its spinoff-turned-rival in fiber channel technology.
The market for such products is expected to grow from $670 million to $4 billion in the next three years, enriching everyone in the sector, but some analysts say QLogic, based in Aliso Viejo, is primed to snatch the lion’s share.
“QLogic is scrappier, a price leader and a tough competitor like EMC or Microsoft, with a broader product line,” said Robert Gray, a storage systems analyst with research firm IDC.
Emulex aims for the high end, selling customers pricey packages rather than offering them the flexibility of individual pieces, he said.
In some ways, Emulex’s business has come full circle, starting and ending in data storage.
Its original business concept, as its name indicates, was emulating other companies’ proprietary storage products. Once those technologies became standardized, the company moved into networking devices, specializing in systems for printers.
But in the early 1990s, Emulex anticipated the need for faster ways to move large chunks of data and started developing a new generation of storage products based on fiber channel technology. The shift proved successful, garnering Emulex a blue-chip client roster featuring big-name manufacturers such as Compaq Computer Corp., Data General Corp. and IBM Corp.
Emulex spun off QLogic in 1994, only to see it emerge as a formidable competitor with an overlapping, though not identical, product line. Between them, the two companies control about 70% of the market for plug-in cards that connect computers to fiber channel networks.
Today, QLogic dwarfs Emulex in staff size and is valued at roughly $10 billion, compared with market capitalization of about $4 billion for Emulex.
QLogic Chief Financial Officer Tom Anderson acknowledged that, even six years after their divorce, the companies’ financial fortunes often seem married.
When Emulex’ stock dived Friday, after a fake news release was issued saying its chief executive had resigned and its fourth-quarter earnings would be restated to show a loss, QLogic’s shares swooned too.
Though Friday’s market swings were artificially induced, analysts offer conflicting views of both Emulex’s long-term prospects and the future of fiber channel storage.
Robert Montague, the Morgan Keegan & Co. analyst whose April downgrade sent Emulex’s stock diving, recently restored the company’s rating.
Emulex, he said, is in a growth phase even within the high-growth storage sector. Montague had feared that its products were less suited than QLogic’s to small computers that run Windows NT software.
But some analysts say Emulex is on borrowed time. They call fiber channel an interim technology that will soon give way to wireless solutions that use the Internet.
“It’s a sunset industry,” said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. “On a short- term basis, QLogic is in a better position than Emulex” because it is less dependent on such products.
Emulex executives, though shaken by the hoax, expressed no long-term anxiety about the company’s success.
The company’s sales hit an all-time high last year, when it recorded almost $68.5 million in revenue. It also earned $5 million, a turnaround from losing more than $11 million the previous year.
Similarly, the company’s most recent quarterly results showed strong growth, outpacing analysts’ expectations.
“Things inside the company are extremely strong,” said Kirk Roller, senior vice president of sales and marketing.
* HIGH-TECH HOAX
A phony news release hits Emulex, sending shivers through Wall St. A1
