Storage Networking Stocks Drop After Emulex Warning
Leaving no corner of the technology sector immune from investor wrath, Wall Street pummeled storage networking companies Monday after Emulex Corp. warned that orders being deferred could lead to flat sales growth for the first three months.
Shares of Emulex, the market leader in fiber channel storage networking products, hemorrhaged nearly half their value, falling $37.13 to close at $40.38 in Nasdaq trading Monday.
The Costa Mesa company’s warning pulled down others in the storage market as well, marking a sudden reversal in a sector that had remained vigorous on Wall Street despite overall technology declines. The demand for high-speed storage products, in fact, was believed to be so strong that some had predicted the sector would remain immune from the overall slowing. But no more.
QLogic Corp. in Aliso Viejo, an Emulex spinoff and rival, lost $15.56 a share, or 22%, to close at $54.81 per share. Brocade Communications Systems Inc. in San Jose, which makes fiber channel switches, lost $11.13 a share, or 15%, to close at $63. Shares of JNI Corp., a San Diego fiber channel developer, lost $1.31, or 7.8%, to close at $15.63 a share.
QLogic and Emulex together control 75% of the market for fiber channel host bus adapters, which are a key component in the storage networking market. Both companies were downgraded Monday by market analyst Ashok Kumar at U.S. Bancorp Piper Jaffray. He wrote in a note that storage area networking products are coming under closer scrutiny in part because they are confusing and their value is difficult for salespeople to explain to customers.
Fiber channel is a complicated, emerging technology that connects data servers and storage devices to form storage networks, making enormous quantities of data available to individual users. The technology is used in some universities and large corporations.
Analysts were mixed on the long-term outlook for the market.
“Storage is a necessity and has a strong future in the long term, but it is also an industry that has been overvalued,” Kumar wrote. “The fiber channel industry has shrunk too far to be a major force again.”
But storage analyst Shebly Seyrafi of A.G. Edwards Inc. brokerage said the “long-term story is intact.”
“I think as we get the economy back on board, storage demand across the board will be brisk enough to help the businesses of Emulex, QLogic and everyone else,” Seyrafi said.
To Edward Sun, an analyst at Salomon Smith Barney, the sell-off was a bit of an overreaction. “Clearly, Emulex didn’t become half the company that it was last Friday. But it’s a momentum stock. I think there were certain people who wanted to believe that the storage industry was immune.”
Kumar predicted that Emulex and Brocade, which are focused exclusively on storage area networks, will suffer most deeply.
QLogic has diversified its business in recent years, so that fiber channel products account for about 55% of its revenue. That diversity could help QLogic weather the storm somewhat better, analysts indicated.
The 48% plunge in Emulex stock was the largest drop Emulex has seen since a stock hoax Aug. 25 sent the company’s shares down 62% from $113 to $43 in less than half an hour. But Monday’s fall was no hoax.
The reversal was especially stinging for Emulex, which reported 37% revenue growth from its fiscal first quarter to its second quarter, which ended Dec. 31. As late as last month, company officials had cited insatiable demand for storage products despite signs of an economic slowdown, and they raised the quarter earnings outlook to 15% to 17%.
But Emulex revealed over the Internet on Friday that revenue growth could turn out flat for the fiscal third quarter ending March 31. Earnings per share for the quarter could be 3 to 5 cents lower than the expected estimate of 23 cents a share, said Mike Rockenbach, Emulex’s chief financial officer.
The company did not officially lower its guidance for the quarter but said customers have postponed orders into the fiscal fourth quarter.
Emulex officials did not respond to requests for comment.
Emulex counts EMC Corp., IBM Corp. and Compaq Computer Corp. as its largest customers. QLogic’s top customers include IBM, Sun Microsystems Inc., Dell Computer Corp., Fujitsu and Hitachi.
Tom Anderson, chief financial officer for QLogic, said his company has not seen customers defer any orders, as Emulex has.
“I don’t want to paint the picture that any of us are immune from a harsh economic environment,” Anderson said. “That would be foolish.”
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Price Plunge
Data storage networking firm Emulex Corp. saw its shares collapse Monday after the company warned that sales will be flat this quarter--a bitter disappointment to investors betting on continued high growth.
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Emulex, weekly close and latest, on Nasdaq
Monday: $40.38, down $37.13
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Source: Bloomberg News
