Emulex Hits the Deck

Emulex Corp. (NYSE: ELX) ended speculation about its weak quarter by making it official: The HBA vendor admits it will miss its previous forecast by as much as $18 million for the fourth quarter just finished (see Emulex Cuts Earnings Forecast and Sour Outlook for Emulex).

After market close Wednesday, Emulex said it expects to report revenues between $85 million and $86 million, compared to previous guidance between $100 million and $103 million. It expects earnings of around $0.18 per share compared to previous guidance of up to $0.25 EPS. Emulex will see huge sequential declines from last quarters $99 million in revenue and $0.25 EPS.

Prospects for Emulex don’t look much better for the current quarter. The company expects revenue of around $75 million to $76 million for the quarter that ends in September, which would be down from $84.6 million from the same quarter last year.

In a statement, Emulex CEO Paul Folino said “tepid demand from two OEMs during the end of our fourth quarter resulted in lower than expected revenue.” Emulex’s fourth quarter ended Wednesday.

Hewlett-Packard Co. (NYSE: HPQ), which along with EMC Corp. (NYSE: EMC)and IBM Corp. (NYSE: IBM) is one of Emulex’s largest OEMs, is widely regarded as the source of "tepid demand." HP has had a soft quarter, by many reports, and is considered the OEM that caused tape library company Overland Storage Inc. (Nasdaq: OVRL) to slash its guidance Wednesday (see Overland Guides Under).Analysts speculate that EMC is the other OEM affecting Emulex, due to product and distribution transitions. EMC is changing its inventory model, which will result in selling off currently stocked Emulex product before additional revenue is recorded. Emulex expects quarterly revenue to be reduced by as much as $10 million, before recovering in the final quarter of the year.

There was plenty of industry buzz about Emulex’s woes over the last week, but the size of the revision came as a surprise. “The magnitude of the miss was beyond expectations,” wrote American Technology Research’s Shaw Wu, one of the analysts who had predicted Emulex would miss previous guidance.

Folino was upbeat in spite of the news. "Despite the challenges encountered during our quarter, industry fundamentals appear solid as the shortfall in revenue is largely related to interim issues at a couple of OEM customers," Folino said.

However, Emulex’s problems could run deeper than interim issues. Folino said revenue from InSpeed embedded switches, which the company has hailed as a high growth product, were down sequentially this quarter.

Emulex’s chief rival QLogic Corp. (Nasdaq: QLGC) today reaffirmed its guidance for the quarter, apparently in an attempt to forestall being tarred with the brush of Emulex news (see QLogic Reaffirms Guidance). QLogic forecasts earnings of between $0.34 and $0.37 and a flat to 3 percent increase in revenue from the $128.3 million it reported last quarter.Sources say QLogic managed to avoid losses by taking some market share from Emulex. Also, some claim it has a more diversified product line, with about 30 percent of its revenue coming from hard drive controllers and SAN switches.

Emulex has also fallen behind QLogic in two potential growth areas: blade server switches and iSCSI HBAs. While Emulex is developing blade switches, QLogic already has OEM deals with HP and IBM.

QLlogic has been an early player in iSCSI, but Emulex has committed to low-cost Fibre Channel HBAs instead -- even after spending $300 million to acquire iSCSI technology when it bought Giganet in 2000. During a June 15 Bear Stearns presentation, Emulex president Jim McCluney said Emulex is watching the iSCSI market but still considers it too small to enter.

Last quarter, it was QLogic that preannounced disappointing earnings due to soft sales through two OEM, most likely Sun and HP (see QLogic Dives on Shortfall). However, Emulex also missed its guidance when it announced earnings in April (see Emulex Short on Revenue).

QLogic will announce its earnings July 14, and Emulex announces on Aug. 5.— Dave Raffo, Senior Editor, Byte and Switch