Emulex Q4 Reveals Storage Trends

Trends like virtualization, ongoing migration to multiprotocol tiered storage, and the arrival of higher-bandwidth Fibre Channel formed a subtext to Emulex's end-of-quarter and end-of-year financial report last night. (See Emulex Reports Q4.)

The vendor, which alongside QLogic holds a leading share of the worldwide Fibre Channel HBA market, predicts ongoing strength in OEM sales of blade server cards and HBAs, including a ramp-up to 8-Gbit/s starting in the first half of 2008. (Emulex execs expect that move to be aided by the vendor's offer of 8-Gbit/s wares, which were unveiled this week.)

The execs noted that in the future, reduced server sales, which analysts have predicted as the byproduct of increased virtualization, will be offset by the vendor's offering of embedded switches and controllers for SAN and NAS gear.

"We actually see virtualized servers creating pretty good opportunities for our business," said Emulex EVP of worldwide marketing Mike Smith. Virtualized servers typically have five times the level of SAN attachment that non-virtualizated servers do, he said.

Emulex reported quarterly revenues of $126.3 million, up 5 percent sequentially and 28 percent year-over-year. Of that, 74 percent, or $93.5 million in revenue, came from host server products, including HBAs, mezzanine cards for blade servers, and server ASICs. This segment was up 7 percent sequentially and 11 percent year-over-year.Blade server adapters OEM'd to Dell, HP, IBM, Sun, and other customers accounted for a 26 percent sequential rise in host server product sales, execs said. And CEO Jim McCluney cited industry analyst figures indicating ongoing 9 percent CAGR for HBAs and adapters through 2011.

More dramatic growth is set for embedded storage products, however, which Emulex defines as its SATA bridges and routers, Fibre Channel embedded switches, and single- and multiprotocol embedded controllers for enterprise storage gear. This segment, which accounted for about 23 percent of overall revenue at $28.6 million last quarter, was down sequentially by 13 percent, but it doubled in growth year-over-year.

The dropoff in embedded revenue this quarter was owing to a backup in inventory for specific OEMs, cited by analysts as IBM and NetApp. And it's not expected to continue. "We're looking at a pretty strong rebound in September. We had no design win losses... We'll get through this softness in September," Cluney reassured analysts repeatedly on a conference call with analysts last night.

Emulex revenues are expected to decline sequentially next quarter by 6 to 9 percent in part as a result of the OEM problem. But McCluney expects embedded storage products to grow 17 percent for the next revenue year, as OEMs increasingly look to providing multiprotocol, multitier storage arrays.

Today, execs said, those kinds of devices support Fibre Channel, SAS, SATA, and IP. (See Emulex Locks Onto SAS.) But there will come a time when they support other protocols, such as enhanced 10-Gbit/s Ethernet and Fibre Channel over Ethernet (FCoE), which Emulex claims to be working on with Cisco, IBM, Intel, Sun, and others. (See Ethernet Storage to Morph Again and FCOE Not Routable.)Emulex is also working on what it calls "intelligent networking products," typified by storage virtualization and data networking components and ASICs. But these won't start to appear until the end of 2008, and OEMs won't adopt them until 2009, execs said.

Meanwhile, there's evidence that 4-Gbit/s Fibre Channel has pretty much penetrated the server environment. "The two- to four-gig transition is nearly complete," McCluney said. In Emulex's fourth quarter, 73 percent of host server products sold supported 4-Gbit/s, as opposed to 65 percent the quarter before. Emulex expects the percentage to keep climbing up, though it will never reach 100 percent.

Another highlight of the call was Emulex's report of a 15 percent sequential increase, 10 percent year-over-year, in fourth quarter revenue from U.S. customers; a 21 percent increase in quarterly revenue from Asia-Pac customers; and a 31 percent quarterly increase in sales to European and rest-of-world buyers. While foreign sales rose in part due to Emulex's $180 million purchase of Sierra Logic in 2006.

Emulex doesn't speak for the industry, of course. But its market share and influence with major OEMs has changed at least one analyst's outlook. "Emulex's results give us confidence that storage spending is not falling apart, contrary to recent market perceptions," writes analyst Laura Conigliaro and colleagues in a Goldman Sachs note today. "It is no secret that enterprise spending thus far in 2007 is not as robust as the past year and storage growth is decelerating. But, we are now beginning to understand that the various pitfalls are not quite as broad based as we had believed."

Mary Jander, Site Editor, Byte and Switch