Hopes Up for Storage Earnings

The next few weeks may show happy days are here again for tech companies -- or at least, happier ones. Nobodys saying we're back in the 90s, but analysts forecast storage companies will ride an overall technology upswing when earnings season begins next week.

“While we expect any enterprise recovery to be gradual, demand should begin to build as the year goes on, with the financial services vertical leading the way,” Laura Conigliaro of Goldman Sachs & Co.

writes in a preview of December-quarter results. “Just as financials’ IT spending proved to be a leading indicator to the downside in 2001, we expect it to be a leading indicator as demand continues to gradually improve in 2004.”

Emulex Corp. (NYSE: ELX) will kick things off when it reports its earnings this coming Wednesday, and analysts give both Emulex and its Host Bus Adapter (HBA) rival QLogic Corp. (Nasdaq: QLGC)positive outlooks.

That's not surprising: The HBA vendors have avoided the pricing pressures that hurt switch vendors Brocade Communications Systems Inc. (Nasdaq: BRCD) and McData Corp. (Nasdaq: MCDTA) after Cisco Systems Inc. (Nasdaq: CSCO) entered the market last year.

There are other reasons HBAs are in favor. Paul Mansky of ThinkEquity Partners

writes in a note this week that he anticipates Emulex benefitting from a strong product cycle, positive sales, and positive results from the Vixel acquisition. As a result, he raised his estimates for the quarter.RBC Capital Markets'Robert Montague writes that QLogic appears well-positioned to beat revenue estimates for the quarter largely because of the continued ramp of its blade server business and gains in programs for Windows and Unix platforms at Hewlett-Packard Co. (NYSE: HPQ). Looking ahead, Montague forecasts strong revenue opportunities. as well as emerging growth in iSCSI and 4-Gbit/s Fibre Channel.

Other segments of the storage market should provide good news as well. Conigliaro of Goldman Sachs forecasts EMC, Sun Microsystems Inc. (Nasdaq: SUNW), and IBM Corp. (NYSE: IBM) will beat estimates for the quarter. She expects EMC to beat its revenue target range of $1.8 billion to $1.825 billion, even without including an additional $30 million to $35 million from the Documentum deal that closed a month earlier than expected.

Conigliaro raised her estimate of Sun largely because of improved enterprise IT spending in the financial services sector. She wrote that Sun will likely see a year-over-year decrease in server hardware for the twelfth straight quarter, but she says the firm nevertheless will have solid storage sales with high-end and low-end offerings. She expects those sales to come from OEM deals with Hitachi Data Systems (HDS) on the high end and Dot Hill Systems Corp. (Nasdaq: HILL)on the low end.

Analysts aren't expecting all storage companies to hit a home run, however -- JPMorgan Partners

downgraded McData Corp. (Nasdaq: MCDTA), citing pricing pressure and other woes that persist despite the overall storage upswing.

— Dave Raffo, Senior Editor, Byte and Switch