Network Engines Motors Into Security

Distributor Network Engines Inc. is getting out of the storage business because it considers selling security appliances a far more lucrative endeavor than selling HBAs (see Network Engines Exits HBA Business).

Network Engines announced its exit from the HBA storage business on the same day it launched a new firewall appliance in partnership with Microsoft Corp. (Nasdaq: MSFT). Who can blame the distributor? The HBA market seems on the decline, while there will always be demand for securing customers running Windows (see Network Engines Joins Microsoft Camp).

"Now is the right time to leave this one business that didn't have such a bright future for us and move into the other business that appears to have a good future," Network Engines CEO John Curtis said in a conference call explaining the decision. "We will become a pure-play security appliance company."

The Canton, Mass.-based distributor generated most of its storage revenue by selling HBAs from Emulex Corp. (NYSE: ELX), QLogic Corp. (Nasdaq: QLGC), and Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) for EMC Corp. (NYSE: EMC) storage systems.

Network Engines acquired its storage distributor business when it bought TidalWire for $18 million in 2002 (see Network Engines Closes TidalWire Buy). But its storage revenue dropped from 18.5 percent of overall revenue in the fourth quarter of last year to 10.8 percent in the second quarter of 2004. Network Engines is expected to lose at least $1 million for the quarter that ended in September after posting positive income of $726,000 in the previous quarter (see Network Engines Lowers Guidance and Network Engines Revenues Dip).Curtis says the trend of losses on HBA sales would continue because of commoditization and increasing competition. "We found it increasingly difficult to differentiate ourselves other than through price," he says.

Curtis isn't the only one to see HBA sales on the decline. A report issued by The Yankee Group this week claimed HBA revenue slipped from $168.9 million to $154 million from the first to the second quarter of this year, and reduced its annual forecast for HBA revenue to $646 million from $710 million (see Yankee: SAN Market Shrinks in Q2).

Still, QLogic Wednesday reported its HBA revenue grew six percent sequentially. CEO H.K. Desai said Network Engines contributed about $1.6 million to QLogic last quarter, and that its leaving the storage distribution business would have no effect on QLogic (see QLogic Reports Q2). HBA market leader Emulex will report earnings next Tuesday after struggling in the previous quarter (see Emulex Cuts Guidance, Jobs).

Dave Raffo, Senior Editor, Byte and Switch