Report: HBA Market Stalls

Host bus adapter (HBA) archrivals Emulex Corp. (NYSE: ELX) and QLogic Corp. (Nasdaq: QLGC) both reported strong quarterly revenue growth last month, but a new Gartner Inc. study casts doubts over whether the growth can continue in a market that last year all but ground to a halt (see QLogic Rolls in Dough and Is Emulex Slowing Down?).

The study, which covers SAN component market share for 2002, reveals that the Fibre Channel HBA market grew by only 1 percent last year, to $570 million -- far below many analysts' expectations. Thomas Weisel Partners analyst Jason Ader claims he held one of the more bearish estimates of HBA market growth last year, and he was forecasting growth of around 6 percent.

"I think this would be a shock to most people who think the space is fast-growing, given ELX's and QLGC's recent growth rates," he writes in an email. "In fact, those guys have just been taking share."

The two HBA vendors have certainly been gaining market share in the space. Over the past week, both Emulex and QLogic highlighted portions of the Gartner report that showed them in the most favorable light. Emulex announced that it had strengthened its position as market leader by 8 percent during 2002, accounting for 48 percent of overall HBA market revenue (see Emulex Tops FC HBA market). Meanwhile, QLogic touted that it had increased its HBA market share by about 10 percent, jumping to a 31.7 percent (see QLogic Gains HBA Market Share).

Gartner has yet to publicly release the market share numbers from its report, but report author James Opfer confirms that the numbers in the Emulex and QLogic press releases are accurate. "2002 was not a good year," he says. "Considering the economic circumstances, any growth is excellent."Indeed, whereas HBAs grew -- albeit anemically -- the disk storage market declined 15 percent in 2002, according to IDC (see IDC: HP Still Top Dog).

The market research firm hasn't publicly forecast what it expects this year's numbers to look like, but, pointing to Emulex and QLogic's recent results, Opfer says it's safe to assume that the market will grow more than 1 percent. "It's hard to argue that the market didn't grow in the first quarter," he says. "This year they already had so much of the share that they can't grow without growing the rest of the market."

If the market doesn't pick up, however, both Emulex and QLogic may find that the HBA revenue express train they've been on could slow to a crawl. The two companies currently account for nearly 80 percent of the market and will be hard-pressed to continue spurting ahead as the overall market virtually stands still. "When the market share gains are exhausted (all else being equal), growth must by definition slow down for ELX and QLGC, unless one starts to take share from the other," Ader writes.

Table 1: HBA Revenue by Vendor (in Millions)

"If it does become a zero-sum game, it boils down to gaining market share from the other," agrees Frank Berry, QLogic's VP of marketing. But he adds that there are still a lot of legacy HBA contracts waiting to be replaced that could benefit either Emulex or QLogic, or both. These two vendors have taken share primarily from Agilent Technologies Inc. (NYSE: A) and JNI Corp. (Nasdaq: JNIC).QLogic may be better positioned to weather a slowdown. In the March quarter, QLogic saw its Fibre Channel revenues grow 7 percent, while Emulex's FC revenues only picked up 3 percent. In addition, analysts say, it appears likely that QLogic will win the business with Hewlett-Packard Co. (NYSE: HPQ) for its HP-UX servers, which is the last large HBA contract remaining not already held by the two market leaders. The winner of this contract can count on additional revenues of about $70 million a year, industry observers say.

Even if QLogic sees its HBA revenue growth slow with the market, the company generates about half of its revenues from other areas like switches and disk drive controllers. Emulex, meanwhile, generates all of its revenues from HBAs.

But Emulex says it's not worried. "We believe that we can continue to grow faster than the market," says Emulex CFO Mike Rockenbach. He says the company is adding more features and functions to its existing products, and at the same time it's focusing on expanding its addressable market.

"We continue to believe that storage is the right market to be in," he says. The HBA market, especially, is very stable, he contends: "There's no mixing of adapters on the fabric. Once youve won the fabric, they continue to buy from the same supplier."

— Eugénie Larson, Reporter, Byte and Switch