Can Vixel Get Rich in Switch Niche?

Vixel Corp. (Nasdaq: VIXL) -- having withdrawn its troops from the pitched battle for the SAN switch space -- has tried to harvest the comparatively tiny market for embedded switches that provide connectivity inside storage arrays.

So far, it's been a fairly big fish in a small pond. But Vixel, which has made its run at the embedded FC switch space virtually unopposed, will likely face some ferocious competitors before its own InSpeed strategy really starts paying off.

Vixel's latest news on this front is a deal it announced today with BlueArc Corp., which is using Vixel switches in its high-end NAS systems. In truth, however, this isn't a new relationship as much as it is an extension of an existing one: BlueArc struck an OEM deal with Vixel a year and a half ago (see BlueArc Embeds Vixel Switches and Vixel Inks BlueArc Deal).

But Vixel has recently won some legitimate new business with two new customers for its embedded switch products, Fujitsu Ltd. (OTC: FJTSY) and Xyratex. In May it firmed up its relationship with Hewlett-Packard Co. (NYSE: HPQ), and earlier this year signed up Apple Computer Inc. (Nasdaq: AAPL), which is bundling Vixel's box with its 3U-high Xserve RAID array. Other Vixel customers include NEC Corp. (Nasdaq: NIPNY) and Network Appliance Inc. (Nasdaq: NTAP) (see Vixel Recaps HP OEM Deal, Fujitsu OEMs Vixel Switch, Xyratex Designs SBOD, and Apple Slices RAID).

Vixel has also flexed some legal muscle, firing off patent-infringement suits against Brocade Communications Systems Inc. (Nasdaq: BRCD) and QLogic Corp. (Nasdaq: QLGC) (see Vixel Slings Suit at Brocade and Vixel Sues QLogic).All this activity has served to ignite Vixel's stock price, which more than doubled in the past three months. The stock hit a 52-week high of $7.35 on June 19, up from $3.24 on March 24. It closed today at $6.34, up 0.5 percent for the day, amid a broader decline in the market.

However, at least two much larger companies -- QLogic and Broadcom Corp. (Nasdaq: BRCM) -- will soon be breathing down Vixel's neck. QLogic, which has chalked up significant wins in the embedded host bus adapter (HBA) space, has plans to deliver a switch-on-a-chip for embedded applications. And Broadcom, which earlier this year acquired the assets of bankrupt FC switch maker Gadzoox Networks, is also expected to pursue this area (see Broadcom Switches on FC and Broadcom Gulps Gadzoox).

Vixel, though, expresses confidence that it has a lead over any competitors. "The likes of QLogic or anyone else could jump into the fray, but we haven't seen anyone with silicon," says Beth White, VP of marketing at Vixel, adding, "Once you get designed into a system, you become part of their DNA."

She also claims that "nine out of the top 10 storage vendors" are either reselling Vixel products, have designed Vixel switch technology into their arrays, or are evaluating its technology [ed. note: but we bet at least four out of five dentists have no clue what Vixel does]. White won't say which vendor isn't working with Vixel.

Apart from the looming competition, though, there are some financial concerns for the company. Vixel, founded in 1991, has never been profitable and doesn't expect to get out of the red until the first half of 2004 at the earliest. As of March 30, 2003, Vixel had an accumulated deficit of $136.7 million. For fiscal 2002, the company posted revenues of $20.6 million -- and operating expenses of $23.0 million.Those numbers would appear to make Vixel one of the bottom-tier performers in the storage sector. Meanwhile, would-be competitor QLogic is currently one of the healthiest, according to a quantitative financial ranking of the top 10 public storage networking companies conducted by Byte and Switch Insider, a new research service from Byte and Switch (see QLogic Tops B&S Insider Ranking).

Nevertheless, Needham & Co. analyst Glenn Hanus -- the only Wall Street analyst to formally cover Vixel -- maintains a Buy rating on the company. He says its fundamentals are improving, and that while it could eventually face QLogic and other competitors, Vixel has a big headstart. "They have lots of irons in the fire with all the major storage OEMs," he says.

The question at this point is, How many of those irons will Vixel be able to turn into cold, hard cash?

Todd Spangler, US Editor, Byte and Switch