QLogic Pulls a Switch Deal

Looking to diversify its revenue source and make a splash in the low-end Fibre Channel switch market, QLogic Corp. (Nasdaq: QLGC) has secured one OEM deal and is believed to be close to others for its SANbox switches.

A spokesman for Hewlett-Packard Co. (NYSE: HPQ) has confirmed that HP will offer QLogic switches along with Brocade Communications Systems Inc. (Nasdaq: BRCD) switches in its low-end HP StorageWorks Modular Smart Array 20 (MSA 20) systems later this year (see HP Tailors SANs for SMBs). Sources say another deal is in the works for QLogic to provide the sole switch on a second, unspecified HP storage system.

QLogic is also believed to have a good shot to close a deal with Dell Computer Corp. (Nasdaq: DELL) to sell SANBox switches on the AX 100 entry-level SAN. Brocade, currently the sole provider of switches on the MSA 20 and AX 100, would be the loser in both QLogic deals (see EMC, Dell Get Small With SATA.

We believe QLogic is applying significant pressure at HP and Dell,” says financial analyst Thomas Curlin of RBC Capital Markets. “At a minimum, we expect further price concessions from Brocade to secure share."

Another storage analyst says Brocade probably already made concessions to remain part of the HP deal to save face. “It’s a good testament to QLogic as they increase their presence with HP and other major OEMs,” says the analyst, who asked to remain anonymous. “Historically, HP has been Brocade’s largest OEM, so maintaining a presence with HP is critical, as it would have been a tremendous blow to Brocade to lose at HP.”QLogic has relied less on HP than has its biggest competitor Emulex Corp. (NYSE: ELX), and that was a good thing for QLogic last quarter as HP storage sales suffered (see Emulex Cuts Guidance, Jobs).

QLogic’s switch deals come as the HBA market hits a rough spot. According to market research firm, the Dell'Oro Group, HBA revenue declined 7 percent from the first quarter to the second this year (see Cisco's Gained Ground, Says Report). Emulex’s revenue fell 13 percent sequentially while QLogic HBA revenue climbed 8 percent.

Both Emulex and QLogic have turned to switches to diversify their businesses. Emulex generated about 10 percent of its revenue last quarter from InSpeed embedded switches acquired from Vixel (see NEC Selects Emulex InSpeed and Emulex Ships 2M InSpeed Ports).

Switching remains a small piece of QLogic’s business. Last quarter, QLogic reported switch revenue of $15 million, or 12 percent of its overall revenue (see QLogic Stacks SMB Deck). Sun Microsystems Inc. (Nasdaq: SUNW) sells SANbox switches under its brand, and IBM Corp. (NYSE: IBM) offers them with its blade servers.

However, QLogic CEO H.K. Desai said during the company’s earnings conference call in July that he expects switches to be a growth driver in 2005.“We expect the switch business to get some traction sometime next year as far as the production levels are concerned,” Desai said.

— Dave Raffo, Senior Editor, Byte and Switch