QLogic Switch Sales Disappoint

Although the merger of SAN switch rivals Brocade and McData may prove a good thing for QLogic in the long term, the HBA vendor has yet to realize hopes for its young switch business.

In its earnings report Tuesday night, QLogic said its switch business -- including blade server switches and standalone SAN switches -- grew only 12 percent year over year and 9 percent sequentially last quarter. (See QLogic Reports Earnings.)

While those aren't bad numbers, QLogic has been forecasting 20 percent year-over-year growth in switch revenue. Further, the 12 percent growth compares to a 33 percent year-over-year increase in Qlogic's far larger HBA business.

QLogic did not break out exact revenue for HBAs and switches.

QLogic CEO H.K. Desai admits the switch business isn't growing as fast as he hoped and says he is counting on qualifications from storage vendors such as EMC, Dell, Hewlett-Packard, IBM, and Sun to eventually push sales. Desai confirms that EMC has qualified the SANbox 9000 256-port switch and added it to its reseller list, but none of the storage vendors are rebranding QLogic SAN switches in OEM deals yet. (See Switch Logic Favors QLogic and QLogic Grabs Director's Chair.)"Fibre Channel switch revenue grew at a slower rate than anticipated," Desai said on the earnings call. "The key for us going forward is to have some more OEM qualifications. There's no guarantee OEMs will qualify it, but we are seeing a lot of interest from them. It will take about six months."

Now that Brocade's proposed $713 million acquisition of McData has the approval of the Federal Trade Commission (FTC) and will close next week if the shareholders approve tomorrow, storage vendors may want to find room for a third switch vendor alongside Brocade and Cisco. (See FTC Approves Deal and Brocade Bags McData For $713M.)

Still, Wall Street analysts seem disappointed by Desai's six-month timeframe for OEM qualifications. One analyst, Dan Renouard of R.W. Baird, downgraded QLogic's stock today mainly because of lower guidance for this quarter than expected. QLogic's HBA business continues to thrive, but newer ventures such as Fibre Channel switches and InfiniBand gear are taking longer to take off.

"While we believe the Brocade-McData combination could prove a boon to QLogic, it appears this will take some time to play out as OEMs and the channel work to reposition during 2007," Renouard wrote in a research note today.

Analyst Laura Conigliaro of Goldman Sachs pointed out in a note to clients that "multiple parts of QLogic's business" were disappointing last quarter and probably won't improve much this quarter."Lackluster growth in switch products, specifically in the channel and with IBMs blade server, currently in the midst of a product transition, should continue through the March quarter," Conigliaro wrote. "Timing of OEM qualifications, still somewhat indefinite, will determine the degree to which switch growth can step up later in the year."

Besides making its strongest move into SAN switching yet with its SANbox 9000 last year, QLogic acquired InfiniBand startups PathScale and SilverStorm for a total of $168 million in 2006. (See QLogic Eyes SilverStorm and QLogic Bets on InfiniBand.) Desai called InfiniBand revenue last quarter "minimal," and says he doesn't expect much of an increase this quarter.

Analysts also expected faster growth with InfiniBand. "While we remain constructive on the potential for the nascent InfiniBand market and QLGC's PathScale and SilverStorm acquisitions, the likely revenue ramp of the second half of 2007 is somewhat disappointing relative to our expectation for a slightly faster market uptake," Renouard wrote.

— Dave Raffo, News Editor, Byte and Switch