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Storage Earnings Bright Spot in Gray Industry

While most of the computer industry fesses up to grim fourth quarters, many storage vendors are ready to share the good news. The desktop PC slowdown did little to affect the booming enterprise storage industry, allowing vendors to meet or beat earnings estimates.

Two high profile companies bucked the downturn in the computer industry, reporting tremendous fourth quarter growth. Veritas Software Corp., which makes storage management and disaster recover software, said revenue grew 64 percent year-over-year from $226.2 million in 1999 to $370.1 million in 2000.

EMC Corp., a provider of Fibre Channel storage systems, software, and services, reported 50 percent year-over-year growth in revenue, and 49 percent year-over-year growth in net income. Sales of SAN equipment constituted a large chunk of the revenue growth, expanding 250% from fourth quarter 1999. Software revenue grew 72 percent year-over-year.

Although most high tech companies saw sales slow or drop, many storage companies showed huge gains in revenue. Tony Prigmore, an analyst with the Enterprise Storage Group, says storage is so essential to enterprise operations, sales will remain stable or grow for some time. “We don’t believe storage is a discretionary capital expenditure,” he says.

“There’s lots of ways information propagates that can’t be shut down,” Prigmore says. Because enterprises need email and databases to compete, he says, they have no choice but to sink money into more storage.  “It’s not something most companies can shut the tap off on,” he says.

News was good all around for Host Bus Adapter vendors. QLogic Corp., which leads the market in shipments, reported a 73 percent earnings growth, up $40.8 million from fourth quarter 1999. Emulex Corp.’s fourth quarter revenue more than doubled, jumping from $33.6 million in 1999 to $71.1 million in 2000. Emulex said it was planning a 2 for 1 stock split. JNI Corp., which specializes in high performance HBAs, grew 113 percent year-over-year.

Fibre Channel switch vendor Brocade Communications System Inc. experienced explosive revenue growth. Brocade took in $27.2 million in the fourth quarter, $23.7 million more than the previous year. Its diluted earnings grew 2300 percent year-over-year from $0.02 in 1999 to $0.56 in 2000. Prigmore says the market for Brocade products is in its infancy, giving it the potential for even larger gains in the future. He says that Brocade could easily branch out in other direction, “There’s no reason Brocade can’t be really big in networking,” he says.

Profitability issues still plagued vendors in the storage arena. Gadzoox Corp. reported flat revenue growth from the third quarter 2000, but reduced operating costs, reducing losses from $.084 a share in the third quarter to $0.41 a share in the fourth quarter. Despite huge revenue growth, Veritas was still losing money. However, its losses dropped from $0.44 per share to $0.31 per share.

Players in the desktop hard drive business painted a drearier picture. Quantum Corp. reported growth for its tape and NAS divisions, but lost money in its hard drive business, which it is selling to Maxtor Corp. While Quantum’s NAS division reported record 41 percent growth, its tape business experienced slow sales. Quantum’s hard drive business lost $3.3 million in the fourth quarter. Maxtor, which is buying the division, reported flat growth.

Quantum and Maxtor’s woes reflect the way that enterprises use and buy storage. “Everything at the desktop is discretionary,” Prigmore says. Companies with weak revenue can postpone buying end user machines, unlike storage for mission critical applications. He also attributes Gateway and other OEMs’ problems to this phenomenon.

OEMs with solid storage business, however, should see stable growth. Prigmore believes companies such as Compaq would have been hit harder if it weren’t for it enterprise storage business. “Compaq has a really big storage business.”

While analysts on Wall Street are cynical about storage companies’ ability to keep up growth, Prigmore believes that storage has plenty of room to grow. “Goldman [Sachs Group Inc.] came out and hit NetApp – we think that’s just crazy,” he says. – Christopher McConnell

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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