Emulex falls on forecast, downgrade

2 min read

Shares of Emulex fell more than 36 percent Monday after the company said revenue growth for its third quarter could come in sequentially flat due to order delays. The company was also downgraded at USB Piper Jaffray.

Shares of the company lost $28 to $49.50 at the opening bell. Emulex (Nasdaq: EMLX) designs high-speed fibre channel products, printer servers, and network access servers. Its adapters and hubs provide high-performance interfaces for computer networks.

The company issued its advisory in a Webcast on Friday, prior to presenting at Monday's Robertson Stephens technology conference. While not formally changing previous guidance, Emulex officials did warn of a "worse case" scenario that could see revenue growth for the quarter sequentially flat, and earnings per share could be 3 to 5 cents below First Call's consensus estimate of 23 cents a share.

The cause of the potential change in outlook, according to the company, is the continuing push out of customer orders into the company's fourth quarter. This marks a change in the company's projections, which forecast 15 percent to 17 percent sequential revenue. The company had also bumped up its fiscal 2001 estimates back in December.

The company maintained that the advisory was not a change to guidance and said that the previous sequential revenue growth targets may still be achieved, albeit with more difficulty.

The news had a ripple effect across fibre-channel and storage-network stocks on fears of deterioration in storage and server spending. Shares of Qlogic (Nasdaq: QLGC), which was also cut to "neutral" from "buy" at USB Piper Jaffray, dropped $11.88 to $58.63, Brocade (Nasdaq: BRCD) fell $6.38 to $67.75, and Veritas slipped $5.31 to $72.83.

Analyst reaction to the news was mixed.

Emulex was dropped to "neutral" from "buy" at USB Piper Jaffray.

According to analyst Ashok Kumar, there are serious concerns over the state and near-term future of the storage market.

In a research note, Kumar said that while storage looks good over the long term, it is also an industry that has been overvalued.

"The fibre channel industry has shrunk too far to be a major force again," Kumar wrote. "The next big wave of storage industry growth will accompany the next fundamental technology advancement, which is likely going to be deployment of IP-based storage".

At Credit Suisse First Boston, analyst Amit Chopra reiterated his "buy" rating on Emulex, stating that he believes that the demand for storage will remain strong, driven by the continued growth of corporate data.

The view was similar at Robertson Stephens where the company's estimates were maintained along with a "buy" rating.

Analyst Ara Mizrakjian said that the visibility issues of the company were temporary in nature and that Emulex remained the most well positioned host bus adapter (HBA) vendor in the industry.

Mizrakjian said the anticipated short-term drop across the storage networking sector will create a good buying opportunity, as the analyst remained bullish on the sector's intermediate to long-term outlook.