Emulex plummets on "worst case" outlook

Shares fall 50 percent and drag down the sector after the company says revenue growth for its third quarter could come in sequentially flat due to order delays.

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Shares of Emulex fell 50 percent Monday after the company said revenue growth for its third quarter could come in sequentially flat due to order delays.

The company also was downgraded at USB Piper Jaffray.

Shares of the company lost $38.94 to $38.56 in early trading. Emulex designs high-speed fibre-channel products, printer servers and network access servers. Its adapters and hubs provide high-performance interfaces for computer networks.

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, which was also cut to "neutral" from "buy" at USB Piper Jaffray, dropped $21, or 30 percent, to $49.38; Brocade fell $11.56, or 15 percent, to $62.56; and Veritas Software slipped $4.41, or 5 percent, to $73.72.

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

The cause of the hedging, according to the company, is the continuing postponement of customers' 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.

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 about the current 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, saying 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 company's visibility issues were temporary and that Emulex remained the best-positioned HBA (host bus adapter) vendor in the industry.

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