Rumor Rattles Emulex, QLogic

Speculation that AMCC might enter the market for host bus adapters chills shares of current leaders.
By Bill Snyder ,

A generally bad Monday for technology shares was worse for

Emulex

(ELX)

and

QLogic

(QLGC)

, which were hit by rumors that a third competitor might enter the heretofore cozy market for host bus adapters, or HBAs.

After it traded as low as $22.73 intraday, Emulex closed down $1.62, or 6.5%, to $23.40 on about five times heavier-than-normal volume; after hours, the stock was recently down another 65 cents, or 2.8%, to $22.75. QLogic fell $1.80, or 4%, to $41.13 in regular trading Monday and was down 33 cents, or 0.8%, to $40.80 after hours.

Although it wasn't clear if there was much basis to the rumor, analysts said it's possible that

Applied Micro Circuits

(AMCC)

, which last year purchased a smaller producer of HBAs, is being qualified as a supplier by a major storage vendor. Once a component supplier's product is qualified, it then has a chance to sell that component to the manufacturer.

HBAs are key components in storage area networks (SANs), devices that enable companies to store vast quantities of data on a dedicated network.

The storage market tends to be very competitive, with several tiers of vendors all exerting downward price pressure on the companies below. Although there are a number of small competitors in the HBA arena, Emulex and QLogic dominate. A fairly sizable third player, such as AMCC, could shake things up, resulting in lower margins for the HBA makers.

To be sure, Applied Micro's HBA business is relatively small, and is derived from its September 2003 acquisition of

JNI

. During the company's third-quarter earnings call, Applied Micro said that JNI's third-quarter HBA revenue -- not all of which was booked by Applied -- was somewhat less than $7 million. In the current quarter, the company's expects that number to increase to $8 million or $9 million, or as much as 20% of Applied Micro's quarterly revenue.

But that's still dwarfed by Emulex, which in its most recent quarter reported $94.4 million in revenue, largely derived from the sale of HBAs, while QLogic posted revenue of $137 million.

HBAs produced by Emulex and QLogic are sold to larger players, such as

EMC

(EMC)

, which in turn incorporate them into systems that are sold to customers or indirectly to manufacturers such as

Dell

(DELL) - Get Report

. On a conference call with analysts earlier this month, Dell execs talked about pushing SANs, typically a high-end market, into the small- and medium-sized business market.

EMC has a reputation for playing hardball with suppliers; in fact, last year a beef with storage vendor

McData

(MCDTA)

over pricing contributed to a revenue miss by the smaller company. A spokesman for EMC said, "We've made no secret of our desire to source from multiple companies," but would not comment further.

Put the various bits of news together and its not hard to guess that Applied Micro has a shot at becoming a Dell supplier, and that would be bad news for Emulex and QLogic.

Nevertheless, Applied Micro traded down as well Monday, losing 38 cents, or 5.5%, to close at $6.55.

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