TechWeek: Stellar Storage Stories

Many companies in the sector managed to avoid the weak-outlook syndrome.
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Sure,

Dell

(DELL) - Get Report

(SYMBOL)

ended the earnings season by becoming yet another victim of bad guidance-itis, a disease characterized by a robust quarter followed by a queasy outlook.

But that shouldn't obscure this week's bravura performance by the enterprise storage sector, which continues to exhibit solid growth and good execution by key players across multiple segments.

Start with

Hewlett-Packard

(HPQ) - Get Report

. For a while it looked like H-P had run its own storage business (not to mention the one it purchased from Compaq) into the ground. Indeed, the unit's wretched performance last year helped grease the skids for former CEO Carly Fiorina. And on the surface, this quarter's results don't look all that good. Storage revenue totaled $852 million, up 4% over last year's relatively weak quarter, and down 9% sequentially.

But delve a little deeper, and it's clear that H-P is doing well in the high-growth, midrange market, where it competes against

EMC

(EMC)

, says Chuck Jones, technology analyst for Stein Roe. H-P's midrange offerings increased revenue a crisp 28% year over year, nearly as good as EMC's blistering 32% growth. (To be fair, Joe Tucci's team had a much tougher compare -- up 19% a year ago.) At the high end, H-P grew by 12%.

What's left? The slowing market for tape backup and storage, which accounts for about 40% of H-P's storage business, according to analysts' estimates. H-P wouldn't give analysts or reporters much color on the tape business, but it doesn't take a genius to figure that given the rest of the numbers, it must have tanked. Even so, Jones says he's heartened by the performance of the company's other storage segments, and he notes that the new products making it possible were put into the pipeline before Carly got the boot. His company has positions in H-P, EMC and

Network Appliance

(NTAP) - Get Report

.

Commenting on the overall environment, Baird analyst Daniel J. Renouard, said: "Our field research with resellers and customers supports a robust storage environment in 2006 (double digit growth), and a decent server market (mid-high single digit growth)."

Network Appliance hit its marks, delivering a solid third fiscal quarter, with sales and earnings coming in stronger than expected. Revenue grew by 30% to $537 million in the January quarter, while net income increased 27% to $76.4 million, or 20 cents a share vs. $60.1 million, or 16 cents a share, a year earlier. And unlike Dell,

Intel

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,

Apple

(AAPL) - Get Report

and others, Network Appliance had some upside to guidance.

Stein and Goldman Sachs analyst Laura Conigliaro both noted that concerns over NetApp's rather bumpy product launch in the spring were overblown, and that, said Conigliaro, "makes the stock that much more attractive, for momentum investors seeking one of tech's highest organic growth rate companies."

Brocade

(BRCD)

, plagued by an ugly scandal that led to the resignation of its top executives and an ongoing

Securities and Exchange Commission

investigation, nonetheless

turned in a good quarter, beating Wall Street's first-quarter expectations by a nickel a share.

What's more, management has been actively negotiating a settlement with the SEC andestimates the cost to be $5 million, well under what some investors had feared, said Steve Berg, who follows storage for Punk Ziegel.

And finally on the storage front,

QLogic

(QLGC)

didn't have earnings to report but did announce that it will buy PathScale for $109 million in cash.

The acquisition is getting good reviews on the sell side, where analysts figure it will help QLogic move into the relatively higher-growth server market. PathScale makes an adapter that is conceptually similar to its core host bus adapter line, but it is based on the high-bandwidth infiniband technology. The adapters are used to move data inside clusters of servers. And how often have we heard

Oracle

(ORCL) - Get Report

going on about grids and clusters, neither of which would function without high-bandwidth connectors?

QLogic expects PathScale to begin contributing to revenue beginning in the second half of its 2007 fiscal year (ending March 2007).

Conigliaro, whose company has investment banking relationship with QLogic and NetApp, noted that the acquisition of PathScale is just the latest in a string of moves in which QLogic has expanded into more attractive growth areas, including fiber channel switches and storage services.

"For calendar year 2005 we estimate that QLogic's total top line was made up of approximately 80% HBA revenue, 15% switch revenue, and5% other revenue (including royalties and management controllers). By calendar 2007, reflecting the diversity of growth prospects for QLogic, that mix could shift to roughly 60-70% HBAs, 20-25% switches, and 5-10% virtualization/InfiniBand," she said in a note to clients.