A key acquisition that rattled the engineering culture at Costa Mesa-based Emulex Corp. two years ago has paid off with big-name design wins and record yearly revenue.
Integrating technology that came with the 2010 takeover of ServerEngines Corp. proved to be the easier part of the deal. Melding the culture of two competing companies and hundreds of egos in the cut-throat realm of chip design and networking took more finesse.
“That was a big cultural change,” Chief Executive Jim McCluney said. “Historically, Emulex had designed its own chips, firmware and software.”
McCluney singled out the 10-gigabit Ethernet connection market for growth after taking the helm in 2006, but the company lacked the Ethernet chips needed to speed up the flow of data in servers.
“We didn’t have the software and interface that the server manufacturers required,” McCluney said. “We could go and do it ourselves. But there wasn’t probably enough time given how quickly the market was evolving.”
Ten-gigabit Ethernet controllers and adapters connect servers to local area networks within data centers, speeding up the flow of information. The technology is seen as an improvement over fibre-channel and 1-gigabit connections, which are prevalent in data centers today.
Emulex designs and makes networking equipment that connects storage, servers and data centers.
$159M Deal
The $159 million cash, stock-and-debt deal for ServerEngines—a Sunnyvale-based company founded by former Broadcom Corp. engineers—charted a new course. A key design win with Palo Alto-based Hewlett-Packard Co. quickly followed, and gave Emulex the inside track to chase down much larger competitors in the lucrative 10-gigabit Ethernet market.
Emulex has moved from a minor player in the segment to the leader board, joining a burgeoning group of big-name rivals such as Santa Clara-based chip king Intel Corp. and Broadcom.
The acquisition also has helped fuel record annual sales, as Emulex posted an 11% revenue climb to $501.8 million for its fiscal year ending June 30.
Adjusted profit rose 62% to $76.1 million, sending Emulex shares back up to a market value of about $621 million after a steep drop earlier this year. The decline was driven by a federal court ruling in late March that the company infringed on two Broadcom Corp. patents, a partial $58 million settlement and licensing agreement with Broadcom related to the litigation, analyst downgrades and an industrywide slump.
The year-end results marked a turn.
“Certainly 10-gig Ethernet has been the real growth driver for the company,” McCluney said.
Emulex was the top seller of 10-gigabit Ethernet ports in the first quarter, shipping 574,800 ports for a 37% market share. Intel was a distant second with 374,000, according to Redwood City-based market tracker Dell’Oro Group Inc.
Intel retained its position as the top revenue producer in the overall 10-gigabit controller and adapter market with $32.8 million in sales for the first quarter. Emulex was No. 2 with $27.8 million.
• Headquarters: Costa Mesa
• Business: computer, network components
• Founded: 1979
• Ticker symbol: ELX (NYSE)
• 2011 revenue: $501.8 million
• Recent earnings: ELX (NYSE)
• Market value: About $8.7 million for quarter ended April 1
• Notable: Acquisition in 2010 credited for key role in recent design wins, record yearly revenue
“They have been gaining share for several quarters in a row,” said Dell’Oro analyst Sameh Boujelbene, who traces most of those gains to Emulex’s HP design win.
HP, the No. 1 computer maker, was the first company to ship blade servers with embedded 10-gigabit Ethernet components geared for high-performance computing and faster system connections. The small servers are designed to save space in data centers by housing multiple circuit boards, or blades, with their own computer, memory and hard disks.
Shift Slowed
The shift to 10 gigabit has been slowed by higher costs, integration concerns, reluctance to change providers and patent litigation. But the hurdles are gradually clearing, as established providers of fibre-channel and 1-gigabit connections, such as Aliso Viejo-based QLogic Corp., develop 10-gigabit products and others join the chase.
The emerging segment got a boost in May when Intel released a new line of processors that promise faster connections and lower operating costs in data center racks and towers, as well as virtual and cloud servers. The bigger racks and towers make up roughly 85% of the data center market, offering the biggest potential for growth.
The Intel launch is expected to shake up the 10-gigabit market again as new players such as Irvine-based Solarflare enter the fray.
Emulex is projected to lose its top spot in port shipments in the second quarter, as Broadcom and Intel move into the top two positions, according to preliminary data from Dell’Oro.
Emulex offset some of those losses by claiming the top spot in the 16-gigabit fibre-channel market with a 75% market share in the second quarter, according to preliminary industry reports.
Primed
The battle for 10-gigabit supremacy is expected to play out for years, and Emulex is primed for the challenge, McCluney said.
“It’s very hard to compete against very high-volume low-cost providers, so you have to do something different,” he said. “We’ve got to continuously innovate to stay ahead of the competition. There’s a lot more business to win.”
