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Newer Products at Heart of Emulex’s Strategy

Emulex Corp. Chief Executive Jim McCluney is making good on his pledge to diversify the company.

McCluney, who took the reins at the Costa Mesa-based maker of electronics for data storage networks a little more than a year ago, said the diversification strategy is rolling out “very nicely.”

Until recently, most of the company’s roughly $500 million in yearly sales came from a single product,host bus adapter cards that connect data storage computers to network servers, allowing for the speedy flow of information.

McCluney has been working hard to make Emulex less dependent on host bus adapters, which still make up more than 70% of sales. A year ago, they accounted for 85% of sales.

He’s got his work cut out for him.

McCluney’s looking to get host bus adapter sales to 50% of revenue and to more than double yearly sales to $1 billion in the next two years.

Emulex had two acquisitions last year that added products and customers.

It spent $39 million for San Jose-based Aarohi Communications Inc. and $180 million for Roseville-based Sierra Logic Inc.

McCluney also broke the company into three units and ventured into new products,a first for Emulex.

One of its fastest growing lines of business is embedded storage products, a group of routers, switches and controllers that speed up the flow of data on a network.

“A good piece of our diversification strategy is being fueled by double-digit growth from embedded storage,” McCluney said.

During the September quarter, embedded products saw $28 million in sales, a 24% chunk of Emulex’s $117 million in quarterly sales. Embedded products revenue was up 78% from a year earlier.

The company also has beefed up its sales and marketing efforts.

“This has been a concerted effort to win new business and protect the old business we have,” McCluney said.

During the September quarter, Emulex spent nearly $13 million on sales and marketing, up from about $10 million a year ago.

It’s paid off with more than 30 design wins, McCluney said.

“The critical thing is about half of them have yet to go into production, so these are long design cycles,” McCluney said, which means revenue will be coming in for a while.

Meanwhile, the company is working to drive down operating costs by reducing the number of outside suppliers.

John Warwick, who joined Emulex in August 2006, was hired away from Irvine’s Lantronix Inc.

“John has consolidated external contract manufacturers,” McCluney said. “We now have much better purchasing power for the chips that power our products.”

The company also is turning to younger networking and storage technologies to gain market share against rivals, including Aliso Viejo’s QLogic Corp.

It’s seen success in mezzanine cards for blade servers, which are stackable, slim versions of computers for corporate networks.

The company counts blade server wins from Hewlett Packard Co., IBM Corp. and Sun Microsystems Inc.

September-quarter sales of mezzanine cards, which serve as host bus adapters for blade servers, are up 33% from a year ago.

“We are really pleased with the traction we have got going with blades,” McCluney said. “That’s well over market growth. We see that continuing again into the (end of the year).”

McCluney’s still focused on a rebound in the December quarter.

Emulex’s forecast for the current quarter are in line with analysts’ estimates. The company said it expects sales of $129 million to $133 million. A year earlier, Emulex had sales of $121.4 million.

Profit is expected to come in at $25 million to $27 million, versus $24.9 million a year earlier before charges.

Wall Street is pleased with the effort so far. Shares are up 20% since they hit a low in August. The company counted a recent market value of about $1.8 billion.

Other products are on tap.

“The drum beat continues,” McCluney said. “We continue to look for other interesting markets that we can diversify into.”

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