A recently announced permanent injunction against Costa Mesa-based Emulex Corp. for infringing on two Broadcom Corp. patents won’t significantly hurt the company’s near-term finances, but the longer-term outlook is less certain, according to analysts.
The federal court ruling, announced March 19, involved U.S. products from Emulex’s line of 10-gigabit Ethernet controllers, chips and switches that produced 5% of its $128.7 million in sales in the December quarter.
Emulex projects a $600,000 charge in the current quarter, based on the jury assessment of royalties. The company also absorbed a $387,922 charge in the September quarter from a prior patent-infringement ruling.
“Emulex generates only very modest revenue from these products in the U.S.,” Jim Kelleher, senior technology analyst at New York-based Argus Research Co., wrote in an investors note. “The non-core technologies at issue can be worked around.”
Chief Executive Jim McCluney said Emulex is working with suppliers to redesign modules in affected products.
Emulex designs and makes networking equipment that connects storage, servers and data centers. For years it has battled Aliso Viejo-based rival QLogic Corp., the market share leader in fibre-channel adapters.
Meanwhile, Emulex has quickly grown its share in the emerging 10-gigabit segment to a lead position. The company had almost 32% of the 10-gigabit market in 2011, up from 2% in 2009, according to Redwood City-based market tracker Dell’Oro Group Inc.
Ten-gigabit Ethernet controllers and adapters—a growing segment—connect servers to local area networks within data centers, speeding up the flow of information. Such technology is seen as an improvement over fibre-channel and 1-gigabit connections, which remain prevalent in data centers.
An estimated 100 million 1-gigabit connections are expected to upgrade to 10-gigabit during the next five years with the potential to generate an estimated $6.5 billion in tech sales.
Milwaukee-based Robert W. Baird & Co. maintained its “neutral” rating on Emulex following the injunction despite “some uncertainty” over the next year as the company transitions from impacted products.
“While the revenue impact seems fairly insignificant, we believe this creates an increased level of uncertainty regarding future orders with strategic original equipment manufacturing customers,” Robert W. Baird senior analyst Jayson Noland wrote in an investors note.
Industry watchers have closely followed the Broadcom and Emulex litigation, which has lasted nearly three years and caused some customers to delay upgrades through either company pending resolution of the dispute. The March 19 ruling by the U.S. District Court for the Central District of California provided some clarity, though three other patents are still being debated.
The ruling requires Emulex to pay Broadcom a 9% royalty on certain products through June 2013.
Broadcom had asserted that Emulex infringed on 12 separate U.S. patents, but the court dismissed six patent complaints before trial.
In October the court ruled Emulex infringed on one patent, and a jury awarded Broadcom $387,922 in damages. That was upheld last month when the court ruled on another patent infringement and tossed another claim out.
A unanimous verdict could not be reached on the three remaining patents, likely setting up another round of court dates. The original lawsuit was filed in September 2009, shortly after Emulex rebuffed a final $912 million takeover offer from Broadcom.
Kelleher views the longstanding duel as an expensive moral victory for Broadcom, which had sought $5 million in damages.
“I wonder how investors can see the entire episode as anything more than sour grapes after Emulex rebuffed Broadcom’s bid,” the Argus analyst said.
Investors have largely ignored the patent rulings to date. But the company’s share price will bear watching when Emulex reports March earnings later this month or early May.
Analysts on average estimate Emulex sales will rise 10% to $123.3 million in the current quarter. They project an adjusted profit of $15.6 million; the company lost $18.6 million in the same quarter.
