Emulex switches gears to grow beyond HBAs.

Emulex is a company on a roll. For its most recent quarter, the company posted record revenue and continues to rack up customer design wins for its Fibre Channel HBAs and its embedded Fibre Channel switches. With its acquisition of Vixel now fully integrated and the market shift to 4 Gb Fibre Channel equipment starting to heat up, CTR talked with Emulex president and chief operating officer Jim McCluney.

Q. Your recent quarter was very strong with record revenue. What's driving that success? Is this something unique to Emulex or a result of the overall strength in the Fibre Channel market?

A. The demand for storage and especially network storage has been quite robust these last few years, actually. I think what the world is starting to see the outcome of some core strategies that Emulex has been driving and certainly the fourth quarter, our fiscal fourth quarter, which ended in June, we were firing on all cylinders. And things just came through very, very nicely for us. It was a record quarter for revenues and actually ended a record year.

It's our seventh consecutive year of revenue growth and a lot of things just started to tick for us. Some markets that have started growing for us are expanding our customer base. The good news from my perspective is the world hasn't seen all the outcomes yet. What we're excited about is this upcoming fiscal year. We hope to make the eighth consecutive growth year. With things like Sarbanes-Oxley for public companies, the need to store, manage, retrieve and protect data has never been higher over and the above the normal needs of business. People that didn't network their storage assets before are now taking a serious look at it.

Q. Another key piece of your announcement is that you expect the next quarter to be better than the last. Is the main challenge a matter of execution for Emulex in managing the move to 4 Gb Fibre Channel?

A. There's a number of things at work. We set a strategy in place a year or two back that said we're going to be first to market with 4Gb speed product for adapters and as well as our embedded switch technology and we've achieved that. If you look at last year as the year of getting the products out and getting the design wins in place, we mentioned on a recent earnings call that we had 38 to 40 design wins already for our 4Gb HBAs. This upcoming year is let's work with our partners and customers to get these over the line into revenue. Laid on top of that is there are many fast-growing sectors to the storage market. One is in the emergence of blade servers. It's a new form factor and it's really just at the outskirts of fairly dramatic growth. It provides cost savings and scalability and ease of management to heavy server users and it's actually drawing heavily from SAN connect. We've just won business with HP and IBM. Between those guys they've got 80 to 85 percent of the market with very high Fibre Channel HBA attach rates there, north of 50 percent. So that's an attractive market and one we haven't previously played in. We're looking to roll that out in this upcoming year and fuel faster-than-market growth with that.

Another one is the Linux market. Over the last years we've put a lot of engineering effort into getting qualified on all the Linux drivers, whether it's Red Hat, SUSE, or Red Flag. Again, our market share historically in Linux had been pretty low but we're winning designs there. So we've been putting the building blocks in place for growth acceleration over the next year. It's all about executing our plan really.

We're also putting a lot more effort into our brand. End users understand our brand and it's helped us to win more business at companies like Sun, and extend our business into blade servers because a lot of the power users have standardized on Emulex adapters for the fabric. We're going to be putting a lot more of our energies into that mode of demand generation. We're working with our OEMs, our channel partners and other partners, such as Microsoft and Oracle, to really get our name out there and extol the virtues of our solutions. So it's not just getting great products out, which we do. It's getting great marketing and a presence at all of the key OEMs.

Q. Given that brand recognition and customer loyalty, how successful have you been in leveraging your HBA success into other products?

A. The Emulex name has really solidified our (InSpeed) embedded switching architecture. We're the market leader there as well. These are Fibre Channel switching products that go inside storage arrays. Emulex had bought Vixel and with Emulex's brand and recognition with some of the large OEMs, it's just really helped accelerate the time to market. We're also are looking at how we can leverage our switch and HBA assets together so we can create integrated solutions for the market. We've got two great technologies here and we're always looking at ways we can make life easier for the customer.

Q. The Sun Microsystems HBA deal was a key customer win for Emulex. They're taking your HBA products but that would seem to be an opportunity to leverage the HBA business into switching products business.

A. The Sun thing we're really, really pleased with. It was the last of the large OEMs that we didn't have an OEM relationship for, although Emulex's HBAs have a large attach rate in Solaris. It may have been with someone else's storage such as EMC or HDS, but the timing was just right for both companies to get together. Sun recognized the value of the Emulex brand and we recognized the value of their business and it gives us once again an opportunity to grow. Sun just acquired StorageTek and they're a heavy InSpeed user.

I wouldn't say our technology is everywhere, but our reach is from deep inside the storage system right through the network. Strategically, we're looking for ways to extend that, either through our I/O technologies or our switching technologies.

Q. It's been almost two years since the acquisition of Vixel, where you were CEO, so you're probably positioned as well as anyone to talk about how that developed and the transition and integration into Emulex. Give us your assessment.

A. It's one of the smoothest mergers I've ever been part of. Emulex was looking to diversify its portfolio and get into different areas as switching was just taking off. Vixel had done a great job creating a market, getting technology out there and winning OEMs. It was just perfect timing for us as we could use Emulex's brand and purchasing power and reach that a smaller company just can't get to. It was a great addition and that product line is now contributing very solidly to our top line and operating profit. If you look back a couple of years, 99 percent of Emulex's revenue was host bus adapter related. The embedded market is now getting close to 20 percent of our business. The engineers are now working together and there's some new technologies coming out. For example, the Fibre Channel-SATA tunneling technology that was a mind meld between switching engineers and adapter engineers to bring some quite exciting new technology into the market. We've gotten a lot of leverage out of that deal.

Q. You mentioned the new SATA tunneling over Fibre Channel technology. Why is that of interest to Emulex and what does it give the customer?

A. There's a trend in storage subsystems toward cost-effective tiered stroage. Some applications need very constant online, high duty cycle access to data and traditionally in external storage that's been the domain of Fibre Channel drives. But there's a lot of data retention required on things that you need infrequently. And many of the storage designers are using ATA drives for near-line storage. Many designers are looking at ways to combine Fibre Channel and SATA drives so they can store the data according to the application and retrieval needs. Up to now they've been using fairly expensive bridging solutions and cabling. So we came up with a way that would cause the SATA data to be tunneled or sent over Fibre Channel. So to the storage controller the SATA drive looks as if it's a Fibre Channel drive with no bridge required. We're building it into our next generation InSpeed silicon. There had to be changes to the I/O controller that targets the drives and we've developed that code and we're opening up to the Fibre Channel community and standards committees. It lends more a multi-protocol environment without the need for the storage designer to completely re-architect the environment. It's very ingenious and it's getting a lot of interest from storage OEMs.

Q. Another piece of technology that Emulex got in the Vixel acquisition is the InSpeed entry-level Fibre Channel switches. Can this technology make Fibre Channel SANs affordable for the SMB market?

A. That's the intent. Fibre Channel has been very successful. It's a great business, there's till growth there, but it really has been data center-centric. Only about 5 percent of all servers shipped actually have Fibre Channel attached. Up to now, Fibre Channel has been perceived as expensive, very complicated, you need a big IT department to run it. A lot of the Fibre Channel community members, Emulex included, are now bringing out products, both hardware and software, which are less expensive and make it easy to use.

A good example of that is the InSpeed switch that was developed for storage array switching but customers said we'd like to use it on SAN side as they're inexpensive and very simple to use. We've won business from Apple, IBM and others and we're looking at some firmware technologies that can bridge both our adapters and switches to make it much easier to configure and manage the network. We're working with other companies, such as Microsoft with their Simple SAN initiative, and we've developed a low-end HBA as part of Simple SAN so the community is getting ready to open up that OEM server segment. And if we can add just 1 or 2 percent connect rate to those servers, it dramatically increases the addressable market for Fibre Channel. I think we'll see some traction there in 2006 onward. I don't think we'll ever see Fibre Channel in the mom-and-pop shop.

Q. On the issue of making SANs simpler to deploy, that's an area that the iSCSI vendors have tried to gain traction with. As a pure Fibre Channel company do you see any threats from iSCSI at the low end or 10 Gb Ethernet at the high end?

A. There's been a lot of play made with iSCSI vs. Fibre Channel, but these are complementary technologies. You may see some overlap at the mid-range, but iSCSI does a great job at the low-end environment where performance isn't really required. We're actually embracing iSCSI. We've got some assets inside the company that allow connecting iSCSI systems into Fibre Channel SAN backbones, so you can imagine islands of iSCSI being connected into the main network. So for us it's not versus iSCSI, it's how do we get our hands around it. We're keeping a close eye on 10 Gb as well because there may indeed be a need for high-performance adapters to offload the work from the central processing unit. So we're watching those markets very closely. But between our Fibre Channel-SATA work, iSCSI-to-Fibre Channel routing and access, you're going to start to see more of a multi-protocol field. That's part of our strategy to look at emerging growth sectors. Certainly we make a great living on Fibre Channel, but our expertise is on networking, storage, I/O interconnect and switching and we know we can apply that to other protocols.

Q. 4Gb is a hot issue for the Fibre Channel industry. How quickly do you see that transition occurring?

A. The stars are aligning for a more rapid transition than we had anticipated. If you look back at the last transition from 1 Gb to 2 Gb, it was very choppy. It took multiple years for that to really take off. This time things are very well lined up. All the switch vendors have their 4 Gb technologies out. We've had our 4 Gb embedded switching technology out for over a year. Our adapters are out at introduction. With the amount of interest we're seeing from the server and storage OEMs I think this could be a fairly rapid transition compared to previous years. Obviously, we feel we're in pole position to benefit from that. There are some markets, such as digital media, that can use all the bandwidth we can throw at them. I see signs that this can be a faster transition than historically. I'm very well pleased with where we are with that.

Q. What can customers look for from Emulex over the coming months and years?

A. We're supporting customers on the 4 Gb transition. We have very solid products there. You'll see us rolling out our blade server products with more design wins to be announced. We'll demonstrate some more of these multi-protocol solutions over the 2006 time frame. And you'll see much more visibility from Emulex and its brand as well.

www.emulex.com