The impact of this move for users will be twofold, according to Enterprise Strategy Group (ESG) analyst Brian Babineau: short term, he said, a third competitor in the HBA market could improve pricing for end users, as well as OEM suppliers and cut down on the number of vendors users have to deal with when deploying a storage area network (SAN). Long term, Babineau speculated that this could lay the groundwork for a Brocade-branded network-based virtualization product.
"Now, they're touching the server," Babineau said. "That opens up the opportunity for them to add services on top of the network, including replication, volume management and data migration."
Brocade said that the single and dual-port Fibre Channel HBAs will be based on a partnership with LSI Logic Corp., the better to get them to market quickly before they're overtaken by the next bump to 8 Gbps products, referring to the initial deal as a "launching pad." However, Brocade also announced its intentions to add 8 Gbps Fibre Channel and 10 Gigabit Ethernet (10 GigE) offerings, which it said will come from its own internal development.
"We have been planning this for several quarters and made some investments in resources several quarters back," according to Brocade officials in an email to SearchStorage.com. " The technology is not that dissimilar to switching technology, which makes this possible." Brocade has "host-side" engineering expertise from the acquisition of Ethernet acceleration chip provider Silverback Systems Inc. for an undisclosed sum this past January.
Meanwhile, other Silverback assets are coming to light with the Brocade 2110 iSCSI Initiator HBA, which is compatible with servers running Microsoft Windows or Linux operating systems. The 10 GigE components will come from SilverBack, as well.
The iSCSI initiator market has become commoditized; many are available today for free. However, iSCSI HBAs, which include TCP/IP offload capabilities for boosting performance, are a different animal with more of a market opportunity. According to a recent ESG survey, 66% of respondents who had adopted iSCSI also had at least one server connected to a storage system with an iSCSI HBA.
The Brocade 2110 is available immediately from Brocade and its channel partners. The new Brocade 4 Gbps Fibre Channel HBAs are expected to be available at the end of July 2007 and the next-generation Brocade intelligent server adapters are planned to be available in 2008.
Earnings results and the Cisco factor
Brocade also reported record revenues of $345.3 million during its conference call Thursday. Revenues for the second quarter of 2007 increased 54% from $224.2 million reported in the first quarter of fiscal year 2007 and increased 89% from $182.7 million reported in the second quarter of fiscal year 2006. This was the first full quarter of combined revenue for Brocade and McData. Historically, according to Klayko on Brocade's earnings call, the second quarter has been a financially soft one for the company.
"I am delighted to report that we have far exceeded the [earnings] commitments that we made when we acquired McData last year," he said. "As you can see, the McData integration is well ahead of schedule."
However, Brocade also reported a 94% drop in profit Thursday on writedowns related to its acquisition of McData-- net income was $843,000 compared with $13.5 million in the same quarter last year. Some in the industry speculated that the move into the HBA market could be an effort to diversify and generate more profit over upcoming quarters in order to hold its own against Cisco. "We can understand that Brocade may feel pressure to make some move to compete against other switch players, but we do not expect this to have an impact on our business," said Mike Smith, executive vice president of worldwide marketing at Emulex Corp., in an email to SearchStorage.
However, ESG's Babineau pointed out that a third player coming into the HBA market after what he termed a "duopoly" between QLogic Corp. and Emulex over the last several years will probably mean more competitive pricing for all Fibre Channel networking suppliers, Cisco included.
"They certainly battled with Cisco all day long this quarter, but considering they just posted record revenue and the fact that this will influence supply-side prices for everyone, I don't think they got into this market because of Cisco," Babineau said.
Meanwhile, Brocade issued guidance that predicts a decline of around $5 million in revenues for the third quarter, but said the quarter is historically one of flat or declining revenues (a statement that met with skepticism from some financial analysts on the call), and that the decline could be attributed to a softening in IT spending. This was cited by Network Appliance Inc. in its earnings guidance last week. Brocade also attributed the termination of McData reseller contracts on "nonstrategic, low-margin, third-party products" as another reason for the anticipated decline in third-quarter revenues.