Revenue Slowdown Vexes Vixel (News) December 21, 1999

Revenue Slowdown Vexes Vixel

By Brian Graney (TMF Panic)
December 21, 1999

Storage area network (SAN) products developer Vixel Corp. (Nasdaq: VIXL) was pounded for a big loss this morning after warning that it will report a fiscal Q4 loss between $0.26 and $0.30 per share on lower-than-expected revenues. Analysts surveyed by First Call had been hoping for a loss of only $0.25 per share or so. Revenues are seen between $7.5 million and $8 million for the period, a 10% to 16% sequential slide. Management said some customers have delayed orders for the company's 8100 full fabric fibre channel switch ahead of the introduction of its new 7000 series switch, which will hit the market in February.

Also hampering earnings were slowness in the firm's entry-level SAN products, which was chalked up to the Y2K bugaboo -- corporate America's underperformance excuse of choice for the past several quarters. Whatever the cause, the sales slowdown is definitely a bummer for Vixel, which saw its share price triple in its first day of trading in October. In Internet time, however, that was ages ago. The company's shares have been slipping ever since, and with today's drop the firm is getting dangerously close to its IPO price of $18 per share.

Based on the explosive growth expected from the SAN market over the next few years, having a player such as Vixel lose steam and pass out this early in the party is probably more than a little discomforting to many investors. The Y2K talk may be merited, of course, meaning Vixel may be able to shake off the cobwebs and emerge from the haze with renewed growth next year. That's the scenario president and CEO James McCluney expects will unfold, commenting that the company is in "an excellent position to serve the SAN market by providing some of the best products in the industry."

On the other hand, the stock market's outsized reaction to the news this morning suggests that there may be more to the story. Order delays are not the type of things investors want to hear about at this point from the fiber channel switch market, which is expected to balloon over the next couple of years from a few hundred million dollars to a few billion dollars. Throw in the fact that Vixel is already playing catch up in this area to switch dominator Brocade Communications (Nasdaq: BRCD), which sports a roughly 80% market share, and the rationale behind today's slide becomes a bit more understandable.

Brocade fell slightly today, as did rival switch maker Ancor Communications (Nasdaq: ANCR). Conversely, Gadzoox Networks (Nasdaq: ZOOX), which is planning to get in on the action in the fabric switch area, sank more than 20%, likely on fears that it is sailing straight into rough waters by moving headfirst into switches over the next few quarters.

Drawing that type of conclusion at this point is incorrect, though, as the fiber channel switch market specifically and the entire SAN products market in general are far from reaching full development. As in chess, many moves must still take place before any kind of technological endgame can evolve and the long-run SAN winners can emerge. But based on today's news, Vixel will need to correct its revenue problems fast if it hopes to ultimately become a king in the SAN market rather than a mere pawn.

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