Gadzoox Networks

Dont blame it on the switches.

While there are different views about why Fibre Channel switch maker Gadzoox Networks Inc. (Nasdaq: ZOOX) seems to be gasping its last breath, most observers agree that the quality of its Slingshot switches has nothing to do with it (see Gadzoox Twitches and Gadzoox Wields Axe).

With its technology, Gadzoox has often been a pioneer. The San Jose, Calif., company was "the embryo for the SAN market," as an ex-employee describes it, having helped lead the market early on from unmanaged to managed hubs.

And, after missing the initial move to Fibre Channel switching, it has continued to break new ground. Last year it was one of the first FC switch makers to release a 2-Gbit/s switch, shipping the Slingshot nearly six months before market leader Brocade Communications Systems Inc. (Nasdaq: BRCD) delivered its 2-Gbit/s switch in mid-November (see Gadzoox Slings Shot).

Still, while Gadzoox’s technological know-how is impressive, it is in danger of being squished out of the market and into oblivion. Brocade holds about 90 percent of the market and is hogging almost every original equipment manufacturer (OEM) the FC fabric switch realm has to offer, leaving Gadzoox very little room to operate. The remaining 10 percent of the market doesn't allow for a lot of breathing room either, with players like QLogic Corp. (Nasdaq: QLGC), McData Corp. (Nasdaq: MCDTA), and Inrange Technologies Corp. (Nasdaq: INRG) competing with Gadzoox for the leftovers."The Fibre Channel switch war was won outright by Brocade a long time ago," says Steve Duplessie, an analyst with Enterprise Storage Group Inc. "Now [Gadzoox] might have a better, cheaper, faster product, but the problem is that Brocade owns the OEM, and most of the decisions are made in the OEM."

Dan Tanner, an analyst with Aberdeen Group, paints a similarly dreary picture for Gadzoox: "With Brocade enjoying about 90 percent of the market and in light of the growing importance of IP technology and the poor economy, it’s not surprising that smaller companies are facing tough times."

The stifling competition has definitely taken its toll. In September, Gadzoox reported that it had ended its last quarter with $14.5 million in cash, and that it expected to burn about $7 million of that over the current quarter. Since the company hasn’t announced any new customers or OEM wins over the last quarter, Byte and Switch estimates that it only has about one more quarter left before it runs out of cash.

However, Cynthia Jordan, who until August 2000 was director of administrative operations at Gadzoox and now holds the same title at optical networking components provider Gigabit Optics Corp., claims that the company will be announcing additional funding of $9 million sometime over the next few days. She says she still maintains contact with Gadzoox insiders, who provided her with information about the new funding. (Gadzoox officials declined to comment on the supposedly imminent funding.)

Jordan -- who still owns a number of Gadzoox shares -- also says she expects the company to announce several large customer wins in the near future."Every single quarter, Gadzoox has gotten funding," she says, insisting that the company will make a comeback. "When push comes to shove, it's product and pricing that matter. [Gadzoox] has always been better and cheaper than Brocade."

But despite the hopes of Gadzoox's shareholders, there is further evidence that things aren’t going quite as they should in Gadzoox-land. The company announced a round of layoffs last Thursday, and while no one at Gadzoox would say how many people had been let go, a former Gadzoox executive who asked not to be named says that 40 employees, or roughly 30 percent of the company, were dismissed (see Gadzoox Zinks).

"In general, this is basic restructuring to reflect the change of expectations on our side," says Clark Foy, Gadzoox’s VP of sales and marketing. "The 2-gigabit market was slower to take off than expected. The restructuring put us in a better competitive cost position."

Investors responded positively to the news of the downsizing, and Gadzoox's stock price jumped nearly 20 percent -- but only to 79 cents, up from 68 cents. And, less than a week later, the stock had dropped back down to 66 cents a share.

Foy might be downplaying the severity of the layoffs, which apparently all but wiped out the company’s Irvine, Calif., office, but he has put his finger on one of the main reasons that Gadzoox’s revenues continue to dwindle. Despite all of the hype a year ago about how big the 2-Gbit/s switch market was going to be, very few customers have actually made the leap over from 1-Gbit/s switches."The 2-gigabit switch market that [Gadzoox] and its peers had hoped would materialize last year never did," says IDC analyst Eric Sheppard. "People are still buying Fibre Channel, but to date, they appear to be satisfied with 1-gigabit speed. The OEMs have been slow to roll out 2-gigabit solutions."

Gadzoox's Foy, however, thinks that it’s just a matter of time before the 2-Gbit/s FC market takes off. "It’s going to start happening very quickly," he says. "We’re offering to replace 1-gig switches with 2-gigs for the same price, and sometimes at a lower price. Our position all along has been that SANs don’t have to be expensive."

So where did Zoox zlip up?

It appears that while the company's technology has been solid, some of its marketing and management decisions have not.

"The management team probably didn’t do the best job in anticipating the market," says Bill Lewis, an analyst with J.P. Morgan & Co., noting that the company didn’t move quickly enough from managed hubs to switches. "The market moved past them.""This is definitely the beginning of the end now," says a market analyst who requested anonymity. "The problem is that the company was founded by tech people, but it missed the marketing aspects and lost the race for market share. It’s not surprising."

Jordan, the ex-Gadzoox employee, admits that in the early days there was a lot of pushing and pulling within the sales and marketing departments over which direction the company should take. But for at least the last year and a half, she says, Gadzoox has gone full-throttle after the OEMs.

And not everyone is buying Brocade switches exclusively. Compaq Computer Corp. (NYSE: CPQ) is a longstanding customer of Gadzoox, as well as a major OEM partner for its 2-Gbit/s platform. Foy says Gadzoox has had an OEM relationship in place with Hewlett-Packard Co. (NYSE: HWP) for several years for its hubs and switches, though not its Slingshot switches.

The good news, says IDC's Sheppard, is that Gadzoox has a good product and its relationship with Compaq seems to be stable. Foy says there are other major OEMs on the horizon, but he says that Gadzoox isn’t ready to reveal who they are.

Gadzoox is pinning its hopes for survival in large part on the entry-level area, which has to a large degree escaped Brocade’s attention, Foy says.Indeed, the Fibre Channel switch market is bifurcating, notes Duplessie. On the high end are Brocade, Inrange, and McData, which are each moving their switches to higher port counts. On the low end, where Gadzoox wants to make new inroads, is QLogic and its strategy of "driving the price into the toilet and making this stuff accessible to everyone," he says.

The fact that there are several companies going after the low-end piece of the pie might actually be to Gadzoox’s advantage, Duplessie says. "QLogic's spreading the word, that this isn’t just for the rich and famous, can’t be bad."

With its stock trading for pennies, its staff cut by a third, and all of its original executives gone, the only thing going for Gadzoox at the moment might be a good product -- and optimism of the kind exhibited by Jordan, the ex-employee who still hopes to salvage her holdings in Zoox. Unfortunately for the company, wishful thinking alone won't be enough to save it.

— Eugénie Larson, Reporter, Byte and Switch
http://www.byteandswitch.com