Storage OEMs Set to Shuffle Deck

Flurry of news over past few days could have big implications for system vendors and partners

July 30, 2005

3 Min Read
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The competition is heating up among storage system OEM suppliers.

Adaptec Inc. (Nasdaq: ADPT), Dot Hill Systems Corp. (Nasdaq: HILL), Engenio Information Technologies Inc., and Xyratex Ltd. (Nasdaq: XRTX) made news in the form of earnings reports or acquisitions this week (see Dot Hill Reports Q2, LSI Logic Reports Q2, and Xyratex Gobbles nStor). Taken together, the developments point to a possible shifting of allegiances in their relationships with the storage vendors that resell their gear.

Here are the highlights:

  • Engenio, the storage division of LSI Logic Corp. (NYSE: LSI), reported its revenues increased 12 percent sequentially and 6 percent year-on-year after bringing out a 4-Gbit/s controller earlier this year that is sold by IBM Corp. (NYSE: IBM), Silicon Graphics Inc. (SGI) (NYSE: SGI), and Storage Technology Corp. (StorageTek) (NYSE: STK). (See IBM Drives 4-Gbit/s, SGI Targets First in 4-Gig, and Four-Gig HBAs on Parade.)

  • Adaptecs storage systems business revenue of $21.5 million dropped sequentially for the second straight quarter, and analysts attributed the drop to poor sales of the low-end products it sells through IBM (see Adaptec Unveils OEM, Revs Guidance).

  • Dot Hill’s revenue of $65.9 million was down 5 percent from last year, and its guidance of $50 million to $54 million was below analysts’ expectation, but it announced an OEM deal with Network Appliance Inc. (Nasdaq: NTAP) that was a long time in the making and could double its revenue by the end of 2007.

  • Xyratex, which could lose revenue from Dot Hill encroaching on its NetApp relationship, bought startup nStor Technologies Inc. (Amex: NSO) for $21 million to give it RAID controller technology and broaden its entry level product line.

    When you put them together, what do you get? For starters, it fuels speculation that IBM might dissolve its partnership with Adaptec for its entry-level iSCSI and Fibre Channel SANs, which Big Blue sells as the DS300 and DS400.

    “We believe IBM has decided to walk away from Adaptec’s products for the DS300 and DS400,” RBC Capital Markets analyst Tom Curlin wrote today in a note to clients. “We believe IBM will use NetApp’s 270 product as an alternative to the DS300 iSCSI/NAS connectivity product, and Engenio’s low-end Fibre Channel offering as an alternative for the DS400 product.”That scenario makes sense. IBM already said it will expand the family of products it gets from Engenio, and it announced an OEM deal to sell NetApp products (see IBM, NetApp Ink OEM Pact). IBM storage GM Andy Monshaw says the NetApp product rollout will begin this quarter, beginning at the low end.

    In another OEM turf skirmish, Dot Hill is threatening Xyratex with its NetApp deal for a low-end RAID disk enclosure. NetApp is Xyratex’s biggest customer, and Xyratex has been NetApp’s only OEM disk partner. Still, the deal might not hurt Xyratex and could even help in the long run. NetApp will continue to sell its Xyratex systems, and can add a second source to the Dot Hill systems after 18 months.

    Dot Hill provided few details about the products it will sell to NetApp, refusing even to identify NetApp as its new partner on its earnings call Wednesday night -- despite naming NetApp in an 8-K/A filed with the Securities and Exchange Commission (SEC). Dot Hill has exclusive distribution rights to the NetApp system for 18 months. After that, NetApp can use Dot Hill’s design to manufacture systems as well as use a second source for the original Dot Hill product. Given its relationship with NetApp, Xyratex is almost certain to be in the running as the second source.

    Xyratex is looking to add entry-level OEM deals for Fibre Channel and SAS systems through its acquisition of nStor. Along with the technology, Xyratex might inherit deals nStor was working on. During a conference call to discuss the acquisition today, Xyratex executives indicated they might be able to complete deals that nStor could not close on its own as an unproven startup.

    — Dave Raffo, Senior Editor, Byte and Switch0

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