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Sour Outlook for Emulex

In a likely bad omen for the storage industry's financial results this quarter, at least three analysts in the past week have weighed in with negative expectations for Emulex Corp. (NYSE: ELX).

Thomas Curlin of RBC Capital Markets downgraded Emulex's rating to Sector Perform from Outperform, while raising its risk from Average to Above Average. Meanwhile, Shaw Wu of American Technology Research and Glenn Hanus of Needham & Co. issued research notes expressing doubts about Emulex's ability to meet revenue expectations.

In April, Emulex missed expectations for the past quarter while giving lower guidance than expected for the current quarter (see Emulex Short on Revenue). Product launches set for the second half of the year were blamed for a soft first half, but now it looks as though Emulex will have a tough time hitting even its reduced guidance.

If Emulex is struggling, that's a bad sign for storage in general. Along with QLogic Corp. (Nasdaq: QLGC), Emulex dominates the Fibre Channel HBA market and has OEM relationships with nearly all the major storage system vendors. So what's wrong?

Shifting relationships with several storage vendors and anticipated weak sales by Hewlett-Packard Co. (NYSE: HPQ) are the major causes of pessimism (see HP Storage Share Slips). Curlin writes that Emulex could get hurt by HP's delaying its rollout of SMB SAN systems to July. He believes HP is also discounting existing SAN products in advance of the SMB launch.

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