Twenty-nine profitable quarters later--and a 30th under way--it looks like Desai had the right idea. Gartner Dataquest forecasts that while IT spending in 2003 will increase a modest 7%, components for storage area networks (SANs) will surge 52%. The lion's share will be based on Fibre Channel.

But there's more to this story than good timing. Though not a leader in any SAN components segment, QLogic has grown faster and performed better than many of its competitors by pursuing a strategy of high performance at low cost--but not necessarily the lowest price, analysts said.

For example, QLogic's fabric switches are not the least expensive, but it has begun offering them as embedded products, eliminating the cost of a separate box.

"We've developed a customer base that highly values our low-cost approach," said Frank Berry, vice president of corporate marketing at QLogic, Aliso Viejo, Calif. "When the economy turned down, it was the high-end server guys that got hit hard, whereas the low-cost providers like Dell flourished."

In the third quarter, QLogic's top 10 customers represented 78% of its revenue. Nine of them grew sequentially, reflected in QLogic's 8% revenue growth.

Its ability to manage a diverse product portfolio helps too. While this doesn't always translate into higher profits, it has allowed the company to spread its risk to maintain stable profit margins in the range of 60% to 63%.

"QLogic has a unique offering, given it can provide a whole spectrum of products, from host bus adapters (HBAs) to switches to even providing the silicon. That has been their competitive advantage," said Brent Bracelin, an analyst at Pacific Crest Securities Inc., Portland, Ore. "The downside of that is they're going up against companies like Brocade and Emulex that specialize in some of these areas."

Executives say QLogic's edge is designing highly integrated silicon and shipping management software and drivers with every QLogic product.

"If we didn't have software, we'd become a commodity," said Desai at a recent financial conference in San Francisco.

QLogic divides its business into two categories. One is selling high-speed I/O controller components, including chips and HBA cards, to small and midsize companies. The other is providing complete systems, such as Fibre Channel switch blades, to OEMs that put their brand on the box.

The company estimates these businesses will represent a $7 billion opportunity in 2006, out of an overall SAN components market that Gartner Dataquest forecasts will reach $8.3 billion in that year.

In the Fibre Channel HBA arena, QLogic gained 5% in 2001 to take a 22% share, according to James Opfer, an analyst at Gartner Dataquest in San Jose. Opfer projects that QLogic's FC HBA revenue will grow 30% in 2002, twice the rate of that market segment.

Still, the company remains a distant second in FC HBAs to Emulex's roughly 40% share. In fabric switches, QLogic is No. 2 behind Brocade Communications Systems, with a 10% share, according to Opfer. A recent foray into Internet SCSI (iSCSI) is expected to produce revenue by 2003.

QLogic ranks fourth in SAN components overall, but continues to climb by improving its product positioning and cost structure, Opfer said.

"QLogic is one of the few companies that tend to gain share as a market matures," he said. "It has been more aggressive at providing products that result in lower cost to customers--something competitors have not been eager to do because then revenue goes down."

"It's a very well-run company," said Pacific Crest's Bracelin. "But at the end of the day, there are still some holes in its story."

One is the fact that a third of QLogic's $108.5 million revenue in the third quarter was from legacy SCSI chipsets for hard-disk drives, a market that is quickly being displaced at the low end by Serial ATA devices from the likes of Intel.

Berry said QLogic is readying Serial ATA products for rollout in the first half of 2003.

Bracelin also is worried that QLogic's history of strong performance has pushed the stock price to an unsustainable premium. At this writing, shares of QLGC were at $43, up from $23 in October--roughly 44 times earnings and eight times revenue.

"Any hiccup in QLogic's business means the stock will get cut significantly," he said.