A leading supplier of high performance network infrastructure
solutions,
QLogic Corporation
(
QLGC
)
reported third quarter 2012 earnings of 31 cents (excluding
one-time charges, but including stock-based compensation expense)
handily beating the Zacks Consensus Estimate by six cents.
However, earnings per share (
EPS
) declined 36.0% year over year, primarily due to weak revenue
growth and operating margin contraction in the reported
quarter.
Quarter Details
Total revenue decreased 2.0% year over year to $152.7 million
but was ahead of the Zacks Consensus Estimate of $150.0
million and was at the higher end of management's guided range of
$145.0 million to $155.0 million. The year-over-year decline was
primarily attributed to weak growth across half of its segments
during the quarter.
Host Products (comprising primarily fiber channel converged and
10-Gig Ethernet adapters) decreased 0.7% from the year-ago quarter
to $112.7 million (73.8% of the total revenue in the quarter).
Network products (fiber channel and InfiniBand switches) also
declined 15.7% year over year to $24.4 million (16.0% of the total
revenue in the quarter).
Silicon products (fiber channel converged 10-Gig Ethernet and
iSCSI protocol chips) shot up 17.1% from the year-ago quarter to
$12.4 million (8.2% of the total revenue in the quarter). Service
revenues climbed 15.1% year over year to $3.1 million (2.0% of the
total revenue in the quarter).
Gross profit decreased 2.1% year over year to $101.8 million.
Gross margin remained flat on a year-over-year basis at 66.7%, and
was within management's guided range of 66.0% to 67.0%.
Total operating expense increased 7.8% year over year to $67.2
million, primarily due to higher engineering and development cost
(up 11.3%) and sales & marketing expense (up 7.0%). Operating
expense exceeded management's expectation of $60.0 million, which
hurt the company's operating profit during the quarter.
Operating profit in the third quarter declined 17.0% year over
year to $34.6 million. Operating margin decreased from 26.7% a year
ago to 22.6% in the reported quarter. Non-GAAP net income was $30.8
million compared with $51.3 million in the year-ago quarter.
Balance Sheet
As of January 1, 2012, QLogic had cash and short-term
investments of $395.8 million versus $391.0 million in the previous
quarter. At the end of the quarter, the company had no debt on its
balance sheet. QLogic generated $52.3 million in cash from
operations in the reported quarter.
Divestiture
Most recently, QLogic announced the sale of its InfiniBand
business to
Intel Corp. (
INTC
)
for $125.0 million in cash. The sale is expected to be closed by
the end of the fourth quarter. QLogic believes that the sale will
allow the company to focus more on high growth opportunities in
converge networking, enterprise Ethernet and storage networking
products, thereby boosting top-line growth going forward.
Guidance
QLogic expects fourth quarter 2012 revenue in the range of
$134.0 million to $140.0 million. Management expects host and
network products to decline 4.0% sequentially. Revenue from Silicon
Products is expected in the range of $11.0 million to $12.0
million.
Gross margin is expected to be approximately 68.0%, while QLogic
expects to incur operating expenses of $56.0 million. Non-GAAP EPS
is expected in the range of 30 cents to 33 cents for the fourth
quarter.
Recommendation
We believe that QLogic will benefit from major OEM customer wins
and increased focus on its key strategic initiatives (post the
InfiniBand sale) over the long term. Moreover, QLogic has gained
significant traction in the fiber channel adaptor market and the
10Gb Ethernet adapters market, primarily driven by strong customer
demand over the last 12 months.
However, we believe that the third quarter beat was already
factored in the stock. We believe that QLogic's top-line growth
will take some time to rebound and is quite dependent on the ramp
of Intel's Romley servers. Meanwhile, a slowdown in IT spending can
hurt QLogic going forward. Further, tough competition from
Emulex Corp.
(
ELX
)
and
Broadcom Corp.
(
BRCM
)
will act as a headwind for the stock.
We continue to maintain a Neutral recommendation on a long-term
basis (6-12 months). Currently, QLogic has a Zacks #3 Rank, which
implies a Hold rating on a short-term basis.
BROADCOM CORP-A (
BRCM
): Free Stock Analysis Report
EMULEX CORP (
ELX
): Free Stock Analysis Report
INTEL CORP (
INTC
): Free Stock Analysis Report
QLOGIC CORP (
QLGC
): Free Stock Analysis Report
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