QLGC

QLogic Corporation (QLGC)

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QLogic Corporation (QLGC)

F3Q13 Earnings Call

January 24, 2013 5:00 PM ET

Executives

Jean Hu – SVP and CFO

Simon Biddiscombe – President and CEO

Analysts

Amit Daryanani – RBC Capital Markets

Aaron Rakers – Stifel Nicolaus

Katy Huberty – Morgan Stanley

Andrew Nowinsk – Piper Jaffray

Glenn Hanus – Needham & Company

Vlad Rom – Credit Suisse

Jung Pak – BMO Capital Markets

Presentation

Operator

Good day and welcome to the Third Quarter Fiscal Year ‘13 QLogic Earnings Announcement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Ms. Jean Hu. Please go ahead.

Jean Hu

Thank you operator. Good afternoon and welcome to QLogic’s third quarter fiscal year 2013 earnings conference call. Joining me on the call today is Simon Biddiscombe, our Chief Executive Officer. I’ll begin the call with a review of the third quarter financial results. Simon will follow with his customary business update. We’ll then open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and our projections of our financial performance based on our current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.

We refer you to the documents QLogic files with SEC, specifically our most recent Form 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our third quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. All of the references we’ll make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of the non-GAAP to the GAAP financial measures is available on our website on the Investor Relations.

Turning now to our financial results for the third fiscal quarter ended December 30, 2012. Our revenue in the third quarter was $119.4 million, compared to $142.8 million recorded in the same quarter last year. This revenue was above the high-end of our guidance range of $112 million to $118 million provided during our second quarter earnings call and slightly above our preliminary third quarter results announced on January 15.

The strength in revenue relative to our guidance was driven by higher than expected revenue from Host Products and particularly strong performance from Network Products. Our third quarter revenue from Host Products, which are comprised primarily of Fibre Channel, Converged and 10-gig Ethernet adapters was $89.8 million, compared to $111.8 recorded in the third quarter of last year. Third quarter revenue from Network Products, which are comprised primarily of Fibre Channel and Converged Switches was $20.1 million, up from the $18.5 million recorded in the third quarter of last year.

Our third quarter revenue from Silicon Products comprised of Fibre Channel, Converged Host and Switch and the 10-gig Ethernet chips was $9.6 million and consistent with our expectations.

Our third quarter gross margin of 67.9% declined from 68.5% recorded in the third quarter of last year, primarily due to lower volumes to offset manufacturing costs. Our gross margin was at a high-end of our guidance range of 67% to 68% provided during our second quarter earnings call.

Next, I’d like to cover our third quarter operating expenses. As a reminder, we continue to invest in engineering in order to address increased opportunities and expand our server to markets while aggressively managing sales, marketing and G&A costs.

Total operating expenses were $59.4 million, up from $55.9 million reported in the third quarter of last year. Operating expenses were consistent with our expectation. Engineering expenses in the third quarter of $35.4 million increased from $31 million to last year.

Sales and marketing expenses in the third quarter was $17.7 million, down from $18.1 million last year. G&A expenses in the third quarter of $6.3 million decreased from $6.8 million last year. Operating income in the third quarter of $21.6 million was 18.1% of revenue. Interest and other income was $900,000 in the third quarter. Our income tax rate for the third quarter was 18.6%.

Our third quarter income from continuing operations of $18.3 million represent net profit margin of 15.4%. This is the 70th consecutive quarter of profitability for QLogic. Our third quarter income from continuing operations per diluted share of $0.20 was above the high-end of our guidance range of $0.14 to $0.19 provided during our second quarter earnings call and consistent with the $0.19 to $0.20 range provided in our preliminary third quarter results announcement.

Turning now to our balance sheet. Our cash and marketable securities were $495 million or more than $5 per share at the end of the third quarter. We continue to maintain a very strong cash position and have no debt. During the third quarter, we generated $33 million of cash from operations.

We remain committed to our stock buyback, and during the quarter we purchased $30 million of company’s common stock. During the first three quarters of fiscal 2013, we have purchased total of $111 million of company’s common stock, which is $41 million above our free cash flow.

Receivables were $69.5 million at end of the third quarter. DSO at the end of the third quarter improved at 53 days from 56 days at end of the second quarter. Inventory was $23 million at the end of the third quarter. Annualized inventory turns for the third quarter was 6.7 compared to 7 turns achieved in the second quarter.

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