QLogic Misses 2Q Estimates

Zacks

A leading supplier of high performance network infrastructure solutions, QLogic Corporation (QLGC) reported first quarter 2013 earnings of 19 cents, which missed the Zacks Consensus Estimate by a penny. Reported earnings include stock-based compensation expense ($9.3 million) but exclude amortization related expense ($0.2 million).

However, earnings plunged 42.0% year over year, primarily due to weak revenue growth and operating margin contraction in the reported quarter.

Quarter Details

Total revenue decreased 9.8% year over year to $130.4 million and lagged the Zacks Consensus Estimate of $132.0 million. However, total revenue inched past the lower end of management’s guided range of $130.4 million to $135.0 million. The year-over-year decline was on the back of weak growth across most of its segments during the quarter.

Host Products and Silicon products decreased 7.2% and 41.8% year over year to $101.0 million and $9.8 million, respectively, in the reported quarter. This steep decline fully offset a 4.3% growth in the Network products revenue to $19.5 million in the quarter.

Total operating expense increased 5.1% year over year to $67.0 million, primarily due to higher engineering and development cost (up 13.2%), partially offset by lower sales & marketing expense (down 4.2%) and general & administrative expense (down 5.3%). Operating expense exceeded management’s expectation of $59.0 million, which hurt the company’s operating profit during the quarter.

Operating profit in the first quarter declined 44.1% year over year to $20.0 million. Operating margin decreased from 24.8% a year ago to 15.4% in the reported quarter. Non-GAAP net income was $18.6 million compared with $34.3 million in the year-ago quarter.

As of July 1, 2012, QLogic had cash and short-term investments of $496.3 million versus $538.0 million in the previous quarter. At the end of the quarter, the company had no debt on its balance sheet.

Guidance

QLogic expects second quarter 2013 revenue in the range of $115.0 million to $120.0 million. Gross margin is expected to be approximately 67.0% to 68.0%, while QLogic expects to incur operating expenses of $60.0 million. Non-GAAP earnings are expected in the range of 16 cents to 20 cents for the second quarter.

Recommendation

We believe that QLogic will benefit from major OEM customer wins and increased focus on its key strategic initiatives over the long term. However, we believe that a sluggish IT spending environment and increasing competition from peers such as Mellanox Technologies (MLNX) will hurt profitability going forward.

We continue to maintain a Neutral recommendation on a long-term basis (6–12 months). Currently, QLogic has a Zacks #4 Rank, which implies a Sell rating on a short-term basis.

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