A leading supplier of high performance network infrastructure solutions, QLogic Corp.‘s (QLGC) fourth quarter 2011 results (both earnings and revenues) surpassed the Zacks Consensus Estimates.
Revenues of $152.3 million were slightly above the Zacks Consensus Estimate of $151.0 million, and earnings per share (EPS) of 32 cents (including stock-based compensation but excluding one-time charges) beat the Zacks Consensus Estimate by 5 cents.
Revenue Details
Fourth quarter 2011 revenues of $152.3 million rose 5.0% year over year. Total revenue was at the higher end of the previously provided management’s guidance of $148 million-$153 million.
For FY11, revenues of $597.2 million not only increased 8.8% from the previous year, but also beat the Zacks Consensus Estimate of $596.0 million. The results reflected growth across all business segments.
On a segmental basis, Host Products (comprised primarily of fiber channel converged and 10-Gig Ethernet adapters) generated 71.6% of the total revenue, increasing 5.2% from the year-ago quarter to $109.1 million. Revenue in this segment was positively impacted by higher demand for both adapters and Application Specific Integrated Circuits (ASICs). Management expects an expansion in these high growth markets to benefit the company in the long run.
Network products (fiber channel and InfiniBand switches), which generated 16.0% of total revenue, increased 7.1% year over year to $24.3 million.
Silicon products (fiber channel converged 10-Gig Ethernet and iSCSI protocol chips) contributed 10.5% to total revenue and decreased 3.6% from the year-ago quarter to $16.1 million. Royalty & Service revenues, comprising the remaining 1.9% of the revenues, increased 3.7% from the year-ago quarter to $2.8 million.
On a geographical basis, the U.S., with a 43.4% revenue share, was the largest revenue-generating region and was up 2.6% from the previous year. The Asia/Pacific and Japan, the second largest region, increased 17.2% year over year and contributed 29.5% of the revenues.
However, Europe, Middle East and Africa (EMEA), which generated around 22.4% of total revenue in the quarter, saw a 3.4% decline year over year. Approximately, 4.7% of the total revenue came from the rest of the world (ROW), down 6.6% year over year.
Net Income
The pro forma net income was $34.1 million, or 22.4% of sales, compared with $28.0 million, or 19.2% of sales in the year-ago quarter.
Pro forma earnings excluding one-time charges, but including stock-based compensation expense, were 32 cents, up from 24 cents in the year-ago period, and 5 cents above the Zacks Consensus Estimate.
For FY11, pro forma earnings excluding one-time charges, but including stock-based compensation expense was $1.31, up from 79 cents in the previous year and beat the Zacks Consensus Estimate of $1.21.
Operating Performance
The gross margin for the quarter was 67.8%, up 120 basis points from the year-ago quarter, primarily due to increased volume, but partially offset by higher manufacturing costs. Gross margin in the quarter exceeded management’s guidance of 66.0%- 66.5%, primarily driven by a favorable product mix.
Operating profit in the fourth quarter was $44.9 million, increasing 8% from the year-ago quarter. As a percentage of revenue, it increased from 28.5% to 29.5%.
Balance Sheet
QLogic exited the quarter with cash and short-term investments of $384.1 million, versus $343.2 million, in the previous quarter. At the end of the quarter, the company had no debt. QLogic generated $73.3 million of cash from operations, up from $60.0 million in the previous quarter.
During the quarter, the company spent $31.5 million for the repurchase of shares, at an average price of $17.62. Since 2003, QLogic has used $1.63 billion to repurchase 103.3 million shares.
Guidance
QLogic provided guidance for fiscal 2012 and expects revenues of $597.2 million. Management also expects GAAP net income to be $139.1 million, which equates to $1.27 per diluted share.
On a non-GAAP basis, net income for FY12 is expected at $167.8 million ($1.54 per diluted share). Operating margin on both GAAP and non-GAAP basis, is expected to be 23.4% and 30.2%, respectively. Additionally, over the next fiscal year, management expects to generate cash from operations of $190.6 million.
Recommendation
We continue to maintain a Neutral rating on a long-term basis (6–12 months). We believe that QLogic will benefit from major OEM customer wins and increased focus on its key strategic initiatives over the long term.
Moreover, QLogic has gained significant market share in the emerging FCoE adaptor market, and the 10Gb Ethernet adapters market, primarily driven by strong customer demand and recovery in enterprise information technology (IT) spending in 2010. We expect this trend to continue in calendar year 2011, along with a strong demand for QLogic’s converged networking technology.
However, tough competition from Emulex Corp. (ELX) and Broadcom Corp. (BRCM) will act as a headwind for the stock.
Currently, QLogic has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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