A leading supplier of high performance network infrastructure solutions, QLogic Corp. (QLGC) reported third quarter 2011 results (both earnings and revenues) that beat the Zacks Consensus Estimates. Given the upbeat results, share price rose 1.36% and closed at $17.93.
Revenues of $155.8 million were slightly above the Zacks Consensus Estimate of $155.0 million, and earnings per share (EPS) of 45 cents (including stock-based compensation but excluding one-time charges) beat the Zacks Consensus Estimate by 8 cents.
Revenue Details
Third quarter 2011 revenue of $155.8 million rose 4.5% year over year and 6.0% sequentially. Revenue was in line with management’s guidance of $155 million to $156 million as updated during the preliminary third quarter results announced on January 12.
The sequential increase in revenues was primarily attributable to a growth in Host Products and Network Products that grew 9% and 6%, respectively, indicating strong demand for hosting and networking products.
By segment, Host Products (fiber channel adapters and converge network adapters) generated 72.9% of total revenue, increasing 2.8% from the year-ago quarter to $113.5 million. Network products (fiber channel and InfiniBand switches), which generated 18.6% of total revenue, increased 5.5% year over year to $28.9 million.
Silicon products (fiber channel and iSCSI protocol chips) contributed 6.8% to total revenue and increased 22.7% from the year-ago quarter to $10.6 million. Royalty & Service revenues, comprising the remaining 1.7%, increased 4.8% from the year-ago quarter to $2.7 million.
By geography, the U.S. was the largest revenue-generating region, with a 42.2% revenue share. However, revenues decreased 1.2% from the year-ago quarter, indicating that the company’s domestic business is facing the brunt of a weak economy.
The Asia/Pacific and Japan, the second largest region, increased 15.4% year over year and contributed 27.9% to total revenue. Europe, Middle East and Africa (EMEA), which generated around 23.3% of total revenue in the quarter, saw a 2.2% growth year over year. Approximately, 6.6% of the total revenue came from the rest of the world (ROW), up 9.5% year over year.
Net Income
The pro forma net income was $57.2 million, or 36.7% of sales, compared with $36.2 million, or 24.3% of sales in the year-ago quarter. The third quarter 2011 pro forma estimate excludes restructuring charges, amortization of intangibles, acquisition-related charges and stock-based compensation expenses on a tax-adjusted basis.
On a pro forma basis, EPS was 53 cents, an increase of 71.0% from 31 cents in the year-ago quarter, above the high-end of management’s expectations of 48 cents to 49 cents, updated on January 12. This represented the 62nd consecutive quarter of profitability for QLogic. The EPS was driven by higher-than-expected gross margin and lower-than-expected operating expenses.
Pro forma earnings excluding one-time charges, but including stock-based compensation expense were 45 cents, up from 26 cents reported in the year-ago period, and 8 cents above the Zacks Consensus Estimate. Sequentially, earnings per share were up 17 cents from 28 cents.
Operating Performance
The gross margin for the quarter was 67.1%, up 110 basis points from the year-ago quarter, primarily due to increased volume, partially offset by higher manufacturing costs. Gross margin in the quarter exceeded management’s guidance of 66.0% to 66.5%, primarily attributable to a favorable product mix.
Operating expenses of $54.4 million were up 2.0% from $53.2 million recorded in the year-ago quarter but below Qlogic’s expectations. QLogic benefited from lower engineering and development expenses, which decreased from the year-ago period, and decreased as a percentage of revenues, from 19.8% to 18.9%. QLogic expects engineering expenses as a percentage of revenues to be in the range of 18% to 21% going forward.
Sales and marketing expenses in the quarter increased 8.0% from the year-ago quarter and from 11.3% to 11.7% as a percentage of revenues. QLogic expects sales and marketing expenses, as a percentage of revenues, to be in the range of 11.0% to 13.0%. General and administrative (G&A) expenses in quarter were 4.3% of revenues. The company expects G&A expenses, as a percentage of revenues, to be approximately 4%, moving forward.
Operating profit of $50.1 million in the quarter increased 11.0% from the year-ago quarter.Operating margin was 32.2% on a non-GAAP basis, up from 30.3% recorded in the year-ago quarter.
Balance Sheet
QLogic ended the quarter with cash and short-term investment balance of $343.2 million versus $304.0 million in the previous quarter. At the end of the quarter, the company had no debt. QLogic generated $60.0 million of cash from operations, up from $26.6 million in the previous quarter.
The company spent $31.5 million on the repurchase of shares at an average price of $17.57 in the third quarter of 2011. Since 2003, QLogic has used $1.6 billion to repurchase 101.5 million shares.
Guidance
For the fourth quarter of fiscal 2011, QLogic expects total revenue of $148 million to $153 million.Management expects gross margin in the range of 66.0% to 66.5%, operating expenses of $58 million, a tax rate of 16% and diluted share count of approximately 107.5 million shares, resulting in a non-GAAP EPS (excluding stock based and one-time charges) of 32 cents to 35 cents for the fourth quarter of fiscal 2011.The Zacks Consensus Estimate is currently pegged at 28 cents in EPS (including stock -based but excluding one-time charges).
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.
However, slower-than-expected growth in enterprise IT spending remains an area of concern. Moreover, tough competition from Emulex Corp. (ELX) and Broadcom Corp. (BRCM) will act as a headwind for the stock.
Currently, QLogic has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.
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