A leading supplier of high performance network infrastructure solutions, QLogic Corp. (QLGC) reported preliminary results for its third quarter 2011. QLogic expects revenue to come in at the high end of its previously projected guidance. The company raised its earnings per share (EPS) outlook on income tax benefits.
For the third quarter management raised the low end of its total net revenue expectation. QLogic now expects revenues in the range of $155 million to $156 million as compared with the previous expectation of $148 million to 156 million. The Zacks Consensus Estimate for revenues is $155 million.
Third quarter revenue is expected to increase 6.0% from $146.5 million reported in the second quarter. This increase is primarily attributable to a sequential growth in each of its Host Products, Network Products and Silicon Products, indicating strong demand for hosting and networking products.
Management also anticipates that gross margin will be higher and operating expenses will be lower than the previously provided guidance. During the second quarter conference call, management had estimated gross margin in the range of 66.0% to 66.5%, operating expenses of $55 million, a tax rate of 18% and diluted share count of approximately 108 million shares for the third quarter.
The company expects third quarter GAAP net income per share in the range of 41 cents to 42 cents. On a non-GAAP basis, excluding stock option expenses, acquisition-related charges and other items, QLogic expects net income of 48 cents to 49 cents per share, up from the previously projected range of 34 cents to 38 cents. This is also up from the Zacks Consensus Estimate of 30 cents.
Third quarter 2011 results will also include benefits associated with the retroactive reinstatement of the federal research tax credit and other quarter-specific income tax items, which are expected to contribute approximately 10 cents to EPS.
QLogic is set to release its third quarter 2011 results after market closes on January 27.
Second Quarter 2011 Highlights
Second quarter 2011 results (both earnings and revenues) marginally beat the Zacks Consensus Estimates.
Revenues of $146.5 million were slightly above the Zacks Consensus Estimate of $146.0 million, and earnings per share of 26 cents (including stock-based compensation but excluding one-time charges) beat the Zacks Consensus Estimate by a penny.
The gross margin for the quarter was 66.8%, up 130 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 65.5% to 66%, primarily due to a favorable product mix.
Operating expenses of $53.6 million were up 1.0% from $52.8 million recorded in the year-ago quarter and were slightly below QLogic’s expectations.
QLogic ended the quarter with cash and short-term investment balance of $304.0 million, down $44.6 million from the previous quarter. At the end of the quarter, the company had no debt. QLogic generated $26.6 million of cash from operations, down from $30.6 million in the previous quarter.
S&P Reshuffling
Standard & Poor’s (S&P) announced that that Noble Energy Inc. (NBL), a leading oil and gas producer will replace QLogic in the S&P 500 index, while QLogic will join the S&P MidCap 400 index, replacing CommScope Inc. (CTV), a supplier of infrastructure to wireless carriers. As per the S&P, QLogic’s $1.8 billion market capitalization makes it a better representative for the MidCap 400 index.
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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