A leading supplier of high performance network infrastructure solutions, QLogic Corp. (QLGC: 15.76 -3.09 -16.39%) reported first quarter 2011 results (both earnings and revenues) that missed the Zacks Consensus Estimate. Lower-than-expected results led to a fall in share price of more thank 16% in Friday trading.Revenues of $142.6 million were below the Zacks Consensus Estimate of $144.0 million and earnings per share of 21 cents (including stock-based compensation but excluding one-time charges) missed the Zacks Consensus Estimate of 24 cents.
We believe that QLogic will benefit from major OEM customer wins and increased focus on its key strategic initiatives over the long term. However, near-term demand trends remain weak and a slower-than-expected growth in enterprise IT spending is hurting results.
Currently, QLogic has a Zacks #4 Rank, which implies a short-term Sell rating (for the next 1-3 months). Over the long term, we have a Neutral rating on the stock.
Revenue Details
First quarter 2011 revenues of $142.6 million were up 16.2% year over year, but fell 2% sequentially. Revenues were in line with management’s guidance of $140 million to $146 million, which was given out during its fourth quarter earnings call. However, it was below the Zacks Consensus Estimate of $144.0 million.
By segment, Host Products (fiber channel adapters and converge network adapters) generated 71.9% of total revenue, increasing 16.0% from the year-ago quarter to $102.5 million. Network products (fiber channel and InfiniBand switches), which generated 18.0% of total revenue, increased 2.7% year over year to $25.6 million. Silicon products (fiber channel and iSCSI protocol chips) contributed 8.3% to total revenue and increased 60.4% from the year-ago quarter to $11.9 million. Silicon product revenues were in sync with management’s expectation. Royalty & Service revenues, comprising the remaining 1.8%, upped 27.2% from the year-ago quarter to $2.6 million.
On a sequential basis, revenues from Host Products declined 1%, while Network Products revenues grew 14%. During the quarter, revenues from converge networking market, including all products based on 10-gig Ethernet connectivity, were $10 million.
By geography, the U.S. was the largest region for the company in the quarter, with a 44.8% revenue share. Revenues increased 5.1% from the year-ago quarter, a clear indication that the company’s domestic business is turning around.
The Asia/Pacific and Japan, the second largest region, was up 48.7% year over year and contributed 27.4% to total revenue. Europe, Middle East and Asia (EMEA), which generated around 22.5% of total revenue in the quarter, saw a growth in revenues of 13.0% year over year. Approximately, 5.3% of the total revenue came from the rest of the world (ROW), up 3.4% year over year.
Net Income
Net Income
The pro forma net income was $34.7 million, or 24.3% of sales, compared with $23.9 million, or 19.5% of sales in the year-ago quarter. The fourth quarter pro forma estimate excludes restructuring charges, amortization of intangibles and stock based compensation expenses on a tax-adjusted basis.
EPS on a pro forma basis was 30 cents, an increase of 50% from 20 cents in the year-ago quarter, coming in at the high end of management’s expectations of 27 cents to 30 cents. This represented the 60th consecutive quarter of profitability for QLogic. Lower operating expense and reduction in the tax rate boosted the company’s bottom line.
Pro forma earnings excluding one-time charges, but including stock based compensation expense were 21 cents, up from 12 cents reported in the year-ago period, but below the Zacks Consensus Estimate of 24 cents. Sequentially, earnings per share also reached 21 cents.
Operating Performance
The gross margin for the quarter was 66.5%, up 100 basis points from the year-ago quarter, primarily due to an 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 $54.0 million were up 4% from $52.2 million recorded in the year-ago quarter and were slightly below Qlogic’s expectations. The increase in operating expenses was primarily due to higher engineering expenses, which upped 2% from the year-ago period, but decreased as a percentage of revenues, from 23.7% to 20.8%. 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% from the year-ago quarter, but fell, as a percentage of revenues, from 13.9% to 12.8%. QLogic expects sales and marketing expenses, as a percentage of revenues, to be in the range of 11% to 14%. G&A expenses in quarter were 4.2% of revenues and increased 1.9% year over year. The company expects G&A expenses, as a percentage of revenues, to be approximately 4%, moving forward.
Operating margin was 28.6%, up 560 bps from 23.0% recorded in the year-ago quarter, as most of the components of cost, E&D, S&M and G&A, increased on a dollar basis, but decreased, as a percentage of sales, resulting in a higher operating margin. Operating profit of $40.8 million in the quarter soared 44% from the year-ago quarter.
The income tax rate for the fourth quarter was 27.7%. The tax rate for the fourth quarter was below management’s expectations.
Balance SheetQLogic ended the quarter with cash and short-term investment balance of $348.6 million, down $27.1 million from the previous quarter. DSOs at the end of the June quarter deteriorated to 48 days compared with 46 days at the end of the March quarter. Management expects DSOs to range from 45 days to 55 days, going forward.
Inventory at the end of the June quarter was $24.4 million and increased sequentially from $19.4 million. Annualized inventory turns for the June quarter totaled 7.8x compared with 10x for the March quarter. The increase in inventory was primarily attributable to advance purchases of silicon to maintain flexibility due to long lead times.
QLogic generated $30.6 million cash from operations, down from $69.3 million generated in the previous quarter. It also spent $52.5 million on the repurchase of shares at an average price of $18.81 per share. Since 2003, QLogic has used $1.5 billion to repurchase 95.4 million shares.
Guidance
In the second quarter of fiscal 2011, QLogic expects total revenue of $143 million to 147 million, which is below the Zacks Consensus Estimate of $150 million.
Management expects gross margin to be in the range of 65.5% to 66%, operating expenses of $55 million and a tax rate of 18% and diluted share count of approximately 112 million shares, resulting in a non-GAAP EPS of 29 cents to 32 cents for second quarter of fiscal 2011.
www.qlogic.com/
| Overall Summary: |  75%, Bullish 25%, Bearish | Trade Quality: | Upside 85%, V. Good Downside 30%, Poor |
| Analysts' Targets | |
| RBC Capital Markets | $22 |
| Sector Perform | |
| Friday, July 23, 2010 | |
| Canaccord Adams | $22 |
| Hold | |
| Wednesday, January 27, 2010 | |
No comments:
Post a Comment