QLogic Beats 2Q Estimates

A leading supplier of high performance network infrastructure solutions, QLogic Corporation (QLGC - Analyst Report) reported strong second quarter 2012 earnings, which beat the Zacks Consensus Estimate by 2 cents. However, earnings per share of 28 cents (excluding one-time charges, but including stock-based compensation expense) remained flat year over year.

Operating Performance

Gross profit was $99.1 million, up 3.0% on a year-over-year basis. Gross margin expanded 40 basis points (bps) year over year to 66.0%. This was in line with the low end of management’s guided range of 66.0% to 67.0%.

Total operating expense increased 9.7% year over year to $67.2 million, primarily due to higher engineering and development cost (up 15.5%) and general and administrative expense (up 10.2%).

Operating profit in the second quarter was $33.8 million, down 8.5% year over year. As a percentage of revenue, it decreased from 23.8% to 21.3%.

Non-GAAP net income was $29.5 million compared with $30.8 million in the year-ago quarter.

Revenue Details

Total revenue increased 2.5% year over year to $150.2 million and was at the higher end of management’s guidance of $147.0 million to $155.0 million. The better-than-expected results were driven by strong growth across most of the segments.

Host Products (comprising primarily of fiber channel converged and 10-Gig Ethernet adapters) generated 70.3% of the total revenue and increased 1.4% from the year-ago quarter to $105.6 million.

Silicon products (fiber channel converged 10-Gig Ethernet and iSCSI protocol chips) contributed 9.2% to the total revenue and shot up 11.5% from the year-ago quarter to $13.9 million. Service revenues comprising 2.0% of the total revenue, climbed 8.7% year over year to $2.9 million. Network products (fiber channel and InfiniBand switches) increased 2.0% year over year and generated 18.5% of the total revenue in the quarter.

Balance Sheet

QLogic exited the quarter with cash and short-term investments of $391.0 million versus $399.7 million in the previous quarter. At the end of the quarter, the company had no debt on its balance sheet. QLogic generated $41.3 million in cash from operations in the reported quarter.

Guidance

QLogic expects third quarter 2012 revenue in the range of $145.0 million to $155.0 million. Management expects sequential revenue growth in host products to be stronger than network products. Revenue from Silicon Products is expected to be approximately $12.0 million.

Gross margin is expected in the range of 66.0% to 67.0%, while QLogic expects to incur operating expenses of $60.0 million. Non-GAAP EPS is expected in the range of 30 cents to 37 cents for the third 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. Moreover, QLogic has gained significant traction in the fiber channel adaptor market and the 10Gb Ethernet adapters market, primarily driven by strong customer demand over the last 12 months.

However, a slowdown in IT spending can hurt QLogic going forward. Moreover, tough competition from Emulex Corp. (ELX - Snapshot Report) and Broadcom Corp. (BRCM - Analyst Report) will act as a headwind for the stock.

We continue to maintain a Neutral rating on a long-term basis (6–12 months). Currently, QLogic has a Zacks #5 Rank, which implies a Strong Sell rating on a short-term basis.