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QLogic (QLGC - Analyst Report) announced preliminary third quarter results on January 15, 2013. For the quarter ended December 30, 2012, the company expects to report GAAP earnings per share (“EPS”) in the range of 14 cents to 15 cents.

Excluding stock-based compensation, acquisition related charges and related tax effect, the company expects EPS to be in the range of 19 cents to 20 cents, significantly higher than its previously forecasted range of 14 cents to 19 cents. However, EPS is likely to decline significantly from 34 cents reported in the year-ago quarter but rise slightly from 18 cents reported in the previous quarter.

QLogic expects net revenue of approximately $119.0 million, slightly higher than its previously forecasted range of $112.0 million to $118.0 million. Revenue is expected to beat the Zacks Consensus Estimate of $115.0 million driven by strong performance from Host Products and Network products business segment.

However, third quarter estimated revenue declines significantly from $142.8 million reported in the year-ago quarter and remains flat sequentially. We believe that this shrinking revenue growth continues to reflect declining enterprise data center spending and sluggish macro-economic environment.

We note that QLogic has outperformed the Zacks Consensus Estimate by an average of 16.3% over the trailing four quarters. Although the Zacks Consensus Estimate was revised down by 7 cents over the last 90 days, QLogic’s preliminary result suggests another beat is on the cards.

Currently, the Zacks Consensus Estimate is pegged at 9 cents per share for the third quarter. Our pro forma calculations differ from management’s presentation as we exclude acquisition-related costs but include stock-based compensation expense and related tax effect.

Despite the imminent earnings beat, we prefer to remain cautious on the stock due to its lackluster margin outlook. Previously, QLogic had forecasted gross margin to be approximately 57.0% to 58.0% for the third quarter. This reflects a significant contraction from 68.5% reported in the year-ago quarter and 67.6% in the previous quarter. 

The company also intends to spend approximately $60.0 million on operating expenses. We believe that increasing investments on engineering and stiff competition from peers such as Mellanox (MLNX - Snapshot Report) and Emulex (ELX - Snapshot Report) will hurt profitability going forward.

Currently, QLogic has a Zacks Rank #4 (Sell).

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