A leading supplier of high performance network infrastructure solutions, QLogic Corporation (QLGC) reported strong first quarter 2012 earnings, which beat the Zacks Consensus Estimate by a nickel.
Earnings per share of 31 cents (excluding one-time charges, but including stock-based compensation expense) increased 29.2% year over year, based on a year-over-year revenue growth of 6.3% and margin expansion.
Operating Performance
Gross profit was $101.9 million, up 8.3% on a year-over-year basis. Gross margin expanded 120 basis points (bps) year over year to 67.2%. This exceeded the high end of management’s guidance of 66.0% to 67.0%, primarily due to a favorable product mix.
Total operating expense surged 7.1% year over year to $68.1 million, primarily driven by higher engineering and development cost (up 8.6%), sales and marketing cost (up 4.1%) and general and administrative expense (up 8.2%).
Operating profit in the first quarter was $33.8 million, up 11.0% from the year-ago quarter. As a percentage of revenue, it increased from 21.4% to 22.3%.
Non-GAAP net income was $33.3 million, or 22.0% of sales, compared with $26.8 million, or 18.8% of sales in the year-ago quarter.
Revenue Details
Total revenue was $151.6 million, which inched past the Zacks Consensus Estimate of $150.0 million. Reported revenue was at the high-end of management’s guidance of $145.0 million to $153.0 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 72.4% of total revenue and increased 7.1% from the year-ago quarter to $109.8 million.
Silicon products (fiber channel converged 10-Gig Ethernet and iSCSI protocol chips) contributed 15.3% to total revenue and shot up 41.8% from the year-ago quarter to $16.8 million. Royalty & Service revenues, comprising 2.9% of the total revenue, climbed 19.3% from the year-ago quarter to $3.1 million.
However, growth in these three segments were partially offset by a 14.7% decrease in Network products (fiber channel and InfiniBand switches), which generated 20.0% of the total revenue in the quarter. The year-over-year decline was due to lower sales of InfiniBand switches.
On a geographical basis, the U.S (46.0% revenue share) generated the largest revenue for the company and increased 9.0% from the previous year. The Asia/Pacific and Japan (30.0% of revenue), the second largest region, increased 16.5% year over year.
However, Europe, Middle East and Africa (EMEA), which generated around 19.0% of the total revenue in the quarter, declined10.4% year over year. Approximately 5.0% of the total revenue came from the rest of the world (ROW), which grew 2.8% on a year-over-year basis.
Balance Sheet
QLogic exited the quarter with cash and short-term investments of $399.7 million versus $384.1 million in the previous quarter. At the end of the quarter, the company had no debt. QLogic generated $40.3 million in cash from operations, down from $73.3 million in the previous quarter.
Guidance
QLogic expects second quarter 2012 revenue in the range of $147.0 million to $155.0 million, with Host and Network Products to increase 2.5% sequentially. Revenue from Silicon Products is expected to be approximately $13.0 million.
Gross margin is expected in the range of 66.0% to 67.0%, while QLogic expects to incur $60.0 million as operating expenses. Non-GAAP EPS is expected in the range of 30 to 36 cents for the second quarter.
Recommendation
Although QLogic reported strong first quarter results, its second quarter guidance disappointed us. While revenue is expected to increase approximately 3.0% year over year (taking the midpoint of management guidance; QLogic reported revenue of $146.5 million in the second quarter of 2011), earnings guidance (considering the midpoint) is lower than 34 cents reported in the prior-year quarter.
Management cited that seasonality in the networking segment will impact revenue growth in the second quarter. However, we believe management’s guidance is cautious. Currently, the Zacks Consensus Estimate for the second quarter is pegged at 29 cents based on revenue of $155.0 million, in line with the high end of management’s revenue guidance.
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 market share in the fiber channel adaptor market, and the 10Gb Ethernet adapters market, primarily driven by strong customer demand and recovery in enterprise information technology (IT) spending over the last 12 months.
However, a slowdown in IT spending can hurt QLogic going forward. Moreover, tough competition from Emulex Corp. (ELX) and Broadcom Corp. (BRCM
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