QLogic Corp. (QLGC) reported first-quarter fiscal 2015 earnings of 16 cents per share, which were in line with the Zacks Consensus Estimate. Earnings per share (including stock-based compensation but excluding one-time items) jumped 54.0% on a year-over-year basis.
Quarter Details
Revenues increased 5.6% on a year-over-year basis to $119.4 million, which was slightly better than the Zacks Consensus Estimate of $119.0 million. Revenues were higher than the midpoint of management’s guided range of $116.0 million to $122.0 million.
This year-over-year increase in revenues was driven by the robust performance of the Advanced Connectivity Platform during the quarter.
In the quarter, Advanced Connectivity Platform (strategic server and storage connectivity products) revenues increased 12.3% year over year to $104.7 million. Ethernet products accounted for more than 20.0% of Advanced Connectivity Platform revenue.
Legacy connectivity product (Fibre Channel Switch products and the 1 gig iSCSI products) revenues declined 26.0% from the year-ago quarter to $14.7 million.
Gross margin declined 840 basis points (bps) from the year-ago quarter to 59.2%, which was below the lower-end of management’s guided range of 64.0% to 65.0%. The year-over-year decline was primarily due to unfavorable product mix in the quarter.
Total operating expense decreased 17.9% year over year to $65.3 million. The year-over-year decrease was primarily due to lower engineering and development costs (down 400 bps) and sales & marketing (down 380 bps) costs.
Operating profit was $5.4 million compared to an operating loss of $3.07 million in the year-ago quarter. Net income was $13.8 million or 16 cents per share versus $9.2 million or loss of 10 cents per share reported in the prior-year quarter.
At the end of the first quarter, QLogic had cash and short-term investments of $250.4 million versus $278.0 million in the previous quarter.
During the quarter, the company formed an alliance with Hewlett-Packard (HPQ) as a result of which QLogic’s products will be embedded in HPQ’s latest Virtual Connect FlexFabric solution as a key enabler of the industry's first 20-gigabit Ethernet connectivity.
Guidance
QLogic expects fiscal second-quarter 2015 revenues in the range of $121.0 million to $127.0 million. The midpoint of $124.0 million is in line with the Zacks Consensus Estimate.
Revenues from Advanced Connectivity Platforms are forecast to be up 6.0% sequentially. Legacy Connectivity Platform revenue is forecast to be $30.0 million.
Gross margin is expected to be in the range of 62.0% to 63.0% while operating expenses are likely to be in the range of $55.0 million to $56.0 million. Non-GAAP EPS is projected to be between 19-24 cents while the Zacks Consensus Estimate for the same is pegged at 18 cents.
Management remains optimistic regarding the bright prospect of the Ethernet products since Ahmet Houssein has joined the company as Senior Vice President and General Manager, Ethernet products. Management believes that Houssein who had earlier served as General Manager at Intel (INTC) and Adaptec will be able to put his rich experience to good usage.
Moreover, the company remained confident regarding its prospects for continued technology leadership in the Fibre Channel market.
Our Take
We believe that QLogic will continue to benefit from contract wins from OEMs such as Lenovo and Hewlett-Packard in the near term. Recently, Lenovo acquired IBM’s X-86 server business. QLogic’s already expanded partnership with Lenovo will help the company to maintain its position as a key supplier to the acquired X-86 business, going forward.
Moreover, an innovative product pipeline, new technologies, partnerships with Broadcom and Brocade and additional savings from its restructuring initiatives will drive profitability, going forward.
However, a tough macroeconomic environment continues to hurt server sales, which in turn may hurt top-line growth in the near term. Increasing investments in engineering and increasing competition from peers such as Cisco (CSCO) will hurt profitability, going forward.
Currently, QLogic has a Zacks Rank #3 (Hold).
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