QLogic Corp. (QLGC) reported third-quarter fiscal 2015 earnings (including stock-based compensation but excluding one-time items) of 30 cents per share, which beat the Zacks Consensus Estimate of 24 cents by 25%.
Quarter Details
Revenues increased 17% on a year over year basis and 10% sequentially to $140.2 million. Revenues beat the Zacks Consensus Estimate of $138 million and also came in higher than management’s guided range of $134 million to $140 million.
This year-over-year increase in revenues was driven by robust performance of the Advanced Connectivity Platform during the quarter.
Advanced Connectivity Platform (adapters and silicon for server and storage connectivity applications) revenues increased 27% year over year to $124.7 million. Legacy connectivity product (Switching products) revenues however declined 35.5% from the year-ago quarter to $15.5 million.
QLogic continues to execute well in the fiber channel market. In the quarter, revenues from fiber channel products grew both on a year over year as well as sequential basis. Increasing stabilization in the fiber channel market bodes well for the company.
QLogic continues to benefit from the strength in the storage connectivity market for Fiber Channel, especially with Flash storage arrays that are suitable for high-speed data centers.
Gross margin declined 590 basis points (bps) from the year-ago quarter to 62.3%but was better than management’s guidance of 62%.
Total operating expense decreased 3.1% year over year to $58.7 million. The year-over-year decrease was primarily due to reducedsales and marketing expenses (down 3.4%) and marginally lower engineering expenses.
Operating income increased 16.7% year over year to $23.7 million, primarily due to higher revenues from Ethernet products and lower operating expenses.
Net income (excluding stock-based compensation and one-time items) was $31.6 million or 36 cents per share compared with $25.6 million or 29 cents per share reported in the year-ago quarter.
As of Dec 28, QLogic had cash and marketable securities of approximately $288 million compared with $278 million at the end of Mar30, 2014. QLogic generated $25.6 million in cash from operations in the quarter.
Guidance
QLogic expects fourth-quarter fiscal 2015 revenues in the range of $132 million to $138 million. At the mid-point, revenues from Advanced Connectivity Platforms are forecast to decrease 2% sequentially. Legacy Connectivity Platform revenues are estimated to be $30 million.
Gross margin is expected to be in the range of 61% to 62%, while operating expenses are likely to be $56 million.
QLogic expects non-GAAP earnings per share in the range of 24 cents–28 cents. The Zacks Consensus Estimate is currently pegged at 20 cents per share.
Our Take
QLogic is expected to benefit from the growing flash array storage connectivity market. The company had received key design contracts from original equipment makers like Cisco (CSCO) and EMC Corp (EMC) in the prior-quarter, which are likely to drive the top line, going forward.
QLogic’s growing share in the overall fiber channel market is a key growth catalyst. The company’s innovative product pipeline (including Gen 6 32-gigabit links), opportunities in the OpenStack platform and partnership with Brocade will further boost market share in the long run.
The forthcoming Intel (INTC) Grantley server cycle also provides significant growth opportunity for QLogic due to strong demand for its Gen 5 Fiber Channel Adapter products.
QLogic believes that it is well positioned in the 10-gigabit Ethernet adapters market. The Grantley server and increasing Ethernet attachment rates will further help the company to solidify its position in the market, going ahead. Also, the company has initiated the development of 25-Gigabit Ethernet solutions.
However, a tough macroeconomic environment continues to hurt server sales. This in turn may hurt top-line growth in the near term. Increasing investments in engineering and intensifying competition from peers will also hurt profitability in the foreseeable future.
Currently, QLogic has a Zacks Rank #3 (Hold).
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