QLogic Corp (QLGC) reported first quarter 2014 earnings of 10 cents per share, which beat the Zacks Consensus Estimate by 3 cents. However, earnings per share plunged 47.4% year over year and 16.7% sequentially.
Revenues
Revenues decreased 13.2% year over year and 3.2% sequentially to $113.1 million, which lagged the Zacks Consensus Estimate. Revenues were in line with the mid-point of management’s guided range of $110.0 million to $116.0 million.
The year-over-year decline was primarily due to weak growth in advanced connectivity platform and legacy connectivity platform. QLogic revised its product categories into these two new segments as a part of its restructuring efforts, which began in the first quarter of 2014.
Advanced connectivity platform (strategic server and storage connectivity products) revenues declined 13.7% year over year and 3.9% sequentially to $93.2 million. Legacy connectivity products (Fibre Channel Switch products and the 1 gig iSCSI products) revenues plunged 10.8% from the year-ago quarter but remained almost flat sequentially at $19.9 million.
Margins
Gross margin expanded 80 basis points (“bps”) from the year-ago quarter but declined 30 bps from the previous quarter to 67.6%. This was within the management guided range of 67.0% to 68.0%. The year-over-year growth was primarily due to favorable product mix in the quarter.
Total operating expense increased 0.8% year over year but decreased 1.7% on a sequential basis to $67.5 million. The year-over-year increase was primarily due to higher engineering and development costs (up 2.4%) and sales & marketing (up 2.8%) costs. Operating expense exceeded management’s expectation of $63.0 million, which hurt QLogic’s operating profit during the quarter.
Operating margin was 7.9% in the first quarter compared with 15.4% in the year-ago quarter and 9.1% in the previous quarter. Net income as a percentage of revenues was 7.6% compared with 14.3% in the year-ago quarter and 7.3% in the previous quarter.
Balance Sheet and Cash Flow
As of Jun 30, 2013, QLogic had cash and short-term investments of $431.9 million versus $579.2 million in the previous quarter. Cash flow from operating activities was $16.6 million in the quarter. QLogic bought back $24.0 million of the company’s common stock.
Guidance
QLogic expects second quarter 2014 revenues in the range of $108.0 million to $116.0 million.
Gross margin is expected to be approximately 67.0% to 68.0%. QLogic expects to incur operating expenses of $57.0 million. Earnings are expected to be in the range of 16 cents to 23 cents for the second quarter.
Restructuring activities are expected to save approximately $20.0 million of operating expenses in 2014. QLogic expects operating expenses of approximately $235.0 million for the fiscal year.
Recommendation
We believe that QLogic will continue to benefit from contract wins from OEM’s such as International Business Machines (IBM) and Hewlett Packard (HPQ) in the near term. Moreover, innovative product pipeline, new technologies (Mt. Rainier) and additional savings from its restructuring initiatives will drive profitability going forward.
However, a tough macro-economic 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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