QLogic Corp (QLGC) reported second quarter fiscal 2014 earnings of 18 cents per share, which beat the Zacks Consensus Estimate by 7 cents. Earnings per share jumped 38.1% year over year and 95.2% sequentially.
Revenues
Revenues decreased 4.4% year over year but remained flat sequentially at $112.6 million, which was slightly better than the Zacks Consensus Estimate. Revenues were also in line with the mid-point of management’s guided range of $108.0 million to $116.0 million.
The year-over-year decline was primarily due to weak growth in advanced connectivity platform and legacy connectivity platform. Beginning fiscal first quarter 2014, QLogic revised its product categories into these two new segments:
Advanced connectivity platform (strategic server and storage connectivity products) revenues declined 3.5% year over year but increased a modest 0.9% sequentially to $94.0 million.
Legacy connectivity products (Fibre Channel Switch products and the 1 gig iSCSI products) revenues plunged 9.0% from the year-ago quarter and 6.6% sequentially to $18.6 million.
Margins
Gross margin expanded 90 basis points (bps) from the year-ago quarter and 20 bps from the previous quarter to 67.8%. This was within 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 decreased 10.8% year over year and 13.0% on a sequential basis to $58.8 million. The year-over-year decrease was primarily due to lower engineering and development costs (down 8.5%) and sales & marketing (down 16.8%) costs. Operating expenses were slightly above management’s expectation of $57.0 million.
Operating margin was 15.6% in the second quarter compared with 11.0% in the year-ago quarter and 7.9% in the previous quarter. Net income margin was 13.7% compared with 10.1% in the year-ago quarter and 7.6% in the previous quarter.
Balance Sheet and Cash Flow
As of Sep 30, 2013, QLogic had cash and short-term investments of $433.0 million versus $431.9 million in the previous quarter. Cash flow from operating activities was $24.1 million in the quarter. QLogic bought back $19.0 million of the company’s common stock.
Guidance
QLogic expects fiscal third quarter 2014 revenues in the range of $114.0 million to $120.0 million. Gross margin is expected to be approximately 67.0% to 68.0%. QLogic expects to incur operating expenses of $56.0 million.
Earnings are expected to be in the range of 22 cents to 27 cents for the third quarter. QLogic expects operating expenses of approximately $230.0 million (down from earlier outlook of $235.0 million) for the fiscal year.
Recommendation
We believe that QLogic will continue to benefit from contract wins from OEMs 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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