QLogic Corp. (QLGC) reported second-quarter fiscal 2015 earnings (including stock-based compensation but excluding one-time items) of 19 cents per share, which beat the Zacks Consensus Estimate by a penny.
Quarter Details
Revenues increased 13.2% on a year-over-year basis to $128 million, slightly higher than the Zacks Consensus Estimate of $125 million. Revenues beat management’s guided range of $121 to $127 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 (adapters and silicon for server and storage connectivity applications) revenues increased 22.2% year over year to $104.7 million. Revenues from Ethernet products increased $5 million in the quarter.
Legacy connectivity product (Switching products) revenues declined 32.2% from the year-ago quarter to $12.6 million.
QLogic continues to execute well in the fiber channel market. In the second quarter, revenues from fiber channel products grew both on a year-over-year as well as sequential basis. Stabilizing SAN connectivity market bodes well for the company.
QLogic continues to benefit from the strength in storage connectivity market for Fiber Channel, especially with Flash storage arrays that are suitable for high-speed data centers.
Gross margin declined 870 basis points (bps) from the year-ago quarter to 59.2%, which missed management’s guided range of 62% to 63%. The year-over-year decline was primarily due to unfavorable product mix in the quarter.
Total operating expense decreased 2% year over year to $62 million. The year-over-year decrease was primarily due to lower sales & marketing (down 6%) cost and modest growth in engineering and development cost (up 2%).
Operating profit increased 2.5% year over year to $13.5 million, primarily due to higher revenues from Ethernet products and lower operating expenses.
Net income (excluding stock-based compensation and one-time items) was $22 million or 25 cents per compared with $20 million or 23 cents per share reported in the year-ago quarter.
As of Sep 28, QLogic had cash and short-term investments of $276.8 million compared with $250.4 million at the end of Jun 30, 2014. QLogic generated $28.4 million as cash flow from operations in the second quarter.
QLogic’s board of directors authorized a new $100 million share buyback program, which the company expects to complete over the next 12 to 18 months.
Guidance
QLogic expects third-quarter 2015 revenues in the range of $134 to $140 million. At mid-point, revenues from Advanced Connectivity Platforms are forecasted to increase 9% sequentially. Legacy Connectivity Platform revenues are forecasted to be $12 million.
QLogic expects revenues from fiber channel market to grow sequentially in the third quarter of 2014, driven by approximately 22% sequential growth at Ethernet Products.
Gross margin is expected to be approximately 62%, while operating expenses are likely to be $56 million. QLogic forecasts operating margin of approximately 21% at the mid-point of its guidance.
QLogic expects non-GAAP earnings per share in the range of 26–30 cents. The Zacks Consensus Estimate is currently pegged at 23 cents.
Our Take
QLogic is expected to benefit from growing flash array storage connectivity market. The company continues to win contracts from original equipment makers like Cisco (CSCO) and EMC Corp (EMC), which will 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) and partnership with Brocade will further boost market share in the long run.
The new Intel (INTC) Grantley server launch also provides significant growth opportunity for QLogic, due to strong demand for its Gen 5 Fiber Channel Adapter products. The company will be deploying more than 45 new 10-gigabit Ethernet products over the next 12 months.
QLogic believes that it will be able to expand market share for 10-gigabit Ethernet adapters in ASICs, going forward. The Grantley server launch and increasing Ethernet attachment rates will help the company to solidifying its position in the market, going ahead.
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 intensifying competition from peers will hurt profitability in the near term.
Currently, QLogic has a Zacks Rank #3 (Hold).
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