QLogic Beats on Q4 Earnings, Revs - Analyst Blog

QLogic Corp. QLGC reported fourth-quarter fiscal 2014 earnings of 18 cents per share, which beat the Zacks Consensus Estimate by a penny. Earnings per share (including stock-based compensation but excluding one-time items) jumped 38.1% year over year.

Quarter Details

Revenues declined 4.4% on a year-over-year basis to $115.7 million, which was slightly better than the Zacks Consensus Estimate of $114.0 million. Revenues were higher than the midpoint of management's guided range of $110.0 million to $116.0 million.

In the quarter, Advanced Connectivity Platform (strategic server and storage connectivity products) revenues increased 4.2% year over year to $101.1 million in the reported quarter. Legacy connectivity products (Fibre Channel Switch products and the 1 gig iSCSI products) revenues declined 26.6% from the year-ago quarter to $14.6 million.

Gross margin expanded 90 basis points (bps) from the year-ago quarter to 67.8%, which nearly met the higher-end of management's 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 to $118.9 million. The year-over-year decrease was primarily due to lower engineering and development costs (down 280 bps) and sales & marketing (down 340 bps) costs.

Operating margin was 15.6% in the fourth quarter compared with 11.0% in the year-ago quarter. Net income margin was 13.7% compared with 10.1% in the year-ago quarter.

At the end of the fourth quarter, QLogic had cash and short-term investments of $278.0 million versus $462.4 million in the previous quarter. Cash flow from operating activities was $45.0 million in the quarter.

In the reported quarter, QLogic announced a partnership with semiconductor solutions provider Broadcom Corporation BRCM. With this agreement, QLogic is expected to license certain Broadcom patents covering its Fibre Channel products for a license fee of $62 million. QLogic expects this deal to be immediately accretive to revenue and non-GAAP earnings per share.

Guidance

QLogic expects fiscal first-quarter 2015 revenues in the range of $116.0 million to $122.0 million with the midpoint at $119.0 million. Revenues from Advanced Connectivity Platforms are forecast to be $105.0 million at the midpoint.
 
The acquisition of Brocade's adapter business is expected to boost revenues in the upcoming quarter. Management expects revenues from Legacy Connectivity Products to be $14.0 million.

Gross margin is expected to be approximately 64.0% to 65.0%. Earnings are expected to be in the range of 17 cents to 22 cents per share for the first quarter. The Zacks Consensus Estimate of 17 cents per share coincides with the lower end of the guidance.

Our Take

We believe that QLogic will continue to benefit from contract wins from OEMs such as Lenovo and Hewlett-Packard HPQ 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, partnership with Broadcom 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).