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A leading supplier of high performance network infrastructure solutions, QLogic Corporation (QLGC) reported fourth quarter 2012 earnings of 29 cents, beating the Zacks Consensus Estimate by four cents. Reported earnings include stock-based compensation expense ($7.3 million) but exclude amortization related expense ($0.2 million).

However, earnings declined 15.0% year over year, primarily due to weak revenue growth and operating margin contraction in the reported quarter.

Quarter Details

Total revenue decreased 7.5% year over year to $135.1 million, which missed the Zacks Consensus Estimate of $138.0 million. However, total revenue was slightly ahead of the lower end of management’s guided range of $134.0 million to $140.0 million. The year-over-year decline was primarily attributed to weak growth across most of its segments during the quarter.

Host Products decreased 3.1% from the year-ago quarter to $105.6 million (78.2% of the total revenue in the quarter). Network products declined 22.4% year over year to $16.3 million (12.1% of the total revenue in the quarter). Silicon products were down 18.6% from the year-ago quarter to $13.1 million (9.7% of the total revenue in the quarter).

Total operating expense increased 2.4% year over year to $62.4 million, primarily due to higher engineering and development cost (up 1.8%) and sales & marketing expense (up 5.3%). Operating expense exceeded management’s expectation of $56.0 million and hurt the company’s operating profit during the quarter.

Operating profit in the fourth quarter declined 25.3% year over year to $29.2 million. Operating margin decreased from 26.8% a year ago to 21.6% in the reported quarter. Non-GAAP net income was $29.7 million compared with $37.0 million in the year-ago quarter.

As of April 1, 2012, QLogic had cash and short-term investments of $538.0 million versus $395.8 million in the previous quarter. At the end of the quarter, the company had no debt on its balance sheet. During the quarter, QLogic completed the sale of its InfiniBand business to Intel Corp. (INTC) for $125.0 million in cash.

Guidance

QLogic expects first quarter 2013 revenue in the range of $130.0 million to $135.0 million. Management expects host and network products to increase 1.0% annually. Revenue from Silicon Products is expected to be approximately $9.0 million.

Gross margin is expected to be approximately 68.0%, while QLogic expects to incur operating expenses of $59.0 million. Non-GAAP earnings are expected in the range of 26 cents to 28 cents for the first quarter.

Recommendation

We believe that QLogic will benefit from major OEM customer wins and increased focus on its key strategic initiatives (post the InfiniBand sale) over the long term. Moreover, QLogic has gained significant traction in the fiber channel adaptor market and the 10 Gb Ethernet adapters market, primarily driven by strong customer demand over the last 12 months.

However, we believe that the fourth quarter beat was already factored in the stock. We believe that QLogic’s top-line growth will take some time to rebound and is quite dependent on the ramp of Intel’s Romley servers. Meanwhile, a slowdown in IT spending can hurt QLogic going forward.

We continue to maintain a Neutral recommendation on a long-term basis (6–12 months). Currently, QLogic has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

 
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