OEM Rains on QLogic's Quarter

When you're an "end-to-end SAN infrastructure" company as QLogic Corp. (Nasdaq: QLGC) bills itself, you risk leaving a lot of ends exposed. QLogic got bit on one of those ends last quarter.

First, the good news: In its quarterly report last night, QLogic reported net revenues of $137.1 million, up 4 percent sequentially and 20 percent year over year, of which 78 percent came from Fibre Channel products. The company reported 16 percent sequential growth in Fibre Channel host bus adapters (HBAs) and high single-digit growth in switches (see QLogic Posts Record Revenues).

Net income was $35 million, or 36 cents per diluted share, up 2 percent sequentially and 27 percent year over year.

QLogic doubled its customers that contributed more than $10 million in quarterly revenue to six from the previous year, and the company expects two more $10 million customers by the end of March 2005.

Now, the bad news: Despite the quarterly growth, Qlogic took a hit from a problem involving its hard-drive controller chips. According to CEO H.K. Desai, an OEM product failed to ramp up as fast as QLogic expected, resulting in lost revenue of $1 million in the quarter. What's more, Desai expects the problem to continue to the tune of $2 million to $3 million next quarter, and the company has revised guidance downward to reflect that.Desai says next quarter's profit will fall between 36 cents and 39 cents per share, reflecting 1 to 2 percent revenue growth. Previously, the company expected up to 5 percent growth in revenues. Desai took the unusual step of giving guidance two quarters down the road in an effort to demonstrate the problem will be under control by then. He forecasts that within six months, profits could rise between 37 cents and 40 cents per share, representing 3 percent to 6 percent revenue growth.

Desai didn't name the OEM, but industry sources say it's likely Hitachi Global Storage Technologies (Hitachi GST), which is using QLogic chips in its new hard-disk drives (see Hitachi Picks QLogic I/O Chips).

In a conference call with analysts, Desai stressed the delayed revenues aren't related to QLogic's product quality. "This is not really a problem," he said. "This can happen sometimes in the hard-disk controller business... The problem is really a product transition, [the OEM] going from old drive to new drive. We expect this will start clearing up. It's not any product problems."

In other highlights of the quarter, QLogic's strong Fibre Channel HBA sales showed that this particular market segment has avoided the pricing pressures that have hurt Fibre Channel switch vendors. QLogic and Emulex Corp. (NYSE: ELX) continue to dominate the HBA space, while the entry of Cisco Systems Inc. (Nasdaq: CSCO) into the switch market has put pressure on McData Corp. (Nasdaq: MCDTA) and Brocade Communications Systems Inc. (Nasdaq: BRCD).

Looking ahead, Desai said QLogic's SANBox 5200 stackable switch aimed at small and medium-sized businesses is expected to launch late next quarter (see QLogic Gets Stacked). The company will continue to invest in 4-Gbit/s and 10-Gbit/s Fibre Channel as well as iSCSI, he said.At press time, shares of QLogic were trading at $46.90, down $3.46 (6.87%).

Dave Raffo, Senior Editor, Byte and Switch