QLogic Gets High on FC

While most of the industry seems to have come to terms with the fact that the tech market will probably remain sluggish for some time, it appears that QLogic Corp. (Nasdaq: QLGC) never got the memo. The storage networking company today posted a record first-quarter profit and also boosted its Fibre Channel revenues to an all-time high (see QLogic Reports Record Q1 Profits).

The Aliso Viejo, Calif., company saw its profits soar 37 percent over the same quarter last year, to $31.7 million, or 33 cents a share. Not including merger-related charges and sales discounts for stock warrants, QLogic posted a pro forma profit of 35 cents a share, beating the Wall Street consensus by 2 cents.

Revenues for the first fiscal quarter of 2004, ended June 29, 2003, also were at a record high, the company says, jumping 5 percent sequentially and 28 percent year over year to $126.2 million.

"We are very pleased with our results this past quarter," H.K. Desai, QLogic's chairman, president, and CEO, said on a conference call today. "We continue to grow market share in Fibre Channel."

Fibre Channel sales accounted for most of the growth, jumping 9 percent quarter-over-quarter, to $93.9 million. Overall, Fibre Channel revenues accounted for 74 percent of QLogics total revenue. Compared with the year-ago quarter, the company saw its Fibre Channel pro forma revenues soar 36 percent, up from $68.8 million. Meanwhile, on a less positive note, the company’s SCSI revenues declined by 6 percent during the quarter.QLogic says its cash short-term investments jumped $51.1 million during the quarter, to a total of $694.3 million.

"I thought that they exceeded expectations on the Fibre Channel side," says A.G. Edwards analyst Shebly Seyrafi. "They consistently are growing more than analyst expectations."

QLogic, which has shown steady growth and profitability over the past two years, easily took the No. 1 ranking in the recent Byte and Switch Insider report analyzing the financial performance of the top 10 public storage networking companies (see QLogic Tops B&S Insider Ranking and QLogic Rolls in Dough).

Most impressive, analysts say, was the company’s gross margin hike from 65.9 percent in the previous quarter to 66.7 percent in the first quarter. "The earnings per share was driven by the gross profit margin," says Punk Ziegel & Co. analyst Steve Berg.

While all of this seems to scream success, QLogic doesn’t appear to have impressed investors. Despite the fact that the earnings are in line with Qlogic’s estimates and beat analyst estimates, the company’s shares, which dropped 2.3 percent in trading today, plummeted another 4.4 percent in heavy after-hours trading after the results were announced, trading at $49.10 a share."They've had a great run," Berg says. "But maybe it wasn't good enough... There probably were people who were more ambitious [and] see this as an opportunity to take some money off the table."

Seyrafi says QLogic's falling stock price could reflect concerns over the company's slipping SCSI revenues. Some investors may also be balking at QLogic's $10.5 million increase in accounts receivable during the quarter, he says. "Investors will ask how they hit their upside."

QLogic CFO Frank Calderoni, however, insists that the increase in accounts receivable is really driven by the skew of the quarter. "Overall from a quality of receivables perspective, we still have a good track record," he says.

— Eugénie Larson, Senior Editor, Byte and Switch