QLogic Keeps on Truckin'

QLogic Corp. (Nasdaq: QLGC) posted record quarterly revenues of $114.2 million, up 5 percent from the previous quarter, keeping up its run of steady growth and providing a positive sign for the storage networking industry at large (see QLogic Q3 Sales Rise).

For the quarter ended December 29, 2002, QLogic's sales of Fibre Channel products were $80.6 million -- the highest in the company's history -- up 7 percent sequentially. Its FC business accounted for 71 percent of total revenue, which was in line with the company's previous guidance of 2 to 5 percent. Net income was $27.5 million, or 29 cents per diluted share, flat compared with $27 million the prior quarter (see QLogic Rips Through Another Quarter).

QLogic is "cautiously optimistic" about its business heading into the new year, said CFO Frank Calderoni on a conference call with analysts. The company expects to see overall revenue for the current quarter increase 2 to 5 percent, with earnings per share in the range of 27 cents to 31 cents per share.

Despite its strong results, shares of QLogic were down 4.4 percent in after-hours trading, at $39.98. The stock closed on Wednesday at $41.83. Analysts have noted that QLogic retains a relatively high valuation (at 8 times revenue) compared with other companies in this sector.

H.K. Desai, president and CEO of QLogic, said storage consolidation will keep driving the company's growth in the next few quarters. He also noted that sales of host bus adapters (HBAs), QLogic's primary product line, aren't necessarily dependent on SAN deployments, since HBAs can be used in direct-attached mode. QLogic also makes Fibre Channel switches and chips, as well as parallel SCSI adapters."This could prove to be a good year for Fibre Channel HBAs," he said. "Even if IT spending doesn't come back, I think HBAs will see growth."

QLogic, along with Emulex Corp. (Nasdaq: ELX), has been steadily taking away market share in the HBA business, says Mark Kelleher, an analyst with First Albany Corp. Vendors on the losing side of this equation, he says, include Agilent Technologies Inc. (NYSE: A) and JNI Corp. (Nasdaq: JNIC).

"The HBA market is operating as a duopoly," Kelleher says. "They're seeing some pretty amazing gross margins for a hardware company... The competition between the two is very gentlemanly." QLogic said its gross margins were 64.2 percent for the quarter, up from 63.0 percent the previous period.

The upbeat news from QLogic bodes well for the whole sector, reinforced by the fact that several storage networking companies pre-announced better-than-expected results for the fourth quarter, including EMC Corp. (NYSE: EMC), McData Corp. (Nasdaq: MCDTA), and Storage Technology Corp. (StorageTek) (NYSE: STK). However, analysts have questioned whether this is simply end-of-the-year "budget flush," rather than real growth (see EMC Shares Surge, McData Blows Doors Off Q4, and StorageTek Sees Stronger Q4).

In contrast to its growth prospects for Fibre Channel, QLogic doesn't see iSCSI in play for at least another 12 months. Desai said QLogic will start sampling its iSCSI products in the first half of the year, with OEM qualifications in the second half of 2003 (see QLogic Does Storage Trois).That means the earliest shipments of iSCSI-based storage systems will be in 2004, according to Desai. "The key driving force behind iSCSI is the storage subsystems guys," he said. "Without that, there's no iSCSI market." To date, none of the major server vendors have disclosed plans to roll out iSCSI products.

Meanwhile, Desai said QLogic this year plans to develop products based on Serial Attached SCSI (SAS), an emerging disk interface technology, which he expects to start ramping in 2004. However, the company hasn't yet decided whether it will develop products based on Serial ATA, another next-generation disk interface.

Later in the call, Desai revealed his true colors as a New York Jets