Apple Shines on QLogic

QLogic Corp. (Nasdaq: QLGC) has a new partner to help its push into the low-end switching market -- Apple Computer Inc. (Nasdaq: AAPL)

Apple plans to announce next Tuesday that it will resell QLogic Fibre Channel switches with its Xserve RAID storage system. Sources say QLogic will replace switches from Emulex Corp. (NYSE: ELX)on Apple systems, and Apple might soon use QLogic HBAs instead of LSI Logic Corp. (NYSE: LSI) gear.

"I can't confirm," says an Apple spokesman, "until October 19." [Ed. note: Um, isn't that kind of a confirmation?]

Apple's not exactly a storage titan, but it provides a good channel for the SMB market. Its storage systems typically sell for under $20,000, so the deal might not drive a lot of revenue, but it will help QLogic push its low-end switches. QLogic recently scored an OEM deal with Hewlett-Packard Co. (NYSE: HPQ) for switches on an entry-level SAN, and it is expected to land a similar deal with Dell Inc. (Nasdaq: DELL). (See QLogic Pulls a Switch Deal.) Last month the company also scored a switch design win on IBM blade servers (see HBA Guys Switch Gears).

"We are working with a lot of OEMs on our SMB solution," said CEO H.K. Desai Wednesday evening, on QLogic's earnings call with analysts. "We continue to execute against our strategy to grow market share in expanding markets and establish ourselves in new markets that will create incremental growth."Desai repeatedly referred to the SMB market as a target during the earnings call, even while conceding it probably won't provide much revenue before next year. QLogic is hoping to offset a weakening overall HBA market by selling entry-level switches and iSCSI products (see Yankee: SAN Market Shrinks in Q2, Network Engines Exits HBA Business, and SAN Market Revenues Slip.)

Financial analysts expect QLogic to make gains in these new areas eventually, but they remain long-range opportunities. One analyst, Les Santiago of U.S. Bancorp Piper Jaffray, wrote today in a research note that he expects QLogic's switch revenue to grow 14 percent in 2006 and 2007 due to gains in the SMB and blade server market.

QLogic's earnings from last quarter show that enterprise HBAs remain its bread and butter for now. Despite the company's push in the switch market, its switch revenue dropped 8 percent from the previous quarter. Desai says that was because of weakness with one OEM believed to be Sun Microsystems Inc. (Nasdaq: SUNW) -- and he expects switch revenue to grow this quarter.

Meanwhile, HBAs carried QLogic to a strong quarter. The company beat analysts' forecasts by reporting revenue of $134.6 million and net income of $37.7 million or $0.40 per share. HBA revenue grew 18 percent from last year and 6 percent from the previous quarter -- outpacing the overall revenue increase of 2 percent year over year and 4 percent quarter over quarter.

QLogic's guidance for next quarter was for revenue from $135.95 million to $142.67 million and earnings per share from $0.38 to $0.41.— Dave Raffo, Senior Editor, Byte and Switch