QLogic Lowers Outlook

QLogic's quarterly and fiscal year-end earnings underscored a reduction in enterprise spending and raised eyebrows on Wall Street last night.

For the quarter ended April 7, the company reported revenues of $147.1 million, including $143.2 million from SAN infrastructure products, including HBAs and SAN switches. This represents a 13 percent increase year-on-year but a 6 percent reduction sequentially. (See QLogic Reports Earnings.)

Net income also dropped sequentially to $18.4 million, or 12 cents per diluted share, versus $35.5 million, or 22 cents per share last quarter. Further, gross margins fell due to lower margins on InfiniBand products, which sold quite well.

For fiscal 2007, QLogic reported $586.7 million in revenues, up 19 percent from 2006.

But execs predict a slower quarter and a couple of ongoing challenges. First-quarter guidance is $140 million to $145 million, an average of 5 percent lower.CEO H.K. Desai blames a number of factors: First, QLogic continues to lose money in its silicon and controller segments, particularly since OEMs want SAS and SATA connectivity, which QLogic doesn't offer and doesn't plan to offer. Second, he says, customers and OEMs report a slowdown in enterprise spending, though he didn't elaborate on the conference call with analysts.

At least one analyst thinks QLogic is losing market share to competitors like Brocade in the Fibre Channel space and Emulex in HBAs. "Investors are concerned about QLGC for a few reasons," writes analyst Shebly Seyrafi of Caris & Co. in a note. "[T]he company provided disappointing guidance... management exhibited weak tone on its last earnings call... the disappointing SAN switch sales last quarter, and the concerns about share loss to ELX at Sun and IBM."

"I don't believe we are losing market share," said Desai on the earnings call.

Several issues are at work, nonetheless. QLogic has banked on Fibre Channel and InfiniBand as winning technologies. But the company isn't delivering the aggressive 20+ percent growth in FC switches it's been promising for months. (See QLogic Switch Sales Disappoint.) And though QLogic's InfiniBand products are selling, gross margins for IB are pulling down the overall numbers.

Despite all of this, Desai and newly appointed president and COO Jeff Benck remain optimistic on the company's financials long term. Though guidance is down for next quarter, the execs are guiding toward 10 percent to 12 percent growth in 2008, with HBA growth of 14 percent anticipated, and 20 percent to 25 percent growth in Fibre Channel switches.Analysts are more cautious. "We view this as rather optimistic targets at this point," writes analyst Aaron Rakers of A.G. Edwards in a note. He estimates revenues more in the 8 percent range for the year.

Another analyst is reducing his estimates for QLogic's year-on-year growth for fiscal 2008 to 10 percent. "We continue to believe QLGC faces increasing competitive pressure in core HBA, switching, and FC silicon businesses," writes Daniel Renouard of Robert W. Baird in a note today.

Mary Jander, Site Editor, Byte and Switch