QLogic Dives on Shortfall

QLogic revenues will miss expectations. The blame is falling on OEMs, mainly Sun

April 1, 2004

3 Min Read
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QLogic Corp. (Nasdaq: QLGC) shares took a dive in trading today, after the company announced it won't meet revenue expectations this quarter. And some analysts blamed OEM Sun Microsystems Inc. (Nasdaq: SUNW).

In a statement last night (see QLogic Predicts Lower Revenue), QLogic said revenue for its fourth quarter, to be announced April 28, will be about $128 million, instead of the $138 million to $141 million it projected during its January report (see OEM Rains on QLogic's Quarter).

According to CEO H.K. Desai, "A majority of our revenue shortfall is related to a decline in expected orders from two original equipment manufacturers for host bus adapters at the end of the quarter."

HBAs traditionally account for roughly half of QLogic's revenue. The new revenue figure represents a 7 percent sequential decline from last quarter's revenue of $137.1 million. QLogic will meet the low end of its originally projected earnings per share at about $0.36 per share. The company also told analysts its gross margin would be in line with last quarter's 68.7 percent figure.

QLogic isn't naming the OEMs involved, but analysts from American Technology Research, Bear Stearns, Susquehanna Financial Group, and ThinkEquity Partners point to Sun, whose storage results have been disappointing of late, as one of the likeliest suspects (see Dot Hill's Alive & Well and Sun Reduces Q2 Loss). And Bear Stearns and American Technology Research think Hewlett-Packard Co. (NYSE: HPQ) is possibly the other.Sun is considered the main source of concern, and not just for QLogic. Susquehannah's Kaushik Roy revised Dot Hill Systems Corp.'s (Nasdaq: HILL) March quarter revenue forecast downward because it derives much of its revenue from Sun. ThinkEquity's Paul Mansky downgraded QLogic's rival Emulex Corp. (NYSE: ELX) because of doubts about the strength of the HBA market after QLogic's pre-announcement.

Analyst Shaw Wu of American Technology Research writes in a note today that Sun accounts for 12 percent of QLogic revenue, while HP accounts for 8 percent. The shortfall leads him to question QLogic's underlying financials: "QLGC has been able to shake weakness at SUNW (12% of revenue) in the past year with strength in other OEMs and other businesses. This preannouncement lessens our confidence in QLGC's ability to escape SUNW's weakness," Wu writes in a note today. He has downgraded QLogic shares to Hold from Buy.

Wu also downgraded Brocade Communications Systems Inc. (Nasdaq: BRCD) on concerns about exposure to Sun and HP, which also are Brocade OEMs: "We believe what is negatively impacting QLGC may affect BRCD," he writes.

Not all analyst response was negative. Stephen Chin of UBS Investment Research thinks QLogic's news doesn't mean it's losing market share to Emulex, with which it dominates the HBA market. UBS also thinks QLogic's OEM arrangement with Hitachi Global Storage Technologies (Hitachi GST), which was blamed by analysts for a revenue hit last quarter, is "on track" for next quarter (see OEM Rains on QLogic's Quarter).

UBS also indicates that QLogic could be up for another OEM win with Dell Computer Corp. (Nasdaq: DELL). This seems possible: QLogic has announced its focus on lower-end SANs, and Dell recently indicated it would diverge from its relationship with EMC Corp. (NYSE: EMC) at the low end (see QLogic Stacks SMB Deck and Dell Covers Its NAS).At press time, QLogic shares were trading at $33.29, down $9.40 (22.2%).

Mary Jander, Site Editor, and Dave Raffo, Senior Editor, Byte and Switch

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