QLogic Tumbles on Earnings Warning

Updated from 2:54 p.m. EST

Network storage vendor QLogic ( QLGC) tumbled more than 20% Wednesday, and shares of other companies in the sector also were hurting, following the company's surprise announcement that it will fail to meet fourth-quarter expectations.

QLogic was recently off $9.70, or 22.7%, to $32.99 in very heavy trading.

The Alisa Viejo, Calif., company now expects to earn 34 cents a share in the quarter ended March 28, on sales of $128 million, well below its earlier projection of revenue ranging from $138 million to $141 million. The new earnings projection was at the low end of previous guidance. Including a merger-related gain, earnings per share will be 36 cents, the company said.

Analysts surveyed by Thomson First Call were predicting pro forma earnings of 38 cents a share on revenue of $140 million in the quarter.

"Although we entered the fourth quarter expecting to continue the momentum generated by our revenue growth throughout the first three quarters of fiscal 2004, we experienced weaker-than-expected demand during the end of our fourth quarter," QLogic said in a release. "Despite the challenges encountered with our fourth-quarter revenue, we expect that our overall gross margin percentage will be comparable to the prior quarter."

QLogic made the announcement at about 10:30 p.m. EST Tuesday, and surprisingly did not hold a call with analysts to discuss the projected results. Analysts grumbled that the company's press release contained little information.

QLogic did not return a call asking why it had decided not to brief the market.

In its statement, QLogic said most of the revenue shortfall is attributable to a decline in expected orders at the end of the quarter from two original equipment manufacturers, or OEMs, for host bus adapters, key components of storage networks.

Although the company did not name any customers, analysts assumed that the major culprit was Sun Microsystems ( SUNW), whose orders account for about 18% of QLogic's revenue, according to Merriman Curhan Ford analyst Brion Tanous.

"I think this is largely a Sun issue," Tanous said. "It's well known that Sun is having problems, and we also hear that Sun's distribution system had some hiccups." (His company does not have a banking relationship with QLogic.)

Merrill Lynch analyst Shebly Seyrafi, who downgraded QLogic to neutral from buy Wednesday, also said in a note that he believes Sun was one of the OEMs whose orders fell short. However, "QLogic should benefit from Sun's seasonally strong June quarter," Seyrafi added. "And to the extent that the weakness noted was due to high levels of inventory at the OEMs, a resumption of more normal ordering patterns as this inventory is worked off could lead to much better growth for QLogic going forward." (Merrill Lynch is seeking banking business with QLogic.)

Sun declined to comment: "We don't comment on other companies' earnings," a spokesman said.

Even though the issue does not appear to signal a downturn for storage as a whole, Emulex ( ELX), which competes directly with QLogic, was recently off $1.45, or 6.3%, to $21.33. Also down was Brocade ( BRCD), off 43 cents, or 6%, to $6.68. Sun shares were recently off 7 cents, or 1.6%, to $4.18.

Last month, QLogic announced that its CFO, Frank A. Calderoni, had resigned for personal reasons effective in May. A replacement has not yet been named.

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