QLogic Corporation ( QLGC)
F3Q2011 Earnings Call Transcript

January 27, 2011 5:00 pm ET

Executives

Doug Naylor – VP, Finance and Interim CFO

Simon Biddiscombe – President and CEO

H. K. Desai – Chairman and Executive Chairman

Analysts

Amit Daryanani – RBC Capital Markets

Aaron Rakers – Stifel Nicolaus

Jayson Nolan – Robert Baird

Mark Moskowitz – JP Morgan

Keith Bachman – Bank of Montreal

Kaushik Roy – Wedbush

Katy Huberty – Morgan Stanley

Glenn Hanus – Needham & Company

Rajesh Ghai – ThinkEquity

Douglas Ireland – JMP Securities

Scott Craig – Bank of America/Merrill Lynch

Presentation

Operator

Good day, everyone, and welcome to the third quarter of fiscal year ‘11 QLogic earnings announcement conference call. Today’s conference is being recorded. And at this time, it is my pleasure to turn the conference over to Mr. Doug Naylor, Vice President of Finance and Interim Chief Financial Officer of QLogic. Please go ahead, sir.

Doug Naylor

Thank you, operator. Good afternoon, and welcome to QLogic’s third quarter fiscal year 2011 earnings conference call. Joining me on the call today is Simon Biddiscombe, our President and Chief Executive Officer. I will begin the call with a review of the third quarter financial results. Simon will follow with a discussion of the current state of our business and strategic initiatives. Afterwards, we will open up the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.

We refer you to the documents that QLogic files with the SEC, specifically our most recent forms 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our third quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. In addition, all of the references we will make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of the non-GAAP financial measures presented to the most directly comparable GAAP financial measures is available on our website under Investor Relations.

Turning now to our financial results for the third fiscal quarter ended December 26, 2010. Our revenue in the third quarter was $155.8 million, an increase of 4% from the same quarter last year. This revenue was at the high end of our forecasted range of $148 million to $156 million provided during our third quarter earnings conference call and consistent with the updated forecasted range of $155 million to $156 million provided in our preliminary third quarter results announced on January 12.

Our third quarter revenue from Host Products, which are comprised primarily of Fibre Channel adapters and converged network adapters, was $113.5 million and increased 3% from $110.4 million recorded in the third quarter of last year. Third quarter revenue from Network Products, which are comprised primarily of Fibre Channel and InfiniBand switches, was $28.9 million and increased 6% from $27.4 million recorded in the third quarter of last year.

Our third quarter revenue from Silicon Products comprised of Fibre Channel, converged networking, and iSCSI chips was $10.6 million. This revenue increased 23% from $8.7 million recorded in the third quarter of last year. Our service and other revenue was $2.7 million. Our third quarter gross margin of 67.1% improved from 66.0% recorded in the third quarter of last year, primarily due to higher volume to absorb manufacturing costs. Our gross margin exceeded our forecast of 66.0% to 66.5% provided during our third quarter earnings call, primarily due to product mix.

Next I’d like to cover our third quarter operating expenses. Total operating expenses were $54.4 million, up 2% from $53.2 million reported in the third quarter last year. Operating expenses were below our expectation. Engineering expenses in the third quarter of $29.4 million were consistent with the third quarter last year and decreased as a percentage of revenue from 19.8% to 18.9%. We expect future engineering expenses as a percentage of revenue to be in the range of 18% to 21%.

Sales and marketing expenses in the third quarter of $18.3 million increased 8% from a year ago and increased as a percentage of revenue from 11.3% to 11.7%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 13%. General and administrative expenses in the third quarter of $6.7 million were 4.3% of revenue. We expect that future G&A expenses as a percentage of revenue will be approximately 4%.

Operating profit in the third quarter of $50.1 million increased 11% from a year ago and increased as a percentage of revenue from 30.3% to 32.2%. Interest and other income was $800,000 in the third quarter. During the third quarter, we’ve recorded a tax benefit of $6.3 million. This tax benefit is a result of third quarter specific income tax items, including the retroactive reinstatement of the federal research tax credit that was enacted December 2010.

Our third quarter net income of $57.2 million increased 58% from a year ago and represented a net profit margin of 36.7%. Our third quarter net income per diluted share of $0.53 was significantly better than the $0.31 we achieved last year. The benefits associated with the third quarter specific income tax items that were not included in our original guidance contributed $0.13 to our earnings per diluted share.

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