QLogic Dips on Guidance

But the storage-equipment vendor betters profit expectations by 4 cents a share.
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Updated from 9:52 a.m. EDT

QLogic

(QLGC)

grew its top line in the second quarter by 2% and bettered profit expectations by 4 cents a share, but third-quarter guidance was on the light side of expectations.

In Thursday trading, shares were off $2.19, or 7.3%, to $27.93.

The storage equipment vendor said after the bell Wednesday that net revenue in the September quarter was $134.6 million, up 2% from the $132.3 million reported in the comparable quarter last year. According to generally accepted accounting principles, the company earned a profit of $35.9 million, or 38 cents per share, compared with $34.2 million, or 35 cents per share, a year ago. A lower tax rate in the just-completed quarter likely accounted for at least some of the earnings upside.

Non-GAAP income was 40 cents per share. Analysts polled by Thomson First Call were expecting a profit of 36 cents on sales of $132.9 million.

Gross margins in the quarter were strong at 69.4%, an increase of 20 basis points, and it appeared that price erosion, an ongoing issue in the storage sector had slowed, the company said. However, CFO Tony Massetti said on a call with analysts that margins are trending toward 60%.

Interestingly, the company said it had repurchased only $10 million in stock during the quarter, considerable less than during periods when the stock was more expensive. The disparity struck analyst Daniel J. Renouard of Robert W. Baird who wrote in a note to clients that "management should be much more aggressive buyers of QLGC and speculate that a near/intermediate-term acquisition could explain the reduced buyback appetite." (Baird is seeking investment banking business with QLogic.)

Looking to the third quarter, the company expects revenue to range from $135.95 million to $142.67 million, or sequential growth of 1% to 6%. Pro forma EPS will range from 38 cents to 41 cents. Analysts were expecting a per-share profit of 38 cents and were looking for a 5.1% increase in sales to $139.7 million.

Like other storage stocks, QLogic has run up strongly since mid-August, appreciating 29%, but not nearly enough to make up for sizable losses earlier in the year. To date, the stock is off 43% this year, while the

Nasdaq Composite

is down just 4%. Rival

Emulex

(ELX)

has moved similarly; down 58% year to date, up 19% since Aug. 16.

Last week, Piper Jaffray analyst Les Santiago lowered his rating on the stock to market perform from outperform, saying he believes the stock is fully valued in its current range. At the time he wrote, the stock was selling at $30.55 a share. Piper does not have a current investment banking relationship with QLogic.