QLogic Slides on Investors' Disappointment

The storage-component maker's solid results apparently weren't enough.
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Updated from July 16

QLogic

(QLGC)

continued to slide Thursday despite the previous day's announcement that earnings and revenue were up solidly in its fiscal first quarter.

In recent trading, shares of the storage-network supplier were off $4.57, or 9%, to $46.78.

Net income for the June quarter of fiscal 2004 was a record $31.7 million, or 33 cents per fully diluted share, according to generally accepted accounting principles, compared to a 27-cent profit a year ago. Revenue was $126.2 million, up 5% sequentially and 25.2% over the prior year, and was also higher than Wall Street's expectations of $125.62 million.

Nevertheless, investors were apparently expecting more from a company whose stock has run up 35% in the last three months. "While results were solid, they fell short of frothy market expectations," said Deutsche Bank Securities analyst Sabrina Ricci.

Like other analysts, Ricci said the company remains a leader in its sector, but maintained her hold rating on the stock. "Main issues for the shares in the near-term are volatility and valuation," she wrote in a research note. Deutsche Bank does not have a banking relationship with QLogic.

Pro forma net income for the first quarter was a record $33.8 million, or 35 cents per share on a diluted basis, two cents better than the consensus of analysts polled by Thomson First Call.

Gross margins improved sequentially in the quarter to 66.7% from 65.9%, due to the ongoing shift to higher-margin fibre channel products (up 9%) as well as continuing manufacturing efficiencies, the company said.

Cash and short-term investments were $694.3 million, an increase of $51.1 million during the quarter, while the cost of revenue increased 13%, from $37.1 million a year ago to $42 million. Both operating expenses and R&D were up year over year, but down as a percentage of revenue. G&A was up 28%, largely because of legal expenses, the company said.

Looking to the September quarter, the company told investors to expect sequential revenue growth of 2% to 5% and earnings per share of 32 cents to 36 cents. Wall Street was expecting revenue growth of 3% to $129.37 million, and EPS of 34 cents.

QLogic designs and develops storage-networking components sold to original equipment manufacturers, resellers and system integrators.

"QLogic once again established new records for quarterly revenue and net income. Our pro forma revenue growth during the first quarter was highlighted by a significant growth in our Fibre Channel sales, which increased 9% sequentially and 36% over the comparable quarter of last year," said H.K. Desai, the company's chairman, chief executive officer and president, in a prepared statement.