08:07am EDT 25-Jul-01 Dain Rauscher Wessels (Montague, Robert
(901)744-5671)
QLGC:B-Aggr;A TALE OF TWO BUSINESSES
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
* QLogic reported first-quarter EPS of $0.23 on revenue of $92.1 million.
This was in line with our EPS estimate of $0.23, but slightly below our
revenue estimate of $93 million due to weaker-than-expected sales of SCSI
products.
* Sales of fibre channel products grew by 10% sequentially due to strong
demand for both HBAs and switches.
* We continue to view QLogic as a core long-term holding in the storage
networking arena.
QLogic Corporation
Nasdaq:QLGC
Rating: Buy
Risk: Aggressive
Price Target: $ 55
,
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Price: $40.74 | Fiscal Yr Prev EPS P/E
52-Wk Range: $130-$18 | Mar/2001A $1.02 39.9x
Tr. 12 ROE: 20.00% | Mar/2002E 1.05 $0.90 45.3x
3 Yr EPS Gr: 40.00% | Mar/2003E $1.17 34.8x
Shares Out: 94.86 million | 2002 Q2 $0.25 $0.21
Book Value: $5.79 |
Market Cap: $3.86 billion |
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Calendar Yr Prev EPS P/E
2001E $0.94 43.3x
2002E $1.09 37.4x
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SYSTEM AREA NETWORKS
Robert Montague
(901) 744-5671
rmontague@dainrauscher.com
Steve Denegri
(901)744-5670
sdenegri@dainrauscher.com
QLGC:B-Aggr;A TALE OF TWO BUSINESSES
QLogic reported first-quarter EPS of $0.23 on gross revenue of $92.1
million.
These results were in line with our EPS estimate of $0.23 and slightly
lower
than our $93 million revenue estimate. Fibre Channel revenue increased by
10.3% sequentially to $56.2 million, representing 61% of total revenue.
This
strong performance was well ahead of our $50.2 million estimate. SCSI
revenue
declined by 27.6% sequentially to $35.9 million, below our estimate of
$42.8
million. Operating margin declined by 390 basis points sequentially to
30.2%
due to an increased percentage of lower margin switch revenue, ongoing
investments in the development of new Fibre Channel, InfiniBand and iSCSI
products, and the marketing programs associated with the rollout of the
company's new 2Gbps product family. This effect was largely anticipated,
and
should stabilize as cost improvement programs take hold on the acquired
switch products.
The Bad...
Management had cautioned that the extraordinary SCSI growth of late in
FY2001 would lead to declines in the SCSI business for this first quarter.
However, the trend was more severe, and appears to be more protracted than
originally planned. We believe the primary driver is economic impact on
storage system demand, as the vast majority of QLogic's SCSI revenue is
for
peripheral (disk and tape drive) controllers. Due to seasonal summer
trends
and higher inventories at disk drive manufacturers, management anticipates
revenue will be down again for the September quarter.
The Good...
The strength of QLogic's Fibre Channel offering shined in this tough
economic period, growing 10% sequentially. Growth was balanced between
adapters, chips, and switches. We believe the product rollout with Sun
Microsystems is helping drive industry leading growth. The company began
initial shipments of Sbus HBA's into the channel. We expect demand for the
company's Sbus product line to accelerate later this year as Sun begins to
OEM the product. In addition, the company also began shipping its 2 Gbps
switches to the channel. The company's customer mix is fairly consistent
with
71% of Fibre Channel revenue coming from six customers, versus 78% from
six
customers in the prior quarter.
QLogic's balance sheet remains very strong. The company's operating
margins
are among the best in the fibre channel space, which enabled the company
to
again generate strong cash flow, increasing cash and investments by $24.3
million sequentially to $379.7 million. Days sales outstanding were 50
days
versus 48 days in the prior quarter. Inventory turns declined sequentially
to
2.9 days versus 3.2 days, due in part to lower than anticipated sales of
SCSI
products.
Our estimates reflect a decline of approximately 15% for SCSI product
revenue and 4% sequential growth for Fibre Channel revenues in the current
quarter for total revenue of $88.5 million. Due to the greater than
anticipated decline in SCSI revenue, our FY2002 EPS estimate now stands at
$0.90 on revenue of $376.6 million.
Stock Opinion
Though industry trends and visibility remain soft, we are seeing some
signs
that the decline in SAN spending trends may have bottomed. We continue to
maintaining our Buy-Aggressive rating as we monitor for a fundamental turn
in
storage spending. We believe QLogic's unique approach to the storage
networking opportunity warrants core holding status for long-term
investors.
We are maintaining our 12-month price target of $55, which reflects a 45
multiple of our CY2002 EPS estimate of $1.09. We believe this valuation is
warranted given that sales of fibre channel products, which are expected
to
account for in excess of 70% of the company's revenue by year end, are
projected to grow at compounded annual growth rates in the ranging from
50%-
90% during the next four years.
Company Description
QLogic Corporation is a leading developer and supplier of high-performance
I/O solutions to the system area network marketplace. The company has a
legacy of securing leading share in the I/O market based on a broad multi-
protocol focus, a strong software migration strategy, and an intense cost
focus.
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