Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : The New QLogic (ANCR) -- Ignore unavailable to you. Want to Upgrade?

To: trendmastr who wrote (28782)	7/25/2001 11:30:01 AM
From: trendmastr	Read Replies (2) \| Respond to of 29386

more comments 08:58am EDT 25-Jul-01 C.E. Unterberg, Towbin (James Poyner 212-389-8104) QLGC QLGC: SCSI Weakness Cuts Guidance; Rating Unchanged James D. Poyner Jr. 212-389-8104 jpoyner@unterberg.com David Y.D. Chiang 212-389-8102 dchiang@unterberg.com Christine Bae 212-389-8217 cbae@unterberg.com Qlogic Corporation (QLGC* $40.74) Neutral July 25, 2001 SCSI Weakness Cuts Guidance; Rating Unchanged Key Data 52-Week Range $17.81 - $130.25 Weighted Average Shares (MM) 92.5 Float (MM) 62.9 % Held Institutionally 70% Market Capitalization (Bil.) $3.8 Average Daily Volume (MM) 6.8 Revenues - LTM (MM) $375.8 Total Debt (MM) $0 Cash Per Share $4.00 Long-Term Growth Rate 30% 12-Month Target Price N/A Fiscal Year Ends: March 2000A 2001A 2002E Revenue (MM) $223 $362.7 $366 Previous estimates $441 Earnings Per Share Q1 $0.11 $0.21 $0.20A Q2 $0.14 $0.24 $0.21E Q3 $0.15 $0.28 $0.22E Q4 $0.16 $0.28 $0.23E Year $0.56 $1.03 $0.89E Previous estimates $1.06 P/E Shares Fully Diluted (000) 74,568 97,669 95,216 Company Overview QLogic is a leading provider of host bus adapters as well as storage-related semiconductors that are sold primarily through OEM relationships with server, storage and disk-drive manufacturers. Key Points We continue to rate the stock Neutral. We expect weakness Wednesday due to lowered guidance to put it in the $35 area. On our lowered forecast we would find the stock moderately attractive under $30. As we expected, QLogic reported earnings that revealed greater- than-expected weakness in its SCSI controller business. While this shortfall was offset somewhat by better fibre-channel product sales, the bottom line of $0.20 represented a $0.03 shortfall relative to the consensus and $0.04 miss relative to our $0.24 model. Revenue of $92.1 before $2.2 million in discounts relative to business with Sun Microsystems was about $3 million short of our forecast, with SCSI revenue a very weak $36 million. SCSI revenue dropped about $13.6 million due to inventory buildups at key disk-drive customer Fujitsu. Fibre-channel revenue grew about $6 million from 4Q, about $3 million better than forecast. Gross profit was off more than modeled because of the SCSI shortfall, but this was offset some by lower operating expenses. The balance sheet saw cash increase about $24 million to almost $380 million, despite flat inventory sequentially that will take a couple of quarters to correct. Guidance chopped revenue for the second half, leading us to cut fiscal 2002 sales from $441 million to $366 million. Earnings drop from $1.06 to $0.89. Our preliminary fiscal 2003 estimate is $1.00 on sales growth of 14%, conservative perhaps but we don't expect the SCSI business to regain former levels on the long haul due to price compression and share battles for Fujitsu. We think the stock is still generously valued at about $35 with a multiple of about 39x for no earnings growth this year. Below $30, our purchase interest would grow. Discussion With signs that disk drive vendors were in oversupply during the June quarter, we became progressively more concerned that the sequential decline in QLogic's sales of its SCSI controllers, principally to Fujitsu, would be worse than expected. Such was the case. Moreover, the company expects this segment to continue to contract for the next two quarters. Not all was doom and gloom, however. Fibre channel revenue of $56 million was quite respectable considering the poor environment currently. Of that, about $14.5 million was from switching, an increase of about $1.5 million from 4Q. Guidance of a small uptick in revenue in the September quarter was a small consolation prize, but gross margins for the switch products are much lower than the SCSI segment. Thus, with operating expenses not expected to drop on a 5% or so overall decline in sales, September earnings estimates of $0.25 are about $0.05 too high. For the year, we don't expect the SCSI segment to recover quickly and could be exacerbated further if Fujitsu fares worse on a relative basis in the drive market. Below is our variance table on the June quarter results. While some investors have worried recently about future price pressure in QLogic's host bus adapter sales, management said that prices were little changed in the quarter and pressure was not being felt due to QLogic's already relatively aggressive price position. Likewise for switching, but we are more dubious that this will remain the case if the company wants to continue to grow switch sales. Still having no incremental OEMs for the switch products other than Sun and INRANGE, QLogic will have to play the price card more aggressively, we believe. The notion that its 2-gigabit switch has an advantage right now is probably mistaken. By the time the marketplace expresses interest in faster switching, segment leaders Brocade and McDATA likely will have such products as well. We continue to believe that QLogic's HBA and fibre-channel chip offerings are relatively secure. Declining to be specific, management noted that one of its six key fibre-channel customers was down 25% from 4Q. We suspect it is either Hitachi Data Systems or Network Appliance, given that Dell probably increased volumes due to aggressive server pricing and IBM's server numbers certainly didn't fall off that much. Sun clearly is increasing its revenue contribution, but management doesn't expect the incremental Sbus HBA revenue from Sun to grow much in the near term, a minor disappointment. Overall, after a solid 10%-plus sales gain sequentially for fibre-channel products, QLogic is counseling much more conservative growth in September because visibility overall remains poor, requiring turns business to account for 50-60% of sales late in the period. We've taken about $0.17 out of the forecast to $0.89 for fiscal 2002. There's still some risk, particularly if the SCSI segment collapses from here. But we are moderating our view that the stock was way ahead of itself recently in the high $50s and low $60s. We suspect selling pressure to be heavy initially Wednesday, reflecting similar estimate cuts around the Street and some dismay over the reversal in the SCSI segment that is highly profitable for the company. Should weakness below $30 persist, we would ponder a more aggressive stance as investors begin to look to fiscal 2003 estimates and more normalized economic conditions. Until then, we remain Neutral. *************************************************************** * C.E. Unterberg, Towbin makes a market in this security.