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

To: J Fieb who wrote (28799)	8/2/2001 1:39:13 PM
From: trendmastr	Read Replies (1) \| Respond to of 29386

08:02am EDT 2-Aug-01 Dain Rauscher Wessels (Montague, Robert (901)744-5671) QLGC:B-Aggr;2002 FIBRE CHANNEL CATALYSTS EMERGING FOR QLOGIC Dain Rauscher Wessels a division of Dain Rauscher Incorporated * QLogic Corporation remains high on our list for long-term investors as catalysts for 2002 emerge. * Compact PCI qualifications by EMC and Hitachi on new Sun servers appear imminent. * Cost leadership continues to shine in our due diligence on Fibre Channel adapter pricing trends. * We sense QLogic Corporation can capture a meaningful portion of the Symm 5 Spider program at EMC. QLogic Corporation Nasdaq:QLGC Rating: Buy Risk: Aggressive Price Target: $ 55 , ____________________________________________________________________________ _ Price: $41.42 \| Fiscal Yr Prev EPS P/E 52-Wk Range: $130-$18 \| Mar/2001A $1.02 40.6x Tr. 12 ROE: 20.00% \| Mar/2002E $0.90 46.0x 3 Yr EPS Gr: 40.00% \| Mar/2003E $1.17 35.4x Shares Out: 94.86 million \| 2002 Q2 $0.21 Book Value: $5.79 \| Market Cap: $3.93 billion \| ____________________________________________________________________________ _ Calendar Yr Prev EPS P/E 2001E $0.94 44.1x 2002E $1.09 38.0x ____________________________________________________________________________ _ __________________________________________________________________________ SYSTEM AREA NETWORKS Robert Montague (901) 744-5671 rmontague@dainrauscher.com Steve Denegri (901)744-5670 sdenegri@dainrauscher.com QLGC:B-Aggr;2002 FIBRE CHANNEL CATALYSTS EMERGING FOR QLOGIC Providing strong confirmation to our thesis that storage networking trends are well into a stabilization phase, we believe that the leading Fibre Channel vendors will exit this earnings season with approximately in-line results. Our thesis of flattish guidance by the group for the third quarter of calendar 2002 also remains intact. We therefore continue to believe that long-term oriented investors should be selectively building positions in the group. QLogic Corporation remains high on our list as several catalysts for 2002 begin to emerge. Compact PCI: Our recent due diligence on the Fibre Channel adapter market indicates that QLogic Corporation is the only vendor shipping production quality Compact PCI adapters for Fibre Channel applications. We therefore believe several vendors, including EMC and Hitachi, are moving quickly to qualify these QLogic Corporation offerings on Compact PCI platforms. Of particular note are the latest midrange server offerings from Sun, which use Compact PCI exclusively. Given the strategic imperative for EMC and Hitachi to ship into all Sun environments, we suspect that qualifications on these platforms are imminent. Any traction that QLogic Corporation gains with these vendors would be incremental to its revenue stream. Cost Leadership: Meanwhile, we also continue to see evidence of QLogic Corporation's cost leadership in the adapter arena, which we believe leaves them most insulated from declines in average selling prices. The competitor most exposed to this dynamic is JNI. We estimate that JNI's adapter pricing to OEMs has fallen 30% to 40% during the past two months, including a 15% drop as of yesterday. Emulex Corporation (Nasdaq: EMLX; B-Agg; $35) has seen a modest 2% to 3% erosion during the same time period, but the emerging Ficon program at IBM should serve to offset this trend in the coming quarters. Meanwhile, we believe QLogic Corporation has not budged on average OEM pricing. The Spider At EMC: Our recent due diligence on the revenue potential of the "Spider" program at EMC has provided surprisingly positive results. This project centers on the opportunity to replace the current 2-port Fibre Channel adapter design for the Symm 5 platform with an adapter that uses Fibre Channel switch silicon to deliver 8 ports. The resulting design would provide a dramatic increase in the connectivity available for each Symm 5, as well as some impressive new availability features within the Symm 5 architecture. We now estimate that Spider adapter attach rates for the Symm 5 in SAN attached environments can approach 30% to 50% by mid 2002. Using an approximate estimate for Symm 5 SAN attached units shipped in 2000, Spider adapters per Symm 5, and per port pricing for Spider adapters, we now estimate that Spider adapters are a $20 million to $180 million opportunity at EMC in 2002. Our current mean expectation for 2002 is $75 million. Though we continue to believe that Brocade Communications Systems (Nasdaq: BRCD; B-Agg; $37.70) is best positioned as primary source for the Spider program, we also sense that QLogic Corporation can capture a meaningful portion of this opportunity as the second source vendor. EMC appears increasingly committed to using multiple vendors for all of its Fibre Channel programs. Stock Opinion As we monitor for signs of acceleration in the near term fundamentals, these emerging catalysts provide improving visibility to our calendar 2002 outlook for QLogic Corporation's Fibre Channel revenue. Meanwhile, we believe the SCSI revenue weakness from pricing and product transition issues among SCSI disk drive customers is conservatively factored into the company's forward guidance. We therefore maintain a Buy-Aggressive rating and our 12-month price target of $55, which reflects a 50x 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 range of 50% to 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. ____________________________________________________________________________ __ Dain Rauscher Incorporated makes a market in QLogic Corporation and may act as principal with regard to sales or purchases of this security.