QLogic Reports Second Quarter Results for Fiscal Year 2008

QLogic Corp. (NASDAQ:QLGC), a leader in networking for storage and high-performance computing (HPC), today announced its second quarter financial results for the period ended September 30, 2007. Second Quarter Highlights Net revenue was $140.3 million. Net income: $22.6 million GAAP, $32.5 million non-GAAP. Net income per diluted share: $0.16 GAAP, $0.22 non-GAAP. Cash generated from operations was $67.2 million. $392.1 million in cash and short-term marketable securities as of September 30. Repurchased $144.7 million of outstanding common stock. Financial Results Net revenue for the second quarter of fiscal 2008 was $140.3 million. Revenue from Host Products, which are comprised primarily of Fibre Channel and iSCSI Host Bus Adapters (HBAs) and InfiniBand Host Channel Adapters (HCAs), was $104.4 million during the second quarter of fiscal 2008 and increased 4% from $100.4 million in the comparable quarter last year. Revenue from Network Products, which are comprised primarily of Fibre Channel and InfiniBand switches, was $22.0 million during the second quarter of fiscal 2008 and increased 8% from $20.2 million in the comparable quarter last year. Revenue from Silicon Products, which are comprised primarily of protocol chips and management controllers, was $11.5 million during the second quarter of fiscal 2008 and decreased 43% from $20.2 million for the comparable quarter last year. Net income on a GAAP basis for the second quarter of fiscal 2008 was $22.6 million, or $0.16 per diluted share, and included stock-based compensation expense, acquisition-related charges, special charges, and the related income tax effects. Net income on a GAAP basis for the second quarter of fiscal 2007 was $30.4 million, or $0.19 per diluted share, and included stock-based compensation expense, acquisition-related charges, and the related income tax effects. Net income on a non-GAAP basis for the second quarter of fiscal 2008 was $32.5 million, or $0.22 per diluted share. "We are pleased with our financial performance and execution during the quarter. We exceeded our earnings per share expectations and delivered strong cash flow from operations,” said H.K. Desai, QLogic’s chief executive officer. "For the first six months of fiscal year 2008, revenue from our Host Products was up 9% and revenue from our Network Products was up 20% over the comparable period last year.” QLogic uses certain non-GAAP financial measures to supplement financial statements based on GAAP. A summary of these non-GAAP financial measures and a complete reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, as well as a description of the reasons that management believes that these non-GAAP financial measures provide useful information to investors and the additional purposes for which management uses these non-GAAP financial measures is presented in the accompanying financial schedules. QLogic’s fiscal 2008 second quarter conference call is scheduled for today at 2:30 p.m. Pacific Time (5:30 p.m. Eastern Time). H.K. Desai, chief executive officer, and Tony Massetti, senior vice president and chief financial officer, will host the conference call. The call is being webcast live via the Internet at www.qlogic.com and www.earnings.com. Phone access to participate in the conference call is available at (913) 981-5543, pass code: 3945670. The financial information that the company intends to discuss during the conference call will be available on the company’s website at www.qlogic.com for twelve months following the conference call. A replay of the conference call will be available via webcast at www.qlogic.com for twelve months. About QLogic QLogic is a leading supplier of high-performance storage networking solutions, which include the controller chips, host adapters and fabric switches that are the backbone of storage networks for most Global 2000 corporations. The company delivers a broad and diverse portfolio of products that includes Fibre Channel HBAs, blade server embedded Fibre Channel switches, Fibre Channel stackable switches, iSCSI HBAs and iSCSI routers. The company is also a leading supplier of InfiniBand switches and InfiniBand host channel adapters for the emerging high-performance computing market. QLogic products are delivered to small-to-medium businesses and large enterprises around the world via its channel partner community. QLogic products are also powering solutions from leading companies like Cisco, Dell, EMC, Hitachi Data Systems, HP, IBM, Network Appliance and Sun Microsystems. QLogic is a member of the S&P 500 Index. Note: All QLogic-issued press releases appear on the company's website (www.qlogic.com). Any announcement that does not appear on the QLogic website has not been issued by QLogic. Disclaimer - Forward Looking Statements This press release contains statements relating to future results of the company (including certain beliefs and projections regarding business trends) that are "forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied in the forward-looking statements. The company advises readers that these potential risks and uncertainties include, but are not limited to: potential fluctuations in operating results; gross margins that may vary over time; revenues may be affected by changes in IT spending levels; the stock price of the company may be volatile; the company’s dependence on the storage area network market; potential adverse effects of server virtualization technology on the company’s business; potential adverse effects of increased market acceptance of blade servers; the ability to maintain and gain market or industry acceptance of the company's products; the company’s dependence on a limited number of customers; seasonal fluctuations and uneven sales patterns in orders from customers; the company’s ability to compete effectively with other companies; declining average unit sales prices of comparable products; a reduction in sales efforts by current distributors; dependence on sole source and limited source suppliers; the company’s dependence on relationships with certain silicon chip suppliers; the complexity of the company's products; sales fluctuations arising from customer transitions to new products; environmental compliance costs; international economic, regulatory, political and other risks; uncertain benefits from strategic business combinations; the ability to attract and retain key personnel; difficulties in transitioning to smaller geometry process technologies; the ability to protect proprietary rights; the ability to satisfactorily resolve any infringement claims; reliance on third party technology; the use of "open source” software in our products; changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns; computer viruses and other tampering with the company’s computer systems; and facilities of the company and its suppliers and customers are located in areas subject to natural disasters. More detailed information on these and additional factors which could affect the company's operating and financial results are described in the company's Forms 10-K, 10-Q and other reports filed, or to be filed, with the Securities and Exchange Commission. The company urges all interested parties to read these reports to gain a better understanding of the business and other risks that the company faces. The forward-looking statements contained in this press release are made only as of the date hereof, and the company does not intend to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. QLogic and the QLogic logo are registered trademarks of QLogic Corporation. Other trademarks and registered trademarks are the property of the companies with which they are associated. QLOGIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited — in thousands, except per share amounts)     Three Months Ended   Six Months Ended September 30, 2007   October 1, 2006 September 30, 2007   October 1, 2006   Net revenues $ 140,326 $ 145,298 $ 280,103 $ 281,990 Cost of revenues   49,013   45,756   99,876   89,076 Gross profit   91,313   99,542   180,227   192,914 Operating expenses: Engineering and development 33,058 32,619 67,742 65,539 Sales and marketing 20,639 20,108 41,812 42,509 General and administrative 8,804 7,594 16,990 16,036 Special charges 1,636 — 3,772 — Purchased in-process research and development   —   —   —   1,910 Total operating expenses   64,137   60,321   130,316   125,994   Operating income 27,176 39,221 49,911 66,920   Interest and other income, net   5,753   5,844   12,019   12,686   Income before income taxes 32,929 45,065 61,930 79,606   Income taxes   10,349   14,618   20,355   28,083   Net income $ 22,580 $ 30,447 $ 41,575 $ 51,523 Net income per share: Basic $ 0.16 $ 0.19 $ 0.28 $ 0.32 Diluted $ 0.16 $ 0.19 $ 0.28 $ 0.32   Number of shares used in per share calculations: Basic 144,782 158,468 148,980 160,008 Diluted 145,202 159,827 149,711 161,362 QLOGIC CORPORATION RECONCILIATION OF GAAP NET INCOME TO NON-GAAP NET INCOME (unaudited — in thousands, except per share amounts)     Three Months Ended   Six Months Ended September 30, 2007   October 1, 2006 September 30, 2007   October 1, 2006   GAAP net income $ 22,580 $ 30,447 $ 41,575 $ 51,523 Items excluded from GAAP net income: Stock-based compensation 7,817 6,371 16,187 15,035 Amortization of purchased intangible assets 5,056 2,370 9,489 5,481 Acquisition-related stock-based compensation (741 ) 2,593 (38 ) 5,472 Special charges 1,636 — 3,772 — Purchased in-process research and development — — — 1,910 Income tax effect   (3,878 )   (3,441 )   (8,334 )   (7,428 ) Total non-GAAP adjustments   9,890     7,893     21,076     20,470   Non-GAAP net income $ 32,470   $ 38,340   $ 62,651   $ 71,993     Net income per diluted share: GAAP net income $ 0.16 $ 0.19 $ 0.28 $ 0.32 Adjustments   0.06     0.05     0.14     0.13   Non-GAAP net income $ 0.22   $ 0.24   $ 0.42   $ 0.45   Non-GAAP Financial Measures The non-GAAP financial measures contained herein are a supplement to the corresponding financial measures prepared in accordance with generally accepted accounting principles (GAAP). The non-GAAP financial measures presented exclude the items summarized in the above table. Management believes that adjustments for these items assist investors in making comparisons of period to period operating results and that these items are not indicative of the company’s on-going core operating performance. The company has presented non-GAAP net income and non-GAAP net income per diluted share, on a basis consistent with its historical presentation, to assist investors in understanding the company’s core net income and core net income per diluted share on an on-going basis. These non-GAAP financial measures may also assist investors in making comparisons of the company’s core net profitability with historical periods and comparisons of the company’s core net profitability with the corresponding results for competitors. Management believes that non-GAAP net income and non-GAAP net income per diluted share are important measures in the evaluation of the company’s profitability. These non-GAAP financial measures exclude the adjustments described in the above table, and thus provide an overall measure of the company’s on-going net profitability and related profitability on a diluted per share basis. Management uses non-GAAP net income in its evaluation of the company’s core after-tax results of operations and trends between fiscal periods and believes that this measure is an important component of its internal performance measurement process. In addition, the company prepares and maintains its budgets and forecasts for future periods on a basis consistent with this non-GAAP financial measure. Management believes that providing these non-GAAP financial measures allows investors to view the company’s financial results in the way that management views the financial results. The non-GAAP financial measures presented herein have certain limitations in that they do not reflect all of the costs associated with the operations of the company’s business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. The non-GAAP financial measures presented by the company may be different from the non-GAAP financial measures used by other companies. For additional information on the items excluded from the non-GAAP financial measures and why the company believes that these non-GAAP financial measures provide useful supplemental information to investors, the company refers you to the Form 8-K regarding this release filed today with the Securities and Exchange Commission. A summary of the non-GAAP adjustments presented in the table above by the financial statement line impacted is as follows: (unaudited – in thousands)   Three Months Ended   Six Months Ended September 30, 2007   October 1, 2006 September 30, 2007   October 1, 2006 Non-GAAP Adjustments: Cost of revenues: Stock-based compensation $ 491 $ 424 $ 1,065 $ 936 Amortization of purchased intangible assets 4,092 2,245 7,310 5,231 Acquisition-related stock-based compensation   —     13     (24 )   26   Total cost of revenue adjustments   4,583     2,682     8,351     6,193     Operating expenses: Engineering and development: Stock-based compensation 3,508 2,419 7,280 5,243 Amortization of purchased intangible assets 78 66 251 133 Acquisition-related stock-based compensation (748 ) 1,965 (33 ) 4,174 Sales and marketing: Stock-based compensation 1,649 1,425 3,274 4,116 Amortization of purchased intangible assets 886 59 1,928 117 Acquisition-related stock-based compensation 7 591 19 1,223 General and administrative: Stock-based compensation 2,169 2,103 4,568 4,740 Acquisition-related stock-based compensation — 24 — 49 Special charges 1,636 — 3,772 — Purchased in-process research and development   —     —     —     1,910   Total operating expense adjustments   9,185     8,652     21,059     21,705     Total non-GAAP adjustments before income taxes 13,768 11,334 29,410 27,898 Income tax effect   (3,878 )   (3,441 )   (8,334 )   (7,428 ) Total non-GAAP adjustments $ 9,890   $ 7,893   $ 21,076   $ 20,470   QLOGIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited — in thousands)     September 30, 2007   April 1, 2007 ASSETS Current assets: Cash and cash equivalents $ 99,646 $ 76,804 Short-term marketable securities 292,436 467,118 Accounts receivable, net 72,201 73,538 Inventories 35,071 38,935 Deferred tax assets 35,009 27,866 Other current assets   13,188     12,892   Total current assets 547,551 697,153   Property and equipment, net 90,774 90,913 Goodwill 103,734 102,910 Purchased intangible assets, net 44,632 55,093 Deferred tax assets 16,976 49 Other assets   25,147     25,241     $ 828,814   $ 971,359     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 28,403 $ 29,280 Accrued compensation 23,374 34,483 Accrued taxes 19,913 15,729 Deferred revenue 11,565 7,368 Other current liabilities   10,616     7,674   Total current liabilities 93,871 94,534   Accrued taxes 42,579 — Deferred tax liabilities   —     2,294   Total liabilities   136,450     96,828     Stockholders’ equity: Common stock 199 198 Additional paid-in capital 636,553 608,515 Retained earnings 1,030,303 988,728 Accumulated other comprehensive income 130 169 Treasury stock   (974,821 )   (723,079 ) Total stockholders’ equity   692,364     874,531     $ 828,814   $ 971,359   QLOGIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited — in thousands)     Six Months Ended   September 30, 2007   October 1, 2006   Cash flows from operating activities: Net income $ 41,575 $ 51,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,964 12,157 Stock-based compensation 16,187 15,035 Acquisition-related: Amortization of purchased intangible assets 9,489 5,481 Stock-based compensation (38 ) 5,472 Purchased in-process research and development — 1,910 Deferred income taxes (9,023 ) (9,732 ) Provision for losses on accounts receivable 188 480 Loss on disposal of property and equipment 795 135 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 1,149 (2,104 ) Inventories 3,864 (4,252 ) Other assets 365 1,120 Accounts payable (1,024 ) (2,821 ) Accrued compensation (8,439 ) (4,397 ) Accrued taxes 28,548 6,134 Deferred revenue 4,197 2,042 Other liabilities   (44 )   315   Net cash provided by operating activities   102,753     78,498     Cash flows from investing activities: Purchases of marketable securities (75,247 ) (122,422 ) Sales and maturities of marketable securities 249,883 211,928 Additions to property and equipment (15,078 ) (16,961 ) Acquisition of businesses, net of cash acquired 67 (92,136 ) Restricted cash placed in escrow   —     (15,000 ) Net cash provided by (used in) investing activities   159,625     (34,591 )   Cash flows from financing activities: Proceeds from issuance of stock under stock plans 8,631 5,528 Tax benefit from issuance of stock under stock plans 589 784 Purchase of treasury stock   (248,756 )   (85,616 ) Net cash used in financing activities   (239,536 )   (79,304 )   Net increase (decrease) in cash and cash equivalents 22,842 (35,397 )   Cash and cash equivalents at beginning of period   76,804     125,192     Cash and cash equivalents at end of period $ 99,646   $ 89,795   QLOGIC CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION (unaudited — in thousands)   Net Revenues   A summary of the company’s revenue components is as follows:     Three Months Ended   Six Months Ended September 30, 2007   October 1, 2006 September 30, 2007   October 1, 2006   Host Products $ 104,436 $ 100,365 $ 208,644 $ 190,890 Network Products 21,954 20,245 46,406 38,571 Silicon Products 11,494 20,215 21,108 45,652 Other   2,442   4,473   3,945   6,877 $ 140,326 $ 145,298 $ 280,103 $ 281,990   Geographic Revenues   Revenues by geographic area are presented based upon the country of destination. Net revenues by geographic area are as follows:   Three Months Ended Six Months Ended September 30, 2007 October 1, 2006 September 30, 2007 October 1, 2006   United States $ 68,541 $ 79,072 $ 146,288 $ 157,445 Europe, Middle East and Africa 34,559 31,280 65,182 58,047 Asia-Pacific and Japan 28,814 27,784 51,857 57,028 Rest of world   8,412   7,162   16,776   9,470 $ 140,326 $ 145,298 $ 280,103 $ 281,990