It looks like Wall Street’s verdict on the sale of QLogic Corp.’s disk drive controller business is in: Investors don’t like it.
Aliso Viejo-based QLogic, a maker of electronic components for data storage networks, saw its shares fall after a recent quarterly report raised new concerns about the diversity of the company’s revenue sources.
The company reported revenue came in at $119 million for the quarter ended Oct. 2. That was up 16% from the year-ago period but short of a $120 million estimate, according to a survey by Thomson Financial.
QLogic also lowered revenue guidance for the next quarter to $121 million to $125 million, compared to the analysts’ consensus of $127 million.
The company reported the disappointing revenue minus its disk drive controller business, which it plans to sell for $225 million to Sunnyvale-based Marvell Technology Group Ltd. in the next several weeks.
QLogic shares had bounced around following word of the sale in August. Investors and analysts clearly were trying to figure out if the company was on the right track.
But there was little pondering after the recent announcement.
When trading picked up after QLogic’s Oct. 20 earnings report, shares fell about 10% to about $30. It then drifted about a dollar lower in the next few days, setting 52-week lows.
The decline came even as QLogic’s profit beat expectations during the quarter. The company posted net income of $30.5 million for ongoing operations, up 20% from the year-ago period. That topped estimates of $29.9 million.
Shaw Wu, an analyst with American Technology Re-search Inc. in San Francisco, lowered his earnings and revenue estimates for the next few years and maintained a “hold” rating on the stock.
He reflected what might have been the growing consensus among investors: QLogic is too narrowly focused in the wake of the sale.
The new QLogic is “less attractive” without the disk drive controller unit, said Wu, who added that the company “is no longer the diversified (integrated circuit) play it once was.”
Wu said that the company’s remaining businesses are in tough markets, and QLogic hasn’t been able to make an impact in the market for more lucrative high-end servers.
Three other analysts,New York-based RBC Capital Markets Corp., St. Louis-based A.G. Edwards Inc. and New York-based Needham & Co.,reduced their stock price targets within a few days of QLogic’s report. And Punk Ziegel & Co. in New York downgraded the stock from “accumulate” to “market perform.”
QLogic has said the sale will help it focus on its core business of making electronic components for storage area networks. Many observers had seen the disk drive controller business as a drag on earnings.
Initially, investors were pleased about the sale and pushed up its shares by about 2%.
But in late August, a couple of analysts downgraded QLogic shares based on the sale and its stock fell by about 6%.
Piper Jaffray analyst Les Santiago, who downgraded his rating on the stock to “underperform,” said the price tag for the business was at least 50% below what investors thought it was worth.
“Our belief is that investors were looking for an improvement in the (disk drive controller) business as opposed to a sale at these prices,” Santiago wrote in a note.
One analyst came to the company’s defense. QLogic got an upgrade to “buy” from Citigroup’s Paul Mansky. He said the stock sell-off was overdone.
After having lowered 2006 sales expectations twice for QLogic, Mansky said the sale of the business improved the company’s growth rates and stock predictability. He also said concerns from other analysts were “backward looking.”
Dakota Pickup
Irvine-based Gateway Inc. has moved some workers back to its roots.
The computer maker put about 50 employees at its Kansas City site on notice earlier this month that their jobs are being shipped to North Sioux City, S.D., according to the Kansas City Business Journal. Gateway has about 500 employees in Kansas City.
The company’s headquarters were in North Sioux City, S.D., during the 1990s, when Gateway used its Midwest roots,complete with cow prints on its boxes,to become one of the nation’s largest computer makers.
By the end of the decade, the company moved to Poway, a San Diego suburb, to be in a larger technology hub where it would be easier to recruit.
The struggling company, which was looking to boost its presence at big retail electronics chains, picked up Irvine-based computer seller eMachines Inc. in 2004. Gateway tapped Wayne Inouye, eMachines’ chief executive, to run the company. Inouye since has moved Gateway from Poway to Irvine.
Are the Numbers Coming?
Santa Ana-based MSC.Software Corp. said earlier this month it expected to come up with its past earnings restatement and file current reports by the end of this quarter.
The industrial design software maker is “approaching the final stages of the restatement process,” the company said.
The company hasn’t filed financial results with the Securities and Exchange Commission for more than a year.
MSC is the target of an SEC inquiry into its financial reporting. The inquiry came after the company launched its own look into its accounting procedures.
