Sometimes diversification can prove frustrating.
Witness the recent financial results from Aliso Viejo-based QLogic Corp.
Although the maker of data networking devices posted record revenue of $158.8 million in the quarter, a 22% increase from a year ago and slightly better than analysts’ expectations, investors chose to focus on a QLogic unit that sells controllers for hard disk drives.
Half of QLogic’s business comes from a different business: host bus adapters. About a fifth comes from controllers for disk drives.
Some Wall Street investment banks, including Bear, Stearns & Co. and Piper Jaffray Cos., downgraded QLogic shares after the earnings release, citing weakness in the company’s disk drive controller business.
Analysts have noted that Japan’s Hitatchi Ltd., one of QLogic’s two biggest buyers of controllers, has seen a lot of volatility lately.
“QLogic noted that (hard disk controller chip) revenues were down 4% sequentially, which was better than its original expectations of a 6% to 12% sequential decline, with shipments to Hitachi increasing sequentially during the June quarter,” said Bear, Stearns analyst Andrew Neff in a report.
“While QLogic expects revenues from Hitachi to again increase sequentially in the September quarter, it expects (hard disk controller) revenues to decline sequentially by a range of 4% to 8%, as its customers draw down inventory of hard disk controllers) with the improved availability of enterprise drives and presumably implying weakness at other customer Fujitsu,” Neff said.
Operating profit came in at $63.5 million, an increase of 32% from the year ago quarter’s $48.3 million. Net income for the June quarter was $41.8 million, an increase of 30% versus a year earlier.
QLogic’s host bus adapters sit inside a storage computer and link up with other storage computers to create massive storage networks.
It used to be that analysts liked QLogic’s diversification. The company’s cross-town rival Emulex Corp. is much less diverse, counting 85% of its sales from host bus adapters.
With observers worrying about QLogic’s flagging hard disk controller business, its shares have fallen 13% this year versus a 12% gain for Emulex.
Emulex’s reliance on adapters,once seen as a vulnerability,now is a benefit, according to analysts.
The company is seeing demand from makers of data storage computers, including EMC Corp., Hewlett-Packard Co. and IBM Corp.
Emulex and QLogic dominate the market for host bus adapters, ringing up more than two thirds of the segment’s sales. Smaller rivals include San Diego’s Applied Micro Circuits Corp. and Palo Alto-based Agilent Technologies Inc.
Broadcom’s Buying
Irvine-based chipmaker Broadcom Corp. still is on the buying track. It’ll be interesting to see what it plans to do with its most recent purchase.
The company said two weeks ago it plans to buy Siliquent Technologies Inc. for about $76 million.
Mountain View-based Siliquent designs devices that boost the performance of networks and storage devices. It has research and development operations in Israel.
Siliquent was founded in 2001 and is a “fabless” chipmaker, which means it doesn’t manufacture its devices. Siliquent has 59 employees designing 10 gibabit Ethernet controllers, which are considered the standard for the next wave of networking gear.
Could Broadcom see Siliquent for its value on the patent side?
It’s not out of the realm of possibility, especially in light of Broadcom’s aggressive patent pursuit of San Diego’s Qualcomm Inc.
Last year Broadcom sued Allentown, Pa.-based Agere Systems Inc. for allegedly violating patents that Broadcom bought from Austin, Texas-based Cirrus Logic Inc. This year it’s going after Qualcomm in a no-holds barred battle between the chipmakers.
Meanwhile, Broadcom’s acquisition pace has slowed some in the past year. Its most recent buys include San Diego wireless phone chip designer Zyray Wireless Inc. for $100 million, Andover, Mass.-based Sand Video Inc. for $77 million and San Diego-based Widcomm Inc., a provider of software for Bluetooth wireless products, for $49 million.
The Siliquent acquisition is seen as a play for the future, according to a research note from Standard & Poor’s Equity Research.
“We think the proposed deal will allow Broadcom to establish a stronger footprint in the emerging 10 gigabit Ethernet market, but do not expect meaningful near-term revenue benefits for the company,” Standard & Poor’s said.
The Siliquent deal has been approved by the boards of both companies and is set to close in the third quarter. Broadcom said it might take a one-time charge for research and development expenses it’s acquiring in the deal.
Business Software Spike
Irvine-based Epicor Software Corp. is on a roll.
The company recently released its second-quarter results that beat expectations and raised its 2005 forecast. (See story, page 1).
The Irvine-based business software maker posted net income of $12.8 million in the quarter, up from $8 million a year ago and slightly higher than Wall Street forecasts. Sales jumped 46% to $71 million in the period.
Epicor’s software culls data from production, distribution and accounting operations for use in sales, marketing and customer support. The company sells software to small and midsize businesses.
The company said its software services revenue was up 44% to $51 million in the quarter compared to $35.6 million in the second quarter of 2004.
“We are delighted to report solid results and growth rates exceeding our goals and representing the strongest second quarter revenues in our history,” said George Klaus, Epicor’s chief executive. “Looking ahead to the second half of the year we are raising both our revenue and earnings guidance reflecting our continued confidence in strong execution plus demand for our products.”
Epicor expects to post a profit of about $47.5 million on sales of $280 million this year.
Shares of Epicor are up 7% this year.
