Thursday, January 20, 2011

Emulex Earnings

Date network hardware manufacturer Emulex beat estimates, but in a recurring theme in this reporting season, Emulex gave guidance which was below the top end of analyst forecasts. For the last few quarters investors have got used to companies beating and estimates may well be above potential outcomes. Nonetheless, these results are good from Emulex.

Emulex reported Q2 results of

  • Revenues of $114m vs. market forecast of $113.4m
  • EPS of 15cents vs. market forecast of 13cents

For Q3 Emulex guided towards

  • Revenues of $108-112m vs. market forecast of $110.5m
  • EPS of 8-11cents vs. market forecast of 11cents

The results were disappointing in the context of the excellent numbers that IBM (their largest single customer) gave last week. Moreover, rival company QLogic upgraded guidance recently and there were a lot of hopes that Emulex would too.

Listening to the conference call, the management was upbeat about prospects and in particular, the upgrade cycle towards 10GB Ethernet based net revenues.  Emulex top brass talked of ‘meaningful’ growth in the June quarter (Q4 fiscal) which was later referred to as ‘high single digit’ revenue growth. This is traditionally a weak quarter for them.

Host Server Products (HSP) makes up the bulk of revenues (81%) and this is where the growth is coming from. Embedded Server Products (ESP) is still in decline but they are seen as providing easy comparatives going forward. Emulex still feels that HSP will be the growth driver going forward. The senior management discussed 18-20% calendar year growth but it is hard to see them achieving that. If I assume that 8% is the ‘high single digit’ growth for June and Mar is predicted at $110m (midpoint) this gives $110+(103.1*1.08)=221m and 500m would be the target. This means the second calendar half has to do around 279m.

This looks to be a rather decent ‘ask’. Nonetheless, these numbers don’t suggest any slowdown in data center or internet hardware spending. Instead, it looks like analyst forecasts have been too exuberant.