Brocade Communications Systems, Inc. F4Q08 (Qtr End 10/25/08) Earnings Call Transcript

Dec. 4.08 | About: Brocade Communications (BRCD)

Brocade Communications Systems, Inc. (NASDAQ:BRCD)

F4Q08 (Qtr End 10/25/08) Earnings Call Transcript

November 20, 2008, 5:00 pm ET

Executives

Alex Lenke – Director of IR

Mike Klayko – CEO

Richard Deranleau – VP of Finance and CFO

Tom Buiocchi – VP of Worldwide Marketing

Analysts

Samuel Wilson – JMP Securities

Antony [ph] – JPMorgan

Aaron Rakers – Wachovia

Jayson Noland – Robert Baird

Kaushik Roy – Pacific Growth Equities

Glenn Hanus – Needham & Company

Tom Curlin – RBC

Matt Woodgron [ph] – FTN Midwest

Min Park – Goldman Sachs

Jackson Shaw [ph] – Icast [ph]

Operator

Good day and welcome to the Brocade Communications' Q4 2008 conference call. Today’s conference is being recorded. At this time I like to turn the conference over to Mr. Alex Lenke, Director of Investor Relations. Please go ahead sir. Mr. Lenke, please go ahead.

Alex Lenke

Okay. Thank you for calling in today. Thank you, operator, and good afternoon everyone. Joining me today from Brocade are Michael Klayko, CEO; Richard Deranleau, CFO; and Tom Buiocchi, VP of Marketing. Before we begin let me cover some housekeeping items.

Brocade issued a press release today detailing its fourth quarter and fiscal year-end 2008 financial results via PRNewswire and First Call. The press release is available on our website at www.brcd.com. A copy of the slide presentation will be posted just after the conference call concludes.

This conference call is being web cast and will be archived on our website for approximately 12 months. In addition, a telephone replay will be made available at approximately 5:00 p.m. Pacific Time today through 5:00 a.m. Pacific Time November 27th. To access the telephone replay, dial 888-203-1112 or 719-457-0820. The pass code is 2148235.

As a reminder, the information the presenters discuss today will include forward-looking statements, including without limitation, statements about Brocade’s financial results, plans and outlook, business outlook, guidance and the proposed acquisition of Foundry Networks. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other risks are set forth in more detail in our Form 10-Q for the quarter ended July 26, 2008.

These forward-looking statements reflect beliefs, assumptions, estimates and predictions as of today and Brocade expressly assumes no obligation to update any such forward-looking statements.

Certain financial information that we review today on today’s conference call is presented on a non-GAAP basis. The most directly comparable GAAP information and a reconciliation between non-GAAP and GAAP figures are provided in today’s press release, which has been furnished to the SEC on Form 8-K and in the corresponding slide presentation on our website.

With that, I will now turn the call over to Mike.

Mike Klayko

Good afternoon everyone. Thank you for joining us. Q4 was an outstanding quarter as Brocade again achieved record revenues growing 17% year-over-year. Our continued operational execution also drove significantly better than expected profitability and overall financial performance.

We exceeded the Street EPS estimates for the 13th consecutive quarter, once again achieved sequential margin expansion and as Richard will discuss, our cash flow and balance sheet metrics remain robust.

On an annual basis, for the full year 2008 we performed very well throughout the year growing both top and bottom lines, returning to double-digit revenue growth, expanding margins, and continuing to extend our competitive leadership position. Our results for the year were driven by continued innovation and delivery of new products and service offerings.

In Q4 we saw continued strong growth of our DCX backbone, increasing acceptance of our full family of 8-gig switch and 8-gig server blade offerings and the introduction of new differentiating capabilities such as high speed data encryption and improved network management products.

Progress in our HBA business also remains on track. Early customer deployments are demonstrating the performance and reliability that we anticipated, the qualification testing at our OEM partners continues to proceed smoothly. As we mentioned in our prior call we expect several of these qualifications to be completed by the end of calendar 2008 helping our ability to ramp this business in 2009.

And today I am pleased to announce that IBM has awarded Brocade a design win for our HBA – our 8-gig Fibre Channel HBA and they will be bringing them to market in early 2009. It is clear that our product advantages have helped this to further widen our competitive advantage in our core markets as we enter 2009.

Clearly, we are balancing our optimistic view with caution looking into 2009 but in that context we will continue to deliver the infrastructure that best enables cost savings solutions such as virtualization, consolidation, and more efficient data protection. And we will do this with the highest quality performance, most reliable, and most energy efficient products available in the market place today. We continue to garner consistent, very positive customer feedback, which along with our broad industry-leading product and service offerings bolsters our confidence in our ability to compete and win in both the short and long term.

With that, I’d like to turn the call over to Richard for some more detail on our Q4 and year end results and our outlook going forward. Then I will return for a few concluding remarks.

Richard Deranleau

Thank you, Mike, and thanks to all of you for joining us today. We are proud of our results in our fourth fiscal quarter and the full fiscal year. As a reminder our earnings release contains a number of details on our Q4 results, which I will not be repeating on today’s call. So please make sure you reference the release and the accompanying slides today. Now let us look at our financial results beginning with the income statement.

The record revenues in Q4 were driven by strong performance in our core infrastructural products including our DCX platform, our switch product family, and our embedded switches for bladed servers.

On a geographic basis, we saw broad strength across all geographies with very solid performance in North America and particular strength in EMEA where we had a record revenue quarter. In Q4, our international revenue percentage, normalizing for those large OEMs who take delivery of internationally destined products within the U.S., was approximately 59%, down slightly from 60% in Q3.

Our full year FY08 revenues were approximately $1.47 billion representing 19% growth over FY07.

Moving on to our Business segments, data center infrastructure revenues were 12% – were up 12% quarter-over-quarter and up 16% year-on-year. Our DCX backbone continues to be a significant contributor, representing approximately 50% of overall direct sales in Q3.

Server connectivity revenues were also up 3% quarter-on-quarter and 43% year-on-year driven primarily by another record quarter in bladed switch modules.

In our Services business, revenues were essentially flat quarter-on-quarter and up 17% year-on-year.

Revenue in our Files business was flat quarter-on-quarter and during Q4 we restructured our Files business to better align the cost structure with revenue performance. After the close of the Foundry acquisition, we expect to integrate our Files business within segments of foundry, where we believe there are technological and product synergies.

Moving on to gross margins, on a non-GAAP basis, gross margin for Q4 was 64.1%, higher than our previously expected range of 61% to 61.5% and above our long-term target model range of 58% to 61%. The upside in gross margin was driven by the higher revenues and by improvements in our product cost structure. Non-GAAP gross margin in our services business was 40.1%, up from 37.5% in Q308 due to reduced direct expenses in service delivery.

Q4 non-GAAP operating expenses were $151 million, slightly above the high end of our prior outlook of $146 million to $149 million, driven primarily by the variable cost from the higher revenue levels. Non-GAAP operating margin for Q4 was 26.2%, exceeding our prior outlook of 20% to 22% and well above our long-term model of 19% to 23%. For the year, non-GAAP operating margin was 23.9%, an improvement of 300 basis points from 20.9% in our FY07.

Moving on to our operating results on an earnings per share basis, Q4 non-GAAP diluted EPS was $0.20, well above our original guidance of $0.15 to $0.16, driven primarily by the higher revenues and higher than expected gross margins.

Reporting on a GAAP diluted basis, Q4 EPS was $0.10 compared to our original guidance of $0.04 to $0.05 primarily due to a favorable change in our GAAP tax rate.

For the year, non-GAAP diluted EPS was $0.67, an improvement of 20% from the $0.56 in FY07 and GAAP diluted EPS was $0.44, an improvement of 110% from $0.21 in FY07. The difference between GAAP and non-GAAP net income is reconciled in today’s press release and in today’s web cast slides.

Now turning to our cash flows and balance sheet, cash flow from operations in the fourth quarter was approximately $169 million, significantly above our expected range of $60 to $80 million, reflecting strong working capital management.

For the year, Brocade generated $438.5 million in cash from operations.

Now let us turn to our annual outlook for fiscal 2009. For the standalone Brocade business, we will be providing you with an updated consolidated outlook which includes both the Brocade and Foundry businesses in Q109 after the expected close of the acquisition in December 2008. Our planning assumption is that current IT spending environment will be challenging for the first half of 2009. As we did in Q4, we plan to continue carefully managing our expenses and headcount growth. While our core markets remain competitive we believe that product advantages and momentum and our installed base advantage keeps us in a uniquely strong competitive position. From a pricing perspective, we expect quarterly ASP declines to remain in the low single digits.

Given these considerations, here is our updated FY09 annual outlook for Brocade’s standalone business as compared to the original outlook we gave you at our September 17, 2008 Analyst Day

We expect our Brocade standalone annual revenue to be in a range of $1.44 billion to $1.49 billion, which is roughly flat with FY08 plus or minus 2%. We expect Brocade Q1 revenues to also be roughly flat with Q408.

We expect our Brocade FY09 non-GAAP gross margin to be between 60% and 61% unchanged from analyst day and at the high end of our long term model range of 58% to 61%.

For FY09, we expect total non-GAAP operating expenses to be in the range of 38% to 39% of revenues. We will be disciplined about our spending, but we continue to invest in order to maintain our product cycle momentum and our strong position within the market.

We expect our non-GAAP operating margin to be in the range of 21% to 23.5%, which is at or slightly above the high end of our long-term target model of 19% to 23%.

Regarding our tax rate for FY09, again on a Brocade standalone basis, although there maybe some level of volatility, we expect that our annual non-GAAP tax rate will be approximately 30%, reflecting the successful completion of our international restructuring. For our GAAP tax rate, we expect a benefit of approximately 29%.

We expect diluted standalone shares outstanding to be in a range of 395 to 405 million shares, including the diluted impact of 12.1 million shares of the McData convertible debt. Based on these factors, we expect FY09 Brocade standalone non-GAAP diluted EPS to be in a range of $0.57 to $0.60 without the impact of the acquisition related debt. This compares to the range of $0.64 to $0.66 presented at our September Analyst Day.

We expect FY09 GAAP diluted EPS including the impact of the interest expense on the $1.1 billion acquisition-related debt to be in a range of $0.11 to $0.15. And we expect the differences between non-GAAP and GAAP results in 2009 to be consistent with the non-GAAP items in our Q4 earnings release plus the interest expense on the acquisition related debt.

Now turning to our balance sheet and cash flows. Once again the following statements are for Brocade standalone business and we will update this information after the Foundry acquisition closes. We expect capital expenditures for FY09 to be in the $48 million to $64 million range, plus expenditures for the new campus of approximately $100 million. From a working capital perspective we expect DSOs in FY09 to be in a range of 40 to 50 days and on hand inventory to be in a range of $20 million to $25 million. In FY09, we expect to generate cash from operations net of interest expense and excluding the one-time $116 million payment for the shareholders settlement of approximately $210 million to $217 million. We expect our long-term debt repayment of principal in FY09 to be in the $55 million to $100 million range.

In summary, Q408 we had an excellent quarter financially, and we ended a very successful FY08 on a particularly strong note.

So thank you, everyone. And with that, I will turn the call back over to Mike.

Mike Klayko

Thank you, Richard. We had an excellent Q4 by every measure and our fiscal 2008 was another very satisfying and transformational year for Brocade.

If I look back at the year in 2008, in Q1 we introduce the industry’s leading DCX Backbone, which consolidated a gain [ph] in Brocade technology and provided breakthroughs in performance, density, and energy efficiency. And our customers are embracing this new platform today’s need and as a seamless stepping stone for future protocols and data center requirements.

In the second quarter, we announced the acquisition of SBS to enhance and expand our service business. We also announced our entrance into the HBA market secured qualification opportunities. We began shipping our new products to customers and channel partners.

In the third quarter, we introduced an entire 8-gig switch and 8-gig bladed switch family that is also completely compatible with installed Brocade integrator products and we announced our intention to acquire Foundry Networks, which we firmly believe will allow us to accelerate growth in a much larger market opportunity. And as you know we ended the year on some very positive notes once again exceeding our financial and business goals.

We look forward to 2009 with great anticipation. Although 2008 was a fantastic year by all measurements, we believe our greatest opportunity still lie ahead of us.

Now, with that, thank you for joining us today. And now, we would like to open up the call to take your questions. Operator, please.

Alex Lenke

Operator, we will take our first question please.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Samuel Wilson with JMP Securities.

Samuel Wilson – JMP Securities

Hi, good afternoon. Two questions for you. One for Mike, have you – when you talk to customers right now are you – is your sense that they’re canceling budgets, they’re maintaining their current budgets, they’re looking at trimming ‘09 budgets. What is thought process here? I know you mentioned that you think the environment is challenging for the next six months, but just when you’re talking to customers on storage budgets what is going on in real time right now?

Mike Klayko

Well I think there is – I think customers right now have an introspection or taking a look at where they actually need and separating between must have and nice to have. Must have is getting funding, nice to have is not.

Samuel Wilson – JMP Securities

Got it. And then Richard, one question for you, I didn’t understand fully did you say that the non-GAAP EPS for ’09 is without interest expense on the debt?

Richard Deranleau

That is correct Samuel. We’re trying to do is make sure you have a clear comparison of apples-to-apples to the Analyst Day. So this way you can go back and use the guidance I just gave you, compare it directly against the Brocade standalone that we talked about at Analyst Day to see the changes. Then we have also given you on the slides today the amount of interest expense related to the $1.1 billion acquisition facilities. So, you have the ability to go either direction.

Samuel Wilson – JMP Securities

Got it, So – one last question, when as you quoted in your reported non-GAAP numbers for ’09, are you planning on excluding interest in the non-GAAP numbers, right?

Richard Deranleau

Well, we’re still considering that but at this point what I’m leaning to do is the acquisition-related debt after the acquisition closes will be brought back into our non-GAAP numbers.

Samuel Wilson – JMP Securities

Perfect. Okay, great. Thank you.

Richard Deranleau

Thanks, Sam.

Operator

(Operator instructions) And we will take our next question from Mark Moskowitz with JPMorgan.

Antony – JPMorgan

Yes, thanks very much. This is Antony [ph] for Mark. Going back to the current business environment, what sort of business are you seeing from new installation build-outs versus the completion of existing build-outs and what sort of applications are driving the new installation activity.

Mike Klayko

Tom, go ahead.

Tom Buiocchi

Yes, this is Tom, Antony. What is driving it a lot is consolidation projects. So I’m not sure if we consider those add-ons or new projects but a lot of consolidation in terms of both energy efficiency, server consolidation and overall data center consolidation is driving a lot of our new projects today. And then on the ongoing side, you know the storage market has been a little more resilient and therefore when you add more storage to your data center storage networking goes along with that. So we have seen that continuing pretty well also.

Antony – JPMorgan

And can you give some sort of mix in terms of new versus existing?

Tom Buiocchi

Yes that is hard to do. We really can’t. We have a difficult time tracking that obviously with our OEM models. It is tough to keep track of that. So I really don’t have a good answer for you there, sorry.

Antony – JPMorgan

Okay, fair enough. And then in terms of existing ongoing sales negotiations, are you adding incentives such as services to drive your hardware sales?

Tom Buiocchi

Not at all. If you look at our gross margin percentage going up I would argue otherwise that our products are becoming more competitive over time and our competitive lead in our product category is increasing. So no, not at all.

Mike Klayko

And I might jump in on that too and mention that we have always as a strategy of wanting to wrap services around our products but that is not something we have done in reaction to the economic climate. That is just something we have always wanted to do.

Antony – JPMorgan

Okay, and then last one from me, in terms of the services business what are the key drivers for that piece of the business?

Tom Buiocchi

Well, it is interesting. Again this is Tom. After our acquisition of SBS, we picked up probably the world’s best and most experienced server virtualization installations team. So lot of server virtualization projects we have probably done more VM [ph] or installations in either service arm in the industry today, and a lot of consolidation and consulting on how to get more out of your existing assets in your data center.

Antony – JPMorgan

All right. Thanks very much.

Mike Klayko

Thanks Sam.

Operator

Our next question comes from Aaron Rakers with Wachovia.

Aaron Rakers – Wachovia

Hi, thanks for taking the question and congratulations on another solid quarter. I guess first question from me, you know congrats on the HBA design win officially being announced. Can you help us understand what platforms specifically within IBM you are getting qualified into?

Tom Buiocchi

Hi, Aaron. This is Tom. I’m not going to give you the exact letter because I will rather let our partner do that but it is a high volume product line.

Aaron Rakers – Wachovia

Okay, fair enough. And I apologize if I missed it but under your assumptions for fiscal 2009 what was your – what is your current estimate the other income line. I don’t know if you gave that or maybe I missed it.

Richard Deranleau

Other income, yes if you go back to slide 19 when you get a chance, we have got current outlook is $0 million to $4 million on other income.

Aaron Rakers – Wachovia

Okay, fair enough. And then when we look at your revised top line guidance relative to the Analyst Day and then also what you are saying about the operating expenses, it looks like you are taking about – out about $60 million of OpEx out of the model. Is that all variable cost and the reason I ask is that let us say that the current demand environment deteriorates further, you know, is there levers within the model that you might pull to even sustain that type of operating margin that you’re talking about.

Richard Deranleau

Yes, I mean clearly at some point of revenue the margin percentage will begin to drop because what we will be doing is we will be maintaining our core strengths in order to make sure that we maintain the product leads and the position we have in the market. There is obviously some flex within our model, but again we feel very comfortable with the revenue guidance we gave at this point in time and we believe we can prudently manage the business.

Aaron Rakers – Wachovia

Okay, perfect. And then final question from me on the Foundry acquisition, just to put it rest, in terms of the financing and everything for that acquisition, you know are we through that completely and that is a non-issue at this point?

Richard Deranleau

Yes, I think it pretty much yes. As you are probably aware, we have $1.1 billion that is sitting in a custodial account in Brocade’s name. We do continue to have a bridge commitment if at all necessary from Bank of America and Morgan Stanley. Clearly with a reduction in the price that the need for that are vastly diminished. So, we were feeling very good about the financing.

Aaron Rakers – Wachovia

Okay, thanks a lot guys.

Operator

And our next question will come from Jayson Noland with Robert Baird.

Jayson Noland – Robert Baird

Thank you. First, just a question on ASPs and gross margin. Richard your guidance is unchanged in ASPs and gross margin from the Analyst Day. I guess the question is you wouldn’t expect an increasingly difficult environment to cause pressure on pricing?

Richard Deranleau

Well, that is a good question. And the reason I think it makes sense for us is the nature of the way our market works, which is you know you go after design, and we have talked about this before Jayson, but you go after design when that is very competitive. It has always been very competitive and then once you have the design win, pricing is more controlled. So that phenomenon really doesn’t change and this allows us to leverage our footprint in an installed base within the market.

Jayson Noland – Robert Baird

Okay, just two more questions briefly. Competitively Cisco pushing the Nexus platform, do you guys feel that is causing a share shift to Brocade, back to Brocade?

Mike Klayko

Instinct way of phrasing that question Jayson, it is tough to quantify that but it is certainly not hurting us at this point in time. So I liked the way you phrased it.

Jayson Noland – Robert Baird

Last question, then Richard on the $100 million spend for the new campus, how would that look quarterly for next fiscal year?

Richard Deranleau

Ratably.

Jayson Noland – Robert Baird

Okay, thanks a lot guys.

Operator

We will move on to Kaushik Roy with Pacific Growth Equities.

Kaushik Roy – Pacific Growth Equities

Most of your current investors and even those who are not involved with Brocade at this time are saying that Brocade should maybe try to renegotiate a lower price for Foundry. So my question is why aren’t you trying to lower the price below 16.50, which is perceived still to be pretty high in this market environment. Any comments will be appreciated.

Mike Klayko

Kaushik, as you know, this is Mike. We started our process years ago in developing a strategy. And if you got a strategy in a market, which I will call fear session. We’re not in a recession. We’re in a fear session. We’re really just afraid and paralyzed to do anything. I actually believe right now that we’re executing very well. I think as we come out of that we’re going to thrive. And if you don’t execute and if you do not stick to your strategy or if you don’t have a strategy you will die. And so with that I’m not going to risk short-term aspects for debt. We’re going to come out of this even stronger because actually we have a strategy and we have proven we can execute pretty well to it.

Kaushik Roy – Pacific Growth Equities

And Richard, you said for fiscal Q1, you are guiding flat revenues, is that correct?

Richard Deranleau

Yes.

Kaushik Roy – Pacific Growth Equities

And then can you give us some color on the non-GAAP gross margin or EPS?

Richard Deranleau

Non-GAAP gross margin and EPS from what perspective Kaushik.

Kaushik Roy – Pacific Growth Equities

For fiscal Q1.

Richard Deranleau

We don’t think so, Kaushik.

Kaushik Roy – Pacific Growth Equities

Okay, and then last question from me, Tom, so it seems like you gained some share and then the market itself was better than expected. So which was more, was it more due to share gain or was it more because the market itself was better?

Tom Buiocchi

The market was clearly strong in Q4 as we often see seasonally but we did gain some significant share we believe particularly in the switch market where our 8-gig switch family is shipping for a full quarter across all OEMs. So, a little bit of both. It is tough to quantify which one is the more dominant at this point in time, but it was a good market in Q4 and we were very strong in our switch family and in our direct [ph] family.

Kaushik Roy – Pacific Growth Equities

Okay, great thanks.

Tom Buiocchi

Yes.

Operator

Our next question comes from Glenn Hanus with Needham & Company.

Glenn Hanus – Needham & Company

Hi, maybe just first to follow up on the gross margin. You know, given the tremendous performance this quarter and the guidance next year in the 60, 61 ranges. Is that more kind of volume related or whether why did you put out sort of more conservative margins there?

Richard Deranleau

There is – there is a mix issue relative to Q1 versus Q4 around products. There is some dynamics going around the residual revenue from McData, there were some benefits that we had in Q4, which were around product costs, which will be difficult to get again in Q1, but I still think that we have some pretty solid gross margins 60% to 61% I think is a pretty good forecast in the world in which we live.

Glenn Hanus – Needham & Company

All right, it certainly is. Could – in your response to the first question there Mike you said you know separate must haves from nice to haves, could you maybe just give us a little more color as to what you and customers view as must have going forward versus nice to have?

Mike Klayko

Yes, I will just give you the simplest one right now. I have made a lot of customer calls in the last quarter. I make customer calls all the time. Just six months ago to get into a large company and say by the way I can show you how you can save a couple of million dollars by implementing A, B, and C; in many of the accounts I would go call on I couldn’t get a meeting for savings of a couple of million dollars. I can get those all day long now. And so that becomes a must have technology when you can show them how you can save costs because everybody is struggling with data and network traffic have grown compounded it is 50% and budgets are relatively flat. And so there’s a huge disconnect there and so if you can show how to save money and take costs out of the equation, it becomes a must have.

Glenn Hanus – Needham & Company

Okay, thanks and maybe lastly any update on Fibre channel over Ethernet. I think you are due to have some FCV [ph] which is out by the end of ’08 and HBA in that space and any general comment on how you are seeing that market develop?

Tom Buiocchi

Yes, Glenn, this is Tom. Again it is kind of a – it is interesting. Some customers are very excited about it and aggressive with regard to pursuing it. Others are less so. We’re going to pursue our product plans to maintain product leadership in that area. But if you think about 2009 with a little bit of uncertainty and a lot of IT budgets and so forth most customers that we talked to will be deploying what they know best and what is the safest choice for that period of time. So, we continue to believe that the FCV market will evolve but it is a probably a 2009 trials and 2010 starting some pilot deployments.

Glenn Hanus – Needham & Company

Okay, thank you.

Operator

And we will take our next question from Tom Curlin with RBC.

Tom Curlin – RBC

Hi, good evening. Congratulations on a good quarter too.

Mike Klayko

Thanks, Tom.

Richard Deranleau

Thanks, Tom.

Tom Curlin – RBC

Have you with the renegotiation of the price were you given an opportunity to go through due diligence again on Foundry’s pipeline of business?

Mike Klayko

Hi, Tom, you know the answer to that one, don’t you? Everything is in the proxy right now.

Tom Curlin – RBC

I don’t know the answer to that one.

Mike Klayko

So, everything that – we haven’t closed the transaction right now. So, I will tell you that everything that is public is public to all and I would have to just keep it in the proxy.

Tom Curlin – RBC

Okay, so, – okay, if is in the proxy then you can repeat it on this call, right?

Mike Klayko

We can reference the proxy.

Tom Curlin – RBC

Okay, all right. That is all I have, thank you.

Mike Klayko

Thanks.

Operator

We will take our next question from Bill Fernley with FTN Midwest.

Matt Woodgron – FTN Midwest

Hi, this is Matt Woodgron [ph] for Bill tonight. My question, any update on the OEM partners testing and deployments of 8-gig HBAs and any color you can give on how the HBA business will contribute to revenue in 2009?

Mike Klayko

Yes, you may have missed them on the comments on the call. We did announce today a design win that IBM awarded us with regard to our 8-gig Fiber channel HBAs and with expectations that will be in the market in early ’09 with that product. And I won’t speak for the other OEMs, but the qualifications are going extremely well and as we stated before we got to look to early ’09 for the initial ramp of that.

Matt Woodgron – FTN Midwest

Okay. And just another topic I want to revisit. Gross margins, particularly ASPs, you said before, I understand that in times of pressured IT spending environment I can give a list to ASPs, I was wondering if you can – if you could just say how long that trend can continue or how that thing is going to continue?

Mike Klayko

You know, we lost – I am sorry we lost you for one second there, could you repeat that?

Matt Woodgron – FTN Midwest

I was wondering how long the trend of ASPs is getting from pressured IT spending environment is going to continue?

Richard Deranleau

Yes, I think what we have seen is we have seen that ASPs have pretty much stayed stable for really since the acquisition of McData as the – as we’re really selling a lot of value now. We have a lot of benefits from a product perspective. There is also some dynamics I kind of referenced earlier in terms of how the actual product is deployed. So, we feel pretty comfortable. It may seem counterintuitive but that the ASPs are going to be the way in the low-single digits for really over certainly over 2009 as we gave our guidance. We feel that it is just the dynamics in the market that lead to that. This has been a fiercely competitive market in the last several years at a minimum and so that dynamic remains and it has and will remain to be a competitive market and the ASPs have settled into the dynamic.

Matt Woodgron – FTN Midwest

Okay, thank you.

Operator

(Operator instructions) We will take our next question from Min Park with Goldman Sachs.

Min Park – Goldman Sachs

Great. Thank you. Just a couple of questions please. First, to what extent are you already seeing some benefits from transition spending from your customers consolidating particularly in the financial services and what do think the longer term impact could be?

Mike Klayko

Min, I don’t know if it is immediate or it has been going on. At any one point in time we actually look at this very closely we think that there is about 60% of our customers, 60% at any one point in time or in some form of consolidation always. So not just financial services but telecom and healthcare, whatever pick your industry, pick your geography. And they do it for a variety of reasons, they acquire, they move to new facilities, they actually want to just bring some applications together. So when you look at it from that perspective – we don’t see a lot of spikes and valleys. So the data on that is relatively low Min from that variable. And so we keep a pretty good look – we watch that pretty closely and looking at it over the past few years it has been relatively constant or like that.

Min Park – Goldman Sachs

Okay, and then I believe that you mentioned that you expect the macro weakness to be more acute in the first half of your fiscal year.

Mike Klayko

Well that is – if you look back over the last 100 years there has been about 13 recessions and if you believe, pick whenever you think the recession if we are in one started in average about 11 months in length and so if you think it started in the summer or the fall or whatever, we have actually think the first couple of quarters is going to be tough. I mean everybody does from that standpoint. It doesn’t mean there isn’t going to be business there, what it means is you just have to go at it and focus on those accounts that need ahead and focus on some of the cost savings and in their deployments and consolidations and so forth. So that is how we were looking at it is – back to this fear session that is going on, everybody writes about it, and we are looking around the corner going well what are we missing because right now we still see lots of opportunity ahead of us.

Min Park – Goldman Sachs

Okay, I guess the question is, if you’re looking for flat sequential revenue in the January quarter that implies about 15% year-over-year growth, but you are looking for a flat year-over-year growth for the entire fiscal year, which suggests that you are looking at declining year-over-year growth as we progress through the year. I am trying to reconcile that with your comment that you are looking, you are being more cautious in the front end of the year?

Richard Deranleau

Yes, I think it is – probably the best way to look at that Min, if you look at our historical seasonal patterns and you would have expected our Q1 to be up significantly over our Q4.

Min Park – Goldman Sachs

Sure.

Richard Deranleau

And what we are saying is we are seeing that that this flat. And then once you take a look at that and then you layer on other historical patterns, then I think you get to your answer.

Min Park – Goldman Sachs

Great. Thank you very much.

Richard Deranleau

Thanks, Min.

Mike Klayko

Operator, one more question please.

Operator

Yes, certainly. We will take our last question from Jackson Shaw [ph] with Icast [ph].

Jackson Shaw – Icast

Hi, good afternoon, just a quick question about the closing. Just wanted to find out any clarification on the closing, you did say December to see it in the proxy, but just wanted to clear or you know it is first half, second half?

Mike Klayko

Sure, the Foundry transaction, as a matter of public record, the Foundry’s shareholders are voting I believe on the 17th, and then we would want to close fairly quickly after that.

Jackson Shaw – Icast

Okay. So a matter of a few days.

Mike Klayko

Yes, I think the original agreement; I think it is still true today as we have 10 days to close. So, we would want to close certainly within 10 days of the shareholder vote.

Jackson Shaw – Icast

Okay, could it be before the holidays or –

Mike Klayko

You know, it actually it is a window of 1 to 10 days.

Jackson Shaw – Icast

Okay.

Mike Klayko

That is the best we can give you at this point.

Jackson Shaw – Icast

Okay, great. Thank you.

Mike Klayko

Thanks everybody. Operator, I think you can end the call. And I thank everybody for joining us. We are going to be scheduling a meeting. Watch the press to come out in some time in December announcing an updated analyst or an updated financial model sometime in January. With that, thanks to all for joining.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation and have a wonderful day.

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