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QLogic Corporation (NASDAQ:QLGC)

F3Q13 Earnings Call

January 24, 2013 5:00 PM ET

Executives

Jean Hu – SVP and CFO

Simon Biddiscombe – President and CEO

Analysts

Amit Daryanani – RBC Capital Markets

Aaron Rakers – Stifel Nicolaus

Katy Huberty – Morgan Stanley

Andrew Nowinsk – Piper Jaffray

Glenn Hanus – Needham & Company

Vlad Rom – Credit Suisse

Jung Pak – BMO Capital Markets

Operator

Good day and welcome to the Third Quarter Fiscal Year ‘13 QLogic Earnings Announcement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Ms. Jean Hu. Please go ahead.

Jean Hu

Thank you operator. Good afternoon and welcome to QLogic’s third quarter fiscal year 2013 earnings conference call. Joining me on the call today is Simon Biddiscombe, our Chief Executive Officer. I’ll begin the call with a review of the third quarter financial results. Simon will follow with his customary business update. We’ll then open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and our projections of our financial performance based on our current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.

We refer you to the documents QLogic files with SEC, specifically our most recent Form 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our third quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. All of the references we’ll make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of the non-GAAP to the GAAP financial measures is available on our website on the Investor Relations.

Turning now to our financial results for the third fiscal quarter ended December 30, 2012. Our revenue in the third quarter was $119.4 million, compared to $142.8 million recorded in the same quarter last year. This revenue was above the high-end of our guidance range of $112 million to $118 million provided during our second quarter earnings call and slightly above our preliminary third quarter results announced on January 15.

The strength in revenue relative to our guidance was driven by higher than expected revenue from Host Products and particularly strong performance from Network Products. Our third quarter revenue from Host Products, which are comprised primarily of Fibre Channel, Converged and 10-gig Ethernet adapters was $89.8 million, compared to $111.8 recorded in the third quarter of last year. Third quarter revenue from Network Products, which are comprised primarily of Fibre Channel and Converged Switches was $20.1 million, up from the $18.5 million recorded in the third quarter of last year.

Our third quarter revenue from Silicon Products comprised of Fibre Channel, Converged Host and Switch and the 10-gig Ethernet chips was $9.6 million and consistent with our expectations.

Our third quarter gross margin of 67.9% declined from 68.5% recorded in the third quarter of last year, primarily due to lower volumes to offset manufacturing costs. Our gross margin was at a high-end of our guidance range of 67% to 68% provided during our second quarter earnings call.

Next, I’d like to cover our third quarter operating expenses. As a reminder, we continue to invest in engineering in order to address increased opportunities and expand our server to markets while aggressively managing sales, marketing and G&A costs.

Total operating expenses were $59.4 million, up from $55.9 million reported in the third quarter of last year. Operating expenses were consistent with our expectation. Engineering expenses in the third quarter of $35.4 million increased from $31 million to last year.

Sales and marketing expenses in the third quarter was $17.7 million, down from $18.1 million last year. G&A expenses in the third quarter of $6.3 million decreased from $6.8 million last year. Operating income in the third quarter of $21.6 million was 18.1% of revenue. Interest and other income was $900,000 in the third quarter. Our income tax rate for the third quarter was 18.6%.

Our third quarter income from continuing operations of $18.3 million represent net profit margin of 15.4%. This is the 70th consecutive quarter of profitability for QLogic. Our third quarter income from continuing operations per diluted share of $0.20 was above the high-end of our guidance range of $0.14 to $0.19 provided during our second quarter earnings call and consistent with the $0.19 to $0.20 range provided in our preliminary third quarter results announcement.

Turning now to our balance sheet. Our cash and marketable securities were $495 million or more than $5 per share at the end of the third quarter. We continue to maintain a very strong cash position and have no debt. During the third quarter, we generated $33 million of cash from operations.

We remain committed to our stock buyback, and during the quarter we purchased $30 million of company’s common stock. During the first three quarters of fiscal 2013, we have purchased total of $111 million of company’s common stock, which is $41 million above our free cash flow.

Receivables were $69.5 million at end of the third quarter. DSO at the end of the third quarter improved at 53 days from 56 days at end of the second quarter. Inventory was $23 million at the end of the third quarter. Annualized inventory turns for the third quarter was 6.7 compared to 7 turns achieved in the second quarter.

Turning now to our near-term outlook. For the fourth quarter of fiscal 2013, we expect revenue to be in the range of $112 million to $118 million, and gross margin to be in the range of 67% to 68%. Operating expenses are expected to be approximately $62 million, up from the prior quarter due to payroll tax increases. When combined with the projected tax rate of approximately 19%, and the diluted share count of approximately 91 million shares, we expect to achieve non-GAAP earnings per diluted share from continuing operations of $0.13 to $0.17 in the fourth quarter.

This guidance excludes the fact of the retroactive restatement of the federal research tax credit that was enacted in January 2013. We estimate that the fourth quarter will include a one-time tax benefit of approximately $6 million related to the retroactive reinstatement of the tax credit.

Actual results for the future period may differ materially due to a number of factors, including those outlined during the course of the conference call in our filings with SEC and in the disclaimer statement at the end of our earnings press release.

I would now turn the call over to Simon. Simon?

Simon Biddiscombe

Thank you, Jean. Turning now to the business update and my comments on the current economic environment. Throughout the second half of calendar year 2012, we communicated that our business was being negatively impacted by macroeconomic conditions and by a number of dynamics working against our major customers in the markets that we serve.

Today although recent third-party survey data continues to suggest a constrained IT spending environment particularly across enterprise customers, we believe that a more favorable picture is emerging and we are seeing a definite stabilization of our business as evidenced by our results in the third quarter and current trends reflected in the guidance we’re providing for the fourth quarter.

For the third quarter, we achieved revenue of $119.4 million and income from continuing operations per diluted share of $0.20, both the revenue and income per share amounts exceeded the guidance range as we provided during our second quarter earnings call. I am very pleased with these financial results and with the execution of our team.

As we look into calendar year 2013, I’m optimistic that we’re going to see a much better year than we saw in 2012. We expect to benefit from exciting new product cycles that were the focus of our investments over the last couple of years. First, is the emergence of an important new product category that we call Information Access Optimization. It is addressed by our innovative Mt. Rainier Technology which combines the very best what QLogic has historically done in I/O and Data Migration with the very best of flash memory technology.

Think about it as the coming together of flash memory technology with adapter-based products in a solution that layers for the full offload of all caching protocols and full I/O offload. I look more news on Mt. Rainier a little later in my prepared remarks. We’re strong believers in Fibre Channel SAN, Ethernet and Converged Network technologies for server connectivity, this year we’ll see a continued ramp of our new products and design wins in these markets including 16-gig Fibre Channel and 10-gig Ethernet.

Also, we’re very encouraged by the progress we’ve made with our increased penetration in the storage target market, and finally Converged Network and Switch opportunities continue to be very robust and an important strategic focus for us.

Overall, we’re very excited about these opportunities and many of these will benefit us in the next 12 months. When combined with very encouraging recent stabilization we’ve seen in our business, we expect calendar year 2013 to be a much better year.

I’ll now move to my customary business update. This past quarter was marked with a number of significant achievements that further strengthen our market position and set the stage for important revenue opportunities. First, in mid October we announced that our FlexSuite 2600 Series 16-gig Fibre Channel Adapters were shipping. FlexSuite Adapters feature I/OFlex Technology that allows end-users to deploy the same hardware for 16-gig Fibre channel or 10-gig Ethernet. This technology provides organizations with a future proof approach to build in flexible infrastructures, protect fibre channel investments, and deliver a simplified and cost effective path to Ethernet and convergence.

In mid November, we announced that our 2600 Series Adapters will qualified as part of Dell solutions to deliver the industry’s first end-to-end 16-gig Fibre Channel Storage Area Networks. Our adapters are providing 16-gig Fibre Channel connectivity for Dell’s 12th generation PowerEdge rack, tower and blade servers as well as native 16-gig Fibre Channel connectivity for Dell Compellent Storage.

In early December, we announced that our 16-gig Fibre Channel adapters were qualified for the newest HP ProLiant Gen8 servers and HP’s ProLiant G7 servers. The HP StoreFabric 16-gig Fibre Channel adapter is one of the latest offerings in an extensive QLogic portfolio selected by HP for its server, networking and storage solutions. The portfolio of HP hardware also includes 4-gig and 8-gig Fibre Channel adapters, 10-gig Ethernet Converged Network adapters, intelligent Ethernet adapters, Fibre Channel switches and modules, Fibre Channel over Ethernet switching modules, and lastly ASICs and adapter solutions for HP’s Converged Storage such as HP 3PAR StoreServ Storage.

And rounding out the news, in nearly January, IBM launched our 16-gig Fibre Channel adapters for used with System x. These adapters are part of the family of high performance fiber channel solutions available from IBM, delivering exceptional performance and enabling smaller medium businesses to experience and surpass robustness and reliability for wide spectrums of service storage and SANS.

With this launch, all three top served OEMs are now selling our latest 16-gig Fibre Channel adapters. With the availability of our new Fibre Channel Products, we undertook independent research using Demartek, an independent research firm specializing in real world hands on analysis to assess our performance against competitive products. Demartek validated the superior performance of the QLogic FlexSuite 2600 Series 16-gig Fiber Channel adapter through a sequence of analysis and testing including the TPC benchmark H. TPC-H is an industry standard, decision-support benchmark that stimulates broad business intelligence database environments, most relevant to information systems that provide organizations with application level answers to critical business analytics.

In one key test, there were FlexSuite 2600 Series, dual-port 16-gig Fiber Channel adapter outperformed the competition in TPC-H queries by up to a 133% with overall TPC-H queries executing 16% faster. With a number of additional FlexSuite OEM qualifications expected to complete early this year, our dual personality adapters could seamlessly enter current installations a 16-gig Fibre Channel adapters or 10-gig Ethernet based converged network adapters. OEM and end-user acceptance of the new FlexSuite products is very encouraging.

On the Fibre Channel adapter market share front, according to Dell’Oro Group’s latest published report, for the three quarters – for the first three quarters of calendar year 2012, QLogic’s Fibre Channel adapter share was 54.8%, up slightly from the market share for the full calendar year of 2011. This gives us a commanding 14 point lead in the market and puts us fully on track for ninth consecutive year of Fibre Channel adapter leadership, a string that began in 2004.

Also last quarter, we announced the addition of a 10GBASE-T model to our 3200 Series portfolio of intelligent Ethernet adapters. The new dual-port adapter rounds out the 3200 Series which includes support for SR optics, LR optics, twin-ax copper and no twisted pair cabling. Although still in the early stages of deployment, 10GBASE-T is expected to eventually overtake other cabling options given its distance and cost advantages over direct attached copper and optical fiber alternatives.

Business trends are positive for our switch business as evidenced by our reported third quarter performance for Network Products. We remain focused on our strategy of enabling OEM customers with uniquely available Fibre Channel and Converged Switch Products, which has resulted in a number of important new partnerships and opportunities. For example in the most recent quarter, another major server OEM started shipping our Converged Switching Products.

These relationships have broadened our base of OEM design wins and are expected to continue to drive switch revenue ramp in the coming quarters. In our last earnings call, we provided considerable detail on our Mt. Rainier Technology project which we announced last September. To recap Mt. Rainier is a revolutionary technology that solves for the significant limitations of the current server captive cache model. It provides an innovative share to clustered cache architecture that brings the benefits of server-based SSD performance acceleration to multi-server application configurations that utilize the shared storage environments of SANs.

We’ve continued to work diligently on the development and qualification of Mt. Rainier based products and are making very good progress. We’re fully engaged with a number of OEM customers evaluating the technologies and products and since our last call, we’ve undertaken multiple early field trials. Feedback from the customers of the EFT sites [ph] is very positive. We’re on track with our plans and expect to ship Mt. Rainier based products in the coming quarters.

In closing, calendar 2012 was indeed a very challenging year as a result of the macroeconomic environment and other market dynamics. As we enter calendar 2013, we’ve clearly started to see a stabilization in our business, qualification and new design customer activity continues at a healthy pace with a wide range of traditional OEMs, cloud OEMs, ODMs and channel partners.

Our focus on server, storage and fabric connectivity gives us excellent leverage from both a product and customer standpoint, and our portfolio is one of the most comprehensive in the industry. As a result of this and the investments we have made in new product and market opportunities, I feel optimistic about the long-term prospects for growth and enhanced shareholder value.

This concludes our prepared remarks. Operator, we’ll now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Amit Daryanani with RBC Capital Markets.

Amit Daryanani – RBC Capital Markets

Yes, thanks a lot, good afternoon guys. So two questions for me, one, could you maybe just touch on the guide that you guys are talking about, down 3% or so sequentially – is that any different between Host and Network Products and is Silicon going to be kind of around the 10 million run rate in the March quarter?

Simon Biddiscombe

So the guidance back to the traditional seasonal guide that’s the first point, right Amit?

Amit Daryanani – RBC Capital Markets

Yes.

Simon Biddiscombe

So typically we’d expect the business, that’d be down about 5.5 points and you correctly pointed out its better than that in the midpoint. We actually expect that the Host will be a little better than the Switch in the current period, so we would expect that Host performs a little better than other midpoint. Host is going to be better than the Switch businesses at this point in time.

Jean Hu

Silicon will be flat.

Simon Biddiscombe

Silicon is roughly flat, yes.

Amit Daryanani – RBC Capital Markets

Yes, perfect, thank you. And then you obviously talked a fair bit on the Mt. Rainier products and the kind of excitement around that product, could you maybe just touch on how many customers are you testing this product with, when you start to recognize revenues, and do you expect it to be a fairly material driver in calendar ‘14? Thank you.

Simon Biddiscombe

So we haven’t given a tremendous amount of color on precisely how many early field trials we’ve undertaken, precisely how many big tests are in progress at this point in time and precisely how many OEMs we’ve engaged with. And frankly it’s a very broad set of OEMs we’ve engaged with and the way we’re engaging with them is unique across each of them in terms of how they’re thinking about use cases for the technology. In fact, how they’re thinking about its use to displace other competitive technologies that might be in the market and shipping today.

So it varies from customer to customer as to how they are thinking about the use cases for the technology. It varies from customer to customers as to how they thinking about the other competitive solutions and the fit of the Mt. Rainier based solutions with them. So we’ll look more news on Mt. Rainier later this quarter and we’ll go from there.

Operator

We’ll take our next question from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yes, thanks for taking the question guys, a couple as well. First, Simon you talked and I know we’ve talked in the past about the target 16-gig opportunities in the pipeline and it sounds like you’re closer and obviously have already some design wins, how do we think about that in terms of the revenue trajectory? And I think in the past we’ve talked about that being as much as an $80 million to $100 million opportunity likely to be split between yourself and your competitor.

Simon Biddiscombe

Yes, so if you go back to the Analyst Day and I don’t remember the exact number, we put up a chart that shows we had 40 – how many design wins do we have on that chart? 45?

Jean Hu

43.

Simon Biddiscombe

43 design wins on a chart that we’d put up at the Analyst Day. So the 43 target design wins across every major storage vendor at this point in time. So you’ve just beginning to see the start of those go into production. The cycles associated with bringing those production are extraordinarily long and we would debating earlier this week, we’ve got one customer who probably between award [ph] in actually getting the solution in production. It’s going to be almost three years and the good news is we’re awarded that some extended period of time ago. But these do take a long time to get the production on the storage side.

We are confident that we’ve won far more that our fair share of the opportunities that are out there and we’re going to start to see them benefit us each quarter as we move forward. There will be more and more come into production each quarter as we move forward.

Aaron Rakers – Stifel Nicolaus

So you expect that to start to materialize in calendar ‘13?

Simon Biddiscombe

Absolutely, imminently.

Aaron Rakers – Stifel Nicolaus

Okay. Second question for me is, when we look at what you guys laid out at the Analyst Day, you talked about a 20% to 25% operating margin is kind of the target model, we’re still running below that, it looks like the guide would still be below that as well.

Simon Biddiscombe

Yes, the guide is slightly below, that’s right.

Aaron Rakers – Stifel Nicolaus

Yes, so when do you think you get back into the target model or maybe another way of asking it is, at what revenue level do you think you’d have to be at to be at that target model?

Simon Biddiscombe

So if you assume the cost structure stays relatively flat from the current level, so you got roughly $62 million then you need to get to a revenue level that’s probably 130-ish in order to get back to that 20% operating margin, okay? I might not be perfect, Aaron, but that’s the kind of number you’re looking at, so around the 130 number at this point in time. I think the important part from an investor perspective is that we’ve done exactly what we said we’d do with regard to the operating expense structure.

We’re going to continue to invest on the engineering side and we have, we’ve hired, we are actively pursuing opportunities associated with Mt. Rainier technologies, we’re seeing more and more opportunity associated with Converged Switch and then you look everything that’s going on within the Host business at this point in time. So we said we were going to aggressively invest in engineering in order to expand the opportunities and bring innovative new solutions to market, we are doing exactly that.

And we’re also reducing the level of spend on G&A and sales and marketing. So as Jean said in her prepared remarks, was actually done reasonable job of reducing OpEx in sales and marketing and G&A. So if the end goal of your question was Simon, are you thinking about cutting cost? The answer is no. I believe that given the stability we have seen in the business and given my expectations of revenue contributions from new product cycles with highly innovative new technologies that we’re going to see this business start to grow again as we move through 2013.

Aaron Rakers – Stifel Nicolaus

Great. And then final thing just a clarification, tax rate I know you said 19% but you also said there was a true up if you will on the R&D side just to be clear 19% is – that’s your guide that gets into your EPS number, you are excluding I thought it was $6 million I heard you say or something.

Simon Biddiscombe

Yes, I would…

Jean Hu

Yes, exactly so $6 million that’s one-time retroactive impact from the previous quarters.

Simon Biddiscombe

That’s the catch up piece there, it’s not a little disingenuous to throw it all in and claim victory for it on the tax line, right. So what we’re trying to indicate is that at – the midpoint of the guidance gives you $0.15, okay, which was the consensus number and we will benefit by a further $6 million which is roughly another $0.06 when we actually report an EPS number 90 days from now.

Aaron Rakers – Stifel Nicolaus

Okay, I just want to be clear. Thank you.

Simon Biddiscombe

You’ve got it.

Jean Hu

Thanks.

Operator

And next we’ll go to Katy Huberty with Morgan Stanley.

Katy Huberty – Morgan Stanley

Hi, thanks good afternoon. Just a question first on this reported quarter. Can you give some more detail around where the upside came from? Was linearity consistent through the quarter, or was it stronger late in the quarter? Have you seen any uptick post the fiscal cliff and just generally any message from the OEMs as to where this upside came from in Host and Network?

Simon Biddiscombe

So on the Network side, Katy, it was combination of actually – on the Network side, it was primary new product served in new markets, okay? So we said that we had another major server OEM who is now shipping our converged product, okay? So we’ve benefited from that new product. We also have benefited from new product introductions late last year by certain of our customers that leveraged new versions of our existing technologies, okay? So, on the network side it was primarily new product centric, new product cycles.

On the Host side, it was actually fairly broad-based. So when you look across Fibre channel and Ethernet based products, we saw a fairly nice over delivery relatively to the expectation that we’d had. The linearity was very consistent which is part of the reason I feel a little bit more confident about the trends were seen in the business at this point in time, and part of providing the guidance is having comfort around the trends that we’ve seen since the end of the – or since the turn of the year.

Looking at the forecast again from our customers, and frankly the strength of the backlog and it all points toward a stabilization of the business at this point in time.

Katy Huberty – Morgan Stanley

And as you think about the new customer wins and the product cycles that benefit you in calendar ‘13, would you expect better than normal seasonality as you move through the next four quarters or a bit more back-end loaded?

Simon Biddiscombe

So I’m an optimist by nature, right? So if we see a continued stabilization of the core Fibre Channel market and if we’ve bottomed as it related to rates have declined in that Fibre Channel market on a year-over-year basis, then my expectation is that the new product cycles will benefit us more significantly off the stability that we’ll see in that core Fibre Channel business moving forward.

Katy Huberty – Morgan Stanley

Okay, got it. Thank you very much.

Simon Biddiscombe

Thanks.

Operator

And our next question comes from Andrew Nowinsk with Piper Jaffray.

Andrew Nowinsk – Piper Jaffray

Good afternoon and thanks. Just had a question in terms of geographic splits, we’ve seen a number of networking vendors call out some better than expected strength in EMEA including Juniper (inaudible), just wondering if you could provide any color on the strength from your geographic regions?

Simon Biddiscombe

So we’re really not the right people to ask that Andrew, because we don’t necessarily know, OEM model where product is ultimately deployed so the split we give geographically is meaningless as it relates to where end-users are – I’ll give you a great example, right, so there is one major OEM that I sell to in China and he has no relationship with me in Europe essentially so that product all goes from China to Europe and I’ve got no idea where it ultimately is deployed. So we’re really – because of the OEM model, we’re not the right people to ask about geographical trends.

Andrew Nowinsk – Piper Jaffray

Okay, fair enough. And then on moving to just 10-gig Ethernet, it appeared you lost share in Q3 on the NIC side, any idea if there [ph] in Q4 specific for (inaudible)?

Simon Biddiscombe

So I know exactly how I performed in each of my major OEM customers and I’m very comfortable with where we stand at this point in time so we see by major customer exactly what our market share is across all Host-related and Switch-related products frankly. And I am very comfortable with where we stand at this point in time.

Andrew Nowinsk – Piper Jaffray

Okay, thanks.

Operator

And our next question comes from Glenn Hanus with Needham.

Glenn Hanus – Needham & Company

Yes, good afternoon guys. Could you maybe talk a little bit about diversifying into I guess what we call a non-traditional OEM customers, what percentage of your revenues might they sort of represent now and over say the next fiscal year, and kind of competitive landscape in reaching those non-traditional OEMs?

Simon Biddiscombe

So there is so many different groups of customers there, Glenn. So think about the Taiwan and China-based ODMs. We’re actively engaged for the customers with both Ethernet and to a certain extent Fibre Channel technologies, right. So as they try to participate in certain parts of the enterprise market, they need QLogic technology in the same way as any other OEM does. So we are actively engaged with the Taiwanese and Chinese ODMs as – not as partners to my traditional OEMs but as white box manufacturers and their own rights in the same way as we would engage with an OEM. And we’ve said it before, we think they are an important part of the market moving forward, and we want to make sure that we cover them as best we can.

The separate group then would be then anything that’s cloud-centric, so think about open computing and so on, we are active participants in each of those environments as it relates to roadmaps and as it relates to thinking through technology, decisions moving forward and it’s interesting, even though we didn’t necessarily think that some of our core technologies would be relevant in certain of those environments, that appears not to be the case, some really interesting and compelling use cases for offload type capabilities in certain of those environments.

And then you’ve also got the incredibly compelling value proposition of Mt. Rainier in those environments as well, so we recognize as a company the need to call on all of the major cloud guys and all of the major Taiwanese ODMs and we will continue to do so.

Glenn Hanus – Needham & Company

Can you give any color whether any of that has started to ramp yet or sort of timeframe when it might start to make a...

Simon Biddiscombe

So we haven’t really, I mean the time when these guys today are our customers, right, so there is already a contribution associated with certain of the Taiwanese manufacturers to the business today. We would never comment on what we’re doing with other customers across that market, as you can imagine it’s highly confidential and highly proprietary when you engage with anyone of those customers. And even if we would – we would never comment essentially.

Glenn Hanus – Needham & Company

Okay. Moving to here now when you said on the guide the Host would be I think better than the Switch on the guide, can you give any color around what some of the puts and takes are that are kind of driving that?

Simon Biddiscombe

Glenn, we’re talking about a couple of million bucks, right, so it’s – we just delivered $119 million, we’re talking about at the midpoint of $150 million. I’m telling you Host will be a little better than Switch that’s – you’re talking about $1 million here and that kind of thing, so I think we’ve given you enough.

Glenn Hanus – Needham & Company

All right, thank you very much.

Simon Biddiscombe

Thanks.

Operator

(Operator Instructions) And we’ll go next to Vlad Rom with Credit Suisse.

Vlad Rom – Credit Suisse

Thank you. I appreciate it. I have one question for Simon and one for Jean. I’m just trying to obtain goal [ph] of the 16-gig upgrade cycle with kind of some sector or dynamics out there. If you look, your key customers, HP, Dell, IBM, their X86 units declined 7% in the fourth quarter and your Host has declined about 20%. So is the 16-gig cycle will that flip that around and you will be able to outgrow your core customers throughout 2013? And then for Jean, it looks like you guys bought back about $12 million worth of share this quarter and I was just wondering if there is opportunity to do more? Thank you.

Simon Biddiscombe

So it’s a great question, Vlad. So you’re right, if you look at the Host business on a year-over-year business, it’s down about 20%. If you look at my biggest customers on a year-over-year basis, we saw preliminary Gartner numbers this morning, they are probably down I thought it was 10%, you are saying 7%, I thought it was about 10% based on some preliminary numbers and we may be looking at different information, okay.

I think what you’ve got to get to is what the hell is going on within the enterprise part of the market, right, and I think this broad acceptance that the enterprise part of the server market has been particularly weak. And that’s why our number looks disconnected from the reality of the total server numbers over the course of the last year. I think that’s probably washed out at this point in time and to your point, could we actually see it flip the other way? Well whether that happens or not, it’s going to be determined by whether enterprise class customers start to spend money on service and connectivity moving forward, okay?

So that’s the key part of how I think about my ability to grow this business disproportionately higher than the underlying sort of the market moving forward, okay? It’s all about enterprise class customers and it’s all about storage connectivity at that point in time. But when I say enterprise, it do include things like government and education and anybody who needs high-end storage and the robustness that comes from the types of solutions that QLogic sells into the market, okay.

So 16-gig has a fairly significantly ASP premium associated with it at this point in time. We were actually very pleased with the uptake of 16-gig products last quarter and it’s going to be the very leading edge customer, very leading edge end-user who chooses to deploy 16-gig as he things through his need for high performance I/O in storage networking. So 16-gig will benefit the business moving forward because of the ASP advantage that we enjoy but only time will tell whether there is a robustness to enterprise spend as we work through 2013 that will benefit us more than the overall X86 market.

Vlad Rom – Credit Suisse

Great, thank you.

Jean Hu

So on the buyback question, if you look at – watch the three quarters for fiscal 2013, we bought back $111 million of our stock which is $41 million above our free cash flow. If you look at the past several years, we typically every year, our buyback is roughly equal to our 100% free cash flow. So we already have done a large – I think we are quite committed, but if you look at our onshore cash it’s about 20% of our total cash balance. So we certainly are balancing those things going forward.

Vlad Rom – Credit Suisse

Thank you. I appreciate it.

Simon Biddiscombe

Okay.

Operator

And we’ll go next to Jung Pak with BMO Capital Markets.

Jung Pak – BMO Capital Markets

Hi, thank you very much. You indicated that you are very pleased with the uptake in 16-gig, can you talk about what percent…

Simon Biddiscombe

No.

Jung Pak – BMO Capital Markets

Of your HP business was 16-gig and how we should think about going forward?

Simon Biddiscombe

I am not doing that, Jung. All it will happen is you will run to my competitor and tell them and they’ll tell you it’s a bigger number so I am not going to do that.

Jung Pak – BMO Capital Markets

Okay, fair enough. How about Mt. Rainier, can you talk about what the target customers are? Is it your traditional storage or server OEM customers, or should we think about maybe a broader set?

Simon Biddiscombe

There is a broader set of customers for those products. It is a broader set of customers because of the use cases, right. So what we’re selling is not a product as such, actually we are selling a physical product of course, but what we’re selling is a way to significantly improve application performance, okay. And when you start to think about the significant improvements of application performance, it takes you way outside the normal enterprise markets, right. So whilst VM and Oracle RAC environments and DB2 and Microsoft environments are all very important, there are other markets where people would wish to see the benefits of significant improvements in application performance and that’s what we’re selling. We’re selling you a solution that will lay us for significant improvement in application performance.

Jung Pak – BMO Capital Markets

All right, thank you very much.

Operator

And this does conclude our question and answer session. I would now like to turn the call back over to Ms. Hu for any further or closing remarks.

Jean Hu

Yes. That concludes our call for today. We look forward to updating you on our progress next quarter. Thank you very much and good bye.

Operator

That concludes our conference for today. We thank you again for your participation.

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