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QLogic (NASDAQ:QLGC)

Goldman Sachs Technology & Internet Conference

February 12, 2013 02:40 PM ET

Executives

Simon Biddiscombe - President and CEO

Analysts

Bill Shope - Goldman Sachs

Bill Shope - Goldman Sachs

Thank you all for joining us. I am Bill Shope and I cover hardware for Goldman Sachs. We’re very pleased to have QLogic with us today. Simon Biddiscombe, CEO of QLogic. Thank you Simon for your time.

Simon Biddiscombe

Thanks Bill and thanks to each of the people in the room for spending time with us as well.

Bill Shope - Goldman Sachs

So, I wanted to just start off with an introductory question to get us all level set on our knowledge. Can you walk through your overall business strategies, your key business segments and how investors should think about your sources of competitive advantage?

Simon Biddiscombe

Yes absolutely. So the business is really organized around three distinct segments at this point in time. The first is all about our host related technologies and historically that’s been predicated on a Fibre Channel connectivity, some six or seven years ago we started investing in Ethernet technology as well, primarily because we see value in Fibre Channel with Ethernet as a converged technology within the enterprise data center moving forward. But that very naturally took us into other parts of the Ethernet business as well. So, the host business on the Fibre Channel side, we enjoyed dominant market share, we expect 54% at this point in time.

Significant lead over the nearest competitors and roughly 13 million ports of Fibre Channel from QLogic has been deployed on the host side and that’s an important point I'll come back to in a few minutes. And the reason that we enjoy the market share is the quality of the solutions that we have at any point in time and quality can be measured by many different metrics but for us it’s the robustness of the solution, the number of operating system supported, the number of high devices supported and so on and so forth.

So the Fibre Channel market is just beginning its transition from 8 gig to 16 gig. We see no reason to think that we won’t have the same share at 16 gig as we have at 8 gig share, it really doesn’t change significantly from year-to-year and we’re very pleased with the positions across the OEMs that we have with all of the major OEMs shipping our 16 gig solutions at this point in time.

On the Ethernet side, we continue to invest aggressively. We do see Ethernet as being an important technology moving forward and we see the ability to add value through other capabilities on top of Ethernet being incrementally more important as we move forward as opposed to just a pure low cost niche capability. So we think about things like our Mt. Rainier Technology orbit Fibre Channel base today move into Ethernet. We think about iSCSI we think about FCoE, its incremental ways to bring higher value to the overall market than the solutions that we provide into that market.

Second segment is switch business, so our switch strategy has been predicated in the recent years on enabling Ethernet switch vendors with a converged capability. So if you think about HP or any other major OEMs that have Ethernet switch businesses, they don’t necessarily have the Fibre Channel capability that’s necessary to bring a converged switch to market that would allow them go and compete against CISCO and Brocade in that market. So, our strategy is about enabling Ethernet switch vendors with a Fibre Channel and converge capability that allows them to go and fight the fight. We've actually been very successful with that strategy, as HP is the one biggest of names to customer but we did make reference to the fact that last quarter another major OEM started shipping the solution. They did it with blades last quarter; they are top of racks in the current period and so and so. Switch business is predicated on enabling convergence within the data center.

And then the final business unit we have is our storage solutions group. And the storage solutions group has historically been my (inaudible) where lots of activities were undertaken, some of which came to market, some of which didn't. But the most innovative thing that we've seen in that group, some extended period and I think offers enormous opportunity for QLogic as Mt. Rainier Technology. So, Mt. Rainier technology takes the very best of what QLogic does, from a storage networking perspective and marries it to the very best of SSD technologies within the server side deployment of storage to date. So, the current solutions that are available as PCIe SSDs have some significant limitations in the enterprise market, primarily associated with an ability to cluster and an ability to meet policies associated with security of data and so on.

And if you think about enterprise applications like Oracle RAC, think about VM environments, think about Microsoft Exchange, you need to be able to share data and data that's just parked on a PCIe SSD, and any individual server cannot be shared at this point in time. So we allow you to share that using Fibre Channel network that already exist in the enterprise data center, so you don’t have to buy new hardware. And we allow you to do it in a way that takes advantage of all of the common drivers you've already got from QLogic deployed within the data center. So that’s' a new and very exciting opportunity for the businesses as we look forward and we're seeing fabulous responses from both end users and OEM customers at this point in time.

So three segments, all with compelling advantages, each of which is predicated on the fact that we're a fabulous storage networking company.

Bill Shope - Goldman Sachs

Right, and I'm going to dig into each of those three segments even more, but I want to start off with a broader view on the overall demand environment. I'd QLogic was early to tell us all about the risks, I'd say late in the summer and it was correct. We certainly saw one week of September. I think you've been far more optimistic as the blade, the only thing that some other enterprise facing company. So, can you give us an idea what you think has sort of turned the dynamic and how you're thinking about 2013 and your optimism level there?

Simon Biddiscombe

Yes, it's kind of interesting, so if you think about the markets we participate in, it's almost entirely enterprise for both Fibre Channel and 10-gig Ethernet at this point in time and Rainier is entirely an enterprise play. We started seeing a stability in the business in the September quarter, so if you look at our results in September and then December and if you look at the guidance we provided for the current period, it all implied a relatively stable environment with either slightly sub-seasonal, slightly better than seasonal performance relative to the guidance in the current period, okay. so sub-seasonal in December, slightly better than seasonal in March. And what we're trying to imply is that based on the border trends, based on the backlog positions, based on the forecasts we're seeing from our most significant customers that we're not seeing any further erosion. So for me one of the critical things was to find stability in that core business to allow us to demonstrate growth based on the new solutions that we're going to have in the market over the course of the next year and I'm comfortable that we've found that stability, it feels like we've found that stability as it relates to the core enterprise market that we serve with Fibre Channel technologies based on as I said, order trends, backlog, what I'm seeing in forecasts and so on.

Bill Shope - Goldman Sachs

Makes sense, now when I look at historically the HBA market and particularly the traditional Fibre Channel business you've been involved in for so long, has been fairly tightly correlated with server ship.

Simon Biddiscombe

Yes, actually I think so.

Bill Shope - Goldman Sachs

Right-right, and I think we all tend to still look at that quite as bit as a potential indicator. But to be fair, the market has become more heterogeneous. You've had the white box effect which I think is really throwing up.

Simon Biddiscombe

It has, yes.

Bill Shope - Goldman Sachs

So how do you think about that in your relationship to the server markets and how we should all think about it…?

Simon Biddiscombe

So your observation is absolutely fair. If you look historically at the correlation between HBA dollars and server units, there's been a very tight correlation over the course of probably a decade or so. But you have seen that diverge as a result of, as you correctly point out the mega datacenter kind of guys, the Googles, and the Amazons, the Facebooks, and the Baidus and so on who don't buy Fibre Channel technology, right? Fibre Channel is not relevant in those environments. So you end up with a disconnect between the overall x86 market and Fibre Channel. So the right way to think about it is actually with more granularity than we've historically done, which means you've got to start looking at the very specific performance of HP and IBM as the major providers of service into the enterprise market and they continue to be the dominant providers of service in the enterprise market.

If you look at their performance in x86 last year, it's exactly the same as my host performance was last year, roughly down 10% 2012 versus 2011. So you can start by looking at the very specific OEMs who provide solutions into the enterprise markets and then you actually start to look at the kinds of servers that go into the enterprise markets. So you're looking at 2-socket, 4-socket type solutions as opposed to 1-socket web frontend type capabilities and so on. So your observation's right. We now have to be more sophisticated with how we think about the attach rate of Fibre Channel to the enterprise class servers and the OEMs who are serving those enterprise class servers and frankly I don't think that changed. We've done a lot of work thinking about, is Fibre Channel attach declining in the environment where Fibre Channel has historically played and the answer appears to be no. If you talk to the major enterprise and use as a Fibre Channel, they find just as much as Fibre Channel as they historically have. There is a most recent forecast that suggests, well actually sell more Fibre Channel in 2013 than we did in 2012, it’s not 10% more by any means but it’s all about finding that stability for the Fibre Channel market at this point in time. So, we got to be smarter.

Bill Shope - Goldman Sachs

Now that other segment is certainly the white box segment. And what about your exposure there…

Simon Biddiscombe

It’s pretty much one gig rule today, right. Something that we pay an enormous amount of attention to in many different regards, okay. So, we pay attention to it within the context of the basic Ethernet functionality that dominates connectivity in those environments, primarily one gig today, will move to 10 gig but it will move to 10 gig, when the price point versus the performance is appropriate for those types of environment. So I don’t see it moving aggressively to the 10 gig Ethernet speed. And then it’s about what innovative things can you do for any one of those individual customers and I am obviously not going to go in details there but there are some fantastic IP that exists around networking within QLogic and think about Mt. Rainier type technologies that plays very well in to certain of those mega datacenter type environments, okay. For us it’s about making sure they were 10 gig solutions and making sure that we continue to innovate on behalf of that customer set in ways that positions them to be able to that. One thing they may be doing far better than they have ever been able to do it before. So kind of twofold approach.

Bill Shope - Goldman Sachs

(Multiple Speakers) When we look at the Fibre channel space, we can go back to that because obviously the general fear out there has been that there be a persistent secular decline here and there is certainly secular risk but it’s hanging in there quite a bit. The next technological transition there is the 16-gig, you talked about that. Can you update us on how you think that shaped the market dynamics relative to prior product conditions but also this time, it’s a bit different because we do have the world sort of splitting up into the Ethernet worlds. So, how do we think about the dynamics of the shift (multiple speakers)

Simon Biddiscombe

Yes, it’s going to be an interesting transition. Every transition has been different, okay. So as you pointed out, we and the nearest competitor have both been shipping 16-gig solution for some extended period of time. At this point we've got all of the major OEMs shipping 16-gig solutions at this point. it’s still a price premium associated with it, primarily associated with the cost of optics and so on that mean it’s a significantly more expensive solution than 8-gig is today

We're pleased with the initial traction. We expect 16 gig to be maybe 10% of the market, as you exit calendar year 2013 kind of think it maybe gets to be about 10% of the market. By that point the cost issues that we have significantly, but I think it’s going to have a transitional period that’s probably consistent with what we saw at 8-gig and in 8-gig it took somewhere around three years to get to 50% adoption versus the prior technologies. so it’s going to be a long cycle and we’ll get to take advantage of it every day.

Bill Shope - Goldman Sachs

How do you think about 16-gig is expanding the life of Fibre Channel service?

Simon Biddiscombe

So, we're way pass 16 now, right. We've got 32 in development and I’m not going to talk about what speeds come after 32. But it’s not 64 necessarily. So, the Fibre Channel is going to be around for years and years to come. I think people tend to lose sight. You made the observation yourself, there is a secular decline.

In 2010, we shipped more Fibre Channel than ever before as an industry. In 2011 we then shipped more Fibre Channel than ever before as an industry. 2012, clearly a (inaudible). Technology is not going away. In the enterprise environment, Fibre Channel continues to be the protocol of choice for storage networking, why? The robustness is the solution. It's incredibly proven, putting in a server, doesn’t matter what operating system, doesn’t matter what version of limits you're running, doesn’t matter which hyper wise you're putting on top of it, doesn’t matter which switch you attach it to, doesn’t matter what storage is on the other end, impact of that is going to do exactly what it’s meant to do time and time and time again and to the storage guide, who is typically the most conservative person in the data center and who’s product cycles run for years, that’s absolutely credible.

He’s not going to take any risk associated with the IO that he is using to run mission critical applications across the very largest of enterprises, okay. So when we talked to the very largest end users, and when you talked to very largest end users, our sense is that they will continue to buy Fibre Channel for generations to come. And ether was having a cost advantage, does not necessarily have the performance characteristic that a ultraconservative storage guide wants to introduce into its data center.

Bill Shope - Goldman Sachs

So, that’s your very stable base, the healthy duopoly operating market. How do you think about the growth of your ether business off of that and also the converged technology offset?

Simon Biddiscombe

So I think, we do expect, I think we’ve got five product cycles frankly. If you got that stable base you just characterized and I look in to calendar year 2013, I think its five compelling products cycles ahead of us. Number one is, as you just characterized, the continued adoption of 10-gig and converged technologies and as the server manufactures sell more and more of the current versions of their servers and fewer and fewer of the previous generations of servers, you’ll just seen continued traction in that 10-gig market. I don’t think there's going to be a step function. I think if you look back to the Romley launch, people expected that there be a giant function in demand, didn’t happen, clearly didn’t happen for the servers and clearly didn’t happen for the 10-gig connectivity either, so I think you're going to continue to see a nice steady ramp of 10-gig technology and converged technologies as the current versions of Romley based servers continue to replace the previous Nehalem versions, that’s cycle number one.

Cycle number two is anything Mt. Rainier centric which is PCIe, SSD, and QLogic Network and Technologies. We've done fantastic job carving out the vast majority of the storage target markets where one of the other providers of technology walked away from the market at 8-gig. That essentially left about $150 million market open to ourselves and our nearest competitor. We think we’ve carved out the vast majority of that 43 design wins we talked about at length.

Then you’ve got all things converged on the switch side and then you’ve got 16-gig cycle, so I think we’ve got five competitor product cycles as we look into 2013 that were there in 2012 when I was just waiting for the latest version of the server to be launched.

Bill Shope - Goldman Sachs

Now when you look at, and I'll give you a little time for water, when we look at the 10-gig transition, I think everyone's on board with the idea that it’s a modest ramp at this point, but it was consensus expectation I would see this pop Romley and there have been various reasons discussed as to why that happened. Obviously the economic environment wasn't idle when that ramp occurred. The OEMs, they haven’t really pushing it frankly (multiple speakers)

Simon Biddiscombe

Yes, it was very mixed execution wise as well. Some OEMs executed (multiple speakers). So I think if you go back, it’s almost a year right, so we originally expected Romley servers would start shipping March, April kind of timeframe of 2013 and the OEMs slowly got their products in the market and they took about six months from the first servers to last servers, I suspect for everybody to be shipping what the expected to ship.

One of the questions, why does an enterprise customer care about, is the upgrade to the feature set associated with the Romley processor, compelling enough to make me go and spend money and is it compelling enough within the context of a really hard spending environment to the enterprise as well and clearly prove to be that no, it wasn’t compelling enough to force people to go and spend money. and even though they may have been a little pent up demand going into the launch of the Romley processors and the servers based on those processors, it wasn’t enough to force people to open that pocketbook, actually spend money on the servers, so it was nowhere near the pop that we know the server manufacturers, expected to see arriving the technology.

Bill Shope - Goldman Sachs

Well, assuming that the world is steadily moving more and more towards Ethernet, it is a market you made a lot of investment as you said

Simon Biddiscombe

Absolutely.

Bill Shope - Goldman Sachs

I think the persistence investor concern or source of confusion is, we've been comfortable with this idea that QLogics and the duopoly Fibre Channel market. We just have to figure out the growth rate of that market and the other markets share in those cases. And moving into Ethernet, you obviously have much tougher basic competitors. So, its early stages, how is that competitive landscape going to evolve?

Simon Biddiscombe

Yes, it is interesting with, the way I think about it is if you go back a number of years Bill, we always said the Ethernet market is a $1 billion market when you get 2015, okay 10-gig is a $1 billion market. I think the 10-gig market will be about a $1 billion in 2015. We don’t know what last year's final numbers were, but it's probably $400 to $500 million in total, okay.

But it's no longer one monolithic $1 billion market. What we found overtime is that you've seen a significant segmentation of that market, where either performance characteristics or connectivity alternatives mean that different people are going to enjoy different shares in part to the market. So there's an element in the market that's clearly very storage centric, be it target market, or be it host where storage protocols, (inaudible) are important. And I think there QLogic's going to do fantastically well based on the storage networking heritage.

Then there's a piece that has low latency Ethernet? So its things like RDMA and (inaudible) and so on where other participants may have a better advantage related to latency characteristics. Then there is the piece associated with data cards and mezzanine card type deployment of what would historically have been LAN. I think we've done a very good job, carving out a position for ourselves in that OEM serving them Ethernet business, okay.

Then you got the pieces just the nick basic stand up, Intel sells $300 million worth of them a year in the channel right? That's a different market and then you got things like copper connectivity as opposed to Fibre connectivity. So what we used to characterize a $1 billion market is actually shaping out to be five, six, seven individual markets where different performance characteristics, different price points, different feature sets are going to be necessary for success.

I think what we figured out is there's a set of those where QLogic can and is very successful, can be and is very successful and there is some of them where, they may just be too small. we may choose not to invest in certain capabilities because the opportunity associated with those capabilities are smaller than we would wish to see. So, no longer a $1 billion market, multiple individual markets of hundreds of millions of dollars where key capabilities of QLogic brings to market are of the most significant value.

Bill Shope - Goldman Sachs

Then how do I read that? Is it smaller than, definition is smaller than you originally thought or years are really you are saying is the competitive landscape?

Simon Biddiscombe

I think the competitive landscape is different. I think what's happened is use cases for the technology, the OEMs expectations for what the technology will do, changes in competing technologies have caused the market to evolve in a way that wasn't necessarily a way we expected it to evolve five, six, seven years ago. So, if you look at low latency Ethernet, can low latency ether be good enough to wipe out [internet]. Maybe there's a price point and a performance level where low latency Ethernet is good enough that the InfiniBand market as we know it today, doesn't survive, or doesn't continue to grow the way it grew in the most recent periods, right. So I think we're looking at individual competing technologies and saying yes, QLogic can be wildly successful in more than half the market by the way. More than half that market will be storage centric or be OEM centric in terms of the data card and mezzanine card and standard adapter for the OEM. That's more than half the market. QLogic can and is very successful in that part of the market.

Bill Shope

I'm going to take a break here and see if there are any questions from the audience while I continue on. Anyone? All right, I want to shift to if I could, I want to come back to technology in a minute but I want to shift to capital allocation. I would say a steady track record of fairly methodical share repurchases. Do you think about getting more aggressive here, or how should we think about your ability to get more aggressive here, your ability to do dividends and your real world use of cash.

Simon Biddiscombe

Yes, so the answer to the question hasn't changed in five years. I guess that's the beauty in the answer. So first objective is always to look at strategic opportunities to expand markets, improve positions, enter the M&A and we've done very little of that over the course of last five years. So that's always priority number one. Recognizing business those generate significant cash. Priority number two then becomes how do we return that cash to shareholders in the absence of doing anything on the M&A side.

So, today we have about $0.5 billion cash, $400 million of that also is offshore, 100 million of that is onshore at this point in time. Now onshore-offshore mix is actually what determines how we think about dividend strategies versus buyback. So the generation of cash is not 80% offshore and 20% domestic but because of the buyback has been all domestic cash over the course of forever, you end up with that strange mix of cash. So we do look periodically at dividend strategies. We looked at it most recently at the end of the last year and the conclusion was given that that 400 million of cash wasn't available for dividends payments, the right way to continue the strategy was to continue with the buyback and typically we buyback more than free cash on an annual basis, that's been that way for seven, eight years at this point in time. We think we do a reasonable job returning the excess cash existing in the business shareholders on an annual basis and we'll continue with that strategy.

Bill Shope - Goldman Sachs

We are digging a bit here M&A philosophy. First of all, when I look at that cash-break down, it's that international cash, is that technically off limit to M&A strategy or would you be more willing to use leverage on that.

Simon Biddiscombe

No, it's not off limits at all, I think if you think about IP ownership, many companies may have IP strategies associated with IPV owned offshores posted domestically and therefore as we think about M&A in many instances the opportunity is to acquire IP that may have been developed here but actually is owned by an offshore entity. So, that cash is available and can be used for offshore IP purchases, offshore team purchase, offshore business purchases, so we’ll continue to look at those.

Bill Shope - Goldman Sachs

Now as investors look at your cash balance and try to decide how much is coming to them eventually, how much is going to M&A, what’s your hurdle rate for larger enterprise.

Simon Biddiscombe

So we actually don’t think about it quite that way. We do so little M&A which is indicative of how we feel about our core capabilities. So, anything we do, would have to expand the market opportunity or fill gaps in the current product offering to serve the existing market opportunities. So I think what you can take away from the absence of significant activity over the course of five years is that we don’t feel like that there is any significant gaps in the product offering at this point in time. Nor have we found markets that we deem to be adjacent that are attractive enough for us to put the capital structure to work at this point in time.

So, if the right opportunity came along and if we can find a transaction that was breakeven may be little diluted, may be a little accretive in year one but had a clear path to accretion in eight years than we'd be all over that type of transaction, but they are few and far between, suffice to say.

Bill Shope - Goldman Sachs

Now, your major competitor recently bought a company, used quite a bit of their cash balance to move into the network performance management space. Do you think that’s an area, that’s of interest?

Simon Biddiscombe

No, we spent an incredible amount of time looking at that market about 18 months or so ago. I think we looked at it because there were a whole series of companies each which happened to be for sale and we looked at the markets, the problem we looked at network management capabilities that every year [Audio Gap] and we didn’t necessarily want to put in place an extensive end-user sales force, those are horrifyingly expensive and not consistent with the model that we have which is very much an OEM centric model where we don’t want them to be competing with our OEM through an end-user model. So we spend a lot of time looking at that network management markets 18 months or so though and concluded that for go to market reasons and for technology reasons, it wasn’t the right thing for QLogic.

Bill Shope - Goldman Sachs

Well, I want to go back to technology if I could, particularly Mt. Rainier. It’s something that I think that many of us got surprised at the analyst day and I think it’s generated a lot of interest. Can you talk about how we should view this, first of all in the context of what you’re trying to do in your longer term strategy? And frankly, how we should think about your overall innovation. It’s not necessarily a linear path, often what you typically do.

Simon Biddiscombe

No, I think its right. So let me recap again what made Mt. Rainier does. So, we are a fantastic storage networking company. We got very well compensated and have a business model for being a fantastic storage networking company. And what we have done in the most recent version of our storage networking world is essentially bring to the enterprise the ability to network server deployed SSDs. So, you got the trend associated with PCIe based or standard form factor SSDs where applications are demanding access to data faster than can be achieved over a regular SAN or NAS to spinning media essentially.

The problem with any version of PCIe SSD today, as I said earlier, those things can’t be networked. It’s very difficult to cluster them, it’s very difficult to share data across them and therefore it makes them just about irrelevant in the enterprise market. What QLogic does is actually bring you the ability to actually network these PCIe SSDs or standard form factor drives using the existing Fibre Channel network and using one common driver set that you got from QLogic. So you don’t have to go through the complexity of installing new drivers and not knowing whether they will work with certain hypervisors, certain operating systems. So, we’ve actually solved one of the major limitations associated with bringing PCIe SSDs to the enterprise market.

Now, other people ultimately may solve those problems as well, but in every instance you are going to have to buy new hardware and in every instance it will consume CPU cycles to actually manage the movement of the data. In our case, the management of the data is all managed on the adaptor on a separate processor. So, we’ve got some highly innovate technologies.

What did we do? What does it speak to us as it relates to our view of innovation? We are always trying to add value to a basic delivery mechanism. So when that basic delivery mechanism is a Fibre Channel chip that resulting Fibre Channel adopters and Ethernet chips that results in Ethernet adopters. I want it able to continue to bring higher value, highly innovative capabilities to market that sit on top that what I characterized as that basically delivery mechanism called an Ethernet chip or a Fibre Channel chip.

I continue to believe it’s important to invest in those capabilities but I also believe the differentiation will get you significantly better paid than that basic niche or even the standard Fibre Channel adaptor and that’s plays out in the Mt. Rainier technology, the Mt. Rainier technology sees us, receives significantly higher ASPs than we would with a traditional Fibre Channel adaptor even without SSD being attached to it. So we’re going to continue to differentiate on top of basic delivery mechanisms that the Ethernet Fibre Channel capabilities, and I think we’re doing a very good job of it, Rainier is a great example, we’ve got some other things going on within our corporate technology organization that are similar in terms of heavy leverage existing capabilities in to new markets.

Bill Shope - Goldman Sachs

When you think first sitting here a year from now we'll have a pretty good idea what the business opportunity is from Mt. Rainier?

Simon Biddiscombe

Absolutely, we'll start shipping the product at end of this quarter. The OEMs have the product for almost a year, certain OEMs have the product almost a year, we gave them the very last day of March, last year, so we'll have an announcement later this quarter, have talked about the product as opposed to the technology and then you’ll see OEMs come to market over the course of next year.

Bill Shope - Goldman Sachs

Okay great. We've got one question here.

Unidentified Analyst

[Question Inaudible]

Simon Biddiscombe

So the question is, to what extent do adaptor based technologies consume power within the context of the overall datacenter and the answer is, we’re just tiny, tiny within the context of the datacenter. Now that doesn’t mean that we’re not always managing down the power curve but the reality is that if you think about a PCIe product, typically there is 15 watts available for the slot, in some cases there is more powerful PCIe slots, you can get 25 watts slots, 35 watts slots and then you’ve got limitations associated with air flow and so on, but reality is that for substantially every product that we sell on the host side, we’re trying to meet a 15 watt window that’s available in a standard PCIe slot and typically we’ll consume as much of that 15 watts as possible such that you get the maximum performance and functionality out of that 15 watts. So that’s how we think about the power issue.

Unidentified Analyst

[Question Inaudible]

Simon Biddiscombe

It’s a question about pricing?

Unidentified Analyst

Yes, how will you be pricing Mt. Rainier and then how are you working with the SSDPCI.

Simon Biddiscombe

Yes, so that’s a great question so we don’t necessarily want to be in the SSD industry, that's important. So I don't want to sell SSDs. I think that market ultimately becomes fairly commoditized. So every one of my OEMs has got a better ability to buy SSDs than I will ever have. I want to marry into the technologies that they've chosen to be their SSDs. so whether they've chosen, take your pick, LSI or micron or they’ve got their own home grown solution, we'll connect to whatever they've got and then the question is where do we run the caching code between the adaptor and the SSD itself. So I don't want to be in the SSD market as it relates to the vast majority of what we're doing which is the OEM piece. We may be in the SSD market as it relates to the channel play but I think channel play is going to be a very small piece of the overall opportunity.

Unidentified analyst

Per server, how is the pricing structure?

Simon Biddiscombe

We'll save that until we actually launch the product at the end of March. The reason, I am not being coy, every OEM is a little bit different.

Unidentified analyst

(Inaudible)

Simon Biddiscombe

About a year ago we said look, we have no idea how this is ultimately going to play out from a macroeconomic perspective and how it impacts revenues, but we're going to put the squeeze on sales and marketing in G&A and we're going to continue to invest in R&D. And if you look on a year-over-year basis, sales and marketing and G&A were both down in the December quarter versus the prior year. Engineering we continue to hire and we continue to spend the money there. so last year this fiscal year which ends in March, we're going to spend about $240 million across all of those operating expenses. Next year, we said that's going to be about $250 million primarily through payroll tax increase is coming back in and merit increase and those types of activity okay.

So the operating margin that we characterize is roughly a 20 to 25% operative margin model. We get back to close to 20% at a $130 million of revenues last quarter we did just under a 120 million of revenues, we're going to continue to invest for the long term and I think we're going to see the benefit revenues of the base of a stable business as Mt. Rainier comes to market as some of the target winds come to market as convergent 10- gig E continue to continue to grow and then the return to the business model comes at that point of time. But we’re not looking to cut cost.

Question-and-Answer Session

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Source: QLogic's CEO Presents at Goldman Sachs Technology & Internet Conference (Transcript)
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