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QLogic (NASDAQ:QLGC)

Q1 2007 Earnings Conference Call

July 25, 2006, 5:30 p.m. EST

Executives

H.K. Desai - President, Chief Executive Officer

Anthony J. Massetti - Senior Vice President, Chief Financial Officer

Analysts

Paul Mansky - Citigroup

Aaron Rakers - A.G. Edwards

Srini Pajjuri - Merrill Lynch

Harsh Kumar - Morgan Keegan

Mark Kelleher - Canaccord Adams

Kevin Hunt - Thomas Weisel Partners

Mark Moskowitz - JP Morgan

Tom Curlin - RBC Capital Market

Min Park - Goldman Sachs

Clay Sumner - Friedman, Billings, Ramsey

Frank Timons - Robert Baird

Glenn Hanus - Needham & Company

Amanda Boruo - Banc of America

Joel Inman - Robert Baird

Kaushik Roy - Neuberger Berman

Operator

Good day everyone and welcome to the QLogic Corporation First Quarter fiscal year 2007 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. H.K. Desai, President and Chief Executive Officer. Please go ahead, sir.

H.K. Desai

Thank you, operator. Good afternoon and welcome to QLogic's First Quarter Fiscal Year 2007 Earnings Conference Call. I am H.K. Desai, CEO and President and with me is Tony Massetti, Senior Vice President and Chief Financial Officer. Today, Tony will begin with a review of the fourth quarter financial results and I will continue with the general discussions of the State of our business. After that, we will open the teleconference for questions. Tony?

Anthony J. Massetti

Thank you, H.K and good afternoon. By now all of you should have seen our press release and associated financial information. In addition to reviewing our financial results, some of the comments today will include forward-looking statements regarding future events and our projections of the financial performance of the Company based on our current expectations. These comments contain 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 that QLogic files with the SEC specifically our most recent Form 10-K. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update any of the information contained in any forward-looking statements that we make today.

Today's conference call is being Webcast and a replay will be available for 12 months on the QLogic website at www.QLogic.com under Investor Relations. An audio replay will be available through August 8, 2006, by calling 719-457-0820 or 888-203-1112, pass code 689-4740. Please be aware that if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording.

Copyright law and international treaties protect this conference call report. Unauthorized reproduction or distribution of this report or any portion of it may result in civil and criminal penalties. Any recording or the use or transmission of the text or audio of today's call is not allowed without the expressed written permission of QLogic.

In our first quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. In the first quarter of fiscal year 2007, the difference between the results is primarily due to acquisition related charges and non-cash stock-based compensation charges. The stock-based compensation charges are primarily result of the requirement to commence expensing stock options in the first quarter of fiscal year 2007. An accounting of this difference is included in our press release. The difference in our non-GAAP as compared to our GAAP results is $0.08 per diluted share in the first quarter or $0.21 per share non-GAAP versus $0.13 per share on a GAAP basis. All of the references we will make today relate to the non-GAAP results from our continuing operations unless otherwise stated. Our revenue in the first fiscal quarter ended July 2, 2006, was a record $136.7 million, an increase of 18% from the same quarter last year and 5% sequentially. This exceeds the high end of our guidance of $133 million to $136 million given during our fourth quarter earnings conference call.

Our revenue from SAN infrastructure products which includes HBAs, switches, appliances, routers and silicon grew 19% to $127.4 million from $107.3 million recorded in the first quarter of last year. Sequentially, revenue from SAN infrastructure products grew 5% from the March quarter. The increase in our revenue from SAN infrastructure products was primarily driven by HBA revenue growth of 19% from the comparable quarter last year. Our switch revenue grew 8% from the same quarter last year.

Our revenue from Management Controllers of $6.9 million in the first quarter was flat compared to the revenue recorded in the first quarter of last year. As we had discussed in previous earnings conference calls, we expect revenue from Management Controllers to decrease over time. Other revenue which is comprised primarily of royalties and services revenue was $2.4 million in the first quarter.

Our June quarter gross margin of 70.9% increased from 70.6% recorded in the first quarter of last year and from 70.7% in the March quarter. The increase in our gross margin was due to product mix although slightly better than our expectation. Consistent with our previous guidance we expect our gross margin during the next 12 to 18 months to be over 65% depending on product mix. During the June quarter, we experienced an ASP reduction on like-for-like products in our HBA business of 1.3%. This is consistent with the amounts experienced in the prior quarters and within our expectations.

Next I would like to cover first quarter operating expenses. Total operating expenses were $52.6 million in the first quarter, up 33% from $39.5 million reported in the same quarter last year. On a sequential basis, operating expenses were up 12% from $47.2 million reported in the fourth quarter. This increase was primarily due to the operating expenses of our investments in emerging markets including Storage Virtualization, Storage Routing, and InfiniBand.

Engineering expenses in the first quarter increased 37% to $27.8 million versus a year ago, and increased as a percentage of revenue from 17.6% to 20.4%. On a sequential basis engineering expenses in the first quarter increased 12%. We will continue to support existing and future technology development with engineering expenses as a percentage of revenue ranging from 17% to 20%.

Sales and marketing expenses in the first quarter increased 25% from a year ago to $19 million, and increased as a percentage of revenue from 13.2% to 13.9%. On a sequential basis, sales and marketing expenses increased 9%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 14%.

G&A expenses in the first quarter of $5.8 million increased by $1.9 million from a year ago, and increased as a percentage of revenue from 3.4% to 4.2%. G&A expenses increased $0.9 million sequentially. We expect that future G&A expenses as a percentage of revenue will range from 3% to 4%. We continue to focus on improving efficiencies in our operating expenses while investing in critical new development programs for existing and new technologies.

In the June quarter QLogic generated an operating profit of $44.3 million, an increase of 6% versus last year. On a sequential basis operating profit declined $0.9 million or 2%. During the June quarter operating profit margin was 32.4%.

Interest and other income was $6.8 million in the first quarter, an increase of $0.7 million versus a year ago and it was consistent with the March quarter. The income tax rate of 34.1% for the first quarter was at the low end of our forecasted range provided during our fourth fiscal quarter conference call of 34% to 37%. Our first quarter income from continuing operations increased 19% to $33.7 million or $0.21 per diluted share from the first quarter of last year when the Company recorded income from continuing operations of $28.3 million or $0.15 per diluted share. On a sequential basis income from continuing operations declined $0.9 million or 3% from $34.5 million or $0.21 per diluted share. Our income from continuing operations as a percentage of revenue in the first quarter was 24.6% compared to 24.5% reported in the same quarter last year and 26.5% in the March quarter.

Our first quarter diluted income per share from continuing operations was at the high end of the forecasted range of $0.19 to $0.21 per share provided during our fourth quarter conference call. This represents the 44th consecutive quarter of profitability for QLogic.

Our GAAP net income for the first quarter was $21.1 million or $0.13 per diluted share. Our financial position continues to be strong especially to guard our cash flow. During the first quarter we generated $40 million of cash from operations. The Company's cash and short-term investment balance was $558 million at the end of the first quarter. In April, we completed our previously announced acquisition of PathScale for $110 million in cash and the conversion of certain unvested PathScale stock options into QLogic stock options.

During the first quarter, we repurchased $29 million of our common stock pursuant to our common, to our current stock repurchase program. In addition during the second quarter we continued to execute against this program and repurchased an additional $20 million of our common stock. Since fiscal year 2003, we have repurchased a total of $610 million of the Company's common stock under programs authorized by our Board of Directors.

First quarter receivables of $71.1 million increased $3.5 million from $67.6 million at the end of the March quarter. The DSO rate in the June quarter was 47 days consistent with the March quarter. With a growing trend toward hub arrangements with our OEM customers and greater contribution from our distribution channel, we continue to expect upward pressure on our DSO performance. Based on our current customer and channel mix we expect DSO in the future will range from 45 to 55 days.

Annualized inventory turnover in the June quarter was 3.9 turns consistent with the March quarter. Inventory at the end of the first quarter was 41.3 million up from $39.4 million at the end of the March Quarter and was inline with our guidance and expectation.

Our long-term outlook for our core business remains favorable. Based on the foundation of design wins and existing markets, as well as emerging markets, we expect to see continued growth in our revenue for SAN infrastructure products. Based on our current customer forecast, we expect total revenue for the September quarter to be in the range of $139 million to $142 million.

Due to the potential variation of product and technology mix, we expect gross margin for the September quarter to be approximately 70%. Considering the above revenue and gross margin expectations combined with planned operating expenses, infrastructure investments and projected tax rate in the range of 34% to 35%, the current outlook is to achieve non-GAAP diluted earnings per share of approximately $0.20 to $0.22 in the September quarter. Our GAAP diluted earnings per share in the September quarter is expected to continue to differ from the non-GAAP diluted earnings per share primarily due to acquisition related charges from Troika and PathScale and the non-cash charges associated with stock-based compensation. We currently expect the difference between GAAP and non-GAAP diluted earnings per share will be approximately $0.06 to $0.07 per share in the September quarter.

Actual results for future periods may differ materially, due to a number of factors including those outlined during the course of this conference call, and the Company's filings with the SEC, and the disclaimer statement at the end of our first quarter fiscal 2007 earnings press release. I would now like to turnover this conference call to H. K. Desai, our CEO and President. H. K?

H.K. Desai

Thank you, Tony. Thank you, again for joining us today. In addition to achieving our 44th consecutive profitable quarter, we are very pleased to announce that QLogic has again set a new record for revenue during the first quarter. Revenue in the first quarter ended July 2, 2006, was $136.7 million, up 18% from the comparable quarter last year, and 5% sequentially. First quarter revenue exceeded the high end of our guidance range of $133 million to $136 million provided during our fourth quarter earnings conference call. Our diluted earning per share for the first quarter was $0.21 which was at the high end of our guidance of $0.19 to $0.21 per share, provided during our fourth quarter conference call.

Total SAN infrastructure product revenue which primarily includes host bus adapters, switches, appliances, routers and silicon showed continued growth in the first quarter. For the first quarter, revenue from SAN infrastructure products was $127.4 million, an increase of 19% from the comparable quarter last year, and 5% sequentially. Driven by ongoing from direct attached storage to SANs and the overall SAN growth, terabytes requirements, our HBA revenue continues to grow. For HBA revenue which includes both Fibre Channel and iSCSI technology, grew 19% from the comparable quarter last year. This is well above the anticipated growth forecasted by various analysts. Although growing from a very small number, iSCSI HBA revenue more than doubled from the year ago quarter. iSCSI appears to be gaining tractions in the small and medium business sector. We believe our ongoing growth in both iSCSI and Fibre Channel HBAs solidifies our position as a market leader for SAN storage interconnects.

Our Fibre Channel switch business also continues to expand. Overall, first quarter switch revenue grew 8% from the comparable quarter last year. This performance was below our expectations due to quarter end supply constraint at one of our contract manufacturers; however we anticipate that our switch revenue will experience double-digit sequential growth in the September quarter.

The channel business continues to be an important growth driver for QLogic. The channel accounted for 28% of our HBA and switch revenue in the first quarter. Overall channel revenue for SAN infrastructure products increased 20% from the year ago quarter.

During the first quarter, we had a very successful partner conference in Dallas, Texas. We will be holding our international partner conferences later this year in China, Japan, and Europe. We are continuing our worldwide channel expansion and believe that these efforts will continue to strengthen our market readership in this area and fuel our overall market share gains.

The transition to 4-Gig technology is progressing well. Sales of 4-Gig Fibre Channel products, as a percentage of all Fibre Channel sales experienced strong growth this past quarter. 4-Gig revenue grew from 15% of Fibre Channel product revenue to 22% of Fibre Channel product revenue and represented a 58% sequential increase. Customers are recognizing significant benefits from the QLogic 4-Gig Fibre Channel HBA products in the areas of reliability and performance.

From the reliability point of view our 4-Gig products are drawing increased attentions from end users, OEMs and channel partners. Our 5 year warranty on Fibre Channel HBAs is unmatched in the industry and is indicative of the quality and reliability building to QLogic products. The two measure of performance from an end-user point of view is how our performance impacts application performance. In independent performance benchmarking using like-for-like environments running Microsoft Exchange, QLogic SAN Pro 2460 HBAs demonstrates superior scalability resulting in a 50% increase in the number of exchange users when compared to our nearest competitor.

In another independent performance benchmarking using Oracle and EMC storage, running OLTP, web and OLAP workloads indicative of real world storage configurations, QLogic HBAs demonstrated 31% better throughput and 28% higher IOPs compared to the competition. We are able to achieve this superior applications results based on the performance advantage that QLogic delivers.

In our Windows environment, QLogic HBAs achieve 79% higher read performance and 246% higher write performance than our competitors’ product. When measuring raw I/O performance, QLogic SAN Pro 2462, 4-Gig HBA achieved 304,000 I/Os per second, exceeding the performance or nearest competitor by 50%. The results of this independent studies illustrate that QLogic Fibre Channel HBAs are capable of meeting the performance requirements for key business applications and demonstrate superior performance compared to the competition.

The announcement of QLogic SANbox 9000 multi-layer, multi-protocol switch expand over Fibre Channel switch portfolio enabling us to scale our product line up to 256 ports. Targeted at the distribution layer, this high density, high port count, multi-protocol intelligent switch provides an affordable means of consolidating multiple box environments and/or establishing a cost effective high port count layered between the core and edge. This concept has been very effective in the LAN switch market and we believe that the time has come for this architecture to be available to storage networks as well. The SANbox 9000 will be available for sampling in the September quarter.

Additionally, we expanded our SANbox 5000 family of stackable switches to support 80 and 96 port configurations, this expansion were driven by customer demand for large configuration support.

As mentioned earlier, the iSCSI market is starting to accelerate. IDC’s recent Worldwide Disk Storage System forecast shows iSCSI SAN terabytes grew by 270% between calendar year 2004 and 2005. We have found that terabyte growth shows a close correlation to interconnect growth and they suggest a strong market for iSCSI HBAs. Most analysts agree that 1-Gig iSCSI will be primarily concentrated in SMB for SAN deployment and stranded server applications in the enterprise. We agree with this analysis and have deployed a variety of solutions to address the opportunity. Our recently announced SANbox 6000 iSCSI-to-Fibre-Channel router is targeted at stranded servers and a remote connectivity, while our QLA 4000 series iSCSI and TCP offered HBAs are targeted at SMB SAN deployment.

Like iSCSI, storage virtualization is just now starting to gain acceptance by end-users. IDC recently released that forecast entitled ‘Worldwide Network Controller for Volume Virtualization’. In this report, IDC describes a new category of products being developed by storage system, network and software supplies, that they call network controllers. IDC states that network controllers make it possible to extend many of the capabilities of individual high end storage system to a pool of diverse storage systems without sacrificing performance or reliability. The QLogic SANbox 8000 product family is among the systems identified in the report.

Additionally, in the report, factory revenue from network controllers and the software application that run on them accounted for $139 million in 2005. This amount increased from only $34 million in 2004. The report forecast that this revenue will grow by 127% in 2006 to over $300 million. By 2010, IDC believes the total available market for network controllers running virtualization software will grow to over $1.7 million.

Our recent acquisition of PathScale provides us access to the new and rapidly growing server area network fabric. The initial opportunities for server-to-server interconnect in the high performance computing market using InfiniBand. According to IDC, InfiniBand’s 2004 revenue share for Interconnect in the HPC market was 9%. InfiniBand’s market share is forecasted to increase to 27% or $388 million in 2009. QLogic addresses this market with InfiniPath, family of server Interconnect solutions supporting both hyper transport and PCI Express bus architecture.

Now, let me review some of the highlights from this past quarter. The SANbox 1400 series 4-Gig Fibre Channel Switch branded as the IBM system storage SAN 10Q switch is now available from IBM small and medium business customers. Installable and manageable by technical journalist (ph), this switch was designed from the ground up to fit the needs of small and medium businesses. This past quarter we announced that EMC will expand the resale of QLogic SAN infrastructure products to include 4-Gig SANblade 2400 series host bus adapters and SANbox 1400 Fibre Channel switches as part of EMC select programs. Expanding the portfolio of QLogic products that are available under the EMC Select Program, greatly enhances the QLogic brand and growth potential.

Continuing to deliver advanced technology to our customer base, we recently announced the Sun storage tech 4-Gig Fibre Channel Express module HBA is now shipping. The innovative new form factor HBA can be added or removed without powering down the server or opening the server chassis. This allows Sun Blade 8000 modular system running Sun Solaris, Linux and Windows to deliver unprecedented op time for enterprise servers in a storage network, as well as illustrating HBA performance of 304,000 hours I/Os per second.

Supporting the continued expansion of our iSCSI distribution channel, we announce that Hitachi data systems will now support QLogic's iSCSI HBA solutions for Windows and Linux environments. Customers can now buy QLogic, SANBlade QLA 4050 iSCSI HBAs from authorized QLogic reseller for Hitachi.

We achieved several new qualifications at Tier 1 OEMs this past quarter. Early in the quarter, we announced qualifications and availability at HP for our 4-Gig SANblade Fibre Channel PCX 2.0 HBAs for HP integrity and HP 9000 servers. Later in the quarter, we also announced a new 4-Gig Fibre Channel HBA for the HP BladeSystem c-Class.

HP customers can now simply buy HBA Management by deploying a common HBA infrastructure across Windows and Linux operating environments. We also announced that our 4-Gig SANblade HBAs are qualified and now available from network appliance.

In addition, QLogic SANbox which is – have also been tested and qualified for use with NetApp storage products. We continue to expand our portfolio of SMB solutions. Last quarter we announced a complete simple and cost effective storage networking solutions from IBM. The package consists of IBM total storage DS4100 or DS4300 arrays and the QLogic SAN Express Starter Kit 1000.

QLogic's newest SMB customer is Network Appliance. Network Appliance is offering the StoreVault Fibre Channel starter kit that includes the SANbox 4-Gig switches and SANblade 4-Gig HBAs. The StoreVault Fibre Channel starter kit provides SMB everything they need to implement and manage NetApp’s new StoreVault S500 all-in-one network storage solutions.

We continue to lead the industry in the deployment of interconnect technology for server virtualization. This past quarter we announced that our storage networking products have been optimized to support the newly released VMware Infrastructure 3. VMware Infrastructure 3 is the next invasion of industry leading infrastructure virtualization software that virtualizes servers, storage and networking. QLogic SANblade 424 and series 4-Gig HBA's and SANbox 4-Gig switches provide a strong compliment to VMware Infrastructure 3.

Over the past 12 months, we have successfully transitioned our business to focus on SAN and server area fabric infrastructure. With this new focus, we are well positioned to continue growth in our core markets. The addition of new emerging market opportunities in the storage routing, storage virtualizations and InfiniBand will compliment our core markets. The incremental investment in this new market will provide us the opportunity to grow faster than our core markets.

Thank you, operator and we'll now take questions.

Question-and-Answer Session

Operator

Thank you. [Operator instructions]. We'll go first to Paul Mansky with Citigroup.

Paul Mansky - Citigroup

Hi, good afternoon and congratulations on a great quarter. I wanted to go back to that inventory number, if I may. If I recall coming out of last quarter, you mentioned that there were some rohas related build going on. I expected maybe a little bit better improvement on a sequential basis. Can you kind of update us on where we are with respect to that rohas overhang on the inventory line?

Anthony J. Massetti

Sure, Paul. As you recall, we guided inventory on the March call to be about flat or near the inventory levels that we exited fiscal ‘06 and we're right in line with that. What we said back on the March call was for the June and September quarters, we expected inventory to be around 40 million. As our customers work through the 4-Gig rohas compliant HBA transition and we're tracking to that according to our forecast and expectations. So you can expect inventory to be flattish in the September quarter and then 4-Gig inventory should start to trend down in the December quarter.

Paul Mansky – Citigroup

Great. And if I could follow-up, on the guidance you mentioned that you expected, what seems to be a pretty strong push from the switch side coming up sequentially which normally I wouldn't expect coming off of Sun’s fiscal Q4. Can you talk a little bit about what you're seeing on the switch side contributing to that comfort level?

H.K. Desai

Well, if you look at -- we have a tremendous product portfolio going in the switch side. It's a switch blade versus the SMB traction we have with every OEM customers which is our 1400 switch plus we also have a 5,000 switch product. And I think they have very strong product portfolio, our channel revenue and revenue with some of the OEMs started creeping up. So I think we expect that we have about double-digit sequential growth in the switch business in September quarter.

Paul Mansky – Citigroup

And is the margin profile on your newer switch products more attractive than your historical --

Anthony J. Massetti

Comparable, Paul.

H.K. Desai

It’s comparable, right.

Paul Mansky – Citigroup

Okay, great. Thank you very much.

Anthony J. Massetti

You're welcome.

Operator

We'll go next to Aaron Rakers with A.G. Edwards.

Aaron Rakers - A.G. Edwards

Yeah, thanks guys and congratulations as well. I guess I want to build up that last question. You had mentioned in your script that you had some supply constraint issues in your switching business in the quarter. Is there -- how do we think about that? Was there, how much business was essentially that slipped out of this quarter and that actually fills into your double-digit sequential growth going forward?

H.K. Desai

So, Aaron, we probably lost approximately, we issue about $1 million on the switch business because of the supply constraint at the end of the quarter. When we give the guidance, we had considered, some of this loss was because of the channel and some with OEMs. We don't know exactly how much of that we'll recover so what we have done is when we give the guidance, we haven’t considered any of this coming back. We have a conservative approach and if it come back then probably we'll have a upside.

Aaron Rakers - A.G. Edwards

Okay that's helpful, thanks. And I guess in the past one of the things you had talked about was you got three obvious big customers and you wanted to diversify that and see maybe a fourth plus 10% customer for you guys. Is that something we should expect over the next couple of quarters, a ramping fourth plus 10% customer?

H.K. Desai

Well, we don't really give a detail about the 10% customer in the quarter, so I give you some color on that like 56% of our revenue came from five customers. Sorry, 58% of our revenue came from five customers and if you compare that to the last quarter, last quarter about 56% anyway, so we are in the mid-50s range from -- coming from this top five customers.

Aaron Rakers - A.G. Edwards

And then final thing if I can. Just some color in terms of where we're at from the blade server side from it regards to the chip to card transition. Are we in half way through that or is that still quite a bit to go in that transition?

H.K. Desai

So all the three major OEMs, they have converted, we have converted them to the Mascot for the 4-Gig and the question of when the ramp is going to happen and how far the ramp is going to happen. So we expect, still continue some silicon business and then slowly we'll ramp to the 4-Gig.

Aaron Rakers - A.G. Edwards

And that should be a positive for gross margin; correct?

H.K. Desai

It's comparable.

Aaron Rakers - A.G. Edwards

Okay, thank you.

Operator

We'll go next to Srini Pajjuri with Merrill Lynch.

Srini Pajjuri - Merrill Lynch

Thank you. Just a follow-up to the previous question, H.K. If you look at the blade server market, are you seeing any more competitive pressure in the last quarter? Have you seen any more competitive pressure in terms of pricing or share loss?

H.K. Desai

If you look at the blade server market, we have two type of products. We have a blade switch blade we supplied for the blade server and we also have a silicon for the 2-Gig and going for in the Mascot. So if you look at the history, we were the only one on the switch blade initially with IBM for example, and then we got our competitions later on and I think the same thing will happen also on the Mascot side 08:01:50 or silicon side, where we will see our competitions now coming up anyway. The good thing is that when you're going from a 2 to 4-Gig, we are going from the silicon to the Mascot so there will be a top line growth for us, so I think even though there will be competitions, I think we will still continue growing in the mascot.

Srini Pajjuri - Merrill Lynch

Okay, fair enough and then in terms of your ASB decline of 1.9%...

Anthony J. Massetti

1.3, Srini.

Srini Pajjuri - Merrill Lynch

Oh, sorry, I missed it. 1.3%, as the transition to 4-Gig and once the 4-Gig transition more or less completes, should we expect that ASP pressure to increase or you expect that to kind of stay at these levels?

Anthony J. Massetti

We don't believe the ASP, that's a HBA like-for-like ASP decline of 1.3%, we don't believe that will change going forward due to the 4-Gig transition. It's been in the 2% to 3% range sequential declines for six to eight quarters, maybe more, and the most recent quarters, below 2%, between 1% and 2%. So based on what we can see, it will be and continue to be in that 2% to 3% range.

Srini Pajjuri - Merrill Lynch

Okay. And then H.K., on the new product side both iSCSI and InfiniBand, you talked about iSCSI more or less doubling this quarter. When do you expect to see some meaningful revenues from InfiniBand, lets say by end of next year? Where do you think this new product as a percent of your total sales will be?

H.K. Desai

Well I don't know how to define the meaningful revenue, but what we said is that for this new emerging technology, we expect the second half of FY 2007, that means December -- March quarter, we start seeing some revenue from IB, but I don't think it will be meaningful but we'll start seeing some revenue, and I think growth will come in the 2008.

Srini Pajjuri - Merrill Lynch

One final one, Tony, the 34% to 35% tax rate, do you think that will come down further or is it going to stay at this level for the foreseeable future?

Anthony J. Massetti

Just one clarification on your earlier question Srini. It's greater than 100% year-on-year in the quarter, iSCSI growth.

Srini Pajjuri - Merrill Lynch

Oh, that’s for the quarter? Okay.

Anthony J. Massetti

Yeah, and then with regard to tax rate, we're at 34.1% non-GAAP tax rate in the quarter. We guided 34 to 35 for the next quarter. It really depends on the mix of U.S, and non-U.S revenue in the quarter, so it built in a little bit of conservatism, so we'll have to see how the revenue plays out in the quarter.

H.K. Desai

But I think we expect 34% to 35% at least in the FY 2007.

Srini Pajjuri - Merrill Lynch

Okay, thank you.

Operator

We'll go next to Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan Keegan

Hi guys, great guidance, great quarter. A couple of questions. First of all, has the switches supply constraint issue been resolved already?

H.K. Desai

Yes.

Harsh Kumar - Morgan Keegan

Okay, and then H.K, I am looking at your guidance it's very good, very strong revenue guidance. Is there any one area that’s standing out? I know this was addressed by couple of other analysts earlier. Is there any one area that’s particularly strong in your guidance?

H.K. Desai

Like we say, do you expect switch to have a double-digit sequential growth. We expect HBA to be also growing sequentially and we will expect management control to decline sequentially for this quarter, so this is what we have considered in the guidance.

Harsh Kumar - Morgan Keegan

Okay, so just kind of seems like it’s all around. Lastly, kind of coming back to your OpEx, you talked about R&D maybe coming down as a percentage of sales going forward, but is there any, is it mostly acquisition H. K or is there any area of R&D that you’re focusing on investing in?

Anthony J. Massetti

The increase, Harsh, in R&D sequentially was acquisition related PathScale, Troika some of the other things we’re doing on the investment on the router side, so the expense numbers are consistent with the guidance we gave back in February when we gave new E-to-R guidance, 17% to 20% for engineering expense, 11% or 14% for sales and marketing and 3% to 4% for G&A. So all categories of OpEx are right in that range and we said that a total revenue from the acquired companies begins to ramp in the second half of fiscal ‘07 but our E-to-R should be closer to the higher end of the ranges, engineering particularly. So, I think as, if we get into fiscal ‘07 and we do see some revenue ramp, E-to-Rs would be in the ranges that you see currently.

Harsh Kumar - Morgan Keegan

Got it, guys, thank you and congrats on a great quarter, great guidance.

Anthony J. Massetti

Thanks, Harsh.

Operator

We'll go next to Mark Kelleher with Canaccord Adams.

Mark Kelleher - Canaccord Adams

Thanks. I wanted to start with a little bit of a clarification. You said the SAN infrastructure was up 19% year-over-year right?

H.K. Desai

Yeah, you are breaking up a little bit so can you ask the question again?

Mark Kelleher - Canaccord Adams

Sure. SAN infrastructure was up 19% year-over-year?

H.K. Desai

Correct.

Mark Kelleher - Canaccord Adams

HBAs were up 19% year-over-year?

H.K. Desai

Correct.

Mark Kelleher - Canaccord Adams

Switches were up 8% year-over-year?

H.K. Desai

Correct.

Mark Kelleher - Canaccord Adams

So I put the 19 and the 8 and I kind of, blend those I’m going to get a number below 19, so does that mean that there's a stronger growth rate than something else?

H.K. Desai

Yes, we have a strong growth in the silicon, for example. We are flat I think for year-over-year on the Management control, so we also have a strong growth in the silicon business.

Mark Kelleher - Canaccord Adams

Great. And how about the stock buyback? Last quarter you said below 20 you were more interested. It’s been below 20. Can you just give us some thoughts on that and maybe what’s still authorized?

Anthony J. Massetti

Sure. We have 140 million left on the buyback that we announced, the $200 million buyback that we announced in November of last year. We were active on the buyback, almost we purchased almost $50 million of stock and it still make sense to us in sub 20 on the stock price particularly below 18 when it starts to become more accretive in the 16, 17 range it makes a lot of sense.

Mark Kelleher - Canaccord Adams

Okay, great. Nice quarter. Thanks.

Anthony J. Massetti

Thank you.

Operator

And we’ll go next to Kevin Hunt with Thomas Weisel Partners.

Kevin Hunt - Thomas Weisel Partners

Hi, thanks, I have some financial questions for you. On the stock option expense, it looks like you got about a nickel impact and then the other acquisition related items had a nickel impact and you kind of saying that was going down going forward to may be $0.06, can you break down, what components that are going down?

Anthony J. Massetti

Sure. If you look at table two, Kevin, of the press release, it gives a nice bridge on GAAP to non-GAAP results, so you can see that we have $8.7 million of FAS 123R expense. You need to tax effect that, so the impact on EPS going from GAAP to non-GAAP is about $0.04 per share, and then there are really three other bridge items. There’s acquisition related non cash competition charges that was about 3 million again you need to tax effect that then IPRD which is the charge for the Troika and PathScale acquisitions and then finally amortization of intangibles. So, when you net all of those together, tax effect them, we think that it will be about a $0.06 to $0.07 impact going forward, about half of that is FAS 123R.

Kevin Hunt - Thomas Weisel Partners

Very nice, now but this quarter, am I right that it was higher as more like $0.10?

Anthony J. Massetti

No. It’s $0.13 to $0.21, so it's $0.08.

Kevin Hunt - Thomas Weisel Partners

$0.08, okay, okay.

Anthony J. Massetti

And, if you take a look at the – there is two tables which bridge you GAAP to non-GAAP on the earnings press release. When you look at those, if you have any questions just give us a call and I'll be happy to take you through those.

Kevin Hunt - Thomas Weisel Partners

Okay. And then a question on the expense line, should we expect those R&D and selling and marketing, any reason to think they would come down? I know you talked in the past about lowering some cost over time on the R&D line. How near term should we think about that?

Anthony J. Massetti

I think for the first half of fiscal '07, consistent with the guidance that we've given, engineering will be at the high end of that E-to-R range, 20% or so. Sales and marketing was a little higher in the current quarter because of our worldwide partner conference which drove about 700 K of incremental expense. So that should come down a bit in the September quarter and then G&A was a little bit higher than the run rate. So, looking at the second half of fiscal '07 as I mentioned earlier, we start to get some incremental revenue from the acquired companies. We should get some leverage particularly on the sales and marketing and G&A line items and you can see those E-to-Rs come down just a little bit but engineering will stay more toward the higher end of that range, the 19% to 20% range.

Kevin Hunt - Thomas Weisel Partners

Okay and one last thing. I thought you said 25% was 4-Gig product versus how much last quarter? Did I have the right number?

Anthony J. Massetti

I think it's a 22%?

Kevin Hunt - Thomas Weisel Partners

22%?

Anthony J. Massetti

Yes.

H.K. Desai

Yeah, it's 22%.

Anthony J. Massetti

22%, Kevin.

Kevin Hunt - Thomas Weisel Partners

That was last quarter?

H.K. Desai

Yes.

Kevin Hunt - Thomas Weisel Partners

Okay. All right thank you.

Anthony J. Massetti

Yeah, it's 22% of Fibre Channel, Kevin.

Kevin Hunt - Thomas Weisel Partners

Okay.

H.K. Desai

Yeah.

Kevin Hunt - Thomas Weisel Partners

Thanks.

H.K. Desai

You're welcome.

Operator

We'll go next to Mark Moskowitz with JP Morgan.

Mark Moskowitz - JP Morgan

Thanks. Hi guys. H.K, I was wondering if you could share with us your view on the broader storage trends in terms of your guidance as well as your June results really suggest that things are pretty stable right now. Are we seeing more that the OEMs are encountering and maybe market share dynamics there with the broader storage markets intact?

H.K. Desai

You know, it's kind of. I can just provide you the color. If you look at the top five customers, four of them grew sequentially for us in this quarter, and we expect probably at least again the same ratio probably three to four will grow sequentially in the next quarter or two anyway. So, I think our OEMs which comprise of almost about 58% revenue, I think they are doing pretty well in the top five OEM's so we expect the same kind of a growth in the September quarter. I think it's kind of very difficult to really predict overall the storage market, what's going on, but what we saw in the June quarters, the linearity we saw versus the business was we already comfortable fourth quarter or achievement in the June quarter. And when we started this quarter, I think July or so, it's going according to our forecast and expectations and linearity is similar to what we have seen in the last few quarters anyway. So I think we are seeing a pretty stable business right now.

Mark Moskowitz - JP Morgan

Okay, so from the hub perspective you're not seeing anything unusual even to move to the first month of July?

H.K. Desai

No. We are seeing exactly what we expected.

Mark Moskowitz - JP Morgan

Okay. And then Tony I was wondering if you could help us out as far as a little more granularity in terms of the PathScale impact in terms of free revenues here, what is the OpEx impact here from a dilution perspective?

Anthony J. Massetti

We aren't going to provide that detail on acquisitions, Mark.

Mark Moskowitz - JP Morgan

Okay, well what about the headcount? Where did it end for the quarter then?

Anthony J. Massetti

Again, we don't provide that on the quarters.

Mark Moskowitz - JP Morgan

Okay. And one last question if I could. As far as the distribution channel, H.K, could you share with us your view in terms of how much the distribution channel is lending to your optimism about the switch business moving into the second half of the year?

H.K. Desai

We don't break down our HBA or the switch business for the channel but we grew, for example, 20%, I mean 28% of our suit in HBA revenue came from the channel and we grew 20% year-over-year on the channel business. So I think we have very strong presence and like what we said, we have expanding also worldwide in the channel business and we have like worldwide partner conference in Dallas, Texas and there are almost 700 attendees, we are going to have another conference in China and Japan. So I think we are expanding pretty well in the channels and we are very happy with what's going on in the channel business for us.

Mark Moskowitz - JP Morgan

Okay, thank you.

Operator

We'll go next to Tom Curlin with RBC Capital Market.

Tom Curlin - RBC Capital Market

Hi, good afternoon.

Anthony J. Massetti

Good afternoon.

Tom Curlin - RBC Capital Market

Can you talk about the FC/9000, just the value proposition there versus some of the other switches that would be in the director space? Is it going to be positioned below the director segment or right into that market?

H.K. Desai

Like what I said on my script that it's really, it's a distribution layer, what we're seeing is there is a lot of inquiry from some of the customers. They like to have a high port count switch which is not the same value proposed in the director class product, but they still like to have a higher value proportion than the eight switches. So we come back with this product to which is in between the director class product and the eight switches and people want the high port count. So what we do is, really we're creating -- it's the same strategy what is in the land business anyway. They have a distribution switch layer came into the play later on in that market when the market get matured and we start seeing the same thing and people are asking also for the 80 ports and 96 port, so that's why we announced, also over 5000 switch product. So, what we're saying is this is going to be high port count switch, it’s also multi protocols, we will have our Fibre Channel to iSCSI, router product, blade into that, we also are storage switches and blade on to that. So we're making a multi protocol distribution switch.

Tom Curlin - RBC Capital Market

Was it -- will it have non-disruptive code load and activation?

H.K. Desai

Yes.

Tom Curlin - RBC Capital Market

And will it have redundant control modules?

H.K. Desai

Yes, going forward.

Tom Curlin - RBC Capital Market

Okay. Well maybe switching gears then, staying with the switching topic but moving to InfiniBand, right now, the only vendor in that market that has a viable product is Mellanox. It would seem like that market would be looking for some choice on the switching side to compliment what you guys are already doing now with PathScale on the HCA side. So what keeps you from entering that market? Doesn't that seem like a logical next step?

H.K. Desai

You know, I think we always believe in the heritage, we are a HBA Company and we also believe in the IP. We always believe that there is more IP in the HBA versus switches for example, even the Fibre Channel. We believe the same way on the IB also. There is a more IP technology on the HCA versus the switch side, so I think we always want to acquire, if you want to enter any new market you need to acquire the technology. So I think our strategy right now to acquire the IB technology for the HCA and that's what our focus is.

Tom Curlin - RBC Capital Market

And finally on CapEx, that's up a pretty good bit year-over-year. Can you just talk about how you're spending that? Is that just related to building out labs and so fourth for some of the recent acquisitions or what's involved there?

Anthony J. Massetti

Yeah, that's right, Tom. Our investment in emerging markets and technologies with Troika and now PathScale along with fibre, -- iSCSI bridge and router products will all drive some incremental CapEx. But H. K. and I scrubbed that CapEx pretty closely and we make sure it's appropriate, so there will be some increase in CapEx but it won't be significant going forward.

Tom Curlin - RBC Capital Market

All right thank you very much.

Anthony J. Massetti

You're welcome.

Operator

We'll go next to Min Park with Goldman Sachs.

Nick Flair - Goldman Sachs

Hi, guys, it's actually Nick Flair on behalf of Min. Looking more at the environment, we heard some comments today in from other people that there seems to be at least some hint of a softening in the enterprise server market. I guess first what are you guys seeing there and what would be the read through for your business if in fact there was to be such a softening?

H.K. Desai

So I mean, the only thing I can say is from historical data and what we are seeing in the July. So far what we have seen in June, we haven't seen any slowdown on any of the market of what we address. So far what we have seen in July is also according to our expectations and the guidance, so we haven't seen anything we don't know what's going to happen in August and September anyway, but so far what we are seeing is I think we are seeing a positive trend.

Nick Flair - Goldman Sachs

Okay. And then finally, kind of switching gears to the 4-Gig adoption curve, what is it going to take to really start pushing those adoption numbers much higher than mid 20%? Is it a matter of getting more 4-gig arrays out there or is there some other bottleneck that's keeping the adoption rates from climbing higher?

H.K. Desai

Well, like we said, before also we expect, I think a couple of quarters ago we made a statement in one of our calls that we expect that if you look at historically what happened from 1-gig to 2-gig and we expect that about 50%, 50% plus can be the 4-gig revenue going into December quarter. So we have seen about 22% which is due from 15% or 13% going into the 22% anyway. So I think we are growing according to what we expect and I think by the December quarter, we expect 50% of Fibre Channel will be 4-gig.

Nick Flair - Goldman Sachs

Okay, great. Thanks, guys.

Operator

We'll go next to Clay Sumner with Friedman, Billings, Ramsey.

Clay Sumner - Friedman, Billings, Ramsey

Thanks just to clarify on that last one, H.K., 50% of Fibre Channel revenue. Do you also expect maybe in the blade server area that 50% of those shipments will be 4-gig mezzanine guards by December?

H.K. Desai

Yeah, close to that, yes.

Clay Sumner - Friedman, Billings, Ramsey

And with the Intel Woodcrest two ACPU really just getting to the market, did you guys notice any or did your vendors or excuse me OEMs notice any stall in the Intel base server market this quarter and do you expect that to accelerate maybe a little bit as these chips start to come out?

H.K. Desai

Actually we heard rumor about these things but we haven't actually seen anything like that anyway. So we haven't seen anything like that but we kind of, we investigate it and we didn't see any slowdown in our business.

Clay Sumner - Friedman, Billings, Ramsey

Okay. So we shouldn't expect any kind of pent up demand for that in the third and fourth quarter here?

H.K. Desai

I don't think so, no.

Clay Sumner - Friedman, Billings, Ramsey

And then you started breaking out deferred revenue, Tony, of $5.5 million roughly of current deferred and looks like maybe another $5 million in non-current. Can you just say where that's coming from?

Anthony J. Massetti

Sure. It's always been there. We just are breaking it out on the balance sheet, Clay, so better transparency and so investors understand the balance sheet a little bit better. That's consistent with our accounting practice related to any kind of software or service activity that would need to be deferred and amortized.

Clay Sumner - Friedman, Billings, Ramsey

Okay, so the same old software management software products you guys have sold and maybe maintenance service contracts?

Anthony J. Massetti

Well, you'll see that line grow very gradually related to our new businesses depending on how much software content. For example, on some of the router products or what we're doing with Troika, that might impact the deferred revenue picture, but for now, it's relatively small but we chose to break it out for better transparency.

Clay Sumner - Friedman, Billings, Ramsey

Okay. And then one thing, Tony. You talked about the Dallas conference cost you about $700,000 in the quarter and you mentioned a couple of times conferences in China and Japan. Are those going to be in the coming quarter or further out in the year?

Anthony J. Massetti

Yeah. The WPC was in the current quarter about $700,000 and the quarter, the conferences, the international conferences will be very minimal expense. For the most part, self-funding. So you shouldn't see incremental expense there.

Clay Sumner - Friedman, Billings, Ramsey

Great. Thank you very much.

Operator

We'll go next to Frank Timons with Robert Baird.

Frank Timons - Robert W. Baird

Thank you for taking my call. First Tony, it's my understanding as you sell more through the channel that actually helps gross margin. If you could give me any commentary on how that affects your business model?

Anthony J. Massetti

Sure. The gross margins are a little better in the channel business. Operating margins though are comparable, Frank.

Frank Timons - Robert W. Baird

Okay.

Anthony J. Massetti

So when you roll in the necessary sales and marketing expenses, the operating margin is about the same as the OEM side.

Frank Timons - Robert W. Baird

Great. And H.K., for you, as you look at kind of these new markets and your acquisitions you're taking in to InfiniBand and then as you look into iSCSI, if you can't quantify it maybe some qualifying comments on how much of this is incremental, adjacent markets versus kind of cannibalization of Fibre Channel? I know you were kind of saying iSCSI more SMB. Anymore kind of color on your perspective?

H.K. Desai

Yeah. So if you look at the emerging markets -- let's look at iSCSI for example. On the iSCSI side, we, like I said in my script, we see a 280 out for the iSCSI and one is most of the HBAs what we sell which is our 4000 series going to SMB market and that’s what most attraction is and if you look at the iSCSI arrays from the storage supplier, storage manufacturer, they are all mostly on the low end of the market and the reason they are on the low end of their product portfolio is because they want to address the SMB market. The second of what we are seeing is that there is also standard servers enterprise customer has and they also want to attach to Fibre Channel SAN and they like to use iSCSI to Fibre Channel router which we will provide with 6000 series of product, over 6040. So we are addressing the both market from that perspective. So we don’t see really cannibalism of anything. We just seeing this expansion of the market to which was just before for example, the stranded server guys.

Frank Timons - Robert W. Baird

And on the IB side? I know, HPC is a different market but do you see that actually encroaching in some Fibre Channel environments?

H.K. Desai

I mean, I believe very strongly that Fibre Channel opportunity for the enterprise and its too late for any technology to come in to displace them. It’s going to be going from 2 Gig to 4 Gig and going to go from 4 Gig to 8 Gigs some time in the future anyway because enterprise customers install base and they’re not going to change it. So even if you look at the this is the reason, one of the reasons we are doing iSCSI to Fibre Channel router or 6000 series of product because people want to attach even with the iSCSI technology they want to attach to the Fibre Channel SAN. Same thing will probably happen with the IB also. There might be a need for a high performance computing customer. They would like to attach with SAN, people like to use IB to Fibre Channel like that. So I think it’s going to be more of region a router product than the native IB market. So we don’t see any cannibalism from any of this technology.

Frank Timons - Robert W. Baird

Great. Appreciate the perspective. Thanks.

Operator

We'll go next to Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company

On your emerging product opportunities, if you would have like look out 6 to 12 months, could you maybe just sort of qualitatively rank kind of the sort of the which would be the biggest revenue contributor and sort of on down the line?

H.K. Desai

You know, I think that it's kind of a, if you look from the investment perspective, we have invested longest in the iSCSI markets. So I think right now if you look at this three different emerging markets, for us I think iSCSI might be contributing more revenue than the storage virtualism or Troika acquisitions or the InfiniBand, I think it’s too early for us to say which ever it’s going to be. But I think we expect both of those technologies to contribute some time in ‘08. Fiscal.

Glenn Hanus - Needham & Company

Yeah, okay, fiscal '08.

H.K. Desai

Yeah. Fiscal '08.

Glenn Hanus - Needham & Company

And so on the IP side, storage side with the iSCSI so you feel your products includes the tows and is that become, more there was a lot of talk for awhile that they need for tow was kind of going away and can you just sort of comment on that? Do you feel like that has come back as a compelling need?

H.K. Desai

So if you look at what we have is we have iSCSI and iSCSI tow and TC/PIC off road engine. So we have one both off load engines in a one silicons and what we start seeing is that some of the customers I used to believe that a NIC card is enough for the storage connects and so they start believing that if you want any scalability, if you want any performance, then if you also want to boot from a SAN, I think they need the iSCSI HPA’s and I think this is the reason we are starting to see some traction on the iSCSI HBA. And we believe that will continue for the 1 Gig moving forward.

Glenn Hanus - Needham & Company

Okay, thank you.

Operator

We'll go next to Amanda Boruo (ph) with Banc of America.

Amanda Boruo - Banc of America

Hi. Good afternoon, thanks for taking my question. Two things if I could. First of all, now that we’re getting some kind of good traction in 4 Gig HBA's have you seen any or are you seeing incremental competition in Linux environment?

H.K. Desai

What do you mean by incremental?

Amanda Boruo - Banc of America

I guess are you seeing I guess has the, I know in the past you have spoken about having upwards of 80% market share in Linux SAN environments. Do you still feel that you are still holding that share position I guess?

H.K. Desai

I believe yes, we do.

Amanda Boruo - Banc of America

Okay, great. Thanks and then also last quarter I believe you commented that on the Sun side, you had gone through some transition issues from old platforms switching in silicon to new platforms. Is that transition now complete and if it is complete, was it actually completed last quarter or was it completed this quarter?

H.K. Desai

I think it started this quarter a little bit to the end of the quarter and then we expect it to continue to the next quarter. So we have some of the time and I think it will be complete next quarter.

Amanda Boruo - Banc of America

Okay great. Thanks a lot.

Operator

We’ll go next to Joel Inman with Robert Baird.

Joel Inman - Robert Baird

Hi, thanks. Just a couple of quick questions on the year and the fiscal year. Can you give us a sense for where you think options are going to be or are you thinking probably $0.13 to $0.14 for the year and then also any thoughts on CapEx and depreciation? I know you hinted about it a little bit.

Anthony J. Massetti

I'm sorry, the first question, Joel?

Joel Inman - Robert Baird

On your options expense.

Anthony J. Massetti

Option expense. So we said that going forward, the difference between our GAAP and our non-GAAP results would be approximately $0.06 to $0.07 per quarter and approximately half of that would be related to expensing in stock options consisting with FAS 123R.

Joel Inman - Robert Baird

So we should just take that and normalize it for the full year?

Anthony J. Massetti

Yeah. And then what was your second question?

Joel Inman - Robert Baird

CapEx and depreciation.

Anthony J. Massetti

Yeah, you know, CapEx, I think you can model roughly 7 to 10 a quarter for CapEx.

Joel Inman - Robert Baird

Okay. Thank you.

Anthony J. Massetti

You're welcome.

Operator

We’ll go next to Clay Sumner with Friedman Billings Ramsey.

Clay Sumner - Friedman Billings Ramsey

Yeah, thanks. A follow-up on iSCSI. You guys saw an uptick in iSCSI revenue at the same time that VMWare 3.0 was released or roughly the same time. So do you think the VMware 3.0 is driving your iSCSI growth or is that just coincidence in timing?

H.K. Desai

We don't believe that's what is driving it.

Clay Sumner - Friedman Billings Ramsey

Okay. So VMWare 3.0 have you seen that as a driver at all or is it still too new?

H.K. Desai

I think it's too new.

Clay Sumner - Friedman Billings Ramsey

Okay. Thank you.

Operator

We’ll take a follow-up from Aaron Rakers with A.G. Edwards.

Aaron Rakers - A.G. Edwards

Hi, thanks for taking the other question. In regards to some of the announcements you've made throughout the quarter and in particular today, the announcement with EMC and I think a couple other announcements with HP and IBM and also Network Appliance, if I think about the second half of the year, can you kind of rank which one you view as kind of the biggest opportunity for you guys? Is it the EMC relationship or is it Network Appliance? Any color there would be helpful.

H.K. Desai

So if you look at without going into without thinking too much and looking at the 40,000 feet, if you look at the HP and the EMC, they have a tremendous market share in the storage and HP always big unique volumes in the storage market. So I think any design win we have with HP, I think it's always going to give us a lot of growth. EMC is always great in the storage markets. So if you look at that as far as rating them, it's going to be HP, EMC and IBM. Those are the guys that usually have a much more unique volume compared with other guys.

Aaron Rakers - A.G. Edwards

And then final thing, Tony. A couple quarters ago, you talked about investments in Europe and that having longer term ramifications for your tax rate going forward. Has that been somewhat of a factor in a little bit of a lower tax rate here recently or is that still something maybe we should think about longer term? Is that fair?

Anthony J. Massetti

That's fair. We talked about on prior calls investment and our Ireland fulfillment center which we brought up in the June quarter of last year and contract manufacturing in Asia which would contribute to a lower tax rate long term, and if you recall for a full year fiscal ‘06, the tax rate was about 38.5% and we brought that down to 34% in the current quarter and we talked about 34% to 35% guidance for the next quarter. So it is helping the tax rate.

Aaron Rakers - A.G. Edwards

Okay, thank you.

Anthony J. Massetti

You're welcome.

Operator

We'll take a follow-up from Paul Mansky with Citigroup.

Paul Mansky – Citigroup

Actually it was already asked and answered. Thank you.

Operator

We have a question from Kaushik Roy with Neuberger Berman.

Kaushik Roy - Neuberger Berman

Congratulations for the next quarter. Can you comment on the competitive situation on the switches and then on the pricing?

H.K. Desai

So on the switch pricing you mean?

Kaushik Roy - Neuberger Berman

Correct.

H.K. Desai

I think we expect in the switches similar to what we have seen in the past and there is a couple of people providing a class product and a couple of guys doing the eight switches and we are kind of more a fifth player in the switch side and we getting some market share. And one other reason is because we are switch blades, we have eight switches,we have SMB tractions and we have 5000 stackable switches. And we are coming from a low market and I think that's why we are growing compared to the other guys. So I don't think there isn't much changes in company situation.

Kaushik Roy - Neuberger Berman

And then on the 9020, it's been a little slow compared to our expectations. Can you comment on that?

H.K. Desai

I even don’t know what is 9020.

Kaushik Roy - Neuberger Berman

Congratulations again.

Anthony J. Massetti

Thank you.

Operator

We'll go next to Kevin Hunt with Thomas Weisel Partners.

Kevin Hunt - Thomas Weisel

Great. Thank you. One other question on the balance sheet. You had new items on there like deferred tax, long term deferred tax assets and so forth sorry, long term deferred tax liability, some income tax payable. Is that related to these acquisitions you did? Or what were those?

Anthony J. Massetti

Most of it is, yes. Also, some of it related to FAS 123 R.

Kevin Hunt - Thomas Weisel

Okay. Thanks.

Anthony J. Massetti

Yes. Thanks.

Operator

That is all the questions we have. I'll turn it back over to H.K. Desai for any additional and closing remarks.

H.K. Desai

Okay, thank you, operator. And thank you for joining us for our first quarter fiscal year 2007 conference call. We look forward to discussing our second quarter fiscal 2007 results with you at our next quarterly conference call in October. Also, we have several upcoming conferences that we'll be attending. In August we'll be presenting at the RBC Capital Markets North American Technology conference. In September, we'll be presenting at Citigroup's 13th Annual Global Technology conference, and the Morgan Keegan Equity conference. Please refer to our Investor Relations website at www.QLogic.com for any updates to the conference schedule. For any of you that will be attending these conferences, we look forward to seeing you there. Thank you.

Operator

This does conclude today's conference call. You may disconnect at this time. Thank you for participating.

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Source: QLogic Q1 2007 Earnings Conference Call Transcript (QLGC)

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