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QLogic Corporation (NASDAQ:QLGC)

Q1 2014 Earnings Call

July 25, 2013 5:00 pm ET

Executives

Jean Hu - Interim Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Harshad K. Desai - Executive Chairman

Roger J. Klein - Senior Vice President and General Manager of Products & Technology Group

Analysts

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Kathryn L. Huberty - Morgan Stanley, Research Division

Karl Ackerman - RBC Capital Markets, LLC, Research Division

Vlad Rom - Crédit Suisse AG, Research Division

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

Jung Pak

Operator

Good afternoon, and welcome to the First Quarter Fiscal Year 2014 QLogic Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Jean Hu, Interim Chief Executive Officer, Senior Vice President and Chief Financial Officer of QLogic. Ms. Hu, you may begin.

Jean Hu

Thank you, operator. Good afternoon, and welcome to QLogic's First Quarter Fiscal Year 2014 Earnings Conference Call. Joining me on the call today are HK Desai, our Executive Chairman; and Roger Klein, our Senior Vice President and General Manager.

I'll begin the call with an update on the progress of our search for a new CEO and the more details on our recently announced restructuring. After that, I will review our first quarter financial results, followed by our business update and second quarter outlook. We'll then open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and our projections of our financial performance based on current expectations.

These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in this forward-looking statement.

We refer you to the documents 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 the forward-looking statements that we make today. In our first quarter of earnings press release issued earlier today, we reported both GAAP and non-GAAP results. Of the reference that we'll make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of the non-GAAP to the GAAP financial measures is available on our website in the Investor Relations.

As we announced in May, our Board of Directors has formed a CEO search committee. The search is a high priority and the board has written executive search firm to assist with this process. The search is progressing as expected, and the committee is actively moving the process forward to ensure that we identify candidate with the right experience and a track record to lead QLogic into the future.

In early June, we announced that we were undertaking restructuring activities to improve our business focus and financial performance. The restructuring activities included a workforce reduction, a consolidation of several engineering activities and to enhance the product development focus. One of the primary goals of the restructuring was to achieve a sharpened focus on the server and storage connectivity market where we have been, and continue to be mostly successful. I believe we have achieved the sharpened focus, and I'd like to add additional color on the specific actions.

After careful and comprehensive analysis, we decided to seize development of all future ASICs switch products. This decision included both future Fibre Channel and the Converged switch ASICs. This decision does not affect any [indiscernible] shipping switch product, which we'll continue to sell. It also does not affect certain near-term OEM switch development and qualification programs, which we are committed to complete for our Tier 1 customers.

Ongoing development and support obligations for our switch product are being provided by our resize [indiscernible] switch team, who will continue to be located in Shakopee, Minnesota. Fibre restructuring activities have largely been completed from an operational perspective. We expect to recall additional special charges throughout the fiscal year as we optimize business operations. Once fully implemented, we expect the restructuring actions will achieve annualized savings of approximately $20 million, primarily in operating expenses. As a result, we now expect our non-GAAP operating expenses for fiscal year 2014 will be approximately $235 million.

With a significant portion of the restructuring activities behind us, our team is focused on day-to-day execution to deliver products and programs to our customers, improving efficiency of our business, secure additional design wins and deliver improved financial performance.

We're announcing today that we'll move from our historical external revenue reporting category of Host, Network and Silicon to redefine categories that are better aligned with our sharpened market focus. Expected this quarter, we'll begin reporting our revenue in 2 new categories, Advanced Connectivity Platforms and the Legacy Connectivity Products. Advanced Connectivity Platforms includes our strategic server and storage connectivity products, while Legacy Connectivity Products include other products such as the Fibre Channel Switch products and the 1 gig iSCSI products. The Legacy Connectivity Products compare most closely to what we previously reported as Network Products, but also includes 1 gig iSCSI products that had previously been included in our Host and Silicon Products.

We anticipate revenue from Legacy Connectivity Products to continue for several years, but will decline over time.

Now, let me turn to a review of financial results for the first quarter ended June 30, 2013. I'm very pleased with our execution in the first quarter. We've delivered net income per diluted share of $0.18, which was above high end of our guidance range of $0.11 to $0.16 provided during our fourth quarter earnings call. Our revenue in first quarter was $113.1 million compared to $130.4 million recorded in the same quarter last year.

This revenue was in the middle of our guidance range of $110 million to $160 million. Our first quarter revenue from Advanced Connectivity Platforms, which are comprised primarily of adapters and the silicon for server and storage connectivity applications, was $93.2 million compared to $108 million recorded in the first quarter of last year.

First quarter revenue from Legacy Connectivity Products, which are comprised primarily of Fibre Channel Switch products and the 1 gig iSCSI product, was $19.9 million compared to $22.3 million recorded in the first quarter of last year. Our first quarter gross margin of 68.4% was above the 67.6% of gross margin we achieved in the first quarter of last year, primarily due to a favorable product mix.

Next, I'd like to cover our first quarter operating expenses. Total operating expenses was $60 million, up from $58.5 million reported in the first quarter of last year. Operating expenses were favorable to our guidance of $63 million provided during our fourth quarter earnings call, primarily due to expense reductions achieved from the restructuring activities. Engineering expenses in the first quarter of $36 million increased from $35.1 million last year. Sales and marketing expenses in the first quarter were $17.6 million and increased from $16.9 million dollars last year. G&A expenses in the first quarter was $6.3 million and declined 2% from last year.

Operating income in the first quarter of $17.4 million was 15.4% of revenue. Our income tax rate for the first quarter was 9.5%. This tax rate reflects the benefit of taxable income earned in tax jurisdictions with favorable tax rate and certainties agreed tax-related items. Our first quarter net income of $15.4 million represented net profit margin of 14.5%. This is the 72nd consecutive quarter of profitability for QLogic.

Turning now to our balance sheet. Our cash and marketable securities were $432 million or nearly $5 per share at the end of the first quarter. We continue to maintain a very strong cash position and have no debt.

During the first quarter, we generated $16.6 million of cash from operations. We remain committed to our stock buyback, and during the first quarter, we purchased $24 million of the company's common stock. Receivables were $59.3 million at the end of the first quarter. DSO at the end of the first quarter was 56 days compared to 51 days at the end of the fourth quarter. Inventory was $17.1 million at the end of the first quarter. Annualized inventory turns for the first quarter improved to 8.4 from 7.3 turns achieved in the fourth quarter.

I would now move on to our business update covering the server and storage connectivity market. The server connectivity market is our largest and the most important market, where we have a long history of leadership and success. It includes our traditional sense, Converged ethernet product, and most recently, our innovative shared cache acceleration products. This server connectivity platform's at the focal point of our customer solutions.

As you may recall, in March, we announced the release and the general availability of FabricCache 10000 Series adapters. FabricCache combine our market-leading host adapter and intelligent adapter-based caching with the connectivity to a high-performance, server-based PCIe flash. It utilizes existing SAN infrastructure to create a shared cache resource, distributed over multiple servers, and delivers the scalable performance benefit and lower latency to a wide range of enterprise applications.

Our effort to date have been focused on market awareness, partner engagement, trending and under [indiscernible] evaluations. This has resulted in an increasing pipeline of FabricCache opportunities. We are also in the early stage of several OEM assessment and qualifications, which should result in higher volume business longer term. Results have been positive and the feedback is very encouraging. We're very excited about the future opportunities we can build on this innovative platform, and we're focusing on product execution.

As we mentioned during our last call, we expect revenue from FabricCache adapters to be modest in fiscal year 2014 and to grow thereafter. Our SAN Converged ethernet programs also continue to be on track. Most of the Tier 1 qualifications for the current server cycle are behind us, and new products are contributing to revenue.

We're pleased to see a continued transition by our leading customer to our FlexSuite Gen 5 Fibre Channel adapters, supporting speed up to 15 gig. Early work is already underway for our Gen 6 Fibre Channel adapters, providing support for speed up to 32 gig. We gained share in Fibre Channel adapter market during the first quarter of calendar year 2013 according to the most recent data from Dell'Oro Group's at Q1 2013 same report. With the sequential quarter-over-quarter gain of more than 4 share of points, QLogic led its nearest competitor by more than 11 share points. QLogic currently hold a total share of 53.5% according to the Dell'Oro Group.

Also according to Dell'Oro Group, with addition of our products shipped during the first calendar quarter, we surpassed the 14 million mark in all-time shipment of Fibre Channel adapter parts, 7 million more than our nearest competitor. Having achieved our ninth consecutive year of market share leadership in calendar 2012, this quarter's solid performance put us well on track to achieve a full decade of Fibre Channel adapter share market of leadership.

While challenges certainly are present in the underpriced server market, we believe that the server connecting market continues to show promise with the potential for innovative products like FabricCache. We continue to focus on executing our plans in this important market.

The story to connectivity market or the target market capitalized on the steady growth in storage systems with good leverage of our overall technology and the product, resulting in expansion for addressable market for our Advanced Connectivity Platforms. This market is addressed by our traditional sense, Converged ethernet product, both adapters and the ASICs, as well as our innovative shared cache acceleration product. While overall underprice server unit growth has been challenged and remains weak, industry analysts expect the external disk storage market to show stronger performance over the next several years. Growth in external disk systems drives growth in the storage connectivity market. The potential revenue growth for our company is even higher than the storage connectivity market as we bring to market programs that will replace prior generation product previously supplied by competitors. Representing incremental new business for us.

We have previously updated you on our success and securing key storage connectivity design wins, and the positive momentum continues. While designs from storage connectivity customers take longer to come to market, they also typically have much longer life cycle. We continue to win the most strategic and promising customers, and we're working closely with them to get products into the market. Active programs continue to progress positively with every leading storage provider.

Our sharpened focus on server and storage connectivity will allow us to operate more effectively and efficiently. Our internal organizations have been realigned and are executing to our new focus. While we have additional work to do and a portion of the market that we serve are challenged, I believe we're on the right track to drive the execution of new product cycles, targeted market opportunities and the long-term FabricCache investments.

Now, I will wrap up with our near-term outlook for the second quarter of fiscal 2014. We expect total revenue to be in the range of $108 million to $116 million. At the midpoint, we expect revenue from Advanced Connectivity Platforms to be approximately flat sequentially, and the revenue from Legacy Connectivity Products to decline by approximately 6%. Gross margin is expected to be in the range of 67% to 68%, and operating expenses, I expect to be approximately $57 million. When combined with the projected tax rate of approximately 12% and diluted share count of approximately 88 million shares, we expect to achieve non-GAAP earnings per diluted share of $0.16 to $0.23 in the second quarter.

Finally, as I close, I believe our priorities are clear. We must stay focused on execution to move forward and continue to build on the encouraging progress being made in many areas across our company. This concludes our prepared remarks. Operator, we'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Aaron Rakers with Stifel.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

A couple if I can. First of all, HK, just curious, or Jean for that matter, where we stand on the CEO search? When do you anticipate an announcement of a new CEO?

Harshad K. Desai

Actually, we established a search committee. We -- committee has hired to engage a search firm. We have a list of candidates we are working on in the search committee. So we expect -- and there's no really fixed timeframe we can talk about. Hopefully, we can make it done by -- before end of the year.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then as a follow-up, when you talk about your focus, your focus on the storage connectivity market, we've heard for quite some time about the programs and the opportunities. Can you just remind us where you stand as far as the target silicon opportunity on 16 gig, when that's anticipated to ramp and how many design wins you currently have in the pipeline?

Jean Hu

Yes, we talked to you about we had 43 design wins back a while ago, but after that, we continue to win more designs. It takes a a longer time to qualify with the storage side of customers. We do expect that some of the platforms will start to ramp up later this year. But certainly, over next year, we'll see more and more programs ramping up.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

And how do you -- what's your current thinking on the size of that incremental opportunity, and what do you feel as though your share is of that opportunity as it stands given the design wins you have?

Jean Hu

Yes, we talked about it, right? In next several years, by the time of our fiscal 2016, market size is probably around $160 million to $180 million. We certainly feel strongly we have won more than our fair share of design wins, and some of the most strategic design wins with all the key storage OEMs.

Operator

Our your next question will come from Katy Huberty with Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

Last night, LSI talked about a back half recovery in server sales. It was unclear whether that's an enterprise server or cloud server recovery, but curious to get your thoughts on whether you think there is any upcoming refresh or catch-up in spending in the server market.

Jean Hu

I think the overall enterprise server market continue to be weak. I think that if you look at Gartner's most recent server data information, certainly, it's continued to be impacted by overall macroeconomic conditions. So from our angle, of course, our customers are OEMs so we really don't see some on the customer demand that quickly. But certainly, it's steady. We haven't seen any deterioration, but certainly, it's not strong either. It's more for continued to be a weak environment in the underpriced server side. I think certainly, some of the cloud server side certainly has been growing more significantly.

Kathryn L. Huberty - Morgan Stanley, Research Division

Sure. And Jean, you had mentioned a more optimistic view of the storage market from industry analysts. Are you seeing any improvement in orders on the storage side of your business recently?

Jean Hu

It's -- I don't think that we see like significant uptick and improvement. It's just steady.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay. And when you think about the $20 million of annualized cost savings, you talked about what you're deemphasizing, that the ASICs business, but where will that money be funneled into investments to either accelerate or broaden projects? Is there an area where you're focusing those cost savings to accelerate time-to-market or increase your market share?

Jean Hu

Yes, if you look at all the major rationale for restructuring, it's really to focus on both server and storage connectivity. This is actually come back to our major product cycle, we talked about it before, right? It's transition to 16 gig Fibre Channel under the future Fibre Channel investment, and also the target market opportunity, Converged market opportunity, and of course, FabricCache, which is a very important innovative platform we're investing for the future long-term driver of this company's growth.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay. So those same 4 to 5 categories that you've been talking about for 6 months?

Jean Hu

Yes, yes. There is no change. Those are really the focus of the company. The only thing, if you think about what we did, we discontinued the switch ASIC development for next-generation.

Operator

The next question comes from Amit Daryanani from RBC Capital Markets.

Karl Ackerman - RBC Capital Markets, LLC, Research Division

This is Karl Ackerman for Amit. Just curious, broadly, June quarter revenues were down, I think, 3% quarter-over-quarter, but server shipments, I believe, were up 2% quarter-over-quarter on the June quarter based on recent Gartner data. I'm just kind of curious maybe what you think led to the kind of uptight in the quarter?

Jean Hu

If you look at the server shipment data, yes, you're right, it was up 2% sequentially. But if you look into the categories, some of our major customers, like HP, IBM combined, actually declined about 13% year-over-year, and 2% or 3% sequentially. So of course, our Fibre Channel revenue business and also our overall is more tied to some of our major customers.

Karl Ackerman - RBC Capital Markets, LLC, Research Division

Got it. Okay. And there's one last question. I think you have nearly 5 0s in cash on the balance sheet. Any update on maybe a capital allocation standpoint or a share buyback thinking?

Jean Hu

Yes, we continue, from capital allocation side. Certainly, the #1 objective we said, to look for investment opportunities either internal or through a joint acquisition. When we don't see that, we continue to buy back shares. During the quarter, as you can see, we bought back 24 million of our shares, and which is much more than our free cash flow generated during the quarter.

Operator

Our next question comes from Vlad Rom with Credit Suisse.

Vlad Rom - Crédit Suisse AG, Research Division

I'm just looking at the numbers and I'm trying to figure this out. So it seems like we're mixing things because of the restatement and the advanced connectivity, but it seems like the revenue growth in that business is starting to narrow. Again, some of your key OEMs server partners, so HP and IBM. So it's not -- it's still trailing in terms of the declines, but not as much. And this quarter was actually one of the better ones in a while. What portion of that came from ASP increases on the 16 gig side versus port shipments?

Jean Hu

I think the ASP 16 gig transition is happening under the moment. I mean it's very good, but the overall 16 gig market adoption has been relatively slow, so it's still a very small portion of our revenue. So that really has no impact on the -- this revenue top line growth. I don't think that's the major driver there.

Vlad Rom - Crédit Suisse AG, Research Division

Okay. And just a quick question on the switch business. Since you're discontinuing development and you expect revenues to trail off there, is that just a sign of confidence that you'll be able to drive revenues from other sources on the storage connectivity side and FabricCache?

Jean Hu

Yes, of course, right. The reason for the restructuring is to review all the R&D investment, see where we can generate a meaningful future revenue growth and the return on investment. So the switch part is really, when you look at the large investment that we have to make under the future revenue opportunity, it's just not meaningful. It's not going to be getting return on the investment. In fact, when we focus on other areas, the server and the storage connectivity, investing in those areas that we can generate more meaningful revenue growth in the future and the return on our investment. That's really the rationale of the restructuring activities.

Harshad K. Desai

We don't -- this is HK. We don't expect, like we said, that Jean said was great, we don't expect this revenue decline. It's going to be declined slowly. It's going to take several years. We're still working on some of the switch product. We still work with the Tier 1 OEM. We have developed the future switch ASIC development, which is now going to impact immediately. And so we are -- we expect still be able to continue for a while. It will decline, but it will decline very slowly.

Operator

We'll go next to Andrew Nowinski with Piper Jaffray.

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

It's Dan Garofalo on for Andy. I just wanted to circle back on your market share comments. I think I heard 4 points a share in the June quarter. I guess, what's your sense in terms of what's potentially driving that?

Jean Hu

I think that during our prepared remarks, we said that it's for the March quarter. For the June quarter number, it has not been published yet. So it's really down the calendar Q1 information.

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

Got it. Okay. Do you -- I guess what's your sense in terms of the June quarter? Do you feel like you were able to sustain the share you picked up in March?

Jean Hu

Yes, we certainly believe so. We, of course, we have to wait and hear on our largest competitor announce their earnings, but we certainly feel good about our market share position.

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

Got it, okay. And then just one follow-up, if I could. From a competition standpoint, I guess, who are you running into, or who do you expect to run into with Mt. Rainier? Is it the legacy PCIe vendors or are you really addressing a new market segment that they don't participate in?

Jean Hu

Yes, I don't think -- we're not in the SSD market, right? Our solution is really based on our Host, adapter card technology software to manage shared cache. So the competitors, Roger, you typically...

Roger J. Klein

It's really limited. I think we hold a bit of a strong position there. And really, as Jean said, it's not really an SSD product by itself. So we think we have some differentiation there.

Operator

Our next question comes from Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

I got a couple of characteristics-type question. HK and Jean, what are you guys looking for in terms of characteristics for the new CEO? Is it turnaround, cost control growth, all of the above? Any color helpful there?

Harshad K. Desai

Well, I think we talked about a lot before, and we mentioned something in the press release. I think you've -- as a board, what we're looking for is we're looking for a strong technology background. We're looking for somebody who has a track record of product executions. We're looking for somebody who is a strategic thinker. We're also looking for somebody who's adaptable to rapidly changing markets for the competitors. We're also looking for somebody who can drive the profitable growth and increase the long-term shareholder value. So it's more a technology focus with all these different characteristics.

Harsh N. Kumar - Stephens Inc., Research Division

Got it. And then another one. I think you mentioned that the switch business will take many years to go away. I'm curious why the decision to keep it and not try to put it on the block and maybe get some money for it?

Harshad K. Desai

So we said it is going to be several years to go away. It's going to be about 3, 4 years before it really, completely go away. What we're saying is that we have design wins with a lot of OEM. We are shipping product with all of our OEM. We are going to be starting on a new design, which is going to come into production. So we're not going to stop any of these things. Our main investment really in the switch business is the switch ASIC. And that's where we have -- we decided that for the future, we don't want to continue investing in that.

Jean Hu

I think, really, the objective is to maximize cash flow and the value of that business, right? The alternative we're choosing right now or the path we're going down is really what we believe can generate most value for the company and for shareholders.

Operator

We'll take the next question from Rajesh Ghai with Craig-Hallum.

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

I just wanted to dig a little deeper into the strategic rationale for exiting the switch ASIC business. Why do it now? You even mentioned that you're looking at the growing -- at the growth opportunities that you have elsewhere. But what's changing the environment that you think that the switch business is not going to be very valuable going forward compared to what it was a few years back? And why take the decision now before this new CEO has been hired?

Jean Hu

Yes, a fair question. I think as a company, we're quite disciplined to review the investment we have, to look at if the R&D spending, if we can generate a return and a meaningful revenue going forward. I think as you know, the switch market, right, there are 2 larger competitors, the one's Brocade and one's Cisco. So our strategy, as you all know, was to work with key OEMs and to enable them to address the converged market. So we constantly evaluate the opportunities we have. In the past, we have been investing in the switch business for 7, 8 years. We have not got the return back on the top investment. When we look at the future going forward, the investment required for next-generation ASIC actually is very large. But when we look at the market structure, those large company continue to have a huge market share and [indiscernible]for us as the ASIC development side of cost increasing tremendously. We just don't see the possibility or likelihood that we'd get the meaningful revenue growth and also return on investment side back. So constantly, we evaluate the investment. The timing of the decision really, certainly, is when we don't see the likelihood of getting return back on the investment. Then certainly, we need to do the best thing for shareholder.

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

Great. Fair enough. And as far as the OpEx run rate, Jean, you had said $235 million on an annualized basis. That's pretty close to what you did or what you spent last quarter. Should -- that's about $59 million. So I'm just curious because most of the restructuring done and the run rate that you have for the June quarter, is that the OpEx run rate that we can expect after the restructuring or...

Jean Hu

So operationally, the restructuring activities are largely done. We may have some special charge from facility consolidation, those kind of thing, going forward. But from the operating -- non-GAAP operating expense side, we guided $57 million for current quarter, for the Q2. I think typically, what happened is Q3 will be similar. But if we have some ASIC development, sometimes, the cost will be higher. But when you get to Q1 calendar year next year, you do have the payroll cost coming back. So I think you can see how it's going to play out.

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

Okay. And my last question is on 16 gig. Is Ivy Bridge going to be a catalyst for you in the 16 gig side or do you think you have to wait until Grantly [ph] next year?

Roger J. Klein

Well, I think most 16 gig designs are already in play. So as the server manufacturers move from one cycle to the next, those will just carry forward, so...

Jean Hu

Yes. So obviously, these designs are already decided.

Roger J. Klein

Yes, they're largely already decided.

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

Even for Grantly or...

Jean Hu

Grantly, no.

Harshad K. Desai

So I think it's like if you look at the Fibre Channel in the storage, it's a little different than Ethernet. Ethernet is really tied to the server cycles, the process cycle. Storage is not really because I think it's a separate card, the mass card, so it nearly never tied exactly the same time. And there, well, it matches different things. But you can keep shipping 8 gig for everything because we ship 16 gig for now or for the future, anyways. So it doesn't make difference. With the 32 gig comp, it will phase it in.

Jean Hu

Yes, so Ivy Bridge is all the designs are already determined. I think that for Grantly, everybody's working on that, right? That's -- we're talking about 2015 and beyond.

Operator

We'll take the next question from Jung Pak with BMO Capital Markets.

Jung Pak

I had a question on your product strategy. You'd indicated continued focus on server and storage connectivity, but it's primarily Fibre Channel based. And I wanted your views on, if you guys are looking at other technologies such as Ethernet or FCoE?

Jean Hu

I don't think it's primary Fibre Channel based, right? And we have said all along, if you look at the opportunities that we have, certainly, Fibre Channel is our traditional, historical strong market. And we have been investing in Converged in the Ethernet market for past 5, 6 years. That's also very important that you asked. And also, we have a really differentiated platform like FabricCache, which can be based on either Fibre Channel or Ethernet or Converged platforms. But it create a differentiation to take advantage of the flash acceleration trend in the data center. So on both server side and storage side, we're investing in Fibre Channel, Converged, the Ethernet and also FabricCache platforms.

Jung Pak

Okay. And a question on the gross margin upside. Was that related to HBA, the 16 gig? Or did you guys have a higher contribution from what was previously in Silicon Products?

Jean Hu

It's really the product mix. As I've said earlier, 16 gig product is still a very relatively low percentage of our revenue. So it will not impact the gross margin to that level yet.

Operator

And that does conclude our question-and-answer session for today. I would now like to turn the call back over to our presenters for any additional or closing comments.

Jean Hu

Thank you, operator. That concludes our call today. We look forward to updating you on our progress next quarter. Thank you very much for your time and goodbye.

Operator

And again, that does conclude today's conference. We thank you for your participation.

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