QLogic Management Discusses Q2 2014 Results - Earnings Call Transcript

| About: QLogic Corporation (QLGC)

QLogic (NASDAQ:QLGC)

Q2 2014 Earnings Call

October 24, 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

Analysts

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Kathryn L. Huberty - Morgan Stanley, Research Division

Joseph Wolf - Barclays Capital, Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

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

Vlad Rom - Crédit Suisse AG, Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Keith F. Bachman - BMO Capital Markets U.S.

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

Srini Nandury - Summit Research Partners, LLC

Operator

Good day, and welcome to the Second Quarter Fiscal Year '14 QLogic Earnings Announcement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean Hu, Interim CEO and Chief Financial Officer. You may begin.

Jean Hu

Thank you, operator. Good afternoon, and welcome to QLogic's Second 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 we have made on the restructuring activities we discussed during our last call, followed by discussion of our second quarter financial results and the business update. We'll close with our third quarter outlook and update on our search for a new CEO. 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 SEC, specifically our most recent Form 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

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

In June, we announced that we were undertaking restructuring activities to improve our focus, execution and financial performance. It's only 4 months since we began this restructuring. We're already seeing solid signs that our plan is working and that we're achieving our milestones and goals. We set out to improve our business focus and execution by driving a sharper focus on the server and storage connectivity market. As a result of our actions, day-to-day execution has improved and that we are delivering more consistently on new programs and products. For example, since early September, we have achieved a general availability for more than a dozen new OEM programs, expanding the server and the storage connectivity market. A number of these achievements have been publicly announced and will be highlighted in our upcoming business update.

We also set out to improve our financial performance and to maximize our reach in our investments. We have more aggressively aligned our investment with our focus strategy and are ahead of plan on our expense reduction activities.

We now expect our operating expenses to be approximately $230 million for fiscal year 2014. This is $5 million better than our previous estimate due to additional restructuring-related savings. Our second quarter financial results clearly showed that we're meeting our financial objectives, including the achievement of a 20% operating margin.

I will now cover our financial results for the second quarter ended September 29, 2013. I'm very pleased with our execution and the financial results in the second quarter. Our revenue from Advanced Connectivity Platforms grew 1% sequentially, better than our expectation. Adapter revenue grew more than 1% and the Fibre Channel adapters performed even better than overall adapters.

In addition, we delivered net income per diluted share over $0.23, which was at the high end of our guidance range of $0.16 to $0.23 provided during our first quarter earnings call. Our revenue in the second quarter was $112.6 million, compared to $117.9 million recorded in the same quarter last year. This revenue was about the midpoint of our guidance range of $108 million to $116 million due to better-than-expected performance for our Advanced Connectivity Platforms.

Our second quarter revenue from Advanced Connectivity Platforms, which are comprised of primarily of adapters and the silicon for server and storage connectivity applications was $94 million compared to $97.4 million recorded in the second quarter of last year.

Second quarter revenues from Legacy Connectivity Products, which are comprised primarily of switch products and the 1-Gig iSCSI product was $18.6 million compared to $20.5 million recorded in the second quarter last year. Our second quarter gross margin of 68.2% was above the 67.6% gross margin we achieved in the second quarter of last year, primarily due to a favorable product mix.

Next, I'd like to cover our second quarter operating expenses. Total operating expenses were $54.2 million, down from $59.4 million reported in the second quarter of last year. Operating expenses were favorable to our guidance of over $57 million provided during our fourth quarter earnings call, primarily due to aggressive operating expense management and additional savings related to our restructuring activity.

Engineering expenses in the second quarter of $32.5 million declined from $34.9 million last year. Sales and marketing expenses in the second quarter were $15.2 million, a decline from $18.1 million last year.

G&A expenses in the second quarter was $6.5 million. Operating income in the second quarter of $22.6 million was 20.1% of revenue, and improved from 17.2% of revenue in the prior year. Our income tax rate for the second quarter was 11.4%. Our second quarter net income of $20 million represents a net profit margin of 17.8% and an improvement from the 14.3% net profit margin last year. This is the 73rd consecutive quarter of profitability for QLogic.

Turning now to our balance sheet. Our cash and marketable securities was $433 million or nearly $5 per share at the end of the second quarter. We continue to maintain a very strong cash position and have no debt.

During the second quarter, we generated $24.1 million of cash from operations, and purchased $19 million of the company's common stock. Receivables were $69 point -- $67.9 million at the end of second quarter. DSO at end of the second quarter was 55 days, compared to 56 days at end of the fourth quarter. Inventory was $17.4 million at the end of the second quarter. Annualized inventory turns for the second quarter was 8.3, compared to 8.4 turns achieved in the fourth quarter.

I would now move on to our business update covering the server and storage connectivity market. As a reminder, this market include our traditional SAN, Converged and Ethernet product, and most recently, our innovative shared cache acceleration product.

I mentioned earlier that we have recently achieved the general availability of more than a dozen new OEM programs, spanning both the server and storage connectivity markets. These programs are new deployment of our Ethernet Converged and the Fibre Channel ASICS and adapters. Here are some highlights of those achievements. In early September, we announced our 16-Gig Gen 5 Fibre Channel and a 10-Gig Ethernet adapters were available for HP ProLiant Gen8 server blades and the HP ProLiant DL and SL servers.

The QLogic designed adapters that complement HP converged infrastructure by delivering high-performance, flexible, efficient storage and networking connectivity that simplify the data center environment.

At a recently held Oracle OpenWorld, QLogic showcased the latest QLogic 16-Gig Gen 5 Fibre Channel and a 10-Gig Ethernet adapter for our Oracle servers. Both of the new products are field-configurable, dual-personality adapters which can operate at either 16-Gig Fibre Channel, 10-Gig Ethernet meg or 10-Gig Ethernet CNA.

Also at Oracle OpenWorld, we demonstrated our innovative FabricCache adapters operating in Oracle RAC environment. Attendees saw first hand how FabricCache adapters deliver ultra-low latency, shared storage access and the high-bandwidth performance enhancement required in Oracle RAC environment.

In the storage connectivity market, we announced that Dot Hill, a leading storage array vendor, has developed a new platform that provide its customers and channel partners with industry's first Ethernet [ph] 15-Gig Gen 5 Fibre Channel and a 10-Gig iSCSI converged networking storage system based on QLogic products. Storage system based on this new Dot Hill architecture are now shipping worldwide through a leading Tier 1 OEM.

In mid-September, we announced that our Converged Network Adapters have been certified and recommended for use with the Dell networking modular unified storage switches.

Specifically, our 8200 Series and 8300 series CNAs are now certified and available with the Dell networking S5000 modular unified storage switches. Deployed together, QLogic 10-Gig CNAs and the Dell networking switch is to deliver high-density LAN and SAN convergence and the feature reach storage networking with a future-proof design for maximized investment protection.

Lastly, we announced that our FlexSuite dual-personality and the FabricCache adapters are now supported by VMware, vSphere, 5.5 native inbox driver. QLogic adapters are automatically recognized by the OS and hypervisor and certify driver if installed for the proper version. We also introduced a web-based version of our QConvergeConsole Plug-in for VMware vCenter Server, which is centralized and simplified virtualization management of adapters and represent further integration with VMware.

These highlights clearly show the positive progress we are making with our several OEMs, storage OEMs and industry partners. It also demonstrated our improved execution. That's the result of a sharper focus.

Now, I will shift to some general comments on our markets, products and technology. Our server connectivity programs consisting of SAN converged and ethernet product continue to progress. As we have highlighted, we are achieving new products to our leading OEM customers and continue to see a transition to our FlexSuite dual-personality products. While this also continuing on our Gen 6 Fibre Channel adapters providing support for speed up to 32 gigabyte.

We are confident that we're on track for our 10th consecutive year for Fibre Channel adapter share leadership for calendar year 2013, a position we earned and have maintained since 2004. QLogic has shipped over 14 million Fibre Channel adapter pods, which is a significant majority of the total pods shipped, over 10 share points greater than our nearest competitor. This strong incumbency combined with brand preference and the strength our FlexSuite product portfolio positions us really well for continued shared leadership in Fibre Channel and provides significant leverage in converged and Ethernet market opportunities.

For our newest FabricCache product, we continue to focus on market awareness, partner engagement, training and end-user evaluations. The results continue to be positive and the feedback is very encouraging. As the first product from our Mt. Rainier platform, it's an excellent opportunity to gain experience in the market inside so we can further build on this innovative technology. As we have previously mentioned, we expect revenue from FabricCache to be modest in fiscal year 2014.

On storage connectivity programs, also consisting of SAN converged and Ethernet products continue to be on plan. Several of the recent OEM achievement represent net new revenue for QLogic in this market with a continued progression of new programs coming to market over the course of the next 12 months.

We continue to win the most strategic and promising customers by working closely with them to get product into the market.

Our restructuring activities are progressing ahead of plan, and we are operating more effectively and efficiently as a result. This is reflected in both our operating results and the day-to-day execution. I believe we are on the right track to be successful in new product cycles, target market opportunity and the longer-term investment.

Now our near-term outlook for the third quarter of fiscal 2014. We continue to be cautious about the demand from our enterprise server customers. However, we are seeing an improved outlook for our adapter and the Silicon Products from our storage customers. We're encouraged by the positive trends in our Advanced Connectivity Platforms, which we expect to achieve meaningful sequential revenue growth in the third quarter.

Overall, we expect total revenue to be in the range of $114 million to $120 million. At the midpoint, we expect revenue from Advanced Connectivity Platforms to be up approximately 6% sequentially, and the revenue from Legacy Connectivity Products to decline by approximately 5% sequentially. Gross margin is expected to be in the range of 67% to 68% and operating expenses I expect to be approximately $56 million.

When combined with the projected tax rate of approximately 12% and diluted share count of approximately 86 million shares, we expect to achieve non-GAAP earnings per diluted share of $0.22 to $0.27 in the third quarter.

To close, our priority remain clear. We'll stay focus on execution to move forward and continue to build on the encouraging progress being made in many areas of our company.

Before we move on to the Q&A, I want you to be aware that our CEO search is progressing and that we expect to complete the selection process by the end of the year. This concludes our prepared remarks. Operator, we'll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Maybe just a question on the guide to start with. I mean, I look at the Advanced segment to be up about 6% sequentially, can you talk about -- is this going to be coming from the traditional Fibre Channel side of the business or is it more from the 10-Gig meg and CNA products. Because it sounds like in the September quarter the Fibre Channel business is better than the rest of the adapter segment, is that right?

Jean Hu

Yes, absolutely. As we said, it performed better. I think if you look at the December quarter guidance, certainly, there are 2 factors coming into play. First, is certainly the overall server, enterprise server environment has been stabilizing and improving. But secondly and more importantly, we actually see new program launching from the storage customer side, which have incremental revenue opportunities for us in December quarter and going forward.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

And Jean, is that more Fibre Channel centric or converged on the storage opportunity that you have in December?

Jean Hu

Both, both, right. On the storage side. Our designs are multi-personality converged card, which can perform Fibre Channel and the CNA and the Ethernet iSCSI.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. And if I can just maybe follow up, that actually would imply that maybe the mix will continue to remain favorable for you in the December quarter. So I'm curious why guide gross margins down 70 basis points at the midpoint when I think it sounds like the mix is going to get better in December, not worse?

Jean Hu

That's a fair question, Amit. Certainly, we're quite conservative on our gross margin guidance. Typically, it's primary driven by mix. In the beginning of the quarter, we really don't know what the mix is going to come out in the end. So we tend to guide that range. But as you can see during the last few quarters that we have always done better than the high end of the guidance range. So I do hear your question there.

Operator

We'll go next to Katy Huberty with Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

We've heard now from a couple of your big customers, IBM, EMC, about a very back-end loaded 3Q and not being able to ship all the product and so, they were essentially left with inventory at the end of the third quarter that then goes into their fourth quarter results. And that would suggest, unless there's a big uptick in demand, that their orders to the supply chain may come down because they have so much inventory at the end of September. Have you -- do you agree that there is some inventory adjustment? Have you seen a change in the order run rate after they were disappointed at the end of their quarters and did you work any of that into the guidance, the revenue guidance for 4Q, calendar 4Q?

Jean Hu

So yes, so as you know, we have different OEMs. Certainly, our own seasonality and order pattern is quite consistent. We have not seen anything change yet but our OEM side, they all have a different momentum and pattern. I would not comment on specific one, but we do have a mix OEMs. Some are slower, some are actually doing better.

Harshad K. Desai

And I think, Katy, this is HK, and it's also they have -- they give us the demand forecast for OEM and if they have an issue on the inventory or something, they include that. So our is more based on what is the demand forecast or what is the backlog or what are the order trends. So we have considered all these things, and I think they put that in the equation when they do the forecast, also.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay, and then in our CIO survey in October, it actually showed a more optimistic view around server spend -- spending. Maybe we've had 8 bad quarters now and companies are having to come back and spend. Are you seeing any sign of that in your business?

Jean Hu

Yes, if you look at our Advanced Connectivity Platforms, it's certainly it has stabilized in September quarter. We actually -- the Advanced Connectivity Platforms grew 1% sequentially, which is almost like the seasonal pattern from the past. If you look at the December quarter, certainly, it's improving. Of course, it's still under the uncertain macroeconomic environment and the Federal spending pattern, but it is improving. That's why we guided a 6% sequential increase for the Advanced Connectivity Platforms. But for us, Katy, the other thing is on the storage side. We have talked a lot about the targeted design wins we have, some of the programs started coming to marketplace. So that's a unique product cycle for us. Those are not new incremental revenue going forward for us.

Operator

We'll go next to Joseph Wolf with Barclays.

Joseph Wolf - Barclays Capital, Research Division

I was wondering if you could maybe give us some guidance on the share buyback plans for all fiscal 2014? It looks like you've bought back almost $45 million already this year, I'm wondering if that's going to continue and you'll hit $100 million for the year.

Jean Hu

Yes, so our -- if you look at the past several years, right, we always have the same philosophy. It's the first objective of capital allocation is to look for investment opportunity. If we don't see one, we typically use more than 100% of our free cash flow to buy back shares. This year, we have not changed our driving principle there. But if you look at the buyback, we actually, as you point out, we have bought back $44 million share -- $44 million, which has almost doubled our free cash flow generated for the first 2 quarters of the year. So we have not changed our guidance on the buyback and the capital allocation.

Joseph Wolf - Barclays Capital, Research Division

Great, and then just if you look at the guidance in the mix and the comments on the storage side of the business, how much of that do you attribute to seasonality and how much do you attribute that to a real view on the continuity into calendar 2014?

Jean Hu

Yes, it's -- both factors come into play, right. If you look at seasonality, typically December quarter is a good quarter for us. You would see, under normal economic environment, it's like a 6% to 8% sequential increase compared to September quarter. If you look at our guidance, it certainly considering the overall economic uncertainty and the IT spending environment. But as we said, we do have new product cycle from our targeted side design wins, which is incremental revenue for us in December quarter. And of course, getting into next calendar year, we'll see different programs launch into the marketplace. We'll all see the steady growth in the storage revenue side.

Joseph Wolf - Barclays Capital, Research Division

And then finally, just on the FabricCache, you talked about being modest this year. But could you just go through some of the verticals where you're showcasing that product right now, whether you're restricting that to certain areas or whether it's more of a widespread, sort of a blanketing the market with the new product?

Roger J. Klein

Sure, sure. This is Roger. So we actually mentioned one of them in the script, and that is the Oracle RAC environment. And there is a number of them that are particularly well-suited to this type of a product. So I think that's -- the Oracle RAC is probably the best example.

Jean Hu

So it's really like medical, like school district, those area verticals where we -- our FabricCache has gotten really very well-received.

Operator

We'll go next to Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

HK and Jean, are you guys pretty happy with the OpEx cuts you've made? Is there any more room? Quota -- I know you can't give me a number, but do you feel there's some more that we can expect in the near- to mid-term?

Jean Hu

Harsh, so on the OpEx side, right, we have been really aggressively managing operating expense and our team has done a great job. And also it is the case when we streamline business operations, organization, certainly, we are saving a lot of money. We think that this is the right level for us because we need to invest for the future revenue growth, too. So right now, at this level, about $230 million for fiscal '14 is the right level we want to keep.

Harshad K. Desai

Yes, I mean, Harsh, we were -- our goal was to reach about $235 million and -- after the restructuring, and we did a little better than that, so that's why we guide -- we think we can do $230 million. I think we've done a much, much better job than we expected after restructuring. And there's a certain level of investment we are going to continue in the Fibre Channel 32-Gig or the Ethernet or the convergence of FabricCache. So I think we are continuing investing in this R&D program.

Harsh N. Kumar - Stephens Inc., Research Division

I've got it. Definitely. And another follow-up on that, Jean and HK, what level of revenue can this kind of OpEx sustain? And at what point do you have to raise it substantially to the next level in terms of growth and top line?

Jean Hu

Yes, if you look at our investment strategy, we are very focused on the server and the storage connectivity. The current investment level, certainly for fiscal '14 and what we can see is for the next fiscal year, we should be able to keep it around this level. Of course, you have to consider the normal inflation kind of increase. We continue to hire engineers because we're continuing to invest. So overall, I think this level is the right level for at least what we can see for the next 12 months.

Harshad K. Desai

And I think eventually our goal is always in this company it's a 20% operating margin. We reached that and eventually, I think the best way to do it is to have about 20% debt margin. And once we achieve -- I think that's the level over long term we'd like to achieve it, and then we'll continue investing all of the monies.

Harsh N. Kumar - Stephens Inc., Research Division

Great. And then if I can slide one more in. HK, you talked about, and Jean, you talked about some sort of strength returning in the storage market. Maybe I was hoping you'd give us some color on the end markets that, that -- particularly those -- your products that are going in that are doing better than the others? Just any kind of feeling you might have.

Jean Hu

Yes, so we talk about it, right. On our target side that we have more done 43 design wins. And so it's really the front end from side of the storage array facing the network. Not only we have design wins with the traditional Tier 1 OEMs, but also the hybrid and the now all-flash storage array. All those start-up or emerging new OEMs and the traditional. So we have design wins on all different front, and our product include Fibre Channel and 10-gigabit Ethernet, converged and iSCSI. If you look at those new start-ups with all-flash storage array, we actually have majority of the design wins, where they are from and connecting to the network.

Harsh N. Kumar - Stephens Inc., Research Division

Okay. That's helpful. Yes, I was hoping just the -- and end markets, like banking or industrial...

Jean Hu

We don't see that.

Harsh N. Kumar - Stephens Inc., Research Division

But the bus comment was helpful.

Jean Hu

Yes, sorry, we don't see that because our OEMs, we don't have that visibility into OEMs and the customers.

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 Andrew. I just wanted to -- I was wondering if you could remind us, I guess, on how you're approaching cash flow generation. Specifically, how we should be thinking about modeling operating cash flow and CapEx for the balance of the year? Any color there.

Jean Hu

Yes, so from cash flow side, right, our operating income, the depreciation, CapEx largely -- they are largely has been quite stable. So for the Q2, our CapEx is about $5 million. For the overall year, we're typically around $25 million to $35 million CapEx. That's what the typical amount of CapEx we have been spending.

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

Okay. Great. And then just one follow-up for me on the 16-gigabyte Fibre Channel. Has that become a more material contributor in terms of revenue and gross margins currently? And then just going forward, how should we think about that in terms of the growing percent of mix, how it affects gross margins?

Jean Hu

So 16 Gig adoption is happening, but it has been slow for us. If you look at the quarter-over-quarter of cost of revenue, sequential increase is very significant but from a very smaller base. Right now it's still under -- below 5% of our revenue. Going forward, we think that adoption is going to be gradual and slow. Gross margin side, it's going to be quite consistent.

Operator

We'll go next to Mark Moskowitz with JPMorgan.

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

I wanted to follow up on your comments around improved execution. Can you kind of help us understand how much of that relates to cost containment versus the sales funnel? And I'm really more focused on the latter part, because I'm trying to figure out, you're starting to see a framework whereby you think you can restore, on a sustainable basis, year-over-year revenue growth.

Jean Hu

So on the improved execution side, certainly the first one from the streamlining operations side, it's straightforward. And then on the sales revenue side, really we are more focused, right, is our investment. If you look at the spending side, we're very focused on the server and storage connectivity side. And our marketing sales team, they are aligned. Our program and marketing spend, they are all aligned with the top priorities. So from that angle, right, to drive the future revenue growth, which we talk about is the target side storage product cycle. Certainly, it's a new product cycle for us. It takes a long time for those designs to get into market. But over time, that's going to be a revenue driver. And of course, in the longer term FabricCache, that innovation, we'll take that into market. And once OEM design wins start to come in, then that will have incremental revenue opportunity, too. HK, do you have any...

Harshad K. Desai

Yes, so market -- this is HK. It's if you look at us, what we have done really is last -- when we did the restructuring, we are not investing into the switch product. We are focusing on the adapters side. It's Fibre Channel adapters, so the iSCSI or the FCoE converging Ethernet. So that's where we are focusing on that. We are focusing also on the target side, either it's the silicone business with the target OEMs like EMC, NetApp and Tachyon, PMC being out of the 16 GB market. It's brought [ph] in us a lot of proportion to the target customers. Also, because we have iSCSI technology, which is more stable and we have our installed base on the 1 GB iSCSI with the storage OEMs, we have a upper hand, compared to a competitor winning a lot of this design win either for the Fibre Channel, for the FCoE, for the iSCSI. So we're getting a lot of tractions, and those will come into play more revenue-wise probably in next year anyway. So that's what -- and then we are doing the new program, like FabricCache, which is going to take some time because it's a brand new technology. So it's very, very focused from engine perspective, from operation perspectives and from sales perspective, and I think it's helping us. Our operating margin is at 20%. Our OpEx is at $230 million now. Our net margins are 17%, 18%. So I think we are getting this, and now we can start growing for the next year.

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

So do you think that's calendar '14 or calendar '15 when you reach the sustainable year-over-year revenue growth?

Harshad K. Desai

Calendar '14.

Jean Hu

Calendar '14, yes. If you look at the Advanced Connectivity Platforms, that's really where our investment is going to be focused. It's -- for the December quarter it will be 6% sequentially. All that new programs that HK talked about is going to come in, in calendar year '14.

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

Okay. And if I could just have one follow-up. I know it's kind of a hard question to answer, but maybe just kind of give us a sense in terms of the overall attach rate or content per deployment. In other words, a lot of investors are trying to figure out how you guys kind of reassert yourself in the data center, as we've seen the number of adapters or HBAs sold per box kind of diminish or compress. I mean, do you see any sort of opportunity with some of your newer targets here whereby you can maybe start to have upward pressure where you can maybe increase your penetration per deployment at your customers now, per box?

Jean Hu

So I think -- let me try to answer your question, right. If you look at the Fibre Channel attach rate on the server side, it has not changed that much, frankly. But the servers that we sell our adapter into talk to the storage array. So fundamentally, if you look at the demand for the storage side of disk and storage array, that's just tremendous. It actually create incremental demand for the interconnect for our product. That's -- I mean, all the -- today, you have a lot of all-flash array, all the hybrid array. We have our adapter talk to those array, too. So that's actually quite encouraging going forward. And on the storage side, it's a new product cycle for us, right, because that's the PMC, the 16 Gig generation, they are not going to maintain and continue. That's where we have a new product cycle.

Operator

We'll go next to Aaron Rakers with Stifel.

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

So I want to dive a little bit deeper on that last comment. As we look at your Advanced Connectivity products, it seems like you're going to have 2 different stories as we look out into calendar '14. With that, can you help us understand how much of that business today is in the traditional adapter versus what would be the advanced other connectivity solutions? And what I'm trying to get at is, how do we gauge the ramp of the 16 Gig target silicon opportunities, the 43 design wins that are expected to materialize over the -- sounds like just imminently here over the next couple of quarters?

Harshad K. Desai

So I think -- I mean, I think it's very -- if we look at Advanced Connectivity, you're right, it's very simple about Fibre Channel adapters or the Ethernet adapters, which is kind of a growth opportunity for us going forward, or the iSCSI and/or FCoE. And any of this thing is -- or traditional business and it's connect to the storage. I think what we're seeing on the -- what we are focus last couple of years on the product development particularly and unfortunately we get because of the PMC getting out of business and because our iSCSI installed base, we have a lot of opportunity going forward with the storage guys. So we have a product now, and we have a lot of design win. And they are start shipping, and we'll be start seeing more revenue coming up probably in 2014.

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

Let me ask it another way, HK...

Harshad K. Desai

If you look at all the storage boxes, right? If you look at -- you have a look at the port on the storage side? Either it's EMC or the NetApp to the Hitachi high-end boxes, you're talking about, Dot Hill, all the Tier 2 customer like Jean mentioned, the flash guys. Everybody need to connect as a target to the Fibre Channel or to the FCoE or to the iSCSI. And then that's where the opportunity come from. So you need to figure out all those connection.

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

So let me ask another way. We saw EMC announced -- or I guess rather Emulex announced the design win in the Symmetrix box here recently on 16 Gig, you guys have said that you have 43 design wins in the pipeline. You've also thrown out a number, and if you can update me on that number, how big that opportunity represents for you. And as you look at those design wins, again, what your share position is, your best guess as far as, as that revenue starts to ramp.

Harshad K. Desai

I don't think we're going to talk about any of the future revenue or future revenue projections. But we said before this is going to be about $60 million to $100 million market for the target side, and we expect more than 50% market share.

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

Okay. And on that same basis, do you expect both your traditional adapter and your new opportunities, those target silicons opportunities, both of those businesses to grow year-over-year as we get into calendar '14?

Harshad K. Desai

Absolutely.

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

Okay. And the target opportunity comes into the model, I mean, as that ramps, I guess the way that we're thinking about it is that there's no incremental operating expense really to think about. That's all behind you at this point. Is that fair?

Harshad K. Desai

So it's the same silicon exactly we use either for the host adapter on the server side or the storage. There's no incremental investment, except maybe a little bit on the software side.

Jean Hu

Yes, it's a leverage in the expenses [ph].

Harshad K. Desai

It's a leverage.

Jean Hu

The software side, there's additional work. But overall, it's a complete leverage. So Aaron, just remember, on the storage side, it takes time to ramp those product. We have all the different designs with the different OEMs, the different platforms. And so over time, we are going to see -- we are very quite confident about our design shares and the future revenue opportunity.

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

And do you think as we exit '14, all of those 40-some-odd design wins are shipping in some form or fashion?

Harshad K. Desai

Almost, not all, but maybe 80%.

Operator

We'll go next to Vlad Rom with Crédit Suisse.

Vlad Rom - Crédit Suisse AG, Research Division

I just wanted to follow up on Mark's question. So Dell 86 was down 14% year-over-year. IBM was down 30%. HP was up 6%, but they had a bunch of hyperscale wins. From what I can tell, your adapter business, your host business, was down actually 5% year-over-year. How did the quarter shakeout? I mean, there seems to be quite a significant divergence between your customer's performance and your host business performance. Is that because a lot of Fibre Channel, the business that existed has kind of burned off and you're more in a stable state on that? Or are we seeing a more transitory cycle?

Jean Hu

Yes, so if I -- I said our Advanced Connectivity Platforms, it declined 3% year-over-year. So you're right, if I look at the -- our top 2 customers, it declined 5% year-over-year. And of course, the top 3, it's about 8%. So we performed better than our top 3 OEMs. There are major -- there are 2 factors. One is the mix. Our adapters are typically attached to the mid- to high-end of the servers. So if you just look at their overall server shipment, it may not be a true reflection of our product revenue. Secondly, is if you look at the top 2 OEMs, as a percentage of our revenue, has declined. So we're diversifying into more other emerging customers, the Asian OEMs and also a lot of emerging other OEMs. And so even though our top customers are losing market share, we are still selling our adapters to the marketplaces through other OEMs. That's a significant change, too. And of course, the last thing is we do see our storage revenue -- the revenue from storage customers actually coming much stronger, which offsets some of the decline, too.

Vlad Rom - Crédit Suisse AG, Research Division

Great. And then you guys have been really strong on gross margins. How persistent is that? Do you think that can remain above 68% going forward?

Jean Hu

It's largely driven by mix, but our team also always have done a great job to try to manage the gross cost of sales side. So we think we'll keep the strong and stable gross margin.

Vlad Rom - Crédit Suisse AG, Research Division

Okay, great. And then just one more for me, if that's okay. It seems like you guys are doing a great job on the OpEx, but you're also pushing the business pretty hard. Your stock comp expense went down. Your CapEx went down, and you guys are able to maintain a fair level of share repurchases. Do you think you're going to be able to keep some of the other cash flow expenses down to maintain the share repurchase level?

Jean Hu

As I've said before, right, our share purchase, our guide on that has always been, if you look at annualized -- every fiscal year, we typically will do a little bit -- about 100% -- more than 100% of our free cash flow. So that has been our guideline on the share repurchase. So I think in fiscal '14, it will be the same, roughly. If we don't see other investment opportunity, we'll follow our guidelines.

Harshad K. Desai

I mean, it can vary from quarter-to-quarter sometime. But I think it's overall, I think our strategy has remained same and that we want to go and buyback for our cash flow. I mean, it can vary, plus/minus, depending on what's going on in general. But I think it hasn't changed for the last few years. I mean, we already bought $2 billion -- more than $2 billion. So we'll continue doing these things, unless there is some opportunity come to invest somewhere, in a small company somewhere or something and then we are do it. I mean, that's always going to be our priority. I think our goal was to stabilize the house, which we did faster than we thought we can do in the last 3 or 4 or 5 months. We have done that now, and we are actually kind of a little surprised with what we have done here. Jean and her team has done a fantastic job. So we're always very happy with that. I think now our goal is to let's look at this thing, but it's an incremental investment. We look at somewhere, we'll [ph] going do it, but we're never going to go and buy something stupid.

Operator

We'll go next to Glenn Hanus with Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

Could you talk about the legacy business? How should we think about the pace of decline there? Will that be sort of linear over the next couple years, or will it sort of decelerate faster over time? And then any comment maybe on how profitable, how much investment is required there and how to think about it being a cash cow business?

Jean Hu

Yes, the legacy business is really cash cow business. It has minimum investment right now. We guided that for December quarter to decline about 5%. So sequentially, quarter-over-quarter, that's about what should we think for the next 12 months, sequentially, quarter-over-quarter, 5% to 6%. Maybe a little bit more. Like last quarter, it declined 7%. But we do think that the revenue will last for several years to come. So that's -- it's a great cash cow.

Operator

We'll go next to Keith Bachman with Bank of Montreal.

Keith F. Bachman - BMO Capital Markets U.S.

I wanted to ask a similar question as Glenn. If you guys think about your consolidated top line, it sounds like Advanced, you think, will more than offset the Legacy. So you can have positive revenue growth next year, and I just want to confirm that, that's how you're approaching it. And the second question relates to OpEx. If there is some variance around OpEx where those, perhaps, Advanced businesses don't shake out to where you want them to be, do you have some room on OpEx to take some more cost out?

Jean Hu

So Keith, you're right on the top line. That's exactly the case is we'll have Advanced Connectivity Platforms grow, which offsets the decline of the legacy connectivity product. So overall, we should see the top line grow. On the operating expense side, we really did a great job to align our operating spend with our current product focus. As you can see, we are really -- we're actually very narrowly focused, right? It's the storage and the server connectivity, adapters and FabricCache, which is viewed or leveraged our adapter technology. So we're very much focused right now.

Harshad K. Desai

Yes, and Keith, this is HK. On the expense side, I mean, we have considered everything, what our future product is going to be, future investment. We are -- we'll continue to invest in the 32 GB Fibre Channel. We'll continue to invest in the convergence on the iSCSI. So we have a program going on, and we're not going to slow down any of these thing we have programmed. We have plan to invest in the FabricCache, which we [indiscernible] product for a while. So I think we are all set kind of where the investment is supposed to be. We have -- we are focusing everything. And something happened that I will use, something there always a way to take the cost out. I always believe that you can always take the cost out if you need to without compromising your investment in the technology.

Keith F. Bachman - BMO Capital Markets U.S.

Okay. Any dimensions how you guys are thinking about kind of that consolidated revenue growth next year even on ranges? I mean, should we be thinking about kind of 0% to 5% revenue growth in calendar year '14?

Jean Hu

Keith, so we never guide for the next year. We don't have that.

Harshad K. Desai

But you can probably judge from our tone, anyway. So...

Operator

We'll go next to Rajesh Ghai with Craig-Hallum Capital.

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

I had a question on the target side opportunity once again. So 43 design wins, when do these start to ramp? And do you expect all of them to ramp in calendar year '14, or there could be some that could ramp later on? And also given that to your 16 Gig HBA revenue contribution is less than 5%, do you expect potentially your 16 Gig HBA contribution to ramp at the same time as your target side opportunity ramps going forward?

Harshad K. Desai

So the first one, we already answered, Rajesh. We said that we expect -- some of the design win, we start just shipping for the target side, and that many of them is going to come in the 2014. We expect -- we don't know exact number, but probably 80% of the design will probably start ramping into 2014 and some of them will even commence 2015. I think the key is that it takes a lot to ramp these design wins in the target side, but also the life cycles are very long. Sometimes we ship the product for about 7 years in the same design, on the target side. So I think this is all going in the positive direction for us. And on our 16 Gig, I think somebody asked questions before, too. I think 16 Gig ramp is a little slower than probably 8 GB, and I think it's all going to depend on the optic price. When the optics price declines, then the ramp will start growing up. But I think it's the same thing happened with the 8 GB. 8 GB also took a little bit more time than 4 GB is because of the optics. And once optics start pricing coming down, then the ramp start. And so like a chicken and egg situation anyway, but we expect it will start ramping.

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

My question was, does it coincide with the ramp up of your 16 Gig target opportunity? Obviously, Brocade has been selling 16 Gig for a while.

Harshad K. Desai

Yes, I mean, it doesn't have to, because the target guys and the host guys can put the 16 or 8, right, or mezz kind of the host guys. You can select what are the adapter you want. On the target side, sometimes it's a silicon, so it's already designed. Or it's a mezz -- or it's an auto card. The key there is that it's a backward compatible with the 8 GB, so it doesn't make difference for the target guys. They can still use a 16 GB silicon and use 8 GB.

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

That's very helpful. And low latency Ethernet seems to be something that your competitor seems to be talking about. And also, Mellanox seems to be seeing some success in the [indiscernible] vertical. Just wondering, is that a product market that you are addressing or likely to address going forward?

Harshad K. Desai

In the future, yes.

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

And when is that going to be approximately? Years or...

Harshad K. Desai

I -- we don't announce our future plan.

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

Okay. And one last question that we've been getting a lot from investors lately is that, what do you consider a more aggressive buyback than what you have right now in terms of -- you just -- you buyback shares to the amount of your free cash flow. But would you consider buying back more aggressively going forward, especially if you believe that 2014 is going to be a growth year?

Harshad K. Desai

So the current strategy is set by the board about what we're doing, and if we need to change [indiscernible]. But right now the strategy is the board has given us authorizations to do to the cash flow and that's what we're doing. If we change, but I don't think we expect -- you expect a change probably next year.

Jean Hu

Yes, so remember, our cash, only about $100 million of our cash right now is onshore. Majority of our cash actually is offshore. So that's one of the major restriction we encounter, and I think that we are comfortable with our current buyback program. And I think as HK said, this is the plan we're going to follow in fiscal '14.

Operator

We'll go next to Srini Nandury with Summit Research.

Srini Nandury - Summit Research Partners, LLC

You mentioned briefly in your comments that you're working on 32 Fibre Channel products. Can you take us through where exactly the standard right now? Has that been approved? And when do you expect the first set of products to hit the market?

Jean Hu

Yes. Roger?

Roger J. Klein

Yes, sure. The standards are not -- all the I's aren't dotted, the T's aren't crossed, but well along the way. Certainly well enough along the way to be developing product.

Operator

It appears we have no further questions at this time. I'll turn it back to our speakers for any final remarks.

Jean Hu

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

Operator

This does conclude today's program. We appreciate your participation. You may disconnect at any time, and have a great day.

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