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Executives

H. K. Desai - Chairman of the Board and Executive Chairman

Jean Hu - Interim CEO, SVP and CFO

Roger Klein - SVP and GM

Analysts

Karl Ackerman - RBC Capital Markets

Aaron Rakers - Stifel Nicolaus & Company, Inc.

Tavy Rosner - Barclays

Bill Shope - Goldman Sachs & Co.

Scott Schmitz - Morgan Stanley

Ryan Bergan - Piper Jaffray

Jung Pak - BMO Capital Markets

Vlad Rom - Credit Suisse

Richard Sewell - Stephens Inc.

QLogic Corporation (QLGC) F3Q 2014 Earnings Conference Call January 29, 2014 5:00 PM ET

Operator

Good day and welcome to the Third Quarter Fiscal 2014 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, Senior Vice President and Chief Financial Officer. You may begin.

Jean Hu

Thank you, operator. Good afternoon, and welcome to QLogic's third 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 a business update, followed by a review of our third quarter financial results and outlook for the fourth quarter. 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 these forward-looking statements. We refer you to the documents that QLogic files with SEC, specifically our most recent Form 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our third quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. All of the references that 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.

I will start with our customary business update, covering server and storage connectivity market. As a reminder, both market include our traditional converged Ethernet products, as well as our shared cache acceleration product.

In addition to the good progress we reported on our last call of achieving general availability for a number of new server connectivity OEM program. We have added two new important achievements. In December, we announced that Huawei began shipping our FlexSuite 2600 Series 16-gig Gen 5 Fibre Channel adapters; their Tecal RH Series rack servers and X series data center servers.

Our continued collaboration with Huawei, a leading global information and communication technology solution provider, demonstrates our commitment to deliver the latest high performance connectivity solutions to the growing IT market in China and around the world.

In November, we announced that Lenovo began shipping our enterprise-class fibre channel and 10-gig Ethernet converged network of products, for their ThinkServer systems. Our high performance data center interconnect technologies enable Lenovo ThinkServer systems to deliver true enterprise class server and storage performance. The expanded relationship between Lenovo and QLogic allows both companies to address the increasing demand for high-performance storage networking solutions for enterprise data centers and government organizations throughout China and around the globe.

Recently, Lenovo announced their plan to acquire IBM's x86 server business. We have been a long time supplier to IBM, and their x86 server business and have numerous server connectivity programs currently shipping. The depth of our expertise with IBM products, and our current relationship with Lenovo, will allow us to effectively address the broader server connectivity needs over Lenovo, once this acquisition is completed.

Also in November, we announced a significant quarterly share gain the fibre channel adapter market. Based on Q3 2013 SAN report by the Dell 'Oro Group, we gained a 12 percentage point of revenue market share in the 16-gig Gen 5 Fibre Channel adapter category, and we increased our overall fibre channel revenue market share lead by 5 percentage points for the quarter ended September 2013. These results put our overall lead to more than 12 percentage points, and strengthen our leading market share position to 54% for the first three quarters of calendar 2013.

In addition, we believe we have also gained share for the full calendar year for 2013. We are very confident that we have achieved our 10th consecutive year for fibre channel adapter market share leadership for calendar year 2013, a position we achieved and have maintained since 2004.

Lastly, for server connectivity market; we announced that our FlexSuite 2600 Series 16-gig Gen 5 Fibre Channel adapters and FabricCache 10000 Series Server-based caching adapters are certified as DataCore Ready, providing full interoperability with SANsymphony-V storage virtualization solutions from DataCore Software.

In the storage connectivity market, we announced that NEC has exclusively selected our Gen 5 Fibre Channel connectivity solutions for their Storage M500 and M700 Disk Arrays, enabling enterprise-class I/O performance, low latency and high availability. Growing collaboration efforts with NEC continue to demonstrate our increasing commitment to deliver the latest enterprise storage connectivity solutions to growing IT markets in Japan and around the world.

These highlights clearly show the continued positive progress we are making with our server OEMs, storage OEMs and industry partners. They also demonstrate our improved execution, that is a result of our sharper focus of the restructuring we undertook early in fiscal 2014. Those restructuring activities progressed ahead of plan, and we are now operating more effectively and efficiently. This is reflected in both our operating results and achievements previously highlighted. I continue to believe, we are on the right track to be successful in new product cycles, target market opportunities and a longer term investment.

Moving on to our recent announcement related to Brocade Communication Systems. We established (inaudible) Strategic Technology and Marketing Alliance that enabled QLogic, the number one fibre channel adapter supplier, and Brocade, the number one fibre channel fabric switch supplier, to bring more innovative products to market. To satisfy enterprise storage networking needs. We plan to jointly develop capabilities to enhance fiber channel on end-to-end basis, as well as align our products and testing plan for Gen 5 and Gen 6 products. This technology and the marketing alliance will help both companies deliver better value products to the market.

In addition, we acquired Brocade's Fibre Channel and converged network adapter business for $10 million. This acquisition is not expected to have a material impact on our operating results.

Now let me turn to a review of our financial results for the third quarter ended December 29, 2013. I am very pleased with our execution and strong financial performance in the third quarter. Our revenue in the third quarter was $119.4 million, consistent with revenue recorded in the same quarter last year. This revenue was at the high end of our guidance range of $114 million to $120 million. In addition, we delivered a net income per diluted share of $0.29, which was above the high end of our guidance range of $0.22 to $0.27 provided during our second quarter earnings call.

Our third quarter revenue from Advanced Connectivity Platforms, which are comprised primarily of adapters and silicon for server and storage connectivity application was $98.5 million, up from the $97 million recorded in the third quarter of last year. Third quarter revenue from Legacy Connectivity Products, which are comprised primarily of switch products and 1-gig iSCSI products, was $21 million, compared to $22.4 million recorded in the third quarter of last year. Our third quarter gross margin of 68.2% was above the 67.9% gross margin achieved in the third quarter of last year, primarily due to a favorable product mix.

Next, I'd like to cover our third quarter operating expenses; total operating expenses were $54 million, down from $59.4 million reported in the third quarter of last year. Operating expenses were favorable to our guidance of $56 million provided during our second quarter earnings call, primarily due to aggressive operating expense management.

Engineering expenses in the third quarter of $32.8 million had declined from $35.4 million last year. Sales and marketing expenses in the third quarter were $14.9 million and declined from $17.7 million last year. G&A expenses in the third quarter were $6.3 million; operating income in the third quarter of $27.6 million was 23.1% of revenue, improved from 18.1% of revenue in the prior year. Our income tax rate for the third quarter was 10.2%. Our third quarter net income of $25.6 million represented net margin of 21.4%, and an improvement from the 15.4% net profit margin last year. This is a 74th consecutive quarter of profitability for QLogic.

Turning now to balance sheet; our cash and marketable securities were $462 million or over $5 per share at the end of the third quarter. We continue to maintain a very strong cash position and have no debt.

During the third quarter, we generated $37.4 million of cash from operations. Receivable was $71.2 million at the end of the third quarter. DSO at the end of the third quarter was 54 days, compared to 55 days at the end of the second quarter. Inventory was $14 million at the end of the third quarter. Annualized inventory turns for the third quarter was 10.8 compared to 8.3 turns achieved in the second quarter.

Now, moving to our near term outlook for the fourth quarter of fiscal 2014. Overall, we expect total revenue to be in the range of $110 million to $116 million. At the midpoint, we expect revenue from Advanced Connectivity Platforms to be down approximately 2% sequentially. This improved incremental revenue approximately $2 million associated with acquisition of the Brocade adapter business. We expect revenue from Legacy Connectivity Products to be in the range of $15 million to $17 million.

Gross margin is expected to be in the range of 67% to 68%. Operating expenses are expected to be approximately $56 million, when combined with a projected tax rate of approximately 10% and the diluted share of approximately 86 million shares. We expect to achieve non-GAAP earnings per diluted share of $0.19 to $0.25 in the fourth quarter.

To close, our priorities remain clear. We have made tremendous progress, and are now operating more effectively and efficiently. We will continue to stay focused on our execution and build on the progress that we have made in many areas across our company.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And we will take our first question from Amit Daryanani with RBC Capital Markets.

Karl Ackerman - RBC Capital Markets

Hi good morning. This is Karl Ackerman on for Amit. Just referring to guidance, given the strength that you saw in the December quarter, any outlook for the March quarter? Just wanted to talk about what's driving the guidance, beyond seasonal pattern? And then, maybe additional color that you may have, with respect to the legacy versus connectivity segments, now that you've performed?

Jean Hu

Yes. So if you look at the guidance for our Advanced Connectivity Platforms, including about $2 million from the acquisition of Brocade business, it's probably 2% sequential decline. But if you take out the $2 million of Advanced Connectivity Platforms, it’s a 4% sequential decline. If you look back, the seasonality, its around 5%. So we are doing a little bit better than seasonality, largely because the stabilization over the fibre channel business and additional revenue starts to ramp up from our targeted design wins that we talked about before.

And on the Legacy business side, really, in December quarter, the revenue was a little bit higher than we projected, because some last time buys. I think, Legacy business, as we talked before, over time in next several years, we will see the decline of the business. I think this quarter, we guided $16 million to $17 million, that's really a normal kind of decline rate we are expecting.

Karl Ackerman - RBC Capital Markets

Understood. Then if I just may ask one more additional question; just curious if you still anticipate modest revenue growth in calendar 2014, and whether this still can be achieved organically without the contribution from acquiring Brocade's Fibre Channel and converged network adapter business?

Jean Hu

I think if you look at our business, right, we are quite focused on investing in our Advanced Connectivity Platform. There are [manufacturers], which assumptions -- which our business rely on. First is (inaudible) we need to see the overall IT spend environment and prices over spending environment that will be stable or growing. That has to be a fundamental assumption, because our Fibre Channel business is largely tied to that market.

If that's stable and growing, we do feel like we have some new product cycles, like target market opportunities we have been talking about, which will give us additional growth. I think we never gave guidance for the annual -- for the year, but from product cycle side, we do have some unique product cycles.

Next question?

Operator

And we will now take our next question from Aaron Rakers with Stifel.

Aaron Rakers - Stifel Nicolaus & Company, Inc.

Yeah. Thank you for taking the question. So, just to build off your last comment there Jean, can you talk a little bit about on the product cycle front? I know you are not quantifying it, but at what stage are we in, in terms of the 16-gig target silicon? Maybe if you will, what percentage of the 43 design wins, that you've referenced in the past, have already started to ship, and we are starting to see revenue contributions? And how do we think about that contribution or that percentage, as we look out into mid-part or second half of this calendar year?

Jean Hu

Yeah. We actually already started to run field platforms off the 16-gig target side of designs. Last year, we announced the (inaudible) design win. We do see other programs start ramping later this year. I think certainly, we start to have revenue from last quarter and this quarter, continue to start to go up. But as you know, 43 designs, they all ramp at different times, different platforms, with different customers. We are very confident, if you look at several years from now, the ramp, the 43 design wins overall will ramp up, three years from now, we will have the market leadership in that target market.

Right now, certainly, for the rest of the year, we are going to see more and more programs get into production.

Aaron Rakers - Stifel Nicolaus & Company, Inc.

So let me ask it a different way; your Advanced Connectivity Products revenue for calendar 2014; if you back out your assumption on those target opportunities, would you assume that that business grows this year, on a calendar basis?

Jean Hu

I think overall fibre channel adapter market, we all know it's a mature market, right? So when you look at overall fibre channel adapter market, certainly, we have been assuming it's going to decline year-over-year because of the maturity of the market. As far as the rate of the decline, is it 3% or 5%, we don't know. I think that's the key assumption. On top of that, we do think our target side of the revenue growth opportunity -- it was incremental revenue cycle for us.

H. K. Desai

Adam, this is HK. Maybe I can give a little color on that. If you look at our different products, if you look at fibre channel, it probably can be stabilized because of the -- maybe hopefully, economy stabilized and macro level can help us. The converged networking probably can be stabilized, it can grow. Target market compared to last year, definitely it will grow; and Brocade adapter business coming into play, that will help us too anyways. So overall, those three or four things will help us. The issue really is that the legacy is very difficult to project. We are assuming about a 5% decline sequentially, but I think that area, I think, we cannot [criticize]. So overall, its very difficult, but if you look at four out of five, I think its all positive.

Aaron Rakers - Stifel Nicolaus & Company, Inc.

Okay. And just to build on that, the FabricCache product in those, make that the fifth element of the story. Where do we stand on that?

Jean Hu

That one will take time.

H. K. Desai

It will take time.

Jean Hu

We do have repeat customers. The feedback is great. But I think for fiscal 2015, the revenue will be modest.

Aaron Rakers - Stifel Nicolaus & Company, Inc.

Okay. Final question for me. It looks like you were a little bit more muted than we have seen in the past on the share repurchase front. Yet you have almost close to 50% of your market cap in cash. Just give us an update of why may be you are a little bit sore on the share repurchase front, and how we should think about that? Looks like your share guide is flat sequentially on a going forward basis?

Jean Hu

If you look at our share repurchase, year-to-date for the first three quarters of fiscal year 2014, our free cash flow generation is about $57 million. We already bought back $48 million of stock. Then we did acquisition for Brocade adapter business for $10 million. As we said in the past, that we have been always quite consistent. Our capital allocation policy, the first is invest -- to find the investment opportunity. If we don't, we will use all the free cash flow to buy back shares. I think, if we look at the first three quarters, that's exactly what we have done. We used $48 million to buy back shares, and we used $10 million to acquire Brocade's adapter business.

Aaron Rakers - Stifel Nicolaus & Company, Inc.

Okay. Thank you very much.

Jean Hu

Thank you.

Operator

And we will now take our next question from Joseph Wolf of Barclays.

Tavy Rosner - Barclays

Hi. This is Tavy Rosner for Joseph. Can you give us a sense of what you are seeing around data center spending and old flash server deployment in the first half of the year?

Jean Hu

You are talking about the general spending environment, is that what your question is about?

Tavy Rosner - Barclays

Yes. That's right.

Jean Hu

Okay. I think frankly, our customers, major customers are OEM customers. So from our angle really, we don't see the -- and the consumer spending pattern that much. We see the same data, as you all have seen from the market. Certainly, what we have noted, this overall enterprise spending continue to be muted. That's what we have seen. If you look at the enterprise server shipment data, Gardiner just published (inaudible), it continues to be muted.

I think for us, we do have some unique product cycles, HK mentioned, that will help us for the rest of the year.

Tavy Rosner - Barclays

Okay thanks. And last one, how much more room is there for margin improvements, can you give us some color on that?

Jean Hu

The margin improvement, from an operating expense perspective, right, our team has done a great job to control operating expense. We are quite happy with the current level of operating expense. We are investing in our advanced connectivity platforms, going forward. So we are continuing to hire engineers. We are continuing to be investing. So it’s a normal process. I think the current investment level is the right one. The current OpEx is the right one Going forward we should have the -- continue to invest in different areas of the company. So I think the margin improvement going forward need to come from the revenue growth. Our model is highly leverageable, if we can grow the top line. We are going to get great leverage on the bottom line.

Tavy Rosner - Barclays

Thank you.

Operator

And we will now go to Bill Shope with Goldman Sachs.

Bill Shope - Goldman Sachs & Co.

Okay great. Thanks. I had a question on the Brocade deal. Obviously, you said it wasn't going to material financially, but given the $2 million contribution to the March quarter, should we think about that type of contribution going forward, or that's something that's going to be a bit more volatile than that?

Jean Hu

Yeah. So March quarter, we closed the transaction late in January, so we only include a partial quarter and also we don't get benefit of some inventory sales. That's why only $2 million for March quarter.

Going forward, when we think about it, their business has been roughly 3% of private channel market this year. If you look at the current market, probably between $500 million to $550 million kind of total market size, so 3% a year. So for the year, its probably $50 million, $60 million going forward.

Bill Shope - Goldman Sachs & Co.

Okay, that's helpful. Then I guess, below the revenue line, do you expect any R&D synergies from the joint development component of the partnership, and how should we think about this contribution to your OpEx line?

Jean Hu

I think we will manage our results, but I don't think there is meaningful savings or additional expense on the OpEx side.

Roger Klein

The focus of it really is more about producing better higher value products, than it is about synergies and development and costs.

Bill Shope - Goldman Sachs & Co.

Okay. That's helpful. And then, just clarifying your OpEx statement earlier. So your OpEx statement came in better than expected this quarter. Was that just a little bit of pull forward of the planned savings, and you are still sort of looking towards, I guess, a steady state, 225 to 230 range for the full year going forward? Is that correct? Beyond this fiscal year?

Jean Hu

We don't guide next year. I think the current level is really -- the operation right now is really efficient. So we are quite happy. But going forward, we do have the merit increase. We continue to hire engineers. So I do expect OpEx to increase next year. The regular 4%, 5% of annual increase kind of things. We will give you a more detailed guidance next quarter, when we get to fiscal 2015.

Bill Shope - Goldman Sachs & Co.

Okay great. Thank you.

Operator

And we will now take our next question from Scott Schmitz with Morgan Stanley.

Scott Schmitz - Morgan Stanley

Thanks for taking the question. Jean, I know you mentioned -- you talked about IBM briefly. But I just wanted to understand, are you expecting any share shifts in the server markets, given IBM's sale and any impact to your business?

Jean Hu

Roger, you want to take that question?

Roger Klein

Is this relative to Lenovo?

Scott Schmitz - Morgan Stanley

Right.

Roger Klein

We don't. I mean, we have had a longstanding relationship with IBM. We have a lot of depth of experience, a lot of program shipping. We are doing a lot of the same things that you are reading. It looks like, some of those programs, may be a good number of them, would go over to Lenovo. We would expect to continue those programs, and we already have a relationship with Lenovo. So I mean, to the extent that this thing moves along in a good clip, we are there to support it, and we don't really anticipate any significant change there.

Scott Schmitz - Morgan Stanley

Okay great. And then -- I know you just announced an open compute adapter yesterday, and I just wanted to participate, I know it's early; but is it still targeting traditional enterprise customers, or is there an opportunity for you to capture some cloud revenue that you haven't been able to in the past?

Roger Klein

Well, a lot of the focus of that is cloud and open, and so to the extent that we can leverage across as many markets as we can, we are going to do that. But definitely a cloud focus on it.

Scott Schmitz - Morgan Stanley

Okay. And then just lastly for me, Jean, on balance sheet, the inventory came down quite a bit. Can you just talk about what happened on the inventory side?

Jean Hu

Yes. That's really because of the timing of our ASic approaches, because our silicon business, ASIC business has very long lead time. So different quarters, you can (inaudible) to the situation, it’s the timing of the purchase. So I think that you will see next quarter, we will be able to back it. So we are having now the inventory there.

Scott Schmitz - Morgan Stanley

Thank you.

Jean Hu

Okay. Thank you.

Operator

And we will take our next question from Ryan Bergan with Piper Jaffray.

Ryan Bergan - Piper Jaffray

Hi, thanks. I just want to follow-up on the IBM-Lenovo question. Just to be clear, I have understood the (inaudible) programs you have had there, but do you expect any pause in spending because of the transition, from the time when it was announced to the time that it gets closed?

Roger Klein

Good question. I mean, you see all the same day that we do, and IBM has certainly had some challenges this year, whether as a result of that, which is kind of your question, or whether as a result of (inaudible), really kind of hard for us to know. These things are inherently a bit disruptive, but we are hopeful that that's minimized and continue along with business.

Ryan Bergan - Piper Jaffray

Thank you.

Operator

And we will now take our next question from Jung Pak with BMO Capital Markets.

Jung Pak - BMO Capital Markets

Hi. Thanks for the question. It seems like you are having a more muted view on your fibre channel business than your last call, and it seems like its more in line with your primary competitor. Should we assume this fibre channel business going forward decline in the 3% to 5% range?

Jean Hu

So, if you think about the fibre channel market, it’s a mature market. I think if you look at the current analyst view, that's really the forecast that they are having. But if you look at our business, if you look at the December quarter, and the March quarter, our guidance, its actually quite stable. The December quarter, if you look at our Advanced Connectivity Platforms, it grew 5% sequentially, it’s the low end of the typical seasonality. Then if you look at the March quarter, its actually better than seasonality, the 4% without Brocade's business.

So its really hard to say. I think that's the future forecast, we don't know. The current trend that we have seen on our fibre channel adapter business actually is quite good, quite stable.

H. K. Desai

And in this quarter, December quarter, Advanced Connectivity grew 5%. Within that, fibre channel grew -- fibre to adapter grew more than 5%. So we had a pretty good quarterly rate.

Jung Pak - BMO Capital Markets

Okay great. That was my second question though. Going back to the Brocade acquisition, can you provide what the rationale was, what the value add is in terms of product IP or customer reach?

Roger Klein

Sure. There is actually a number of aspects to it. First thing you want to do, is strengthen our relationship with Brocade. That kind of makes a lot of sense to have the number one (inaudible) guy and the number one switch guy working on storage area networking solution together, for better values for the customer.

Second part of it was -- we wanted to be able to expand our install base, and they have been shipping our product for several years, so that gives us a little bit broader base. What comes with that going forward is a slight increase in market share, and market share is always important, and then I guess, maybe just to summarize it, it just overall made good economic sense to do it. So there is a strategic rationale part too and there is kind of an economic part to it, and they just all fit together to be a sensible thing for us to go pursue.

Jung Pak - BMO Capital Markets

Okay. Last question for me, staying on the fibre channel side. Have you guys -- can you guys provide any update on what you guys are thinking about doing with your fibre channel switch business?

Jean Hu

Fibre channel switch business, we discontinued the next generation ASIC development right now, where Fibre channel switch business is a part of our legacy business we are running. Its great cash, and we have said, its going to decline. But we have a very long tail for next several years. So where this is running is, it continues to serve our customers.

Jung Pak - BMO Capital Markets

Okay. You guys are not exploring other opportunities?

Jean Hu

No.

Roger Klein

One thing I would add to it is, Jean, is right, we announced that we were discontinuing future development. But we continue to support customers, we continue to complete program, and we would expect, as Jean said, for this revenue to have a pretty long tail on it. So we didn't turn off the lights, we just basically said, for future development, we weren't going to invest. But there is a lot of things in the near term, and we continue to sell the products.

Jung Pak - BMO Capital Markets

Great. Thank you.

Operator

[Operator Instructions]. And we will now go to Vlad Rom with Credit Suisse.

Vlad Rom - Credit Suisse

Hi Jean. Thanks. I am just trying to understand the kind of the revenue ramp on the target business, and what's going on in Advanced Connectivity Platform segment. When do you expect that business to ramp, and was there any contribution this quarter?

Jean Hu

Yeah. Last quarter we said that we already started to have revenue from the targeted side of design wins, ramping into production. There is 43 programs, different programs with different customers will ramp at a different time. So we said that, we had programs starting last year, December quarter, and going forward, each quarter we will have new program to launch for the rest of the year.

Vlad Rom - Credit Suisse

Okay. And any sense on the magnitude for this quarter?

Jean Hu

Its not meaningful to call out. Certainly, it helps to contribute to our seasonality to be (inaudible) here than the traditional ones, but we don't give that kind of details.

Vlad Rom - Credit Suisse

Okay great. Then also trying to understand kind of the forward contribution of the Brocade business. I think there was recently $20 million to $25 million a year run rate business. Now it seems like its about 16. And so it seems to be under pressure. Do you think that business is going to be purely accretive to you, or do you think you will face continued pressure (inaudible).

Jean Hu

So it is accretive to us, from a transaction perspective. I think its install base, like Roger mentioned, typically has a very long tail. I think for us right now, looking forward, its really important to serve our customers from that installed base, and going forward. Its really -- its about 3% of fibre channel market this year. So it all depends on what the fibre channel market, the total market will do for the 2014 calendar year, right.

Roger Klein

And we would expect a lot of longevity to those 16-gig adapters that came to us from that acquisition.

H. K. Desai

I mean, if you look at this, the 16-gig is not contributing to the market here. There is much -- so if you look at the Brocade, lot of revenue is in the 8-gig and then transition to 16-gig. They were shipping the 16-gig before anybody else on the adapter side. So I think there is some ramp coming through, so we expect this business to be stable at least.

Vlad Rom - Credit Suisse

Okay. That makes sense. I think its kind of interesting that you are able to guide towards a reduced OpEx base; even though, you are onboarding, I am assuming, some of the headcount from Brocade, is that correct? What's the impact of that?

Roger Klein

I will let Jean talk about the impact. We did bring on-board engineering resources, consistent with supporting those products.

Jean Hu

Yeah. But it has weakened our sales marketing results. Its not like -- the [peak] we acquired from this transaction, they are just engineers supporting those products going forward.

Vlad Rom - Credit Suisse

Okay. And is there an opportunity to consolidate or is that kind of a de minimis number?

Jean Hu

Its really minimum. It doesn't peak always, not much.

Vlad Rom - Credit Suisse

Okay. Great. Thank you. I appreciate it. That's all for me.

Jean Hu

Thank you.

Operator

And we will take our next question from Harsh Kumar with Stephens Incorporated.

Richard Sewell - Stephens Inc.

Yes, thanks for taking my question. This is Richard in for Harsh. Wanted to go back to the prior discussions around the target storage opportunity. Can you give us some color, guidance, on kind of the market size and then, how you are positioned in this market?

Jean Hu

Okay. So if you talk about market opportunity, we are talking specifically, private channel and Ethernet target ASIC opportunity. There is now third party analysts following this market. Our internal estimate is between $80 million to $100 million opportunity right now. We do believe, this market is going to grow around 10% each year going forward. We talk about the 43 design wins we have. We do believe we have majority of the design wins in this market. But remember this is target market. The program ramping up process is very long. It takes two or three years to ramp up revenue. What we are comfortable with and confident with, three or four years from now, when all the different programs with different customers ramp up, we are going to have the market share leadership position in that market.

Richard Sewell - Stephens Inc.

Great. Then for my follow-on, and thank you for the color on that one. As we go into fiscal 2015, how would you stack right your growth opportunities? Clearly, target storage is a large one. But outside of that, how would you stack right those opportunities?

Jean Hu

There are several new products that we talk about. Certainly, the target opportunity is quite a significant and meaningful one for us, and that will cause -- we do believe the converged, the 10-gig Ethernet market will continue to grow. So we will grow in that segment too. The fibre channel adapter market, that is upgraded to 16-gig transition. That will help, and as those are going forward, even the transition happens faster during the next year. But typically, it will give us a little bit opportunity on the 16-gig transition side too.

So those are the things I will rank from the -- just near term during the next fiscal year, fiscal 2015.

Richard Sewell - Stephens Inc.

Great. And if I can sneak one more in. I think you talked about OpEx, kind of you are going to control that, and may be grow 4% or 5% as we go into fiscal 2015. Is it safe to assume that most of that will be in R&D, or how should we think about the SG&A side?

Jean Hu

It will be in R&D. We will be very aggressive with the controlled SG&A costs.

Richard Sewell - Stephens Inc.

Great. Good luck. Thanks guys.

Jean Hu

Thank you.

Operator

It appears there are no further questions at this time. Miss Hu, I'd like to turn the conference back to you for any additional or closing remarks.

Jean Hu

That concludes our conference today. As a reminder, Prasad Rampalli, our new CEO will be joining us next week. We are excited to have him join our team and we look forward to updating you on our progress next quarter. Thank you for your time and good bye.

Operator

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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