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Emulex (NYSE:ELX)

Q2 2014 Earnings Call

January 30, 2014 5:00 pm ET

Executives

Frank Yoshino - Vice President of Finance

Jeffrey W. Benck - Chief Executive Officer, President and Director

Kyle B. Wescoat - Chief Financial Officer and Senior Vice President

Analysts

Scott D. Craig - BofA Merrill Lynch, Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Tavy Rosner - Barclays Capital, Research Division

Richard Sewell - Stephens Inc., Research Division

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

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

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Jung Pak

Operator

Good day, and welcome to the Emulex Corporation Fiscal Year 2014 Second Quarter Earnings Release Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Frank Yoshino, Vice President, Finance. Sir, please go ahead.

Frank Yoshino

Thank you, operator. Good afternoon, and welcome to Emulex's Second Quarter Fiscal 2014 Earnings Conference Call. By now you should have Emulex's second quarter 2014 earnings release, which was issued earlier this afternoon. If you do not have a copy, the press release is available in the Investor Relations section of our website at emulex.com.

The press release and this presentation contains forward-looking statements including, but without limitation, statements regarding Emulex's business operations, ongoing patent litigation and related mitigation efforts and the anticipated financial results for our third quarter of fiscal 2014 and beyond. These statements are subject to a number of risk and uncertainties, and our actual results may differ materially from those discussed in the forward-looking statements.

Those risks and uncertainties are highlighted in our earnings release under the heading of Risk Factors in Emulex's most recent annual report in Form 10-K and quarterly reports on Form 10-Q. We undertake no obligation to update the forward-looking statements.

During the call, when we use any historical non-GAAP financial measure, you will find the reconciliations to the most directly comparable GAAP financial measure in our earnings release. All of the references we will make today relate to non-GAAP results unless otherwise stated.

Today's conference call is being webcast and a recording will be available on the Emulex website through January 2015. I'd also like to remind participants that if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording.

Now let me turn the call over to Jeff Benck, the President and CEO of Emulex.

Jeffrey W. Benck

Thanks, Frank. Good afternoon. I'm Jeff Benck, and with me today is Frank Yoshino, VP of Finance; and Kyle Wescoat, our new CFO.

For those of you who may have missed the announcement, Kyle joined the Emulex management team at the beginning of January. Kyle has more than 25 years of CFO experience in a variety of well-regarded public and private companies, including VIZIO and VANS here in Orange County. Most recently, Kyle was the CFO at Skullcandy, the publicly-traded headphone company headquartered in Park City, Utah.

Kyle will begin our prepared remarks and highlights of our second quarter financial results and provide our guidance for the third quarter of fiscal 2014. I will then provide some additional color on our results and follow-up with an update on the transformational efforts that have kicked off at the beginning of the fiscal year. I'll conclude with some perspectives on the current business environment and a few recent industry announcements. After our prepared remarks, we will open the lines for your questions.

Over to you, Kyle.

Kyle B. Wescoat

Thanks, Jeff. Good afternoon, everyone. It's a pleasure to have recently joined such an outstanding company. Emulex has a rich and consistent history of delivering technology and innovation to the markets it serves. I'm pleased to be joining the company at this exciting time in its history, and I look forward to working with the great team Jeff has assembled to build value for those of you on the call and all our investors. Now let me review our results for the quarter.

Sales for the second quarter came in $123 million, which was at the upper range of the guidance of $118 million to $124 million which we gave during the October earnings call. Second quarter diluted earnings per share exceeded the high end of our guidance range of $0.15 to $0.17, coming in at $0.21. The tax rate for the second quarter was 9%. The same rate will be used -- the same rate we used in the first quarter. Based on the anticipated mix of revenue by geography, we are modeling for approximately an 8% tax rate for the remainder of fiscal 2014.

Take a look at our revenue by product line. Network Connectivity Products, or NCP, is our largest product line. NCP consists of our Fibre Channel and Ethernet products that are used to connect servers and storage arrays to the Fibre Channel's storage array network or to an Ethernet network. Historically, during the December quarter, we had seen strong sequential growth in our NCP business, and this year was no exception. On a sequential basis, NCP grew 12% to $87 million and accounted for 71% of our revenue in the quarter compared to 68% in Q1.

Our second product line, Network Visibility Products, or NVP, is our family of Intelligent Network Recording products that are used to monitor and provide visibility to the packet traffic or Ethernet networks at speeds up to 100 gigs. NVP net revenue for the quarter totaled $10 million or 8% of our Q2 results compared to 9% of total revenue in the first quarter.

Our third product line, Storage Connectivity and Other Products, or SCOP, consists of our bridges and back end connectivity products, baseboard management controllers and other miscellaneous products. In the second quarter, SCOP accounted for 21% of total revenues, coming in at $26 million, down approximately 2% from the first quarter.

Turning to the company's gross margins. Second quarter gross margins remain strong, coming in at 66% of revenue. A favorable mix of products during the quarter resulted in our gross margin exceeding the 65% guidance we gave you during our October call.

Looking onto operating expenses. Total OpEx for the quarter was $61 million, which represents a sequential decrease of $1.1 million or 2%. As a reminder, payroll tax matching starts over again at the beginning of this calendar year, which adds approximately $2 million to our third quarter operating expenses. With the organization's changes we have already announced and made, we expect this expense to be somewhat offset by spending reductions. But keep in mind, the benefit from the recent announced restructuring efforts will not be felt until Q1 FY 2015.

Operating income was $21 million or $0.17 of revenue -- 17% of revenues, an increase of more than 50% for the first quarter result. Net income also increased nearly 50% sequentially, coming in at $18 million or 15% of revenue.

On a GAAP basis, second quarter gross margins were flat with Q1, coming in at 59% of net revenues, and GAAP operating expenses were $74 million or 60% of revenues compared to $71 million or 62% of revenues in the first quarter. During the quarter, we took an $8 million charge associated with the restructuring, site closure and other related expenses that we announced in December.

You will recall in our press release announcing the restructure, we estimated that the total restructuring cost would be in the $9 million to $10 million range. We expect the remaining $1 million to $2 million will be incurred as we wind down the Bolton engineering facility over the next 2 quarters.

In addition to the restructuring cost, GAAP operating expenses for Q2 included $1 million related to patent litigation efforts, $1.6 million of amortization of intangibles and $3.6 million of equity-based compensation charges. All of these charges are excluded from non-GAAP results. Our GAAP net loss for the quarter was $4 million or 3% of revenue. Excluding the $8 million restructuring charge, we would've shown a profit on a GAAP basis. A reconciliation of GAAP to non-GAAP numbers is included in our press release.

Turning to the balance sheet. We ended the quarter with $199 million in cash and investments. As you know, we completed a senior convertible debt offering during the quarter for a total of $175 million, which is due in 2008. Net of this debt, our cash balance is $24 million. Working capital was in line with our expectations given the high sales experience in Q2 with DSO and inventory turns tracking favorably with the same period of last year.

In conjunction with the debt offering, we also announced a $200 million share repurchase plan, which will be largely funded by the proceeds from the convertible debt. A $100 million of the share repurchase will be completed during the fiscal 2014. $56 million of this amount was completed during the second quarter by direct repurchases, and an additional $44 million will be completed before the end of the fiscal year through an accelerated share repurchase program.

As a result of these transactions, the diluted share count for the second quarter was approximately 88 million shares compared to 93 million shares for the first quarter. And for the modeling purposes, we're expecting a diluted share count of approximately 83 million for Q3.

Before I discuss our revenue and earnings guidance for the third quarter of fiscal 2014, I want to once again remind everyone that the public filings with the SEC and our Safe Harbor statements included in our press release discuss the risks and uncertainties that could affect the future performance, causing actual results to differ materially from our forward-looking statements.

Taking into consideration recent industry impacting announcements from customers and suppliers in our space, the normal seasonality in the March quarter for our NCP business, as well as the current forecast for our customers, we are modeling revenue in the $110 million to $114 million range for our third quarter ending March 30, 2014. We also expect gross margin to moderate a bit from Q2 as a result of mix and OpEx spending similar to Q2 due to the aforementioned payroll tax reset.

Using an 8% tax rate, based upon our anticipated mix -- revenue mix in 3Q [ph] and the diluted share count of approximately 83 million shares, we anticipate diluted earnings per share in the range of $0.14 to $0.17 for the third quarter on a non-GAAP basis. On a GAAP basis, we expect a loss of $0.04 to $0.07 per share. Our third quarter GAAP results will include approximately $0.21 in charges. Once again, I'd refer you to our earnings press release for a complete reconciliation of the differences between our GAAP and non-GAAP guidance.

Finally, I want to share with you some of my early observations in areas where I will be focusing my attention in the coming months. First, I believe the initiatives undertaken by Jeff since becoming CEO [indiscernible] that we are rapidly adjusting our fundamentals to position ourselves for the future. We have a solid balance sheet, access to capital and are making thoughtful investments in our lines of business commensurate with our long-term prospects. We are also making investments in products and people that will help us to compete in today's environment.

Further, the impact of the litigation we've been fighting for the past several years is waning, and this will afford us greater line of sight as we attack that segment of our business. Some of the areas I and my team will be addressing include: making a strong balance sheet with access to capital, instill greater financial management and discipline around investments, capital deployment and product line returns, focusing on customer and shareholder [ph] profitability to ensure that we adjust to our changing marketplace and working to optimize our organization while delivering sustainable returns, manage cost that protects the profitability. Working with Jeff and the team are strategic initiatives that will support our transformation in the near term and growth in the future and articulating that story to our current and future investors.

In closing, we plan to hold an Investor Day in New York City in May, where we will outline the long-term strategy and financial plan for our business. We will be webcasting this event and encourage everyone to join us for the webcast if you cannot attend in person.

This concludes my prepared remarks, and I'd like to pass it back over to Jeff.

Jeffrey W. Benck

Thanks, Kyle. This afternoon, I'm going to cover 3 topics. First, I'll provide some additional color on our progress during the second quarter. Second, I'll give you an update on our transformational efforts that we've been working on over the first half of the fiscal year. And I'll close on my prepared remarks with some perspective on the recent announcements in our space and my thoughts on the potential implications to Emulex over the coming quarters.

Looking at the second quarter results, I want to recognize the Emulex team for their focus on meeting and, in many cases, exceeding the operational goals that we set out to achieve in October, while at the same time, making significant progress on the transformational efforts to position the company for the future.

Top line revenue of $123 million was at the high end of our guidance. Our gross margins exceeded our target of 65%, coming in at 66% for the quarter, driven by strong sequential growth in our NCP products. Our operating expenses came in favorable to our plans in the second quarter and were under 50% of revenues. The net result of this was that we delivered earnings per share that exceeded the high end of our guidance for the quarter by $0.04, coming in at $0.21. This represents an 11% increase in EPS over the comparable quarter last year.

I'm also pleased to report that during the second quarter, we recorded initial revenues from our redesigned 10Gb ASIC. And just last week, we launched our latest OneConnect 10Gb and our first 40Gb Ethernet Network Adapter family. These are adapters that include a number of industry-leading contemporary features, such as SR-IOV for server virtualization density; a new open API for software-defined networking enablement; a low-latency RoCE architecture for high-speed, low-latency networks; and overlay networking offloads for reducing CPU utilization when implementing a fully virtualized enterprise or cloud data center.

We are well down the path on a number of OEM quals for these products that will be announced over the next several quarters on Ivy Bridge platforms. These lower -- these new lower-latency Ethernet adapters, with the most advanced virtualization available today, are well timed to intercept the upcoming Grantley server transition later this year. We look forward to reentering the U.S. channel this quarter with these new products and getting our growing number of 10Gb OEM wins to market.

One area that did fall a little short of our goal in December was the NVP business. During the quarter, we increased our pipeline of opportunities. However, recognizable revenue of $10 million was below our target for the quarter. Having said that, as we approach our 1-year anniversary of the acquisition, we remain very bullish on our prospects for this business, including the recent focus on the need for visibility to prevent network breaches and information theft.

Just last week, the FBI issued a warrant of warning to retailers to expect more credit card breaches following the recent attacks on 2 large U.S. companies. Experts in retail security that audit point-of-sale systems to find vulnerabilities hackers exploit, are calling on retailers to move more quickly to get better tools in their networks that can analyze traffic patterns on-the-fly and identify any unusual activity. This is right in the Endace wheelhouse and in fact, we have seen an increase in interest in our capabilities in recent weeks in this large vertical. I'm still confident that NVP has the ability to achieve our objective of 10% of the company revenues as we exit this fiscal year.

Turning to my next topic, let me provide you an update on our efforts to improve our business model. During the first quarter, I discussed our goal of achieving a $10 million reduction in our spending in the connectivity business. During the October earnings call, we highlighted that we are on track to exceed our original $10 million objective.

In December, we increased our savings target to $30 million in operating expense reductions for the connectivity business from the spending level in fiscal 2013. As we look at our Q3 forecast, spending in our connectivity business is already down over $5 million in the quarter compared to the prior year, demonstrating that we are well on our way to achieving our goals. With the closure of our Bolton engineering lab, as well as additional spending cuts across the SG&A functions, we will see a reduction of approximately 15% of our headcount from where we began the fiscal year.

Moving on to my third topic. In the past few months, there were a number of M&A announcements and some consolidation in our industry. I'd like to give you some context on how we view these announcements. In the 3 months since our last earnings call, an acquisition was announced by one of our suppliers, and Lenovo has announced their intent to acquire IBM's x86 server business. These type of announcements tend to blur the near-term visibility in our business, and this has influenced how we are looking at the remainder of FY '14.

Longer term, I believe Emulex will see benefits from these changes. Over the past few years, we have seen increased customer concentration as the OEM server and storage industry has consolidated. If completed, this acquisition would reverse that trend, and Emulex should benefit from the strong OEM relationships we have already developed with Lenovo, as well as leverage our end-user sales investments we have made in the China market.

Hopefully, you also saw our release yesterday, highlighting our collaboration with Brocade on the development of Gen 6 or 32Gb Fibre Channel solution. We have a long history of working with Brocade to provide innovative solutions to the SAN market. One recent benefit of our collaboration is the implementation of ClearLink, an advanced diagnostic cable solution that improves network reliability between Gen 5 switches and adapters.

Additionally, we are partnering to bring new solutions to the market for the cloud, SSD and server virtualization environments. These solutions include new features such as ExpressLane, our Quality of Service capability that addresses latency needs of SSD storage. CrossLink, which accelerates VM mobility and provide in-band communications between SSD devices to maximize visibility. And finally, we have certified our overlay networking capabilities with Brocade's flagship VDX Ethernet fabric switches for cloud and telco applications.

Before we open up the line for your questions, let me share some closing comments. It's been about 6 months since I took over as CEO of Emulex. In that short period of time, we have driven an unprecedented amount of change in the company in order to get us back on track to driving shareholder value and a direct response to concerns voiced by shareholders regarding our approach to managing the business.

What we heard from our shareholders was they wanted to see us drive better efficiency and take out cost. They also want us to be more judicious about uses of capital and implement a plan to return cash to shareholders. And then they wanted to see management changes to ensure we would stay on track with our new plans. At this time, I believe we have put plans in place to effectively address all of these concerns and more.

First, we committed to take $30 million of costs out of our core connectivity business. In order to facilitate this goal, we rationalized our product lines, road maps, organization and structure. We then canceled some low-performing products. We decided to close all of our engineering facilities, and we are reducing our overall headcount by approximately 15%.

At the same time we initiated this restructuring, we were able to concurrently focus on shipping our redesigned 10Gb ASICs and introducing our latest generation of 10Gb and 40Gb controllers to the market. You should take away from this that we have not lost sight of our longer-term growth objectives and their importance to the business.

In regards to capital structure, we took advantage of the low cost of capital, our strong balance sheet and our ability to generate future cash flow by issuing $175 million of 5-year convertible debt. We put this capital to work immediately with an aggressive $200 million share buyback program, and the first $100 million will be completed by the end of May. With the reduction on our outstanding share count, this debt transaction is accretive to our EPS.

Lastly, I'm excited to have our new CFO, Kyle Wescoat, on board to help me ensure we have the right processes and discipline to not only execute our strategy but also accomplish this in the most efficient manner. I'm also really looking forward to our shareholders' meeting next week, where we will confirm the appointment of our 3 new independent board members who bring a wealth of experience and insight from around the industry. I genuinely believe Emulex will benefit from their collective experience and fresh perspective.

Even though we are operating in somewhat of a dynamic environment with less visibility in the short term, I remain very confident of the future prospects for our business. We are fortunate to have 2 growth engines in 10-gig and NVP in the company and have very stable and profitable core business. But most importantly, we have a great leadership team who are committed to the philosophical change we are making in how we manage our business with an eye towards profitable revenue growth and improving our cash flow. I look forward to updating you on our progress on the next earnings call or at our Analyst Day in May.

Operator, we can now open the line for questions

Question-and-Answer Session

Operator

[Operator Instructions] And at this time, we'll take a question from Scott Craig with Bank of America Merrill Lynch.

Scott D. Craig - BofA Merrill Lynch, Research Division

Two questions. First, Jeff, if you can go in a little bit more detail on Endace. The 10% target obviously implies that it ramps up a bit here over the next couple of quarters and sort of how you're thinking about the growth there. Was there something in the quarter in particular that prevented you from realizing some of those sales? And then the second question is on the cost saving side, maybe for Kyle. You talked about $5 million year-over-year in the December quarter from the cost savings. How does that ramp as we work out into the calendar -- or sorry, fiscal 2015?

Jeffrey W. Benck

Yes, I'll start and then I'll let Kyle jump in. On the Endace sales, we are looking for sequential -- some sequential growth this quarter, to your point, on things -- do we see things ramping up. We're pleased with the growth in the pipeline of opportunities. We knew this wouldn't be an overnight deal for us to get the leverage of the broader organization in place.

I'm pleased about some of the opportunities I see the classic Emulex sales team helping identify. I think our marketing efforts are having an impact, and we did add quite a few new incremental sales folks to help tell the Endace story and close business. But we also recognize that it wasn't going to be something that would happen in a quarter. It was going to take a little bit of time. Because even though we've done a good job, I think, of enhancing our training materials and really honing in on the value proposition, it's something that we put focus on, but we knew it's a multi-quarter kind of effort.

As far as the quarter itself, it wasn't wildly off what we expected it to be. But we had hoped for a little better performance in that. Because it's an end user-focused business, you do see some deals move around a little bit quarter-to-quarter. Certainly, it wasn't something that I felt like competitively, we were disadvantaged. In fact, I don't see any, really, material change in the opportunities that we're engaged in. It's really more about -- sometimes we're a small piece in a bigger deployment, and we obviously don't necessarily control exactly the timing on those.

So we're getting, I think, more insight into the way this demand lays [ph] out, but that's kind of the comments on Endance a little bit. Let me just sort of start on the cost savings, and I'll let Kyle sort of add a little more there. On the cost savings, I think that $5 million, we were talking to -- if you look at our guidance for operating expense, Kyle talked about it being sort of flattish quarter-to-quarter, but when you look at the -- our connectivity business, we said we look for it year-over-year to be down about $5 million to $6 million. And we just felt like we would share that.

While we don't break out expense by group, we thought we could sort of share that to give you a sense of the kind of progress we're making against this $30 million target. However, we were very clear that it's going to take us time to get this done, and we had a site closure and we had some transitional issues over the next 2 quarters. So we really kind of pointed to the end of the fiscal year to fully realize that. I think, just looking at some of the models out there, I think some of the guys got a little bit in front of us on how much expense comes out, how quickly. But we -- you probably know we can spend more time on that, but Kyle maybe...

Kyle B. Wescoat

Yes, no, I would agree. I mean, in the short time I've been here, in reviewing kind of where everybody is with respect to spending, it seems to be the one area where -- we have 2 things going on concurrently. We're taking expense out of the legacy business or the core business, and we're investing in our Endace business. And so the Endace business doesn't really anniversary until these next couple of quarters, and that's a moderate single-digit million-dollar kind of operating expense number. So as the spending comes down in the core business, it's being offset to some extent by what's going on in Endace. Our hope is, and I believe this, is that, that Endance will begin to get traction and as they do, we'll start to see the operating leverage on this side of the business as well as the operating leverage that we're seeing out of the ECD business and that over time, that serves us well. So I think we're not giving guidance beyond the third quarter. We may have something to say at the analyst -- or later calls and maybe at Analyst Day. But for now, it's directionally what we're talking about.

Operator

Then we'll take a question from Andrew Nowinski with Piper Jaffray.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

First off, I guess, did you provide a percentage of your NCP revenue that was attributable to Fibre Channel this quarter?

Jeffrey W. Benck

No, we didn't break that out. Our NCP business had a pretty good second quarter. If you -- we did talk about it being up mid-teens sequentially. And what I would say in that is our Fibre Channel business did a bit better than Ethernet in sequential growth. So maybe we should've stated that as the -- well, I think in the script, we talked about NCP being up 12%, but Fibre Channel was up a little more than that. So it was a strong Fibre Channel quarter. We usually enjoy a stronger December quarter, but I feel very confident, given our results, that we're going to gain some pretty good share in the December quarter looking at my largest competitors' results. And I think they were up 5% sequentially, and we were up more than what NCP will -- what our NCP business was up, for Fibre Channel. So maybe that gives you enough to sort of get there.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

It does. I mean, when I look at normal seasonality for Fibre Channel, clearly, I mean, that's normally I think up 6% to 8% or so. And so you clearly almost doubled your normal seasonality. I guess, is there anything in there that you could point to that would drive such strong Fibre Channel results this quarter?

Jeffrey W. Benck

I think it varies a little bit quarter-to-quarter -- year-to-year. I mean, some years you're -- the number you said sounds about right, but we've seen it a little stronger in some years. I think that September probably wasn't as strong as I would've liked to see it, frankly, and that probably had a bearing on that. We're also seeing a little bit more 16-gig, still got a long way to go there, but we're starting to approach the 10% mark. We're still a bit short of that. We're getting into the high-single digits on 16-gig. I think we've got -- yes, I know we have leadership share in that position. But it varies a little bit depending on how the different OEMs do. And we are now participating in the target space a bit with the EMC -- when we talked about, that helped a little bit. But I wouldn't say that was the biggest factor in the numbers. But definitely, a good share -- a good quarter for share gain there.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Right. All right. Okay. And then just last question for me, would love to hear your thoughts on how QLogic's purchase of the Brocade adapters will impact Emulex if at all?

Jeffrey W. Benck

Well, it looks like one less competitor in the HBA/CNA space, so that's probably a good thing. It looks like the business was declining a bit, I think, even from the other guys' comments that, that business is coming down. So we think that it's sort of -- we recognized at [indiscernible] a year ago that Brocade was not a big competitive segment. We started partnering with them, and we did a partnership release this week with them about the efforts we have going together. It's a pretty cool technology that differentiates us from the competition and this just really, really makes it very clear in the marketplace that their switches and our adapters make a nice combination. And I think it's good. I think it makes sense. I mean, they weren't very big player in the space. And as those customers transition, because you can imagine the other guy's going to consolidate their road map, as they transition, I think it's a jump ball in terms of where they go for 16Gb or 32Gb, and I think we're well positioned to capture some of that. So probably some upside, but that's not a near term -- because it will take time for that to transition now. So I'm generally okay with it. I mean, Lloyd and I had a good discussion this week and remain close partners.

Operator

At this time, we'll take a question from Joseph Wolf with Barclays.

Tavy Rosner - Barclays Capital, Research Division

This is Tavy Rosner for Joseph. Can you comment on the pace of 10-gig Ethernet adoption and how you see 40-gig progressing in 2014?

Jeffrey W. Benck

Yes. We just announced our first 40-gig product. We talked that we would be announcing it in the early part of this year. We just announced that last week. Excited about it, but I will say it's early days for 40-gig. I think, even the analysts have a few percent of 40-gig this year. But it's great to be there on the front end. Not many people have 40-gig technology in the market. We've got actually a couple of OEM wins, but they're not through qual yet so we're not in a position to talk about revenue from that really until they come to market. But it's good to have OEMs wanting it and see it happening. It also gives us an entrée into the cloud customers and be able to participate in the market that we've really been -- stepped away from, waiting on the new products and new product introductions. So feel pretty good about that, although early days for 40.

On 10-gig -- 10-gig adoption, it's -- we're still seeing very heavy adoption on blade servers, greater than 65%, 70% on blades. On racks we're still in the low-double digits, probably closer to 10% that anything more than that. So I think there's still quite an upgrade cycle to go. The analyst numbers for 10-gig growth is in the mid-20s in 10-gig growth. I don't -- we don't want to argue that. We think that probably sounds right. I'm kind of mindful to see -- I'm kind of watching what this Grantley upgrade cycle means for 10-gig because -- I know we've got a number of great design wins. We're going to expand our position a bit there with the new products we just announced and kind of anxious to see that happen. But I know it's not happening in the first half of this calendar year, so that's kind of what we're looking to is, it could be a meaningful catalyst there. That, coupled with our new products that are well timed to that.

Operator

And at this time, we'll take a question from Harsh Kumar with Stephens Inc.

Richard Sewell - Stephens Inc., Research Division

This is Richard Sewell in for Harsh. I wanted to take a longer-term view of your growth opportunity. Can you give us any color and kind of stack-rank those opportunities for us as we go into fiscal '15?

Jeffrey W. Benck

Yes, so we got a couple of things at play here, right? The 2 big growth opportunities, we've been pretty consistent on this, our 10-gig Ethernet and our 10-gig strategy and you could lump 40-gig in on that, too. But that is definitely a little longer-term play, but coming to market and getting a foothold early would be key. So we think 10-gig Ethernet is an important opportunity for us. We still are #2 in that space by quite a margin. Believe that -- 10-gig, I think, in the December quarter grew sequentially for us.

And looking at the market, I believe that we probably held and maybe gained a touch of share there. But we know we're in a bit of transition period here. We talked about our Ethernet kind of being flat for the really looking at the calendar year because of the transition going on in our products and those products that we were shipping before and the redesigns we were undergoing. But we really see 10-gig as a meaningful growth opportunity, both with server guides as well as storage customers in the target side.

The second growth opportunity for us is Endace. And the Network Visibility Product segment, it did about $7 million this quarter. We see that, that market's growing about 25%. It's about a $350 million market today. It's growing to be a $1 billion when you get out to 2017, so it's a meaningful market in terms of size.

So, to keep things real simple, Ethernet's growing 25%, Network Visibility is going 25%. So those are 2 growth opportunities for us. I think, then you look at the rest of the business, you got Fibre Channel is very large and mature. Certainly, wouldn't characterize it as a growth opportunity. But what happens underneath that is going to be kind of interesting to watch because there's definitely -- the analysts are saying that it's going to decline somewhere around 5 to maybe higher or single-digit in decline. But then you've got 16-gig coming in, in that space as a new -- as a bit of an upgrade cycle in front of us. You've also got target, which is $50 million to $75 million in opportunity.

We've got about -- I had the team go look at this because my biggest competitor likes to throw good numbers around here. But we've got about 50 design wins in that target segment. So we're going to be a meaningful player. We already are in the storage target space with some of the biggest storage providers putting us there. We talked about the EMC design win. So I think that some of those other things happening in Ethernet can offset some of that long-term decline. But how that plays out is going to be sort of interesting to watch. But hopefully, that gives you a bit of character around our business and where we see the growth.

Richard Sewell - Stephens Inc., Research Division

And then on my second question, where do we stand in the patent lawsuit with Broadcom? And then going forward, how are you looking at the Ethernet as the patent lawsuit kind of rolls off?

Jeffrey W. Benck

Well, a couple of things -- a couple notable things in the script and it's easy to get lost. We probably sound like we're droning on and apologize for that, but we want to provide some good color to you guys. As far as that goes, we did -- a nuance that maybe wasn't caught there, we did start shipping redesigned 10-gig product for revenue in the December quarter. So that was meaningful to get a redesigned 10-gig controller out.

And then we've got kind of new products launching in 10- and 40-gig that are next generation, that are coming out, that we announced in this month but will ship later this quarter. So those are the couple of things there that are opportunities for us to participate in the space that litigation might have kept us away from and looking forward to reentering the U.S. channel, looking forward to expanding our OEM position, looking forward to getting some business from the cloud customers. So clearly, see that as a new opportunity that's really just a -- we're on the precipice right now.

As far as the litigation itself, the spending's been coming down a bit, I think Kyle used the term waning in spending, so we're not spending quite as much on it. There are a couple of patents that are a part of a retrial that is rescheduled now for September. They are against the non-redesigned product, the product that we've been shipping now for 5 years and we're going to [indiscernible] on that and see how that plays out. But the fact that we've got a new roadmap, products that are coming into market and a redesign of the product that was under the injunction, puts us in a pretty good position there.

Operator

At this time, we'll move to Aaron Rakers with Stifel.

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

I just want to go to -- back to the operating expense discussion. You guys have obviously outlined your realignment of the $30 million that you're taking out, and I think the base was fiscal '13. I guess, just to ask it succinctly, how much of that do you expect to be reinvested in the model? And how much of that do you expect to maybe, for model purposes, for us to start to think about falling to the bottom line?

Jeffrey W. Benck

Yes. I think one thing that I think tripped folks up a bit is that we had acquired Endace, brought that on in February but didn't have a full quarter until the June quarter. And when you sort of wrap that around, Kyle talked about high-single-digit expense there. So when you look at the $30 million that was coming out, we're really looking to offset a substantial amount of the Endace spend. So it's not even so much as just reinvesting in something organic. It's just the company, with its revenue that they we're doing, had associated expense with it. And we're investing a little bit more in that because we added some sales folks, but we also took some synergies out of the business.

So I guess, I don't want you to think of it totally as this is some incremental investment, other than really just folding in Endace on a full-year basis in the kind of expense. So if we achieve the goal on expense and I'm pretty confident we will in the core business, that will -- may have a major impact in that in what otherwise would've been an expense profile, that would've been growing through time.

Kyle B. Wescoat

And also, just to correct it, this would be fiscal 2015 is the year, so starting June or July of this year. The other point I'll make is we said -- we believe that Endace -- I mean, one of the reasons why I came to work here, I believe in Endace. I believe in that particular space, and you can't pick up -- you can't read an article on the Internet or pick up an article in the Wall Street Journal that doesn't talk about the space in which they play. So being quick to market and being judicious about how we go about doing that, I think, is something that investors should applaud. Now we're not -- clearly not going to get out over our skis in any way, but I think that, given the heightened awareness of this particular situation and the fact that our products serve that market, I think you would want to see us try to exploit that as quickly as possible.

Jeffrey W. Benck

The only other comment I would say, just to think about this a little bit is I think we're doing a little bit better against the $30 million. Maybe I'll share that much. We're doing a little bit better, as you could see. I talked to $5 million to $6 million in the March quarter. And there's more to come out in front of us here as we get to July. I wouldn't say more to come out in this current year, because we've got work to get done in the next 2 quarters. But there's more opportunity from there to come down. So there's still benefit here left but -- and we're focused on really making sure we get the operating leverage out of the core business, even with the 10-gig growth opportunities that's embodied there.

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

Okay. I got a couple of quick other ones, if I can. So real quickly, on Lenovo, the acquisition of the IBM business, can you just remind us what your share position is within that IBM x86 server division?

Jeffrey W. Benck

I don't know if we've ever broken it out, but I can tell you that we are -- well, we've done a great job of gaining share in Fibre Channel at -- in IBM System x business. We became, last year, the leader in Fibre Channel share in that segment, so that's pretty important to us. Huge 10-gig customer for us and they've been a great partner from that standpoint. So meaningful. We're probably the market leader in terms of 10-gig business there with that customer. So solid customer, pretty important to us. I might mention, at Lenovo, in front of some of our competitors, we invested in China. jeez, when I joined 5 years ago, we started to invest in China and have a pretty strong presence there.

I don't know if you remember the last year, we won Supplier of the Year with Lenovo in its storage -- in their storage business. Now it was -- we were one of the few enterprise suppliers they had but we got recognized as Supplier of the Year and have had just a great relationship with Lenovo. So from that standpoint, we're -- we think this is good for the industry. We think there'll be investment here and this makes sense. In the short-term, though, and we talked a little bit about cloudy visibility. You just don't know exactly how customers are going to react. I think in the long term, this is net good. In the short term, it's not clear customers if will wait and see or watch this thing play out, this is going to take multiple quarters, if it's successful to get done, and that's factoring in a little bit in the way we think of our business because it is so large with these guys that we're just careful about that, I think, [indiscernible].

Operator

And we'll move now to Mark Moskowitz with JPMorgan.

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

Two questions if I could. Jeff, I wonder if you could just talk a little more about the revenue growth profile. Clearly, a lot of nice progress here on the easier lifting in terms of cost-cutting. But in terms of heavy lifting, how should we think about the model returning to growth and it's been turning x growth, a top in a positive growth here in December but now you're kind of modeling x growth again for March. I'm just kind of curious how investors think about the next 18 months. Can you firmly cross back over? Is it all going to be Endace? Or is it going to be other stuff around the target and Ethernet opportunity as well? I just have a question for Kyle afterwards.

Jeffrey W. Benck

All right. We'll come back then to you. Yes. No, I think that, again, it kind of comes back to it's not just Endace. It's also 10-gig and -- but it's not 10-gig in the current quarter as we talked about as being flattish because there's transition going on and the Grantley upgrade in front of us. So I think that when you look at us, we've done well in this Fibre Channel business. December quarter was a great quarter for us. And we've got a couple of these growth opportunities. We also have our Storage Connectivity business, which has held up pretty well.

We talked about 5% to 10% decline in that business in the calendar year, and that will continue in the next year. But I think a lot of it's going to hinge on what Fibre Channel does and how targets take -- comes on and if 16-gig is a more meaningful upgrade cycle. So while we really aren't in a position at this point to talk about '15 guidance, I think we can give you a little more clarity. We'll try to give you some more input in this May Analyst Day. We have now sort of put out there in the calendar, but it really comes down to these 2 growth engines and then the mature business and how that behaves and performs. Certainly, think that we feel -- see stabilization there in the business through time and growth beyond that, I think we've got to execute against the opportunities.

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

Okay. I appreciate the thoughts and I really look forward to this track, having covering you guys for a long time and it's good to see Emulex starting to really pursue a more sound fiscal discipline financially. With that in mind, Kyle, I was kind of curious if you could talk a little bit about your tool set that you've -- you've been around and seen a lot of different companies in your tenure as a CFO for various organizations. What have you learned that you think you can bring to Emulex to help drive revenue growth over the long haul while also trying to preserve the margin profile, which is quite above that of some of the companies you worked for previously? I mean, here, I'm thinking like VIZIO for example, where VIZIO has really jumped start the growth profile from a revenue perspective, but they were okay because they're comfortable with razor-thin margins. Whereas Emulex, much different story, very attractive gross margin, operating margin cash flow, kind of see -- how you kind of balance all that and what you've learned from your prior experience. I know it's kind of a load of questions. I'm sorry.

Kyle B. Wescoat

No, that's great. That's great. Mark, we haven't really spoken since the old VIZIO days, so good to reconnect. Yes, I think that [indiscernible] change agent and kind of be the guy who has -- is battle tested in the low margin end of the business. I think that one of the things that's happening is that the OEM market is really transitioning into an end user market and there's more -- much more attention on that. And as a result of that, I think it's a little different sell. It's a little different approach to how you do business. And so I think that I can bring some sort of experiences in that regard to what's going on here. I think that I said at the outset, just had a wonderful tradition in a -- it's been a terrific company. Yes, it's consistently been a great generator of cash. And so I think that what we want to try to do is to become that much better at it and really be very thoughtful about being -- whatever comments I make, make sure we make investments commensurate with where we are for the prospects for that line of business.

I think that in the current environment, it's a very delicate balance between buying market share or gaining market share because you've done a great job and you could turn that into profitability and some degree of growth. So I think it just -- it's in that regard, I think, that I'll bring some sensibility and some discipline to the company. Again, based on -- based from my experience in that rock 'em sock 'em kind of lowering to the market. It -- so hopefully, the team will put up with me and help me along the way. But I think that we can collaborate and get to a better place than where we are and squeeze out some more profitability as a result of it.

Operator

At this time, we'll take a question from Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

A couple of questions. First, maybe if I think about the Fibre Channel business, it sounds like you grew that in the 12% of the NCP segment. How much was 16-gig as a percent of that? And did the higher 16-gig pricing have a positive driver to the overall revenue growth of the company?

Jeffrey W. Benck

I don't think it was big enough to really move the needle in terms of the total. But it was -- basically, the 16-gig represented high-single-digit percent of our total revenue. So I think the analysts had predicted 10%. We didn't get to that. We didn't get to that. But it is starting to be deployed. Now that all the blade guys are out shipping 16-gig, that's great to see. We did see some pretty good sequential growth in it, but it's still small part of the total. So I wouldn't put everything on 16-gig. But it definitely helped move things in the right direction.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. And then when I think about just the revenue guide for the March quarter, I have it down 9% or a couple points on a year-over-year basis, is the restructuring efforts that you guy -- the efforts that you guys are undertaking, is that bound to have a negative impact on the revenue guide for March? Or is that headwind more further down the road for you guys?

Jeffrey W. Benck

We said, when Mike Rockenbach -- Kyle can blame Mike now for some of these comments. But Mike and I had talked a little bit about the March quarter -- the March, June quarter that we didn't think we could take out a tremendous amount of expense without some potential risk to the top line. And we know we talked a little bit about something like 2% to 4%. When you look at -- what we normally -- seasonally are down, March, I think last quarter was a little bit different. We were down much last quarter because our Storage Connectivity product had just a blah quarter, which was kind of unusual. So we're used to being down mid- to high single digits. Maybe this is just a skosh more than seasonal. But given all the restructuring and things going on, we're being a bit careful there and also just seeing what the macro looks like.

I won't say there's been a slowdown, but there seems to be more caution entering into the language in the industry. Just looking at some of the results of some of our competitors, some of our customers, there's been a little bit more cautiousness in the guides. And I think for us, I think our focus has been and has continued to be, we're going to deliver the profit and even if -- even at the expense of low-margin revenue, we're going to bias towards profitability. But I wouldn't read too much into this in terms of the business and where we see the opportunities.

Kyle B. Wescoat

I mean, one other point I've come out of some pretty fast-moving industries. But I've been here 3 weeks and I've seen more announcements by major suppliers of customers in that 3-week period than I've seen in any place I've ever worked. It's just been a remarkably high action-packed space right now and so I think -- in the near term, I think it does tend to make people a little bit more cautious.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Fair enough. And just finally for me, the buyback program, as you go forward, I think you said $44 million will be done this quarter in Q3. What's the time line for the remainder $100 million that you still have authorization for?

Jeffrey W. Benck

We talked about that because what you just stated I think is exactly accurate. We said that the $44 million would be complete by May, which isn't technically this quarter. It could happen earlier than that. But we just sort of put May out there in the script based on the agreement and the accelerated stock purchase program. We -- as you know, we did $56 million in direct transactions and then there's $44 million to go, which will -- we'll get through a lot of that this quarter. Our intent is to start in the second, underwrite [ph] as that completes, so that's kind of what we said related to when we made the announcement and we kind of stand by that and think that makes sense, given where the opportunities are and the fact that we did have a very successful $175 million of convertible debt offering and we've -- we're in a position where we've got the ability to do that. We'll look to do that in -- next quarter.

Operator

And now at this time, we'll go to Bill Shope with Goldman Sachs.

Bill C. Shope - Goldman Sachs Group Inc., Research Division

I have a question on OpEx and I'm sorry to be your third or fourth question on OpEx. But I want to make sure I really understand what you're trying to tell us about the push and pull between the restructuring and the growing Endace OpEx. I guess, the simplest way to ask it, and maybe you can just give us some color on this before the analyst day, is it reasonable to conclude that the absolute OpEx in fiscal 2015 is going to be materially lower than fiscal '13? Or should we be thinking it's closer to flattish?

Jeffrey W. Benck

It won't be -- fiscal '13 didn't have any Endace in it. So I think if you think about bringing the Endace business on and opportunity it represents and being able to absorb a significant amount of that with the connectivity business being leveraged or getting operating leverage out of that, I think that's pretty good progress. But I think that is sort of the way -- I don't -- it's hard -- we went back to 2013 and when we talked about the connectivity business because if you just look at -- if you try to take it off of the current business where we have half of Endace. Endace wasn't in for the full year. It got confusing, so I think we said just to -- harkening back to what was in the script from a bit ago, we said that, that connectivity business was $226 million in fiscal '13. And as we think of '15, we're thinking of it being south of $200 million. So what you can't do is just say, "Well, we're going to take this $30 million off of your FY '14 spend because that FY '14 had growing -- had Endace for the full year."

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Okay. So the restructuring balance is out of a lot of the growth in Endace OpEx? A lot of '13, '15 period?

Jeffrey W. Benck

Yes.

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Okay. And then my last question, and we're running up in here is when you look at this Grantley cycle, how are you thinking about it in terms of its impact on the server market and potentially your business relative to the prior platform cycles we've seen in the market? I mean, obviously, there's been -- some have been more significant than others. But when you think about it and think about the tech [ph] and how important it's going to be, how are you thinking about it?

Jeffrey W. Benck

Yes. Well, I was a big talker in the Romley time frame, thinking that Romley was going to be a major mover. So I'm a little hesitant to speak about the adoption of the next Intel platform. I know it is a major platform refresh and it does change a number of subsystems, so it's a great qualification cycle for both Fibre Channel and 10-gig products. So from that standpoint, I think that, that timing is good from that. When you got new products to be introduced, then you want to fold it in. I will say that our design wins -- well, Fibre Channel, we got design wins across the range as you might expect being a strong share participant there. But we've got more designs at Grantley than we had in the prior generation and that may not be that surprising, if you think about the fact that we had products that we're enjoying, that we couldn't go after a set of customers.

There were customers that we had won in the prior generation and we weren't able to market to them with products that were restricted. So -- but I'd say the other thing that may not be as obvious is that you got to have the technology that people want and you got to have the feature set that people are clamoring for. And I think we've got very differentiated 10-gig products. We got great virtualization capability, which this whole notion of overlay networks is really hot now and the talk on that, not only in the enterprise, but in the cloud data center. We've got hardware offload for that, that most of the competitions do not have. And we still have the natural advantages in storage offload like FCoE. We thought we've also got a much faster, lower-latency part than the prior generation. So generally, I feel like we've got great technology and it's good that there's a refresh cycle coming up. But beyond that, that's probably as much color as I can give you.

Operator

The final question will be from Jung Pak with BMO Capital Markets.

Jung Pak

My question is on 10-gig market and what the redesign view in terms of the U.S. market. Is that -- is the target customers based on the Grantley upgrade or it's anything before that?

Jeffrey W. Benck

The redesign product -- the redesign ASIC that was part of the injunction, is shipping into -- actually, not only Ivy Bridge, but the prior product platform. But we also have the next-generation ASIC that we're launching and that will also be introduced with Ivy Bridge. And I think we said that in the script. So not across as many customers as Grantley, but we'll start to participate in this Ivy Bridge cycle, although we're pretty far into Ivy Bridge and we've yet to really ramp that yet. But we're not fully dependent on Grantley to start participating there.

Jung Pak

So for the next couple of quarters then, your 10Gb, your revenues will depend solely on your current customers.

Jeffrey W. Benck

Yes, I would say it's -- I mean, certainly, it's probably directionally okay. You'll see some new customer launches from us, but they'll be ramping. So that's probably a reasonable characterization. I guess, you could judge our success by some of the announcement you'll see us make over the coming months in terms of the cycle of new products.

Frank Yoshino

Okay, so I would like to thank everyone for their participation in the Emulex Second Quarter 2014 Conference Call. Before we wrap, I wanted to let everybody know that we're currently scheduled to be attending the following investor conferences before our next earnings call: on February 11, we'll be at the Stifel Nicolaus Conference in San Francisco. We'll be -- February 12, Goldman Sachs in San Francisco as well. March 11, we'll be at the Piper Jaffray Conference in New York. We look forward to speaking with you at one of the upcoming investor events or on our third quarter earnings call at the end of April. Thanks for the attending the call.

Operator

Once again, this does conclude today's conference call. Thank you all for your participation. You may now disconnect.

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