QLogic Corporation F4Q10 (Qtr End 03/28/10) Earnings Call Transcript

Apr.30.10 | About: QLogic Corporation (QLGC)

QLogic Corporation (NASDAQ:QLGC)

F4Q10 (Qtr End 03/28/10) Earnings Call Transcript

April 29, 2010 5:00 pm ET

Executives

Simon Biddiscombe – SVP and CFO

H.K. Desai – Chairman and CEO

Analysts

Amit Daryanani – RBC Capital Markets

Katy Huberty – Morgan Stanley

Aaron Rakers – Stifel Nicolaus

Paul Mansky – Canaccord Adams

Mark Moskowitz – JP Morgan

Kaushik Roy – Wedbush Securities

Munjal Shah – Jefferies

Rajesh Ghai – ThinkEquity

Min Park – Goldman Sachs

Keith Bachman – Bank of Montreal

Jason Nolan – Robert W. Baird

Brent Bracelin – Pacific Crest

Harsh Kumar – Morgan, Keegan

Glenn Hanus – Needham & Company

Operator

Good day and welcome to the fourth quarter fiscal year 2010 QLogic earnings announcement. Today’s conference is being recorded. Now, at this time, I would like to turn the conference over to Simon Biddiscombe, Chief Financial Officer. Please go ahead.

Simon Biddiscombe

Thank you, Antony. Good afternoon and welcome to QLogic’s fourth quarter and fiscal year 2010 earnings conference call. Joining me on the call today is H. K. Desai, our Chief Executive Officer. I will begin the call with a review of the fourth quarter and full-year financial results and in addition, provide detail on the tax impact of our globalization initiative. H. K. will follow with a discussion of the current state of our business, a brief recap of fiscal 2010, and progress on our strategic initiatives. Afterwards, we will open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our 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 QLogic files with the SEC, specifically our most recent Forms 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 fourth quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. A reconciliation of GAAP net income to non-GAAP net income and a summary of the non-GAAP adjustments are included in our earnings press release. All of the references we will make on the call today relate to non-GAAP results unless otherwise stated.

Turning now to our financial results for the fourth fiscal quarter ended March 28th, 2010. Our revenue in the fourth quarter was $145.7 million, an increase of 12% from the same quarter last year. This revenue exceeded our forecasted range of $140 million to $144 million provided during our third quarter earnings conference call.

Our fourth quarter revenue from Host Products, which comprised primarily of fiber channel adapters and converged network adapters was $103.7 million and increased 17% from $88.4 million recorded in the fourth quarter of last year. Fourth quarter revenue from Network Products, which comprised primarily of fiber channel and InfiniBand switches, was $22.6 million and decreased 10% from $25.1 million recorded in the fourth quarter of last year, primarily due to the lower revenue from InfiniBand switch products. Our fourth quarter revenue from Silicon Products comprised primarily of fiber channel and iSCSI protocol chips was $16.7 million and increased 22% from $13.7 million recorded in the fourth quarter of last year. Silicon Products also include chips for embedded applications for converged networks.

Our revenue from royalty and service was $2.7 million. Our fourth quarter gross margin of 66.6% declined from 67.7% recorded in the fourth quarter of last year, primarily due to unfavorable product mix. Our gross margin exceeded our forecast provided during our third quarter earnings conference call due to product mix, primarily associated with the higher-than-expected revenue from Silicon Products and lower-than-expected revenue from InfiniBand switch products.

Next, I would like to cover our fourth quarter operating expenses. Total operating expenses were $55.5 million, up 4% from $53.3 million reported in the fourth quarter last year. Operating expenses were slightly below our expectations. Engineering expenses in the fourth quarter of $30.4 million increased 2% from a year ago and decreased as a percentage of revenue from 22.9% to 20.9%. We expect future engineering expenses as a percentage of revenue to be in the range of 18% to 21%.

Sales and marketing expenses in the fourth quarter of $17.6 million increased 4% from a year ago and decreased as a percentage of revenue from 13% to 12.1%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 14%. G&A expenses in the fourth quarter of $7.4 million were 5.1% of revenue. We expect that future G&A expenses as a percentage of revenue will be approximately 4%. Operating profit in the fourth quarter of $41.5 million increased 18% from a year ago and increased as a percentage of revenue from 26.9% to 28.5%.

Interest and other income was $1.5 million in the fourth quarter. Our income tax rate for the fourth quarter was 24.6%, resulting in an annual rate for the full year of 24.7%. The tax rate for the fourth quarter was consistent with our expectation and excluded the effect of the special charge recorded during the quarter related to the globalization initiative. Our fourth quarter net income of $32.4 million increased 32% from a year ago and represented a net profit margin of 22.3%. Our fourth quarter net income per diluted share of $0.28 significantly beat the $0.20 we achieved last year and exceeded the high end of our forecasted range of $0.24 to $0.26 provided during our third quarter earnings conference call. This represents the 59th consecutive quarter of profitability for QLogic. The income per diluted share calculation for the current quarter was based on 115.6 million shares.

Turning now to our balance sheet. The company’s cash and investment securities were $375.7 million at the end of the fourth quarter. We continue to maintain a strong cash position and have no debt. During the fourth quarter, we generated $69.3 million of cash from operations. During the quarter, we purchased $56.8 million of the company’s common stock at an average price of $18.56 pursuant to our stock repurchase program. Since 2003, we have used nearly $1.45 billion to repurchase 92.6 million shares of the company’s common stock.

Receivables of $73.3 million at the end of the March quarter decreased sequentially from $86.1 million at the end of the December quarter. DSO at the end of the March quarter improved to 46 days compared to 53 days at the end of the December quarter. We expect DSO in the future will range from 45 days to 55 days. Inventory at the end of the March quarter was $19.4 million and decreased sequentially from $21.8 million at the end of the December quarter. Annualized inventory turns for the March quarter were 10 compared to 9.3 turns for the December quarter.

Now, let me summarize the results for the full fiscal year. Revenue for the full fiscal year was $549.1 million. Non-GAAP net income was $117.7 million or $1 per diluted share and represented a net profit margin of 21.4%. During the fiscal year, we generated free cash flow of $137.2 million and purchased 10.1 million shares of our common stock for $165.5 million at an average price of $16.38 pursuant to our stock repurchase program.

Approximately five years ago, we implemented the globalization initiative to greatly expand our worldwide footprint. As part of this initiative, certain intellectual property and other rights were licensed to an international subsidiary of QLogic. During the fourth quarter of fiscal 2010, we recorded special tax charge for GAAP purposes of $29.7 million, primarily related to an amendment of the license agreement with the international subsidiary, which resulted in a fully paid up license. We determined that all obligations under the license agreement had been satisfied and accordingly, this will result in a significantly lower effective tax rate in fiscal year 2011 and subsequent years.

Turning now to the outlook for the first quarter of fiscal 2011. We expect our combined revenue from Host and Network Products to grow sequentially at approximately 3% and our revenue from Silicon Products to decline. We expect total revenue for the June quarter to be in the range of $140 million to $146 million. We expect gross margin for the June quarter to range from 65.5% to 66%. Based on this outlook, combined with the planned operating expenses of approximately $55 million, our projected annual tax rate of approximately 20% under diluted share count of approximately 115 million shares, we expect to achieve non-GAAP earnings per diluted share of approximately $0.27 to $0.30 in the June quarter.

Actual results for future periods may differ materially due to a number of factors, including those outlined during the course of this conference call, in the company’s filings with the SEC, and in the disclaimer statement at the end of our earnings press release.

I will now turn the call over to H. K. H. K.?

H. K. Desai

Thanks, Simon. My comments today will include a discussion of our business highlights for fiscal 2010 as well as the most recent quarter, followed by an update on our strategic initiatives.

Despite a very challenging macroeconomic environment, QLogic delivered solid financial performance for the fiscal year. This performance was attributable to continued share gains within our traditional markets, the introductions and ramp of innovative new products that provide us incremental business opportunities in the converged networking and 10-Gig Ethernet markets, extremely careful operating expense management and our reduction in our tax rate.

For fiscal year 2010, we delivered revenues of $549.1 million and non-GAAP net income per diluted share of $1. We achieved an operating margin of 27% and net profit margin of 21.4%, which is consistent with our long-term target of greater than 20% net profit margin. Our revenue in the fourth quarter was $145.7 million, a sequential decrease of 2%, but above our forecasted range of $140 million to $144 million provided during our third quarter earnings conference call.

Sequentially, revenue from Host Products was down 6%, revenue from Network Products was down 18%, primarily a result of lower revenue from InfiniBand switches and revenue from Silicon Products was up 93%. The fastest growing part of our revenue from Silicon Products was those serving the converged networking market. We also benefited from strong sequential growth for our fiber channel and iSCSI silicon products. Throughout the fiscal year, we remained sharply focused on our goals and business strategies and have executed very well against them.

During our fourth fiscal quarter, we continued to make significant progress on the three strategic initiatives that we have previously highlighted, specifically FCoE or converged networking, fiber channel and InfiniBand. In converged networking, we further extended our lead as the premier supply of single-chip Fiber Channel over Ethernet converged network adapters or CNAs. In January, we announced that about 8100 Series CNAs had completed certification and were immediately available for HP ProLiant DL and ML servers. The 8100 Series CNAs ensure continued availability of the same proven QLogic fiber channel stack broadly used by a majority of HP enterprise datacenter customers today.

In March, we announced that Cisco had certified and is shipping our 8100 Series CNAs with its unified company systems or UCS platform. Our products had previously been fully certified for use with Cisco’s Nexus 5000 Series FCoE switches, which are commonly deployed with a UCS platform. With the addition of our 8100 Series CNAs, Cisco customers can now take full advantage of the complete range of QLogic fiber channel and converged network adapters.

The addition of HPN and Cisco to the already impressive list of customers for QLogic converged networking products caps off a fiscal year of a tremendous achievement and the successful completion of our initial goals for the converged networking market. Just over one year ago, we announced our second-generation single-chip converged networking products. We followed that announcement with a succession of Tier 1 deployment, including IBM System x, IBM BladeCenter, NetApp, EMC, IBM Power Systems, Dell, HP, Cisco, and QLogic branded version of our worldwide channel partners.

These customers are now providing end users the full benefits of network convergence by deploying QLogic’s fully qualified and OEM deployed storage and Ethernet stacks with QLogic’s own cost-effective, highly integrated single-chip ASIC technology. We succeeded in our goal of early converged networking leadership by establishing a clear time-to-market advantage, leveraging our industry-leading storage and Ethernet stack, and establishing QLogic as a networking market leader.

Our ownership of all IP associated with our ASIC, fiber channel stack, and Ethernet stack give us a complete control over our technology roadmap, future production and a lifecycle management. This leadership position allow us to significantly benefit in multiple ways from the growing market for converged networking products currently estimated by Dell’Oro Group at approximately $50 million for calendar year 2010 and growing at a compounded annual growth rate of over 90% over the next few years.

During the quarter, our revenue from solutions serving the converged networking market grew approximately 50% on a sequential basis. Turning now to fiber channel, based on this week’s announced results, we believe that we capture revenue market share for fiber channel adapters during the first calendar quarter and expanded significant leadership position that we enjoy exiting 2009.

According to Dell’Oro Group’s calendar Q4 2009 SAN report, our revenue market share for fiber channel adapters was 54.4% in calendar year 2009 beating our nearest competitor by 16.5 percentage points. This represents the sixth consecutive year of market leadership and share gains. Turning now to fiber channel switches. We are seeing a shift in our favor, which we believe will allow us to expand our global market share in the fiber channel switch market. In February, we announced that our 8-Gig stackable fiber channel switches are now available from HP as a scalable SAN solutions for use with HP server and storage portfolios, including HP’s Blade system, Virtual Connect, HP StorageWorks, MSA and EVA systems.

Branded as the HP StorageWorks SN6000, the switches incorporate QLogic’s unique intra switching technology, which significantly reduces total cost of ownership compared to non-stackable alternatives. The switch is innovative, dedicated 20 gigabit per second fiber channel stacking ports made it possible to connect switches together without utilizing valuable user ports. By reducing cable and connection costs while enhancing SAN performance, the SN6000 enables lower capital and operational expenditures. Revenues from this solutions comments in our fourth fiscal quarter and we expect a more meaningful revenue contribution later this year.

In March, we also announced the availability of our 8-Gig stackable fiber channel switches for the EMC Select programs as well as scalable SAN solutions for a broad range of EMC network and Unified Storage systems, including Symmetrix and CLARiiON portfolios. The switches are available worldwide from EMC and its partners and have been qualified through the EMC E-Lab.

Turning now to our InfiniBand initiative, during the fourth fiscal quarter, we introduced the Dell QDR Blade mezzanine card in conjunction with the industry’s first Quad Data Rate InfiniBand Pass-Through Module. The Pass-Through Module is now available for Dell PowerEdge servers in high performance computing environments. The new module designed specifically to address Dell’s HPC customer’s requirements eliminates the latencies associated with internal switch hubs, by connecting BladeServers directly to the external QDR InfiniBand port switch, typically found in a large HPC cluster. In additions to the Pass-Through Module and QDR Blade mezzanine card, Dell offers QLogic end-to-end QDR InfiniBand adapter and switch solutions worldwide.

In closing, we are very confident that we have placed our focus on the right set of strategic initiatives which will continue to benefit us in fiscal 2011 and beyond. First, the server update cycle which commenced in 2009 is continuing and will benefit us as a result of our market-leading position in the fiber channel adapters. Second, our network products are better positioned to experience revenue growth and capture market share for both fiber channel and InfiniBand switches. Finally, in the converged network adapter market, based on our time-to-market advantage, technology superiority and a significant number of publicly-announced Tier 1 OEM customer shipping our products, we expect to further extend our lead as enterprises transitions to converged networks.

Datacenter is focused on even greater efficiency through virtualizations, lower power consumptions, increased bandwidth in smaller footprint and converged networking technology. We will continue focusing on these aspects while driving higher performance and greater ease-of-use through highly innovative products based on our own IP. This concludes our prepared remarks.

Operator, now we will open to the questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from Amit Daryanani with RBC Capital Markets.

Amit Daryanani – RBC Capital Markets

Thanks. Good afternoon guys. Starting up on the HBA side, if I look at the business in March quarter, it was down a little bit more than what we thought it would be at least and looks like the June guidance in line with seasonal trends. So I am just curious, a, did you see a positive sever refresh cycle due to the late launch of Nehalem, and then thinking about a 3% sequential growth in June, it doesn’t look like you are still seeing any outsized benefit versus seasonality from the refresh cycles, could you just talk about that?

H. K. Desai

Amit, this is H. K. We make what the guidance we gave. Normally, (inaudible) 5% to 6% decline in the March quarter and that’s our average for last few years. And we based our guidance on about to 5% to 6% declining on this Hosts business. And I think that’s what we are seeing. So, I don’t think we see anything different. Only trend we saw was that the first month was very strong and it kind of slowed down in February and I think we expect that one because of the supply challenges some of our OEMs has, and I think March was very strong. So, I think we haven’t seen really any unusual.

Amit Daryanani – RBC Capital Markets

Got it. And then, H. K., could you just, you talked about the CNA markets, the converged network markets quite a bit, could you just talk about what sort of market share do you guys currently think you have based on the ’09 numbers at least in the FCoE market? I think Emulex last week had talked about 57% plus market share, and sort of how do you see this market develop going forward and how do you see your market share probably move throughout 2010?

H. K. Desai

So, we are not providing any guidance to the CNAs because we want to make sure that the market get mature and there is a consistency that when you grow before we allow, because it’s a technology. So, we don’t what’s going to happen at least next few quarters. So, we don’t really publicly announce any of the data you see from, for example, Infonetics or something. So, I don’t know where they get the data for the CNS market share. So, we haven’t announced anywhere about the CNS revenue.

When we look at that data and we look at our competitor, we believe that what we have seen is that we have a much, much bigger market share. Our revenue number is much, much bigger than what our competitor has shown in that data.

Amit Daryanani – RBC Capital Markets

All right, and just finally, 8-Gig, what percent was that as a percent of HBAs?

Simon Biddiscombe

Around 30%.

H. K. Desai

Around 30%.

Amit Daryanani – RBC Capital Markets

All right, thanks a lot.

Operator

Our next question comes from Katy Huberty with Morgan Stanley.

Katy Huberty – Morgan Stanley

Yes, thanks, good afternoon. I wonder if you can just update us on why the Network Products business continued to decline into no recovery, and I know H. K., you made some comments about that the fiber channel in InfiniBand switches well positioned. How long do you think it takes to get back up to the $30 million quarterly run rate in that business?

H. K. Desai

So, what we have, I think that what we have seen is we declined lot more than what you expected in the March quarter, and that came from IB Switches. We did not perform in the IB Switches as what we expected. Fiber channel switches was reasonably what we expected. It’s slightly lower than what we expected, but it is not as bad as InfiniBand is. So, what we have seen is all this design, which we have seen recently and what we said in the prepared remarks script that we probably started seeing the growth in the second half of the fiscal 2011 for the fiber channel switches particularly.

Katy Huberty – Morgan Stanley

And was the light InfiniBand switches, was that related to product cycles or execution or is something going on in the market?

H. K. Desai

I think it’s more on – we saw this design win, our go-to-market model was little different in the previous quarters and we started shifting that to the more OEM-focused. We see a lot of design wins in the December quarter. I think it takes about a couple of quarter before we start seeing it. So, we expect our IB revenue to go sequentially up this quarter and forward.

Katy Huberty – Morgan Stanley

Okay. And then my other question is around the silicon products business, what drove the significant increase this quarter and why is a teen revenue run rate in that business not sustainable?

Simon Biddiscombe

If you look at the – Katy, it’s Simon, if you look at specifically what drove the performance last quarter, everything was very strong, fiber channel protocol chips, iSCSI protocol chips, actually the fastest-growing part silicon line right now are those products that the converged networking opportunity. So, we show great strength. As you have seen in the past, this silicon line does tend to be a little choppy, and we would experience that over a number of quarters. It’s primarily associated with the lead times, the fact that more participants in the supply chain are OEMs and they contract manufacturers, tend to place orders that reflective of lead time. Sometimes we can deal with those issues through inventory that we have. Sometimes you end up with choppier patents because we are satisfying demand in different periods and it may actually exist and so on.

So, it has been a little lumpy. If you take the midpoint of guidance range that we provided to you, you end up with somewhere around $11 million silicon number. I think our expectation as we look forward over the course of the coming years that will sit somewhere close to that kind of level based on what facts we have in hand today. It’s certainly improved from the $7 million to $8 million to $9 million that it had been running through the first part of fiscal 2010, and $11 million feels like an appropriate rate to have about for the remainder of the year for now, but other than that, it’s choppy in the past and it will probably be choppier in the future.

Katy Huberty – Morgan Stanley

Okay. Thank you. Nice quarter guys.

Simon Biddiscombe

Thank you.

Operator

Our next question comes from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yes, thanks guys. If I can go back on that last question a little bit and maybe push back a little bit, so I mean, I think when you guys had given guidance and I think we had questions last quarter, you had alluded to the silicon business as being more or less flat sequentially.

H. K. Desai

Yes, that’s right.

Aaron Rakers – Stifel Nicolaus

So, I think it would be helpful to understand what the bigger swing factor of the delta was in that business to the upside relative to that assumption?

Simon Biddiscombe

As I said, everything performed better within the silicon business than we had expected it to do so. When you gave the commentary which said that we expected the silicon line to be roughly flat to $8 million right, so it’s clearly within the overall performance of the company versus the guidance that we provided you back in the January timeframe over-performance relative to the midpoint of the guidance that we gave you and relative to the high point of the guidance, and then some of the silicon improvement offsetting some of the weakness that we saw primarily in the InfiniBand switch business.

So, across the board, fiber channel protocol chips, iSCSI protocol chips and chips serving the converged networking opportunity were better that we had expected them to be. Now, we are able to deal with some of the customer demand, because we hold inventory of certain of those products at various points in time, not necessarily all, and the lead times do tend to cause customers to place orders that can be for larger quantities than they expect to consume in any individual short period of time, right. So, even you see that to be choppier, we move forward. But we were in a very good position to be able to satisfy the incremental demand that occurred over the course of the quarter.

Aaron Rakers – Stifel Nicolaus

I wanted to be clear that there was no one-time end-of-life thing in that?

H. K. Desai

But I think the only thing is this is my own personal view, and if I look at the 40,000 feet, Aaron, it might be because of the fab capacity. People keep hearing about the fab capacity issue and maybe our customer decided that it’s better to order more and get the parts now versus missing it in the future. So, that can be one reason I think wafer demand increased than what we expected.

Aaron Rakers – Stifel Nicolaus

Okay. Couple of other questions real quickly, on your incremental opportunities in the SAN switching market in particular for HP as you see that ramp in the back half of the year, what type of incremental revenue run rate would you attribute to that?

Simon Biddiscombe

So, we are not good office specific dollar at this point in time, Aaron. What we have said is that with HP and EMC, very important rights to market as it relates to the fiber channel switch market for EDGE switches essentially right. So, clearly there is opportunity there that we haven’t been able to serve in the past, and we look forward to being able to deliver the incremental performance later in the year.

Aaron Rakers – Stifel Nicolaus

And tax rate, final question, tax rate of 20%, is that the right level, or can you actually bring it lower than that?

Simon Biddiscombe

Yes, 20% is the right place to have it right now. This most recent quarter and the charge that we took was the culmination of a five-year project that we have had ongoing to essentially more closely align our business with our customers’ businesses. So, we think that to put it in a 20% as a tax rate for now is absolutely the right place to have it and we will work very hard to make sure we keep that as low as possible.

Aaron Rakers – Stifel Nicolaus

Thanks guys.

Operator

We will hear next from Paul Mansky with Canaccord Adams.

Paul Mansky – Canaccord Adams

Thanks for taking the questions. We have heard a lot about several different programs that you especially kicking during the course of the next 12 months and obviously in the backdrop of that, we have ultimately some point in time the server upgrade cycle kicking in. As you line up all the inputs, how are you thinking about gross margin trends specifically over the course of the next year?

Simon Biddiscombe

Paul, it’s Simon. We have roughly 65.5% toward 66% kind of number, very mix-centric as you will imagine. You saw it in the most recent period and Silicon carries a higher gross margin than the Host and Network businesses do, and we benefited from that from the most recent period. As you look forward into the current period, the gross margin comes down a little, primarily because the silicon comes down, and also because we expect the royalty and service line to be a little bit lighter, but I think as we look at the mix of our business, we are comfortable that over the course of the next year, we are going to maintain 65.5% to 66% gross margin and hopefully be able to overachieve.

Paul Mansky – Canaccord Adams

Perfect. And then if I can go back and revisit the InfiniBand switch weakness commentary, obviously one the former merchants-only suppliers has made a bit of a push into the market at the device level. Was that a contributor to that weakness or is there anything else specifically you can kind of point to, to help us get our arms around that, given some of the performance from some of the others in the food chain.

H. K. Desai

No, Paul this is H. K. No, we don’t see that. I think it materially is related to what timing of the design wins. I think we are kind of a shifting like I said in a grow market model, we were focusing a lot into the channels, and end user and so on, and we decided that our model really matched where we need to make sure the qualification is done in the OEM. We focused tremendously on that, but it’s always by qualifications to going into the production, it takes some time. I think that’s what the reason right now and we see we expect sequential growth in the IB switch market this quarter and going forward. So, I think it’s just design win timing to go in a production. So, all with a couple of quality lags, always will be the OEMs.

Paul Mansky – Canaccord Adams

Thanks H. K., and then lastly just a housekeeping, Simon, what was headcount during the quarter?

Simon Biddiscombe

Our headcount was down slightly in the quarter. We exited at 1,018.

Paul Mansky – Canaccord Adams

1,018?

Simon Biddiscombe

We have done 27 hires or so.

Paul Mansky – Canaccord Adams

Okay. Perfect. Good job on the tax rate.

Simon Biddiscombe

I appreciate it, thank you.

Paul Mansky – Canaccord Adams

Thanks guys.

Operator

Next, we will hear from Mark Moskowitz with JP Morgan.

Mark Moskowitz – JP Morgan

Yes, thank you. Good afternoon. Coming back to silicon real quickly here, I am just curious Simon, why wouldn’t the gross margins for the corporate even be better just given the huge upside or whether greater pricing pressures in Host or Network that provide us some counter?

Simon Biddiscombe

Let me answer the second part first. There was no greater pricing pressure in Host than we would normally see, Mark, nor in Network actually. So, there wasn’t anything going on with ASP erosions in Host business that’s anything other than the normal ASP erosion that we would expect to see. When we look at the gross margin on silicon business, and we never break that out for you, right. So, you don’t have that number as such, but when we look at the gross margin on the silicon business, the performance of 66.6% was right on what you would expect it to be.

So, you shouldn’t expect it to be higher than the number we delivered. It’s very consistent with the incremental margin that we do enjoy on silicon. We do enjoy incremental gross margin percentage on Silicon. But what we delivered is very consistent with what you should expect.

Mark Moskowitz – JP Morgan

Okay. And then the flick on inventories on your customers, will there be an overhang as we go through the June quarter or do you think you can kind of chug away through that?

H. K. Desai

So, I mean, that’s why I think we gave a guidance for this quarter for example, we said that we are going to decline the silicon business and we consider that, that if they have inventories they are going to probably deplete this by June. So, what we expect looking at all the data what we have is that we expect our silicon revenues should be around $11 million through the midpoint of our guidance and that should be flat going forward. For the full year, now, we have said that before in the past and we haven’t performed what we said and it’s because the business is very choppy.

I think one thing what we do is like we always skip inventory with ours for the silicon and if the customer demand come in within the quarter, we are able to satisfy these things. So, right now, it looks like we should be able to do that, but I think where we are – if you look at even last year 2009 when we gave our guidance, we said that we should have about $35 million, $36 million, $37 million overall revenue for the year actually we were right there. I think quarter-to-quarter, it’s going to be choppy and it’s going to be very difficult for us predict what’s happening.

Mark Moskowitz – JP Morgan

Okay. And then to my last question, H. K., can you maybe address a little more of the fiber channel switch opportunity? I know you and I like to debate in the past about market share opportunities in Host and typically you are actually right much more in the items. I just wanted to get a sense more about the fiber channel business, where do you guys think you are in terms of the displacement opportunities. Do you have to put that education in force intact here or are you guys already ready to go?

H. K. Desai

I think I am right, because I am much older than you. So, see, it’s – you know what, what we have been – if you look at our switch project in the past, it’s always lot more based on the channel and lot more based on the Tier 2 OEMs and so on. We really never had qualification done as a Tier 1 OEMs like what we have seen with HP and the Select Program for the EMC. So, I think first time we are seeing a route-to-market for our fabs and switch product which is better than we ever seen it.

Now, it’s always taken time between qualifications to the revenue. So, we expect the revenue to come probably by second half. What is going to be, so I think difficult to project, because there’s always a strong competitor, already have footprints in the market. So, we are hoping that we start and getting some share in the second half of the year.

Mark Moskowitz – JP Morgan

Thank you.

Simon Biddiscombe

Mark, it’s Simon, that’s $1 billion market approximately. So, every point of share that we are able to move in our direction is $10 million of incremental opportunity for QLogic to serve right, but that’s significant number as it relates to our switch business and we have been able to move from the high-single digits market share that we enjoy today, up by a point here and there. It will be an important driver for total QLogic as well.

Mark Moskowitz – JP Morgan

Maybe you could give us some commentary around the gross margin, as you do get greater scale, could we think about fixed hand part of the business from a gross margin perspective.

Simon Biddiscombe

We have always characterized mid-50s, Mark. There is no need to put a six on the front of it at this point in time. I think continuing to have it at mid-50s is appropriate.

Mark Moskowitz – JP Morgan

Okay, thank you.

Operator

And we will hear next from Kaushik Roy with Wedbush Securities.

Kaushik Roy – Wedbush Securities

Thanks, I have a couple of questions. Going back to switches again, on InfiniBand actually, because the ATAs are highly correlated to IB switches, was IB HDA’s weak too or it was okay.

H. K. Desai

It’s probably a little weaker than what we expected, I think mostly we are providing solutions. So, it’s weak on both sides, yes.

Kaushik Roy – Wedbush Securities

And then you mentioned that the fabs is growing in silicon versus CNA ships, can you give some color as to who are the customers and to what products those CNA chips are being used, are those going to cars or mother boards.

H. K. Desai

No, I think that’s competitive information which we never provide you, Kaushik.

Kaushik Roy – Wedbush Securities

Okay. One last question, Simon you said about 11 million per quarter in Silicon for the rest of the year. That means about $44 million for the full year, which is not much growth, which is actually just 4% year-over-year growth. Is this because the fiber channel chips can come down or because the CAN chips may grow just single digits.

Simon Biddiscombe

It more so sits with fiber channel element. Kaushik, if you go back to the first part of fiscal 2010, and then throughout 2010, we had 2-Gig fiber channel chips that we are shipping, okay. That’s going to roll off over time and in many instances when they started mezzanine card solutions of 4-Gig and 8-Gig instead of 2-Gig chips to people who would then manufacture their own fiber channel products. So, you should not read into this that we expect the converged networking business to do anything other than grow strongly. You should read into it that there are some older technologies that are just going to diminish overtime.

Kaushik Roy – Wedbush Securities

Okay. Thank you.

Operator

Our next question will come from Munjal Shah with Jefferies.

Munjal Shah – Jefferies

Hi, thanks guys. One question, H. K., I mean think that there was a question on this, but could you kind of talk a little bit about the server refresh cycle, what you saw at the quarter-end, what’s the impact of new Intel chips, because they came on right at the end of the quarter. Did you see any positive results; do you see any pent-up demand going into Q2?

H. K. Desai

No, we did not see any pent-up demand going into Q2, but this is also seasonally slower quarter for us anyway. So, I think what we probably start seeing more refresh revenue for the second half of the year, Q3 and Q4.

Munjal Shah – Jefferies

Okay. And could you, Simon, characterize how big, I mean, I know you don’t’ break it out your network business but maybe on an annual basis, could you just give us a sense of big fiber channel versus InfiniBand is?

Simon Biddiscombe

You said it correctly, we don’t break them out, but did tell you earlier in the call, Munjal that we have high single digit share in the $1 billion fiber channel switch business right. So, you can figure out how big the IB switch business is based on that.

Munjal Shah – Jefferies

Okay. All right. Thank you.

Simon Biddiscombe

There are some other products in there as well, you will get close.

Munjal Shah – Jefferies

Okay, thanks.

Operator

We will take next from Rajesh Ghai from ThinkEquity.

Rajesh Ghai – ThinkEquity

Yes, thanks. Congratulations on a strong cash flow performance.

Simon Biddiscombe

Thank you.

Rajesh Ghai – ThinkEquity

Just one question following up on the silicon business question. How much visibility do you specifically have at the beginning of the quarter as far as that business is concerned, and how much is typical lead time of the turnaround time that your customers typically expect from you?

H. K. Desai

So, so –go ahead. Sorry. Go ahead.

Rajesh Ghai – ThinkEquity

That’s enough.

H. K. Desai

So I think what we said is that normally it’s about 12 to 16 weeks lead time, and we give OEM that 12 to 16 weeks time, but then you will be held at anyway. So, we have done is that we always carry inventory of the Silicon, because sometime if you don’t invent it and we cannot satisfy, may times you have seen it during the quarter. So, we know exactly what’s going to happen during this quarter for the Silicon, but during the quarter, many times they go and demand the product and their requirements. We go and fulfill that, because we carry the inventory, add that’s why it kind of fluctuates.

Rajesh Ghai – ThinkEquity

Okay. And can you update us on how you feel the CNA market is going to be this year. In the past, you have talked about the size of markets, but at the end of 2010, being close to 50 million, do you have any update on that based on what you saw this quarter and what you see in the pipeline?

Simon Biddiscombe

No, I think Rajesh, this is Simon, we actually said in the prepared comments that we thought that the CNA market would be up by $50 million this year. We are very comfortable with the level of share that we have in the market as H. K. said in response to Amit’s question at the very beginning of the QA session here. I think we are doing very well, I would execute in the competition. We are not going to share the dollars that we have, but as H. K. said, there were businesses significantly large in our nearest competitor in the space. So, I think we are well setup to enjoy the majority of the shares we moved forward through the year.

Rajesh Ghai – ThinkEquity

Okay. Great. And on the InfiniBand side, in the past you talked about it being very niche protocol and probably being used only at the HPC market, and given what’s been, given the Oracle announcement recently where they talked about InfiniBand being used across the card suite in general, do you think have your expectations for InfiniBand have changed as a result, and given the way your business has been going in that, are you happy with the way the business is going with commensurate of the investments you are making?

H. K. Desai

So, let me answer this little differently. What we have done in the past is that we always want to make sure we have our insurance policy again some new technology coming into play. When we are strongly in fiber channels, iSCSI came in, and we said, you know what, we got to take an insurance policy on that. We acquired the company, we invest, and we continue investing in that. Then certainly the FCoE happened, so the iSCSI becoming not that important, because it’s going to converge technologies, not going to be the iSCSI – Ethernet iSCSI, but it’s going to be FCoE. So, we are focusing a lot more on that.

At the same time, we also thought going backward for few years ago that we can become one of the – can get traction in the enterprise datacenter. So, we want to make sure that we go and take a bat against that, we invest into these things. We are not seeing that because of the FCoE coming into play, we invested in the IB before the FCoE coming into play, and now FCoE coming into play, the convergence is going to happen on Ethernet that is going to be storage and it’s going to be data or eventually it’s going to be the HPC 2. So, we believe the long-term IB is not going to be a technology for the datacenter convergence. It’s going to be really the FCoE.

So, what we are doing is we have invested in these things, we will continue investing, because we have OEM customers and it’s going to be just like what you are enjoying, the iSCSI will enjoy some revenue in profit.

Rajesh Ghai – ThinkEquity

Okay. And one last question on the lowering of the tax rate, obviously that clearly increases the earnings power for the company and clearly that’s a big deal. Can you just provide a little bit more color beyond what you have in your prepared remarks as to how that lowers the tax rate in terms of what exactly have you done that kind of breaks down in my case?

Simon Biddiscombe

Sure, Rajesh. This is a very typical technology company; in fact any major company that has international operations will have this type of structure in place, right. So, in many ways you could argue that QLogic was later coming to the market because of the specific US nature of our business that existed 5 or 10 or 15 years ago, right. So, what we did beginning 5 years ago was essentially realigned the business to more appropriately support our OEM customers increasing global activity. So, that means multiple international manufacturing locations, (inaudible) continue to supply to ensure cost competitiveness, they ensure that we are manufacturing closer to the actual component providers and to the customers as well. It involved putting in place international fulfillment centers, so our product staged overseas. That improves time-to-market or time-to-delivery for our customers; it improves the cost of delivery for customers. It improves our ability to manage inventory.

It involved an expansion of our global sales force into geographies that they haven’t previously participated in, in order to support the OEM efforts that were ongoing in those places, and to a certain extent, it even involved the setup of international development centers, right. So, with this entire globalization initiative, which is obviously very expensive to implement, there are series of benefits that we realized and one of those benefits is overtime a lower tax rate and in the most recent period, we were able to finalize, the agreements have been in place for many years, and there we are in a position where we are going to enjoy those lower tax rates as we move forward.

Rajesh Ghai – ThinkEquity

Great, thank you. Congratulations.

Simon Biddiscombe

Thank you.

Operator

And we will hear next from Min Park with Goldman Sachs.

Min Park – Goldman Sachs

Great, thank you. Just on the HBA side, I think you said earlier about HBA’s performed mostly as expected this quarter, but the silicon revenue actually came in as expected around, they changed, so it would have missed or always come at the very low end of your target range. So, I was wondering if you can just give us a little bit more color on what happened in the quarter.

Simon Biddiscombe

I think we have tried to answer this several times. I think IB business performed more weakly than we had expected to. So, you are right. We had essentially $8 million more silicon revenues than we had expected to. We performed at about $3.7 million ahead of the midpoint of the guidance range we provide to you, and then the IB business was weaker than we had expected it to be. So, there is an element of the silicon business offset weakness in IB, and there is an element of the silicon business that allowed us to overachieve routed to the midpoint of the guidance.

Min Park – Goldman Sachs

Okay. And then staying with the HBAs, can you give us a little color on how your HBA business performed in the X86 environment versus Unix at HP and Sun?

H. K. Desai

So, we performed well on both sides on the Unix or customer for Unix and also for the X86, and I think we believe that we performed actually well on the X86, and I think we believe what we have seen it so far with the public data that we again gain market share in the x86. So, if we look at our overall customer base, actually two OEMs, if you look at four Tier 1 OEMs, two were flat for the quarters, even though it’s supposed to be declining about 5% or 6% for the reason, but the two of them were flat and the two declining.

Min Park – Goldman Sachs

Okay. And then on the networking side, do you actually expect your OEM partner to start carrying inventory or your switches?

Simon Biddiscombe

So, we enjoyed – which OEM partner, I mean?

Min Park – Goldman Sachs

HBA, are they going to carry fiber channel switches on their own inventory?

H. K. Desai

We have a same hub arrangement what we have with HBA and the switches. So, it’s just a hub arrangement, we will put in the hub, and they will pull from the hub. So, there is no inventory really on this area.

Min Park – Goldman Sachs

Okay. And then lastly, is there – can you chip it any part of the weakness in the IB, stemming from 10-Gig Ethernet pushing into the HPC market?

H. K. Desai

No, I think the IB was if you look at the publicly available data, I think the other guys have performed really well and I think it’s all our issues of the timing of the design with the OEMs, I think that’s the reason our performance is weak this quarter and hopefully we will be able to continue sequential growth going forward.

Min Park – Goldman Sachs

Great. Thank you very much.

H. K. Desai

It has nothing to do with the 10-Gig Ethernet or something. I think HPC market, IBM is going to continue IB for a long, long time.

Min Park – Goldman Sachs

Okay, great. Thank you.

Operator

We will hear next from Keith Bachman with Bank of Montreal.

Keith Bachman – Bank of Montreal

Hi guys. Simon, is there converged network adapter revenue in Host products?

H. K. Desai

Yes.

Keith Bachman – Bank of Montreal

And so –?

Simon Biddiscombe

Keith, just to be clear, and this is one of the differences between ourselves and our principal competitor. In our host number, there is fiber channel adapters, there is converged network adapters, there is iSCSI adapters, and there is InfiniBand HCAs as well, okay. So, there are FCoE adapters in the host number, and then in the silicon number, there are FCoE, iSCSI and fiber channel numbers associated with us selling a chip to somebody who either wants to put it down or wants to manufacture their own mezzanine cards as well. So, we have fiber channel iSCSI, FCoE technologies in both the host and the silicon line. And it’s typically the same chip, right.

H. K. Desai

Yes, so what we do, what Simon trying to say that what we don’t do is we don’t put the silicon into our host business.

Keith Bachman – Bank of Montreal

I get that. Let me just ask another question. It’s very tough to judge this quarter frankly, because investors haven’t had a whole lot of confidence in your silicon products, the sustainability or the volatility of that number makes people assign a higher risk to that number, because it has moved up and down so much over the last couple of years. Is there any indication, it was up 100% sequentially, can you give us some sense about the percentage of that or dollar amount or anything related to CNA that drove that, can you peel the onion back a little bit for us?

H. K. Desai

You are talking about on to the silicon?

Keith Bachman – Bank of Montreal

Yes, how much of the CNA side or converged network of that business was driven by the converged network silicon that you sold?

Simon Biddiscombe

So, we are not going to give you the dollars, Keith. What we said was that the silicon for the converged network was the fastest growing part of that silicon line.

Keith Bachman – Bank of Montreal

Yes, it doesn’t help a lot. It’s just – I leave it; it’s just very difficult to judge success of this quarter when you look at the different revenue categories because we can’t judge you relative to Emulex, because you are putting the numbers in different buckets. So, I will leave that for food for thought and see the floor.

Simon Biddiscombe

So, Keith, I think it’s different, okay. Emulex told you that board business was down 17%. They said that on that call, right?

Keith Bachman – Bank of Montreal

Yes.

Simon Biddiscombe

I am telling you our board business was down 6%.

Keith Bachman – Bank of Montreal

Right.

Simon Biddiscombe

I think that’s pretty straightforward.

Keith Bachman – Bank of Montreal

Yes, it may be better than that, right, if we could just somehow capture because it sounds like converged network is going to be really interesting over the next 12 months, over the next 18 months, and it’s hard to look at your results and understand how well that product category is doing, because it is in two different line items, and it’s just hard to understand exactly what it’s doing.

H. K. Desai

Understood. So, what Keith wanted me to do is like what we said once we – I mean I have seen this saying in the fiber channel transition that what we have seen is that when the market transition happen or the technology transition happen, it’s very difficult to give any guidance. We don’t believe in giving any numbers on those revenues, because it’s going to take some time. There has to be stability and the growth has to be continued. The market is still just starting any way. We are growing every quarter, we said we are growing 75% and we are growing 50% sequentially. So, our converged network business which includes everything for example includes the CNA and excludes the Silicon. That’s what we gave you as all converged solutions grew about 50% sequentially. So I think that’s continuing. What we are saying is as the time goes when we give the data about, we also start giving the colors, even though we will put CAN into the parcel of Host and the Silicon, Silicon will give you the color of overall conversion network, what’s going and it will give you that color. So, you will know what’s going on.

Keith Bachman – Bank of Montreal

Okay, thank you.

Operator

We will hear next from Jason Nolan with Robert W. Baird.

Jason Nolan – Robert W. Baird

Yes, thank you. Simon, just some more housekeeping questions. I believe you guided F Q1 to OpEx of $55 million?

Simon Biddiscombe

That’s right.

Jason Nolan – Robert W. Baird

And G&A for the year around 4%, so should we expect R&D kind of flat to down from these levels and S&M flat to up into the June quarter?

Simon Biddiscombe

The way I have got them modeled right now, Jason, for the June quarter, I am looking within the context of $55 million, and engineering expense level that’s roughly flat. Sales and marketing number, that’s up $500,000 to $600,000 and then a G&A number that’s down about $900,000. So, that gets you from 55.5 in Q4 to 55 in Q1.

Jason Nolan – Robert W. Baird

And what happened in G&A for to drive such a substantial change?

Simon Biddiscombe

So, obviously payroll costs are a big element of the fourth quarter with the reset of payroll tax levels and so on.

Jason Nolan – Robert W. Baird

Okay. Last question from me on the balance sheet, some of the metrics there were very strong. DSOs and turns looked great. I assume those are unsustainable at these levels?

Simon Biddiscombe

I mean, on the inventory side, I am very comfortable. We told you for an extended period that we would drive and do out a 10 turn number. So, I think the inventory is just about right. The 46 days DSO I think, my team did a fantastic job colleting cash, and I suspect that will creep back up, but 45 days to 55 days is the range we stated for DSO, and I think we will comfortably stay within that 45 days to 55 days range, but 46 days was an extraordinary effort on the part of the team. So, inventories I think we can keep it 10 turns, DSO probably creeps a little.

Jason Nolan – Robert W. Baird

Thanks guys.

Operator

We will hear next from Brent Bracelin with Pacific Crest.

Brent Bracelin – Pacific Crest

Thank you. I apologize here for beating a dead horse, and I am going to ask another question on silicon, maybe take a different approach here. As you think about that silicon business, if you kind of flat line your guidance here going forward, it does imply three or four quarters of year-over-year growth. And so, I guess the question I have specifically is, is that year-over-year growth that you expect in silicon solely tied to just a volume rebound on legacy design wins in the silicon business or are there some new design wins that we should think about driving and sustaining some growth specifically in the silicon business, and kind of part B to that, is there any NetXen silicon design wins that’s in that segment as well?

Simon Biddiscombe

So, Brian, that’s an excellent way to ask a question. We do have high expectations for new design wins specifically around the converged network opportunity that will ramp and contribute from a quarter-to-quarter basis. So, when you look at it on a year-over-year basis, it’s not about rebound in the traditional fiber channel and iSCSI elements of that part of the business, it is about contributions from both NetXen-related products and QLogic’s own converged networking products, okay. So, two distinct concepts, but we do expect a ramp in those FCoE products serving the converged network as we move forward.

Brent Bracelin – Pacific Crest

And the upside this quarter, just to be clear, was that all legacy design wins or was there actually some new design wins that you recognized that also contributed to the upside in the March quarter?

Simon Biddiscombe

Both.

Brent Bracelin – Pacific Crest

Both? Okay, I think that’s very helpful. Thank you.

Simon Biddiscombe

Thank you.

Operator

Next question comes from Harsh Kumar with Morgan, Keegan.

Harsh Kumar – Morgan, Keegan

Hi guys, first of all good job beating the EPS. Question for you H. K., as you get perhaps better clarity coming out of the recession, can you characterize for us how you see your different businesses, the fiber channel host bus adapter business, the IB business, and the switches, would you expect a little bit of an outsized performance relative to recent history prior to a year or would you think that they had continued to grow at the rate that they have been growing, just any color would be helpful, and I am talking longer term?

H. K. Desai

I think we have a great, like I said in my script, we have a great execution in last year, last fiscal year. We have done a great job of CNA, we have time-to-market advantage, we have qualification with all Tier 1 OEM, except one, we have a second-generation product coming into the market. So, I think we are on a great shape there. We are gaining markets there on the fiber channel traditional market, and on top of that, what we have – we also executed really well as well as the products on the IB side, QDR, probably based on own silicon, we have our HCA based on our own silicon. I think that’s one area we can start growing. Also we have – the things in favor is also fiber channel switch side which is we are getting OEM track some of the A switches of the fiber channel. So, I think everything is kind of coming into place for us. Upgrade is the rephrase cycle continues second half of the year. I think we (inaudible) perform than normal seasonality going forward.

Harsh Kumar – Morgan, Keegan

Fair. And then another question, coming back to your June guidance, perhaps, bottom line [ph] yourself guided sort of – you are guiding to a little bit of growth perhaps, but outside of Nehalem, you know, it’s getting delayed. Was there anything else going on in terms of customer behavior that was weird or uncharacteristic or was it just that much?

H. K. Desai

I mean, if you look at our guidance, we give a little more data than normal we do on the guidance, which is normally if you look at average, we are about – June quarter is about 2% sequential growth, we have some last few years. We have given our guidance for our coal business, which is HBA, he host and the network, we said we will grow about 3% sequentially and what we are seeing is the reason of guidance is $140 million to $146 million because the silicon is the one, which we scored tremendously and we don’t expect that to grow in the June quarter.

So, I think what we have down in the guidance is more because of silicon and we probably assume that they have some inventory OEMs, because they were so strong quarter in the March. That’s what the guidance is. Our guidance really is a slightly built on seasonality as well as June quarter is concerned for the coal business.

Harsh Kumar – Morgan, Keegan

Yes, yes, absolutely, but you are not seeing anything uncharacteristic from the customers outside of this delay and high end servers?

H. K. Desai

No.

Harsh Kumar – Morgan, Keegan

Okay, great. Thanks. And I might follow up with you later.

H. K. Desai

Thanks.

Operator

And we will take the next question from Glenn Hanus with Needham & Company.

Glenn Hanus – Needham & Company

Hi guys, I got cut off on the phone a couple of times, so I apologize if this has been asked. Can you give us your thought process on OpEx through the year?

Simon Biddiscombe

Really hasn’t changed. Glenn. We have been saying 220ish for the entire year. We are giving you 55 for the current period, and multiply it by four, you get 200. So, 220 for the full fiscal year, still feels like the right number.

Glenn Hanus – Needham & Company

Great. And H. K., your share in the X-86 side on the HBAs, I think your competitor basically said they thought they maintained share in this quarter, did you feel that you gained share or maintained share or how do you think about that?

H. K. Desai

I feel very strongly we gained share.

Glenn Hanus – Needham & Company

Okay. And P Series FCoE, I mean, I know they don’t have the high end out yet, any color there on how that may be rolling out for you?

H. K. Desai

We started shipping the product to them for the P Series and X Series in the Blade for the IBM. So, new shipping product to all the OEM except one of the Tier 1 for the FCoE.

Glenn Hanus – Needham & Company

Okay. And the timing on the Nehalem-EX is that sort of the key to accelerating sort of the refresh cycle in the second half, is that a key item for you?

H. K. Desai

Yes, that’s what we believe that I think you will pick up the rephrase again in the second half.

Glenn Hanus – Needham & Company

Yes, thank you.

Operator

And at this point, there are no further questions. I would like to turn the conference back over to today’s speakers for any additional or closing remarks.

Simon Biddiscombe

That concludes our call today. We look forward to updating you on our progress next quarter. Thank you very much and good-bye.

Operator

Once again, this does conclude today’s conference call. We thank you for your participation.

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