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QLogic (NASDAQ:QLGC)

Q4 2014 Earnings Call

May 01, 2014 5:00 pm ET

Executives

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

Prasad L. Rampalli - Chief Executive Officer, President and Director

Analysts

Joseph Wolf - Barclays Capital, Research Division

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

Joseph Quatrochi - Stifel, Nicolaus & Company, Incorporated, Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Vlad Rom - Crédit Suisse AG, Research Division

Srini Nandury - Summit Research Partners, LLC

Yi Chen - Aegis Capital Corporation, Research Division

Operator

Good day, everyone, and welcome to the QLogic Corporation Fourth Quarter Fiscal Year '14 Earnings Announcement Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Jean Hu, CFO. Please go ahead.

Jean Hu

Thank you, operator. Good afternoon, and welcome to QLogic's fourth quarter and fiscal year 2014 earnings conference call. Joining me on the call today is Prasad Rampalli, our President and Chief Executive Officer. Prasad will open the call with his perspectives after joining QLogic 3 months ago and provide a review of our business. Then, I will provide a review of our fourth quarter and the full year financial results, as well as the guidance for our fourth fiscal quarter. We'll then open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and our projections of our financial performance based on current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We refer you to the documents QLogic files with 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 we make today.

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

I would now turn the call over to Prasad. Prasad?

Prasad L. Rampalli

Thanks, Jean. Good afternoon, everybody. It is a pleasure to be here on my first quarterly earnings call with you. As a quick introduction, I joined QLogic 3 months ago, having led various transformational assignments, both at EMC and Intel in the past 30 years. I am very excited to be leading QLogic in this time of IT industry transition and opportunity.

The past 90 days have been a period of intense focus on execution and integration of our recent Broadcom NetXtreme II network controller acquisition, and ensuring we are delivering to our customers' timelines. In addition, I spent a significant amount of time meeting with customers, shareholders, employees and the analyst community, communicating the company's vision and plans for growth. And I'm very energized by their feedback that we are on the right track. At a macro level, we are at an inflection point in the IT industry with an excess of social, mobile, cloud and big data trends driving the emergence of the third platform as cited by both Gartner and IDC. This emerging platform is highly disruptive to the current cloud and server environment and key technologies like Flash, high-speed Ethernet and virtualization, coupled with software-defined data center services are establishing the new DNA of the data center. In addition, there is also a permanent shift in the IT business model and buying patterns as CIOs are moving from experimenting to now embracing the hybrid cloud business model. In this model, the enterprise is rapidly transforming to the private cloud, with seamless migration of both data and application workloads to the public cloud. We believe that a redefined data and storage network I/O stack will be a key pillar of the next-generation data center and will be a significant catalyst for the workload transition to the cloud. This provides QLogic a unique growth opportunity to build differentiated value, extending our core network connectivity products, where we are #1 in the fiber channel market, and we expect to be #2 in the Ethernet connectivity market later this year.

We plan to innovate and integrate our core technologies in the I/O connectivity space, aimed specifically at the targeted private and public cloud market segments to deliver differentiated I/O platforms and software services in close collaboration with key ecosystem partners. We leverage our unique position in the industry as the only company in the I/O networking space with world-class capabilities to deliver a programmable and extensible set of differentiated network-based services on both the fiber channel and Ethernet connectivity platforms. We believe the attainment of this goal, with the evolution of our company from a leader in I/O connectivity products to I/O platforms, will provide our end customers with unparalleled agility and TCO advantages in setting up their cloud and big data infrastructure.

To realize this goal, I'm directing QLogic's efforts in 4 specific areas. First, we will drive singular focus and flawless execution to entrench QLogic as a leader in data and storage networking connectivity products. In January, we acquired Brocade's Fibre Channel and Converged Network adapter business and, in March, we acquired Broadcom's 10-, 40-, 100-gigabit Ethernet business. In addition, we have moved aggressively to fill the void left by PMC Sierra in the target storage connectivity market. We currently have nearly 60 design wins in this important growth market. These aggressive moves, coupled with our June 2013 decision to cease development of next-generation ASICs for switch products, now position QLogic with singular and laser-focus on Fibre Channel and Ethernet network connectivity leadership as our core foundation. We expect this to put us on a robust financial growth trajectory for the next couple of years. Second, we'll focus on delivering on the QLogic vision and our long-term growth opportunities by extending leadership from our core to become a preeminent I/O connectivity platform and value-added services player for private and public clouds. As I stated before, given our entrenched position as a leader in fiber channel adapter market and our position in the 10-, 40-, 100-gigabit Ethernet connectivity market, we are very well positioned to evolve from being a hardware connectivity provider to building a robust I/O platform with integrated software and data management solutions for both the fiber channel and Ethernet environments. We have shipped more than 15 million fiber channel ports and, thus, we have a very large install connectivity base in the enterprise that uses our technology today. We believe that we can graduate these ports for higher intelligence with our future I/O platform offerings and are confident that this will be a key differentiator for both the enterprise and the fast-growing public cloud and hyperscale markets. We are well into defining our strategy and product plans, and I expect to have more details to communicate to you at an analyst day that we anticipate scheduling for the fourth calendar quarter of 2014. Third, we will continue our solid discipline in managing operating expenses and drive operating efficiency across the company. In addition, we'll focus our investments on areas where we can deliver compelling future revenue growth and return on investment to create value for shareholders. And fourth, we'll continue to build a strong leadership team with a proven track record in delivering differentiated systems and software services for private and public cloud environments. To support our 2014 strategy and beyond, I'm very excited with the addition of key industry-proven executive talent on my team. [Indiscernible] Mikael [ph] joins us as Senior Vice President, leading our Ethernet connectivity and software services team. [Indiscernible] brings extensive systems architecture and engineering experience, having a stellar record at EMC in developing very successful storage and data protection systems. [indiscernible] joins us as Vice President of ASIC design and firmware engineering from Western Digital, and brings 25 years of extensive VLSI experience from storage and the semiconductor industries. [indiscernible] joins us as our new Chief Technology Officer. [indiscernible] is a 25-year industry veteran and an established thought leader in cloud data center technologies with deep specialization in storage, data center virtualization and converged infrastructure architectures with several design patents to his name. And finally, Tim Lloyd [ph] joins us as our Vice President of Operations from Intel and brings 30 years of executive leadership and international experience in manufacturing, supply chain planning and operations in the semiconductor industry.

Now let me give you a brief business update for the fourth quarter. I'm very pleased with our execution and financial performance in the fourth quarter. We delivered revenue of $115.7 million, which was above the midpoint of our guidance range provided during our third quarter earnings call. In addition, our net income per diluted share was $0.24, was at the high end of our guidance range. I'd like to take this opportunity to thank all the QLogic employees for their commitment to excellence, solid execution and their enthusiastic embrace of me as their new CEO.

I'd now like to discuss the NetXtreme II Ethernet business that we acquired from Broadcom. Strategically, this acquisition delivers on 3 key business objectives. First, it accelerates our time-to-market for 40-gigabit and 100-gigabit Ethernet products by almost 2 years. This will position us among the frontrunners for targeted workloads that are driving the early adoption in the high-end enterprise and scale out Hadoop, Big Data and cloud environments. Second, the Ethernet market is growing rapidly and the consolidation of players will drive better economics for the top performers. As I mentioned earlier, we are expected to become the #2 player later this year in the server Ethernet connectivity market, which has an estimated 29% CAGR and a total SAN of $1.2 billion in calendar year 2016.

Third and most importantly, we now expect NetXtreme II Ethernet business to generate approximately $60 million of revenue in fiscal 2015 and to be accretive to non-GAAP earnings in the first quarter and for the full year. We expect our total revenue to grow between 10% and 12% during fiscal 2015. Operationally, we closed the Broadcom transaction just 23 days after we announced the deal in mid-February with a tremendous amount of preplanning that happened in parallel. We implemented a comprehensive integration plan immediately after the closing and adopted a new technology roadmap as a plan of record going forward. We successfully transitioned approximately 170 engineering and management personnel to the QLogic team, which provided instant continuity for the customer base and an effective knowledge transfer. This team has formed the nucleus of our expanded networking business. As a result of our Ethernet roadmap consolidation, we also undertook certain restructuring activities in the fourth quarter, resulting in the elimination of approximately 160 positions. One important aspect of the integration was to ensure that current customers had an uninterrupted supply of products to satisfy their demand given the rich history of design wins in both the Romley and Ivy Bridge server cycles. We have met this goal by quickly and efficiently transitioning the order management and fulfillment functions with good planning and cooperation between the 2 companies.

Beyond products that are shipping today, there is a great deal of qualification activity in progress for the next-generation NetXtreme II designs. Some of these programs are x86 server cycle independent. However, as you would expect, a majority of these are tied to the upcoming [indiscernible] server cycle. The 3 leading server providers: HP, Dell, and IBM, account for well over 20 active qualification programs for NetXtreme II products. We are very excited about the program activity and prospects for future revenue growth from the new designs. We foresee solid demand across a variety of markets, including enterprise and cloud, and are confident that we'll expand our market share in the fast-growing server Ethernet connectivity market.

Now I'll move on to a discussion of some business highlights for the quarter, starting with the growth area of storage connectivity and then move on to the general server connectivity market. Over the past year, we've shared with you our increased focus and design win success in the target ASIC market for storage connectivity. This important growing market allows us to leverage our core Fibre Channel, Ethernet and Converged development resulting in an expansion of the addressable markets of our Advanced Connectivity Platforms. As I stated earlier, we have a deep pipeline of nearly 60 design wins, spanning traditional storage areas, fast-growing all-flash arrays, and backup and recovery offerings. As a key proof point of our success, we announced in February that NetApp, an industry leader in storage, is utilizing QLogic's storage connectivity products. NetApp's new FAS8000 unified scale-out storage systems and second-generation universal target adapters now support fiber channel, fiber channel over Ethernet, FCoE, NFS, and common Internet file systems, or CIFS, on a single wire. Our storage connectivity products enable NetApp customers to select their storage protocol of choice through a simple field upgrade and allow for future transitions to alternative I/O options. The use of QLogic products by NetApp is a very strong indicator of the value our products are bringing to this growing market.

In February, we announced our 10th consecutive year of fiber channel adapter market share leadership as confirmed by recent market share reports from both the Dell'Oro Group and Crehan Research. In calendar year 2013, QLogic held a total revenue share of 54.1% according to the Dell'Oro Group, and both sources confirmed that QLogic led its nearest competitor by more than 12 percentage points. In addition, QLogic was the only company to show year-over-year growth on market share gains in both reports. 2 additional accomplishments for 2013 are noteworthy. First, in the important 16-Gig Gen 5 fiber channel adapter market, QLogic gained more than 17% points in revenue market share from calendar year 2012 to 2013. Second, during 2013, we surpassed the 15 million mark in all-time shipments of fiber channel adapter ports, over 3 million more than our nearest competitor. Based on our March quarter results and the recently announced results from our nearest competitor, we are very confident that we have gained significant fiber channel adapter market share during the March quarter.

Moving on to the other quarterly highlights. In early March, we announced that our Flex 2600 Series 16-Gig Gen 5 Fibre Channel adapters were shipping for the Lenovo ThinkServer product family. Continued collaboration between QLogic and Lenovo demonstrates an ongoing commitment to deliver true enterprise class server and storage performance and satisfy customer needs in growing IT markets in China and around the globe. Recently, we partnered with the Quanta's cloud technology subsidiary to optimize storage I/O performance in open compute project, or OCP, servers. In January, we announced the industry's fiber channel adapters specifically designed for use in OCP servers. Our new OCP 8-Gig Fibre Channel Mezzanine Adapter brings optimal security, maximum performance, and enterprise-class reliability and manageability to OCP data centers. Founded by Facebook in 2011, the OCP is an initiative designed to increase technology efficiencies and reduce the environment impact of data centers. This initiative is an excellent example of leveraging our core products into the cloud market.

Finally, as I close, I am very confident in our growth and financial trajectory going forward. We are well positioned to outpace industry growth and evolve from a leading server and storage connectivity player to an I/O platform company that offers a compelling value proposition in the IT transition to cloud and big data environments.

I'll now turn the call over to Jean to provide a summary of our fourth quarter and full year financial results. Jean?

Jean Hu

Thank you, Prasad. Our revenue in the fourth quarter was $115.7 million compared to $116.9 million we recorded in the same quarter last year. Revenue in the current quarter includes approximately $1 million associated with the NetXtreme II Ethernet business we acquired from Broadcom in March. Our revenue in the fourth quarter was above the midpoint of our guidance range provided during our third quarter earnings call, excluding the incremental revenue from Broadcom transaction. Strength in revenue relative to our guidance was driven by higher-than-expected revenue from Advanced Connectivity Platforms. Revenue from Silicon Products exceeded our expectations due to additional demand related to new program launches by a certain storage customer. Our fourth quarter revenue from Advanced Connectivity Platforms, which are comprised primarily of adapters and the silicon for server and storage connectivity applications, was $101.1 million, up 4% from $97 million recorded in the fourth quarter of last year. Fourth quarter revenue from Legacy Connectivity Products, which are comprised primarily of switch products, was $14.6 million compared to $19.9 million we recorded in the fourth quarter of last year. As a reminder, we ceased development of future ASICs for switch products in June 2013 and we expect revenue from this product to continue to decline over time. Our fourth quarter gross margin of 68.2% was consistent with the fourth quarter of last year.

Next, I'd like to cover our fourth quarter operating expenses. Total operating expenses were $57.4 million, down from $62.2 million reported in the fourth quarter of last year. Operating expenses were above our guidance of $56 million provided during our third quarter earnings call, primarily due to additional operating expenses associated with the NetXtreme II Ethernet business we acquired from Broadcom. Engineering expenses in the fourth quarter of $34.8 million declined from $37.1 million last year. Sales and marketing expenses in the fourth quarter were $15.3 million and declined from $18.9 million last year. G&A expenses in the fourth quarter was $7.3 million. Operating income in the fourth quarter of $21.5 million was 18.6% of revenue and improved from 15.1% of revenue in the prior year. Interest and other income was $1.1 million in the fourth quarter. Our income tax rate for the fourth quarter was 8.2%. Our fourth quarter net income of $20.8 million represented a net profit margin of 17.9%, an improvement from the 13.4% last year. This is the 75th consecutive quarter of profitability for QLogic. Our first quarter net income per diluted share of $0.24 was at the high-end of our guidance range of $0.19 to $0.25 provided during our third quarter earnings call.

Turning now to our balance sheet. Our cash and marketable securities were $278 million or more than $3 per share at the end of the fourth quarter. The balance is net of $148 million we paid for the acquisition of NetXtreme II Ethernet business from Broadcom and the $62 million paid for the patent license due to Broadcom, both in the fourth quarter. We continue to maintain our very strong cash position and have no debt. Receivables were $65.2 million at the end of the fourth quarter. DSO at the end of the fourth quarter improved to 51 days from 54 days at the end of the third quarter. Inventory was $18 million at the end of the fourth quarter. Annualized inventory turns for the fourth quarter was 8.2.

Now let me summarize the results for the full fiscal year 2014. Revenue for the fiscal 2014 was $461 million. Operating income for fiscal 2014 of $89 million was 19.3% of revenue. Net income for fiscal 2014 was $83 million or $0.94 per diluted share. The net profit margin for fiscal 2014 was 18%.

Turning to our near-term outlook. For the first quarter of fiscal 2015, we expect revenue to be in the range of $116 million to $122 million. At the midpoint, we expect revenue from Advanced Connectivity Platforms to be up approximately 4% sequentially and 13% year-over-year. This include approximately $11 million of revenue for our NetXtreme II Ethernet product. We expect revenue from Legacy Connectivity Product to be approximately $14 million. Gross margin is expected to be in the range of 64% to 65%, and the operating expenses are expected to be approximately $57 million. When combined with a projected tax rate of approximately 15% and a diluted share count of approximately 88 million shares, we expect to achieve non-GAAP earnings per diluted share of $0.17 to $0.22 in the first 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 our filings with the SEC and in the disclaimer statement at the end of our earnings press release.

This conclude our prepared remarks. Operator, we'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we'll go to Joseph Wolf with Barclays.

Joseph Wolf - Barclays Capital, Research Division

I guess, if I look at the guidance on the current -- for the year and for the quarter, could you just give us a little bit more granularity about which part of your business do you expect to grow in the Legacy business compared to what you've acquired from the NetXtreme and Broadcom?

Prasad L. Rampalli

Yes, sure. I'll take a stab first and Jean can chime in. In the upcoming quarter, as we said, our guidance is between $116 million to $122 million with the midpoint of $119 million. And we expect the Advanced Connectivity Platforms to be $105 million at the midpoint in Q1. Most of this increase is going to come from the NetXtreme II products, which is around $11 million in Q1. And so, at the midpoint of our guidance, we'll be expecting the Advanced Connectivity Products to grow sequentially by 4%. And this is as part of our expected ramp of the acquisition that's going exceedingly well that we acquired from Broadcom. Now in addition to that, we had a significant upsurge in Q4 of our storage ASICs. And as I told you before, we are looking at a significant ramp of that business. For us, it's a greenfield business with a significant volume growth that we anticipate, and it's growing by about 10% year-on-year. So with the Q4 volume ramp, we don't anticipate any significant growth in Q1, but we expect to sustain that in Q2, Q3 as an ongoing growth. So when you add up everything just for Q1, clearly the key driver of growth is the NetXtreme II ramp for $11 million. And going beyond that, we expect to have the Fibre Channel volume also kick in with our storage growth that we anticipate to be on a healthy pace.

Joseph Wolf - Barclays Capital, Research Division

Okay, that's very helpful. I guess, you mentioned the 40-G, accelerating the timetable by 40 -- in 40-G by -- and 100-G by 2 years. Until you guys bought it, there haven't been much coming out of Broadcom about the 40-G and 100-G. Could you tell us where you are in terms of sampling? How you see that market, and whether you think 40-G is going to be a full-fledged cycle or whether it's going to be a partial step on the way to 100 for many vendors?

Prasad L. Rampalli

Yes. Sure, Joseph. In short, we are sampling product this year. The Everest product line, as we call it, which is our 40-gig and 100-Gig E product, is doing exceedingly well in terms of tape-out. Now clearly, we have to go through the OEM validation cycle and the volume we expect to turn in, in the first quarter, a timeframe of 2016. But so far, so good. We think we have an excellent product. In terms of 40-Gig features, the thing I want to point out is this is all about low latency fabrics in the cloud environments and in some high-performance compute areas in the enterprise as well. And the features like RDMA and RDMA Ethernet are rocky, are going to be a significant play for us as we start ramping this product. So we expect this to be pretty competitive.

Joseph Wolf - Barclays Capital, Research Division

Okay, great. And then one last question for me and that is, across the sector of interconnects, there's been some issues I guess with the IBM, Lenovo transaction and some sort of anticipation or pause in purchasing based on the Grantley launch. Could you describe any influences that, that's had on your business in the March quarter and what you expect in the June quarter?

Prasad L. Rampalli

Yes, sure. Let me start with the Grantley question. The Grantley launch is still a couple of quarters out, so we don't see any anticipated breaks in the system this quarter, Joseph. And so from our crystal ball, we think it's business as usual. Now there are clearly some secular pressures, which we'll get into in a minute, but we don't think that's because of Grantley. With regards to the Lenovo partnership and the IBM consolidation, look, we have an excellent relationship with Lenovo, as I said in my prepared remarks. And we also have an excellent relationship with IBM. As a matter of fact, if you look at the Grantley cycle, we have a very significant number of sockets there. We are going to be the incumbent in that cycle with IBM. So we have goodness on both sides. And as this consolidation happens, we expect to churn out on the right side of the equation, however it lands.

Operator

Moving on to Bill Shope with Goldman Sachs.

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

I guess this is a bit of an extension to the last question. There a lot of moving parts to the guidance with the new acquisition figures obviously, and your competitor had some pretty pessimistic commentary last night. So I guess to help clarify the underlying trends in your business, excluding acquisition, are you seeing similar near-term pressures in the server market that Emulex discussed? And if not, can you talk about how can we think about how 2 vendors can have such a substantial difference in outlook and tone, given that you're in very similar markets right now?

Prasad L. Rampalli

Yes, Bill, I'm glad you asked that question because clearly, there's has to be logic behind what I'm saying. At a macro level, if you look at the 3 OEMs, they have experienced a 12% year-on-year decline. And when you talk about Fibre Channel, I think there is a downward pressure, and we believe it's in the 6% to 7% -- at least for us. So that is a given in the background. However, as I said before, we are ramping significantly into the target side, which is now reaping benefits, if you will, where we have 60 design wins and a pretty deep pipeline. And so as we ramp that this quarter and the next one and the next one, we anticipate that this is going to result in a net positive for us in the Fibre Channel space, in addition to the market share that we are gaining, as I said in my prepared remarks. So when you add the 3 variables in the equation, take market share, win on the storage side and keep pushing on our revenue, we think we are in a good shape here.

Operator

And next we'll go to Aaron Rakers with Stifel.

Joseph Quatrochi - Stifel, Nicolaus & Company, Incorporated, Research Division

Great. This is Joe Quatrochi for Aaron. I just want to go back to the guide if we could. So when I look at your guide at the midpoint of 10% to 12% year-over-year in fiscal '15, with $60 million coming from Broadcom, up from the $45 million, we would imply a core business decline of 2% versus a prior of up 2%. So I was wondering if you could maybe help us to understand what's changed there?

Jean Hu

Yes, sure. I'll give you like a high-level view, right? When you exclude the $60 million Broadcom acquisition revenue, really, when you look at our core business, our advanced connectivity actually is going to grow about 3% to 4%, the decline actually coming from our Legacy Connectivity Products that we -- if we look at into fiscal '15, our Legacy Connectivity Product is probably going to decline over 30%. So that's really -- when you combine those 2, certainly, our organic business looks like -- more like declined 2% to 3%, as you said. But the key thing is our organic Advanced Connectivity Platforms actually going to grow around 3%. The Legacy Connectivity, as you know, we're running it as a cash cow going forward.

Prasad L. Rampalli

Yes. And just add, as I said, I think for us it's all about taking share and growing our storage connectivity revenue to offset the secular decline pressures that are happening on the macro level. And when you do the math for us, we are turning out positive, 3% to 4%.

Joseph Quatrochi - Stifel, Nicolaus & Company, Incorporated, Research Division

And then just one other if I could. Could you talk about the traction that you're seeing for the FabricCache offerings and then maybe how we should think about the company's efforts to add Ethernet-based intelligence?

Prasad L. Rampalli

Yes, sure. And FabricCache is really, in many ways, a very innovative product that leverages our core competency and takes advantage of the flash acceleration, again this notion of what I've been calling the I/O connectivity platform specifically focused in the Fibre Channel space. With our integration of flash with the I/O controller stack and the SOC on board, we are now able to do application of air and data management services. And the feedback from key customers and channel partners that we've gotten so far is very, very positive. They can clearly see the significant benefits, both in terms of performance and TCO. Our focus right now is to ensure that we can scale this product by working on some ease-of-use functionality so that we can rapidly adopt and drive this product in the channel in the second half of next year. So we are going to be working on fine-tuning ease-of-use and ensuring that we ramp up our channel capabilities that actually go to market. So we don't expect meaningful revenue in calendar year '14. But next year, we'll certainly be looking at the second half ramp of this capability. Now having said that, I also said in my prepared remarks that as we build these network-based services, we are not just going to be focused on the protocol of the day. In many ways, the software services that we are building will be platform-independent. In other words, we could be leveraging the same capability as well with the same efficacy on Fibre Channel as we will do on Ethernet. And so when we have our 10 Gigabit Ethernet and certainly the 40-gigabit Ethernet products coming online, we'll be enabling an Ethernet-based caching capability for workloads that would require that same type of requirement. A good example of that is Hadoop and other low-latency types of workloads that are absolutely going with server-side caching and very large clusters. And so we think that on the Ethernet side, with similar software services that are going to be differentiated on our silicon, we can enable that same kind of capability in the cloud and Big Data environments. But clearly, that's forward-looking. We are very focused and heads down, improving the capability on the Fibre Channel space in the enterprise today.

Operator

We'll now go to Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

A couple of questions from me. Can you maybe just start off -- if you just talk about the $60 million revenue contribution from the Ethernet ASIC from Broadcom? What's the margin structure for that business through the year? And what's sort of the EPS contribution accretion you guys expect for the year?

Jean Hu

Yes. So as you know, in general, Ethernet business has a lower gross margin compared to our corporate averages. So if you look at the fiscal '15, including this $60 million revenue from the Ethernet side, it's actually going to lower our overall gross margin by 3 to 4 percentage points. So then the math, you probably can calculate it quickly. The Ethernet business is about 40% the gross margin. So I think that's the revenue mix. But the key thing, Amit, as you know, is really -- on the operating expense side, right, we acquired 170 people. We actually -- during the quarter, we immediately did a restructuring and we eliminated about 160 positions from our own QLogic Ethernet development team. So the incremental OpEx is just some fixed OpEx from facilities, equipment. But overall, the deal is accretive immediately in Q1 and, of course, for the whole fiscal year. So the operating margin and the operating margin pull dollars we are going to generate from this business is going to be tremendous going forward.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

And then I guess, Prasad, you talked a great amount about building and leveraging QLogic into an I/O connectivity platform. I was wondering if you can just maybe expand on that. I think that as you're adding more software functionality, like FabricCache solutions -- but could you maybe just talk about that? And how do you go about building the software stack? Would it be an organic strategy? Would it be inorganic? How does that play out, if you don't mind talking about that a bit more.

Prasad L. Rampalli

Yes, sure. Thanks, Amit. Let me just start with the fact that the fundamental pillar -- or one of the fundamental pillars of the emerging architecture around the construction or the transformation to the private cloud inside the enterprise -- or the formulation of these public clouds is going to be around how I/O is going to be shaped as a key pillar. And we sit in the I/O connectivity path. We are on the data path. We sit on 15 million ports, as I mention, just in the enterprise, and our goal is not just to be a transport pipelayer going forward. We want to create intelligence in this transports. And obviously, we're going to do that with enabling features natively in the silicon and adding appropriate level of intelligence in our firmware and associated software that runs on top of the silicon as part of the overall I/O stack. Now what does that mean in terms of specific use cases? The one that is front and dead center for the enterprise clearly is server-side caching and large virtual clusters that require -- that had to run on very low latency and require significant IOPS per VM. Now how do you enable that? How do you alleviate this bottleneck for virtual machine going forward, which will only gets more exacerbated with Grantley cycle with more cores? We'll think that enabling the right level of I/O bandwidth, intelligence that's application-aware in our software that does things like clustering, that does things like tiering, is absolutely needed to get the right performance of that workload. And by doing so, we'll be monetizing our additional services and enabling the TCO and the value prop to the customer. So that's just one example of what we are going to go about doing. Now to your question on how do we actually do this at the level of QLogic, we are calling this QLogic 2.0, and the whole idea here is that we are going to look at clearly rejiggering our OpEx. We're going to be staying flat to our OpEx to $235 million. So I'm not talking about spending a significant amount of incremental money but re-prioritizing our existing investments. But in addition to that, we have a significant amount of cash, and we are going to leverage that cash to go after appropriate M&A acquisitions as we've done in the past. And we're going to do that relevant to the use case, to the differentiation, along the lines of what I've talked about.

Operator

And next we'll go to Andrew Nowinski with Piper Jaffrey.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

I'd just like to ask another clarification, I guess, on your guidance. So does that -- the 10% to 12% revenue guidance -- or growth includes $60 million from the Broadcom assets, but does that also include $15 million from the Brocade assets as well?

Jean Hu

Yes, it does. Yes. So it's the total company's revenue for fiscal '15. That includes all of the acquisitions we have done.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Okay. So if we pull out the Broadcom and the Brocades revenue, it looks like your organic growth would have -- or decline would have been about 4% to 6% in FY '15. And so I'm just trying to -- and you said the Fibre Channel market, you think, is declining 6% to 7% annually. So I'm just trying to understand sort of your growth expectations for the various parts. Maybe if you could just provide any color on the Fibre Channel, the Ethernet and the legacy business on what you -- what you're kind of assuming for those growth rate in FY '15 on just an organic basis?

Jean Hu

Yes. I think as Prasad said, right, the overall Fibre Channel market is a mature market. It's declining around 6% to 7% and -- but as we talked about earlier, we have significant design win opportunities in the target market, which we're really at the beginning of the product cycle to ramp it up. So for the fiscal '15, this is the first 2 years we're ramping up this market. So it's incremental. It's still not -- the future years will be more. But for the first year, the ramp up of the packet-side opportunity will offset some of the decline on the server of Fibre Channel adapter side. So that's really the equation there. Now of course we had Brocade about $16 million plus Broadcom, and that's actually going to drive our Advanced Connectivity Platforms to grow about 19% in fiscal '15. But our Legacy Connectivity platform would decline close to 30%. So that's how the different part of the equation works.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

On the Fibre Channel side, I know you said ramping on the target market piece, which is new, but would you say that your Fibre Channel revenue is effectively growing in line with sort of that -- excluding that target piece, would have been growing in line with the market? Or are you actually taking -- assuming any sort of share gains at the cost of Emulex?

Prasad L. Rampalli

Yes. Let me answer that. We are -- we have actually gained share just in this current quarter. And so we expect to continue that in the rest of the year. So there are really 3 components: strong position in the storage space; continue to gain share in the Fibre Channel space as the drivers; and obviously, the VNX 2 product line on the Ethernet side. And when you add A plus B plus C, that's a 10% to 12%.

Operator

Next we'll go to Vlad Rom with Credit Suisse.

Vlad Rom - Crédit Suisse AG, Research Division

Prasad, you've talked about investments in the business. Can you provide maybe an outline of the timing that you plan to invest in the business? What you're planning to do and kind of the rollout of new products? And then for Jean, given the increased level of investments, how are you thinking about cash returns, especially in the context of the acquisition of Broadcom assets?

Jean Hu

So, Vlad, let me answer the OpEx question and then Prasad can talk about the investment, the time line. Right? So operating expense, as Prasad mentioned earlier, we think we're going to be able to maintain operating expense at this quarterly run rate level, which probably implies that for the fiscal 2015, our overall OpEx will be around $235 million. As you can -- you'll recall, right, the last quarter, when we had the earnings call, that's what we guided for fiscal '15. So including Broadcom's acquisition, we're actually going to keep the OpEx flat from that perspective. Second question I want to -- you asked about the cash side is when we look at the combined business going forward, we're going to generate a tremendous cash flow. If you look at the fiscal '14, we -- actually, as a company, we actually generated about $120 million cash from operations side before we paid the $62 million for Fibre Channel license. And going forward, the company is going to continue to generate a tremendous cash flow. Right now, our cash onshore is only $45 million. So we have to build the cash back in U.S. For sure, that's the first thing. With that, our -- Prasad will answer your question about the investment and the time line, those kind of things.

Prasad L. Rampalli

Yes. Vlad, we're going to be very deliberate about what it's going to take to graduate from an I/O connectivity product to this notion of an I/O platform. I'm going to give you a lot more detail on specifics at an Analyst Day that I anticipate scheduling in the fourth calendar quarter of 2014. Think of that as sometime in November. And between now and then, as I mentioned, I just brought on a number of very senior talent on my team. This talent is very well versed with the notion of building system software and very deep in the understanding of cloud architectures. And we already have started formulating plans and certain key concept vehicles. I can't give you the details right now obviously, but in this time frame, in November, we will describe to you in substantive detail what the plan is and hopefully have prototypes that you can see and appreciate with some customer testimonials.

Vlad Rom - Crédit Suisse AG, Research Division

Great. And just one more for me. Just trying to understand, so the storage connectivity business, that's about -- on the target side, that's about -- it sounds like about a $5 million quarter business, and you said that was growing about 10% year-over-year? Is that correct?

Jean Hu

No. No, I don't know where you get the number. We never talked about our storage side of our business, what's the total revenue for the target side of the business. We have never disclosed that kind of detail, and we don't plan to disclose that detail either. All we can say is we have over 60-plus design wins with all major OEMs across the traditional storage, all flash array, recovery, back up, all those kinds of those different things. It's quite a significant market. As you know, that market is going to be about $150 million opportunity several years from now. Even right now, we are talking about $100 million market opportunity. So I don't know where you got that number, but that's not right.

Prasad L. Rampalli

Yes. Clearly way off. I mean, looking at that total serviceable market today at $100 million and given what we are projecting in terms of our growth rates, you're way off by a factor there.

Operator

Next we'll go to Srini Nandury with Summit Research.

Srini Nandury - Summit Research Partners, LLC

Prasad, one of your competitors talks about InfiniBand taking share in the storage business from private channels. So obviously, the new data centers, like we have 2.0 data centers that are using InfiniBand or Ethernet, but what about the enterprise side of things?

Prasad L. Rampalli

Yes. Srini. There's been a lot of noise on InfiniBand now penetrating in the Fibre Channel and the enterprise space. We don't think so. And having been a practitioner in IT, having built a lot of these things, I think InfiniBand is -- it does great in targeted areas like high-performance computing and in-line analytics like what Oracle has done with Exadata and so on. But to take that further into mainstream enterprise and say, "Hey, that's going to be the de facto fabric in place of Ethernet," is a huge, huge stretch. Ethernet, if anything, is exploding. A 10-gig E is already come into its own. Customers are going to be wanting 40 gigabit Ethernet through the Grantley cycle, and what IT guys care about is standards. What they care about is unification of both the storage and the data network on one protocol. Ethernet does that for them. It has a promise of speed and low latency very soon. It has a promise of features on top of that, with things like Rocky or [indiscernible]. And what you have is unification capability of fabric supporting SCSI, iSCSI, FCoE, as well as Ethernet, with sufficient speed and as development -- developers, as you well know, write to the Ethernet sockets in a generic fashion. So standards is the name of the game for IT. Unification is the name of the game, and TCO and agility matter. So InfiniBand, absolutely. A high-speed interconnect, targeted areas. I think it will be there. But to say that's going to be mainstream, I just don't see it.

Srini Nandury - Summit Research Partners, LLC

Okay. If I have one more question, what are your expectations for Grantley? I mean, when do you see that new processor hitting the market? And do you -- more importantly, do you think there's some kind of a stall factored into your guidance?

Prasad L. Rampalli

Yes. That question was asked a couple of questions ago. But the short answer is, sitting here in this quarter, we don't see any stall or pause in consumption patterns for Grantley today. Okay? Now we actually obviously see a virtual cycle happening, and obviously the industry is waiting in anticipation for that to happen to the Grantley GA and after. And with the benefit of Moore's law and the preponderance of course and the fact that they're going to now have a new architecture emerging on the server-side with integration of flash, as well as large cores and virtualization with very large virtual clusters for mission-critical applications, we think there's going to be a significant transformation of the mission-critical space in large clustered VM deployments on Grantley that's going to drive very significant bandwidth, as well as IOPS that is going to, frankly, push, 8 gig to 16 gig at a pretty rapid pace on the SAN side. And on the Ethernet side, the same thing is going to happen on 10-gigabit Ethernet and 40 gigabit. So we see that happening in the Q4, Q1 calendar year cycle and beyond obviously. Yes, there will be -- potentially a pause earlier on before Grantley. But sitting here now for this quarter, I don't see it. I'm not -- we're not seeing any of that in the consumption.

Operator

[Operator Instructions] We'll go to Yi Chen with Aegis Capital.

Yi Chen - Aegis Capital Corporation, Research Division

Could you give us some color on your stock repurchase plan going forward?

Jean Hu

Yes. We -- as I said before, we only have 20% of cash right now in U.S. after we made the acquisition last quarter. So our U.S. cash, which is -- we use to run our business, is really low. Our first order is to build back our U.S. cash base. Certainly, if you think about our capital allocation strategy, it will be the same. It's the first -- we'll look for investment opportunities organically or through M&A. Certainly, they need to be -- create value for shareholders. If we don't see anything, I think going forward, once we build our U.S. cash back, we certainly will return cash to shareholders through buybacks.

Operator

And we have no further questions. I'll turn it back over to our speakers for any additional or closing remarks.

Jean Hu

That concludes our call today. We look forward to updating you on our progress next quarter. Thank you so much and goodbye.

Operator

Once again, this does concludes today conference. We do thank you all for your participation.

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