Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

QLogic F3Q07 (Qtr End 12/31/06) Earnings Call Transcript

TRANSCRIPT SPONSOR
Better Than AdSense

QLogic Corporation (QLGC)

F3Q07 Earnings Call

January 23, 2007 5:30 pm ET

Executives

H.K. Desai - Chairman, President and CEO

Tony Massetti - SVP and CFO

Analysts

Laura Conigliaro - Goldman Sachs

Aaron Rakers - AG Edwards

Kevin Hunt - Thomas Weisel Partners

Srini Pajjuri - Merrill Lynch

Dan Renouard - Robert Baird

Harsh Kumar - Morgan Keegan

Mark Kelleher - Canaccord Adams

Mark Moskowitz - JP Morgan

Glenn Hanus - Needham & Company

Clay Sumner - FBR

Keith Bachman - Banc of America

[Robert Reitz] - Bear Stearns

Paul Mansky - Citigroup

Tom Curlin - RBC Capital Markets

Shebly Seyrafi - Caris & Company

Presentation

Operator

Good day, everyone, and welcome to the QLogic Corporation third quarter fiscal year 2007 earnings conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. H.K. Desai, the Chairman, President and Chief Executive Officer. Please go ahead, sir.

H.K. Desai

Thank you, operator. Good afternoon, and welcome to QLogic's third quarter fiscal year 2007 earnings conference call. I'm H.K. Desai, CEO and President, and with me is Tony Massetti, Senior Vice President and Chief Financial Officer.

Today, Tony will begin with a review of the third quarter financial results and I'll continue the general discussions of the state of our business. After that, we'll open the teleconference for questions. Tony?

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Tony Massetti

Thank you, H.K, and good afternoon. By now, all of you should have seen our press release and associated financial information. In addition to reviewing our financial results, some of the comments today will include forward-looking statements regarding future events and our projections of the financial performance of the Company based on our current expectations. These comments contain significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We refer you to the documents that QLogic files with 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 any of the information contained in any forward-looking statements that we made today.

Today's conference call is being webcast and a replay will be available for 12 months on the QLogic website at www.QLogic.com under Investor Relations. An audio replay will be available through February 6, 2007, by calling 719-457-0820 or 888-203-1112, pass-code 993-9749.

Please be aware that if you decide to ask a question it will be included in both our live transmission as well as any future use of the recording. Copyright law and international treaties protect this conference call report. Unauthorized reproduction or distribution of this report or any portion of it may result in civil and criminal penalties. Any recording or other use or transmission of the text or audio for today's call is not allowed without the expressed written permission of QLogic.

In our third quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. The difference between the results is primarily due to acquisition-related charges and non-cash stock-based compensation charges. The stock-based compensation charges are primarily a result of the requirement to commence expensing stock options in fiscal year 2007. An accounting of this difference is included in our press release. The difference in our non-GAAP as compared to our GAAP results is $0.06 per diluted share in the third quarter or $0.28 per share non-GAAP versus $0.22 per share on a GAAP basis. All of the references we will make today relate to the non- GAAP results from our continuing operations unless otherwise stated.

Our revenue in the third fiscal quarter ended December 31, 2006, was a record $157.6 million, an increase of 22% from the same quarter last year and 8.5% sequentially. This was within our guidance range of $154 million to $160 million given during our second quarter earnings conference call.

Our revenue from SAN infrastructure products which is comprised primarily of HBAs, switchers and silicon grew to $152.5 million from $120.4 million recorded in the third quarter of last year. The increase in our revenue from SAN infrastructure products was primarily driven by HBA revenue growth of 33% from the comparable quarter last year. In addition, our switch revenue grew 12% from the same quarter last year.

Our revenue from Management Controllers of $2.6 million in the third quarter declined $3.5 million from the revenue recorded in the third quarter of last year. The third quarter revenue was approximately $1.5 million less than we expected. Other revenue, which is comprised primarily of royalties and services revenue, was $2.6 million in the third quarter.

Our December quarter gross margin of 69.6% decreased from 71.4% recorded in the third quarter of last year and from 70.4% in the September quarter. The sequential decrease in our gross margin was primarily due to product mix and the effects of the anticipated lower royalties. Consistent with our previous guidance, we expect our gross margin during the next 12 to 18 months to be over 65% depending on product mix.

During the December quarter, we experienced an ASP reduction on like-for-like products in our HBA business of 1.6%. This is consistent with the amounts experienced in prior quarters and within our expectations.

Next, I'd like to cover third quarter operating expenses. Total operating expenses were $53.4 million in the third quarter, up 22% from $43.7 million reported in the same quarter last year. This increase was primarily due to our investments in emerging markets, including storage virtualization, storage routing and InfiniBand. On a sequential basis, operating expenses increased 3% from $51.7 million reported in the second quarter.

Engineering expenses in the third quarter increased 29% to $29.1 million versus a year ago, an increase as a percentage of revenue from 17.5% to 18.5%. On a sequential basis, engineering expenses in the third quarter increased 3%. We will continue to support existing and future technology development with engineering expenses as a percentage of revenue ranging from 17% to 20%.

Sales and marketing expenses in the third quarter increased 20% from a year ago to $19.3 million and declined as a percentage of revenue from 12.4% to 12.2%. On a sequential basis, sales and marketing expenses increased 7%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 14%.

G&A expenses in the third quarter of $5 million declined by $0.1 million from a year ago and declined as a percentage of revenue from 3.9% to 3.2%. G&A expenses declined $0.5 million sequentially. We expect that future G&A expenses as a percentage of revenue will range from 3% to 4%. We continue to focus on improving efficiency in our operating expenses while investing in critical new development programs for existing and new technologies.

In the December quarter, QLogic generated an operating profit of $56.3 million, an increase of 16% versus last year. On a sequential basis, operating profit increased $5.7 million, or 11%. During the December quarter, operating profit margin was 35.7%. Interest and other income was $5.6 million in the third quarter, an increase of $0.5 million versus a year ago, and a decrease of $0.2 million from the September quarter.

The income tax rate for the third quarter was 27.5%. This rate improved from the 33% for the first six months of fiscal 2007, as a result of the recent reinstatement of the research credit, and the resolution of routine tax matters from prior years.

Our third quarter income from continuing operations increased 43% to $44.9 million or $0.28 per diluted share from the third quarter of last year when the Company recorded income from continuing operations of $31.4 million or $0.19 per diluted share. On a sequential basis, income from continuing operations increased $6.6 million, or 17% from $38.3 million or $0.24 per diluted share.

Our income from continuing operations as a percentage of revenue in the third quarter was 28.5%, compared to 24.3% reported in the same quarter last year, and 26.4% in the September quarter. Our third quarter diluted income per share from continuing operations, up $0.28 exceeded the high end of the forecasted range of $0.25 to $0.27 per share provided during our second quarter conference call. This represents the 46th consecutive quarter of profitability for QLogic. Our GAAP net income for the third quarter was $35.5 million or $0.22 per share.

Now let me summarize the results for the first nine months of fiscal year 2007. Revenue for the first nine months of fiscal 2007 was $439.6 million, an increase of $76 million or 21% from the comparable period of fiscal 2006. Our revenue from SAN Infrastructure products for this period was $415.1 million, up 23% from the comparable period last year.

Gross margin for the first nine months of fiscal 2007 was 70.2%, down from 70.9% from the comparable period last year. Operating income for the first nine months of fiscal 2007 increased 13% to $151.1 million from $133.3 million in the comparable period of last year.

Income from continuing operations for the first nine months of fiscal 2007 was $116.9 million, an increase of $26.7 million or 30%, from the comparable period of last year. Income from continuing operations per share on a diluted basis was $0.73, an increase of $0.22 over the comparable prior year period. Net income on a GAAP basis for the first nine months of fiscal 2007 was $87 million or $0.54 per share on a diluted basis.

Our financial position continues to be strong especially with to regard to our cash flow. During the third quarter, we generated $42.2 million of cash from operations. The Company's cash and marketable securities were $555.3 million at the end of the third quarter.

In November, we completed our previously announced acquisition of SilverStorm Technologies for approximately $59 million in cash. The third quarter receivables of $85.5 million increased $16 million from $69.5 million at the end of the September quarter.

The DSO rate in the December quarter was 49 days, compared to 44 days in the September quarter. This increase is consistent with our expectations for the December quarter seasonality. With hub arrangements at our OEM customers and greater contribution from our distribution channel, we continue to expect upward pressure in our DSO performance. Based on our current customer channel mix, we expect DSO in the future will range from 45 to 55 days.

Annualized inventory turnover in the December quarter of 4.3 turns improved from 3.9 turns in the September quarter. Inventory at the end of the third quarter was $44.5 million, an increase from $43.7 million at the end of the September quarter. The increase in the December inventory was due to the acquisition of SilverStorm during the quarter. As a result of increased supply chain requirements associated with a broader, high value product portfolio, we expect that inventory will be approximately $45 million in the March quarter.

Our long term outlook for our core business remains favorable. Based on a foundation of design wins and existing markets as well as emerging markets, we expect to see continued growth in our year-to-year revenue.

With current customer forecasts based on traditional seasonality and an accelerating decline in revenue from Management Controllers, we expect total revenue for the March quarter to be in the range of $147 million to $153 million. This assumes approximately 20% year-over-year revenue growth for our SAN infrastructure products. Due to the potential variation of product and technology mix, we expect gross margin for the March quarter to be approximately 69%.

Considering the above revenue gross margin expectations, combined with plant operating expenses, infrastructure investments, and a projected tax rate of approximately 31%, the current outlook is to achieve non-GAAP diluted earnings per share of approximately $0.22 to $0.24 in the March quarter.

Our GAAP diluted earnings per share in the March quarter is expected to continue to differ from the non-GAAP diluted earnings per share primarily due to acquisition-related charges and non-cash charges associated with stock-based compensation.

Upon completion of the purchase price allocation related to our acquisition of SilverStorm, a portion of the purchase price will likely be allocated to in-process research and development, or IPRD and intangible assets. Accordingly we will recognize a charge to operating expenses for the amount of the IPRD and amortization of intangible assets. As a result of the uncertainties associated with the allocation of the purchase price, we are unable to estimate the effect this will have on our GAAP diluted earnings per share for the March quarter.

However, excluding the impact that SilverStorm purchase price allocation will have on our GAAP diluted earnings per share, we currently expect a difference between GAAP and non-GAAP diluted earnings per share will be approximately $0.06 per share in the March 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 and the Company's filings with the SEC and the disclaimer statement at the end of our third quarter fiscal 2007 earnings press release.

I would now like to turnover this conference call to H.K. Desai, our CEO and President. H.K?

H.K. Desai

Thank you, Tony. And thank all of you on the call for joining us today. During the third quarter of fiscal 2007, we have again set a new record for revenue and achieved our 46th consecutive quarter of profitability. Revenue in the third quarter fiscal 2007 was $157.6 million, up 22% from the comparable quarter last year and 8.5% sequentially. Third quarter revenue was within our guidance range of $154 million to $160 million provided during our second quarter earnings conference call.

In addition, we achieved record earnings for the third quarter. Our diluted earning per share was $0.28, an increase of $0.09 from the comparable quarter last year and $0.04 sequentially. This exited the high end of our guidance range of $0.25 to $0.27 per share provided during our second quarter earnings conference call.

During the third quarter, the revenue from SAN infrastructure products, which is comprised primarily of host bus adapters, switches and silicon, continued to grow at above market rates. For the third quarter, revenue from SAN infrastructure products was $152.5 million, an increase of 27% from the comparable quarter last year.

Driven by the ongoing transition from direct attached storage to SANs, and accelerated by the chip to mezzanine card conversion for blade servers, our HBA revenue experienced significant growth. Our HBA revenue, which includes both Fibre Channel and iSCSI technology, grew 33% from the comparable quarter last year and 14% sequentially. In addition to strong industry growth, QLogic continues to expand its market share positions.

For the first nine months of fiscal 2007, HBA revenue has grown 26% from the same period a year ago. This is well above our anticipated 10 growth which we have estimated to be in the mid-teens. The most recent market share data as reported by Dell'Oro shows that QLogic's Fibre Channel HBA revenue market set for the first nine months of calendar year 2006 was 49%. This is an increase of 5 share points over the same period in 2005. This expands our market share lead over the nearest competitor to over 10 share points.

With a 14% sequential HBA revenue growth in the fourth calendar quarter, we anticipate that QLogic will have achieved another year of steady market share gains in calendar year 2006. Transitions to 4-Gig HBA technology is tracking to our expectations. For the third quarter, 4-Gig HBA product revenue represented 56% of our total Fibre Channel HBA revenue and increased 80% sequentially.

Fibre Channel switch revenue continued to grow, although at a slower rate than anticipated. Overall, third quarter switch revenue grew 12% from the comparable quarter last year and 9% sequentially. For the first nine months of the fiscal 2007, we have grown the switch product revenue by 13% over the comparable period last year, when royalty for the switch IP that we license is included, the growth rate increases to 19%.

In October, we launched production shipments of our new SANbox 9000 multilayer, multiprotocol core switch. Early product reviews from the end-users have been very positive. As we have stated in the past, market share gains in our switch business required that we add additional OEM partners for our products.

In January, EMC completed qualifications of the QLogic's SB 9000 core switch. The SB 9100 and SB 9200 are now EMC support metrics listed. These are significant milestone for QLogic. Achieving EMC listings enables SB 9000 family of switches along with a stackable SB 5000-H switches which were qualified last year to be sold as a total solutions to EMC's very large customer base.

Earlier today, we announced our licensing agreement with Alacritech. In addition to providing Chimney support for Microsoft Windows, this agreement allows QLogic to respond to the market need for multi-OS support of 10-Gigabit TCP offload. In this agreement, QLogic has acquired the rights to technology that will enable us to deliver 10-Gigabit Ethernet adapter with a TCP offload for all open and proprietary operating system including UNIX, Linux and Microsoft Windows.

The channel business continues to be an important growth driver for QLogic. Overall channel revenue for SAN infrastructure products increased 26% from the comparable quarter last year and 3% sequentially. For the third quarter, the channel accounted for 27% of our HBA and switch revenue. We continue to expand worldwide channel coverage and believe that these efforts will continue to strengthen our worldwide market leadership role in data center connectivity.

Although we anticipated the continual erosion of our Management Controller business, the abrupt decline in revenue from this product line was a surprise. For the third quarter, product revenue for Management Controller declined 53% sequentially to $2.6 million. This decline was approximately $1.5 million greater than we expected.

We are in the process of integrating our new InfiniBand acquisitions into QLogic. We have a number of OEM design wins for both our HBA and switch products and anticipate the market starting to accelerate. While product has started to shift, we do not expect meaningful revenue from our OEMs until the second half of calendar year 2007.

Our revenue and earnings growth for the first nine months of fiscal 2007 was strong. For the first nine months of fiscal 2007, revenue increased by nearly $76 million or 21% from the comparable period last year. Income from continuing operations for the first nine months of fiscal 2007 was $116.9 million or $0.73 per diluted share. This represents a $0.22 improvement over the first nine months of fiscal 2006. This growth was achieved without significant revenue contribution from any of our new markets. As the expansion strategy we have accelerated over the past year unfolds, we believe it will enhance our ability to deliver industry-leading performance.

Thank you. Operator, we are now ready for questions.

Question-and-Answer-Session

Operator

[Operator Instructions]

And we'll start with Laura Conigliaro with Goldman Sachs.

Laura Conigliaro - Goldman Sachs

Yes, a couple of things. First of all, given the strength on the HBA side, can you talk to us a little bit about why gross margins were so light? I mean, I understand some of the things that you talked about as not being, as not meeting your expectations, but typically we would expect that those have lower margins.

Also, can you please help us better understand the product mix in SAN infrastructure, on the SAN infrastructure side that really led to that margin decline and then one more follow-up.

Tony Massetti

Sure, Laura. With regard to gross margins in the quarter, 69.6%, we did guide approximately 70% on the September call for December, so we were within the range. A couple of points. Fibre Channel product gross margins in total were flat sequentially, so HBAs, switches, silicon, flat from September quarter to December quarter.

So what drove the small decline was the anticipated decline in royalty revenue, which is at 100% gross margin, and as we talked about in the script, product and technology mix. The product mix was, Management Controllers declined as we talked about, $1.5 million more than we expected in the quarter, and as we said in past calls, that is a higher gross margin than the corporate average. And then the second on technology mix, the small IB revenue, really minimal, had a lower gross margin than the corporate average, due to the initial integration to QLogic processes, so hopefully that answers both your questions.

Laura Conigliaro - Goldman Sachs

I guess the follow-up is about the EMC qual that you referred to. How should we really think about that, as far as improvements in your switch revenue growth?

H.K. Desai

So, Laura, the key really is that -- we said that we were kind of a little disappointed with our switch business, particularly for the first nine months, which grew about 13%, and if you include the relative of 19%, and we expected better growth.

And I think the key for us going forward is we, particularly the 9000 product, we have to have some more OEM qualifications. What we have done with the EMC really is it's a select, its EMC qualified and certified. But we still need to have some traction with some of the OEMs if you want to continue the growth higher than 13%.

Laura Conigliaro - Goldman Sachs

Thank you.

Tony Massetti

You're welcome.

Operator

Now we'll hear from Aaron Rakers of AG Edwards.

Aaron Rakers - AG Edwards

Yes. Thanks, guys. I guess my question is kind of piggybacking on the last comment. In regards to further OEM qualifications, H.K., when do you expect those to begin to materialize, and when -- you know, I guess first of all from the EMC standpoint, do you expect revenue contributions to begin to materialize in this next quarter?

And when do we see -- I think for a long time, you've talked about 20% type growth in that SAN switching business come into play. And I have a follow-up if I can.

H.K. Desai

So what we expect is that we will start seeing some revenue from the EMC qualifications probably next -- maybe in the June quarter, starting in April some time, and some will be in the March quarter too. But I think the other OEM qualifications is going to take, like I said in a couple of conferences, it will take about six months.

I mean there is no guarantee that they're going to qualify the product, but we are seeing a lot of interest from them, either the end users or OEMs. So I think next six months is when we'll determine what's going to happen.

Aaron Rakers - AG Edwards

Okay. And the follow-up is if I look at your revenue of guidance for the quarter, it looks like a range that looks to be well below the typical seasonal 3% decline that we've seen in the March quarter over last few years. I understand the concerns on the switch side, but you've got still the mezzanine card transition playing out. Just help me understand or help us understand why the guidance compared to typical seasonal trends in the March period.

Tony Massetti

Sure, Aaron. Well, the guidance, as I mentioned in the script, the SAN Infrastructure Products, which is really the core business, does assume that that business grows 20%, -- approximately 20% year-on-year. So still very good growth forecasted for the March quarter.

But you touched on the -- you know, seasonality is really probably the key driver, as well as the accelerating decline in the Management Controller business. As H.K. mentioned in his script, that was down a little bit more than we anticipated and the run rate is less than $1 million for the March quarter. So the core business is still growing as it's been growing and the non-core business with Management Controller is trailing off.

Aaron Rakers - AG Edwards

And then final question if I can --

H.K. Desai

If I can add one more thing on that, I think the key really is the point is that we expect -- what's going to happen is that we say we have -- we are seeing an abrupt decline in our Management Controller business because end of life, about year and a half ago, we didn't invest anything on these things.

And finally, the customer has qualified some of the product and we start seeing that decline. And on the March quarter, we expect a couple of million dollar decline in the Management Controller. And I think that's where I think guidance is a little lower.

Aaron Rakers - AG Edwards

Thanks for that clarity. And then final question, if I can. Any color on how we should anticipate InfiniBand contributions ramping? Just any color there would be helpful.

H.K. Desai

So we expect, like I said, we have minimal contributions from in the December quarter and we're expecting the same thing. It's a newer technology and it's very, very difficult to really predict what's going to happen. So we expect a minimal contribution from the IB in the March quarter, and I think it will take maybe a couple of quarters we will start seeing the tractions in that business.

We're also integrating those technologies and those companies into the QLogic business. So we are more focusing on the product and the product quality and the supply chain and so on versus going after the revenue anyway. So we might -- what we're doing is we are probably not focusing on the topline growth. It is about three to six months before we get the product quality figured out.

Aaron Rakers - AG Edwards

Thanks a lot, guys.

Tony Massetti

You're welcome, Aaron.

Operator

Now from Thomas Weisel Partners, we will hear from Kevin Hunt.

Kevin Hunt - Thomas Weisel Partners

Hi. Thanks. So I just want to kind of follow-up on a couple of things. On the switch business, was that actually down sequentially it sounds like?

H.K. Desai

It was 9% up sequentially.

Kevin Hunt - Thomas Weisel Partners

Okay. I missed that. And then in terms of the Management Controller business, is that -- should we expect that to be going to zero then pretty quickly or what --

H.K. Desai

It will be less than $1 million in the March quarter.

Kevin Hunt - Thomas Weisel Partners

Okay. And then finally just on the InfiniBand, you said it was minimal. How are you guys going to actually report that when it starts becoming material? Is it going to be --

H.K. Desai

Yes. We haven't decided how we're going to break that out. I think for the March quarter since it is going to be minimal, we'll continue to report in the SAN infrastructure line. And then looking into the June quarter and beyond, as it ramps and becomes more meaningful, we'll decide how best to --

H.K. Desai

Yes. I mean new fiscal FRA -- we'll figure out how we're going to break that out.

Kevin Hunt - Thomas Weisel Partners

Okay. Thanks a lot, guys.

H.K. Desai

Sure.

Operator

Now Srini Pajjuri from Merrill Lynch has the next question.

Srini Pajjuri - Merrill Lynch

Thank you. H.K., I guess going into the quarter, you definitely sound a little bit more bullish about the end market. Could you give us a little bit more idea as to what you saw during the quarter, toward the end of the quarter, and maybe, you know, that changed your outlook for the business in general?

H.K. Desai

We saw some softness in the last week of the December, and it may be because of the holidays. But particularly on in the channel site, the channel business, we saw softness than what we expected. We saw some softness also in the last week, week and a half, on the blade server, particularly on our switch blade business.

And what I haven't seen much -- I mean January is looking the same as what we expected. But what I'm seeing is particularly looking at some other report -- we're seeing a slight softness in the March quarter than what we have seen in the fourth quarter, in the December quarter.

Srini Pajjuri - Merrill Lynch

Is the softness coming from any particular region or customer or is it broad based?

H.K. Desai

No. Like for example, in the December quarter, we had a very strong December quarter from beside the Management Controller problems, which we haven't expected and a little bit channel business. What we have seen the five OEM's, which is about 57% of our revenue, and four of them were double-digit sequential growth in the December quarter. So there was a strong December for the OEMs.

Srini Pajjuri - Merrill Lynch

Okay. And then on the royalty revenues, what exactly is included? Is it all switch royalties or is there anything else in there, and also how do you see that trending going forward?

Tony Massetti

Sure, Srini. Yeah, it's mostly switch revenue, and we think it will be about flat going forward. There might be a quarter where there's another million or so. But the going rate as we've talked on past calls is probably about $2 million for that line item, the other non-product category of revenue which royalty is the driver.

Srini Pajjuri - Merrill Lynch

Okay. And then coming back to H.K., do you still expect your switches to grow 20% this year?

H.K. Desai

Yes.

Tony Massetti

You mean in our fiscal '07?

Srini Pajjuri - Merrill Lynch

Yeah, calendar '07.

Tony Massetti

Calendar '07? Yeah, our goal continues to be to grow the switch business 20% or greater.

Srini Pajjuri - Merrill Lynch

Okay. Fair enough. And then, lastly, Tony, you said your gross margins will be over 65% and then you're guiding to 69%. And given that your royalties are going to be flattish going forward, is there any reason to believe that your gross margins have more downside than 69% for the next few quarters?

Tony Massetti

Well, we don't guide beyond the current quarter, Srini, as you know. So we guided 69% for the March quarter. It really depends on product mix, you know, switch business growth, IB business growth. So when we talk about 65 -- we say over 65%, we're talking longer term, 12 to 18 months.

So my comment about Fibre Channel product gross margins being flat sequentially, I think is an important one. And ASP's have been -- they continue to be very stable. So I think it comes down to product mix as we said in past calls that's going to drive margins.

Srini Pajjuri - Merrill Lynch

Okay. Thanks, guys.

Tony Massetti

You're welcome.

Operator

Robert Renouard with Robert Baird has our -- sorry, Dan Renouard with Robert Baird has our next question.

Dan Renouard - Robert Baird

Thank you. My question, I guess, is on use of cash, Tony and H.K. And I know I probably beat on that drum a lot, but you had a very good cash flow quarter. You guys have a lot of cash on your balance sheet. And historically you've talked about that $40 sort of bogie is -- or I guess $20 now is sort of where you get below that, you start to view it as more accretive and you get more aggressive.

Is that still where you're at and how do you anticipate as the stock looks like it's going to be meaningfully below 20 or at least somewhat below 20, would you expect to be a lot more active this quarter on the buyback side?

H.K. Desai

Sure, Dan. As you know, we've bought back $646 million of stock since fiscal year '03, and I think it will price below $17 per share. So we've been timely in our buyback. Most recently in the September quarter we bought back $56 million, again at around $17.

So as we talked about on past calls, as the stock price moves into the 20s, it's less accretive. It takes a lot of buyback to move the EPS numbers. So it makes more sense to be more active on the buyback when the share price is in the teens, the upper teens, mid teens, of course. So as the share price -- should the share price come down, it would make sense to be more active, yes.

Dan Renouard - Robert Baird

Did you buy any back this quarter?

H.K. Desai

In the December quarter, no, Dan.

Dan Renouard - Robert Baird

Okay. Thanks.

H.K. Desai

Yeah, the average share price was well above 20 for the quarter.

Dan Renouard - Robert Baird

Okay. Thank you.

H.K. Desai

You're welcome.

Operator

Moving on we'll hear from Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan Keegan

Hi, guys. A couple of quick questions. Your taxes came down pretty nicely, you guided for 31%. I think you have a long-term plan of bringing taxes down. Can you tell us if we should be modeling 31% going out beyond this current timeframe?

Tony Massetti

It's early to say beyond fiscal year '07, Harsh. As you know, there are many moving parts with the tax calculation. In the script we talked about the reinstatement of the research credit and the resolution of routine tax matters from prior years.

So these two drivers brought the December quarter tax rate to 27.5% and the annual rate to 31% from the 33%. So 31% is a good rate for fiscal year '07. And then on the March call and early May, we'll give you guidance for fiscal year '08. The tax rate decline really depends on the growth of our non-US Business and non-US revenue.

Harsh Kumar - Morgan Keegan

Okay. That's pretty helpful. Can you, for the December quarter and also maybe for the March quarter help us get a handle and maybe H.K. Can answer this on HBA growth versus the mezzanine card growth?

H.K. Desai

So we don't break that -- because when we say HBA we include the mascot too but I know you're going to ask the question so I'm prepared for it. So without the card, we will still have our double digit sequential growth for HBA in the December quarter.

Harsh Kumar - Morgan Keegan

That's pretty good. And kind of on a similar tone and this is probably my last question, can you maybe, I know you said that iSCSI was meaning and iSCSI were themselves were meaning. But together, did you get at least over a $1 million in the quarter or maybe help us get a ballpark of how much it was. And if you expect that to go in March in a sequential basis, the iSCSI plus HCA?

H.K. Desai

So I mean -- well, I mean you asked too many questions on that but let me answer a little differently on the HBA side. I mean, when we said HBA, we should include the iSCSI and Fibre Channel and mezz card too. But if you exclude the iSCSI we will still have grown about 14% sequentially for the Fibre Channel HBSI and the mezz card.

So the iSCSI it's not the growth coming from our iSCSI. I think the growth in the HBA, 14% sequential growth is coming strong from the Fibre Channel HBA. And some from on the mezz card.

Harsh Kumar - Morgan Keegan

Got it. And just a part of that previous question, H.K. Can you just at least tell us what the total of the newer pieces were iSCSI or if you can?

H.K. Desai

When you say that, you talk about IB?

H.K. Desai

Well, InfiniBand, yes.

Harsh Kumar - Morgan Keegan

We aren't even including that's in part of the HBA.

H.K. Desai

Got it. Okay. Thanks.

Harsh Kumar - Morgan Keegan

No, it’s that's not included at all in there.

Operator

Now, we'll hear from Mark Kelleher with Canaccord Adams.

Mark Kelleher - Canaccord Adams

Thanks, just wanted to touch on the Fibre Channel switch revenue one more time. Do you think there's any effect on the market of Mcdata and brocade getting together? Is that affecting switch revenue?

H.K. Desai

No. I mean, we have, we grew about 9% sequentially in the December quarter so I don't think that the December quarter is an issue but overall, we expect the first nine months we grow 13% for the product and 9% in royalty.

And we expected that overall for the full year probably we grow 20% plus, and it didn't happen. And I think the key reason for that is that one of the OEM who has, one of the customers OEM or switch, I think they are the one who did not grow according to what we are planning anyway.

So I think that's the biggest impact on our switch business and we don't expect that going forward anyway, so I think we have to but with the 9,000 coming out and getting some OEM tractions, I think we should grow 20 plus again in the 2007 calendar.

Mark Kelleher - Canaccord Adams

Okay. And in the blade server side, you said there was some weakness in the channel. Is that, do you think maybe competitive related? Is there any new competition that you're seeing?

H.K. Desai

No. The blade server is not sold in the channel at all. It has nothing to do with the channel. I say two things somebody asked me with economy so the key on the blade server is the one, we said on the switch side was slower than expected in the December quarter.

Mark Kelleher - Canaccord Adams

Okay. And blade servers into the OEM's were just as strong so you're not seeing any --?

H.K. Desai

No it is OEM

Mark Kelleher - Canaccord Adams

Great. So you're not seeing competitive issues with blade server?

H.K. Desai

No. We're not.

Mark Kelleher - Canaccord Adams

Okay. That's it. Thanks.

Operator

Moving on, we'll hear from Mark Moskowitz with JP Morgan.

Mark Moskowitz - JP Morgan

Yes, thank you. A couple questions, guys. Could you maybe help us understand the potential impact of the SANbox 9,000 given its meaningful ESP premium to some of your other solutions that are sold, and in terms of what could be the upper pressure as far as bringing one of your top four or five customers to maybe a 10% customer over time? How should we think about that? Is that a calendar '07 or 08 event?

H.K. Desai

It's a FY '08 event. We just announced the product in the December quarter and we start shipping some. I think it's still early. We still have a couple of from starting, which we are releasing this quarter, so I think it's FY 08 and two couple of key things in that one is that we have to assume OEM qualifications in the next six months to grow that business.

So I mean, yes, it is a higher ASP, even the channel, it can give us a more growth and higher ASP, but still if you want to continue the hard space growth of the switch business, we immediate to get some OEM.

Mark Moskowitz - JP Morgan

Okay. And then, H.K. or maybe Rick, you could answer this, kind of a follow-up to that. Given your EMC qualification and that you are done now with some of your major OEM's, what has been some of the incremental suggestion or maybe wish lists from these OEM's in terms of bringing you deeper and deeper into the core, the data center from the switch perspective?

You know are they really liking what they're seeing right now with the SANbox 9,000 hoping you are going to do a lot more after that?

H.K. Desai

Yes. They like the product from the density perspective, from the power perspective, from the cost perspective, so I think it's a great product as far as the core is concerned and the data center. I think the key question is going to be, I mean, it still takes time to further qualifications.

We have new supplier for them so it's going to take some time. Also, the transitions to going from different customers also is going to take some time so I think it's a couple of quarters before we start growing this business.

Mark Moskowitz - JP Morgan

Okay. And then, shifting gears to InfiniBand, can you give us a sense of at what point QLogic can maybe provide the silicon solution for the silver storm switch rather than using an external merchant supplier?

H.K. Desai

So we don't have any plan for these things right now. I think the key is that these are margin pressure on the IB switch product because we are buying this switch silicon for somebody else. And if you don't get the right pricing, I think there's tremendous margin pressure on the IB switch.

So if you don't get the right pricing, we might have to go and develop overall on silicon. But if you get the right pricing I don't think we need to develop anything. So it all depends on what the pricing is.

Mark Moskowitz - JP Morgan

Okay. And then just lastly, can you maybe help us understand the longer term applications of InfiniBand? I know it's early for QLogic in terms of not really having meaningful revenue streaming yet, but right now, InfiniBand is primarily server to server, interconnect. When do we see it or do we see it pop-up in the storage environment as well, InfiniBand?

Rick Franz: So this is Rick. We've already seen it, we've already seen it pop-up in storage just a little bit. We aren't expected to be a big player in storage for sometime into the future. There's a lot of players that need to have storage subsystems working that marketplace.

So for the foreseeable future here, it's primarily a server-to-server interconnect plus through interconnect. And we'll use bridges to get outside of the IB into the primary storage environment. And depending on what the storage subsystem manufacturers want to do, we'll be ready when they want to go into primary storage.

Mark Moskowitz - JP Morgan

Okay. Thank you.

Operator

Now with Needham & Company, we'll hear from Glenn Hanus.

Glenn Hanus - Needham & Company

Just H.K, to follow-up on your OEM forecasts, so broadly on the HBA business, you're seeing general weakness across-the-board with most of your major OEM's or could you just sort of flush that out a little bit, in terms of what the new forecasts are versus maybe what you expected to see?

H.K. Desai

So what we have expected to see and which is what we're seeing is a typical seasonality on the HBA side or the switch side. There's no difference what we are seeing today versus what we are seeing three or four months ago. I think the key difference or guidance is the Management Controller. That's the one difference we're seeing a few months ago versus what we're seeing today, and what we observe.

So what we experience in the December quarter and what we are seeing in the forecasts now in the March quarter is Management Controllers is the biggest decline for us, $1.55 million and the $2 million in the March quarter. I think that's the biggest difference we're seeing. Everything else is the same thing we have seen before or what we expected the typical seasonality.

Glenn Hanus - Needham & Company

And -- but you were commenting on the switch business also being a little lighter and that's mostly related to getting specific OEM wins as opposed to the market; is that right?

H.K. Desai

So there are two points. One was that our overall growth rate on the switch business for the first nine months was not as good at what anticipate -- what we expected. And I say that the most leads all tied down to the one OEM. We did not get the business as much as what we anticipated.

So I think that's a killer for us on the first nine months. What we seen in the December quarter is that our switch business, you it grew 9% and it is growing bigger because the blade switch blade did not grow as much as we expected particularly last week, week and a half of the December quarter.

Now, I think we are coming back to the typical March quarter and what we see in the March quarter either the switch or the HBAs exactly what we anticipated. It's just that the traditional seasonality except for the Management control. Thank you.

Glenn Hanus - Needham & Company

Thank you.

Operator

Now we'll hear from Clay Sumner with FBR.

Clay Sumner - FBR

Thanks. Given the land mine of the Management Controller business in the December quarter, can you just refresh us on the size and the growth outlook for anymore of those other little like the other silicon buckets?

H.K. Desai

We saying -- when we talk about the San infrastructure, which is our core business, Clay, we are, the only thing we don't include in that is a Management Controller and the royalty and most small organizations.

Everything else we include other bucket is we will start seeing decline in the silicon business, which we start seeing even now because we are transitioning from our silicon to the mezz card anyway.

So I think that's actually beneficial to us versus the silicon. So I think that's beneficial to us versus the silicon business so we don't see anything else. I Think this is only, Management Controller is only non-core business, we have in our portfolio for last 18 months or so when we decided not to invest into that.

Clay Sumner - FBR

Okay. So the silicon business you referred to HBA silicon for blade servers exclusively?

H.K. Desai

Right. That’s mostly that.

Clay Sumner - FBR

Mostly that, okay. Nothing other bigger than the million bucks in that bucket?

H.K. Desai

No, I don't think so.

Clay Sumner - FBR

Okay. And on the mezzanine card transition, I think you said four gigabit HBA was about 56% of your total HBA shipments.

H.K. Desai

Correct.

Clay Sumner - FBR

Does that share for HVA is one to one of the blade services as. So we are half way through the mezzanine card transition. So that’s a good questions and we ink the four [BHK] is about 56% an the mezz card is a slightly little bit more little higher than I will tell you about two-third the transition is done from two to four or from silicon the mezz card.

H.K. Desai

Scan you give us kind of a one-time look at what is the absolute number of mezzanine card. The mezzanine card revenue in the quarter. No we don’t do that, good question. Okay. And the last for me, do you guys expect meaningful 10 gigabyte internet related revenue in 2007.

Clay Sumner - FBR

No.

Operator

Now we'll hear from Keith Bachman of Banc of America.

Keith Bachman - Banc of America

Hi, thank you. I had two questions if I could, please. Number one, I wanted to go back to silver storm and just try to understand, can you make any commentary about the revenue run rate of the business, when you acquired them?

It looks like they were taking products and had revenues at least according to industry reports but you're saying it didn't really have impact on revenue. So I'm just wondering are the industry reports knows us the S-1 registration statement just not right or was there some change in your strategy that you're delaying those revenues until you have a more robust solution including potentially even your own chip set? So that's question Number one.

H.K. Desai

Sure, Keith. We really can't comment on revenue prior to the acquisition. We're integrating the products to our processes and we've said that in the December quarter there was minimal revenue and we expect again minimal revenue in the March quarter.

Keith Bachman - Banc of America

Okay. Well let me try the follow on then if I could. Because I think your commentary was that you anticipate that InfiniBand revenues will increase in the second half of calendar year '07, I hope that was correct, calendar year '07. Is any kind of color or commentary on the gross margin impact will be up or down relative to the Company average?

Tony Massetti

Sure. As we integrate, the silver storms products, you know the margins are a little lower now. We'll integrate them into our supply chain processes and those margins will come up to more of the where the Fibre Channel switch product margins are, so that's our expectations that once we get to a steady State with that business, they will be in line with the Fibre Channel switch business.

H.K. Desai

Okay. Final also and also -- And also I think I just want to add one more thing on that is I think the key in particularly on the switch business for the IB, I think it's going to depend on the pricing on the switch silicon we acquired from a supplier and I think if that pricing is really going to determine in the margin of this business and also the traction whether we get traction generally in IB is going to depend on the pricing and if pricing is too high, I think that the market will not grow as fast as we are anticipating. So I think that pricing is going to determine key for the margins or the market traction.

Keith Bachman - Banc of America

So that's your make-buy decision, H.K?

H.K. Desai

No, where we are buying there's no make for that.

Tony Massetti

Well longer term, I mean, might you backward integrate using some of the --

H.K. Desai

Well, we don't have any strategy right now. Right now strategy is to buy from---.

Keith Bachman - Banc of America

Okay. Last one I wanted to ask, if I could was the product transition that's helping the HBA side of the business going from silicon to cards, when do you see the benefits of that slowing down or normalizing.

H.K. Desai

You talk about the mezz card. I just said that almost two-third transition is done and the one-third is to go. I think it will take probably a couple of quarters at least to complete the transitions and then to grow at the rate server growth rate.

Keith Bachman - Banc of America

Great. Thank you.

H.K. Desai

You're welcome.

Operator

Now from Bear Stearns, we'll hear from [Robert Reitz].

Robert Reitz - Bear Stearns

Yeah. Hi. I just wanted to get a sense, the new products going into EMC and possibly qualify for the other markets. What kind of sales is that market currently right now?

Can you just give me an idea of frame for that and what percent of the market would you guys like to get or do you think is a reasonable expectation? I'm not saying during which quarter but over the next couple of years? Can you just frame that for me, and then after that I've got a different question.

Tony Massetti

So that the market, if you look at the entire market, it's close to a $1 billion. For all of the switch and that includes what we consider the core product plus the fabric side and the blade switch. If you're talking about a specific customer, EMC, we don't address market shares of individual customers.

Robert Reitz - Bear Stearns

No. No, I meant what do you think if it's a $1 billion market, what would you say is a reasonable expectation. What kind of goals do you have?

Tony Massetti

Yeah. We really don’t give guidance beyond the current quarter. Right, right. We talk in terms of market, looking out beyond the current quarter we just talk in terms of markets and market growth rates. It's too early to say what our market share might be.

Robert Reitz - Bear Stearns

Okay. Then the next question is the product that's kind of running out of steam at the end of life, how big or how much of sales is that currently?

Tony Massetti

You talking about the Management Controller?

Robert Reitz - Bear Stearns

That's correct, of the total either by quarter?

Tony Massetti

Well, we said that in the March quarter, we expect less than a $1 million. So I think we are almost coming to the end of the transition. It lasted for almost 18 months now.

Robert Reitz - Bear Stearns

And what was it in the fourth quarter, can you tell me?

Tony Massetti

In the December quarter?

Robert Reitz - Bear Stearns

December quarter, right.

Tony Massetti

December quarter is at $2.6 million.

H.K. Desai

$2.6 million, Robert.

Tony Massetti

Okay. So basically.

Robert Reitz - Bear Stearns

And before there was about $5 million or something. Okay. So basically, that's a non-event. So is there anything else that's similar to that where you kind of are running out of steam or it's end of life? Is there any other products?

Tony Massetti

No. Somebody asked that question and no, we don't have any issues. I think its Management Controller problem for the December and the March quarter, I think its bad news-good news scenario for us. I think it was dragging our growth rate and now I think it's coming to the end, so after the March quarter, I think it's good news for us because it wouldn't drag our growth rate.

Robert Reitz - Bear Stearns

Okay. And the gross margin is going to be down somewhat in this quarter and you said you'd like to keep your gross margin north of 65%. Is there, that kind of the low point on the gross margin is 65% gross margin, is that the worst you see it barring the world coming to an end or something?

Tony Massetti

Well, what we've said in the script that we said over time, Robert, is that gross margins over 65% looking out over the next 12 months to 18 months really depending on product mix. So again, we don't Fibre Channel product gross margins were flat sequentially.

Pricing environment has been stable. And we were pricing on like-for-like HBAs was down 1.6% sequentially. So again, it really depends on product mix. Growth in businesses that have lower than the corporate margin. That's the only thing that we can see at this point that will drive gross margins down.

Robert Reitz - Bear Stearns

Okay. Thanks for your help.

H.K. Desai

You're welcome.

Operator

Now we'll hear from Paul Mansky of Citigroup.

Paul Mansky - Citigroup

A couple quick things, H.K. Just as we look at calendar '07 numbers, you talked earlier in the call about the gaining approximately 10 points a share on the HBA side over the last 12 to 18 months or so. As you look at your calendar '07 outlook just from internal budgeting perspective, are you anticipating flat market share up or down in HBAs?

H.K. Desai

Well, I think I can say only -- I can say that we probably continue growing HBA in the mid teens still. I mean, even into '07 anyway, so I don't know what that boils down to market share but we expect the same growth rate.

I mean, we grow 26% or something for the first three months we grew 33% year-over-year anyway.

Paul Mansky - Citigroup

Right.

H.K. Desai

So we still have 20 plus growth rate for the last couple of years or something and I still continue even we grow in the market we grow as the mid teens.

Paul Mansky - Citigroup

So you think the market is growing mid teens for HBAs?

H.K. Desai

That's what we believe, yes.

Paul Mansky - Citigroup

Yeah. Okay.

H.K. Desai

That's including the mezz cards.

Paul Mansky - Citigroup

Right. Not sure if you said this earlier, and I apologize. I was toggling back and fourth a little bit, but of your top OEM's, did you indicate flat up, down, in the quarter?

H.K. Desai

Yes. So I said that we have like of the top five OEM's, it's about 57%, 58% of revenue income, and four of them grew double digit sequentially, in the December quarter. Except one was slightly declined and that's more due to the debt product transition than anything else.

Paul Mansky - Citigroup

And on the new high end SANbox, I know you're still, it's still early days. You certainly are not into any type of volume ramp, but do you anticipate that at volume carrying better gross margins than your switch portfolio as a whole or comparable?

H.K. Desai

I think it will be comparable.

Paul Mansky - Citigroup

Okay. Great. Thanks a lot.

H.K. Desai

You're welcome.

Operator

Now, from RBC Capital Markets we'll hear from Tom Curlin.

Tom Curlin - RBC Capital Markets

Hi, good afternoon.

H.K. Desai

Good afternoon.

Tom Curlin - RBC Capital Markets

The Alacritech agreement, how much of that is really technology you guys need versus just covering yourself on the intellectual property front?

H.K. Desai

So I think that the key here is that some new technology for -- it’s only for the Microsoft, so we acquired that through our chimney support of the technology. But we have more wider partnership agreement with them that we can decide the chimney we also give the support for any operating systems, either it’s any Unix can be a proprietary, or open Unix, Linux and windows.

So we have the product that with the most broad agreement with Alacritech. So we’re going to work with them to like really drive that market. And that's what Larry and I agree on these things anyway. So I think it’s a great opportunity for both of us going forward anyway.

Tom Curlin - RBC Capital Markets

Do you -- can you walk through the -- do you have an exclusive with them on particularly the chimney implementation or is that just gives you coverage I guess, and they will license that to whomever?

H.K. Desai

You should ask that question to Larry.

Tom Curlin - RBC Capital Markets

Well that's why I'm asking it to you.

H.K. Desai

Well you can call him up and he will tell you.

Tom Curlin - RBC Capital Markets

Does it help your relationship with Microsoft with respect?

H.K. Desai

Yeah, I mean definitely, we can have support now, so.

Tom Curlin - RBC Capital Markets

Is Microsoft free user implementation without being sued by Alacritech?

H.K. Desai

Well we can support the chimney, that's a key really. You have to have this license if you want to support the chimney for iSCSI or TCP Offload.

Tom Curlin - RBC Capital Markets

Okay.

H.K. Desai

Not iSCSI. Sorry TCP Offload.

Tom Curlin - RBC Capital Markets

Okay.

H.K. Desai

If you want a TCP Offload or you have it -- for the chimney support you have to have this license.

Tom Curlin - RBC Capital Markets

Yeah. Okay.

H.K. Desai

But I mean, what we did differently than other people probably, which I don't know what other people are doing is we have a really broad I -- we went after for the broad arrangement with this thing, the ten gig Ethernet take off. I think we want to make sure that we have a broad agreement with Alacritech, so we can support all the ways and work together on this for those -- creating the market.

Tom Curlin - RBC Capital Markets

Okay. And then on the blade server side, are you seeing, I don't – I realize no share loss obviously on a per platform bases, but do you think that share shifts among OEM's within the blade server market is driving and you're a relative participation if you will on each platform, is driving some of that revenue weakness or I guess at least below plan execution on the Blade Switches?

H.K. Desai

I really don't have the data. I really cannot make comment about my OEM's, what's going on between the share or something. But I mean within the OEM, the only thing the data we have is that we haven't lost a share.

Tom Curlin - RBC Capital Markets

Okay. And then finally on the distribution, you mentioned some distribution weakness. What do you see as the root cause of that if the OEM business was relatively strong in the quarter, what do you think drove distribution weakness relative to OEM?

H.K. Desai

So I think particularly, it's like if you look at the -- what we say is that on the channel business, particularly the last week of the quarter was not as strong of what we anticipated and we look at the detailed number is that it's mainly coming from a switch channel business versus HBA channel business. So the weakness is coming from the switch side of the channel business.

Tom Curlin - RBC Capital Markets

Okay. And so that's, of course that's mostly low-end box – I mean low-end entry level I guess, is it the 20 port product through the channel then?

H.K. Desai

I mean everything. All of our products are through channel on the switch side. Our 5,000 cities or the 1,400 everything is go through channel.

Tom Curlin - RBC Capital Markets

And is that, any feedback from your partners on what caused that? Is there some competitive pricing actions or you know?

H.K. Desai

I think it's too early to say that and we also reporting the 9,000 to the channel now. So I think that the business will come back. I'm not worried about that, I think it will come back in March quarter.

Tom Curlin - RBC Capital Markets

All right. Thank you very much.

H.K. Desai

Sure.

Operator

And now we'll hear from Shebly Seyrafi with Caris & Company.

Shebly Seyrafi - Caris & Company

Yes, hello. So, Tony you talked about the San infrastructure segment growing around 20% year-to-year, that's down 4% as I calculated sequentially. How do you think the HBA and switch businesses separately will grow sequentially in the March quarter versus that down 4%?

Tony Massetti

Yeah. We said approximately 20% year-on-year, Shebly, and we're not going to break out the HBA from the switch.

H.K. Desai

We don't breakdown those on the guidance.

Tony Massetti

Right.

Shebly Seyrafi - Caris & Company

Right. But can you at least talk about which one do you think will grow faster for you?

H.K. Desai

No. I mean, seasonally, you expect both of them for the decline, that's what our expense is in the March quarter. So I mean, it's nothing more than what we anticipated or the forecast is nothing more than we anticipated. So there's nothing different.

Shebly Seyrafi - Caris & Company

Okay. So also you talked about softness late in the December quarter in the channel, do you believe that that was QLogic's specific or do you think that was reflective of the HBA margin in general?

H.K. Desai

It's a QLogic Switch specific more than anything else.

Shebly Seyrafi - Caris & Company

So, no HBA weakness?

H.K. Desai

No. We have pretty good HBA growth in the channel.

Shebly Seyrafi - Caris & Company

I noticed that your Europe business grew quite a bit. It was like 7 million or so, 6 to 7 million sequentially and your US business was down. Maybe you can talk about how Europe, the changes in Europe might be a factor in your forecast. Do you expect the business in Europe to decline sequentially after this big growth in the December quarter?

Tony Massetti

Sure. Shebly, we haven't seen a shift in any of our OEM customers in terms of revenue distribution. The way we categorize revenue on the earnings announcement is based on destination point, so as we ship our product to international locations for our OEM's.

And then that revenue, those HBAs for example, are pulled from hubs overseas, we record that as our international revenue. But, you know, it will be in H HP and IBM or Dell and so on. So it really depends on where those OEMs are so.

H.K. Desai

So I mean, it's our overall contribution from the OEM hasn't changed and I don't think that business has changed US versus Europe, I think the shift is like the hub locations are shifting and I think that's impact of how we count revenue.

Shebly Seyrafi - Caris & Company

Okay. Finally for me, the royalty business or the other, I'm trying to see how to predict the future. It was at $2.6 million in the December quarter. Do you expect it going back to, you know three plus say over the next year per quarter?

I do know that or note that your relationship with the top switch Company who I believe was giving you some royalties has changed. Is that a factor as well?

Tony Massetti

We've talked about that earlier, Shebly. I think for a modeling assumption, approximately $2 million per quarter is good for fiscal '08.

Shebly Seyrafi - Caris & Company

Okay. Thank you very much.

Tony Massetti

You're welcome.

Operator

And gentlemen, there are no further questions.

Tony Massetti

Okay. Thank you for joining us for our third quarter fiscal 2007 conference call. We look forward to discussing our Fourth Quarter and fiscal year 2007 results with you at our next quarterly Conference Call in early May. Also we have several upcoming conferences that we'll be attending.

In February we'll be presenting at the Thomas Weisel Partners Technology Conference and the Goldman Sachs Technology Investment Symposium. In March, we'll be presenting at the Morgan Stanley Technology Conference and Citigroup Small & Mid-Cap Conference.

Please refer to our investor relations website at www.qlogic.Com for any updates to the conference schedule. For any of you that will be attending these conferences, we look forward to seeing you there. Thank you.

Operator

That does conclude today's conference and we do thank you for your participation.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: QLogic F3Q07 (Qtr End 12/31/06) Earnings Call Transcript
This Transcript
All Transcripts