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

QLogic Corporation (NASDAQ:QLGC)

F4Q 2011 Earnings Call

May 5, 2011 5:00 pm ET

Executives

Simon Biddiscombe – President and Chief Executive Officer

Jean Hu – Senior Vice President and Chief Financial Officer

H. K. Desai – Executive Chairman

Analysts

Katy Huberty – Morgan Stanley

Glenn Hanus – Needham & Company

Paul Mansky – Canaccord

Keith Bachman – Bank of Montreal

Kaushik Roy – Wedbush Securities

John Slack – Citigroup

Douglas Ireland – JMP Securities

Rajesh Ghai – ThinkEquity

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Fiscal Year 2011 QLogic Earnings Announcement Conference Call. As a reminder today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Simon Biddiscombe, Chief Executive Officer. You may begin when ready, sir.

Simon Biddiscombe

Thank you, Keith. Good afternoon, and welcome to QLogic’s fourth quarter and fiscal year 2011 earnings conference call. I am Simon Biddiscombe, President and Chief Executive Officer and with me is Jean Hu, our recently appointed Senior Vice President and Chief Financial Officer.

Jean has more than 18 years of financial and corporate development experience and joins us from Conexant Systems where she mostly recently served as Senior Vice President and Chief Financial Officer. Please join me in welcoming Jean to our team.

On today’s call Jean will begin with a review of the fourth quarter and full year 2011 financial results then I will follow with a discussion of the current state of our business. We will then open the call for questions.

With that I’ll turn the call over to Jean. Jean?

Jean Hu

Thank you, Simon, and good afternoon. Certain of our comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.

We refer you to the documents QLogic files with SEC, specifically our most recent Forms 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our fourth quarter earnings press release issued earlier today, we reported both the GAAP and the non-GAAP results. All the references we’ll make on our call today relates to non-GAAP results unless otherwise called out. Our reconciliation of non-GAAP to the GAAP financial measures is available on our website under Investor Relations.

Turning now to our financial results for the fourth fiscal quarter ended April 30th 2011. As a remainder to everyone, our fourth quarter included 14 week. Our revenue in the fourth quarter was $152.3 million, an increase of 5% from the same quarter last year. This revenue was at the high end of our guidance range of $148 million to $153 million provided during our third quarter earnings call.

Our fourth quarter revenue from host product which have comprised primarily of fiber channel converged and the 10-Gig Ethernet adapters was $109.1 million and increased 5% from $103.7 million recorded in the fourth quarter of last year.

Fourth quarter revenue from network products which are comprised primarily of fiber channel and InfiniBand switches with $24.3 million and increased 8% from $22.6 million recorded in the fourth quarter of last year. Our fourth quarter revenue from Silicon products comprised over fiber channel converged 10-Gig Ethernet and iSCSI chips was $16.1 million and decreased to 4% from $16.7 million recorded in the fourth quarter of last year. Our service and other revenue was $2.8 million.

Our fourth quarter gross margin of 67.8% improved from 66.6% recorded in the fourth quarter of last year primarily due to higher volume to absorb manufacturing cost. Our gross margin exceeded our forecast of 66% to 66.5% provided during our third quarter earnings call primarily due to product mix.

Next, I would like to cover our fourth quarter operating expenses. Total operating expenses were $58.3 million, up 5% from $55.5 million reported in the fourth quarter of last year. Operating expenses were consistent with our expectation.

Engineering expenses in the fourth quarter of $33.2 million increased 9% from year ago and it increased as a percentage of revenue from 20.9% to 21.8%. Sales and the marketing expenses in the fourth quarter of $18.3 million increased 3% from year ago and it decreased as a percentage of revenue from 12.1% to 12.0%. G&A expenses in the fourth quarter of $6.8 million were 12.5% of revenue.

Operating profit in the fourth quarter of $44.9 million increased 8% from a year ago and increased as a percentage of revenue from 28.5% to 29.5%. Interest and other income was $900,000 in the fourth quarter.

Our income tax rate for the fourth quarter was 14.4% resulting in an annual rate for the full year of 9.3%. Our fourth quarter net income of $39.3 million increased to 21% from a year ago and it represent a net profit margin of 25.8%.

Our fourth quarter net income per diluted share of $0.37 was significantly better than the $0.28 we achieved last year and exceeded the $0.32 to $0.35 range we provided during our third quarter earnings call. This represents 63rd consecutive quarter of profitability for QLogic.

Turning now to our balance sheet. The company's cash and investment securities was $384.1 million at the end of the fourth quarter. We continue to maintain a strong cash position and have no debt. During the fourth quarter, we generated $73.3 million of cash from operations.

During the quarter, we purchased $31.5 million of company’s common stock at an average price of $17.62. Since 2003, we have used $1.63 billion to purchase 103.3 million share of those companies common stock.

Receivables of $70.1 million at end of the fourth quarter decreased sequentially from $83.9 million at end of the third quarter.

DSO at end of the fourth quarter was 45 days and decreased from 49 days at end of the third quarter. New entry at end of the fourth quarter with $26.9 million and increased from $25.9 million at the end of the third quarter. Annualized inventory turns for the fourth was 6.8 compared to 7.9 times achieved in the third quarter.

Now, let me summarize the results for the full fiscal year 2011, which includes 53 weeks. Revenue was $597.2 million, an increase over 9% from the prior year. Operating income for fiscal 2011 increased 21% to $180.2 million and resulting in an operating margin of 30.2% compared to 27% in fiscal 2010.

Net income for fiscal year 2011 was $167.8 million or $1.54 per diluted share and increased 43% from the prior year. As a reminder to everyone, our EPS included a benefit of $0.13 per share related to third quarter specific income tax items. The fiscal year 2011 net profit margin was 28.1%.

During the fiscal year, we generated a free cash flow of $167.3 million and purchased 10.7 million shares of our common stock for $186.4 million at average price of $17.35.

Before we turn to the outlook for our fourth quarter of fiscal 2012, I want to briefly update you on the impact of QLogic of the tragic earthquake and tsunami in Japan. Despite the magnitude of the tragedy, we don't believe it had any impact on our financial performance for the fourth quarter. As we look into the future, we have carefully evaluated the potential impact of these events on our supply chain and have taken proactive steps to mitigate any potential supply exposures. While we will continue to closely monitor the situation, we currently do not expect to have any disruptions to our supply chain with adversely impact our results of operations for the first quarter.

In addition, while none of our major customers have advised us of any non-QLogic supply constraints that would materially impact their purchase of our products. We continue to be cautious regarding their product demand for the September quarter and beyond.

Turning now to the outlook for our first quarter of fiscal 2012, we expect total revenue for the first quarter to be in the range of $145 million to $153 million. As it be the point this guidance represents normal seasonality of approximately 2% sequential growth the Host and the Network Products after adjusting for approximately $4 million of revenue from the 14 week in the fourth fiscal quarter of 2011. We expect revenue from Silicon product to be approximately $40 million.

During the fourth quarter, we expect gross margin to range from 66% to 67% when combined with the planned operating expense of approximately $59 million. Our projected annual tax rate of approximately 15% and the diluted share account of approximately $107 million shares, we expect to achieve non-GAAP earnings per diluted share of approximately $0.30 to $0.35 in the first quarter.

Actual results for future periods that may differ materially due to a number of factors including that was outlined during the course of this conference call, in the companies filing with the SEC, I mean in the disclaimer statement at end of our earnings press release. I would now turn the call over to Simon. Simon?

Simon Biddiscombe

Thanks, Jean. My comments today will include the discussion of our business highlights and accomplishments for fiscal 2011 as well as the most recent quarter. Fiscal year 2011 was highlighted by improved financial performance, continued focus and investment in emerging technologies and market leadership in both our traditional and expansion markets. Our customers and partners continue to reinforce the value and importance of our long-term relationships, focus on execution and product portfolio strategies.

On the financial front, I’m very pleased with our execution and discipline. For fiscal year 2011 we delivered revenues of $597.2 million, an increase of 9% and we achieved an operating margin of 30.2% and a net profit margin of 28.1%.

Turning to the fourth quarter, our revenue of $152.3 million, a sequential decrease of 2% and at the high end of the guidance we provided during our third quarter earnings call. On a sequential basis revenue from Host Products was down 4%, within Host Products our revenue for fiber channel converged and 10-Gig Ethernet Adapters each performed better sequentially than the overall Host performance.

Revenue from Network Products was down 16% sequentially, with the Network Products our revenue from InfiniBand, which has declined more than the overall Network performance. Revenue from Silicon Products was up 51% sequentially, driven by strength in Fibre Channel, converged and 10 GigE products.

I'm also very pleased with that we achieved an operating margin of 29.5% during the fourth quarter driven by higher than expected gross margins.

During the fourth quarter, our net income per diluted share was $0.37, which beat the high end of our forecasted range of $0.32 to $0.35 provided during our third quarter earnings call.

Moving beyond the financial front, our focus continues to be on convergence and 10 Gig Ethernet expansion markets while continuing an appropriate emphasis on our traditional markets.

Our total revenue in the fourth quarter from converged and 10 Gig Ethernet products grew more than 20% sequentially. We address these high growth markets with both adapters and ASIC products. Our early success in these important expansion markets is key to our longer term growth, and independent market data demonstrates that we are on plan to lead the technology.

According to the Dell'Oro Group, for the calendar year 2010, we took over the lead in the emerging FCoE converged network adapter market with more than 43% revenue market share, taking market share directly from our nearest competitor and leading them by 13 percentage points. Our leadership in the FCoE adapter market further reinforces the power and leverage of our traditional fibre channel market position and the value of incumbency.

Capping of the fiscal year, we had several key achievements in the March quarter. First, we announced that HP had completed its qualification and is shipping our 8200 series 10 Gig Ethernet CNAs and 3200 series 10 Gig intelligent Ethernet adapters for the HP ProLiant ML and DL rackmount and tower servers.

Second, Juniper Networks qualified our QLE 8200 3G CNA on its QFX 3500 switch in QFabric for Ethernet and iSCSI and is in the process of completing the qualification for FCoE based solutions.

Juniper’s QFabric Architecture delivers a quantum leap in scale, performance and simplicity for today's converged and the virtualized environments while the 10 big Ethernet QFX 3500 3G CNA provides standard based fiber channel IO convergence capabilities to satisfy the most demanding data centers. Juniper and QLogic are committed to full interoperability between these products, both our OEM partners and customers.

Lastly, we announced that our 3G CNA products are fully optimized for Cisco data center fabric, which is designed to be simple, scalable, and secure, delivering any application across any location within the data center, across data centres or to the cloud. Combined with Cisco’s Data Center Fabric, our 3GCNA products deliver N2N convergence and intelligence for highly secured Cloud Computing and virtualized data centers. Every major server OEM and the leading storage OEMs a nice shipping QLogic converged in 10-Gig Ethernet products. This milestone combined with early market leadership sets the stage for continued revenue expansion as convergence in 10-Gig Ethernet are more broadly deployed.

Cost convergence and 10-Gig Ethernet are significant expansion opportunities for us. Traditional fiber channel storage area networking is important and continues to be a focus. According to the Dell'Oro Group for calendar year 2010 the number of fiber channel adapter port shipped was the highest ever at over $3.2 million. We will continue investment in products for the same market for many years to come deploying 16-Gig fiber channel and beyond.

Validating our traditional markets success, according to the most recent Dell'Oro Group report for calendar year 2010, we grew market share for the seventh consecutive year to 54.5%, this also represents our seventh year of market leadership. And we now have led our nearest competitor by more than 15% points for three consecutive years. This demonstrated strong brand preference and the result in Fiber Channel SAN incumbency is a significant and growing competitive advantage for us as our customers transition to Converged and 10-Gig Ethernet products.

The market share reports from industry analysts for the first calendar quarter of 2011 are not yet available. But based on our results and the publicly released results by our competitors, we’re confident that we have gained share in the fiber channel adapters in the March quarter and we’ll continue our strong leadership into an [APO]

Our InfiniBand momentum continued in March when we announced that a cluster using NVIDIA Tesla graphics processing units. QLogic InfiniBands switches and adapters and operated by the National Center for Supercomputing Applications achieved the number three ranking for MegaFlops/watt on the Green500 list of the world’s top super computers. The Green500 ranks the most energy efficient super computers in the world.

Turning now to fiber channel switches, we’re seeing a shift in our favor, which we will believe will allow us to expand our global market share in the fiber channel edge switch market. We’ve recently announced that our 5800 series 8-Gig fiber channels stackable switches and 9000 series co switches are now available from Huawei Symantec. The selection of our switches validates the value of our stackable switch architecture and further demonstrates the adoption of our switch product continues to gain momentum on a global scale.

In closing, I’m very optimistic with regard to the future of our company that a greater opportunities for QLogic than ever before. We have an unmatched foundation for success, world class execution and a winning strategy. The markets we serve are healthy.

We exited fiscal 2011 in an improved market position and achieved our key market leadership and OEM qualification goals. The key designs we won in fiscal 2011 would translate into additional revenue programs later in fiscal 2012 as new service and storage platforms come to market. We see incremental organic growth potential in both our traditional and expansion markets and we’re making additional investments to drive long term growth.

I believe that we’re on the right path and are well positioned to capitalize on the significant incremental opportunities in the expanding high performance data center connectivity market.

That concludes our prepared remarks. Joining us for the Q&A session is our Executive Chairman H. K. Desai. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Katy Huberty with Morgan Stanley.

Katy Huberty – Morgan Stanley

Thanks. Good afternoon, guys. Some other component suppliers have talked about a spike in OEM demand at the end of March, just given the concerns around supply in the Japan earthquake. Did you see an abnormally strong last few weeks of March? Do you now think that impacted HPA market?

H. K. Desai

I don’t think I don’t think it impacted the HPA market Katy. There is a couple of data points, right. We told you in our prepared remarks that the activity in the very last week of the quarter was about $4 million and that would have captured the end of the quarter certainly for IBM. I don’t think we saw anything in the weeks prior to that. Typically the hubs and the hub model that we implement, hubs are well stocked. We’ve any product that the OEMs may wanted to take at any point in time. So it could that our model is just different than some of the other component suppliers as you characterize them. But with the hubs being essentially for them, the OEM is able to take products whenever they wish to. We didn’t see anything that I would characterize as abnormal, no.

Katy Huberty – Morgan Stanley

Okay. And then Intel and Facebook and a few other data points are suggesting that their divergent between the tier 1 server vendors and tier 2 or [way park] vendors that are talking share were severs are getting built over in Asia and being shift directly into some of the big cloud data centres, how does that impact demand for your products?

[Multiple Speakers]

Simon Biddiscombe

So the part of the market you’re characterizing, I think you said, second tier, but the part of the market you’re characterizing essentially Whitebox and products that go into cloud environments, web giants and so on. To the extent that it uses SAN infrastructure then it’s no different than any other customer for SAN infrastructure, okay. So whether I'm selling it to IBM, HP, Dell, or Oracle here in with the America versus one of the Asian based Whitebox manufacturers, there is no different. If it’s SAN infrastructure, it’s going to be purchased from QLogic.

Where it does become different and where our expansion effort is important is to the extent that that part of the market does not use fibre channel infrastructure to the extent that it is predominantly an Ethernet world, that is why we’ve invested aggressively in both Ethernet and to a lesser extent converged technologies over the course of the last few years. As we think about the total market opportunity, you saw in our comments that the 10 gig Ethernet and converged part of the business grew by 20%. And there is tremendous amount of activity that’s aligned behind those types of opportunities that are kind of next generation server manufacturers I hope (inaudible). So for us it’s about making sure that we can cover every flavor of IO within the data center across every server and storage manufacturer. We know we’ve got to cover every base to be relevant. When you might have look at market such as InfiniBand and the move of InfiniBand to a certain extent within the data centers, it converges over the wire, Ethernet wire, all protocols are important.

Katy Huberty – Morgan Stanley

Fair to say that given the strength you saw in converged and 10 gig that you would expect that business to grow sequentially, really every quarter for the next fiscal year?

Simon Biddiscombe

Absolutely. We expect that business to grow every quarter sequentially in this fiscal year. And our perspective around web, there is an inflection point, really hasn’t changed. I think you get to a point with a Sandy Bridge processor start shipping from Intel service based on those processors, and you will see more and more 10 gig and converged technology from that point.

Katy Huberty – Morgan Stanley

Are you still expecting that product cycle around the calendar fourth quarter of this year?

Simon Biddiscombe

Yes. Fourth quarter, this year into the first quarter next year.

Katy Huberty – Morgan Stanley

Okay. Great. Thanks so much.

Simon Biddiscombe

Thank you.

Operator

We’ll go next to Glenn Hanus with Needham & Company.

Glenn Hanus – Needham & Company

Good afternoon, guys. Maybe just a follow-up on Katie’s question first. To the extent that the cloud providers, if you will, move to using Ethernet instead of a fibre channel, do you see them mostly staying with 1-Gig for a while or will they be moving to 10-Gig quickly as well.

Simon Biddiscombe

It's predominantly a 1-Gig world today Glenn there is no doubt about it, I think it moves 10-Gig overtime but today that cloud world is primarily a 1-Gig world.

Glenn Hanus – Needham & Company

Okay. I mean, do you view that as a risk factor as you are looking at your revenue projections over the next year or so or how should we think about that?

Simon Biddiscombe

Well, I think our expectation is the fiber channel market continues to be fairly robust, right. We said in our prepared remarks, we shipped more fiber channel last year than we’ve ever shipped before and $3.2 million ports as an industry was shipped. So the fiber channel world that still represents the predominance of our revenues is fairly robust at this point in time.

Everything else that we do around converged in 10-Gig Ethernet is essentially expansion opportunity for us. Now, as I said in my answer to Katy’s question. Having all of the wires and all of the protocols covered is critical to success. QLogic is in the unique position of having everything covered at this point in time and as that whole transitions to a 10-Gig world QLogic will be there but I think you can't dismiss the fiber channel business when you think about the prospect of the company over the course of the coming years it’s very robust and then everything else we do is incremental and expansion opportunity on top of that.

Glenn Hanus – Needham & Company

Okay, great. Maybe give us a little bit of color on the InfiniBand business and the prospect for some rebound there over the next couple of quarters, sort of what happened this quarter and what’s the outlook there and what might drive some more growth there?

Simon Biddiscombe

Yeah. I said in the prepared remarks the InfiniBand business performed less strongly than the remainder of the Network business in the most recent quarter. So that by implication means it was down more than 16%, we expect to see continued progress in the InfiniBand business as we move forward. I alluded on the last call to the fact that we’d made some changes internally around how we do certain things within the context of our InfiniBand business, I'm not going to talk about the (inaudible) because I don't necessarily want to tell my competitors what I’m doing, but the plans that I have in place when I alluded to them on the earnings call 90 days ago have now being executed to and I expect to see that business improve as we move forward.

Glenn Hanus – Needham & Company

And lastly from me, strong in the silicon products this quarter what were certainly exceeded my numbers, what would really happen there and you gave pretty good guidance there as well, what's going on there?

Simon Biddiscombe

Sure. Its couple of things. It’s fiber channel and it’s products serving converged and 10 gigE and that's both on the host side and on converged side on switch as well. So we’ve got that ASIC that we sell to HP for use in their Blade infrastructure that we call Bullet internally that we announced probably the best part of a year ago at this point time. We saw our incremental activity associated with the Bullet ASIC. We saw incremental activity associated with our host products both converged and 10 gigE. And we saw incremental activity associated with fibre channel as well. So as you can tell from the fact that we gave you $14 million is a number for the June quarter, we expect the majority of the growth that we saw last quarter to stick not all of it at this point but the majority of growth that we saw will stick as we moved forward. And that's primarily because of the expansion markets that we serve with Silicon.

Glenn Hanus – Needham & Company

Great. Thank you very much.

Simon Biddiscombe

Thanks.

Operator

We’ll go next to Paul Mansky with Canaccord.

Paul Mansky – Canaccord

Yes. Thank you for taking the question and welcome to the new role Jean. As we look at the last two years March quarter specifically we’ve seen some pretty substantial spikes on the Silicon side of the house. Is that something we should be contemplating modelling from a seasonality on a go forward bases. And maybe can you talk to what's actually going into driving that type of sequential performance?

Simon Biddiscombe

I wouldn't necessarily think about modelling at that way as you move forward, Paul. I think a year ago, what we told you was we felt the business was averaging about $12 million a quarter. We did 16, then we did 12, then we did 12, then we did 10, then we did 16 again. So the business was averaging about $12 million last year, which is exactly what we expect it to do. As we look forward, we’re telling you we did 16 last quarter, 14 in the current period. You could hold it pretty close to that number through the rest of the year and we’d be comfortable with that kind of assumption as we serve more products that are based on ASIC as opposed to based on full switches or adapters. We expect that number to have some stability associated with it and at a higher level than you saw last year.

Paul Mansky – Canaccord

Okay. Perfect. And then as I contemplate guidance, it appears from your comments earlier obviously Japan doesn’t sound like it's driving any incremental conservative for you at least not on the June quarter.

Simon Biddiscombe

Cautious, I think I’d say we’re being cautious, Paul. Okay. We’ve given you a slightly wider guidance range not because I necessarily think that QLogic has an issue. I just don’t want to wake up at some point in June and figure out that one of my major server OEMs or one of my major storage OEMs has a product shortage that results in them not taking QLogic products. So I'm being incrementally a little more cautious because of it but don’t see any immediate impact, let me put it that way.

Paul Mansky – Canaccord

Okay. And then last one from me. Actually I think last quarter going back through the transcript, it looks like you specifically mentioned pricing is as a key lever on InfiniBand and I know that, you mentioned a minute ago you’re looking at a number of things and majority of which are in place. Would that pricing level, it will be one of the things, which you put in place during the course of the last quarter, 90 days.

Simon Biddiscombe

I’m going to steer clear of answering that, Paul. That’s a little bit more detail that I had wanted to give.

Paul Mansky – Canaccord

Okay, fair enough. Thank you.

Simon Biddiscombe

Thank you.

Operator

We’re next with Keith Bachman with Bank of Montreal

Keith Bachman – Bank of Montreal

Thank you. I had a couple of some if I could excuse me, you mentioned that you thought your CNA has grew sequentially faster than the market I think as you what you mentioned, I want to hear your characterization of what do you think the market growth rate was sequentially?

Simon Biddiscombe

I didn’t say that.

Keith Bachman – Bank of Montreal

Okay.

Jean Hu

I said our business grew 20% sequentially when you take all products serving the convergent 10-Gig Ethernet market, I didn’t suggest I knew what rate those had grown and frankly I don’t think you’re going to have that data for sometime, I think we’ve not seen Dell'Oro data for the March quarter yet, I know from any other industry analyst, so I wouldn’t dream of telling you I think that grown faster or slower than the market loss.

Simon Biddiscombe

Yes, we’re getting close to the 20% I think that’s a great number.

Keith Bachman – Bank of Montreal

Okay, yes fair enough, you want to see if I could reverse that. Can you tell us what some more to what your competitor does, what you think your total converged revenues are as a percent of total revenues?

Jean Hu

Yes, I mean the last quarter we told you it was roughly 10% and it’s grown by 20% since then.

Keith Bachman – Bank of Montreal

Okay, great.

Jean Hu

I suspect it’s very similar to more competitive.

Keith Bachman – Bank of Montreal

And then if we look at, I want to change course for a second and focus on the fiber channel switch market. As you look out to that business, over the next couple of quarters, it sounds like you have two opportunities growth in share and then growth in the underlying market. And I just want to hear your characterization about how we should be thinking about the switching market in particular as we look out over the next couple of quarters?

Simon Biddiscombe

So, if I think about the fiber channel switch part of the market, I think its going to be a relatively flat low growth part of our total QLogic business that’s just the fiber channel switch part of the market.

Keith Bachman – Bank of Montreal

Right, exactly.

Simon Biddiscombe

A lot of the incremental activity that we expect to see Keith is because of the converged capability that we’re delivering into the likes of an HP, so the HP play base system that is dependent upon the Bullet ASIC that they buy from us. A lot of activity and then modules that we sell to other partners for converged based switching technology will help us grow a little faster than the overall market but the fiber channel switch market is not necessarily expected to be fast growing over the course of next couple of quarters. For us it’s about share capture as you correctly pointed out. And it’s about the fact that we’ve got some very interesting technology that OEMs have begin to deploy both in terms of ASIC sales and that’s from ASIC line. And then in terms of modules and subsystems that will show up in the network line.

Keith Bachman – Bank of Montreal

Okay. Great. Thanks very much. That’s all from me.

Simon Biddiscombe

Thanks.

Operator

We’ll go next to Kaushik Roy with Wedbush.

Kaushik Roy – Wedbush Securities

Thank you. So going back to the InfiniBand business, it seems like you mentioned InfiniBand switches were down 16%. And last year HCS were down sequentially. So the question is, was HCS up this quarter?

Simon Biddiscombe

No. If you think about what I said in my prepared remarks, Kaushik, I told you that the Host business, within the Host business, Fibre Channel, 10 gigE and CNAs all performed better than the overall Host business, okay, which means something must have gone the other way. Part of what went the other way was InfiniBand and part of it was 1 gig iSCSI.

Kaushik Roy – Wedbush Securities

And then on gross margins for the full year 2012, you have guided somewhere around 64.5% midpoint. And June you’re guiding midpoint about 66.5%. So has anything changed in terms of your longer term this fiscal gross margin?

Simon Biddiscombe

So the numbers we gave you at the Analyst Day, Kaushik, for gross margin were kind of 66% for fiscal 2011. And then we said it would actually have some erosion over time. It’s 66% to 67% for the current period. What it does over the course of the remainder of the year is going to be very mix dependent. We’re clearly okay from a volume perspective in terms of the levels of activity. So we’re way past volume having a negative impact on gross margin at this point. But what I'm telling you, what I think it’s going to be for the full year, 66% to 67% in the current period feels like a good starting point. Last year we did 67.1% for the full year. That was better than we expected to do so. Now, 64.5% is too low, I’ll tell you that.

Kaushik Roy – Wedbush Securities

Okay. And then can you give some color on the gross margins by different segments like Host products, Networks and Silicon.

Simon Biddiscombe

The Silicon product is typically high, carry the highest gross margins. The Host products would follow and then Network products carry the lowest gross margins in the company. And within Network products, InfiniBand products carry low gross margins in Fiber Channel products. So that’s how the business breaks out.

Kaushik Roy – Wedbush Securities

All right. Thank you.

Simon Biddiscombe

Thanks.

Operator

We’ll go next to Douglas Ireland with JMP Securities. Mr. Ireland your line is open. Please check your mute button; we do not hear a response. Sir, your line is open. There are no response. We’ll go next to John Slack with Citi.

John Slack – Citigroup

Great, thanks a lot. I wondered kind of following up on Kaushik’s questions about the mix in gross margin. Clearly Silicon outperforming this quarter and it looks like at least versus my estimate outperforming for the rest of the year. Clearly that helps mix. I'm just wondering how we should think about silicon in the mix going forward. You mentioned 14 being the right level kind of fund average. Should that get bigger as the ASIC sell into, number of venders is increasing?

Simon Biddiscombe

It's possible, there is no doubt about it. John, whether its get bigger within the context of total QLogic and therefore impacts the mix significantly, I think only time will tell, right. But I think the issue with the silicon business over the course of a number of years has been, there have been things going away that contributed. So you go all way back to the hard disc drive controller business that we sold and then subsequently to the management controller business that we shut down. So we’ve had things going away from the silicon business, which meant silicon as a percentage of total QLogic shrink and therefore its ability impact the gross margin stink as well.

As we look forward there is nothing going away from the silicon product family and things that we are adding as we begin to sell next generation products serve the expansion market. So whether or not the overall impact to gross margin is significant will depend on the growth vectors of the Host and Network business also, and we think that there is tremendous growth in both of those as you look forward as well. Again sort of in the converged market and the 10-Gig Ethernet market and the robust fiber channel market right. So I think you might be trying to read too much into the ability of the silicon business to swing the overall gross margin.

John Slack – Citigroup

Okay. And then maybe on the broader fiber channel market, 16 gig announced by Brocade earlier this week can you kind of give your thoughts on 16 gig (inaudible) from your perspective?

Simon Biddiscombe

I guess we started talking about 16 gig products in the middle of last year then we talked about it length at our Analyst Day. We showed the roadmaps for fiber channel technology as well as other technologies that QLogic is involved in. 16 gig products will sample very shortly. We haven't made our announcements at this point in time. But clearly, the OEMs are fully aware of where we are and we don't have any concern whatsoever.

John Slack – Citigroup

Do you guys view it as a kind of a factor to reaccelerate the fiber channel kind of the Host market?

Simon Biddiscombe

The timing of the 16-Gig will be probably the production – the second half of next year, well away from production of 16. You can start assembling now and by the time our OEM start shipping and the volume second half of next year. So we wont’ see many growth 16-gig till then.

John Slack – Citigroup

Okay. And then maybe one more from me if I can, on OpEx up more than I was thinking sequentially, kind of can you give me some color behind that way?

Simon Biddiscombe

It’s really two parts to it. Number one is, as I said in my closing comment there are some incremental market opportunities that I wanted QLogic to pursue, some of the mobility in our traditional market, some of them are adjacent to expansion market. So we’re going to make some incremental organic investments in those. And then we’ve also told you’ve been in the analyst community for sometime that we’re going to put back some of the benefits that we haven’t restored for the employee base as we entered fiscal 2012. So we’ve also given back certain of the benefits that we took away from our employees a couple of years ago. So there is a couple of things that drive the incremental OpEx.

John Slack – Citigroup

Okay. Great, thanks.

Operator

We’ll go back to Douglas Ireland, JMP Securities.

Douglas Ireland – JMP Securities

Thank you. Sorry about that, I couldn’t get of from you earlier.

Simon Biddiscombe

No problem.

Douglas Ireland – JMP Securities

So going, tying off on the last question asked there were announcements of people moving to 4-Port Host Bus Adapters or CNAs and 40-gig Ethernet capabilities along with the 16-gig Fibre Channel. I am just wondering, how important you think those capabilities are and what impact it could have in terms of market share that you are not at the front of the performance curve in that dimension?

Simon Biddiscombe

Why do you think we’re not at the front of the performance curve?

Doug Ireland – JMP Securities

Because the ability to view 4-Ports of 10 gig as a 40 gig and to do 16 gig, my understanding?.

Simon Biddiscombe

So we haven’t announced our products yet?

Doug Ireland – JMP Securities

Yes.

Simon Biddiscombe

So you’re making an assumption about what my product launch is going to look like, that we haven’t even launched at this point in time. By the way we haven’t communicated to you what it’s going to look like Doug. So that’s part number one. Part number two is to every other, I don’t say every other, every other transition of technology certainly on the Fibre Channel side, but we've been through over the course of the last three speed hops, QLogic’s gain share every time, typically transitions at somewhere where we do manage to execute our competition and in particular when you look back at the Fibre Channel technology, we gain share to everyone of those transitions and I think our execution and track records fixed for itself. We have our product announcement shortly and at that point in time, I'm sure we’ll be dealing with any concerns you may have. Some of these products get to serve pretty narrow sets of applications, right. I mean when you look at the specific needs for 40-gig today when you look at the specific needs for certain other technologies Quad Port is an example. It often serve in a very specific set of applications that are not in a broad market. So we’re very comfortable that we’ve got the right set of products come in and the announcements will be shortly.

Doug Ireland – JMP Securities

Great. Thank you, sir.

Simon Biddiscombe

Thanks.

Operator

We’ll go next to Rajesh Ghai with ThinkEquity

Rajesh Ghai – ThinkEquity

Yes. Thanks. One question on the Fibre Channel switch market. So Cisco and HP broke off about a year ago and you step into and fill the void and you also launched your stackable switches soon after that. But if you look at your performance over the past one year in this – fiber channel switch market does appear to be benefiting you, the Cisco, I’m just kind of curious as to why that could be happening?

Simon Biddiscombe

So, if you think specifically about the launch we made of our stackable switches and it was about a year ago, actually I think it was February of last year. That business has continued to grow nicely every quarter since the launch. So I'm happy about the levels of activity that I'm doing with HP for that stackable switch. You can't see the fibre channels switch numbers. I think that's probably part of the issue Rajesh, because you can only see my total network business and that obviously has the InfiniBand business in it. And as I mentioned, the InfiniBand business performed less well than the Fibre Channel switch business did within my network numbers right. So I think you almost have to get degrees of granularity that we haven't provided to be able to see that the Fibre Channel switch business is doing okay. And that it’s really the InfiniBand business that’s pulling down that overall number.

Rajesh Ghai – ThinkEquity

Fair enough. To just following up on that, the InfiniBand side some changes have happened over the past quarter with Voltaire being acquired by Mellanox and much rather compared to, it means you mainly focused on InfiniBand. Now, do you think you are investing enough in R&D to compete against this new domination in the light of the fact that InfiniBand business has underperformed for the past couple of quarters.

H. K. Desai

Decisions around how to invest in this business every day, right. Your observation is absolutely fair. There’s no participant in the market, which is the coming together of Mellanox and Voltaire. This is their principle focus and who invests at rates that are historically, significantly higher than QLogic has invested. When you combine the entities it’s significantly high than QLogic has historically invested. InfiniBand continues to be an important market to us. The coming together of Mellanox and Voltaire to a certain extent cleaned the market up at something that I’d myself thought was long overdue. So it creates a market environment that’s similar to the fiber channel adapter business. It provides us incremental opportunity as OEMs think through their dual sources strategies where previously one of the sources may have been Melanox and one of them maybe been Voltair and there’s probably opportunity associated with the disruption that’s created through integration. So, as I think about coming together I think our position, is probably a little more robust as the number two player in the market. The OEMs are certainly engaged with us and I think we’ll see continued progress as we move forward.

Rajesh Ghai – ThinkEquity

And one last question on Voltair’s announcement of 16-Gig fiber channels are across the board including a fabric adapter that does 16-Gig fiber channel. I’m just curious do you see that as a threat in terms of Brocade getting a little bit more traction on the adapter side feeling that they might have product out of qualification next quarter versus what you said about you and I may be talking about little later in the year or next year?

Simon Biddiscombe

Well, first of all we didn’t say next year, okay, so as I said our product announcement will be shortly and we’ll be sampling very, very shortly to the OEM customers as well. Okay, some are concerned about that aspect of it. Its three years, right three years ago I joined this company and Brocade that just was in the process of introducing it’s adapters at that point in time and everybody was fearful of what that would mean to QLogic and today they have immeasurable share in the adapter market. We never dismiss them as a competitor they’ve got fabulous fiber channel DMA but you have to think through the power of incumbency and brand preference when it comes to adapter technology and today that’s been us and the nearest competitor we have. I’m not sure that changes when you go to 16-Gig the brand preference is still all about QLogic and our nearest competitor when it comes to fiber channel adapter technology. We are always appropriately paranoid about competition but I don’t fall in second thing that Brocade now introducing 16-Gig changes in the dynamic that was obviously in the next step in the fiber channel protocol move.

Rajesh Ghai – ThinkEquity

Thank you.

Simon Biddiscombe

Thanks.

Operator

Ladies and gentlemen this does concludes today’s Q&A session. For closing remarks, I will turn the conference over to Jean Hu. Please go ahead.

Jean Hu

That concludes our call for today. We look forward to updating you on our progress next quarter. Thank you for your participation and good bye.

Operator

Ladies and gentlemen this does concludes today’s conference. We appreciate your participation. And then good-bye.

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 CEO Discusses F4Q 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts