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QLogic Corporation (NASDAQ:QLGC)

F1Q 2012 Earnings Call

July 28, 2011 5:00 PM ET

Executives

Jean Hu – SVP and CFO

Simon Biddiscombe – President and CEO

Analysts

Ahmet – RBC Capital Markets

Aaron Rakers – Stifel Nicolaus

Katy Huberty – Morgan Stanley

Scott Craig – Bank of America

Jason Nolan – Robert Baird

Keith Bachman – Bank of Montreal

Mark Moskowitz – JP Morgan

Operator

Good day and welcome to the first quarter fiscal year 2012, QLogic earnings announcement conference call. As a reminder, today’s conference is being recorded. At this time I would like to turn it over to Jean Hu, chief Financial Officer. You may begin when ready, ma’am.

Jean Hu

Thank you, operator. Good afternoon, and welcome to QLogic first quarter 2012 earnings conference call. Joining me on the call is Simon Biddiscombe, our Chief Executive Officer. I’ll begin the call with a review of the first quarter financial results. Simon will follow with a discussion of the current state of our business. We’ll then open the call for questions.

Certain of our comments today will include the forward-looking statements regarding future events and our 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 to you the documents QLogic files with SEC. Specifically, our most recent Form 10-K. 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 first quarter earnings press release we issued earlier today we posted both GAAP and non-GAAP results. Our references we make relate to non-GAAP results and unless otherwise stated.

A reconciliation of the non-GAAP to GAAP financial measures is available on our website under Investor Relations.

Turning now to our financial results. For the first fiscal quarter ended July 3, 2011. Our revenue in the first quarter was $151.6 million, an increase of 6% from the same quarter last year. This revenue was at the high end of our guidance range of 145 to $153 million, provided during our fourth quarter earnings call.

Our first quarter revenue from Host Products, which are comprised primarily Fiber Channel, converged and Ethernet adapters, $101.8 million, increase of 7% from $102.5 million recorded in the first quarter of last year. First quarter revenue from Network Products, which are comprised primarily of Fiber Channel and InfiniBand switches, 29 – a decrease of 15% from 25.6 million recorded in the fourth quarter of last year, as a result of lower InfiniBand suite revenue.

Our first quarter revenue from Silicon Products comprised of Fiber Channel, converged, 10-gig Ethernet and (inaudible) chips was $16.8 million, and the increase to 42% from $11.9 million, recorded in the first quarter of last year. Our surveys and other revenue was $3.1 million. Our first quarter gross margin of 67.8%, improved from 66.5% recorded in the first quarter of last year. Primarily due to favorable product mix.

Our gross margin exceeded the high ends of our guidance range, 66 to 67% provided during our first quarter earnings call, primarily due to favorable product mix. Next, I’d like to cover our first quarter operating expenses. Total operating expenses $59.3 million, up 10% from $54 million reported in the first quarter of last year. Operating expenses were consistent with our expectation.

Engineering expenses in the first quarter, $33.1 million, increased 11% from a year ago. And that increased as a percentage of revenue from 20.8 to 21.8%. Sales in the marketing expenses in the first quarter of $19.4 million increased to 6% from a year ago and remained consistent as percentage of revenue at 12.8%. G&A expenses in the first quarter of $6.8 million were 4.5% of revenue. Operating profit in the first quarter of $43.5 million increased to 7% from a year ago and was 28.7% of revenue.

Interest and other income was $1 million in the first quarter. Our income tax rate for the first quarter was 9.4% and favorably impacted by several discrete items. We expect our annual tax rate for the full year to be approximately 14%. Our first quarter net income of $40.3 million increased to 16% from a year ago, and they represent a net profit margin of 26.6%.

This represents the 64th consecutive quarter of profitability for QLogic. Our first quarter net income per diluted share of 38 cents was significantly better than the 30 cents we achieved last year. And exceeded the high end of our guidance range of $0.30to $0.35, provided during our fourth quarter earnings call. The better than planned tax rate contributed two cents per share during the quarter.

Turning now to our balance sheet, the company’s cash and marketable securities, $400 million at end of fourth quarter. We continue to maintain a strong cash position and have no debt.

During the first quarter we generated a $40 million of cash from operations, which is an increase of 32% from the first quarter of last year. We remain commit to the stock buyback during the quarter purchased $19.4 million of the company’s common stock. Accounts receivables were $79.1 million at end of the first quarter. DSO at the end of the first quarter was 47 days compared to 45 days at end of the fourth quarter.

(Inaudible) end of first quarter was $26 million, and decreased from $26.9 million at end of the first quarter.

Annualized (inaudible) return for the first quarter improved to 7.5 from 6.8 achieved last quarter.

Turning now to the outlook for our second quarter for fiscal year 2012. We expect total revenue for the second quarter to be in the range of 147 to $155 million. At the middle point of our guidance. Revenue from Host and Network Products is expected to be up approximately 2.5% sequentially.

We expect revenue from Silicon Products to be approximately $13 million. During the second quarter, we expect gross margin to range from 66 to 67%. When combined with a planned operating expense of approximately $60 million. Projected annual tax rate of approximately 14%. And the diluted share count of approximately 105 million shares. We expect to achieve non-GAAP earnings per diluted share of approximately 30 to 36 cents in the second quarter.

Our actual results for future period may be materially due to number of factors, including those outlined during the course of this conference call. In the company’s filing with the SEC, and the disclaimer statement at end of our earnings press release.

I will now turn the call over to Simon. Simon?

Simon Biddiscombe

Thanks, Jean. I will discuss our performance within the framework of our unmatched foundation, our winning strategy, and our world class execution including recent highlights and accomplishments. First, I’m very pleased with our financial execution and discipline. Our revenue in the first quarter was $151.6 million, consistent with our revenue in the fourth quarter fiscal 2011 which is a reminder included an extra week. Our revenue was at the high end of our guidance provided during the first quarter driven by strength in our host and Silicon Products.

On a combined basis, revenue from Host and Silicon Products grew by 11% year over year. As a reminder, substantially all of our silicon is Host-related.

I’m also very pleased that we achieved better than expected gross and operating margins. During the first quarter, our net income per diluted share was 38 cents, which exceeded the high end of our guidance of 30 to 35 cents provided during our fourth quarter earnings call.

Now I want to share some of the recent highlights and accomplishments that are clear indicators of the progress we have made in expanding our market opportunities and maintaining leadership in our traditional markets.

The focus of our adaptive convergence strategy continues to be on converged and capitalizing on significant end user trends, and virtualized data centers, cloud, and the converged enterprise.

We continue to invest aggressively, are committed to market leadership, and are realizing the benefits of our strategy.

Our total revenue in the first quarter, from converged and turnkey net products grew more than 20% sequentially for the second consecutive quarter. A clear indication of the positive results of our adaptive convergent strategy. Our continuing success in these important expansion markets is key to our future growth.

In fiscal 2011, we launched the industry’s first third generation turnkey Ethernet converge portfolio named 3G CNA. These products effectively address the complex end user requirements of virtualized data centers, cloud environments, and the converged enterprise. Building upon the early success that we had previously discussed, we continue to make very positive progress and had several important achievements in the June quarter.

First, we announced the offering of our 8200 series tan Kay converge network adapters with a broad range of Dell-power edge servers. Unique converge flex technology which enables convergence of storage and data networking over 10-gig Ethernet through multiprotocol support. These adapters provide the first concurrent multiprotocol convergent solution Dell blade server environments.

Second, we announced that our 8200 series 10-gig CNAs are now available from Hitachi data centers. These adapters are developed for 10 gig and iSCSI. And interoperable with the comprehensive portfolio of HDS storage systems. In addition, we announced our 3G CNA technology is now shipping as an embedded target controller solutions and Hitachi AMS arrays. Our 3G CNA, single chip products allow – to transition from one gig iSCSI to 10 gig, thereby allowing organizations to meet increasing complex requirements of today’s virtualized data centers and cloud computing and preserving existing IT environments.

Lastly, right to technology is providing 10-gig and – as well as 1-gig iSCSI connectivity for the HP P-6,000 enterprise virtual array family. Leveraging our technology behind the HP, MPX, 200 multifunctional writer, the HP P-6000 EVA systems with the first EVA systems to – 10-gig eliminating the need for external connectivity options.

Every major server OEM, leading storage OEMs and 10-gig E partners are shipping our converged and 10-gig Ethernet products. This achievement combined with early market leadership sets the stage for continued revenue expansion as convergence and 10-gig Ethernet products are more broadly deployed later this year, with the next generation of servers based on Intel processors.

While convergence and 10-gig Ethernet are significant expansion opportunity for us, traditional Fiber Channel storage area networking is impossible and will continue to be a focus for many years to come.

According to the most recent reports from 2 leading industry research firms, Dell’Oro (inaudible) we gained revenue market share in Fiber Channel adapters, in the first calendar quarter of 2011.

Both research firms showed we gained market share and increased the lead over our nearest competitor in Fiber Channel adapters.

We maintained our clear number one position with more than 55% of total revenue share, a lead of more than 18 percentage points over our nearest rival and an increase of 1.9 personal points over the previous quarter.

These latest market share figures are validation that we continue to gain momentum in the Fiber Channel adapter market. This demonstrated strong end user brand preference and the resultant Fiber Channel SAN incumbency is a competitive advantage for us as our customers transition to converge and 10-gig Ethernet products.

During the June quarter, our storage area Network Products were recognized for certain achievements. QLogic was selected for the 2011 HP alliance partner of the year award in the category of converged fracture ecosystem partners.

These HP awards are presented to an exclusive set of HP alliance partners, in recognition of outstanding accomplishments in the development and delivery of innovative solutions that achieve standard setting levels of business excellence and client satisfaction.

The award recognizes a server to storage solution that integrate QLogic technologies with HP converged infrastructure to significantly reduce SAN deployment and management time.

Turning now to InfiniBand. Our InfiniBand momentum continued in June, when we announced the QLogic had been selected to provide 12,000 series switches and 7300 series adapters in a significant supercomputer deployment from the Department of Energy national nuclear security administration.

The clusters will be deployed over the next two years, at the Lawrence Livermore, Sanda, and Los Alamos National Labs and encompasses as many as 20,000 notes.

AtPro is providing its Extreme X Supercomputer, along with QLogic quad data InfiniBand solutions. The selection of AtPro and QLogic was the result of a higher competitive evaluation and benchmarking process that involved all major InfiniBand interconnect vendors.

This award follows our successful deployment of more than 4,000 notes, connected with our true scale and InfiniBand architecture. Of the Lawrence Livermore Lab in late 2010. In closing, I remain very optimistic with regard to the future of our company. There are greater opportunities for QLogic than ever before.

We have an unmatched foundation for success, world class execution, and a winning strategy.

The server and storage markets we serve are healthy. The key designs were won in fiscal 2011 will translate to additional revenue programs later in fiscal 2012, as new servers and storage platforms come to market.

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 your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Ahmet [ph] with RBC Capital Markets.

Ahmet – RBC Capital Markets

Good afternoon, guys. Is a question looking at September quarter guide, flattish revenues, I think guiding for, it looks partially the silicon being down but I think the host business looks softer than historic trends as well. Could talk about what’s going on there?

Jean Hu

Yeah, we look at it slightly differently, Ahmet. At the midpoint, take the midpoint of the guidance, I think revenue from host and network would be right at seasonal. It’s up 2.5% sequentially, essentially. And then do you have a $13 million silicon number as we suggested, and as you’ve seen in the past, that silicon line contend to be just a little lumpy primarily because of the long lead times and also the way that some of our customers order those products through contract manufactures and so on. We’re looking at it as relatively consistent with what you’d expect for normal seasonality in the September quarter.

Ahmet – RBC Capital Markets

Got it. And then could you just talk about what are your expectations around the ram any launch. When do you see that happening and when do you expect that to benefit U.S. specifically?

Jean Hu

So I think we were asked this question last quarter, and I think I said go ask Intel and go ask the OEMs and then Intel essentially. I think our expectation is we will see some benefit in the fourth calendar quarter, but we expect the benefit really starts to roll once you get into the March quarter of next year and beyond. But we see the same trends, we see the same information that you get from the OEMs that we serve and we see it later this calendar year, but the real benefit next year.

Ahmet – RBC Capital Markets

And finally for me, I want to confirm the C NA, and 10 gig combined combine for about 14% of revenue?

Simon Biddiscombe

No, we haven’t given that number for some extended period. We don’t think it’s necessarily relevant. It’s getting a little confusing. So we’re going to keep pointing to you, to the levels of growth that we see, as opposed to the absolute value of it. Especially given that certain of the revenue that we see is switch centric as opposed to host centric now.

So we’re seeing an increasing benefit, for example, from the bullet ASIC we supplied to HP, by way of example we’re going to try to get to the point where we’re not explaining as a percentage of revenue. Just the incremental growth of. What we said we saw in excess of 20% of growth for the second sequential quarter. Things are going very well in that part of the business.

Ahmet – RBC Capital Markets

Got it. Thank you.

Operator

Our next question comes from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yeah, thanks guys. A couple questions as well. First going back to the Romley question. I know you’ve talked about initial contributions starting to show up in the December quarter and more of a ramp into next year. Do you see this it transition as differing from prior transitions, meaning as though there’s a more multistage roll-out that we should consider as we think about our models looking into the next couple quarters?

Jean Hu

I guess it depends which ones of the previous transitions you give consideration to, right in I think you have to look at the better prize piece of the market as being the predominant driver of activity for QLogic.

So you’ve got to get to the point where you’re looking at multicore processors in higher end servers, where we’ve historically served Fiber Channel and we will increasingly serve converge and 10-gig Ethernet technologies the incremental opportunity continues to expand as you move down beyond those enterprise class servers and start thinking about single and dual core processors, going into servers where historically Fiber Channel may not have attached at the same rates as it did in the enterprise space.

So it really depends and it’s going to vary from OEM to OEM on when individual platforms end up being introduced. And if you go back to the most recent transition, around Halem, EX, in particular it was probably a solid 6 months from the first benefit that QLogic saw in terms of OEMs rolling out servers, to the last benefit that QLogic saw in terms of OEMs rolling out servers. So I don’t know whether we strongly believe it’s going to be different than that, Aaron. I think – only time will tell.

Aaron Rakers – Stifel Nicolaus

And then shifting gears a little bit, on the networking side of the business, I know that analyst day, a while back, you guys had talked about opportunities on the silicon side. We’ve seen now Dell announce Force 10. Can you update where you’re at as far as design opportunities, ramping there, how we should think about that relative to what you had said at the analyst day?

Simon Biddiscombe

You have seen a series of different M&A activity over the course of 9 months since the analyst day at this point in time that stands to benefit QLogic when we think about the strategic value of the converge technologies so. Whether it’s the Dell acquisition, of force 10, whether it’s Intel and Fulcrum, whether it’s IBM and BNT.

All of those essentially incremental opportunity for QLogic to leverage its Fiber Channel switching capability into Ethernet switch capabilities. In order to bring a converged solution to market. So every one of the recent events, each of those recent M&A activities increases QLogic’s desire to engage, right? We want to engage with as big a company as possible, and when somebody is a part of Dell or part of IBM, then our ability to engage, our ability to enjoy significant revenues is increased. We continue to work a whole list of those very aggressively.

Aaron Rakers – Stifel Nicolaus

Final question, Simon. Can you briefly talk about the InfiniBand strategy, how that might – you know, how that might be changing, or if you’re implementing any changes there, you know, as an opportunity for incremental growth over the coming quarters.

Simon Biddiscombe

Sure. So we said 6 months ago, shortly after I took over as CEO, that we will bring in a new focused InfiniBand business, even though it declined on a year over year basis, it actually has increased sequentially, and I’m seeing some activity that I’m very pleased with.

We talked at length about the Tri-Labs s win. That’s a very significant piece of activity over the course of the coming quarters. In addition, there’s incremental opportunities that are being pursued in nontraditional HPC environments, think about storage, scale 8 and so on, type application where QLogic already plays. We continue to play to win, within the InfiniBand market. And we’re pleased with the success, the growth we saw last quarter, and expectations going forward are good.

Aaron Rakers – Stifel Nicolaus

Okay, thank you.

Operator

Next we have Katy Huberty with Morgan Stanley.

Katy Huberty – Morgan Stanley

Thanks, good afternoon. You mentioned mix as a driver of margins. Can you just walk through a few of the most important nuances in the quarter? Sounds like InfiniBand was weaker, silicon stronger. What were some of the other mix and – in the quarter?

Jean Hu

So Katy, this is Jean.

Katy Huberty – Morgan Stanley

Hi, Jean.

Jean Hu

If you look at the mix, both host and Silicon Products are much stronger than expected. Network Products relatively lower. That’s really what the driver – the drove the gross margin mix.

Katy Huberty – Morgan Stanley

Okay. Then from a bigger picture perspective, some of the IT distributors are talking about growth while still healthy normalizing at lower levels. Is that a trend that you expect to impact the calendar second half results, or do you think Romley can supply some of the other product cycles can help you offset any slowdown in IT spend?

Jean Hu

I think there’s a lot of things going on right now, Katy and I think it depends upon at what level that IT spending environment truly slows down, right? So as we think about the overall macro environment and we try to take that from macro level numbers to IT spend in numbers to IT spend numbers on servers and storage, that ultimately impact levels of demand that QLogic would expect to see.

And then you take it across different verticals and how it may impact enterprise versus government and so on. You know, we’re cautious, right in we’re being cautious as we think about the way we guide the current period, because there’s clearly a great level of uncertainty than there has been in the past.

Now, whether or not we are overly cautious or prone – once you get to the December quarter, some of the benefits from the product cycles around Romley outweigh that IT spending level impact, only time will tell. The product cycles are there. We’re very well positioned to benefit from each of those product cycles, the wins for QLogic in place when it comes to Romley late this year and into next year. So how it all plays out in terms of macro impact on IT spend, only time will tell but we believe we’ve done the right things to drive QLogic forward. We have the right socket secured.

Katy Huberty – Morgan Stanley

And then just lastly do you have any visibility into where you think OEM inventory ended last quarter? I ask because some semiconductor companies are talking about inventory adjustments in June and July. Do you think that’s impacted the business?

Jean Hu

No, I don’t think so, Katy. The reason is if you think – with the exception of some contribution to the silicon line, the vast majority of the revenues are based on hub arrangements. So product will be taken from a hub today, we’ll find out it was taken tomorrow, and then that product is going to ship through very quickly from an OEM perspective.

So the only place we typically see inventory is on the silicon line. And as we suggest and provide in the guidance, that can tend to be a little lumpy. Part of that is attributable to inventory and how contract manufacturing partners for the OEMs may choose to play orders. So I don’t think there’s a major correction by any means as it relates to QLogic given the vast majority of our revenues are recognized almost instantaneously when OEM ships.

Katy Huberty – Morgan Stanley

Okay, thanks so much.

Operator

(Operator instructions.)

Next from Bank of America, Merrill Lynch, we have Scott Craig.

Scott Craig – Bank of America

Thanks, good afternoon. Hey, Jean. Can you go through the puts and takes that you think are going to happen on the gross margin line last quarter, on a quarter to quarter basis, or next quarter, sorry.

On a quarter to quarter basis. And then Simon, can you maybe talk at a higher level about last quarter you discussed Fiber Channel robustness that you were still kind of seeing this. So take us through maybe your updated thoughts on how you see the Fiber Channel market playing out over the next few quarters and longer term. Thanks.

Jean Hu

On the gross margin question, right, that we guided 66 to 67%. It’s primarily due to the product mix. You know, our silicon revenue will be $13 million, that’s where we guide compared to 16 million. That’s really drives to the mix. Because the silicon typically higher gross margin. That’s the reason.

Simon Biddiscombe

On the second question, Scott, with regard to the Fiber Channel market. We continue to believe – be strong believer in the future of Fiber Channel as we engage with our OEM customers and as I hold conversations with end users about their use cases for Fibre Channel moving forward. How those evolve based on cloud converge enterprise, virtualized data centers and so on.

Fiber Channel is going to be around for many years to come. And our expectation around Fiber Channel growth this year is really unchanged. I think the Fiber Channel market is going to grow somewhere consistently with the underlying server market and if you look at what we saw from our Fiber Channel and converge business to be fair, we continue to outperform the server market last year when you look at the combination of host and silicon.

So Fiber Channel continues to be a robust market. It continues to be important to us. We continue to invest in next generation Fiber Channel, and we are thrilled to be in the market.

Jean Hu

Operator?

Operator

Next we have Jason Nolan with Robert Baird.

Jason Nolan – Robert Baird

Okay, thank you. Simon, with the seasonal guide into the September quarter, you don’t expect to see a pause in front of Romley?

Simon Biddiscombe

Really good question. So you know, we build many different things into our guidance, and perhaps we’re being a little more cautious than – you’re right, we gave you a seasonal guide. Perhaps part of that seasonal guide is an expectation for something of a pause. Now, we certainly haven’t seen anything impact us. Certainly didn’t see anything last quarter, haven’t seen anything quarter to date.

But you never rule it out, Jason. So, as we think about the $8 million range that we gave you on the guidance, part of that range, if you will, or part of the reason that the range is as broad as it is, is some risk associated with the being a pause ahead of Romley. Isn’t seen it yet but we’ve seen it in the past and we would be somewhat foolhardy to assume that it won’t happen, or that it couldn’t have some minor impact on the business.

Jason Nolan – Robert Baird

Thanks for that. And maybe an update from you on your opportunity to gain share in the FC switch market.

Simon Biddiscombe

Sure. I think if you look at the FC switch market, most of what we have talked about over the course of the last year to two years, is really primarily about activity that we have with HP, activity that we have with IBM.

And activity that we have through channel partners. So we continue to invest aggressively in the Fiber Channel switch business. We’ll have our next generation 16 gig Fiber Channel switch products in the market later this year. We are very comfortable with the position, we continue to drive aggressively. No change in our perspective around what we’re doing and why we’re doing it.

Jason Nolan – Robert Baird

Okay. Last question from me, for Jean. On R&D, it’s come up the last couple quarters, and I guess should we plan for that to be a recurring level of R&D spend, and if you can talk about what that is targeting.

Jean Hu

I’ll answer that, Jason, because part of what I talked about last quarter was a desire to invest in a series of incremental organic opportunities that exist for QLogic. So we’ve consciously decided that there’s a handful of incremental opportunities that we wanted to pursue. And that that would result in spending incremental dollars on R&D.

The guide we gave for the current quarter OpEx was $60 million and my expectation is that for the full year we’ll be at around a 240 number. So you can assume you take the 60 and just roll it out through the remainder of the year.

Jason Nolan – Robert Baird

Okay. Thank you.

Operator

Next we have Keith Bachman with Bank of Montreal.

Keith Bachman – Bank of Montreal

Hi, good afternoon, team. Two for me. Simon, you commented that you expected networking to be seasonal in September. Yet if you look at March and June, they were materially below seasonality. Any kind of seasonality.

Simon Biddiscombe

Yes.

Keith Bachman – Bank of Montreal

So that you know, that still strikes me at odds with the dash growth rate that looks interesting or meaningful. Why – you’ve had two separate quarters of below seasonality, why isn’t it better than that in what’s causing it?

Simon Biddiscombe

So the key driver for the incremental activity looking forward, Keith, is InfiniBand, right? So as I look at what we have done within our InfiniBand band over the course of the last 6-9 months at this point in time, as I said, it’s down on a year over year basis, but has started to grow sequentially and I suspect we did actually capture share in the InfiniBand market last quarter.

Then you look at some of the major installations that I alluded to in my commentary around the national labs and so on, those installations can result in meaningful benefits to the revenue line that impact the network line in total, right? So when we look at some of the individual transactions that we see moving forward, they stand to benefit us within our network business greatly.

Keith Bachman – Bank of Montreal

Okay. Simon, if you took a guess at what the normalized growth rate of this category would be, how should we be thinking about that in because there’s been a lot of volatility on both sides.

Simon Biddiscombe

Yeah, and I think the reason there’s been a lot of volatility, it’s not a large number in itself. So a couple of million dollars here and there is 10% up and down. So you are going to see that in the network business, because of its smaller scale relative to overall QLogic. So we think that the normalized growth rate based on the numbers that we laid out at the analyst day last year is somewhere between 10 and 15%, and it’s partly attributable to continued growth in InfiniBand, and it’s partly attributable to growth in the converged element of the switch market. The Fiber Channel market itself is, call it a low single digit growth business over the course of the coming years.

The converged piece of the story that gives us the opportunity to deliver on numbers in excess of that. So as we look at the market, Keith, InfiniBand continues to be a double-digit growth business. The converged market is obviously growing very significantly on the switch side, albeit you have a small business base and the Fiber Channel, a low single digit growth market.

Keith Bachman – Bank of Montreal

Let me sneak one more in.

Simon Biddiscombe

Sure.

Keith Bachman – Bank of Montreal

On the converge network in aggregate. The Romley design wins have all been distributed at this point. So how should we think about share? Because it seems like we’re getting different answers from different parties. In terms of who has the share and whatnot? How should we be thinking about the share distribution as these design wins start to roll out in late December and more in earnest in March?

Simon Biddiscombe

I think what you have to do is look at in it in the context of where QLogic has the wins. You mow our philosophy, we don’t tell but design wins because we don’t want to tell you what any individual OEM is doing because we don’t want – because that’s highly competitive information, right?

So as I said, we’re very comfortable with our positions. We’re very comfortable that we’ve got every server and storage OEM aligned behind (inaudible) 10-gig Ethernet technology and we’ll see the benefits as those servers come to market.

Jean Hu

If you look at share today, Keith, the FCoE part of the market, our FCoE, converged share, if you will, is entirely consistent with the Fiber Channel share at roughly 55% and that’s a message that we’ve been communicating as being the likely outcome for at least 3 years at this point in time, right?

So on the converge side it’s playing out exactly as we’d expected it to play out. And then as you move to 10 gig E, the positions we have and the positions that our principal competitor has as well. They seat same things we see. Very compelling based on the storage expertise that we bring to the OEMs as they bring forth series of adapters, that cover 10-gig E, as well as Fiber Channel and converge technology. So we’re very comfortable with where we are.

Keith Bachman – Bank of Montreal

I will cede the floor. Thank you.

Operator

Our next question comes from Mark Moskowitz with JP Morgan.

Mark Moskowitz – JP Morgan

Thanks, good afternoon. Sorry if these questions have been asked. I fell off for a few moments. But Simon, I want to see if you could give us a little more color around the outlook here in terms it of how much is being driven by conservatism due to the broader based headlines out there.

Because when I think about no real major transition this year with Romley, related to next year, per se, and in server and storage spending still pretty strong relative to other segments. I felt it would have been a little more (inaudible) if you will, or juice to your model right now than we’re seeing.

Simon Biddiscombe

Sure. I think we gave consideration to many different factors as we work way through building the guidance model, Mark. And one of the factors, no doubt is how we perceive the macro environment may impact IT spending and how that may impact serve certify and storage demands.

So we are giving careful consideration to that fact, and we are also giving careful consideration to whether or not you may see a vacuum ahead of the launch of those Romley processors. We’ve seen vacuums in the past ahead of the introduction of new servers, based on new processes. So we don’t feel that this is a time to be overly aggressive in how we set the expectations for our business. There are – there’s an uncomfortable macro environment that we are not immune from any more than our OEM customers are immune from. We’re sufficiently far removed from end user buying behavior that we typically choose to be conservative in these environments.

Mark Moskowitz – JP Morgan

And in terms of the end user behavior, have you come across anything that would suggest with this kind of shift to the mid-range that we’re seeing across the enterprise, are you seeing maybe a different change in the content that’s been attached? Are more folks maybe using direct attaches versus either NAS, or SAN?

Simon Biddiscombe

No, if you look at the growth of our Fiber Channel business, Mark, relative to the underlying server market, it’s still very robust, right? And we like you slice and dice HBA units and dollars versus server units and so on. And we really don’t see a disconnect.

I mean, our business is performing consistently with the underlying server markets. And when I look at all of the investments that we make, be they Fiber Channel, converge, 10-gig E, we are doing at least as well as the overall server market is. And you’ll note of yesterday that gave the overview of the Gartner numbers is entirely consistent.

I think you suggested that Gartner was thinking that servers had grown by 7% on a year over year basis. That’s exactly what my host business did, right in and if you take my host plus silicon it was 11% on a year over year basis and they’re targeted at the underlying server market. I think we’re comfortable that the thesis about our business and its ability to grow at or faster than the server market remains intact.

Mark Moskowitz – JP Morgan

Okay, thank you.

Simon Biddiscombe

Thanks.

Operator

That does conclude our question-and-answer session. I’d like to turn back over to our speakers for any closing comments.

Jean Hu

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

Operator

That does conclude our conference. We appreciate your participation.

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