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Executives

Jean Hu – SVP, CFO

Simon Biddiscombe – President and CEO

Analysts

Aaron Rakers – Stifel Nicolaus

Amit Daryanani – RBC Capital

Jason Nolan – Robert W. Baird

John Slack – Citigroup

Scott Schmitz – Morgan Stanley

Jung Pak – BMO Capital Markets

QLogic Corporation (QLGC) F2Q12 Earnings Call October 27, 2011 5:00 PM ET

Operator

Good day and welcome to the Second Quarter Fiscal Year 2012 QLogic Earnings Announcements Conference Call.

As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Jean Hu, Chief Financial Officer. Please go ahead.

Jean Hu

Thank you, operator. Good afternoon and welcome to QLogic's second quarter fiscal year 2012 earnings conference call. Joining me on the call today, Simon Biddiscombe, our Chief Executive Officer.

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

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

Turning now to our financial result for the second fiscal quarter ended October 2, 2011. Our revenue in the second quarter was $150.2 million, an increase of 2.5% from the same quarter last year. This revenue approximates the middle point of our guidance range of $147 million to $155 million provided during our first quarter earnings call.

Our second quarter revenue from host products, which are comprised primarily of Fibre Channel, converged and the 10 giga Ethernet adaptors was $105.6 million, an increase 1% from $104.2 million recorded in the second quarter of last year. Second quarter revenue from network products, which are comprised primarily of Fibre Channel and the InfiniBand switches, was $27.8 million, an increase of 2% from $27.2 million recorded in the second quarter of last year.

Our second quarter revenue from silicon products, comprised of Fibre Channel, converged 10 giga Ethernet and iSCSI chips, was $13.9 million, an increase 11% from $12.4 million recorded in the second quarter of last year. Our service and other revenue was $2.9 million.

Our second quarter gross margin of 67.2% improved from 66.8% recorded in the second quarter of last year, primarily due to favorable product mix. Our gross margin exceeded the high end of our guidance range of 66% to 67% provided during our first quarter call, primarily due to favorable product mix.

Next, I'd like to cover our second quarter operating expenses. Total operating expenses were $59.8 million, up 12% from $53.6 million reported in the second quarter of last year. Operating expenses were consistent with our expectation.

Engineering expenses in the second quarter of $34.3 million increased 19% from a year ago, and increased as a percentage of revenue from 19.7% to 22.8%. This increase was related to our planned incremental investment to expand our served market opportunities and drive future revenue growth.

Sales and the marketing expenses in the second quarter were $18.6 million, declined as a percentage of revenue from 12.6% to 12.4%. G&A expenses in the second quarter of $6.9 million were 4.6% of revenue.

Operating profit I the second quarter of $41.1 million was 27.4% of revenue. Interest and other income was $1.1 million in the second quarter. Our income tax rate for the second quarter was 16.8%.

Our second quarter net income of $35.1 million represented a net profit margin of 23.4%. This represents the 65th consecutive quarter of profitability for QLogic.

Our second quarter net income per diluted share of $0.34 was consistent with last year and exceeded the midpoint of our guidance range of $0.30 to $0.36 provided during our first quarter earnings call.

Turning now to our balance sheet. The company's cash and marketable securities were $391 million at the end of the second quarter. We continue to maintain a strong cash position and have no debt.

During the second quarter, we generated $42 million of cash from operations. We remain committed to our stock buyback, and during the quarter, we purchased $42 million of company's common stock.

Receivables were $86.5 million at the end of the second quarter. DSO at the end of second quarter was 52 days, compared to 47 days at end of the first quarter.

Inventory at the end of the second quarter was $23.5 million and decreased from $26 million at the end of the first quarter. Annualized inventory turns for the second quarter improved to 8.4 from 7.5 turns achieved in the first quarter.

Turning now to our near-term outlook, while we are pleased with our performance for the second quarter, we're taking a cautious view on the near term, given the challenging macroeconomic environment and the sub-seasonal trends in the market that we serve. Based on these factors, we expect total revenue for the third quarter to be in the range of $145 million to $155 million. We expect sequential growth in revenue from host products to be stronger than network products. We expect revenue from silicon products to be approximately $12 million.

During the third quarter, we expect gross margin to range from 66% to 67%. When combined with the planned operating expenses of approximately $60 million, a projected tax rate for the third quarter of approximately 17%, and a diluted share count of approximately 101 million shares, we expect to achieve non-GAAP earnings per diluted share of $0.30 to $0.37 in the third quarter.

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

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

Simon Biddiscombe

Thanks, Jean. As in prior quarters, my comments will focus on financial and business highlights, along with our view of the current environment in which our business operates.

First, I am pleased with our financial execution and discipline. Our revenue in the second quarter was $150.2 million, which approximates the midpoint of the guidance provided during our first quarter earnings call, despite clear challenges in the macroeconomic environment. I'm also pleased that we achieved better than expected gross and operating margins. During the second quarter, our net income per diluted share was $0.34, which exceeded the midpoint of our guidance of $0.30 to $0.36.

Now I want to share some of the recent accomplishments that are clear indicators of the progress we have made in maintaining leadership in our traditional markets and expanding our opportunities in newer markets. Our core strategy continues to be Adaptive Convergence.

The focus of our Adaptive Convergence strategy is on converged and 10-gig Ethernet products for expansion, capitalizing on significant end-user trends and virtualized data centers, cloud service providers, and the converged enterprise. Last month, we further extended our Adaptive Convergence strategy with the public introduction of a new portfolio of innovative products, including adaptors, switches and routers, with the flexibility to power 16-gig Fibre Channel and 10-gig Ethernet converged networks from the same hardware. QLogic's newest solutions are designed to help companies smoothly transition their data center networks at their own pace and provide the versatility to handle any protocol, any host, and any storage and any fabric, empowering virtualized enterprises and cloud computing environments with complete fabric freedom.

These recent public announcements consisted of a new Flex Suite Adaptors and converged controllers, universal access point switches, and next-generation intelligence storage routers. Our new Flex Suite Adaptors have the ability to power both native 16-gig Fibre Channel and 10-gig converged enhanced Ethernet protocol networks. Powered by a new PCI Gen-3 compliant controller, these adaptors are based on QLogic's market-proven third-generation converged networking and fifth-generation Fibre Channel technologies.

The Flex Suite Adaptor portfolio leverages the same mature QLogic Fibre Channel, iSCSI, Ethernet and FCoE software currently qualified and shipping from all major server and storage OEMs. By leveraging the same software across the Flex Suite Adaptor portfolio and all previous generation products, end-customers can protect the legacy investments and achieve superior application performance across virtualized and non-virtualized environments.

Unlike competitive offerings, QLogic Flex Suite Adaptors and converged controllers uniquely offer support for native 16-gig Fibre Channel and simultaneous TCP IPM fully offloaded FCoE and iSCSI on the same hardware. These technologies -- these technologically superior solutions result in a very low consumption of CPU resources, making the products ideally suited for virtualized and cloud computing environments, giving end-users the freedom to serve applications and repurpose infrastructure at will.

Flex Suite Adaptors are currently being qualified at all major tier 1 server and storage OEMs and will be available from them in a wide variety of form factors, giving OEMs the capability to deliver 16-gig Fibre Channel and 10-gig Enhanced Ethernet with support for FCoE and iSCSI through the same adaptor and program software.

Our new universal access point switches feature QLogic's exclusive flexible port technology, giving service instant access to all of today's most advanced storage and converged networking capabilities, and allowing customers to connect Fibre Channel, FCoE, 10-gig Ethernet or iSCSI devices to any port. The initial offering is the UA5900, a powerful Fibre Channel and FCoE top-rack switch.

Organizations with an immediate need to expand their storage area network and infrastructure can deploy the UA5900 as a pure 16-gig Fibre Channel switch, providing scalability, port density and cost per port advantages not found in existing Fibre Channel products. Entry-level configurations start with as few as 24 ports and can grow to an unprecedented 68 ports per single rack unit via pay-as-you-grow port licenses.

The flexible port capability allows customers to switch the identity of any of the 68 ports between 16-gig Fibre Channel and 10-gig Ethernet converged networks, enabling immediate deployment of converged network adaptors within the traditional Fibre Channel fabric.

The features of the universal access point switches make it easy to create highly portable rack solutions that can plug into any network, further facilitating customer-paced Adaptive Convergence.

Our ISR router family allows cross-protocol routing including 16-gig Fibre Channel, one in 10-gig iSCSI and 10-gig FCoE, as well as multi-protocol host connectivity storage systems, and SAN over WAN connectivity for business continuity and disaster recovery. In addition, these routers provide, for comprehensive enterprise data migration solutions, flexible support for private, public and hybrid cloud computing.

QLogic's Adaptive Convergence strategy strengthened by the recent product announcements extends proven Fibre Channel investments while simplifying the migration path toward converged, highly virtualized IT environments. The new portfolio of adaptors, switches and routers deliver unparalleled any-to-any connectivity for service-based IT environments, and allow service providers to unleash the full potential of cloud computing.

Industry analysts, OEM customers and partners have been overwhelmingly positive on the recent announcements, citing the versatility of the new product portfolio, its unprecedented flexibility, and its ability to dramatically reduce complexity and enable seamless infrastructure migration. Adaptive convergence provides fabric freedom to connect any server, any network and any storage on any switch port.

While our Adaptive Convergence strategy will position us for continued success, there are some noteworthy midyear 2011 market share accomplishments to report in both our traditional and expansion markets. Continued success in our traditional Fibre Channel adaptor markets is a key focus, and we are happy to report that, according to the Dell'Oro Group, for the first six months of calendar year 2011, QLogic increased its adaptor revenue share to 55.1% from 54.6% in calendar year 2010. QLogic shipments of Fibre Channel adaptors are now well in excess of 10 million ports.

This is also important because storage area network customers have already demonstrated a strong preference to maintain the same supplier when they moved to converged network and products. Our success in the converged network in FCoE market continues according to both Dell'Oro and Crehan Research. QLogic shipments of FCoE non-captive adaptors for the first six months of calendar 2011 has resulted in our continued number one position and an 8.5-point increase in the lead over our nearest competitor, to a commanding overall revenue share in excess of 53%.

Lastly, in the broader non-captive 10-gig Ethernet adaptor market, which includes FCoE, according to both Dell'Oro and Crehan Research, QLogic shipments from the first six months of calendar 2011 resulted in us taking over the number two share position. This accomplishment is in a market arena with a broader set of competitors.

These market share accomplishments reinforce our position in traditional markets and demonstrate our market leadership leverage and potential in our expansion markets. With the recent additions in our Adaptive Convergence portfolio, we are well positioned for continued success.

In closing, I continue to be very optimistic with regard to the long-term future of our company. We are continuing to introduce highly innovative new products that we believe will position us to capitalize on significant opportunities in cloud computing, convergence and virtualized environments. These market opportunities expect to more than double over the next few years, and we believe that we are well-positioned to grow revenue and gain market share.

At the same time, we are taking a cautious view on the near term given the challenging macroeconomic environment and sub-seasonal trends in markets that we serve.

This concludes our prepared remarks. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll go first to Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yeah, thanks, guys, for taking the question. Simon, the question for me is that, when I look at your host segment, you guys put up a down 4% sequential number. I think last quarter when we had talked, I think your expectation was more or less a seasonal modest uptick sequentially. So, I'm curious exactly what transpired through the quarter, was it weak throughout the quarter? Any indications of what drove that shortfall relative to the initial expectations?

Simon Biddiscombe

Yeah, I think Jean alluded to it in her comments. The underlying market that we serve with substantially all of the host products is obviously server, and then there's an element of the storage market that's included there as well. Those markets clearly weren’t as robust as people had expected them to be 90 days ago when we provided the guidance, Aaron.

So, the deterioration in people's expectations for what the server, and to a certain extent the storage market, were going to do over those 90 days pulled down the host number.

Aaron Rakers – Stifel Nicolaus

And then with that said, obviously you're alluding to a sub-seasonal quarter, December quarter.

Simon Biddiscombe

Absolutely.

Aaron Rakers – Stifel Nicolaus

Can you give us a little bit more clarity on what that exactly means for that host division, and how maybe you're baking in the timing of the Romley transition?

Simon Biddiscombe Yeah. So we are expecting a sub-seasonal quarter for our host business. Typically that host business will be up 8% to 10% in the December quarter. Again, as Jean said, we are expecting the host business, as we look into December, to be much stronger than the network business. But when you look at the underlying market again, when you look at what people expect for servers, it's nowhere near what you would typically see in the December quarter. I think the most recent number we were looking at was a Gartner number that called for very low single digits growth, nothing like the -- nothing like the trend that we would typically see in the fourth quarter.

So, the -- I don’t think the correlation between what our business is doing and what the server market is doing is disconnected. It's got the usual puts and takes. We were stronger than the server market in the June quarter, we were a little -- about a point or so off in September quarter. I think we're going to do better in the December quarter. But there's no doubt that the underlying markets we serve are not quite what people expected them to be.

Aaron Rakers – Stifel Nicolaus

And Romley? Should we think about an above seasonal trend in March then?

Simon Biddiscombe

You know what, we're not trying to give guidance for the March quarter at this point in time, Aaron. I think there is some pent-up demand ahead of Romley. We weren't sure how that was going to play out 90 days ago when we last gave guidance. And clearly there's been some slip in the time where the OEMs are going to have their Romley-based servers in the market. So I think you're going to see some pent-up demand that's impacting our performance in the current period. And if it all plays out such that those servers start to ship middle of next quarter, then we should see better than expected trends. But there are many things that go into any individual quarter's revenues, right? And some things will work for us and some against us. But if it were only for the Romley, then, yeah, you'd see a better than seasonal March.

Aaron Rakers – Stifel Nicolaus

Okay. Thank you.

Simon Biddiscombe

Pleasure.

Operator

We'll go next to Amit Daryanani with RBC Capital.

Amit Daryanani – RBC Capital

Thanks a lot. Simon, maybe just one follow-up on the last point you made. Is the basic assumption, what you said, Romley shipments to happen middle of Q1?

Simon Biddiscombe

I mean you really go ask the OEMs, right? They're the ones who are going to ship the servers that have the Romley processor capability embedded in them. I think, as we've said multiple times, if you look at what happened with the [Mihale MEX] launch between the very first servers being launched and the last servers being launched, they had essentially a six-month period. So I don’t -- you're not going to see all of the benefit immediately when servers start to ship, Amit. It's going to take some extended period for the OEMs to get every SKU into the market. And that's no different than any other server launch that's happened over multiple generations of processors. I think we're optimistic that you will start to see those first servers shipped in the market quarter.

Amit Daryanani – RBC Capital

Yeah. Got it. And then if I just can ask about the December quarter gross margin as an expectation [somewhat] will be down 70, 80 basis points. I would imagine the mix would help you a little bit with host being a little strong and networking being flat. So, could you just maybe talk about what are the other nuances that are driving to the gross margin degradation next quarter?

Jean Hu

Yeah, if you look at our guidance, right, we guided the range of 66% to 67%, and for the September quarter, what we did is 67.2%. Really it's all driven by mix. It all depends on different product lines, the segment, the mix of the product. That's really the one.

Simon Biddiscombe

So, Amit, as you know, we never stick our necks on gross margin, right? Sixty-six to 67% is what we've given you I suspect for the last handful of quarters and typically we've over-delivered to that number. So we're giving you 66% to 67% and we'll see how it plays out.

Amit Daryanani – RBC Capital

Fair enough. My final question, I'm just curious, given the strong cash generation you guys have had historically, I know you guys use it for buybacks typically, is there any part or any look at potentially doing a dividend payout? Because given the cash generation you have, I would imagine you can sustain a 3% yield rather easily.

Simon Biddiscombe

Yeah, we look at it from time to time. I probably discuss it more broadly once a year within the organization. There's no plan as of now to change from the buyback policy to the dividend policy. You have, to a certain extent, think about it within the context of where the cash is generated as well, Amit, right? So there's a significant amount of cash that's generated offshore at this point in time versus onshore, and that's not necessarily available to do everything that you may want to do with a capital structure for shareholders, so, whether it was buyback or dividends. That cash isn't available to enter into those types of activities. But we scratch our heads on it from time to time.

Amit Daryanani – RBC Capital

Thank you for your time.

Simon Biddiscombe

Pleasure.

Operator

We'll go next to Jason Nolan with Robert Baird.

Jason Nolan – Robert W. Baird

Yes, thank you. Simon, we've heard about a slowing server market and a relatively stable storage market. Are you hearing anything [anecdotally] on the disconnect?

Simon Biddiscombe

On the disconnect with our business?

Jason Nolan – Robert W. Baird

The disconnect between server and storage. Is it Romley-related or VMware pricing, or any idea?

Simon Biddiscombe

No, I don’t think we're offering a perspective. There's little doubt that, if you look at the trends that are driving storage purchases today, the enormous incremental need for storage across many different capabilities, many different applications is something that's been ongoing for many, many years. And the server market isn't delivering at the same types of rates as the storage market is. I don’t think that's a pause as such. I think that's just a trend that you would expect to see given the technology dynamics within servers versus a technology dynamics within storage at this point in time.

Jason Nolan – Robert W. Baird

Okay. Last question from me, on expense management. OpEx has come up a little bit the last few quarters while revenues trended flat into down. Is that a function of investment in new opportunities, or maybe if you could talk about…

Simon Biddiscombe

Yeah, it is, yeah. No, it's exactly what it is. Jean talked about it in her prepared remarks. If you look at sales and marketing, you look at G&A, they're entirely consistent with where we were a year ago. The investment that we are making in new products that will serve new markets, that we'll start to talk about early next year are almost exclusively on the engineering line. So we are investing more in engineering at this point in time in order to be able to offer a new set of products and serve a new set of market opportunities.

Jason Nolan – Robert W. Baird

For our models, we shouldn’t assume negative leverage through calendar '12?

Simon Biddiscombe

That's important to us, right? So we've still got that 30% operating margin that we hold out as being our objective. Given the level of incremental investment we've made over the course of the last couple of quarters, the operating margin is sitting a little below that. But we've said $240 million of OpEx for the fiscal year 2012. We're right on track to deliver that at roughly $60 million per quarter. And then with revenue expansion as we move through FY '13, so, beginning April 1 next year or so, I would expect to see the operating -- the operating margin structure come back to more traditional targeted levels.

Jason Nolan – Robert W. Baird

Thank you.

Simon Biddiscombe

Pleasure.

Operator

We'll go next to John Slack with Citigroup.

John Slack – Citigroup

Hi, Simon and Jean. InfiniBand, comments around the InfiniBand business was conspicuously absent on the prepared comments. Any comments on how that business is doing, and is it still strategically important for you guys?

Simon Biddiscombe

Yeah, it actually did very well in the quarter. Revenue for InfiniBand was better than we had expected it to be, and our market share continues to grow. I suspect that based on what our only competitor's numbers were within the last 24 hours, that we've successfully gained share for the second consecutive quarter. It does tend to be lumpy, right?

We always caveat trends associated with InfiniBand because any individual transaction can be very large and therefore very lumpy to the overall performance. But I think we continue to be thrilled with the performance of our QDR products. We've, over the course of the last nine months, as I started to talk about when I took over as CEO almost a year ago, we've refocused the IB efforts. I think that's beginning to pay dividends in terms of the performance we're seeing in that business.

So it wasn't omitted from the prepared remarks for any other reason than there wasn't significant news in the most recent period. The business, the IB business continues to do very well and we're very pleased with the performance against competitor.

John Slack – Citigroup

Got it. And then on the new products front, I mean you alluded in your products. When should we start thinking about those? I know you don't want [furrow] on yourself, but in terms of when will we hear some more detail on those…

Simon Biddiscombe

I still think it'll be in the March quarter.

John Slack – Citigroup

March quarter?

Simon Biddiscombe

No change in my perspective. I told you a year ago I thought it would be early '13 before -- early calendar '12, fiscal '13 before we started talking about those things, and I'm still there.

John Slack – Citigroup

Great. That's all for me.

Simon Biddiscombe

Excellent. Thanks, John.

Operator

And as a reminder, that is star 1 if you have a question today. We'll go to -- we'll go next to Scott Schmitz with Morgan Stanley.

Scott Schmitz – Morgan Stanley

Hi, Simon; hi, Jean.

Simon Biddiscombe

Hi, Scott.

Scott Schmitz – Morgan Stanley

A quick question on the networking constraint, can you talk about -- can you just give a more detailed…

Simon Biddiscombe

Sure. Yeah, it goes back to the last question that John asked. It was primarily driven by strength in InfiniBand in the most recent period. And as I said, typically those transactions can be a little bit lumpy and therefore they don’t necessarily recur at exactly the same values, and therefore we don’t expect it to be quite as strong in the December quarter. That's the network business in total.

So, as Jean said, we expect host to be stronger than network. Network did very well last quarter, primarily due to InfiniBand, and as I said, we're pleased with the progress we've made over the course of the last nine months or so, continue to execute to the priorities, and we're doing well.

Scott Schmitz – Morgan Stanley

Okay. And then just going back to the gross margin. You said it was mostly mix-related. But it looks like the host business was a little bit lighter than at least I was expecting. Networking was better, which I think the margins of those are kind of flipped. So, can you just help us understand what, you know, is it silicon, or what's really driving that?

Simon Biddiscombe

No. It's actually at levels you can't see. So you have to get below the headline level to start see the true mix impacts on gross margin, and we don't let you have the level of detail that's necessary to do that. So you actually have to get to individual product families within the host business, individual product families within the network business, and then, believe it or not, individual products within silicon as well, right?

So we're pleased that we continue to execute well to the gross margin guidance. We work hard to make sure that we're able to deliver a gross margin model that's of value to shareholders, in the face of a customer set that is always looking for continued improvements in pricing. So we're pleased with the progress we continue to make around gross margin.

But you can't get to the level of detail you need, nor will we provide it, around precisely where the gross margin benefit came from.

Scott Schmitz – Morgan Stanley

Okay. And just lastly for me, just on Thailand. I know your competitor, they had some issue with a contract manufacturer. Do you have any exposure? And do you expect to take any share as a result?

Simon Biddiscombe

No. So we're getting pretty good understanding the impact of natural disasters, if you do Japan and then Thailand as well over the course of the last six months or so. We've carefully evaluated the potential impacts on our supply chain, and currently we don't expect any disruptions at all.

You always have that concern about, could there be something else that disrupts a customer's ability to ship products, I mean drives are clearly square in everybody's minds at this point in time, but I think the enterprise part of the market is probably good based on everything I've seen and people we've talked to. But you always have concern about whether there's something that could impact an OEMs ability to ship a server that would impact their ability to pull a host product from a hub and so on. So we're always cautious.

But no impact having carefully evaluated our supply chain.

Upside given what the competitor announced? No idea. No idea. We'll have to look at what they've said on their earnings call to try to understand in more detail. But we're ready. We've got all the products that could possibly be necessary to satisfy customer demands and upside.

Scott Schmitz – Morgan Stanley

Okay. Thank you.

Simon Biddiscombe

Thanks.

Operator

We'll go next to Jung Pak with BMO Capital Markets.

Jung Pak – BMO Capital Markets

Hi, Simon; hi, Jean. Can you talk about linearity in the quarter compared to past September quarters?

Jean Hu

It's actually quite consistent. Linearity is very consistent with the past.

Jung Pak – BMO Capital Markets

Are there any changes in the OEM activity in terms of the [hub pools]?

Jean Hu

No, not really. Quite consistent.

Jung Pak – BMO Capital Markets

Okay, good. Also on 16-gig HPAs, when should we expect some type of market acceptance for 16-gig, and what are the current gating factors for ramp there?

Simon Biddiscombe

So there's multiple elements to that, right? I still think 16-gig starts to ship some point in the middle of next year, and that's essentially what we said on the earnings call 90 days ago and probably 180 days ago as well. The principal reason for that is that, as the server OEMs are working frantically to get their Romley products positioned for launch, essentially everything they're doing is with 8-gig Fibre Channel, not 16-gig Fibre Channel, right? So the practicalities of getting solutions in the market is all about having them qualified through each of the OEMs, and that's a long and extensive process.

So, our perspective continues to be that we and the 16-gig competitors won't see any significant revenue uptick until the middle of next year, and it'll be when Romley servers are shipping.

Jung Pak – BMO Capital Markets

How about pricing? Is it still too expensive?

Simon Biddiscombe

I think pricing is an element of it. You're looking at 15% to 20% premium without optics at this point in time, and the optics continue to be significantly more expensive than 8-gig optics do. So, pricing is going to play a part in this. It's not unusual at the beginning of the technology cycle for that to be the case. You need to get optics in particular well-ramped into production to enjoy all the benefits of the scale. And we're not there yet as it relates both 16-gig optics.

Jung Pak – BMO Capital Markets

Okay, great. Thanks.

Simon Biddiscombe

Thanks.

Operator

And at this time, we have no further questions.

Jean Hu

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

Operator

That concludes today's conference. We thank you for your participation.

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