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QLogic Corporation (NASDAQ:QLGC)

F3Q12 Earnings Call

January 26, 2012 5:00 p.m. ET

Executives

Jean Hu - Senior Vice President and Chief Financial Officer

Simon Biddiscombe - President and Chief Executive Officer

Analysts

Amit Daryanani - RBC Capital Markets

Aaron Rakers - Stifel Nicolaus

Mark Moskowitz - JPMorgan

Katy Huberty - Morgan Stanley

Jung Pak - BMO Capital Markets

Operator

Good day and welcome to the Third Quarter Fiscal Year ‘12 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 Jean Hu, Senior Vice President and Chief Financial Officer.

Jean Hu

Thank you, Brandon. Good afternoon and welcome to QLogic's third quarter fiscal year 2012 earnings conference call. Joining me on the call today is Simon Biddiscombe, our Chief Executive Officer. I'll begin the call with a review of the third quarter financial results. Simon will follow with a discussion of the current state of our business and our recent announcement relating to the definitive agreement to sell substantially of the asset associated with our InfiniBand 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 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 third quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. These results include our InfiniBand business for all periods. Of the reference we will make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of the non-GAAP to the GAAP financial measures is available on our website under investor relations.

Turning now to our financial result. For the third fiscal quarter ended January 1, 2012, our revenue in the third quarter was $152.7 million, a decrease of 2% from the same quarter last year. This revenue was at the upper end of our guidance range of $145 million to $155 million provided during our second quarter earnings call, driven by better than expected performance from our fibre channel adapters.

Our third quarter revenue from host products which are comprised primarily of fibre channel, converged and 10-gig Ethernet adapters, was $112.7 million, compared to $113.5 recorded in the third quarter for last year. Third quarter revenue from network products which are comprised primarily of fibre channel and InfiniBand switches, was $24.4 million compared with $28.9 million recorded in the third quarter of last year. Our third quarter revenue from silicon products comprised of fibre channel, converged, 10-gig Ethernet and iSCSI chips, was $12.4 million, an increase of 17% from $10.6 million recorded in the third quarter of last year.

Revenue from silicon product was consistent with our expectation. Our service and other revenue was $3.1 million. Our third quarter gross margin of 67.1% was consistent with gross margin recorded in the third quarter of last year. Our gross margin slightly exceeded the high end of our guidance range of 66% to 67%, provided during our second quarter earnings call. Next I would like to cover our third quarter operating expenses.

Total operating expenses were $59.7 million, up 10% from $54.4 million reported in the third quarter of last year. Operating expenses were consistent with our expectations. Engineering expenses in the third quarter of $33.3 million increased 13% from a year ago, an increase as a percentage of revenue from 18.9% to 21.8%. The increase was related to our planned incremental investment to expand our server market opportunities and drive future revenue growth. Sales and marketing expenses in the third quarter were $19.6 million, an increase as a percentage of revenue from 11.7% to 12.8%. G&A expenses in the third quarter of $6.8 million were 4.5% of revenue.

Operating profit in the third quarter of $42.7 million was 28% of revenue. Interest and other income was $800,000 in the third quarter. Our income tax rate for the third quarter was 16.5%. Our third quarter net income of $36.3 million represented net profit margin of 24%. This represents the 66th consecutive quarter of profitability for QLogic. Our third quarter net income per diluted share of $0.36 was at the upper end of our guidance range of $0.30 to $0.37 provided during our second quarter earnings call.

Turning now to our balance sheet. The company’s cash and marketable securities were $396 million at the end of the third quarter. We continue to maintain a strong cash position and have no debt. During the third quarter we generated $52.3 million of cash from operations. We remain committed to our stock buyback. During the quarter we purchased $42 million of company’s common stock. In November our Board of Directors authorized the purchase of another additional $200 million of our common stock, pursuant to our stock repurchase program.

Receivables were $82.2 million at the end of the third quarter, decreased from $86.5 million at the end of the second quarter. DSO at the end of the third quarter improved to 49 days from 52 days at the end of the second quarter. Inventory was $27 million at the end of the third quarter. Annualized inventory turns for the third quarter was 7.5 compared to 8.4 turns achieved in the second quarter.

Turning now to our near term outlook. As announced earlier this week, we have entered into a definitive agreement to sell substantially of the asset associated with our InfiniBand business to Intel for $125 million. We expect this transaction to close during our fourth fiscal quarter. Following the satisfactory completion of regulatory requirements and the customary closing conditions. As a result of this transaction, we expect to report the result of our InfiniBand business as discontinued operations in the future. Accordingly, the guidance that we will provide today for our fourth quarter will be for our ongoing business on a continuing operations basis and excludes the results of the InfiniBand business.

Our total revenue for the third quarter of $152.7 million included approximately $10 million of revenue from our InfiniBand business. During the fourth quarter we expect revenue from continuing operations to be in the range of $134 million to $140 million, at a middle point of this guidance. Revenue from host and network products is expected to be down approximately 4% sequentially, which is better than normal seasonality. We expect revenue from silicon products to be approximately $11 million to $12 million.

During the first quarter we expect gross margin to be approximately 68%. When combined with planned operating expenses of approximately $56 million our projected tax rate for the fourth quarter of approximately of 18% and a diluted share count of approximately 99 million shares. We expect to achieve non-GAAP earnings per diluted share from continuing operations of $0.30 to $0.33 in the fourth quarter. Our actual results for future periods may differ materially due to a number of factors including those outlined during the course of the conference call, in the company’s filing with 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. Before I provide my comments on the financial and business highlights for the third quarter, I want to discuss the recent announcement regarding our InfiniBand business. We have entered into a definitive agreement to sell substantially all of the assets associated with the business to Intel for $125 million. We strongly believe this transaction is in the best interests of our company, our customers and employees and ultimately our shareholders.

The sale allows improved focus in high growth opportunities in converge networking, enterprise Ethernet and storage networking products serving the data center. Over many years we have developed a core set of competencies in high performance connectivity for the data center, aligned to an OEM go to market model with design wins followed by high volume OEM branded products. These competencies have resulted in well established leadership positions, such fibre channel adapters, FCoE adapters, Ethernet products and embedded switches.

As the InfiniBand market has evolved, the technological and go to market complexities have become less aligned with our competencies of our core business. We believe this transaction will allow us to fully focus our attention and energy on high growth opportunities in the data center which leverage our core competencies. I am confident that the sale of our InfiniBand business to Intel, a leading technology innovator and recognized HPC leader, will benefit our talented InfiniBand employees by enabling long term career opportunities as well as providing a long-term road map for our InfiniBand partners and customers.

Turning now to how we believe this transaction will positively impact our financial performance. First, we expect faster revenue growth in future periods and in fact our revenue for the first nine months of fiscal 2012 would have grown faster if we exclude the revenue from InfiniBand products. Second, we expect to have higher gross margins as InfiniBand products have historically had lower gross margins than our corporate average. And third, we expect higher operating margins following the transfer of the team and expenses associated with the business to Intel. We believe these compelling financial improvements will benefit shareholder value.

After the sale our cash position will be further strengthened and we expect the impact on earnings per share to be neutral. Next I would like to comment on a few financial and business highlights from the third quarter. First, I am pleased with our financial execution and discipline. Our revenue in the third quarter was $152.7 million, an increase of 2% sequentially. Our sequential revenue growth was actually 5%, if you exclude the revenue from our InfiniBand products. This revenue was at the upper end of our guidance range of $145 million to a $155 million.

I am particularly pleased with our revenue from host products, which grew 7% sequentially due to strength in fibre channel and converged adapters. Revenue from host products would have grown at a faster rate excluding InfiniBand host channel adapters. I am also pleased with our strong gross and operating margin performance. During the third quarter our net income per diluted share was $0.36 which was at the upper end of our guidance range of $0.30 to $0.37 provided during our second quarter earnings call.

Now turning to my customary business update. 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 in virtualized data centers, cloud service providers and the converged enterprise. During our last earning conference call we discussed the recent extension of our adaptive convergent strategy with the September public introduction of a new portfolio of innovative products, including adapters, switches and routers with the flexibility to power 16-gig fibre channel and 10-gig Ethernet converged networks from the same hardware. The announcement included our new Flex Suite Adaptors and converged controllers, universal access point switches and next generation intelligent storage routers.

The products have received continued positive reception by the market and we continue to win new designs with them. Our existing portfolio of converged products also continues to demonstrate strong market success. In early October, we announced that our 8200 Series 3G CNA 10-gigE converged networking adapter technology we are shipping as an embedded target controller solution in NEC’s storage M Series Arrays. In late October we announced that our NIC partitioning, Switch-Agnostic I/O virtualization solution named NPAR, was available to channel partners on our 3200 Series Intelligent Ethernet adapters and 8200 Series converged network adapters.

Available for use for the old QLogic 3G CNA adapters, QLogic VMflex NPAR technology is the most widely available solution for critical I/O virtualization requirements in the data center and serves as a precursor to industry wide I/O virtualization technologies such as SR-IOV across a wide variety of operating systems. And lastly we announced in November that our 8200 Series 10-gig Ethernet converged network adapters have been fully tested and certified as fully interoperable with the Juniper Networks’ QFabric family of products including the QFabric System QFX3500 switch. These achievements highlight the strengthened value of our 3G CNA family.

While our adaptive convergence strategy will position us for continued success, there are noteworthy market share accomplishments to report in both our traditional and expansion markets. We continue to focus and invest in our traditional fibre channel adapter market and I am pleased to report that according the Dell'Oro Group, for the first nine months of calendar year 2011, when compared to the calendar year 2010, QLogic increased its adaptive revenue share to 54.7%. Storage area network customers continue to demonstrate a strong preference for the same supplier in ongoing fibre channel purchases and when they move to converged networking products.

Our market leadership and success in the converged networking market continues. According to Crehan Research, for the first nine months of calendar year 2011, QLogic increased its FCoE non-captive adapter revenue share to 55.8% from 52.7% in calendar year 2010. The 55.8% share exceeds our market leading fibre channel adapter revenue share and indicates strong preference for the value of QLogic converged networking products.

And lastly, in the broader non-captive 10-gig Ethernet adapter market, which includes FCoE, according to Crehan Research, QLogic’s revenue for the first nine months of calendar 2011 has strengthened our number two revenue share position which we attained during the June quarter of 2011. This accomplishment is in the market arena with a broader set of competitors, challenging competition and demanding product cycles.

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

In closing, with a sharpened focus on our core business, we expect an increased acceleration of innovative new products we believe will position us to further capitalize on the significant opportunities in cloud computing, convergence and virtualized environments. We are in the early stages of a market opportunity that is expected to more than double and we believe that we are well positioned to grow revenue, gain market share deliver strong financial performance and continue to drive shareholder value.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Thanks a lot, good afternoon, guys. Couple of questions. One, looking at the March guidance, looks like fairly sub-seasonal on the host side. Do you think that’s a reflection more of the fact that December was so soft or do you think you are starting to see benefits from the Romley ramps happening in March and how do you expect that to progress beyond the March quarter?

Simon Biddiscombe

I am not sure what math you are doing there, Amit. So we think that if you look at the total company guide, and you start with the 152.7 we guided, you back out 10 million for the InfiniBand contribution last quarter, so last quarter without InfiniBand was 142.7 million. And then we are saying that we expect the combination of host and switch to be down approximately 4% at the mid-point, I think that looks entirely like a kind of traditional seasonal guide. It’s actually slightly better than a traditional seasonal guide.

Amit Daryanani - RBC Capital Markets

That was my point. I though, I guess, I read it as host was down 4 but you are saying host and switch are down 4%, that still looks you know better than seasonality or seasonal down take. I am not understanding -- does that reflect the fact you are starting to see some benefits from Romley happening. And how do you think that should transpire in June and September? Should we expect that in seasonal trends for a few quarters?

Simon Biddiscombe

So you may be trying to read a little bit too much into it. I think if you look at what our traditional seasonal guide would be, it would be somewhere around down 5%, we have given down 4% at mid-point. I think we are at the very earliest stages of starting to see benefit from QLogic solutions that will ultimately ship in the Romley platforms. But as we have experienced previously Amit, that’s an extended time between the first introductions and the final introductions of server platforms based on new processors. So I think we are beginning to see the benefit of all of the products that we have introduced, of the relationships we have with key OEMs around next generation technologies. But the benefit within the context of this current quarter remains fairly small. The benefit will be enjoyed more so in the June quarter and the September quarter as more of those platforms go to production and our OEM customers have significantly more activity with end-users.

Amit Daryanani - RBC Capital Markets

Got it. And then on the InfiniBand side. Could you just talk about, you know allocate gross margins I think expanding by 80 basis points on the guide and OpEx going down by $4 million. How much of that is because of InfiniBand has been put in as discontinued? Just wanted to get a sense on the impact on the margins.

Amit Daryanani - RBC Capital Markets

It’s a fair question.

Jean Hu

So our InfiniBand business gross margin is lower than our corporate average. So without InfiniBand business largely, our corporate gross margin will improve about 1 percentage point. So it’s fair to say 80 basis points to 100 basis points of improvement without InfiniBand business. On the operating expense side it’s about $4 million a quarter, so that’s about right. That’s the expense associated with the employees and the InfiniBand business.

Simon Biddiscombe

So you are right on the money, Amit. Right. So what we are saying is, look the margin goes up roughly a point sequentially. There is a little bit of -- it’s clearly isn’t significant mix associated with it because we have given you hosting network downfall percent, so you have to look at it within the context of InfiniBand was costing roughly a point of margin.

Operator

Our next question comes from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Thanks, guys. I just want to go back to -- first of all just to kind of close a loop on my model. What are you assuming the other revenue line does going forward?

Simon Biddiscombe

You should have roughly a million coming out of it.

Jean Hu

Yeah. So it would be about...

Simon Biddiscombe

$2 million.

Jean Hu

Around the $2 million.

Aaron Rakers - Stifel Nicolaus

And as we think...

Simon Biddiscombe

Just to be clear what that was, right, just to be clear. What that represented was service contracts when we sold InfiniBand related products, okay. So it’s primarily service related contracts on InfiniBand related products.

Aaron Rakers - Stifel Nicolaus

Okay. And as I think about the model here from a going forward basis, it seems like a lot of people seem to think that the Romley impact starts to show up or the launch has started to show up in the March timeframe. Can you help us understand why? Are you assuming any Romley benefit in the current quarter and why maybe even down 4% might even prove conservative. Why it would not possibly prove conservative?

Simon Biddiscombe

I think as I said to Amit in answering his question, right. I think we think there will be some level of Romley related activity in the current period but we do not believe that it will be a significant contributor to the period. We think the greater benefits are enjoyed in the June and September quarters as more and more platforms from our OEM customers come to market, right. So that’s part number one. Part number two is, we have been talking for an extended period about Romley launches and obviously we have expected them at various points prior to now and haven’t seen them. So we wouldn’t try to second guess when those products will ultimately hit the market. And that’s a question for Intel and a question for other OEMs, right. So we don’t expect a significant benefit to the business in the current period and perhaps we are proven to be conservative as a result of it.

Aaron Rakers - Stifel Nicolaus

Okay, fine. Final question from me would be is, tax rate you are guiding up to 18%. I haven’t seen 18% in quite a few quarters. So why is it going back up and then also is that the right level that we should think about going forward.

Jean Hu

The tax rate is going up is also because the InfiniBand business. After we take out the InfiniBand business the revenue and profit mix of the continuing operations is just because of the mix the tax rate actually will be higher. We are not -- we will give you more detailed financial guidance after we close the transaction on the tax rate and other financial details. But for the Q4, for continuing operations, 18% is the right one.

Operator

Our next question comes from Mark Moskowitz with JPMorgan.

Mark Moskowitz - JPMorgan

Thank you, good afternoon. Two questions if I could. Maybe just want to come back to first to the InfiniBand sale. I want to get a sense here in terms of what was really the tipping point to drive the sale. And what have you learned, I mean are there other areas of the business that now maybe you can double down and invest further on. Are you kind of signaling that there could be an incremental market penetration elsewhere, specifically around 10-gig Ethernet? Just wanted to get a little more sense about the (inaudible)?

Simon Biddiscombe

That’s a very valid question, Mark. So we have been talking about the significant opportunity that we believe exists with our key OEM customers around fibre channel, converged and pure 10-gig Ethernet related technologies for some extended period of time now. And our perspective on what it takes to be successful in those markets hasn’t changed. We have got everything lined up to be very successful with the right set of partners in that set of markets, okay. We have also talked about the fact over the course of the last year at this point in time, that we do have some organic investments that we are undertaking that will result in new products coming to market that’s entirely new opportunities then exist today, over the course of the next -- launch within next three to six months essentially.

So we are refocusing and driving a greater degree of focus around the opportunities that exist in the data center. One of the things that we had given careful consideration to is we thought through the InfiniBand sale was the fact that from a technology perspective with both host and switch related InfiniBand silicon requirements, and very expensive silicon requirements. And then platform requirements associated with both adapters and switches that were becoming extraordinarily complex and expensive to bring to market, that our market share position as was didn’t necessarily allow us to do everything that was going to be necessary to be successful against the competition, right. So, much though I am thrilled with the progress we have made against that competition over the course of the last year, and that progress in terms of both products and market share. We recognize that in the hands of a different party, greater success could be enjoyed and that will allow them to talk about what they think they are going to invest and will allow them to talk about how they think it changes the competitive environment for InfiniBand products.

So this was absolutely the right thing to do. You can see it in the business model. InfiniBand continues to be a very niche technology. The total market, if we take ourselves, and Mellanox as a competition is less than $300 million. And I think the rates of growth in that market are smaller than the rates of growth in the date center, converged and Ethernet products. So absolutely the right thing for us to do for shareholder value, absolutely the right thing to do for the employees and the team.

Mark Moskowitz - JPMorgan

Okay. Thank you. Now the other question I have, as a good segue in terms of you finishing comments around growth rates or delineation in terms of difference. Because I guess my question now, number two here is, how shall we think about the growth rates longer term for your host business with Romley? Because I think it’s fair to say that once Nehalem gained traction over the past few years we did see a reduction or kind of a deflationary effect in the (inaudible) chips with servers where there are less -- there are still HPAs sold and adaptors sold, but assuming there is less sold per box because of these more powerful server chips. Is Romley going to even up the ante there where you could see even a greater deflationary force?

Mark Moskowitz - JPMorgan

So we look at this opportunity, right, Mark. I mean if you look at it, you can't just look at pure fibre channel adapters, you have to look at it within the context of fibre channel adapters and then you have to move from fibre channel into FCoE and the fact you have got the E in FCoE means you have Ethernet adapters as well. So we look at this as being a significantly expanding opportunity. When you look at all of the technologies that QLogic’s providing from both fibre channel and FCoE and Ethernet, the 10-gig iSCSI perspective and so on, right.

So I think if you look at the products we have introduced over the course of the last six months. We have got the only product in the market that can deal with all four protocols on a single chip and therefore single adapter and we think that’s an extraordinarily compelling solution for our OEM customers. And we think that this significant growth could be enjoyed associated with that set of opportunities, right. The InfiniBand business has actually been a dampener on growth. As I said in my prepared remarks, had it not been for InfiniBand the business would have actually grown by 5% in the most recent period instead of 2%. On a nine month over nine month basis the company would have grown faster. And perhaps most compellingly in seven out of the last 11 quarters, we have grown slower because of InfiniBand. So we would have growth faster seven of the last 11 quarters without the InfiniBand contribution to the business.

So I think you have seen a dampening on the business over the course of the last couple of years, Mark. But in many instances that was attributable to non-fibre channel and non-ethernet related technologies. I think the story is much cleaner moving forward and as we have explained many times in the past, the InfiniBand business has been extraordinarily lumpy and can cause growth to be far different then you are looking for. As you think about the tax rates, far different then you are looking for, as you think about where growth should come from, and then far different than our competitors.

Mark Moskowitz - JPMorgan

Okay, that’s helpful. If I can get a follow-up. I guess what should investors be looking to then as driving the inflection point. To getting you back to that 7% to 10% or even higher growth bogie going forward.

Simon Biddiscombe

Okay. So our expect on that hasn’t changed much. It’s all about Romley. It’s all about the fact that today you buy a server it’s primarily a 1-gig world. With the Romley launch and our expected success based on OEM products that we have qualified over the course of the last 18 plus months in expectation of Romley, that you move to a 10-gig world. So our position is unchanged. We have been saying for an extended period, with Romley will come the 10-gig Ethernet and FCoE market acceleration that we have been waiting for and you have been waiting for. And our view on that hasn’t changed, it comes with Romley.

Operator

(Operator Instructions) We will next move to Katy Huberty with Morgan Stanley.

Katy Huberty - Morgan Stanley

Thank you. Simon, given the cash that the sale of InfiniBand frees up, does it change your view as to how aggressive you will be over the next year on share buyback and potentially dividends.

Simon Biddiscombe

No, Katy it doesn’t. I think the buyback strategy has been the right buyback strategy over a number of years and we have tended to average into the buyback over an extended period of time. It’s resulted in a very successful buyback relative to most buybacks to be fair. The buyback and the dividend continue to be the second choice, right. We continue to put capital to work both in terms of the operating expense structure, and have done in excess of a year now, and in terms of thinking about the M&A opportunities that come along with, to your point, roughly $0.5 billion of cash once the transaction closes. So first and foremost is finding ways to continue to accelerate the growth, be they organic or be they through M&A.

And then secondly, to the extent that we don’t identify those opportunities, the free cash that exists in the business will continue to be returned to shareholders through the buyback.

Katy Huberty - Morgan Stanley

Okay. And then Intel and a few of the server vendors have suggested that the uptake of Romley won't be as fast as it was for Nehalem, because a lot of servers have recently been refreshed and there will be more of a slow and steady transition to the new technology. Do you agree with that, that it will take probably 18 months to really fully show up in the model or do you have a different view?

Simon Biddiscombe

I think -- yes, we understand Intel’s perspective around the fact that servers that are in the date center today are based on Nehalem primarily and therefore they are couple of years old roughly, maybe a little newer. And that the ramp that we saw in Nehalem two plus years ago, was predicated on significant improvements in performance of the processor but also the fact that people haven’t significant amounts of money on servers as we went through really a tough macro, 2008-2009, right. So we understand and would never second guess Intel and the server vendors around the fact that the server -- the average server in the data center today, going into the Romley launch is a lot newer than the average server going into the Nehalem launch was.

So I think it will be a little slower, Katy. I also think that as with the Nehalem launches, it actually takes a long time from the first platform shipping to the final platforms being introduced by our OEM customers. It’s kind of a six month process, right. And that’s exactly what we saw with the Nehalem EX introductions sometime ago. So it takes time for everybody to get all of their platforms in the market and for us to realize all of the benefit associated with the wins we have achieved over the course of the last 18 months.

Katy Huberty - Morgan Stanley

Okay. And then as you think about the 10-gig opportunity with Romley penetration, is there a certain penetration point that you think is a inflection point or tipping point for your 10-gig business to really start to meaningfully move the needle.

Simon Biddiscombe

No, I think it’s -- the moment the Romley servers start to ship, the QLogic adapters, be they (donor) cards or be they mezzanine cards, regular adapters, will all start to ship. And obviously it’s various points as individual servers come to market. But now, December, I mean it could be the December quarter before you have got the full, total impact of all of the Romley and 10-gigE business shipping, right. Assuming it takes up to six months for the server vendors to each get all of their platforms in the market. You won't see a full quarter with everybody shipping all 10-gigE until perhaps the December quarter.

Operator

We will take our next question from Keith Bachman with BMO Capital Markets.

Jung Pak - BMO Capital Markets

Hi, thanks. This is Jung Pak for Keith Bachman. Simon, previously you indicated that the network’s growth longer term would be about 10% to 15% range. With the exclusion of InfiniBand should we look at that growth rate more in the fibre channel switch business which is about low single digits?

Simon Biddiscombe

So you can't do that, Jung. If you think about the total switch business and you think about 10% to 15%, that’s essentially the same rate as the individual InfiniBand business was going to grow, right. So I don’t characterize the fibre channel switch business as being different than the InfiniBand business, and the reason is all of converged opportunities, right. So we have talked about the fact that HP in particular were shipping a QLogic that is essentially a converged offering that leverages our fibre channel switching solution. And then in September we introduced the universal access point with all of the converged switch ports associated with that as well.

So you can't think about fibre channel switch and assume what QLogic is doing is just fibre channel switch. There is far more of a converged element to it than that. And we have talked about HP, there is a whole series of other customers we have not talked about within the context of converged switching versus fibre channel. So you shouldn’t have a dramatically different perspective on the rate of growth in the network business today then you had prior to the sale of the InfiniBand business.

Jung Pak - BMO Capital Markets

Okay, that’s helpful. And also your guidance for the March quarter reflects operating margins below your 30% target. With the InfiniBand closing, when should we expect your operating margins to return to the target model?

Simon Biddiscombe

So I think, I don’t have the model, pardon me, Jung. But if you actually look back historically this is one of the lower operating margin quarters and the reason is kind of twofold. Number one, you do have a sequential decline revenues due to normal seasonality, and number two, you have got incremental operating expenses associated with all the payroll tax, resets and benefits and so on. So this isn’t typically a strong operating margin quarter. We continue to target 30% as being the right operating margin for the business. When we have laid out the model, the long term model, we have characterized kind of a 28% to 32% range. We are not going to pick an individual quarter where we think we get back to that range. We don’t think it’s necessary to change the operator model, I think that’s the critical point here. We would continue to believe that the 28% to 32% operating margin is the right way to target the business and we will continue to drive towards types of numbers.

Jung Pak - BMO Capital Markets

So then what should we be looking for in terms of some sign posts. Is the ramp in 16-gig or is it 10-gig or both?

Simon Biddiscombe

I mean it’s less 16-gig, it’s more about 10-gig converged opportunities. I mean 16-gig is -- most of what launches with the Romley processors is all 8-gig fibre channel not 16-gig. 16-gig launches will be middle of this year and beyond. We have set that for an extended period of time. So what you are looking forward to deliver on the model is revenue expansion, right. We have laid out the operating expense structure, you understand what the gross margin structure is. We are looking for revenue growth to continue to drive operating margins upwards.

Operator

And we have no additional questions in our queue. I would like to turn the call back over to our speakers for any additional or closing remarks.

Jean Hu

Thank you, operator. This concludes our call today and we look forward to talking to you next quarter. Goodbye.

Simon Biddiscombe

Thank you.

Operator

Once again that does conclude today's call. Thank you all for your participation.

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