QLogic F2Q08 (Qtr End 9/30/2007) Earnings Call Transcript

Oct.23.07 | About: QLogic Corporation (QLGC)

QLogicCorporation (NASDAQ:QLGC)

F2Q08 (Qtr End 9/30/2007)Earnings Call

October 23, 2007 5:30 pm ET

Executives

H.K. Desai - CEO

Tony Massetti - SVP and CFO

Jeff Benck - President and COO

Analysts

Min Park - Goldman Sachs

Paul Mansky - Citigroup

Keith Bachman - Bank of Montreal

Andrew Neff - Bears Stearns

Aaron Rakers - Wachovia

Jeff Brickman - UBS

Kaushik Roy - Pacific Growth

Mark Moskowitz - JP Morgan

Shebly Seyrafi - Caris

Tom Curlin - RBC

Clay Sumner - FBR

Roberta Chen - Lehman Brothers

Glenn Hanus - Needham

Operator

Good day, everyone and welcome tothe QLogic Corporation second quarter fiscal year '08 earnings announcements conferencecall. Today's conference is being recorded. At this time, I'd like to turn theconference over to Mr. H. K. Desai, Chief Executive Officer. Please go ahead,sir.

H.K. Desai

Thank you, operator. Goodafternoon, and welcome to QLogic's second quarter fiscal year 2008 EarningsCall. I am H.K. Desai, chief executive officer, and with me are Jeff Benck, ourpresident and chief operating officer and Tony Massetti, our senior vice presidentand chief financial officer.

Today, Tony will begin with thereview of the second quarter results, and I will continue with the generaldiscussions of the current state of our business. After that, Jeff will discussstrategic initiatives, and then we will open the teleconference for questions.Tony?

Tony Massetti

Thank you, H. K., and goodafternoon. By now, all of you should have seen our press release and associatedfinancial information. In additional to reviewing our financial results, someof the comments today will include forward-looking statements regarding futureevents and/or projections of the financial performance of the company based onour current expectations.

These comments containsignificant risks and uncertainties that could cause our actual results todiffer materially from those expressed in these forward-looking statements. Werefer you to the documents that QLogic files with the SEC, specifically ourmost recent Forms 10-K and 10-Q. These documents identify important riskfactors that could cause our actual results to differ materially fromexpectations. We do not intend to update any of the information contained inany forward-looking statements that we make today.

Today's conference call is beingwebcast, and a replay will be available for 12 months on the QLogic website at www.qlogic.comunder "investor relations."

Please be aware that if youdecide to ask a question, it will be included both in our live transmission aswell as any future use of the recording. Copyright law and internationaltreaties protect this conference call report. Unauthorized reproduction ordistribution of this report or any portion of it may result in civil or criminalpenalties. Any recording or other use or transmission of the text or audio fortoday's call is not allowed without the expressed written permission of QLogic.

In our second quarter earningspress release issued earlier today, we reported both GAAP and non-GAAP results.The difference between the results is primarily due to stock-based compensationexpense, acquisition related charges, special charges and the related incometax effects. An accounting of this difference is included in our press release.The difference in our non-GAAP as compared to our GAAP results is $0.06 perdiluted share in the second quarter or $0.22 per diluted share non-GAAP versus$0.16 per diluted share on a GAAP basis.

All of the references we willmake today relate to our non-GAAP results unless otherwise stated.

Our revenue in the second fiscalquarter, which ended September 30, 2007, was $140.3 million, which is at thehigher end of our forecasted range of $137 million to $141 million providedduring our first quarter earnings conference call.

Our second quarter revenue fromHost Products, which are comprised primarily of Fibre Channel and iSCSI Host Bus Adapters and InfiniBandHost Channel Adapters, was $104.4 million an increase of 4% from $104.4 millionrecorded in the second quarter of last year.

The increase of our revenue fromHost Products was primarily driven by HBA revenue growth of 4% in thecomparable quarter last year. During the second quarter, our revenue fromnetwork products, which are comprised primarily of Fibre Channel and InfiniBandswitches, was $23 million an increase of 8% from $20.2 million recorded in thesecond quarter of last year.

The increase in our revenue from networkproducts was primarily driven by the revenue from our InfiniBand switch portfolio,which was added with our acquisition of SilverStorm Technologies, partiallyoffset by a 16% decline in revenue from Fibre Channel switches from the secondquarter of fiscal year 2007.

Our second quarter revenue fromSilicon Products, which are comprised primarily of protocol chips andmanagement controllers, was $11.5 million and decreased 43% from the $20.2million reported in the second quarter of last year. The second quarter revenueof Silicon Products exceeded our expectations due to last time buys of protocolchips. Revenue from silicon products declined from the prior year as expected.

Other revenue which is comprisedprimarily of royalties and services revenue was $2.4 million is second quarter.Our second quarter gross margin of 68.3% decreased from 70.4% recorded in thesecond quarter of last year. The decrease in our gross margin was primarily dueto product mix, including the addition of InfiniBandproducts, and increased manufacturing related costs. However, the gross marginperformance during the second quarter exceeded our forecast of approximately66% provided during our first quarter earnings conference call.

During the second quarter, weexperienced an ASP reduction, our like-to-like products in our HPA portfolio of1.9%, which was within our expectations. Next, I would like to cover our secondquarter operating expenses.

Total operating expenses were $55million in second quarter, up 6% from $51.7 million reported in second quarterlast year. This increase was primarily due to our investment in InfiniBand products. Engineering expenses in the secondquarter increased 7% to $30.2 million versus a year ago and increased aspercentage of revenue from 19.4% to 21.5%. We continue to make investments inexisting and new technologies, including Fibre Channel, InfiniBandand Fibre Channel over Ethernet. As a result, we are targeting engineeringexpense as a percentage of revenue to be in the range of 18% to 21%.

Sales and marketing expenses inthe second quarter of $18.1 million were consistent with a year ago andincreased as a percentage of revenue from 12.4% to 12.9%. We expect that futuresales and marketing expenses as a percentage of revenue will range from 11% to14%.

G&A expenses in the secondquarter of $6.6 million increased from $5.5 million from a year ago period, andwe are at 4.7% of revenue in the current quarter. We expect that future G&Aexpenses as a percentage of revenue will be approximately 4%. We continue tofocus on improving efficiency in our operating expenses, while investing incritical development programs for existing and new technologies.

During the second quarter, QLogicgenerated an operating profit of $40.9 million, which resulted in a 29.2%operating margin. Interest and other income was $5.8 million in the secondquarter and was consistent with a year ago.

The income tax rate of 30.5% forthe second quarter was lower than the annual forecasted tax rate of 33%provided during the first quarter earnings conference call. We are nowforecasting a lower annual tax rate range of 32% to 33%. Our second quarter netincome was $32.5 million or $0.22 per diluted share and represented a netprofit margin of 23.1%.

Our second quarter net income perdiluted share of $0.22 exceeded the high enough, the forecasted range of $0.17to $0.19 per diluted share, provided during our first quarter earningconference call. This represents the 49th consecutive quarter of profitabilityfor QLogic.

Net income on a GAAP basis forthe second quarter was $22.6 million or $0.16 per diluted share.

Now let me summarize the resultsfor the first six months of fiscal year 2008.

Revenue for the first six monthsof fiscal 2008 was $280.1 million, compared to $282 million, the same periodlast year. Our revenue from host products for this period was $208.6 million,up 9% in the comparable period last year, and our revenue from network productswas $46.4 million, up 20% in the comparable period last year.

These increases in revenue duringthe first six months of fiscal year 2008 were offset by the decline in revenuefrom silicon products. Non-GAAP, net income of $62.7 million or $0.42 perdiluted share for the first six month of fiscal 2008 represented a net profitmargin of 22.4%. Net income on a GAAP basis for the first six month of fiscal2008 was $41.6 million or $0.28 per diluted share.

Our financial position continuesto be strong, especially with regard to our cash flow. During the secondquarter, we generated $67.2 million of cash from operations. The company's cashand marketable securities were $392.1 million at the end of the second quarter.

During the second quarter, wepurchased $144.7 million of our common stock pursuant to our stock repurchaseprogram. In addition during the third quarter, we continued to execute againstour current stock repurchase program, and we've purchased more than $30 millionof our common stock.

Since fiscal year 2003, we'verepurchased over $1 billion of the company's common stock under programsauthorized by the Board of Directors.

Receivables of $72.2 million atthe end of the second quarter decreased from $77.3 million at the end of theJune quarter. The DSO rate in the September quarter was 47 days compared to 50days in the June quarter. Based on hub arrangements with our OEM customers andour current customer channel mix, we expect DSO in the future to range from 45to 55 days.

Annualized inventory turnover inthe second quarter of 5.1 turns was comparable with the 5 turns in the Junequarter. Inventory at the end of the second quarter was $35.1 million anddecreased sequentially from $38 million at the end of the June quarter. Weexpect that inventory levels at the end of the December quarter to be flat orslightly down from the September quarter.

The long term outlook for ourcore business remains favorable. Based on current customer forecast, we expecttotal revenue for the December quarter to be in the range of $147 million to$151 million. Due to the potential variation of product and technology mix, weexpect gross margin for the December quarter to be approximately 67%.

Considering the above revenue andgross margin expectations combined with planned operating expenses,infrastructure investments and a projected annual tax rate should be between32% and 33%. The current outlook is to achieve non-GAAP earnings per dilutedshare of approximately $0.23 to $0.25 in the December quarter.

Actual results for future periodsmay differ materially due to a number of factors including those outlinedduring the course of this conference call and the company's filings with theSEC and the disclaimer statement at the end of the second quarter fiscal 2008earnings press release.

I would now like to turnover thisconference call to H.K. Desai our chief executive officer, H.K.

H K. Desai

Thank you, Tony. QLogic executedwell in the quarter, exceeding EPS expectations and delivering strong cash flowfrom operations. Revenue in the second quarter was $140.3 million, which was atthe higher end of our guidance range.

Our earnings per diluted sharefor the second quarter of $0.22, was well above our guidance range. This is the49th consecutive profitable quarter for QLogic. According to the Dell'Orosecond quarter 2007 SAN Report, QLogic was once again ranked number one inoverall Fibre Channel HBA market share.

The report indicated that the QLogicHBA revenue share increased from 43.4% in the March quarter to 44.4% in theJune quarter. Our market share of HBA ports increased from 45.8% in the Marchquarter to 48.5% in the June quarter.

Dell'Oro also reported a QLogicgain in market share in every major Fibre Channel HBA category for the March toJune quarter. Second quarter revenue from host products, which are comprisedprimarily of Fibre Channel HBAs, iSCSI HBAs and InfiniBand HCAs, grew 4% fromthe year ago quarter.

Fibre Channel HBA units shippedwere up 22% from the year ago quarter, which was driven by a more than 200%increase in the Fibre Channel Mezzanine Card unit shipments. This strong growthin the Mezzanine Card is consistence with the continued growth in the bladeserver market. As with last quarter, the higher Mezzanine product mix impactedour overall HBA revenue.

Our second quarter revenue fromnetwork products, which are comprised primarily of Fibre Channel and InfiniBandSwitches, grew 8% from the year ago quarter. This increase was primarily drivenby our InfiniBand Switch product line, partially offset by our decline inrevenue from Fibre Channel switches.

Fibre Channel switch revenue wasdown 16% from the year-ago quarter, and the primary driver was impact from theend of life McData blade switch products. For the first six months of fiscalyear 2008, revenue from Host Products was up 9% and revenue from NetworkProducts was up 20% over the comparable period last year.

Our Silicon Products arecomprised primarily of protocol chips and management controllers. As we havepreviously discussed, we expect our revenue from silicon products to declineovertime. Second quarter revenue of $11.5 million was down 43% from the prioryear. Sequentially, revenue from Silicon Products was up, driven by some lasttime buy for protocol chips for Tier-2 customers. We expect revenue fromsilicon products to decline sequentially next quarter by approximately $500,000to $1 million.

In summary, fiscal year 2008 is atransition period. As the impact of the declining revenue from silicon productsdiminishes and we launch major strategic initiatives in 8-gig, InfiniBand andFibre Channel over Ethernet or FCoE, we expect the overall revenue growth rateto improve in the future.

I am now going to turn the callover to Jeff Benck, our president and chief operating officer to discuss theseinitiatives in more detail. Jeff?

Jeff Benck

Thank you, H.K. Good afternoon. Iwant to give you an update on how we are progressing in our network [concerns].Our mission is to apply our expertise in storage, data and server networking tohelp enterprises to transform their data center into an efficient computingenvironment that is consolidated, virtualized, and simpler to manage. In termsof the market, we believe networking infrastructure will continue to consist ofthree distinct technologies; Fibre Channel, InfiniBand and Ethernet.

However, we see a transition anda new way of network consolidation beginning. We've already seen the benefitsof storage consolidation in the SAN and server consolidation driven by denseserver, multi-core processors and virtualization. We anticipate the next phaseof evolution in the IT industry will be the consolidation of storage and datanetwork onto a single converged fabric of FCoE.

Based on our broad networkingexperience including Fibre Channel, InfiniBand and Ethernet technologies, webelieve QLogic can lead our customers through this transition.

Last week, at the StorageNetworking World Conference, or SNW, we hosted a press conference where weunveiled an array of technologies and products for high performance networkingand convergence that will enable the data center of the future. With continuedserver consolidation due to virtualization, there will be greater demand forbandwidth in the data center. We believe that 8-gig Fibre Channel willrepresent a technology refresh required to meet the increasing performancerequirements of the new data center.

To SNW, QLogic introduced theindustry's first end-to-end family of 8-gig Fibre Channel HBAs and 8-gigswitches available to OEMs. Unlike the transition to 4-gig, when the technologywas pushed by manufacturers, we see the pulse of this new 8-gig technology fromend users due to I/O aggregation.

We are currently sampling 8-gigHBAs and expect OEMs to start shipping our 8-gig products in the first quarterof 2008. In fact, we already have our 8-gig products deployed with end users.

In the area of high performancecomputing, InfiniBand continues to be the preferred server networking solutionand is the fastest growing networking technology based on its low latency,affordable cost and initial standard option

IDC projects a nearly 40% revenuecadger for the combined InfiniBand switch in the HBA market through 2011.

As HPC work loads continue toexpand into commercial accounts and new HPC applications are developed, webelieve QLogic is well positioned to participate in this growing market.

At SNW, we introduced theindustry's first mid-range InfiniBand director switch based on Double Data Rateor DDR with gateways to Fibre Channel storage networks and Ethernet data networks.This product enables high performance Oracle RAC clusters built on inexpensivex86 computer notes.

Additionally, we introduced theDDR InfiniBand HBA with the world's lowest latency and fastest messaging rate,which sets the standard for performance in HPC clusters.

And finally, as we look to thenext generation of technology that will enable the consolidation of storage anddata network, QLogic introduced the industry's first converged network adaptorbased on 10-gig Ethernet technology.

Our first FCoE product is capableof supporting both Ethernet and Fibre Channel protocols on a single adaptorenabling significant savings through consolidation. FCoE will also provideinvestment protection for existing customers. Due to the fact that our FibreChannel software stack remains unchanged, this will allow for seamlessintegration with legacy stores network.

At SNWs, QLogic also facilitateda demonstration of a native FCoE network environment with strategic partners.The demonstration included converged network adaptors from QLogic, FCoEtechnology, from Nuova Systems and FCoE storage from Network Appliance. We arepresently sampling our converged network adaptors and believe we have asignificant time-to-market advantage.

We are very excited about ourinvestments and the resulting new products we have introduced based on 8-gigFibre Channel, InfiniBand and FCoE technology. These technologies will not onlyenable the next wave of IT, they are the foundation of our future growth.

We look forward to reporting onour progress on the next earnings call. This is the end of our prepared remarkstoday. Operator, we will now open lines for questions.

Question-and-Answer Session

Operator

Thank you. Thequestion-and-answer session will be conducted electronically. (OperatorsInstructions). We will take our first question from Min Parkwith Goldman Sachs. Please go ahead.

Min Park - Goldman Sachs

Yes. Thank you. Just a couple ofquestions, please. First, can you help us better understand the dynamics inyour Host Products business? It seems like, even though you will gain share onthe port size that, the revenue of 4% seems to be a little lower than what weare expecting? And is that an indication of the overall revenue growth as itaccelerates to a lower single-digit? Or did you just experience a negative mixshift versus your competitors?

H. K. Desai

Well, like we said in last coupleof calls, that we expect our Host revenue to grow about mid-single-digit tohigh-single-digit. And if you look at for the first six months, for the twoquarters for the fiscal 2008, we grew our revenue by 9% year-over-year anyway.

So, we are right on way where wesaid we will be anyway. So, you can really look at the first quarter and thensee the trend. And if you look at our numbers also, overall for our top fivecustomers, five OEM reached about 62% revenue and four of them grew by adouble-digit sequential growth in the quarter anyways. So, we are very happywith what's happening in the market.

Min Park - Goldman Sachs

And then just following up onthat, given your Fibre Channel HBAs actually grew 4%, it suggests yourInfiniBand HCAs growth to accelerate this quarter. But can you help usunderstand what's going on there particularly given the chance there in IPSwitches?

H. K. Desai

We don't have really too muchbusiness on the InfiniBand HCA. Now, we are not shipping that much revenue onthe HCA. So, I think all over growth is coming from the Fibre Channel.

Tony Massetti

If that's still an insignificantnumber, Min.

Min Park - Goldman Sachs

Okay, great. And then lastly,your sequential gross margin is up quite a bit and is that mainly related tomix or did you see unusually benign pricing in the market? Is that all theend-of-life Silicon? Can you help with what's going on?

H. K. Desai

Sure. The gross margin in theSeptember quarter was at 68.3%. So, it is up about 200 basis pointssequentially. We saw a favorable mix in the quarter as you pointed out, moreHBAs, more silicon, as well as improvement in manufacturing-related costs, boththe bond costs and in our other manufacturing costs which contributed to thesequential increase. So, we're forecasting gross margins to be approximately67% in the December quarter, Min, and that's attributed to mix.

Min Park - Goldman Sachs

Great, thank you

Operator

We will take our next questioncomes from Paul Mansky with Citi. Please go ahead.

Paul Mansky - Citigroup

Yeah. I just wanted to follow-upon that gross margin question, and then I had a couple of follow-ons. Isspecifically the InfiniBand margin profile, I know you are not breakingInfiniBand out or InfiniBand switches any longer, that's fine. But, can youtalk to us directionally what that margin profile looks like?

Tony Massetti

Sure. We did see sequentialimprovement in the InfiniBand gross margins, Paul. On our previous earningscalls, we've talked about the drivers for the gross margin improvement, ourmanufacturing supply chain integration, and we did see a good progress on thatin the quarter. Volume ramp for better absorption of our fixed cost, and thenthe component cost, primarily, switch silicon cost. And we did see someprogress there, but we still need better cost on silicon for IB switch productsin order to get the gross margins to where we think that they should be. Sooverall, we saw sequential improvement in InfiniBand products, and particularlyin InfiniBand switch.

H.K. Desai

Yeah, I can add on -- I thinkwhat Tony says, is right. I think we see progress on everything, the supplychains, the manufacturing variance and so on. I think, the rate from thecomponent, I think, the rate we haven't see yet, really, the benefit what weare expecting from the silicon cost and the IB, and we are concerned aboutthat, because we are not seeing that much progress on the silicon pricing onthe IB switches.

Paul Mansky - Citigroup

Alright. On the 8-gig front, whendo you think that you'll start receiving some concrete indication relative todesign wins, room for competitive displacement, et cetera, et cetera. Is thatsort of Q1 '08 event, Q2 '08 events or later in the year?

H.K. Desai

So we have a -- we have made atremendous progress in the 8-gig, we are sampling the product right now. Weexpect some OEM to ship the product in the March quarter. We also haveinstalled some of the product at the end user, anyway so, our technology isworking really well, and I think we feel that what the data we are getting fromindustry and the OEMs, there we are way ahead of our competitors in both theHBA and the switches.

Tony Massetti

And in fact, we already havedesign wins, we are not going to talk about specifically about where, but youwill see more as we start to shift.

Paul Mansky - Citigroup

Sure, and then lastly on thepricing front, relative to the entry point for 4-gig, how do you feel 8-gig isgoing to shape up?

Tony Massetti

On the technology transition,Paul, we typically see a one or two quarter price premium, which is justtemporary and then pricing gets pretty much down to where the previoustechnology was.

Paul Mansky - Citigroup

Okay, so no material changes inyour approach to pricing?

Tony Massetti

No, we are not planning for anychanges.

Paul Mansky - Citigroup

Okay, great. Thank you very much.

Tony Massetti

You're welcome.

Operator

We will take our next questionfrom Keith Bachman with Bank of Montreal. Please go ahead

Keith Bachman - Bank of Montreal

Hi, thank you very much. I wantto back to gross margins for the December quarter. If I look at September, itlooks like mix was the -- its not completely the lion share, because yourNetwork Products fell off pretty hard sequentially, and your Silicon Productswere much better than I thought. Tony or H.K., is there a way that you can giveus some color on how you are thinking about the composition of the variouspiece parts in the December quarter to help get us to the 67% gross margins?

H.K. Desai

We gave a guidance for theDecember quarter which is a 147 to 151, it's approximately 5% to 8% sequentialgrowth and we also say that we expect Silicon Product to decline $500,000 to $1million in the December quarter. So that means that we will see a growth bothin our HBA business, Fibre Channel, iSCSI or we also see a growth in ourNetwork Products, and I think compulsion is really going to come from HBA andthe switches.

Keith Bachman - Bank of Montreal

Okay. So H.K., can I just pressyou on that. Is the Network Product, do you think going to have -- it soundslike what you saying as the Host Products will have a faster sequential growthin the December quarter which also would be a positive mix for the margin. Am Ireading that right?

H.K. Desai

I think we'll have a sequentialgrowth in the both Host Products and Network Products. But, I think we kind oftake a mix considers and what is the forecast right now, but you know, actualresults can vary. We don't know exactly where it's going to end up, but I thinkfrom what we felt, the mix what we are seeing from our forecast is about 67%margin.

Keith Bachman - Bank of Montreal

Okay. Let me try another one.H.K., you mentioned that the Fibre Channel switch business was down, I think16% year-over-year. Any kind of current updates, I know there has been somediscussions on potentially, I was at SNW as well this past week, and any kindof comments on any other OEM design wins. And then the related question is, ifthere aren't any design wins in the next period of time, however you definethat, how do you think about the Fibre Channel switch business?

Jeff Benck

So, this is Jeff. Let me take ashot at this. We continue to work with Tier 1 OEMs on our Fibre Channel switchbusiness. As we've kind of said before, we're working closely there and we seethat as a growth driver for us to close more Tier 1 OEM business. We thinkwe've got a great set of products, we continue to believe we've got leadershipfrom a product category, not just in the blades, but in our scalable modularswitches including our 9000 family of switches. So, it's an area that wecontinue to focus on, but like you would expect in any business we are lookingclosely at the profit and growth of the profile of the businesses and we'llcontinue to look at our strategy in that context.

Keith Bachman - Bank of Montreal

So Jeff, just going to say it'sstill an open, and we know, I mean, you guys will evaluate as approximate butdoesn't gain traction and there are other consideration for the businesses,kind of..?

Jeff Benck

I guess, it's always there, rightas you look at any business, but right now we are very focused on working withOEMs on growing the switch base for us.

Keith Bachman - Bank of Montreal

Okay. Final one, if I can sneakone in, 8-K Broacade also talking about shipping their 8-gig HBA in the Marchquarter and intimating that they have some OEM design win thereafter pending,how do you think the dynamics of HBA business will change if at all during thecourse of calendar year 2008? Thanks.

H.K. Desai

Well, I mean, historically, ifyou look at either it's a iSCSI HBA or the Fibre Channel HBA, my experience isthat normally there are the two suppliers and particularly even competitive toiSCSI HBA, the Fibre Channel HBA it is extremely difficult because ofnetworking support and the multiple OS support VMware, you name it, we haveabout there is two suppliers, we are very strong. Financially, these two strongsuppliers, they have a tremendous experience in the Fibre Channel HBA or 10years either its software stack to the multiple software support or also thequalification of OEMs. So, I think, it's going to be very difficult for thethird guy to come in and I have seen in every place that when the two guys, ifthey are solid, then I think third guy will be in a difficult position. So, Idon't expect there really any change in dynamic for the 8-gig HBA.

Keith Bachman - Bank of Montreal

Okay, thank you guys.

H.K. Desai

Sure.

Operator

We will take our next questionfrom Andrew Neff with Bears Stearns. Please go ahead.

Andrew Neff - Bears Stearns

I just want to get some generalcomments about, as you look at the enterprise margin, looking customers, anysense in terms of the total demand that you see any hesitation or anything likethat, just give us a general sense, where it seems to me just been givencustomers?

H.K. Desai

So, I mean, if you look at whatwe've seen in our forecasts and the guidance we have given, seasonally Decemberis the strong quarter for OEMs, and that's what we have seen. We have also seenthe same in the September quarter, like I said before, we were strong growthfrom the four of the five OEMs. It should double-digit sequential growth. Andwe are now really, at least for most of our business income, 62% of which isfrom the five OEMs, anyway, so we really not close to the end users. We don'texactly understand, but from what we seeing from our OEM forecast, and fromwhat we have seen so far in this month anyway, I think we can expect that forthe December quarters positive things seems to be fairly sure outcome.

Andrew Neff - Bears Stearns

Is that all goes and anything,any just little comments?

H.K. Desai

I mean, we have, if you look atour number for our September quarter, we see a growth, more growth in Europeand Asia compared to the North America. So, Imean, that's a general trend, it means, everybody has seen, we saw the samething in our September quarter.

Andrew Neff - Bears Stearns

Thank you, H.K.

Operator

Anything thing further, Mr. Neff?

Andrew Neff - Bears Stearns

No.

Operator

Thank you. We will take our nextquestion from Aaron Rakers with Wachovia. Please go ahead.

Aaron Rakers - Wachovia

Yeah, thanks guys. A couple ofquestions, as well. I want to go back to the InfiniBand business and I know, youguys aren't breaking it out but kind of backing into the numbers a little bit,given what you've disclosed, it looks like even the switch business was downsequentially, so my question is: first of all is that true? And second, is itstill the target for the company to get to roughly $30 million in InfiniBandrevenue for fiscal '08?

H.K. Desai

Yeah, if you look at, we don'tbreakdown the number between IB and Fibre Channel, but I think you would alsoagree, if you had a look at what is IB switch business. So, particularly it's alot more than our end user sales currently versus OEM, anyway so the salescycles are extremely long. We have lot of deals going on. So, I don't think youcan really miss the true picture if you attempt to judge from only one quarterbut if I look at the two quarters, something over a longer period of time, ifyou look at the September/December quarter, I think, we are growing the same aswhat we had expected, which is about $30 million in revenue. So, I think, weare on the right track on the business.

Jeff Benck

I am sorry. I was just, that'sthe annual guidance we gave at the beginning of the year Aaron to $25 millionto $30 million and I think at this point we are tracking towards the higher endof that on a full-year basis.

Aaron Rakers - Wachovia

Very good. And then, a follow-up,if I can, with regard to the gross margin structure in that business, we havenow heard two quarters in which you have improved sequentially. But we havealso heard H.K. you talked about that you still not getting the Silicon grosspricing breaks that you'd hope to get. And I guess, first question on that isthat do you still expect over the course of the next, I guess, it would bethree quarters to get the InfiniBand gross margin to corporate like levels. Andsecond on that at what point downward, we potentially hear you guys talkedabout spending around Silicon and InfiniBand inside on the switch side?

H.K. Desai

I mean I tell you before, I mean,we have two goals. We have to make sure that, we are going to continue to twopoints what we do on the Silicon, we are not getting the price but we'd be liketo be and we got some price but we are not seeing what we suppose to be anyway.So, what our goal is that if the business continue growing what we are seeingand if the growth is there either we have to go and if we don't give the pricefrom the current suppliers, we have two choices either we go and partner withsome other Silicon supplier, either we go and partner with some of our owncompetitors and do the silicons or we do our own silicons anyway. But I thinkthat in next few months or so, we need to figure out whether we get the priceor not. Our goal is eventually, like I said about three to four quarters, wewant to make sure our IB switch margin is comparable to the Fibre Channelswitch margin.

Aaron Rakers - Wachovia

Okay, very good. And then lastquestion from me and I apologize if I missed this. But did you guys say whatthe like-to-like ASP erosion was in the Host Bus Adaptor business? And that'sit. Thanks.

Tony Massetti

Yeah. We did Aaron. We said itwas 1.9% like-for-like sequential decline.

Aaron Rakers - Wachovia

Okay. Thank you.

Tony Massetti

You are welcome.

Operator

We will take our next questionfrom Jeff Brickman with UBS. Please go ahead.

Jeff Brickman - UBS

Hi. Great. Thanks. Last quarter,you commented your thoughts server virtualization might be slowing servergrowth and may be resulting some weakness in your HBA sales. Can you provideany additional commentary are you still seeing that now and do you still thinkthat dynamic exists?

Jeff Benck

So, this is Jeff. I'll answerthat. We continue to see virtualization to be a driver of HBA business. We didsay in prior calls that we are sensitive to the fact that when you haveconsolidation going on that it is not necessarily all upside because you havepotentially less servers that you have slots that you are plugging HBAs into.But when we look at 8-gig technology with high growth in virtualization, weactually see sort of an opportunity here that's coming out of thevirtualization play that our customers are adopting. Where their bandwidthconcern is there and they look at 8-gig as a need versus current technology.So, we see an opportunity to drive 8-gig technology and really virtualizationis likely to be a killer app for 8-gig.

But that being said, we alwaysjust take a balance view in the sense that when you virtualize servers thatpotentially have less loss depending on the environment you are coming from.

Jeff Brickman - UBS

Okay. Thanks. And from anacquisition perspective, are you looking at any particular areas that you wantto talk about or are you happy with your current position?

Jeff Benck

Well, we are in pretty good shapein the Fibre Channel technology. We almost done with 8-gig products. So, forthe FCoE technology, you need to have expertise inFibre Channel and Ethernet and we have lot of expertise in both because we did iSCSIproducts. So, we understand the Ethernet technology real well too so.

So, we are all set for FCoE technology from that perspective. We have alsoacquired the IB technology both for HCA and the switches. I think currently, weare in a pretty good shape. But at the same time, we always go and look aboutsomething, and if something is available, we always get to the (inaudible).So, we always leave our eyes open for anything which going to enhance our andmatch our strategy, we will go and acquire.

Tony Massetti

The strategy hasn't change interms of our smaller technology kinds of acquisitions to broaden the ITportfolio and provide future revenue streams. So, the strategy is consistent atthis point. We also want to stay focused with the Silicon companies we acquiredlast year. We have been focused on integration and driving consistency both indevelopment, execution as well as manufacturing, supply chain. Which is were,we need to continue to focus to improve the margins as we talked about. So, weare, particularly sensitive to be in focus on acquisitions we have made and makesure there's good prospects.

Jeff Brickman - UBS

Okay. Great and then just lastone for me. If I do the math, it looks like you have about $25 million or soless than the repurchase program, based on what you have already done thisquarter. Should we expect for you to may be go back to Board and get a grantfor an additional chunk here, or how are you looking at that?

Tony Massetti

Sure. In the prepared remarks,Jeff, we talked about repurchasing a $144.7 million in the quarter which isabout 10.7 million shares. The average repurchase price was $13.52 and over 30million subsequent to the end of the quarter. So, that leaves approximately 40million left on the $300 million repurchase program approved by the Board inApril. And we do have a Board meeting coming up in early November.

Jeff Brickman - UBS

Okay. Great. Thanks guys.

Tony Massetti

You are welcome.

Operator

We will take our next questionfrom Kaushik Roy with Pacific Growth. Please go ahead.

Kaushik Roy - Pacific Growth

Thanks. I have a question on thenetworking product. Last quarter, you had motioned that networking products maygrow 20%. Has anything changed from there?

H.K. Desai

Yeah. We said that we gave acolor for the FY 2008 and we said that we expect that our Host Product willgrow year-over-year from a mid-single-digit to high-single-digits and NetworkProducts will grow about 20% and I think we are sticking to that number rightnow.

Kaushik Roy - Pacific Growth

And then on the Fibre Channel'sfixed business, can you comment on your plans going forward? Are you going tohave FCoE switches and if so when?

Tony Massetti

When we look at FCoE right now,we are looking at with out technology that we have today, as H.K. mentioned,we'll have in both Fibre Channel and some Ethernet technologies. But then alsoour partners are going to play a key role in this space as we go through thistransition and the convergence that's going to happen there. So we are not, weare not going to talk about any specific switch announcements but we are goingto continue to work with partners in this space in this new transition.

Kaushik Roy - Pacific Growth

So, do you think FCoE may have anegative impact on Host Products or switch sales? I am trying to understand thetransition process.

Jeff Benck

When we see FCoE, you know we arepretty bullish, and we've invested pretty early here. And I even started tointroduce our first Host Product at SNW this month. But, we also recognize,this is a new technology with very front end of it, and it's going to take awhile for customers to understand it, and get into the technology adoptionphase.

So, that's why I think you see ustalk a lot about 8-gig Fibre Channel because of the needs for customers to dothat refresh, and we see that sort of proceeding as expected, and not havingFCoE really play a role there. But we do some incremental opportunity that willstart to develop as customers look at converged fabric and what that will meanfor us. So, when we look at next year, we don't see a big pickup from revenuecoming for FCoE. But we will start to have products in the market, and we'llsee how this new technology develops.

Kaushik Roy - Pacific Growth

And one last question for Tony.For modeling purposes, what should we use for share counts for December?

Tony Massetti

For the December quarter,Kaushik, you can be thinking in terms of about a 140 million shares.

Kaushik Roy - Pacific Growth

Okay. Alright, thanks. That'sall.

Tony Massetti

You're welcome.

Operator

We will take our next question fromMark Moskowitz with JP Morgan. Please go ahead.

Mark Moskowitz - JP Morgan

Yes, good afternoon. A fewquestions, Tony, could you first start and help us out, did you say anything asfar as the channel revenue exposure this quarter versus last?

Tony Massetti

No, we didn't talk about thebreakout of the channels business. Typically, the September quarter is aseasonal quarter for the channels business with, there is not a lot of strengthcoming out of Europe with the vacationschedules and what not. So, the channels business was not really a revenuedriver. As H.K. mentioned earlier, it was more of the OEM business which growsthe sequential growth in the HBA business.

Mark Moskowitz - JP Morgan

But didn't you guys earlier saythat Europe and Asia was particularly strongfor you or was I misinterpreting that?

Tony Massetti

No, that's through our OEMpartners as well, right. So, we get revenue of course through our OEM's throughthose geographies.

Mark Moskowitz - JP Morgan

Okay, that's fine. And then, Jeff,could you help us to understand the verticals right now, where you are seeing astrength obviously with InfiniBand, you're still in the early stages. But whatverticals are really warming up? Is it still your traditional HPC folks likeresearch academic or financial institution?

Jeff Benck

Well, I think when you look atInfiniBand, it's kind of interesting, it's not just scientific in academia nowthat's deploying these HPC solutions, we see. Our financial segment isparticularly strong, petroleum is pretty strong when you look at -- we've had astrong presence in a number of petroleum-based cluster solutions, so they'veactually got money to spend, and are looking at the next oil field in thosekind of applications. So, we see strength there.

And then, digital media andentertainment is also an area of growth, of course with all the animation andthings like that going on. Many of those customers are leveraginghigh-performance clusters for that work load. So, we see the growth in newapplications and work loads there beyond the traditional public sector andacademia deploying InfiniBand technology.

Mark Moskowitz - JP Morgan

And just as a follow-up there,Jeff, as far as the financial institutions, obviously, the last week and a halfor so has not been too kind to the companies that have reported their earnings.Has there been a sort of tone change at some of these the Wall Street banks interms of how they view InfiniBand in the near term?

Jeff Benck

Well, a lot of the discussionsthat I've had, that they still remain very interested in InfiniBand. In fact,I've seen some pressure on native InfiniBand stores, some request to that itsnot products that we developed, but we have seen people asking for that, stilla lot of interest there. I think when they're under financial pressure, theycontinue to want to look at non-proprietary technologies, and we'll allow themto easily go back to the CIO and CFO and justify the spend.

So, that actually may put to ourbenefit, because InfiniBand sort of fits the bill as being a good valueindustry-standard technology, but also very high performance low latencies. So,I haven't seen a big change there, even though there has been some challengesin the performance of some of those firms.

Mark Moskowitz - JP Morgan

Okay, and then just two quickmore questions here, I have one for Jeff and one for Tony. Jeff, can you maybejust walk us through, how we should think about the Fibre Channel directorbusiness. Do you need to spend more either on the R&D side or the educationside working with the OEMs to really jumpstart this initiative here in the nextcall 6 to 9 months?

Jeff Benck

Well, when you look at thetechnology, I mean, I think we've got the right investment and product. We'vegot a leadership product there. We have got a number of sales reps deployed outwith end users looking what their needs and demands are, and we continue toshare that information and our insights with our OEM clients.

At this point, the OEMs have todecide what they want their portfolio, the mix to be, and how they see thingsplay now. I think we have a disruptive product from a cost standpoint that canbring some significant benefit to those clients. And we will continue work withthem on opportunities where they exist in the Fibre Channel switch portfolio.So, we've said before, the 9000 is a segment where it is a longer sales cyclewith customers, and we noticed that from our channel business and obviously itis a more complex product offering. But that being said, it is a big market andthere is a lot of opportunity for us to go to pursue both with OEMs and withthe channel. So, that's kind of what I'd say about the Fibre Channel business,the Switch business right now.

Mark Moskowitz - JPMorgan

Okay. And then, for Tony, just lastlyhere. Tony, answering Mr. Bachman questionearlier about the potential for a price premium, these and early stages whatthe 8-gig that that of that the optics module, in terms how that's been the lotmore expensive versus 4-gig, whereas the 8-gig optics module even miss you anymore?

Jeff Benck

I think I can answer that. Ithink the optic, I think what Tony was talking about that in generally when yousee these things the 2-gig, 1 to 2 or 2 to 4, you will see that, you see alittle price premium for a couple of quarter before the volume ramp start. Hewas not talking about the optics and optic is going to be a different story onthis one. Hopefully, optics also will come down eventually to same level 4-gig,but there might be a little higher pricing because of the 8-gig opticsinitially.

Tony Massetti

Yeah, we see that on the frontend 8-gig optics is going to be more expensive, some of environments I haveplaced, so we don't need all the optics, there is an opportunity for, yet to bemore consistent with 4-gig but we also saw 4-gig optics come down fairlyquickly. Yes, as production moves there, volume moves there, that will movetoo.

Mark Moskowitz - JP Morgan

So you don't see any relative tothe margin profile than from optic fees?

Tony Massetti

No, not at this point.

Mark Moskowitz - JP Morgan

Okay, thank you. Good afternoon.

Tony Massetti

Okay, you also, thanks.

Operator

We will take our next questionfrom Shebly Seyrafi with Caris. Please go ahead.

Shebly Seyrafi - Caris

Yes and thank you very much. So,there has been a lot of chatter about the accounted third quarter being littletough on the storage space, is it fair to say that there you did see the marketbeing difficult in the first part of calendar Q3 and did it improve for examplein the month of October, is that why you are getting more positive about thegrowth rate sequentially in calendar Q4?

H.K. Desai

No, I mean, I think we have,simply if you look at, what we have seen in our business for the last many,many quarters that because of the offset of some of the OEMs like HP and Delland NetApp we always have a stronger first month of every quarter then it'skind of level off in the second month. And then, we expect a stronger thirdmonth and that's the trend we have for I don't know how many quarters nowanyway. So, I think, we have seen same thing in September quarter and westarted the same way in December quarter.

Shebly Seyrafi - Caris

Okay. And can you talk about thecompetitive dynamics, I know, pricing was stable but do you think you gained orloss share against your major competitor?

H.K. Desai

I mean, if you look at, if youlistened to my script, I said on that that we gained, we had, if you look atthe Dell'Oro report, we gained market share from our March quarter to Junequarter both in a revenue wise and also the port count wise. But if you look atDell'Oro report said in the second quarter report that in the revenue share weincreased from 43.4% to 44.4% and the port count is 45.8% to 48.5%. We alsolook at some of the un-audited number unofficial number we got from our OEMsthen the data they gave us that IBM for example, we gained our share in aSeptember quarter in the Mezz Card for example we are flat on the standard HBA.At the HP, we got a share both of standard HP and the Mezz Card. On the Dell wegot a share both of standard HBA and the Mezz Card anyway. So, if you look atthose OEMs, I think all our dealers either its Dell'Oro or the dealer from ourOEM customers, we are going to share in the September quarter.

Shebly Seyrafi - Caris

Okay. And I have a broaderstrategic question. It looks like with the network products segment is onewhere you are evaluating whether you are going to close a bit or makemodifications? The silicon products segment is declining naturally, asmanagement controllers decline overtime, I mean, is there a scenario thatwhereby in the future you are basically a Host Products company, you are backedbeing an HBA kind of you are not diversifying, your are worst diversifying?

H.K. Desai

No, I mean, like Jeff said wealways look at this things, in every business we have is, I mean, if you lookat our track record, we are extremely profitable company for last 49 quartersand we haven't lost our money single time. We have great margin profile, so welook at our business and we always look at business from a profitableperspective, are we profitable in the business or not?

And we always invest in newbusiness, we always have invested because it takes time for the profitability.We are very profitable in some business in an investment stage and that's whywe continue our strategy. So, like we acquired a company in the IB side and wewon't be profitable for one or two or a few quarters anyway. But our strategyis always to continue the diversified approach and you look at the everysegment, if you are not successful for a longtime then you always rethink andrelook at it, where you are going to invest. And we are still gaining, ourgrowth is still there for example in the blade switch side, I mean, we have aswitch blade design with IBM and we have the Virtual Connect for example withHP.

Some in we are doing in a certainsegments, it's a very well, the areas we are not performing well to ourexpectations on the Fibre Channel switch side particularly on the 9000 productsand it's a long, long sale cycle. So, we are going to wait till FY '09 and seehow it goes. I think, it's also fair to say, we are a more diverse company. Ifyou look at us, today, then a year ago or two years ago, not only with theinvestments in InfiniBand, both Switch and Host, but also with our iSCSI productsand with the range of Fibre Channel offerings we have. We have got really apretty broad range, pretty broad set of offerings that we go to market with.

H.K. Desai

But, I think the key point I mayhave said in my prepared text that I mean 2008 is a transitioning year for us.I mean if you look at the Silicon business declining for the whole year whichis of few reasons. One, we got out of the management control a few years agoand as I think it's the end of life for that. The protocol silicons, which hastransitioned from Silicon business to the Mezz Card. So, we had a 100% Siliconbusiness. When you tie it with the Mezz Card, you are going to decline theSilicon business.

We decided not to invest in the4-gig Silicon for the target, Silicon for example. So, all this is going tocome to the end in FY08 and we expect because of the 8-gig because ofInfiniBand investment we have and also with the FCoE, we are way ahead of ourcompetitors. So, I think we expected our growth will come back.

Unidentified Analyst

Thank you.

Operator

We will take our next questionfrom Tom Curlin with RBC. Please go ahead.

Tom Curlin - RBC

Hey. Good afternoon. Can we talka little about the March quarter in terms of seasonality? So, the last fewyears that's been anywhere from flat to down 6% or 7%. And I am just trying tounderstand, hopefully, if you can give us some thoughts on at least the bestcase scenario for sequential trend in March or how you would want that modeled,especially given, the up and down side with the Silicon product segment? Do youworry that you are going to have another surprise show up in the March quarterthere, given some of this end of product buying behavior? How do you thinkabout the March quarter with respect to that segment just overall?

H.K. Desai

I mean I think we never give aguidance to the March quarter. We will guidance only to the December quarter.But I can give you a little color on these things. If you expect March is aseasonal quarter, all of our OEMs will be declining in the March quarter. It isa seasonally slow quarter for all of them. And I think we said before too, Tonysaid before that we expect maybe 2% to 3% sequential decline in the Marchquarter. That is what we expect right now. It's too early to say that becauseit sometimes depend on the product cycles, sometime depend on the newtechnology. We introduce some new products and things can change. Two yearsago, we were up sequentially. So, you can really try it now, as Tony said that.But if you look at history probably, it's 2% to 3% sequential decline.

Tom Curlin - RBC

Okay. And specifically there onthe Silicon products, how much of that mix is this legacy, while you've got,we'll call it, legacy stuff and then you've got I guess the existing Fibre downor all blade server, chip based designs. What piece of that is really risky ifyou will, if just disappearing and like we saw in the March quarter?

Tony Massetti

I think we have said, Tom, and asalways we cannot predict what will happen in the future anyway. If I predicteverything, I won't be talking to you guys. But if you look at we said Siliconbusiness will probably decline a $500,000 to $1 million a quarter anyway. Thisquarter was a little unusual because of the end of last time buy anyway. Weexpect same thing in December quarter and for you we will expect same thing inthe March quarter. It's too early to say that.

Jeff Benck

The customer base is generallytier 2 customers. There are many customers in that $11 or so $12 million comp.We did see a sort of a step down in the revenue from March to June that wasanticipated and that happened but we don't see that kind of tier step functionin the revenue in the March quarter or beyond that

Tom Curlin - RBC

What is the legacy managementcontroller revenues still more than, say, $3 million a quarter?

Tony Massetti

No. It was below $1 million asexpected in the September quarter.

Tom Curlin - RBC

Okay. And the rest is more justFibre down, ships on blades versus Mezzanine that kind of stuff?

Tony Massetti

Also the target scenario for thetier 2 customers.

Tom Curlin - RBC

Okay. All right. That surpriseme.

Tony Massetti

And also the iSCSItargets silicon.

Tom Curlin - RBC

Okay. Now, in terms of some ofthe OpEx efficiencies and this kind of relate to the go-forward strategy onswitches. I think there has been a rift in the Minneapolis Group, speciallymarketing and stuff like that. Is that Fibre Channel switch focused? And what'sthe thinking on the Fibre Channel Switch go-to-market strategy in that context?

H.K. Desai

Whatever we do on, this is notbased on the long term strategy, whatever you have seen it. Many times we makeadjustments. Every business units has to perform according to their plananyway, and I think they make a lot of decisions based on that. And also wecame out with a tremendous investment in the R&D and marketing on the 8-gigproduct. And I think we are done with the 4-gig and 8-gig anyway. We havetremendous investment on the switch on the 9000 products, which is last two tothree years anyway. So, lot of these things is like coming to the fruit anyway.So, we always make adjustment on the spending based on when they are in theproduct cycle.

Tom Curlin - RBC

And finally, are you developingyour own 10-gigbit Ethernet silicon for the FCoE strategy on the Host side,just given the changes with, I guess what was the Roseville group. Had that been pulled back toheadquarters or -- what's your silicon strategy for that?

H.K. Desai

Our Ethernet expertise in Roseville, they are there,and they will be always there.

Tom Curlin - RBC

Okay. So that's ongoing siliconwork for Ethernet?

H.K. Desai

Yes.

Tom Curlin - RBC

Okay. Thank you.

Operator

And we'll take our next questionfrom Clay Sumner with FBR. Please go ahead.

Clay Sumner - FBR

Yeah, thanks very much. Jeff, Ijust want to go back to what you're saying about end user pull for 8-Gigabit.Can you just put some more color around, in what kind of used cases the 4-GigFibre networks aren't keeping up with the need, what type of customer, whattype of load?

Jeff Benck

Well, we have -- what we have isa bit of a confluence here of three events you've got denser technology withblade that's happening there, you've got multi-core processors coming out withquad-core processors are now out there, and then stacked on top of that,virtualization. So now you've got a server that's potentially representing 6 to8 to 10 virtual machines on one platform. So, when you look at that, and youlook at the data center, what used to fit in our row in the data center nowfits in a rack. And if you look at the number of IO lanes coming off of there,you need to have a bigger pipe, because in many cases you're now supportingmany more systems with one machine. So, many more virtual environments with onemachine.

Also a higher availability isrequired because of now got more machines -- one machine handling multiple workloads. So, saying deployments are really the preferred choice there, and thenalso in a virtual world, if you want to move work loads from one server toanother, you really want to have centralized storage. So, that you don't have astate fold computing on a given server.

So when you look at all that,that's why we see a real need for customers deploying it. Another example, oneof our early customers is actually in the film area, and when they look at doand digital video and film playback, they are finding with 4-Gig at highresolution. They actually have some choppiness in that, and with 8-Gig it's aclean playback. So, that's a kind of application that driving the need for8-Gig technology with our end customers that we see.

Clay Sumner - FBR

Okay. So, its suffice to say forthe mass market, kind of blades and virtualization and quad-core will be sweetspot?

Jeff Benck

Yeah. That's clearly the trendsthat are going on there and we see it driving the demand on 8-Gig. And I thinkwe said in our prepared remarks, there was probably a little bit of push fromthe manufactures on 4-Gig with 8-Gig, we see a bit of pant-up demand there.

Clay Sumner - FBR

Okay. And then on the siliconcategory, to just make sure I understand what you guys are talking about, Ithought you said at one point during the Q&A, that the 4-Gig targetsilicon, you didn't choose to invest in that, and therefore target silicon isalso something that's going to keep going down. Does $40 million this year goto $30 million next year? Is that the kind of transition you expect?

H.K. Desai

So let me -- I think Tony cangive you the numbers, and let me tell you what's the silicon business. I thinkI said few times, but if you look at our silicon business, is there is a lot ofcomponents, it is a one management controller which we decided not to investabout three years ago or something. So, it's going to be end of life, prettysoon, I don't think on much there.

Clay Sumner - FBR

But that's already just a milliondollars.

H.K. Desai

Right. So, then if you look atprotocol silicon, there is a two-type one is a whole side. We initiate ourwhich is really the Fibre down or we just go for the Mezzanine Card, which isconverting from Silicon to the Mezz Card. So, that's another kind of secondcondition. The target silicon, which is really most of our business on thetarget silicon, is a Tier 2 or Tier 3 types of OEMs. Anyway, so we have somebusiness and we kind of invest, we have decided not to invest too much ontothat thing. So that business will be declining which we are already countingour numbers. And the fourth one is, the really target silicon for the iSCSIwhich will continue growing or at least this will be a flat for a while.

Clay Sumner - FBR

Okay.

H.K. Desai

If you look at the overall number

Tony Massetti

Yeah, the overall number, Clay,for modeling purposes, you can expect that to decline $500,000 to $1 millionsequentially, for the balance of this year into next year.

Clay Sumner - FBR

Okay. So, I'll leave it at that.Thanks very much.

Tony Massetti

Okay, you are welcome.

Operator

We will take our next questioncomes from [Roberta Chen] with Lehman Brothers. Please go ahead

Roberta Chen - Lehman Brothers

Hi guys. Thanks for taking myquestion. I just wanted to follow-up a little bit on cost expression actually,on full year outlook, I was wondering if your viewpoint is still at more or ifyou said that your viewpoint -- if that moderate growth will come fromInfiniBand for this [physically] or has that viewpoint kind of changed in lightof recent results. And if you have any update on any OEM for expandingopportunities and where you are at with that? That would be great, too. Thankyou.

Tony Massetti

Are you talking about the 20%growth for the networking model, Roberta?

Roberta Chen - Lehman Brothers

Yeah, in terms of the splitbetween

H.K. Desai

I mean we say that most of ourgrowth, we said before that on our Network Products, we expect to grow about20% year-over-year and almost all the growth will come from the IB switches.

Roberta Chen - Lehman Brothers

Okay.

H.K. Desai

We said that, and we still standby that.

Jeff Benck

And we stand by that. And did youhave a second part to the question?

Roberta Chen - Lehman Brothers

Yes. That you had any updates onthe OEM for spending on machines? I know you've mentioned fiscal year '09, but,if you had any additional granularity on that?

Tony Massetti

We are really not in the positionto comment on the switch OEM business, until we are into position to startshipping with them. So, we haven't given any specific feedback on that otherthan to say, we can of course to continue to work with Tier 1 OEMs on switchbusiness, both on the InfiniBand and then on the Fibre Channel side of thing.

Roberta Chen - Lehman Brothers

Great, thank you.

Operator

We will take our next questionfrom Glenn Hanus with Needham.Please go ahead.

Glenn Hanus - Needham

Just a little more on theInfiniBand side. As we think about going beyond this year and I know you arenot giving guidance but core growth in that market something a little beyondthe 20 area a little bit more towards 30, is that there?

Jeff Benck

Well, I mean, we talked about IDCwe have tagged almost 40% CAGR in that space. So, when you look at our profilenext year, I think, InfiniBand is going to play a role in our growth. I meanthere is no question about that. And I think given our position andcapabilities that QLogic has with now both host and switch and our supportstructure and the backing that couple like QLogic have put in InfiniBand. We thinkwe are positioned to gain share there.

Glenn Hanus - Needham

Thank you.

Operator

At this time, there are nofurther questions. I will now turn the conference back over to Mr. Massetti forclosing comments.

Tony Massetti

Okay, thank you. I'd just like topoint out that this afternoon, we did make available on the QLogic websiteunder Investor Relations the historical revenue breakout for fiscal year '07for your use and modeling and that's the breakout in the current revenuecategories host networks, Silicon and others. So, please let us know if youhave any questions of that revenue breakout.

So, thank you for joining us onour second quarter fiscal year 2008 conference call. I want to note severalupcoming conferences that we'll be attending. In November we'll be at the JPMorgan's Small and Mid Cap Conference in Bostonand the UBS, Global Technology and Services conference in New York. And then in December, we'll beattending the Lehman Brothers Global Technology Conference in San Francisco, followed in January by the Needham Growth Conference in New York.

So please refer to the InvestorRelations section of our website at www.qlogic.com for any updates to theconference schedule. For those of you planning to attend any of theseconferences, we look forward to seeing you there. Thank you.

Operator

Ladies and gentlemen, this willconclude today's presentation. We do thank you for your participation, and youmay disconnect at this time.

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