Emulex Corporation F2Q08 (Qtr End 12/30/07) Earnings Call Transcript

Emulex Corp. (ELX)

F2Q08 (Qtr End 12/30/07) Earnings Call

January 24 2008 5:00 pm ET

Executives

Jim McCluney - President and CEO

Mike Rockenbach - CFO

Mike Smith - EVP, Worldwide Marketing

Analysts

Aaron Rakers - Wachovia

Min Park - Goldman Sachs

Kaushik Roy - Pacific Growth

Mark Moskowitz -- JP Morgan

Tom Curlin - RBC Capital Markets

Jeff Brickman - UBS

Brent Bracelin - Pacific Crest Securities

Paul Mansky - Citigroup

Jayson Noland - Robert W Baird

Clay Sumner - Friedman, Billings, Ramsey

Presentation

Operator

Good day everyone and welcome to this Emulex Corporation second quarter conference call. I remind that this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Jim McCluney. Please go ahead, sir.

Jim McCluney, President and Chief Executive Officer

Thank you, operator. Good afternoon, everybody, and welcome to Emulex's second quarter conference call. I am Jim McCluney, CEO and President of the Company, and with me today is Mike Rockenbach, our CFO; Mike Smith, our Executive Vice President of Worldwide Marketing; and Steve Berg, our Senior Vice President of Corporate Development.

Mike Rockenbach will start off our prepared remarks with the second quarter fiscal 2008 results, and I will follow with my comments, including progress in our products during the quarter and a discussion of our view of the health of our industry. At the conclusion of our prepared remarks, we will take questions. Mike?

Mike Rockenbach - Chief Financial Officer

Thank you, Jim. By now, you should all have Emulex's second quarter earnings release, which was issued earlier this afternoon. If you do not have a copy, the press release is available in the Investor Relations section of our website at www.emulex.com.

The press release in this presentation contains forward-looking statements, including but not limited to statements regarding Emulex's business, operations and anticipated financial results for the third quarter of fiscal 2008 and beyond. These statements are subject to risks and uncertainties, and our actual results may differ materially from those discussed in the forward-looking statements.

Those risks and uncertainties include economic conditions, market growth, IT spending patterns, changes in technology, evolving industry standards, competitive pressures, pricing pressures and fluctuations in OEM ordering patterns, the estimate of total available market size, the ability to address these markets with available technology in a timely fashion, and plans for research and development in India, and the risks and uncertainties described in Emulex's SEC reports filed under the Securities Exchange Act of 1934, including Form 8-K and under the heading Risk Factors in Emulex's most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

We undertake no obligation to update the forward-looking statements. Investors should also be aware that Emulex will not disclose in its Q&A or in conversations afterwards any material financial data that was not already disclosed in our conference call or its press release.

In addition, during this call, when we use any historical non-GAAP financial measure as defined by the SEC in Reg G, you will find reconciliation to the most directly comparable GAAP financial measure in our press release available on our Investor Relations website. All of the references we will make today relate to our non-GAAP results unless stated otherwise.

Today's conference call is being webcast, and a recording will be available on the Emulex website through January 2009. I would also like to remind participants that if you decide to ask your questions, it will be included in both our live transmission as well as any future use of the recording.

Sales for the second quarter ending December 30, 2007, totaled $130.6 million, an increase of 12% sequentially and 8% from fiscal Q2 a year ago. Q2 fully diluted earnings per share of $0.34 increased 26% from the $0.27 reported in both the first quarter of 2008 and from the year ago period.

Our top-line results of $130.6 were within our second quarter guidance of $129 million to $133 million, and was a record for Emulex. In addition to our record quarterly revenues performance, fully diluted EPS of $0.34 exceeded the high end of our guidance of $0.30, to $0.32, and matched our previous best EPS result achieved in the fourth quarter of 2007.

As you may recall, our fourth quarter 2007 results included non-recurring revenue of approximately $3.9 million for services with nearly 100% margin contribution. Our fully diluted EPS for the fourth quarter also benefited from the resolution of some outstanding tax audits, which reduced our non-GAAP tax rate to 28% in the fourth quarter, compared to 37% in the current quarter. So on an operational basis, this is clearly the best quarterly performance in Emulex's nearly 30-year history.

Now, let me discuss the revenue results for the quarter by each of our product lines. I'll begin with our Host Server Products, or HSP, which consists of standard host bus adapters, custom form factor mezzanine cards for blade servers, and ASICs used in the server applications.

HSP revenues totaled $94.4 million, an increase of 6% sequentially and an increase of 4% from the comparable period last year. During the second quarter, 4 gigabit revenues grew approximately 14% sequentially and now account for 90% of HSP revenue. Board-level products for the quarter achieved year-over-year revenue growth of 9%, unit growth of 20%, and port of 32%.

We continue to highlight unit and port growth in addition to revenue as an indication of our market share gains in our core product line. During the quarter, the average selling price for board-level products declined by 9% year-over-year, which is less than our expected annual ASP decline rate of 12% to 15%.

Our year-over-year results continue to benefit from the increased mix of dual channel adaptors, which rose over 80%. On a sequential basis, total HBA ASPs declined 4%. However, on a like-for-like basis, the pricing environment remains favorable with sequential declines in the 2% range.

The strengthen of board-level products is partially offset by a decrease in ASICs during the quarter, as one of our OEM customers is preparing for a server refresh in the spring.

We continue to experience strong revenue growth with the transition to 4 gigabit mezzanine cards for the blade server market, which increased 21% sequentially, and 140% compared to the prior year's quarter. With our blades of the mezzanine cards continuing to share significantly faster growth than the market and our nearest competitor, we believe these results are a clear indication that we are building momentum for share gains in this important market.

Our second product line, Embedded Storage Products, or ESP, encompasses SATA bridges and routers, Fibre Channel embedded SOCs and route switches, as well as single and multi-protocol embedded controller products for enterprise-class storage systems.

With the completion of the Sierra Logic acquisition at the beginning of October 2006, our December quarter results reflect an apples-to-apples comparison of ESP performance on a year-over-year basis. ESP revenues for the second quarter totaled $36.1 million, or 28% of total revenues.

Revenues increased 29% sequentially and increased 19% over the prior year's period. The second quarter benefited from the initial product launch about half of [Emulex] design wins and this with the highest contribution from this group of products.

With our new product launches ramping and several additional launches scheduled for the March quarter, we are modeling for double-digit year-over-year growth for EPS revenues in the third quarter. The balance of revenue came from IMP, and others which are not a significant amount, during the quarter.

Looking at revenues by customer type, second quarter OEM revenues of $96.3 million increased 17% sequentially and 6% from a year ago. OEMs represented 74% in the second quarter revenue, compared to 71% in the first quarter and 75% in the second quarter of last year.

Q2 sales through distribution channels of $34 million, was flat sequentially, but increased 11% from a year ago. As a percent of revenues for the second quarter, distribution was 26% compared to 29% in the first quarter and 25% in the second quarter of last year.

As we further discussing income statement, I want to remind everyone that we will primarily be discussing our non-GAAP results. In our press release, you'll find a reconciliation of the difference between our GAAP and non-GAAP earnings, as well as a discussion of why we believe non-GAAP financials are a relevant measure of our business for investors.

Second quarter gross margin was 68%, increased 2 percentage point from the Q1 level of 66%, and increased 6 percentage points compared to the prior-year gross margins of 62%. As you may recall, our prior year gross margins were impacted by an approximately $2.5 million reserve for an older generation multi-chip two gigabit product.

Second quarter gross margins benefited from our on-going focus to streamline our supply chain combined with the growth in dual channel products, which grow 11% sequentially and now account for over 40% of HSP revenues.

Based on expected normal seasonality in our HSP board level products, combined with double-digit year-over-year growth in ESP, we are modeling for non-GAAP gross margin percent to decrease modestly to approximately 67% during the third quarter.

Turning to our operating expenses, second quarter OpEx increased 2% sequentially to $47.2 million. Expenses decreased as a percent of revenue to 36% compared to 39% in the prior quarter. We exited the second quarter with the total of 816 employees, a net increase of 32 people. With strong top line growth in fiscal responsibility in our spending, we delivered Q2 operating income up $41.1 million, which was a record for us. This represented an increase of 24%, year-over-year, and 30% sequentially.

Operating margin increased to 31% in Q2, an improvement of four percentage points from the 27% report in both the first quarter of 2008 and the comparable quarter of last year. Non-operating income in the second quarter grew slightly to $3.5 million compared to $3.4 million in the prior quarter. Second quarter net income was $28.2 million, an increase of 24% sequentially, and 14% from the prior year results.

Our net profit margin for the quarter was 22%, compared to 19% in the first quarter and 20% a year ago. For the second quarter on a GAAP basis, we report operating income of $25.4 million, net income of $17.6 million, and diluted earnings per share of $0.21. The difference between GAAP and non-GAAP income in the second quarter is primarily attributable to amortization of intangibles and stock-based compensation.

FAS 123R expense reduced GAAP earnings by approximately $0.07 per diluted share this quarter. On a GAAP basis Q2 R&D expenditures were essentially flat at $31.5 million compared to $31.3 million in the first quarter. Q2 R&D included $3 million of stock-based compensation. Quarterly R&D spending varies depending on the timing of the new product development expenses; however, while we expect absolute dollars to grow year-over-year, we continue to focus on reducing R&D investments as a percentage of revenue.

Second quarter GAAP sales and marketing expense was $13.7 million compared to $12.9 million in the prior quarter. Q2 sales and marketing expense included $1.5 million of stock-based compensation. GAAP G&A expenses increased 3% sequentially to $8.8 million in Q2, which includes $ 2.4 million of stock-based compensation.

In addition to record operational performance, we also strengthened our balance sheet during the period. We exited the second quarter with total cash and investments of $308 million. This represents an increase of approximately $33 million from the end of the first quarter.

We reduced second quarter inventories by $3.3 million sequentially and our inventory turns of 10.8 were slightly over our calculated range of 8 to 10 turns. We expect inventory turns will be within our target during the March quarter.

Our supply chain improvement initiatives continue to provide meaningful benefits to our financial results. In addition to improving gross margins over the past year, we are supporting higher revenues with lower inventory levels and maintaining our key customer satisfaction metrics for quality and on-time delivery.

Our Q2 receivables increased sequentially by $6.6 million, to $71.8 million. Depreciation in the second quarter was approximately $4.8 million versus $4.6 million in Q1.Capital expenditures during Q2 increased to $7.9 million compared to $6.3 million in the first quarter.

Before I discuss our targets for the third quarter of fiscal 2008, I want to again remind everyone that there are numerous risks that can affect our future performance, causing actual results to differ materially from forward-looking statements. These risks are noted in the Safe Harbor Statement at the end of our earnings release and other public filings with the SEC. As a result of these risks and uncertainties, we are unable to predict with accuracy what future quarterly results might be, and there is no guarantee that business will reach our expectations or goals.

Based upon current market conditions, our customers' public comments and their most recent forecasts, we believe that revenue for the third quarter, ending March 30, 2008, could amount to approximately $127 million to $131 million, which represents a year-over-year increase of 6% to 9%. Sequentially, this will give us revenues of flat-to-down and modest 3% on what has historically been a seasonally week quarter. If we achieve revenue in this range, we anticipate non-GAAP earnings per diluted share of $0.28 to $0.30.

We expect GAAP charges of approximately $0.12 per diluted share in the third quarter of fiscal 2008, and the difference between our GAAP and our non-GAAP figures are attributable to the expected amortization of intangibles and stock-based compensations recognized under FAS 123R.

I will now turn the call over to Jim, who will give you an overview of our progress with our products, color on the quarter, and an update on the Company's growth strategy. Jim?

Jim Mccluney

Thanks Mike. Again, this quarter we produced very solid results with great execution across all functions and all product lines. Where the quarter exhibited a fairly normal seasonal uptick in capital spending, we delivered better than market performance and, our gross margin and operating profit expansion demonstrated a laser light focus on continuing operational efficiencies and fiscal control.

The Emulex team has established a very solid track record of consistency, transparency and dependability, which we intend to sustain as we continue to drive diversification and growth strategy in the quarters to come.

As you just heard from Mike, our financial results for the December quarter met or exceeded our guided ranges from a revenues, which were a record for the company. We improved gross margins again this quarter and we continue to manage expenses to the proper level.

Net revenue for the quarter came in $130.6 million, which was at the midpoint of our guidance, and handily exceeded our previous high of a $126 million. Our overall business grew 12% sequentially and 8% over fiscal Q2 last year.

On a year-over-year basis, we saw revenue expansion at 9 of our top 10 OEMs. Both host server products under the embedded storage products provided solid results. ESP was particularly strong with new product launches during December building on the momentum that began in the September quarter.

We also comfortably exceeded the high-end of our EPS guidance of $0.30 to $0.32, delivering $0.34. Product mix and continuing operation efficiencies grew gross margins to the best we have hired for at least the last decade, and our fundamentals continued to be strong.

Notwithstanding Emulex's fine performance, from a macroeconomic perspective it is clear that we are living through on same times. [19:30] However, when I look at the December quarter results, the Storage and Storage Networking business sectors enjoy typical seasonality with regard to capital spending and in some cases performed even better than normal.

Demand was strong, particularly internationally, and the number of companies has produced results that exceed industry expectations. The concerns, however, obviously are more focused on the outlook for calendar 2008. Nobody has a crystal ball, but when I look forward, as I mentioned in our last earnings call, we continue to believe that the growth in this sector will persist.

Our message is straight forward. A softening economy has not slowed the growth rate of data and we believe that the capital investment required to store data is practically non-discretionary.

The underpinnings of the storage business should remain robust. Here are some recent data points; IDC published a report earlier this month citing the expectation that storage capacity will grow nearly 60% in 2008.

Deloitte has recently predicted Fibre Channel HBA boards will grow 23%, compounded annually over the next four years. And our January Goldman Sachs report forecasted the growth rate of U.S. technology spending to be between 5% and 6% in 2008. We lead on fractionally from the growth achieved in 2007. IDC also collaborated this number.

Within IT budgets, a large portion of spending will be allocated to data storage and networking, and this session is supported by very recent CIO service. We remain upbeat with other prospects and we are giving what I think is very robust guidance for our normally done March quarter. Revenue guidance in the range of $127 million to $131 million and EPS in the range of $0.28 to $0.30 per share for the March quarter is also consistent with what we have traditionally seen in calendar Q1 for HSP, and suppose a continued sequential expansion of our ESP revenues, as we capitalized on new design wins, more of that number of wins.

Looking at the performance of our business by product line for the December quarter, our Host Server Products were in line with our expectations; revenue from 4 gig products grew 14% sequentially and 72% year-over-year. Board level products grew 9% sequentially on year-over-year and within that mezzanine cards for blade servers increased 21% sequentially and a 140% year-over-year, all very healthy growth rates.

During the quarter, we announced support for Oracle’s new VM server virtualization software. Emulex has taken a leadership position in connecting virtual servers to the SAN, and this one is one more step in that direction.

We also announced LightPulse Virtual HBA technology is available from Microsoft System Center Virtual Machine Manager 2007. This marks the first integrated SAN connectivity solution with support for industry-standard NPIV for Microsoft Windows Servers Virtualization environments.

Then this morning we announced that Emulex has teamed up with Cisco and VMware to integrate NPIV functionality into VMware VMotion technology, which enhances storage access by maintaining the same Virtual Port ID while migrating live virtual machines from one physical host to another.

And finally within HSP, we announced the PCI Express I/O Controller based HBAs from HP are now supported for use within their Integrity mid-range servers and high-end Integrity Superdome servers. HPs integrity class and entry class servers already support a LightPulse I/O Cs and are single and dual channel Fibre Channel PCI Express HBAs. This completes our coverage across the entire HP Integrity product family.

In addition to the best quarter, HBA in use, HSP enjoyed a number of other milestones in Q2 including a record quarter IBM and record international shipments. We're making solid progress to gain share to our new customers and platforms as well as topping into high growth areas such as virtualization.

This calendar year, we will see the rollout of our next-generation 8 gigabit per second Fibre Channel products. As you are aware, this new generation of HBAs is in broad qualification with our customers. We chopped up several more key 8 gig wins in the quarter with a total wins now standing at 15.

We have demoed the product both here and abroad. Of course, our 8 gig products are fully backward compatible with earlier link speeds, a significant benefit toward installed base of over 5 million ports, and a clear advantage over new entrance to the market. Our architecture also enables full leverage of our OEM qualified drivers creating another competitive advantage to us.

As I said before, that expectation is that 8 gig will start rolling out over the calendar year and we are working closely with our OEM customers to support their product launches. We are confident that all of our come 4 gig customers and platforms that are looking to deploy 8 gig technology will go to market with our offering. We will continue to provide updates on this link speed transition as it progresses.

So, overall, we are rolling out at HSP growth strategies very effectively. Our aggressive outbound marketing has helped drive brand awareness. We've strengthened our channel presence and we've established leadership in the technologies like virtualization and data protection. This sets Emulex up very nicely to compete for increased market share over this calendar year, as well as extend our products further, and do business critical data center obligations.

Turning now to our Embedded Storage Products - we saw revenue rise 29% sequentially on 19% year-over-year and was the first apples-to-apples comparison since our acquisition of Sierra Logic. There was a great performance by the ESP team. The quarter also saw some design win announcements, which included that Pillar Data Systems has selected Emulex InSpeed Embedded Storage Switches for integration into their Axiom storage system, and they also qualified our 4 gig Fibre Channel HBAs for the same system.

Fujitsu selected our IOP 502M for integration into the ETERNUS2000 Storage System to provide a single-chip solution for simultaneous front-end Fibre Channel SAN connectivity and back-end SAS/SATA disk connectivity.

Fujitsu is also now shipping our BR-2001 Embedded Storage Bridges in the ETERNUS family. This embedded bridge enables low cost SATA drives to be used transparently with an existing Fibre Channel and enclosures.

As we look back in fiscal Q2 of the 52 design wins, we have previously talked about 27 having entered production. Several of the remaining five are with significant customers, also a number of the design wins they started shipping this past quarter are still in relatively low volumes and they are expected to run this quarter in mix.

ESP is positioned to continue to provide revenue growth in the quarters to come. Work on next generation products is well underway to support a fibre channels install base and we have also products and development that continue to provide functionality for the various disk storage protocols and the stringent enterprise requirements that are customers' demand.

Additionally at the request of some of our customers, we are looking to move up the [value] team to provide more board level and service offerings rather than just chip sales. Our customers are asking for us help and we are taking advantage of the opportunity, which we anticipate will provide incremental revenue growth in the years to come.

More on this on future calls, as the opportunities develop, and over the coming year during which we expect ESP to remain the fastest growing product line in the company to build, and those compelling end-to-end product road map and to win new embedded business.

And finally, looking our third product line, Intelligent Network Products, this product line focused on imaging Fibre Channel over Ethernet market and the potential for incremental growth through SAN expansion and network conversions.

Let me give you an update on the state of FCoE at Emulex. We are still engaged in driving FCoE standards in the T11 standards committee and also worth remains for the steady progress being made. Our first generation converged multi-protocol network adaptors are in test. We are leveraging a Fibre channel technology to provide a seamless end user migration path providing for an investment protection and allowing the use of existing SAN management tools.

The example of this was on display at a major Cisco event in Spain this week in which we demonstrated our Fibre Channel NPIV technology they ships with the 4 gig products running on a FCoE converged adapter. This demonstration highlights the significant end user benefits and competitive advantage we bring to the market with the SCO products. We expect wide reaching customers sampling of converged adapters in the first half of this calendar year.

Our announced collaboration with Nuova Systems is going well and we are driving positive engagements with our OEMs customers and end users. We view this FCoE market as a very positive growth opportunity for Emulex. We believe FCoE enables marketing expansion of signs, June path to several virtualization driven inclusion of block type servers. For end users our converged network translates into less complexity in terms of cost savings we have reduced cabling, lower power consumption and integrated management. As I mentioned, Emulex is uniquely positioned because FCoE leverages our expertise, history and large installed base in Fibre Channel providing end users complete investment protection.

We expect to be the forefront of this evolving market in the calendar of 2008 through the introduction of our first generation FCoE Solutions. We have a compelling marketing campaign to educate and foster end user demands for Emulex's products.

So while we have summary, the IT spend projections for data storage and networking products remains fairly healthy and we are excited about our prospects for calendar year of 2008. Throughout the year, we expect to grow revenue by continuing to capitalize on the HSP market share traction we gained in 2007 as our new customers and platform. As well as keeping the momentum going on our embedded business.

We will also manage our operations and expenses to rebate solid operating profits and corresponding return for our shareholders. We like our fundamentals, we like our market positioning and we remain confident in our growth and diversification strategy.

That concludes my prepared remarks. Operator, if you please open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our question from Aaron Rakers with Wachovia.

Aaron Rakers - Wachovia

Yeah. Thanks, guys. I have got a couple of questions, if I can. I guess first, just a clarification for me. Looking at the HPA business, you had mentioned board products were relatively healthy offset by a decline in ASICs. According to my model, it looks like ASIC revenue decline quite substantially, even cut in half this quarter, can you help me understand that a little bit and how do you expect that to trend here into the current quarter? I am assuming that you're talking about the mainframe cycle from IBM.

Mike Rockenbach

Yeah. Hi, Aaron, this is Mike. We do see and we have seen historically that that the ASICs piece of our Host Several Products business does tend to be pretty lumpy. It is tied primarily into one customer. And then, so when they get near a product launch cycle going into that for the quarter too prior, we tend to see that business slowdown and then we do see it ramp-up pretty nicely when they get ready to launch the products.

Aaron Rakers - Wachovia

So, I guess, my question is then: are you assuming a ramp-up in that revenue stream this next quarter or is that more of a June quarter story?

Mike Rockenbach

We expect that it's going to ramp-up in the March a bit, yes.

Aaron Rakers - Wachovia

Okay. So that should offset a typical seasonal decline in the HBA business in the March quarter?

Mike Rockenbach

Within host several products, yeah, and then for the total topline, we're expecting to see some pretty nice growth in the Embedded Storage products as well. But it will also offset some of the seasonality in HBA.

Aaron Rakers - Wachovia

Okay. Fair enough. And then my other two questions, I guess the first one here on the five customer wins or design wins in ESP that are expected ramp here in this next quarter, can you help us understand when you say significant, how many of those you would categorize as Tier 1 relative to some of the smaller players in the storage market?

Mike Rockenbach

Aaron, I would say about three out of five is what we would class as Tier 1 customers.

Aaron Rakers - Wachovia

Okay. And then final question for me: You mentioned, I think for the first time looking out over the next couple of quarters the potential for a shift from chips selling board-level of products, when do we expect that to happen? And can you give us any feeling for quantifying what the potential impact of that could be?

Jim McCluney

Yeah, let me clarify. I don’t see that change in over the next couple of quarters. You need to wait for storage soft system refresh cycles that are usually out -- probably closer a year to 18 months away. So this is something I think it's more of a late 2009 kind of impact in revenues as we go through these designs. But we are engaged with several storage soft system designers to I said we added the value chain provide boards as supposed to chips. So, we think will be great momentum this calendar year with a design wins we have and we just see some kickers comings in 2009 to take that to another level.

Aaron Rakers - Wachovia

I think the final thing from me now, I see before share repurchase any update with regard to the activity on the share repurchase what we can expect?

Mike Rockenbach

Yeah. This is Mike, as we kind of talk about in the past our goal with our share repurchase plan had minimum has been to eliminate the creep in our share account from acquisition and share based compensations within the quarter. So, as you saw we didn't repurchase any shares in the most recent quarter, however over the past four quarters since the plans been in place. We've spent about $110 million out of the $150 million of cash we've generated on share repurchases. So, this particular quarter we didn't repurchase any if, but we fully expect to use the $40 million are still outstanding in the plan before it expires at the end of this year.

Aaron Rakers - Wachovia

Thanks guys.

Operator

Moving on with Goldman Sachs, we have Min Park.

Min Park - Goldman Sachs

Yes. Hi, just a couple of questions please. Starting off both you and QLogic reported HBA revenue growth of around 4% year-over-year. Really at a time, when the industry should be seeing a strong talent from virtual vision, so could you just help us reconcile this growth rate with your expectations for the very high single-digit revenue growth for the industry over the few years?

Mike Rockenbach

Yeah. This is Mike. Well, I think as you look at the business server virtualization is going to be a benefit to end users and a benefit for our business over the next couple of year. So, I think certainly this year, when you look at the total growth maybe there is a little bit lighter than that compounded annual rate that is expected over the next three to four years. But I think where we are at right now, we did show pretty solid growth and we think that's a good indication that we are starting to reap gain some share in the market.

Jim McCluney

And one thing to know, I mean, today this is a well real realized market, only the 5% servers are virtualized even though it's growing very, very rapidly. So this is a long timeframe here. As I wouldn't be looking at December quarter and as middle of the year is any indication of lack of progress on virtualization?

Min Park - Goldman Sachs

Okay. And then second how much of your outlook fully driven by your expectation that's company's specific expectation such as strengthening our embedded segment versus the overall macro spending trends and you too can give us any indication of taken to your first part of your January , month of January, that be great?

Mike Rockenbach

Well. I can't really quantify one versus the other, but I will say, we have taken in consideration, what we truly taken in the consideration the macro environment. Forecast from our customers in the March quarter have been pretty consistent with what there feeling was a few months ago. So, we haven't really seen that change much. The activity we've seen so far this month looks good. And I think we have taken all those things in to consideration, in our guidance.

Jim McCluney

And this as I mentioned in the several locations, we do expect embedded products to be a fastest growing product line. As we move these design wins into production and obviously they are subject to overall macro demand as well, but as Mike said so far as the quarter shaping up nicely.

Min Park - Goldman Sachs

Well, thank you very much.

Operator

Next, we have Kaushik Roy with Pacific Growth.

Kaushik Roy - Pacific Growth

Thanks. How much was top three OEMs'?

Mike Rockenbach

The top three OEMs?

Kaushik Roy - Pacific Growth

Yeah.

Mike Rockenbach

I don’t know. Let me look that up and I'll answer you in just a minute.

Kaushik Roy - Pacific Growth

And then, if you can comment on FCoE, what type of impact you think it would have on the revenue growth for adapters and on the margins?

Mike Smith

Yeah. This is Mike Smith. I'll talk to the market impact that we see. FCoE is being driven by expansion of demand for SANs, virtualized servers, server blades have a very strong and very high SAN attach rate. So Fibre Channel is very strong in the backend of data centers. We don't see that changing.

In fact the popularity of Fibre Channels really was behind Fibre Channel over Ethernet. And FCoE will enable our SANs really to penetrate more deeply across the enterprise, strictly when the notion of Converged Network comes in a play. That is combining server storage data with network traffic. So, yes, we see this as a market expansion opportunity.

Kaushik Roy - Pacific Growth

And when do you expect customers to really adopt in 2009, 10?

Mike Smith

Yeah. I think you can expect this start rolling out in 2009.

Kaushik Roy - Pacific Growth

And then one last question: The US was at 40% of Rev, it's the lowest I've seen. I mean, what should we make out of that or shouldn't we read so much into it?

Mike Rockenbach

Hi. This is Mike again. So in answer to your earlier question, our top three OEMs were about 64% of our revenue for the quarter. And one thing from the earlier question, our board-level products in the fourth quarter last year we have 9% over the prior year for revenues. So we did show pretty strong double-digit growth on that.

And then, specifically on the revenue mix, we have seen that with our Embedded Storage Products after the acquisition of Sierra Logic, we have seen more of our businesses outside the US in terms of our build-to location. And they are naturally driven by where our customers are building products, not necessarily where that product is being deployed. So I don't think you can necessarily read anything specific to the end user demand based on where the OEMs are taking product from us.

Kaushik Roy - Pacific Growth

Okay. Thank you.

Operator

Moving along, we'll take our question with JP Morgan, we have Mr. Mark Moskowitz.

Mark Moskowitz -- JP Morgan

Yes, sir, thank you. Good afternoon. A couple of quick questions: Getting back to the embedded piece, is that fair to say now that the Sierra Logic component is outstripping your old embedded switch piece, Vixel piece?

Mike Rockenbach

No. We actually saw a good growth in both the InSpeed products as well as in the Sierra Logic products.

Mark Moskowitz -- JP Morgan

So InSpeed is starting to show signs of recovery then?

Mike Rockenbach

It's been performing pretty well a year long actually.

Mark Moskowitz -- JP Morgan

Okay. And then, as far as the Sierra Logic piece, how should we think about that revenue velocity going forward, just given that you have a pretty big storage provider out of Massachusetts now taking product?

Mike Rockenbach

Well…

Mark Moskowitz -- JP Morgan

Are we looking at 20% plus year-over-year for the next couple of quarters or is December kind of the punishment period?

Mike Rockenbach

Well, December was definitely a strong period. You've got a lot of launches and there is kind of a whole process referring the pipeline when we launch products. We do model this quarter for double-digit year-over-year growth. And just kind of going back to where we talked about on our Analyst Day, we do see that business growing and high teens on an annual basis.

So to be perfectly honest, there is a bit of uncertainty as we get up towards summering how the back half of the year looks. So we'll just kind of see that as we walk through it. But as we look at the world today, we're in great shape in that business, it's ramping up and we're expecting really another nice quarter in March as well.

Mark Moskowitz - JP Morgan

And you still own that market there is really no competitive force out there?

Jim McCluney

Certainly on the bridging products obviously on the embedded switching, we did have o competitive out there. And the other keep key things -- to nice comments is that, but obviously something to the vagaries of OEMs product runs as well. And: why it is as always it had lumpiness in this things? So you see sometimes in the up quarters and down, by and large enlarge at least to the next couple of quarters we see continuing momentum there. And obviously looking to for other opportunities for those product lines as well and I think you can see from the disguise, from the projected growth in external storage, this obviously is a healthy market.

Mark Moskowitz - JP Morgan

And then just shifting gears to the CapEx, can you talk about some of the nuances in CapEx this quarter versus last, were those investments?

Mike Rockenbach

Yeah. Actually the last two quarters have been up from where we typically have seen CapEx I think on the last -- over the last years our CapEx really run to the $4 to $5 million a quarter. We had some increases over the last two quarters driven by moving to a new facility in Roseville, to be able to expand that particular operation. So, there is some investment in lease hold improvements and facilities that amount about $5 million over the two quarters. So, outside of that I think our CapEx is pretty much inline with what we've spent historically.

Mark Moskowitz - JP Morgan

Okay. And then just lastly I have to ask you, you mentioned earlier in response to Min's questions as far as the share gain in terms of your revenue growth, what indicate you can not taken a share. Can you really talk about that one because when your competitors, the market data last two quarters would suggest they are taking shares? So, are you taking share from each other, are you taking share from the actual OEMs that use to make 2 gig mezz card?

Jim McCluney

Yeah, I think familiar with in 2007 shakes, I think you'll see that Emulex has gained share. And I think the most noticeable area will be in those mezz cards for blade serves -- for prior to last year where new market share what's so ever. So, I think the as in the nearest competition of pretty much you qualified across most of the customers out there and some of them were previously sourced with a competitive.

And so we are still in the very early stages of those deployments, those new customers and every quarters what we perform stronger than them and like best us. So, I think this is a long-term thing to hear that we see I think this three opportunities as we look into 2008 for us to keep the momentum going. We did say sales and objective to gain two or three points of market share in the year. We think we did gone 2007 and that sort of intent to accomplish in 2008. So stay tune.

Mark Moskowitz - JP Morgan

Okay. Thank you.

Operator

Next up we have Tom Curlin with RBC Capital Markets.

Tom Curlin - RBC Capital Markets

Hi. Good afternoon. Can you walk us through your expectations for the timing of the 8 gig cycle, when would you say we out to see roughly 50%, if you will to cross several point in terms of mix of 8 gig versus 4 gig?

Mike Rockenbach

Well, I think as we mentioned in the call, we are already sampling a 8 gig products to customers and we've already got 13 design wins it actually happen and more on the way. If you look at the OEMs that all in different stages are finding one to roll out 8 gig depending on their product refreshes and normally, but doing more to the system and just upgrading the link speeds.

So, we are very much attuned to when our OEM customers want to make that transition to 8 gig. And we are cutting, you'll start seeing that rolling over the next several quarters. And its going to -- for us anyways it going to hard to predict what, how quickly that will be? Obviously, the 4 gig transition happened very quickly. I believe a lot of that was propelled by the introduction of PCI Express.

There is no real bus changes at the several site at this time. So I think wherever it is we will be on top of it. We have high quality product. And as I mentioned in the call, we fully expect all of our product customers to transition with us at 8 gig. When they are ready and we will be ready for them with whatever less of choice they want.

Tom Curlin - RBC Capital Markets

What would be an aggressive timeframe versus a more conservative timeframe for seeing a 50% mix crossover?

Jim McCluney

Well, if we look at it historically, we've done six or seven transitions from one platform to next. 4 gig really stood out as unique in terms of an aggressive timeline and that was from product launch or from general availability to 50% of our revenue took six quarters. And that was literally twice as fast as any other platform we have ever done.

More typical is 10 to 12 quarters and that's when all things are equal, when pricing is comparable and when everything is called, all the pieces of the system not just the HBAs. So I would think if it's toward 4 gig timeline of six quarters, I will consider that pretty aggressive.

Tom Curlin - RBC Capital Markets

And so when would count as GA, I mean: you don't consider yourself a GA now, right?

Mike Rockenbach

Not yet, no.

Jim McCluney

Everything is moving off very nicely, just stay tuned.

Tom Curlin - RBC Capital Markets

Okay. And then with respect to FCoE, you guys are expecting some product shipments in the first half of calendar '09? Did I hear that correctly?

Jim McCluney

Yeah. We've got -- our products are ready, we are just working with our partners and OEMs and end users. We want to do some early sampling and seeding of the seeding of the product. I mean it's always there and in this market is very much in it's infancy, and so at this point hyperbole reigns supreme. But I think you'll see us with some very well orchestrated campaigns to get out to end user reach. We have a number of end users that are very interested in sampling our products. And again, we are working very closely with our switch partners to achieve that.

Tom Curlin - RBC Capital Markets

So do you, I mean: what exactly is going to ship in the first half of calendar '09? Is this Fibre Channel over regular Ethernet, which seems unattractive technically or is it Fibre Channel over data center Ethernet, enhanced Ethernet, et cetera?

Jim McCluney

Yes, the lot of…

Tom Curlin - RBC Capital Markets

And do you really think that, I mean: it's seems to me there is multiple standards that have to come together for some kind of cohesive DCE to hit the market, unless it's just a proprietary Cisco version?

Mike Smith

Yeah. Hi, Tom, this is Mike Smith. Yeah, on that point, you are absolutely right. There is lot of activity in the standards bodies. I can tell you that all the big companies in the industry, the infrastructure companies, ourselves included, the server guys, the storage guys are all in the mix working together to drive this. There is a lot of motivation to come together on standards and it's moving very quickly through the process. I think you'd expect to see, maybe sometime this summer for some rectifications that would drive the standards process to closure. So definitely that part of thing is lining up for '09 and its all going to come together.

Tom Curlin - RBC Capital Markets

So you would be able to turn second or third generation ASIC for ratified DCE standards and say six months and be ready to go on the first half of '09?

Mike Rockenbach

Yeah, there are a lot of elements to the standards and you mentioned the enhanced ethernet piece, there are some other pieces that impact the fibre channels standard. A lot of stuff has to do with parts of the technology that can be managed from one software.

Tom Curlin - RBC Capital Markets

Okay. Thank you. Thanks very much.

Mike Rockenbach

You're welcome.

Operator

Next one we have Jeff Brickman, UBS.

Jeff Brickman - UBS

Yeah, thanks. Mike can you color a little more detail in your expectations for OpEx heading into the third quarter particularly in R&D.

Mike Rockenbach

Yeah. Typically what we see in our March quarter is that we have payroll tax matching kicks back in. So that's going to increase our OpEx about $1.6 million for the quarter. We also are continuing to invest pretty significantly in terms of the spinning to expand ourselves, the marketing presence as well as the infrastructure both IT and accounting to support that. So, I don't have the specific numbers for R&D, but I think it's probably up slightly, but relatively flat compared to the other areas of our OpEx for the quarter.

Jeff Brickman - UBS

As far as just growing as a percentage of revenue I mean: are looking for ranges they kind of get out of where they were this quarter?

Mike Rockenbach

I think its going to be little higher than they were this quarter basically for some of things I've mention also we're modeling for revenue to be flat to down 3% on the top line. So that will increase a bit as a percent of revenue.

Jeff Brickman - UBS

Yeah, got it and what was -- and also I miss this one, what was the cash flow in the quarter?

Mike Rockenbach

Cash balance increased about $33 million.

Jeff Brickman - UBS

And do you have a kind of that the free cash or even operating cash number?

Mike Rockenbach

I don’t have that, but it's probably right in that same range.

Jeff Brickman - UBS

Okay. And then just finally, just as a follow-up to the early 8 gig question. Can you guys give any kind of update and what you think or versus the competition just based on what you are hearing from the customers?

Jim McCluney

Yeah, sure I think we are right on top of all of our customers. I mean when they are ready to launch, we ready to launch and just said some customers will sequence things others will do all [hard well]. So, I don't think there is much of a near gap between us and competition until.

Jeff Brickman - UBS

Okay. Thanks all guys.

Jeff Brickman - UBS

Thanks.

Operator

Next we have Brent Bracelin with Pacific Crest Securities.

Brent Bracelin - Pacific Crest Securities

Thank you. Couple of follow-ups on the embedded side, Mike, first half if you look at gross margin, it looks like even with a way pretty significant mix shift embedded -- you didn't see a cover drag on gross margins? Was there anything kind a one-time in nature there as we started to think about -- embedded -- being less of a drag on margins going forward?

Mike rockenbach

No, there wasn't any one-time benefit in the quarter on gross margins. We are benefiting from just overall supply chain efficiencies as well as being a much larger customer to our suppliers in that respect. But having said that the embedded products do have lower gross margins than our standard HPAs and to the extent that we are anticipating ESP being a bigger mix, specifically in the March quarter and then just in general as we go forward. We do expect gross margins are going to come down over time and in fact we are modeling for a little bit of a decrease in the March quarter, were expected to come down about 67% versus the 68% that we showed for non-GAAP margins in the December quarter.

Brent Bracelin - Pacific Crest Securities

Okay. Fair enough. And then, really a question regarding the sustainability of growth in that business as you look at, kind of, these customers that are still just now starting to ship, they are low volumes. Is there kind of a rush of orders initially that you see on the embedded side and then it dries up and then starts to build again? Help us understand: what gives you confidence in the sustainability of that embedded business? And then: what do you typically see in the initial launch of those products?

Jim McCluney

Well, typically, what you see in the embedded side is a couple of characteristics, one is OEM sole source. They don't dual source suppliers at the component level inside the array. So that's a great position to be in. On the other hand, they do tend to be very long launch cycles. It can be as long as 12 months maybe more from the time that we get a design win until they actually get in the market.

And if you think about it, what they're doing their internal testing, they're not buying a lot ASICs, they are buying enough to build what they need to test. As they launch, they fill out their supply chain and so you do see a ramp-up pretty rapidly, and then it tend to flatten out and then it starts to grow with whatever level their performance is in the marketplace.

So when you've only got a couple of customers that can make the individual quarters pretty lumpy. But as we've launched a lot of more of the design wins over the last couple of quarters, you tend to see those cycles of the individual customers offset each other. So it does make the performance a bit more consistent over time. So I think we're at the point, where we're seeing a solid contribution. They we're -- Embedded Storage Products were about 28% of revenue and we expect that to continue to grow as the Embedded Storage Products ramp over the next few quarters.

Brent Bracelin - Pacific Crest Securities

Great. My last question really is for Jim. You talked about the OEMs continue to rely on you for helping them with their new product roadmaps. As you think about what you have internally versus externally what you need, how should we think about M&A? You guys have clearly been aggressive with buyback. Will M&A take a bigger role in, kind of, trying to find new growth engines for Emulex in 2008?

Jim McCluney

We always -- my standard answer is we're always looking out there for new growth opportunities for the company. I think we've made some great acquisitions over the last three-four years. We know how to do it. And our team actually headed by Steve here, is constantly looking for new candidates either on the host side or indeed in embedded side.

I think there is some very interesting new emerging technologies in markets that we are paying very close attention to. And it's nice accumulating the cash we have. It gives us some flexibility to make any moves that we think is good for the company.

Brent Bracelin - Pacific Crest Securities

Okay. Thank you.

Operator

Next on, we have Paul Mansky with Citigroup.

Paul Mansky - Citigroup

Great. Thanks. Just quickly by the way of housekeeping: what was the headcount at the end of the quarter?

Mike Rockenbach

816.

Paul Mansky - Citigroup

816. Great. And then on the embedded side, can you characterize how much of the growth in that business was from the new program ramps versus existing programs in the quarter?

Mike Rockenbach

I don't know offhand, but we did launch quite a number of design wins during the quarter. So I would think that that was a pretty big piece of the contribution.

Paul Mansky - Citigroup

Okay.

Mike Rockenbach

We also, if you recall the summer quarter was a bit light compared to where we had expected it coming out of our Analyst Day call. And that was really based on some of the inventory positions of our customers themselves. So, we saw that all get cleaned up in September, and so that also helped in the December quarter as well.

Paul Mansky - Citigroup

And then and I know I ask this just about every quarter but if you so please forgive me. But with respect to InfiniBand, it seems though there is some momentum in the market, Cisco looks like it's poised to give it another prod around the DC-3 initiative. Are there any new thoughts or updated thoughts relative to Emulex' participation in that market?

Mike Rockenbach

I will give you the same answer to your question.

Paul Mansky - Citigroup

I am waiting for any variation whatsoever so.

Mike Rockenbach

No, deviation, Paul, I think we continue to focus on energies, more on the Ethernet side with FCoE, and I do believe then InfiniBand is a good niche market for high performance compute. I still think it would be interesting to see how the -- we will wait and see Ethernet which I know a few startups are really focused on at least on the switch side, they are seeing numbers comparable to InfiniBand. So we will see, but for the moment we're not investing in that market segment. We think Ethernet and FCoE is just a much bigger horse to throw a saddle on.

Paul Mansky - Citigroup

And then finally on the 8-Gig Fibre Channel as I am sure you are probably in some pricing discussions with your OEMs given some of your earlier comments about proximity to GA. Can you compare the pricing discussions versus the entry point with respect to the 8-Gig cycle?

Mike Rockenbach

I think the key difference this time between 2 and 4-Gig, we generally follow very linear pricing with the OEMs to make the transitions pretty straightforward, and 8-Gig would have followed that same curve, were not for some of the premiums we're still seeing on the optical transceivers.

Paul Mansky - Citigroup

Okay.

Mike Rockenbach

If you go in that market you see that that clearly doesn’t impact things like blade servers.

Paul Mansky - Citigroup

Right.

Mike Rockenbach

You don't need optic. So there you'll see a very, very seamless transition. But on -- where you need optical links there, there is a price premium. And to some of these earlier questions depending on how the OEMs price the overall solution out there? That can either accelerate or people will wait till some of those prices stop to coming more in line with the 4 gig offering, unless that really stop the bandwidth from that application in which case, they don't care the price of the optics will just go for the 8 gig IO capability.

Paul Mansky - Citigroup

And how should we be thinking about the step functioned discounting at the volume threshold? Is that going to be consistent with the 4 gig as well? And obviously the reason I ask is, it's pretty clear that Fibre Channel is reaching a level of maturity. And I am just wondering: if whether or not OEM are looking at, obviously, more competitive pricing as potentially an opportunity to drive down market a little bit more?

Jim McCluney

Actually, what we do, Paul, and this has been kind of the case on the board-level products for the last couple of years is, pricing is more time-based now because the volumes are significantly higher. We see is there step pricing over cumulative volume in the more early stages, because the launch cycle were so drawn out. But now that the OEMs have really been much more consistent in performance and as you say Fibre Channel is kind of the main stream for the SAN markets certainly and more of the mature technology. Those pricing agreements are set when we get design wins and it's more time-based and platforms specific than it is volume.

Paul Mansky - Citigroup

And then, finally, a side from the optics component of the discussion. Are there really other opportunities by way of components integration around 8 gig that we should be thinking about or is that move pretty much done?

Mike Rockenbach

You know ASIC's are pretty integrated these days. So there isn't a lot more than can be squeezed out.

Jim McCluney

Obviously, we've done a lot in the last six months, on a year on supply chain efficiencies and really leveraging our customer base to great success. And when we added -- one side benefit of having a very, very robust embedded business, we shipped millions of chips there, is it give us great processing product but are suppliers as well. So we've -- we continue to look at ways for efficiency there, but as Mike says, I mean: just about everything is into the ASIC now.

Paul Mansky - Citigroup

Great. Thank you very much.

Operator

Next up, we have Jayson Noland with Robert W Baird

Jayson Noland - Robert W Baird

Thanks just clarify on the this transition to 8 gig, it doesn't sound like you expect much share shift at the OEM level, meaning if there is an OEM today that's 60-40, you and your competitor. That likely wouldn't change much with 8 gig?

Jim McCluney

I don't think you have look to early stages of any new product ramp for remarkable share change, unless one of the suppliers hasn't got product to offer. I mean we took very early advantage in this 4 gig transition because we were very substantially ahead on particularly PCI Express.

And that allowed us to win some new customers. And I think 4 gig is where all the customer shake out was done. And that was just a quarter-over-quarter market share battle from the end-user all the way back. That's not atypically of a maturing market.

And so we are not anticipating any major market share gains one way or the other just through the 8 gig launch because we know where we are. And even if the competitions announce a day before us, or a week before us, it's not going to make much difference in the broad scheme of things really.

Jayson Noland - Robert W Baird

Okay. And gross margin, I think we were talking about the potential for embedded to push gross margin down to the low 60's over 12 to 18 months. It sounds like that might be too aggressive now, is that fair?

Mike Rockenbach

I think that's fair. When we were looking at the low 60%, I think we were actually starting from much lower gross margins then we are at today. So I think we still expect kind of like we talked about back in May at our Analyst Day, that gross margins are going to trend down over time as the mix shifts. But that's going to be pretty nominal on any one quarter. It's probably more like in the 1% and 1.5% annually basis as opposed to a big stair function.

Jayson Noland - Robert W Baird

Okay. And then Mike on R&D it seems like R&D in absolute dollars at least would start to come down over the next 12 months as you finish a fair amount of development work around 8 gig, new ASICs are out there. Is that the correct way to think about that?

Mike Rockenbach

Well, a funny thing, the engineers keep thinking of new things. So we expected it will trend down as a percent of revenue, but in absolute dollars, we expect it's going to continue to grow and every quarter it will vary a little bit. But on an annual basis, we do expect it will trend up in absolute dollars but at a rate of slower than revenue growth.

Jim McCluney

And of course, just to add to that, we're leveraging our operation in India. It's a fastest growing development site. We are well growing in on all our sites, but that is growing proportionally faster. And we do have some next generation products for our embedded businesses well. And it follows somewhat the 8 gig cycle, but usually a year or so later after the host moves.

So we need to be ready for our embedded products there and evolving new protocols and bridges. So as Mike said, there is always a lot creativity within engineering ranks for new business, but our intent over time is absolutely as a percent of revenue to reduce on the...

Jayson Noland - Robert W Baird

And I assume on FCoE, its too early to talk, ASPs and margin profile relative to Fibre Channel?

Jim McCluney

Yeah. That's early

Jayson Noland - Robert W Baird

Thanks, guys.

Jim McCluney

Okay. Operator, I think we've got time for maybe one more question.

Operator

Next question will come from Clay Sumner with Friedman, Billings, Ramsey.

Clay Sumner - Friedman, Billings, Ramsey

Thank you. Actually just a couple of clarification on that last point about the margins. Mike, could you just remind us maybe what you're one to two year targets are for R&D and S&M as a percent of revenue?

Mike Rockenbach

Well, I think, we've kind of looked at it at a macro level. For gross margins, I think we're expecting that they are going to come down 1%, 1.5% a year over the next several years. We think sales and marketing is a percent of revenue and basically G&A to SG&A is probably going to remain in the range that it is at today, maybe pick up a little bit as we continue to focus on investment and sales and marketing over the year. And then have R&D come down as a percent of revenue in about the range that would offset that that erosion in gross margins.

Clay Sumner - Friedman, Billings, Ramsey

Okay. And then, Jim, earlier in the calls you said, I think you said you expect Sierra products -- you guys were talking about Sierra products at the time to grow, kind of, high team on an annual basis. I just want to clarify the timeframe you're thinking about there. I had expected a little bit higher than that in fiscal '09.

Mike Rockenbach

Well, this is Mike. And I think that actually my comments. We are looking a double-digit growth in the March quarter and again kind of referring back to where we were in the Analyst Day and I think that's still relatively intact, is we have been modeling that markets going to grow at about 17% on a compound basis over the next three, four years.

So, I think we will see how the product launches and ramp shape up, when we get out into '09, but certainly as we look at the rest of the calendar year. I think we are pretty confident with those numbers.

Clay Sumner - Friedman, Billings, Ramsey

Okay. So high-teens, is kind of a three to four years market, correct?

Mike Rockenbach

Yeah.

Clay Sumner - Friedman, Billings, Ramsey

And then lastly also on an earlier point characterizing kind of the ESP inventory cycle. I assume none of that comes from just in time up since the products are embedded. So, should we expect the same kind of inventory related lumpiness that tends to characterize the host IOC business?

Mike Rockenbach

No, that was a little bit different and I think there were some specific stuff going on in the summer time, with the couple of our customers, there were some preannouncements at the time. Well over half of our design wins haven't been launched yet.

So, I think that was more specific to the September quarter and very partially driven by the fact that we only had a few customers launched as suppose as we figure today, we have got a lot more depth to the number of customers that are on the market place.

Clay Sumner - Friedman, Billings, Ramsey

Okay, all right. Thank you very much.

Mike Rockenbach

Okay. Well, thanks everyone for joining us on the second quarter conference call. Just to note in February, we are going to be attending the Thomas Weisel Partners conference as well as the Pacific Crest conference is in San Francisco. We will also be at the Goldman Sachs conference in Las Vegas and then in March we will be here locally in Dana Point at the Morgan Stanley conference. So, hopefully we will see you at one of those events. Thanks again and have a good evening.

Operator

Once again everyone this will conclude today's program. We do thank you for joining us. Please enjoy the rest of your day.

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