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Executives

H.K. Desai - Chairman and CEO

Simon Biddiscombe - Sr. VP and CFO

Jeanie Herbert - Senior Director of IR

Analysts

Aaron Rakers - Wachovia Capital Markets

Min Park - Goldman Sachs

Jeff Brickman - UBS

Harsh Kumar - Morgan, Keegan & Company

Keith Bachman - Bank of Montreal

Shebly Seyrafi - Caris & Company

Douglas Whitman - Whitman Capital

Paul Mansky - City Group

Kaushik Roy - Pacific Growth Equities

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Glenn Hanus - Needham & Company

David Cahill - RBC Capital Markets

QLogic Corporation (QLGC) Q4 FY08 Earnings Call May 1, 2008 5:30 PM ET

Operator

Please standby we are about to begin. Good day and welcome to the Fourth Quarter Fiscal Year 2008 QLogic Earnings Announcement Conference Call. As a reminder, today's conference is being recorded. At this time I would like to turn the conference over to Mr. H. K. Desai, Chief Executive Officer. Please go ahead sir.

H.K. Desai - Chairman and Chief Executive Officer

Thank you, operator. Good afternoon and welcome to QLogic's fourth quarter and fiscal year 2008 earnings conference call. I am H.K. Desai, Chief Executive Officer and with me is Simon Biddiscombe, our recently appointed Senior Vice President and Chief Financial Officer. Simon has more than 18 years of experience mostly in the technology space. He joins QLogic from Mindspeed Technologies, where he served as Chief Financial Officer. Please join me in welcoming Simon to our team. In today's call Simon will begin with a review of the fourth quarter and fiscal year 2008 financial results. Then I will continue with a general discussion of the current state of our business. We will then open the call for questions. With that I will turn the call over to Simon.

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Thank you H.K. and good afternoon. By now, all of you should have seen our press release and associated financial information. In addition to reviewing our financial results some of our comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our current expectations. These comments contain significant risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements. We refer you to the documents QLogic files with the SEC specifically our most recent Forms 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update any of the information contained in any forward-looking statements that we make today.

In our fourth quarter earnings press release issued earlier today. We reported both GAAP and non-GAAP results. The difference between the results is primarily due to stock based compensation, acquisition related charges, impairment charges related to intangible assets and marketable securities, special charges, and the related income tax effects, a reconciliation of GAAP net income to non-GAAP net income, and a summary of non-GAAP adjustments is included in our earnings press release. All our references we will make on our call today relate to the non-GAAP results unless otherwise stated.

Turning now to our financial results. Our revenue in the fourth quarter ended March 30, 2008 was a record $159.7 million, an increase of 9% from the same quarter last year. This revenue exceeded our forecasted range of $147 million to $151 million provided during our third quarter earnings conference call. Our fourth quarter revenue from host products which comprise primarily of fiber channel and iSCSI host bus adapters, and InfiniBand host channel adapters was $110.3 million and increased 5% from $105 million recorded in the fourth quarter of last year. The increase in our revenue from host products was primarily driven by HAA revenue growth.

During the fourth quarter, our revenue from network products which comprised primarily of fiber channel and InfiniBand switches was $27.5 million and increased 6% from $25.9 million recorded in the fourth quarter of last year. Both fiber channel and InfiniBand switch revenue grew year-over-year. Our fourth quarter revenue from silicon products comprised primarily of protocol chips and the management controllers was $13.9 million and was consistent with the fourth quarter of last year. The revenue for silicon products exceeded our expectations during the fourth quarter due primarily to last time buys and unexpected demand from a customer who secured a design win with tier 1 OEM for a storage platform.

Other revenue, which is comprised primarily of royalties and service revenue was $7.9 million in the fourth quarter and included a one time royalty adjustment of approximately $5 million. Our fourth quarter gross margin of 69.8% increased from 67.3% recorded in the fourth quarter of last year. The increase in our gross margin was primarily due to the one time royalty adjustment, product mix, and improved manufacturing costs. The gross margin performance during the fourth quarter exceeded our full cost of approximately 68% provided during our third quarter earnings conference call.

Turning now to fourth quarter operating expenses. Total operating expense were $56.1 million in the fourth quarter and were consistent with the $56.2 million reported in the fourth quarter last year. Engineering expenses in the fourth quarter declined 5% to $29.7 million versus a year ago and declined as a percentage of revenue from 21.2% to 18.6%. We expect future engineering expenses as a percentage of revenue to be in the range of 18% to 21%.

Sales and marketing expenses in the fourth quarter of $19.8 million increased 2% from a year ago and declined as a percentage of revenue from 13.1% to 12.4%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 14%. G&A expenses in the fourth quarter of $6.7 million increased from $5.7 million from the year ago period and with 4.2% of revenue in the current quarter. We expect that future G&A expenses as a percentage of revenue will be approximately 4%.

Operating profit in the fourth quarter increased 29% to $55.4 million versus a year ago and increased as a percentage of revenue from 29.1% to 34.7%. Interest in other income was $4 million in the fourth quarter. The annual income tax rate for the full fiscal year was 33.3%, was slightly above the annual forecasted tax rate range of 32% to 33% provided during our third quarter earnings conference call due primarily to greater than expected earning in countries with higher tax rates.

Our fourth quarter net income was $37.7 million or $0.28 per diluted share and represented a net profit margin of 23.6%. Our fourth quarter non-GAAP net income per diluted share of $0.28 exceeded our forecasted range of $0.25 to $0.27 per diluted provided during our third quarter earnings conference call. This represents the 51st consecutive quarter of profitability for QLogic.

Now let me summarize the results for the full fiscal year 2008. Revenue for fiscal year 2008 was $597.9 million, an increase of $11.2 million from $586.7 million for fiscal year 2007. Our revenue from host products for this period was $437.9 million, up 7% from the prior year, and our revenue from network products was $101.8 million, up 15% from fiscal 2007. These increases in revenue during fiscal 2008 were partially offset by the $32.3 million decline in revenue from Silicon products.

With regard to our customers for the full year, HP, IBM, and Sun each accounted for more than 10% of our total revenue and were approximately 20%, 16%, and 11% of revenues respectively. Non-GAAP net income of $141.3 million or $0.99 per diluted share for fiscal 2008 represented a net profit margin of 23.6%.

Turning now to our balance sheet, our financial position continues to be strong especially with regard to our cash flow. During the fourth quarter, we generated $49 million of cash from operations. The company's cash and marketable securities were $376.4 million at the end of the fourth quarter. During the forth quarter, we purchased $36.2 million of the company's common stock pursuant to our stock repurchase programs. Since 2003 we have repurchased over $1 billion of the company's common stock under programs authorized by our Board of Directors.

Receivables of $81.6 million at the end of fourth quarter, increased from $75.6 million at the end of December. The DSOs at the end of the March quarter were 47 days compared to 44 days at the end of the December quarter. Based on hub arrangements at our OEM customers and our current customer and channel mix we expect DSO in the future will range from 45 to 55 days. Annualized inventory turn over in the fourth quarter of 7 tons improved from 6.3 tons in the December quarter. Inventory at the end of the fourth quarter was $27.5 million and decreased sequentially from $31.2 million at the end of the December quarter. We expect that inventory levels at the end of the June quarter will be similar to the March quarter.

As we exit fiscal year 2008 with favorable second half performance we believe we have positive momentum heading in to fiscal 2009. We continue to be cautious due to the broader macroeconomic issues affecting many industries in North America. We expect total revenue for the June quarter to be in the range of $154 million to $158 million, which is flat 2% sequential growth excluding the impact of the $5 million one time royalty revenue adjustment in the March quarter.

Due to the potential variation in products and technology mix we expect gross margin for the June quarter to range from 67% to 68%. Considering the above revenue and gross margin expectations, combined with the planned operating expenses and a projected annual tax rate of approximately 33%, the current outlook is to achieve non-GAAP earnings per diluted share of approximately $0.26 to $0.28 in the June quarter. Actual results for future periods may differ materially due to a number of factors including those outlined during the course of this conference call, in the company's filings with the SEC, and in the disclaimer statement at the end of our fourth quarter and fiscal year 2008 earnings press release. Now I turn the call back over to H. K. H.K.?

H.K. Desai - Chairman and Chief Executive Officer

Thank you Simon. In fiscal year 2008, QLogic achieved record revenue, driven by revenues for both our host and network products. We continue to gain market share in fiber generated HBAs and achieved our 51st consecutive quarter of profitability. QLogic reported strong financial performance during the fourth quarter with revenue and non-GAAP earnings per diluted share above our previous forecast. Revenue in the fourth quarter was a record $159.7 million. This revenue exceeded our forecasted range of $147 million to $151 million provided during our third quarter earnings conference call.

Our non-GAAP earnings per diluted share for the fourth quarter of $0.28 exceeded our forecasted range of $0.25 to $0.27 per share provided during our third quarter earnings conference call. Fourth quarter revenue for host products was $110.3 million, up 5% year-over-year. During the March quarter, 91% of our fiber channel revenue, HBA revenue came from 4 gig products and approximately $1 million came from 8 gig products.

Fourth quarter revenue for network products was $27.5 million, up 6% year-over-year and approximately flat sequentially. Fiber channel switch revenue grew 3% sequentially. InfiniBand switch shipments in dollars increased approximately 40% sequentially but recognized revenue declined as a result of certain revenue deferrals. Fourth quarter revenue for silicon products was $13.9 million up $4.7 million sequentially. The key drivers of this increase were last time buys and unexpected demand from a customer who secured a design win with a tier 1 OEM for our storage platform.

As result of this win and a continued momentum with iSCSI silicon products we now expect our revenue from silicon products will be approximately flat in our fiscal year 2009. Other revenue which includes royalties and service was $7.9 million up $5.9 million sequentially due to a one time royalty adjustment of approximately $5 million.

We had many significant successes during fiscal year 2008. We attained a nearly 50% revenue market share in fiber channel HBA's, gaining 6 share points in calendar year 2007. In fact according to the fourth quarter 2007 report QLogic gained market share in nearly every major fiber channel HBA category for the March, June, September, and December quarters.

We were first to market in launching 8 gig fiber channel products. Revenue for 8 gig products was approximately $1 million in the March quarter. We captured our first major tier 1 design win in fiber channel switches with HP for the storage works 8 gig simple connection kit which includes QLogic's 8 gig switches and HBAs. We continue to gain traction with our fiber channel edge and blade switches which is our primary area of focus.

Our InfiniBand business continues to meet our expectations with continuing sequential increases in shipments. We have continued to add design wins to our portfolio including IBM' s high data plaque solutions announced last week. We believe revenue from this wings will commence at the beginning of next year.

In October 2007 we were first to preview a converged network adaptors based on 10 gig Ethernet technology at storage networking world. This past month at SNW we introduced our 8000 series of converged network adaptors compatible with the Cisco's Nexus 5000 10 gig enhanced internet. FCoE represents our major market expansion opportunity for us beyond storage into data networking. We are sampling FCoE products now and expect to be first to market with FCoE converged network adaptors media.

As we exit fiscal year 2008 with favorable second half performance, we believe we have positive momentum heading into fiscal year 2009. We continue to be cautious due to the broader macroeconomic issues effecting many industries in North America. However, globally the need for additional storage, high performance, and virtualized solutions continues to drive demand in both large and small to medium enterprises. We are energized by our current market opportunities in 8 gig fiber channel in InfiniBand switches and iSCSI technologies.

Looking into the future, we believe we will continue to lead the market for converged network technologies with FCoE. Additionally, we would continue to invest in 16 gigs fiber channel, broad rate... and FCoE technologies.

We have built a team at QLogic with considerable expertise in storage, data, and server networking that we believe positions the company favorably for long-term growth. This concludes our prepared remarks; operator we will now open the call for questions.

Question And Answer

Operator

[Operator Instructions]. And we take our first question from Aaron Rakers of Wachovia

Aaron Rakers - Wachovia Capital Markets

Yes, thanks. Congratulations on the quarter and specifically gross margin. And I guess first on the gross margin, I got a couple of questions, can you quantify the impact of the royalty contribution in the quarter on the gross margin line?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Aaron, this is Simon. The precise impact to the gross margin associated with the one time royalty adjustment that flowed through the other line of the revenue was just over 1%.

Aaron Rakers - Wachovia Capital Markets

Okay and then H.K. last quarter you had talked about kind of continuing to see a decline in the management controller piece, and I think you even mentioned that there was roughly a $1 million contribution in the prior quarter, can you help us understand the end of life purchases and quantify that for this quarter so we can understand, you know how we should think about the trends going into the next fiscal year?

H.K. Desai - Chairman and Chief Executive Officer

I think there's a couple of things going on. What we said, if you remember what I said in the last call is that we declined about approximately $32 million to $35 million in FY '08 on the silicon year-over-year. And then we said give a color then in FY '09, we expect to decline about $5 million to $9 million in FY '09 or FY '08. Now what we are seeing is that little different than what we said last time is because the couple of things happened, one is we have... one of our customer has a target silicon design win with the tier 1 OEM's and I think we start seeing that the results in the March quarter and I think we are going to continue the demand from them. Plus we also start seeing some more tracks in iSCSI silicon business. So we expect that now in the whole FY '09 we sort of decline $5 million to $9 million, we will be flat year-over-year. So I think we are getting our results on the silicon business.

Aaron Rakers - Wachovia Capital Markets

Okay, and a couple of other questions. H.K. last quarter you had talked about design wins 8 gig, can you give us an update there on your HBA's?

H.K. Desai - Chairman and Chief Executive Officer

So, we get our... we are first to market the 8 gig, we announced HP design for example, they start shipping our switches and the HBA. We are also in the call with most of the OEM's. We said we will expect to finish sometime this quarter and we have about $1 million in revenue came from 8 gig products in the March quarter and we expect to continue that growth and we expect about 20% revenue at the end of the year coming from 8 gig. We are kind of done with the 8 gig products now.

Aaron Rakers - Wachovia Capital Markets

Okay and final question for me. When I look at kind of the model, looking at just your peer InfiniBand HCA business it looks like that was up maybe mid single digits sequential. I guess is that fair and also kind of backing in to that, can you quantify what the ASP trends and unit shipment trends were in your core fiber channel host adapter business and I will leave the floor?

H.K. Desai - Chairman and Chief Executive Officer

Because... I don't think we have... we don't have really that much business on the InfiniBand HCA because we are late to market for the DDR product we just announced and we're going to go into production sometime this quarter. So we really don't have a much traction with IB HCA we said the last quarter. I think we're going to wait for the second half of the year. Our ASP decline was about 2% for the fiber channel HBA in the March quarter.

Aaron Rakers - Wachovia Capital Markets

And unit growth?

H.K. Desai - Chairman and Chief Executive Officer

I don't have a really unit growth number for the same. But we are about 5% year-over-year on those products.

Aaron Rakers - Wachovia Capital Markets

Okay, thank you.

Operator: And we'll take our next question from Min Park of Goldman Sachs.

Min Park - Goldman Sachs

Yes, hi. Thank you. Just a couple of questions please. A lot of companies has noted some incremental softness in demand at the end of March and I was wondering if you can talk about how the quarter wrapped up particularly on the networking HBA side?

H.K. Desai - Chairman and Chief Executive Officer

So we have, like we have a typical seasonality for last many quarters. Now we have is a real strong first month because of HP, Net App, and Dell offset of the quarter, this last month of the quarter. We have a level up in the second month and we have pretty good third month and we see that things not this quarter.

Min Park - Goldman Sachs

Okay and then just a question on your balance sheet, I know that your short term investments were down roughly $77 million, it looks like a lot of it was moved down to your long-term investments, is this settled due to liquidity issues in your portfolio [indiscernible]

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Yes, this is Simon, and that's precisely what it is. We moved $56 million worth of carrying value, optional securities, short term and put them back in the long term and that's the liquidity issue is exactly why we have moved them to that part of the balance sheet as opposed to leaving them in the short-term section. As you imagine it, we think it will... over some period of time and it doesn't cause us too much concern given the cash has been generated by the business and the other short term marketable securities and cash that exists in the business. So its there in the long term but doesn't cause us too much concern at all.

Min Park - Goldman Sachs

Is that the same reason why you have to write off this quarter?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Yes, there was some impairment in the quarter of the marketable securities and that is the case, yes.

Min Park - Goldman Sachs

Okay, thank you very much.

Operator

And we'll take our next question from Jeff Brickman of UBS.

Jeff Brickman - UBS

Great, thanks. You are supposed to put clarification on the 20% in 8 gig, is that the end of the calendar year or the end of the fiscal year?

H.K. Desai - Chairman and Chief Executive Officer

Both. So I think it's probably what we expected somewhere between December to March quarter.

Jeff Brickman - UBS

Okay and just H.K., I mean last quarter you talked about macro that you gave guidance was a little more conservative than you typically would do due to macro. I mean, how do you bounce that as you are now, are you kind of doing it again as you look into June?

H.K. Desai - Chairman and Chief Executive Officer

Yes, I mean if you look at... we did not see any macro level impact on the March quarter and if you look at what we have seen so far in the April month, we haven't seen any macro impact yet. So the guidance is a little bit conservative because of macro level considered essence.

Jeff Brickman - UBS

Right, okay. And then on the... congrats on the fiber channel switch with HP. I guess, just how do you see opportunities of other tier 1 OEM's and is there anyway you can kind of just give us some sort of color on what you see as growth you know as we move forward.

H.K. Desai - Chairman and Chief Executive Officer

I mean, I think there are what... what we are doing is that we are refocusing our switch business, our network products group. We are investing... we need to invest... lot more investments in the InfiniBand switch portfolio, either it's a DDR or going forward to QDR. So, we are doing a lot of investment there. So we are making some adjustment in the investment.

On the fiber channel side we are focusing lot more on to this 8 switches and the blade side and we are also looking at the only side whether we want to invest into the blade side or not. So, we are considering, so we are kind of making a lot of adjustment depending on the market condition.

Jeff Brickman - UBS

Right, okay. And then just last one for me. You know in InfiniBand switches obviously it sounds like it is still on the small side but could you just comment on any kind of improvements we saw on the margins, has there been an improvement in the silicon pricing you are getting and clearly maybe the volumes are still little low until you make the full decision on how you are going to, what way you are going to go but if you could just give us a little bit of update there?

H.K. Desai - Chairman and Chief Executive Officer

So, we have seen improvement in the silicon price income for supplier and we expect to improve our margin also in the June quarter because of that. And as long as we continue, I think we expect that as long as we continue the pricing from our current supplier I think they are going to enjoy our business for a long time.

Jeff Brickman - UBS

Thanks H.K. Thanks guys.

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Thank you.

Operator

And we'll take our next question from Harsh Kumar of Morgan Keegan.

Harsh Kumar - Morgan, Keegan & Company

Guys, congratulations, great quarter, great guidance. Couple of things, I missed a small part of the call H.K., you might have covered this. Could you talk about the ramp in silicon, I got the part that you are going to be flat year-over-year but how should we think about the ramp, will it be flattish or would it actually ramp in the second half of your fiscal year?

H.K. Desai - Chairman and Chief Executive Officer

So we expect, I mean silicon business is always difficult to predict, particularly quarter-to-quarter, so we expect for the full year we expect a bit flat '08 to '09 and for the June quarter we expect flat to slight increase in the silicon business in the June quarter.

Harsh Kumar - Morgan, Keegan & Company

Got it, that's... that's very helpful and H.K. looking at your Host Bus Adapter business or what you call is a host product is down about 7% on a sequential basis, did you see any, I mean one of you bigger competitors talked about some issue and I know they had some specific issues with one of the customers, but they talked a little bit about difficulties in the high-end, are you seeing any of that or just normal seasonality for you now?

H.K. Desai - Chairman and Chief Executive Officer

Its like, we look at the numbers from the last few years to and it's a normal seasonality, but 5% to 7% decline normally on... in the March quarter, we saw the same thing and we expect that we will see a growth in out host business in the June quarter, sequential growth.

Harsh Kumar - Morgan, Keegan & Company

Got it, and may be this is the part I missed H.K., but as you finished your year and you look at the next year, what are you thinking in terms of growth rate for InfiniBand and may be even the switch business.

H.K. Desai - Chairman and Chief Executive Officer

So I mean what we expect to that for the host business, we expect that the growth is about, the analyst prediction is about some where mid to high single digits and we want to be conservative, so we expect our 5% year-over-year growth we expect our net group products which include both Fibre Channel and IB to about 15% we expect in there for '09.

Harsh Kumar - Morgan, Keegan & Company

Got it, thank you H.K. and great quarter guys, congratulations.

H.K. Desai - Chairman and Chief Executive Officer

Thank you.

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Thanks.

Operator

And will take our next question from Keith Bachman from Bank of Montreal.

Keith Bachman - Bank of Montreal

Hi it's Keith.

H.K. Desai - Chairman and Chief Executive Officer

Hey.

Keith Bachman - Bank of Montreal

On the other line item that had a royalty win, does that thereby go back down to kind of a $2 million level and stay there for the balance in '09, is it just flattish with what it had been and it's roughly a $2 million run rate?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Yes, this is Simon, Keith and that's exactly what we expected. It's going to drop back down to $1.5 million to $2 million on a quarterly basis and we expect to sit right in that range for the remainder of the fiscal 2009 period.

Keith Bachman - Bank of Montreal

Okay, second question and is H.K. on IB, did that have, if you aggregate the IB revenues, did that have year-over-year growth in this quarter?

H.K. Desai - Chairman and Chief Executive Officer

So what we say yes, there was a year-over-year growth and we said the revenue shipments was up 40% sequentially for the IB switches, but the revenue declined, because we a default [ph] some of the transactions in the March quarter.

Keith Bachman - Bank of Montreal

Okay. On the HP's design win on the switching side, is that a reasonable amount of revenue or is it still too small to move the needle there?

H.K. Desai - Chairman and Chief Executive Officer

It's too small to move in the needle.

Keith Bachman - Bank of Montreal

Yeah, fair enough and okay and final one from me and then I would cede the floor, just again going back to silicon products, if the revenue is roughly flat in the June quarter with a March quarter, it's just under $14 million, and yet you are suggesting on the year-over-year basis its '09 is comparable with '08 and that would suggest that the couple quarters thereafter are sequentially down, am I hearing you correctly on how we should be thinking about this?

H.K. Desai - Chairman and Chief Executive Officer

So, I mean what we said is in June quarter. I mean it's really difficult to predict quarter-to-quarter, because like silicon grows 14 to 16 weeks timings and the sub-contractor can have some inventory and so on. So it's always difficult to predict what happen, but I think we expect that overall, year-over-year will be flat, maybe June, June quarter maybe flat to slightly up and then maybe slightly decline in the later quarters.

Keith Bachman - Bank of Montreal

Okay, thank you guys.

H.K. Desai - Chairman and Chief Executive Officer

Thank you.

Operator

And we will take our next question from Shebly Seyrafi of Caris.

Shebly Seyrafi - Caris & Company

Thank you very much. So you gave the annual customer percentages which you do once a year and it looks like if I did the calculations right, your sales for IBM and Sun were down year-to-year and your sales for Hewlett-Packard were up over 20% year-to-year. IBM just reported weak xSeries revenue and Sun just report tonight very weak results. Can you talk about what's happening on the customer side, are you depending more and more on Hewlett-Packard for growth I mean what's your outlook for sales to IBM and Sun, going forward?

H.K. Desai - Chairman and Chief Executive Officer

So I mean, I think it's a always, I mean March quarter is a seasonal quarter and we expected some of the OEMs. I cannot name it which one, but you expect decline right [ph] of five top OEMs and three were up sequentially in the March quarter and two were down sequentially in the March quarter. If you look at the June quarter, you expect that some of those guys like for example Sun and IBM, they are normally strong in the June quarter and Sun is strong in the June quarter, because this is their year end. So I think it's varied from quarter-to-quarter depending on their seasonality and I think we haven't seen anything unusual. I think our business is what we expected for all those OEMs.

Shebly Seyrafi - Caris & Company

Okay and you gave some pretty good segment and the forecast for the June quarter. I guess other is going to be tailing [ph] silicon flat, Host you said up, but should we think about like 1% or 2% growth sequentially?

H.K. Desai - Chairman and Chief Executive Officer

Yes, I mean we said we are flat to 2% [Multiple speakers].

Shebly Seyrafi - Caris & Company

And network products, what should we expect that network sequentially?

H.K. Desai - Chairman and Chief Executive Officer

I think basically same thing.

Shebly Seyrafi - Caris & Company

Flat up 2%?

H.K. Desai - Chairman and Chief Executive Officer

Yes.

Shebly Seyrafi - Caris & Company

Okay thank you.

Operator

And we will take our next question from Douglas Whitman of Whitman Capital.

Douglas Whitman - Whitman Capital

Could you talk a little bit of the wire-winding [ph] in InfiniBand and where the strength is coming from and what's driving customers to use your products?

H.K. Desai - Chairman and Chief Executive Officer

Dough, I don't think we can go in the detail, but particularly IB's switch business, we're gaining a lot of track since with short OEMs. We're also getting the work with some of the end users and some of the verticals. So I think the key is really is on the HPC, High Performance Computing market, in different verticals... I think we are wining and we are gaining, so we're up like for example 40% sequential growth in IB switch business, if you follow shipment wise, if you exclude the... if you include the differed revenue. So I think we are going improve tracks [ph] since market is going around 40% for the switch and about 28% on the HCA side. We don't have any tracks on the HCA side, because we are late to the product, late to the market in that. But I think in the switch side we are doing pretty well on most of set verticals.

Douglas Whitman - Whitman Capital

Our key to refer another call [ph], so I have got to ask you, who seems better now the locals or QLogic?

H.K. Desai - Chairman and Chief Executive Officer

Both.

Douglas Whitman - Whitman Capital

Thanks and the great quarter Curby [ph].

H.K. Desai - Chairman and Chief Executive Officer

Thank you.

Operator

And we will take our next question from Paul Mansky of City Group.

Paul Mansky - City Group

Hey thanks, for setting the entry [ph]. Most of my questions have been answered. I did want to [Technical Difficulty].

Unidentified Company Representative

In the new technologies how... when you start investing and what that a what expertise you have and for QLogic, one thing we did great was we acquired RAID's Technology about seven or eight years ago, so we have tremendous Ethernet expertise, which require perhaps, really we have storage expertise for many, many years and now we also have clustering expertise. So I think we are really positioned extremely well, normally for the current product for the future roadmaps and that's what the OEMs are looking at. So I think we are on a really, really good positions to be successful in the absolutely [ph] for the conversion equipped market.

Paul Mansky - City Group

Great thanks, and Simon welcome on board, wanted to ask you quickly if you have a handle, just from a housekeeping [ph] perspective have a handle on where headcounts wound up as you close up here?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Well thank you for the kind words and welcoming me on board. Headcounts as we exist the deals, right around 920.

Paul Mansky - City Group

Great, thanks again.

Operator

And will take our next question from Kaushik Roy of the Pacific Growth Equities.

Kaushik Roy - Pacific Growth Equities

Congratulates on the great question again. Unexpected design win for the silicon at the tear 1 customer. Can you comment whether it's a Fibre Channel target or it's and iSCSI target?

H.K. Desai - Chairman and Chief Executive Officer

It's, I mean I can tell you that because it's public knowledge. It's a target silicon with dart hill [ph] and they've won the HP storage design win. So it's publicly out now.

Kaushik Roy - Pacific Growth Equities

Great thanks, and then on FCoE, it seems like you are making good progress on the conversion of the conversion network adapter, but can you comment when you can have an FCoE switch or assuming that you're planning to build one?

H.K. Desai - Chairman and Chief Executive Officer

So I mean, I think we are looking at... the first thing we won't be doing, we do not want to go in at this stage into the Ethernet switching, because there are enough players there. So eventually this will become enhanced Ethernet switching and all the Ethernet switch guys will be there, but initially there is some opportunities where because we can even use our Fibre Channel technology to the blades sold markets. So we are looking at and see that we want to switch plate for the FCoE technology for the blades sold on large. So we are looking at these things, so but that's our strategy right now.

Kaushik Roy - Pacific Growth Equities

Okay, last question. On the margins, I mean can you comment what kind of margins you are getting on the IB switches and when you can get to the IB switch margins, as opposed to your Fibre Channel?

H.K. Desai - Chairman and Chief Executive Officer

I mean it's, I won't tell you exactly what the margin is, but we improved the IB margin to last few quarters and we expect to improve also in the June quarter, because we are getting a better silicon price from our current suppliers and if we continue doing that, we will probably improve the margin over times. We don't expect like we said, we had about four to six quarters. So sometime in next year I think we probably will start seeing the same margin as Fibre Channel switching.

Kaushik Roy - Pacific Growth Equities

Great, thank you.

H.K. Desai - Chairman and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Clay Sumner of FBR.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Thank you. I just want to back in the silicon question again. Was the last time buy related to the management controller business?

H.K. Desai - Chairman and Chief Executive Officer

I think it's both, management controller and also the protocol silicon.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Okay, so --

H.K. Desai - Chairman and Chief Executive Officer

I think the key really is like you might be hearing that, but this keeps changing that we have so many different protocol silicons or even a target silicon, it can be, I think sometime it's of 2 gig or 4 gig anyways. So, and the difference was on 2 gig and 4 gig, so, different customers are buying last time buys. So I think it keeps changing. So we have done this second or third time unexpectedly and you might see that one more time or two more time anyways, so that can continue, but there was some management control and also some protocol silicon.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

And was the last time buy the bigger piece of the upside, rather than the Dot Hill piece?

H.K. Desai - Chairman and Chief Executive Officer

I think its all, it's the Dot Hill piece and it also have a last time buy, and we're also getting little bit better tracks and with, if you look at the iSCSI market, it's also growing in the particular SMV's sector and if you, we have our target, silicon design with every tier one or tier two OEMs on the target silicon. So, we also start seeing some upside on that too a little more than that we expected. So, I think that's we are saying that going forward there is a two factors going to drive it, one is going to be the target silicon new design win plus the iSCSI, they can start growing, the rate is growing now a days, then I think we will probably see a flat silicon business next year.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Well and that's what I am trying to understand, so you are guiding to flat growth and yet hill is just now starting the ramp at HP. I am just curious that there is something else declining later in the year that offsets this growth.

H.K. Desai - Chairman and Chief Executive Officer

We have like; we gave you a guidance about mid single, to high single digits decline in FY'09 which is including some management controllers and so I think and some of the protocol silicons still will continue decline anyways, so.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Okay and then on the... you indicated that edge and blades switches are your primary focus now in Fibre Channel. Just curious, does that means, you no longer expect the tier one win for your AK [ph] Fibre Channel director?

H.K. Desai - Chairman and Chief Executive Officer

We never give up on anything.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Okay, but it's not focus any more, I guess?

H.K. Desai - Chairman and Chief Executive Officer

The focus is, you can look at lot of different perspectives, it can be the investment going forward, it can be the sales and marketing, the lot of different things anyways so overall focus right now, I think your resources to really drive us to.

Clay Sumner - FBR Friedman, Billings, Ramsey & Co., Inc.

Okay thank you very much and the switching?

Operator

And we'll take the next question from Glenn Hanus of Needham.

Glenn Hanus - Needham & Company

Good afternoon. Any color on the FCoE products as they roll out from kind of business model or margin perspective?

H.K. Desai - Chairman and Chief Executive Officer

I think we expect the similar margin probably, but I think Glenn, I think it's too early to say that now. I think we won't know it for till probably next year what the margin level is going to be. But it should be reasonably similar to the HPA business.

Glenn Hanus - Needham & Company

Okay thank you.

Operator

And we'll take our next question from David Cahill of RBC Capital Markets.

David Cahill - RBC Capital Markets

Hi guys, good quarter. Just a few questions. HP, you are talking about the simpler, the switch the business being a part of the simple sand bundle. Is that... through that is it standalone switches by itself or it is only part of that simple sand bundle that win in HP?

H.K. Desai - Chairman and Chief Executive Officer

It's both, it's called our simple sand kit which include our HP and the switch, in the some software.

David Cahill - RBC Capital Markets

What about the standalone products as well, can they be sold on their own or is it only part of the kit?

H.K. Desai - Chairman and Chief Executive Officer

Both.

David Cahill - RBC Capital Markets

Okay, it would seem in blade, I mean in our adaptors it seems like cards [ph] continued to be strong for you guys. Is that a function of product position or share gain or can you add a little bit of color on where the strength is coming from there?

H.K. Desai - Chairman and Chief Executive Officer

Well we have, if you remember we were leader in the mass card, when it was just silicon and I think it's continued the level. I mean we grew a few, if I look at the number in FY'08, we grew 136% year-over-year on the mass card and which is also not coming from a small base. It's a bigger numbers, than sort of other suppliers. So we grew 136% year-over-year in the mass card in F5'08.

David Cahill - RBC Capital Markets

Okay, and then I think just one question maybe for Simon, was there a change in the quarter in the revenue accounting for the geographic regions, it seems like our numbers were a bit skewed better?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

No I am not aware that there was any change in the revenue that geographical split of the business in quarter-to-quarter, no.

David Cahill - RBC Capital Markets

Okay and I'll look at it and llow-up afterward. Thank you.

H.K. Desai - Chairman and Chief Executive Officer

Yes, please do.

Operator

And we'll take our next question from Joe Amen [ph] of Robert W. Baird.

Unidentified Analyst

Hi thanks I was just wondering if you could comment a little bit more on the FCoE kind of roll-out. If you're a customer looking at adopting this kind of protocol is it an either or choice between maybe say taking an 8 gig solely private channel product or is it both or kind of how do you see the impact in the rollout of your core?

H.K. Desai - Chairman and Chief Executive Officer

I think its going to be over time, so the people who has that... there are centers done with the 8 gig and I think they will continues these things. People will... it's a new technology, so I think its going take time before people started opting it. So I think we are going to get my... what I feel is that we are going to get some incremental opportunity initially for the FCoE, and its going to take time or before it really converts the whole thing to the one network. So I think it will exist, co-exist between the Fibre Channel and the FCoE together, anyway.

Unidentified Analyst

Okay, but that doesn't make for a longer adoption cycle for the 8 gig Fibre Channel that you are rolling out this year?

H.K. Desai - Chairman and Chief Executive Officer

No, absolutely that won't because people who have their network with the Fibre Channel 4 gig are the ones going to upgrade to the 8 gig, so then it will rate for the conversion network.

Unidentified Analyst

Okay, thank you.

Operator

And will take the follow-up question from Aaron Rakers of Wachovia.

Aaron Rakers - Wachovia Capital Markets

Yes, I guess, thanks for taking the follow-up. One question on the InfiniBand switch business, you talked about the deferral taking place and by my math that could be in $3 million or $5 million of revenue. Can you talk about when that deferral gets recognized in to revenue, is it next quarter or is that couple of quarters that you recognized that?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Hey Aaron. This is Simon. It's actually over many years to come, so we will call it a few years, probably [ph] this is thinking about it, but it's certainly something that we enjoy any where near, all the benefit for in the near term and says it's going to be over a number of years.

Unidentified Analyst

Okay that's helpful and then in InfiniBand, I believe one of your competitors has talked a lot about this virtual protocol interface or VPIE, what are you guys doing on that in supporting that?

H.K. Desai - Chairman and Chief Executive Officer

I think it's too technical for me right now. So may be we can answer that later on.

Unidentified Analyst

Okay and then final question with the 8 gig, starting to kick in, I think you said $1 million dollars of revenue. Can you help us understand and what the gross margin implications are, as we see the ramp, because I think, last quarter you've noted that maybe that has a negative impact on the gross margin as that starts to materialize?

H.K. Desai - Chairman and Chief Executive Officer

I don't think we ever said that. Yes, but the overall margin is not going... over margin is going to be similar, I think it's a 4 gig or 8 gig, we don't say that's going to go down.

Unidentified Analyst

Okay fair enough, thanks guys.

Operator

And will take our follow question from Shebly Seyrafi of Caris.

Shebly Seyrafi - Caris & Company

Yes thank you. So just want a little bit more detail on $5 million in royalty. Can you talk at all about where it came from and also what's the likelihood that you get another such big royalty over the next year or two?

H.K. Desai - Chairman and Chief Executive Officer

So it's you know like we do, we've a right on it every couple of years. So we did the audit and this the is the results of that audit, so it's like over two year periods. This is adjustment for the royalty over two year periods, last two years. And if you do one of the audit after couple of years again half, whatever we don't know yet and then we probably can get something, but I don't think you expect this in the mix short term.

Shebly Seyrafi - Caris & Company

So it's possible that our over the next two years you should get another $5 million incremental on the other?

H.K. Desai - Chairman and Chief Executive Officer

It is not necessarily, really because of when you do audit and you find the problems the customer go make adjustment in there process.

Shebly Seyrafi - Caris & Company

Okay, thanks.

Shebly Seyrafi - Caris & Company

Thank you.

Operator

And will take another follow up from Keith Bachman from Bank of Montreal.

Keith Bachman - Bank of Montreal

Hi, two quickies. The impairment of marketable securities, what was that and is that going to be an ongoing, or was that the securities at we are in, was they a write-down on some of those securities, if you just little clarification and second one is the tax rate, you mentioned it was 33%, is that a good proxy for the balance of the year? Thanks

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

So, let's start with the tax rate; it is easier to do. We expect for fiscal 2009, the tax rate is going to be 33%, no change in the commentary there. Let me be very clear as it relates to the right days, my last answer was probably less than crisp. There was $6.9 million of impairments of marketable securities.

Unidentified Analyst

Yeah.

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Approximately $1 million of that related to our auction rate securities and approximately $5 million of it related to an equity position that we are having in another public company that we acquired as a result of selling our business to them sometime ago. So there was $5 million of write down associated with the sale of the hard disk controller business.

Unidentified Analyst

And so back to the question now, what are your thoughts going forward in terms of risk for incremental write downs on your basket of marketable securities, I understand the equity is probably out of there and I assume that, that's done but what else is in there that might be subject to future write downs?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

I think when you have a portfolio that is the size of QLogic investment portfolio, you are always exposing yourself to some level of risk and as we go through analysis of understanding exactly where the investment portfolio was positioned, we are always trying to maximize the yield and minimize the risk associated with that yield. So as we sit here today there is no expectation of having to take further writedowns associated with auction rate securities or anything like that but frankly it's a rapidly moving environment that the auction rates are in at this point in time and people's perspective have evolved very quickly just over the course of last couple of months. So what we've done, as you can see on the balance sheet is move $56 million worth of auction rates down to long term make and to short term. The rest of the short term portfolio was non-auction rate and we are very comfortable with the quality of the investments that we have there. And fingers crossed that the auction rates comeback at some point over the course of the next few months or few quarters or whatever it may be.

Unidentified Analyst

Okay. Thank you. Appreciate it.

Operator

And we will take a follow up from Harsh Kumar of Morgan Keegan.

Harsh Kumar - Morgan, Keegan & Company

Hey Simon, A quick question. What should we think about for share account for the June quarter?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

134.

Harsh Kumar - Morgan, Keegan & Company

Got it, thank you.

Operator

And we'll take our follow up from Jeff Brickman of UBS.

Jeff Brickman - UBS

Hey thanks, just one last question on the silicon line. During the past you kind of talked about that... I mean understanding you are going through end of life on the management side but it didn't seem like this was kind of a core focus and certainly with... I though you were a little more focused than other areas for growth. With this side hill win are you kind of giving us a base case scenario for '09 and what's your visibility into passing the gains, some other wins, and should we start thinking about this being a real growth opportunity for you.

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

No, I mean. If you look at we have about three kind of a different silicon business. One is a management controlled which we are end of life two-three years ago and this is the one we are not investing at all in any new silicones and we have stopped investing. So, that's definitely going to go away because that's not part of our core. If you look at other silicon which is either it's a protocol silicon which was on the mass card before or it can be the same silicon which we use in host adapter can be also used as a target silicon. So, we don't have any new investment into that because it is the same silicon we use for the host. So, anybody any opportunity we can get on that we can always continue to driving it. But if we get some design win I don't know but we have some tier 2 customers we have shipping it and we have some tier 1 new direct customer like Dot Hill through HP. These are our 4 gig products. So we are continuing to see. Things can change also when they have FCoE technology come. So when we say that we are not focusing in the sense that we want to make sure that we are doing our specialized development for the silicon and we are not doing it and management control we had done going forward.

Jeff Brickman - UBS

Got it, thanks.

Operator

And that does conclude the question-and-answer session. I would now like to turn the call over to Ms. Jeanie Herbert, Senior Director of Investor Relations. Please go ahead ma'am.

Jeanie Herbert - Senior Director of Investor Relations

Thank you Kevin. Thank you all for joining us on our earnings call today. I want you to note several upcoming conference that we plan to attend. In May we will attend the Baird Growth Conference in Chicago, the JPMorgan Technology Conference in Boston, and FBR Growth Conference in New York. In June we will be in New England for the Wachovia Nantucket Equity Conference. Please refer to the Investor Relations section of our website at www.qlogic.com for any updates to the conference schedule. For those of you planning to attend any of these conferences we look forward to seeing you there. Thank you very much.

H.K. Desai - Chairman and Chief Executive Officer

Thank you.

Operator

And that does conclude today's conference. We do appreciate your participation. You may disconnect at this time.

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Source: QLogic Corp. F4Q08 (Qtr. End 03/31/08) Earnings Call Transcript
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