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QLogic Corporation (NASDAQ:QLGC)

Q1 FY09 Earnings Call

July 21, 2008, 05:30 PM ET

Executives

Jeanie Herbert - Senior Director, IR

Simon Biddiscombe - Sr. VP and CFO

H.K. Desai - CEO and Chairman

Analysts

Brian Mansfield - Goldman Sachs & Co.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Glenn Hanus - Needham & Company

Tom Curlin - RBC Capital Markets

Kaushik Roy - Pacific Growth Equities

Operator

Good day, everyone and welcome to the First Quarter of Fiscal Year 2009 QLogic Earnings Announcement Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Jeanie Herbert, Senior Director of Investor Relations. Please go ahead.

Jeanie Herbert - Senior Director, Investor Relations

Thank you, Keith. Good afternoon and welcome to QLogic's first quarter fiscal year 2009 earnings conference call. On our call today are H.K. Desai, Chief Executive Officer, and Simon Biddiscombe, Senior Vice President and Chief Financial Officer.

Simon will begin the call with a review of the first quarter financial results, and H.K. will follow with the discussion of the current state of our business and progress on our strategic initiative. We will then open the call for questions.

Certain 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 certain significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We refer you to the documents QLogic files with the SEC, specifically, our most recent Form 10-K. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our first quarter earnings release... press release, issued earlier today, we reported both GAAP and non-GAAP results. The difference between the results in fiscal year 2009 is due to stock-based compensation, acquisition-related charges, impairment of marketable securities, and the related income tax effects.

A reconciliation of GAAP net income to non-GAAP net income and a summary of non-GAAP adjustments are included in our earnings press release. All of the references we will make on our call today relate to the non-GAAP results unless otherwise stated.

And now, I'd like to turn the call over to our CFO, Simon Biddiscombe. Simon?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Thank you, Jeanie and good afternoon. Our revenue in the first quarter ended June 29, 2008 was a record $168.4 million, an increase of 20% from the same quarter last year and exceeded our forecasted range of $154 million to $158 million provided during our fourth quarter earnings conference call.

Our first quarter revenue from Host Products, which are comprised primarily of Fibre Channel and iSCSI host bus adapters and InfiniBand host channel adapters, was $120.7 million and increased 16% from $104.2 million, recorded in the first quarter of last year. The increase in our revenue from Host Products was primarily driven by Fibre Channel HBA revenue growth.

During the first quarter, our revenue from Network Products, which are comprised primarily of Fibre Channel and InfiniBand switches, was $29.9 million, and increased 22% from $24.5 million recorded in the first quarter of last year. The growth was primarily driven by our Fibre Channel blade switches.

Our first quarter revenue from Silicon Products, comprised primarily of protocol chips and management controllers, was $15.6 million and increased 62% from $9.6 million, recorded in the first quarter of last year. Revenue from Silicon Products was up year-over-year, due to stronger demand for target chips, primarily iSCSI, and the impact from last time buy activities for management controllers.

Other revenue, which is comprised primarily of royalties and service revenue, was $2.3 million in the first quarter. Our first quarter gross margin of 68.7% increased from 66.3% recorded in the first quarter of last year. The increase in our gross margin was primarily due to product mix and manufacturing-related efficiencies.

Next, I'd like to cover our first quarter operating expenses. Total operating expenses were $56.5 million in the first quarter, up 4% from $54.3 million reported in the first quarter last year.

Engineering expenses in the first quarter of $29.9 million were consistent with the first quarter last year and declined, as a percentage of revenues, from 21.5% to 17.8%. 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 first quarter of $20.6 million increased 11% from a year ago and declined, as a percentage of revenue, from 13.2% to 12.2%. We expect that future sales and marketing expenses, as a percentage of revenue, will range from 11% to 14%.

G&A expenses in the first quarter of $6 million increased from $5.8 million a year ago and were 3.6% 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 first quarter increased 54% to $59.2 million versus a year ago and increased, as a percentage of revenue, from 27.5% to 35.2%. Interest and other income was $4.2 million in the first quarter, consistent with our expectations. The income tax rate of 33.9% was slightly above the annual forecasted tax rate of approximately 33%, provided during our fourth quarter earnings conference call.

Our first quarter net income was $42 million or $0.31 per diluted share and represented a net profit margin of 24.9%. Our first quarter net income per diluted share exceeded our forecasted range of $0.26 to $0.28 per diluted share, provided during the fourth quarter earnings conference call. This represents the 52nd consecutive quarter of profitability for QLogic.

Turning now to our balance sheet. Our financial position continues to be strong, especially with regard to cash flow. During the first quarter, we generated $58.2 million of cash from operations. The company's cash and marketable securities were $405.4 million at the end of the first quarter.

During the quarter, we purchased $28.9 million of the company's common stock pursuant to the stock repurchase program. Since 2003, we have repurchased over $1.1 billion of the company's common stock under programs authorized by our Board of Directors.

Receivables of $86.7 million at the end of first quarter, increased from $81.6 million at the end of March quarter. DSOs at the end of the June quarter were 47 days, consistent with the end of the March quarter.

Based on hub-arrangements at our OEM customers and our current customer and channel mix, we estimate DSO in the future will range from 45 days to 55 days. Annualized inventory turnover in the first quarter of eight turns improved from seven turns in the March quarter. Inventory at the end of the first quarter was $26.2 million and decreased sequentially from $27.5 million at the end of the March quarter.

Our long-term outlook for our core business remains favorable, and we believe we have positive momentum. However, we continue to be cautious, due to global economic issues.

As a result, we expect total revenue for the September quarter to be in the range of $168 million to $172 million, which is flat to 2% sequential growth. Due to the potential variation in product mix, we expect gross margin for the September quarter to range from 67% to 68%.

Considering the above revenue and gross 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 $0.30 to $0.31 in the September 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 earnings press release.

I will now turn the call over to H.K. Desai, our Chief Executive Officer? H.K.?

H.K. Desai - Chief Executive Officer and Chairman

Thank you, Simon. We are very pleased with our strong financial performance in the first quarter. Our revenue in the first quarter was a record $168.4 million, an increase of 20% from the same quarter last year and exceeded our forecasted range of $154 million to $158 million, provided during our fourth quarter earnings conference call.

Our first quarter net income was $42 million or $0.31 per diluted share. This exceeded our forecasted range of $0.26 to $0.28 per diluted share, provided during our fourth quarter earnings conference call.

Revenue from Host Products was $120.7 million during the first quarter and increased 9% sequentially. Revenue from Fibre Channel HBAs grew 10% sequentially, as a result of strength across a broad base of customers and products, including standard 4 gig HB adapters, mezz cards and 8 gig adapters.

Revenue from Network Products was $29.9 million during the first quarter and increased 9% sequentially. The increase in this revenue was primarily driven by Fibre Channel blade and edge switches.

Now, let me give you some color on the anticipated growth rates, based on current market dynamics for the full fiscal year 2009. We expect Host Products to grow in the high single digits, and we also expect both Network Products and Silicon Products to grow in the mid 20s. However, Silicon Products could be choppy quarter-to-quarter, due to occasional last time buys and long lead times.

Now, I'd like to give you an update on several strategic initiatives we have underway in the areas of InfiniBand, Fibre Channel and Fibre Channel over Ethernet or FCoE. Overall, we are very pleased with our progress and are confident the initiatives will yield short-term and long-term favorable results for the company.

Under our InfiniBand initiatives, we recently begun production shipments of our new QLogic TrueScale dual data rate host channel adapters. These HCAs deliver a high messaging rate and lower scalable latency than any competitive cluster interconnect. We have already seen positive traction in the HPC market for these products.

We are also in active development of our quad data rate HCAs, based on our own TrueScale QDR ASIC. The QDR adapters, based on our TrueScale ASIC, is expected to be available at the end of the 2008, with revenue contribution in calendar 2009.

Moving now to our InfiniBand switch initiatives, we recently announced that our SilverStorm InfiniBand detectors and switches are now qualified with IBM iDataPlex and 1350 systems for HPC environments. These systems are used in complex scientific and commercial applications.

Under the Fibre Channel initiatives, our 8 gig solutions lead the market. We are first to market with an end-to-end solution. The design-in and qualification cycles for ASIC products is virtually complete, and all of our existing 4 gig HBA customers are either shipping or will soon be shipping our HBA products.

Overall, customer qualifications have gone extremely well, as our 8 gig HBA software stack is almost 100% leveraged from the hardened and widely deployed QLogic 2 gig and 4 gig stack. Demand on the end-user side is building, and we anticipate a smooth transition for our HBA products.

Our Fibre Channel HBAs continue to be the clear market leader, having achieved over 50% revenue share for the first time, in the Dell'Oro First Quarter 2008 SAN Report. We anticipate a further strengthening of market share, based on our positive results this quarter.

The demand for our Fibre Channel HBA product is fueled by successfully addressing key customer requirements, including optimized for virtualization, power, RAS, security and management.

We recently announced the results of QLogic's HBA working with Microsoft Server 2008 Hyper-V... Microsoft's next generation hypervisor based server virtualizations technology. We are able to achieve near native Fibre Channel I/O performance in a virtualized environment, using our standard 4, 8 gig Fibre Channel HBAs. This is positive news for the continued adoption of virtualizations and QLogic HBAs.

On the Linux front, our 8 gig HBAs were recently certified on Red Hat Enterprise Linux 5.2, which provides improved virtualization capabilities based on XEN Hypervisor. We believe virtualizations will continue to be a driver of market absent from 8 gig HBAs, due to the higher demand for bandwidth in virtualized environments.

Lastly on Fibre Channel, we have already started early development work on 16 gig products. We intend to offer a complete suite of 16 gig products, including switches and HBAs when the technology is ready to deploy.

Given with the advent of converged networks, we believe Fibre Channel will be a thriving market for many years to come, and we are committed to serving its needs.

The last initiative, I will provide comment, is our Fibre Channel over Ethernet program. FCoE represents a major market expansion opportunity for us, beyond storage into data networking while building on leveraging the success we have achieved in the Fibre Channel and iSCSI HBA markets.

The value proposition for FCoE is build around reservations of the Fibre Channel software stack and operational model. QLogic customers would be able to take advantage of our FCoE converged products while not giving up any of the benefits of the most widely used Fibre Channel software stack. Our market leadership and number one installed base of Fibre Channel HBAs are key assets, as we move into converged network products. We believe the non-disruptive software stack aspect of the FCoE value propositions will drive a faster adoption cycles than previous technology transitions.

Evidence of the readiness of FCoE is abundant in a recent industry event, posted by QLogic. Last month, we held an FCoE test drive to assess and validate the industry's promise that our simpler and more cost effective converged network is close at hand.

A total of 14 storage server and software vendors, including NetApp, EMC, HP, Microsoft and Cisco RAM device drivers, device management software, Network management software, storage management software and business applications on an FCoE network. Participants found their hardware products and software applications easily recognized Fibre Channel and FCoE devices, because the FCoE network appeared to their products as just another Fibre Channel network.

There are more details about this event in press release we issued last week. With converged network now on the way to becoming a reality, servers will no longer require separate interfaces for data and storage networking. IT professionals can increase functionality while reducing costs and complexity by using a single set of adapters, cables and switches.

The move to FCoE will be revolutionary as the technology is being developed to allow for either full scale implementation or incremental change, while protecting investment in existing technologies. We plan to deploy our first generation of FCoE products this year, enabling early adapters.

We expect OEM revenue from FCoE to begin in second half calendar year 2009 and become meaningful in 2010. There are many factors that will govern the actual pace of adoption, but in all cases, we expect FCoE to be a major force in the data center of the future.

In conclusion, we have great opportunities ahead of us, in InfiniBand, Fibre Channel and FCoE. As we move into our second quarter, we are optimistic about our business prospects and new product attractions. However, due to the broader global economic issues, we continue to include a degree of caution in our outlook.

Globally, the need for additional storage, higher performance and virtualized solutions continues to drive demand in both large and small to medium enterprises. And QLogic is the leading supplier. I look forward to updating you next quarter on our progress.

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

Question And Answer

Operator

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. [Operator Instructions] We'll go first to Min Park with Goldman Sachs.

Brian Mansfield - Goldman Sachs & Co.

Hi, this is Brian for Min. Overall you're seeing healthy rebound in the HBA market. Can you tell us you're taking share from your competitors where more than one bp [basis point] is qualified? Or is that the case that OEMs and other platforms you are most exposed to are outperforming better? Thank you.

H.K. Desai - Chief Executive Officer and Chairman

I mean... I don't... like I said in my script that we have 50% market share, the Dell'Oro report for the first quarter. And where our results are, I'm sure we're going to gain market share on the HBA. So we are getting market share. But the key real is a strength of our HBA... Fibre Channel HBA growth to 10% sequential growth came across all OEMs. And like we have 5 top OEMs, and they all grew sequentially. We also grew our channel business. So I think growth came all across... all the customers plus across all the products, and via strong 4 gig, via some revenue coming from the 8 gigs. So I think we performed extremely well across everything.

Brian Mansfield - Goldman Sachs & Co.

Thank you.

Operator

We'll go next to Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Hey guys, first of all, congratulations, very nice quarter, very nice guidance. A couple of questions. H.K., QLogic seems to be firing on all cylinders. I mean HBA is up, network's up. Can you tell us maybe what's going on? Because that's obviously not the case, I don't think for the industry nor for your key competitors. Could you maybe just help us out, whether a lot of it is market share or is there something that's changed within the company?

H.K. Desai - Chief Executive Officer and Chairman

Well, I think what we have seen is that we have a strength in all our products. And if you look at Fibre Channel HBAs, we grew 10%. Our host business a lot of [ph] grew about 16% year-over-year. Our Network Products grew 22% year-over-year and 9% sequentially. Our silicon business also grew by $1.6 million. So, I think that key really for us is everything grew, all our customers, their strong performance. So this is not coming from like a onetime event or just not coming from our one customer. I mean that's kind of the key for us. And I think it's like, what we have done last year, which was a transition year for us. And I think we executed extremely well on the transition year. And I think we are starting the fruits of that... now this year.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Very well, very well, H.K. Question maybe for Simon. Gross margin was down sequentially. I think you mentioned product mix. Could you tell us what happened or what the product was that is down? And I think your guidance also is calling for somewhat lower margins again.

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Sure. So, Harsh, if you actually look at the numbers I used in my script that was the year-over-year comparison. Your observation that they were down sequentially is absolutely correct. They were down from 69.8% to 68.7%. And if you recall in the fourth quarter, we actually had a fairly significant royalty number that impacted the other revenue stream. Now it was obviously at roughly 100% gross margin.

So, if you back that out from last quarter's number, it was essentially flat sequentially from a gross margin perspective, at right around the 68.7% number, okay. So, sequentially, let's say, it's flat if you extract royalty from the previous quarter.

As you look forward, again, we're primarily pointing to product mix at this point in time, as being the major driver for the 67% to 68% guidance that we've provided as opposed to the 68.7% that we achieved last quarter.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Got it. That's very helpful and last question, and I'll give it to somebody else. Silicon business, sort of coming back, I think you mentioned H.K., there are two pieces to it, iSCSI and management controllers. Would it be possible for us to give us the breakdown, one? And within those two products, as you look for your mid 20s guidance, should we assume that iSCSI silicon is the business that's growing or am I incorrect in assuming that?

H.K. Desai - Chief Executive Officer and Chairman

We don't break down these things, and the management controller is the one, which we... end-of-life... I don't know, about two to three years ago and I think we expect, will be driving the company [ph] one or two quarter, maybe one quarter. And I think that is going to go away in a couple of quarters completely. And lot of growth what we say it which is going to come from a target silicon either iSCSI or Fibre Channel. And I think that's where most of the growth will come from in the future. I think the key take what we said in the prepared remark Harsh is that, it's going to be about mid-20s growth rate year-over-year. But it's still going to be choppy quarter-to-quarter, because of the long lead times, and some of the last time buys still continuing, I think it's going to be choppy business. So but overall we expect to grow about mid-20s in FY09.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Thanks guys and again great guidance. I'll come back. Thank you.

H.K. Desai - Chief Executive Officer and Chairman

Appreciate it. Thanks a lot.

Operator

We'll go next to Glenn Hanus with Needham.

Glenn Hanus - Needham & Company

Hi guys. Can you give us a breakdown on the segment guidance for next quarter?

H.K. Desai - Chief Executive Officer and Chairman

What we're saying is that we're going be flat to 2% sequential growth, and we expect all of our business to grow sequentially.

Glenn Hanus - Needham & Company

Okay. Can you give us any color between the Host and the Network side on?

H.K. Desai - Chief Executive Officer and Chairman

I think Hanus that I think it's very difficult to predict really at this stage.

Glenn Hanus - Needham & Company

Okay. Maybe could you talk a little bit about your market share gains in the HBAs given maybe there's not a huge disparity between you and your competitor? Can you maybe drill down a little bit and talk in a little more depth? I think they've talked some about the business being driven a little bit more by server vendors instead of storage vendors, and perhaps you're in a little better positioned that way. Could you give us a little color on why you think you're... you have been gaining and you should continue to do so?

H.K. Desai - Chief Executive Officer and Chairman

Well I mean, I think it's really key for what we believe in it. It's like we have a great performance in our products that's of two gig, four gig or eight gig and most of the revenue right now is coming from four gig. So performance is well. Our performance is also real well compared to any of our competitors on the virtualized environment, as we perform extremely well in the virtualized environment. Quality, reliability of products are really good. We have like five years warranty versus three years to most of our competitors. And we see a strength across everything, and I don't think the strength is coming because of the mezz cards, people are believing a mezz card is growing for us sequentially again. If you look at our mezz card number really it's the breakdown... mezz card is less than 20% of our revenue for the HBA anyways. So the strength is really coming from overall all HBAs.

Glenn Hanus - Needham & Company

How about the just you're little better positioned, kind of with some of the server vendors, and perhaps they drop the ball there a little bit, any thoughts on that?

H.K. Desai - Chief Executive Officer and Chairman

I really don't want to [ph] comment on my competitors.

Glenn Hanus - Needham & Company

Okay. Thank you.

Operator

We'll go next to Tom Curlin with RBC.

Tom Curlin - RBC Capital Markets

Hey. Congratulations on another good quarter. Do you think you're taking meaningful share right now because if you just do the numbers. The compares for you guys versus last year make not only the numbers you did, just now fairly easy. But if you look at your guide, it states very easy. So how much of this is share gain versus compares? And then does that set us up really for the share gain opportunities with 8 gig?

H.K. Desai - Chief Executive Officer and Chairman

I think we... only thing we can tell you, the only data we have is that, we have a 50% share when the Dell'Oro Report came out of the first quarter. We don't know what's going to happen because with our number and size [ph] we expect to gain the share. We don't have exactly what the number is going to be. But if you look at what we announced today, for example, 10% sequential growth in the Fibre Channel actually is a tremendous growth for us. So I think we expect share gain to continue. But I mean, I don't know I cannot really point to anything, and I'm not expert at this thing. You guys are really good at share numbers all the time anyway. So you guys point... should figure it out and tell us what's going on.

Tom Curlin - RBC Capital Markets

Do you think, you mentioned strength in blades right on the adapter side, strength in switches? Do you think there is a systemic kind of accelerated mix shift to blades and maybe your historical strength there is paying off for you?

H.K. Desai - Chief Executive Officer and Chairman

Well I don't think I really buy into that reasoning, because if you look at... yes we grew... we continue growing our mezz card business. But if you look at... when we look at our data as a mezz card, HBA revenues are less than 20% compared to all our HBA revenue anyway. So I think our strength is coming from everywhere.

Tom Curlin - RBC Capital Markets

Okay. And then just timing of 8 gig cycle, where do you... did you guys give a metric on percent of adapter, 8 gig adapter shift in the mix? And what do you think that mix will look like by, let's say, calendar year-end?

H.K. Desai - Chief Executive Officer and Chairman

So we are... I think we... if you look at our number we had about... if you look at Fibre Channel HBA revenue and putting the mezz card in the standard HBAs, they only have the 2 gig... was approximately about 5% of the revenue breakdown wise, almost all majorities came from 4 gig and now we start ramping the 8 gig. We are done with design-in cycles. We are done with the qualifications. Some OEMs start shipping last quarter, some are shipping this quarter. So I think we expect to continue to ramp. I think it's very difficult to predict what's going to happen. I mean we gave some number, but the key really is, it's going to tie to the OEM product cycles and we start shipping those 8 gig when their products cycle is there. They're just not going to go and upgrade from 4 to 8 gig. It has to tie to their server platform, so to storage platform anyway. So I think that's why... I think it's difficult for us to predict what's going to happen. But I think we are very happy with what's happening in the markets, because we have a strong position also on the 4 gig.

Tom Curlin - RBC Capital Markets

Just following up on that, this is my last question. So, I mean just very roughly right, I mean do you think it can hit 50% by calendar year-end or is it less than 20% or is it somewhere in the 20% to 50% range? What's your best?

H.K. Desai - Chief Executive Officer and Chairman

This year you mean?

Tom Curlin - RBC Capital Markets

Yes, by calendar year-end?

H.K. Desai - Chief Executive Officer and Chairman

Yes. I think it's... will be less than 15%.

Tom Curlin - RBC Capital Markets

Okay. Thank you very much.

Operator

Our next is Kaushik Roy with Pacific Growth.

Kaushik Roy - Pacific Growth Equities

Congratulations on the great quarter and guidance. I have two questions. First is, can you comment on the acquisition of Foundry by Brocade? Do you feel the need to buy Ethernet vendor to be a player in the FCoE? And then my second question is on InfiniBand?

H.K. Desai - Chief Executive Officer and Chairman

What was the second question?

Kaushik Roy - Pacific Growth Equities

Second question is on InfiniBand? I'll --

H.K. Desai - Chief Executive Officer and Chairman

Okay. You'll come back again.

Kaushik Roy - Pacific Growth Equities

Yes.

H.K. Desai - Chief Executive Officer and Chairman

So I think what we... if you look at our script, what we're seeing and we're focusing lots on the converged network for the last couple of years and more than that. I think we are in a great position as far as adapter is concerned on the converged network. I think what the acquisition is telling us that what we believe for a while that converged network is going to happen. It's a right way to do in the future because it's going to be same adapters either for the data or for the storage, the same switches, same cablings, it's going to be easy to use. It's going to take some time for the adoption any way but I think this is going to happen eventually.

So we start investing; only having lot of people under this thing [ph]. So I think we are in a great shape. We already have Ethernet technologies like we said in the past because of the iSCSI investment we did in 2000. So we've about six to seven years of expertise on the Ethernet, and we're using that to design our converged network adapter. So I think we're in good shape there. We said in the past also that we don't expect to address the Ethernet switch market, because there are so many players there. And we don't have Ethernets stacks. So we're not going to go and do any switch boxes for the converged network, because of the Ethernet. And there are enough Ethernet players in here. What we'll do is we're looking at, maybe we can invest something into or we can address the blade switch market for that, but that's what's we're looking at. But we're not going to invest into Ethernet switching because there is no place there.

Kaushik Roy - Pacific Growth Equities

Blade switches for Ethernet?

H.K. Desai - Chief Executive Officer and Chairman

The converged network.

Kaushik Roy - Pacific Growth Equities

Okay. Converged FCoE, okay. And then seems like most of the traction you got was from Fibre Channel side. HBAs did very well. The blades did very well. But can you comment what's happing in the InfiniBand space? I mean is it not growing? Can you comment on the HCAs and the IB switches?

H.K. Desai - Chief Executive Officer and Chairman

So, we have... on IB switches, if you look at, we grew sequentially for the IB switch business like what we said in the prepared remarks. We expect in FY09 to grow by 40% or more on to the IB switch, so we're growing. So despite some deferred revenue we still had this quarter... we still grew IB switch business. So I think we are very happy with that growth, and 40 percentage year-over-year growth is going to be pretty good for us.

On the HCA side, we just announced the DDR product. So we are late to the market. The revenue was not meaningful this quarter... last quarter, and see what happen in the future anyway. But overall we are very happy with the IB and way it's growing.

Kaushik Roy - Pacific Growth Equities

And then one last question for Simon. Simon, it seems like most of your revenues are... I mean your non-U.S.... your U.S. revenues came down from 56% to 48% in one year. So what are your expectations for tax rate for fiscal '09?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

We did say in the prepared remarks, Kaushik, that we still expect an effective tax rate of approximately 33% in fiscal year 2009. No change in the expectation.

Kaushik Roy - Pacific Growth Equities

Okay, great. Thank you.

Operator

We'll go next to John Slack [ph] with Citigroup.

Unidentified Analyst

Hey thanks for taking my call. Just a couple of quickies. Most of the questions have really been hit on. I'm just wondering if you could talk a little bit on the strength of the business. If you could talk maybe by vendor platform, if there was any particular platforms that were stronger than the other or is it... you mentioned it was balanced, but just trying to get a little more of a beat on that?

H.K. Desai - Chief Executive Officer and Chairman

I think it is really... where we're surprised really is the strength came across all OEMs like, when I give a statistic about the top five OEMs, I always say in the past that maybe three grew and two down, or maybe one flats on. This quarter we saw, we have sequential growth with our all top five OEMs, so really strength came across all OEMs.

Unidentified Analyst

Great. And then maybe follow up on the FCoE stack, you talked about little quicker adoption, I think, than other technology curves. What should we be thinking about in terms of kind of a faster revenue recognition in terms of the timeframe there?

H.K. Desai - Chief Executive Officer and Chairman

So we... I think the key really is that, the reason we believe that it's going to be a quicker adoptions than the past technology transition because the software stack is a key always in any technology transition. When a technology transition happens, hardware doesn't make much difference. I think the software stack is the key. So if you look at the FCoE for the adapter side, the software stack has exactly remained the same at what the Fibre Channel software stack is. Either it's our Linux driver and we have seen it and we have done with some testing with the OEMs with some of the customers that if you look at our Fibre Channel driver software stack can also run the FCoE.

So I think that's going to be the key for us, and we have largest installed base on the Fibre Channel, I think. So we are in a great position to really grow our business in the FCoE adapters.

Now if you look at a timeframe, we are already sampling the FCoE adapters. We announced last quarter, we are going to start shipping our first product in... and some revenue coming in the... we start shipping the product this year, our first generation of the product. Revenue can come second half of calendar 2009 and then the meaningful revenue come in 2010. That's what's our expectations, so, this is normally faster than the other technology transition.

Unidentified Analyst

Great. Thanks a lot, nice quarter.

H.K. Desai - Chief Executive Officer and Chairman

Thanks.

Operator

And we'll go next to Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Hey guys, quick follow up. I think you mentioned QDR ASIC and I think you mentioned at your own ASIC. Am I to then suppose that you're coming out with your own ASIC H.K., for InfiniBand products?

H.K. Desai - Chief Executive Officer and Chairman

Yes, what we're saying is a QDR ASIC, we have our own DDR ASIC for IB InfiniBand HCA; it's for the HCA not for the switches. And when we talk about QDR ASIC also, which is coming out end of this year, is also for the HCA, not for the switch.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Got it. Okay, that's helpful. And just kind of listening to your comments, it seems to me and maybe I'm reading into it too much, business is very strong. You're not seeing anything fundamentally weak with your end markets or your customers. And then I look at your guidance and I'm basically assuming that you are being somewhat cautious. Would that be a correct read, H.K.? Again you had a massive bid and hade to come and pre-announce, is that the right way to look at it?

Simon Biddiscombe - Senior Vice President and Chief Financial Officer

Harsh, it's Simon. We actually said in our prepared comments that we're being cautious as a result of the macro environment that we're also here experiencing today. Let the whole series, and difference factors we've built into the guidance, model obviously and hopefully we've given appropriate consideration to each of those as we give you the guidance as we've given you today. So, yes, we're still cautious about the macro environment within which we operate. And we're going to continue to operate appropriately.

Harsh Kumar - Morgan, Keegan & Company, Inc.

That's very fair. Thanks guys.

Operator

And this does conclude our question-and-answer session. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Jeanie Herbert - Senior Director, Investor Relations

Thank you, Keith and thank you all for joining our earnings call today. I want to note several upcoming conferences that we plan to attend.

In August, we will be in San Francisco for the RBC Capital Markets Communications Media and Technology Conference. In September, we plan to attend the Citigroup Global Technology Conference in New York, the Morgan Keegan Equity Conference in Memphis and the Deutsche Bank Technology Conference in San Francisco. Please refer to the Investor Relations section at our website 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 then. Thank you for being on our call.

Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time.

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Source: QLogic Corporation F1Q09 (Qtr. End 06/30/08) Earnings Call Transcript
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