Emulex Corporation F4Q08 (Qtr End 06/29/08) Earnings Call Transcript

Emulex Corporation (ELX)

F4Q08 Earnings Call

August 07, 2008 5:00 pm ET

Executives

James M. McCluney - President, Chief Executive Officer, Director.

Michael J. Rockenbach - Chief financial Officer

Jeffrey W. Benck - Chief Operating Officer, Executive Vice President

Steve Berg - Senior Vice President of Corporate Development

Analysts

Glen Hanus - Needham & Co.

Jayson Noland - Robert W. Baird & Co.

Clay Sumner - FBR

Min Park - Goldman Sachs

Kaushik Roy - Pacific Growth Equities

Aaron Rakers- Wachovia

Paul Manksy - Citigroup

Keith Bachman - Bank of Montreal

Presentation

Operator

Welcome to this Emulex Corporation fourth quarter conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the conference over to the President and Chief Executive Officer, Jim McCluney.

James M. McCluney

I am Jim McCluney, CEO and President of the Company and with me today are Mike Rockenbach, our CFO; Jeff Benck, our COO; and Steve Berg, our Senior Vice President of Corporate Development.

Mike Rockenbach will start off with prepared remarks with the fourth quarter and full fiscal year 2008 results. I will follow with my comments on the fourth quarter and a discussion of our markets, and Jeff will talk about our action plan for the coming fiscal year. After that, I will provide some concluding remarks and we will open the line for questions.

Michael J. Rockenbach

By now you should all have Emulex’s Fourth Quarter and Full Year Fiscal 2008 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 without limitation statements regarding Emulex’s business, operations, and anticipated financial results for the first quarter of fiscal 2009 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, research and development activities, the inability to achieve the expected benefits from our globalization initiatives, and the risk and uncertainties described in Emulex’s SEC reports filed under the Securities Exchange Act of 1934 including Forms 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, and 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 its 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 and Reg G, you will find reconciliations 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 August 2009. I would also like to remind participants that if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording.

Sales for the fourth quarter ending June 29, 2008, totaled $112.8 million, a decrease of 11% over the prior year’s quarter and a 12% decline from fiscal Q3. Q4 fully diluted earnings per share of $0.22 decreased by 35% compared to $0.34 reported in the fourth quarter of the prior year and was down 29% sequentially from $0.31 reported in the prior quarter.

Now, let me discuss the revenue results for the quarter by product line. Beginning with our Host Server Products or HSP, which consist primarily of standard host bus adapters, custom form factor cards for Blade servers, and ASICs used in server applications. HSP revenues totaled $84.4 million, a decline of 10% from the fourth quarter of last year and down 1% sequentially.

Revenue from board level products for the fourth quarter declined 9% year-over-year; however, units grew 2% and ports grew 14%. The average selling price for board level products declined by 11% year over year, which is below the annual ASP decline rate of 12% to 15% that we use in our model.

Our results for the quarter benefited from the increased mix of dual-channel adapters, which now accounts for nearly 45% of our stand-along HBA revenues. Sequentially ports for our HSP board-level products increased by 7%, units increased by 4%, and revenues were essentially flat for the third quarter. ASPs declined by 4% in the fourth quarter. It’s worth noting that on the like-for-like basis, our ASPs are fairly predictable with contractual decreases ranging from 0% to 3% per quarter, so the primary driver for change in our ASPs is product and/or customer mix.

As we discussed at our Analyst Day in May, we are seeing a trend in HBA sales towards server OEMs rather than attached kits from the storage OEMs by the distribution channel. HSP’s revenues for our four largest server OEMs grew approximately 12% sequentially. In particular, mezzanine cards for Blade Servers continue to show strong revenue growth of 14% sequentially and 120% year-over-year.

ASIC revenue on HSP comes from a small number of OEMs which increases the volatility of these revenues. After growing more than 50% sequentially in the third quarter, revenues were down nearly 40% sequentially in the fourth quarter.

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. ESP revenues for the fourth quarter totaled $28.3 million or 25% of total revenue compared to 33% in the third quarter. ESP revenues decreased 33% sequentially and are essentially flat from the prior year’s period.

As we discussed in our third quarter conference call back in April, we were modeling for ESP revenues to be down; however, the final results were lower than we expected. The biggest impact on Q4 was some slowness in orders coming after a strong ramp from initial product launches in Q3. Historically we’re seeing it can take several months after initial product launch for our end customers’ demand to normalize, and at this time, we are modeling for ESP revenues to be flat to slightly down during the September quarter, which should be the bottom of this cycle. Jim and Jeff will provide some more color on the trends in the embedded market.

The balance of revenue came from Intelligent Network Products and others which were not significant during the current quarter; however, Q4 2007 include $3.9 million in revenue primarily for engineering services related to an agreement that was in place prior to our acquisition of Aarohi.

Geographical and customer breakdown for our revenues is included as supplemental information in our press release.

As we further discuss the income statement, we will be primarily discussing our non-GAAP results unless otherwise noted. Our press release includes a reconciliation of the differences 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.

Fourth quarter gross margins of 68% increased 1 percentage point from the 67% reported in the third quarter and the comparable period of last year. If you were following us last year, you may recall that our fourth quarter of 2007 gross margins benefited by a percentage point from the previously mentioned engineering services revenue.

As we previously discussed over the next several years we expect our embedded products and our mezzanine cards will grow faster than our standard HBAs. We’re modeling for gross margins to trend down as lower-margin products become a larger portion of our revenues.

Turning to our operating expenses, during the fourth quarter OpEx increased 9% over last year, but spending remained essentially flat compared to the third quarter at $51.8 million. Operating expenses increased as a percent of revenue to 46% compared to 40% in the prior quarter.

On a GAAP basis, Q4 R&D expenditures increased 1% sequentially to $33.4 million compared to $33 million in the third quarter. Q4 R&D included $3 million of stock-based compensation. We expect quarterly R&D spending to vary depending on the timing of new product development expenses.

Compared to Q3, fourth quarter sales and marketing expenses were essentially flat at $15.7 million on the GAAP basis. Q4 sales and marketing expense included $1.3 million of stock-based compensation. GAAP G&A expenses increased to $11.5 million in Q4 compared with $9.7 million in Q3. Q4 included $4.4 million of stock-based compensation, severance, and associated charges.

Q4 operating income of $24.7 million was down 28% sequentially to 22% of revenues. In the short-term, only a small portion of our expenses varied based on our revenues. Consequently modest changes in revenue can have a more dramatic impact on our operating income and margins in the given quarter.

Non-operating income in the fourth quarter was $2 million compared to $2.9 million in the prior quarter and $3.5 million in the fourth quarter of last year. Although our cash investments increased during the quarter, significant cuts in short-term interest rates had a meaningful impact on our interest income and we expect rates to remain low for at least the next 2 quarters.

Fourth quarter net income was $18.2 million, a decrease of 38% from the prior year results and a 29% sequential decrease. The tax rate for the fourth quarter was 32%, up from 31% in Q3 and 28% in the fourth quarter of 2007.

We are budgeting for a non-GAAP tax rate in the 37% range for the first quarter of 2009. Our net profit margin for the quarter was 16% compared to 20% in the third quarter and 23% in the fourth quarter of last year. For the fourth quarter on a GAAP basis, we report operating income of $8.8 million and a net loss of $50.4 million resulting in a loss per share of $0.61.

The difference between GAAP and non-GAAP income in the fourth quarter is attributable to amortization of intangibles, stock-based compensation, severance, and associated charges, and tax expense related to our global initiatives. FAS 123(R) expense reduced GAAP earnings by approximately $0.06 per diluted share this quarter.

Let me expand a little bit on our global initiatives and their impact on our 2008 results. During 2008 we kicked up several initiatives to more closely align our business with our customers focusing on our international operations. For example, last year we opened a sales office in Germany, in June we completed the creation of an Irish subsidiary with staffing well underway, and in July we opened a sales office in Japan.

While we expect our GAAP and non-GAAP results to benefit from these initiatives in the future, the estimated tax expense of approximately $58 million is primarily associated with the initial prepayment resulting in a GAAP loss for the fourth quarter of 2008. For the full year we are modeling for a GAAP tax rate of approximately 65% for 2009 with potential benefits in 2010 and beyond.

Turning to the balance sheet, we exited the fourth quarter with total cash and investments of $350 million, and this represents an increase of approximately $18 million from the end of the third quarter. Inventories increased $3.6 million sequentially primarily due to the lower than anticipated revenues; however, our inventory turns of 8.5 remained in our target range of 8 to 10 turns. Our Q4 receivables decreased sequentially by $5.8 million to $61.6 million. Depreciation in the fourth quarter was approximately $5.1 million compared to $4.7 million in the third quarter and capital expenses during Q4 increased to approximately $10.1 million compared to $4.4 million in the prior quarter. The increasing capital expense was primarily related to leasehold improvements in our US facilities, our movement to a new facility in the UK, as well as continued investment in R&D equipment.

For the full fiscal year 2008, revenues were $488 million, an increase to 4% over 2007 and representing our 10^th consecutive year of top-line growth. Non-GAAP diluted EPS was $1.13 compared to $1.14 in 2007 and GAAP net loss per share was $0.09 compared to diluted EPS of $0.34 in 2007.

Before I discuss our targets for the first quarter of fiscal 2009, 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 our public filings with the SEC and the Safe Harbor statement at the end of our earnings press release. As a result of these risks and uncertainties, we are unable to predict with accuracy what future quarterly results might be, and there’s 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 first quarter ending September 28, 2008, could amount to approximately $108 million to $111 million, which represents a sequential decline of 2% to 4% and a decline of 5% to 8% from the prior year’s first quarter. If we achieve revenue in this range, we anticipate non-GAAP earnings per diluted share of $0.18 to $0.20 assuming a 37% tax rate.

We expect GAAP charges of approximately $0.18 per diluted share in the first quarter. The difference between our GAAP and non-GAAP figures is primarily attributable to expected amortization of intangibles, stock-based compensation, severance and associated charges, and additional estimated tax charges related to our global initiatives.

I also want to note in regards to our cash balances for Q1, we are expecting a larger than normal tax payment in the range of $40 million. This is primarily associated with our global initiatives.

Finally, as you may have seen in our earnings release, we anticipate completing the remaining $40 million available under the 2006 board-approved share repurchase plan during the first quarter.

I will now turn the call over to Jim who will provide some details on the quarter and an update on the company’s growth strategies.

James M. McCluney

Clearly the fourth quarter results are disappointing compared to the guidance we gave at the beginning of the quarter and reaffirmed at our Analyst Day in May. In response, I can assure you that we are aggressively adjusting our near-term strategies to improve product demand visibility, revamp our operations, and to ensure that our spending is appropriately aligned with our revenues. My intent is to get the business back on track, regain market share, and at the same time continue to invest in new products and market opportunities that we believe will provide longer term diversification in growth.

Now, let me go through some of the specifics of the quarter.

As you heard from Mike, revenue for the quarter was $112.8 million, an 11% decline versus the fiscal fourth quarter of last year and a sequential decline of 12% while our fourth quarter EPS of $0.22 was down 35% from the prior year and 29% sequentially. HSP revenue of $84.4 million declined 10% from the same quarter last year and was more or less flat sequentially. While we believe there were some continued economic impacts to our enterprise HBAs, especially within the financial services vertical, another more pronounced crosscurrent adversely affected sales.

During the HSP portion of our Analyst Day, one of the trends we discussed was a shift in end-user buying patterns towards server OEMs rather than attached kits from the storage OEMs via the distribution channel. As you know, we have achieved a broader range of qualifications at key server OEMs like IBM, HP, Sun, and Dell. Collectively these server OEMs show a double-digit sequential and year-over-year revenue growth in the June quarter. Although these sales increases were very positive, they were insufficient to offset the drop in HBA sales we saw through the distribution channel in June. Server OEMs tend to pull products fairly linearly throughout the quarter, whereas the channel tends to be more backend loaded in the latter months of the quarter. During the fourth quarter, we didn’t see the typical uplift in the last couple of weeks in June as we have seen in prior June quarters. While HSP revenues did not meet our overall expectations, we know where we will focus to get the market share needle moving back in our direction again.

Turning to ESP, revenue came in at $20.3 million essentially flat year-over-year but reflected a 33% sequential decline. This was a disappointing performance and one which had the greatest impact on our June results. In reviewing our third quarter revenue with you in April we highlighted the ESP growth was particularly strong showing 18% sequential and 29% year-over-year increases.

Both the December and March quarters saw the launch of several embedded design wins across both our InSpeed switch products and the Fibre-Channel-to-SATA bridges. As we’ve discussed in prior quarters, the demand for embedded products can fluctuate as our customers ramp up for new product introductions, and as you would expect, this gets compounded when several OEMs are launching in a relatively short period.

In our April guidance, we modeled for a decline in ESP revenue as of embedded OEMs walked through the inventories in the fourth quarter. However, our final results reflected a larger decline than we had anticipated. Just to be clear, we did not have any customer or project cancellations, but we have not yet realized the anticipated revenue growth from the design wins we launched during fiscal 2008. We also need to do a better job of monetizing those wins and will have to improve our capabilities in demand forecasting for the ESP.

Having said that, based on the customer demand, we’re expecting a relatively flat quarter for ESP in September with a tangible recovery in the seasonally strong December quarter. Despite these operational issues, I remain confident in the future growth prospects of our ESP business, and as Bob Whitson, the GM of our embedded products highlighted in our Analyst Day in May, we have a solid pipeline opening up for future growth. We see increasing demand in bridging and other opportunities to support the transition of solid state drives in the enterprise. We also discussed an increasing demand from our OEM customers to leverage our systems expertise by providing board-level products instead of traditional ASIC solutions. Executing in both of these opportunities will be key to accelerating our ESP revenue growth.

Now let me turn my focus to overall expectations for the coming quarters. Although there is still a lot of speculation and debate when broader economic prospects will improve, all indications are that the market for storage is vibrant and storage networking products remain the standing priority of IT managers. I also believe that the undercurrent that impacted our business will be largely behind us as we exit the September quarter. This is anticipated in our September quarter revenue guidance of between $108 and $111 million and diluted EPS guidance of $0.18 to $0.20. Furthermore, as we execute our new strategies to gain share in our existing markets, we are expecting a sequential increase in the December quarter to be more pronounced than normal.

Looking beyond 2008, we are accelerating our investments internally in innovative new business opportunities that will help fuel revenue expansion in the years to come. In addition, our global initiatives will not only tap into high-growth emerging markets and better align us with our partners and customers, but will also give us an effective tax structure in the later years that will complement the return on these investments.

While diversification and revenue growth remain the primary strategy for using our cash balances, we will also use a portion of our cash to increase shareholder return and improve earnings through our 2006 share re-purchase program.

As we highlighted in our earnings release, we will be active in the open market during the first quarter to complete the approximate 40 million of share re-purchasings remaining under the existing board-approved plan. Looking forward, the board has approved an additional 100 million of share re-purchases.

Lastly before I close my portion, I’d like to make some comments on our organization which has changed over the last several months. With the addition of Jeff Benck in May as our COO, we’ve added a wealth of operation experience and focus that will be a tremendous asset as we take Emulex through this next phase. We’ve also added new leadership in human resources and organizational transformation with the recruitment of Susan Bowman to our executive team.

We integrated HSP and IMP into a single product line to better leverage convergence in the HBA and CNA adapter markets, and we’ve also made some recent changes in sales and marketing to infuse new leadership into those functions with the intent to provide a focus on strong execution in our core business. The changes that we’re making will stabilize our base business and more aggressively address opportunities to gain market share.

Now with that let me turn over to Jeff for some color on the business opportunities and our strategies for fiscal 2009.

Jeffrey W. Benck

Let me start off by saying we’re in an interesting time of transition and consolidation in the industry, and this is creating a lot of new opportunities for Emulex to grow its business. Virtualization is still and just beginning to be implemented. This provides new opportunities for Emulex’s or customers moved to network storage environments in order to get the biggest return from virtualization. Our focus has been on enabling our adapters to be efficiently managed in virtual environments and this has allowed us to participate in a disproportionate amount of this business. Mega data centers is another key trend that is driving the need to both scale-up to larger virtualized systems and scale-out to high-density stacks of rack and blade servers. These dense consolidated systems will drive the need for high bandwidth storage networking products like our 8 gig Fibre Channel and 10 gig Ethernet FCoE products.

At our Analyst Day, we talked quite a bit about the fact that network convergence is the next natural phase of consolidation. Our technologies like FCoE will be critical to facilitate that trend and enable our clients to receive maximum benefit from this consolidation while at the same time protecting the significant investment our install base has already made in Fibre Channel SANs.

Data integrity and security continue to be top priorities of IT managers and a focal point of our investments. We have several ongoing initiatives with our server and storage customers to provide end-to-end solutions in this area.

These are just a few opportunity areas that have emerged from the changes that are going on in the industry. Our investments will continue to focus on innovation that is relevant to solving customers’ problems. Our success relies on Emulex being a leader in these technologies and bringing the best in class products to the market at the right time.

With that as the ground work, let me talk about our specific plans for Q1 and make more general comments on the year ahead.

Our action plan is focused on market share gains, international expansion, and continued innovation. We are aggressively adjusting our sales and marketing strategies to get back on track and stem the share loss sustained last quarter. Our objective is to realize near-term gain but equal important is making sure that these are sustainable. One of our challenges is that we are underrepresented in blade servers where our market share is 27%. In response to the shift in buying patterns, we are re-doubling our efforts to increase penetration at server OEMs. The 8-gig transition is well timed to help with this effort.

Virtualization is a hot topic in the data center. It continues to be another key growth opportunity. Today, only 8% of servers are virtualized but that number is growing quickly. We expect to maintain a market share of greater than 50% during this growth. Again, a strong position in server OEMs will be key to our success, particularly in the blade server form factors which are predicted to grow significantly faster than the overall server market.

When we look at our levels to market, the one to many relationship achieved through leveraging distribution channels is an efficient model to address emerging market opportunities providing a regional focus on a global level combined with closer alignment of sales and marketing efforts with our partners will be essential to gain early foothold as these emerging markets begin to deploy SANs.

In order to reduce business risk, we are making a better effort to drive revenue diversification by focusing additional efforts with new emerging customers, by dedicating specific resources to help our smaller customers embrace our technology, we believe there are some competitive opportunities that represent meaningful growth for us.

On the embedded side, the buying pattern of storage components is significantly different from that of HBA. Our task in ESP is to improve our visibility of the pipeline through manufacturers and ultimately the OEMs own channel so that we can provide more predictable results.

One opportunity we have is to leverage our incumbency in technology in the embedded space. We believe that we are uniquely positioned through the coupling of our CNAs with our embedded products to drive FCoE into the embedded markets as its point takes place over the next several years.

Not all of our opportunities are here in the US. As Mike described, we are well underway in our efforts to grow an international presence with the creation of an Ireland operation focused on supporting our increasing international demand. In addition to the expanded European operations, we are also growing our footprints in the Asia Pacific market. As an example, we recently opened a sales office in Japan, and of course, our globalization plans aren’t limited to sales and operations as we continue to invest in global R&D capability. We are expanding our Bangalore Engineering Lab as part of our strategy to build leadership products through the efforts of a global development team

Our international objective over the next 12 months is to expand sales, marketing, and operation support locally in EMEA and Asia. Virtually all of our customers are focused on meeting the demands in these and other emerging growth markets and Emulex is making the investments in these regions right alongside of them.

A strong product sense is essential for tapping into these developing markets. We are well positioned for the 8-gig Fibre Channel link speed transition and see deployment and certification momentum continuing over the next few quarters with revenue ramping in fiscal year 2009 as these design wins go into full production.

During the third quarter we talked about 22 8-gig Fibre Channel design wins. We now have design wins in every major OEMs as well as supports the VMware Microsoft Virtual environment.

Earlier this week we announced qualification with EMC CLARiiON as part of their CX4 launch. In addition, this quarter, we announced 80 qualifications at HP and IBM. These products are available with new performance, advanced virtualization and security features while maintaining backward compatibility with existing 4 and 20-gig Fibre Channel products.

The other product announcement we made in Q4 was our conversion network adapter. Our LightPulse 21000 utilizes 10-gig Enhanced Ethernet networks running the FCoE protocol to enable both network and storage traffic to run simultaneously. This product has been shipping to end-users since March and the OEM qualification process is fully underway. We expect additional qualifications throughout the remainder of the year.

In summary, we will leverage our collective strength across the company from our host product lines to our embedded storage business. We will continue to play a vital role in connecting our clients to their critical information across multiple protocols from server to storage device. It is our trusted abstraction layer in the storage space and our rock solid enterprise software stack on the host server side that supports the foundation of this end-to-end strategy. We believe FCoE and SSD technologies represent significant inflection points in the market. Our proven history of providing multi-protocol solutions and ensuring investment protection enables our customers to benefit from these new technologies and uniquely positions us as these transitions occur.

While we still have a lot to do, we’ve set the wheels in motion onto new initiatives and we are moving in the correct strategic direction. We are reinforcing our performance-based culture and asking the team to deliver innovation that matters. I’m excited about the people and opportunities here at Emulex and I look forward to reporting on our progress over the coming quarters.

James M. McCluney

We’ve covered a lot today, so let me conclude with some key summary points. Our June results were below our expectations. We’re taking steps to address the issues that created the challenges. Our September quarter guidance of $108 to $111 million in revenue and $0.18 to $0.20 in diluted EPS is the low water mark. We understand the issues and challenges in what we have to do to get the business back on track. We do not anticipate any major changes to our overall business strategy, but we’ve taken a hard look at our operations to ensure that the investments we’re making deliver value to shareholders. We remain committed to profitable revenue growth combined with our balance investment in our existing products as well as in the new trends for the data center that take advantage of our expertise. We also realize the importance of diversifying our revenue stream. Opportunities like board-level solutions in our embedded business, capitalizing on the introduction of SSDs to enterprise storage, virtualization and data integrity are just a few of the places we are spending our energy.

Over time, we intend to broaden our portfolio and expand our global reach into faster growing markets, all of which will strengthen the revenue growth prospects and reduce our business risk. Lastly, we’re using a portion of our cash to increase shareholder return by executing on our share re-purchase programs.

That concludes our prepared remains, and with that, we have time to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Glen Hanus with Needham & Co.

Glen Hanus - Needham & Co.

You said in the December quarter you expected a more pronounced than normal rebound if you will, did you mean that for both the HSP and ESP areas, and did you discuss the key drivers behind that, why are more normal rebound than normal and if you can quantify that at all would be helpful.

James M. McCluney

While obviously we don’t normally break out HSP and ESP guidance, but we do see….

Glen Hanus - Needham & Co.

Was that a comment directed to both of those?

James M. McCluney

It was a comment directed, to both, although we see both product lines go sequentially stronger than normal seasonality, and we are expecting to see some improved results from the sales and marketing strategies that Jeff outlined as well and we are doing a much better job in exploiting some of the market trends that we see and take advantage of some of these changing buying patterns, and we’re starting to see the 8-gig products coming onstream as well in the December quarter, so there are some various things happening in the market, things that we are changing, and obviously as I said we are getting through some of these undercurrents in both the fourth quarter and first quarter of this fiscal year and get that stock behind this.

Glen Hanus - Needham & Co.

Could you comment at all about new sales marketing management or what your plans are there?

Jeffrey W. Benck

While we’re putting some specific sales and marketing tactics in place to drive really the channel and OEM share opportunities and gain opportunities as Jim kind of eluded to, we really are re-doubling our focus with server OEMs, particularly in the X86 and blade space ensuring that we’re timed to mark with products. As are as some of the changes we’ve made in the management team, we will look to augment our leadership there and bring on some additional talent to help us increase the focus in that space as we go through time. In the meantime, interim lead heading up the sales organization and I’ve kind of stepped in managing the marketing activities directly myself.

Operator

And moving on to Jayson Noland with Robert W. Baird & Co.

Jayson Noland - Robert W. Baird & Co.

Mike you talked about a 25% operating margin at the Analyst Day; looking out into fiscal ’09, is it fair to say we may see an operating margin slightly below that number?

Michael J. Rockenbach

I think certainly as you look at the Q1, I think we’re going to be in a range that’s a little bit lower than that. Our operating margins, at least in the short term, are largely driven by what’s going on in the revenue line, so we don’t have a lot of expenses that vary directly with our revenue, and when you see a revenue change fairly late in the quarter, there’s really not a lot we can do in a very short period of time on the operating expense line to make adjustments for that. The other thing is R&D expenses for us varies more on new product development costs for future products as opposed to current R&D spending, but clearly, we’ve got some things we need to do to improve our operating margins, and I think we’ve got a number of things underway some of which Jeff and Jim have talked about that have focused on that; one is having more predictability and more sustainability in terms of revenue growth. So, I think that’s one of the things that we’re focused on and there’s certainly some opportunities in both host server products as well as embedded storage products coming out in 2009 and beyond to improve our revenue growth opportunities, but having said that we can’t rely just on our revenue growth. We’ve got to manage our business and we’re very committed to ensuring as Jim talked about that our spending model fits our revenue expectations and we are implementing changes to make sure that there is a positive effect on our operating margin; so I don’t think we’re going to see 25% in Q1, but I think given our business model and our opportunities that’s certainly something that is achievable.

Jayson Noland - Robert W. Baird & Co.

On the embedded side, we see flat to slightly down in the September quarter and then a nice pop in December, beyond that… Is this a segment that should continue to show some volatility or will we see a little bit more of a normalized pace post December?

James M. McCluney

I think we should see a more normalized pace here as we get a better handle on some of the design wins. We’ve got a couple of design wins that did get pushed to the early 2009 timeframe to the customers, some of these are going into fairly large complex environments, and while we should have launched soon, they have moved them out; so we will be preparing for that and obviously our focus now is getting some of the pipelines of new products and design wins coming through. I think Jeff talked about the opportunities particularly in expanding on bridging technologies into solid state drives, and as we articulated on our Analyst Day we’re getting strong pull from OEMs to move from just pure chip level sales to board and so we’ll be preparing for those transitions in the future, but I think we should see that we’re following more normal market trends as our current batch of the design wins kind of get normalized. We’ll get through some of this choppiness in the first quarter and then we’re pretty confident of the things coming back in December. It’s a good product line. As I said, we haven’t lost a single customer. In fact, our customers are looking for us to do more business with them. So, it’s a good strategy for us.

Jeffrey W. Benck

It’s clear though operationally we didn’t forecast accurately this quarter and we had taken some actions in that space, particularly to better understand how our products are being used by our customers and really understanding their channel a little better and a pipeline to their manufacturer. So, that certainly is our intent to do a better job guiding this segment, and as Jim said, there are a lot of nice opportunities there to continue to grow that business but we haven’t done a good job of being on top the forecast and that’s a clear focus for us.

Jayson Noland - Robert W. Baird & Co.

Last question from me, Jeff, when you look at server OEM side of the business here, are these people that the company knows, do you have a relationship with them, do you need to set up new account teams? Any additional commentary there would be helpful.

Jeffrey W. Benck

I think we know very well. We’ve done business with server OEMs for a long time. There are some segments which Emulex entered later than the competition, and I think at this point we’ve got nice design wins kind of across the gamut of product lines, and it’s really on us to work closely with those OEMs to gain share. I think the 8 gig is an opportunity from the standpoint that we really look to be time-to-market really across all the OEMs. We talked about the breadth of the design wins there. So I think that’s a key focus for us. As we look at the emerging areas, there’s also a lot of growth in X86 servers and blades in some of the emerging markets, so that’s an area where we’re paying keen attention to as well. So, I don’t think it’s a question of knowing who those folks are and having some relationship with them; I think it’s a question of just focusing on execution on the design wins that we have. At my former background, I was at server OEMs, so I certainly understand that business pretty well.

Operator

And moving on to our next question from Clay Sumner with FBR.

Clay Sumner – FBR

I was hoping Jim you can explain a little bit more about what you meant from the comments in the press release about aligning sales and marketing in faster growth global markets? I think you mentioned talking about going in with your partners globally. Can you say what’s going to be different about this?

Jeffrey W. Benck

Some of this is just looking at our overall resources and looking where we’re doing our revenue globally. We opened a Japan sales office recently and there are opportunities with growing Ireland facility which we’re putting in place where we can just be aligned more closely to where our customers’ business is and have focus in a region versus managing all from the US-based infrastructure.

James M. McCluney

And I think more and more we’re working more closely with our customers and partners to leverage their channels and sales forces as well. I think it’s important to note that we’re reshaping our sales and marketing effort. We’re going to keep sales and marketing at the same percentage of revenues as we move forward; so we’re just getting smarter with how we’re deploying these resources and I think it hasn’t gone unnoticed that comments from some of our large customers are that they are seeing pretty exclusive growth in markets where we haven’t yet got any representation and Jeff and team are taking steps to address that.

Clay Sumner – FBR

That was one of my questions of how this was going to affect the targets for sales and marketing as a percentage of revenue and you said it won’t change. Mike can you just remind us what those are currently?

Michael J. Rockenbach

I think sales and marketing was in the 11% to 12% range on a non-GAAP basis. So, it’s probably a little bit higher than the current quarter because of where revenue ended up, but that’s where we were modeling out around the time of the Analyst Day a couple of months ago.

Clay Sumner – FBR

No intent to change that with all these initiatives?

Michael J. Rockenbach

No, I think particularly for host server products, sales and marketing is an important part of that. You’ve got to have a couple of different pieces, obviously you have to have the technology and you’ve got to have the technology at the right time, but you need a footprint in sales and marketing to implement the decision makers. We’ve got good competition in this market. We think we’re better than the competition, but not everybody knows us and so you’ve got to reach out to where those areas of growth are and that takes sales and marketing investment. So, it’s not so much that we haven’t been making investments for the last year or so, and I think we saw some benefits from that investment early one, but that has to evolve over time, and so I think we’re looking at not necessarily just spending less dollars but really focusing those dollars on the areas where we’re going to get the most paying for our bucks, so it’s not somewhat a shotgun approach; it’s more focused on an ongoing basis and evolving that over time.

Jeffrey W. Benck

Yeah, I think you really have to measure the effectiveness of the spend and look at what’s working and what’s not and then weigh big on those areas that you see moving the needle. So, clearly when we look globally and the growth that our storage and server customers are having in the various countries and in emerging geographies, you have to pay attention to that because it’s dynamic what’s happening around the world.

Clay Sumner – FBR

One more quick one; can you explain why taxes go up so much as you open international sales offices?

Jeffrey W. Benck

There are a number of different ways that you can structure these things. In our case, we did a prepayment in 2008 as we set up those operations, so in doing that, that gives us a taxable event in the US and we’ll be paying those in the first quarter. So, like I said, there’s a number of different ways you can set this up. We chose a way that gets us to what we think will be some meaningful benefits, much quicker than maybe some of the other alternatives that we could have looked at.

Operator

And we’ll move on to our next question from Min Park with Goldman Sachs.

Min Park - Goldman Sachs

Just a couple of questions. On the embedded side of the business, you mentioned that you felt the September quarter would be the bottom of the cycle, but apart from better seasonality in the calendar fourth quarter, what else gives you the confidence about culling the bottom here; I mean are you seeing the visibility of the design wins compared to revenue by the end of the year?

Jeffrey W. Benck

We do have a healthy pipeline of business including our bridging as it relates to some of the new opportunities around SSD as we talked about. We also see an opportunity to play a bigger role in some of our customer solutions as they look for us to take on a bigger piece, but it also comes back to us not seeing all the benefit for some of the ramp of the design wins in 2008. We do expect to see improvement as those get deployed and we get past this initial startup which happened over the last quarter and into this quarter. We do see that stabilization which will help us as we look at the back end of the calendar year.

Min Park - Goldman Sachs

I guess the question is what do you see as a catalyst to drive the product refreshes and accelerating the launches of the products?

Jeffrey W. Benck

Well, there are a couple things. When you look at our SSD business Fibre Channel drive growth is what drives that business. When you look at bridging, it has more driven off SATA drive growth, and our ability to participate in that is pretty significant and when you look at the 50% growth rate that IDC predicts between 2007 and 2011, that gives us a pretty big opportunity to play into with our bridging products, and then when you look at the SATA usage with our routers, we are kind of following the Fibre Channel market trends there; so, when you look across there are several drive technologies we play in here with our embedded business and it takes a combination of those to look across these few product lines and determine what that profile looks like going forward.

James M. McCluney

Yeah. I think it’s also a micro level as Jeff touched on some of the growth, but we do see continued strong demand for storage and storage networking, and as these were designed across many many storage subsystems with our technology in. Once we get some of these operational issues behind us, we’ll get the growth engine rolling again.

Jeffrey W. Benck

It’s clearly an attached-rate model here too, so that’s where we see the storage demand if it picks up even more based on the economy, we should benefit in that.

Min Park - Goldman Sachs

And then on the HBA side, you saw a healthy growth for your mezzanine card business and then if you look at some of your server partners, particularly IBM had a very strong quarter in the ZMP. Can you just give us a little bit more color on where the weakness on the HBA side is coming from? I mean is that due to really your product and OEM exposure or are you seeing some displacement in segments?.

James M. McCluney

Well, I think as we pointed in the call, we looked at the top 4 server OEMs, they grew 12% sequentially and the same number year-over-year in the June quarter, and again strong mezzanine card growth as you point out, but as I mentioned, we are seeing a shift in purchasing patterns out there by end users more towards the server OEMs as opposed to the storage OEMs who would sell HBAs through the channel. We’ve had very healthy market share historically of both server and storage OEMs and we just need to get out seeing healthy market share on the server side, particularly as Jeff mentioned, with the X86 servers and blades. We just need to get the tax rate soft in those markets and those products, and we’re seeing some things on 8-gig that may get us even better, but in some of those server markets. I think 8-gig is going to be good for us in that regard.

Operator

And moving on to Kaushik Roy with Pacific Growth Equities.

Kaushik Roy - Pacific Growth Equities

My two questions will also be on HSP and embedded, so first on HSP, are you seeing a shift from distribution to OEMs server, but your competitors are also probably seeing the same trend, and their HBAs grew 9% sequentially and 16% year-over-year, so can you comment whether it is partly, I understand they are bigger in blades, or is it possible that you’re having some product issues with the new 8-gig or is there any particular customer that is shifting towards your competitor; and then another question on HSP would be, you mentioned that embedded would be flat to down in September, what are your expectations for HSP in September?

Jeffrey W. Benck

You’ve said a lot in there, so we’ll start and then see if we can get most of your questions here. If you look at that shift that’s going on, we see some of the business moving from the storage side to the server OEMs and our competition’s stronger market share in the server OEMs is allowing them to have higher growth as that transition happens. We’ve had great growth in the server OEMs but not fast enough to offset some of that shift going on, and that’s kind of where it comes back to what Jim was talking with 8-gig being an opportunity. We think it’s interesting, there is a lot of competitive thought around 8-gig and issues that we apparently are having, let me just kind of clear the air there, we really think it’s kind of nonsense. We’ve got strong 8-gig products and really don’t have an issue at all with the quality or the reliability or any of the qualifications, we’re on with 8-gig right now; in fact, some of that thought has been around about how hot a particular product runs versus the competition and we’ve actually done some independent testing to show that our actual 8-gig product runs 16% cooler than our closest competitor and we believe that that will ultimately relate to higher reliability. So just thought I would share that because we’re just seeing a lot of noise on that with the investor community and we really don’t have any issues there; in fact, as Jim mentioned, we think we’re well poised with 8-gig. So, that sums up what’s going on there and that’s why we have this intent to focus on X86 servers and blades because as we said before, our blade share is 27%, that’s lower than our share in broader marketplace and while we’ve been growing very fast, we need to continue to gain enough space as this industry shifts where the product is being procured.

Kaushik Roy - Pacific Growth Equities

In September are you expecting the host products to be up or flattish?

Michael J. Rockenbach

I think as we look at the September quarter related to HSP products, I think we see this as, for lack of a better term I guess, kind of normal seasonality for our September quarter, so that would give us a range of may be plus or minus a few percentage points on a sequential basis.

Kaushik Roy - Pacific Growth Equities

And on the embedded side, it seems like all systems vendors reported very good numbers and so can you comment like whether you’re seeing the issues with one or two customers because I understand there is volatility but you have several customers that should reduce the volatility.

Jeffrey W. Benck

One of the things that we can see in that dynamic is while we have broad set of wins and this is across a number of customers, we are a small part of the total bomb that a storage vendor would put together as they put a solution in the market. So, when you look at some of the forecasting and what’s happening there, they can still have a strong performance and not have had to procure as much product from us in a given quarter to reflect that. So, they don’t always necessarily follow directly against the storage OEMs results.

Michael J. Rockenbach

Yeah. I think one thing I would add is if you remember Q3 was just a phenomenal quarter, and if you think about it, we’re an ASIC embedded deep inside that array, so they’re going to be building that product, level-loading their contract manufacturers, their factories, filling their pipelines when they do a product launch. So, nearly did over $40 million in the March quarter. So, I think when you look at kind of the two quarters combined, we did show good growth on the year-over-year basis, not as much as we would like but certainly good performance, but when you look at the OEMs, you’re looking at them selling the array into the marketplace; we’re selling much earlier in that process and as they go into new product launches, they are filling their tech support, their product lines, their distributors with that initial launch and we had a lot of OEMs launching at the same time and this takes a few months or so to work out, the more you have, it maybe takes a little bit longer, but after a certain point they get to a growth rate in the marketplace that represents raw demand, and I think what we’re really seeing this experience of that phenomenon coming off such a strong March quarter. So, it seems like it’s more of a timing of how those products get built and deployed as opposed to a competitive situation.

Kaushik Roy - Pacific Growth Equities

Can you comment on whether the softness is more on the bridging/routing side or on the switching side?

Michael J. Rockenbach

We don’t really break it down by the different products within the product line, but I think if you understand or if you look at the broader trends in the market, clearly Fibre Channel drives are kind of coming off the peak. I think over the long haul you would expect Fibre Channel drives are going to come down, but SATA drives are really ramping up. So, we’re not going to get into the individuals within a quarter but the longer-term trend clearly is a migration towards the SATA drives, and that’s where we are very well positioned.

Kaushik Roy - Pacific Growth Equities

So, you’re still expecting 17% CAGR in ESPs?

Jeffrey W. Benck

That’s what the business model is over the next 4 or 5 years, yeah.

Operator

And we’ll take our next question from Aaron Rakers with Wachovia.

Aaron Rakers - Wachovia

A couple of them as well. I guess first of all clarification, Jim you had made a comment earlier in reference to one of the questions that two of the customer design wins that had pushed out look to be now opportunities looking in the early calendar ’09, is that correct?

James M. McCluney

That’s correct.

Aaron Rakers - Wachovia

So, my question is that I believe last quarter when you reported, you had mentioned that those were looking to be a second half calendar year story, so I guess I’m wondering what’s happened incrementally to push those out further.

James M. McCluney

We had a component in some cases, very large storage subsystems, and usually when new designs and new architectures are coming out, they’re worrying a lot more than just our bridge product or switch product. In the OEM game, this stuff happens all the time. So, they moved the overall platform launch out into the first half of 2009.

Aaron Rakers - Wachovia

And at least one of them was a big tier-1 customer, correct?

James M. McCluney

That’s correct.

Aaron Rakers – Wachovia

And maybe a couple other questions as well; I guess from a modeling perspective Mike, what are you assuming in terms of the other income line, especially considering the tax payment that’s going to flow into the P&L, I’m sure from an interest income standpoint this next quarter and beyond?

Michael J. Rockenbach

Well, I think we’re assuming that interest rates stay at the level they are at for at least the next couple quarters. We will spend more cash than we generate typically in the first quarter; so, given those dynamics, I would imagine it would be down a little bit in Q1 relative to what we saw the $2 million we had in Q4.

Aaron Rakers – Wachovia

And I guess that payment from a tax perspective, if I were to take that out of cash, is that something that happens at the latter end of the Q1 and therefore that other income line is going to continue to trend down; I’m just trying to fine tune my model a bit.

Michael J. Rockenbach

Well, two things to think of; one is, we expect to be active in the market when our window opens for the remaining $40 million of our share repurchase, so that is essentially gone right away. Second thing is; our estimated tax payments are due pretty near the end of September, so you won’t see as much of an impact from that in Q1. So, puts and takes, maybe it’s down just a little bit from where we’re at in Q4, I don’t think it will make a big different in terms of this.

Aaron Rakers – Wachovia

Fair enough, and final question from me, maybe a two part thing; when I think about what you’re seeing with regard to the December quarter and I go back historically and maybe even strip out the December ’06 quarter, the sequential growth range for the company has been anywhere between 6% to close to 20%, so I think in this environment would be helpful may be to give us some flavor of what you’re thinking and kind of segregating from that point; what metrics are you looking at in terms of saying at some point maybe headcount reductions are what we may need to take this company?

Jeffrey W. Benck

In December, I don’t remember exactly when we had a 20% growth, might have been a quarter when we did an acquisition, so I think when we look at what we would expect in terms of a normal December quarter, I would say we’re thinking about in the context of high single digits, and I think where we are positioned today and what we’re seeing going on in the markets with Q1 being a bottom for us, I think we can expect double-digit growth in the December quarter.

Aaron Rakers – Wachovia

And the second part of that in terms of what metrics specifically you’re looking at; be it operating margin, if we’re not getting to those levels, at what point do we look at the organization and maybe take some more aggressive steps?

James M. McCluney

Well, as I said in the call, we’re already taking some belt-tightening efforts here as well, scrutinizing every bit of expense, and our intent is to align our expense structure to top-line prospects.

Operator

And moving on to Paul Manksy with Citigroup.

Paul Manksy - Citigroup

I wanted to just kind of go back obviously what appears to be bit of a structural change with respect to the channel in the HSP side, I know you don’t typically talk about this, but given the significance both on the recent quarter, the outlook for September and December, it’s obvious from your SEC filings, EMCs were $20 or $25 million per quarter, most of that’s indirect; can you give us some context as we look to calibrate those models, give us some context of what your channel inventory exposure looks like right now on the HSP side?

Michael J. Rockenbach

Channel inventories are pretty low. I think they really stayed relatively low over the last quite a number of quarters. When you look at the business model for distributor, they don’t have a lot of margin dollars to play around with and certainly that’s the use of a lot of cash. I think as we look at that market and that channel, I think it’s focused on meeting raw demand, so you’ve got different times in the year, for example, coming into the summertime, summer tends to be relatively slow, so you might see inventories down a bit more, maybe in some other quarters, but I think it is not so much what’s going on in terms of channel inventories, it’s really where’s that fulfillment coming from, and HBAs and Fibre Channel SANs in general are pretty much the mainstream; they’re the bulk of the market for the bigger data centers, and so I think you reach a point where it just seems like it’s going to be logical for that fulfillment to be coming from the server OEMs and not so much as in the catch kit. So, that’s not to say that we don’t continue to focus on the channel and that the channel’s not an important piece of our business, clearly it is, it’s just that in terms of where you see the growth and where we see the opportunities for growth, I think at a certain level that’s going to be fulfilled more by the server OEMs, but I think as you look out globally, distribution in the channel becomes more meaningful because it’s a big world out there and we can’t have an office in every location, we need that one to many relationships that you do get from distribution and bars; so I think that’s still a critical part of our business and certainly something we’re going to focus on. I think it’s just the dynamics of how we’re spending our sales and marketing dollars are going to move around a bit.

Paul Manksy – Citigroup

One on pricing; as we think about, obviously we have a pretty dynamic situation in front of us whereby you’re just now starting to enter the market on 8 gig, you have 10-gig FCoE on its tails, you’re talking about gaining market share versus your competitor; I know that you have trended better than your ASP decline forecast for arguably years, but as we think about you going out trying to recover your investment in 8-gig before that 10-gig FCoE starts taking over, should we be thinking about pricing, maybe getting a little bit more aggressive back to that long-term range or maybe even above over the course of the next several quarters to a year?

Michael J. Rockenbach

Well, I think our experience in what we’ve seen is that it’s really not a price elastic market. That doesn’t mean that you can charge whatever you want. There’s a drive for lower costs and higher performance always. That’s just the nature of the beast in technology, but it’s not a market where you can just come in and undercut the other guy by 50% and move the needle a lot. That hasn’t been effective from others trying to enter the market and take market share, and I don’t think that’s affected now; I think its execution that’s going to be a bigger piece of that, but I do think you’re right. If you go back a couple of years, may be our year-over-year ASP range was may be more in the 7% or 8% range, and if you look at this year, it’s closer to 11%, but the reality is on a like-for-like basis, the vast majority of our prices in HSP and ASP for that matter is contractually driven, so on a like-for-like basis, it ranges from 0% to 3% every quarter. The product mix between say the high-end adapter or dual-channel adapter and the mezzanine card or mixes between different customers is what’s having more of an impact. So, I don’t think you’re going to see pricing change because we think that’s an effective way to gain market share. I think you’re going to see the pricing change because of the dynamics of how products are procured and which products are procured.

Paul Manksy – Citigroup

And then finally, just by way of housekeeping, do you have a headcount number and also did I miss the customary cash flow metrics for the quarter?

Michael J. Rockenbach

Headcount I think was around 850s for the quarter. Cash flow was $18 million. We ended the quarter with about $350 million.

Paul Manksy – Citigroup

And then CapEx and depreciation?

Michael J. Rockenbach

CapEx was $10.1 million and I think depreciation was $5.147.

Why don’t we take one more question and then we’ll wrap it up.

Operator

We’ll take our last question from Keith Bachman with Bank of Montreal.

Keith Bachman - Bank of Montreal

Mike, I just have two; number one, going back to the embedded side because it hadn’t been discussed enough on the call, a couple of years ago the thought was when you ramp this part of your business, NetApp was the clear first and largest customer and when they had some problems, you guys struggled, but the idea was as you have more portfolio diversification that the impact of any one customer would be lower; now you’re in a position whereby I think NetApp has actually had a very good quarter and yet you guys are still struggling; when does the size of the business get to be large enough in terms of diversification that any one ramp or in this case it sounds like a ramp of two programs doesn’t completely cause the business to fall on its back?

Michael J. Rockenbach

Well, I think what we saw in the business was really a compressed launch by a number of customers. So, you saw a huge growth in the March quarter and you have to get to a point where those products are out in the field and you have a consistent flow of demand pull and you’ve got a series of design wins following one after another where you’re replacing your own part. So, for example, if you look at the InSpeed products, going back to prior to this the Sierra Logic acquisition, that was pretty predictable. We have the 312 chip and that was replaced by the 320 chip, we moved forward to 4 gig; so, you’ve got a series of design wins where you’ve got this flow of products that’s fulfilling demand, and we just don’t have that yet, and that’s why you saw such a huge spike in the March quarter this year followed by weaker quarters in Q4 and Q1. So, I think we do see that business as we look out into December quarter being more demand driven, but I think we do still have some work to do in a couple of areas, one to make sure we understand what is demand and what is filling these new product launches and then get a clear understanding not just the contract manufacturers that are doing the assembly where we do have a lot of visibility too, but beyond that, through the contract men, beyond that into their customers, so we’ve got some more predictability, and then also, I think it’s broadening our portfolio so that you’ve got a repetitive sense of cycles and the OEMs are tending to launch at different points in time throughout the quarter as opposed to having one big launch or a series of big launches in a relatively compressed time.

Keith Bachman - Bank of Montreal

Mike, if I just push back a little bit, it just sounds like the systematic risk of this part of the business that will be ongoing, it will always be subjected to the lumpiness inherent in the business and it doesn’t sound like there will be a diversification that will allow some of that smoothing out of the lumpiness if you will.

James M. McCluney

I think as a point to that we have several projects in the pipeline which will, I mean, when one going further up the food chain you get better visibility. It’s not just the chip sale anymore, it’s selling blades in there and it will create a much tighter relationship with some of our storage OEMs. That’s going to help plus diversifying further into supporting things with flash drives SSDs which we see as a great growth prospect as well. So, what we’ll see there’s obviously a fairly strong customer concentration there that is going to happen; ten people out there last to make a difference in the storage markets, so therefore some rise and fall as well, but our intent for sure is to keep this market growing upwards to the right and modify some of this choppiness we’re seeing. And as Mike pointed out, I think we’re getting much better operational visibility to what’s going on and what can cause it and with the purchasing practices of our customers will go a long way to help normalize this.

Keith Bachman - Bank of Montreal

You mentioned the tax rate, is the non-GAAP tax rate going to be around that 37% for the balance of the FY.

Michael J. Rockenbach

I would expect that it will, yeah.

Keith Bachman - Bank of Montreal

What’s your share count assumption in Q1 please?

Michael J. Rockenbach

We’ll be repurchasing in the quarter, so you’ll see a partial benefit on that. So, I would expect that will be done a little bit from where we were in Q4. You won’t see the full impact from that share repurchase until we have it for the full quarter which would be the December quarter.

James M. McCluney

At this point I’ll pass it over to Mike for some concluding remarks.

Michael J. Rockenbach

Thanks Jim and thanks everyone for participating in our Fourth Quarter 2008 Conference Call. Couple of things I want to note, that we’re coming out of the summer quarter, we will be attending some investor conferences in September and beyond. September 3^rd we’ll be at the Citigroup Technology Conference in New York, September 9^th we’ll be Deutsche Bank Technology Conference in San Francisco. Farther out in the year by December 9^th we’ll be at the Lehman Brothers Technology Conference also in San Francisco. So, hopefully we’ll be able to see you at one of these events. Thanks for joining us on the call and hope you all have a good evening.

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