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Executives

Jean Hu - Senior Vice President of Finance and Chief Financial Officer

Simon Biddiscombe - President and Chief Executive Officer

Analysts

Amit Daryanani - RBC Capital Markets

John Slack - Caris & Company

Jayson Noland - Robert W. Baird

Harsh Kumar - Stephens Incorporated

Scott Schmitz - Morgan Stanley

Jung Pak - BMO Capital Markets

QLogic Corporation (QLGC) Q2 2013 Earnings Call October 25, 2012 5:00 PM ET

Operator

Good day and welcome to the QLogic Corporation Second Quarter Fiscal Year 2013 Earnings Announcement Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Jean Hu, Chief Financial Officer for QLogic. Please go ahead.

Jean Hu

Thank you, operator. Good afternoon and welcome to QLogic's second quarter fiscal year 2013 earnings conference call. Joining me on the call today is Simon Biddiscombe, our Chief Executive Officer. I'll begin the call with a review of the second quarter financial results. Simon will follow with a customary business update. We'll then open the call for questions.

Certain of our comments today will include the forward-looking statements regarding future events and our projections of our financial performance based on our current expectations. These comments are subject to 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 SEC, specifically our most recent Forms 10-K and 10-Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statement that we make today.

In our second quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. All of the references we will make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of non-GAAP to GAAP financial measures is available on our website under Investor Relations.

Turning now to our financial results for the second fiscal quarter ended September 30, 2012. Our revenue in the second quarter was $117.9 million, compared to $136.3 million recorded in the same quarter last year. This revenue was above the middle point of our guidance range of $115 million to $120 million provided during our first quarter earnings call.

Our second quarter revenue from Host Products, which are comprised primarily for Fibre Channel, converged 10-Gig Ethernet adapters was $89.6 million, compared to $103.4 million recorded in the second quarter of last year. Second quarter revenue from Network Products, which comprised primarily of Fibre Channel switches and was $17.6 million, compared to $19 million recorded in the second quarter of last year.

Our second quarter revenue from Silicon Products comprised of Fibre Channel, converged, 10-Gig Ethernet and iSCSI chips was $10.7 million and consistent with our expectation.

Our second quarter gross margin of 67.6% declined from 68.8% recorded in the second quarter of last year, primarily due to unfavorable product mix. Our gross margin was consistent with our guidance range of 67% to 68% provided during our first quarter earnings call.

Next, I'd like to cover our second quarter operating expenses. As a reminder, we continue to invest in engineering in order to address increased opportunities and expand our server markets while aggressively managing sales, marketing and G&A costs.

Total operating expenses were $59.4 million, up from $55.5 million reported in the second quarter of last year. Operating expenses were consistent with our expectation. Engineering expenses in the second quarter of $34.9 million increased from $31.8 million last year.

Sales and marketing expenses in the second quarter were $18.1 million and increased from $16.8 million last year, primarily due to products samples associated with increased new design win opportunities and qualifications. G&A expenses in the second quarter of $6.4 million decreased from $6.9 million last year. Operating income in the second quarter of $20.3 million was 17.2% of revenue.

Interest and other income was $1.1 million in the second quarter. Our income tax rate for the second quarter was 20.8%. Our second quarter income from continuing operations of $16.8 million represent (Inaudible) of 14.3%. This is 69th consecutive quarter of profitability for QLogic. Our second quarter income from continuing operations per diluted share of $0.18 was within our guidance range of $0.15 to $0.20 provided during our first quarter earnings call.

Turning now to our balance sheet. Our cash and marketable securities were $484 million or more than $5 per share at end of the second quarter. We continue to maintain a very strong cash position and have no debt. During the second quarter, we generated $42 million of cash from operations.

We remain committed to our stock buyback, and during the quarter we purchased $41 million of company's common stock. Receivables were $72.9 million at end of the second quarter. DSO at the end of the second quarter was 56 days, compared to 55 days at end of the first quarter. Inventory was $21.8 million at the end of the second quarter. Annualized inventory turns for the second quarter was 7, compared to 7.6 turns achieved in the first quarter.

Turning now to our near-term outlook. We continue to see macroeconomic conditions as a major hurdle and enterprise data center spending forecast have weakened for the six last year. Server unit sales in the enterprise data center remain enterprise share, and according to Gartner, our largest customers are clearly being more negatively impact within the total markets.

For the third quarter of fiscal 2013, we expect revenue to be in the range of $112 million to $118 million, and gross margin to be in the range of 57% to 58%. We expect operating expenses to be approximately $60 million. When combined with projected annual tax rate of approximately 19%, and the diluted share count of approximately 92 million shares, we expect to achieve non-GAAP earnings per diluted share from continuing operations of $0.14 to $0.19 in the third quarter.

Actual results for future period may differ materially due to a number of factors, including those outlined during the course of the conference call in our filings with SEC and disclaimer statement at the end of our earnings press release.

I will now turn the call over to Simon. Simon?

Simon Biddiscombe

Thanks, Jean. In past calls I have provided my customary business update and commentary on the current environment within which our business operates.

I will still provide both on this call, but with an abbreviated business updates, so I can provide more information on the very important announcement we made recently named Mt. Rainier.

First, my economic comments. 90 days ago, on our July earnings call we made it clear that our business was being negatively impacted by macroeconomic conditions. Today these adverse conditions are resulting in a further deterioration of expectations for IT spending, particularly across the markets QLogic serves.

Macroeconomic conditions continue as a major hurdle and there are more variables into play. Enterprise server unit sales continue falling short of projections, particularly across our traditional customer base. This shortfall continues to be particularly pronounced in the government and financial verticals. This is having a direct impact on our business, which is highly correlated to the performance of the server market.

Beyond servers has also been a softening of expectations for the storage market. Despite these challenges, during the second quarter we achieved revenue of $117.9 million and income from continuing operations per diluted share of $0.18.

And I move to my business update. Our new design custom activity continues with a wide range of traditional OEMs, cloud OEMs, white box manufacturers, ODMs and channel partners.

Activity and interest is centered on our multi-protocol adaptive convergence portfolio, which offers customers the flexibility to power 16-gig Fiber Channel and 10-gig Ethernet networks including FCoE and iSCSI from the same hardware.

The number of new designs we are pursuing and the success rate continues to be at an all-time high creating an important pipeline of new programs. A good example of this customer activity is the recent announcement that we were recognized by Inspur Group, a leading OEM in China with the supplier of the Year Support Award, based on QLogic's strong product portfolio of commercial terms in engineering support. QLogic earned the highest scores in every category including sales support, technical support and marketing support.

On the market share front, according to Dell'Oro, the halfway point in calendar year 2012, our Fibre Channel adapter revenue share is 56.5%, up two points from calendar 2011, while our nearest competitor is down one point for the same period. This gives us an 18-point lead in the market.

As we look forward, the recent announcement that our 16-gig Fiber Channel adapters are now available and shipping, will ensure leadership in this important market for many years to come. We also announced gains in global market share in the 10-gig Fiber Channel Ethernet adapter market for the second quarter of calendar year 2012, increasing the company's presence in the 10-gig Ethernet market.

According both, Dell'Oro and Crehan Research, we lead our nearest competitor by 18 points in the non-captive revenue share of FCoE adapters for the quarter ended June 30th. This lead is the same as our lead in Fibre Channel, demonstrating the power of our installed base, the value of our software stack and they loyalty of customers for storage protocols.

Now, move to our Mt. Rainier Technology, which we announced in September. First, a little background on this technology. Over the last 15 years, enterprise applications in the data center have come to rely on highly available shared SAN storage with performance optimization of enterprise applications and ever increasing requirement for end users to maintain business competitiveness.

Increased application performance has a direct impact on customer satisfaction, operational efficiencies, information on asset utilization and ultimately profitability. Increased server performance, higher virtual machine density, advances in network bandwidth and more demanding business applications have created a critical I/O performance gap between service, networks and mechanical storage subsystems. Mechanical storage subsystem I/O performance is at the heart of this performance gap, has become one of the most pervasive challenges in the data center.

In recent years, flash memory has emerged as a valuable technology for addressing the storage I/O performance gap. Flash performance traditional disk drives by orders of magnitude. Although SSDs were originally packaged to be plugged compatible with traditional disk drivers, they are now available in various form factors, most notably server based PCIe SSD cards. This has led to the introduction of server based SSD caching of frequently accessed application data as a latest innovation in resolving the storage I/O performance gap.

By caching critical hot data on PCIe SSD cards in the server, frequently accessed information is closer to the processor eliminating the latency of networks and storage systems. However, current server-based SSD implementations increased management challenges with complex driver architectures and introduce server-based SSD storage as a server captive direct attach storage that cannot be shared by clustered applications or virtual workloads across multiple physical servers.

Many clustered enterprise applications and virtual server environments require shared storage resources, cannot take advantage of these server based SSD solutions, because critical application data is captive in a single physical server and is unavailable for sharing between multiple servers that are clustered and/or connected to a SAN. This limits the range of application environments that can benefit from current server based SSD offerings.

Mt. Rainier is a revolutionary technology that solves the significant limitation of the current server captive cache model. It provides a shared clustered cache architecture that brings the benefits of server based SSD performance acceleration to multi-server application configurations that utilize shared storage environment of SANs. Mt. Rainier combines SSD data management with industry leading QLogic adapter technology into a new product category that enables transparent clustered caching of server based SSDs across multiple physical service and delivers the application performance, acceleration benefits of server based SSDs without many of the limitations of current solutions.

Mt. Rainier dramatically simplifies server based SSD deployment in management. Unlike existing solutions, Mt. Rainier does not require installation and management of a separate driver for the network adapter and additional driver for the server-based PCIe SSD card and a third caching driver or software agent.

The Mt. Rainier adapter uses only one QLogic per operating system, which dramatically simplifies installation and management, particularly for servers running multiple virtual machines and clustered applications. Additionally, caching and SSD data management are offloaded from that server to the Mt. Rainier adapter hardware resulting in an application transparent, hypervisor and operating system independent SSD caching solution to provide scale acceleration of critical server application data without consuming additional server processor and memory resources.

Mt. Rainier's flexible hardware architecture supports connectivity to the various server-based SSD from factors finding their way to the market today. Including PCIe SSD, and Industry standard SAS SSDs. We recently demonstrated the unique benefits of Mt. Rainier should cache technology in real world multi-server enterprise application environments at several industry events.

At Oracle OpenWorld earlier this month, we featured a live demonstration of Mt. Rainier adapters running on Oracle RAC on some of the latest Intel x86-based servers with SAS, SSDs and Oracle's, Pillar Axiom SAN storage. We showed how Mt. Rainier accelerated application performance in mission-critical clustered database environments, for example delivering a five times improvement in peak Oracle RAC data warehouse transaction response times.

This was achieved without having to install additional drivers for cashing and SSD management while using existing Fibre Channel infrastructure. The storage network in World Last Week, QLogic used Mt. Rainier technology to demonstrate operating system transparent SSD caching of SAN storage as well as former virtual server vMotion migration of virtual machines from one physical server to another physical server using a shared SSD cache.

Virtual machine vMotion migration is a key VMware enabling technology for creating a dynamic, and automated and self optimizing data center, and it's deployed in production by the vast majority of VMware customers. Mt. Rainier brings unique SSD performance acceleration benefits to clustered, multi-server VMware environment.

We believe Mt. Rainier technology opens a new and exciting chapter for QLogic, it's partners and customers that brings a new category of high performance connectivity solutions to the data center dramatically simplifying server-based SSD caching and accelerating application performance using existing infrastructure in a single server and clustered shared resource environments which dominate today's enterprise data center.

Mt. Rainier offers game changing potential. Built on a solid foundation of proven QLogic's storage connectivity of networking products combined with industry standard SSDs. We believe the market opportunity Mt. Rainier based products is approximately $0.5 billion in fiscal year 2015. We are seeing extraordinary levels of customer engagement interest with Mt. Rainier across a wide range of customers including our traditional OEMs, ODMs, white box manufacturers and in the cloud.

In closing, despite the current challenging macroeconomic environment, we remain committed to our long-term strategy and will continue to aggressively invest in next generation enterprise data center products such as Mt. Rainier. We believe that as we execute on our strategy and continue to focus on our core and expansion markets, we will be well positioned to deliver growth and enhanced shareholder value.

This concludes our prepared remarks. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Thanks a lot. Good afternoon, guys. Just a couple of questions. One, just look at the December quarter guide, can you just maybe, A, talk about how do you think the down 2% of the midpoint tracks against the various sub-segment. And then I am curious in terms of the softness you are talking about. Was it something fairly steady state you saw throughout the quarter, or did something really downtick in the month of September in terms of the future audit you guys look at?

Simon Biddiscombe

Hey, Amit. So, let's start with the expectations for the current period. I think, we don't typically provide guidance by product family as you know, but we are looking at a fairly consistent down 2% across the two major product families for host and network at this point in time. I don't think we are suggesting that either will be dramatically different than that down 2%. And, it's characterized by the environment within which we are operating at this point in time. As I think about the trends that we are seeing in the business, as I think about what other major players who serve the enterprise data market or the enterprise data center market are seeing at this point in time.

It is clearly not as robust as people had expected it to be, and the trends throughout the September quarter which was the second part of your question, I would say we are not inconsistent with that we've seen in previous quarters. I know others have suggested that they saw a deterioration at the end of the quarter. For us, we actually saw a pretty consistent trajectory throughout the course of the quarter, so no significant step down in the month of September that others have suggested that they saw, but there is no doubt in my mind. You know, you look at what's going on across each of the major geographies we serve, so you think about the trends we and others are seeing in Europe, trends we and others are seeing here in North America, then in China, and then you also think about it within the context of the major verticals that we are serving government and financial services and it is clearly not a robust environment at this point in time, and we believe that our guidance is reflective of exactly that.

Amit Daryanani - RBC Capital Markets

Got it. And then, Simon, I think last when you guys talked about you evaluate and look to take some steps to bring cost and especially demand get worse. Given the fact demand is getting worse, could you maybe talk about cost initiatives and levels that you want to protect your operating margin…

Simon Biddiscombe

I think nothing to ex-Q2, Amit, within the context of cost reductions or anything along those lines. I think, we continue to believe that this is exclusively associated with the macro environment at this point in time. We are going to spend the same $60 million or so that we spent last quarter. And as we look into next year, we expect to continue to spend at that level as well, but we are not ready to declare that the world has ended. We continue to have our believe system around the investments that we are making. We continue to believe that technology such as Mt. Rainier, which are extraordinarily you know it even solves major problems within the enterprise data center. And where we are seeing increasing use cases across cloud and Web 2.0 environments as well, offer enormous potential for us down the road and we are going to continue to invest in those, so we are not ready to start think about or execute and do any kind of cost reduction at this point in time. We'll keep an eye on it as we move forward.

Amit Daryanani - RBC Capital Markets

Fair enough. Thanks a lot.

Operator

And we'll go next to John Slack with Caris & Company.

John Slack - Caris & Company

Hey, Simon and Jean. Quick question on any update on your timing and call process, if you can just give us any sort of meat on the bone around.

Simon Biddiscombe

Yes. Sure. So, announced the technologies at the Analyst Day back in the September timeframe. We first sample that product back in the March timeframe, right? So, the product has been in existing for some extended period now. We will have formal product launches throughout the course of the March quarter and then I expect to see my first revenues in the June quarter.

Now, obviously, they are not going to be significant at that point in time. But, as I said in my prepared remarks, the level of interest in the Mt. Rainier technologies is more pronounced than any other product that QLogic has introduced probably all the way back to the beginning of Fibre Channel, frankly, because it is so innovative and it is so differentiated from anything else that's in the market at this point in time, and it does enable SSDs to be used in ways that no other solution enables them to be used today.

So, when you think about enterprise markets, you think about the use of applications require clustered capabilities and shared resource essentially, Mt. Rainier is the only way you can start to think about bringing those solutions to the market today, and because of that highly innovative nature, we are seeing extraordinary levels of interest across the board.

John Slack - Caris & Company

Great. And then maybe a similar question on the 16-gig side for you guys since you are now in the market with. What does the ramp look like for you there in terms of revenue?

Simon Biddiscombe

That's clearly very early days. So, it's going to be interesting to see how that ramp plays over time frankly. You always question whether, how the products ramp during difficult economic times I think would be the right way to think about it, and we think it will be a relatively slow ramp, but clearly with shipping products at this point in time and we would expect that as we move forward. We sustain the market share that we've enjoyed in the 18-point lead over the nearest competitor.

You look at the first half of the year, and as I said in my prepared remarks, we've extended our market share lead in Fibre Channel over that period of time, and I see no reason to think that we won't continue to move in that direction as we move forward.

John Slack - Caris & Company

Okay. Then two more little clarification. Any color on how big 10-gig is as a percent of Host or as a percent of revenue?

Simon Biddiscombe

No. We've stopped breaking that out a long time ago, John.

John Slack - Caris & Company

Yes. That was worth try. Then finally, Jean, maybe cash on-shore, domestic cash?

Jean Hu

It's about 100, little bit over 100 maybe on-shore, so 80% of it's off-shore.

John Slack - Caris & Company

Great. Thanks a lot.

Operator

And, we'll go next to Jayson Noland with Robert W. Baird.

Jayson Noland - Robert W. Baird

Great. Thank you. Simon, maybe a question stepping back, if you have a feel for this. I know it's difficult, but could you talk about cyclicality with Romley versus macroeconomic challenges. Do you have a feel for what the contributor?

Simon Biddiscombe

I think it's macro. I don't think we've seen any significant cyclicality associated with Romley. I think, we waited for that significance step up in demand and we questioned whether we were seeing a pause at the very beginning of the fiscal year I think as you work your way through it. I think most people on the server side probably are a little disappointed with the overall Romley performance they have seen. There was no step up in demand associated with Romley, so I think essentially everything we are seeing at this point in time is macro and very little of it has to do with individual product cycles.

Jayson Noland - Robert W. Baird

Okay. And, then a second question on Rainier. I guess, who do you see as your competitor there?

Simon Biddiscombe

We don't. There is no competition for this solution in the market, and I don't think anybody is going to be able to bring a solution to market for an extend number of years. It leverages capabilities that existed within QLogic, that most of my competition doesn't have.

Jayson Noland - Robert W. Baird

Okay. Fair enough. Thanks, Simon.

Operator

And, we'll take our next question from Harsh Kumar Stephens Incorporated.

Harsh Kumar - Stephens Incorporated

Hey, guys. Simon, just a quick question, I wanted to talk about your use of cash. You've had a buyback now for well over a decade, and I am wondering, what other alternative uses of cash do you see for your company and maybe could give us some color on that. And, then as second part, why not at this price $9, why not get really, really aggressive on the buyback?

Simon Biddiscombe

So, two parts there, Harsh, right? So, first and foremost, we are always looking for ways to expand the markets we serve. We're always looking at or for M&A opportunities that would allow us to further expand the markets we serve and would bring adjacent capabilities to the table. So, that's always been the first part of the answer. Okay? And, that hasn't changed in any way.

The second part. Clearly, the buyback has been the way that we've returned the excess cash that existed in the business to shareholders over an extended period of time. The principle reason that we become hugely more aggressive, Harsh, is as Jean just said, the vast majority of that cash is off-shore at this point in time and not on-shore. And, we are always cognizant of the fact that we wish to maintain an appropriate level of cash here in North America to deal with the running of the business on a day-to-day basis. Then the next set of logical that you would force me to go through, Simon, shouldn't you be thinking about leveraging up in order to buy back stock and so on, but we've always believed that that was not the right thing to do and that continues to be the case today.

Harsh Kumar - Stephens Incorporated

Actually, beyond the leverage, Simon, I am not going to make you go there, but well if I can't ask you a follow-up. I wanted to follow-up quickly on cost cuts. I think somebody brought it up earlier. Clearly, this is a little bit economic-driven and also product cycle. I am not sure if you are seeing into this sort of economic mélange. Having said that, since we don't have an insight why not consider getting aggressive on a little bit of cost cutting.

Simon Biddiscombe

All right, so if you think about where we spend money, Harsh, right? I mean, we spend less and less money on G&A, and with the exception of samples, we spend less and less money on sales and marketing on a quarterly basis. We are spending all of our money on engineering, and we do that in order to bring innovative new solutions to market. I don't think that we are inefficient in our engineering spend.

I think, if you look at the margin structure the business has historically enjoyed. We work extraordinarily hard to make sure that we bring innovative products to market and continue to get paid for those innovative products through margin, right? So, I think we have a long-term belief system that we are doing the right things instantly that applies within the Host business. It applies within the switch and it applies within our storage solutions group, which is where we gave birth to the Mt. Rainier technology, right?

So, we believe we are continuing to do the right things in order to bring innovative solutions to market that in the long-term will allow for revenue and earnings growth, and to cut the cord on those activities at this point in time can only have a negative impact to growth in the longer term and that is not how we are thinking about running this business at this point in time. That's a fool's paradise in many ways and we are going to continue to invest aggressively in engineering to make sure that we continue to bring innovative technologies to market.

Harsh Kumar - Stephens Incorporated

Got it. Thanks, Simon, for clarification.

Simon Biddiscombe

Pleasure.

Operator

And, we'll take our next question from (Inaudible) with Credit Suisse.

Unidentified Analyst

Hi, Simon. Thank you. Looking at kind of the Gartner data, the preliminary data high-end server seem to be down about 10% year-over-year.

Simon Biddiscombe

Yeah.

Unidentified Analyst

And then your Host products business, it's not that different from that around 13%?

Simon Biddiscombe

Yes.

Unidentified Analyst

But, looking at it, what was the ASP impact on the Fibre Channel business kind of can you tell us the…

Simon Biddiscombe

Yes. So the way we think about it (Inaudible) the correlation has historically been between server units. Actually the six server units and revenues from Host products, okay? So, the ASP erosion that we have typically seen over the course of many years as a couple of points per quarter, and frankly that's been no different over the course of the recent quarters, so we are seeing very typical ASP erosions on a quarter-to-quarter basis, but the correlation between to your point, the roughly 10% year-over-year decline in the server market and my Host business is entirely intact. That correlation continues to exist.

Unidentified Analyst

Okay. So, you think Fibre Channel ASPs declined a few points this quarter year-over-year?

Simon Biddiscombe

Fairly typical.

Jean Hu

Very consistent.

Simon Biddiscombe

Very consistent.

Unidentified Analyst

Okay. Thank you.

Simon Biddiscombe

Pleasure.

Operator

We'll go next to Scott Schmitz with Morgan Stanley.

Scott Schmitz - Morgan Stanley

Hi, Simon and Jean. Do you have any sense for pent-up demand given kind of this muted demand environment we are in. Do you ever expect a snapback, or is it going to be more gradual resumption of spending?

Simon Biddiscombe

If I knew the answer to that I'd be making a lot more money than I do as QLogic CEO, right? (Inaudible) many different ways, Okay? So, first part of that is, do we expect to see a snapback in the current period, which would essentially be a budget flush, right? So, the answer to that is no. We are not expecting to see a significant budget flush in the current period and we didn't build anything significant in to our guidance as it relates to a budget flush that we would traditionally expect to see in the fourth calendar quarter. Okay?

Now, as it relates to whether this turns into a more long-term base from which we are going to see the business recover over an extended period of time, Scott. I think that comes back to general macroeconomic trends moving forward. It comes back to some other things that others have talked about on their earnings call such as when will the European crisis, when will European debt situations be under control? What's going to happen here in North America post election and so on?

What's going to happen with rates of growth in China and to what extent are they controlled moving forward, so we are going to see our business perform based on the overall trends in the macro economy, and specifically those associated with infrastructure that goes into enterprise and much though the participation of our business within cloud, Web 2.0, and non-enterprise environments continues to increase on a quarter-to-quarter basis, the business and its core markets are still dominated by the enterprise data center, so we need to see those enterprise data centers start to recover and I think that's going to be a factor of macroeconomic issues as opposed to anything else.

Scott Schmitz - Morgan Stanley

Fair enough. Just one follow-up if I can. Despite the lower volumes, you are still able to hit your gross margin targets. Can you just talk about the levers you have. Is it mix or pricing, or what allows you to do that?

Jean Hu

Gross margins are mainly driven by the mix and of course we constantly work really hard to reduce cost of sales, to improve gross margins, but overall the major driver is the revenue mix.

Scott Schmitz - Morgan Stanley

Thank you.

Simon Biddiscombe

Thanks, Scott.

Operator

And, we'll take our next question from Jung Pak with BMO Capital Markets.

Jung Pak - BMO Capital Markets

Hi, thanks for taking the question. Simon, can you talk about, within your Host business, how your Fibre Channel business fared relative to your 10-gig?

Simon Biddiscombe

So, we've stopped breaking those out right, Jung? I mean, we don't talk about them anymore. Jean, you want to?

Jung Pak - BMO Capital Markets

Can you talk about qualitatively how they performed?

Jean Hu

I think, certainly, we are happy with the performance for our Converged product lines and they show strength. I think the Fibre Channel, so we never break it down, but you can assume 5% of our cost is still accounting for a large percentage of our revenue there.

Jung Pak - BMO Capital Markets

Okay. Any update on your target business? When should we expect some revenue contribution from that new business?

Simon Biddiscombe

So, that comes as we move forward here, Jung, over the course of the next year. There's no one. It ramps my customers programs ramp over the course of the coming year.

Jung Pak - BMO Capital Markets

Okay. Thanks.

Simon Biddiscombe

Thanks.

Operator

And, that concludes our question-and-answer session. I would like to turn the conference back over to Jean Hu for closing remarks.

Jean Hu

Yes. That concludes our call for today. We look forward to updating you on our progress next quarter. Thank you very much for your time and good bye.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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