Emulex's CEO Discusses F3Q2014 Results - Earnings Call Transcript

| About: Emulex Corporation (ELX)
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Emulex Corporation (NYSE:ELX) F3Q2014 Results Earnings Conference Call April 30, 2014 5:00 PM ET


Jeff Benck - President and CEO

Kyle Wescoat - Senior Vice President and CFO


Harsh Kumar - Stephens

Vlad Rom - D.A. Davidson & Co.

Joe Quatrochi - Stifel

Tavy Rosner - Barclays

Karl Ackerman - RBC Capital Markets

Ryan Bergan - Piper Jaffray

Srini Nandury - Summit Research


Greetings. And welcome to the Emulex Corporation Fiscal Year 2014 Third Quarter Earnings Release Conference Call. This call will be hosted by Jeff Benck, President and Chief Executive Officer; and Kyle Wescoat, Senior Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. This call is being recorded.

At this time, for opening remarks and introduction, I would like to turn the call to Kyle Wescoat. Sir, please go ahead.

Kyle Wescoat

Thank you, Operator. Before I read the Safe Harbor statement, I would like to make an announcement related to the management of the company’s Investor Relations. I’m announcing today that Frank Yoshino, our VP of Finance will be leaving Emulex on May 30th.

Frank has been the face of our Investor Relations and Communications for the past 14 years. In that time Frank has made many contributions to the success of Emulex and for this, I want to thank him and wish him well in his future endeavors.

At the same time, I want to announce our appointment of Paul Mansky as Emulex’s Senior Director of Corporate Development and Investor Relations. As many of you know, Paul was a Wall Street analyst for nearly 20 years in the data center networking, storage and security segment, and we are very pleased to have Paul joining us at this time.

From here forward, Paul will be the principal contact for Investor Relations and External Communication from Emulex and his name and contact information are on today’s earnings press release. With that, I will begin the earnings call.

Good afternoon. And welcome to Emulex's third quarter fiscal 2014 earnings conference call. By now you should have Emulex's third quarter 2014 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 emulex.com.

The press release and this presentation contain forward-looking statements including, but without limitation, statements regarding Emulex's business operations and the anticipated financial results for our fourth quarter and the full year of fiscal 2014 and beyond.

These statements are subject to a number of risk and uncertainties, and our actual results may differ materially from those discussed in the forward-looking statements. Those risks and uncertainties are highlighted in our earnings release under the heading of Risk Factors in Emulex's most recent annual report on Form 10-K and quarterly report on Form 10-Q. I want to note that we undertake no obligation to update the forward-looking statements.

During the call, when we use any historical non-GAAP financial measure, you will find the reconciliations to the most directly comparable GAAP financial measure in our earnings release. All of the references we will make today relate to non-GAAP results unless otherwise stated.

Today's conference call is being webcast and a recording will be available on the Emulex website through April 2015. Finally, I would like to remind all 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.

Now let me turn the call over to Jeff Benck, the President and CEO of Emulex.

Jeff Benck

Thanks, Kyle. Today Kyle kick-off our prepared remarks with the review of our third quarter financials results and provide guidance for the fourth quarter of fiscal 2014. I will then follow Kyle with a commentary on the business highlight four topics.

First, I will speak to items outside of our direct control, namely the macro and OEM environment and the implications for our business. Within the realm of items we can control, I’ll review our recent patent litigation settlement with Broadcom and how this affects our Ethernet business moving forward.

I'll follow this up with an update on our Network Visibility business and conclude with the progress report on the $30 million OpEx reduction that we committed to at the beginning of the fiscal year. After our prepared remarks we will open the lines for your question.

With that, back over you, Kyle.

Kyle Wescoat

Thank you, Jeff. Good afternoon, everyone. Sales for our third quarter came in at $110 million, at the low-end of the guidance range of $110 million to $114 million given during our previous quarterly earnings call.

While revenue performed at the low end, our focus expense management during the quarter resulted in Q3 fully diluted earnings of $0.15 per share, near the midpoint of our projected $0.14 to $0.17 non-GAAP EPS range. The tax rate for the third quarter was in line with our expectations, coming in at 8%.

Looking at our revenue by product segment, Network Connectivity Products or NCP is our largest product line, consisting of our Fibre Channel and Ethernet products used as server to storage interconnect, as well as Ethernet network interface.

NCP revenue finished at $78 million for the quarter or 71% of our total revenue. Coming off a strong December, Fibre Channel products which are the bulk of the NCP revenues typically see seasonality in the March quarter. This seasonality was magnified in the most recent quarter by weaker overall demand for UNIX space offerings.

Partially offsetting this, however, was counter seasonal sequential growth in our 10-gig Ethernet products. Nonetheless, aggregated NCP revenue declined 11% sequentially and 9% year-over-year for the quarter.

Our second product line, Network Visibility Products or NVP is our family of intelligent network recording products. For the quarter, NVP revenue came in below our expectations at $7 million or 6% of revenue.

While we did see a better than 20% revenue growth year-over-year in the U.S. market, this was more than offset by unexpected week results in Europe. Jeff, will provide more color on the NVP business in his remarks later in our presentation.

Our third product line, Storage Connectivity and Other Products or SCOP consists of our bridges and backend connectivity products, baseboard management, controllers and other miscellaneous products. In the third quarter, SCOP accounted for 23% of the total revenue or $25 million. It too was down 5% from the second quarter and 7% year-over-year.

Turning to gross margin, they came in at 66% of revenue, essentially in line with prior quarter and up 60 basis points compared to the March quarter of last year. Continuing on to operating expenses, total OpEx for the quarter was $58 million, representing a decrease of $2.6 million compared to December or down 4% sequentially. This included approximately $400,000 in monetary recoveries from our suppliers related to previously spend patent litigation expenses.

As you can see for results, we are starting to see the benefit of the spending reductions we announced earlier this year, as well as the effect of further cost control measures initiated during the quarter in response to weaker than expected revenue.

The combination of these discipline measures allowed us to absorb the seasonal payroll tax increase of $1.2 million delivering reduced absolute dollars expense as compared to our December quarter. Correspondingly, non-GAAP third quarter operating income was $14 million or 13% of revenue and net income for the quarter was $12 million or 11% of revenue.

On a GAAP basis, third quarter gross margins were 58% of net revenue, down slightly from the 59% reported in second quarter. GAAP operating expenses were $69 million or 63% of revenue, compared to $74 million or 60% of revenue in the second quarter. During the quarter we took $5 million charge related to the aforementioned dismissal and settlement agreement with Broadcom as reflected in our GAAP results.

In addition to the settlement costs, GAAP operating expenses for Q3 included approximately $1 million of restructuring and severance costs, $1.6 million of intangible amortization and $3.7 million of equity-based compensation charges, all of this charge are excluded from non-GAAP results.

Our GAAP net loss for the quarter was $7 million or 7% of revenue. Excluding the impact of the Broadcom settlement, our loss would have been $2 million for the quarter. A reconciliation of our GAAP to non-GAAP numbers is included in our press release.

Turning to the balance sheet, we ended the quarter with $209 million in cash and investments. As you know, we completed a senior convertible debt offering during second quarter for total of $175 million which is due in 2018. Net of this debt our cash balance was $34 million, an increase of $11 million from the prior quarter.

Now I’d like to give you an update on the accelerated stock buyback that we announced on November 11th. We have made good progress on the ASR initiative and expect that it will complete in the next few weeks, reducing the number of shares outstanding by more than 12%.

Additionally, we remain committed to $200 million buyback we announced back in the fall of last year. And to this end, during the March quarter, we initiated a 10b5 plan to repurchase an additional 15 million of stock and have already purchased $3 million of stock under this plan.

When completed, this will further reduce the number of shares outstanding by approximately 6%. Based on these activities, we are modeling for diluted share count of 81 million shares for the fourth quarter.

Before I discuss our guidance for the fourth quarter of fiscal 2014, I want to once again remind everyone that our public filings with the SEC and our safe harbor statement included in our press release discuss the risks and uncertainties that could affect the future performance causing actual results to differ materially from our forward-looking statements.

After my first 100 days here at Emulex, as I look at our current business environment, the demand trends in the server and storage businesses, I believe it's prudent to anticipate higher rate of secular decline in the Fibre Channel business than previously anticipated. We have been modeling for year-over-year decline in the mid-single digit range but based on the current situation and direction, I'm recommending that we take a more cautious view.

As such, we will be managing the business with the expectation that Fibre Channel revenue will decline in the high single to low double-digit range year-over-year. Consequently, for the fourth quarter we are modeling for NCP to be down low single digits sequentially.

As we previously discussed, within SCOP, we expect the bridge and router revenue decline to accelerate as these products further mature for the end-of-life. For fiscal year 2014, we model this decline to be in the 10% to 15% range. For fiscal 2015, the range of decline in SCOP could be greater than 30% year-over-year. As a point of reference, bridges and routers currently represent approximately 75% of the SCOP revenue.

This plant rate of decline will likely be further impacted over the near term by weaker demand and inventory positions at some of our storage OEMs. Finally as recent performance illustrates predictability in the NVP business is not where we wanted to be. We have identified and are executing on several initiatives to approve deal qualification and tighten up our forecasting process.

Until this is complete to a level that meets our satisfaction, we will be reflecting a more cautious outlook as seen in our fourth quarter guidance where we are projecting NVP revenue to be flat quarter-to-quarter. Taking these factors and headwinds into account, we are modeling for our revenue to be in the $94 million to $100 million range for our fourth quarter ending June 29, 2014.

We are modeling gross margins to be in line with previous quarters, plus or minus 100 basis points depending on mix. Meanwhile, we’re expecting some temporary upward pressure on operating expenses translating to a sequential increase. This increase is attributable primarily to the timing of ASIC tape-out and related NREs and year end accounting fees.

Assuming an 8% tax rate and a diluted share count of 81 million shares, we are forecasting non-GAAP earnings in the range of breakeven to $0.05 per share for Q4. On a GAAP basis, we expect a loss of $0.16 to $0.21 per share. Our fourth quarter GAAP results will include approximately $0.21 in charges. Once again I referred you to our earnings press release for complete reconciliation of the differences between our GAAP and non-GAAP guidance.

Given the number of moving parts of our business, the lack of OEM visibility and the actions we're taking at NVP, right now, we do not see a meaningful catalyst for near-term revenue growth. So we would expect to see normal seasonality of sequential decline of 3% to 5% in revenues for the September quarter.

Before I turn it over to Jeff, I want to give you an update on our Analyst Day which we discussed on the call back in January. Subsequent to our announced date, one of our major partners announced that they would be holding a conference on the same day because this represents a potential conflict for many of our covering analysts and investors and given the current demand being placed on our business, we decided to postpone our event until later time. We'll update you on this event on our future call.

This concludes my prepared remarks. And I’d like to pass it back to Jeff.

Jeff Benck

Thanks Kyle. This afternoon, I’m going to cover four topics. First, I’ll provide some more color on the macro and OEM environment and the implications on our connectivity business. I’ll follow that up with the discussion of the agreement with Broadcom and the implications for our 10-gig business going forward.

Next, I will give you an update on our NVP third quarter results, where we’re focusing for growth. Then I’ll close out my remarks with an update on our progress with our cost reduction initiatives that are well under way.

Looking at the macro environment, our I/O connectivity business is a reflection of server and storage demand experienced by our OEM customers. Historically, we have seen a seasonal decline in revenues going from the December to the March quarter. This year normal seasonality was further compounded by weakness in high-end storage on the UNIX market, coupled with some specific issues of one large OEM customer in the x86 Server market.

As Kyle mentioned, we're preparing for this market level of volatility to persist beyond the current quarter while maintaining a tight focus on the management of items that are within our control.

Now I’d like to discuss our recent settlement with Broadcom. As I’m sure you can appreciate, I am very pleased that we’re able to reach dismissal and standstill agreement with Broadcom and in further proceedings in our patent litigation. This is a major accomplishment and in that it not only ends nearly five-year litigation process between the two companies but it also cancels a pending retrial that was scheduled for September.

Most importantly, it removes any potential overhang, additional legal spending and distractions associated with our 10-gig business, which I would like to highlight, showed solid progress in the March quarter as we saw revenue growth sequentially, aided by the momentum from our new 10-gig products which began shipping in Q3.

We further were pleased to announce a number of new 10-gig products specifically with Dell. These offerings marked our first 10-gig branded server design wins with this key customer and leading server vendor, which we expect to be a positive catalyst for our Ethernet revenue momentum in the future.

Dell selected our OneConnect family of CNA because we can offer customers lower operating cost in next-generation data centers with full hardware offload from the CPU, lowering system power consumption up to 30% over competitive offerings.

Another highlight in our 10-gig business was their announcement of next-generation 10 and 40-gig solution in support of the open compute project. Flexible open architectures are essential to meet the scale and security needs of our customer and we are committed to meeting these demands. Our adapters are the first one available for OCP platform that feature fully offloaded FCoE and iSCSI providing superior CPU utilization and storage traffic performance.

In further support of the open community, we recently joined the OpenPOWER foundation. This foundation is focused on maximizing the performance and scalability of the power architecture for a merging web scale data centers, delivering hybrid cloud service.

As you can see, this is a very active quarter in our 10-gig business with solid revenue performance, design wins and customer announcements. Although we are anticipating there maybe some demand parts ahead of the pending Grantley refresh, we've an unprecedented number of design wins being qualified with customers that we expect will ramp up over the coming year.

Now let me provide an update on the NVP business. Although there were some bright spots such as 20% growth in U.S. over the last four quarters, including a 3Q close of our first new win in the U.S. government since completing the acquisition. The overall revenues for the quarter came in well below our expectations.

Specifically weighing on performance in Q3 and carrying on into Q4 was a general weakness in EMEA, further compounded by the shift in timing from one large government installation. Since becoming CEO nine months ago, I’ve spent a considerable amount of time talking to customers and listening to their needs. And it’s clear to me that the drivers for network visibility remain in tact. In fact, if anything the needs for visibility into what's going on in your network are increasing.

In the last few weeks alone, there have been numerous announcements of security breaches and data loss by large retailers and banks including cyber attacks and exploits such as the heart bleed bug. That being said as we sit here a little over a year, after the acquisition, we are not pleased with the results. And I can assure you we’re going to make changes.

The bottom line is we know the market opportunity is there, and we intend to get after it. To that end, we have identified three core initiatives that will help us succeed. First, we need to do a better job of building and qualifying the pipeline with focused execution by our expanded sales force.

Second, we’ll be increasing our opportunities in relevance within the growing part of the ecosystem. Such is the very promising Cisco Sourcefire partnership recently announced. Lastly, we need to leverage our core competence in the OEM marketplace. While this would take time to harvest, we intend to sow the seeds over the next year to enable accelerated growth in years to come.

Turning to my last topic, let me provide you an update on our efforts to improve our operating efficiencies. As Kyle mentioned, we're starting to see a meaningful benefit from the spending reduction efforts that we implemented over the past two quarters and we expect expenses to come down further as we enter fiscal year ‘15.

We are also well down the path of completing the closure of the Bolton development site targeted for the end of June. With that action complete, we expect to deliver upon our commitments to a targeted reduction of $30 million in annual OpEx for the ECD business as we exit fiscal 2014.

Given the challenges created by our end market and customer volatility, we must continue to be singularly focused on developing the most efficient model and organization in the industry. To that end, we're continuing to focus on cost savings throughout the business and exploit the most efficient way to run operations while maintaining investment in our key growth initiatives.

With that discipline in place, we expect to be in a better position to weather today’s volatility, while delivering attractive returns as 10 gig and NVP begin to fully ramp. But I want to stress that we are balancing the desire for near-term profits with the need to invest for long-term sustainable growth in our business.

So, let me close with some summary observations. We have a lot of positive activity in our 10-gig business, including settling the Broadcom patent litigations, launching new CNA platforms of Dell developed for the first time in four years. And significant development work for supporting open architectures of next-generation card environments and data centers that will take advantage of the next server refresh cycle.

While the overall market for our visibility business remains strong, we need to improve execution to achieve the full benefit of these opportunities. With the renewed focus and energy in this business, the extended Emulex team is working together to ensure that we achieve our goals for NVP. Our transformation in the operation is well underway and we are on track to deliver the spending reduction, board level changes and the return of capital to shareholders that we committed to you in November.

But as we discussed over the past year, this transformation extends further to a philosophical change to how we run the business. And we are committed to continue to seek out operational efficiencies that will drive profitability and ultimately increase shareholder value today and in the future.

That includes our prepared remarks. Operator, we can now open up the line for questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question is coming from the line of Harsh Kumar with Stephens. Your line is now open. You may proceed with your question.

Harsh Kumar - Stephens

Yeah. Hey, guys. It seems like you guys have done some strategic rethinking about the growth of a lot of your business lines. As I look at your model, I'm not sure if $30 million cost cuts, you outlined is enough. Could you maybe explain to us why OpEx is not coming down dramatically more, or if maybe there's a plan to cut OpEx much more dramatically to support the declining business longer-term Fibre Channel as well as SCOP?

Jeff Benck

Yeah. Hi, it’s Jeff. I’ll start and then I will let Kyle add some color to this as well. As you know, we were focused on taking $30 million out of the core business by the end of fiscal ’14. We are closing the Bolton development lab and that will essentially be complete this quarter. And as we said in the prepared remarks, we are really confident that we will achieve that $30 million. In fact, we believe at this point, we can contain really all of the under spending within that same envelope. So if you look at, when we said we take $30 million out of, it was off of, ECD spend of $227 million.

And when you add back the under spending, we think the aggregate total will be less than that. We are going to continue to stay focused on expenses and look for additional opportunity like I said, we are already north of that $30 million number. But we are also balancing, we are still investing in 10 gig Ethernet as well as NVP business and that’s the kind of balance that we are trying to strike here across our product lines.

Kyle Wescoat

And I would add to that. We are in the midst of our AOP cycle right now and we are evaluating lots and lots of things that we do. And as we enter next year and at same time as we noted in the press release, we were very conscious of the weakening revenue situation in the quarter just ended and we initiated immediate plans for cost reduction and we are successful in those efforts. So we are very cost conscious. We are very aware of the demands on managing that relative to what’s going on in the rest of our business and we are going to continue to do so.

Harsh Kumar - Stephens

And guys, just one follow-up if I can ask, can you give us an idea of how big 10-gigabit business is? Seems like as I look at the different line items as you guys knew your own commentary as you guys described it, that’s the only part that’s growing today. NVP has been, I’m actually fair in saying it struggled ever since you bought it in terms of deliverable. So, I’m wondering if you could just tell us, A, how big is 10-gig for you today as it grew in March? And then secondly, how should we think of OpEx past the June quarter?

Jeff Benck

Yeah. We haven’t broken our 10-gig business as part of the connectivity business that we put together. Obviously, analysts had their view of what that business is and the latest answer we can afford to say is north of $20 million a quarter, if you look at some of the analysts’ summaries of that. But we had a good 10-gig quarter and grew that business 25% year-over-year or north of 25% year-over-year in the March quarter. But the largest component of the connectivity business is still fibre channel and will be for quite sometime.

Your other question was related to, how should you think about it and I think we are trying to give you a sense of where we’ve been on the $30 million that we got out of the core business, gain better than that and now been able to contain the complete under spending in that. So we are trying to give you at least a sense of the direction from an OpEx standpoint. As we continue to drive additional savings, I think we will update you as we go forward. But we are not at a point here where we are going to be able to give you a quarter-by-quarter for fiscal ’15 and it’s not something that was typically done. But directionally, I think what we are trying to say in Q4 is that, in Q4, there is a little bit of bump up because of some ASIC take outs and I know it’s a very busy quarter for us. I will say Q3 came down quite a bit more than we anticipated right at the beginning of the quarter. Some were driven by good cost management and also some exits out of the business were earlier than planned. But it’s safe to say in Q1, we will be done from Q4 spending level because Q4 is stepping up just a bit from the Q3 outlook.

Harsh Kumar - Stephens

Okay, guys. I will get back in line. Thank you.


Our next question is coming from the line of Vlad Rom. Your line is now open. You may proceed with your question.

Vlad Rom - D.A. Davidson & Co.

Hi, Jeff. It seems like there is kind of the secular issues with the fibre channel and some potential temporary weakness. I’m assuming you are referring to sale of the server business on IBM to Lenova, x86 side but then there is also some cyclical uplift. IBM has the power cycle coming up. There is a ground where you refresh and then there is kind of potential on 10-gig side. How should we step out growth in that context where you kind of have cyclical elements and some secular elements as well?

Jeff Benck

That’s a good question, Vlad. As you think about fibre channel, a lot of the analysts are seeing mid single-digit decline. We saw 10% last year. I mean that's what published numbers out for the calendar year. We are taking a little more cautious view right now, looking at our exposure to UNIX platforms where we are pretty dominant and where we thought we’d see some backing off in the decline there. It didn’t decline as quickly in the March quarter but it still continued to decline pretty materially. So that I would say is bit of a headwind.

The other thing that’s in our favor is 16-gig is now over, a clear 10%. It is north of 10% of our revenue in the March quarter. And it’s got a little bit higher ASP. So that’s actually a bit of an uplift. And then we also have the target opportunity but the target opportunity, it’s really taken, it’s a multi-year on a cycle. So we’ve not seen a lot of near-term lift from the target side that we talked about that represents $50 million to $75 million of incremental business that we can go after. As we just look at all the moving parts, we are seeing high single digit to 10%. The decline is, we are sort of planning on. If power rates is compelling and done something or reverse the trend that we are seeing there then that will be a really good news for us.

But at this point given our guide down in the fourth quarter, we are taking a more cautious stand. From a 10-gig standpoint, we think the market is growing, is growing nicely. I will highlight a number of things that went really well for us in 10-gig, settling the litigation in the upcoming retrial and the patient litigation with Broadcom and having that resolved, a number of design wins on Grantley which are pretty prolific, pretty pleased about that and we are busy qualification across relative to OEMs while I kind of looked at it which was about two days ago.

And then just the general matter even without the bridge that we are starting to see come back, we feel that we can do pretty well in the 10-gig space. The only potential counter flow on 10-gig is that we might see a bit of positive from Grantley. We’ve heard others indicate concern in the same realm, some of our competitors, and it’s nothing uncommon the quarter or two before to see a little bit of pause there and need some transition things. But from the time it launches later this year into our second half of the fiscal year ’15, I think we see good opportunity for growth there.

Vlad Rom - D.A. Davidson & Co.

Okay, great. Thank you. Appreciate it.

Jeff Benck

Thank you.


Thank you. Our next question is coming from the line of Aaron Rakers. Your line is now open. You may proceed with your question.

Joe Quatrochi - Stifel

Great, this is Joe Quatrochi for Aaron. I was wondering if you guys maybe comment on your competitors’ recent acquisitions of Broadcom’s Ethernet controller assets?

Jeff Benck

Absolutely. I think the comment on that. We think it’s going to take a foundation in the 10-gig space particularly from a rather larger aggressive competitor not longer being in the market. So we think that’s generally a positive trend that there is some consolidation happening and freeze up opportunity. Continuing with QLogic, they have been analysis in the Fibre Channel space for a long time.

When I look at what’s going on there, you got further from Ethernet stack that they are trying to nationalize. They had their own platform at Cornet then. They got 10-gig business related to HCV not at the Broadcom 10-gig bigger very completed roadmap to get through consolidating. And as they presumably jettison some of those product lines because only to consolidate, that’s going to open up opportunities for us to gain share there and I feel pretty good about that.

The other thing I would say is we have been clearly the number two guy in 10-gig behind Intel. And you look at QLogic and Broadcom together, they were both less than half of our size in terms of market share. So the other reasons that even with our headwinds around litigation, it’s not been in the full market. We have great technology and people have been adopting our technology and the differentiation we bring in then resonating with clients. So bringing these two guys together and assigning the role out together, it doesn’t immediately address the roadmap differential between us. So that’s kind of how we feel about that transaction and I think it’s kind of that positive for us.

Joe Quatrochi - Stifel

Okay, great. Thanks.


Thank you. Our next question is coming from the line of Joseph Wolf. Your line is now open. You may proceed with your question.

Tavy Rosner - Barclays

This is Tavy Rosne for Joseph. I was wondering if you could give some color on the 4-gig interent by now also do you think that the 40-gig cycle will be full cycle or customer may jump right to 100-gig?

Jeff Benck

Yes, I will come in at that it. We announced our first 60-gig product in the quarter. I don’t think we highlighted it in the comments of the script because frankly it’s early days for 40-gig. And where I think the most opportunity in short term for 40-gig is probably with some of the OEMs, but more interest right now in the could space and we have got a deign wins with the Taiwanese ODM that’s going after and participating in the COG business for 40-gig so. So we expect that to be an upside opportunity for us going forward.

But the market in my view is clearly going to move from 10 to 40 and 40 to 100, it’s just that it took the market 10 years to go from 1 to 10 gig. I don’t think it will four years to go from 10 to 40, but I think we are the -- we just starting to see Tangee cross over in revenue. We are long way from 10-gig crossing over into core shipments. I mean I think it’s 20% of the quarter Ethernet shipped. So we got a bit of room to go before 40 will overtake 10-gig, and then I think 100 is a natural from there. So I don’t see aside from maybe a few stocks in the quarter the network, I see that we got always to got 40-gig happens and I do think that will be interim step before 100-gig adoption takes off.

Tavy Rosner - Barclays

Yes, that’s helpful. And maybe just one last, what’s the current trajectory of flash storage deployment from your perspective and how are the new product for that opportunity doing with customer?

Jeff Benck

First storage is a pretty hot segment for us and this is -- I didn’t mention it was [Brad] (ph) asked the question earlier, but this has actually been a pretty good opportunity for our Fibre Channel business particularly 16-gig. We signed killer app for 10-gig for -- the killer app for 8-gig fibre tended to be virtualization. For 16-gig, one of the killer app is flash deployment in arrays and we’ve got some flash optimization that we’ve actually put into our Fibre Channel -- 16-gig Fibre Channel product, that’s allowing us to be very well positioned for those flash appliances and flash array deployment.

So we don’t sell flash product, but it is driving our storage networking offerings and we see it’s a pretty good win that plenty right now some of those appliance solutions are in qualification but a lot of the names you would know they are doing quite well in flash storage are taking advantage of our 16-gig technology. Probably some 10-gig rocking opportunity there too, but right now I am seeing a demand for 16-gig linked to the flash growth out there. And then you can looking any reports from the large storage OEMs and flash is probably about a particular, I don’t think probably particularly bright spot, I think IBM highlighted on a recent earnings announcement that they were pretty happy with their flash business and how that’s growing.

Tavy Rosner - Barclays

All right. Thank you.


Thank you. Our next question is coming from the line of Amit Daryanani. Your line is now open. You may proceed with your question.

Karl Ackerman - RBC Capital Markets

Good afternoon. This is Carl Ackerman speaking on behalf of Amit. Just curious if I could talk on the no physically products. That was down 27% sequentially. I think you highlighted it was a little bit softer than what you were anticipating. I think you mentioned kind of softness in EMEA and then kind of shifting the government contract there. And I guess just curious if that is the case, why should we maybe not see a larger step up in June given maybe a pushing of that contract? And then secondly, are you seeing any demand impact from maybe recent security breaches at major retailers?

Jeff Benck

Yeah. Let me -- I'm glad you asked about ANDAs and NVP product. This wasn’t just a little softer. This was a lot softer than what we’ve intended. We missed on this one. We didn't execute well across multiple dimensions. This was not just the sales execution. We missed on a number of dimensions here. Now when I step back to look at the business, this market is hot. There's no question there are great opportunities and there are some things that some specific changes that we are making to get after the opportunity in this segment. Just like you said, recently I mean it’s hard (indiscernible) we can help enterprises determine whether this is susceptible within this technology.

So there's no question we should be participating in that and there is no question now we're getting inquiries around how we can help folks here. What we described to you is look we missed call this quarter. We are looking at it very -- we are looking at the business very hard and saying look there is a couple of key things we have got to do. We absolutely got to do a better job of clarifying and closing the pipeline and the deal pipeline is growing and that is important, but we haven't been driving the closure rate at a fast enough pace to meet our objectives. We’re also sharpening the focus on a couple of key verticals, right. So we see government, we see utilities, we see media and entertainment, we see telco, our key areas that we can participate and where we’ve had success and where we are done well and we want to make sure we’re getting after those verticals and not difussing ourselves everywhere into marketplace. And then we are also increasing our opportunities through a number of partner relationships and one of the ones we announced in the quarter was Cisco Sourcefire. I think people are now realizing that intrusion detection is not enough. You're going to get a breach and once a breach occurs how do you get visibility to what’s happening in the network and that’s in the sweet spot of what we do and we can help customers understand that.

When I step back and look by geography, EMEA clearly was the big miss in terms of our expectations. When we look over the last year the U.S. business has grown 20%, that is kind of in line with the market growth, but we are still very dependent on a few large customers that are a big part of our revenue and that is why we are looking to grow the customer base and that is making it lumpier than we would like. And as we went through this quarter and looked at the pipeline going on, because of some of the uncertainty and timing of closure, even though -- I would say in general losing deals is not the primary factor here. A lot of this is we are part of some complex offerings that there is a bigger solution we are a piece of and we have less control over that timing which is making this a bit lumpy year. In the near-term we’re taking a more conservative stance and we are working on those operational elements I described.

Karl Ackerman - RBC Capital Markets

Understood the color. Just one more if I may, you mentioned briefly on Fibre Channel (indiscernible) not having much of a lift as of now, but I guess as we look at the benefit in 2015, I guess are you comfortable your share on the $60 million to $80 million opportunity will be close to existing market share within Fibre Channel today or maybe what’s the upside that we may be able to see in 2015?

Jeff Benck

I think it is fair to say that the market share, we should be able to see in the target side, it’s going to be close to representative of what we see in the broader market today. When you look at 16-gig specifically, we got 50% share so 16-gig adopts, so a 6- adoption, that is helpful to us, and that is where we see some of the target opportunities.

I guess the comment I made is that some of those deals, not all, but some of those deals or chip level deals and it tied a lot to 16-gig and given the fact that we are only at 10% option on our whole portfolio of 16-gig or a little, north of that this quarter, but generally over the last couple of quarters we’re just getting up north of 10%. It is just not a huge contribution and not enough to say this is going to make Fibre Channel be 5% down instead of high single digits. So that is kind of how we are modulating that.

No question we still see that. I see a couple deals, couple larger deals through that the qualification is happening. Not it is not complete in this quarter, the qualification is happening over the next couple of quarter. So when you look at the reality when those are going to be in market, its going to be later in fiscal ’15. So I just don’t want folks get to too far in front of us though.


Thank you. Our next question is coming from the line of Ryan Bergan with Piper Jaffray. Your line is now open. You may proceed with your question.

Ryan Bergan - Piper Jaffray

Thanks. So it sounds like to me you’re saying that EMEA was the executions issues not necessarily just sales but kind of overall execution issues. I heard you with NVP in Europe? But is there any element of macro-conditions in Europe that impacted that business?

And secondly, is there opportunities for the U.S. NVP business to grow above and beyond market growth rate of 20% take some share, they might be little offset the near-term weakness you’re seeing or the near-term issues you are having in Europe?

Jeff Benck

Yeah. I mean, the Americans did not said in, obviously, in the third quarter and while the, like I said, while the pipeline is growing, I think our forecast doesn’t reflect Americans offsetting in the coming quarter.

I think that when you look at Europe. It would be hard to me to say its economy driven. I think the server market EMEA is softer though, so IT spending maybe underneath that, isn’t doing quite as well because we see softness being down year-to-year over there.

But we did have and I think we talked about, we have pretty substantial U.K. government customer that there were some movement in the timeline or something there that also was a big contributor to that.

The other thing I would tell you is that the Europe sales force since there where we have added some additional resource. And its overall, we’ve got 50% of sales force now because we did invest there is new.

And we are finding the time for our sales force to be effective is taking a bit longer than I think we’ve been initially anticipated for them to get into new -- potentially new territory and open it up and increase the pipeline in that.

But beyond that we’re also -- we’ve got opportunities that we have to close and that’s on the team and it is got to be marketing and sales and engineering all pulling together to help us execute that.

So I clearly think that anything is very much on team support and we had to pull together there and we’re increasing the focus not just call at my level. But within the general management team at ANDAs and looking at what steps we need to be taken.

That’s why I talked about kind of holding in on the verticals where we seen good success. Security is a higher, you mentioned with some of the intrusion of stuff. It’s been a pretty hard area in general and quite a bit of our business comes from the (indiscernible) more as much as net ops of the business.

So we are seeing quite a bit of traction there in terms of proof-of-concept. But a proof-of-concept is one thing and another thing to take in order and then ship the product and we got to get after that.

And this quarter was down so much. I don’t think it is setting a new floor, even though we’re saying, we think in flat quarter-to-quarter. We don’t think that’s a new floor in the business. We just think that seeing big growth year-over-year has been more challenging and that’s we’re taking steps to ensure that this be one of the growth engine. We still absolutely characterize it as one of the company growth engines. We were wrong on the ethernet and we have every mean to pursue that.

Kyle Wescoat

I’ll make a final comment on the government business that, Jeff, referred to. In this historically, we’ll experience that the end fiscal years, when they were dealing with government agencies are pop right before the end of the fiscal year with the idea of fully spending in at the end of the government funding year.

I think the expectation was that we were going to see some of that this particular quarter. It did not happen, quite the way it had happen in past years as it related to ANDAs. Is about assuming that those projects are in anyway in jeopardy, it just that we had seen a cyclical event that historically happened that didn’t materialize quite as we thought it would in March being the end of the fiscal year for the government in the U.K.

Ryan Bergan - Piper Jaffray

All right. Thank you for that. And then on the share repurchases, are you able to give us any additional color as far as the cadence of the number of shares bought in next couple of quarters and the timing of such in order to achieve your goals?

Jeff Benck

Well, I think that we put it out that we purchased to date about 12.5 million shares and about 700,000 are more part of the recently announced. It can be 5, that we mentioned on the earnings -- on the -- in the text early on this call. I mean, we are convenient to the buyback and we’re actively watching the market and participating.

And so I think you are aware the accelerated repurchase plan that was entered into back in November will be wrapping up here shortly. And with that there will be some additional shares that will be part of our whole back that will be part of the account. But in any of that, we continue to be very active and we’re committed to the buyback.

Kyle Wescoat

Yeah. Let me just add to that. I mean, we saw this is all happened and we completely in the fourth quarter and it’s still the case. I think the sentiment of the buyers that we’ve had is, we’ve been a little bit more aggressive in the sense that we kicked off the 10b5-1 program with 50 million in it to go after the next tranche after the first $100 million. And we didn’t wait for that $100 million to complete. So we’ve been in market with that 10b on top of the ASR. So we believe that return in this capital shareholder made sense and we’ll buy it from that direction.

There is a lot of moving parts to try to predict the number going forward, we’ve given you a sense of the level of spend. We will complete that 10b5 likely this quarter. I’ll just the percent of the market and we not want to move the stock with our buys. As we look out that probably would time out in the first quarter of next fiscal year, just to give you a sort of a sense of the timing of that. And as you might run calculations about that.

Ryan Bergan - Piper Jaffray

All right. Thank you guys.


Thank you. (Operator Instructions) Our next question is coming from the line of Srini Nandury. Your line is now open. You may proceed with your question.

Srini Nandury - Summit Research

Thank you for taking my call. Jeff and Kyle, one of your competitor, InfiniBand talks about InfiniBand taking share from Fibre Channel storage, looks like that Avado guys are doing that already, but what about an enterprise to a segment?

Jeff Benck

I think as those systems are clustered together. We’ve seen some of our storage OEMs put InfiniBand interface on the platform for clustering storage. I still think it’s a small percent of the InfiniBand deployments. I think it’s quite interesting that -- I mean, of course, if dominant Infiniband, I’m saying it’s going everywhere.

So I don’t think that’s a material impact. I do think ethernet will impact storage. We’ll see in -- we’ll impact Fibre Channel in terms of the storage Interconnect. We’re seeing quite -- we’ve seen a bit of resurgence on FCoE. It’s becoming a bigger percent of block storage sales of our company. So that I think is the good trend for us because we’re one of the two leaders in that space. Certainly, I think everybody pronounced FCoE dead, maybe a little bit pretty maturely.

And then secondly, we think that absolutely -- we absolutely think that ethernet particularly with the Rocky support will be a strong deployment mechanism for storage going forward. And we’ve seen a lot of interest in that area. I think that customers are going to pick ethernet over InfiniBand because it’s the whole 80-20 -- the content is going to be good enough and it’s going to be less expensive. And with Rocky, it gets faster and lower latency and it starts to be -- starts to compete with InfiniBand in that space. And guess what, you can get it from multiple people.

You are not -- you’re holding one guy that forces you to use discrete processes and different approaches to managing your infrastructure than the Ethernet technology that they know and loving use everywhere today.

So our strategy is really been, don’t bet against Ethernet and as Ethernet goes more to storage that plays to our strength because storage networking is where we started with our Fibre Channel business and while the FCoE will play a role there, we think that over time Ethernet will playa bigger role than Infiniband in storage interconnects.

Srini Nandury - Summit Research

Okay. And the next question I have is that, I know that we are still in a very early stages of 16-gig Fibre Channel. One of the search partners is all-in invested into 32-gig Fibre Channel. Now with the business is declining faster than you’re expected. And the pressure to reduce OpEx is fairly significant, do you think it will invest in 32-gig Fibre Channel at this point?

Jeff Benck

We’re investing in 32-gig already. We were a year ahead of my biggest competitor in deploying 16-gig. So we’ve had a bit of a jump start there. We are sensitive to the amount of spending in the Fibre Channel space given market opportunity and the declining profile of it.

But when you look at -- as we can do the thing incrementally and not re-architect and do something to deploy the different, we think we can do it fairly cost effectively, so at this point, as we look at the business and the size of the market and the opportunity and --

Srini Nandury - Summit Research

One last question.

Jeff Benck

That’s okay.

Srini Nandury - Summit Research

Can you talk about the market share and penetration of NDIS into MDD? I mean, do you think you have the right product to address the market? How much of your weakness is execution versus competition product positioning?

Jeff Benck

Yeah. I think, our product, I would tell you the customers that are deploying NDIS are delighted. We got great feedback, so we continue to enhance the roadmap. We just launched -- we just launched this -- we announced at the end of the last quarter and will ship in this quarter, our Gen-3 data acquisition card versus Gen 3 PCI technology, time to market with the industry, moving to that.

I think that our product offering is strong. I do think though that we often times play in a bigger solution as I mentioned before. We may not provide all the analytics. We’ve got a big ecosystem of partners that do an application performance management. And we’re a piece of some of those larger solutions. So, I think more of that, a little bit of complexity of the space they we are in and the role we play.

Within our own technology, I mean, I just saw a two bit from a high frequency trailing customer that just ordered some product from us because we’ve got better time stamping and better capability for supporting that kind of environment in the competition and needed a big bake off to get to that. So, I think it’s generally -- our technology is good. But it is very much leveraging 10-gig. If customers are doing one-gig stuff, that’s not really where NDIS plays and Emulex didn’t do one-gig either, so we’re very -- both Ethernet and NVP strategy are driven by this transition to 10-gig.

And we are the number two supplier in the segment of network recording. And from that standpoint, I think that says that we played pretty heavily into that. I would also note that there was a small company with the small sales force and they had several large customers that were buying quite a bit of product. But they really were broadly seen everywhere and that’s one of the things we’ve been focused on is how do we get the more exposure and how do we increase the pipeline. And that allows more predictability in closing deals and not being so dependent on some of the larger opportunities here and there.

Srini Nandury - Summit Research

Thank you so much.

Jeff Benck



Thank you. Mr. Benck, at this time there are no further questions. We’ll turn the call back to you for your closing remarks.

Jeff Benck

Okay. So we would like to thank everyone for your participation in the Emulex third quarter 2014 conference call. And this will wrap it up and we look forward to seeing you at upcoming conferences and then follow-up discussions. Thank you.


Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful day.

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