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| QLGC > SEC Filings for QLGC > Form 10-Q on 4-Feb-2009 | All Recent SEC Filings |
4-Feb-2009
Quarterly Report
• Gross profit as a percentage of net revenues was 66.5% for the third quarter of fiscal 2009 compared to 67.9% for the second quarter of fiscal 2009.
• Operating income as a percentage of net revenues was 27.7% for the third quarter of fiscal 2009 compared to 29.2% in the second quarter of fiscal 2009.
• Net income of $30.8 million, or $0.24 per diluted share, in the third quarter of fiscal 2009 increased from $27.2 million, or $0.20 per diluted share, in the second quarter of fiscal 2009.
• Cash, cash equivalents and marketable securities were $371.7 million at December 28, 2008 compared to $421.0 million at September 28, 2008.
• Accounts receivable was $87.5 million as of December 28, 2008, compared to $77.9 million as of September 28, 2008. Days sales outstanding (DSO) in receivables was 49 days as of December 28, 2008 compared to 41 days as of September 28, 2008.
• Inventories were $30.2 million as of December 28, 2008, compared to $33.3 million as of September 28, 2008. Our annualized inventory turns in the third quarter of fiscal 2009 increased to 7.3 from 6.6 turns in second quarter of fiscal 2009.
As a result of the worldwide economic slowdown, it is extremely difficult for
us and our customers to forecast future sales levels based on historical
information and trends. Portions of our expenses are fixed and other expenses
are tied to expected levels of sales activities. To the extent that we do not
achieve our anticipated level of sales, our gross profit and net income could be
adversely affected until such expenses are reduced to an appropriate level.
Results of Operations
Net Revenues
A summary of the components of our net revenues is as follows:
Three Months Ended Nine Months Ended
December 28, December 30, December 28, December 30,
2008 2007 2008 2007
(Dollars in millions)
Net revenues:
Host Products $ 112.2 $ 118.9 $ 352.5 $ 327.5
Network Products 32.8 27.8 92.5 74.2
Silicon Products 16.5 9.3 47.7 30.4
Royalty and Service 2.2 2.0 10.6 6.0
Total net revenues $ 163.7 $ 158.0 $ 503.3 $ 438.1
Percentage of net revenues:
Host Products 69 % 75 % 70 % 75 %
Network Products 20 18 18 17
Silicon Products 10 6 10 7
Royalty and Service 1 1 2 1
Total net revenues 100 % 100 % 100 % 100 %
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Historically, the global marketplace for network infrastructure solutions has
expanded in response to the information storage requirements of enterprise
business environments, as well as the emerging market for solutions in HPC
environments. These markets have been characterized by rapid advances in
technology and related product performance, which has generally resulted in
declining average selling prices over time. In general, our revenues have been
favorably affected by increases in units sold as a result of market expansion
and the release of new products. The favorable effect on our revenues as a
result of increases in volume has been partially offset by the impact of
declining average selling prices. However, as a result of the worldwide economic
slowdown, we believe there may be potential for a broader slowdown in global IT
spending rates in the next few quarters. Accordingly, it is extremely difficult
for us to forecast future sales levels and historical information may not be
indicative of future trends.
Our net revenues are derived primarily from the sale of Host Products,
Network Products and Silicon Products. Net revenues increased 4% to
$163.7 million for the three months ended December 28, 2008 from $158.0 million
for the three months ended December 30, 2007. The change in net revenue was
primarily the result of a $6.7 million, or 6%, decrease in revenue from Host
Products; a $5.0 million, or 18%, increase in revenue from Network Products; and
a $7.2 million, or 78%, increase in revenue from Silicon Products. The decrease
in revenue from Host Products was primarily due to a 9% decrease in the average
selling prices of HBAs, partially offset by a 3% increase in the quantity of
these products sold. The increase in revenue from Network Products was primarily
due to a 27% increase in the number of InfiniBand switches sold and a 49%
increase in the number of Fibre Channel switches sold, partially offset by a 27%
decrease in the average selling prices of Fibre Channel switches. The increase
in revenue from Silicon Products from the same period in the prior year was due
primarily to an increase in the number of protocol chips sold, partially offset
by a decrease in revenue from management controllers, as these products have
reached end of life. Royalty and Service revenues are unpredictable and we do
not expect them to be significant to our overall revenues.
Net revenues increased 15% to $503.3 million for the nine months ended
December 28, 2008 from $438.1 million for the nine months ended December 30,
2007. This increase was primarily the result of a $25.0 million, or 8%, increase
in revenue from Host Products; an $18.3 million, or 25%, increase in revenue
from Network Products; and a $17.3 million, or 57%, increase in revenue from
Silicon Products. The increase in revenue from Host Products was primarily due
to a 17% increase in the quantity of HBAs sold partially offset by an 8%
decrease in average selling prices of these products. The increase in revenue
from Network Products was primarily due to a 58% increase in the number of Fibre
Channel switches sold, partially offset by a 23% decrease in the average selling
prices of these products and a 46% increase in the number of InfiniBand switches
sold. The increase in revenue from Silicon Products from the same period in the
prior year was due primarily to an increase in the number of protocol chips
sold. Royalty and Service revenues for the nine months ended December 28, 2008
increased to $10.6 million from $6.0 million for the nine months ended
December 30, 2007, primarily due to a $3.5 million one-time royalty associated
with the license of technology acquired from Troika Networks.
A small number of our customers account for a substantial portion of our net
revenues, and we expect that a limited number of customers will continue to
represent a substantial portion of our net revenues for the foreseeable future.
Our top ten customers accounted for 83% and 85% of net revenues during the nine
months ended December 28, 2008 and the fiscal year ended March 30, 2008,
respectively. Three of our customers each represented 10% or more of net
revenues for fiscal 2008, and these same three customers continued to be the
only customers representing 10% or more of net revenues for the nine months
ended December 28, 2008.
We believe that our major customers continually evaluate whether or not to
purchase products from alternative or additional sources. Additionally,
customers' economic and market conditions frequently change. Accordingly, there
can be no assurance that a major customer will not reduce, delay or eliminate
its purchases from us. Any such reduction, delay or loss of purchases could have
a material adverse effect on our business, financial condition or results of
operations.
Net revenues by geographic area are as follows:
Three Months Ended Nine Months Ended
December 28, December 30, December 28, December 30,
2008 2007 2008 2007
(In millions)
United States $ 75.8 $ 78.7 $ 240.1 $ 224.9
Europe, Middle East and Africa 40.4 40.2 123.4 105.4
Asia-Pacific and Japan 39.0 29.1 111.4 81.0
Rest of the world 8.5 10.0 28.4 26.8
Total net revenues $ 163.7 $ 158.0 $ 503.3 $ 438.1
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Revenues by geographic area are presented based upon the country of
destination, which is not necessarily indicative of the location of the ultimate
end-user of our products.
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of revenues
consists primarily of the cost of purchased products, assembly and test
services; costs associated with product procurement, inventory management and
product quality; and the amortization of purchased intangible assets. A summary
of our gross profit and related percentage of net revenues is as follows:
Three Months Ended Nine Months Ended
December 28, December 30, December 28, December 30,
2008 2007 2008 2007
(Dollars in millions)
Gross profit $ 108.9 $ 105.8 $ 337.8 $ 286.0
Percentage of net revenues 66.5 % 66.9 % 67.1 % 65.3 %
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Gross profit for the three months ended December 28, 2008 increased
$3.1 million, or 3%, from gross profit for the three months ended December 30,
2007. The gross profit percentage for the three months ended December 28, 2008
was 66.5% and compared to 66.9% for the corresponding period in the prior year.
Gross profit for the nine months ended December 28, 2008 increased
$51.8 million, or 18%, from gross profit for the nine months ended December 30,
2007. The gross profit percentage for the nine months ended December 28, 2008
was 67.1% and increased from 65.3% for the corresponding period in the prior
year. The increase in gross profit percentage was primarily the result of
manufacturing related efficiencies.
Our ability to maintain our current gross profit percentage can be
significantly affected by factors such as the results of our investment in
engineering and development activities, supply costs, the worldwide
semiconductor foundry capacity, the mix of products shipped, the transition to
new products, competitive price pressures, the timeliness of volume shipments of
new products, the level of royalties received, our ability to achieve
manufacturing cost reductions, and amortization and impairments of purchased
intangible assets. We anticipate that it will be increasingly difficult to
reduce manufacturing costs. As a result of these and other factors, it may be
difficult to maintain our gross profit percentage consistent with historical
periods and it may decline in the future.
Operating Expenses
Our operating expenses are summarized in the following table:
Three Months Ended Nine Months Ended
December 28, December 30, December 28, December 30,
2008 2007 2008 2007
(Dollars in millions)
Operating expenses:
Engineering and development $ 33.1 $ 33.2 $ 100.6 $ 100.9
Sales and marketing 20.9 20.3 67.9 62.1
General and administrative 8.2 8.2 24.9 25.2
Special charges 1.4 - 1.4 3.8
Total operating expenses $ 63.6 $ 61.7 $ 194.8 $ 192.0
Percentage of net revenues:
Engineering and development 20.2 % 21.0 % 20.0 % 23.0 %
Sales and marketing 12.8 12.9 13.5 14.2
General and administrative 5.0 5.2 4.9 5.8
Special charges 0.9 - 0.3 0.8
Total operating expenses 38.9 % 39.1 % 38.7 % 43.8 %
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Engineering and Development. Engineering and development expenses consist
primarily of compensation and related benefit costs, service and material costs,
occupancy costs and related computer support costs. Engineering and development
expenses decreased to $33.1 million for the three months ended December 28, 2008
from $33.2 million for the three months ended December 30, 2007. During the nine
months ended December 28, 2008, engineering and development expenses decreased
to $100.6 million from $100.9 million for the nine months ended December 30,
2007. The decrease was primarily due to a $1.7 million decrease in cash
compensation and benefit costs resulting from a net reduction in headcount,
including a reduction in headcount related to the consolidation and elimination
of certain engineering activities during fiscal 2008. This decrease was
partially offset by a $1.1 million increase in depreciation and equipment costs.
We believe continued investments in engineering and development activities
are critical to achieving future design wins, expansion of our customer base and
revenue growth opportunities.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related benefit costs, sales commissions, promotional
activities and travel for sales and marketing personnel. Sales and marketing
expenses increased to $20.9 million for the three months ended December 28, 2008
from $20.3 million for the three months ended December 30, 2007. The increase in
sales and marketing expenses was due primarily to a $0.5 million increase in
cash compensation and related benefit costs.
Sales and marketing expenses increased to $67.9 million for the nine months
ended December 28, 2008 from $62.1 million for the nine months ended
December 30, 2007. The increase in sales and marketing expenses was due
primarily to a $4.1 million increase in cash compensation and related benefit
costs, principally related to a $1.9 million increase in salaries due to
increased headcount and a $1.8 million increase in commissions. In addition,
occupancy costs and related computer support costs increased by $1.4 million.
We believe continued investments in our sales and marketing organizational
infrastructure and related marketing programs are critical to the success of our
strategy of expanding our customer base and enhancing relationships with our
existing customers.
General and Administrative. General and administrative expenses consist
primarily of compensation and related benefit costs for executive, finance,
accounting, human resources, legal and information technology personnel.
Non-compensation components of general and administrative expenses include
accounting, legal and other professional fees, facilities expenses and other
corporate expenses. General and administrative expenses were consistent at
$8.2 million for the three months ended December 28, 2008 and December 30, 2007,
respectively.
General and administrative expenses decreased to $24.9 million for the nine
months ended December 28, 2008 from $25.2 million for the nine months ended
December 30, 2007. The decrease in general and administrative expenses was due
primarily to a $2.1 million decrease in stock-based compensation, partially
offset by a $1.3 million increase in cash compensation and related benefit costs
due to increased headcount.
Special Charges. During the three months ended December 28, 2008, we
implemented a workforce reduction initiative primarily in response to the
macroeconomic environment and recorded special charges totaling $1.4 million
associated with the cost of severance benefits for the affected employees, of
which $0.8 million had been paid as of December 28, 2008. The unpaid severance
benefits of $0.6 million are expected to be paid over the terms of the related
agreements, principally during fiscal 2009.
During the nine months ended December 30, 2007, we recorded special charges
of $3.8 million associated with the consolidation and elimination of certain
engineering activities. As of December 28, 2008, the payments related to these
activities were substantially complete.
Interest and Other Income, Net
Components of our interest and other income, net, are as follows:
Three Months Ended Nine Months Ended
December 28, December 30, December 28, December 30,
2008 2007 2008 2007
(In millions)
Interest income $ 2.9 $ 4.4 $ 9.4 $ 16.2
Gain on recognition of put options 8.1 - 8.1 -
Loss on trading securities (4.5 ) - (4.5 ) -
Impairment of available-for-sale securities (4.3 ) - (12.0 ) -
Gain on sales of available-for-sale securities 0.6 0.4 1.0 0.6
Loss on sales of available-for-sale securities (0.1 ) - (0.1 ) (0.2 )
Other (0.2 ) 0.1 0.1 0.3
$ 2.5 $ 4.9 $ 2.0 $ 16.9
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Interest and other income, net, for the three months ended December 28, 2008
was comprised principally of an $8.1 million gain on the recognition of put
options and $2.9 million of interest income related to our portfolio of
marketable securities, partially offset by a $4.5 million loss on trading
securities and a $4.3 million impairment charge on available-for-sale
securities. The gain on recognition of put options resulted from an agreement
that we entered into with the broker for substantially all of our auction rate
securities (ARS) that entitles us to sell the related ARS back to the broker for
a price equal to the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, if any, at any time between June 30, 2010 and July 2,
2012, if the securities are not earlier redeemed or sold. The loss on trading
securities was due to the realization of $3.4 million of previously unrealized
losses on certain ARS that were transferred from accumulated other comprehensive
loss as a result of the reclassification of the ARS from available-for-sale to
trading securities and $1.1 million related to changes in the fair market value
of the trading securities subsequent to the reclassification. Interest income
decreased primarily due to a decrease in the balance of our marketable
securities and a decline in interest rates.
Interest and other income, net, for the nine months ended December 28, 2008
was comprised principally of $9.4 million of interest income related to our
portfolio of marketable securities, the $8.1 million gain on the recognition of
the put options and $0.9 million of net gains on sales of available-for-sale
securities, partially offset by a $12.0 million impairment charge on
available-for-sale securities and the $4.5 million loss on trading securities.
Interest income decreased primarily due to a decrease in the balance of our
marketable securities and a decline in interest rates.
We reviewed various factors in determining whether to recognize an impairment
charge related to our unrealized losses in available-for-sale securities,
including the current financial and credit market environment, the financial
condition and near term prospects of the issuer of the marketable security, the
magnitude of the unrealized loss compared to the cost of the investment, the
length of time the investment has been in a loss position and our intent and
ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery of market value. Based on this analysis, we determined that
a portion of the unrealized losses were other-than-temporary and recorded
impairment charges of $4.3 million and $12.0 million related to our portfolio of
available-for-sale securities during the three and nine months ended
December 28, 2008, respectively.
Income Taxes
Our effective income tax rate was 38% and 34% for the nine months ended
December 28, 2008 and December 30, 2007, respectively. Our effective income tax
rate for the nine months ended December 28, 2008 was adversely impacted by a
valuation allowance against deferred tax assets related to impairment charges on
certain available-for-sale securities. Due to the recent turmoil in the
financial and credit markets, and limitations on the deductibility of capital
losses, we are currently unable to assert that it is more likely than not that
we will realize the benefit of the related deferred tax assets. The impact of
the valuation allowance was partially offset by the retroactive benefit for the
federal research tax credit which was reinstated in October 2008. We expect the
annual effective tax rate for fiscal 2009 to approximate 37%. Our annual
effective tax rate was 35% for fiscal 2008. Given the increased global scope of
our operations, and the complexity of global tax and transfer pricing rules and
regulations, it has become increasingly difficult to estimate earnings within
each tax jurisdiction. If actual earnings within each tax jurisdiction differ
materially from our estimates, we may not achieve our expected effective tax
rate. Additionally, our effective tax rate may be impacted by other items
including the tax effects of acquisitions, newly enacted tax legislation,
stock-based compensation and uncertain tax positions.
Liquidity and Capital Resources
Our combined balances of cash, cash equivalents and marketable securities
totaled $371.7 million at December 28, 2008 compared to $376.4 million at
March 30, 2008. The decrease in cash, cash equivalents and marketable securities
. . .
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