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| QLGC > SEC Filings for QLGC > Form 10-K on 21-May-2009 | All Recent SEC Filings |
21-May-2009
Annual Report
• Gross profit as a percentage of net revenues of 65.9% for the fourth quarter of fiscal 2009 compared to 66.3% for the fourth quarter of fiscal 2008.
• Operating income as a percentage of net revenues was 18.3% for the fourth quarter of fiscal 2009 compared to 24.9% in the fourth quarter of fiscal 2008.
• Net income was $19.2 million, or $0.16 per diluted share, in the fourth quarter of fiscal 2009 compared to $22.8 million, or $0.17 per diluted share, in the fourth quarter of fiscal 2008.
• Cash, cash equivalents and investment securities of $378.3 million at March 29, 2009 increased from $376.4 million at March 30, 2008.
• Accounts receivable was $68.5 million as of March 29, 2009, and decreased from $81.6 million as of March 30, 2008. Days sales outstanding (DSO) in receivables as of March 29, 2009 was 48 days compared to 47 days as of March 30, 2008.
• Inventories were $40.3 million as of March 29, 2009, compared to $27.5 million as of March 30, 2008. Our annualized inventory turns in the fourth quarter of fiscal 2009 were 4.4 turns compared to 7.8 turns in the fourth quarter of fiscal 2008.
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:
2009 2008 2007
(Dollars in millions)
Net revenues:
Host Products $ 440.9 $ 437.9 $ 410.6
Network Products 117.6 101.8 88.3
Silicon Products 61.4 44.3 76.7
Royalty and Service 14.0 13.9 11.1
Total net revenues $ 633.9 $ 597.9 $ 586.7
Percentage of net revenues:
Host Products 70 % 73 % 70 %
Network Products 18 17 15
Silicon Products 10 8 13
Royalty and Service 2 2 2
Total net revenues 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 market for solutions in high performance
computing 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.
The United States and other countries around the world have been experiencing
deteriorating economic conditions. This economic decline has resulted in a
global downturn in information technology spending rates, which has negatively
impacted our revenue and operating results. In addition, we believe there may be
potential for a broader slowdown in global information technology spending
rates. 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 6% to
$633.9 million for fiscal 2009 from $597.9 million for fiscal 2008. This
increase was primarily the result of a $3.0 million, or 1%, increase in revenue
from Host Products; a $15.8 million, or 16%, increase in revenue from Network
Products; and a $17.1 million, or 39%, increase in revenue from Silicon
Products. The increase in revenue from Host Products was primarily due to an 8%
increase in the quantity of host bus adapters sold partially offset by a 7%
decrease in average selling prices of these products. The increase in revenue
from Network Products was primarily due to a 40% increase in the number of Fibre
Channel switches sold, partially offset by a 21% decrease in the average selling
prices of these products, and a 32% increase in the number of InfiniBand
switches sold, partially offset by an 11% decrease in the average selling prices
of these products. The increase in revenue from Silicon Products from the prior
year was due primarily to a 32% increase in the number of Fibre Channel and
iSCSI controllers sold. Net revenues for fiscal 2009 included $14.0 million of
royalty and service revenue compared with $13.9 million of royalty and service
revenue for fiscal 2008. Royalty and service revenues are unpredictable and we
do not expect them to be significant to our overall revenues.
Net revenues were $597.9 million for fiscal 2008 compared to $586.7 million
for fiscal 2007. This increase was primarily the result of a $27.3 million, or
7%, increase in revenue from Host Products and a $13.5 million, or 15%, increase
in revenue from Network Products, partially offset by a $32.4 million, or 42%,
decrease in revenue from Silicon Products. The increase in revenue from Host
Products was primarily due to a 21% increase in the quantity of host bus
adapters sold partially offset by a 12% decrease in average selling prices of
these products. This host bus adapter volume increase was primarily driven by
approximately a 150% increase in the quantity of Fibre Channel mezzanine cards
sold which are used in blade servers and have a lower average selling price than
standard host bus adapter products. The increase in revenue from Network
Products was primarily due to the addition of InfiniBand switches to our product
portfolio as a result of our acquisition of SilverStorm Technologies, Inc.
(SilverStorm), partially offset by a 4% decrease in revenue from Fibre Channel
switch products. The decrease in Fibre Channel switch revenue was primarily due
to a decline in revenue from our legacy and end-of-life products, which was not
offset by revenue from our more recent product offerings until late fiscal 2008.
The decrease in revenue from Silicon Products from the same period in the prior
year was due primarily to an expected decrease in units sold. Net revenues for
fiscal 2008 included $13.9 million of royalty and service revenue compared with
$11.1 million of royalty and service revenue for fiscal 2007.
A small number of our customers account for a substantial portion of our net
revenues, and we expect that a small number of customers will continue to
represent a substantial portion of our net revenues for the foreseeable future.
Our top ten customers accounted for 84%, 85% and 80% of net revenues during
fiscal 2009, 2008 and 2007, respectively.
A summary of our customers, including their manufacturing subcontractors,
that represent 10% or more of our net revenues for any of the fiscal years
presented is as follows:
2009 2008 2007
Hewlett-Packard 21 % 20 % 16 %
IBM 18 % 16 % 17 %
Sun Microsystems 11 % 11 % 12 %
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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:
2009 2008 2007
(In millions)
United States $ 303.7 $ 305.2 $ 314.3
Europe, Middle East and Africa 154.5 144.6 132.0
Asia-Pacific and Japan 139.9 113.1 111.1
Rest of world 35.8 35.0 29.3
$ 633.9 $ 597.9 $ 586.7
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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. No individual country other than the United States
represented 10% or more of net revenues for any of the fiscal years presented.
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 and impairment of purchased intangible
assets. A summary of our gross profit and related percentage of net revenues is
as follows:
2009 2008 2007
(Dollars in millions)
Gross profit $ 423.8 $ 391.9 $ 394.7
Percentage of net revenues 66.9 % 65.6 % 67.3 %
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Gross profit for fiscal 2009 increased $31.9 million, or 8%, from gross
profit for fiscal 2008. The gross profit percentage for fiscal 2009 was 66.9%
and increased from 65.6% for the prior year. The increase in gross profit
percentage was primarily the result of manufacturing related efficiencies and a
decline of $3.5 million in amortization and impairment of purchased intangible
assets in fiscal 2009.
Gross profit for fiscal 2008 decreased $2.8 million from gross profit for
fiscal 2007. The gross profit percentage for fiscal 2008 was 65.6% and decreased
from 67.3% for the prior year. The decline in gross profit percentage was
primarily impacted by a shift in product mix, including the addition of
InfiniBand products as a result of our acquisition of SilverStorm, and an
increase of $4.1 million in amortization and impairment of purchased intangible
assets.
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:
2009 2008 2007
(Dollars in millions)
Operating expenses:
Engineering and development $ 133.2 $ 134.7 $ 135.3
Sales and marketing 87.0 84.2 86.8
General and administrative 32.6 34.0 31.0
Special charges 4.1 5.3 -
Purchased in-process research and development - - 3.7
Total operating expenses $ 256.9 $ 258.2 $ 256.8
Percentage of net revenues:
Engineering and development 21.0 % 22.5 % 23.1 %
Sales and marketing 13.7 14.1 14.8
General and administrative 5.2 5.7 5.3
Special charges 0.6 0.9 -
Purchased in-process research and development - - 0.6
Total operating expenses 40.5 % 43.2 % 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. During fiscal 2009,
engineering and development expenses decreased to $133.2 million from
$134.7 million in fiscal 2008. The decrease was primarily due to a $1.0 million
decrease in acquisition-related stock-based compensation that resulted from
headcount reductions in the fourth quarter of fiscal 2009, a $0.9 million
decrease in cash compensation and benefit costs and a $0.7 million decrease in
occupancy and related computer support costs that both resulted from a net
reduction in headcount, including a reduction in headcount related to the
consolidation and elimination of certain engineering activities during fiscal
2008. These decreases were partially offset by a $1.2 million increase in
depreciation and equipment costs.
During fiscal 2008, engineering and development expenses decreased to
$134.7 million from $135.3 million in fiscal 2007. The decrease in engineering
and development expenses was due primarily to a decrease in acquisition-related
stock-based compensation of $6.4 million, a $1.6 million decrease in new product
development costs and a $1.5 million decrease in cash compensation and related
benefit costs. These decreases resulted primarily from the consolidation and
elimination of certain engineering activities. See further discussion under
"Special Charges." These decreases were partially offset by a $3.3 million
increase in stock-based compensation, excluding acquisition-related charges, a
$3.2 million increase in occupancy costs and related computer support costs, and
a $2.5 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 $87.0 million for fiscal 2009 from $84.2 million for
fiscal 2008. The increase in sales and marketing expenses was due primarily to a
$2.4 million increase in salaries due to increased average headcount during
fiscal 2009, a $1.7 million increase in occupancy costs and related computer
support costs and a $1.4 million increase in commissions. These increases were
partially offset by a $2.2 million decrease in promotional costs, including our
costs for certain sales and marketing programs, and a $0.6 million decrease in
travel costs, both related to our cost cutting measures in the second half of
fiscal 2009.
Sales and marketing expenses decreased to $84.2 million for fiscal 2008 from
$86.8 million for fiscal 2007. The decrease in sales and marketing expenses was
due primarily to a $4.0 million decrease in promotional costs, including the
costs for certain sales and marketing programs, and a decrease in stock-based
compensation of $3.3 million, including stock-based compensation related to
acquisitions, partially offset by a $2.0 million increase in amortization of
purchased intangible assets related to the acquisition of SilverStorm, an
increase in depreciation and equipment costs of $1.0 million, a $0.9 million
increase in cash compensation and related benefit costs and a $0.9 million
increase in travel related expenses.
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 decreased to
$32.6 million for fiscal 2009 from $34.0 million for fiscal 2008. The decrease
in general and administrative expenses was due primarily to a $2.8 million
decrease in stock-based compensation, partially offset by a $1.6 million
increase in cash compensation and related benefit costs due to increased
headcount.
General and administrative expenses increased to $34.0 million for fiscal
2008 from $31.0 million for fiscal 2007. The increase in general and
administrative expenses was due primarily to a $0.7 million increase in cash
compensation and related benefit costs, a $0.6 million increase in accounting
and legal fees, and a $0.4 million increase in bad debt expense.
Special Charges. During fiscal 2009, we implemented a workforce reduction
initiative, primarily in response to the macroeconomic environment, and recorded
special charges totaling $4.1 million. The special charges consisted primarily
of $3.9 million of exit costs associated with severance benefits for the
affected employees and costs related to a facility under a non-cancelable lease
that we vacated during fiscal 2009.
During fiscal 2008, we recorded special charges totaling $5.3 million related
to workforce reductions and the consolidation and elimination of certain
activities, principally related to certain engineering functions. The special
charges consisted of $5.0 million for exit costs and $0.3 million for asset
impairments. The exit costs include the costs associated with workforce
reductions, the cancellation of a contract and the consolidation of certain
facilities.
The unpaid exit costs as of March 29, 2009, which aggregate $2.0 million, are
expected to be paid over the terms of the related agreements, principally during
fiscal 2010.
Purchased In-Process Research and Development. In connection with our
acquisitions, we recorded $3.7 million of purchased in-process research and
development (IPR&D) charges during fiscal 2007. The amounts allocated to IPR&D
were determined through established valuation techniques used in the high
technology industry and were expensed upon acquisition as it was determined that
the underlying projects had not reached technological feasibility and no
alternative future uses existed.
The fair value of the IPR&D for each of the acquisitions was determined using
the income approach. Under the income approach, the expected future cash flows
from each project under development are estimated and discounted to their net
present values at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance on
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
on forecasted revenue and costs, taking into account product life cycles, and
market penetration and growth rates.
As of March 30, 2008, all IPR&D projects were complete.
Interest and Other Income, Net
Components of our interest and other income, net, are as follows:
2009 2008 2007
(In millions)
Interest income $ 11.3 $ 20.6 $ 25.7
Impairment of investment securities (16.4 ) (6.9 ) (8.1 )
Gain on sales of available-for-sale securities 2.7 0.8 0.2
Loss on sales of available-for-sale securities (1.2 ) (0.2 ) (1.8 )
Gain on sale of shares of a publicly-traded company 2.1 - -
Gain related to put options 9.3 - -
Loss on trading securities (5.8 ) - -
Other 0.1 (0.3 ) 0.9
$ 2.1 $ 14.0 $ 16.9
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Interest income decreased to $11.3 million in fiscal 2009 from $20.6 million
in fiscal 2008 primarily due to a decrease in the balance of our investment
securities and a decline in interest rates.
The impairment charges on investment securities of $16.4 million, includes
$11.3 million related to declines in value of our available-for-sale securities
that were deemed to be other-than-temporary and $5.1 million related to our
investments in a money market fund and an enhanced cash fund sponsored by The
Reserve (an asset management company).
During fiscal 2009, we sold all of our remaining holdings in common stock
that we held in a publicly-traded company and recorded a net gain of
$2.1 million. We had received the common stock in connection with the sale of
our hard disk drive controller and tape drive controller business in fiscal
2006. We had previously recorded impairment charges related to these shares
totaling $15.9 million since fiscal 2007, including $4.3 million during fiscal
2009.
The gain related to put options includes $8.1 million recognized as a result
of 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. In
addition, we recorded a $1.2 million gain related to subsequent increases in the
fair value of these put options during fiscal 2009.
. . .
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