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| QLGC > SEC Filings for QLGC > Form 10-Q on 29-Jul-2009 | All Recent SEC Filings |
29-Jul-2009
Quarterly Report
First Quarter Financial Highlights and Other Information
A summary of the key factors and significant events which impacted our
financial performance during the first quarter of fiscal 2010 are as follows:
• Net revenues for the first quarter of fiscal 2010 were $122.8 million
compared to $130.5 million in the fourth quarter of fiscal 2009. Revenues
from Host Products were $88.3 million compared to $88.4 million in the
fourth quarter of fiscal 2009 and revenues from Network Products were
$25.0 million compared to $25.1 million in the fourth quarter of fiscal
2009.
• Gross profit as a percentage of net revenues was 63.8% for the first quarter of fiscal 2010 compared to 65.9% for the fourth quarter of fiscal 2009.
• Operating income as a percentage of net revenues was 13.4% for the first quarter of fiscal 2010 compared to 18.3% in the fourth quarter of fiscal 2009.
• Net income was $15.0 million, or $0.13 per diluted share, in the first quarter of fiscal 2010 compared to $19.2 million, or $0.16 per diluted share, in the fourth quarter of fiscal 2009.
• Cash, cash equivalents and investment securities were $354.8 million at June 28, 2009 compared to $378.3 million at March 29, 2009.
• Accounts receivable was $68.9 million as of June 28, 2009, compared to $68.5 million as of March 29, 2009. Days sales outstanding (DSO) in receivables was 51 days as of June 28, 2009 compared to 48 days as of March 29, 2009.
• Inventories were $29.9 million as of June 28, 2009, compared to $40.3 million as of March 29, 2009. Our annualized inventory turns in the first quarter of fiscal 2010 increased to 5.9 turns from 4.4 turns in the fourth 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 others 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
June 28, June 29,
2009 2008
(Dollars in millions)
Net revenues:
Host Products $ 88.3 $ 120.6
Network Products 25.0 29.9
Silicon Products 7.4 15.6
Royalty and Service 2.1 2.3
Total net revenues $ 122.8 $ 168.4
Percentage of net revenues:
Host Products 72 % 72 %
Network Products 20 18
Silicon Products 6 9
Royalty and Service 2 1
Total net revenues 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 decreased 27% to
$122.8 million for the three months ended June 28, 2009 from $168.4 million for
the three months ended June 29, 2008. This decrease was primarily the result of
a $32.3 million, or 27%, decrease in revenue from Host Products; a $4.9 million,
or 16%, decrease in revenue from Network Products; and an $8.2 million, or 52%,
decrease in revenue from Silicon Products. The decrease in revenue from Host
Products was primarily due to a 25% decrease in the quantity of host bus
adapters sold and a 4% decrease in the average selling prices of these products.
The decrease in revenue from Network Products was primarily due to an 18%
decrease in both the number of units and average selling prices of Fibre Channel
switches sold. The decrease in revenue from Silicon Products was due primarily
to a 43% decrease in the units of protocol chips sold and a decrease in revenue
from management controller chips, as these products reached end-of-life in
fiscal 2009. Net revenues for the three months ended June 28, 2009 included $2.1
million of royalty and service revenue compared with $2.3 million of royalty and
service revenue for the three months ended June 29, 2008. Royalty and service
revenues are unpredictable and we do not expect them to be significant to our
overall revenues.
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 89% and 84% of net revenues during the three
months ended June 28, 2009 and fiscal year ended March 29, 2009, respectively.
Three of our customers each represented 10% or more of net revenues for fiscal
2009, and these same three customers continued to be the only customers
representing 10% or more of net revenues for the three months ended June 28,
2009.
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
June 28, June 29,
2009 2008
(In millions)
United States $ 60.8 $ 80.6
Europe, Middle East and Africa 28.4 41.0
Asia-Pacific and Japan 26.3 35.9
Rest of the world 7.3 10.9
$ 122.8 $ 168.4
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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,
logistics 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
June 28, June 29,
2009 2008
(Dollars in millions)
Gross profit $ 78.3 $ 112.7
Percentage of net revenues 63.8 % 66.9 %
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Gross profit for the three months ended June 28, 2009 decreased
$34.4 million, or 30%, from gross profit for the three months ended June 29,
2008. The gross profit percentage for the three months ended June 28, 2009 was
63.8% and decreased from 66.9% for the corresponding period in the prior year.
The decrease in gross profit percentage was primarily due to lower volumes to
absorb manufacturing costs and a change in product mix, partially offset by a
decrease of $1.2 million in amortization 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:
Three Months Ended
June 28, June 29,
2009 2008
(Dollars in millions)
Operating expenses:
Engineering and development $ 34.1 $ 34.4
Sales and marketing 19.5 22.9
General and administrative 8.3 7.6
Total operating expenses $ 61.9 $ 64.9
Percentage of net revenues:
Engineering and development 27.8 % 20.4 %
Sales and marketing 15.8 13.6
General and administrative 6.8 4.5
Total operating expenses 50.4 % 38.5 %
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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 the three months
ended June 28, 2009, engineering and development expenses decreased to
$34.1 million from $34.4 million for the three months ended June 29, 2008.
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 decreased to $19.5 million for the three months ended June 28, 2009
from $22.9 million for the three months ended June 29, 2008. The decrease in
sales and marketing expenses was due primarily to a $1.7 million decrease in
promotional costs, including the costs for certain sales and marketing programs,
and a $0.6 million decrease in travel costs, both related to our cost-cutting
measures implemented in the second half of fiscal 2009. In addition, commissions
expense decreased by $0.7 million as a result of the decline in net revenues.
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 increased to
$8.3 million for the three months ended June 28, 2009 from $7.6 million for the
three months ended June 29, 2008. The increase in general and administrative
expenses was due primarily to a $0.6 million increase in stock-based
compensation expense.
Interest and Other Income, Net
Components of our interest and other income, net, are as follows:
Three Months Ended
June 28, June 29,
2009 2008
(In millions)
Interest income $ 1.6 $ 3.5
Gain on sales of investment securities 1.4 0.4
Loss on sales of investment securities (0.2 ) -
Impairment of investment securities - (2.7 )
Other 0.1 0.3
$ 2.9 $ 1.5
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Interest and other income for the three months ended June 28, 2009 of
$2.9 million was comprised principally of interest income of $1.6 million
related to our portfolio of investment securities and $1.2 million of net
realized gains on sales of investment securities. Interest and other income for
the three months ended June 29, 2008 of $1.5 million was comprised principally
of interest income of $3.5 million related to our portfolio of investment
securities and $0.4 million of net realized gains on sales of available-for-sale
securities, partially offset by a $2.7 million impairment charge on investment
securities. The decrease in interest income was primarily due to a decrease in
the average balance of our investment 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 investment 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.
Income Taxes
Our effective income tax rate was 23% and 36% for the three months ended
June 28, 2009 and June 29, 2008, respectively. We expect the annual effective
income tax rate for fiscal 2010 to approximate 28% as compared to our actual
annual effective tax rate of 36% for fiscal 2009. Our estimated effective tax
rate for fiscal 2010 is favorably impacted by additional payments made in fiscal
2009 in connection with an intercompany technology license related to our
intellectual property. These additional license payments resulted in a larger
portion of income taxed at U.S. rates in fiscal 2009 compared to our estimates
for fiscal 2010. In addition, the effective income tax rate for the three months
ended June 28, 2009 was favorably impacted by higher income generated from our
foreign operations, which are taxed at more favorable rates, and the resolution
of various federal, state and foreign tax matters. 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 investment securities
decreased to $354.8 million at June 28, 2009 from $378.3 million at March 29,
2009. The decrease in cash, cash equivalents and investment securities was due
primarily to the purchase of our common stock pursuant to our stock repurchase
program and the acquisition of NetXen, partially offset by cash generated from
operations. We believe that existing cash, cash equivalents, investment
securities and expected cash flow from operations will provide
sufficient funds to finance our operations for at least the next twelve months.
However, it is possible that we may need to supplement our existing sources of
liquidity to finance our activities beyond the next twelve months or for the
future acquisition of businesses, products or technologies and there can be no
assurance that sources of liquidity will be available to us at that time.
Cash provided by operating activities was $16.9 million for the three months
ended June 28, 2009 and $57.8 million for the three months ended June 29, 2008.
Operating cash flow for the three months ended June 28, 2009 reflects our net
income of $15.0 million, net non-cash charges of $21.9 million and a net
increase in the non-cash components of working capital of $20.0 million. The
increase in the non-cash components of working capital was primarily due to a
$12.7 million decrease in accrued compensation, a $10.0 million decrease in
accrued taxes and a $9.1 million decrease in accounts payable, partially offset
by an $11.4 million decrease in inventories. The changes in accrued
compensation, accrued taxes and accounts payable were primarily due to the
timing of payment obligations. The decrease in inventories was associated with
the completion of a planned contract manufacturer transition.
Cash used in investing activities was $64.3 million for the three months
ended June 28, 2009 and consisted of $43.7 million of net purchases of
investment securities, $13.7 million for the acquisition of NetXen (net of cash
acquired), and $6.9 million of purchases of property and equipment. During the
three months ended June 29, 2008, cash provided by investing activities of
$3.1 million consisted primarily of net sales and maturities of investment
securities of $9.3 million, partially offset by purchases of property and
equipment of $6.2 million.
As our business grows, we expect capital expenditures to increase in the
future as we continue to invest in machinery and equipment, more costly
engineering and production tools for new technologies, and enhancements to our
corporate information technology infrastructure.
Cash used in financing activities of $22.8 million for the three months ended
June 28, 2009 consisted primarily of our purchase of $21.0 million of common
stock under our stock repurchase program, $2.4 million for minimum tax
withholdings paid on behalf of employees for restricted stock units that vested
during the quarter and the repayment of a $0.9 million line of credit assumed in
the NetXen acquisition, partially offset by $1.5 million of proceeds from the
issuance of common stock under our stock plans and the related tax effect.
During the three months ended June 29, 2008, cash used in financing activities
of $26.2 million consisted primarily of our purchase of $28.1 million of common
stock under our stock repurchase program and $1.6 million for minimum tax
withholdings paid on behalf of employees for restricted stock units that vested
during the quarter, partially offset by $3.5 million of proceeds from the
issuance of common stock under our stock plans and the related tax effect.
As of June 28, 2009, our investment securities included $24.6 million of
investments in auction rate securities (ARS), the majority of which are rated AA
or higher. During late fiscal 2008, the market auctions of many ARS began to
fail, including auctions for our ARS. The underlying assets for auction rate
debt securities in our portfolio are student loans, substantially all of which
are backed by the federal government under the Federal Family Education Loan
Program. The underlying assets of our auction rate preferred securities are the
respective funds' investment portfolios.
In November 2008, we entered into an agreement with the broker for all of the
ARS we currently hold, which provides us with certain rights (ARS Rights), in
exchange for the release of potential claims and damages against the broker. The
ARS Rights entitle 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
. . .
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