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Filed by QLogic Corporation
pursuant to Rule 425 under the
Securities Act of 1933 and deemed
filed pursuant to Rule 14a-12 of the
Securities Exchange Act of 1934
Subject Company: Ancor Communications,
Incorporated
Commission File No.: 001-12982
THE FOLLOWING IS A TRANSCRIPT OF A CONFERENCE CALL HELD ON MAY 10, 2000
BY QLOGIC CORPORATION.
INVESTOR TELECONFERENCE
May 10, 2000
Operator:
Operator: Ladies and Gentlemen thank you for standing by. Welcome to the QLogic
fourth quarter earnings release conference call. At this time, all
participants are in listen only mode. Later, will we conduct a
question and answer session. At that time, if you have a question,
you will need to press one followed by four on your push button
phone. I would now like to turn the conference over to H.K. Desai
("HK)", President, Chairman and Chief Executive Officer. Please go
ahead sir.
H.K.: Thank you, operator.
Good afternoon, and welcome to QLogic's fourth quarter conference call.
I'm H.K. Desai, Chairman, CEO and President and with me is Tom Anderson, Chief
Financial Officer for the company.
Today, Tom will begin with a review of the fourth quarter and year end
financials and I will continue with a discussion of the I/O industry and our
recently announced acquisition of Ancor Communications.
But before we begin, I'd like to tell you something that we at QLogic
are especially proud of: In the April 24th issue of Barron's, the business
weekly rated the top 500 companies in how they have performed for their
investors. The criteria used to grade them were stock
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performance relative to the S&P 500, cash flow return on investment for the past
three years, CFROI forecast for the current year, and revenue gains or declines
for the past year. I am pleased to announce that we ranked 5th out of the 500
companies listed.
Tom: Thanks, H.K., and good afternoon.
During the course of this conference call, we may make forward-looking
statements regarding future events or the financial performance of the company.
We wish to caution that actual events or results may differ materially. We refer
you to the documents that QLogic files with the SEC, specifically the most
recent 10K and 10Qs. These documents identify important factors that could cause
our actual results to differ materially from expectations.
Today's conference call is being webcast and a recording will be
available for 72 hours on the Street Fusion website. Please be aware 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. This conference call report is
protected by copyright law and international treaties. Unauthorized reproduction
or distribution of this report or any portion of it may result in civil and
criminal penalties. Any recording or other use or transmission of the text or
audio for today's call is not allowed without the express permission of QLogic.
With that being said, I'll continue with our fourth quarter results.
1. Our revenues in the fourth quarter ended April 2, 2000, grew to a record
$60.1 million. This was up 71% from the $35.1 million we reported a year
ago.
2. Fibre channel revenues continued to contribute the largest amount of growth,
expanding 200% from a year ago to $21.9 million, or 36% of total fourth
quarter revenue. Sequentially, fibre channel revenues grew over 31%. This
sequential growth was again distributed very broadly across our Fibre
channel customer base. Fibre channel continues to grow as a percentage of
our overall revenues, being especially fueled by growth with our Windows NT
sector customers that is our focus.
3. Our traditional SCSI I/O business grew 29% from a year ago. SCSI represented
58% of our revenue, versus 65% in the previous quarter. Lastly, we continued
to benefit from the inclusion of IDE shipment-based royalty payments
especially during Q4, which amounted to $3.4 million.
4. The fourth quarter's gross margin of 67.7% expanded from the 66.5% recorded
a year ago and also increased from the third quarter level of 67.0%. Our
gross margin performance over the past few years is an example of an area
where we expect synergies, after we complete our acquisition of Ancor,
through larger economies of scale, and with other operational efficiency
improvements.
5. Next, I'd like to cover Q4 operating expenses. R&D rose 25% in dollars
versus a year ago, but declined as a percentage of revenue from 19.2% to
14.0%. All of the following figures exclude the R&D write-off of $7.5
million we took in connection with the AdaptiveRAID acquisition from nStore
in January. Sales and Marketing expenditures
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grew 51% from a year ago, but declined as a percentage of revenue from 8.9%
to 7.8%. G&A expenses grew 3% from a year ago, and declined to 3.2% of
revenue from 5.4% a year ago. SG&A expenses will also be targeted to provide
synergistic improvements after we close the Ancor acquisition.
6. As a result of ongoing improvements in operating efficiencies coupled with
strong revenue growth, QLogic generated a record pro forma operating profit
of $25.5 million, or 42.5% of revenue. This represents a gain of 121% over
last year's fourth quarter operating profit.
7. Our pro forma fourth quarter net profit grew 116% to a record $18.5 million,
and pro forma fourth quarter earnings per share expanded 118% to $0.24 per
share from last fiscal year, when the company recorded earnings of $0.11 per
share.
8. As previously mentioned, earlier this year, we announced the acquisition of
certain intellectual property of Borg Adaptive Technologies (a division of
nStor), which we purchased for $7.5 million in cash. We took an
acquisition-related charge amounting to most of the value of this
transaction in the fourth quarter, with immaterial acquisition-related
charges in the future. This charge is included in R&D, but is generally
excluded from analyst models.
9. I believe that it is also appropriate to summarize the significant
accomplishments the company made for the full fiscal year. Revenues in
fiscal year 2000 totaled $203.1 million, a new annual record. This was over
73% higher than last fiscal year's previous record of $117.2 million. Pro
forma earnings per share, totaled $0.76, also an annual record, and 124%
higher than the $0.34 recorded in the previous fiscal year, which was actual
earnings per share.
10. With respect to the balance sheet, the company's cash position was $162.5
million at the end of Q4, which includes short and long-term investments.
During Q4 the company generated approximately $28 million of cash excluding
the extraordinary, but important, use of cash, for the purchase of our new
site and building, and the acquisition of the AdaptiveRAID technology.
11. Q4 receivables only increased 82% from the end of fiscal 1999 to $21.6
million, while our DSO rate ended the year at 36 days. This was in line with
the growth in yearly revenues.
12. Inventory turns remained relatively constant at 3.5 times, compared to the
third quarter, and net inventory closed the year at $22.3 million. This was
up 110% from last year end. Our planned Y2K buildup has temporarily reduced
turns.
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13. I would now like to turn the meeting back over to H.K. Desai, our Chairman,
President and Chief Executive Officer, who will review some of the trends in
our business today.
H.K.: Thank you, Tom.
1. Today, I'd like to discuss the continuing momentum in the fibre channel
industry, the success of our migration strategy, and our expanding position
in the I/O and Storage Area Network, or SAN, markets, and, importantly, our
acquisition of Ancor.
2. First, over the course of the past three days, it has become clear that the
financial market does not fully appreciate the benefits of the Ancor
transaction. In light of the financial performance that we just reported,
you can understand why we are so confident in our business. We are equally
confident in the opportunity that the Ancor acquisition presents to QLogic
and Ancor shareholders. We believed that the strategic and financial
benefits of the transaction would be easily understood and as a result did
not explain them as well as we could have. I hope to clear that mistake up
now. This is a powerful combination. Let me describe why it is so powerful
and why we are so enthusiastic about it.
3. To give you some background on QLogic, we are the industry's sole supplier
of a complete spectrum of I/O solutions that ranges from fibre channel to
SCSI to IDE, and covers both host computer and peripheral requirements, as
well as management controllers. This has provided us with unique competitive
advantages, particularly relative to SCSI suppliers that have not been able
to offer a fibre channel migration path.
4. In early April IDC published a market report entitled "Fibre Channel Host
Bus Adapter Forecast and Analysis, 1997-2003," the first of its kind to
include fibre channel host bus adapters from companies who manufacture
boards for their own servers and workstations, otherwise known as the
captive market. This report shows that QLogic leads the global market with a
30 percent unit share for fibre channel host bus adapters in 1999.
5. We have been using highly integrated single-chip technology to define the
low price point of fibre channel HBAs, which we believe has resulted in a
strong presence within the Windows 2000 (or NT) market. This strategy has
made us the largest unit supplier for the past two years, growing unit
shipments 264 percent in 1999.
6. Much of today's fibre channel market is concentrated in the RAID sector and
consists of external connections between the host computer and disk array.
In today's market, QLogic supplies both the host adapters and target chips
that enable both ends of the fibre channel connection "outside of the RAID
box". However, the I/O connection inside of disk arrays continues to be
SCSI. In the future, as more native fibre channel hard disk drives enter the
market, fibre channel RAID arrays will evolve from today's hybrid fibre/SCSI
configuration to 100% fibre channel. With our ability to supply fibre
channel chips for
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RAID initiator and disk controllers "inside the box", QLogic is positioned
for the next phase of fibre channel evolution, and to capture even more of
the fibre channel value chain.
7. Early in the fourth quarter, we extended our I/O expertise through the
acquisition of certain AdaptiveRAID technologies from Borg Adaptive
Technology, a development stage company focusing on the RAID market, and a
subsidiary of nStor. This acquisition brought key RAID software and
algorythms that will enable us to provide more value-add to our major OEMs,
and will enable us to position for the emergence of InfiniBand in upcoming
years. As a general strategy, we are adding more and more software content
to our product line. This acquisition also gave us a presence in Colorado,
where we can attract additional engineering talent to supplement and speed
our design efforts.
8. While most of today's fibre channel adapters are installed to provide a
simple connection between a server and a storage array, the fibre channel
opportunity includes not only storage arrays, but also network attached
storage, and storage area networks. The NAS and SAN market sectors comprise
about 50% of our long-term fibre channel opportunity, and are just starting
to take off.
9. On Monday, May 8th we announced a very important next step in the
development and delivery of an end-to-end SAN solution, the acquisition of
Ancor Communications. The acquisition of Ancor will extend QLogic's
extensive portfolio of products based on fibre channel technology. Ancor's
SANbox family is recognized as one of the broadest and technologically
advanced lines of fibre channel switches in the industry. Our fibre channel
technology is very complementary, allowing us to excel in the marketplace in
such areas as interoperability, performance optimization and overall
competitiveness.
10. The SAN architecture, which leverages fibre channel to create a true network
between servers and storage subsystems, is just beginning to achieve
acceptance in the corporate enterprise. The applications that are driving
SAN deployment are storage consolidation, remote backup, and LAN-free
backup. We believe that SANs will begin to achieve critical mass in the
enterprise starting this summer, which is a very exciting prospect for our
host bus adapter products and Ancor's switches.
11. Specifically, IDC has estimated that the SAN market will grow to over $4.5
billion in 2003. This includes host bus adapters, switches, hubs and
routers. With the acquisition of Ancor, QLogic can now address over 94% of
this market, instead of 38% for host bus adapters alone.
12. All significant OEM customers in the industry were contacted immediately
after our joint press release. They confirmed, along with leading industry
market analysts, that they were extremely excited about this announcement
and about the creation of a viable, alternative switch provider. It will
offer all current and potential customers a larger set of internally
certified and qualified fibre channel products, and it will also help bring
the types of efficiencies that can be offered by a broad-based supplier of
SAN technologies.
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13. Let me briefly review the transaction structure and discuss why Ancor is an
ideal addition to QLogic's strategic roadmap.
Transaction Structure. As announced on Monday, QLogic agreed to acquire Ancor in
a deal whereby we will exchange 0.5275 QLogic shares for each share of Ancor.
This is a fixed exchange ratio and will not change. The proposed merger has no
price collar or other provisions that would otherwise change its structure. Both
QLogic and Ancor are committed to the transaction. On a pro forma basis, Ancor's
shareholders would own approximately 18% of the combined company. The deal is
structured as a pooling-of-interests and is expected to close in the third
calendar quarter.
Why does it make sense for us to acquire Ancor?
Total SAN Solution. Together, we're combining the #1 provider of fibre channel
HBAs with the SAN switching technology leader. SAN is a rapidly emerging market
characterized by fragmented players offering point solutions. Together, QLogic
and Ancor can meet customer demands by offering interoperable, end-to-end fibre
channel solutions. QLogic is uniquely positioned to leverage Ancor's technology
to respond to all customer requests."
Ancor has the Best Technology. First some observations about Ancor....According
to market feedback from customers, Ancor has developed the industry's most
robust fibre channel switch technology. In addition, Ancor has a big lead in
InfiniBand. Overall, Ancor reminds me of QLogic four years ago - a technology
leader on the verge of something very big.
Highly Complementary Customer Base. The customer bases of our companies are
highly complementary. To date, Ancor's switches have been well received by large
OEMs, including SUN, MTI, Hitachi, EMC and INRANGE. QLogic already sells HBAs
and chips to the same customer base, as well as others like Fujitsu, Dell,
Intel, IBM and Network Appliance. QLogic provides Ancor with the clout to pursue
larger opportunities and gain market share. As I already mentioned, customer
reaction to the merger has been overwhelmingly positive.
Ancor Financial Momentum. Behind the strength of its recently introduced SANbox
product family, Ancor reported CY Q1 revenue of $7.2 million, up 373% from the
comparable period last year and 57% sequentially from Q4. SAN products comprised
90% of total Q1 sales - up 64% sequentially from the fourth quarter. Of this,
Sun contributed only one million dollars of revenue in Q1. Ancor is ramping
impressively. With a robust pipeline and incremental effects of recent
announcements like EMC, QLogic can help take the company to the next level with
our financial and managerial resources.
Management of the Combined Company. Following closing of the deal, Ancor's
operations will continue to operate out of its current location. We see many
advantages to having a Minneapolis presence, including being able to draw upon
the rich talent pool of engineers. We intend to put the best people in the best
places.
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Financial Impact. What is the financial impact of the deal?...In summary, very
positive. We have conducted extensive due diligence and are confident in the
pipeline of business that Ancor has built. We are even more confident that we
can grow the size of that pipeline and improve its profitability.
Let me turn it back over to Tom:
Tom:
EPS Impact. As I indicated previously, this deal will be accretive to QLogic's
EPS in the June quarter of calendar 2001 - before synergies. This is a powerful
financial combination. In discussions with Ancor's management, we believe that
by working together, the combined company should have ample opportunities for
significant operating efficiencies, as well as incremental revenues.
Accelerates Growth. Adding Ancor's leading-edge technology to our portfolio
should enhance QLogic's already strong growth profile. While the HBA market is
expected to grow by an annual rate of 62% through 2003, the switch market is
expected to grow by nearly 100%. The blended effect on QLogic's growth prospects
should be obvious. Our most recent performance shows us growing at a rate in
excess of 70% per year, while Ancor, according to the Street, is expected to
grow at a rate well in excess of 150%.
Synergies: Gross Profit. QLogic and Ancor reported gross margin percentages of
68% and 46%, respectively. This brings into focus a significant opportunity.
Clearly our proven management and operational expertise can be brought to bear
to achieve operational efficiencies immediately. When combined with additional
revenue opportunities, the upside is extraordinary. Every incremental $2 million
of revenue will drop approximately $1 million of net income to the bottom line.
Synergies: SG&A. Over the past 12 months, Ancor and QLogic incurred over $80
million in operating costs. As we have said earlier, we do not intend to cut R&D
spending. However, we do intend to aggressively manage general and
administrative costs as well as sales and marketing expenses. For instance,
Ancor's stand-alone forecast assumes rapid headcount growth across the board. If
even a relatively small part of the headcount ramp and the associated costs
could be avoided by leveraging QLogic's existing sales, marketing, customer
service and administrative infrastructure, the resulting savings would drop
directly to the bottom line. Every $1.5 million dollars of operating costs
savings will translate into more than a penny of incremental earnings per share.
Let me give the floor back to HK to discuss revenue enhancement opportunities
and to make closing comments:
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HK:
Revenue Enhancement Opportunities. In terms of revenue enhancement
opportunities, all I can say is that the fibre channel market opportunity is
huge. QLogic has the financial wherewithall to properly leverage Ancor's
technology. We each have relationships with very large customers and potential
customers, all of whom are asking for a alternative, viable switch supplier. We
can deliver this - our competitors can't.
Remember, the deal is accretive before cost synergies and revenue enhancements.
We are on our way to becoming a company with a half-billion dollar revenue run
rate. We did our homework on this deal. Ancor is the right partner. Ancor has
always had the technology; now they will have QLogic's financial resources,
reputation and infrastructure behind them.
14. In summary, the fibre channel sector is growing rapidly, and QLogic is
positioned as the volume leader with a diverse product line that spans host
computer, peripheral target applications, and fabric products added by our
acquisition of Ancor. In the fourth quarter we made strong progress in all
of our markets. And now, with the addition of Ancor's switch products, which
are complementary to our current product lines, we have entered an important
new phase in the development of a total fibre channel SAN solution for our
customers.
This concludes our formal comments and now we would like to open up the meeting
for questions and answers.
Tom: Operator can you assist us?
Operator: Yes sir. Thank you. Ladies and gentlemen we will now begin the
question and answer session. If you have a question you will need to
press the one followed by the four on your push bottom phone. You
will hear a three tone prompt acknowledging your request and if your
question has been answered and you would like to withdraw your
polling request you may do so by pressing the one followed by the
three. If you are using a speaker phone please pick up your handset
before entering your request. One moment please for the first
question. Art Grey with First Union Securities please go ahead with
your question.
Art Grey: Yes. Great quarter. I had spoke with Tom a little bit about this
issue but I wanted just to bring it back to the floor. The comments
out there regarding and this is regarding the Ancor acquisition I
guess from some of the competitors are that the alliances and
relationships now are severed if you will and I'm speaking
specifically possibly Brocade as is. I think that there is some
misconception out there about what your relationship is with them and
what really goes on with that relationship. If you could walk us
through what you see going on long term with the Ancor relationship
and why it will not be a negative relative to the rest of the switch
companies out there I would appreciate it. Thank you.
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H.K.: This is H.K. We have taken a total look at the industry. We have
looked at every switch supplier and we have talked to. We have been
in this business for a long time. What we see is the key is what is
happening in the industry is that there is a big question about a few
things that are happening. One: the customers, the OEM customers
telling us for a long time now that they are looking for a second or
alternate viable switch supplier. So that is one point we looked at.
The second important point is: that there are also all the switch
suppliers, except one, also believe strongly in the interoperability
issues. It is not happening in the industry so we want to take the
leadership with that. The second important point is we don't sell
anything to Brocade, we don't market anything with the Brocade and
Brocade doesn't help with getting any design wins. What we have done
is on our own. So we really don't worry about this thing. So whatever
the Brocade is saying. So we have a terrific relationship with Dell
and IBM and Sun and you name it. They buy our product. They not just
buy Host Bus Adapters. They are buying a lot of product from us. They
are buying enclosure management. They are buying SCSI product. They
have a broad portfolio of the product that they are buying. Some of
the customers, OEM customers, are looking for one strategic supplier
who can provide them everything and they are asking us their
questions. So we do whatever our customer asks us to. We have done
that when we acquired RAID. We have done that when we acquired the
enclosure management. We are exactly doing that with the switch
product, and that is what we are doing. I think that's what is
important.
Tom: Yes. I would just like to add one other thing. The combination with
Ancor can really help the industry move to an open Storage Area
Network standard which we think will benefit all of our customers.
Art: Just a follow up on that. You got the Gadzooks, Vixel, Brocade and
what was it about Ancor's technology that really attracted you to
that company versus some of the competition. What is it about Ancor
that you see?
H.K.: Yes. If I can do that. One is that we talk to the customers. We
always talk to the customers because they are the one who said who
has the best technology. What they say is they have the best
technology. So that is why we bought it. If you look at really -- and
then you also always look at the competitor of Ancor and who are
really making Brocade keep saying that Ancor is the biggest
competitor. So we believe that Ancor is the right technology and what
we find out in the last three days receiving phone calls from our
OEM customers, large OEM customers, and what they told us is that
this is the best thing you have ever done, this is best for the
industry and they are looking for a second supplier so nobody can
have a market share more than 90%.
Art: Thank you. Sounds very exciting.
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H.K.: Thank you.
Operator: Your next question comes from Steve Denigray. Please go ahead with
your question.
Steve: Hello. A lot of the question is about the Ancor transaction. I wanted
to ask you it sounds like without synergies you're still really
positive about the accretion next year. Clearly the Sun relationship
must be the meaningful portion of that. Can you give us some sense of
when you think that might ramp for you and for Ancor and I have some
follow up questions to that.
H.K.: Yes, I think, remember our comment about us that we will see some
revenue. We always are shipping some revenue to Sun for on the host
bus adapter for the work group servers and our dual channel card is
going to start getting in production this quarter. Start slowly
ramping up and the second half is the one which we will start ramping
up more. Ancor has the same situation and we have looked at the
numbers and we have talked to Sun. The second half is the one that
will start ramping up Ancor product.
Steve: O.K. Tom do you usually give some sense of customer concentration and
a backlog this time of year. Can you do that for us this time?
Tom: Yes, we can. The backlog lets start with that is about at the end of
the year. The SEC backlog which you will see in our filings will be
$54.4 million. That is up very significantly from last year when that
number was about $28 million as I recall. With regard to the customer
concentration give us just a second we will look for the statistics
we have on that. I think again you're looking for the annual figure?
Steve: Yes. If you just had maybe the ones that were above 10%.
Tom: Yes. We do have that for the full year. Just a second. The two that
were above 10% for the full year were Fujitsu and Sun Microsystems
and roughly you are going to have a concentration of approximately
30% for Fujitsu and approximately 15% for Sun.
Steve: O.K. Another question. IDE revenues saw a nice jump this quarter
sequentially?
Tom: Yes.
Steve: What do you think the trend line is going to be for that going
forward from here?
H.K.: Yes. Steve if you look at the IDE revenue history we are jumping
around from $1.5 million to 3.8 to 3.9 million. So it is really
variable. If you look at it we are 3.8, then we are 2.5, then 1.5 and
again 3.4 now. So it is really very difficult. That business is very
volatile because it's the PC industry and the
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PC market. That is why it is very very difficult for us to really
project what is going to happen and we even don't know what is going
to happen anyway.
Steve: O.K. and one last question. Tom, on Monday you mentioned that the
Ancor deal for the calendar fourth quarter might be dilutive on the
order of three to five cents. I guess with the upside this quarter,
are you still, would that still be the case or does this upside from
this previous quarter offset that?
Tom: I think there is a very good chance that it might. We took another
look at that, another hard look at that. I think we're probably, that
number that I knew out the day was probably, conservative. I think it
is more on the low end of that range. More on the three cents end of
the range, and basically, as I'll outline in our presentation today
there are a lot of synergies to address here so we've got great
opportunities both in the short and the longer term. One thing that
we didn't bring up the other day, too, as well is that we get
significant net operating loss carryforwards on this transaction and
all of our comments with regard to accretion do not play in those net
operating loss carryforwards. So, there is, if you are going to
really tax effect this properly we've got tremendous advantages right
out of the box.
Steve: O.K. thanks.
Tom: You are welcome.
Operator: Your next question comes from Amir Ahari with U.S. Bankcorp Pipper
Jaffrey. Please go ahead sir.
Amir: Thank you. Great quarter guys and definitely a good acquisition there
from our side. One question. Could you just give a little color in
terms of your margins going forward and do you expect the tax rate to
remain the same for the year?
H.K. I'm sorry I didn't understand.
Tom: The margins.
Amir: I'm sorry. Gross margins. With that, could you provide some color on
the gross margins going forward with the acquisition in place as well
as with what the tax rates would be.
Tom: Yes. Future gross margins are really going to depend on the
manufacturing and industry conditions and a lot of the success of our
IDE licensing strategy. All of those are factors in the margins
moving up or down. At present we don't see any such change in terms
of industry conditions that would generate much margin erosion in the
near term. However, we do retain the option to probably adopt a more
aggressive pricing stance in the future if it does provide us an
opportunity to go after some incremental revenues and profits and, of
course, to that extent as long as the royalty performance stays
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up that really helps to offset it a lot. With regard to the, I think
you are asking particularly about some guidance related to, tax rate
going forward. There isn't any significant change there from just
core QLogic perspective at this time. We have been booking 34% now I
believe for about two years.
H.K.: Yes. I just want to add one more point on the margin comments that
Tom made. If you remember when you started four or five years ago our
model was about 35%. We took that margin from 35% to about 70%. I
think that there is a big benefit where we said in the script Ancor
margin is about 45%-46% and what we have done with the manufacturing
efficiencies with the foundry relationships. We have the cost
structure. We can really help Ancor with improving their margin.
Amir: Excellent. And one follow up is when do you think you will start
cross marketing the products?
H.K.: We are. If you look at in our business, actually, we are cross
marketing this product with all the suppliers. All the switch
suppliers. We always do that. We work with Gadzooks. We work with
Vixel and we work with Ancor and I think we will continue working
with that, including Brocade and we will continue cross marketing the
product because it is important to create, our philosophy it is very
very important to create the SAN markets. It is a big market. It is a
$4.5 billion market in 2003. So we want to make sure that we all work
together and create that market.
Amir: Thank you.
Operator: Your next question comes from Jim Thayer with Prudential Securities.
Please go ahead with your question sir.
Jim: Thank you and congratulations on the quarter. Would you talk a little
bit more about some of the factors behind the gross margin
improvement and also the effect from rising semiconductor prices. Do
you feel any of that yet?
Tom: With regard, again the factors are related to improved gross margins
where related to the operating efficiencies that we have achieved
over the years really. Over the last two or three years in
particular. Also foundry conditions have been very favorable for
steering this timeframe. It has only been in the last six months to
nine months that we have seen some tightening in the market. Most of
that has manifested itself with regard to lengthened lead times. The
way we have offset that a little is by carrying a little extra buffer
stock. So H.K., you said.
H.K.: Right. I think there is another point about the margin comment is
that if you really look at this things so what is happening with our
top line it starting growing very rapidly now when we had about 70%
growth in the top line. So our expenses, as a percent of the revenue,
we cannot grow that rapidly - so our R&D expenses use to be 19%-20%
even though we are adding 25%.
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We spend 25% more money on R&D and a percentage of revenue is going
down because the revenue is growing so rapidly. So if there is a
1%-2% margin difference it is not going to make any difference is the
bottom line.
Jim: O.K. Tom you mentioned slightly higher inventory stocks. I guess I
had thought that with the end of Y2K, the Y2K scare the inventories
would have gone down but they were kind of flat I noticed actually
relative to sales on a sequential basis.
Tom: Yes. We do have some plans to improve our inventory turns both in the
short and long haul. But with that being said I think the other
pressure at work here is how fast our revenue is ramping. As you also
note that we've had a tremendous ramp in revenue in the fourth
quarter and all throughout the year really and we continue to see
some very robust demand for our products and I think we want to be
able to deliver product expeditiously to any product opportunity that
arises. So, we have to balance those two pressures a little bit. The
one other thing that I would add is that we also see a lot of
customers who have adopted JIT inventory programs and that always
puts a little more pressure on that particular asset.
Jim: O.K. Final question. Do you have a geographic breakdown of sales
between U.S. and overseas?
Tom: I think we do.
Jim: I can get it offline.
Tom: O.K.
Jim: Thanks a lot.
Tom: You'll have to search for it a little bit.
Jim: Thank you very much.
Operator: Your next question comes from Douglas Whitman. Please go ahead sir.
Douglas: I have a housekeeping question. I apologize but I missed what was the
Fibre Channel revenues this quarter?
Tom: It was $21.9 million Doug and that was up 31%.
H.K.: Sequentially 31%.
Tom: Yes.
Douglas: O.K. and a year ago it was? I am sorry.
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H.K.: Year, over year it was 200%, and sequentially 31%, and it was a 36%
of the revenue.
Douglas: O.K.
Tom: Yes and when we say year-to-year we mean a full year FY 99 to full
year FY 00.
Douglas: What was it on a quarter-to-quarter year over year basis?
Tom: Fourth quarter this year it was again $21.9 million. Fourth quarter a
year ago we have $7.3 million.
Douglas: So roughly 300%. Fantastic.
Tom: Yes.
Douglas: O.K. Thank you for clarifying on the acquisition. I appreciate it.
Tom: Good thing.
H.K.: Sure.
Douglas: Thank you.
Operator: Your next question comes from Mark Calliher with Fund Trust Equitable
Securities. Please go ahead sir.
Mark: Hi guys. Great quarter.
H.K./Tom: Thank you.
Mark: Following up on that Fibre Channel question the revenue question. Do
have an ability to split that Fibre Channel between NT and Unix? Can
you see that?
H.K.: No. But we are I don't think we have the capability because we have
so many different customers. I think I can tell you only one thing is
that the 60% of our revenue gain from about six customers. They are
included Unix and also NT.
Mark: How about between chip sales and board sales in fibre channel?
H.K.: We don't do that. The reason is when we did the first time the only
customer really for the chip is disk contoller OEMs and they don't
like to give out that information.
Mark: One last question. The SCSI revenue do you figure that can hold flat
around $34 million. What are your expectations or your backlog or any
insight or
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opinions you can give on that?
Tom: Yes. I think our expectations still remain very good for this
business. This is an area which over the last year and I think for
the near term at least as much as we have an outlook on looks to
continue to be developing very nicely in our favor. We have a lot of
opportunities in the SCSI area that comes to us because we have done
a marvelous job in breaking into NT customers with our fibre channel
product.
H.K.: We actually we continue to see the growth expected and we continue to
see growth in our business particularly in the SCSI and fibre channel
technology both. The IDE is the one which is very difficult for us to
predict anyway but we see a continued growth in our business.
Tom: And actually to think as just a reminder our SCSI business from a it
grew 29% really over last year. That is much higher than a lot of the
statistics that we see generally on the street with regard to how
much that market is growing so we feel pretty positive about holding
our presence there.
H.K.: And if you look at the things if you look at the last three quarters
excluding this one it was over 37%. So we had a year-to-year growth
in the SCSI board 30 more than 30%-33%, 34% and that is coming, a lot
coming, from peripheral business. Now we haven't seen any growth
coming from the Ultra3. Actually, we missed Ultra2 to because we will
be doing fibre channel. We started investing in the Ultra3 and we got
a lot of design wins at AMI and DPT (which is Adaptec now) and Mylex
for example. We have a design win which we took over from Symbios
Logic. We have a design win on Ultra3 with Intel on some motherboard
applications and those design wins with the SCSI will start coming in
the second half also. So we got we will continue seeing those in the
SCSI also. We are very very bullish about that.
Tom: Before we take the next question operator I just hope Jim Thayer is
still on the line. I wanted to answer his question with regard to the
international revenues. They were 55% of the total revenue in the
fourth quarter and they are again primarily composed of sales to
Asian companies. O.K.
Operator: Alright. The next question comes from Mike Marone with Citus
Investment. Please go ahead sir.
Mike: Yes. Hi. I'm not certain on whether or not there is a collar on your
deal with Ancor or are there any firms given as the stocks have gone
down to renegotiate that or what is going on?
H.K.: Well this is like I said in my script this is a fixed exchange ratio
and will not change. The proposed merger has no price collar or other
provisions that will otherwise change its structure.
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Mike: So I was wondering if that's the case obviously it is good for you
does that change decrease the dilution timeframe on the deal?
H.K.: No.
Mike: Thanks a lot.
Operator: O.K. Next question comes from Neil Miller with Fidelity Investment.
Neil: Yes. Hi. Clarification on that last point. The share price versus the
warrant position Ancor with Sun Microsystems. I thought there was
price sensitivity there.
Tom: I'm not sure where quite where you are going with this now but QLogic
will treat the Sun warrants in the same manner they have been handled
as Ancor. The warrants essentially become exercisable as revenue is
generated in the Sun relationship.
Neil: I need to go back over my thoughts there and notes but I thought that
there was a direct relationship between the price of the stock and
the value of the warrant and the subsequent dilution so that the
higher price of the stock the greater the dilution potential. I guess
my real question was how do you expect to treat these warrants? Is
there any way of writing those off?
H.K.: We haven't even looked at these things anyway but I think the way I
understood from the conference call on Ancor is that it is like a
sales discount or something to treat that.
Neil: Well I don't know. That was an interesting arrangement to say the
least. The second question I have in on the second source supplier
for switching and I am just kind of wondering what are the challenges
that Ancor had was the last mile of the micro code to you know
produce a look alike functionality and they couldn't and they were
stumped by that challenge. Currently they are and I am just thinking
if Brocade would comes out with different series switch how that
challenge will be more easily met in the future. In other words, how
do you fulfill the prospect of a second source supplier?
H.K.: Well it is when we are saying that the second source we are not
talking about the second source saying the Brocade switch. What we
are saying is what the customer is looking for merely is that they
are looking for a viable alternate source and that will be rewarding.
We got a after the deal was announced we got a call from every large
OEM customer. It's not we call them. They call us and they say this
is the best thing you have done for industry and this is the best
thing for all of us because now we can go to the other supplier.
Mike: Yes but it Brocade is no longer open with you down the road which I
assume
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they won't be.
H.K.: No everybody has to follow the fibre channel standard. So as long as
you follow the fibre channel standard we can connect with any HB or
anywhere.
Mike: O.K. I just know that Ancor had a huge challenge here with reverse
engineering Brocade's product.
H.K.: No. I think you already heard the wrong thing Neil. They don't
require to reverse engineer at all. They already have a product under
one gig and they are working the two gigs. They are 8 ports. They are
working on 16 port switches. They are also working 64 port and so on
anyway. Those products will just follow the fibre channel standard
and that's all.
Mike: O.K. But Brocade's 80% share is based on something.
H.K.: They were first to market and there was no second viable source.
Mike: Appreciate the thoughts. Thanks.
H.K.: Thank you.
Operator: Your next question comes from Shaw Woo with Bear Stearns. Please go
ahead sir.
Shaw: Alright thanks. First great quarter and great acquisition. I just
have a one follow up on an OEM question. When you look at when you
talk to OEMs when they pick a host bus adapter or a switch does one
influence the other in your opinion and how do you, could you, just
provide some color on that?
H.K.: I tell you that when the OEM picks up the supplier particularly large
OEMs like Sun and Dell and IBM they go and pick up the supplier on
their own. They look at everybody who has the best performance, who
has the best cost, and overall who is the one it is easy to work with
and gives them the support on the qualifications and the third point
is very important because that's what QLogic is all about. We are the
best at supplying the support to the customers and they just love us
for that. All OEMs. When we started the business with them they just
fall in love with us just because of that and that is important. You
cannot tell OEM you think IBM and Dell and Sun will pick up the
supplier. They decided on their own. So we work, I'll give you an
example of the Dell Microsystems, Dell computers. When we were doing
the host adapter there is a one component of SAN wanted to use other
host adapter and they kept trying and Dell said absolutely not. We
are going to QLogic and they selected QLogic. That is a great
example. Same thing happened to IBM when we wanted first times. The
storage supplier wants to use somebody else and IBM said no. The host
adapter we are going to pick so they decide what it is. The second
and important point the host bus adapter is the most important
component for the SAN because they are the
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one with a lot of software investment and we are the most difficult
to qualify. We are the one who is in charge of the system
environment. They look at the error conditions. They are the one who
does that thing. So this is very important and people who have
already invested the money are not going to change because some
switch supplier said that they want them to change.
Shaw: O.K. Thanks. Just a follow up question in terms of the deal is going
to close in September. Any thoughts on like timing of integration in
terms of the sales force, and engineering, perhaps even the ASIC's.
H.K.: We will start. The way we are going to do this the management team of
both companies will start working on these things. We already have
our integrated process inside the company so we will use that process
and we will work and we look at the best people from both the teams.
The way both companies are going, the way the revenue is going for
QLogic, and the way it is going for Ancor and with the growth we
really need people from both parties. I mean I told those guys
yesterday and QLogic. We need people from everywhere but we will
select the best people of what we need.
Shaw: O.K. Thank you.
Operator: Your next question comes from Ara Mizrakian with Robertson Stevens.
Please go ahead with your question.
Ara: Hi. I have two questions. First one is do you think now that you have
the two companies together that you will be able to drive, maybe you
touched on this earlier some of the SAN functionality that you know
is starting to emerge where we got off the LAN backup and disaster
recovery and those types of features. Is there synergy in software in
the switch on the HBA? Then I have another question.
H.K.: O.K. We are looking at that and there are a lot of synergy between
the software between the host bus setup and between the suites and we
will start working on that with Ancor and software customers. We have
already started getting calls from OEM customers. At least go and
look at it and see what more values we can add in the switch.
Ara: O.K. and then secondly we have seen announcements from Brocade and
Vixel that they are working with some of the next gen optic guys to
facilitate you know metropolitan area net worth SAN or something to
that effect or the provisioning of such. Do you know or is there
something you can talk about on the Ancor side or maybe on your own
relationships such that you've got something like that lined up.
H.K.: I talked to Ancor guys yesterday about the same subject and they are
working on it because they are getting the same request from OEM
customers. So they are working on it.
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Ara: O.K. and then the final. You said that you won't breakout fibre
channel components and HBAs. Is there a way to just to get some call
that they both grew roughly the same in corner. One grew faster and
is there a point when you actually think you might start breaking
those numbers out.
H.K.: I told you that I think we did one time but we kind of got a kind of
reprimanded from a customers because there is only one guy who
shipped this controller. We don't want to get all the comparisons
information about our customer to their competitors and that is
mainly why we are doing it. The second thing we always keep saying is
that most of the business is coming from HB right now.
Ara: Finally, sorry I keep adding questions in. You made it sound as
though you feel like you are gaining SCSI momentum because of the
fact that you have a fibre channel gross structure at least the
option to migrate to that. Do you feel that that is competitive
against some of the other players in the SCSI market?
H.K.: Yes we are getting the momentum of the SCSI because of the fibre
channel relations with OEMs and I think this is one of the great
example. It is the reason we are gaining the momentum on the SCSI
side because there are two reasons. One is architecture which is very
simple to go from Fibre to SCSI. The way it goes from SCSI to Fibre
for our SCSI customer. With the second one what the customers are
finding out that QLogic team and QLogic engineers are the best to
work with. They are the easiest people to integrate the product
anywhere. They love to do this. I think that is what is helping us
and exactly that is what we are going to use for the Ancor product
too.
Ara: O.K. and forgive my ignorance. For something like a SCSI to fibre
channel router do you have a product like that in the works? Does
Ancor or is that something else you are looking at or maybe that you
will be able to develop together?
H.K.: No we have the SCSI fibre bridge -- we have all the technology at
QLogic. We have SCSI chips and we have fibre channel switch so we
look into doing that one time but we thought it was a limited market
and also we believe it is a shorter market. Once the tape native
board becomes our label and we announce the native design with
another company. So once fibre channel becomes native on the tape
drive there is not a long term market for that so we don't really
invest into that.
Ara: Yes and those statistics by the way seem to be borne out in the
latest IDC statistics we have seen.
H.K.: That is a good point.
Ara: Yes. It is a very small percentage of the Storage Area Network by the
time
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you get out to the year 2003.
H.K.: If you look at the IDC number in 2003 ninety-four percent of the
market is a switch and host bus adapter and six percent is all other.
Ara: Great. Thank you very much.
Operator: Your next question comes from Kevin McCarthy with DLJ. Please go
ahead sir.
Kevin: Alright. Hi. Thanks. Tom just looking to get a little help on the
sequential revenue outlook. It looks like the fiscal year you just
completed your sequential revenue growth accelerated throughout each
quarter growing 15% in the quarter just recorded. Can you help me a
little bit thinking about Q1? Is that a growth rate? Obviously as you
get bigger it is tougher to grow that rate but you guys sound really
bullish about the opportunity in fibre channel and think IDC is
looking for 70% grow in the underlying business so can you provide a
little guidance on sequential revenue growth.
Tom: It is flowing in the fibre channel growth rate.
H.K.: Yes but I let me explain it a little bit different. I think he is
looking at the different segment of the market. I think one of the
biggest advantage we have is we just don't, the initial market
happens box-to-box where the real market is the HBA connecting to the
front end of the RAID controller. Then the market will happen from
the backend which is an initiator chip on the RAID controller and
also the disk drive controller. Then there is a market developing for
the native fibre channel drives. If you look at this thing there are
different segments coming into play and we are playing a role in
every segment and that is why we believe that our growth will
continue not at the rate of for the IDC sake but it is faster then
because we got all segments in the market.
Kevin: O.K. How about Q1 H.K. or Tom could you provide a little help? Are
there better revenues in Q4 than what the street is looking for?
Could you show 10% overall sequential growth from Q4 to Q1?
Tom: I think you are asking for a very specific forecast there. That is
something that generally you know we don't get. We would be glad to
give you some general guidance and have you draw up some conclusions
for that. I mean we haven't in the market so much that we are serving
we haven't seen any significant change in the type of growth patterns
we have had during this year and we already mentioned that the SCSI
growth rate has been very robust. Of course the IDE sector which is
the third technology area that which we deploy products. That one is
subject to some, you know, some light variation quarter-to-quarter.
There is just no way of ever predicting that piece.
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Kevin: O.K. Thanks.
Tom: I can forward these numbers and you can figure out an estimate from
that.
Kevin: Thanks.
Operator: Your next question comes from Andy Shellpeg with Nutmeg Securities.
Please go ahead sir.
Andy: Well thank you very much. For either H.K. or Tom. I am wondering
whether you can give us any kind of a guidance or numbers on the ASP
pricing transfer host adapters for SCSI versus Fibre Channel in the
fiscal year just completed and whether you have any guidance with
respect ASP pricing trends in terms of any expected decline.
H.K.: We have, I don't have an exact number but if you look at the because
SCSI been a lot of different SCSI adapters single handed versus
differential and if I remember it is about $110 - $115 to $250 for a
SCSI. That is with a SCSI also that pricing is depending upon the
interface and if you look at the fibre channel pricing we are seeing
our average pricing for us is about somewhere between $350 to about
$800. $750 to $800, it depends on the OEM versus channel and so on.
But if you look at that pricing and if you look at our competitor's
pricings there are somewhere around $1,100 - $1,200. So, and, we
still have about 68% 70% of the margin compared to what their margin
is. So I think we have are a long way to go for us. We are very
comfortable with our cost structure and our margin structure.
Andy: Yes. I understand how you responded but I am looking for is some
sense of how those ASPs are trending or expected to trend perhaps in
a year ahead and I don't know to what extent the component cost.
H.K.: I'll tell you, historically if you look at the SCSI. SCSI pricing was
stable for a long time once the market become mature. There it starts
about a year or two year ago about 15% down. So, about 2%-3%
sequential, down with the pricing. But that's after the technology
has matured and I don't think fibre channel has reached that point
yet anyway. So I don't see anything until probably 2001.
Andy: So, basically you are looking for more or less flat, only slightly
down, ASPs?
H.K.: Yes.
Andy: O.K. Thanks.
Operator: Your next question comes from Rick Billy with SG Cowan. Please go
ahead.
Rick: Tom let me just clarify something you said earlier with respect to
the tax loss carry-forward that Ancor has. Number one you will be
able to utilize them
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and number two the dates and amounts of dilution and accretion that
you gave us do not take into account any tax loss carry-forwards
utilized by QLogic.
Tom: That is absolutely correct. We felt a little bit that -- you know
-- we didn't know how much those of you on the street might discount
that net operating loss factor in this whole equation and so we
didn't put in the numbers. But we did fully taxed -- basically the
results when we were looking at the accretion issue and so absolutely
we did not put them in.
H.K.: Yes, but, you are absolutely right, that's the benefit we can get.
Rick: Is there a statutory guideline that says that if there is $40 or $50
million however much of the loss carry-forwards there are you can use
so much per quarter or you have to use them over a certain period of
time?
Tom: Yes there is. Yes.
Rick: What would that be like?
Tom: I don't know if we have that information in here Rick. We probably
have to get it. Two or three quarters. We think. Let us take a sweep
for that and I can maybe announce it. Why don't we go onto another
question and then we will try to get that information before we hang
up here.
Operator: Your next question comes from Mark Dundee with H.E. Edwards. Please
go ahead with your question sir.
Mark: Hi guys. Great quarter. Great results.
H.K.: Thank you.
Mark: First question. Is Brocade is a pretty ruthless competitor. They did
a nice job on beating up Ancor and really there's an impression in
the market that Ancor really is a not what they are. Obviously you
understand that to be different. I guess my question is now that you
are basically competitor of Brocade how do you, and are we going to
receive the same kind of treatment and in fact I believe already are.
How are you going to respond to that and how do you think you are
going to fair in head-to-head competition with Brocade?
H.K.: I said before let me answer the question. I said before what we are
seeing, we are hearing from the customers that Ancor is a great
technology, and we hear even after the acquisition the last few days
that these guys are a great technology and now what you guys have
done is you have created a viable alternate source of Brocade. That
is what is most important for the customers. That is most important
for the analyst. They are saying the same thing that we need to
create this SAN market. It is a big market and we need to have more
than one source and I think if you look at for example the back
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end of the fiber channel the back end industry on the fiber channel
is not happening because there is only one source right now which is
Seagate. As soon as it happened the second source and Seagate is
doing their best job to create the second source. They are really
helping the market to create the second source. They are really
helping the market to create the second source. Once that happened
then the back end will go from SCSI to fiber channel. That is the
same thing that happened to SAN too, unless from the $4 billion
market or $2.7 billion market for the switch unless there is two
three sources is not going to happen. So what we are going to do also
we also will work. You and me are hearing from switch suppliers. What
they are saying is that this is the best thing happened. Now let's
create the open standard and I think that is what we are going to do
working with everybody. We are going to create the open standard
which is benefit to the customers, which is benefit to all the
suppliers and which have created the market.
Mark: Do you think your current OEMs will end up using Ancor switches?
H.K.: We are going to try our best.
Mark: Well what do you think?
H.K.: If you look at our track record we have done that. We always are
serious to go with the one program and strive to take all the
different programs slow by slow with SCSI and fiber channel programs
and Sun is a great example, Fujitsu is a great example. We are
working with IBM on that same areas as we work are working with Dell
in the same areas so we have our customers OEM customers, like us.
The biggest name for us is that we execute and we support.
Mark: O.K. guys thanks.
H.K.: Your next question comes from Neil Miller. Please go ahead with your
follow up question.
Neil: I guess on the slippery slope of opportunity here competitive
conjecture has been gigabit ethernet versus fiber channel and I guess
Merrill Lynch dropped a 45 page report with that sort of conjecture
and today released it and concluded that fiber channel has got a
limited life. When will that settle favorably for fiber channel which
is what I hope?
H.K.: Well there is a lot of report about that that, why fiber channel is a
bright technology competitor ethernet for the storage. There is a lot
of paper outstanding so I don't want to go into detail. There are a
lot of issues. I mean the fiber channel was created for the storage
because that is what the main thing it does and it's the right to
interface not the ethernet so we fully support that. I think that is
one of things we like to do is that we like to take a leadership role
being a SAN supplier and we like to work with all the switch
suppliers, all the host adapter and we want to create the standard so
we can
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create that market quickly and I think that is more important for us
right now because fibre channel has a lead compared to ethernet and I
think that we are about two to three to four years ahead of the
ethernet being used for the storage anyway. So I think it is kind of
late for the ethernet to get into that.
Neil: I appreciate it. Thanks.
H.K.: Thank you.
Operator: Your next question comes from Art Grey with First Union Securities.
Please go ahead.
Art: Just a follow up again on the Ancor situation. You know, Brocade has
80%-85% market share right now. When talking with the company what
has it been do you think that has kept Ancor from taking share from
Brocade up to this point? Has it been execution within sales force
and kind of a follow-up question that can you foresee a situation
where you go into one of your customers and they still want to use a
QLogic HBA or are not comfortable with Ancor yet and still go with
Brocade. I mean is it going to be an end-to-end solution that cannot
be separated or will it still be separated from that standpoint.
H.K.: There can be a solution which can be used that is why we said our
goal is to create an open standard. It can be Brocade switch, it can
be Ancor switch, it can be Gadzooks or Vixele and can be any HBA. It
can be anybody anyway and that is what the customer is looking for.
We need to provide what the customer wants. It is not what we really
want. Customers are really really looking for open standard and that
is what we will try to create and we will work with everybody. That
is not the issue here at all. The reason we look at what happened to
Ancor is that they really started they are the one who did the first
fibre channel but there is more business on the IP sides for the IBM
and so on. So they were in a different market and once they switched
to the storage they was kind of late so they were behind-the-curve
for the time-to-market and that is why I think the other competitor
get the advantage. But now what we are hearing from the customers is
that those guys really know the switch business. They are the first
one through the fibre channel switch and they are looking for the
second viable supplier. Ancor was not a viable supplier for the
customer. Now, it becomes a viable supplier with our acquisition.
Art: So your customers, what you are saying then what you hear from your
customers is that they do have a viable switch alternative to Brocade
and maybe they just haven't executed yet but your customers know and
use the technology and they are comfortable with what their path is
and what they are doing right now. Is that what you are saying?
H.K.: Right. They are looking for a second another supplier and they
believe that
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Ancor is a very good technology and with our background they have
become a viable source. Like I talked to one customer call and their
concern was that boy somebody is going to acquire them. They were
concerned about that. Their competitor acquired them so they were
really concerned about those things and now they called us and said
well that is gone now.
Art: O.K. Thank you.
Tom: Before we go onto the next question I just did a little research
here. I just wanted to more fully answer the question that Rick Billy
of SG Cowan asked a few moments ago. Basically what we know about the
NOL at this point is that we can fully utilize the NOLs but we are
still investigating the level to which they can be utilized. They
definitely will help with timing of the accretion. Operator you can
go to the next question.
Operator: Thank you sir. Ara Mizakian. Please go ahead with your follow up
question.
Ara: There was talk earlier about gross margins and ASPs and I was
specifically on the HBA side and I was just wondering if that
factored into account what will we start to see as two gig and ten
gig start to ramp up.
H.K.: Sorry can you ask the question again.
Ara: The question is there was some talk about potential price erosion and
that you guys are well positioned. You have a you will be able
leverage your gross margins and the current cost levels of your
product and I guess my further part of the question is as we see two
gig two gigabit fibre channel and ten gigabit fibre channel start
being deployed in volumes I would assume that there is not going to
be any kind of ASP decline as those start to kick in. In fact we
might start seeing increases.
H.K.: Yes. You are probably right about this. It is our experience with the
SCSI that whenever there is performance there is a next generation
standard come. It always cost a little bit more than the first one.
So the ASP stay anyway so you don't see the erosions in the margins
are a little better initially. Before, and what happens is that SCSI
every year, year and a half is a new technology come in. So if the
technology upgrade happens you don't see the errosion.
Ara: Now with the two engineering teams in separate places do you think
you will have difficulty synchronizing your two gig and ten gig
efforts between the two ASIC teams.
H.K.: If you look at this too, the host adapter or the switch or the chip
products versus the switch you know this is completely different
architectures anyway. So, there is no overlap between the two and
they will continue the separate team and for both products.
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Ara: There is no overlap left, but, are there synergies to developing
this?
H.K.: There is always synergies right and architecture issues and the
software issues.
Ara: O.K. Thanks.
Operator: Steve Denigree please go ahead with your follow up question.
Steve: H.K. you seem to hint to this and I wanted to see if you can clear
this up because I think there is a lot of confusion about this. Host
bus adapters versus switches. You seem to suggest that adapters are
harder to qualify and it relates to software. Is it really that easy
to qualify a second source relative to a second adapter and if you
could explain that.
H.K.: No it is really very difficult to do that host bus adapter. We are
the account for the two gig and we are kind of a little behind
compared to some of the competitor over the two gig and every
customer OEM customers we have they are waiting for us and we will
have the samples somewhere either this month or early next month and
they are happy with this thing. I said you know what it took us about
six nine months to change it because we have a lot software and we
have a lot of management software. We are LAN masking all those
things so it is very difficult for them. The qualification process at
OEM customer is becoming so complicated because when we have multiple
host bus adapter like you know just putting a one host bus adapter
talking to one storage you have five or six or eight host adapter
talking to switch and then there about six or eight or ten RAID
subsystems. It has become very very difficult for them to do the
qualifications so you can say that we can practically say that we are
locked in.
Steve: O.K. and then relative to a switch is really what I was driving
towards.
H.K.: The electrical switch what I have heard from from the customers and I
we need to still qualify them. We still need to do more study on that
but what we heard from Ancor and from the customers that it is kind
of a little easier to switch to switch.
Steve: Right. O.K. Thanks.
Operator: Your next question comes from Mark Gunday with his follow up
question. Please go ahead sir.
Mark: Just wanted to know if you had any comments about the current
argument out there in the media that is talking about NAS versus
fibre channel.
H.K.: I did talk about this thing. Are you talking about the network
storage or are you talking about the ethernet?
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Mark: Network storage.
H.K.: Network storage I think for us either it was storage on the network
or network storage it really doesn't make any difference. Like for
example Network Appliance is a big customer because they always use
the fibre channel chip when you talk to the storage anyway. So for us
it really doesn't make a difference whether it is a because we also
supply the chips and host bus adapter. So it doesn't make a
difference. If it is the ethernet then it is a different story.
Mark: Well there is some discussion about gigabit ethernet being used for
SANs.
H.K.: That is a different one. If you talk about the ethernet then that is
a different issue. There is a lot of talk about going on. What we are
seeing so far and what the studies we have done working with the.
There is a lot of companies including Brocade that fibre channel is
the right technology for the storage and we continue working on that
issue.
Mark: O.K. Thanks gentlemen.
Operator: Ladies and Gentlemen if there are any additional questions please
press the one followed by the four at this time. There are no further
questions at this time sir. Please continue with your presentation or
closing remarks.
H.K.: Thank you for joining for our fourth quarter conference call. We look
forward to discussing our first quarter calendar in 01 results at our
next quarterly conference call in July. In the interim we will be
presenting at the Salomon Smith Barney semiconductor conference
tomorrow which is May 11 in Monterey and then the CIBC world markets
conference in New York on May 23. We also will be on the road next
week on the week of May 16 in New York, and Boston. So, if you would
like to talk to us call us about that anyway. Thank you very much
again.
Operator: Ladies and Gentlemen that does conclude our conference for today. You
may all disconnect and thank you for participating.
................................................................................
About Ancor Communications
Ancor Communications Inc. (Nasdaq: ANCR) provides high-performance SANbox(TM)
Fibre Channel switches for storage area networks (SANs). The company's customers
include EMC, Hitachi Data Systems, INRANGE Corporation, MTI Technology Corp.,
Sun
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Microsystems, and premier SAN resellers, including Bell Microproducts and
Datalink. The company was the first to deliver a Fibre Channel switch, and the
first to hit the one-gigabit performance level. Ancor, an ISO 9001 quality
certified company, is a member of the Fibre Channel Industry Association, the
Storage Networking Industry Alliance, the InfiniBand Trade Association, the ANSI
Standards Committee, and the University of New Hampshire Fibre Channel
Consortium to promote the advancement of Fibre Channel standards and
interoperability. Information on Ancor is available on the Web at
http://www.ancor.com.
About QLogic
A member of the Nasdaq-100 Index, QLogic Corporation sold more Fibre Channel
host bus adapters in 1999 than any other manufacturer in the world according to
IDC. The company is also a leading designer and supplier of semiconductor and
board-level I/O and enclosure management products targeted at the computer
system, storage device and storage subsystem marketplaces. QLogic
high-performance controllers are implemented in products from technology leaders
such as AMI, Compaq, Dell, Fujitsu, Hitachi, IBM, Iwill, Quantum, Raidtec,
Siemens, Sun Microsystems and Unisys. The company's high-performance Fibre
Channel and SCSI solutions play a key role in enabling enterprise-level storage
area networks (SANs) and the company's enclosure management products monitor and
communicate component information that is critical to computer system and
storage subsystem reliability and availability. For more information about
QLogic and its products, contact QLogic Corp., 26600 Laguna Hills Drive, Aliso
Viejo, CA 92656; telephone: 800/662-4471 (sales); 949/389-6000 (corporate); fax:
949/389-6126; home page (http://www.qlogic.com).
ADDITIONAL INFORMATION AND WHERE TO FIND IT
QLogic Corporation ("QLogic") and Ancor Communications, Incorporated, ("Ancor ")
plan to file a Registration Statement on Form S-4 and other relevant documents
with the Securities and Exchange Commission (the "SEC") in connection with the
merger, and QLogic and Ancor expect to mail a Joint Proxy Statement/Prospectus
to stockholders of QLogic and Ancor containing information about the merger.
Investors and security holders are urged to read the Registration Statement, the
Joint Proxy Statement/Prospectus, and other documents filed with the SEC
carefully when they are available. The Registration Statement, Joint Proxy
Statement/Prospectus, and other filings will contain important information about
QLogic, Ancor, the merger, the persons soliciting proxies relating to the
merger, their interests in the merger, and related matters. Investors and
security holders will be able to obtain free copies of these documents through
the website maintained by the SEC at http://www.sec.gov. Investors will be able
to obtain copies of the documents free of charge from QLogic by directing a
request through the Investor Information portion of QLogic's website at
http://www.qlogic.com or by mail to QLogic Corporation, 26650 Laguna Hills
Drive, Aliso Viejo, CA 92656, attention: Investor Relations, telephone: (949)
389-6000. Documents filed by Ancor will be available free of charge from Ancor
by directing a request through the Investor Information portion of Ancor's
website at http://www.ancor.com or by directing a request by mail to Ancor
Communications,
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Incorporated, 6321 Bury Drive, Eden Prairie, MN 55346, attention: Investor
Relations, telephone: (612) 932-4000. In addition to the Registration Statement
and the Joint Proxy Statement/Prospectus, QLogic and Ancor file annual,
quarterly and special reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other information filed by
QLogic or Ancor at the SEC public reference rooms at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at any of the SEC's other public reference rooms in
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. QLogic's and Ancor's
filings with the SEC are also available to the public from commercial
document-retrieval services and at the Web site maintained by the SEC at
http://www.sec.gov.
INVESTORS SHOULD READ THE JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY WHEN IT
BECOMES AVAILABLE BEFORE MAKING ANY VOTING OR INVESTMENT DECISIONS. NOTHING
HEREIN SHALL CONSTITUTE AN OFFER OF ANY SECURITIES FOR SALE.
SOLICITATION OF PROXIES; INTERESTS OF CERTAIN PERSONS IN THE MERGER.
QLogic, Ancor and their respective directors and executive officers, who may be
considered participants in this transaction, and certain other members of
management and employees may be soliciting proxies from QLogic's stockholders
and Ancor's shareholders in favor of approval and adoption of the merger
agreement.
The following are the directors and executive officers of QLogic:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
H.K. Desai Director, Chairman of the Board, Chief Executive
Officer and President
Thomas R. Anderson Vice President and Chief Financial Officer
Michael R. Manning Secretary and Treasurer
David Tovey Vice President and General Manager, Peripheral
Products Group
Lawrence F. Fortmuller, Jr. Vice President and General Manager, Computer
Systems Group
David M. Race Vice President and General Manger, Enclosure
Management Products Group
Mark A. Edwards Vice President, Sales and Corporate Marketing
Carol L. Miltner Director
George D. Wells Director
Larry R. Carter Director
</TABLE>
The following are the directors and executive officers of Ancor:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
</TABLE>
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<PAGE> 30
<TABLE>
<S> <C>
Kenneth E. Hendrickson Director and Chief Executive Officer
Calvin G. Nelson President
Steven E. Snyder Chief Financial Officer and Secretary
John F. Carlson Director
Gerald M. Bestler Director
Paul F. Lidsky Director
Michael L. Huntley Director
Amyl Ahola Director
Thomas F. Hunt, Jr. Director
</TABLE>
The directors and executive officers of Ancor have interests in the merger, some
of which may differ from, or may be in addition to, those of Ancor shareholders
generally. Those interests include:
* in connection with the merger, Steve Snyder and Calvin Nelson have entered
into employment agreements with Ancor and noncompetition agreements with QLogic
which will be effective as of the closing date of the merger;
* in connection with the merger, Ken Hendrickson has entered a consulting
agreement and a noncompetition agreement with QLogic which will be effective as
of the closing date of the merger;
* in connection with the merger certain key engineers will enter into employment
agreements with Ancor and noncompetition agreements with QLogic;
* certain of the directors and executive officers of Ancor may own options to
purchase shares of Ancor common stock which will become vested and exercisable
in connection with the merger;
* Ken Hendrickson will become a member of the board of directors of QLogic in
connection with the merger; and
* certain of the executive officers of Ancor will receive payments pursuant to
the merger that are considered to be "parachute payments" under the Internal
Revenue Code of 1986, and Ancor will pay excise taxes on behalf of the executive
officers in connection with such parachute payments.
Additional information about the officers and directors of QLogic can be found
in QLogic's Proxy Statement for its 1999 Annual Meeting of Stockholders. More
information about the officers and directors of Ancor, including information
about their option benefits and holdings of Ancor common stock can be found in
Ancor's Proxy Statement for its 2000 Annual Meeting of Shareholders in the
section titled "Executive Compensation." QLogic's and Ancor's filings with the
SEC are available to the public from commercial document-retrieval services and
at the Web site maintained by the SEC at http://www.sec.gov.
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The report contains forward-looking statements within the meaning of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
References made in this report, and in particular, statements regarding the
proposed QLogic/Ancor merger are based on management's current expectations or
beliefs and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. In particular, the following factors, among others,
could cause actual results to differ materially from those described in the
forward-looking statements: inability to obtain, or meet conditions imposed for,
governmental approvals for the merger; failure of the QLogic stockholders or
Ancor shareholders to approve the merger; costs related to the merger the risk
that the QLogic and Ancor businesses will not be integrated successfully; and
other economic, business, competitive and/or regulatory factors affecting the
businesses of QLogic and Ancor generally.
For a detailed discussion of these and other cautionary statements concerning
QLogic and Ancor and their respective operations, please refer to QLogic's and
Ancor's filings with the Securities and Exchange Commission, including their
most recent filings on Form 10-K and 10-Q, QLogic's and Ancor's Proxy Statements
for their respective Annual Meetings of Stockholders and the "Forward-Looking
Statements" section of the Management's Discussion and Analysis section of
QLogic's Form 10-K for the fiscal year ended March 28, 1999 and Form 10-Q for
the quarterly period ended December 26, 1999. QLogic's and Ancor's filings with
the SEC are available to the public from commercial document-retrieval services
and at the Web site maintained by the SEC at http://www.sec.gov.
Trademarks and registered trademarks are the property of the companies with
which they are associated.
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