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| QLGC > SEC Filings for QLGC > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
Second Quarter Financial Highlights and Other Information
A summary of the key factors and significant events which impacted our
financial performance during the second quarter of fiscal 2010 are as follows:
• Net revenues of $131.5 million for the second quarter of fiscal 2010
increased sequentially by $8.7 million, or 7%, from $122.8 million in the
first quarter of fiscal 2010. Revenues from Host Products of $94.0 million
for the second quarter of fiscal 2010 increased sequentially by $5.7 million,
or 6%, from $88.3 million in the first quarter of fiscal 2010.
• Gross profit as a percentage of net revenues was 63.7% for the second quarter of fiscal 2010 compared to 63.8% for the first quarter of fiscal 2010.
• Operating income as a percentage of net revenues increased to 15.8% for the second quarter of fiscal 2010 from 13.4% in the first quarter of fiscal 2010.
• Net income increased to $16.2 million, or $0.14 per diluted share, in the second quarter of fiscal 2010 from $15.0 million, or $0.13 per diluted share, in the first quarter of fiscal 2010.
• Cash, cash equivalents and investment securities were $340.4 million at September 27, 2009 compared to $354.8 million at June 28, 2009.
• Accounts receivable was $75.2 million as of September 27, 2009, compared to $68.9 million as of June 28, 2009. Days sales outstanding (DSO) in receivables was 52 days as of September 27, 2009 compared to 51 days as of June 28, 2009.
• Inventories were $23.3 million as of September 27, 2009, compared to $29.9 million as of June 28, 2009. Our annualized inventory turns in the second quarter of fiscal 2010 increased to 8.2 turns from 5.9 turns in the first quarter of fiscal 2010.
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 Six Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(Dollars in millions)
Net revenues:
Host Products $ 94.0 $ 119.7 $ 182.3 $ 240.3
Network Products 24.5 29.8 49.5 59.7
Silicon Products 9.6 15.6 17.0 31.2
Royalty and Service 3.4 6.1 5.4 8.4
Total net revenues $ 131.5 $ 171.2 $ 254.2 $ 339.6
Percentage of net revenues:
Host Products 71 % 70 % 72 % 71 %
Network Products 19 17 19 18
Silicon Products 7 9 7 9
Royalty and Service 3 4 2 2
Total net revenues 100 % 100 % 100 % 100 %
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Historically, the global marketplace for network infrastructure solutions has expanded in response to the information storage requirements of enterprise business environments, as well as the 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. 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 23% to
$131.5 million for the three months ended September 27, 2009 from $171.2 million
for the three months ended September 28, 2008. This decrease was primarily the
result of a $25.7 million, or 21%, decrease in revenue from Host Products; a
$5.3 million, or 18%, decrease in revenue from Network Products; and a
$6.0 million, or 39%, decrease in revenue from Silicon Products. The decrease in
revenue from Host Products was primarily due to an 18% decrease in the quantity
of host bus adapters sold and a 7% decrease in the average selling prices of
these products. The decrease in revenue from Network Products was primarily due
to a 16% decrease in the number of Fibre Channel switches sold and an 8%
decrease in the average selling prices of these products. The decrease in
revenue from Silicon Products was due primarily to a 16% decrease in the units
of protocol chips sold and an 18% decrease in the average selling prices of
these products. Net revenues for the three months ended September 27, 2009
included $3.4 million of royalty and service revenue compared with $6.1 million
of royalty and service revenue for the three months ended September 28, 2008.
Royalty and service revenues for the three months ended September 28, 2008,
included a $3.5 million one-time royalty associated with the license of
technology acquired from Troika Networks. Royalty and service revenues are
unpredictable and we do not expect them to be significant to our overall
revenues.
Net revenues decreased 25% to $254.2 million for the six months ended
September 27, 2009 from $339.6 million for the six months ended September 28,
2008. This decrease was primarily the result of a $58.0 million, or 24%,
decrease in revenue from Host Products; a $10.2 million, or 17%, decrease in
revenue from Network Products; and a $14.2 million, or 46%, decrease in revenue
from Silicon Products. The decrease in revenue from Host Products was primarily
due to a 22% decrease in the quantity of host bus adapters sold and a 5%
decrease in the average selling prices of these products. The decrease in
revenue from Network Products was primarily due to a 17% decrease in the number
of Fibre Channel switches sold and a 13% decrease in the average selling prices
of these products. The decrease in revenue from Silicon Products was due
primarily to a 30% decrease in the units of protocol chips sold, a 12% decrease
in the average selling prices of these products and a decrease in revenue from
management controller chips, as these products reached end-of-life in fiscal
2009. Net revenues for the six months ended September 27, 2009 included
$5.4 million of royalty and service revenue compared with $8.4 million of
royalty and service revenue for the six months ended September 28, 2008.
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 87% and 85% of net revenues during the six
months ended September 27, 2009 and September, 28, 2008, respectively.
We believe that our major customers continually evaluate whether or not to
purchase products from alternative or additional sources. 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 Six Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(In millions)
United States $ 58.5 $ 83.7 $ 119.4 $ 164.3
Asia-Pacific and Japan 36.5 36.5 62.7 72.4
Europe, Middle East and Africa 27.8 42.0 56.2 83.0
Rest of the world 8.7 9.0 15.9 19.9
Total net revenues $ 131.5 $ 171.2 $ 254.2 $ 339.6
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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 Six Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(Dollars in millions)
Gross profit $ 83.7 $ 116.2 $ 162.0 $ 228.9
Percentage of net revenues 63.7 % 67.9 % 63.7 % 67.4 %
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Gross profit for the three months ended September 27, 2009 decreased
$32.5 million, or 28%, from gross profit for the three months ended
September 28, 2008. The gross profit percentage for the three months ended
September 27, 2009 was 63.7% and decreased from 67.9% for the corresponding
period in the prior year. The decrease in gross profit percentage was primarily
due to lower volumes to absorb manufacturing costs, a change in product mix and
the $3.5 million one-time royalty in fiscal 2009, partially offset by a
$3.6 million decrease in amortization of purchased intangible assets.
Gross profit for the six months ended September 27, 2009 decreased
$66.9 million, or 29%, from gross profit for the six months ended September 28,
2008. The gross profit percentage for the six months ended September 27, 2009
was 63.7% and decreased from 67.4% for the corresponding period in the prior
year. The decrease in gross profit percentage was primarily due to lower volumes
to absorb manufacturing costs, a change in product mix and the $3.5 million
one-time royalty in fiscal 2009, partially offset by a $4.7 million decrease in
amortization of purchased intangible assets.
Our ability to maintain our current gross profit percentage can be
significantly affected by factors such as manufacturing volumes over which fixed
costs are absorbed, sales discounts and customer incentives, component costs,
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 Six Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(Dollars in millions)
Operating expenses:
Engineering and development $ 34.2 $ 33.1 $ 68.3 $ 67.4
Sales and marketing 20.0 24.0 39.5 47.0
General and administrative 7.8 9.2 16.1 16.7
Special charges 0.9 - 0.9 -
Total operating expenses $ 62.9 $ 66.3 $ 124.8 $ 131.1
Percentage of net revenues:
Engineering and development 26.1 % 19.3 % 26.9 % 19.9 %
Sales and marketing 15.2 14.0 15.5 13.8
General and administrative 6.0 5.4 6.4 4.9
Special charges 0.6 - 0.3 -
Total operating expenses 47.9 % 38.7 % 49.1 % 38.6 %
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Engineering and Development. Engineering and development expenses consist primarily of compensation and related employee benefit costs, service and material costs, occupancy costs and related computer support costs. During the three months ended September 27, 2009, engineering and development expenses increased to $34.2 million from $33.1 million for the three months ended September 28, 2008. The increase in engineering and development expenses was primarily due to a $0.7 million increase in stock-based compensation.
During the six months ended September 27, 2009, engineering and development
expenses increased to $68.3 million from $67.4 million for the six months ended
September 28, 2008. The increase in engineering and development expenses was
primarily due to a $1.3 million increase in stock-based compensation, partially
offset by a $0.5 million decrease in cash compensation and related employee
benefit costs.
We believe continued investments in engineering and development activities
are critical to achieving future design wins, expansion of our customer base and
revenue growth opportunities.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related employee benefit costs, sales commissions, promotional
activities and travel for sales and marketing personnel. Sales and marketing
expenses decreased to $20.0 million for the three months ended September 27,
2009 from $24.0 million for the three months ended September 28, 2008. The
decrease in sales and marketing expenses was due primarily to a $1.5 million
decrease in promotional costs, including the costs for certain sales and
marketing programs, and a $0.5 million decrease in travel costs, both related to
our cost-cutting measures implemented in the second half of fiscal 2009. In
addition, cash compensation and related employee benefit costs decreased by $1.3
million.
Sales and marketing expenses decreased to $39.5 million for the six months
ended September 27, 2009 from $47.0 million for the six months ended
September 28, 2008. The decrease in sales and marketing expenses was due
primarily to a $3.2 million decrease in promotional costs, including the costs
for certain sales and marketing programs, and a $1.2 million decrease in travel
costs, both related to our cost-cutting measures implemented in the second half
of fiscal 2009. In addition, cash compensation and related employee benefit
costs decreased by $2.0 million.
We believe continued investments in our sales and marketing organizational
infrastructure and related marketing programs are critical to the success of our
strategy of expanding our customer base and enhancing relationships with our
existing customers.
General and Administrative. General and administrative expenses consist
primarily of compensation and related employee benefit costs for executive,
finance, accounting, human resources, legal and information technology
personnel. Non-compensation components of general and administrative expenses
include accounting, legal and other professional fees, facilities expenses and
other corporate expenses. General and administrative expenses decreased to
$7.8 million for the three months ended September 27, 2009 from $9.2 million for
the three months ended September 28, 2008. The decrease in general and
administrative expenses was due primarily to a $0.5 million decrease in legal
fees and a $0.5 million decrease in cash compensation and related employee
benefit costs.
General and administrative expenses decreased to $16.1 million for the six
months ended September 27, 2009 from $16.7 million for the six months ended
September 28, 2008. The decrease in general and administrative expenses was due
primarily to a $0.7 million decrease in cash compensation and related employee
benefit costs, and a $0.6 million decrease in outside services and legal fees.
These decreases were partially offset by a $0.8 million increase in stock-based
compensation.
Special Charges. We recorded special charges of $0.9 million during the three
months ended September 27, 2009, related to our acquisition of NetXen. The
special charges consisted of exit costs related to the former NetXen leased
facility that we vacated and severance benefits for involuntarily terminated
employees. The unpaid exit costs are expected to be paid over the terms of the
related agreements, principally during fiscal 2010.
Interest and Other Income (Expense), Net
Components of our interest and other income (expense), net, are as follows:
Three Months Ended Six Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(In millions)
Interest income $ 1.4 $ 3.0 $ 3.0 $ 6.5
Gain on sales of investment securities 2.2 - 3.5 0.4
Loss on sales of investment securities (1.3 ) - (1.4 ) -
Impairment of investment securities - (5.0 ) - (7.7 )
Other - - 0.2 0.3
$ 2.3 $ (2.0 ) $ 5.3 $ (0.5 )
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Interest and other income (expense) for the three months ended September 27,
2009 of $2.3 million was comprised principally of interest income of
$1.4 million related to our portfolio of investment securities and $0.9 million
of net realized gains on sales of investment securities. Interest and other
income (expense) for the three months ended September 28, 2008 was comprised of
a $5.0 million impairment charge on investment securities, partially offset by
interest income of $3.0 million related to our portfolio of 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.
Interest and other income (expense) for the six months ended September 27,
2009 of $5.3 million was comprised principally of interest income of
$3.0 million related to our portfolio of investment securities and $2.1 million
of net realized gains on sales of investment securities. Interest and other
income (expense) for the six months ended September 28, 2008 was comprised
principally of a $7.7 million impairment charge on investment securities,
partially offset by interest income of $6.5 million related to our portfolio of
investment securities and $0.4 million of net realized gains on sales of
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
. . .
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