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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.
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. |
