LSI (LSI)

Q3 2011 Earnings Call

October 26, 2011 5:00 pm ET

Executives

Sujal Shah - Director of Investor Relations

Bryon Look - Chief Administrative Officer, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Abhijit Y. Talwalkar - Chief Executive Officer, President and Director

Analysts

Craig Berger - FBR Capital Markets & Co., Research Division

Brian Peterson - Raymond James

Kaushik Roy - Merriman Capital, Inc., Research Division

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Harlan Sur - JP Morgan Chase & Co, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Matthew Bryson - Avian Securities, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LSI Corporation Investor Relations Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sujal Shah, Vice President of Investor Relations at LSI. Please go ahead.

Sujal Shah

Good afternoon, and thank you for joining us. With me today are Abhi Talwalkar, President and Chief Executive Officer; and Bryon Look, Executive Vice President and Chief Financial Officer. Abhi will begin the call with some opening remarks and highlights from our business, and then Bryon will provide results for the third quarter and guidance for the fourth quarter of 2011.

During this call, we'll be mentioning non-GAAP financial measures, which we may refer to as results excluding special items. Today's earnings release describes the differences between our non-GAAP and GAAP reporting. You can find reconciliations of our non-GAAP financial measures to corresponding GAAP amounts on the Investor section of our website at www.lsi.com/webcast. At that site, you can also find a copy of the earnings release and a presentation highlighting the key points from today's call and providing an overview of our business.

Earlier today, we announced the acquisition of SandForce. A presentation highlighting this acquisition is also on our website.

I want to remind you that today's remarks will include forward-looking statements. Our actual results could differ materially from those suggested by the statements made today. Information about factors that could affect our future results is contained in our Form 10-K for the year ended December 31, 2010, our second quarter 10-Q and today's earnings release. With that, it is now my pleasure to introduce Abhi Talwalkar.

Abhijit Y. Talwalkar

Good afternoon, and welcome. I'd like to begin by discussing our announcement to acquire SandForce, a leading provider of flash storage processors extending LSI's industry-leading position and breadth in storage technology solutions. There were several drivers that motivated us to make this acquisition. The acquisition greatly enhances LSI's competitive position in the fast-growing server and storage PCIe flash adapter space, where our family of WarpDrive products already uses SandForce and compete with solutions from companies such as Fusion-io. Secondly, the complementary combination of LSI's custom products and SandForce's standard product offering catapults LSI into an industry-leading position for the rapidly-growing, high-volume flash storage process from market for Ultrabooks, notebooks and enterprise SSD and flash solutions. PCIE flash-based adapters and flash storage processors will together represent a greater than $2 billion TAM expansion for LSI in the next several years, extending LSI's exciting growth opportunities.

With this acquisition, LSI now has a complete portfolio of storage products, including SAS, RoC, processors and controllers, ACD, SoCs and preamps, custom and standard flash storage processors and PCIe flash adapters and acceleration software, giving us breadth and capability that exceeds any competitor in the space. We believe that SandForce is on track to generate approximately $60 million of revenue in 2011, and we expect continued growth that will be captured in our 2012 numbers. We expect to close this transaction early in Q1 2012 and expect the deal to be neutral in 2012 earnings per share.

I now want to address the current environment and more importantly, how to view LSI in light of current conditions. There continues to be a cloud of economic uncertainty and this has now been magnified by the significant disruption in the industry supply chain from the severe flooding in Thailand. Our customers have talked about the disruption to our -- to their factories, logistics, power and availability of labor. Some of LSI's subcontractors in Thailand land have been similarly impacted and the effects of this have been factored into our outlook for Q4. Our guidance for the current quarter assumes $35 million to $45 million of primarily supply-related constraints, which are mostly affecting our Hard Disk Drive business. Due to these manufacturing constraints, we're assuming that our Hard Disk Drive business declines over 10% sequentially, which is also consistent with the guidance outlook provided by our largest HDD customer. We continue to work with our suppliers to mitigate risks and execute on alternative plans to maximize our ability to supply to our customers.

Turning to our results, Q3 financials provided a proof point of the strength of our share gains in new product cycles, as well as the operating leverage we have worked hard to create. Despite the deteriorating demand environment, we grew revenues 9% sequentially and expanded non-GAAP operating margin by nearly 300 basis points to 15%. While we witnessed deterioration in demand as we moved through the third quarter, particularly in Hard Disk Drive and wireless markets, we correctly anticipated this softness and factored it into our Q3 guidance back in July. While we cannot control the demand environment, we are positively influencing the factors we can control, including execution of new products, further penetration into market leading accounts, expense control and pursuit of new growth drivers in product cycles.

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