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LSI Corporation (LSI)

Q4 2008 Earnings Call

January 28, 2009 5:00 pm ET

Executives

Sujal Shah - VP, IR

Abhi Talwalkar - President and CEO

Bryon Look - EVP and CFO

Analysts

Kaushik Roy - Pacific Growth Equities

James Schneider - Goldman Sachs

Craig Berger - FBR Capital Markets

Shawn Webster - JPMorgan

Eric Ghernati - Banc of America-Merrill Lynch

Presentation

Operator

Welcome to the LSI Corporation investor relations conference call.

(Operator Instructions).

I would now like to turn the conference over to your host, Sujal Shah, Vice President of Investor Relations at LSI. Mr. Shah. Please go ahead sir.

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 fourth quarter and full-year 2008 financial results and guidance for the first quarter of 2009.

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 reconsolidations of our non-GAAP financial measures to corresponding GAAP amounts on our website at www.lsi.com/webcast. At that site, you can also find a copy of the earnings release and a presentation, which highlights the key points from today's call, and provides an overview of our business. This may be particularly useful to new investors.

I also 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 quarterly report on Form 10-Q for the quarter ended September 28, 2008 and our Annual Report on Form 10-K for the year ended December 31, 2007.

With that, it is now my pleasure to introduce Abhi Talwalkar.

Abhi Talwalkar

Thank you, Sujal. Good afternoon and welcome. I would like to start by recapping some of our accomplishments in 2008, and then address how we intend to emerge as a stronger company coming out of this economic downturn.

For 2008, LSI delivered many solid achievements, despite tough second half economic conditions; we demonstrated year-over-year revenue growth in storage systems, storage semis, our go-forward networking products and IP licensing. Our quarterly operating expense run-rate was significantly reduced. We grew non-GAAP earnings $0.44 per share representing nearly 70% growth over 2007.

We significantly increased our operating margins over 2007. We expanded non-GAAP gross margins by 320 basis points. We completed our shift to a 100% outsourced manufacturing model across all our product families. And lastly, we reduced our outstanding share count.

To compliment our financial performance, we also generated significant design win momentum at key customers in both storage and networking. Had it not been for the economic downturn, I am confident that LSI was on its way to achieving its target business model in the December quarter.

The progress we have made in such a short time reinforces that we have the right strategy and execution to drive long-term improvements in revenue, earnings and ultimately shareholder value. As we operate in this environment, our game plan is to play offense and emerge stronger through this downturn. We have just come off of two years of unprecedented design win activity and successful execution of those key programs will allow us to gain share and grow at above market rates as end market demand improves.

As we navigate through this environment, we have three main objectives; first, to extend our competitive lead in key product areas; second, to further elevate our design win momentum; and third, to carefully manage our solid cash position. Successful execution to these objectives should lead to significant increase in long-term shareholder value, which is the focus of this Management team.

Before I give you my perspective on extending our competitive lead and elevating our design win momentum, I would like to outline the changes we have made that have put us on solid financial ground. From prior to the merger through Q3 2008, we reduced our non-GAAP operating expense levels by approximately $60 million per quarter. We divested the lower margin and more volatile consumer and mobility businesses at the right time.

We changed our manufacturing strategy to an outsourced model making our costs mostly variable and lowering capital expenditure requirements. We are now taking the following additional steps to further reduce operating expenses and effectively manage our cash, including a 5% reduction of our global workforce. The suspension of company matching 401(k) contributions and freezing of our pension plan, the suspension of salary increases for all employees, reduction of all discretionary spending and a corporate level restructuring designed to increase synergies across our semiconductor investments, reduced overhead costs and eliminate corporate functions.

We expect the net impact of these and other cost cutting actions to be a $20 million reduction in non-GAAP operating expenses per quarter compared to our previous run-rate of approximately $245 million per quarter with no impact to the key programs that we expect to drive future growth.

Now let me talk about how we intend to emerge a stronger company through this downturn and drive long-term improvements to shareholder value. The key to extending our competitive position is delivering leading edge in differentiated technology and products that generate breakaway opportunities against the competition.

There are several key development programs in 2009, which we believe will enable us to distance ourselves further from the competition yielding share gains and future growth. Our next-generation 40-nanometer read-channel technology will deliver best-in-class signal-to-noise ratio and allow us to leapfrog the competition. In systems, our next-generation external entry platform will incorporate LSI's leading-edge storage processor and deliver twice the performance and scalability at a far less cost.

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