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LSI Corporation (LSI)

Q2 2010 Earnings Call

July 28, 2010 5:00 p.m. ET

Executives

Sujal Shah - VP, IR

Abhi Talwalkar - President & CEO

Bryon Look - EVP & CFO

Analysts

James Schneider - Goldman Sachs

Parag Agarwal - UBS

Blayne Curtis - Jefferies

Srini Pajjuri - CLSA

Daniel Amir - Lazard Capital Markets

Craig Berger - FBR Capital Markets

Kaushik Roy - Wedbush

Sumit Dhanda - Bank of America

Sukhi Nagesh - Deutsche Bank

Harlan Sur - JPMorgan

Sanjay Devgan - Morgan Stanley

Christian Schwab - Craig-Hallum Capital Group

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LSI Corporation Investor Relations Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. 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. It looks like we had some technical difficulties to start the call, so we apologize for that. But we're going to get going I knew some folks are still dialing in as we speak, but 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 and guidance for the third quarter of 2010.

During this call, we will 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 our website at www.lsi.com/webcast.

At that site, you will also find the 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 investors who are new to LSI.

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 annual report on Form 10-Q for the quarter ended April 4, 2010 in our annual report on the Form 10-K for the year ended December 31, 2009.

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

Abhi Talwalkar

Thank you. Good afternoon and welcome. In Q2, our revenues were 639 million representing a slight increase from Q1. Also in Q2 and on a non-GAAP basis, gross margins were at the high end of the guidance range above Q1 levels and above our business model goals.

Operating expenses came in below the midpoint of guidance, and we generated operating income expansion. We also have solid cash flows eliminated our debt, and we're active in buying back stock during the quarter. I'm pleased with how our team executed in Q2 delivering non-GAAP EPS at the midpoint of the guidance range even with revenues at the low end of the rand.

Now, I would like to put our near-term revenues in perspective. Our Q2, in Q2 we had solid year-over-year growth across all our businesses and grew faster than the majority of the end markets we participated. Our server-related businesses, which includes SAN, SAS and server blade solutions in aggregate, grew 40% year-over-year well ahead of server unit growth rates for the same period.

Our total networking business grew 23% year-over-year exceeding respective end market growth with investment areas in networking growing in excess of 50% year-over-year. And our systems business grew 13% year-over-year, also exceeding end market growth.

There are three dynamics of our influence in our sequential revenues in Q2 and Q3. First, we outperform some of our markets in our Q1, and are seeing in inventory adjustment from several customers in Q2 and Q3 as a result. Second, in the HDD business we saw a softening in demand late in Q2.

While the softening seems to have stabilized, we have seen a reduction in industry TAM and build plans particularly in desktop which commonly drives a higher portion of LSI's SoC revenues. This soften reach to more modest growth expectations in Q3, lastly we expect to see sequential declines in our non-investment areas in networking this quarter.

To drill down further our semiconductor revenues were up 9% sequentially in Q1 which was considerably higher growth than most of our peers and proxies for the end markets we participate in.

In retrospect, our out performance in Q1 was partly driven by our SAN and SAS customers building inventory ahead of technology transitions. This led to unit shipment reductions in SAS and SAN in Q2 and continued weakness in SAN shipments in Q3 to bring supply in line with end demand for those customers.

While our hard disk drive revenues are primarily from the desktop segment today, our recent SoC wins will expand our OEM base to customers more exposed to the faster growing notebook segment.

We believe these wins are our major step towards achieving our long-term goal of greater than 40% share of the ACD SoC market in the future.

Our Q2 results and Q3 guidance are simply reflections of these dynamics and not any loss of share in any of our businesses. In fact based on our year-over-year performance we have gained share in most of the markets we share.

As we look forward into Q4 based on our current industry projections for the HCD server and storage systems markets combined with near term inventory adjustments we expect to realize high single digit percentage revenue growth in Q4 of this year from Q3 levels.

Going forward the management team is committed to making continued progress towards our business model target of 17% non-GAAP operating margins. While we can't control end demand or the ordering patterns of our customers, we will take action on things we can control to improve operating leverage.

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