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LSI (LSI)

Q4 2010 Earnings Call

January 26, 2011 5:00 pm ET

Executives

Abhijit Talwalkar - Chief Executive Officer, President and Director

Sujal Shah - Director of Investor Relations

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

Analysts

Blayne Curtis - Jefferies & Company, Inc.

Hans Mosesmann - Raymond James & Associates

Sanjay Devgan - Morgan Stanley

Daniel Amir - Lazard Capital Markets LLC

James Schneider - Goldman Sachs Group Inc.

Sujeeva De Silva - ThinkEquity LLC

Kaushik Roy - Wedbush Securities Inc.

Sukhi Nagesh - Deutsche Bank AG

Presentation

Operator

Ladies and gentlemen, thank you for standing by. 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.

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 and guidance for the fourth quarter and full year of 2010.

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 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. 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 Form 10-Q for the quarter ended October 3, 2010, and in our annual report on Form 10-K for the year ended December 31, 2009.

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

Abhijit Talwalkar

Thank you, Sujal. Good afternoon and welcome. Over the past several years, LSI has undergone a significant transformation, and we are pleased with the progress we have made today. During this time, we have been investing ahead of revenue, as we rebuild our key businesses for future success. We're now strongly positioned with differentiated products, technology leadership and wins with market leaders and are beginning to see new product cycles materializing with our key customers.

In 2010, we grew revenue 16% year-over-year and nearly doubled our non-GAAP operating income margins to 13%, on track towards our business model targets. We also generated approximately $370 million in operating cash flow and repurchased over 50 million shares, further strengthening our balance sheet while reducing our outstanding share count.

In Q4, we grew revenues over 5% sequentially to $664 million at the high end of our guidance, with growth and storage systems, HDD and SAS standard compliance [ph]. Now I want to review additional business highlights for Q4. I'll begin with Storage Systems, which includes both external storage systems and server RAID adaptors and software.

Our Storage Systems business grew 14% sequentially and 6% year-over-year in Q4. We saw our growth across midrange and entry-level platforms, with sequential growth at IBM, Oracle and Dell. We also saw sequential growth with our emerging Tier 2 OEM base. We continue to see very strong adoption of our entry-level 2600 storage platform achieving the fastest volume ramp for new storage platform in our history. We've further expanded our customer base for this platform over the past quarter, with six additional customers now shipping the 2600, bringing our total to 16 OEMs in production. This product family is also shipping to distributors and white box resellers.

In our Server RAID Adapter and Software business, growth in 2010 far exceeded server unit growth due to share gains at OEMs and in the distribution channel through the combination of our MegaRAID and 3ware product families. Direct attached storage within servers is seeing a resurgence, driven by its certain data center architectures, larger virtualized server environment and flash tuners.

I'll now turn to Storage Semiconductors, which includes SAS, SAN and HDD. In SAS, we have the broadest portfolio with our server and external storage solutions and continue to extend our leadership position. In 2010, our SAS product line revenues grew over 21%, outpacing both the server and external storage unit growth rates. This growth was accomplished through both share gains and OEMs and new products expanding our participation.

Looking forward, we expect to extend our number one position in server SAS through 6-gig design wins we have already secured across a long list of server OEMs for the upcoming Intel Romley generation. Our wins include IBM, Dell, Cisco, Supermicro, Fujitsu, NEC, Hitachi, Toshiba, as well as Oracle.

With our timely market and performance advantages in SAS storage processors and controllers, we have also made significant progress at another leading server OEM, starting with the Romley generation. We are enhancing our product value and margins for servers by providing advanced software features on top of our SAS ROC and MegaRAID solutions. These software products enable our customers to take advantage of performance, ensuring benefits of solid state drives and are being used by IBM and Dell.

The external storage SAS infrastructure opportunity continues to develop nicely for LSI. In 2010, this market grew to over $200 million and is expected to surpass $300 million in size in 2012 based on our estimates. In 2010, LSI doubled its revenue in this space through a broad offering of SAS expanders and now holds over 35% share. We expect to grow faster than the market through timely market and performance leadership. To further our participation in the space, we launched our SAS system-level switch in the distribution channel in Q4, and we expect to ramp at major OEMs later this year.

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