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LSI Corp. (LSI)

Morgan Stanley Technology, Media & Telecom Conference

February 26, 2013 3:45 pm ET

Executives

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

Analysts

Joseph Moore - Morgan Stanley, Research Division

Presentation

Joseph Moore - Morgan Stanley, Research Division

I'm going to read the safe harbor real quickly. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley website at www.morganstanley.com/researchdisclosures or at the registration desk. Very happy, today, to have with us the CEO of LSI, Abhi Talwalkar. Abhi's going to start with some brief opening remarks and then we'll open it up for Q&A.

Abhijit Y. Talwalkar

Okay, great. Thank you. Hopefully, most of you know the company but let me give you a little bit of a context around LSI. We're very excited about where we are as a company. The transformation that we drove over the last 3, 4 years really starting to bear fruit. And our entire focus has been around networking and storage applications that have to do with storing, moving, protecting, accelerating and sharing sort of data. And as the world continues to generate tremendous amounts of traffic and store that data, it's really playing to our strengths. And we're a very focused company. Unlike many of our competitors that are much, much broader, we're #1 and #2 in the markets that we've selected to participate in.

If I look at how this strategy has played out, in the form of execution, ultimately, it's about results. We grew our business 23% last year, in 2012. Over the last 3 years, our growth has averaged 17%, substantially above the industry. And probably only second to someone like a QUALCOMM, when you think about multibillion semiconductor companies. And it's again, because of where we position the company around the tremendous growth in data, as well as the tremendous growth in traffic as well.

Over the course of the last 3 years, we've also seen operating margin expansion substantially. We had ran the company, specifically, in the 8% to 12% sort of operating income range as we've rebuilt the company and repositioned it. Last year, we saw expansion of operating income to 17%, 17.1% or so, substantially above 12.6% in 2011. We have a business model target that wants us to be around 20% to 22%. And we're certainly very focused, as a management team, to get towards that. We've also seen gross margin expand, substantially, over the course of the last 3, 4 years. Our gross margins are in the 53% to 54% range, very close to our business model, which also wants us to be somewhere in the 55% range in terms of operating gross margins.

From a cash position, cash is also very strong. We're about $676 million in cash coming into the year, no debt. We've retired all our debt over the last 3, 4 years. We've got an authorization outstanding, right now, of $476 million in terms of share repurchase.

Over the course of this morning's investor discussions, it became really clear to me that there's an opportunity for clarity on certain fronts, relative to our business. As well as an opportunity, potentially along the way, to debunk some of the myths that out there.

Let me hit the flash segment here, first and foremost. It's clearly a topic of interest, because of the tremendous growth that we're experiencing, and also the industry's experiencing itself. Our PCIe flash business, as well as our flash storage processor business, grew an aggregate of over 200% in 2012 to a total of $237 million, up from $70 million in 2011. We've talked about growing this overall business in 2013 at a rate -- at market growth rates potentially higher, and we expect the market to grow, somewhere in the 40% to 50% range.

We absolutely believe that LSI has emerged, over the past 12 months, as really the viable second player in the market, in terms of PCIe flash acceleration adapters. We believe, from a unit standpoint, we're clearly #2. We also believe, from a revenue standpoint, we achieved #2 as we exited last year. We've seen ourselves emerge out of sort of the wanna-be pack. If you go back to the beginning of 2012, which probably 8 or 9 of us, in addition to Fusion-io participating in this marketplace, OCZ, STEC, SanDisk, Intel, Micron, IDT, Verity, long list of companies. We have clearly established ourselves as the viable other player in the marketplace. Our product line is much more broader, and the full product line is now shipping in the marketplace. We have built proof-of-concept capacity to take on 30, 35 different customers at one given time. Which is important, because every single deployment is unique in nature, requires optimization and tuning, requires a tremendous amount of enterprise know-how as well.

And along the way, we've achieved some pretty significant milestones. Over the last several months, we've now -- are at a point where at least 4 major web cloud companies have put our products in production environments or are placing production orders. We've got 3 financial services companies that have also placed production orders or are in production, sort of deployment process, across a number of applications. We think these will materialize into significant contribution in terms of revenue ramp in the second half. And we've got many more pilots and POC's, very active across the top 20, 25 web cloud and financial services companies as well.

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