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LSI Corporation (LSI)

Q3 2010 Earnings Call Transcript

October 27, 2010 5:00 pm ET

Executives

Sujal Shah – VP, IR

Abhi Talwalkar – President & CEO

Bryon Look – EVP, CFO & Chief Administrative Officer

Analysts

James Schneider – Goldman Sachs

Parag Agarwal – UBS

Sukhi Nagesh – Deutsche Bank

Srini Pajjuri – CLSA

Blayne Curtis – Jefferies

Kaushik Roy – Wedbush

Craig Berger – FBR Capital Markets

Daniel Amir – Lazard

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. 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 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 Web site at www.lsi.com/webcast.

At that site you will 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 July 4, 2010, and our Annual Report on the Form 10-K for the year ended December 31, 2009.

With that it is my pleasure to introduce Abhi Talwalkar.

Abhi Talwalkar

Good afternoon and welcome. I am pleased with how our team executed in Q3 delivering non-GAAP EPS above the midpoint of our guidance range even in a challenging demand environment where revenues were impacted. As a management team, we continued to execute on the factors we can control to improve our operating margins.

On a non-GAAP basis, we delivered gross margins above the high end of the guidance and above business model and demonstrated continued operating expense control. As a result, we expanded operating margins to 13% and delivered EPS of $0.13 per share. We also had solid operating cash flows of 82 million and were active in buying back stock during the quarter.

Overall, LSI revenues came in at $629 million, which was towards the low end of our guidance range. Softness was driven largely by declines in shipments of hard disk drive SoCs precipitated by well publicized challenges in the hard disk drive end market and associated inventory burn, as well as the anticipated inventory adjustments at our customers in our fibre channel SAN and SAS business. We saw our storage systems business grow quarter-over-quarter and our networking investment areas posted solid sequential growth.

Now I want to review additional business highlights for Q3 including details on new product cycles. I’ll begin with Storage Systems, which includes both external storage systems and server RAID adapters and software.

Our external storage systems business continued to grow in Q3 as IT shops added capacity to meet their digital content growth. We have been expanding our business through a multi-pronged approach encompassing new platform introductions, growth in existing OEM partnerships, and diversification of our customer base and channels.

We’ve seen strong adoption of our recently introduced entry level 2600 storage platform achieving the fastest volume ramp for a new storage platform in our history. The 2600 is now being shipped by seven of our top OEM customers with several more scheduled to launch before the end of this year.

Our midrange segment also saw growth at multiple OEMs. Existing customers such as IBM, Teradata, Dell and SGI all contributed to our sequential growth and are expected to deliver overall growth in Q4 as well.

At IBM, we have solidified roadmap commitments to extend LSI solutions into 2011 and beyond. In the entry segment, IBM launched the DS3500 series, and in the midrange segment, we are releasing new software extensions and new family members to the DS5000 series.

As you may be aware, IBM recently extended its midrange offering with the announcement of the Storwize V7000. This is a complementary offering that is positioned above the DS5000, which is sourced from LSI.

IBM has always maintained a broad portfolio of storage products to address a wide range of customer needs and customers have chosen LSI solutions in the midrange because of our field-proven reliability, exceptional price performance, and broad availability.

We’ve been driving customer expansion through the development of new OEMs that add application and channel value on top of our systems. This category includes companies such as BlueArc, Quantum, ZTE, Cray, IBM’s cloud and analytics offerings and a number of other OEMs. This category delivered growth this quarter and is expected to grow for the full year.

In an effort to further diversify and grow our business, in Q3 we began shipping a family of unbranded configurable storage system building blocks into the white box distribution channel, which represents a large TAM expansion opportunity.

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