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Q2 2011 Earnings Call

July 27, 2011 5:00 pm ET


Abhi 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


Craig Berger - FBR Capital Markets & Co.

Kaushik Roy - Merriman Capital, Inc.

Stephen Chin - UBS Investment Bank

James Schneider - Goldman Sachs Group Inc.

Sujeeva De Silva - ThinkEquity LLC

Hans Mosesmann - Raymond James & Associates, Inc.

Harlan Sur - JP Morgan Chase & Co

Srini Pajjuri - Credit Agricole Securities (USA) Inc.



Ladies and gentlemen, thank you for standing by. Welcome to the LSI Corporation Investor Relations Conference Call. [Operator Instructions] 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, 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 results for the second quarter and guidance for the third quarter of 2011.

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 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. In addition, I would like to point out that we completed the sale of our External Storage Systems business on May 6, and that the results of that business are shown as Discontinued Operation in our income statements.

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-K for the year ended December 31, 2010, our first quarter 10-Q and today's earnings release.

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

Abhi Talwalkar

Good afternoon and welcome. As you know, over the past several years, LSI has been undergoing a vast transformation. We've been investing ahead of revenue to strengthen our core businesses while divesting businesses with lower profitability and growth profiles. The net result is that LSI's positioned to deliver above market growth, generate greater profitability and increased shareholder value. We're now entering a new, exciting phase in the evolution of the company where we are driving top line and bottom line growth, as our design win pipeline of new products begins to materialize into revenue. Our Q2 revenues and guidance for Q3 begin to reflect share gains and new program ramps at new and existing customers.

We executed solidly in Q2 with revenues above the high end of guidance, driven by strength in our HDD and Networking businesses. We're also active in buying back stock during the quarter, repurchasing 42 million shares. Year to date, we have now repurchased a total of 56 million shares and expect to continue to be aggressive with share repurchases as we move through the year. Our revenue guidance for Q3 represents 10% sequential growth from Q2. While there is uncertainty in the macro environment and demand outlook for certain segments, we have factored in various inventory puts and takes and are comfortable with our growth projections for Q3.

Our growth is being driven by increases in our Hard Disk Drive business, where we are seeing the materialization of share gains in existing client and enterprise platforms, as well as the launch of new client SoC programs with existing customers. We're also expecting strong growth in SAS and networking state [ph] products in Q3. We have been talking for some time about our rich design win pipeline and we are now beginning to see its impact as we were expecting.

We remain committed to driving earnings growth and getting to our current business model target. The midpoint of our guidance suggests that we will generate approximately 15% non-GAAP operating margins in Q3, representing a 270 basis point sequential expansion from Q2 and demonstrating the earnings leverage we have created.

Going forward, we believe LSI is well positioned in large, growing markets with solid fundamentals. We expect to benefit from growth in the deployment of servers, storage and networking equipment. This is being driven by major trends such as wireless infrastructure build outs supporting rich mobile clients and mobile Internet growth, the growth in adoption of commercial and private clouds, large build outs supporting social networking and new emerging web platforms, as well as continuing growth in data and video traffic. The vast majority of LSI's business is influenced by business and service provider IT spending, which is benefiting from strong corporate balance sheets and the need for companies to use IT technology to stay competitive.

Now on to review additional business highlights for Q2. I'll begin with our Server and Storage-related businesses which include our SAS, ServeRAID adapter and software, SAN and HDD businesses. Based on our demand forecast, visibility into various end customers and earnings releases by peers serving enterprise IT markets, data center growth incorporate upgrades in areas of server compute and data storage continue to show seasonal patterns going into the second half, which is typically up from the first half.

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