Q3 2012 Earnings Call
October 24, 2012 5:00 pm ET
Sujal Shah - Vice President of Investor Relations
Abhijit Y. Talwalkar - Chief Executive Officer, President and Director
Bryon Look - Chief Administrative Officer, Chief Financial Officer, Principal Accounting Officer and Executive Vice President
James Schneider - Goldman Sachs Group Inc., Research Division
Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division
Blayne Curtis - Barclays Capital, Research Division
Craig Berger - FBR Capital Markets & Co., Research Division
Vivek Arya - BofA Merrill Lynch, Research Division
Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division
Arnab K. Chanda - Avian Securities, LLC, Research Division
Daniel L. Amir - Lazard Capital Markets LLC, Research Division
Harlan Sur - JP Morgan Chase & Co, Research Division
Betsy Van Hees - Wedbush Securities Inc., Research Division
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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 third quarter and guidance for the fourth quarter of 2012.
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 the Investor Relations section of 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 additional information about our business. Today's remark 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, 2011, our second quarter 10-Q in today's earnings release. With that, it is now my pleasure to introduce Abhi Talwalkar.
Abhijit Y. Talwalkar
Thanks, Sujal. Good afternoon, and welcome. While there continues to be challenges in the macro environment and softness in certain end markets impacting near-term revenue, I'm pleased with our execution and results for the third quarter and the progress we have made over the past year.
For Q3, revenue was within our guidance range but below our midpoint, driven largely by a weak PC market leading to declines in our HDD business. However, revenues grew 14% year-over-year driven by growth from new products, including SandForce FSPs, Nytro PCIe flash adapters and Axxia multi-core communications processors. Even the revenue softness, non-GAAP gross margin and EPS came in at the midpoint of our guidance as we lowered variable expenses to be in line with lower revenue and earnings levels.
On a year-over-year basis, non-GAAP operating margin expanded from 15% to nearly 18%, illustrating the structural improvements we've made as we work towards our business model target for 20% to 22%.
Going forward, our guidance for Q4 reflects a cautious outlook due to uncertainties in the macro environment and softness in PC demand. While we did see reductions in our HDD business in Q3, we expect further reductions in component shipments in Q4 tied to ongoing softness in the PC end market. We also expect reductions in both our custom and standard product, flash storage processors in Q4. This is driven by several factors including ongoing weakness in the PC market, elevated shipments in Q3 in support of new product launches, and SSD PC enabled rollouts being rollouts being lower than previous expectations.
As we look beyond the near-term environment, LSI is centered in applications benefiting from strong, secular growth in data and traffic. We continue to benefit from the rapid adoption of flash-based products and the penetration of our products into large web and cloud data centers.
We believe we have the broadest and most competitive lineup of flash-based solutions and expect to have a #1 share in flash storage processors this year, emerging as the #2 player in merchant PCIe flash adapters. We continue to expect our total flash revenues to grow over 200% year-over-year in 2012, well ahead of market growth rates.
Even with the revenue softness in the second half, we expect to grow over 20% year-over-year in 2012 while the semiconductor market and many peers are expected to decline. This year, our design win momentum is tracking ahead of expectations, giving us confidence in our ability to grow more than our served market segments and our semiconductor peer group. As we look ahead, we expect to benefit from new product cycle ramps, including PCIe flash adapters at Oracle, Cisco, IBM and a new win at a leading social networking company. We have a broad footprint of FSP designs and are well positioned as FSPs get increasingly adopted in client, as well as enterprise platforms. We also began shipping FSP to a new ACD customer this quarter, and we'll benefit as this program reaches full production in 2013. In addition, Axxia revenues are expected to grow as we continue ramping at the leading base station OEM.
In the management team, we continue to drive improvements to what we can control. Our efforts have led to improvement in financial results and solid positioning in growing markets, reflected by new product cycles and share gains.