To All:SUMMARY OF LSI LOGIC 2Q '99 CONFERENCE CALL
In the room are Wilf Corrigan, Doug Norby, Diana Matley, John Dahne, Britt Morris Joe Allietta and Bruce Entin. Ellie Antoun, who is normally present, is out of town on business
The meeting starts with Diana reading the highlights of the press release after not having done so the last time. (Comment: what a waste)
Wilf: SOC leadership and the focus on Internet driven high volume markets networking storage telecomm storage computer and consumer electronics are paying off in record level revenues. At an annualized rate of Two Billion.—and growing Book to Bill for Q2 was above one Continue to build backlog and they are comfortable with sequential growth rate of 6 to 8 percent per quarter for second half of 99. Design activity strong for 2Q good, which gives high confidence level in ability to grow business the next 18 to 24 months. In this environment continue to focus on the bottom lime .LSI is moving to achieving their target financial model—expand gross margin , control costs and reduce operating expenses, improve operating income and generate cash. Firing on all cylinders
Capacity utilization moved to 85 % for Q2 expect to manage at that level going forward. Plan is to have capacity that is available that is more than adequate to approach growth objectives yet still be at high capacity.
Accelerated ramp at Gresham is progressing smoothly adding equipment in Colorado and Japan Adding people and some equipment to Fabs in Japan and Colorado But most of the expansion is at Gresham. As a result cap ex increased by 50 mil to $250 Gresham gives ability to add capacity though 2000 while bringing wafer costs down quarter by quarter. In 2001 and 2002, the Malaysian Silterra will give additional capacity with no significant expenses .
Looking at P&L , revenues grew at 8% sequentially track to outpace SIA projections of 12%. 2Q included SEEQ, which is pooling of interest. Its acquisition will be acretive this Q. n
North American, Asia and Japan were all strong Europe was down slightly Gross margin. But they see good growth in Q3 in Europe. Gross margin is up 230 basis points reflecting improved fab utilization. Expect this to improve Q to Q and expect to be at 45 % by the end of 2000
On track to achieve 13 % R&D and 12 % SGA by the end of the year. Per share EBG was 21 cents.
Comments on the vertical markets:
Highlights from consumer and storage systems groups. Consumers increased in 2Q and continue to grow in second half. Announced FC 2000—the next generation set top box and they signed up two Asian customers. Playstation I is strong and is expected to be seasonally strong through 4Q stronger than expected .Are anticipating PSII this year later not really sure they will be-could be before or after Christmas, but they can respond either way.
Storage Systems is gaining market share record revenues record level. saw record booking in Q2. Meta Store which is branded product as opposed to OEM also growing quickly Gross margin is less than expected than is components level of business. Operating margin increased to 15% as opposed to 9.6% in Q1 so it's real contributor. Right markets with the right product.
Will adequate capacity and are executing financial model so that margins are beyond 20% by the end of 2000
Expect to grow faster than the industry as a whole
John Danhe:(Who continues to show increased confindence and maturity as Wilf's annointed successor, which each call)
For the third straight quarter the networking, storage components telecomm and wireless , and Mint design services each had sequential revenue increases and bookings. Bookings very strong in storage components and networking And breaking down networking LSI Logic and SEEQ both had strong quarters. New design activity with Coreware, ASICs, and ASSPs for such customers as 3 Com Sony Alcatel, Sony, Dell, Nokia, Hewlett Packard, Apple Cisco Compaq NEC, Nortel, Eriskson, IBM, and other key emerging accounts.
Projected revenue per program is running at higher than historical rates .Shipped 500th Coreware design this quarter. This included a single chip Fibre Channel drive For Quantum that integrates MIPS CPU, Merlin Fibre Channel controller and two 2 gigahertz Gigablaze analog transceiver cores. Continued success of Coreware program has paved way for IP revenue to grow to 50% by year-end.
In 2Q Dataquest reported LSI as number one merchant supplier of standard cells and total ASICs in 98. (Total ASIC category includes Standard Cells, Gate Array and PLDs)
Dataquest reported LSI standard Cell revenue increased by 62% in '98 significantly ahead of 3% standard cell growth—much of this due to Symbios. Attributed to vertical market strategy and/or system level approach to technology.
In networking, SEEQ showed 50% Q over Q and it's expected that market shares gains will continue for Quad and Octel(?) Ethernet products. SEEQ will be immediately acretive this Q. Market share gains will continue.
Two customer Coreware announcements. Cisco Selected PCI cores for optical based networking product Cabletron Storage selected Gigablze Analog transceiver core for 9500 ATM Switch product Line.
In storage Division two announcements: Released SIM 753 C 1010 dual channel ultra III SCSI controller and SIM FC 909 PCI FibreChannel controller The Ultra III and host adapter board products provide direct extension to already leading SCSI III product line. The SIM FC 909 and host adapter board completes LSI Fibre Channel portfolio where they produce not only their own product but also the products for HP Emulex Q Logic on host controller front, Seagate and Quantum on the Disk Drive front and Brocade in the switch front. Also announced Compaq chose 753 C 1510 PCI RAID on Chip product and will use it along with software on the motherboard of their pro LAN sever offerings
In Telecomm and Wireless, Field tests for CBP/CDMA base band controller ASSPs are proceeding “extremely well” and have received high volume orders which will be sold in the Japanese market. Acquired DSP company named and will have roadmaps on the technology and strategic directions.
Questions form the Peanut Gallery
Daniel Meyer s with Lehman Brothers:
Why the seasonal strength in the Consumer business?
Wilf: The down quarter in consumers is usually Q1. But the strength is the stronger demand for Playstation I and the clarification that Sony made on II has really helped in the matter. Wilf calls it reasonable. LSI is not yet a real factor in the Chinese consumer market, which bumps Q1 up because of the New Year it was stronger than expected but not that unusual
What are doing in terms of shutting down SCUBA?
Wilf: Scuba I has been shut down and we are now moving people back to SCUBA Fab II, which is actually running very efficiently. The main growth in Gresham is next generation designs, but they have consolidated in Japan
Mark (The Hammer) Edelstone from Dean Witter
Can you give us sense of what SEEQ revenues and what if any dilution did it cause?
John Dahne:
SEEQ was $10.2 million, which was 50% over Q1, and we expect the momentum to continue. LSI is taking market share from Level One and Broadcomm. (Comment: Whoa. That is some serious business. The mighty and omnipotent BRCM and INTC are losing a portion of their business to LSI)
Edelstone: How did Gresham costs effect P&L, and what did standard margins look like for the company as a whole this Q?
Doug Norby: Standard margins were again in the 40s as they have been for some time and Gresham cost 16 to 17 cents in Q2.
Wilf: Those costs are steadily going down. We are breaking even by the end of the year
Edelstone:
Have you been able to reduce the lead times in Colorado?
Wilf: They are longer than we would like, part of the issue is that they are bringing up the C9 capacity qualification in Gresham. And this takes a certain number of months So that once Gresham is up and qualified ..
Joe Allietta
Gresham should be qualified on C9 this quarter so we should see shipments coming out of there late this Q or 4 Q
Wilf : So this will free up capacity lead times will be down by the end of the year.
Of course the market could continue to embarrass us by giving us more business
Eric Klauer with BP. Alex Brown:
Could you talk a little bit about currency and how it impacted LSI and your expectation going forward given the volatility of the Yen, and what was your depreciation this quarter?
Doug Norby:
Depreciation and amortization was $84 million and there was essentially no impact due to the yen.
Hans Mosselmen with Prudential securities:
Can you give us a sense of lead times and where they are going? Can you give SEEQ's revenue? Can you rank by size your six business?
Bruce Entin: Lead times we don't comment specifically on lead times; it's ceased to be a customer issue.
Wilf: On vertical markets –they are reasonably well balanced at some point we will break out Systems business but the components vertical markets are relatively well balanced at this point in time. On SEEQ one of things they did was bring it in line with their distributor policies which is to not recognize revenue until the distributor ships to the end customer. Thus there was a $2.5 mil reserve so they actually recorded $7.9 and this was done last year with Symbios. The other point its that they expect to grow form the $10 million figure. SEEQ was not materially dilutive this quarter.
Sadim Blotnikoff with Stanford Bernstein:
At what point do you expect to get revenues form Silterra. You have seen decline in operating expenses—could we expect this to continue? Have you had any design wins in mixed signal wins
Doug Norby:
We recognized benefits from Silterra that appeared on R&D line and it had modest impact on Q2
Wilf: We are on track with R&D
John Dahne:
Design wins--are doing a lot of analog work on designs and much Coreware and Standard Products are actually incorporating analog from wireless consumer telecomm networking and storage directly onto the chip. In the high speed FIE category LSI has several products from which they are selling including Hyper Fie and Giga Blaze with Giga Bit Ethernet Fibre Channel market share 90% market share because of Gigablaze transceiver Hyper FIE is used in telecomm networking and servers. Another technology is obviously SEEQ FIES. Used to be MAC Based(?) where they were shipping Digital Standard Products. Now released FIE products in 10 and 100 Megabit Ethernet market places so that a majority of revenue is FIE based now. Thus a tremendous number of high performance Analog FIE cores that are being incorporated in many designs.
Terry Ragsdale of JP Morgan:
On capacity side the lead times are headed in right direction are you still capacity constrained?
Wilf:
Yes it was and we want to retain dynamic tension with supply and demand and we want to bring on capacity so that incremental revenues exceed the increased costs. They have a few seats available on the 747. LSI can respond to any change in the market place and grow at an orderly expected rate.
Ragsdale: Did you grow a little bit more than expected?
Wilf: We had a summer slow down last year. But this year, July is the strongest July they have ever seen, and they feel comfortable with the balance of the Q.
Dahne: Typically telecom is tough in Q3 with Europe vacations. They see very very strong growth this Q.
Ragsdale: Why was Europe weekish in 2Q?
Wilf gets uppity and says I am just stating facts but we will see good growth in Q3 this quarter.
Dahne: With geographies one must remember that because accounts are on a world wide basis and they move things around.
Ragsdale: Will Gresham break even by 4Q
Wilf: We cannot dial thing that in accurately.
Ragsdale: Are you willing to say what order growth was in 2Q sequentially?
Wilf: Order growth was well over 1 this quarter and what we are seeing and others are recording similar strength the thing is how strong it is world wide.
Rick Morris: Asia is one of the strongest markets right now Terry and while North America is strong we seen very strong return to business in Asia market If you look at granularity in Europe they have strong large markets and this what causes problem in sense that Q 2 was slow.
Clark Westmont of Smith Barney
Let's look at Europe Any sense that there is double ordering for Y2K.
?? : There is nothing to lead them to believe that this is a buildup.
Westmont Backlog that you have now is terms of visibility How far out does it reach and could you give color ?
Wilf: We have good visibility right now that is based on major design wins Felt good on 2000 all along Major design wins Now can look out six months instead of two months
Joe Moore with Goldman Sachs: Could you expand on operating margins in systems business?
Wilf: This is coming from volume this is a very good operation They are really trying to sell this business Data General is competitor in OEM space, and they have shown initiatives and going out and competing with the customer where they are going to a direct sales model Other areas are OEM customers who are being driven by Server
Rick Morris: Meta Store which is branded product has a lot of different ISPS to back room operations Meta Star is slightly higher gross margin. Big effort in marketing outside the US
?? Bilan with Soundview Technologies
Can you comment on ASP trends? The revenue per program continues to improve. Are you able to command better ASPs?
Wilf: When you look at pricing in our business Design is when the price is determined. Revenue per designs is function of system level technology.
Bilan: Tier one versus Tier two lead times? There was a delta where tier one versus tier two and now it appears that they improving across the board for tier two.
Wilf (very unhappy) I don't know where you got that impression. We treat all of the customers the same However the larger customers have better visibility for us and they can provide a better idea of their needs. ASIC customers are very dependent customers
Bilan:
Total number of units shipped in Q2 v Q1
Joe Allita: They were up about 8
Bilan: Any backend capacity issues that they are seeing?
Wilf: We build to order the lead time issue is more at the customer end. There is a latency in the system, and it you are a standard products, you can respond out of inventory but LSI doesn't have product on the shelf.. It takes six to eight weeks to make the product, but they wen into year with a large factory that wasn't highly utilized.
Industry was working with unrealistic lead times as everyone was attempting to get on the Dell model
Tim Mahone with CS First Boston
What was breakout with ASSPs Standard Cells and Gate Arrays?
Wilf: Gate Array is now a minor portion of business
Entin: the Bulk is cell based and whether its ASSP or ASIC ASSP is growing with addition but still a majority ASIC company
Mahone: Did you use R&D in plant in Santa Clara?
Alliata: We always run plant at a fraction of capacity
Seth Dickson for Greg Mishew with Warburg Dillon Reed
With regard to PSI would you expect 99 to be higher year over year.
Wilf: When we talk about I and II there are two constituents At this time last year there was a lot of speculation of the effect of II on I, and the truth is that across the world we expect to see the same number of units and we haven't gone into Xmas season yet so it's possible that PSI will be higher the little bit of uncertainty is that I is dominated by Sony and as they bring on II at a price that is substantially higher and the timing in the winter is before or after Xmas They are clearly targeting two different markets You can buy PSI over the Internet for less than one hundred dollars and it's targeted at a younger age group The kids at 6 to 9 is different group thus II will be incremental. LSI feels great for next year's PSI and II prospects.
Dickson: At your last analysts meeting you indicated that next generation ASICS from LSI will include some sort of FPGA functionality. Could you give us an update?
John Dahne: When you look at SOC history, they started out in the 80s with digital logic into ASICs and then it was incorporating SRAMs and then it was high performance microprocessors and then most recently it was analog blocks. The next logical step is to incorporate FPGA. This is because average gate counts that people utilize with FPGA customers is about 1000 to 2000 gates, and that is easy to install in their products going forward and to give customers some programmability on chip, and this is now available because of smaller die size. Where FPGA is about 1500 gates per mm squared but at .18 you are talking about 100000 gates which means there is room for FPGA.
Dam Scovil with Fahnstock: In light of your licensing activities would you expect upside to your target of 45 %
Wilf:
We would be happy to get to the target
Norby: 45% is an average for them and on a long-term basis that is what they want.
Terry Ragsdale with a follow up:
Can you talk a little about digital camera?
Wilf: We have seen a slowing in the business We have a couple of major design wins that are expected to show strength in 2H—major players now in our camp Have a couple of major players in camp. Has not grown as rapidly as was projected As we move forward, and as get more comfortable with format, Ultimately you've got 50 35 MM cameras a year. Most of the camera people are assemblers of a product. Previously used multiple chip solution camera market as opposed to single chip. Camera market in the 80 was ASIC—no longer true. This market moves around--All have favorite customers
Terry Ragsdale: Can you talk about where you are at on CDMA?
Dahne: We are in actual field trials with actual phones in Japan and North America. Working on tuning software Trials have gone extremely well and received-hard orders for product this quarter from Japan. Think we have the best technology
Ragsdale: Who is real in CDMA?
Dahne: Obviously Qualcomm who clearly is the leader DSPC and LSI Logic will be shipping this quarter. That‘s the three. Others are laying off their own internal group and that a lot of consumers and telecomms are having trouble executing CDMA and are moving to buying standard products. They really think they have a tremendous opportunity for growth as a competitor to Qualcomm. And it's purely a standard product market that will grow as such.
Ragsdale: Do you have a market share goal for next year?
Dahne: We are coming from zero and our goal is 50% over time
Mona Eurebe of Gruntal:
I am not clear about operating margins on storage systems v components in Q1 versus Q2?
Wilf Operating margins were around 15% and that was up substantially from a year ago.
Euribe: Could you go over Europe?
Wilf: Billings were slightly off. That's all I was commenting on.
|
