Here are my CC notes. Thanks, Addi, for the number.
Wilf:
Q2 was the 10th consecutive Q of revenue growth. Net income for than tripled from Q2 last year. Cash grew by $75m to $943m in Q2. About $20m in revenues slipped into early July primarily due to issues with the newly-installed supply chain management system and part shortages affecting the SAN systems division. Both have since been corrected. There is no change in revenue outlook for the full year, expect 10-12% growth for Q3. The strong booking pattern is accelerating and off to a fast start in Q3. The order input in the first three weeks of July set a record and was substantially ahead of the first three weeks of April.
In order to meet strong demand for .25u and .18u production, they are further accelerating the ramp of Gresham and pulling in capacity from next year. Capacity will increase 30% from the original plan, which was 3000 8-inch wafer starts per week. By mid-Q1 they expect to have 4500 wafer starts per week. Manufacturing resources are primarily focusing on capacity expansion. Gross margin will expand in Q3, but more slowly than anticipated. Expect to reach 50% GM during 2001. The operating margin expectation is still 20% for Q4. Operating expenses as a percent of sales are forecasted to be somewhat less, which compensates for the timing shift in the GM outlook. The net result is no change for bottom line expectations for the year as a whole. 2001 is shaping up as a very strong year. BTB is solidly above 1. Backlog is growing and bookings strength is broad-based in products and geographically.
John Dana:
The momentum in communications revenue and bookings accelerated. Anticipate 2000 communications revenue to grow by 65%+ over 1999 and to exceed 50% of LSI revenues by Q3. Q2 saw revenue strength across the board. Networking and set-top decoder boxes grew 20%+ sequentially, and broadband was close behind. LAN switching, optical switching, and satellite set-top decoder boxes were the strongest products in the Q. There was strength across ASIC and ASSP product lines. Q2 saw an acceleration in design wins at Alacatel, Cisco, Copper Mountain, Echostar, Ericcson, Extreme, Hughes Network Systems, Lucent, Nokia, Siemens, Sony, and Thomson.
Volume production shipments of the single-chip 24-port intelligent Ethernet switch began this month to the lead customer and 2 new additional customers this Q. In wireless, they booked two additional high-volume CDMA standard product customers and are on pace to exceed projections of 4 to 6 new customers for the year, all in the North American market. The 1394 controller core is in production today in the Sony PS2.
In broadband two acquisitions were made to get the remaining IP blocks for a complete ADSL-DSLAM and customer-premise equipment solution. They licensed the Alcatel ADSL modem core and acquired Datapath Systems. The acquisition will be 2 cents/share dilutive in Q3 and Q4 and accretive in 2001. Datapath had a full pipeline of standard products including ADSL, cable modems, and high-performance transceivers and was ramping volume production of an ADSL Analog Front End, which complements the Alcatel DMT core and the LSI microprocessors and Shortconnects technology.
The communications business is ahead of plan. Each division had record revenues and bookings. LSI continues to add technologies and secure the right customer sockets.
Q&A:
First Boston:
The revenue slippage was $10m on the systems side from shortages of mundane parts, such as capacitors, connecters, oscillators, and $10m on the components side from erroneous inputs to the new ERP system. Product that should have shipped in the last week of Q2 shipped in first week of q3. These are execution issues, the $20m will ship in Q3. The GM issue is due to the ramp at Gresham. When bringing on more equipment faster than expected, GM suffers compared to bringing it on at a more steady pace. They saw tightening at the foundries and wafer costs going up in the last 90 days. The rate of operating expense growth will be less than expected, partly because the Datapath acquisition solves some expense problems.
Alex Brown:
Japan is the only area geographically that was not as strong as anticipated. Europe has done well, the US continues to be a real engine, and SE Asia is very strong. The Q3 outlook looks surprisingly strong for Europe. Japan is starting to strengthen as is traditional with the high mix of consumer business. In the consumer business, Q3 and Q4 always see strength from the holiday, particularly in Japan, and this year is no different. There is very strong growth in all areas. There is no summer slowdown in Europe, and strong orders and revenues there, with very aggressive booking into Q4.
Sanford Bernstein:
0.6u and 0.8u legacy products are reaching end of life. Demand for 0.35u is still strong. Demand is moving into 0.35u and 0.25u and is just at the leading edge of 0.18u. The Colorado facility is being upgraded to run at 0.35u, which takes some load off the fabs moving to 0.25u and 0.18u. Inventory turns deteriorated from 64 days to 67 days. Customers are moving to dynamic replenishment, using Solectron, etc. LSI bears the brunt of rapid demand and carries more inventory than traditionally. The rapid ramp in manufacturing, which means more inventory at the front end of the line, will come down somewhat but not much. Datapath revenues are very small. They were just in the process of releasing standard products. LSI is excited because they were very rich in engineering, had strong product development and IP, and they complement what LSI is developing and has deployed. LSI has the existing customers, and as with SEEQ, they expect to very quickly start taking market share from competitors. Last year 13% of revenue was categorized as "other", including gate arrays, in medical, military, and industrial markets. This is anticipated to decline to 3-4% by the end of the year.
JP Morgan:
The shift in revenues happened at the very end of the last day of the Q and was discovered too late to be able to recover. Legacy products are coming down pretty fast, either because they are 10 year old process technology which is being deliberately phased out, or because it is part of more recent product lines like graphics products which are being phased out. The decline in legacy revenues is pretty linear throughout the year.
Salomon Smith Barney:
Capacity Utilization is over 90%. The lead times for 0.25u and 0.18u are between 10 and 20 weeks, which are anticipated to be brought back down in the first Q of next year.
G Carr Madison and Co:
The business cycle seems to have legs left. They see acceleration in orders compared to expectations and customers more willing to give forward visibility. Growth is driven by the Internet, and in Europe, many carriers don't expect to catch up for five years. We also have the normal PC cycle. 2001 looks very strong. Customers are running out of product rather than seeing a buildup of inventories.
?:
GM going forward will continue to increase Q by Q and will be 44-45% for Q4. The revenue outlook for Q3 includes the $20m slipped from Q2, but the 10-12% growth outlook was raised a couple percentage points from previous expectations. Expect similar 10-12% growth for Q4. LSI is not a big foundry user. Eventually LSI will have 20-25% with foundries. LSI is a new customer at the foundries and under the circumstances is treated fairly well. Although the foundries are sold out right now, LSI has been getting what they needed. SEEQ had relationships with foundries, other product lines have been going a little slower. That is why LSI is putting in a little headroom in by moving capacity forward a Q or two. The foundries will probably be able to supply what they require by 2001. The first half of the year the foundries will be around 10%. The entire industry is tight at .25u and .18u.
Bear Stearns:
The Sun business is strong and was 12.6% of revenues. Sun is doing well. There are no other 10% customers but several are close. The workstation business is a good solid business. Most of the growth in the computer sector is in servers, which are part of the communications revolution. The ASIC market for server graphics is not a growth market for the future, therefore LSI is deemphasizing it. R&D expenditure projections were a little ambitious. R&D was overestimated and won't grow as fast as projected, which will keep down operating expenses.
Cowan:
SAN systems component shortages were resolved by bringing on additional suppliers. Inventory objectives were relaxed somewhat in the manufacturing group; they had been trying to follow the Dell model too closely. It is not a limit going forward.
Chase H&Q:
LSI does not see any slowdown in the Sony PS2. Japan is struggling as a country and is still in recession. Nonetheless they have seen reasonable growth, in line with the worldwide industry, but there has been a swing back in Japan to source from domestic suppliers. Both the PS1 and PS2 are doing very well. PS1 has not been cannibalized by the PS2. LSI revenues from the PS2 will be going up in second half, right were they thought it would be. LSI expects to achieve 50% GM by the end of 2001.
Josephthal:
The wireless business introduced its first vehicle last year in Q3 and Q4 and derived several customers. They expect to go into production at the back half of year. Base station business has a lot of business. It is included in the broadband side. There are strong bookings with both GSM/CDMA but also for 3rd generation.
First Boston:
LSI will support Datapath's prior technical commitments to NEC and a couple other companies. They brought the read channel expertise, which is an important element needed for the disk drive business.
JP Morgan:
The product that did not ship with the ERP error was spread across markets. The error was corrected quickly and no customers were impacted. For the CDMA wins, everybody is using Qualcomm and is concerned about announcing that they are moving one or more platforms to LSI. Announcements can be expected during this Q, next Q, and throughout the year. They had expected from 4 to 6 announcement, but due to the Qualcomm turmoil, this will be easily surpassed. The handsets business is down to Qualcomm and LSI; everyone else has dropped out. LSI revenues will grow from zero to several $100m in the next several years.
Merrill Lynch:
The U.S. launch of the PS2 is still proceeding as planned as far as LSI knows. Sony just put large capacity in place for the Emotion Engine. European availability will be concurrent with U.S. availability. During the PS1 launch, revenues increased for Q1 over the Christmas Q, and the same may happen for PS2. The US launch is scheduled for late October, so it is likely that pent-up demand will spill into next year.
Regards,
G.P. |
