Some news from Goldman Sachs about RapidChip etc.
2) LSI (U/N): FOCUS ON SEMIS - END MARKET DIVERSITY, GROWTH OPPORTUNITIES, AND MARGIN LEVERAGE
a) TARGET MARGIN MODEL MAY INCREASE - We met with Wilf Corrigan (Chairman and CEO), Bryon Look (EVP and CFO), Diana Matley (VP, Investor Relations), and Robert Pursel (Investor Relations). Our discussion focused on the continuing semiconductor business given the impending spin out of the company's storage systems business, Engenio Information Technologies.
Overall, LSI is encouraged regarding opportunities for its semiconductor business given end market and product positioning. In addition, the company expects its fab-light business model will drive capital efficiency and more predictable gross margin through a cycle. LSI currently maintains gross margin target range of mid-40s, though the company could see this inching into the 50% range over time; we note that while LSI's corporate gross margin stood at 44.5% in Q1'04, the standalone semiconductor business had gross margin of 46.4% so approaching 50% is not much of a stretch as internal capacity utilization continues to improve (capacity utilization was reported to be around 84% in Q1'04). LSI also noted potential for operating leverage as certain areas, which represent significant opportunities including RapidChip and certain standard products, are currently in investment stages and are expected to contribute more meaningfully to top line over time.
b) RAPIDCHIP COULD GROW TO 10% OF REVENUE IN 2005 - LSI highlighted its broad product portfolio leveraging three core enabling technologies: 1) standard cell ASICs (850 proven designs with opportunities for high density and high volume applications), 2) RapidChip platform ASICs (emerging product line positioned as FPGA alternative with faster time to market and lower up front cost than ASICs; Seagate announced as the first customer and expected to ramp in 2H of the year; could develop into a significant revenue contributor in 2005 representing upwards of 10%), and 3) standard products (standard products account for approximately 40% of semiconductor revenues currently and continues to be a focus area of growth for the company).
c) DVD RECORDER CYCLE IN H204 - From an end market perspective, LSI remains optimistic regarding outlook in consumer (driven by DVD-Recorder and EVD high definition video in China), communications (driven by ASIC and RapidChip opportunities in enterprise and WAN with recovery expected in 2H in Europe and North America; also the company noted broadening of standard products efforts given recent acquisitions, including Velio, which is expected to
contribute revenues immediately), and storage components (driven by success related to Ultra320 SCSI, RAID, and SAS/SATA, and accelerating RapidChip opportunities). We expect the most promise is likely in DVD recorders, driven by the Domino product line. LSI has up to 30 customer
design wins, representing 90-100 individual product programs. With ASPs 3x those of DVD read only and DVD recorder market potentially growing from 4 million units in 2003 to 12-15 million units in 2004, this could drive some incremental revenue in H204.
2 Goldman Sachs Global Investment Research
June 9, 2004 Analyst Comment |
