Clarified notes and thoughts from the conference call
Wilf really brought out the entire team. They seemed very organized with a much better organization than prior conferences.
First, Diane Mately read some highlights from the press release, which included revenues of 330 Million up one percent from previous quarter and earnings of 23 cents a share v 22 cents from previous quarter. The visibility is flat for third quarter, but the fourth quarter will be stronger. R&D is 64.8 million which is 19.6% of total sales. Wilf had cautioned in the last quarter's call that R&D would be high because of the way in which Santa Clara would be expensed. Next quarter, as I recall it will go to the revenue side. I felt the asset to price ratio of LSI was very cheap.
Then, Wilf spoke:
The lower Yen reduced sales by 4.2 million dollars, but unit volumes were .up. Gross Margin was up to 46.7%. Operating expense increases reflect opening a China office, payment of Merit raises this April, and SAP. The R&D was up because of the Santa Clara fab's conversion to 8" wafers. Book to Bill was just over one. The June book to bill was slower than expected. Communications were strongest, and design wins doubled from last quarter. Kurlak got this right. The increase in wins assures future revenue growth in networking. They also had important wins in CDMA. Consumer market video games are just starting the pre-Xmas manufacturing ramp However, 98 revenues will be quiet due to previous pricing agreements in this segment Wilf indicated that aggregate Sony was 11% of revenues. It was 22%. Sony revenue has been replaced with network revenue.
DCAM is now shipping, as is DVD. He feels that the best estimate for DVD is 2 million shipped this year, and LSI will have 25% of this. Other DVD shippers are from indigenous set manufacturers. LSI has the best independent business in DVD. He expects DVD to gather momentum. In the computer sector (non-PC) LSI has just delivered a print design to a major printer manufacture-a multi function peripheral product that will connect directly through the Internet rather than through a PC. This is a repeating them that one continually hears from Wilf, and this sort of thing goes relatively unnoticed by the analysts because their focus is so short term. Wilf seems to grasp the importance of this, though. Fibre Channel design wins gain momentum. LSI is the leader in design wins
Utilization exceeded 90% this quarter (Great News! Will need Gresham)
Gresham comes on line in October with shipments. Wilf described the semi industry outlook as "challenging". He said that fundamentally it is flat and it is tough to predict an upturn other than to say it will happen in next few quarters. While the third quarter is expected to be flat, the month of September will see strength. They expect the fourth quarter to be stronger. He sees LSI has being in the right markets with the right products. Symbios is a major Q3 item with 600 million in revenues with a focus on storage. LSI has already received FTC clearance verbally and they expect to close the deal in the third quarter.
He emphasized that certain federal statutes limited him as to what he could say, and that they would only be able to talk about Symbios in broad terms.
John Dahner was next:
He talked about LSI's strategy for going after high growth markets, and growing into the markets. These include telecomm, networking, games, computer servers, and wireless for voice and data storage. Storage is a new market for LSI. They have had a little market here given their strong position in Fibre Channel, which tripled this year over last year and now totals over 25 million dollars.
Dahner said that Symbios had an additive SCSI product line with IP content. Symbios has a nearly identical customer base in the US as LSI with such stalwarts as HP SUN IBM and CPQ. But with LSI's customer relationships intact, they think they can accelerate Symbios sales, while not de-emphasizing other markets. LSI views this as a strategically growing a market that has a strong product line.
Hugh Durton was next
He noted that Symbios is strategic move increasing LSI's storage position all of the first tier OEMs in the server business have Symbios in their servers. He saw the purchase as accelerating LSI position in the market for the next 3-5 years. He noted that most of the growth is coming from NT Workstations. CPQ has at least one Symbios component in every one of its servers Symbios has VERY LITTLE TIED To the PC as opposed to ADPT. Windows NT will be a very strong part of this market It will be 30 times current market in three years. Increasingly, manufacturers are looking for a way to differentiate themselves from Intel, and Symbios offers this opportunity. More than just the simple combination, the Symbios purchase offered LSI lots of new intellectual property. He too noted that LSI has the same American customers, but without overlap. Mr. Durton also noted that Symbios is not overseas that much so this gives Symbios a big boost from LSI
Questions then were taken from the analysts
Terry Ragsdale of JP Morgan
Question: What is your view Wilf? Are we done with OEM inventory reduction? Or do we have a broader demand problem?
Answer: Networking is strong. There is not much inventory in the pipe. End demand may be a slight problem. When looking at Asia, and direct business, in some of the sectors you are seeing the secondary effect of Asia where Japanese and Koreans are not buying equipment from US customers. There is still fairly strong US demand. But, he does see a bite into US equipment suppliers.
Question: What is the effect of Gresham? Was Sony formerly 17% of sales? What is it now? And is that a decline in pricing?
Answer: Sony has 20 million year (in Playstation sales) Overall revenue declined with the reduction in the Yen. Wilf added that the yen would help going forward because American companies cease to be competitive, and LSI Japan business is Yen based. Wilf also noted that they had recently see a bottom in pricing
Gresham adds 16 Million to depreciation to the 4th Q. It will ultimately get up to 20 million per quarter over the following 4 to 5 quarters.
Sanford Bernstein.
Questions: How much margin erosion with start up? Can production for Symbios be shipped into Gresham?
Answers: Within next few weeks they will go through Symbios due to Sherman
Act. They will have a special meeting for analysts. Symbios is starting on .35. Wilf expects them to look to Gresham next year for.25 if they need it, but many SCSI products need to be at .5. Therefore, those will stay in their current fab for the near future. Gross margins have risen and will be mid 40s. They will be back to low 40s in 4th quarter although the bottom line will be better
Erica Klauer:
Question: How much the was cost of goods impacted by the yen?
Answer: 100 basis points.
It was also noted that the breakout of sales is 50% international roughly split into single digits in non-Japan Asia. The rest of international sales are split between Japan and Europe
Ultimately LSI will have four segments that should approximate 25 % of gross revenues with the addition of storage.
Soundview
Question: This three or four Q outlook does not have Symbios included?
Answer: Correct.
Drew Peck of Cowen
Question: Why was SG&A up over from quarter to quarter?
Answer: Sales office openings. SAP system in Q2 Merit increase in April Expect SG&A will be flat in absolute dollars going forward.
Goldman Sachs
Question: What about Symbios non-storage business?
Answer: They have some wireless. They have some non-storage.
Gruntal
Question: Can you break down your revenue by market product type?
Answer: In video games, LSI expects volumes to be equal to 97. LSI sees DVD with higher volumes in Q3 for the source decoder. Set top box is steady. DCAM went into volume. Yen deterioration will hurt Networking looks very bright. Sony was down 2 million due to Yen pricing. The rest was step pricing, which is now at its lowest minimum per contract with Sony. Sony is not just Playstation. Playstation will be stronger second half.
Question: Will Q4 be a consolidation of Symbios?
Answer: Yes/
Mark Edelstone of Morgan Stanley
If you just look to 4 Q, what kind of turn potential is there as you exit Q3 and go to Q4?
Answer: Ramp on DVD is less than expected. It was 750K last year. Next year will be strong for DVD. Won't see seasonality next year in DVD. Once introduced you will see little seasonality. With DCAM, (not DVD as I put in my notes) the stuff is flying off the shelves. For '99, we will see a rapid quarter to quarter growth. DCAM is designed into most of still cameras companies. Single chip gives to 4 million pixels.
Question: Is there turns potential?
Answer: They are good says Wilf. DVD will double next year. In terms of ASIC for Fibre Channel LSI has 80 % of design wins. Symbios will extend a powerful Fibre Channel lineup. Wilf says to look at Q Logic, which had spectacular earnings just this past week or so.
Question: Why low margin in Q4?
Answer: (I may have this wrong) 16 million for Gresham is gross depreciation. 6 quarters into 99 It's an increment of 25 million.
Capital expenditure for year will be 360 million, might be less next year. A little more depreciation next year
DLJ
Question: What percentage came from coreware?
Answer: Over 30% in revenues.
Question: What about the competitive front. Do you find Lucent in your accounts and pricing accounts?
Answer: Wilf says there are a little different problems at different levels. LSI meets IBM at the high performance end of computers. LU is down the food chain in telephone infrastructure. In consumers, it is all of the Japanese companies. In terms of most price competitive it is lower complexity. IBM is a technology competitor rather than a price competitor. LU now that they are buying networking is becoming less competitive in the semi area because their competitors do not want to buy from their competitor. There is no one single competitor.
Prudential
Question: What are the average lead times this quarter?
Answer: The average lead times were 14- 16 weeks this quarter.
Tom Kurlak.
Question: In light of Sony's decline which is now only 11% of total business, please talk about communication sector?
Answer: Communication segment was above 120 million in revenue. Good trend is building in networking. Telecom grows. Wireless continues to grow. Networking space says size of design is growing. Most of the gain occurred from networking
Montgomery
Question: Asks about relationship with Q Logic.
Answer: We are close with Q Logic. We have collaborated with them on a number of customers. Q logic is board level. LSI is component and subcomponent level. LSI offers cores to their levels. Wilf analogized this relationship to the storage business where ADPT had no enthusiasm for components business while LSI does. Wilf feels that QLogic is enabled by Symbios purchase
Interesting sidelight to the call is the revelation to me that competing customers intellectual property needs to be protected. This is part of their infrastructure. They actually produce product lines that compete with their own products without revealing the others intellectual property.
In response to question about cable they said they are undergoing extensive and strategic planning process. |
