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Technology Stocks : LSI Corporation

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To: patrick tang who wrote (18588)	5/28/1999 12:16:00 AM
From: shane forbes	Read Replies (4) of 25814

Patrick: I think that LSI was capacity constrained in Q1. But don't quote me. Here's a roundabout way of looking at this - as a corollary here are some rev estimates. As I see it LSI has to produce 2.17 billion to be "just average". I base this on an old LSI base of 1.25 b and an old Symbios base of 0.6 b, split 75% semiconductor and 25% storage components (both for full year 1998) - now tack on 15% growth for old LSI, 15% for Symbios semiconductor, 30% growth for Symbios storage components, and 20 mil for 6 months of Seeq and we get: 1.251.15 + 0.451.15 + 0.15*1.30 + 0.020 = 2.17 billion. So far we have had 457 m. Let's say 484 m next Q (6% growth). This in turn means that Q3 and especially Q4 have to be monsters. Corrigan has said Q4 will be very strong. It's tough to figure out exactly how it will be distributed between the 2 quarters since I do not know the ramp-curve. but Q3 has to see strong growth or Q4 won't and the whole year will be a bust! For instance if Q3 sees robust sequential growth of 10% then I get 540 m for Q3 and 689 m or 28% sequential growth for Q4!!! It is difficult for a company of this size to ramp up this fast. So try again: Q3 at 15% growth to 557 m and Q4 at 672 m or 21% sequential growth. Still too high.... Conclusion might be that the ramp-curve is very steep (quite possible) or the 2.17 billion is too optimistic (quite possible). However I do believe LSI will beat the industry average this year as their std. cells biz is now 1.2 b and their gate array biz is under 0.3 b - the former is growing at rates higher than 30% the latter who cares (this bifurcation with 2 parts growing at different rates was the basis of my 2 LSIs story sometime in early to mid 1998) - the key is that the gate array biz is no longer dragging down performance. So the question still remains: why can't LSI grow revs faster? Best guess: LSI is capacity constrained and is moving fast to address this. Long lead times are good unless the customer gets annoyed. My feeling is we will fall short of the 2.17 bil. because of capacity shortages - BUT whatever we don't get, instead of going elsewhere, will be gained next year. Nevertheless a penny today is worth a dollar tomorrow and it would've been better to get the penny today. Finally note the operational leverage. On a measly 27 mil increase in revs LSI is going to produce an extra 14.5 mil in earnings (10c per share). This is cooking with gas as it shows that LSI is yanking in 19 mil in Earnings (before taxes) from the 27 mil in revs - thus 70% of the incremental revs is falling to the operational line (pre taxes of 25%). Mm... These look a bit too good to be true. There must be start up costs, bonuses etc in Q1 that will go away in Q2. Nevertheless a robust fall-through effect - it is indicative of what you can do if you own a fab and operate it high capacity - printing money as they say.

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