To all: The following is a detailed summary of the LSI 4th Quarter Conference Call. I have included some comments in the summary. These are clearly labeled comments.
Tuesday January 25, 2000
Diana Matley Vice President of Investor Relations Wilf Corrigan CEO, Doug Norby CFO, John Dahne, Exec VP for Communications Products Group are in the room
Diana reads the Safe Harbor Statement.
Wilf will comment on the 4th Quarter; John Dahne on Communications; then Doug Norby on the Financial Statement
Wilf: Overall a good quarter. LSI had $585 million in record revenues up 8 percent from Q3. Q4 bookings were a record. Net profit was 47 cents a share for Q4--four cents over First Call. Cash grew by $200 million in the quarter. LSI tightened up asset management in '99. Beyond raw numbers, the large Gresham wafer complex turned on very smoothly and exceeds expectations. Ramp time, output level, yields, and defect entities have all exceeded expectations. Q4 start up costs are no longer a drag on profits. Cost per wafer at Gresham will drop quarter by quarter in ‘00. LSI has ample capacity in what will be a capacity short semiconductor world in 2000. Orders are strong. 1999 Bookings grew by 54 % and grew in the first three weeks of January, which is usually a slow period. .For the first time in years, US, Europe, and Asia are growing at the same time. Japan is growing but it is still a laggard. Thus, all of the major semiconductor economies on the demand side are growing. Looking at Q4 as a culmination of the whole year showed a year of controlled rapid growth. Gross margin was up by 600 basis point with revenues up by 38%. LSI exited the year with operating margins of 17%. LSI expects similar progress in 2000. LSI expects to show steady margin expansion each Q and revenue growth better than the industry as a whole. Communications and Internet will be the drivers of industry and LSI for years to come. Communications products were 39% for the year. LSI expects communications to grow by 60% this year and be the majority of LSI's business going into 2001. The three drivers of the communications industry are the Internet, cell phones, and convergence of voice, video, and data across expanding backbone networks. This creates a new generation of infrastructure builders and transformation of traditional telephone equipment companies. Thus, it's not just companies like Cisco that are spending money. LSI is seeing a rebuilding of the whole communications infrastructure of developed nations and also rapidly deploying new capacity, especially in China and rest of Asia. The demand for bandwidth is growing exponentially as data and soon video are placing huge incremental demands on existing communications networks. Cell phone usage is skyrocketing, thus placing more demand for communications structure. Fortunately, optical networking has arrived. The other two business (groups) is networking computing, which is 34% of LSI's revenues and storage area networking, which is 13% of revenues. These two areas (groups) will show growth in 35% range for '00. The revenue share of “Legacy Products” will shrink from 14% to 3% in 2000. LSI expects 3 to 4% revenue growth this Q due to seasonally slower demand in consumer end markets and then revenue growth will go back to 6 % to 8% for Q2 '00.
Comment: I have been away for a while, so I was not aware that LSI divided its business into four (essentially three) groups. I have no idea what happened to the six divisions, and as a result I have no idea as to which product group the various lines from each division went. I realize that these distinctions were somewhat artificial to begin with, since it was not as if networking had its own building and consumer another. Moreover, it is very clear that John Dahne is the number two man LSI, and whoever is in charge of the Networking Group or the Storage Area Networking Group does not share equal status with John Dahne
John Dahne: The communications industry revolution has been fueled by the growth of the Internet requiring the replacement of voice based circuit switch networks with high bandwidth packet networks, the explosion of wireless telephony and the ultimate convergence of voice, video, and data provided by a single framework. Communication semi sales are growing faster than the semi industry and LSI's communication semi sales is outpacing this hot industry segment. For LSI's Communications Group, Q4 is up 46% over 4Q of 98 as the result of LSI's strong product portfolio and customer base. LSI's Communications Group will grow double digits in Q1 and 60% for all of 2000. Product categories in the Communications Group include Networking with over 19 million
Fast Ethernet 10 100 Mac Ports sold for '99. This is 35% of the total market share. LSI Acquired SEEQ, a company focused on Ethernet physical layer devices, secured design wins with Cisco, Nortel, and Cabletron and grew business by six fold in 10 100 FIE Shipments from Q1 '99 to Q4. This momentum will continue in '00. In Q3, LSI started CDMA volume shipments and continued ramping in Q4. LSI secured new design wins for CDMA in Q4 in Japan and North America and mobile computing.. LSI is the second largest IC supplier for all types of set boxes combined in a market that will reach $1.8 billion this year. LSI's customer list includes, Sony, Acer, Pioneer, Thompson, Phillips , Pace, Echostar, Nokia. LSI pioneered the European terrestrial set top market in'99. With US government approval to allow reception of local telecast over satellite, LSI had an up tick in set box top revenues in Q 4. This up tick will continue in 2000. Finally, taking advantage of shortfalls of LSI's competitors in manufacturing, LSI secured several new sockets in set top decoder boxes for Q4. LSI also acquired ZSP, a high performance DSP architecture tailored for communications applications including DSL, voice over IP, wireless base stations, and handsets. In September '99, LSI announced its intention to license ZSP to other communications companies to drive an open industry standard high performance of the DSP architecture and accelerate ZSP market's acceptance. This month, LSI announced Broadcom as a licensee of ZSP with several more prospective licensees in the pipeline. LSI is in high volume production with ZSP into voice over IP and DSL systems, and LSI has won several new sockets in third generation wireless base station systems. In broadband access, LSI provides ADSL solutions for Orchid, Alcatel Fujitsu, and others. LSI had fifty percent market share of product shipped in this area in '99. LSI had long maintained a strong SDH optical business and in ‘98 branched into DWDM optical systems, which are the new optical switches. Here, the customer list includes Nortel, Lucent, Ciena and others. Several of these systems are now ramping in high volume production. Thus, LSI has strong communication product lines and customer engagement across key high growth market areas including wireless, optical switching, LAN switching, DSL, and set top decoder boxes. Communications revenues have grown from 15% in '94 to 39% this past year, and based upon current trends will go to a majority of revenues in '01.
Comment: At the time of purchase, there was a lot of speculation that LSI had overpaid for SEEQ. Given the six fold increase in revenues, it appears that LSI made another savvy purchase that compares favorably with the Symbios purchase. Similarly, the potential for ZSP is enormous. At the time of purchase, the owners of ZSP stated their conviction that the one thing holding the company back was the lack of financial muscle that a company like LSI could provide. We shall see over the next two years, how successful LSI will be with ZSP. Clearly, Broadcom's name has an extraordinary cachet.
Doug Norby: I would point out that we having a two for one stock split for holders of Feb 4th. The split shares will be distributed on February 16th. In Oct of ‘98 LSI laid out a business model road map to achieve a 45% gross margin by 4Q 2000 and a 13% R&D and 12% SG&A, which was expected to be achieved by 4Q 1999 LSI also expected to achieve a 40% gross margin by Q4 ‘99. LSI has exceeded the Q4 ‘99 targets. LSI is raising gross margin targets to reflect the impact of its Communications group, which has high margins, and as the communications group becomes a larger part of total revenues, overall gross margins will increase. Moreover, LSI is also investing more in R&D. LSI specific target is for 52% gross margins in next year's second half . LSI is also targeting R&D at 18% in '01 and SG&A at 11%, thus giving an operating income ratio of 23%. By 4Q of this year, LSI expects gross margins to be at 48% with R&D at 16% and SG&A at 12% thus producing a 20% operating income ratio.
Comments: This means that in '01, LSI will approach earnings of $4.00 a share with a year over year growth of EPS that exceeds fifty percent. There are not that many business that will be growing revenues at 30 percent per year and profits by 50 percent per year. Clearly, the market is willing to pay a premium for such companies, and notwithstanding the cyclical nature of LSI business, the fact is that the long-term investor who moved into LSI in the early ‘90s has had a tremendous return on his investment despite the slump the stock was in between October '95 and September '98. Given Mark Edelstone's record in the semi business, it is very possible that LSI's stock price will appreciate to 150 in the next twelve months. Moreover, Wilf spoke of this time period as being the beginning of a super cycle in semis. And given the relative newness of several of LSI”s product lines, it is very possible that any sustained slump in LSI's semi business could be as late as five years off. I also am very encouraged by the increase in R&D. I strongly felt that cutting R&D in '98 was a poor idea. And given the increase in revenues over the three year period from '98 to '01, R&D expenditures will have been doubled. And that speaks to the long-term sustainability of the company. |
