To all. Questions from the analysts at the LSI CC (Apparently my report was too large to post in one post, so I have to do it in two.)
Questions from the analysts:
Vadim Zotnikov (sp?) with Stanford Bernstein: Could you describe just a little bit more your participation in CDMA, and in particular are you involved in the NTT trials for the W CDMA trials in Japan? And also could you comment a little bit on your participation in the optical market? Could you be specific as to what portion of the value added chain you currently compete and where you are seeing the design wins?
Dahne: What we are shipping in volumes today is IS 95 CDMA which is second generation This is a standard that has been deployed in Korea, Japan and North America. We are also developing 3rd generation technology which include W CDMA , which is called UMTS in Europe and also a variant in US which is called CDMA 2000. So LSI is shipping major second generation CDMA today and LSI will be a major player in 3rd generation. In terms of the optical switches, LSI is providing very complex custom chips for customers that are doing switch fabric. Also have analog transceivers that are doing clock recovery, and data transmission and reception at greater than one megabit per channel rates that are being used for back plane transceivers. So it's a combination of custom switch fabrics and protocol transceivers as well as back plane transceivers that LSI is doing.
Erica Klauer of DB Alex Brown: What was capital spending and depreciation projections in 2000. Could you talk about DCAM?
Norby: For 2000, total depreciation will be around of $350 million and capital spending will be $450 million
John Dahne: DCAM will triple in the year 2000. But he does not know what the DCAM market share is.
Hans Mosselman with Prudential Securityies: Could you give an update on PSII and the ramp that you expect this year, and what is the percent of business in .18 micron?
Wilf: PSII is .25 micron tech. Sony intends to launch PSII in March this year.
Sony expects to sell one million units in the first week of introduction. LSI expects to ramp through the year. LSI sees no problem in making the chips. The forecasts very much depends on what happens in US Xmas market in 2000. Most estimates fall in the range of 8 to 11 million units throughout the year. The product will be exciting since it will perform as a DVD player The initial price will be around $300. This will probably be that price in the US. At that price, the consumer gets a leading price video game player that can also double as a DVD player, which is the same price for around $300. LSI assumes a fall roll out in Europe and US at the same time.
Dahne: In the area of .18 micron, LSI has shipped a number of prototypes in.18. LSI will take a number of those codes into volume production in the second half of '00.
Mark Edelstone of Morgan Stanley Dean Witter: What is the tax impact on the gain?
Norby: For regular EBG it is 25% For the GAP it is slightly higher.
Edelstone: Can you give a sense of wireless designs that you have? Can you forecast what percent of communications in '00 and '01 will be wireless?
Dahne: We count wireless handsets in the wireless area and then we take all of our base stations and put that in the broadband area. End equipment makers traditionally supply base stations and handsets are more a consumer item. So wireless handsets started to ramp in Q3. LSI has several design wins that will ramp throughout this year. This is the fastest growing area of communications because it is growing from a very small base of revenues. But LSI expects that in the next couple of years it will grow this market into multiple hundreds of millions of dollars based on pure market size and expectations based on success of its product to date.
Wilf: We are totally focused on CDMA. The GSM is a big market, particularly in Europe, but we just decided to totally focus on CDMA. We already have a significant position in base stations, and we are going to build our handset position totally focused on CDMA.
Dahne: And the third generation systems as they start to blink
Clark Westmont of Solomon Smith Barney: Could you give what you actually spent in capital expenditures in '99 and the geographic mix of sales, and in the communication business, can you rank what is main driver? Is it optical networking? Is it LAN?
Norby: Cap ex was $240 million. The US accounted for half of the total revenue with Pan Asia showing good growth in '99.
Wilf : Revenues outside of the US are fairly evenly divided between Europe, Japan and Pan Asia. LSI thinks of it as an even spilt among the three. If one looks at recovery in semi business, it was driven by US. Then Asia came back in late '98. Now LSI is seeing Japan coming back modestly. The surprise is how well Europe is doing, and that is based on communications. There is very little computer business in Europe any more. It is strictly communications based. Europe will take a bigger slice of the pie this year.
Dahne: In terms of communications, we are seeing growth across the board in LANs and Ethernet switches where LSI is the largest player. There are a number of players with standards products who have failed. Plus with SEEQ, LSI continues to see the growth of the FIE business and LSI will continue to grow. Networking will continue to grow quickly. LSI has a very large business in Sonnet SDH optical systems, which continues to grow at an industry wide 30% rate. LSI is in new optic systems for DWDM, so anybody who wins there is based on LSI Logic chips and that is just beginning to ramp LSI also has 50% of the access market in DSL, which makes the broadband side extremely strong for LSI Logic. Set top decoder box is getting a lot of growth, LSI is number two in market share and its products are broad and superior to competition, and LSI has the manufacturing capacity to supply these people. This is a tremendous value added. So LSI sees broad growth in communications, land based networking, broad band including infrastructure and access products, set top decoder boxes and wireless.
Westmont: Any greater than ten percent customers in quarter?
Wilf: The biggest customer is Sun Microsystems and that is not a communications. It's at 11.5% Sony is at 10 percent
Joe Ossa of ML. Can talk on how the Fibre channel is going? I would be interested to see whether SCSI is seeing any competitive pressure. On the Ethernet business, are there any plans for to roll out any standard 24 by 2 switches and integrate your FIE core onto that?
Wilf : On Fibre Channel we have about 85% of Fibre Channel ASIC designs throughout the industry. We supply this as ASIC products. It you look at Q Logic HP with the Tachion (sp?) Emulex as well and as you go down with Brocade, Fibre Channel is starting to move quite significantly, and we are engaged with the people selling Fibre Channel products. LSI's main focus has been to use Giga Blaze technology, which is a proprietary technology. LSI has a lot of capability with 2 and one half Gigs and LSI can see 5 Gigs in the future. Fibre Channel has a lot of potential. But it is not close to displacing the SCSI business
Dahne: We are seeing both SCSI and Fire Channel being sold into the server based business that LSI has in networking computing. SCSI keeps coming out with new versions of the standard. LSI has picked up market share. Whichever standard wins, LSI wins.
Wilf: The other side of that is that our systems business is moving toward full Fibre Channel, and we think that this will help us significantly in the systems business.
Dahne: On Ethernet, it's been an ASIC market predominantly. Some of the people in the standard products switch business ultimately dropped. LSI has continued to grow. Clearly the physical air of the market is the standard product, and that is why LSI purchased SEEQ. And if the low end of the market moved to standard product, LSI has the entire intellectual product to build. LSI has CAMs for the look up table (Content Addressable Memories) the MACs, the high performance IOs for connecting the memories, the physical layers, and devices to connect to the ports, It's a question of when and if the market ever develops. Right now LSI is content with a combination of standard product FIEs and ASIC products with IP for the LAN business.
Jack Geharty with Garrard Klauer and Mattson: How do you see your lead times going out and how do you see this with Gresham ramping?
Wilf: We have been able to bring out lead times down. We never had any significant problem. The only area where we had with lead times was in the storage area. Hyundi made little capital investment in Symbios prior to selling LSI Symbios. Thus, it took about 12 months to bring that capacity up 50%. It also took about twelve months to bring that capacity up and in parallel with that LSI brought the leading edge products in storage components to o Gresham, and that took about six to nine months to qualify since that was mixed signal, and that is more difficult that direct digital. LSI is able to satisfy most customers. Most customers today are placing demands that are well within the lead time. A typical order is about six weeks despite the fact that lead times are eight to ten weeks. LSI is at stable lead-time right now
What advantage LSI has as an ASIC concern with a new wafer fab is are there going to be hiccups. LSI is company that is pushing envelope on technology at the prototype stage—not at the production stage. Typically, LSI hits volume production after design six months later so LSI already had six to nine months experience more on technology So have six months leeway to the big standard products company, which means a more smooth transition.
Carl Richard substituting for Dan Niles with BBRS: What kind of growth does LSI expect from the other 61% of its business?
Wilf: Looking at network computing area the growth could be in the 35% range. It could be better, but that is what current estimate. If one looks at Storage Systems it will grow in 25 to 30% range with some of initiatives on the branded product it could be more A bunch of products LSI is phasing down. This is not new. “Legacy Products” will go down to 4%. It constitutes the last throes of the military business, medical business, and industrial products. These are low volume transaction intensive businesses. These are customers LSI no longer calls on. Yet these are custom products, and LSI can't shut customers off.
Comments: The “legacy” products are of course the old gate array products that constituted what Shane Forbes called “Bad LSI” The business is clearly low margin, and as will be explained in a comment later by Wilf, is just not the sort of business, LSI wants any more.
Shadib Blllan: Soundview Technologies If you look at December how much of the business came from .35 micron? And FPGA is at 40 to 50K gates in terms of sweet spot. What is your sweet spot?
Wilf: What FPGA is attacking is the 13% we are planning to reduce to 4%. This is not something that they are seizing out of our hands. This is something that we are thrusting into their hands.
Dahne: This is the gate array business from the mid 80s. We rarely do a design under 800 K gates. You really have to stretch an FPGa to go over 50K gates These are ships passing in the nights. We just don't see each other.
Wilf. Not yet. Not yet. However We will be embedding 50Kgates programmable in our big chips this year so the ships might return.
Comment: This was the only remark at this CC about the FPGA functionality that is being added to LSI's Coreware. The potential for this market is truly significant and could add as much as fifty cents a share to the bottom line over time.
Dahne: We don't have the breakouts on geometires. Most of our business .35 and .25
Wilf: Most of design is .18 but any prototype is probably 12 months before you actually see peak volume. Silterra is 12 months away.
Mona Eureba of Gruntal: Who is the largest customer in the communications area? Do you supply custom chips to other chip companies?
Dahe: We only list our largest customers if they constitute more than ten percent of our revenues. However, if you were to scan the industry and look at all the successful companies out there, either the hot start ups or the established brand names, you would see that LIS is a preferred supplier of these companies.
Wilf: We have announced a $50 million investment fund focused on communications. Historically what we have done is that if we are excited about the technology of these start ups we actually use those companies to push out technology. We also make investments in those companies, and that has been quite useful for us.
Comment: This is an outstanding idea to the extent that perhaps even greater funds should be invested. Who better to assess a young start ups potential than the company that is making the chips for that company. If LSI had invested in a company such as Emulex, LSI would have been able to drive its technology in the Fibre Channel area and made clsoe to $500 million. That would of course have been the best of both worlds.
Mona Eureba: Do you have a few names of custom chipcompanies that do ASIC with LSI Logic?
Dahne There are some small semi companies that LSI provides product to. That would include Trans Switch, Conexint, PMC, and Orchid. These are companies that do ASIC business with LSI and because LSI has intellectual property that they do not have and need for the market place, LSI provides the needed technology. Companies like Q Logic and Emulex area among these companies. And LSI generally has good relationships with these companies
Eureba: What kind of chips do you supply to Sun Micro?
Dahne: We supply host storage products for SCSI and Fibre Channel, complex custom products that are IO devices for their servers, core logic chip sets for their microprcessors and graphics for their systems. LSI also supplies the storage area network systems boxes to Sun as well.
Wilf: We are the largest ASIC supplier to Sun.
Eureba: Now that you no longer break it down revenues in the Consumer Divison, can you tell where most of the product is counted from?
Dahne: Some of the products such as set top decoder boxes go into communications since that is the area where everybody else moves the product. Some of the products are in others because it's just the focus. In the end, a lot of products like wireless headsets are sold to consumer oriented markets but we break it out as to whether it's product that's sold to the infrastructure of the communications market such as all of the broad band or the LAN networking or is it a communication vehicle that hooks up to the Internet such as wireless handset or a set top decoder box or a cable data modem all of which are communications. Other products have moved into the other category or the networking computer.
Eureba: Where is DVD? (In terms of category)
Wilf :(Probably not understanding question) They are right in line. If you take a DVD product going into china, that is clearly a consumer product. (Yeah but what category is that in?) Some of the other DVDs are buried in a larger chip or a larger system, and that results in the DVD sale going into either one of the two areas.
Alex Cowe for Richard Whittington of Bank of America: I was wondering of the sensitivity analysis of LSIs Communications Group with regards to the projected double digit revenue increase. What is the range of this double digit increase, and what kind of seasonality is LSI seeing in set top, wireless, and Ethernet?
Dahne: Some of the products such as wireless and set top boxes are more consumer oriented and will see higher volumes in Q3 and Q4. Broadband sees strong Q4 and Q1, but broadband is weaker in Q3 because of vacation time in Europe. LAN hax grown over all time periods. Q3 was extremely strong last year. LSI saw no strong seasonality last year. In some of the consumer areas LSI is seeing strength in Q1 and Q2 such as in wireless and set top decoder boxes, so it could be that LSI is taking market share or seeing a very strong market in set top decoder boxes. It could be that the market is so strong for Internet related products. Wireless is continuing to do well for LSI Logic. If one is analyzing the growth potential of wireless, one must take into account that not only have is there a good replacement market with people who are looking at next generation product, but it's easier to lay wireless than to lay wireline in undeveloped countries. LSI thinks that wireless is going to be a “barn burner” for years to come. Wireless items are pretty cheap items to the consumer so LSI is seeing many turns in the market where people will retire a handset in a year to purchase the newest feature or battery life. There are wireless products being shipped today have data capability in CDMA and the purchaser can hook your handset to his computer and download the e-mail wherever he is. That's a very strong feature right now in Japan.
Dan Scovill of Fahnstock: Could you review revenue break by the product group by the quarter and could you give you overall view of the semi industry?
Wilf: We did not break out quarter by quarter for the product group. We did it just for the year. The overall semi industry is a very strong environment. The full implication of the Internet is that it is going to have a super cycle effect, The Internet is a driver at the same time as the cell phone is growing as well as the same time we are seeing the rebuilding of the telephone infrastructure. The PC market is ok, plus there is a capacity problem. There has been a lot of capacity that resulted from shrinks in the past two years. That's over. Now the semi industry needs a lot a of raw capacity, and there hasn't been a lot of capital spending the last couple of years. Even though capacity has come up it is only now coming back to the levels ‘95 and '96 levels since Moore's law continues, and a lot of capacity is obsolete. I am sanguine about overall demand and we see less capacity at this stage of the cycle.
Comment. Even if the cycle lasts just another two years, by that time LSI will have come close to accumulating $3 billion in cash, which would be an excellent start for constructing a fab that would use .12 micron geometries. Moreover, LSI is in an optimal position to make superior investments in companies that are bringing cutting edge technologies to market. It will be interesting to see what sort of return LSI will garner on its $50 million to be spent on nascent technology companies in the communications industry. My guess is that Wilf and company will outperform the talking heads of Wall Street given there superior performance to date in terms of purchasing various companies. |
