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Technology Stocks : LSI Corporation -- Ignore unavailable to you. Want to Upgrade?

To: michael97123 who wrote (22453)	7/26/2000 2:43:43 PM
From: Maverick	Read Replies (2) \| Respond to of 25814

SSB:strong bookings,Q3 rev seq up 12%,SUN's 12.6% sale Excerpts follow, 7/25/00: SUMMARY * LSI produced a weak June quarter, with sales falling COMMUNICATIONS short of expectations and earnings before goodwill COMPONENTS (EBG) in-line with consensus. The company blamed transitory problems for the disappointment. * Bookings remain strong, and the company is bullish about its prospects for the second half of the year. * We are maintaining our 2000 EBG at $1.20, and our 2001 EBG estimates goes from $1.62 to $1.59. * We are downgrading the stock from Buy to Neutral (3S) based on poor execution and cyclical risk. Our price target has been reduced from $70 to $40. LSI Logic reported revenue of $644 million, up 4.7% sequentially and 28.6% year over year. We had modeled 9% sequential growth from March to June, with a top line expectation of $670 million. Management's guidance was for 8% to 10% sequential growth in June. Most, if not all, of the shortfall was attributed to component shortages and an ERP glitch. Earnings before goodwill amortization (EBG) were in line with our expectation and First Call consensus of $0.29. Gross margins expanded by 50 basis points to 42.9%, 10 basis points shy of our model of 43.0%. Despite a top line shortfall, LSI was able to meet EBG estimates by squeezing its operating expenses, which were about $12.5 million lighter than our model. As a result, operating profit margin came in at 17.8%, 80 basis points higher than our 17.0% model. Communications products continued to show strength. LSI expects this segment to grow 65% in 2000, and that it will represent about 50% of the company's revenue by the end of Q3, ahead of its earlier forecast of achieving the 50% milestone by year-end. All geographies grew in the June quarter, although Japan was not as strong as the other regions. Sun Microsystems remained LSI's largest customer at 12.6% of sales. The company attributed the top-line shortfall to component constraints in its storage area networking (SAN) system division, as well as errors in its new ERP implementation. The two problems combined to push $20 million in sales from June into September. Since LSI still expects to capture this revenue, management has raised its sequential sales growth expectations for September to 10-12%. Even with this slope, however, the revised top-line of $715 million for September is below our prior expectation of $724 million. While the company was vague about the disparity, it sounds as if Japanese sales are slightly below plan. Bookings remain strong, and the company is bullish about its prospects for the second half of the year. Based on the demand environment, the company is adding capacity ahead of original plans and accelerating its fab ramp by six months. To us, this is a marginal negative, as it increases the chance of excess capacity overhang in 2001. One of the bullish cases for LSI Logic has been gross margin expansion as the company's capacity becomes more highly utilized. The near-term outlook is mildly disappointing on this score, as accelerated capacity additions within the company's Gresham plant should constrain the margin expansion in the next few quarters. While LSI plans to manage operating expenses to meet its prior operating margin goals, the lack of leverage comes as a disappointment. We have trimmed our 2000 sales assumption from $2.79 billion $2.75 billion, and 2001 from $3.51 billion to $3.43 billion. We are also adjusting our margin assumptions down slightly. Base on the top-line and margin adjustments, we are maintaining our 2000 EBG at $1.20 and trimming our 2001 EBG estimates from $1.62 to $1.59. Prior to the earnings release, First Call consensus had been $1.26 for 2000 and $1.80 for 2001.