K: SG&A will be flat in absolute numbers for the remaining of the year because of reasons announced at this most recent CC. These reasons were also given in the prior CC. Similarly, R&D will decline slightly throughout the rest of the year. This has also been mentioned during the two most recent CC's. Thus, both of these items will have slightly less impact upon GM.
Your scenario of low sales growth assumes that LSI's growth is dependent only upon consumer products. Networking is the strongest segment for LSI right now, and it is apparent that it will see strong sustained growth in the foreseeable future. I do not see any part of your calculation that addresses either the growth in networking or communications.
I would add however, that the enormous success of DVD is not assured with the introduction of DIVX. That topic has been raised on this thread a number of times. Moreover, there is another competing technology called HyperDVD, wherein interactive information can be downloaded between entertainment web sites and the PC. By the year 2003, there will be approximately 15 million midband and broadband households with the capability of utilizing this technology. You can be darn sure that these households are not going to be using VCR. There will also be 60 million narrow band households. So in that sense HyperDVD does compete with DVD. On the other hand, HyperDVD is clearly synergistic with current LSI thrusts in the consumer area as well as networking and to a much lesser extent, high-end storage, since HyerDVD does have business applications. So it's heads LSI wins, and tails LSI wins a little more on the consumer front in various DVD technologies.
Given the seasonality in DVD and to a slightly lesser extent DCAM, it is possible that 4Q will not see the strength in consumers as 3Q. This has certainly been the previous trend. However, as Wilf noted, this trend will be in part ameliorated due to the lack of seasonality in consumer technologies that are nascent in cycle. I would also note that the demand for DCAM is extremely strong, and given the small initial base with which LSI is working, there is little chance that DCAM will affect the sales revenue that much over the next two quarters.
Given the last three CCs, I am satisfied that Wilf has done a good job of predicting the near-term prospects of LSI, and my post did address what he said. He said 4Q will be up in earnings despite lower GM. He is also on record as having said GM for next year will be about 49%. By contrast, the SG&A and R&D figures you have just cited don't match with what has been predicted. If that makes me a homer, so be it. I am very happy with my long-term track record. I don't subscribe to the theories that all CEO's are out to manipulate the shareholders and all analysts are out to manipulate the stock price down for the benefit of their institutional customers. Why? Because for years, I have put one half of my one of my three investment portfolios into stocks that have a Zacks rating of 1. The Zacks ratings are based upon analyst earnings estimates. My returns have been nothing short of sensational.
Why am I an LSI bull?
1. More and more of their business falls into the category of high quality intellectual property. The analogy I use is the difference between a lawyer who does a closing on your house and a firm that handles difficult litigation. Over time, the firm doing difficult litigation becomes a trusted member of your team, and LSI's thrust toward intellectual property allows for more enduring and stable relationships.
2. Critical mass. With the Symbios purchase LSI now has critical mass as a stand-alone company to build the next generation fab. Yet at the same time, this doesn't prevent LSI from seeking out a a worthy dance partner should they wish to do so. Rather it allows them to be choosy.
3. This is the worst semi cycle in 40 years because there was overinvestment, a buildup in inventory, and a change in inventory management. We are probably near the end of our current overall business cycle, and the major area of world wide growth has gone into a recession. During this time, LSI has done a great job of holding its own. If it had merely kept R&D even with revenue over the past three years, it still would be showing a profit of about $1.70 a share. R&D has "hurt " LSI's bottom line. LSI has wisely invested in its future growth despite the short term pain it has caused shareholders. Wilf has another five years before retirement. He does see himself as a visionary, and he has a right to do so. He's been in the business since about 1961, and he has grown up with the business. His vision for the future growth of our company is clear. But that doesn't always means pumping the price of the stock on a day to day basis. Nor does it mean short term-gains at the expense of long term gains. You spent a lot of time criticizing management's relations with the institutional community. Now that members of this thread have had the opportunity to listen to the CC, they can make up their own mind.
3. The gap between the intellectually richer semi companies and the intellectually poorer semi companies has increased rather than decreased. LSI's competitive position has never been better, and as noted in the conference call, at the high end, LSI's competitors are not particularly price competitive. This of course is less true in the consumer sector.
4. New product cycles for LSI are just beginning to take hold. Ask me how much I care whether DCAM or DVD deliver a penny less in earnings for 4Q. It's an exploding market, and the perception of it as an exploding market will begin some time this year.
5. There will be either significant disinvestment or diminished investment in Asia's fabs over the next few years. Certainly there will be less money spent on the upper end market in which LSI plays. So LSI is competing with less strong competitors or fewer competitors in their consumer markets and using the cheap Yen as its currency.
6. Perhaps the most important issue from my point of view as an investor is the issue of perceptions by the investment community. Consider this scenario:
A: We will see lower overall earnings growth in the next year. We are starting to see that right now. GB Jr may get to do to WJC what WJC did to GB Sr.
B:The public understands the basics of the economic cycle, which says semis are the first to tank at the end of a strong upturn and the first to go up prior to the beginning of the next upturn.
C: The public understands that rich valuations must be paid for companies showing explosive earnings growth, and LSI will show explosive earnings growth in '99.
D: The public is not going to give up its love affair with stocks, and in a market where the earnings are less than spectacular, those companies that do produce great earnings growth are going to be valued even more so than in a very good market as institutions look for winners in a smaller pile of possibilities.
E: There will be a perception that this is the beginning of the upcycle for semis, and this is always where the greatest appreciation in a stock's price occurs. I felt that when I purchased LSI in late January that this perception would have occurred by now. Clearly I was wrong. But this perception will not wait a full year. Being early in the semi cycle is much better than being late because the easy money is gone for the latecomers. To me, the thought of LSI at 30 a year from now seems like an enormous disappointment.
K: As you know I researched virtually all of your posts on the IDTI thread. For almost two years your posts sounded an awful like mine and others on this thread. You wrote of being patient with a company that had moved out of commodity chips and into logic, and the need to wait out the down cycle that the semis were in. You defended management. But toward the end of your stay on the IDTI thread, you became increasingly frustrated and bitterly attacked others, failing to take your own advice. You also were premature in your timing, and you bought the wrong company. But your advice today is as prescient as ever for a prospective LSI investor. Be patient.
That leaves one final issue K--honesty. Your lack of honesty hurts not only your credibility. It hurts you personally. No one is going to believe that you would throw in the kind of money you claimed to have invested in LSI and then relentlessly attack the stock and management. Nor is anyone going to believe that you have sold calls in LSI with the kind of fervor you show. Nor does anyone believe that you bought puts in IDTI after you relentlessly defended the company while never once criticizing the company. I suppose that there is some slight return in dirtying up this thread, and make no mistake about it, you alone are responsible for the attacks on myself and other thread members. I didn't even post a response to you until you had been attacking other thread members for three weeks. You started the personal attacks. You stop it. Even when you are anonymous you do harm to yourself with your lies and attacks upon other people. If you lie one more time or involve yourself with one more attack on another thread member, you will just be taken out of the loop. You will not be the hub of this thread through which communication flows. At best, you will be ignored, and have defeated your purpose on this thread. At worst, I will coordinate a group effort to to have you suspended for your repeated personal attacks. If you continue to post the well reasoned post to which I am responding, your bearish outlook will be most appreciated and welcomed. It's your choice.
PS. My wife wants to know if K The Investor stands for Krause the Investor. She thinks you are Jerry Krause the beloved GM of the Chicago Bulls.
Regards Shemp (Not Moe)
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