Shane: The problem is that all of your assumptions are based on the most wildly optimistic growth for the semiconductor industry—just the opposite of what we have experienced during the past three years. To use your own word, they are ludicrous.
Let's take a look at your core assumptions: Using your R&D as 15% ( not Wilf's of 13%), the targeted net pre tax margin thus becomes 15%.
Your assumptions include no R&D in the systems storage business. Typically, systems storage R&D is half of what is in chips, so this is precisely what accounts for the current difference between Symbios and the old LSD R&D. Thus, there is no question that LSI is cutting its R&D budget by fully 20%. Since, one of the strengths of LSI was it commitment to R&D to develop future products, I think it's safe to say that it's long-term future is being compromised by the cut in R&D. I also think it's a little presumptuous on your part to suggest that there is that much redundant R&D. Clearly, there is no redundancy in the systems storage area, and if there was so much redundancy in the chip components of Symbios's business, then LSI would have made a very poor purchase, especially in light of their pronouncements that the attraction of purchasing Symbios was its intellectual capital in the chip making business. You also conveniently neglect to mention in your calculations that since fully one-sixth of LSI's business is now in the systems storage business, that we can expect that fully one sixth of LSI's PE will reflect that storage business, which has historically had far lower PEs than the chip making industry.
Your next assumption is also not based upon the current business model, wherein you opine that SYM can up margins to as much as 15%. That's a 60% increase in margins. It won't happen.
Most importantly, you are trying to have the best of both worlds, when you are trying to infer that a business model that expects zero growth in sales will also provide a growth rate of 20 percent per year for the next three years, despite the fact that the industry has been savaged the past three years. Cutting back R&D, and cutting back on SG&A is precisely the sort of thing that makes it difficult for a company to grow at a sustainable rate of 20% per year.
Where do you get your growth rate of 20% a year? Surely it's an historical assumption, but since 1982, we have been working with the assumption that, at the margins, Asia's booming economy will be a major component of US economic growth. We may no longer hold to that assumption. And Shane, let's face it, both you and I have been guilty of using the most optimistic set of assumptions in the past.
Moreover, there isn't any model that supports your assumptions of 20 percent growth for the semi industry for the next three years. And as you acknowledge, the figures change dramatically without those assumptions. I also don't see Wilf saying that LSI will outperform the semi market by ten percent in 1999, as he was saying a year ago.
You are assuming that in the third year of 20 % growth in what everyone acknowledges is a cyclical business, that investors are going to assume that there will be a fourth year of positive growth and pay premiums well in advance of the stock's recent growth rate. It might happen—for a few months. Shane you are an actuary. You know better than to include a table for “crap” times, when in fact your crap assumption is based upon thee best possible revenue growth over the next three years—growth that is not even in the business model of LSI.
A truly genuine “crap” table would include the scenario of “What happens if the US economy goes into the tank”, or are we to assume that the longest ever expansion will just continue for the next four years, because if it does not, than the 50% of LSI's business that has been it's strongest component will surely suffer, and Wilf acknowledged this, when he expressed his bewilderment at the downturn in business despite the strength in the US economy. And if the US economy goes into the tank, than LSI will not only not be meeting its business model, but it unquestionably will be running at a loss, and will be cash flow negative, which will make future expansion virtually impossible. That's not a scenario that is three years out, but rather a scenario that may well be upon us. The fed doesn't cut rates in between meetings unless there are some very serious problems on the horizon.
Worse yet is your assumption that there will be undercapacity. Just because there is currently overcapacity does not assure us that there will be undercapacity. Is undercapacity an outlook upon which we can rely? No. I mean we can talk about it, but the fact is that LSI will not be pushing one scintilla of .18 product out of its door until the year 2000, so it is truly foolish to speculate on undercapacity as if it were fait accompli. Rather than focusing on this nonsense, what this thread needs to do going forward is monitor the growth of .25 and.18 fabs in the world, so that we can address the issue of capacity in a neutral non-hypester mode.
To quote, “Sales, Sales, Sales, Sales, Sales”. If sales meant so much, then Wilf could have bought a mid-sized grocery chain or made a bid for Iomega. If you are talking about sales in the semi industry, then LSI has currently paid an awful lot of money for a little bit of sales in the semi industry, and this purchase has possibly reduced their probability of surviving long enough to build a next generation plant beyond Gresham. This is clearly a company that is headed nowhere for the time being. Could it become a spectacular play over the next two years, and in particular between a period of 12 months and 24 months from now? No question. But to work with assumptions that have no basis in fact does no one any good.
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