Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Sujal Shah - Vice President of Investor Relations

Abhijit Y. Talwalkar - Chief Executive Officer, President and Director

Bryon Look - Chief Administrative Officer, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Vivek Arya - BofA Merrill Lynch, Research Division

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

Steven Chin - UBS Investment Bank, Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

William Harrison - Wunderlich Securities Inc., Research Division

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

LSI (LSI) Q4 2012 Earnings Call January 23, 2013 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LSI Corporation Investor Relations Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sujal Shah, Vice President of Investor Relations at LSI. Please go ahead.

Sujal Shah

Good afternoon, and thank you for joining us. With me today are Abhi Talwalkar, President and Chief Executive Officer; and Bryon Look, Executive Vice President and Chief Financial Officer. Ahbi will begin the call with some opening remarks and highlights from our business, and then Bryon will provide results for the fourth quarter and full year 2012 guidance for the first quarter of 2013.

During this call, we will be mentioning non-GAAP financial measures, which we may refer to as results excluding special items. Today's earnings release describes the differences between our non-GAAP and GAAP reporting. You can find reconciliations of our non-GAAP financial measures to corresponding GAAP amounts on the Investor Relations section of our website at www.lsi.com/webcast. At that site, you can also find a copy of the earnings release and a presentation highlighting the key points from today's call and providing additional information about our business.

We have also created an Investor Education Center on this site, which contains video presentations about each of our businesses. This may be particularly useful for new investors.

Today's remarks will include forward-looking statements. Our actual results could differ materially from those suggested by the statements made today. Information about factors that could affect our future results is contained in our Form 10-K for the year ended December 31, 2011, our third quarter 10-Q and today's earnings release.

With that, it is now my pleasure to introduce Abhi Talwalkar.

Abhijit Y. Talwalkar

Thank you, Sujal. Good afternoon, and welcome. While we continue to have uncertainty in the macro environment and softness in some end markets, I'm pleased with our execution and results for the fourth quarter and the significant progress we have made as a company over the past year.

For Q4, revenue was above the midpoint of guidance and non-GAAP EPS exceeded the high end of guidance. We delivered strong gross margin performance along with continued expense control. Year-over-year 2011 to 2012, revenue grew 23%, non-GAAP operating margin expanded 450 basis points to 17.1% and non-GAAP EPS grew from $0.47 per share to $0.75 per share. In fact, over the past 3 years, LSI has delivered an average revenue growth rate of 17% as a pure play semiconductor company.

We also achieved key business milestones during the past year. We successfully integrated SandsForce and established a strong position for flash processors. We've launched and started ramping our family of Nytro PCIe flash adapters at Oracle, IBM, Cisco and others. We achieved the goal of growing our aggregate flash revenues by over 200% year-over-year. We grew our HDD business by nearly 40% while beginning our SoC ramp at our new customer. We grew SAS and ServeRAID more than the server end market due to strong product offerings. We secured major base station wins for Axxia and custom products in our networking business while generating 5% annual growth in networking investment areas through new product cycles. This was especially noteworthy since 2012 had an unfavorable wireless CapEx environment, and many of our networking peers saw revenue declines in 2012. And lastly, we achieved record level design wins, which we expect to fuel future growth.

While 2012 was a strong year for us, we witnessed market-related softness in the second half that is continuing into the first quarter of this year. Our Q1 guidance reflects a cautious outlook due to continued uncertainties in the macro environment, as well as softness in PC and server end markets. While these factors are impacting first quarter demand, we believe that Q1 should be the trough for our revenues, with growth expected as we move forward. Looking beyond Q1 at opportunities ahead of us in 2013, I'm excited about new product cycles that can drive growth in our flash, server and networking businesses, and I will touch on these in a moment.

Beyond these growth rates, there have been many questions about the softening in the PC market and the outlook for our HDD business. We have effectively seen multiple quarters of softness that include reductions in desktop and notebook SoC shipments. Provided that HDD TAM remains stable or improves, we would expect to grow from these levels as we benefit from increased shipments in the desktop, enterprise, nearline and hybrid platforms while now having limited exposure to traditional 2.5-inch notebook SoCs. Keep in mind that, overall, LSI is centered in applications benefiting from strong secular growth in data and traffic. We're effectively positioned and focused on large and exciting market segments, including flash, data center, cloud and mobile networks.

Now I'd like to briefly review additional product highlights and growth drivers for our businesses. I will begin with our server and storage business, which includes flash-related businesses, SAS, ServeRAID adapters and software, SAN and HDD.

In flash, we are the only company offering standard product flash storage processors or FSPs, custom FSPs and PCIe flash adapters, positioning LSI to benefit from a multi-year growth cycle in flash-based storage adoption. In 2013, we believe we have a funnel of opportunities that should enable us to grow our aggregate flash revenues in excess of market growth rates, which are projected to be at least 40%. We are excited about our flash storage processor road map and the differentiated features that are incorporated into our next architecture. We believe that this next-generation processor is vastly superior to the competition and customer response has been extremely favorable. In addition, our expertise in delivering production firmware to a very wide customer base will continue to be a key competitive advantage for FSP solutions.

On existing products, we continue to expand our footprint with SandForce FSPs and are now shipping in 13 different Ultrabook and notebook platforms being offered by market-leading customers. We have secured a high-profile design win with PNY, who is shipping FSPs into the retail channel under both PNY and another Tier 1 PC OEM brand. SandForce FSPs continue to support leading-edge NAND flash geometries. We have secured another design win with Intel by working closely with them on an SSD solution using our flash controller technology and their 335 series of SSDs, which utilizes Intel 20-nanometer flash. Another proof point of our technology leadership is that Kingston is shipping SandForce-enabled SSDs supporting 19-nanometer NAND flash. Looking forward into this year, we're excited about the Intel Haswell platform launch and the potential growth opportunities for SSD-enabled notebooks, such as Ultrabook and convertibles, which could drive incremental upgrade cycles in both retail and corporate market segments.

I'll now move to PCIe flash adapters, where we are bringing the performance advantages of flash to enterprise server, storage and networking applications. We believe LSI has emerged as the #2 provider of merchant PCIe flash solutions, enabling acceleration across a broad spectrum of enterprise and data center applications. At IBM, Nytro WarpDrive has begun shipping in multiple platforms, including System x volume servers, BladeCenter and Flex System. We are now in production with Oracle and Cisco and expect to begin shipping at a very large web cloud company in the first half of this year.

To further expand our customer base, we have put direct customer teams in place and are actively engaged with leading web and cloud companies, along with major financial firms. Nytro's high performance, reliability and ease of deployment in large data center environments, combined with LSI's extensive experience in SAS and RAID infrastructure, are proven to be differentiators versus the competition. In our SAS and RAID business, we expect customers to begin migrating servers from 6-gig SAS to 12-gig SAS in the second half of this year, and believe that LSI is the clear technology and time-to-market leader for this transition.

Beyond our traditional SAS business, last quarter, we introduced Syncro, an innovative new storage architecture that enables cost-effective sharing and scaling of storage across multiple servers. Syncro is designed to address challenges across all data center segments, from SMB to enterprise to mega data centers. With Syncro, we are building new capabilities on top of our industry-leading SAS and MegaRAID solutions. This product will be offered in conjunction with Microsoft Windows Server 2012.

In hard disk drives, we continue to be impacted by soft demand due to weakness in the PC market segment and this is reflected in our Q1 guidance. However, if we look beyond Q1 at expected trends in the HDD space, we are well positioned in the most resilient segments of the storage market. Keep in mind that HDDs represent a large market with favorable competitive dynamics. There are only 3 customers and 2 suppliers of SOCs, and we have secured key wins to enable share growth going forward.

Exiting Q4, over 90% of our HDD SOC revenues was driven by shipments in the desktop, enterprise and nearline drives, which are collectively excepted to be a significant driver of storage capacity. We also have a significant presence in both hybrid and SSD drives, which, over the long term, are expected to be the fastest-growing segments of client storage. LSI today has limited exposure to the traditional 2.5-inch HDD-based notebook PC market, which is being encroached upon by tablets and SSD adoption. The bulk of notebook SOC mix shifts at our largest customer will be behind us after Q1. Our client SSD revenue now exceeds our 2.5-inch HDD SOC revenue on a quarterly basis.

I would now like to discuss our networking business, where our products address the wireless mobile network, data center and enterprise market segments. After a year of reduced capital expenditures by wireless carriers, there has been some positive commentary from AT&T and Deutsche Telekom, indicating that spending in wireless infrastructure could be higher in 2013. This should benefit LSI based on our footprint in 4G LTE base stations.

We have a number of growth drivers in our networking business. We began ramping our standard product Axxia multi-core communication processor at the leading base station OEM and expect continued growth as we move through this year. We have multi-generational engagements in the wireless space that we believe will enable LSI to have in excess of 50% share in data and control plane processing silicon in a few years. In addition to standard products like Axxia, we have custom silicon wins in the baseband function of base stations with multiple OEMs, further broadening LSI's footprint in base station infrastructure.

In the enterprise space, we have multiple Axxia wins with a leading data center switch OEM and have also won high-volume and high-end switch platforms with custom switch and PHY solutions, with revenue ramps expected later this year. With our strong road map for multiple products, we are working closely with ARM on interconnect technology that will enable Axxia to be the industry's first multi-core ARM SoC targeted to wireless and enterprise networking infrastructure.

To wrap up, while the near-term environment remains uncertain, we remain confident in the long-term growth outlook for the company and believe that there are drivers in place for growth beyond Q1. LSI is well positioned with share gain opportunities and new product cycles in growing markets. We also have a large share buyback authorization and are well positioned to return capital to shareholders.

Now I'll turn the call over to Bryon, who will take you through our results and provide guidance.

Bryon Look

Thanks, Abhi, and good afternoon, everyone. I'll begin with a few highlights on LSI's financial performance for full year 2012 before moving on to Q4 results and guidance for Q1. In 2012, we generated annual revenues of $2.51 billion, representing 23% year-over-year growth, which was well ahead of most of our peers. Gross margin for the full year, excluding special items, was 53.6%, an expansion of 210 basis points year-over-year.

Operating expenses, excluding special items, were $914 million for the year as we remained focused on expense control, growing revenues at a rate higher than expenses. Operating income, excluding special items, was $429 million or 17.1% of revenues for the full year. This represents an increase of 450 basis points year-over-year and demonstrates significant progress towards our business model target of 20% to 22%.

EPS, excluding special items, significantly increased from $0.47 in 2011 to $0.75 in 2012. In addition, one of our key focus areas has been to maintain a strong net cash position while driving efficient working capital management. In 2012, we delivered $374 million in operating cash flows, a $127 million increase from the prior year. And we closed the year with $676 million in cash and short-term investments and no debt after having used approximately $273 million of cash to buy back stock.

Moving on to Q4 results and Q1 guidance. LSI delivered a solid quarter relative to the guidance we provided in October. Revenues were $600 million, which was above the midpoint of our guidance. Non-GAAP gross margins were 54.1%, just above the high end of guidance. Non-GAAP operating expenses were $231 million, and we delivered non-GAAP EPS of $0.18, just above the high end of guidance.

Now turning to a more detailed discussion of our financial results for the quarter, beginning with revenues. Q4 revenues were $600 million, up 15% on a year-over-year basis and down 4% sequentially. Our server and storage semiconductor revenues, which include products from our ServeRAID adapter and software, flash, SAS, SAN and HDD businesses, were $479 million, up 23% on a year-over-year basis and down 3% sequentially.

In the quarter, we saw growth in our server-related businesses, offset by expected declines in our flash business. Our HDD business was roughly flat with increased shipments of desktop and enterprise SOCs, offset by declines in notebook SOC shipments. Server and storage semiconductors represented 80% of total revenues in the fourth quarter.

Q4 revenues in our networking business were $95 million, down 11% on a year-over-year basis and down 10% sequentially. Sequential reductions were primarily due to softness in the server provider end markets, while the year-over-year decline was primarily due to decline in legacy revenues. We did see year-over-year growth in our networking investment areas. Networking represented 16% of total revenues for the fourth quarter. Revenues for the IP business were sequentially flat at $26 million.

Moving next to gross margins. LSI's Q4 gross margin, excluding special items, was 54.1% and just above the high end of guidance we provided in October. This represents a sequential increase of 20 basis points, primarily due to favorable excess in obsolescence charges.

In terms of operating expenses, R&D, together with SG&A expenses, excluding special items, totaled $231 million in Q4, above the midpoint of guidance, primarily due to the timing of new design tape-outs. Non-GAAP operating income for the quarter was $94 million or 15.6% of revenue. Interest income and other net of interest expense, excluding special items, was $8 million for Q4. This includes approximately $5 million for payments received for insurance claims covering a portion of our losses that resulted from the Thailand flooding in 2011.

Now let me turn to the special items we recorded in the fourth quarter, which netted to $72 million. Special items, primarily noncash, included $30 million in amortization of acquisition-related items, $25 million of stock-based compensation expense, $16 million of restructuring costs and other items and a $1 million tax provision true-up related to the SandForce acquisition.

Moving next to tax. Our tax provision on both a GAAP and non-GAAP basis can vary significantly quarter-to-quarter based on our profitability in different geographic tax jurisdictions and certain discrete items. We experienced such events in Q4, where the expiration of certain statutes of limitation resulted in a noncash tax benefit that largely offset the provision of $9 million we guided to in October. The tax provision for Q4 was $1 million on a GAAP basis and approximately 0 on a non-GAAP basis.

On a GAAP basis, fourth quarter income from continuing operations was approximately $29 million or $0.05 per share. Non-GAAP income from continuing operations was $101 million or $0.18 per share. The diluted weighted average share count for the period for both GAAP and non-GAAP purposes was 569 million shares. This includes the weighted average benefit of purchasing approximately 7 million shares during the period under our stock repurchase program. For the full year 2012, LSI repurchased a total of 36 million shares.

Turning now to the balance sheet and cash flows. Cash and short-term investments ended 2012 at approximately $676 million. We continue to operate with no debt on our balance sheet. Operating cash flows were $95 million in Q4 and $374 million for the full year. Finally, with respect to Q4 results, depreciation and software amortization was $14 million for Q4 and $58 million for the full year, while capital expenditures were $27 million in the quarter and $131 million for the full year.

Next is a discussion of our guidance for Q1 2013. Q1 revenues in the range of $535 million to $575 million were sequentially down approximately 8% at midpoint compared to a stronger-than-expected Q4. Sequential declines are primarily being driven by expected reductions in our HDD and server-related businesses. We expect slight declines in our networking business, and we expect our flash businesses to be roughly flat, with slight growth in our IP business.

Gross margin, excluding special items, is expected to be 54%, plus or minus 1%. Operating expenses, excluding special items, are expected to be in the range of $225 million to $235 million, down slightly at midpoint. Interest income and other interest expense, excluding special items, is expected to net to income of approximately $4 million. Special items are expected to net to approximately $50 million to $70 million.

The GAAP and non-GAAP tax provision is expected to be approximately $8 million for Q1. We expect our non-GAAP tax rate to be between 10% and 12% for 2013. We expect Q1 GAAP income in the range of negative $0.03 to a positive $0.06 per share, and non-GAAP income in the range of $0.09 to $0.15 per share. The share count is expected to be approximately 570 million shares for both GAAP and non-GAAP purposes. In addition, we expect depreciation and software amortization of approximately $15 million for Q1 and $60 million for the full year, and capital expenditures of approximately $25 million in Q1 and $80 million for the full year.

In closing, we delivered solid results for 2012 and for the fourth quarter of last year despite difficult business conditions. We continue to make progress on our gross margins, as well as generating strong cash flows. We continue with our stock buyback program and enter 2013 with $479 million remaining in the authorization. While we remain in a challenging environment, we are confident in our market positions and growth prospects as we move forward.

Now let me turn the call back to Sujal.

Sujal Shah

Thank you, Bryon. At this point, we'll begin the Q&A portion of the call. Gina, will you please give the instructions for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Vivek Arya.

Vivek Arya - BofA Merrill Lynch, Research Division

Abhi, if you look at the December quarter, can you give us a sense of what your share was in hard disk drive SoCs and how you see that changing in 2013? I think there was some expectation that they would start -- that you would start shipping into Western Digital last quarter. And if you did, is there a specific product that you were shipping into?

Abhijit Y. Talwalkar

Well, relative to share in the fourth quarter, we don't break our share out on a quarterly basis, so I'll just go back to some of the prepared commentary relative to our hard disk drive business. In general, our hard disk drive business in Q4 behaved as expected. However, we did see strength in our enterprise and our desktop SoC shipments in the fourth quarter as we sort of exited the fourth quarter. And I also said that as we look at our overall mix, exiting the fourth quarter, 90% or more of our HDD shipments were enterprise or desktop. We do believe that Q1 quarter is our trough quarter as we go forward relative to the HDD marketplace. And assuming the HDD TAM is flat to up from flat, we should benefit from that.

Vivek Arya - BofA Merrill Lynch, Research Division

I see. And then the competitive position on the consumer flash controllers and your flash processors, I think over the last year, the competitive landscape has expanded. And I mean, you had traditional companies like Marvell. But now, there are also several OEM and even the NAND vendors themselves who have spoken about in-house solutions. Can you give us a sense for how that market is evolving from a competitive perspective?

Abhijit Y. Talwalkar

Yes, Vivek, are you talking about PCIe flash adapters for server and storage environments or are you talking about flash storage processors?

Vivek Arya - BofA Merrill Lynch, Research Division

So actually, so first, the flash storage processors and then on the PCIe flash, where I think you started your sales in the September quarter. So 2 separate parts to that question.

Abhijit Y. Talwalkar

Yes -- I mean, yes, I think, clearly, it's a fast-growing market. It's going to become a big market so we certainly anticipate, and we take every competitor very seriously. But we feel very good about our competitive position. I think we have the broadest offering out there when it comes to flash storage processors from standard products for the SandForce family that we believe are incredibly competitive. And the next-generation product, we believe is dead-on in terms of customer requirements, and the feedback has been very strong. We also have a line of custom flash processors that has also been unique in the marketplace. And then relative to PCIe flash adapters, we clearly, as I noted in the prepared remarks, are emerging as really the second player here in the alternative to the #1 player that's in the marketplace, and that is because of not only a robust offering of 3 major product lines in that Nytro family, but also our extensive history in the SAS and RAID technology as well, which are incorporated into our product strategy.

Vivek Arya - BofA Merrill Lynch, Research Division

And then one last for Bryon, if I may. How should we think about the OpEx trajectory for this year? I think if you look from when your sales peaked last year, sales are down but OpEx -- so sales are down about 16% from the June quarter last year, but OpEx is down about 1%. I understand there were a couple of very strong quarters back in the year. But how should we think about the OpEx trajectory this year, Bryon?

Bryon Look

I can assure you that we have been managing OpEx very carefully, and we will continue to do so going forward. We're confident relative to the growth prospects that we have and continue to make investments in those growth areas such as flash. You've seen, in terms of recent quarters, our ability to manage OpEx pretty tightly here. We are seeing typical softness in the Q1 and another -- other factors as well that are affecting revenue. But these are near-term softness areas versus -- has much more positive view in terms of the long term. So our goal is continue to be able to grow relative to operating performance as we get through the uncertainties of that short term. And I'll remind you, our business model continues to be one where we would grow gross margins to the mid-50s, and we're already essentially in that territory, and grow the bottom line to a business model target that's roughly 20% to 22%.

Abhijit Y. Talwalkar

Vivek, I forgot to answer one of your questions relative to a certain HDD OEM. I can say that we are shipping production SOCs to all OEMs now.

Operator

Your next question comes from the line of James Schneider.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

This is Gabriela Borges on behalf of James Schneider. I have a question on the components correction in SSDs and HDDs that you talked about last quarter. Based on your commentary, it sounds like this is now largely behind us. Is that the right takeaway or are there still some reductions in inventory, either on SSDs or HDDs as we go into 1Q?

Abhijit Y. Talwalkar

No, I think that's the right takeaway, Gabriela.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Okay, great. And then just as a follow-up, if I may. I understand that you don't break out share on a quarterly basis, but perhaps you could give us an estimate on what you're share in 2012 was in kind of flash versus certain custom flash processors, and maybe then what your aspirations are for 2013?

Abhijit Y. Talwalkar

Yes, I mean, I think, in general, we grew share across flash segments, all segments that we participate in, client enterprise, as well as PCIe flash. And as I said and also in the prepared remarks, our objective is certainly to grow our aggregate flash revenues in excess of what market is projected to be, which is 40%.

Operator

Your next question comes from the line of Blayne Curtis.

Blayne Curtis - Barclays Capital, Research Division

A couple of questions. On the hard drive side, I just want to understand your comments. You mentioned that you're 90% transitioned. Is the step down in Q1 just the remaining share coming out or do you expect the overall TAM down as well? And then can you also talk about the transition in enterprise? You actually saw some upside in Q4. When does that transition to the other vendor?

Abhijit Y. Talwalkar

Well, you got a lot of questions in there, Blayne. Let me start with TAM, first of all, in terms of TAM assumptions. We're sort of assuming TAM to be slightly down from Q4, just part of the conservative view that we have. So to the extent that TAM is flat or up, we should certainly benefit from that. Relative to the 90%, I think the way I would phrase that, and what I was trying to get across to all of you, is we exited Q4 with more than 90% of our shipments being in enterprise and desktop. So less than 10% of our shipments being associated with sort of the traditional notebook 2.5-inch drive space. And then I think the other question you had was relative to sort of enterprise. I think we are the leader today in enterprise SOC shipments across a number of OEMs. We expect to have high share. And relative to, I think, one of our major customers who's had a strategy of alternating suppliers, we've already won the next-generation device and continue to feel very good about our ability to have high share in enterprise segments.

Blayne Curtis - Barclays Capital, Research Division

And then just on the flash side, you mentioned outgrowing the market, you have some good drivers in the enterprise side. Do you expect to outgrow the market on the client side as well?

Abhijit Y. Talwalkar

We're not going to break specifics out. I mean, both of these markets, both in terms of flash storage processors, as well as PCIe flash adapters, are still lumpy in nature. They're very early. They're very fast growing. There's lots of moving parts. I think, just suffice it to say, that we've got the broadest product line out there. We feel very good based on the pipeline of opportunities and RFQs that we're engaged in. And in aggregate, we feel good about growing our business faster than market growth rates, and market growth rates are projected to be around 40% for our aggregate SAM.

Operator

Your next question comes from the line of Steven Chin.

Steven Chin - UBS Investment Bank, Research Division

First question is on the notebook hard drive segment that you mentioned that you're moving away from. I was curious if your strategy there is, one, predicated on your own view of tablets and other mobile devices taking share from traditional notebooks, or is there a stronger message or new strategy that you're seeing from customers that suggests your -- sort of your moving away from notebook 2.5-inch drives is a good way to go?

Abhijit Y. Talwalkar

Yes. Hey, Steven, I think you took the wrong message away and I want to make sure that's corrected. We're not moving away from notebook hard disk drives. I mean, we still see the overall hard disk drive market as a very large multibillion semiconductor market. There are only 2 suppliers, 3 customers. Our share, in aggregate, is in the 30s, and we have leadership technology. In fact, we believe we are head on 28 nanometer. And our goal will continue to be to grow our share across all segments and notebook being one of them. What I was more so referring to is around a shift that has occurred within our largest customer over the course of the last several quarters, as Seagate, specifically, is who we're talking about, started ramping more of the Samsung notebook product, which we were not involved in. And as that shift occurred, which occurred through the last 2 or 3 quarters, our overall exposure to the traditional notebook 2.5-inch sort of drives has lessened significantly, and to the point that it's sub-10% of our business as we exited Q4. Okay?

Steven Chin - UBS Investment Bank, Research Division

Great. Just one follow-up related to that. Both looking at client hard drive SOCs, as well as on the enterprise side, do you -- just from an architectural or technology standpoint, are there any increasing hurdles that would prevent your OEM customers from switching back and forth between your solution and your other main competitor for either the client or the enterprise SOC segment? Or is there a reason for them to stick with one solution longer term, for example, based on 20-nanometer technology? Or are there other technology advantages you can highlight?

Abhijit Y. Talwalkar

Well, I mean, I think -- first of all, I don't think the hurdles are any different. There's an investment that's required. All our SOCs are dropping incompatible. Right? You can't take one part from one vendor and drop it into the socket of another part. They're all incompatible from that standpoint. We are all working and looking to stretch our R&D investments and stretch the life of SOCs from a hard disk drive standpoint. The aerial density, growth rates over the course of the next 5 years will be different than the last 5. But I don't think anything has materially changed. I would say in 1 or 2 areas, our customers have the ability to now leverage both suppliers more effectively, which, I think, benefits us more favorably just given all 3 customers are working to have a more balanced supplier base.

Operator

Your next question comes from the line of Craig Berger.

Craig Berger - FBR Capital Markets & Co., Research Division

Can you give a little more detail on the networking business? It's kind of at the lowest quarterly run rate that I've seen it in a while.

Abhijit Y. Talwalkar

Yes, I mean, I think, Craig, as you probably well know and have written about as well, wireless CapEx expenditures over the course of last year were very soft. And we certainly were impacted by that as were many of our peers. Despite that, our networking investment areas will have grown 5% over the course of last year, where many of our peers declined. If I step back and look at the last 5 years of our networking investment areas, the average sort of CAGR for that period of time is in the 20% still. So we clearly are ramping new products and gaining share despite the backdrop of a soft overall environment. And there's also legacy, which is certainly -- has been playing a factor, but less and less of a factor. Just a cookie trail on that, we had about $100 million of legacy in 2011. We ended up with $43 million in 2012, so that's a $57 million drop. That $43 million in '12, I think, people should anticipate that dropping by about 50% over the course of this year. We feel very good about our growth initiatives across networking. Axxia and our multi-core solution there continues to be adopted more and more across base station system vendors. And we've got a long list of ramp opportunities here in the second half and certainly into '14, but starting in the second half, across enterprise and data center switch products.

Craig Berger - FBR Capital Markets & Co., Research Division

Great. And then just as a follow-up, can you detail or help us ballpark SSD controller revenues and PCIe revenues in the fourth quarter and also your server storage connectivity revenues, in case I missed that detail?

Abhijit Y. Talwalkar

In terms of mix, I think, is what you're talking about, overall mix across server storage?

Craig Berger - FBR Capital Markets & Co., Research Division

[indiscernible] in the flash businesses also.

Abhijit Y. Talwalkar

Yes, I mean -- well, let me give you, the overall storage -- server and storage sort of revenue base was $479 million for the fourth quarter. That was up 23% year-over-year. In terms of the mix of that $479 million, approximately 40% was HDD -- and 40% was server, and the rest of it was flash.

Craig Berger - FBR Capital Markets & Co., Research Division

Got it. And any comments on PCIe flash versus client? And that's my last question.

Bryon Look

No, we're not going to break into that level of detail, Craig.

Operator

Your next question comes from the line of Sandy Harrison.

William Harrison - Wunderlich Securities Inc., Research Division

You talked in your prepared remarks, Ahbi, about the 6 to 12 transition in SAS happening in 2013. What sort of timeline are you looking at there, specifically, and what do you think and what do you see is the a catalyst to get that going? And could that be moved up or moved back? Just your thoughts on that whole transition.

Abhijit Y. Talwalkar

Yes, I think a lot of that is just aligned to a refresh across a number of server OEMs, and we anticipate shipments to commence sometime in the middle of the year. I don't anticipate that being pulled in. It's centered around fairly rigid sort of transition strategies and refresh strategies across a wide base of OEMs and what they're doing across their storage subsystems and their server space.

William Harrison - Wunderlich Securities Inc., Research Division

And then as you look at your PCI express adapter cards, in prior conference calls, you've talked about as a total percentage of your business or as a dollar amount in a quarter, I think it's been tens of millions of dollars. Is that pretty consistent in Q4, and do you expect similar amounts in Q1? Or what's the best way to look at that as you guys further cement your position as a solid #2?

Abhijit Y. Talwalkar

Yes, I think that's consistent for Q4 and Q1. And let me just take the opportunity to provide some additional color and characterization of this market. It's still very early days. This market is in its infancy. As a result, there's not a lot of transactional business on a quarter-to-quarter basis, so it's still lumpy in nature, probably 20 to 25 large customers across the web cloud, as well as financial services. And then the broader enterprise is still in that evaluation low unit space. And so this tends to make this business lumpy, but I can say that our activity in terms of the pipeline, the proof of concepts that we're doing, the evaluations that we're engaged in across this top 20 to 25, as well as financial services, looks really exciting for us. And that's what gives us confidence in terms of driving our overall aggregate flash business up this year, 40% or higher.

William Harrison - Wunderlich Securities Inc., Research Division

Got you. Just a real quick last one. On the prior question near the end, they gave a mix of -- or you gave a mix of what the breakout was of the server and storage. You unfortunately broke up. Could you clarify that again?

Bryon Look

Yes, let me have Sujal give you because I think I need to correct one element on that.

Sujal Shah

Yes, I think the line did break up. So I think we had $479 million in server and storage semi. And just in broad brush strokes, HDD was in the mid- to high 40% range of that. Our total server-related products were about 40%. And flash was the balance, which puts it at about mid-teens in terms of relative to the $479 million number. So those are the moving pieces. And we broke out networking separately at $95 million and IP at $26 million.

Operator

Your next question comes from the line of Hans Mosesmann.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

This is Hans. Greg Huff, at the Open Compute Summit last week, indicated that LSI -- I believe it was the Nytro series PCIe express flash card in your second-generation version had been able to overcome some of the latency issues relative to your -- you're the #1 player there. What are the issues that allowed you to do that, and how did that play out over time?

Abhijit Y. Talwalkar

Well, I think, a lot of it is around optimization of our overall firmware stack and solution, Hans. And what we found ourselves doing, every one of these opportunities requires a level of optimization and work, intimate work with the customer and the actual application environment. A lot of these applications aren't your standard variety applications because many of the early deployers are in the web sort of cloud space and a lot of these are internal sort of application environments. So we've learned so much in this segment over the past 6 to 12 months, engaging all of these companies. We've been able to really hone our solution and improve it dramatically. The other thing that we're finding, that I think is going to clearly be a differentiator for us in broader application deployment, is the fact that we've got a very high-performance-rated solution in our Nytro MegaRAID product. People absolutely want to take advantage of flash and the improved latencies, but there's still a nervous base of end customers out there around flash technology and its overall robustness and data integrity. And so our solutions, such as Nytro MegaRAID, really provide best of both worlds. Acceleration through flash, improved latencies, but very robust data integrity with the MegaRAID in front of it. So that's starting to emerge as a pretty strong differentiator, which we'll work to exploit this year.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Okay. And do you have a goal of becoming #1, just as a last question?

Abhijit Y. Talwalkar

Well, in all our product segments, we have goals of certainly becoming #1 and not settling for just #2. So that goal is out there. Right now, we're focused on driving exciting revenue growth in this product line and broadening our footprint of customers.

Sujal Shah

Since we have no further questions, I'd like to thank all of you for joining us this afternoon. If you have any additional questions, please call Investor Relations at LSI. Thank you and have a nice day.

Operator

Ladies and gentlemen, a telephonic replay of this conference will be available beginning today at approximately 5:00 p.m. Pacific Standard Time and will run through 9:00 p.m. Pacific Standard Time on January 31. The replay access numbers are 1 (855) 859-2056 within the U.S., and 1 (404) 537-3406 for all other locations. The conference ID number is 83877821. The webcast will be archived at www.lsi.com/webcast. That does conclude your conference for today. Thank you for your participation. You may now disconnect. k

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LSI Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts