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LSI Corp. (LSI)

February 12, 2013 5:00 pm ET

Executives

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

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Okay. Let's get started. Good afternoon, everybody. Welcome to the LSI Corporation presentation at the Goldman Sachs Technology and Internet Conference. My name is Jim Schneider from the semiconductor team here at Goldman, and it's my pleasure to introduce LSI this afternoon, which provides storage and networking semiconductors to the broader enterprise and consumer markets.

And with us from the company is CFO Bryon Look. Welcome, Bryon.

Bryon Look

Thank you, Jim. Thanks very much, and thank you, all, for joining us here. For a company like LSI that's firmly positioned in the fields of storage and networking semiconductors, this is a pretty exciting time. The last time we checked, there's a proliferation of data traffic and data storage that we haven't seen in a long time that keeps mounting. The numbers I've seen recently, greater than 30% growth rates in terms of network traffic, and greater than 50% growth rates in terms of data that's getting created and needs to be stored.

So a lot of what you'll see from LSI is a strong focus. There've been a number of inflections in the marketplace that also give us great excitement about the prospects we have for driving strong revenue growth in the years ahead. And so whether you're talking about the rise of smartphones creating lots of data content that needs to be stored or whether you're talking about the cloud and infrastructure that's being built out, across many different fronts, we have tremendous opportunity to add value in terms of intelligence in the network.

It's pretty clear to us that growth in capital expenditures aren't enough to be able to meet all those demands that are out there in terms of data storage and processing data traffic. You need to do that with more intelligence to drive the performance, capacity requirements, quality and reliability requirements, and so on and so forth.

And so we feel pretty good about the changes that we've made over the last several years, the focus on these end markets and these needs. And some of the proof points that we're seeing laid, we're coming off of a very strong year 2012. Our revenue growth last year was over 20%, which is significantly higher than almost every other company in the semiconductor space. At the same time, we made tremendous progress in terms of our operating performance, growing that from about 12.5% to over 17% in 2012.

Yet the best things really lie ahead of us. We measure our performance, our traction with our customers based on the value that we can enable them to provide to their customers. And so we measure that oftentimes in terms of design wins. We've just come off the end of the year once again measuring record levels in terms of the design wins that we've captured. We typically measure this in terms of 3 years worth of revenue generated from specific designs with specific customers. And we've targeted really the leaders in the respective markets.

So the likes of Ericsson and Nokia, Siemens, Cisco, Huawei, companies like that, in the networking space, that is an example. And clearly, in the areas of storage, similarly leaders in the industry, Seagate, Western Digital. We've got great traction across our SADS front as well, traditional server-related businesses where we continue to hold strong market share, but also have the promise of significant growth going forward.

So you amass all of that in terms of design win traction and we feel that we're very well positioned to continue to drive strong growth, despite lingering macroeconomic concerns, despite what looks like softness certainly in the latter part of 2012, carrying over into this first quarter.

Some of the growth drivers that we can focus on in the year 2013, clearly, the SandForce acquisition, the capability that's brought to LSI in terms of flash storage processors, coupled with our own growth in our PCIe-based flash solutions pays tremendous dividends for us as we think about our opportunities going forward. Collectively, that business grew by 200% last year, and we expect once again in the year 2013 to outgrow the market in flash, which would translate into greater than 40% growth rate for 2013.

In other areas, there are significant inflections that I pointed to you, the transition in the SaaS space from 6 gig solutions to 12 gig solutions, where we have a very strong competitive position. Historically, we've captured 9 out of the leading 10 server providers with our solutions there, and once again have market leadership in terms of the technology and the capabilities that enables our customers with.

So -- and overall, in terms of a very large market, which is the HDD market, despite softness that we saw towards the latter part of 2012, we remain confident in terms of our prospects going forward. We couple that, of course, not only with our HDD controller position, but also our flash position. And so relative to storage, in general, I mean, we're quite optimistic about some of the opportunities we have going forward.

And then, finally, as an additional way to return value to shareholders beyond just expanding the bottom line with our operating margins, we are -- continue to have and see a strong cash position and we continue to operate the company with no debt. And we've been able to use the strong operating cash flows, which this last year we're well north of $350 million, to be able to return value to shareholders in the form of share buybacks. And I think, collectively, over the last -- less than 2 years, we've spent more than $770 million buying back our own shares, a vote of confidence, if you will, in the long-term prospects that we have in driving the company.

James Schneider - Goldman Sachs Group Inc., Research Division

That's a helpful overview, thanks, Bryon. Maybe just kind of talking about the near term, because I think I'd be remiss if I didn't spend any time on the near term. I just wanted to kind of get an update from you, I mean, for your Q1 guidance, you basically talked about the hard drive-related business, the server-related business and the networking business all down, mostly seasonally, in Q1. But then the flash business that you guided, roughly flattish. Can you talk to us about any updates that you've seen since the time of the earnings call, any kind of changes in order patterns you've seen out there?

Bryon Look

Yes, sure. While I'm not really here to provide an update in terms of the guidance we provided, I will give you some color relative to what we said at our earnings call. It's not atypical in Q1 for this to be a seasonally down quarter. A good part of our customer base is tied to enterprise spend. And as you would see with many of our end customers and the OEMs that serve those end customers, you'd typically see some decline in revenues, going from a strong Q4 where people are exercising their equipment budgets and then deploying that equipment in the first quarter. So much of the guidance we provide is related to server business and networking business, which historically would be down, perhaps 8%, 10% quarter-over-quarter at this time of the year. What we have seen is some lingering softness in terms of the HDD TAM, very much in line with the customers. And since our announcement, you've seen comments from some of our customers in the HDD space talking about the PC environment and what they see in terms of the TAMs there. So our guidance really reflects that. And we do think that based on the traction we have with designs, we expect to see growth from Q1 going forward in terms of overall company revenues. And typically, you would see also a stronger second half versus a first half.

James Schneider - Goldman Sachs Group Inc., Research Division

Got it. And then if we look at the June quarter, specifically, there's been a lot of changes in your business. You needed to get to the storage business a couple -- the systems business a couple of years ago, you now have SandForce where you didn't before. So can you maybe help us understand what typical June quarter seasonality looks for you -- looks like for you when you have all of these kind of changes in business baked in?

Bryon Look

That's a great question, Jim, because I'm not sure the last few years whether there is anything such as typical anymore. We've got everything from floods in Thailand to lingering macroeconomic softness, political uncertainties that, to some extent or another, influence the confidence levels or the buying behaviors, potentially, even of some of the folks in the industry. But I would say that typically, Q1 would be the softest quarter. And then based on the pro forma business, you would see some level of moderate growth, Q1 to Q2, with definitely a stronger pattern in the second half of the year. Some of the more exciting things that we can focus on and look forward to, because we have been garnering a sequence of very significant design wins, many of which are ramping and are, therefore, already in production today. We know that some of the growth will come just from our own expansion of market share positions and delivering some of our products to the end markets. And so we guided, for example, in terms of flash, the view of what was 200% growth rate last year. Again, expecting to grow faster than that in 2013. And that's triggered by really some end market growth, where the value proposition for flash is very strong in terms of driving performance. And we have, as a company, a lot of value to add in terms of not only delivering that performance, but doing it in a way that also is protecting the data, addressing issues with flash, such as durability over timing, just some very significant differentiators that enable us to gain share in some of those related markets, and has a lot to do with software and firmware that we add to our solutions in the flash space. As well as -- I think SandForce having a strong reputation out there for really having an industry-leading product. And when the market share numbers are all said and done for 2012, I think it will show that we ended up with the #1 share in terms of the business last year.

James Schneider - Goldman Sachs Group Inc., Research Division

Great. Maybe just kind of digging into the individual businesses for a second. In drives, first of all, clearly we've seen consolidation there. We basically have now Seagate, Western Digital and Toshiba left. And you're -- you've been the historical incumbent at Seagate and Marvell has been the historical incumbent at Western Dig. Recently, Marvell's also been very vocal about trying to get in and take share at Seagate in the notebook side. And so I was wondering if you could just kind of refresh our memories in terms of what percentage of your total hard drive sales are exposed to notebooks? And then kind of whether you've seen that, indeed seen some of that share shift and whether you expect it to continue over the next couple of quarters? Or are we basically done at this point?

Bryon Look

Yes, let me start with maybe a higher-level answer to that, because I think it's important for people to understand the overall picture with respect to the HDD industry. Again you've got 3 customers and basically 2 suppliers. Our market share for last year was roughly in the 30s, 30% or slightly north of that. And so we believe that over time, as long as we continue to deliver competitive technology, which we have, that our opportunities to gain share overall in the industry as we go forward over the next number of years should be very positive. Right, now with respect to specifics there, we said on our earnings call in the fourth quarter, our notebook-related sales, if you will, in HDD were south of 10%. And so, if you will, any of the transitions that have happened there have taken place. So therefore, we would characterize the first quarter as really being trough and looking to expand. And if it turns out that our cautious view relative to the overall market TAM turns out to be overly conservative, then that's just upside for us as we move through the year 2013.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. Can you maybe help us understand kind of what your expectations are more broadly for 2013 in terms of the TAM, both in terms of overall drives and then the notebook and consumer and desktop segments within that? Rough numbers?

Bryon Look

Yes. We're not setting huge targets out there in terms of expectations for the TAM growth, there's a number of secular things going on relative to the industry. But we're comfortable with our position there. And as I said, we believe that even based on a more flattish TAM for the industry overall, that we can grow our business in HDD. Again looking at Q1 as really being the trough quarter and then being able to expand from that point forward.

James Schneider - Goldman Sachs Group Inc., Research Division

Got it. So essentially flash TAM with normal seasonality kind of overlaid within that over the course of the year.

Bryon Look

Right. And again, it would not be unusual for the second half to be stronger than the first half. I don't think there's anything revolutionary with that.

James Schneider - Goldman Sachs Group Inc., Research Division

Right. Right. Okay. Can you maybe talk about where you see potential to gain share in hard drive space, potentially at new customers that are not so traditional for you, like at Western Digital or others?

Bryon Look

Yes, absolutely. As I said, overall, our share is in the 30s, and we have an opportunity with 2 suppliers to really have this be maybe closer to a 50% kind of range. And the key, though, is really being able to deliver to our end customers value and having them be successful in the marketplace with their products. Historically, we've been very strong with respect to the Seagate relationship and have captured strong position there relative to both desktop, as well as enterprise drives. We haven't had not -- as strong a position on the notebook side. But again, how we play in that space is we've got a very strong position in terms of the SSD marketplace with our SandForce processors. And so to the extent that there's any concern about notebooks and that market being eroded potentially by the rise of flash-based solutions, we're very well positioned there. And by the way, when we sell a controller into that particular part of the marketplace, the ASPs tend to be -- there's a lot of value add in those controllers and they tend to be 2x to 3x the ASPs of an HD control in the same space. So there's a lot of opportunity for us moving forward in that HDD space. The key, though, is again enabling our customers with, in this case of HD, a leading rechannel technology. We continue to be able to drive a competitive advantage there in time to market, because of the way that we have dual design teams across the globe. We work closely with those customers. Our share at WD, we have a piece of that business because of the Hitachi enterprise drives, I know you're very familiar with that, Jim. And so we have opportunity with that footprint to expand beyond as we look for, for example, hybrid drive opportunities, both with the leading customers in HDD. And so that represents another growth opportunity. Plus just in a more normalized share, I would say, relative to target customers such as Western Digital.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. Maybe we can talk about the solid state drive part of business because, obviously, that's one of the more exciting growth drivers you have going on. You actually started to touch on it a little bit in the drive discussion. Maybe just kind of compare with us -- you talked about 30% market share in the traditional drive space, in the hard drive space, at a lower ASP. Can you maybe talk about what you think those equivalent numbers are in the solid state drive space right now on the client side?

Bryon Look

Well, there's maybe a number of questions embedded with that. In terms of the actual opportunity, the market is growing pretty significantly at a hefty rate. Again, if you averaged out both the flash storage processor side of business as well as flash solutions, right, those markets are growing 50% and greater. And so we have a good opportunity just because the market growth and competitive positions do well there. But in terms of value add, the control is a very important piece of intellectual property relative to the overall solution. And so we have a competitive advantage in being able to interface with our SandForce base processors but also with our custom solutions, a competitive advantage that I don't think anybody else really has in the space. It has this command with the combination of that silicon, plus the firmware, plus the test solutions that we provide, not only enabling customers to take that to market, but being able to command a reasonable value for that. ASPs, again, in that space, being about 3x what they are in the HD controller space.

James Schneider - Goldman Sachs Group Inc., Research Division

Got it. And within solid state drives, there's clearly 2 segments of the market within clients. One is the merchant and one is the captive. The captive would be an example -- for example, Samsung, where they make their own flash and they make their own controller. And merchant would be where somebody else sources the flash or makes flash themselves and then sources the control externally. So maybe if you can talk about your position within the merchant side of things, maybe.

Bryon Look

Yes, I really -- to get the full performance advantage of flash, to be able to do that reliably, have rights that are durable and so forth, over time takes tremendous amount of technology and expertise. One of the things that attracted us to SandForce was basically taking the requirements of the enterprise-class solutions and being able to deliver that type of capability more in the client high-volume solutions. And so as time goes forward and we move to more advanced geometries in terms of NAND flash technology, that controller IP becomes more and more valuable. It becomes a more difficult challenge to be able to deliver the benefits of performance and reliability without intelligence in the controller. And so the error correction technology, the DuraWrite technology that we have pioneered with respect to our SandForce flash processors, has enabled us to capture a lot of that business. But similarly, that same IP can be delivered in terms of some of the merchant players, if you will, where they can partner with us and do what others cannot, and that is do an integrated SoC solution using our custom capability. Again, if I were to differentiate ourselves versus some of our competitors, we have the ability to go to the market with either standard products, SandForce controllers, as an example, or custom solutions, and we have a number of customers today who use our custom solutions to also produce SSDs.

Overall, the marketplace -- if you think about the players out there and look at 2012, broke out that market between merchant and cap to suppliers, if you will, turns out to be about 1/3, 1/3, 1/3 between ourselves and Marvell, and then cap specifically Samsung having a pretty significant share there. So we feel pretty comfortable that, however this market seems to evolve, we're very well positioned in terms of meeting the needs the customers actually have there.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And I think kind of thinking about the market share, I think, the 1/3 of the market kind of lines up with my own calculations for the overall client SSD space. I think on your last conference call, you talked about -- and just now, you talked about the fact that you expect the market to grow roughly 40%, and you hope to outgrow the market there. So can you maybe give us a sense of what gives you the confidence that you can actually hold on to the unit share that you have now? And is it based on design wins? Or maybe give us any color there? And then can you talk about what kind of ASP declines we can expect in the market, because usually, when you have markets that are growing that fast, typically a little bit more ASP decline than you would, for example, in a more mature, slower growing market.

Bryon Look

Yes. I think that -- to answer your latter question first, relative to ASPs. Yes, our expectation would be that over time and as volumes in particular rise, that you would see some level of ASP erosion. But remember, we're -- the product cycles for these products are probably a little bit faster than in other parts of the industry, HDs, for example, I think flash products would turn over a little bit faster based on just the refresh cycles on NAND flash itself. And so we have good opportunity there to continue to add value. And as I said earlier, I think the controller IP is very critical for the flash vendor to be able to get the full value out of an SSD. So that's all been factored into our outlook as we go forward, all factored into the sort of forecast that we have or expectations we have relative to growth in the course the year. A reminder, that growth comes from both a combination of our flash storage processor business, both standard and custom, as well as our PCIe-based flash products. And there, we continue to widen our customer base. I think we've been public about being successful with customers like Oracle, like IBM, like Cisco. But we've also talked about a recent -- more recent penetration in customers that are more like web or cloud customers, Web 2.0 types of companies. And there is where another tremendous opportunity for growth exists, because those companies devour a tremendous amount of storage and they truly value the performance optimization that you get with a flash-based solution. And we make it pretty easy for these folks to take those products and deploy them. It's a standard PCIe interface, where you can get some pretty significant, immediate performance advantages without a lot of customization.

James Schneider - Goldman Sachs Group Inc., Research Division

Got it. And I want to get to the PCI thing in just a second. But one more to finish up on the client side. I think you've had a lot of success with, I guess, what I call a turnkey solution based on SandForce technology where you provide both the controller flash processor, as well as a lot of the software for your customers. There's also another point of view which says the customers really want to differentiate on the software side, and just kind of use a standard processor. So how do you think about the way that market evolves? Do you think that turnkey is still going to be the way things go and to what extent are you -- or have you supported and will continue to support customers who want to differentiate and do their own software stack?

Bryon Look

Well, to a certain extent, I think the industry may support both of those models. There's a tremendous amount of value being focused in terms of controller technology or processing technology that isn't necessarily the core competency or even where somebody who's a merchant provider of NAND flash wants to put their dollars. I mean, a lot of the business in some of these high-volume markets is driven by volume, by manufacturing capability, by quality, reliability, yield, things like that. But to the extent that one of those players decides they want to do their own controller, for example, because we have very strong IP we actually engage today, we have a custom model that works with a number of these players, and there are proof points today with some of our customers that we engage and we're making very successful marrying their IP with ours in this particular space. I will go back to the fundamental value proposition that we have and that is we can deliver, more reliably, the kind of performance advantages and the durability with this technology as we go forward, and we work with all the NAND flash vendors. At the end of the day, it's going to be the customer who makes the decision relative to what's the right combination of controller and NAND flash they need to have. And in any particular generation, it may be one NAND flash vendor who has the better NAND flash, either in terms of cost or performance. And therefore, we offer the customer the opportunity to have a controller that works with that NAND flash for that particular product generation, and therefore, to be -- win in the market if they're reselling that product or to get the full advantages of that performance if they're deploying that internally as with some of the Web 2.0 folks.

James Schneider - Goldman Sachs Group Inc., Research Division

Got it. And then I wanted to shift onto the enterprise side of SSD for a second. You mentioned the PCI Express-based drives. And I think you've also mentioned in the past that you're the #2 provider of those kind of drives behind Fusion I/O, which has been the market leader to date. Can you maybe talk about kind of where you see your competitive position heading? I think your biggest competitor in Fusion guided for a pretty big decline in their first quarter. I mean, do you think that there's an opportunity for you to gain share from them? And maybe how you see yourself lined up competitively in the market over the next year or 2?

Bryon Look

Well, given that Fusion I/O sort of, if you will, pioneered, the first to market with a broad-based solution in -- I wouldn't say broad-based but with a high-volume set of solutions there, I would say that we've entered the market later, but we've made tremendous progress in terms of penetration with key customers, and there are significant proof points in terms of our product being very competitive from a benchmarking standpoint. We do have some advantages, first of all, while initial solutions have been targeted for sort of a niche really relative to total number of servers that are sold. I mean, you're talking about single-digit kind of penetration, right? So there's a huge opportunity. This is a market that should be growing to $2 billion plus in terms of available market size. And so we have a tremendous opportunity to grow there. We believe we've got the right products and we've been targeting some key customers. To an extent that our success takes away maybe from a #1 position that Fusion I/O had, I think it's just a fact that, hey, it's an attractive market and there's opportunity -- plenty of opportunity there for a strong #2 player like LSI.

James Schneider - Goldman Sachs Group Inc., Research Division

Got it. Maybe if we can shift over to the other piece of your business, the networking side, for a moment. I think it's pretty clear that by anybody's account, the last 6 quarters have been pretty dismal from a carrier-spending perspective. And so that goes with you and everybody else in the industry. But I think you've also talked about your investment areas and new products actually seeing some growth despite the kind of declines in Legacy business that you have. And I think Legacy business is down to $40-some-odd-million as of last year. I think you talked about maybe seeing another $20 million headwind, or something like that, as you head into this year. So can you kind of sort it out for us and understand -- setting legacy aside for a second, what you see in terms of the overall customer environment, in terms of spending levels from carriers and enterprise in general? And when do you think we're going to see a bit of an inflection point, if you have any visibility there? And then maybe talk about specific LSI-related drivers, new design wins that are ramping and how should we expect those to feather in as we head through the year and next year?

Bryon Look

Well, to your point, I think there's no doubt that relative to networking CapEx in 2012 it was softer than people had expected. Certainly, there was some more recent data to suggest that CapEx spending would increase in the year 2013. I think announcements by AT&T and then more recently by Deutsche Telekom, a couple of the proof points there. Did you step way back and say, "Well, fundamentally, with all this data traffic, there needs to be some sort of shift in terms of the infrastructure to absorb all that traffic." I don't think CapEx alone is going to do that. I think it requires solutions, which our customers are very well aware of, to drive better efficiencies with respect to the processing and the sorting of data. And so you take a product line like an architecture like Axxia, it's almost ideal to be able to address some of those key concerns. And that's where we've been targeting our R&D investments. You're right, though, the legacy part of the business has really become a much more de minimis part of the overall networking envelope. While the industry was soft last year, our investment areas grew actually in networking last year. And maybe the most important thing is a lot of the development that we've engaged with, with some of our leading customers in the wireless infrastructure space, and base stations in particular, those products are beginning to ramp now in terms of the marketplace. So in the fourth quarter, we started to ramp the Axxia platform with a leading provider in terms of wireless infrastructure part of the marketplace. We have multiple additional wins that will ramp as we go through in networking in the course of 2013 and '14. So we're hopeful that finally that inflection, that softness or whatever, starts to turn positive. I think some of my peers have commented on the expectations that certainly by middle of the year, we would expect to see stronger spending profile. But we're quite comfortable with our competitive position. We have multi-generational wins. And again, while the actual spend levels may vary from year-to-year, I think from a competitive standpoint, we're winning.

James Schneider - Goldman Sachs Group Inc., Research Division

And in terms of the new design wins with the new platform, just give us a sense of how broad those are across customers? Are we talking about 1 customer, 5 customers? Any kind of sense on that would be helpful.

Bryon Look

I'm always limited by naming specific customers. But if you think about the wireless infrastructure space, which is our primary area of focus -- I mean, you really have the Ericsson, Nokia, Siemens, Alcatel-Lucent, and then you've got Huawei and ZTE, okay? So those 5, we engage with all of them. We're not able to announce all the wins, but I can tell that if you just take the data playing, control playing part of the markets that they serve, right, we believe we've already captured design wins that represent more than 50% of that market. So that's the proof point that -- I mean, almost by definition, that's at least 2 and a significant piece of that pie that we've already captured.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And maybe [indiscernible] financial model. So I just wanted to get a sense -- you've laid out some goals, Analyst Day is just almost a year ago right now. You talked about target model being 55% gross margin, I think 20%, 22% operating margin, that's all pro forma. So I guess maybe 2 pieces of that, 1 would be on the gross margin side if we kind of -- and that's on, I think, $700 million of quarterly revenue base. First of all, what are you doing to improve the gross margin side of the equation just in terms of -- on the same revenue level? And #2, what kind of visibility do you have in terms of when you actually get to that $700 million kind of number?

Bryon Look

Well, first of all, driving to our target business model remains among our highest priorities. And so we made great progress in the year 2012. As I mentioned earlier, took our operating margins on a non-GAAP basis from 12.5% to 17%, remains the focus. Relative to the components of that, much of this will be driven by top line growth. We've done a lot relative to restructuring the businesses, divesting businesses that were lower margin or less attractive growth rates and so forth. On the gross margin front, we've done a lot relative to the profile of the company, both in terms of product mix, but also in terms of just benefits that we've driven in terms of manufacturing costs. We moved to a deployment of copper, for example, in some of the packaging for some of our product lines. Mix will be a significant driver of that. But we're already at the 53%, 54% gross margin versus the 55% target model, at least next target, if you will. So I'll tell you that, fundamentally, if you drive the revenue growth, that will probably take us to that gross margin target. It may vary a little bit depending on the actual composition in terms of products. And then relative to the operating margin goal, again we're going to continue to manage our operating expenses carefully. Part of what we've done is focus on R&D that's core to the storage and networking parts of our business, which is the focus that we started driving several years ago. We get the most leverage we can by targeting also the leading customers within the respective markets, so they tend to drive share, drive volume and enable us drive larger designs wins in general. And so that's another thing that we can do to better leverage the R&D that we do. It's important for us to remain competitive. We don't want to just hit the business model for a year and then recede. And so we also have this balance between continuing to invest to sustain that competitive position. Part of that is getting much more productive in terms of our R&D capabilities across the world. And I think we're able to do many more designs today than, say, 5 years ago, even as the cost of designs grow, because of the fact that we've got dual design teams across virtually all of our product groups now.

James Schneider - Goldman Sachs Group Inc., Research Division

And then capital allocation, I think, is a lot of people's favorite topic these days. And as you pointed out in your opening remarks, you've bought back a lot of stock. You've talked about buybacks being kind of the preferred vehicle for returning cash to shareholders. So can you share with us any kind of view about -- do you think that that's what you want to continue to be your #1 priority? What your capacity for buybacks are given the cash flow you generate? And then maybe further down the line, would you consider a dividend in addition to the buyback program?

Bryon Look

Yes. First of all, the most important thing in terms of operating the company is to make sure that we are, in fact, focused on cash generation, cash flow. We've done a really good job of that, I think, over the last many years. We also continue to operate the company with no debt. And so, what we want to do is make sure we have the ability to continue to drive the sort of growth which ultimately drives shareholder value and shareholder return. But to balance that with any excess capital and how to use that excess capital. When we look at our long-term trajectory in terms of design win traction, in terms of multi-year growth as we move towards the business model targets, it has been, for the last many quarters now, from our perspective, the best use of that capital, given that we have no debt to service and we don't have any obvious holes relative to the product lines that we need to do M&A to fill. The most positive or powerful use of that, I think, has really been share buyback. But that's not something that necessarily holds true forever. I mean, I think we're very open to things like looking at dividends as well. I think the bottom line, though, is we're in a very strong position. We have the flexibility. And as we see those opportunities, we can move on those.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. And then last one. I think you sort of touched on it there. But in terms of the M&A possibilities, you've historically done some smaller tuck-in deals and those have augmented your portfolio quite nicely. So are there things you're kind of thinking about on the smaller side or even on the bigger side that would kind of help you build out your portfolio or even move you into adjacent markets even if there's not a technology hole?

Bryon Look

Well, I think to achieve some of the revenue targets that we internally have and to be able to drive to those leadership positions in storage and networking, we're quite comfortable with the opportunities that we have. The IP that we have, we can be very competitive in terms of capturing design wins because we have the right technology, both IP as well as the right process generations. So we're very comfortable with that. Obviously we'll, as we always have, be proactive in looking at those opportunities. SandForce was a great example of that where, hey, this was a field that was pretty close to our knitting, right, almost down the middle of the fairway in terms of our expertise, where we approached this with: Can we make this an accretive transaction? Will it drive long-term shareholder value? Will it substantially enhance our ability to grow and have #1 product positions? And it met all those criteria. So we'll continue to be proactive there, but there's no immediate needs there. In -- the semiconductor industry is quite interesting, right, because there's sort of this secular consolidation theme, but then some fast-evolving markets like flash, and so one has to always be out there and looking for those opportunities, both in terms of specific companies, markets, but also the right timing on doing that. And again -- once again, the key is having the flexibility to go out and actually execute and take action on some of those things, which I believe we do have.

James Schneider - Goldman Sachs Group Inc., Research Division

Great. I think with that, we're out of time. But Bryon, thanks very much for being with us today.

Bryon Look

Thank you, Jim. Appreciate it.

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Source: LSI Corporation Presents at Goldman Sachs Technology & Internet Conference 2013, Feb-12-2013 02:00 PM
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