LSI Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: LSI Corp. (LSI)

LSI (NASDAQ:LSI)

Q1 2013 Earnings Call

April 24, 2013 5:00 pm ET

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

Christopher Hemmelgarn - Barclays Capital, Research Division

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

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

Christopher Rolland - FBR Capital Markets & Co., Research Division

Steven Chin - UBS Investment Bank, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

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 like to now turn the call over to your host, Sujal Shah, Vice President in Investor Relations at LSI. Please go ahead.

Sujal Shah

Thank you. 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. Abhi will begin the call with some opening remarks and highlights from our business, and then Bryon will provide results for the first quarter and guidance for the second 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, 2012, 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. I will begin with a brief discussion of our results for Q1 and our outlook for Q2 and will provide highlights of our businesses.

We delivered solid results for the first quarter with revenue towards the high end of guidance and with non-GAAP EPS exceeding the high end of our guidance range. We delivered strong non-GAAP gross margin performance of 55%, and we maintained good expense control. During the quarter, we saw higher-than-expected revenues in IP licensing, and revenues in our HDD business also were higher than expected as customers increased orders for both SoCs and preamps.

Looking into Q2, our guidance reflects a cautious environment and roughly 2% sequential revenue growth at midpoint. We anticipate mid single-digit percentage growth in product revenues, including growth in flash, networking and server products, offset by declines in IP licensing as that business returns to a more typical level of quarterly revenue.

As we look forward into the second half and beyond, we remain very excited about our new product cycles across all our businesses. We have been successful at expanding our customer base in PCIe flash adapter solutions and expect new ramps with leading server OEMs and a broad base of end customers, including those from hyperscale, Web, cloud, financial services and many emerging Web companies around the world. In mobile and enterprise networking, the combination of new Axxia programs and numerous custom silicon products is expected to drive healthy growth. In HDD, we have won 100% of the hybrid drive platforms at Seagate, including 500-gig drives, and can benefit as hybrids gain traction in the second half of this year and into 2014. In servers, we're in a leadership position in SAS for the expected second half transition from 6-gig to 12-gig, and we'll have multiple OEMs launch shared storage solutions based on our Syncro technology.

Now I'd like to briefly review additional product highlights and growth drivers for our businesses. In flash, we're the only company offering standard product flash storage processors, or FSPs, custom FSPs and PCIe flash adapters and related caching software, positioning LSI to benefit from a multiyear growth cycle in flash-based storage solutions. With our existing FSPs, LSI has established a leadership position in SATA-based SSDs, which represent the highest volume of SSDs shipping this year across client and enterprise applications. I am pleased to announce that through our customers, LSI-based SSDs are now shipping or will soon ship into 8 of the top 10 mega data centers companies worldwide.

This quarter, we expect to tape out our third-generation flash storage processor and are excited about the differentiated features incorporated into this new architecture. In addition to 6-gig SATA, the 3000 series will support native PCIe with ahci and MVME interfaces. We expect to sample the product to our customers next quarter, and a number of major SSD companies have already committed to this next-generation product. Furthermore, we have added significant resources to accelerate the proliferation of this next-generation architecture across all SSD segments to ensure our leadership position into the future.

In addition to standard product FSPs, we continue to gain traction with custom FSPs, securing wins with 3 of the top 6 flash OEMs by combining the customers' controller technology with LSI building blocks to provide a complete solution. Overall, LSI now has 17 different custom FSP products that are either in production or in development across 6 different SSD providers. These custom products are a combination of client and enterprise FSPs supporting either SATA, SAS or PCIe interfaces. The unique combination of both standard and custom FSPs enables LSI to service all segments and flash controller implementation models for FSPs.

I'll now move to PCIe-based flash solutions where I want to spend some extra time given the exciting growth potential. This technology has tremendous promise given its ability to drastically improve application performance and deliver significant total cost of ownership benefits to IT organizations of all sizes. At the same time, this market is in the category creation phase and is far from reaching broad adoption. Based on inputs we have received from customers, we believe broad adoption will occur through a variety of solutions and business models, including those that are disaggregated for some hyperscale environments. Because we offer a portfolio of PCIe flash adapters, flash controller silicons, SAS RAID-On-Chip devices and RAID software and adapters, we are uniquely positioned to provide a broad range of solutions.

LSI's go-to-market strategy is multidimensional, reaching into hyperscale, Web, cloud and financial services accounts directly, cultivating a broad base of long-standing OEM customers and leveraging LSI's existing indirect channel that reaches solution bars that sell into a broad base of Web to traditional enterprise customers. From a product offering standpoint, we believe LSI has now established itself as the supplier offering the broadest portfolio of products, and this is a key point of differentiation versus all competition.

Leveraging our silicon, software and systems expertise, we have been successful in creating a whole new category of products in the PCIe flash adapter space with our Nytro MegaRAID offering. Nytro MegaRAID products combine low-capacity flash with industry-proven MegaRAID technology to offer seamless caching, acceleration and data protection in servers. We're experiencing strong interest in this product's unique capability. For example, through a very close collaboration, JPMorgan Chase is deploying a 1,000-server Hadoop cluster with a Nytro MegaRAID adapter in each server. This enables a 30% overall reduction in acquisition cost and total cost of ownership, while meeting strenuous performance and reliability requirements. This is a very strong endorsement of LSI's Nytro technology. Adding to this momentum, Intel recently announced solutions leveraging LSI Nytro MegaRAID technology, and IBM is now offering LSI Nytro WarpDrive technology with their System x servers to help clients speed big data analytics. In total, we now have IBM, Intel, Oracle, Cisco, NetApp, Supermicro, EMC and Dell offering our Nytro flash solutions to their customers, and our direct end customer pipeline continues to grow rapidly. We expect the list of OEMs offering LSI Nytro solutions to continue to grow through the year, reinforcing LSI as the #2 provider of merchant PCIe flash solutions.

In our SAS and RAID business, last month we announced that we are the first company to ship production-level 12-gig SAS RAID-On-Chip and I/O controller solutions to OEM customers. We expect customers to begin migrating servers from 6-gig SAS to 12-gig SAS in the second half of this year. At launch, LSI can offer a 45% throughput performance increase using current generation 6-gig drives with LSI's 12-gig SAS solutions. So big data environments, such as Hadoop clusters, can benefit today from -- even before 12-gig hard drives and SSDs become broadly available.

Beyond our traditional SAS business, this quarter we expect to release our Syncro product family, which provides a new storage architecture that enables sharing and scaling of storage across multiple servers. We expect numerous OEMs to launch system-level solutions to the marketplace at midyear.

In hard disk drives, LSI is well positioned in the most resilient segments of the storage market. In Q2, we expect over 95% of our SoC revenue to be driven by shipments in the desktop, enterprise and nearline drives, which are collectively expected to be a driver of storage capacity for cloud and mega data center build-outs.

In the enterprise space, LSI has reinforced its leadership by securing design awards at all enterprise HDD OEMs in 28-nanometer technology with the first platforms launching in early 2014. This will enable future share growth for LSI in enterprise SoCs.

In the notebook space, while we have very little exposure

today to the traditional 2.5-inch ACD-based notebook PC market, we do have wins that can lead to future share gains. Moving forward, PC makers and hard disk drive suppliers have a challenge to improve the performance of notebooks.

Seagate recently announced a family of solid state hybrid drives, or SSHDs, that are up to 5x faster than today's traditional notebook hard drives, featuring significantly faster boot and resume times. We are pleased to announce that LSI has won 100% of Seagate's third-generation solid state hybrid drive platforms, which include both 500-gig and 1-terabyte capacities. As we look to the second half of this year, we are well positioned to benefit as these drives have the potential to replace 500-gig per platter drives, which have far lower performance than new hybrids.

The story in HDD continues to be around 2 strong suppliers in a consolidated marketplace. We feel good about our position to grow share over the long term given our product portfolio and design wins.

I would now like to discuss our networking business, where our products address the wireless mobile network, data center and enterprise market segments. In addition to seeking leading technology, these system OEMs have been increasingly working with fewer and fewer semiconductor suppliers to help them consolidate more [indiscernible] integration, to reduce costs and power consumption, while also maintaining an ability to differentiate with their own unique IP. We have been successful in serving these segments with a combination of custom silicon and our growing family of Axxia multicore-standard products.

We continue to expand our footprint in wireless mobile network applications. Per our announcement at Mobile World Congress, we were awarded multi-generation wins with Nokia Siemens Networks. LSI was selected to provide both standard product Axxia multicore communication processors and custom baseband silicon for future generations of base stations. As our designs ramp at 2 of the top 3 market leaders, it will enable LSI to grow from less than 15% share today to 50% share in data and control plane processing and 40% share in baseband silicon in the coming years.

Expanding from our beachhead in wireless base stations, we have been driving a similar strategy for 18 months across enterprise and data center Ethernet switching. As a result, we have won 15 strategic sockets in the data center and enterprise market segments with several designs already in production and the rest in various stages of development.

First, in custom products, we have begun shipments of a custom switch chip for a high-end campus core modular switch as well as several data center switches.

We have also won a number of custom switch and OctoFi [ph] solutions in very high-volume systems with production beginning in the second half of 2013.

Finally, Axxia products are being used as the line card CPU in next-generation data center switches, while, in parallel, we're aiming to take Axxia products into higher-volume Ethernet switches. In fact, we recently announced the Axxia 4500, which is well suited for next-generation switches and routers as well as the challenges faced by next-generation networks, including Software Defined Networks. There are dozens of other opportunities we are pursuing across this application space and expect our success to continue.

Continuing our close collaboration with ARM, last quarter we announced the Axxia 5500 product family, which combines 16 ARM cores with our specialized networking accelerators to optimize performance and power efficiency. Mobile broadband is outpacing infrastructure capability, and service providers need solutions that will meet traffic performance requirements while also minimizing cost and power consumption. The Axxia 5500 product family addresses these needs with an exciting and very flexible architecture that delivers exceptionally high performance without sacrificing power efficiency.

To wrap up, we continue to demonstrate solid performance in an uncertain environment and have established product cycles to drive growth going forward. The midpoint of Q2 revenue guidance reaffirms our expectation that Q1 was a trough for our business as we expect to drive growth going forward as long as the economic environment remains stable. 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 start with a few highlights for the quarter. Revenue at $569 million came in towards the high end of guidance. Non-GAAP gross margins were 54.9%, near the high end of guidance. Non-GAAP operating expenses were $228 million, just below the midpoint of guidance. Non-GAAP operating margin was 14.8%, and non-GAAP diluted earnings per share were $0.17, above the high end of guidance.

Now turning to a more detailed discussion of our financial results for the quarter beginning with revenues. Q1 revenues were $569 million, down 5% sequentially and down 9% on a year-over-year basis. Our server and storage semiconductor revenues, which include products from our ServeRAID adapter and software, flash, SAS, SAN and HDD businesses, were $438 million, down 9% sequentially and down 10% on a year-over-year basis. Sequential reductions were primarily due to seasonal declines in key end markets such as servers and PCs. Server and storage semiconductors represented 77% of total revenues in the first quarter.

Q1 revenues in our networking business were $93 million, down 3% sequentially and down 13% on a year-over-year basis. Sequential reductions were primarily due to seasonal declines in our networking end markets. Networking represented 16% of total revenues for the first quarter.

Revenues for the IP business were $38 million, up sequentially by $12 million. This revenue is higher than our typical quarterly results driven by specific contracts in the quarter. We expect IP licensing to return to its normalized run rate going forward.

Moving next to gross margins. LSI's Q1 gross margin, excluding special items, was 54.9%, near the high end of guidance we provided in January, benefiting from higher-than-usual IP revenue as well as improvements in manufacturing costs.

In terms of operating expenses, R&D, together with SG&A expenses, excluding special items, totaled $228 million in Q1, just below the midpoint of our guidance.

Non-GAAP operating income for the quarter was $84 million or 14.8% of revenue.

Interest income and other, net of interest expense, excluding special items, was $8 million for Q1. This includes approximately $6 million of final payments received for insurance claims covering our losses that resulted from the Thailand flooding in 2011.

Now let me turn to the special items we recorded in the first quarter, which netted to $76 million. Special items, primarily noncash, included $30 million in amortization of acquisition-related items, $26 million of stock-based compensation expense and $20 million of restructuring costs and other items.

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 discrete items. We experienced such events in Q1 where the expiration of certain statutes of limitation contributed to a net noncash tax benefit of approximately $2 million on a GAAP and non-GAAP basis.

On a GAAP basis, first quarter net income was approximately $18 million or $0.03 per share. Non-GAAP net income was $94 million, or $0.17 per share, which is above the high end of our guidance. Our Q1 results include the favorable impact of the tax benefit I just mentioned as well as payments received for Thai flood insurance claims, which together contributed approximately $0.03 per share to our net income.

The diluted weighted average share count for the period for both GAAP and non-GAAP purposes was 567 million shares. This includes the weighted average benefit of purchasing approximately 9 million shares during the period under our stock repurchase program. We utilized approximately $61 million in Q1 from our stock buyback authorization.

Turning now to the balance sheet and cash flows. We ended the first quarter with cash and short-term investments of approximately $659 million. Operating cash flows for Q1 were $63 million, and we continue to operate with no debt on our balance sheet.

Finally, with respect to Q1 results, depreciation and software amortization were $14 million, and capital expenditures were $25 million.

Next is a discussion of our guidance for Q2 2013. Q2 revenues in a range of $560 million to $600 million or sequentially up approximately 2% at midpoint compared to a stronger-than-expected Q1. We are expecting mid single-digit percentage growth in product revenues, offset by declines in IP licensing as that business returns to its typical quarterly run rate.

We expect our server and storage semiconductor revenues to be sequentially up in Q2 with growth coming from our flash businesses as well as our server and storage connectivity businesses.

We expect our HDD business to be roughly flat, and we expect our networking semiconductor revenues to be slightly up.

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 $228 million to $238 million with the increase primarily driven by annual merit increases.

Interest income and other and interest expense, excluding special items, is expected to net to income of approximately $2 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 Q2. We expect our non-GAAP tax rate to be between 10% and 12% for the remaining quarters in 2013. We expect Q2 GAAP net income in a range of negative $0.02 to positive $0.07 per share and non-GAAP net income in the range of $0.10 to $0.16 per share. The share count is expected to be approximately 565 million shares for both GAAP and non-GAAP purposes. In addition, we expect depreciation and software amortization of approximately $15 million for Q2 and $60 million for the full year and capital expenditures of approximately $20 million in Q2 and $85 million for the full year.

In closing, we delivered strong Q1 results in a seasonally soft quarter. We continued with our stock buyback program and ended the first quarter with approximately $418 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 to Sujal.

Sujal Shah

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

Question-and-Answer Session

Operator

[Operator Instructions] And you do have a question from the line of Blayne Curtis.

Christopher Hemmelgarn - Barclays Capital, Research Division

This is Chris Hemmelgarn on for Blayne. First off, could you just talk a little bit to how share is looking, particularly in HDD enterprise, just what trends are like there and how that went during the quarter?

Abhijit Y. Talwalkar

Yes, I mean, I think as certainly has been discussed, there are some share shifts that are occurring in the enterprise in the near term. But I think it's probably more constructive to talk about the overall HDD business in aggregate. As we look forward, we feel pretty good about the HDD business and expect that Q1 to be the trough and sort of the floor for this business. There's lots of different moving parts, and I think looking at the business in aggregate is probably the best way to look at it. So if we assume a stable TAM to modest improvements of TAM in the second half as well as no significant share shifts at the customer level, not our share, but our customers' share in terms of the segments they participate in, we believe our HDD business is stable and should improve from here. If you look a little bit under the covers from an enterprise standpoint, what's important to remember is today we ship at Seagate, we ship at Hitachi, and those 2 companies are comparable within a couple of points in terms of overall market share. As we look a little bit forward, we have won all 4 HDD OEMs with our 28-nanometer enterprise SoC and expect shipments to begin in the first half of '14, which will allow us to maintain our high share in enterprise and grow it from there as well. In the case of notebooks, the vast majority are basically all the share shifts that occurred in the course of last year and into this quarter are largely all behind us, and just about 95% of our business is across desktop and enterprise. We are also starting to see favorable impact from Toshiba's focus on the desktop sort of business that they picked up from Hitachi as the industry overall looks for a third player, and we're seeing favorable benefits there. And lastly, we also have an SoC ramping into WD that we expect to benefit through the course of this year. So all in all, we feel very good about Q1 being the floor and growing from here. And then just lastly, long term, we continue to be very positive on our prospects in growing share long term, where our share is overall somewhere in the 30s. There are 3 major players in HDD, and they look towards balancing the overall supplier base. We've won a number of notebook SoCs middle of last year that we expect to contribute, and I articulated earlier our very strong position in enterprise going forward.

Christopher Hemmelgarn - Barclays Capital, Research Division

Glad to hear that you -- so you guys do expect the SoC at Western Digital to ramp sometime this year?

Abhijit Y. Talwalkar

We started shipping initial production quantities in Q1. That ramp continues in Q2, and we remain very excited about the prospects there.

Christopher Hemmelgarn - Barclays Capital, Research Division

Great, okay. So then my second question is just could you talk a little bit about how SSDs were in the quarter? And are they still on track to outgrow the market rate? I think you guys quoted a 40% market growth rate there.

Abhijit Y. Talwalkar

Yes, I mean, what we quoted and I think what you are referring to is really overall flash business. And from an FSP standpoint, flash storage processors, they're basically flat coming into the quarter. We believe we held share in the quarter based on sort of our data. If we step back and look at overall aggregate FSPs, we feel very good about our position. We provided some additional transparency relative to the number of custom projects that we have as well to the tune of 17. The combination of our custom sort of participation as well as our standard product based on SandForce really gives us a fantastic and a very unique position and allows us to play across a very broad spectrum of SSD players, from the NAND guys to the channel guys as well, and we feel very good about our share and prospects in that overall business. And then there's also PCIe flash. In aggregate, we certainly have talked about the aggregate business growing at 40% this year, at least at market level, and that's what the analysts still are really projecting in terms of overall potential growth for our aggregate flash SAM. What we have to watch along the course of this year is NAND availability and NAND pricing, which certainly was elevated in the second half of last year. We're starting to see that sort of attempt to come back in line. Availability certainly has been a little bit of a concern in the second half of last year. The PCIe flash-based sort of accelerator market, the adapter market, is still very much early in its life, so we are going to see sort of lumpiness, if you will, as that market develops into a larger market. But aside from those, we feel very good about our ability to grow at the market growth rates.

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 Jim. I wanted to just follow up on the commentary on the PCIe flash business with the description of it being lumpy because it's in the early stages of adoption. Can you share with us any details on what you expect going into the second half of the year and what kind of level of visibility you might have on that business?

Abhijit Y. Talwalkar

Well, we certainly expect the business, Gabriela, to grow nicely in the second half. We've been working very aggressively across all our sort of routes to market, from directly engaging end customers in the hyperscale environments to financial services, as well as growing our list of OEMs that are offering our product and selling our product, as well as leveraging our extensive VAR channels. So we're very pleased with the progress that we're making in establishing LSI as really the #2 player with the breadth of products. Our overall opportunity pipeline is up 100% from last quarter. Our overall POCs that we have, active POCs with customers looking at how our products enhance their overall usage models and environments and enable them to accelerate applications and improve total cost of ownership, the POCs are up nearly 300% from last quarter. So we're very, very happy with the traction and expect this market to continue to grow. But the market does remain in an early phase in its life and there's a lot of trial and discovery, but the promise remains significant.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

That's very helpful color. And then as a follow-up, if I may, I think you mentioned normal seasonality in the server networking markets in 1Q, and it certainly seems like data points in carrier and enterprise spending have been relatively muted so far year-to-date. Can you give us an update on what you're seeing in these 2 verticals as we go into 2Q?

Abhijit Y. Talwalkar

Yes, I mean, I think as you said from a server standpoint, server seasonality sort of behaved as expected in Q1. But relative to wireless or service provider spending, really that remained soft over the course of Q1 and assumed to be soft incorporated in our guidance into Q2. As to the second half, I think we're probably like everyone else, waiting to see the signals there, which aren't -- have not yet really materialized. There's certainly a lot of talk about China potentially spending more in terms of LTE deployments and getting those started. But at this point in time, I would say soft in service provider segments in the first half. On the enterprise side, I think behave generally seasonally, slightly better off, obviously, than wireless service provider and do expect enterprise networking to be up in the second half.

Operator

Your next question will come from the line of Christian Schwab.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

As we look to the disk drive TAM next quarter, which you 2 guided your revenues to be flat, given we've gone through probably a 3-quarter inventory adjustment by your largest customers as they overbuilt for anticipated demand and that looks to be relatively done, could we see revenues up in the June quarter similar to Nidac's message earlier today?

Abhijit Y. Talwalkar

I have not had time to absorb Nidac's message, but I think our assumption and what's sort of factored into our guidance is sort of a flattish TAM in the quarter for Q2 and some level of modest improvements in the second half.

Operator

Your next question will come from the line of Hans Mosesmann.

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

Abhi, on -- going to hard disk drives again, the enterprise -- the success that you're getting in -- at all 4 of these OEMs on the enterprise side, what's driving that? Is that the 28-nanometer? Is that your performance? Is -- or just the natural kind of [indiscernible]

Abhijit Y. Talwalkar

Yes, yes. Yes and yes, Hans. I mean, I think as -- if you'll recall, we've been maniacal about time-to-market execution on critical transitions, and that's what has led us to go from the teens in terms of share, 5 -- 5-plus years ago to in the mid 30s. And we were there first at 65, first at 40 with LDPC and so forth. And the same thing relative to 28, we have a, we believe, a very commanding position in there in terms of technology as well as our re-channel performance, and we have been the leader in terms of enterprise SoCs for quite a long time. And it's that collection of strengths that has led to and led to over the past our ability to win all 4 HDD OEMs in the enterprise space on that 28-nanometer sort of technology platform, which we expect to ship -- begin shipping in the first half of 2014.

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

Okay, great. And...

Abhijit Y. Talwalkar

By the way, Hans, while we're talking about 28-nanometer, it's also the 28-nanometer leadership position that has enabled us to win several notebook SoCs that we also expect to contribute to our longer-term share gains as we try to move up from where we are to, let's just say, a more balanced supplier base.

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

And as a follow-up, if I may, on Axxia and specifically to the ARM version of 5500, what are the competitive dynamics there that you're seeing within the ARM kind of camp itself? And when is the timing of kind of sales for that product?

Abhijit Y. Talwalkar

Well, the ARM product, the 5500, the Axxia 5500, which is a 16-core ARM product that also obviously leverages all our unique sort of accelerators targeted towards networking workloads, in particular the 5500 is aimed at the wireless infrastructure space, where we've had tremendous success with both Ericsson, and we talked about Nokia Siemens on the call in the prepared remarks as well, we believe we are well ahead of the competition relative to that class of a network processor leveraging ARM. And before, I've commented that we're potentially 6 to 9 months ahead, potentially more, in terms of delivering real silicon there. And that is what has led to, along with all the other attributes of Axxia, the success that we've had in the mobile network space. Yes, and the same customers we have that are -- that we won with Axxia on the power base are committed and are in development around the 5500 as well.

Operator

Your next question comes from the line of Novak (sic) [Vivek] Arya.

Unknown Analyst

This is Eschi Schraud [ph] for Vivek Arya. Question on the thoughts on how -- the customer needs for enterprise PCIe flash. It seems to have changed over the last couple of years. I mean, some of the more integrated hardware and software kind of providers approach pursued by some of the early leaders is changing somewhat to a more piecemeal approach to hardware and software. So I'm just wondering, how has LSI adapted to some of these changes? And also, when do you see sales beginning to accelerate in this business? Is it a 2013 event or more a 2014 event?

Abhijit Y. Talwalkar

Well, the -- let me answer the latter part of your question. I mean, we certainly expect sales to grow and accelerate this year and, as we've talked about, in the second half this year just based on the momentum that we've established with a broad base of customers and channels. Relative to your first comment in terms of the evolution of how flash is being deployed, I would argue it hasn't really stabilized or established itself because it's so early in its life. And some of the initial deployment that makes up a large percentage of the marketplace today, especially some of the big hyperscale guys, they are absolutely thinking about different deployment models, and some of those deployment models are disaggregated in nature, as you used a different term and it's a term sort of I'm using. You used the term piecemeal. And that's driven by some for a lot of different reasons, whether it's TCO, whether it's serviceability and so forth. And you asked relative to where LSI is, I think we're at the forefront of this because we have the ability, and have been having discussions with a broad base of customers, especially the hyperscale ones, to be able to talk at that level and enable them and work with them to implement flash in many different implementation models. And the reason is, is, a, we're not necessarily stuck to one particular business model, but we have all the ingredients. We have flash storage processors that are going into a full breadth of SSDs, we have RAID adapters, we have RAID software, we have caching software that sits on top of that. So we can play at any level of integration, right? And we have the broadest Nytro product offering, we believe, of our competitive base. So we think we're really well positioned here as this market continues to evolve as more and more people deploy flash for the benefits that it provides.

Unknown Analyst

Got it. Okay, that's great. Second question is on the Intel's transition to 22-nanometer Ivy Bridge and Avatan [ph] beyond -- later this year. I mean, are there any technological or feature changes on the platform which could potentially accelerate or hinder LSI's server and storage product growth prospects? Any color on the puts and takes would be helpful.

Abhijit Y. Talwalkar

No, not at all. I think it's orthogonal. And to the extent that this refresh here in the second half is a healthy strong refresh in terms of ROI for end customers, that only benefits LSI because LSI has such a strong market share position across the x86 server base, right? We're shipping to every player in the marketplace. And we do have a strong sort of competitive position and lead relative to 12-gig SAS, which is certainly going to be adopted by, I think, all the players at some degree as that transition starts in the second half.

Unknown Analyst

Okay. So last year, you didn't really see the -- a big jump from Romley. But, I mean, are expectations a bit more positive for this transition, you think, or...

Abhijit Y. Talwalkar

I -- we believe so. But again, a lot of factors there, the biggest one being just overall economic environment. But we certainly do expect the second half, if economic environments remain stable, the second half should be stronger than the first half.

Operator

Your next question comes from the line of Chris Rolland.

Christopher Rolland - FBR Capital Markets & Co., Research Division

So I guess some people have been waiting a while for your Gen 3 SSD controllers. Well, I'm wondering what that ramp might look like in terms of end products. Is it going to be sort of lumpy sort of a burst at the beginning because there might be some pent-up demand there? And then also, what sort of differentiators might we see this time around besides just faster IOPS?

Abhijit Y. Talwalkar

Yes, I mean, we're not going to get into a list of our differentiators. Certainly don't want to aid our competition any more than we want to. But we feel very good about the architecture and all of the features and all the conversations that we've been having with customers, especially a lot of our lead customers across the current SandForce product base, that it's a superior architecture and a superior platform. And also, we have the ability and are working on proliferating that architecture aggressively across the full spectrum of SSDs. As the SSD market grows, it's been segmenting and we're going to play across all those segments. As to the profile, the ramp and so forth, again don't want to get into the details here beyond what we said, which is we expect to tape out this quarter and sample in the third quarter, and we feel very good. And I just want to reinforce also the combination of both standard products based on SandForce in this next generation but also our participation in custom, which bodes well to a number of the NAND companies that want to also do custom and have their differentiation. We're very unique in this regard, right, which is going to allow us to maintain leadership share and continue to grow at or better than market growth rates.

Christopher Rolland - FBR Capital Markets & Co., Research Division

Got you. Also as Haswell ramps this year, well, first of all, what's your overview of the PC market more generally in terms of growth rates and also call it pure SSD attach rates there, especially as we move into Haswell?

Abhijit Y. Talwalkar

Well, I mean, I think in terms of our assumptions relative to the commentary we provided, whether it's Q2 or the high-level color I provided for the full year, we're expecting PC units to sort of decline mid single digits for the year, kind of consistent with what is out there across a broad spectrum of analysts. In terms of attach rates, SSD attach rates in general continue to be low. I mean, there's a high single digits sort of 10% and growing from there. And as I think this generation of Haswell products come out and the push for the PC industry to offer more compelling PCs that can compete with tablets or at least fight that share of wallet game more effectively, that's going to drive more adoption of SSDs, more adoption of dual-drive SSDs with hard drive and flash as well as hybrids, which we feel pretty good about, and we're very well positioned there as that continues to grow. And from our standpoint, we have very low to little exposure to the traditional notebook 2.5-inch hard drives. So we think we're in the best position from that standpoint.

Operator

Your next question comes from the line of Steven Chin.

Steven Chin - UBS Investment Bank, Research Division

First question. In terms of the hybrid hard drives, what do you estimate will be the penetration of these products in the traditional notebook share, ultrabook market by the year end? And also, what do you think your market share could be?

Abhijit Y. Talwalkar

Well, I mean, on market share, right now, all I can tell you is we're very well positioned across all of Seagate's hybrid offerings. And Seagate has been really the leader in this space, although the market has yet to form in sort of any kind of meaningful size. We do hear and do see across this next generation base of Haswell PCs that come out there's certainly a fairly healthy adoption of hybrids. Time will tell. Pricing is going to be a big factor, not only pricing by the hard drive vendors but also pricing of the PCs as well as they push to hit $500, $600 price points to compete against the whole tablet challenge that they face, at least one challenge that they face. So very difficult to predict based on lab tests and so forth. We think hybrids are -- have a lot of promise in addressing what hard drives today -- traditional hard drives can't, which is very rapid boot times but, more importantly, very rapid resume times.

Steven Chin - UBS Investment Bank, Research Division

Got it. And just one quick follow-up. For your enterprise PCIe NAND cache products, can you please discuss how the demand was in Q1 and what the overall data center cloud customer demand was?

Abhijit Y. Talwalkar

Yes, I mean, I think it was down from Q4 slightly. But again, not indicative at all relative to momentum. Momentum was just the opposite direction. This is just back to my comments that this is a market that's still very early in its phase, has not established sort of a run rate level of composition. And there's a lot of discovery, trial and POCs that are in flight. And all of those metrics, which is what we watch right now, are up and to the right very aggressively.

Operator

Your next question comes from the line of Betsy Van Hees.

Betsy Van Hees - Wedbush Securities Inc., Research Division

I'm sorry if I missed this, but I was wondering if you could -- in your server and storage business, if you could help us understand how much of that is your flash business, how much is HDD as a percentage range and then the other chips? And then my follow-up is you talked about -- briefly about NAND pricing and NAND. I don't know if you mentioned supply constraints, but it seems like it's been a little bit challenging in Q1, and it looks like supply and demand is going to be fairly tight throughout the balance of the year. How do you see that helping or hindering your business, particularly in the enterprise space?

Abhijit Y. Talwalkar

Okay. Betsy, on the first question, our server and storage sort of business was roughly $438 million for Q1. In terms of the overall composition, assume that HDDs are roughly in the high 40s in terms of percentage, servers in high 30s and flash sort of in the mid teens, roughly, okay? Relative to NAND, yes, I mean, NAND certainly was elevated in Q4 and Q1 in terms of pricing. Availability was certainly tight. We are starting to see that sort of improve and recede a bit over the course of Q2 and certainly expect that to improve into the second half. We don't -- we're not too concerned relative to that in terms of our business. As it pertains to our flash storage processor business, as I said earlier, our footprint is very, very broad with probably 50 to 100 different designs, either standard or custom, across NAND companies that certainly have less of an issue in terms of supply but also a broad base of other forms of OEM. And then relative to our PCIe flash adapter business, given that market is still smaller and early in its sort of deployment, we don't anticipate any concerns there in terms of availability. So right now, I would say we are not concerned too much relative to NAND pricing or availability impacting our business this year. It's something we'll have to watch closely.

Sujal Shah

All right. Thank you, Betsy. It looks like we have no further questions, so 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 the conference call will be available beginning today approximately at 5 p.m. Pacific Daylight Time and will run through 9 p.m. Pacific Daylight Time on May 2. The replay access number is 1 (855) 859-2056 within the U.S. and 1 (404) 537-3406 for all other locations. The conference ID is 83885557. The webcast will be archived at www.lsi.com/webcast. This does conclude today's conference call. Thank you for your participation. You may now disconnect.

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!

LSI Logic (LSI): Q1 EPS of $0.17 beats by $0.05. Revenue of $569M beats by $13.12M. Shares +1.6% AH. (PR)