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Executives

Abhijit Talwalkar - Chief Executive Officer, President and Director

Sujal Shah - Director of Investor Relations

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

Analysts

Blayne Curtis - Jefferies & Company, Inc.

Hans Mosesmann - Raymond James & Associates

Sanjay Devgan - Morgan Stanley

Daniel Amir - Lazard Capital Markets LLC

James Schneider - Goldman Sachs Group Inc.

Sujeeva De Silva - ThinkEquity LLC

Kaushik Roy - Wedbush Securities Inc.

Sukhi Nagesh - Deutsche Bank AG

LSI (LSI) Q4 2010 Earnings Call January 26, 2011 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LSI Corporation Investor Relations Conference Call. [Operator Instructions] 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. Abhi will begin the call with some opening remarks and highlights from our business, and then Bryon will provide results and guidance for the fourth quarter and full year of 2010.

During this call, we'll 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 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 an overview of our business. This may be particularly useful to investors who are new to LSI. I want to remind you that 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-Q for the quarter ended October 3, 2010, and in our annual report on Form 10-K for the year ended December 31, 2009.

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

Abhijit Talwalkar

Thank you, Sujal. Good afternoon and welcome. Over the past several years, LSI has undergone a significant transformation, and we are pleased with the progress we have made to date. During this time, we have been investing ahead of revenue, as we rebuild our key businesses for future success. We're now strongly positioned with differentiated products, technology leadership and wins with market leaders and are beginning to see new product cycles materializing with our key customers.

In 2010, we grew revenue 16% year-over-year and nearly doubled our non-GAAP operating income margins to 13%, on track towards our business model targets. We also generated approximately $370 million in operating cash flow and repurchased over 50 million shares, further strengthening our balance sheet while reducing our outstanding share count.

In Q4, we grew revenues over 5% sequentially to $664 million at the high end of our guidance, with growth and storage systems, HDD and SAS standard compliments. Now I want to review additional business highlights for Q4. I'll begin with Storage Systems, which includes both external storage systems and server RAID adaptors and software.

Our Storage Systems business grew 14% sequentially and 6% year-over-year in Q4. We saw growth across midrange and entry-level platforms, with sequential growth at IBM, Oracle and Dell. We also saw sequential growth with our emerging Tier 2 OEM base. We continue to see very strong adoption of our entry-level 2600 storage platform achieving the fastest volume ramp for new storage platform in our history. We've further expanded our customer base for this platform over the past quarter, with six additional customers now shipping the 2600, bringing our total to 16 OEMs in production. This product family is also shipping to distributors and white box resellers.

In our Server RAID Adapter and Software business, growth in 2010 far exceeded server unit growth due to share gains at OEMs and in the distribution channel through the combination of our MegaRAID and 3ware product families. Direct attached storage within servers is seeing a resurgence driven by its certain data center architectures, larger virtualized server environment and flash tuners.

I'll now turn to Storage Semiconductors, which includes SAS, SAN and HDD. In SAS, we have the broadest portfolio with our server and external storage solutions and continue to extend our leadership position. In 2010, our SAS product line revenues grew over 21%, outpacing both the server and external storage unit growth rates. This growth was accomplished through both share gains and OEMs and new products expanding our participation.

Looking forward, we expect to extend our number one position in server SAS through 6-gig design wins we have already secured across a long list of server OEMs for the upcoming Intel Romley generation. Our wins include IBM, Dell, Cisco, Supermicro, Fujitsu, NEC, Hitachi, Toshiba, as well as Oracle.

With our timely market and performance advantages in SAS storage processors and controllers, we have also made significant progress at another leading server OEM, starting with the Romley generation. We are enhancing our product value and margins for servers by providing advanced software features on top of our SAS ROC and MegaRAID solutions. These software products enable our customers to take advantage of performance, ensuring benefits of solid-state drives and are being used by IBM and Dell.

The external storage SAS infrastructure opportunity continues to develop nicely for LSI. In 2010, this market grew to over $200 million and is expected to surpass $300 million in size in 2012 based on our estimates. In 2010, LSI doubled its revenue in this space through a broad offering of SAS expanders and now holds over 35% share. We expect to grow faster than the market through timely market and performance leadership. To further our participation in the space, we launched our SAS system-level switch in the distribution channel in Q4, and we expect to ramp at major OEMs later this year.

To further address opportunities in the flash market, last quarter we talked about bringing PCI Express base SSD adapters to the market. We successfully launched this product in the channel and are pleased to announce that Cisco, Supermicro and SGI will be launching our SSD adapters this quarter. In addition, we expect to begin ramping SSD custom controllers targeted to enterprise applications this year.

Turning to Hard Disk Drives. We are solidly in position to grow SSD share as our solutions become increasingly deployed by both existing and new customers. Last quarter, we increased shipments of our SSCs in the Seagate Savio and Constellation enterprise drives and began shipping 40-nanometer LDPC SSCs into Hitachi's Deskstar family of drives. In addition, LSI is participating in hybrid programs at our leading HDD customer. We are also seeing success with our PA 2900 preamps, which have a common architecture for desktop, mobile and enterprise drives and are shipping across all of these segments. We expect to grow share in 2011 building upon this product success.

Looking forward, we continue to hit our development milestones to expand our customer base for SSCs. In November, we launched a second-generation 40-nanometer rechannel that is now sampling to hard disk drive manufacturers. This product features multiple cores optimized for high-speed or low-power applications, enabling significant density increases while reducing power consumption and supporting data rates exceeding four gigabits per second.

Now I would like to the review the Networking business, where we continue to experience strong momentum driven by network processors, DSPs and custom products that serve the wireless and enterprise markets. For the full year 2010, revenues in our networking and investment areas grew over 50% driven by design wins materializing into revenue at market-leading customers. Network processors and BSP growth was by driven by Ericsson, Nokia Siemens, Cisco and Huawei. And in custom products, growth was fueled by Alcatel-Lucent, Huawei and ZTE.

As proof point of our strategy and execution, we are now in production for client Gigabit Ethernet PHYs with the leading PC chipset company and expect our share to approach 15% of the worldwide PC market in 2011.

We've also won the next-generation Gigabit Ethernet PHY with the same customer in 40-nanometer technology, extending this revenue stream into the future. LSI-enabled solutions are now participating in the adoption of 10-gig Ethernet and FCoE in the data center for server and switching platforms. We continue to increase shipments of 10-gig silicon for long and adapter applications to Emulex. In addition, we have begun sampling our custom data centers switch solution to the leading data networking company and expect to release this product into production next quarter.

In Wireless Access, we continue to grow through market share gains and are benefiting from global expansion of 3G and 4G networks. Network processor volumes nearly doubled for the full year, driven by Ericsson and Nokia-Siemens wireless access platforms. Further, we entered high volume production with Ericsson's next-generation mobile media gateway that incorporates our DSPs and network processors.

In summary, our Networking business performed very well in 2010, driven by end-market growth and significant market share gains. Before I turn it over to Bryon for financials, I want to stress that we are expecting continued revenue growth and operating income expansion as we move through 2011.

The top priority of the management team is to make continued progress towards our operating model goal of 17% non-GAAP operating income. We have a number of new product cycles that we expect to contribute to revenues, as we move through the year and expect to maintain tight controls on operating expenses.

The long-term fundamentals of our business are solid. Our large and growing multi-year design win pipeline continues to move towards and into production, and we continue to deepen our engagements with market-leading customers to establish growth drivers for the future.

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

Bryon Look

Thanks, Abhi, and thanks, everyone, for joining the call today. I'd like to begin by providing a few highlights and perspectives on LSI's financial performance for the full year. We closed 2010 with annual revenues of $2.6 billion, representing 16% year-over-year growth. Our Systems business grew 20% and Semiconductors grew 14%. We delivered gross margins excluding special items above business model throughout 2010, posting full year gross margins of 48.3%, an improvement of 370 basis points over 2009.

Our operating expenses excluding special items were $919 million for the year. We remain focused on expense control throughout the year, reporting effectively flat non-GAAP operating expense for each quarter in 2010, while driving 16% top line growth year-over-year.

We delivered solid progress towards our business model, producing double-digit non-GAAP operating income percentage for every quarter in 2010. And on a year-over-year basis, we nearly doubled our non-GAAP operating income, growing from 6.7% for fiscal 2009 to 12.6% for 2010, a significant progress towards our business model target of 17%.

In addition, one of our key focus areas has consistently been to maintain and grow our net cash position, while driving efficient working capital management. In 2010, we delivered $367 million in operating cash flows or an 80% improvement over 2009. We closed the year with a cash and short-term investment balance of $677 million and zero debt, while also having utilized $250 million of cash to buy back stock.

Now, some highlights from the recent quarter. Total revenues for Q4 were $664 million at the high end of our guidance range, sequentially up 5.6% and up 4.2% on a year-over-year basis. Semiconductor revenues for Q4 were $393 million, sequentially up 1% from Q3 and up 3% on a year-over-year basis.

Our Storage Semiconductor revenues were sequentially up $6 million or 3% to $248 million, driven by strength in HDD and SAS. Storage Semiconductors represented 37% of total revenues in the fourth quarter. Q4 revenues in our Networking business were $119 million, sequentially flat to Q3 and represented 18% of total revenues for the quarter. Revenues for the IP business in the fourth quarter were $25 million, in line with our expectations.

Turning now to our Storage Systems business, which includes both external storage systems and server RAID adapters and software. Storage systems revenues were sequentially up 14% to $272 million, a record high for this business. This represented a 6% improvement in systems revenues as compared to Q4 2009. The Storage Systems segment represented 41% of LSI's total revenues in the fourth quarter.

Moving next to gross margins. LSI's consolidated Q4 gross margin, excluding special items, was 48.0%, consistent with the guidance we provided in October. Non-GAAP gross margins were sequentially down 130 basis points from Q3, primarily due to a higher concentration of systems revenues as a percentage of total, along with lower IP revenues and mix within our semiconductor products.

Non-GAAP gross margins improved to 60 basis points compared to the same quarter a year ago. Semiconductor gross margins, excluding special items, were 53.5%, approximately 170 basis points below Q3, again, primarily due to lower IP revenues and product mix. Storage Systems gross margins for the fourth quarter excluding special items sequentially improved 50 basis points to 40.0%.

Moving to operating expenses. R&D together with SG&A expenses, excluding special items, were sequentially up $2 million to $230 million in Q4. Non-GAAP operating margin sequentially improved by approximately 40 basis points to 13.4% or $89 million. We successfully delivered operating margin expansion for three quarters in a row, as we continued to drive progress towards our business model targets.

Interest income and other net of interest expense excluding special items was approximately $8 million for Q4.

Now let me turn to the special items we recorded in the fourth quarter, which netted to approximately $103 million. During the quarter, we made the decision to terminate several software programs associated with our External Systems business and recorded several charges as a result. These programs were isolated primarily to one customer and unrelated to our current core product offerings. We do not expect any material impact to near-term or future revenues due to these actions.

Special items, primarily non-cash, included approximately $49 million in restructuring and other items, primarily relating to the actions I just mentioned, $40 million in amortization of acquisition-related items and $15 million of stock based compensation expense.

Moving next to tax. For Q4, we recorded a provision of $7 million for both GAAP and non-GAAP. As a reminder, our tax provision on both a GAAP and non-GAAP basis can vary significantly from quarter-to-quarter based on our profitability in different geographic tax jurisdictions and discreet items.

On a GAAP basis, fourth quarter net loss was $13 million or $0.02 per share. Net income excluding special items was $90 million, sequentially improving from $0.13 to $0.14 per share. Share count for the period was 617 million shares for GAAP and 626 shares on a non-GAAP basis.

Turning now to cash flows and the balance sheet. Operating cash flows in the fourth quarter were $112 million and $367 million for fiscal 2010. We exited the year with a cash and short-term investments balance of $677 million. During the quarter, we utilized approximately $32 million of cash for share repurchases. During the full year, we repurchased a total of 51 million shares and utilized $250 million under the current share repurchase authorization.

In addition, depreciation and software amortization was $26 million for Q4 and $105 million for fiscal 2010, and capital expenditures were $12 million for the fourth quarter and $52 million for the year.

The following is our guidance for Q1 2011: Revenues in the range of $605 million to $635 million. At the midpoint, this is sequentially down about 7%, following a strong Q4. And this is somewhat better than historical seasonality, which has typically been down on average about 10%. We expect both our Networking Semiconductor and Storage System businesses to be down relative to Q4, while we expect our Storage Semiconductor business to be roughly flat.

Consolidated gross margin excluding special items is expected to be between 46.5% and 48.5%. We expect gross margins, excluding special items, to be approximately 52% for the Semiconductor segment and approximately 40% for the Systems segment. Operating expenses excluding special items are expected to be in the range of $225 million to $235 million, which is sequentially flat at midpoint.

Interest income and other in interest expense is expected to net to income of approximately $3 million. Special items are expected to net to approximately $40 million to $60 million. The GAAP and non-GAAP tax provision is expected to be approximately $7 million for Q1. We expect Q1 GAAP net income per share in the range of negative $0.03 to positive $0.07, and EPS excluding special items to be in the range of $0.07 to $0.13 per share.

The share count is expected to be approximately 625 million shares for both GAAP and non-GAAP purposes. In addition, we expect depreciation and software amortization of approximately $26 million and capital expenditures of approximately $15 million.

Before we go to your questions, I just want to note that the consistent expansion of non-GAAP operating margin throughout 2010 underscores our continued commitment to drive the business model performance. We are running above our business model goals on gross margin and expect to maintain tight control on operating expenses to improve our earnings growth as we demonstrated in 2010.

I would now like to turn the call back to Sujal.

Sujal Shah

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Kaushik Roy with Wedbush.

Kaushik Roy - Wedbush Securities Inc.

You've done a pretty good job in keeping OpEx flat almost every quarter. Can you give us some color? Like what are your OpEx plans for 2011?

Sujal Shah

We will continue to maintain, I think, tight controls on our operating expenses. Our primarily goal is to ensure that we drive revenue as well as operating income growth significantly faster than our spending. We will still continue to maintain those controls. And as you see in 2010, we are effectively able to hold our OpEx levels flat from Q1 through the end of Q4.

Kaushik Roy - Wedbush Securities Inc.

As a follow-up, the Storage Semis, there's a lot of confusion about what the PC demand and hard drive demand would be. What are your assumptions or what are your thoughts on your Storage Semi business, considering what's happening in the PC and the hard disk drive markets? And what I'm asking, what are your thoughts on Storage Semi, I mean for 2011, the full year?

Abhijit Talwalkar

Let me first comment on the quarter in terms of Q1 and sort of guidance and the thought process that has gone into our guidance. And so, I can certainly offer a perspective for the full year in terms of the market. But clearly, this has been something that we have been something we've been watching very closely, given what the overall industry experienced last year this time in the first half. So we've gone to great lengths to really get as much visibility as we can into our customers' inventories. We've got hubs with all our customers, certainly trying to extract color around the channel inventories and to whatever extent, PC OEM inventories. Taking that into account, as well as placing the TAM for Q1 on the lower end of the spectrum that's been discussed out there from $155 million to $168 million. I've even heard some numbers slightly above that. We're sort of assuming $160 million unit TAM coming into this quarter. And so that's what's kind of modeled into our forecast. We certainly have the ability to respond to a stronger end market, but we decided to put our TAM on the lower-end caution. Relative to storage semi or hard disk drive for the year, we continue to believe that growth in the year is somewhere probably in the mid- to high-single digits in terms of units for hard disk drive. I think that's supported by not only the PC growth, but definitely supported by half the hard disk drive market that has nothing to do with PCs and associated with everything from home to cloud buildout to drives they're making into TVs and set-top boxes and so forth. That part of the hard disk drive market continues to grow at a pretty healthy pace.

Kaushik Roy - Wedbush Securities Inc.

And so can we assume, if you're saying mid- to high single-digit growth, can we assume that you'll grow faster than that because of market share gains?

Abhijit Talwalkar

Well, we have a number of new programs that are absolutely kicking in. We started shipping in volume our Enterprise SSC with Seagate. We're starting to benefit from that this quarter. We had some unique SSCs that we started development on several years ago that will start to go into production in the second half of 2010. And we continue to make progress relative to the new SSC programs that we've been discussing over the past year or two, five quarters as well.

Operator

Your next question is from Sujee De Silva of ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC

Can you help us understand? It sounds like you have some programs ramping in HDD. What's the potential magnitude of share gain for you? And where do you think your share gain is headed now that it's starting to...

Abhijit Talwalkar

Well, our share to date from an SSC standpoint is in the low 20s. And we've been working very hard the last two, three years with customers across really all OEMs, to develop new SSCs and take those into production. Some of that certainly has started and a majority of that is ahead of us, Sujee. So we expect to start seeing share gains that are meaningful towards the second half of this year. I'm going to stop giving you a projection at this point, but we do expect to outpace the market because of the share gains.

Sujeeva De Silva - ThinkEquity LLC

And then on the server side, it sounds like Romley is going to create more opportunity for you. What do you think your share gains can be there? It sounds like you mentioned a customer, I imagine HHP [ph] there, where you're cutting over. Will that be a sole source to you, guys, or will you share HP [ph]?

Abhijit Talwalkar

Well, I'm not going to speak about specific customers, but I've always said you've got the best product in the industry. And if you're well ahead of your competition, good things will happen. And we feel very confident relative to our competitive position in SAS. And that's both SAS for servers as well as SAS for external storage. And we expect both our product lines aimed at servers and storage from a SAS standpoint to grow share over this next sort of generation.

Sujeeva De Silva - ThinkEquity LLC

On the Semis, why is the gross margin weaker than guiding to 1Q? What in the mix is driving the Storage Semis gross margins down two quarters in a row?

Bryon Look

Well, first of all, we've been operating throughout this period of time with gross margin performance above our business model levels, both on the Semiconductor as well as the Systems side. Relative specifically to your question about Q1, based on the guidance that we provided, we would expect our product mix to be a factor which drives that delta. We're expecting our Networking Semiconductors in the quarter to be down Q1 and expecting our HDD and Storage Semiconductor business to be roughly flat in the first quarter.

Operator

Your next question is from the line Blayne Curtis with Jefferies.

Blayne Curtis - Jefferies & Company, Inc.

Abhi, your investment areas in network have been growing quite nicely. Can you just give some color into Q4? It looks like it flattened out a bit. Was that due to Legacy? Or did those investment areas slow? And then when you look to Q1, kind of just some additional color there as to what's driving the decline?

Abhijit Talwalkar

I'll give you some perspective. No, the investment areas did not slow in the fourth quarter. In terms of -- from a year-over-year growth rate standpoint, year-over-year growth was pretty impressive as well. But if you look at the overall year, I'll give you a couple of data points that will put that into perspective or the overall Networking business in perspective. Our Legacy business was quite strong in the first half of the year, some of it driven by last-time buys and some of the surge buildout that occurred on some older system products with our customers. The Legacy business did absolutely drop in the second half relative to first half. So that definitely played a bit of a role. But we also saw quite a bit of strength in Q2 and Q3 in our go-forward networking areas that sort of -- that strength sort of subsided a little bit going into Q4. There were also some inventory in Q2 and Q3 that was also worked through in the wireless space, which I think has been fairly well documented out there. So that's how I would provide some color on that. I think the other thing to keep in mind, especially as it pertains to our products versus potentially FPGA, or products of that sort. Our supply line or cycles for our customers in the telecom service provider space typically run anywhere from 12 to 15 months in terms of lead times and so forth. So we are a bit off -- we're a bit pre-shifted relative to what you see in terms of end-system revenue versus a part of revenue. So I think those three factors sort of explain the experience that we're having with our Networking business.

Blayne Curtis - Jefferies & Company, Inc.

And then maybe just a little bit longer term, on Hard Drive SSC business. I mean you have talked about some of the near-term ramps. You didn't address them all, the longer-term customers you're trying to get into and your progress there.

Abhijit Talwalkar

Good progress. And I think everyone's aware of what we've communicated over the past five quarters or so in terms of our penetration across the entire OEM base with SSCs, and the progress over the past five quarters has been, I think very, very good. I've been very pleased with the progress. We're hitting all our milestones, and Silicon's looking really good and we're even more positive today than we were three months ago and six months ago relative to these things materializing into share gains. And our share objective that we've put out there certainly is to have us go from the low 20s to the 40% range over the course of time.

Operator

Your next question is from the line Sukhi Nagesh with Deutsche Bank.

Sukhi Nagesh - Deutsche Bank AG

Abhi, you said you're modeling your assumptions. Assuming $150 million for your HDD TAM for the quarter, that would indicate maybe a roughly 5% decline on a sequential basis quarter for the TAM. Do you expect your HDD segment to track in-line to that TAM decline?

Abhijit Talwalkar

No, because we're growing. We've got certain cycles that are growing and growing share, right? That might also help -- not might, it does also help explain sort of our guidance or color on Storage Semis quarter-to-quarter being flat, when historically, it's down. Enterprise being the primary contributor right now.

Sukhi Nagesh - Deutsche Bank AG

And then shifting over to gross margin side. I think Bryon, you said your gross margin is currently trending above target. Can you remind us what your gross margin targets are for the Semi and the Storage System side of things? And then should it be prudent for us to model it returning back to target range this year?

Bryon Look

Let me answer the second part of that first, because we do expect to benefit as we continue to grow revenues with gross margin, product mix of course, you also have to factor that in. Relative to the business model question, overall, as a company, we've been targeting 47% gross margins. But of course, we performed above that through each quarter in 2010. That consists of a composite of our Semiconductor gross margins, which should be well north of 50% as well as Systems gross margins in the high 30s to about 40%. And again on both sides of this, you've seen that performance and we would expect that opportunities to continue to improve gross margins as we go forward. A lot of initiatives that we've launched over time continue to be in place in effect, and we'll continue, as we said, focusing on using that as well as top line growth and continue monitoring of our operating expenses to drive good progress towards our business model in 2011.

Sukhi Nagesh - Deutsche Bank AG

So just to follow up there, Bryon, why wouldn't you raise your gross margin targets in that case?

Bryon Look

Yes, that's a good question. And over time, we may choose to do so. We're not doing that at the current point in time.

Operator

Your next question is from the line Sanjay Devgan with Morgan Stanley.

Sanjay Devgan - Morgan Stanley

Looking at the Storage Semi business, with the flattish outlook, I was wondering if you can kind of go one step further and kind of give us some of the puts and takes with respect to some of the above-board drivers and some of the drivers that are going to be down, namely between the SAN, SAS, custom silicon and HDD portions of that business?

Abhijit Talwalkar

Well, the primary drivers are HDD and SAS, and we can certainly talk about the private channel space. It's a fairly small component. So HDD Q4 TAM was roughly 168 million units. We're sort of modeling 160 million units. You know our share, roughly, is in the 20% to 25% share for at least the SoCs, pre-amps, it's higher than that. So that's a bit of a downward bias with the TAM coming down. But at the same time, we've got an upward bias. In particular, in the Enterprise SoC space, which we started shipping three months ago. Now we'll get even a bigger quarter. With that, we'll continue to see that ramp through this year. We will see other SoCs come into the revenue stream, but that will be, as I pointed earlier, second half as those programs kick in. Relative to SAS, from a SAS standpoint, the overall server market is projected to be down in terms of units, but we've got other growth drivers that are compensating for some of that, in particular, continued growth in our external SAS business as well, which is a little bit of a new market that's growing that is able to meet some of the seasonality in terms of system decline.

Sanjay Devgan - Morgan Stanley

And then just switching gears a second to the Storage Systems business. Over the last six to seven months, there's been a lot of talk about M&A in that space, specific to the likes of 3PAR are compelling. Can you talk about your business and talk about what's different or similar to those other businesses?

Abhijit Talwalkar

There's certainly been a lot of activity and with that a lot of speculation. What I can say relative to the businesses and how they're different, first of all, we will serve the same end market, which is data storage and data protection. However, we serve a lot of different segments. 3PAR is more higher end, Isilon is more clustered to large scale-out file. We're more of general-purpose block storage. Now our business models vary dramatically. We are a OEM business. In that way, we sell our building blocks to many, many OEMs around the world that are unbranded. And as a result, our margins are in the 30s, as we've talked about before. And we don't have a direct sales force that touches on customers. So they are different in many ways. We solve some of the same problem for end customers, but very different in terms of business model.

Operator

Your next question is from the line James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

It sounds from the overall tone of what you're saying for Q1 that you're taking a pretty conservative posture relative to guidance. Can you maybe share with us what you're expecting in terms of backlog coverage at this point in time for the quarter? And if you could address specifically whatever inventory you see in terms of the situation for the storage adapter and Fibre Channel space in particular?

Abhijit Talwalkar

Let me take the latter part of your question, first. Relative to Fibre Channel, as you know, in Q2, Q3, we had excess inventories from the components that had built up at our customers. We believe all of that has worked itself out, especially in Q4. So we don't perceive or see any inventory-related concerns there. Relative to HDD, there's a broad spectrum in terms of TAM. And there's different opinion as to why there is that broad spectrum and what will really materialize. I don't know if we're taking this from a conservative position, but we felt 160 was reasonable, based on all the information we had, as well as sort of historical seasonality that we have to factor into the hard disk drive space. But again as, I said, we're certainly prepared to deal with a bigger TAM if that materializes. In terms of backlog, terms and so forth, we're consistent with what we would expect for a Q1 quarter. And it's certainly, for some of our businesses, it's very early for certain businesses. We're tracking to what we would expect, very consistent in supporting the guidance that we're laying out.

James Schneider - Goldman Sachs Group Inc.

Can you share with us your thoughts around buybacks at this point? I mean, obviously, you succeeded in using your share count pretty meaningfully this year, and you've got a pretty decent net cash position, as you pointed out. Any thoughts on buybacks or potential for M&A or dividends or other capital allocation at this point?

Abhijit Talwalkar

I'll give you my perspective and Bryon can certainly add to it. As I think most people know, we've been aggressive in share buybacks over the course of the last three years. We completed our $250 million authorization that was authorized back in March of 2010. We completed that. And we continue to have very solid cash generation and share buybacks continue to be a strong consideration in terms of the use of our cash. Relative to M&A, I will reiterate what I've said before is, right now, we are focused on delivering the business model against the investments that we've made the past three years as we built the company. And we're not about to jeopardize that progress by doing M&A, which can come with a lot of risk as well as often come with expense and no income. So I'm focused on the job at hand, which is business model performance for the investments that we've made.

James Schneider - Goldman Sachs Group Inc.

You talked about moving towards your operating margin target of 17%. Based on what you see in the market today, any kind of rough sense about when do you think you can get there?

Abhijit Talwalkar

We've shied away from putting a specific time frame on it. But again, we've said that in the $700 million to $750 million revenue range per quarter is about when we get to the business model. So this kind of gives you a sense for what we have to be doing from a top line standpoint. And as Bryon alluded to earlier, we remain very diligent about maintaining tight controls on OpEx.

Operator

Your next question is from the line Hans Mosesmann with Raymond James.

Hans Mosesmann - Raymond James & Associates

Abhi, could you comment about the Storage Systems side of your business and the opportunity that you may see as a result of large OEMs strategic changes in direction due to acquisitions or partnerships? I think that would be helpful.

Abhijit Talwalkar

The storage systems market continues to be a very, very large market. From a market-size standpoint, it's about $55 billion to $60 billion in size, many, many different segments. The midrange is the biggest segment in itself, a lot of different product lines, entries growing incredibly fast. My point there is there's a lot of opportunities in that particular overall market segment, opportunities also for our business model in terms of make versus buy. Most OEMs cannot cover the full spectrum. There's probably only one or two companies that have the revenue scale to fulfill all the product segments that they need have to effectively compete, as well as keep building the software position. So the opportunity still remains as it has. In terms of specific opportunities that we're focused on and certainly cultivating and growing, our entry product, as we talked about earlier, is a homerun in terms of value proposition, competitiveness, price performance, and it is the most ubiquitous platform that we've had in our history in terms of number of OEMs and customers buying and shipping this product. And the growth rate in the entry segment is very strong. In terms of customers, we continue to be very focused on helping Oracle leverage our storage system, in particular, around their database and database platform, and their overall strategy for an integrated solution. We've seen that business now grow two quarters in a row. We're seeing a far greater level of focus and intensity in bigger deals going down. So we're excited to continue to see that grow. I think relative to other companies such as Dell, which we had a great relationship and relative to some of the dynamics there, we certainly see opportunities to keep growing our business and help them participate in more and more segments.

Operator

Your next question is from the line Daniel Amir with Lazard.

Daniel Amir - Lazard Capital Markets LLC

Can you give us an idea how far long are we currently inside the Enterprise upgrade cycle, which obviously is impacting some of the Server business and some of the Storage business? And then I have one follow-up.

Abhijit Talwalkar

So the Enterprise upgrade cycle primarily run on servers and storage, and not associated with desktops or clients. I don't have a precise number as to how far we are. But this upgrade cycle started in earnest about the middle of '09 and really kicked into gear as it exited '09 and has been very strong throughout this year. There’s, I think, several things that are going on. There's certainly an upgrade cycle, but there's so many new demands that are driving server growth. Demands associated with data center buildouts that are occurring. We're increasingly participating in data centers through our Channel business. It's selling into the big data centers and sort of dot coms. That buildout continues to happen. There is data center buildout that's taking place relative to even wireless service providers who are increasingly having to deal with data and services to support all the handheld clients from smartphones to now tablets and so forth. There's that buildout that's going on. We're seeing certainly buildout associated with hosting companies, because the hosting space, whether it's Software-as-a-Service or IT hosting, that's also growing. So you've got a number of different dynamics that are taking place, and I think we've got quite a bit of room to run on this server cycle. And then we'll see even more pronounced ROI benefits that will come with the Romley generation later this year.

Daniel Amir - Lazard Capital Markets LLC

In the past, you've given us sometimes kind of a design win pipeline update. Can you give us any clarity kind of where that stands right now in terms of potential design wins that we should see in the next 12 to 18 months?

Abhijit Talwalkar

Well, what I can do is tell you what we've executed to, because we laid some specific data in front of people at our analyst event in March. And we specifically showed a semiconductor design win pipeline, or at least a design win closure history and we also talked about a goal for 2010 of roughly $3.8 billion or so. I can say that we met and surpassed that goal in 2010. I won't comment relative to our goals in 2011, but maybe that's something we'll cover at an analyst event later this year.

Sujal Shah

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 4:00 p.m. Pacific Standard Time and will run through 9:00 p.m. Pacific Standard Time on February 3. The replay access numbers are 1(800)642-1687 within the U.S. and 1(706)645-9291 for all other locations. 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.

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