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Executives

Abhi 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

Craig Berger - FBR Capital Markets & Co.

Lauren Stoller - Lazard Capital Markets

Sujeeva De Silva - ThinkEquity LLC

Parag Agarwal - UBS Investment Bank

Kaushik Roy - Wedbush Securities Inc.

Gabriela Borges - Goldman Sachs Group Inc.

LSI (LSI) Q1 2011 Earnings Call April 27, 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sujal Shah, Vice President of Investor Relations at LSI. Please go ahead.

Sujal Shah

Good afternoon, and thank you for joining us. With me today are Abhi Talwalkar, President and Chief Executive Officer; and Bryon Look, Executive Vice President and Chief Financial Officer.

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 2011.

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 our website at www.lsi.com/webcast.

At that site, you will 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.

We expect to complete the sale of our External Storage Systems business in the next few weeks. Because of our decision to exit the Storage Systems business, we are reflecting that business as a discontinued operation in our financial statements.

To facilitate your modeling, we have included on our website historical revenue information for continuing operations by quarter for the years 2008 through 2010.

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-K for the year ended December 31, 2010, and today's earnings release.

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

Abhi Talwalkar

Good afternoon, and welcome. I'm pleased with how our team executed in Q1, delivering revenue and non-GAAP EPS effectively at the high end of guidance, while continuing to drive solid gross margin performance and operating expense control.

We were very active in buying back stock during the quarter, repurchasing 15 million shares. So far, we have utilized only $100 million of our new $750 million buyback authorization and expect to be aggressive with share repurchases as we move through the year.

Last month, we announced an agreement to sell our External Storage Systems business to NetApp, and we expect the transaction to close in the next few weeks. The sale marks a significant milestone in our evolution, enabling LSI to transition to a pure play semiconductor company with higher revenue growth, margins and earnings growth potential.

We are excited by the growth opportunities we have been pursuing in our semi-conductor business and are still only at the front edge of new design win ramps that we expect to contribute to our top line growth.

Going forward, we believe we can accelerate the achievement of our current business model, establish a new richer business model target later in the year and deliver greater long-term shareholder value.

I'd like to spend a few minutes talking about how investors should think about LSI going forward. We're well positioned in large growing markets, with solid fundamentals and high exposure to increases in business IT spending. Growth in social networking, private and public cloud build outs, the expansion of the mobile Internet and related Smart phone and tablet services, the rise in video traffic and continued Web commerce growth in emerging markets are some of the major trends fueling growth of servers, storage and networking infrastructure.

LSI plays a critical role in providing leading products and solutions for the storage protection and delivery of digital information and content within this infrastructure.

Over the last several years, we have been investing ahead of revenue and strengthening our core businesses. We're now emerging from this deep investment cycle with leadership positions and expected growth well above end-market rates in our served markets.

We are #1 in Server and Storage SAS components, #1 in direct attached storage RAID adapters and software, #1 in SAN custom solutions, #2 in HDD and #2 in networking processors and an emerging leader in flash-oriented solutions for enterprise applications.

In our served markets, we have established deep incumbency by providing trusted silicon and software solutions that have been hardened over many generations.

We are positioned for solid operating leverage as revenues grow through share gains and new product cycles. We are committed to achieving our current business model target at 17% non-GAAP operating margins by the end of this year and expect to communicate a higher, long-term target business model as we move forward.

In addition, we have a solid balance sheet with no debt and have consistently returned capital to shareholders by buying back stock. We have reduced our outstanding share count by 20% over the past several years and expect to continue to be aggressive in using our current repurchase authorization.

Now, I want to review additional highlights of our business for Q1. I'll begin with our server and storage-related businesses, which now includes our Server RAID adapter and software business in addition to our SAS, SAN and HDD businesses. The breadth of components and software LSI offers for data protection, management and storage protocol traffic applications in servers and storage is unparalleled in the industry and has often set the cadence and industry standard for such solutions.

For SAS and servers, we expect to extend our #1 position through second generation, 6-gig design wins across a long list of server OEMs for the upcoming Intel Romley generation.

In addition, we are now selling solutions to many Web 2.0 and cloud-oriented companies, including the leading social networking company. For SAS and external storage, we have been growing and doubled revenues in 2010, achieving 35% share. The sale of our External Storage Systems business to NetApp enables us to engage more deeply with all the storage system OEMs for additional SAS opportunities.

In Server RAID adapters, our business continues to grow at key OEMs such as IBM, Dell, Cisco, Oracle and NEC as well as the channel.

Our channel offering to white box server integrators is a key growth driver through participation in the build out of mega data centers focused on cloud computing and services.

Last quarter, we were the first to announce availability of a new RAID adapter solution based upon second generation 6-gig SAS technology and flash-optimized RAID software. This product delivers the industry's highest Server RAID performance at 465,000 IOPS, enabling both the highest performance SSD deployments as well as the best-priced performance in mixed SSD and HDD deployments.

When it comes to exploiting flash in enterprise applications, LSI offers a complete portfolio solutions. Our CacheCade software, which operates in conjunction with our MegaRAID adapters, allows servers to easily and efficiently manage flash storage as a secondary cache tier within the overall storage system.

Our FastPath software, also operating in conjunction with our MegaRAID adapters, enables the industry's highest performance solution using an array of SSDs. Beyond this, the introduction of our PCI Express-based flash adapter, called WarpDrive, builds out LSI's portfolio solutions targeted at optimizing storage performance and accelerating applications by utilizing flash.

Supermicro, Cisco and SGI have already launched WarpDrive, and we're making good progress with additional OEMs and channel partners.

Turning to hard disk drives. We're solidly positioned to grow SoC share, as our solutions become increasingly deployed by both existing and new customers.

Last quarter, we increased shipments of our SoCs in the Seagate, Savvio and Constellation enterprise drives and are now shipping into 4 enterprise platforms.

Our development milestones continue to be on track, and we have now sampled a second generation 40-nanometer Read channel across the industry.

Now, I'd like to 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.

In the wireless space, we continue to gain market share and are benefiting from the global expansion of 3G and 4G networks. Our network processors, which are used in wireless access platforms by Ericsson and Nokia Siemens continue to ramp strongly.

In Q1, we also continued to ramp our custom solution using Huawei's base stations. In addition, we won a high-volume baseband processing custom solution on the multi-radio platform of another Tier 1 OEM.

In the enterprise space, we increased client Gigabit Ethernet PHY shipments to the leading PC chipset company in Q1, and have extended this revenue stream by winning the next generation design in 40-nanometer technology. In addition to client platforms, we also expect to ship Gigabit Ethernet PHYs into platforms for the Romley generation of servers later this year. We also continue to increase shipments to Emulex of 10-gigabit silicon for LAN and motherboard and adapter applications.

Also in Q1, LSI launched a new power optimized high-performance DSP that extends our leadership in voice and video processing for infrastructure applications. Our DSP volumes continue to ramp in Q1 with Cisco's ISR platform and Ericsson's next generation mobile media gateway.

The long-term fundamentals of our business are solid. Our large and growing multiyear 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 good afternoon, everyone. As mentioned, we entered into a definitive agreement in March to sell our External Systems business and are on track to close this transaction in the next few weeks. Accordingly, the financial results and tables included in our first quarter earnings press release classify this business as a discontinued operation. Since the guidance we provided in January included external systems, I'll provide key results on a comparable basis, followed by more detailed financial results for continuing operations only.

Please note that as we go forward, we will only be providing guidance for continuing operations. Relative to the guidance we provided in January, revenues, including external systems, were $629 million, $9 million above the midpoint of our guidance, and sequentially down 5.3%.

Non-GAAP net income, including discontinued operations, was $82 million or $0.13 per share, $0.03 above midpoint of guidance, primarily as a result of higher revenues, a tax benefit in the first quarter and lower-than-expected operating expenses in continuing operations.

Now turning to a more detailed discussion on financial results for continuing operations for the quarter, beginning with revenues. Q1 revenues were $473 million, up slightly from $471 million in Q4 of 2010 and better-than-normal seasonality. Our server and storage semiconductor revenues, which include hard disk drive silicon, SAS standard components, RAID storage adapters and software and storage area network ICs were sequentially up $10 million or 3% to $336 million.

Server and storage semiconductors represented 71% of total revenues in the first quarter. Q1 revenues in our networking business were $112 million, sequentially down $7 million or 5.7% and represented 24% of total revenues for the quarter. Revenues for the IT business were sequentially flat relative to Q4 at $25 million.

Moving next to gross margins. LSI's reported Q1 gross margin, excluding special items, was 52.4%. As you can see, the benefit of the divestiture to the company, relative to gross margins, is immediately evident. Reported gross margins, excluding special items, are above 52% compared with the consolidated 48% gross margins we reported in Q4.

Moving to operating expenses. R&D together with SG&A expenses, excluding special items, totaled $191 million in Q1. Operating expenses were lower than expected due to the timing of design tapeouts and litigation costs, along with some expenses which were classified as discontinued operations in Q1, but will fall into continuing operations going forward.

Non-GAAP operating margin for the quarter was 12.0% or $57 million. Interest income and other, net of interest expense, excluding special items, was a positive $4 million for Q1.

Now let me turn to the special items we recorded in the first quarter, which netted to $47 million. Special items, primarily noncash, included $30 million in amortization of acquisition-related items, $14 million of stock-based compensation expense and $3 million of net 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 certain discrete items. Such discrete items occurred in Q1 relating to the expiration of certain statutes of limitations and resulted in a net tax benefit of $4.1 million recorded on both a GAAP and non-GAAP basis.

On a GAAP basis, first quarter income from continuing operations was approximately $19 million or $0.03 per share. Non-GAAP income from continuing operations was $65 million or $0.10 per share. The weighted average share count for the period for both GAAP and non-GAAP purposes was 630 million shares. This includes the benefit of purchasing approximately 15 million shares late in the period under our share repurchase program.

We utilized approximately $97 million of the $750 million buyback authorization in Q1. And we expect to remain aggressive with share repurchases throughout 2011.

Turning now to the balance sheet and cash flows. First quarter operating cash flows were $108 million, driven by collections from the seasonally strong fourth quarter.

Our cash and short-term investments ended the March quarter at approximately $682 million. Even with $97 million of cash being utilized for share repurchases, our net cash position grew slightly from Q4, due to the level of cash provided by operating activities.

And finally, with respect to Q1 results, depreciation and software amortization was $25 million and capital expenditures were $8 million.

The following is our guidance for continuing operations in Q2 2011. Revenues in the range of $465 million to $495 million. At the midpoint, this is sequentially up approximately 2%. We expect server and storage semiconductor revenues to be sequentially up in Q2. We expect networking revenues to be sequentially stronger in Q2 as well. Gross margin, excluding special items, is expected to be between 52% and 54%. Operating expenses, excluding special items, are expected to be in the range of $190 million to $200 million.

Interest income and other and interest expense, excluding special items, is expected to net to income of approximately $5 million. Special items are expected to net to approximately $35 million to $55 million. The GAAP and non-GAAP tax provision is expected to be approximately $7 million for Q2. We expect Q2 GAAP income per share from continuing operations in the range of negative $0.02 to positive $0.07, and non-GAAP income from continuing operations in the range of $0.07 to $0.13.

The share count is expected to be approximately 610 million shares for both GAAP and non-GAAP purposes, as we expect to continue to execute on our share repurchase program. In addition, we expect depreciation and software amortization of approximately $17 million and capital expenditures of approximately $20 million.

And finally, regarding the tragedy in Japan and its impact on our business, we did not experience any global supply constraints in this most recent quarter. LSI shipped less than 2% of its Q1 sales into Japan, and we have no manufacturing operations there. So our direct risk is relatively small. We've been working closely with our suppliers. And in our guidance, we have comprehended any supply-related risk.

As you would expect, there remains an inevitable element of risk that one of our customers may be impacted by shortages that could affect our business. We're not aware of any such situation, but we'll continue to monitor this closely.

As Abhi noted, the long-term fundamentals of our semiconductor businesses are solid, and we are well positioned as the #1 or #2 market leader in our served markets.

And 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. Ryan, will you please give the instructions for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jim Schneider with Goldman Sachs.

Gabriela Borges - Goldman Sachs Group Inc.

This is Gabriela Borges on behalf of Jim. You mentioned the systems divestiture should close in the next few weeks. Do you expect that to be within the 60-day window you originally guided to? And what are the remaining steps left in the approval for this?

Abhi Talwalkar

Yes, when we guided that, we said that we would close some time by early to mid-May, and we remain on track to do that. Relative to any remaining steps, certainly, one major hurdle, which is HSR approval, that's been achieved. And we continue to make progress on closing conditions and don't foresee any issues.

Gabriela Borges - Goldman Sachs Group Inc.

Great. Thanks, and if I could just ask a follow-up. Given the pending consolidation in the hard drive market, how do you think it's likely to impact your Preamp business? And can you quantify how big that business is right now?

Abhi Talwalkar

We haven't quantified the size of that business. We have provided color in the past where we've shared that, they were around 35% to slightly higher percent market share of that business. In terms of the consolidation or potential consolidation of the market, as these 2 major deals come to close, we think, in terms of the long-term, we think that's a positive that will, I think, create increased motivation for the remaining companies to have dual sources for critical technologies, such as Read channels and SoCs. And as a #2 with share in the low-20s, I think that only bodes well for LSI long-term.

Operator

Our next question comes from Kaushik Roy with Wedbush.

Kaushik Roy - Wedbush Securities Inc.

Thank you. I have one question on operating margins or OpEx. You mentioned that by end of this year, you'll get to 17% and Q1 was 12%. If I take the midpoint for June, I'm getting to 12.4%. So what I'm trying to understand is, how you can get to that 17% by the end of this year? Is it mostly because of revenue growth, or is it more in OpEx savings?

Abhi Talwalkar

We are expecting based on the ramps of programs, the market positions that we hold with our key customers and so forth to see significant growth in the back half of the year. And that's a significant driver to us getting to what we said earlier, which is achievement of our business model target of the 17% by the end of the year.

Kaushik Roy - Wedbush Securities Inc.

And then for 2012, it seems like the revenues from continued operations was -- grew 18%, which is last year. So what are the expectations for revenue growth this year for the continued operations? Any color will be helpful.

Abhi Talwalkar

Yes, I think you said 2012, but Kaushik, I think you meant 2009 to 2010, the go-forward business grew 18%. And your question, I think is relative to color for this year?

Kaushik Roy - Wedbush Securities Inc.

Yes, yes.

Abhi Talwalkar

Right, we're not providing guidance for the full year or guidance beyond our Q2. As you know, we've certainly been investing ahead of revenue for several years now and trying to build our core businesses, and we expect those ramps to continue to come online to help us drive exciting growth for the company.

Operator

Our next question comes from the line of Craig Berger with FBR Capital.

Craig Berger - FBR Capital Markets & Co.

Thanks for taking my question. Could you just give us a little detail into what we should expect in the hard disk drive SoC market this year? I mean, should we expect -- certainly it’s been -- it feels like it's been muted for a number of quarters. Do we expect to see normal seasonality in the second half?

Abhi Talwalkar

Yes, I mean I think there's certainly a lot of moving pieces, everything from the different data points relative to TAM. There's certainly a debate out there relative to where the PC TAM is going to end up, which is certainly a big factor for the hard disk drive TAM. And also, there's been some color provided relative to the tragedy in Japan and the impact it might have in terms of building out complete drives. So a lot of moving parts and a lot of ambiguity. In terms of how we're thinking about it, relative to Q2, we're basically assuming that TAM is going to be flat to Q1, roughly 159 million to 160 million units or so. We do expect growth obviously in the second half and assume that we'll see return to normal seasonality, but Q3 still is a bit unpredictable. Again, largely tied to the supply issues.

Craig Berger - FBR Capital Markets & Co.

Just as a follow-up on hard drive, I mean, do you guys view that as sort of a mid-single digit grower over the long-term, is it a double-digit grower sort of the way Intel suggests? And then, also as part of that, I have gotten a little bit of investor questions about whether some of your SATA content gets integrated into the Romley system, and can you just address that? Thank you so much.

Abhi Talwalkar

Yes, your first question was around just long-term hard disk drive TAM growth? Is that correct, Craig?

Craig Berger - FBR Capital Markets & Co.

Yes. Unit growth, right.

Abhi Talwalkar

Yes, I mean, I think unit growth is probably in the mid, high-single digits sort of level, and certainly it could be higher depending on how things, such as tablets and effect tablets might have with PCs, as well as flash and SSDs might have. But I would say that would probably be a conservative number in terms of unit growth. And regardless from an LSI standpoint, whether it's the second half or into 2012, our growth rates are expected to be considerably higher, just given the share gains that we've accumulated over the last 2, 3 years and those programs coming into production. So we feel pretty good, really, regardless of how strong the hard disk drive growth is, whether it's mid-single digits or high-single digits or better than that. In terms of your second question, just so I understand the question correctly, Intel SATA in the chipset?

Craig Berger - FBR Capital Markets & Co.

Yes.

Abhi Talwalkar

Well, SATA has been available in the chipset for some time. If you're referring to SAS in Intel's Romley chipset and what impact that might occur, maybe that's the question. We don't see a material impact relative to that. That's a very low-end sort of offering and there's a big hierarchy across RAID offerings within the server itself. We participate at every single point. We'll even have RAID software available for support of that silicon on Intel's chipset, as well as our complete full family that ranges into very, very high-end RAID adapters as well.

Operator

Our next question comes from the line of Parag Agarwal with UBS.

Parag Agarwal - UBS Investment Bank

Thanks for taking my question. Talking about your networking business. In terms of growth, how should we rank it with the growth in U.S. storage semiconductor business? And also, how should we think in terms of operating margin for this business going forward?

Abhi Talwalkar

Our networking business, certainly, our investment areas and networking have been averaging anywhere from 25% to 30% annual growth rates, and we certainly expect to do that level of growth this year as well. Because the way we've characterized the overall aggregate networking business is we should expect it to grow despite the legacy business dropping around $50 million to $70 million this year. So that's a little bit of color relative to our networking growth. And I would say, relative to other growth areas, our investment area networking growth rates are certainly among the top 2 in terms of just overall growth rates. In terms of operating margin question, your question -- just so I can understand it again, can you repeat it please?

Parag Agarwal - UBS Investment Bank

So how does the operating margin of networking business compare to your corporate average? And how should -- what should be the trend going forward, albeit there would be any increases, so when do we think it should be accretive to the corporate operating margin?

Abhi Talwalkar

Yes, Parag, that's not -- we're not going to provide color relative to that. I mean, we're still in an investment cycle, the business is profitable, and so forth, we continue to see expansion of operating margins for that particular business. Obviously, it's very attractive, just given gross margins are typically in the 60-plus to as high as 70% range. And we're delighted that it continues to grow at about 25% CAGR.

Parag Agarwal - UBS Investment Bank

Okay, perfect. So in terms of growth of that business, the key drivers are going to be wireless infrastructure in 3G and 4G departments, or is there any other factor that will drive that business?

Abhi Talwalkar

Well, I think we have certainly had a big focus in wireless and our penetration across wireless base stations, as well as RMCs and even media gateways through a combination of standard and custom products has clearly been a big driver of growth for us for that business. And will continue to be. We're far from done tapping into that full potential. We are also starting to see a lot of design wins that we accumulated over the last several years start to come into production for the enterprise sort of side of the business, which is around LAN connectivity, both in terms of PC connectivity, server connectivity, as well as routers and switches. So that will start contributing as well this year to that growth.

Operator

Our next question comes from the line of Sujee De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC

Now that we're talking about pro forma revenues, can you update us on what revenue run rate you'd have to get to, to achieve the same 17% target operating margin model yet?

Abhi Talwalkar

Yes, I want to reiterate a couple of things. One is relative to timing. Our expectation is that we achieve its current business model targets by the end of the year. As to the factors that drive that, yes, revenue growth is significant, as we just said -- but it depends a lot on product mix and other factors as well. Having said all that, we would probably feel comfortable with a range of revenue, I would call it, $525 million to maybe $575 million of revenue where we would be at that level of business model target.

Sujeeva De Silva - ThinkEquity LLC

Okay, great. And then someone asked about the risk associated with Romley, but can you talk on the flip side about the opportunity you have, as Romley ramps in terms of your share and incremental content on servers?

Abhi Talwalkar

Yes, we believe that we have the opportunity to gain share through the Romley transition. We've been able to secure additional business and additional sockets that are in development. So we feel that Romley will be additive to our share position as we go into the full year of 2012 and see Romley transition, which will probably take 6 to 9 months into 2012.

Sujeeva De Silva - ThinkEquity LLC

And content, Abhi, increase?

Abhi Talwalkar

Yes, and content include -- when you say content, I mean, certainly, share increase via more sockets, but what are you asking in terms of content?

Sujeeva De Silva - ThinkEquity LLC

Per server, if you have a higher content opportunity as well?

Abhi Talwalkar

I think there can be because there's other product that we brought into the product line. So I mentioned a number of software products that we have around flash and storage optimization, CacheCade and FastPath. Those are softwares sort of products that will have an attach rate, as we're successful in enabling our OEMs to sell and advocate and deliver value through those products. We have a SAS switch platform, and we also expect to intercept Romley in a more meaningful way relative to our WarpDrive flash solutions as well. So absolutely focused on increasing LSI's content per server as we go forward through our current foundation but also these new products.

Sujeeva De Silva - ThinkEquity LLC

And lastly, one quick housekeeping question on the buyback. Were you able to buy back shares every day since you've announced it, or was there a lockup period around the earnings? Just so I understand.

Abhi Talwalkar

Yes, there was a blackout period. So we purchased through the majority of March and then went into a blackout period given at quarter end.

Operator

[Operator Instructions] And our next question is a follow-up from the line of Craig Berger with FBR Capital.

Craig Berger - FBR Capital Markets & Co.

Thanks for taking the follow-up. Did you -- were you able to detail some of the specific design wins that you talked about that will help you get your operating margins up in the second half? And maybe you could just break it out, hard disk drive versus networking and other storage?

Abhi Talwalkar

We've provided some color, Craig, at a high level. I can certainly repeat that here in terms of where we expect growth this year. We certainly expect to continue to see growth as we ramp enterprise, SoCs into Seagate's various enterprise drives. We also have SoCs coming online in Seagate products in the second half as well as another HDD OEM in the second half. And these are designs that were won several years ago that are at sort of the final stages of customer calls and so forth and ramp. So we certainly expect those 2 to be contributing to growth. As we've said earlier, we expect our networking business to continue to grow as well. Our investment areas have done very nicely. And then we've got a number of new products in the form of SAS switch, as well as WarpDrive and so forth that will also contribute to our growth through the year.

Craig Berger - FBR Capital Markets & Co.

Is the hard drive wins at Seagate, is that incremental for you guys? Are you coming at the expense of STMicro, or is that a continuation of existing sockets?

Abhi Talwalkar

Well, they’re share gains, and they’re displacing other competitors out there. And certainly ST would be one of them.

Craig Berger - FBR Capital Markets & Co.

And then in the networking wins, can you be anymore specific in terms of product areas or customers?

Abhi Talwalkar

Yes, and I'll just refer to the prepared remarks. So clearly, we've had some of our greatest success in wireless is around the content we have in both the Nokia Siemens base station products, as well as Ericsson's base station products. So Ericsson, who's the #1 in the market and actually gained some share last quarter in their wireless infrastructure space. Their RBS 6000, which is -- I got to believe it's the highest volume running wireless access platform out there, but the network processor there is based on LSI. And so actually those are examples of how we're participating. We also have custom content in Huawei's wireless access platforms as well. And there's also media gateways that are being built out. There's more than just -- voice is traversing wireless networks, and that's also dragging with it our DSP product.

Craig Berger - FBR Capital Markets & Co.

That's helpful detail. On the operating expense, given that you guys have been forward spending some of these product ramps, does that suggest that you can hold the line pretty tight on where OpEx is guided for Q2, or how much might that rise as we go through the year?

Abhi Talwalkar

Well, I mean, we've certainly been very tight in terms of OpEx control despite taking on a tremendous amount of design wins over the last 2, 3 years. Our mission continues to be the same, which is to get to our business model performance, and as we do that, maintain tight controls on operating expenses. Relative to Q1 and Q2, as Bryon alluded in his prepared remarks, Q1 came in a little bit light, relative to our midpoint of $195 million, came in at $191 million because of some linearity associated with mass cost and so forth. But we continue to track to sort of our expectations for the first half around $195 million sort of level. And that's consistent with the color we've provided for the go-forward company, coming off a $230 million OpEx midpoint for the whole co., and $35 million off of that.

Operator

Our next question is a follow-up from the line of Kaushik Roy with Wedbush.

Kaushik Roy - Wedbush Securities Inc.

Thank you. Are there any changes to this tax structure going forward?

Bryon Look

No, not really. That's all incorporated in the guidance we provided, which would be for $7 million on a GAAP or non-GAAP basis for the current quarter.

Kaushik Roy - Wedbush Securities Inc.

And beyond Q1, what type of tax rate should we assume?

Bryon Look

Yes, if I were to model something, be something like a 10% sort of rate. Longer term, it's probably closer to about 15%.

Kaushik Roy - Wedbush Securities Inc.

Okay, and then you mentioned that you'll be aggressive in the buyback. Can you give some quantitative color like, by what time frame do you feel like you can use up the whole buyback?

Bryon Look

Well, we will be aggressive, and we think we’ve demonstrated that. It’ll be a function of market conditions as it always is. It's factored into the guidance we've provided in terms of share count.

Kaushik Roy - Wedbush Securities Inc.

Okay, and lastly, can you give some color on what you're doing on the SSDs or flash solutions. I know you're doing quite well on the PCI E-based flash solution, but what about SSD controllers?

Abhi Talwalkar

Yes, Kaushik, our SSD controller focus primarily has been in the enterprise SSD space. We've been public about our participation in Seagate's enterprise SSD drives and their pulsar family. We are also well down the development path with 2, 3 other enterprise SSD manufacturers, both of the hard disk drive as well as of the flash variety. We have some opportunistic activity in client SSD controllers as well. So that's sort of what we're doing today in the SSD, SoC sort of space. And then obviously, we've got a pretty extensive focus in the enterprise sort of use of flash through various products.

Operator

Our next question comes from the line of Lauren Stoller with Lazard Capital Markets.

Lauren Stoller - Lazard Capital Markets

Thanks for taking my question. I was just wondering if you could force rank the factors that you said would drive your growth in the second half of the year?

Abhi Talwalkar

From a rank standpoint, clearly, HDD is at the top of the list, given the expected share gains that we have and the number of products that will be coming to market. Then I would put our networking activities next in terms of our investment area and networking activities. But we certainly expect to grow our SAS server-related business as well. And then, we've got some new products that we have plans for growth as well. So that would be sort of rough order.

Lauren Stoller - Lazard Capital Markets

Okay. And then in HDD, your expected share gains are mainly at Hitachi and Seagate, right?

Abhi Talwalkar

That's correct.

Lauren Stoller - Lazard Capital Markets

Okay, and then in networking, it's the DSP and...

Abhi Talwalkar

Well, we will see share gains across really all product families and networking. So network processors, that are heavily used across 3 of the top 5 wireless infrastructure or base station providers. We also have custom content within wireless access that will continue to see growth. And then DSP is clearly, as we see the ramp continue at companies such as Cisco and Ericsson for the use of our DSPs and Cisco's ISR router as well as Ericsson's media gateway across their wireless infrastructure product line.

Lauren Stoller - Lazard Capital Markets

Okay, great. That's very helpful. Thank you.

Operator

Our next question comes from the line of Parag Agarwal with UBS.

[Technical Difficulty]

Parag Agarwal - UBS Investment Bank

So on your -- a question about your RAID business on the gross margin side. What's the value to the 1Q gross margin...

[Technical Difficulty]

Abhi Talwalkar

What was the rest of your question?

Parag Agarwal - UBS Investment Bank

Also the revenue, what was the revenue contribution for the first quarter?

Abhi Talwalkar

Yes, we're not breaking out the revenue itself. In terms of gross margins, the gross margins were comparable to the rest of the product line or average of the company.

Okay. Thank you. 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 telephone replay of this conference will be available beginning today at approximately 4 p.m. Pacific Daylight Time and will run through 9 p.m. Pacific Daylight Time on May 5. The replay access numbers are 1 (800) 642-1687 within the U.S. and 1 (706) 645-9291 for all other location. 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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