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LSI (NASDAQ:LSI)

Q2 2011 Earnings Call

July 27, 2011 5:00 pm ET

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.

Kaushik Roy - Merriman Capital, Inc.

Stephen Chin - UBS Investment Bank

James Schneider - Goldman Sachs Group Inc.

Sujeeva De Silva - ThinkEquity LLC

Hans Mosesmann - Raymond James & Associates, Inc.

Harlan Sur - JP Morgan Chase & Co

Srini Pajjuri - Credit Agricole Securities (NYSE:USA) Inc.

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 second quarter and guidance for the third quarter of 2011.

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. In addition, I would like to point out that we completed the sale of our External Storage Systems business on May 6, and that the results of that business are shown as Discontinued Operation in our income statements.

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, our first quarter 10-Q and today's earnings release.

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

Abhi Talwalkar

Good afternoon and welcome. As you know, over the past several years, LSI has been undergoing a vast transformation. We've been investing ahead of revenue to strengthen our core businesses while divesting businesses with lower profitability and growth profiles. The net result is that LSI's positioned to deliver above market growth, generate greater profitability and increased shareholder value. We're now entering a new, exciting phase in the evolution of the company where we are driving top line and bottom line growth, as our design win pipeline of new products begins to materialize into revenue. Our Q2 revenues and guidance for Q3 begin to reflect share gains and new program ramps at new and existing customers.

We executed solidly in Q2 with revenues above the high end of guidance, driven by strength in our HDD and Networking businesses. We're also active in buying back stock during the quarter, repurchasing 42 million shares. Year to date, we have now repurchased a total of 56 million shares and expect to continue to be aggressive with share repurchases as we move through the year. Our revenue guidance for Q3 represents 10% sequential growth from Q2. While there is uncertainty in the macro environment and demand outlook for certain segments, we have factored in various inventory puts and takes and are comfortable with our growth projections for Q3.

Our growth is being driven by increases in our Hard Disk Drive business, where we are seeing the materialization of share gains in existing client and enterprise platforms, as well as the launch of new client SoC programs with existing customers. We're also expecting strong growth in SAS and networking state [ph] products in Q3. We have been talking for some time about our rich design win pipeline and we are now beginning to see its impact as we were expecting.

We remain committed to driving earnings growth and getting to our current business model target. The midpoint of our guidance suggests that we will generate approximately 15% non-GAAP operating margins in Q3, representing a 270 basis point sequential expansion from Q2 and demonstrating the earnings leverage we have created.

Going forward, we believe LSI is well positioned in large, growing markets with solid fundamentals. We expect to benefit from growth in the deployment of servers, storage and networking equipment. This is being driven by major trends such as wireless infrastructure build outs supporting rich mobile clients and mobile Internet growth, the growth in adoption of commercial and private clouds, large build outs supporting social networking and new emerging web platforms, as well as continuing growth in data and video traffic. The vast majority of LSI's business is influenced by business and service provider IT spending, which is benefiting from strong corporate balance sheets and the need for companies to use IT technology to stay competitive.

Now on to review additional business highlights for Q2. I'll begin with our Server and Storage-related businesses which include our SAS, ServeRAID adapter and software, SAN and HDD businesses. Based on our demand forecast, visibility into various end customers and earnings releases by peers serving enterprise IT markets, data center growth incorporate upgrades in areas of server compute and data storage continue to show seasonal patterns going into the second half, which is typically up from the first half.

For SAS and Servers, we have been awarded a 6-gig controller design on HP's Romley generation of servers, which begin shipping at end of this year. This will expand our customer base to include all top 10 server OEMs for 6-gig SAS solutions when the industry transitions to Romley in 2012. Earlier this week, LSI announced that it was the first in the industry to sample the next generation 12-gig SAS ROCs controllers and expanders to major server OEMs, underscoring our clear leadership in SAS. We believe we're 6 months ahead of our nearest competition for 12-gig SAS. Our performance and timely market leadership will enable us to grow share in the Romley generation and extend it further when 12-gig SAS begins shipping in server adapters in late 2012 and subsequently in other motherboard in 2013.

In ServeRAID, we have captured a number of Web 2.0 data center wins and our business continues to grow at key OEMs such as IBM, Dell, Cisco and Oracle. Our Channel business, which serves end customers through distributors and resellers, has been a great avenue for us to participate in the build out of Web 2.0 platforms in the cloud. LSI products are being used by the likes of Amazon, Rackspace, Akamai, Google and numerous others.

Flash is becoming a quite exciting area, and we are experiencing a high level of customer activity. We're expanding and increasing focus in storage and server application acceleration, bringing the performance advantages of been NAND flash to enterprise storage, server and networking applications. We're developing and delivering both software- and hardware-based solutions. LSI's CacheCade software, which accelerates application performance by intelligently placing more frequently used data into the higher performance SSD layer, is now being offered by both Dell and IBM.

We are also seeing significant customer activity with our PCI Express-based flash adapters, called WarpDrive, recently securing a design with another Tier 1 storage system OEM. The WarpDrive card plugs into a standard PCI slot in a server to maximize the transactional I/O performance of applications such as Web serving, data warehousing and data mining. WarpDrive is enabled by LSI's industry-leading SAS controller. As the market leader in SAS with established relationships with the top server OEMs, WarpDrive is a natural adjacent product allowing customers to utilize WarpDrive's flash capability within a familiar and well-supported LSI SAS ecosystem. We expect to continue to build our design win funnel for WarpDrive through 2011, with revenue contributions beginning in 2012.

With our custom silicon capability, we have numerous SSD Controllers at various phases of development and qualification. We have recently secured additional wins for next-generation 12-gig SAS flash controllers with key players in the SSD space.

In Hard Disk Drives, we saw TAM expansion from Q1 to Q2 and growth from our customers. We are seeing the materialization of share gains across both client and enterprise platforms. In fact, we set new quarterly unit shipment and revenue records for both SoCs and preamps in the second quarter and are expecting additional growth in the second half of this year. In addition, our development milestones continue to be on track, and we have now entered volume production on our second generation of 40-nanometer SoCs, which is a proof point of our technology and execution.

Now I'd like to review the Networking business, where we continue to experience strong momentum driven by wireless infrastructure build outs, growth in video traffic and upgrades to enterprise networks. Given its future potential, wireless has been a key focus for us as we drive to maximize LSI's footprint in base stations and wireless back-end infrastructure. Our offering of advanced network and communication processors, multi-service processors, DSPs and custom silicon has enabled us to win meaningful positions across all top 5 wireless equipment providers namely, Ericsson, Nokia Siemens, Huawei, Alcatel-Lucent and ZTE.

Our wireless-related revenues have been growing, led by successful growth of Ericsson and Nokia Siemens base stations. We're also benefiting from new ramps of custom products for key base station functions within Huawei's and ZTE's offerings. In terms of new wins at top 5 OEMs, we have secured both standard product and custom product wins which position us well to increase our dollar content in base stations going forward. A key milestone is the adoption of our multi-core communications processor by top wireless equipment vendors such as Ericsson. Building upon our very successful network processor heritage, which addresses the data plane market, our multi-core product extends our reach into the adjacent communications processor market, which addresses the control plane. Our multi-core processor offers industry-leading control plane and transport processing for multi-radio base stations in a single SoC and will start contributing to revenues in 2012.

In the enterprise space, we again increased client Gigabit Ethernet PHY shipments to the leading PC chipset company in Q2, and expect to ship an integrated single-chip Ethernet PHY and controller into platforms for the Romley generation of servers later this year.

Before I turn the call over to Bryon, I just want to reiterate that we are now entering an exciting time for LSI, where we are well positioned to increase shareholder value. We're excited about the broad customer activity we are seeing across multiple product lines, growth of share in key businesses and the top line growth we expect to generate.

Now let me hand the call over to Bryon, who will go through our financial details.

Bryon Look

Thanks, Abhi, and good afternoon, everyone.

As a reminder, LSI completed the sale of its External Storage Systems business to NetApp on May 6, 2011. The financial results of the External Systems business have been classified as Discontinued Operations in LSI's financial statements. Our ongoing business is referred to as Continuing Operations. The results we are covering, as well as our guidance for Q3, will be for continuing operations.

Now turning to our financial results for the quarter, beginning with revenues. Q2 revenues were $501 million, sequentially up 6% from $473 million, and above the high end of our guidance range. Our Networking Semiconductor and Server and Storage Semiconductor businesses performed well relative to expectations and delivered solid quarters, representing sequential growth from Q1. Our Server and Storage Semiconductor revenues, which includes products from our ServeRAID adapter and software, SAS, SAN and HDD businesses, were sequentially up $23 million or 7% to $359 million. Server and Storage semiconductors represented 72% of total revenues in the second quarter. Q2 revenues in our Networking business were $117 million, sequentially up $5 million or 4%, and represented 23% of total revenues for the quarter. Revenues for the IP business were relatively flat sequentially at $24 million.

Moving next to gross margins. LSI's Q2 gross margin, excluding special items, was 51.9%. Gross margins were sequentially down approximately 50 basis points. Contributing to this decline were unexpected costs associated with manufacturing scrap, along with higher gold prices.

Moving next to operating expenses. R&D, together with SG&A expenses excluding special items, totaled $198 million in Q2, following a lower-than-expected spending level in Q1. Operating expenses were within the Q2 guidance range, with the sequential increase primarily being driven by compensation, along with increased litigation costs. Non-GAAP operating margin for the quarter was 12.4% or $62 million. Interest income and other, net of interest expense excluding special items, was $6 million for Q2.

Now let me turn to the special items we recorded in the second quarter which netted to $31 million. Special items, primarily noncash, included $29 million in amortization of acquisition-related items, $14 million of stock-based compensation expense and offset by a net $11 million favorable amount associated with 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. The tax provision for Q2 was $9 million.

On a GAAP basis, the second quarter income from continuing operations was approximately $28 million or $0.05 per share. Second quarter GAAP net income, which includes income from discontinued operations, was approximately $0.48 per share, primarily due to the gain we recorded relating to the sale of the External Systems business. Non-GAAP income from continuing operations was $60 million or $0.10 per share. The weighted average share count for the period, for both GAAP and non-GAAP purposes, was 611 million shares. This includes the weighted average benefit of purchasing approximately 42 million shares during the period under our share repurchase program. We utilized approximately $397 million of our current $750 million buyback authorization in the first half of the year, and we expect to remain aggressive with share repurchases.

Turning now to the balance sheet and cash flows. Operating cash flows for Q2 were $38 million, and $146 million for the first half of 2011. Operating cash flows were sequentially down from the first quarter, primarily due to the effects associated with the sale of the External Systems business, along with some inventory pre-builds we completed in Q2 in support of expected Q3 growth. Cash and short-term investments ended the June quarter at approximately $907 million, up 33% from Q1. Finally, with respect to Q2 results, depreciation and software amortization was $17 million, and capital expenditures were $15 million.

The following is our guidance for continuing operations in Q3 2011. Revenues in the range of $535 million to $565 million, which would represent a 10% sequential increase at midpoint. We expect both our Server and Storage Semiconductor and Networking Semiconductor businesses to deliver sequentially higher revenues in Q3. Gross margin, excluding special items, is expected to be roughly flat at 52%, plus or minus 1%. Operating expenses, excluding special items, are expected to be in the range of $198 million to $208 million. Interest income and others, 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 $10 million for Q3. We expect Q3 GAAP income per share from continuing operations in the range of $0.01 to $0.11, and non-GAAP income from continuing operations in the range of $0.11 to $0.17. The share count is expected to be approximately 575 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 $16 million and capital expenditures of approximately $20 million.

In closing, we delivered solid revenues in non-GAAP operating margins in Q2, while positioning ourselves for strong revenue growth and significant non-GAAP operating margin expansion in Q3.

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. David, will you please give the instructions for the Q&A session?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Harlan Sur of JPMorgan.

Harlan Sur - JP Morgan Chase & Co

Abhi, within your -- if we're looking at the third quarter, within your Server and Storage segment, can you just rank order; server, external storage, HDDs, in terms of growth contribution in Q3? And also if you could just do the same for your Networking business as well.

Abhi Talwalkar

Across the different segments? Let me start here, and let me see if I can answer your question. Let me give you a sense for where the growth is coming from, that's driving a 10% midpoint guide. I'd say we have 3 components that are contributing to it. The first component is in our HDD business, where we are seeing a step function increase in share gains in existing SoCs and in existing customers. The second sort of component that's enabling us to drive growth in the Q3 is due to new programs and products ramping at existing and new customers across the board. This is consistent with the rich design win pipeline we've been talking about, and we're starting to see that materialize. The third component is sort of the expected seasonality from first half to second half that is associated with our end markets, which are largely 80% comprised of enterprise and service provider IT spending. And certainly consistent with what you've seen from other companies such as IBM, EMC and Intel's Data Center business.

Harlan Sur - JP Morgan Chase & Co

On the Networking side, can you maybe articulate the same type of breakout as well?

Abhi Talwalkar

Well, that was the break out for the entire aggregate revenue base for the company. We are seeing networking growth from Q2 to Q3, and it's driven by wireless infrastructure growth. It's also seeing contribution from new product ramps at customers with new products.

Harlan Sur - JP Morgan Chase & Co

And then just a follow-up, obviously, you've got a number of product cycles and tailwinds here in the second half of the year. If we just, and I'm thinking about the fourth quarter now, if we step back and take a look at what would be some of the normal seasonal trends in the fourth quarter, I would assume that your business would see further revenue growth as Q4 is the strongest quarter for your enterprise storage products. Is that how you see it as well from a seasonal perspective?

Abhi Talwalkar

Well, I mean -- I don't think the industry has experienced a normal seasonal second half for 2 years given the downturn, given last year's snapback and inventory work off. But if you look at over a 10-year period, yes, our second half, again, driven by business and service provider IT spending, is up from the first half. Typically, Q4 is up from Q3. I'm certainly not going to attempt to guide Q4, but we would expect Q4 up from Q3.

Operator

Next question comes the line of Srini Pajjuri from CLSA (sic) [Credit Agricole] Securities.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Abhi, just to follow up to the previous answer. On the HDD side, can you maybe help us understand where in the share gain ramp we are at your existing customer, both from a client standpoint, as well as from an enterprise standpoint?

Abhi Talwalkar

I mean, I think let's pick the enterprise one. We're still ramping. We're not at sort of full production run rate levels, relative to enterprise SoC. In the client space with our existing customers, in particular, our largest customer, we have a number of things that are going on. We have the sort of step function share gain that I mentioned earlier that is occurring with existing SoCs. And then we also have new SoCs that are ramping and will be ramping throughout the second half.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

And what do you think is causing that step function increase? Given the comments by your customer, is it because the other supplier are not able to supply? Or is this a new platform that they're ramping? If you could give us some color, that would be helpful.

Abhi Talwalkar

No, it's not a new platform that's ramping. Again, it's SoCs that have been shipping for some time and they're in production today. And LSI is benefiting from a material shift in share from this customer.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

And then my other question, you mentioned that you won a design at HP for the Romley generation. Just wondering how we should think about the magnitude and the potential, and also if this is a sole source design?

Abhi Talwalkar

Yes, we did win a design. This design has been in development for quite some time, expected to start shipping when server OEMs start shipping Romley-based platforms later this year. We see it as a meaningful win in a number of ways. One is we will start participating again within HP's server-related fast spend. And it's certainly not their entire business, but it's a good-sized portion of their business. I think the other meaningful aspect here is we are back into the account. And we're back into the account at a point where we feel our roadmap for SAS going forward is the strongest it's ever been in terms of time-to-market leadership and performance leadership.

Operator

You next question comes from line of Craig Berger of FBR.

Craig Berger - FBR Capital Markets & Co.

I guess I'm curious as to how much the macro picture is baking into your guidance. You guys are clearly outperforming. The new design wins are ramping, and that's great. What have you factored in for macro? And kind of maybe how many -- what's your turns needed to hit the midpoint of guidance?

Abhi Talwalkar

Well, I mean, coming into the quarter relative to where our bookings are, relative to turns that we expect nothing abnormal, very normal, I would say. In terms of what macro aspects have been factored into our forecast, I'll give you the various data points. Relative to the HDD TAM, we're factoring in what our largest HDD customer had sort of disclosed in their earnings call, a TAM of about $165 million to $170 million, which I think is sort of consistent with also where some of the PC forecasts have been, given the softness in terms of U.S. and mature market consumer retail, where PC's annual growth is probably around the mid-single digits sort of level. In terms of server- and storage-related spending, I guess we would characterize it as modest seasonality, which is Q3 is up from Q2. But again, nothing inconsistent from what we're seeing from both our major customers, the likes of IBM, Intel, from a server standpoint. So I think we're taking a modest approach relative to seasonality into the second half.

Craig Berger - FBR Capital Markets & Co.

And then just as a follow-up, can you help us understand how deeply penetrated your new hard drive products are at Seagate, relative to sort of the coproduced products you used to sell? What the margin implications are as you ramp higher? And just comment on your gross margins. You kind of -- I think the guidance range is a point lower this quarter.

Abhi Talwalkar

Craig, just due to customer confidentiality and just sensitivities around that, I can't give you a precise number. But we are benefiting from a material shift relative to that relationship. I'll let Bryon comment on gross margin.

Bryon Look

Relative to the gross margins, we guided to basically flat, Q2 to Q3, at 52% plus or minus 1%. A number of factors that are driving that: if you look at where revenue growth is coming from, a significant growth in the Hard Disk Drive business in Q3. So product mix is one factor that we've factored into the gross margin guidance. We are continuing to see the effects of higher commodity prices, specifically gold, and that's another factor that plays into the margin assumptions that we have.

Operator

The next question is from the line of Sujee De Silva of ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC

Taking to account the gross margin trends and some of the operating leverage, can you update us on your long-term target expectations given the divestiture?

Abhi Talwalkar

We have not disclosed a new long-term target, so we're still operating to our historical target. Obviously, that target is old and needs to be refreshed, something that we plan on doing at an Analyst Day that we'll have later this year. I will say that we had talked about gross margins in the last call a quarter ago, and said people should expect this year to be somewhere flattish around 52, which is what we're experiencing, just given mix and a number of other factors. We did say, however, that our goal and our aim is certainly to improve gross margins from there as we go into 2012, and you'll get much more clarity on both a new target as well as direction on gross margins at our Analyst Day later in the fall.

Sujeeva De Silva - ThinkEquity LLC

And then on the question of 3Q growth, you said both storage and networking would grow. Can you talk about which one would grow faster and whether you're still having networking legacy headwinds in your 2Q or 3Q guidance?

Abhi Talwalkar

I mean, Storage is growing faster. Storage, from an HDD standpoint, is growing the fastest. We certainly have growth across Server and Networking categories, as well. We do have some headwind, as we characterized the Networking business. The Networking business did about $140 million in revenue in 2010. We said that people should expect about a $50 million to $70 million decline in 2011 and we're sort of tracking to that level at the midpoint of the year here.

Operator

The next question comes from the line of James Schneider of Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

I was wondering if you could maybe just make a clarification on the step function change in share at one of your client hard drive customers? Is that step function just lasting for this one quarter, and then you're kind of plateauing at this level? Or are you stepping up again in Q3 and Q4?

Abhi Talwalkar

It's a step function that moves us up this quarter, and at sort of a new run rate level relative to this particular part of the business.

James Schneider - Goldman Sachs Group Inc.

So that's not going to keep going up from here?

Abhi Talwalkar

There's not another step function that's coming. Clearly, we have other SoCs and so forth in other customers that will be ramping as we go into the 2012 period.

James Schneider - Goldman Sachs Group Inc.

And then just as a follow-up, on the capital allocation front, you've showed a very aggressive buyback which I think investors appreciate. Can you talk about any kind of metrics you're thinking about going forward in terms of percentage of operating cash flow devoted to buybacks on a longer-term basis? And then how you're thinking about that relative to any potential M&A?

Bryon Look

Well, I think the use of cash for buybacks, clearly, we've seen that as an attractive opportunity for the company, and we've been aggressive in doing so. The level buybacks going forward is just going to be a function of different factors. You mentioned M&A, and while we continue to look for opportunities, we're pretty well set relative to needs there. So I think I would stick with what we said in our commentary, and that's that we continue to be aggressive in terms of utilizing our share repurchase program. And clearly, we have a strong cash position. Our operating cash flows for the first half are very strong, and further reinforce our ability to go and use cash for the purpose of buying back our shares.

Operator

The next question comes from the line of Kaushik Roy of Merriman.

Kaushik Roy - Merriman Capital, Inc.

I have 2 questions. First is on margins. It seems like gross margins are likely to stay at 52% because of the hard disk drive mix and because of commodity prices. So question is are you still targeting 17% for Q4 operating margin?

Bryon Look

I would say that if you look at the progression in our results, as well as the guidance we're providing for Q3, we're well on track to be able to move towards that 17% target. That's about a 270 basis point expansion on operating margins going from Q2 to Q3, yielding 15-plus percent just with Q3. So yes, we're still committed to driving to that model. Obviously, it's going to be a function of a number of different factors: growth in Q4, the level of that growth, as well as continuing to manage our costs as we go through the second half of the year.

Kaushik Roy - Merriman Capital, Inc.

And then my second question is on PCIE flash. Look at Fusion-io, they have a market cap of $2.5 billion. Even OCZ was nowhere. Now, they have a PCIE flash that they're selling. And I think last year, in March Analyst Day, I think I saw a flash prototype. I guess my question is when can LSI start generating revenues from PCIE cards and SSD controllers?

Abhi Talwalkar

Yes, Kaushik, it's is a very exciting part of the marketplace right now, as you can imagine. I won't comment on the market cap of another competitor. But I will tell you what we're doing. We've recently formed a division dedicated entirely around this product line, have ramped up and shifted internal headcount, and brought a lot more focus to this opportunity which we believe we're well equipped to participate in and enjoy meaningful share over time. We've been very focused on bringing out new variants of our product. In particular, have just now started sampling a second generation of the product, which enhances the performance, also brings us to support MLC flash as well. The level of activity that we have is pretty extensive. Our hope is to secure numerous design wins through the year so that we can have contribution from this new product line in 2012. And I hope to certainly talk more about this later on in the fall.

Operator

Your next question Parag Agarwal of UBS.

Stephen Chin - UBS Investment Bank

This is Stephen Chin, calling on behalf of Parag. I have a couple questions. First one is just focusing a bit in on the overall visibility that you guys have for the second half. I know that there's a number of puts and takes that are already baked into your guidance. But just looking at both the broader Hard Disk Drive as well as Networking businesses, I guess, how far out is your visibility in terms of Q3, first of all? Is the order patterns from OEMs into the month of September, is that looking pretty good right now? Any color you can provide on that would be helpful.

Abhi Talwalkar

I mean, I would say visibility for Q3, generally good, given we put guidance out there. And our Semiconductor business has fairly expected cycles depending on what part of the business, in terms of bookings and billings and turns and everything, I would say is behaving as expected, nothing abnormal. I think what continues to benefit us, at least in this current environment, is the heavy exposure that we have, the business and service provider spending. Again, 80% of our business is influenced by that. And I think those end markets are generally a bit more stable than certainly consumer electronics or consumer-oriented IT purchases. So visibility is generally okay. I mean, I can't predict what may happen in the fourth quarter or later on in the year depending on some of these fun topics around U.S. debt and European sovereign debt and so forth. But businesses continue to do spend at a stable level.

Stephen Chin - UBS Investment Bank

Just to drill down a little bit more on the Service Provider of portion of the business. I understand that enterprise is pretty healthy right now. But as far as service provider goes, just geographically, did you feel that the lower CapEx in the second half this year from North American telcos, for example, and essentially more modest or more normalized run rate from Chinese telcos, do you think that's much of a risk right now for sort of late Q3 or going to Q4 service provider dimension?

Abhi Talwalkar

I believe we factored that in, and most of our service provider sort of revenue is more influenced by a wireless infrastructure and some of the backhaul associated with that. So we think we've captured that into our forecast.

Stephen Chin - UBS Investment Bank

And the other question I had was also regarding solid state drive technology. I heard your comments on PCI Express and it sounded like it's somewhere more enterprise built. If you could talk about any similar SSD-focused initiatives that might have and the risk reward surrounding that relative to enterprise would be great.

Abhi Talwalkar

Relative to the consumer SSD space, our only point of participation is going to be the flash controller, the chip that's in that SSD, that is playing the controller function for that flash. And in general, we certainly have been participating in that area. We have some designs in development. I would say it's been of secondary focus, with primary focus being around enterprise-related flash applications. But we will continue to monitor that opportunity, and we certainly have the ability to participate there via custom capability as we have been.

Operator

The next question is from the line of Hans Mosesmann of Raymond James.

Hans Mosesmann - Raymond James & Associates, Inc.

A couple of questions on the market conditions today. A lot of investors freaked on Juniper. In that, I don't want you comment specifically, if you have a relationship there. Can you just comment regarding that side of what that company does? Are you seeing any unusual dynamics in terms of order trends, inventories and what-have-you?

Abhi Talwalkar

No, Hans, we have very little business with Juniper. At this stage, certainly, we are working on developing a bigger position in Juniper, especially in the data center space, as they build their data center position over time. But where most of their business is, which is around carrier edge routing, we don't have a lot of business there.

Hans Mosesmann - Raymond James & Associates, Inc.

And then a follow-up on the Romley, on the SAS side of things with your win at HP. You indicated that HP would be ramping this product at the end of this year. Just want to make sure that from your perspective, that this product from Intel has not been delayed. Because there is chatter that this product got delayed, or portions of this server product got delayed into next year.

Abhi Talwalkar

As far as I know, the entire industry is working very hard to support a Romley launch later this year. I think Intel would probably be the best person to ask, relative to what that date is.

Sujal Shah

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

Operator

Ladies and gentlemen, a telephonic replay of this conference will be available beginning today at approximately 4:00 p.m. Pacific Daylight Time and will run through 9:00 p.m. Pacific Daylight Time on August 3. The replay and access numbers are 1 (800) 642-1687 within the United States and 1 (706) 645-9291 for all other locations. The conference ID is 80327485. 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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