LSI Corp. Q1 2008 Earnings Call Transcript

Apr.23.08 | About: LSI Corp. (LSI)

LSI Corp (NASDAQ:LSI)

Q1 FY08 Earnings Call

April 23, 2008, 5:00 PM ET

Executives

Sujal Shah - VP of IR

Abhijit Y. Talwalkar - President and CEO

Bryon Look - EVP and CFO

Analysts

Arnab Chanda - Deutsche Bank Securities

Suji DeSilva

Kaushik Roy - Pacific Growth Equities

Romit Shah - Lehman Brothers

Craig Berger - Wedbush Morgan

Tayyib Shah - Longbow Research

Brian Curtis

Perve John

Hans Mosesmann - Raymond James

Mark Heller - Merrill Lynch

Shawn Webster - JPMorgan

Eric Ghernati - Banc of America

Sanjay Devgan - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LSI Corporation investor relations conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time.

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 - Vice President of Investor Relations

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 opening remarks and highlights from our business and then Bryon will provide first quarter 2008 financial results and guidance for the second quarter of 2008.

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 can also find a copy of the press release and presentation, which highlights the key points from today’s call and provides an overview of our business. This may be particularly useful to new investors.

I also 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 annual report on Form 10-K for the year ended December 31, 2007.

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

Abhijit Y. Talwalkar - President and Chief Executive Officer

Thank you, Sujal. Good afternoon and welcome. Our strong financial results for the first quarter of 2008 represent the third consecutive quarter of delivering revenues that have exceeded expectations. These results underscore the strength we have in our core business and reinforce our strategy to focus on storage and networking. We made significant progress in 2007 in shaping the new LSI and I believe we will continue to see the benefits of our decisions as we move forward.

The world at large is in the midst of an explosion of digital content. The drivers include digital content generation within homes and enterprises. The explosion of video relates services such YouTube and movie downloads. The emergence of digital surveillance and the digitization of various aspects of the healthcare industry to name a few. One thing is for certain, there is no end in sight for the need for storage across all forms.

Growth in content coupled with the proliferation of connected devices and real-time services is driving the evolution of network equipment to take on far greater IP traffic, while also being much more intelligent and how traffic managed and how the data is protected and secured.

With unparallel silicon assistance portfolio of storage building blocks and sharpen portfolio of leading networking building blocks gear to enable intelligent real-time and secured networks LSI is well position to capitalize on this exciting opportunity ahead of us.

There are some key takeaways that I would like you get from this call. We have made solid progress in driving earnings growth in Phase II of our business acceleration plan. We have taken major steps towards our goal of becoming number in hard disk drive silicon by securing the next two generations of enterprise SOCs at Seagate and anticipate accelerating our revenue at Hitachi.

The sharpening of our networking offerings has been well accepted by top tier customers and we are winning with leading products for content inspection, voice and video processing, advance traffic management, as well as data center connectivity. We continue to experience strong design win momentum across the entire family of LSI products and expect these wins to fuel future growth.

Now, I want to review with you the business highlights for last quarter in our storage and networking businesses. I will start with Storage Semiconductors, which includes hard disk drive silicon, SAS as well as SAN.

In hard disk drives, we agreed to acquire Infineon’s hard disk drive business and one key designs at Seagate, taking large steps towards our goal of becoming the number one supplier of hard disk drive silicon.

The pending acquisition of Infineon’s hard disk drive business will expand SoC customer base and accelerate our revenues at Hitachi, the number three global supplier of hard disk drives. We will gain immediate revenues in their desktop and enterprise platforms and solidify our position as a leading supplier. We are well position to grow our business as we move forward with Hitachi.

In addition, we are pleased to announce that we have secured the next two generations of enterprise SoCs at Seagate.

LSI SoCs are expected to ramp in 2010. With these recent wins, LSI plays across all of Seagate’s hard disk drive platforms and continues to be Seagate’s leading supplier of SoC.

In the last call, we highlighted our success in growing sales in our preamp products. Recently, we strengthened our product line with a new notebook offering, which has been qualified at two major hard disk drive suppliers and is expected to complete qualification at two additional hard disk drive suppliers later this quarter. We now have preamp penetration and key design wins in all hard disk drive segments.

There has been a lot of discussion regarding solid state drives and their potential applications. We believe that the meaningful adoption and penetration of SSTs in notebooks and enterprise is still at least a few years away. That being said, LSI is in a strong position to capitalize on this opportunity as it develops, given our unique position as a silicon-to-system supplier to the storage industry.

We recently announced that LSI has joined the Open NAND Flash Interface Working Group and are already engaged with several key potential customers. In SAS storage components, LSI announced the industry’s first sampling of 6 gigabits per second Serial Attached SCSI Expander ICs to major OEM customers, further strengthening our leadership position in SAS.

With our second generation SAS products LSI is laying the groundwork for complete 6 gig SAS server and external storage systems. We expect the transaction to begin in the second half of 2009, when a complete ecosystem including controllers, Host Bus Adapters, RAID, hard disks drives, expanders and cabling are all in place and fully tested.

We are leading this transition by investing at a scale above our competitors and working with partners to deliver the industries most complete product line with differentiated features. In addition to the expander we will offer custom silicon solutions for disk drives, controllers, HPAs, RAID-on-Chip processors, MegaRAID host-based solutions as well as bridge products.

We continue to make progress expanding our share in external storage SAS silicon as well with wins at Xyratex as well as Dot Hill in their new SAS RAID storage solution.

In storage array networks we continue to lead and deliver innovation. For example EMULEX recently announced a family of converged network adapters supporting Fiber channel over Ethernet powered by LSI’s custom silicon. We also secured a number of other design wins for Fiber channel over Ethernet.

Turning to storage systems and server RAID advancements, we are pleased to be working with Intel in technical collaboration to redefine RAID deployment on Intel architecture-based server and workstation platforms. By working closely with Intel, LSI is well positioned to deliver the trusted protection and reliability of MegaRAID software across an even broader range of platforms providing OEM’s and system builders with more platform options to meet customer’s performance and data protection requirements.

As the preferred RAID solution for Intel architecture based platforms we expect to increase our MegaRAID software footprint and the attach rate of our Raid-on-Chip devices.

Our entry level systems are now in full ramp with increased shipments across all interfaces and momentum on the iSCSI variance, which began shipping in September of 2007. We believe that our combined OEM volume shipments have now placed us in a leadership position in entry level SAS based platforms.

SGI recently announced its latest high-end storage platform for high performance computing, which is based on LSI’s new XBB2 architecture, which supports Fiber channel and InfiniBand. This was another major milestone for us and represents an early roll-out of our next generation mid range architecture. It is expected to power our mid range systems’ business into the future.

To-date we have shipped more than two million SAS and SATA solutions for host-based RAID underscoring LSI’s leadership in both SAS and Raid-on-Chip technologies.

LSI offers the most complete family of host-based RAID solutions in the industry including a wide range of MegaRAID adaptors and RAID-on-motherboard solutions. During the quarter we announced a number of new customer wins that underscore our strength in host-based RAID including Fujitsu Siemens, NEC and IBM for integration into their xSeries server line.

In additional as end customers deploy more data protection solutions, we are seeing continued momentum in software revenues for advanced replication features with our external storage systems.

Now I would like to review the networking business, where our investments are aim at delivering products and software for constant processing, voice and video processing, advanced graphic management and data center connectivity at fast data rates. This enables our customers develop more secured networks with greater intelligence and real-time services. We continue to see strong design win momentum demonstrating our progress in this business.

We are already shipping our latest generating StarPro DSPs in volume and are anticipating formerly launching this product next week at Interop. We have a number of significant design wins in high growth wireless access and media Gateways. We are the incumbent at the world leading telecommunications OEM with multiple StarPro DSP design wins and we recently secured a design win Nortel’s GSM EDGE product line.

Additionally, our Starpro DSPs were selected by a market leading enterprise OEM for voice-over-IP capability on our new generation of service raiders [ph] and Gateways targeted at voice and eventually video.

Our PayloadPlus Advanced communication processors are driving a new networking platform the multi-service Gateway aimed at delivering enterprise quality, networking to small and medium size businesses. You will see several announcements over the next week endorsing this solution, including leading OEMs, software vendors and system integrators all standardizing on this LSI media services business gateway architecture.

During the quarter, we also announced the Tarari T1000 series of Content Processors for networking applications. This represents the industry’s first single- chip low cost solution for cost sensitive applications that currently run on much slower software only approaches to performance critical tasks such as intrusion prevention and anti-virus and other services that depend on real-time content inspection.

Overall, I am very pleased with the momentum we have in each of our businesses and the strong financial results we have posted for the last three quarters, which serve as a proof point of our strategy. In Phase II of our business acceleration plan, our goal remains to strike a balance between driving and improving the 2008 earnings, while making targeted investments to generate an acceleration of revenue and earnings growth.

We have taken large steps towards our goal of becoming the world’s number one hard disk drive supplier. We have expanded our leadership position in SAS, reinforced our leadership position in storage systems and expanded our design win base in networking.

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

Bryon Look - Executive Vice President and Chief Financial Officer

Thanks, Abhi. I will reveal our first quarter 2008 financial results followed by comments regarding our Q2 guidance.

LSI had a solid March quarter, exceeding several of our guidance metrics. We are realizing the benefits of the strategic and operational decisions we have made over the last year, along with demonstrating solid financial discipline.

Highlights for the March quarter include the following. Revenues were $661 million. Consolidated gross margins excluding special items were 46%. Operating expenses excluding special items were $240 million. Earnings excluding special items were $0.10 per diluted share, and operating cash flows were $96 million.

During the quarter, we agreed to acquire the hard disk drive semiconductor business of Infineon Technologies, and we expect to close the transaction within the 60 day timeframe we outlined, when we announced the agreement. We anticipate the deal to be slightly accretive to non-GAAP earnings in 2008, and we have factored the acquisition into our guidance.

Now turning to a more detailed discussion on revenues. We experienced stronger than expected revenues for the first quarter, eliminating the effect of the mobility sale on total revenues for Q4, revenues were down 7% sequentially to $661 million.

Semiconductor revenues were $459 million in Q1. Net of the mobility transaction, semiconductor revenues were down less than 1% sequentially. Our storage semiconductor revenues, which include hard disk drive silicon, SAS standard components and storage area network ICs were $322 million representing 48.7% of total revenues in the first quarter and essentially flat sequentially. The expected seasonal decline in revenues from shipments of SoCs and HDD controllers was offset by increased demand for SAS standard components and storage area network ICs

Q1 revenues in our networking business were $122 million representing 18.5% of total revenues for the quarter and sequentially down $10 million or 8% from Q4. The sequential decline in revenue is primarily due to a decline in legacy products partially offset by an increase in sales of networking standard product ICs in our investment areas. Revenues for the IP business in the first quarter increased sequentially to $14 million as we continue building our IP revenue stream.

And turning now to our Storage Systems business, systems revenues were $202 million in Q1 coming off a strong Q4. The storage system segment represented 31% of LSI’s total revenues in the first quarter. Storage revenues continue to be significant percentage of LSI’s total revenues. Combined revenues from storage system and storage semiconductors amounted to $524 million or 79% of LSI’s total revenues in Q1.

Next, consolidated Q1 gross margin excluding special items was 46%, which was sequentially down 70 basis points from Q4 on lower volumes, but at the high-end of our expected range. Semiconductor gross margins excluding special items increased approximately 40 basis points from the fourth quarter to approximately 49.6% primarily due to mix.

Storage systems gross margins excluding special items declined to 37.9%, a 380 basis points sequential decline from the fourth quarter primarily due to lower fixed cost absorption. However, gross margins improved 380 basis points year-over-year from 34.1% for the same period in 2007 due primarily to our efforts in driving down product costs.

As I noted before our operating expenses were $240 million in Q1 excluding special items. This represents a sequential improvement of $4.6 million compared to the fourth quarter. Compared to the June ‘07 quarter, we’ve reduced operating expenses approximately $50 million per quarter. Interest income and other net of interest expense was $5.7 million for Q1.

And now let me turn to the special items we recorded in the first quarter which netted to $78 million. Special items primarily non-cash included $56 million in amortization of acquisition-related items, $18 million of stock based compensation expense and $5 million in net restructuring costs and other items.

The tax provision for the first quarter on a GAAP basis was approximately $6 million. The non-GAAP tax rate was 8%. On a GAAP basis, first quarter net loss was $13.6 million or $0.02 per share. Net income excluding special items was a profit of $64.3 million or $0.10 per diluted share.

Turning now to the balance sheet and cash flow. We reported yet another strong cash generating quarter. As I previously highlighted operating cash flows for the first quarter were $96 million. Cash in short-term investments ended the quarter at $1.24 billion and our net cash position at the end of the quarter was approximately $520 million.

During the quarter, inventories increased approximately 7% or $18 million as compared to Q4. The increase was largely driven by temporary buffer stocks required to complete planned factory shutdowns. We expect inventories to decrease throughout the year as we complete the assembly and test transitions previously announced for our systems and semiconductor businesses.

Depreciation and software amortization for Q1 was $22 million and capital expenditures were $21 million. Included in our operating cash flow was approximately $6 million of cash receipts from IP licensing that was not reflected in the income statements due to purchase accounting.

In the last 12 months, we repurchased approximately 147 million shares essentially completing the $1 billion of share repurchases authorized by the Board in 2006 and 2007. We continue to expect strength in our cash flows and anticipate this will allow us to consider additional share repurchases as we move forward.

The following is our guidance for the June quarter. Revenues in the range of $650 million to $680 million. This represents a slight sequential increase from a stronger than expected first quarter and excluding the mobility and consumer businesses approximately 20% greater in the same quarter last year. We expect storage semiconductors to be sequentially down from Q1 due primarily to lower shipments in HDD to a key customer. We expect storage systems and networking to be slightly up in the June quarter.

Consolidated gross margin excluding special items is expected to be in the range of 45% to 47%. Semiconductor gross margins to be in the 50% range, and systems gross margins in the 39% range, each excluding special items. Operating expenses in the range of $235 million to $245 million, excluding special items.

Our forward looking guidance for flat OpEx assumes we are making incremental investments in the strategic areas such as solid-state drives and the HDD acquisition that are offset with reductions elsewhere in the company. Interest income and other and interest expense to net to zero.

Regarding special items netting to approximately $80 million to $100 million. Our GAAP tax provision of approximately $8 million, and the non-GAAP tax rate of approximately 8%. We expect our non-GAAP tax rate to be approximately 8% to 12% for the year and continue to vary quarter-to-quarter based on our profitability and different geographic tax jurisdictions and certain discrete items.

We expect Q2 GAAP net loss in the range of $0.08 to break even per share. EPS, excluding special items in the range of $0.08 to $0.12 per diluted share, and share count of approximately 640 million shares for GAAP purposes and 645 million shares for non-GAAP purposes.

In addition, we expect depreciation and amortization of approximately $25 million, capital expenditures of approximately $15 million, and IP cash receipts, not reflected in net income of approximately $2 million for the second quarter of 2008.

In summary we have demonstrated solid financial performance both sequentially and year-over-year and continue to generate strong operating cash flows. Net of our strategic sales and divestitures, we have shown solid top line growth in our core businesses and driven efficiencies to continue to improve shareholder returns of balancing the desire to invest in additional growth engines.

And now let me turn the call back to Abhi.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Thanks Bryon. Before we go to your questions I want to provide some perspective on our business and what we can expect going forward. To continue... we continue to expect favorable second half seasonality, as some of our key customers and competitors have indicated visibility remains limited in this economic environment, so may be prudent to take a cautious outlook beyond the June quarter until visibility improves.

Re-enforcing the strength in our business our March quarter revenues exceeded our expectations and our guidance for June represents roughly a 20% year-over-year revenue growth for our storage and networking businesses adjusted for the divestitures in mobility and consumer in 2007. Below the top line we have made significant improvements to increase our operating leverage and I’m very pleased with our financial performance. I would also like to acknowledge the hard work of the LSI employees worldwide who are enabling us to deliver these results.

Now let me hand the call back to Sujal.

Sujal Shah - Vice President of Investor Relations

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

Question and Answer

Operator

Ladies and gentlemen, to ensure that all participants have an opportunity to ask a question each person will be limited to one question and one follow-up during this Q&A session. You may rejoin the queue if you need an additional follow-up. [Operator Instructions]. Our first question is from Suji DeSilva.

Suji DeSilva

Yes. Hello Abhi. Hello Bryon.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Hello.

Suji DeSilva

Congratulations on the quarter. Abhi, can you elaborate on the comments you just made in terms of the demand environment particularly the highly spending environment. What you saw with linearity in the first quarter and perhaps customer inventory levels?

Abhijit Y. Talwalkar - President and Chief Executive Officer

All right. We saw nothing unusual relative to linearity. The quarter behaved as we expected it to behave. Clearly, there are certainly a little bit of inventories that we did see build up at one of our largest customers in the hard disk drive space. And I think that’s been well discussed and publicized around the three and half inch ATA space. But other than that we see inventory as very healthy and very balanced across all other product categories.

Suji DeSilva

And, any…

Abhijit Y. Talwalkar - President and Chief Executive Officer

I think you asked a question relative to demand in the second half. Is that correct?

Suji DeSilva

Well, sure, certain. Let me clarify that question. The second half you talked, I kind of heard you saying being caution on the second half, you are expecting seasonal. Can you just remind us what the typical seasonal second half is and how this year may differ from your comments?

Abhijit Y. Talwalkar - President and Chief Executive Officer

You know, so far well, typical seasonality in the second half... second half is absolutely up over the first half. Q3, we do see an increase and Q4 is our strongest quarter. All of our growth largely is driven by business spending in the second half and the majority of our business ends up in business when it is spending relative to storage and networking. At this point in time and its still early in the year, we have not seen any indicators that would suggest seasonality in the second half is going to be any different. Now at the same time with the macro economics sort of backdrop we are just trying to be very prudent and cautious as we move through each month and each quarter. We are going to know infinitely more obviously as the weeks go by.

Suji DeSilva

Great. And perhaps a one quick follow-up on the acquisitions, the Infineon hard drive business and Tarari. Can give Bryon as much color as you can as to how much those are influencing the second quarter in terms of the hard drive business declining versus Infineon coming in and then Tarari, how that’s in networking? Thanks

Abhijit Y. Talwalkar - President and Chief Executive Officer

Let me take that one, then Bryon can help you. I mean the Tarari, acquisition itself that was back in the fourth quarter, so I’m not sure whether the questions there. Relatively to our sort of guidance of storage semis being down in the second quarter, a big part of that is the TAM is down and that’s a seasonal sort of aspects of the hard disc drive business. So units are lower, so we will experience lower shipments and as we again, earlier discussed there were some inventory that built up at one of our largest customers that is also adding to some of that decline that we are talking about. Now that is certainly offset by what we are seeing in the acquisition of Infineon business as well as other segments.

Suji DeSilva

Okay, that color helps. Thanks guys. Congratulations again.

Sujal Shah - Vice President of Investor Relations

Okay, thank you Suji. Can we have the next question please.

Operator

Kaushik Roy, your line is open.

Kaushik Roy - Pacific Growth Equities

There has been so much talk about Marvell’s gaining some market share at Seagate Enterprise platform, maybe starting Q3 they are going to ramp. Can you quantify in anyway, how much of the Seagate Enterprise revenues is at risk? And then can you quantify in anyway how much of Seagate revenues are tied with enterprise and how is notebook and how is that stuff?

Abhijit Y. Talwalkar - President and Chief Executive Officer

We don’t breakout our Seagate revenues across the different segments and Kaushik as you well know this has been a topic of debate for probably the last two and half, three years. Bottom line is we have made significant progress in taking steps towards becoming number one in hard disc drive. We have taken solid steps over the last quarter but also over the last year. As recent as the announcement that we made today, relative to securing the next two generations of enterprise SoCs at Seagate. We’ve also said, there are number of puts and takes that we’re dealing with, but at the same time the acquisition of Infineon’s business will more than offset what potential declines we may see.

Kaushik Roy - Pacific Growth Equities

Okay, so the HESD [ph] revenues will more than offset any loss of enterprise SoCs?

Abhijit Y. Talwalkar - President and Chief Executive Officer

That’s correct.

Kaushik Roy - Pacific Growth Equities

Another question, if I may, please. You mentioned that Q3 or Q3 typically or it could be up sequentially, but I’m looking at some of the last few years and I’m seeing Q3 to be flat over Q2. So, are you saying that this year it might be different or…

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, I mean, if we look at storage and networking in general and storage in particular, when I talk about storage, we’re talking about silicon in systems that ends up in storage systems and servers and so forth. Q3 is slightly up, and then Q4 is very strong. What may have been creating some of that dampening in past years was, you know if you look back several years, we had a meaningful element of consumer business. We had a meaningful element of mobility business, and those businesses tend to be... right tend to be not as strong in that third quarter.

Kaushik Roy - Pacific Growth Equities

Okay. Thanks so much.

Sujal Shah - Vice President of Investor Relations

Okay, thank you Kaushik. Could we have the next question please?

Operator

Romit Shah, your line is open.

Romit Shah - Lehman Brothers

Yeah, hey guys, nice quarter. If I back off the contribution from Infineon, is it fair to assume that revenues would be down a couple of percent here in Q2?

Bryon Look - Executive Vice President and Chief Financial Officer

Yeah, I think its fair to say that we’d be guiding our revenues in the storage semiconductor space to be down in the quarter.

Romit Shah - Lehman Brothers

I was referring to the total revenues for LSI.

Bryon Look - Executive Vice President and Chief Financial Officer

No, I think that’s a little bit on the high side.

Romit Shah - Lehman Brothers

Little bit on the high side. Okay and then Abhi just on the storage systems business, it was down in Q1, I think around 19%-20%, a little bit lower than I was modeling. I know this business tends to be more back end loaded. Could you give us a feel on some of the puts and takes in that business presently?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, I mean seasonally Q1 is down and we were probably on the upper end of seasonality relative to the systems business, but the systems business did grow year-over-year. We grew in units across all segments. We also saw growth year-over-year from a software standpoint as well. We finished the quarter with some very good momentum that we saw coming into the second quarter.

Romit Shah - Lehman Brothers

And that drives the confidence that this business will grow in Q2?

Abhijit Y. Talwalkar - President and Chief Executive Officer

That’s correct, plus as I mentioned earlier we’re starting the sort of early rollout relative to our next generation mid range platform, which starts in high performance computing and then eventually will lead to a broader deployment here in the near future.

Romit Shah - Lehman Brothers

Okay thank.

Sujal Shah - Vice President of Investor Relations

Hey thanks Romit. Can we have the next question please?

Operator

Craig Berger, your line is open.

Craig Berger - Wedbush Morgan

Hey guys, good job and thanks for taking my question. On the Engenio gross margins can you help us understand how we should be thinking about that, I guess on higher volumes and greater absorption? Does that work into the low 40’s?

Bryon Look - Executive Vice President and Chief Financial Officer

I think we’ve been consistent saying that we expect the margin in that business to be certainly in the high 30’s. Reflecting that we have guidance for the second quarter for those margins to be about 39%. We did demonstrate, you are right Craig [ph] last quarter in Q4 margins that were north of 40% and we’ll continue to drive the same sorts of initiatives in terms of reducing our product costs, growing our software business and certainly things like refreshing some product lines are also going to help sustain certainly gross margins in that sort of territory.

Craig Berger - Wedbush Morgan

And then just as a follow-up. It seems like a lot of chip companies you are seeing a pick-up in the comp space networking maybe international deployments. Are you guys seeing things pick-up or can you comment on business accelerating or improving, order trends improving an additional color there? Thanks.

Abhijit Y. Talwalkar - President and Chief Executive Officer

I think, I’m putting aside that the legacy on that that we have to contend with. The other segments are doing fine. We are seeing good stability. I mean we are seeing growth. The growth isn’t blow your socks off growth. But there definitely is isolated spending in certain category of products and even in geographies that is really enabling us to drive that business up into the second quarter. For example we’ve seen some aggressive deployments in Beijing specifically associated with the Olympics and some of our legacy products there have definitely benefited from that demand surge that we are experiencing this last quarter and into next... into this quarter itself.

Craig Berger - Wedbush Morgan

Last one. Can you give us the split in your networking business between I guess what you consider to be legacy versus newer, you know what the age gap is? And then just as you look at your overall chip business. How much is standard products versus custom ASIC at this point?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, relative to networking, I think as we’ve said this year we sort of expect those two businesses to be about 50-50. Now in terms of legacy versus non-legacy. We’ve experienced about $100 million decline this year, we don’t see anything that has changed that perspective at this point in time.

Craig Berger - Wedbush Morgan

On the total company custom ASIC versus standard products?

Abhijit Y. Talwalkar - President and Chief Executive Officer

I would say standard products still probably... standard products in the of 45% to 50% and custom being the other 50. But again, we put our entire hard disc drive business in that custom category as well, Right.

Craig Berger - Wedbush Morgan

Thank you.

Sujal Shah - Vice President of Investor Relations

Okay, thanks, Craig. Can we have the next question please.

Operator

Tayyib Shah, your line is open.

Tayyib Shah - Longbow Research

Hi, guys. Good quarter and guidance. Abhi, in your opinion how much of the positive surprise in the first quarter was company specific and how much would you characterize as being market driven?

Abhijit Y. Talwalkar - President and Chief Executive Officer

I think we saw very strong deployments relative to service from a market standpoint. There is clearly a lot of data center build out that is occurring, that I think we are hearing certainly our customers talk about as well as some peer companies that are experiencing the benefit there. So we saw a lot of strength across our SAS product line. We saw strength in fiber channel SAN as well. So that was certainly one of the biggest drivers that put us towards, lets say the lower end of seasonality in terms of the drop that we would have expected in Q1.

Tayyib Shah - Longbow Research

Okay. And Bryon, why have the storage system gross margin been so volatile in the last two quarters even though you have restructured manufacturing. And is that volatility something that we should expect going forward or should we expect steady improvement going forward?

Bryon Look - Executive Vice President and Chief Financial Officer

I just would describe a lot of that as being seasonal ride and it is still driven by the fact that you have lower volumes and there is a certain amount of fixed costs that have. We are making good progress relatively to those outsourcing initiatives or assembly and test activities. And again, that’s all baked into the fact that we’re pretty comfortable with being able to have margins in the high thirties kind of range.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Yeah, I wouldn’t even characterize it as volatile. I think it has been well behaved and we have outperformed the expectations that we have in this business. The variability you see across some of the quarters is exactly as Bryon pointed out driven by volume and volume associated with the seasonality that we see in that systems’ business, which the rest of the industry sees as well.

Tayyib Shah - Longbow Research

Okay. Thank you.

Sujal Shah - Vice President of Investor Relations

Okay. Thank you, Tayyib. Can we have the next question please?

Operator

Brian Curtis [ph], your line is open.

Brian Curtis

Thanks. I just want to follow-up with you Abhi... on your comments that you believe the Infineon business would offset your losses. Seagate... would the same hold through, as the Infineon business kind of drops when you close that deal in the Seagate business is a ramp over time, would the same hold through in the out quarters?

Abhijit Y. Talwalkar - President and Chief Executive Officer

In the out quarters, well, I think again, the way I’d like to answer this question is, as we’ve talked a number of times, the enterprise segment is very complex. There is a number of form factors, number of... drive sizes and RPMs and so forth. There are puts and takes in this particular segment within Seagate’s business, and we’re not going to go into the details of that. That’s something you can talk to Seagate about.

Our position at Seagate has only been further solidified over the past year, and even more so solidified recently with the announcement of our next two generation participation in, really wins in the enterprise space for the next two generations. And whatever potential declines that we may see in terms of these puts and takes is going to be offset by the Infineon acquisition.

Brian Curtis

Okay. And just a follow-up, do you plan to shift your controllers and do you ramp that SoC in ‘09 or 2010?

Abhijit Y. Talwalkar - President and Chief Executive Officer

We expect to ship our HDC controllers throughout 2008 and throughout 2009.

Brian Curtis

Okay, great. Thank you.

Sujal Shah - Vice President of Investor Relations

Hey, thank you Brian. Can we have the next question please?

Operator

James Schneider [ph], your line is open.

Perve John

Hi. This is Perve John [ph] on behalf of James Schneider. Most of my questions are answered. Just one housekeeping question, you mentioned in your comments about SSD in your announcement of [inaudible], can you quantify your R&D expense in this area?

Abhijit Y. Talwalkar - President and Chief Executive Officer

We’re not going to break out our R&D expense, but we are spending R&D in this particular area because we do believe that this is going to be a relevant market down the future, we’ll well position to capitalize on it as it develops and we’ve started doing some investments across silicon, software, firmware as well as systems.

Perve John

Okay. And one simple question. I know you guys break down what percent of revenues as customer, but with IBM more than 10%?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Yes, yes. IBM remains a greater than 10% customer.

Perve John

That’s it. Thank you.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Thank you

Sujal Shah - Vice President of Investor Relations

Thank you. Can we have the next question please?

Operator

Hans Mosesmann. Your line is open.

Hans Mosesmann - Raymond James

Thanks, congratulations on the quarter guys. Abhi just a quick commentary if you can regarding geographic trends, we’re hearing that Europe is perhaps getting a little weaker. Is that what you were seeing and some commentary also on the other markets. Okay, thanks.

Abhijit Y. Talwalkar - President and Chief Executive Officer

From a geographic standpoint again we’re not seeing the softness or any sort of softness or indicators that there is softness in Europe and in fact a good part of the server strength that we saw, which drove a lot of the strength in our SAS and Fiber channel business was driven by the US as well and I think we’ve seen that come out with some of our customers that have talked to their geographic splits and what they’re seeing across the geographies.

Hans Mosesmann - Raymond James

Can it be that for example your relationship with Intel and they have a series of new Quad-Core products, is there a product cycle that could be going on and then explain some of this.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, there’s certainly a big infrastructure build out that we’re sensing especially in the server space. Servers have been very strong in the fourth quarter, certainly strong in Q1 and this is a TAM comment, it’s clearly Intel has been strong in terms of their roadmap and I think it’s most peoples guess they’ve been gaining share, but the TAM has been relatively strong here and it continues to hold up.

Hans Mosesmann - Raymond James

Very well, thank you.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Thank you.

Sujal Shah - Vice President of Investor Relations

Okay. Thank you, Hans. Can we have the next question please?

Operator

Arnab Chanda, your line is open.

Arnab Chanda - Deutsche Bank Securities

Thank you. Abhi, sorry to continue on this topic. Just one quick question about the Seagate situation. Could you clarify a little bit about... did you lose a SAS or a SCSI or what kind of platform? Because clearly it seems like your competitor is ramping there. Are you regaining that share that you lost? I mean what is exactly going on there?

Are there multiple platforms someone has? And you are continuing on the same level? It would be really helpful because there is a lot of thunder and not a lot of lightning. If you know, what I mean?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, the thunder has been there for several years. And I think you need to go ask the people who would have been creating at thunder and ask Seagate specifically. So I’m not going to get into the Seagate roadmap specifics.

Again, I know I’m getting very competitive here in my answer. But we in the enterprise there are 2.5 inch, 3.5 inch, a number of different RPMs speeds as well in capacity points. There are some puts and takes relative to those socket and we are well capable of replacing some of the potential decline with the Infineon business.

Relative to the wins that I talked about today that we will be ramping in 2010. Those wins are across 2.5 inch, across 3.5 inch as well as all RPMs across Seagate’s entire product line in the enterprise.

Arnab Chanda - Deutsche Bank Securities

Thanks. Abhi. And then one question about the networking business. You talked about legacy versus growth businesses; I think you talked about DSPs today. Can you talk a little bit about where do you expect majority of the growth to come from? And were those an expectation of Agere was not investing the DSP beyond 2.5G and sounds like that’s not the case. What area should we be looking for in terms of growth rate?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Yeah our DSPs and I can ask Sujal also jump in relative to some of the history there, but relative to where we are focusing our DSPs today and where we are starting to see production deployments today and we will see into the future is around two areas.

One in particular is certainly in terms wireless access in terms of broadband and we’re seeing deployments there with some of the biggest players in the industry. Especially as they drive cost reduction cycles across their base stations. There is a big cycle underway relative to improving the overall costs of the base station infrastructure and we’re benefiting from that with our DSPs.

The other area that we are targeting our DSPs again, because we have a very strong competitive position versus one of the key competitors there in terms of voice and video channels and channel density at a fraction of the power is around media gateways, which is really targeted towards the distribution and delivery of voice and video within enterprise networks, both in the core of an enterprise network as well as an integrated service raiders that end up in branches or out in local departments.

Arnab Chanda - Deutsche Bank Securities

Thanks, Abhi.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Yeah, thank you Arnab .We have the next question please?

Operator

Mark Heller, you line is open.

Mark Heller - Merrill Lynch

Yeah, hi guys, thanks. Nice job. Can you tell me what we can expect for IP revenues as it really bottomed here? Can we expect growth going forward?

Bryon Look - Executive Vice President and Chief Financial Officer

Well, Mark, I think it bottomed back in Q2 of last year. We consistently grown the IP business post the merger and post all the merger accounting treatment that we had to contain with and so our objective is been to consistently grow that and grow it quarter-to-quarter although there is variability because not all of our licensees and our deals happened exactly according your timetable.

But we grew that in the first quarter, our expectations to drive growth in the second quarter with the caveat that sometimes this business is lumpy. We have talked publicly about the fact that we are driving that business to the tune of about $70 million this year, and that’s a P&L statement, there Is additional cash flows from preexisting revenues that will also be added to that.

Mark Heller - Merrill Lynch

Okay. And two more questions on the P&L. Is OpEx pretty much bottomed here, can we expect it to grow going forward, it looks like you’re guiding sort of flattish here for Q2, but... and the other question is on tax rate. Is 8% basically the new tax rate going forward?

Bryon Look - Executive Vice President and Chief Financial Officer

Okay, so Mark. On OpEx, we’re going to continue to stay focused on OpEx management. We showed another quarter of sequential improvement, taking out another $4.5 million a quarter, again I want to remind everybody that you... we’re going to stay focused this year. We’ve taken out over $50 million worth of OpEx since the time when we first combined with the Agere merger.

There are still opportunities going forward. At the same time, we want to make sure that we’re balancing the opportunities. We’re also seeing to expand our long-term revenue and to create new growth drivers that ultimately translate into good overall performance.

And well, we met the guidance relative to spending in the quarter. We’re guiding flat to that in Q2, while absorbing things like the HDD business that we’re acquiring from Infineon. So, I think we’re going to continue to stay disciplined and yet not sacrifice opportunities to grow the top lines.

Mark Heller - Merrill Lynch

And in terms of the tax rate?

Bryon Look - Executive Vice President and Chief Financial Officer

Yeah, tax rate, tax... the provisions is going to vary quarter-to-quarter. Typically, the process we go through, we reassess the full year outlook, we look at the distributions of our profits by the different geographic tax jurisdictions and then we have to take into account discrete events in the quarter and one of the benefits that we had in fact was in Q1, which reflects the fact that we were able to have a tax provision lower than the prior expectations.

And I think, I sort of factored in the expectations going forward with the guidance of 8% in the second quarter and because there can be some variability put out of suggestion that as you monitor your tax rates in the second half of the year that you think about 8% to 12% for a full year 2008 kind of range. And we’ll keep you updated as we go to and get a different visibility into our growth areas and where that profit is around the globe.

Mark Heller - Merrill Lynch

Thanks.

Abhijit Y. Talwalkar - President and Chief Executive Officer

Yeah, thank you, Mark. Can we have the next question please?

Operator

Shawn Webster, your line is open.

Shawn Webster - JPMorgan

Yeah, thank you for taking my question. For the order linearity, can you give any comments on how your orders progress in the quarter and then I have a follow-up after that?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Orders relative to Q1 itself and turns?

Shawn Webster - JPMorgan

Turns and how your orders progressed each month in the quarter. Was it stronger in the first part of the quarter or stronger later in the quarter?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well again, I think the quarter behaved normally and typically. We come into the quarter with a fairly strong backlog in the networking business. So, its less turns oriented in the storage systems business, there is a heavy turns oriented business and it’s weighted certainly in the back half of the quarter, very large percentage of the business occurs in the last four weeks as well, and again nothing abnormal behaved, as we expected it to behave.

Shawn Webster - JPMorgan

Okay, thanks. And then on the OpEx, do you expect the dollar value of your OpEx to go up in Q3 and Q4?

Abhijit Y. Talwalkar - President and Chief Executive Officer

The dollar value of our OpEx?

Bryon Look - Executive Vice President and Chief Financial Officer

We haven’t provided specific OpEx guidance for the second half. But as I said, the second quarter is flat to Q1 OpEx and we’re going to tend to be careful in monitoring the spending.

Shawn Webster - JPMorgan

Okay. And then, can you talk to us a little bit about what you’re expecting the Infineon acquisition to contribute in terms of revenue and operating expenses?

Abhijit Y. Talwalkar - President and Chief Executive Officer

We’re not close at this point in time. So we’re not going to share that detail at this juncture. Shawn, sorry.

Shawn Webster - JPMorgan

Okay. Thank you very much.

Sujal Shah - Vice President of Investor Relations

Okay. Thanks, Shawn. Can we have the next question please?

Operator

Sumit Dhanda, your line is open.

Eric Ghernati - Banc of America

Hi this is Eric Ghernati for Sumit. Thanks for taking my question. Bryon, first just clarify comments you made earlier so excluding Infineon, you would expect revenues to be down less than 2% sequentially?

Bryon Look - Executive Vice President and Chief Financial Officer

No. I don’t think we quantified that. We just said that directionally, we would expect in terms of that part of our business for Q2 to be down. That’s overall storage semiconductors.

Eric Ghernati - Banc of America

Okay. So overall storage semiconductors to be down excluding Infineon?

Bryon Look - Executive Vice President and Chief Financial Officer

Including the effects of the Infineon.

Eric Ghernati - Banc of America

Okay. So, Infineon being incorporating new storage semiconductor revenue.

Bryon Look - Executive Vice President and Chief Financial Officer

Yes. It’s in our guidance.

Eric Ghernati - Banc of America

Okay. And thus assuming 50 days of contributions from Infineon?

Bryon Look - Executive Vice President and Chief Financial Officer

Well...

Eric Ghernati - Banc of America

60 days from March.

Bryon Look - Executive Vice President and Chief Financial Officer

Yeah. Because we can’t really quantify that that specifically.

Eric Ghernati - Banc of America

But you said it’s was going to close within 60 days of the announcement?

Bryon Look - Executive Vice President and Chief Financial Officer

Yes.

Eric Ghernati - Banc of America

Okay. All right. And if I recall, you had said... you had stated before that the acquisition will be neutral to accretive. I heard you say that it was going to be just accretive. Is that correct? And if so, could you quantify is it going to accretive in June quarter?

Bryon Look - Executive Vice President and Chief Financial Officer

Well, what one says we reiterate the fact that we expect us to be slightly accretive for 2008 and that’s consistent with what we said when we announced the transactions as well.

Eric Ghernati - Banc of America

Okay. And then question for you, Abhi. We respect to Seagates, are your design wins in the next generation SOC across all drive interfaces in enterprise?

Abhijit Y. Talwalkar - President and Chief Executive Officer

That’s correct.

Eric Ghernati - Banc of America

Okay. Thank you.

Sujal Shah - Vice President of Investor Relations

Okay. Thank you. Can we have a next question please?

Operator

Suji DeSilva

Suji DeSilva

Hi, guys. Just a quick follow up. I think I heard Abhi that you said legacy business is tracking a little better than you had expected. Can you updated us on what do you think legacy fall off will be in the next few quarters?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, we’re not going to guide into the next... I think we’re still sticking with what we’ve been telling all of you relative to the legacy fall off this year, which around $100 million or so and that’s where we at this point in time.

Suji DeSilva

Okay. So that’s unchanged there. And on the base station, you said that that’s doing better. Can you give sense whether that’s older 2, 2.5G or is it newer 3G and is it geographically more China or outside China?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Yeah. It’s a mixture because you know we are shipping in the 2, 2.5G systems from design wins that were won and deployed a long, long time ago. So there is some of that build out occurring in emerging geographies and some of the new wins are going into the cost reductions that are taking place in the 3G space.

Suji DeSilva

Great. And lastly…

Abhijit Y. Talwalkar - President and Chief Executive Officer

Those are not in the deployment phase but getting soon too.

Suji DeSilva

Great. And lastly the headcount drop here, I just want a sense of how much that was the mobile business dropping out and the puts and takes obviously, Infineon has closed here but and what do you expect headcount growth to be kind of going forward?

Bryon Look - Executive Vice President and Chief Financial Officer

Well, the mobility related headcount that was really a Q4 activity there. So really what we have done is continue to look at opportunities to make sure that we’ve got appropriate headcount to fund all the areas of investments. There we have concluded a good part of that transition relatively to the assembling and testing activities associated with semiconductor. And so that also accounts for some of the headcount reduction that you’ve seen in the numbers.

Suji DeSilva

Great. Thanks, guys.

Sujal Shah - Vice President of Investor Relations

Okay. Thank you. Can we have the next question please?

Operator

Sanjay Devgan, your line is open.

Sanjay Devgan - Morgan Stanley

Yeah. Hi. Thanks for taking my questions. I just had a quick question regarding your HDD business. Aside from your major customer Seagate, if you could just kind of walk us through some of your growth opportunities, especially in light of the... especially with respect to the Hitachi opportunity, Can you talk about that in particular and then, just the HDD landscape in general?

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, I mean, I think relative to our business, one of the focuses that we’ve had with the business over the past year is not only solidifying our position with Seagate across all their segments and into the future, which we’ve done, it’s to also diversify the business. And that was clearly one of the motivations behind the acquisition of the Infineon business. While it was to utilize that to enhance our relationship, which... we already had an existing relationship with Hitachi but enhance it significantly, and not only accelerate revenues there within the desktop and enterprise segment, but really position us to grow our position and share within that customer across broader segments.

So that is clearly an opportunity. And we’re just getting started on growing that opportunity for LSI. The other area that we’ve seen significant growth, and we continue to believe represents a growth opportunity over the next one to two years is in the preamp space. There we’re shipping across all segments, we’re shipping to basically all HDD customers as well, and that business has grown very nicely in terms of market share. And I talked about it in the last call, in the fourth quarter call, where our shares as we exited the year was exceeding 30%, almost 35%, which was nearly doubling in share from the prior 12 to 15 months.

And we continue to believe that we’re well positioned there in terms of technology to keep growing that business well north of that market share position.

Sanjay Devgan - Morgan Stanley

Thank you.

Abhijit Y. Talwalkar - President and Chief Executive Officer

I think there are more opportunities then what I just eluded to you. We have a good relationship with WD today, but it can be significantly bigger. And we’re very focused there as well. And again, one of the objectives of bringing LSI here together was to have a very comprehensive portfolio of products from preamps to SoC’s, to hard disc controllers to leadership retail technology. And so, you can bet we’re very engaged with them as well.

Sanjay Devgan - Morgan Stanley

Thank you.

Sujal Shah - Vice President of Investor Relations

Okay. Thank you, Sanjay. I believe we have time for one last question.

Operator

Kaushik Roy, your line is open.

Kaushik Roy - Pacific Growth Equities

Going back to systems, it seems like it’s essentially was down a little bit more than other years. So, was it any particular OEM that was down more than the others or it was just across the board?

Abhijit Y. Talwalkar - President and Chief Executive Officer

I think Q1 is always a tough quarter, Kaushik. You know this. You’ve watched the storage system’s market from many, many years. Q1 is tough seasonally because everyone is busy deploying all the stuff that they bought in the fourth quarter. And on top of it, there is a little bit of backdrop relative to US spending in certain sectors.

So, I think that is why we’re little bit on heavier side of the seasonality. I think we feel very good about the refreshers that we have coming to the product line. We’ve got a number of product cycles here that start in Q2 and end of the second half, both in the entry space as well as mid-ranged space. And we continue to see good uptake relative to our software. So, we feel good about the rest of this year, again, as long as the macro economic conditions don’t severely change.

Bryon Look - Executive Vice President and Chief Financial Officer

That comes off of us of the Q4 where we grew that business above 26% or so. So a very strong buying in the fourth quarter.

Kaushik Roy - Pacific Growth Equities

And then Dell’s iSCSI product that control would have probably came from you. That was ramping up quite nicely but now with Ecologic being at Dell, I mean, do you see that revenue still growing or staying flat or maybe, revenues --

Abhijit Y. Talwalkar - President and Chief Executive Officer

Well, I’m not going to comment relative to our role and participation in Dell’s iSCSI products specifically, the MD3000i that you’re referring to.

Kaushik Roy - Pacific Growth Equities

Yeah

Abhijit Y. Talwalkar - President and Chief Executive Officer

But if you look at the MD3000i relative to where Ecologic is positioned, Ecologic is positioned much, much higher. It’s really attacking a different segment, a different application environment and far larger scalability. So there really isn’t no overlap between those two products.

Kaushik Roy - Pacific Growth Equities

Okay. That’s helpful. Thank you.

Sujal Shah - Vice President of Investor Relations

Thank you, Kaushik. I’d like to thank you all of you for joining us this afternoon. If you have any additional please call investor relations at LSI. Thank you and have a nice day.

Operator

Ladies and gentlemen, the telephonic replay of the conference will be available beginning today at approximately 5 p.m. Pacific Daylight time and will run through midnight on April 28. The replay access numbers are 1-800-337-5613 within the United States. Again, that is 1-402-220-9646 for all other locations.

The webcast will be archived at http://www.lsi.com/webcast. That does conclude your conference for today. Thank you for your participating. You may now disconnect. Thank you

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