LSI Logic Storage Systems

LSI Logic Storage Systems Inc. was one of the few storage companies that actually grew in 2002 -- increasing its revenues 59 percent year over year -- even as IDC says the overall industry saw storage systems sales drop 15 percent. Now it has its eye on the nascent iSCSI market as an opportunity to suck up even more business.

How did LSI Logic Storage Systems fight the prevailing winds of a tough economy and zero-growth IT spending? In a nutshell: It dissolved its reseller channel and focused on delivering high-performance, low-cost storage arrays to its original equipment manufacturer (OEM) partners.

A wholly owned subsidiary of LSI Logic Corp. (NYSE: LSI), LSI Logic Storage Systems refocused itself on a pure OEM business model with customers that include IBM Corp. (NYSE: IBM), Storage Technology Corp. (StorageTek) (NYSE: STK), NCR Corp., and Silicon Graphics Inc. (SGI) (NYSE: SGI). That matched up well with the strategy of its parent company, which develops and sells a range of components, including RAID controllers and Fibre Channel and SCSI adapter chips.

"In the last year, we've taken apart our indirect channel and concentrated that business with our partners," says Mitch Seigle, senior marketing director for LSI Logic Storage Systems.

As a result, even as other areas of LSI's business have struggled, the storage systems group is profitable and growing. LSI announced yesterday that it will cut its work force by 11 percent, eliminating 580 jobs, after posting a net loss of $122 million on revenues of $373 million. However, its 820-employee storage systems unit hasn't been affected -- and is actually hiring in certain areas, such as systems engineering and field marketing, Seigle says (see LSI Posts Q1 Loss).Much of that success is due to its largest OEM, IBM, which resells LSI Logic Storage Systems' arrays as the FastT midrange family (see HP, IBM Muscle Up Midrange). Of LSI Logic Storage Systems' $335.5 million in revenues for 2002, 36 percent -- or $120.8 million -- was attributable to IBM, according to LSI's 10-K filing.

"They significantly expanded their relationship with IBM, and that was the big tipping point," says John McArthur, group VP of storage research at IDC.

The unit finished the most recent quarter, which ended March 31, with revenues of $99.7 million, a 6 percent sequential decline that Seigle attributes to "seasonality" while pointing out it was the highest revenue for any first quarter in the company's history. LSI Logic does not break out profit/loss results for LSI Logic Storage Systems, but company officials claim the unit has been profitable since mid-2002.

Figure 1: LSI Logic Storage Systems RevenueSource: LSI Logic

McArthur notes that the company has rebuilt its business nicely after dropping significantly in 2001. That year, Sun Microsystems Inc. (Nasdaq: SUNW), previously a major OEM, stopped selling LSI's storage systems in favor of its own T3 arrays. Now LSI Logic Storage Systems has secured a reputation for delivering high-throughput, highly scaleable systems at relatively low cost, he says."Once hidden beneath the blanket of a very large semiconductor provider, LSI Logic Storage Systems is emerging as a significant player in its own right," IDC's McArthur wrote in a recent research report on the company.

Indeed, LSI Logic Storage Systems caused heads to swivel in the industry last year when it released results on the Storage Performance Council SPC-1 benchmark test -- showing better price/performance than higher-end systems from IBM and Sun, which tested an OEM version of a Hitachi Data Systems (HDS) array (see LSI Screams Past IBM, Sun).

Now, say analysts, in order to further build its business, LSI Logic Storage Systems needs to boost its branding and visibility among end users. "LSI has design wins from every storage company in the industry, but no one knows who they are," says Steve Duplessie, senior analyst at Enterprise Storage Group Inc.

IDC, in fact, has recommended LSI adopt an Intel Corp. (Nasdaq: INTC) Inside-style marketing program to put it on the storage map. And the company plans to do just that: It has an ad campaign set to launch later this year with the tagline "At the Heart of Information." [Ed. note: Better than their first idea, "Got Disk?"]

"We're behaving in the same way an Intel behaves," says Seigle, who adds that LSI's marketing is as much geared toward its partners to show "that we're their partner and not their competitor."LSI Logic Storage Systems may be facing new challengers vying for OEM accounts. Dot Hill Systems Corp. (NYSE: HIL) has ratcheted up sales dramatically, thanks to its OEM partnership with Sun (see Dot Hill Boosts Sales 88% Q/Q). And last month, Adaptec Inc. (Nasdaq: ADPT), one of LSI's competitors in the RAID controller business, acquired Eurologic Systems for $30 million. That deal lets Adaptec position itself directly against LSI's storage systems division. IDC says in 2001 LSI had $168 million in OEM disk systems sales and Eurologic $130 million (see Adaptec Adopts Eurologic).

Nevertheless, Seigle claims no other competitor offers the full spectrum of storage offerings that LSI does: "We have the ability to go from silicon to systems and go from desktop to data center. Companies are choosing to do business with fewer vendors in order to survive."

Duplessie agrees that the breadth of LSI's portfolio is a huge asset: "In the IT world, the trend has been less vendors are better than more -- that's also true on the manufacturing side."

The longer-term challenge for LSI is to win a broader base of OEMs, says McArthur. "Hewlett-Packard Co. and Sun might buy some of their technology from LSI, but they're not buying complete storage solutions from them," he says. "And winning Dell would be important." Dell Computer Corp. (Nasdaq: DELL) is currently in the second year of its five-year agreement to resell EMC Corp. (NYSE: EMC) Clariion systems (see EMC, Dell Keep Dancing).

Another important technology trend LSI is poised to ride is iSCSI, says Duplessie. LSI recently introduced single- and dual-channel iSCSI RAID controllers that support Serial ATA and SCSI (see LSI Lines Up iSCSI Mates and LSI Logic Demos iSCSI RAID).Seigle says the iSCSI market should start emerging later this year and into early 2004. "It's the next big technology shift, because it combines both the media and the access to the media at previously unaffordable price points. We're offering more functionality at lower prices -- that's what end users want, and that creates tremendous opportunities for us."

Todd Spangler, US Editor, Byte and Switch