LSI Stands By Storage

Despite a multimillion-dollar loss, a 16 percent decrease in revenues, and an 11 percent layoff, LSI Logic Corp. (NYSE: LSI) hasn't soured on its key markets -- especially not on storage.

Indeed, execs on the company's third-quarter earnings call last night said that out of the semiconductor maker's three core segments -- consumer equipment, communications, and storage -- storage will likely rebound first next year.

"Storage components growth will resume in '05," LSI Logic CEO Wilfred J. Corrigan told analysts last night. That, he said, is because storage was first to be affected by the slowdown in spending that's caused inventories to mount in the semiconductor market. In his view, the situation will likely worsen near-term for communications chips, while consumer chip sales will be flat early next year.

The market woes hit LSI hard. Quarterly revenues of $380 million were down 16 percent year-over-year and 15 percent sequentially. GAAP net loss was $282 million, or $0.73 per diluted share, compared with GAAP net income of $7 million or $0.20 per diluted share last quarer (see LSI Reports Q3).

Among other things, LSI's laying off 520 employees in order to improve its cost structure. It's also ditching some earlier forays into areas other than its core markets.And even as storage remains in focus at LSI Logic, some question whether the parent company's love takes in subsystems, sold by its subsidiary Engenio Information Technologies Inc., as well as ASICs.

It's a logical question in light of recent developments. Engenio, originally set to spin off from LSI Logic last summer, has ditched the IPO plans for now (see Engenio Gets Cold Feet). And news of a new OEM deal with Sun Microsystems Inc. (Nasdaq: SUNW) has been dogged by speculation that another OEM relationship with IBM Corp. (NYSE: IBM) could sour in light of IBM's latest Shark announcement -- which is a bit too close to Engenio's market for total investor comfort (see IBM Still Loves Engenio and Engenio's Sun Rises).

Would LSI Logic sell Engenio? Given the vagaries of the subsystem market and the overall stake LSI's got in an eventual IPO, the answer seems a clear "not yet." On the plus side, Engenio raked in $97 million, or 25 percent, of LSI's total revenue this quarter. That compares with $144 million, or 38 percent, from storage components; $70 million, or 19 percent, from communications chips; and $69 million, or 18 percent, from consumer chips.

There's also some evidence that Engenio's new deal with Sun is a threat to Dot Hill Systems Corp. (Nasdaq: HILL), especially given Engenio's support of both Fibre Channel and SATA drives in the StorEdge 6130, the product that's selling through Sun.

"Unfortunately the StorEdge 6130 appears cannibalistic to the upper end of the Dot Hill business at Sun," writes analyst Thomas Curlin of RBC Capital Markets in a note to Dot Hill clients today. "Furthermore, the availability of a SATA option for this new product probably may dilute the new SATA-based product ramp for Dot Hill at Sun."An analyst from another firm, who asked not to be named, thinks LSI Logic is stuck with Engenio for awhile. "They won't release numbers just yet, but clearly, Engenio's not spinning off anytime soon."

For its present quarter, LSI Logic forecasts revenues between $260 million and $390 million with a net loss between $2 million and $3 million.

Mary Jander, Site Editor, Byte and Switch