LSI cuts outlook, sees rebound in second half of 2001

Don't look for a sharp rebound for LSI Logic (NYSE: LSI) until the second half of the year, analysts and company executives said Tuesday.

After market close, the maker of chips for communications, networking and multimedia applications reported fourth quarter net income of $116 million, or 34 cents per share, excluding goodwill writedowns. That was in line with First Call's analyst consensus estimate, which was reduced after LSI's profit warning in December.

LSI predicted first quarter earnings of 21 cents per share, on revenue of roughly $660 million, a 12 percent sequential decrease from fourth quarter sales of $751 million.

Analysts were looking for a first quarter profit of 34 cents per share, on sales of $780.9 million, according to First Call.

Shares of LSI traded at $24 in afterhours activity on the Island ECN, following the release of quarterly results. LSI stock fell 93 cents to $24 in Tuesday's regular trading ahead of the earnings report.

The company now expects to grow about 10 percent for all of 2001, with faster growth in the second half, said Wilfred J. Corrigan, chairman and CEO. First Call consensus was predicting annual revenue growth of 35 percent.

"We believe the strong underlying growth rates in our four business areas will get us back on a solid growth track during the second half of 2001 and beyond," Corrigan told analysts.

Fourth quarter revenue increased 28 percent year-over-year and 3.2 percent sequentially.

Last month, the company pointed to an oversupply of chips on the market. Now the company sees slowing demand from customers, Corrigan said.

The current slowdown is either a "mid-term correction" or the early stages of a downturn, Corrigan. He believes it's the latter.

"I think we'll be well into February before we get a good perspective on what's happening with customers for Q2," he told analysts.

LSI's outlook is bad, but not unexpected, said Hans Mosesmann, analyst with Prudential Securities. "They're seeing a slowdown as everybody else is reporting," he said.

Mosesmann and other Wall Street analysts praised LSI's manufacturing efficiency; the company expects first quarter gross margins to stay at the same level as the fourth quarter, despite the projected decline in revenue.

"What they can control, they're doing a very good job of controlling," said Alvin Kressler, analyst with the Kaufman Brothers investment bank.

LSI has a good chance of meeting its goal of boosting annual revenue by 10 percent, as long as the economy doesn't slip into a recession, Kressler said.

"To get to 10 percent year-over-year growth, after a 12 percent sequential downturn in the first quarter, you have to have a pretty good snapback in the second half," Kressler said. "What I am picking up on my channel checks in the equipment space is that LSI is in line for a good second half."

Broadband entertainment business should revive in the second quarter, Corrigan said. Business is strong for storage components, storage area networking and Sony PlayStation 2 chips, he added.

The company, Kressler said, in the second half of the year could get an unexpected boost from two trends: the introduction of products based on newer wireless technology; and the start of the next major upgrade cycle in computing. Corporations' last major upgrades took place in the second half of 1999 going into 2000, Kressler said.

"Near-term, LSI is a question mark," he said. "But the long-term prognosis is a little bit better."

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• Downgrades hammer LSI Logic shares>