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LSI Narrows Loss (Update)

Alexei Oreskovic

SAN FRANCISCO -- LSI(LSI Quote) narrowed its losses in the second quarter, as strong demand for the company's networking chips and storage systems pushed its sales and profit above Wall Street expectations.

"Our business has demonstrated resilience through recent market uncertainty, and we expect this to continue as the positive effects of seasonal buying patterns materialize in the second half," said CEO Abhi Talwalkar in a statement.

Shares of LSI jumped 10.9%, or 75 cents, to $7.60 in extended trading Wednesday.

Similar to Broadcom's(BRCM Quote) earnings report on Tuesday, LSI pointed to strong demand from telecommunications and networking infrastructure build-outs in Asia, which helped boost sales of its high-margin networking chips up 25% year-over-year to $140 million.

And sales of LSI's storage systems, which are used in gear sold by companies like IBM(IBM Quote), grew 24% year-over-year.

Overall, the Milpitas, Calif., company recorded revenue of $692 million in the three months ended June 29, up 3% year-over-year, and better than the $665 million expected by analysts.

LSI's better-than-expected financial report marks the fourth consecutive quarter in which LSI has outpaced Wall Street expectations, as the company rebounds from a difficult acquisition of Agere Systems, which it acquired for $4 billion in 2007.

In the months since the acquisition, LSI has sold various chunks of its business, including its consumer and wireless chip groups and slashed its workforce.

The company's stock remains roughly 25% lower than its level before the acquisition, although it is up considerably from its 52-week low of $3.75.

LSI posted a loss of $14 million, or 2 cents a share, compared to a loss of $378 million, or 50 cents a share, at this time last year, when it incurred $340 million in special charges stemming from its acquisition with Agere Systems.

LSI said the loss in its recently ended quarter included $97 million in special charges, including restructuring charges and stock compensation expenses.

Excluding those items, LSI said it earned 13 cents a share. On that basis, analysts were expecting 9 cents a share.

In the current quarter, LSI said its earnings could range from a loss of 3 cents to a profit of 4 cents, which would represent its first quarter in the black since the Agere deal.

Excluding special items, LSI's EPS forecast ranged between 11 cents and 15 cents, vs. the 11 cents expected by analysts.

During a post-earnings conference call, some analysts questioned LSI's projected gross margin in the current quarter, which will range between 39% and 41%, compared to the second quarter level of 41.2%.

LSI executives said the decline was due to a natural shift in seasonality, as the third quarter favors lower-margin hard drive chip sales. What's more, LSI experienced a greater-than-expected boost in the second quarter from legacy networking products -- chips no longer under development -- which the company does not necessarily view as sustainable.

Talwalkar said the company remained committed to its goal of becoming the No. 1 maker of chips for PC hard disc drives, overtaking Marvell Technology(MRVL Quote), although he did not provide a timeframe for achieving the feat.

"Overall I'm very pleased with the speed with which we have transformed LSI," Talwalkar said, citing the company's recent financial results as proof of the soundness of the company's strategy.

LSI said revenue in the current quarter will range between $695 million and $725 million, compared to the $693.4 million expected by Wall Street.