LSI Puts New Look to the Test

SAN FRANCISCO -- The ghosts of 2007 still haunt LSILSI and its shareholders.

Last year, the chipmaker saw its shares collapse 41% in the wake of the $4 billion merger with Agere Systems and investor fears about grim prospects for the broader semiconductor industry.

By most estimates, the chip industry's outlook has only gotten worse. But LSI Chief Executive Abhi Talwalkar reckons the company's future is brighter than ever.

Having completed the challenges of integrating Agere, shedding unwanted product linesand moving to fully outsource its manufacturing operations, LSI is ready to showcase the benefits of its metamorphosis.

LSI Re-Invents Itself

"We have been aggressively and decisively repositioning the company," says Talwalkar.

Quarterly operating expenses are almost $60 million lower than before the restructuring, and the company is now focused exclusively on the storage and networking markets.

And after last year's shellacking, Talwalkar says LSI's stock is now outperforming many of its peers. LSI shares, which closed at $4.96 Friday, are down roughly 5% year to date, compared with the double-digit declines suffered by the Nasdaq Composite, the Dow Jones Industrial Average and the Philadelphia Stock Exchange Semiconductor Sector Index so far this year.

To truly prove its mettle though, the Milpitas, Calif., chipmaker will have to take on a couple of formidable foes that presents Talwalkar, and his reinvented LSI, with its biggest test yet.

In the market for PC hard disk drive chips, which is now among LSI's key product lines, the company is contending with heavyweights Texas InstrumentsTXN and Marvell TechMRVL. The latter has risen to become the No. 1 provider of hard-drive SOCs, or systems-on-a-chip, which include the read-channel that decodes the bits of data stored on a disc drive.

"Marvell has always been the engineering guru with the best engineers and design team, led by [co-founder and CEO] Sehat [Sutardja]," says Friedman, Billings, Ramsey analyst Craig Berger.

But Berger and other analysts believe that LSI will give Marvell a tougher fight now that it has combined its technology with Agere's and sharpened its focus on hard-drive chips. LSI now offers a full menu of hard drive chips, manufactured, like Marvell's chips, with 65-nanometer circuits -- the industry's leading edge.

"It gives the customers a little more confidence in order to use them [LSI] for the long term, because these customers want roadmaps and things like that," says Berger.

Hard-drive companies may also see a benefit in diversifying their supply base, similar to the way cell phone makers have begun to work with chip firms besides Texas Instruments for the handset's baseband processor.

"I don't think anyone's a lock longer term," says Kaufman Brothers analyst Suji de Silva, who rates LSI a buy. "Original equipment manufacturers would like to look for competitive solutions to make sure that they themselves are gaining share."

As it stands, LSI is tight with hard-drive maker SeagateSTX, while Marvell counts Western DigitalWDC and virtually all the other hard drive makers in its camp of customers.

That gives LSI plenty of market share to go after, although the nature of the business means that any gains may take 12 months or more before they show up on LSI's income statement.