Updated from 5:01 p.m. EDT LSI Logic ( LSI) boosted its second-quarter profit thanks to the sale of various assets that the company jettisoned in a plan to change operational focus. But, following setbacks in its consumer electronics business, one of the two foundations upon which LSI recently rebuilt, the company's management indicated tough times ahead. "We don't believe we can continue to sustain the current level of business, long term. It's not optimal," CEO Abhi Talwalkar said of the consumer electronics business, telling analysts on a conference call that LSI would explore strategic "alternatives." LSI shares slipped 0.7%, or 6 cents, to $8 in extended trading. The company's stock is down roughly 33% since April. The main cause of LSI's consumer electronics chagrin is Apple Computer ( AAPL), which said in April that it would no longer use chips supplied by PortalPlayer ( PLAY) in certain models of its popular iPod. LSI provides the silicon component of PortalPlayer's iPod chip. LSI has estimated the loss of that business at around $40 million for the second half of 2006. Meanwhile, LSI's revenue from the Sony ( SNE) PlayStation has also evaporated as that gaming console has reached the end of its lifecycle. These two "revenue discontinuities" will play a large role in LSI's lackluster guidance for the third quarter, which was shy of Wall Street expectations. By contrast, LSI topped analysts' expectations with solid financial results in the recently-ended second quarter. LSI more than doubled its profit in the second quarter, earning $54 million, or 13 cents a share, compared with $25 million, or 6 cents a share, a year ago. The company had second-quarter sales of $490 million. Analysts polled by Thomson First Call were looking for LSI to earn 12 cents a share on revenue of $487 million.
According to LSI, much of the net income growth came from the recent divestitures of parts of its business. During the past few months, LSI sold its only chip-manufacturing facility to On Semiconductor ( ONNN) for $105 million and took in $13 million for its digital-signal processor business, which it sold to China's VeriSilicon Holdings earlier this month. The divestitures were part of a plan undertaken by Talwalkar to refocus the company on the storage and consumer electronics markets. LSI said that storage-systems revenue increased 17% year over year in the second quarter, while semiconductor revenue of $307 million was up sequentially, but lower than the $325 million in the year-ago period. Talwalkar said that all of LSI's business segments increased revenue compared with the first quarter of the year and that the company anticipates accelerating demand for its storage products in the second half of 2006. Gross margins in the second quarter were 42.7%, down from the 44% level a year ago, due to the introduction of new storage products. As the company pumps out these products in volume in the second half of the year, management indicated that gross margins could get a lift. Talwalkar said that strong sales of storage products is enabling the company to overcome pressure in its consumer electronics business, which he said would decline sequentially and year over year in the current quarter. Overall, LSI projected that revenue in the current quarter will range between $475 million and $500 million with EPS between 5 cents and 7 cents, or 11 cents to 13 cents excluding special items. Wall Street was looking for $505 million in third-quarter sales, with 14 cents EPS. Talwalkar said the company remained committed to its plan of building consumer electronics into the second pillar of the company, suggesting that any changes would involve acquisitions or partnerships rather than divestitures.
Given the volatility of the consumer electronics market, the key to success is scale, said Talwalkar. "We recognize that our current position in consumer electronics is not optimal in the long term and that we need to take some actions to get us in the right place," Talwalkar said.