Updated from 4:35 p.m. EST

Strong sales of storage products carried LSI Logic ( LSI) ahead of Wall Street expectations in the fourth quarter.

But the company's outlook for the first three months of 2007 came up short.

LSI said it earned $59 million, or 14 cents a share, on sales of $524 million in the fourth quarter. That compares with a profit of $38 million, or 9 cents a share, a year ago.

Excluding certain acquisition-related charges, LSI earned 18 cents a share.

By that measure, LSI beat the Street's expectations, which called for 17 cents EPS on sales of $517 million.

After hours, shares recently lost 11 cents to $10.37.

"Our solid fourth quarter performance was fueled by the seasonally strong demand for storage products, with 22% sequential growth and record quarterly revenue in our Engenio systems business," said CEO Abhi Talwalkar in a statement.

LSI storage systems sales were bolstered by strong demand for the company's midrange products as well as warm reception for the new entry-level external storage products that LSI launched during the fourth quarter.

Chip sales were less stellar, declining 3% sequentially to $304.1 million.

Consumer chip sales continued to dwindle, falling 15% sequentially to $40 million. DVD recorders, for which LSI provides video-encoding chips, experienced slower-than-expected worldwide demand in the second half of 2006.

And shipments of cable and set-top box chips slowed in the fourth quarter because of customer inventory issues.

In a postearnings conference call, Talwalkar said the company had taken various measures in the fourth quarter to improve the cost structure in its struggling consumer-chip division.

The company's strategic goal remains to achieve double-digit, top- and bottom-line growth across all its business lines.

Still, the storage industry continued to be the dominant engine of LSI's growth: Storage chips and systems together accounted for 78% of LSI's total revenue, up from 75% in the third quarter.

Talwalkar said the merger with Agere Systems ( AGR), announced in December, remains on track, with the U.S. antitrust regulators raising no objections to the combination.

The CEO reiterated the goal of achieving at least $125 million in cost savings in 2008 as a result of the merger, which he said is expected to close in the spring.

But LSI's outlook for the current quarter was softer than expected, with the company projecting first-quarter sales between $460 million and $480 million, and EPS, excluding certain charges, between 8 cents to 10 cents a share.

Analysts polled by Thomson Financial expected on average revenue of $495 million, with 13 cents EPS.

Gross margin in the first quarter will range between 40.5% and 42.5%, compared with the 43.4% level in the fourth quarter.

LSI said it planned $15 million in capital spending in the first quarter and $55 million for all of 2007.

Fundamental demand in the storage marketplace remains very strong, said Talwalkar.

"We expect that storage budgets within IT organizations in 2007 to be fairly consistent with 2006, which is a pretty good year," he said.

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