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LSI Logic

(LSI) - Get Life Storage, Inc. Report

unfurled a plan in March to refocus the company around two key markets: storage and consumer electronics.

But six months into the transformation, LSI is looking more like a storage company than anything else.

That impression was reinforced Wednesday, when the company reported financial results for the third quarter and guidance for the fourth quarter powered largely by storage sales.

And while the company had previously talked about beefing up its consumer electronics position through M&A, the only acquisition to be seen Wednesday was a $50 million deal to buy a storage software company.

CEO Abhi Talwalkar told analysts in a post-earnings conference call that the company remains dedicated to the consumer market, even if the financial results are not where LSI would like them to be. During the current quarter, Talwalkar said LSI would take various actions to improve financial performance in the consumer business.

Talwalkar took over at LSI in May 2005, and is the author of LSI's makeover. On his watch, the company has exited certain businesses and sold off its chip fabrication facility in Oregon.

Investors don't seem to be fretting about the status of the reorganization.

LSI's stock was up nearly 7%, or 57 cents, to $8.92 in extended trading, as the company swung to a profit and sailed past Wall Street profit expectations.

LSI said it earned $43.6 million, or 11 cents a share, in the third quarter. At this time last year, the company reported a loss of $73.3 million, or 19 cents a share.

Excluding $11 million in stock-compensation expenses and certain acquisition-related charges, LSI said it earned 16 cents a share, 4 cents higher than the average analyst expectation, according to Thomson Financial, and above the company's own guided range.

LSI Finance Chief Bryon Look attributed the earnings upside to higher gross margins and improved operating performance. Selling, general and administrative expenses were down in dollar terms and as a percentage of revenue from the year-ago period.

Gross margin in the second quarter was 43.5%, vs. 42.7% in the second quarter.

The top-line results were less stellar, with LSI's sales ticking up a modest 2% year over year to $493 million.

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While storage chip sales grew 18% sequentially during the quarter, consumer chip sales plunged 28%.

The consumer decline was expected, owing to

Apple Computer's

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decision earlier this year to stop using a chip from


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in certain models of its iPod MP3 player. LSI provides the silicon component of PortalPlayer's iPod chip.

Meanwhile, LSI's revenue from the



PlayStation game console has evaporated as that product reaches the end of its life cycle.

And LSI acknowledged Wednesday that sales of chips for recordable DVD players were not as strong as expected during the third quarter.

Consumer chip sales dwindled to 9% of total revenue in the third quarter, compared with 13% in the second quarter.

By contrast, the two prongs of LSI's storage business -- storage chips and storage systems -- together accounted for 75% of the company's total revenue in the third quarter.

And there's no sign of a change in the near term. LSI said consumer revenue would be down slightly in the fourth quarter, while storage chip-sales are expected to see modest growth; storage systems business should have strong growth.

To succeed in the consumer business, says Talwalkar, it is important that LSI achieve a certain scale. How LSI will get that scale, given the businesses' eroding sales, is still unclear.

Talwalkar did not rule out the possibility of exiting the consumer business if things don't eventually pick up.

"We have a very clear set of expectations that we manage to," says Talwalkar, noting that the company will look at "a number of different actions and options that balance the profitability and diversification of this business."

Looking ahead, LSI projected gross margins will range between 43% and 44% in the fourth quarter currently under way. LSI said fourth-quarter sales would range between $500 million to $525 million, with EPS of 15 cents to 18 cents, excluding certain charges. Analysts were looking for $515.7 million in revenue with EPS of 15 cents.

LSI also announced Wednesday that it has signed a deal to acquire privately held storage software firm

StoreAge Networking Technologies

for $50 million in cash.

The company said it expects the deal to have a neutral impact on earnings per share in 2007 and to add to earnings in 2008.