LSI Slashes Quarterly Forecast

The chipmaker will cut staff 13%.
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Updated from 5:11 p.m. EDT

LSI

(LSI) - Get Report

is slashing its workforce and jettisoning its struggling consumer business, as the chipmaker scrambles to cut costs after its $4 billion merger with Agere Systems.

Milpitas, Calif.-based LSI said Wednesday that business in the current quarter was proving weaker than expected, and the company pared back its sales and profit outlook.

LSI said that it now expects revenue to range between $650 million and $670 million vs. its previous outlook of $715 million to $745 million. Only two months ago, analysts were expecting

LSI to generate $836 million in sales this quarter.

The company also said that it expects to lose between 43 cents and 52 cents a share, depending on the charges it takes to account for the restructuring. Excluding those items, LSI said results will range between a loss of 3 cents a share and break-even.

Analysts polled by Thomson Financial were looking for EPS of 2 cents.

Shares of LSI were off 5.7%, or 49 cents, to $8.15 in extended trading Wednesday.

LSI said it will eliminate approximately 900 jobs, or 13% of its nonproduction workforce, as the first part of a three-phase business acceleration plan adopted after the

$4 billion all-stock merger in April.

LSI also said it will sell its consumer chip business to

Magnum Semiconductor

for an undisclosed sum.

"We are accelerating our timetable for aligning the resources of the new LSI with market opportunities and focusing on those markets where we possess leading technology and sustainable competitive advantages," CEO Ahbi Talwalkar said in a statement.

The restructuring will allow LSI to improve gross margins in its semiconductor business and to "grow profitably in a competitive, fast-changing market," said Talwalkar.

The Agere deal bolstered LSI's portfolio of storage chips, while giving LSI new business in networking and cell phone handset chips.

But some analysts fretted that the projected cost-savings from combining the two businesses was underwhelming. And LSI's near-term sales outlook postmerger suggested that Agere's business was not in great shape.

Since the announcement of the deal with Agere in December, LSI's stock has dropped about 18%.

LSI has said that it expects to save $125 million in expenses in 2008 as a result of manufacturing savings and operational efficiencies.

On Wednesday, LSI said that the layoffs and other restructuring initiatives will put it ahead of schedule on its merger integration and will result in operating expenses between $290 million and $310 million in the third quarter, and $275 million and $295 million in the fourth quarter.

It was not immediately clear what impact the new operating expense guidance will have on LSI's initial plan for $125 million in savings.

The decision to divest the consumer business, which makes video-encoding chips for DVD-recorders and digital TV set-top boxes, was not unexpected given LSI's comments earlier this year that it was exploring "strategic options" for the group.

Though the consumer business was

designated as one of LSI's two main pillars in a March 2006 restructuring of the company, the group fell on hard times as business involving

Apple's

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iPod and

Sony's

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PlayStation both dried up.

In the first quarter, the consumer business had sales of $28 million, representing a mere 6% of the company's total revenue and down 54% year over year.

The sale of the business to privately held Magnum, which is expected to close in the third quarter, will be funded through a private-equity investment, the companies said.