LSI's View Light

The chipmaker doubles profit, but its outlook for the coming quarter is below consensus estimates.
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Updated from 4:48 p.m. EDT

LSI

(LSI) - Get Report

doubled its profit in the first quarter, besting its own projections.

But the company's outlook for the current quarter was significantly below Wall Street expectations, raising questions about the recent

$4 billion merger with Agere Systems .

LSI said late Wednesday that sales in the current quarter -- the first to include Agere -- will range between $715 million and $745 million. Analysts had been looking for $836 million in sales.

And the company said it will lose between 40 cents and 49 cents a share. Excluding charges, LSI said its EPS will range between break-even and 3 cents vs. analysts' expectations of 10 cents a share.

LSI's stock slid 6.2%, or 62 cents, to $9.30 in extended trading.

In a postearnings conference call, LSI executives said the soft sales forecast owed to a variety of temporary adverse market conditions, including recent consolidation among customers in the networking industry that has led to a pause in orders, as well as disappointing performance in the consumer chips business.

LSI also said that purchase accounting rules mean it will not be able to recognize some $15 million in IP revenue in the current quarter.

"The June quarter revenue is being impacted by isolated and well understood items," said CEO Abhi Talwalkar. "We are well positioned for revenue growth in the second half."

But the massive miss left some analysts scratching their heads.

Wedbush Morgan analyst Craig Berger said that it looked like sales coming from Agere in the second quarter will be as much as 13% below the fourth-quarter level, even though Agere's management had never indicated that such a fall-off could be around the corner.

"The point is the

Agere business has weakened substantially since this deal was announced -- and maybe it's market forces, and maybe it's just overly optimistic forecasting," said Berger.

LSI executives said the company was actively taking steps to reduce costs at the new company, and promised to eliminate $50 million in operating expenses during the second half of 2007.

Some of that $50 million in savings will be part of the $125 million that LSI already announced it will save by 2008, but the company said it believed there were additional savings to be had this year.

LSI also said it was exploring "strategic options" for its troubled consumer chip business, and expected to conclude the process within the next two quarters.

The news marks a sharp, though not wholly unexpected, change of course for LSI, which

reorganized the company around storage and consumer chips one year ago.

The consumer chip side of the business quickly ran into trouble as LSI customer

PortalPlayer

lost its slot in certain models of Apple's iPod.

In the most recently ended quarter, consumer chips had sales of $28 million, down 54% year over year, and representing a meager 6% of the company's total revenue.

While Talwalkar said the company's encoder chip for DVD recorders was making nice headway in the marketplace, he said that LSI's consumer chip business currently lacks the scale to be a viable part of the company.

Though LSI did not specify whether the strategic options under consideration entail bulking up the business through acquisitions or spinning it off, the latter course of action seems more likely, given that LSI already has its plate full digesting the merger of Agere Systems.

LSI said that sales in the three months ended April 1 totaled $465 million, down 2% year over year, and shy of analyst expectations of $473.4 million.

In the recently ended quarter, LSI earned $30 million, or 7 cents a share, compared with $13 million, or 3 cents a share a year ago.

Excluding stock option compensation expenses and other charges, LSI said it earned 11 cents a share, ahead of the average analyst expectation of 9 cents a share, according to Thomson Financial.