LSI Logic: Staying the course
Undeterred by current conditions, chipmaker continues to pin long-term growth strategy on communications.
By Erik Sherman -- Movers and Shakers, 6/15/2001
| AT A GLANCE | |
| LSI Logic |
The company closed out 2000 with $2.74 billion in sales, over $1 billion sitting in the bank, and debt “reduced back...to essentially zero,” according to chairman and CEO Wilfred J Corrigan. “The whole industry last year grew by 35 percent,” Corrigan says. “We grew 31 percent. In our sector of the industry, we grew as fast [as we could].”
There seems little doubt among industry observers that Corrigan has steered his company in a smart direction for the long haul. At one time, the company made products for the general computing industry, notes Steve Cullen, director of semiconductor research at Cahners In-Stat Group. “The thing that LSI Logic has done well over the last few years is position themselves well in the communications center, and to a lesser degree, in storage,” Cullen says. “These are two areas that probably have very, very long-term growth potential. In the short term, when you start reading about the problems that network hardware companies are having, particularly in the matter of inventories, LSI Logic has a problem.”
The problem continues in communications, where companies such as Motorola and Ericsson have lowered their own earnings expectations. Even storage, another area of concentration for LSI Logic, has experienced a rapid fall-off in purchases. As a result, LSI Logic has experienced its own share of trauma recently. Toward the end of the calendar year’s first quarter, analysts trimmed their expectations for the 19-year-old company’s stock. LSI Logic also announced that it would close a facility in Colorado Springs in the summer due to a weakening national economy and lack of demand for products from the plant, which used older technology. That move would cost an expected $120 to $150 million in restructuring and closing costs. The company also lowered first-quarter revenue expectations not once, but twice, ending at 30 percent lower than the prior quarter.
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| “We still see the communications end of the business growing very rapidly.” |
“If you remember, the mantra in ‘97 and ‘98 was ‘Everybody has to get on the Dell model,’” Corrigan says, referring to the PC vendor’s tightly controlled inventory and manufacturing operations. “By the middle of last year, they had forgotten all that and they said ‘Get those parts no matter how you get them.’ A certain amount of revenue in 2000 was inventory build. Clearly that is starting to be paid back.” Corrigan expects some resurgence in the third quarter of this year, but that will likely be inventory levels evening themselves out, not customers recovering previous business levels.
Over a longer period of time, LSI Logic expects that its lines of business will thrive. “We still see the communications end of the business growing very rapidly,” Corrigan says. “Historically, communications infrastructure equipment had a useful life of 15 years. Now it will be more like four years.”
LSI Logic has been expanding its presence in its core business areas largely through acquisitions. Most acquisitions aim to supplement existing strengths, Corrigan explains. For example, last summer LSI Logic acquired DataPath Systems, a company with expertise in broadband access. “It would have taken us a year or so to develop the capability,” Corrigan says. “So we acquired a capability. It’s more a way of accelerating R&D.”
The March acquisition of video and audio chipmaker C-Cube Microsystems shows how LSI Logic is structuring some of its purchases to add strength where it had little to none. “[The C-Cube purchase] gives LSI MPEG-2 encoding technology,” observes Michelle Abraham, senior multimedia analyst with Cahners In-Stat Group. Many of the set-top-box manufacturers are trying to integrate storage into their devices, and encoders are necessary to compress the video. LSI Logic already had a decoder, but that would not have been enough to interest that market.
Another business strategy that LSI Logic will pursue is an expansion of outsourcing. The Colorado plant closing underscores how semiconductor companies can be at the mercy of fab technology. “As you get to the 0.13-micron [level], then the 0.1-micron [level], the cost of building fabs is getting higher and higher,” Corrigan says.
Outsourcing offers the ability to use new fabrication technologies without spending the hundreds of millions to billions of dollars necessary to build foundries. LSI Logic currently outsources less than 10 percent of its production, but looks to expand that to more than 30 percent over the next three to four years.
Even at billions of dollars in annual revenue, LSI is considered a niche player, because much of its work lies in custom semiconductors. The bulk of the company’s business comes from about 200 customers. That leaves LSI Logic potentially exposed to the vagaries of the economy.
“Their weaknesses are, they’re entering some real high-flying—and potentially high-diving—industries,” says Allen Nogee, an In-Stat senior analyst in wireless component technology. “A lot of their communications are based on Internet growth. Those are the highest-potential and highest-risk industries there are.”
Corrigan sees some additional challenges approaching. “How do you wrestle with ever-increasing complexity?” he asks. “When LSI started in 1981, we started with 10,000 gate arrays. Nowadays it’s more like 10 millions transistors on a chip. We’re starting to think about what to do with 100 million transistors on a chip. One of the big struggles is how do you generate the methodology to design these great complex systems?” Then there is the problem of finding enough qualified engineers, which has the company continuing to open design centers around the world.
But overall, Corrigan likes the company’s current position. “At this stage, we are about where Intel was at the same age,” he says. “So we’re more or less on track for growth.” Not a bad target at that.
