MILPITAS, Calif. -- While executives from LSI Logic Corp. remain upbeat despite a downturn in its core communications-chip business, the company is quietly hedging its bets by rushing into some new and long-awaited IC markets.
In the middle of the current IC downturn, the Milpitas-based ASIC pioneer and giant has recently taken some bold and aggressive steps by expanding its consumer- and storage-chip businesses. And LSI Logic has also dropped several hints that it is exploring the long-awaited "convergence" chip market.
The 20-year-old company is looking at new IC markets--and for good reason. In recent times, LSI Logic gambled by leveraging its vast ASIC and system-on-a-chip portfolios into some key markets, particularly communications ICs. While it currently sells consumer ICs, storage chips, and mass storage subsystems, LSI Logic still bills itself to the marketplace as the "Communications Company."
But since the beginning of late last year, communications chip suppliers and equipment houses have been hit hard by the strong downturn--the first of its kind to hit the new wireless and broadband communications segment. Moreover, there's no relief in sight for this troubled sector, according to many analysts tracking communications.
Executives from LSI Logic make no apologies for the company's communications-oriented IC strategy. In fact, they believe there is still plenty of upside in communications despite the current downturn, insisted Wilfred Corrigan, chairman and chief executive officer of LSI Logic.
Center of action
"What's the next killer application in the market?" Corrigan quizzed. "The next killer application is still communications," Corrigan told SBN in an interview at the company's Milpitas headquarters.
"The telecommunications industry won't go away," Corrigan observed. "If you look at the wireless space, the handset market has slowed down. But the business still looks pretty positive next year," the Silicon Valley veteran added.
The CEO was also quick to say that he believes the worst is over for the current downturn in communications and other markets. "The panic is over," Corrigan said. "A lot of our customers have told us that their business has bottomed."
He also indicated that three of LSI Logic's four major segments remain healthy, including consumer chips, storage ICs, and storage subsystems. But not surprisingly, its communications chip business remains soft.
"It depends on the market," Corrigan explained. "What we've seen is that three out of our four markets have hit the bottom. Networking will continue to go down more slowly. But we are doing very well in storage components. Our consumer business is also strong."
In all, the LSI Logic executive is somewhat upbeat for 2002. "I think the semiconductor market will grow at 20% next year," he said. "I think we will do as good or better."
But still, there's a cause for concern at LSI Logic, especially given its exposure in communications, according to analysts. The company counts Alcatel, Cisco, Extreme Networks, and other communications-equipment makers as its biggest customers, industry analysts noted.
In 2000, for example, LSI Logic generated 50% of its sales from communications ICs. Last year, the company also realized 32% of its sales in storage components, 15% in storage subsystems, and 3% were in other markets.
"I though LSI Logic had a good strategy a year ago, but the company's communications business is taking a beating right now," observed analyst Brian Matas of IC Insights Inc. in Scottsdale, Ariz.
"Like a lot of semiconductor companies this year, LSI Logic has stalled out a little bit," Matas said.
Last year, the company reported record sales of $2.74 billion, a 31% increase over the like period in 1999. Net income was $417 million, a 140% increase over 1999.
It's been a different story this year. Citing the downturn in communications, the company posted a net lost of $343.7 million on sales of $982.5 million for the first half of 2001. This compares to a profit of $156.8 million on sales of $1.26 billion in the like period a year ago.
In the third quarter of this year, LSI Logic expects its revenues to decline approximately 10-15% sequentially from the $465 million reported in the second period. The company anticipates reporting a third quarter loss of about 31 cents a share.
On a positive note, the company is in a strong position if or when the IC business recovers, said analyst Matas of IC Insights. "I still like their product portfolio," he said. "They have a good DSP digital signal processor and other products," he added.
LSI Logic also has another competitive advantage: its ASIC and system-on-a-chip technology. For years, it has been able to leverage its so-called CoreWare line of ASIC building blocks and libraries in order to develop some of the world's most sophisticated system-on-a-chip products.
The company's CoreWare building blocks are extensive, ranging from a slew of communications and storage components, to a DSP core, to RISC processors based on the technologies from ARM Ltd. and MIPS Technologies Inc.
The company is also aiming to remain strong in manufacturing. Providing a glimpse into the company's chip-manufacturing strategy, LSI Logic officials recently told SBN that the chip maker will soon deliver its first 0.13-micron ICs with copper-interconnects and other advanced features. It also quietly developed its first test chips, based on a next-generation 0.10-micron process technology (see Aug. 27 story).
Basically, the company believes it can leverage its technology into several key markets. "Our ASIC capabilities are strong," said Christopher Hamlin, senior vice president and chief technology officer for LSI Logic. "But we see ASIC technology changing and becoming more flexible," Hamlin said.
Among those changes is what the LSI Logic executive said is a "clash" between several different and incompatible technologies in the computer, communications, consumer, and storage businesses.
That "clash" is prompting the need for convergent-oriented chips that combines several technologies and protocols on the same device, he said.
As a result, the company is exploring--if not already developing--ICs and systems-level designs for the long-awaited convergence market. "We see ourselves as one of the few companies that can take advantage of the move towards convergence," Hamlin said.
Details of this strategy remain somewhat sketchy and LSI Logic is keeping many cards close to the vest, but it is clear that the company is seeking new and emerging markets, especially in the consumer field.
LSI Logic is no stranger to this business. Perhaps the company's most successful product is history in not a standard chip product, but rather a specialty ASIC. For some time, LSI Logic has been making a custom RISC-based I/O processor for Sony Corp.'s wildly successful PlayStation line of game machines.
Pushing deeper into consumer ICs
In March, the company expanded its efforts in the consumer space by acquiring C-Cube Microsystems Inc. for $878 million in stock. The move expanded LSI Logic's chip offerings in communications, broadband, digital set-top boxes, and other markets. It also strengthened the company's position in video compression technology, especially with C-Cube's MPEG chip lines (see March 26 story).
The C-Cube acquisition is already paying dividends. "The acquisition of C-Cube has been good, especially in China," Corrigan said, referring to C-Cube's strong position in the DVD, video CD and related markets in that nation. "The China market seems to be doing pretty well," he said.
Another area of interest is storage chips and storage subsystems. The company believes it has a strong chip position in Fibre Channel, SCSI, and storage-area networks (SANs), but it is also pursing new and emerging markets like 3GIO, Infiniband, iSCSI, and Serial ATA.
But LSI Logic says its core strength is in communications. In this and other chip businesses, LSI Logic is taking a two-prong strategy to attack these markets. It not only has a vast portfolio of standard chip products, but it also develops ASICs, chip cores, and system-on-a-chip products for customers.
For example, the company quietly develops and makes switching chips on an ASIC basis for Extreme Networks Inc., the world's leading supplier of Layer 3-based switches for Ethernet networks.
LSI Logic also sells the L64324, which is a standard product geared for Layer 2-based switches in Ethernet networks. The single-chip device includes 24 Ethernet/Fast Ethernet ports, with two Gigabit Ethernet ports.
There's a place for standard products, but they "do not scale to the highest level," said Ronnie Vasishta, vice president of technology market for LSI Logic. "The advantage with ASICs is performance," he said.
While LSI Logic appears to be shoring up its local-area networking chip lines, its wide-area networking IC strategy remains a mystery. For example, the company was once a leader in ATM chips, but it has failed to upgrade its venerable ATMizer family of ATM ICs in years.
LSI Logic is also mum about its plans in the network-processor market, although some speculate that the company is developing these parts on an ASIC basis for customers.
In wireless, LSI Logic has achieved modest success with a chip set for handsets based code-division multiple access (CDMA) applications. But the company's fortunes in wireless and wireline may revolve around its high-speed DSP lines.
LSI Logic gained the DSP technology by acquiring ZSP Corp. in 1999, and it kicked off an "open architecture campaign" a year ago when it licensed the 200-MHz ZSP400 architecture to Broadcom Corp. (see Jan. 17, 2000, story). It has also licensed the technology to other companies, such Brecis, Conexant, IBM, and Virata.
While LSI Logic does not intend to sell its DSP in the form of a standard product, the company has some lofty goals in the area: it hopes to grab market share away from digital signal processor leader--Texas Instruments Inc.
"We want our DSP to become an industry standard," said W. Richard Marz, executive vice president of ASIC technology for LSI Logic.