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LSI Logic's Hidden Storage Gem

Can ASIC powerhouse mine value from unheralded storage networking subsidiary?

Inside LSI Logic Corp. (NYSE: LSI), there's a gem of a storage networking business, albeit one whose value may prove hard for investors to mine.

Though LSI's Storage Systems subsidiary has a strong product line, an impressive customer list and a fiscal scorecard that shows $405 million in revenues for 2000, the division is often overlooked due to the high profile of LSI's semiconductor business (which generated more than $2 billion in revenue last year).

As a standalone company, LSI's storage networking subsidiary might have more sex appeal than the entire firm, whose stock price has remained nearly flat at around $20 a share since last December. Though most analysts tracking the company like LSI's long-term potential, the combination of LSI's chip-manufacturing burdens and the current down markets for LSI's main products leads to a host of Hold, Market Perform, and cautious Buy ratings on LSI stock.

"The biggest problem for LSI is something that's specific to a lot of companies right now," says Douglas Lee, managing director and senior semiconductor analyst at Banc of America Securities LLC. "It's weak markets."

After posting a banner year in fiscal 2000, with $2.74 billion in revenues (a 31 percent gain from the previous year), LSI ran into the market buzzsaw in the first quarter of 2001. A declining demand for LSI's ASIC products left the company with just $517 million in revenues for the first three months, down from $751 million in 2000's fourth quarter. Already, the company has warned that its second-quarter earnings will decline even further, to a number that will be revealed when LSI reports on July 26.

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