LSI CEO says worst over for chipmakers

SAN FRANCISCO, US: The brutal business conditions that battered chipmakers in recent months is past its worst phase, but the full impact of the industrydownturn has yet to be seen, LSI Corp's chief executive said.

Abhi Talwalkar told Reuters in an interview on Friday that he anticipates more industry consolidation.

The comments, which were published late Friday late afternoon, boosted the U.S. chip maker's stock in the absence of other news, analysts said. LSI rose 7.5 percent to end at a one-month peak of $3.14 on the New York Stock Exchange.

"There's a lot of semiconductor companies, small companies as well, that aren't sufficiently capitalized. And they're going to be challenged getting through this," Talwalkar said.

But chipmakers, including LSI, are not ready to make acquisitions.

"A lot of that consolidation that could occur is somewhat frozen because people who have cash are not going to run out and do anything with cash today in this unpredictable environment," said the 45-year-old CEO, who joined LSI from Intel Corp in 2005.

Demand for chips is no longer contracting as sharply as it was in the final months of 2008, when customers curtailed orders for new chips and focused instead on burning off existing inventories.

Talwalkar believes 80 to 90 percent of the necessary "inventory correction" has already occurred and that "pockets" of LSI's business and end-product categories are "definitely tightening up from a supply-demand standpoint."

U.S. chip stocks have rallied following signs of improving customer orders.

On Monday, Texas Instruments Inc raised the midpoint of its forecast for first-quarter revenue, while Taiwan Semiconductor Manufacturing Co, the world's largest contract chipmaker, boosted its sales and margin outlook.

The Philadelphia Stock Exchange Semiconductor Sector Index has jumped 14.9 percent from the level it closed at on Monday, versus the Dow Jones industrial average's 10.1 percent increase over the same period.

While the inventory correction may be winding down, Talwalkar noted that any pickup in orders at the moment is largely related to restocking among customers such as PC hard drive makers, who "over corrected" and reduced chip stockpiles too sharply at the end of the year.

"The fundamental question that remains for everyone is what's the stability of these end-markets that buy technology," Talwalkar said.

LSI merged with Agere Systems in a $4 billion deal in 2007 and Talwalkar has since moved to cut costs and divest consumer-focused businesses, such as cellphone chips and video chips.

As a provider of chips for PC hard drives, LSI is at the center of the storm -- shipments of PCs are expected to decline 8 percent in the first half of 2009, according to market research firm IDC.

But Talwalkar said 85 percent of the company's business, such as storage systems and networking chips, is tied to technology infrastructure and is better positioned to ride out an economic recession.

The need for storage continues to grow, as does the traffic of data across telecommunications networks.

Certain segments of the semiconductor industry have been particularly hard hit by the downturn, including makers of memory chips such as DRAM and flash memory. Earlier this year, memory makers Spansion and the North American operations of Qimonda filed for bankruptcy protection.

Talwalkar added networking chips to the list of businesses ripe for consolidation, with too many players relative to the market's overall "profit pool."

But LSI was focused on managing its cash through the downturn rather than looking to beef up its own networking business.

"We have to see a lot more in terms of the shape of the recovery before we do really anything on the M&A side of things," Talwalkar added.