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LSI: 'Sony snag won't hurt'
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September 28, 2000: 3:52 p.m. ET
Chip maker says delay in shipments of PlayStation 2 won't affect results
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NEW YORK (CNNfn) - Sony isn't saying which of its suppliers is behind the component shortage that caused a production shortfall for its new PlayStation 2 game consoles, but at least one of them has said the snag won't affect its top line in the third quarter.
LSI Logic Corp. (LSI: Research, Estimates), a leading supplier of semiconductors used in Sony's PlayStation consoles, said it remains comfortable with its previous forecast of 10-12 percent sequential revenue growth.
Citing component shortages, Sony confirmed Wednesday that it will ship only 500,000 units when it launches the PlayStation 2 in the United States Oct. 26, half as many previously expected. The Japanese electronics firm said it will accelerate shipments following the launch in order to catch up with its target of shipping three million units by the end of its fiscal year in March 2001.
LSI (LSI: Research, Estimates), which is based in Milpitas, Calif., said its third-quarter outlook already reflects modifications for Sony's diminished roll-out.
"LSI is continuing to fulfill all of its requirements for Sony's PlayStation 2 computer entertainment systems," Wilf Corrigan, the company's chief executive, said. "Due to LSI Logic's close working relationship with Sony, we have been aware of their product requirements, and had already factored them into our manufacturing plans and into our financial guidance."
 Characterizing the PlayStation 2 as "one of the key drivers for LSI's future revenue growth," Credit Suisse First Boston analyst Tim Mahon said Thursday that the delay in the PlayStation 2 production schedule could have a slight impact on the company's third quarter results.
Even so, Mahon pointed out that the downside risk over the longer term is limited, and he reiterated his "buy" rating on the stock. "With LSI trading at approximately 18-times our Street-low 2001 estimates, it's an attractive value proposition with what we believe is somewhat limited downside risk," Mahon said in a research note Thursday.
Analysts on average expect LSI to report a profit of 32 cents per share when it discloses its third-quarter results in Oct. 23., according to earnings tracker First Call. It earned 18 cents per share a year earlier.
LSI shares were up $1.50, or 5.2 percent, in afternoon New York Stock Exchange trade Thursday. Meanwhile, Sony (SNE: Research, Estimates) American depositary receipts added $5.25 to $104.63.
Sony said the modified schedule will not affect availability of PlayStation 2 during the holiday season, anticipating there will be about 1.3 million units in supply. The company also said it still expects to meet target of shipping 10 million units of the game worldwide, including 3 million to North America, by March 2001.
Toshiba is likely culprit
Although Sony executives did not name the supplier or specify the components responsible for the production shortfall, some analysts reckon it's Toshiba.
"The major microprocessor in the PlayStation 1 was made by LSI logic," said Jack Geraghty of Gerard Klauer Mattison in New York. "In the PlayStation 2, there are two of them in there, and the main one is made by Toshiba."
Called the "Emotion Engine," the Toshiba chips are much larger and more complicated than the PlayStation's previous main processors from LSI. While LSI's chips play a major role in the PlayStation 2, they serve primarily to integrate the units' various functions, Geraghty said.
In addition to gaming, the PlayStation 2, which will retail for $299, will allow consumers to watch DVD films or listen to music CDs.
"If there's a component shortage, I'd bet it is the Toshiba chip," Geraghty said. "Its new, complicated and just being rolled out. You can always have glitches in anything new."
The new units also use flash memory chips, which have been scarce amid soaring demand for wireless communications devices. The company may also be scrambling to acquire other commodity electronic components such as capacitors, Geraghty said.
Separately, THQ Inc. (THQI: Research, Estimates), a developer of software for the video game industry, said Thursday the PlayStation 2 production shortfall will not affect its expectations for its fiscal fourth quarter or its fiscal 2001 results.
"From the beginning, our expectation was that sales of games for the PlayStation 2 would account for less than 5 percent of THQ's revenue for this year's fourth quarter," Brian Farrell, THQ's president and chief executive, said in a statement.
THQ shares were up $2.31, or 11 percent, at $23.38 in afternoon Nasdaq trade. 
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LSI Logic
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