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LSI Corporation posted adjusted earnings per share (excluding one-time items but including stock-based compensation) of 11 cents in the second quarter of 2013, which was above the Zacks Consensus Estimate of 9 cents but below the year-ago earnings per share of 16 cents.

Revenues

LSI Corp. generated revenues of $589.6 million in the second quarter, down 10.6% year over year. Reported revenues were toward the higher end of management’s wide guidance range of $560.0 million to $600.0 million and above the Zacks Consensus Estimate of $581.0 million.

Server and storage semiconductor revenues (products include ServeRAID adapter and software, flash, SAS, SAN and HDD) were $457.0 million, down 14.0% from the year-ago quarter but up 4.0% sequentially. The year-over-year decline was mainly due to the cessation of the Thailand-flood benefit over HDD pricing (HDD price shot up due to supply shortage caused by the flood), while the sequential improvement was due to strength in server, storage connectivity and flash businesses.

Networking revenues grew 6.0% year over year and 13.0% sequentially to $105.0 million, mainly due to solid demand from the service provider end market, partially offset by decline in legacy product demand. Revenues from the IP business were $28.0 million, down from $38.0 million in the prior quarter.

Margins

Reported gross profit declined 9.8% year over year to $299.3 million. Gross margin came in at 50.8%, slightly up from 50.3% in the year-ago quarter. Gross margin expansion was mainly due to favorable product mix. Operating margin was 4.7%, down from 9.2% in the year-ago quarter reflecting higher operating expenses.

Net income from continuing operations was $24.6 million or 4 cents per share versus $58.7 million or 10 cents per share in the year-ago quarter. But excluding one-time items and including stock-based compensation expense, adjusted net income from continuing operations was $62.1 million or 11 cents compared with $95.2 million or 16 cents in the year-ago quarter.

Balance Sheet & Cash Flow

LSI Corp. ended the quarter with cash and short-term investments of $673.4 million, up from $658.5 million in the previous quarter.

Cash from operating activities was $77.8 million, up from $62.8 million in the prior quarter. Capital expenditures were $18.3 million, down from $25.1 million in the previous quarter.

The company repurchased 9 million shares for approximately $61.5 million in the quarter under its $750 million share repurchase program. The company also announced its first-ever quarterly cash dividend of 3 cents a share, which is scheduled to be paid on Sep 20.

Guidance

Management continues to be cautious due to the uncertainty in the macro environment and weak PC demand. But with the growing demand for Virtual Desktop Infrastructure, Hadoop and other Big Data applications, LSI is positive about rapid adoption of its Nytro flash adapter solutions. Also, it believes that higher sales of flash-based products and new product launches will boost its performance in 2013.

For third quarter 2013, management expects revenues between $590.0 million and $630.0 million. GAAP gross margin is expected in the range of 49.0% to 53.0%, while non-GAAP gross margin is expected in the range of 53.5% to 55.5%. GAAP EPS will be in the range of 1-11 cents, while non-GAAP EPS will be in the range of 13-19 cents.

Management expects mid-single-digit growth in product revenues, offset by declines in IP licensing. Server and storage semiconductor revenues are expected to be up sequentially, given improving flash businesses as well as server and storage connectivity businesses.

Conclusion

LSI Corp. delivered decent second quarter results with the top and bottom lines exceeding the Zacks Consensus Estimate. The continuing macro uncertainty and dwindling PC market prompted the company to provide a conservative guidance. But management’s optimism regarding new product launches and product ramp is encouraging. Moreover, continuous share buyback and dividend payout is also a positive for earnings.

We think that LSI’s focus on flash-based technology will be beneficial for the company, going forward. Popularity of LSI’s Nytro flash suites can be gauged from some high-value customer win, namely Intel Corp. (INTC - Analyst Report), IBM Corp. (IBM - Analyst Report), Oracle (ORCL - Analyst Report), Cisco, NetApp, Supermicro, EMC Corp. and Dell.

Currently, LSI Corp. holds a Zacks Rank #3 (Hold).

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