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LSI Corporation (LSI - Analyst Report) reported adjusted earnings per share (excluding amortization, restructuring expenses but including stock-based compensation) of 13 cents in the third quarter of 2013, which matched the Zacks Consensus Estimate and remained flat on a year-over-year basis.

Revenues

LSI Corp.’s third-quarter revenues of $606.9 million were down 2.7% from the year-ago quarter and lagged the Zacks Consensus Estimate of $612 million. Reported revenues were also below the mid-point of management’s guidance range of $590.0 million to $630.0 million.

Server and storage semiconductor revenues (products include ServeRAID adapter and software, flash, SAS, SAN and HDD) were $470 million, down 5% from the year-ago quarter. Networking revenues grew 3.0% year over year to $109 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 remained flat on a sequential basis at $28.0 million. The three segments generated 77%, 18% and 5% of quarterly revenues, respectively.

Margins

Although, LSI Corp’s adjusted gross profit (excluding amortization but including stock-based compensation) was down marginally (down 0.5% year over year) to $332.4 million primarily due to a lower revenue base, margins expanded 124 basis points (bps) during the same period. Gross margin expansion was mainly due to favorable product mix.

Adjusted operating margin (excluding amortization, restructuring expenses but including stock-based compensation) was 13.9%, up from 13.3% in the year-ago quarter. reflecting higher operating expenses.

LSI Corp.’s adjusted net income (excluding amortization, restructuring expenses but including stock-based compensation) came in at $72.9 million or 13 cents compared to $71.4 million or 13 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

LSI Corp. exited the quarter with cash and short-term investments of $664.6 million compared to $673.4 million in the previous quarter.

Cash from operating activities was $63.0 million compared with $77.8 million in the previous quarter. Capital expenditures were $22.0 million, up from $18.3 million in the previous quarter.

The company repurchased shares worth $41 million in the quarter under its $750 million share repurchase program and paid dividends of $16 million.

Guidance

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

For fourth-quarter 2013, management expects revenues between $580 million and $620.0 million. Management expects revenues from server and storage semiconductor to be flat to marginally up sequentially, primarily due to lower-than-expected revenues from LSI Corp.’s legacy business. Moreover, IP licensing revenues are expected to be down on a sequential basis.

Non-GAAP gross margin is expected to be approximately 54.5% (+/- 1%) while non-GAAP operating expenses are expected to range between $225 million and $235 million. Management expects LSI Corp.’s non-GAAP earnings per share to be in the range of 13 cents–19 cents. The Zacks Consensus Estimate for the fourth quarter stands at 15 cents.

Conclusion

LSI Corp. delivered modest third-quarter results as the top line lagged the Zacks Consensus Estimate but bottom line matched the same. The continuing macro uncertainty and dwindling PC market prompted the company to provide a conservative guidance. However, management’s optimism regarding product launches and product ramp is encouraging.  Moreover, LSI Corp. is gaining rapid traction in the growing PCIe flash adapter market segment which is a big positive for the company.

The company’s associations with Cisco (CSCO - Analyst Report) in the networking space should positively impact the company. Popularity of LSI’s flash suites can be gauged from some high-value customer wins, namely Intel Corp. (INTC - Analyst Report), International Business Machines Corp. (IBM - Analyst Report) and Oracle, to name a few. Moreover, continuous share buyback and dividend payout are added positives.

However, sluggish macroeconomic conditions and competition from its peers are the near-term headwinds. Moreover, the company’s conservative guidance could also be an overhang in the near term.

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

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