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LSI Corporation reported adjusted earnings per share (excluding amortization, restructuring expenses but including stock-based compensation) of 16 cents in the fourth quarter of 2013, which not only beat the Zacks Consensus Estimate of 13 cents but also increased 21.5% from the year-ago quarter.

The company did not provide any guidance as Avago Technologies (AVGO - Analyst Report) has agreed to acquire LSI for approximately $6.6 billion or $11.15 per share. The deal is expected to be completed in the first half of 2014.

Revenues

LSI Corp.’s fourth-quarter revenues of $605.1 million increased 0.8% from the year-ago quarter and came ahead of the Zacks Consensus Estimate of $601 million. Reported revenues were also within management’s guidance range of $580.0 million to $620.0 million.

During the quarter, revenues from storage, networking and IP came in at $482 million, $93 million and $30 million, respectively. Moreover, 80% of the quarter’s revenues were derived from server and storage semiconductors.

Margins

LSI Corp.’s adjusted gross profit (excluding amortization but including stock-based compensation) increased 1.9% on a year-over-year basis to $352.5 million primarily due to a higher revenue base. Margins expanded 62 basis points (bps) during the same period.

Adjusted operating margin (excluding amortization, restructuring expenses but including stock-based compensation) was 19.8%, up from 16.8% in the year-ago quarter, reflecting lower operating expenses. Operating expenses as a percentage of revenues were down from 40.8% in the year-ago quarter to 38.5%.

LSI Corp.’s adjusted net income (excluding amortization, restructuring expenses but including stock-based compensation) came in at $92.1 million or 16 cents compared to $75.6 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 $809.8 million compared to $664.6 million in the previous quarter.

Cash from operating activities was $134.2 million compared with $62.9 million in the previous quarter.

The company did not purchase any stock during the quarter but paid dividends of $16.5 million to shareholders. Owing to the acquisition, the company will also not repurchase or pay dividends.

Conclusion

LSI Corp. delivered better-than-expected fourth-quarter results on the heels of its acquisition news. We believe that LSI was a potent acquisition target because of its broad range of products that enables it to serve a diverse clientele in the hard disk drive, server and networking end markets.

Moreover, LSI Corp. is gaining rapid traction in the growing PCIe flash adapter market segment which is a big positive for the company.

LSI’s association with Cisco (CSCO - Analyst Report) in the networking space should positively impact the company. Popularity of the company’s flash suites can be gauged from some high-value customer wins, namely Intel Corp. (INTC - Analyst Report), International Business Machines Corp. and Oracle, to name a few.

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

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