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LSI Corporation posted adjusted earnings per share (excluding one-time items but including stock-based compensation) of 12 cents in the first quarter of 2013, beating the Zacks Consensus Estimate of 8 cents.


LSI Corp. generated revenues of $568.6 million in the first quarter, down 8.6% year over year. Reported revenues were toward the higher end of management’s wide guidance range of $535.0 million to $575.0 million and above the Zacks Consensus Estimate of $563.0 million.

Server and storage semiconductor revenues (products include ServeRAID adapter and software, flash, SAS, SAN and HDD) were $438.0 million, down 10.0% from the year-ago quarter and 9.0% sequentially.

Networking revenues decreased 13.0% year over year and 3.0% sequentially to $93.0 million, mainly due to decline in legacy revenues. Revenues from the IP business were $38.0 million, up from $26.0 million in the prior quarter.


Reported gross margin came in at 50.9%, up from 46.1% in the year-ago quarter. Gross margin expansion was mainly due to higher-than-expected IP revenues as well as lower manufacturing costs. Operating margin was 1.5% compared with 1.8% in the year-ago quarter.

Net income from continuing operations was $18.4 million or 3 cents per share versus $75.2 million or 13 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 $68.5 million or 12 cents compared with $101.9 million or 17 cents.

Balance Sheet & Cash Flow

LSI Corp. ended the quarter with cash and short-term investments of $658.5 million, slightly down from $676.0 million in the previous quarter.

Cash from operating activities was $62.8 million, down from $94.9 million in the prior quarter. Capital expenditures were $25.1 million, down from $27.5 million in the previous quarter. The company repurchased 9 million shares for approximately $60.8 million in the quarter under its $750 million share repurchase program.


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 the second half of 2013.

For second quarter 2013, management expects revenues between $560.0 million and $600.0 million. GAAP gross margin is expected in the range of 48.0% to 52.0%, while non-GAAP gross margin is expected in the range of 53.0% to 55.0%. GAAP EPS will be in the range of (2)-7 cents, while non-GAAP EPS will be in the range of 10-16 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. The HDD business is expected to remain flat while networking semiconductor revenues could grow slightly sequentially.


LSI Corp. delivered decent first quarter results with the top and bottom lines exceeding the Zacks Consensus Estimates. The continuing macro uncertainty and dwindling PC market prompted the company to provide a conservative guidance. But management’s optimism regarding new product launches is encouraging. Moreover, continuous share buyback 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 wins, 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), given the continuing macro uncertainty and dwindling PC market.

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