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LSI Corp In Line, Outlook Cautious

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LSI Corporation (LSI - Free Report) posted a net income per share (excluding one-time items but including stock-based compensation) of 13 cents in the third quarter of 2012, in line with the Zacks Consensus Estimate.
Net income from continuing operations came in at $39.6 million or 7 cents per share versus a net income of $58.7 million or 10 cents per diluted share in the second quarter of 2012 and a net income of $29.3 million or 5 cents per diluted share in the year-ago quarter.
The company generated revenues of $624 million in the third quarter of 2012, up 14.1% year over year but down 6.0% sequentially. Reported revenues came in toward the lower end of management’s guidance range of $620 million and $660 million.
The year-over-year increase in revenues was driven by growth from new products, including SandForce FSPs, Nytro PCIe flash adapters and Axxia multi-core communications processors.
The sequential decrease was due to a weak PC market leading to declines in the company’s hard disk drive (HDD) business. The HDD business posted a 20% sequential decline due to lower PC sales affecting ACD demand and resulting inventory adjustments by key customers.
Networking business, accounting for 17% of total revenue, reported revenue of $106 million; down 10% on a year-over-year basis but up 7% sequentially.  Server and storage semiconductor business revenue (consists of ServeRAID adapter and software, flash, SAS, SAN and HDD businesses), accounted for 79% of total revenue, was up 22% on a year-over-year basis but down 8% sequentially to $493 million. 
The sequential decrease was primarily driven by a reduction in demand for HDD products, partially offset by increased demand for flash products. 
Revenues for the IP business were approximately $25 million.
Gross margin (excluding special items) came in at 53.9%, flat with the previous quarter.
Operating margin came in at 17.7%, down from 18.6% in the previous quarter but up from 15.2% in the year-ago quarter.
Balance Sheet
During the quarter, LSI Corp generated $112 million of cash from operating activities and incurred $26 million in capital expenditures. The company repurchased 7 million shares for approximately $50 million in the second quarter under its $750 million share repurchase program.
LSI Corp. has repurchased a total of 102 million shares, thereby utilizing approximately $725 of its current $750 million authorization. In addition, the company’s board authorized a new $500 million stock repurchase program in August.
LSI Corp. ended the quarter with cash and short-term investments of $643 million, up from $601.1 million at the end of the previous quarter.
Going forward, management expects revenues between $570 million and $610 million in the fourth quarter of 2012. Management continues to be cautious due to the uncertainty in the macro environment and weak PC demand. 
Demand continues to be weak, and hence LSI Corp. expects to see lower demand for components in the fourth quarter, resulting from the ongoing softness in the PC end market. LSI expects both custom and standard product along with flash storage processors to decline due to the ongoing weakness in the PC market, elevated shipments in the third quarter in support of new product launches, and SSD PC enabled rollouts being lower than previous expectations.
In the long run, management expects LSI to continue to benefit from strong, secular growth in data and traffic, from the rapid adoption of flash-based products and the penetration of the company’s products into large web and cloud data centers.
LSI Corp expects to benefit from new product cycle ramps, including PCIe flash adapters at Oracle (ORCL), Cisco (CSCO - Free Report) , International Business Machines Corporation (IBM) and a new win at a leading social networking company. Moreover, the company expects Axxia revenues to grow as it continues to ramp up at the leading base station OEM.
Server and storage semiconductor revenues are projected to be down sequentially in the fourth quarter. Networking semiconductor revenue is also expected to decline. 
Gross margin is projected around 53%, (+/-1%). Net income from continuing operations is forecasted to come in the range of a loss of 2 cents to profit of 7 cents. Excluding one-time items, income from continuing operations is estimated to come at at $0.11 to 0.17.
The results drove a 1.91% increase in the company’s share price in after hours trading to close at $6.41.
We maintain a Neutral recommendation on LSI Corporation in the long run. However, the near-term weakness forces us to confer a Zacks #4 Rank on the stock, which translates into a short-term rating of Sell on the stock.

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