We recently reiterated our NEUTRAL rating on LSI Corporation (LSI). LSI Corporation designs, develops, and markets complex high-performance semiconductors and storage systems.
First quarter results beat expectations driven by improved demand from all end-markets. Net income came in at $23 million or $0.03 per share compared with a net loss of $104 million or $0.16 per share in the year-ago quarter and a net income of $64.8 million or $0.10 per share in the previous quarter. Net income (excluding special items but including stock-based compensation expense) came in at $0.11 per share, easily beating the Zacks Consensus Estimate of $0.07 per share.
LSI Corp. has been taking strategic steps to improve its business model and transform LSI into storage and networking company over the past two years. The company continues to focus on the storage systems business for providing products to leading OEM storage companies, rather than selling directly to end-customers. LSI Corp. is currently focusing on fewer and larger end-markets. It aims to focus on established and growing applications and narrow its focus to market-leading customers.
The demand for storage continues to depict a strong secular trend driven by a number of factors including the rise in demand for data-intensive content such as video and use of internet for most applications.
In 2009, LSI Corporation acquired privately-held ONStor, which provides clustered network-attached storage solutions to help enterprises consolidate, protect and manage the accelerating growth of unstructured data.
LSI Corp. also acquired the assets and certain associated intellectual properties of the 3ware RAID adapter business of Applied Micro Circuits Corp (AMCC) for approximately $20 million in cash. 3ware products include SAS and SATA RAID adapters and high-capacity storage solutions for a broad range of applications. These acquisitions should bolster the storage segment of the company.
LSI Corp. is well positioned to benefit from a broad enterprise rebound in late 2010. Networking business continues to gain traction and should offset declines in legacy products. The pick-up in Enterprise spending (as LSI has heavy exposure to enterprise spending) should boost the business going forward. Besides, LSI has become a fabless company reducing its fixed costs. This should improve margins in the coming quarters.
The stock dipped in late 2008 and has not managed to recover lost ground since then. The top-line plunged in the fall of 2008 due to the economic crisis leading to a significant decline in demand from all end-markets. Nevertheless, sales have picked up from the second half of 2009 and we expect solid improvement in business in the second half of 2010.
Given the sluggish improvement in the demand environment, we maintain our Neutral rating on shares of LSI Corporation.
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Read the full analyst report on “AMCC”
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