LSI: Fiscal 3Q10 Financial Results

(in US$ millions)	3Q09	3Q10	9 mo. 09	9 mo. 10
Revenues	578.4	629.0	1,581	1,906
*Growth*		9%		*21%*
Net income (loss)	52.5	23.4	(112.5)	53.4

(in US$ millions)	3Q09	3Q10	Growth
Semiconductor revenues	371.8	390.1	5%
Storage systems revenues	206.6	238.9	16%
TOTAL	578.4	629.0	9%

LSI Corporation reported results for its third quarter ended October 3, 2010.

Third Quarter 2010 News Release Summary

Third quarter 2010 revenues of $629 million
Third quarter 2010 GAAP net income of 4 cents per diluted share
Third quarter 2010 non-GAAP net income of 13 cents per diluted share
Third quarter operating cash flows of $82 million

Fourth Quarter 2010 Business Outlook

Projected revenues of $635 million to $665 million
GAAP net (loss)/income in the range of ($0.01) to $0.08 per share
Non-GAAP net income in the range of $0.10 to $0.16 per share

Third quarter 2010 revenues were $629 million, a 9% increase year-over-year compared to $578 million reported in the third quarter of 2009, and compares to $639 million reported in the second quarter of 2010.

Third quarter 2010 GAAP net income was $23 million or 4 cents per diluted share, compared to third quarter 2009 GAAP net income of $52 million or 8 cents per diluted share. Third quarter 2009 GAAP results included a tax benefit of $65 million, or 10 cents per diluted share. Third quarter 2010 GAAP results compare to second quarter 2010 GAAP net income of $7 million or 1 cent per diluted share. Third quarter 2010 GAAP net income included a net charge of $56 million from special items, consisting primarily of $40 million of amortization of acquisition-related items, $17 million of stock-based compensation expense, $4 million of net restructuring and other items, and $5 million of gain on the sale of securities.

Third quarter 2010 non-GAAP net income was $79 million or 13 cents per diluted share, compared to third quarter 2009 non-GAAP net income of $119 million or 18 cents per diluted share. Third quarter 2009 non-GAAP results included earnings of 10 cents per diluted share reflecting the above-mentioned tax benefit. Second quarter 2010 non-GAAP net income was $71 million or 11 cents per diluted share.

Cash and short-term investments totaled approximately $601 million at quarter end. The company completed third-quarter purchases of approximately 32 million shares of its common stock for approximately $137 million. On a year-to-date basis, the company has purchased approximately 46 million shares of its common stock for approximately $218 million under its $250 million share repurchase program.

"Healthy growth in our storage systems business coupled with strong execution contributed to solid operating performance, with net income near the high end of our guidance range, despite some end-market softness and related customer inventory adjustments that affected sequential revenues," said Abhi Talwalkar, LSI president and chief executive officer. "While end-market demand challenges could continue, we expect to benefit from new product ramps in 2011 as several of our design wins with top-tier storage and networking customers transition to production."

Bryon Look, LSI CFO and chief administrative officer, said: "Our third quarter results reflect a continuing, strong focus on achieving our business model targets. Gross margins were at the high end of our guidance range, showing solid quarterly expansion and much improvement versus year-ago levels, while operating margins continued to grow on a sequential basis and were sharply higher year over year. Operating cash flows grew 21% sequentially to $82 million and were $256 million on a year-to-date basis, approximately double the $128 million recorded in the same period last year."

LSI Fourth Quarter 2010 Business Outlook
lsi_fiscal_3q10_financial_results_540

Capital spending is projected to be around $15 million in the fourth quarter and approximately $55 million in total for 2010.

Depreciation and software amortization is projected to be around $27 million in the fourth quarter and approximately $107 million in total for 2010.

Comments

Abstracts of the earnings call transcript:

Abhi Talwalkar, president and CEO:
"Overall, LSI revenues came in at $629 million, which was towards the low end of our guidance range. Softness was driven largely by declines in shipments of hard disk drive SoCs precipitated by well publicized challenges in the hard disk drive end market and associated inventory burn, as well as the anticipated inventory adjustments at our customers in our fibre channel SAN and SAS business.
Our midrange segment also saw growth at multiple OEMs. Existing customers such as IBM, Teradata, Dell and SGI all contributed to our sequential growth and are expected to deliver overall growth in Q4 as well.
"At IBM, we have solidified roadmap commitments to extend LSI solutions into 2011 and beyond. In the entry segment, IBM launched the DS3500 series, and in the midrange segment, we are releasing new software extensions and new family members to the DS5000 series.
"As you may be aware, IBM recently extended its midrange offering with the announcement of the Storwize V7000. This is a complementary offering that is positioned above the DS5000, which is sourced from LSI.
"We’ve been driving customer expansion through the development of new OEMs that add application and channel value on top of our systems. This category includes companies such as BlueArc, Quantum, ZTE, Cray, IBM’s cloud and analytics offerings and a number of other OEMs. This category delivered growth this quarter and is expected to grow for the full year.
"IBM has chosen our next generation SAS ROC and RAID software for their high volume xSeries server product line. Dell and Cisco have already chosen LSI ROC devices and RAID software for their Romley generation servers, and we have made significant progress at another leading server OEM for future SAS products.
"Turning to hard disk drives, we are solidly position to grow SoC share as our solutions become increasingly deployed by customers. In the third quarter, we began ramping SoCs in the Seagate Savvio and Constellation enterprise drives.
"We expect to expand our footprint to additional enterprise drives at Seagate as we go forward. We are also shipping SoCs into Hitachi’s Ultrastar enterprise offering.
"In hard disk drives, we have begun ramping enterprise SoCs at Seagate and we’ll expand to additional enterprise platforms as we move through 2011.
"In the second half of next year, we also expect to gain share in client platforms at Seagate. In SAS, we expect IBM, Dell and Cisco to ramp Romley generation servers with LSI solutions and expect to see ramps in our new solid state storage adapters.
"For Ethernet connectivity in the data center, we are supplying a custom 10 gigabit Ethernet solution for server applications to Emulex in the product line that was formerly server engines."

Bryon Look, CFO:
"Turning now to our storage systems business which includes both external storage systems and server RAID adapters and software. Storage systems revenues were sequentially up 7% to $239 million. This represented a 16% improvement in systems revenues as compared to Q3 2009. The storage system segment represented 38% of LSI’s total revenues in the third quarter.
"We expect both our networking and storage semiconductor businesses to be flat to slightly down relative to Q3, while we expect our storage systems business to be sequentially up."