LSI Life Storage Inc

We continue to maintain our Neutral recommendation on LSI Corporation (LSI).

LSI Corp. recently sold its external storage systems business (accounting for roughly 27% of total sales) to NetApp Inc. (NTAP) for $480 million in cash. The storage business generated revenues of $705 million in 2010. LSI Corp will retain its RAID adapter business, which develops MegaRAID and 3ware storage controllers and software for direct-attached storage environments.

We view this divestiture as positive. Not only will it boost margins, but the streamlined company can better focus on its networking semiconductor and enterprise storage business. LSI Corp. will now become a pureplay semiconductor company.

LSI Corp. has been taking strategic steps to improve its business model and transform itself into a storage and networking company over the past two years. LSI Corp. is currently focusing on fewer and larger end-markets. It aims to focus on established and growing applications and narrowed its focus to market-leading customers. LSI Corp.’s continuing adoption of newer storage protocols such as SAS and ramp in new entry-level storage systems may steadily improve its position in the hard drive market.

Over the last two years, LSI Corp. has invested heavily in a number of product lines, some of which have started to contribute to the top line this year. Management expects the majority of these products to start over the course of 2011 and 2012. The company will be ramping new enterprise SOCs at Seagate (STX) – the largest customer in the third quarter. Starting in 2012, LSI Corp. will start shipping SoCs to other OEMs, such as Toshiba and Samsung as well.

Earlier, LSI Corporation generated revenues of $501 million in the second quarter of 2011, up 6% year over year and sequentially and surpassed management’s expectations of revenues between $465 million and $495 million.

Net income from continuing operations came in at $28.4 million or 5 cents per share compared to $10.1 million or 3 cents per share in the previous quarter and net income of $7.4 million or 1 cent per share in the year-ago quarter.  

Excluding one-time items, net income per share from continuing operations came in at 11 cents, easily beating the Zacks Consensus Estimate of 8 cents.

We are also encouraged by the company’s upbeat guidance for the third quarter driven by better seasonality in service providers and enterprise IT spending, share gains on existing HDD platforms and ramp-up of new new platforms at new and existing storage and networking customers.

Moreover, the recent stock buyback program announced by management will boost the bottom line. Earnings estimates have inched up in the last sixty days.

We continue to maintain a Neutral recommendation on the stock. Our recommendation is supported by a Zacks #3 Rank which translates into a short-term rating of Hold. 

 
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