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Earnings estimates for LSI Corporation (NASDAQ:LSI) have been more or less static ahead of the company’s fourth quarter results, expected on January 25, 2012.

Meanwhile, although third quarter results for LSI Corp. beat expectations, guidance for the fourth quarter was below expectations due to supply constraints in the Hard Disk Drive (HDD) business. LSI Corporation expects revenues between $500 million and $550 million in the fourth quarter of 2011. The guidance assumes that approximately $35 million – $45 million will be affected by primarily supply-related constraints, largely affecting the Hard Disk Drive business.

Due to manufacturing constraints, management estimates that Hard Disk Drive business will decline over 10% sequentially. LSI Corp projects that server and storage semiconductor revenues would be down sequentially in the fourth quarter, driven by HDD declines.

Revenues from the networking semiconductor business will be flat to down slightly, fueled by last-time purchases of legacy products.

Gross margin is projected around 51%, +/- 1%. Income from continuing operations is forecast to come around $0.04–$0.08 per share. Excluding one-time items and stock-based compensation, income from continuing operations came in at $0.06–$0.14.

LSI Corporation recently acquired SandForce Inc, for $322 million. The acquisition is expected to strengthen LSI’s strong position in storage technology solutions. We view this acquisition as positive as it will also use the cash derived from the divestiture of the external storage systems business (accounting for roughly 27% of total sales) to NetApp Inc. for $480 million in cash.

The acquisition is also expected to enhance LSI's competitive position in the fast-growing server and storage PCIe flash adapter space. Management stated that PCIe flash-based adapters and flash storage processors will together represent a greater than $2 billion TAM expansion for LSI in the next several years.

Earlier, LSI Corporation divested its lower margin Engenio storage systems. We believe the divestiture of the storage systems business will positively impact the margin structure along with ramp up of higher margin networking and SAS products. We expect margins to steadily pick up in 2012. The company is also utilizing idle cash to buy back shares, thereby boosting the bottom line.

Although the supply constraints seem to have eased down of late, we continue to maintain a Neutral recommendation on LSI Corporation.

Our Neutral recommendation is supported by Zacks #3 rank, which translates into a short-term rating of Hold.

LSI CORP: Free Stock Analysis Report

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Source: LSI Corporation: Earnings Preview