Emulex: Fiscal 3Q09 Financial Results

Emulex Corporation announced results for its third fiscal quarter ended March 29, 2009.

Third Quarter Financial Highlights

• Total net revenues of $78.6 million
• Host Server Product net revenues of $59.0 million, or 75% of total net revenues
• Embedded Storage Product net revenues of $19.4 million, or 25% of total net revenues
• GAAP gross margin of 60% and non-GAAP gross margin of 66%
• GAAP operating loss of $8.4 million, or (11%) of total net revenues, and non-GAAP operating income of 3.8 million, or 5% of total net revenues
• GAAP loss per share of $0.07 and non-GAAP diluted earnings per share of $0.05
• Cash, cash equivalents and investments of $302.7 million, a sequential increase of $17.5 million from the prior quarter
• Inventory turnover of 12.8 times

Business Highlights

• Emulex captured over three percentage points of revenue and two percentage points of port market share over its nearest competitor in the total Fibre Channel Host Bus Adapter (HBA) market during the last calendar quarter of 2008 according to Dell’Oro Group
• Launched Emulex OneConnect Universal Converged Network Adapters (UCNAs), a groundbreaking single-chip, high-performance connectivity solution that enables true network convergence and full protocol offload for TCP/IP, iSCSI, NAS and Fibre Channel over Ethernet (FCoE)
• Announced Emulex Secure HBA technology, the industry’s first 8Gb/s Encryption HBA. It provides enterprise-class, host-based security solution that protects data across the enterprise, encrypts data in-flight and at-rest and provides effective access controls
• Introduced Emulex OneCommand, open automated and centralized management framework that provides a single interface for the deployment, dynamic provisioning, asset management, security and quality of service of I/O connectivity
• Launched Emulex Connect Partner Program, an ecosystem of over 75 industry leaders and innovators, offering partners the ability to collaborate on technology supporting network convergence, virtualization, data integrity, security, target device enablement and vertical market solutions
• Company favored by IT professionals in March 2009 IT Brand Pulse FCoE Adapter Leader Survey over all other vendors in five out of six categories: overall FCoE Adapter Market, Performance, Reliability, Service and Support, and Innovation
• Emulex LightPulse Fibre Channel HBAs named 2009 Hardware Product of the Year by Network Computing
• Emulex LightPulse 8Gb/s Fibre Channel HBAs available and optimized for use with the new generation of IBM System x3650 M2 and IBM System x3550 M2 equipped with Intel QuickPath Interconnect technology (QPI)
• Emulex LPe1205-HP 8Gb/s Fibre Channel HBA’s (mezzanine cards) available and optimized for use with HP BladeSystem Matrix, c-Class and server blades, including HP ProLiant G6 and HP Integrity blades
• Emulex LightPulse Fibre Channel HBAs and FCoE Converged Network Adapters (CNAs) fully supported with VMware in-box drivers as part of VMware vSphere 4
• Emulex LightPulse HBA’s and CNAs supported in the latest SUSE Linux Enterprise Server 11 release from Novell
• Emulex LightPulse HBAs and OneConnect UCNAs optimized for use with the Intel Xeon processor 5500 series (formerly codenamed Nehalem)

Financial Results
Third quarter total net revenues were $78.6 million, a decrease of 39% from the comparable quarter of last year and a 28% sequential decrease. Third quarter GAAP net loss was $6.0 million, or $0.07 per share, compared to GAAP net income of $15.5 million, or $0.19 per diluted share, reported in Q3 of fiscal 2008 and net income of $10.5 million, or $0.13 per diluted share, in Q2 of fiscal 2009. Non-GAAP net income for the third quarter, which excludes amortization of intangibles, stock-based compensation, and severance along with associated costs, was $4.4 million, or $0.05 per diluted share. Non-GAAP net income per diluted share decreased 84% from $0.31 per diluted share reported in Q3 of fiscal 2008, and decreased 78% sequentially from $0.23 per diluted share reported in Q2 of fiscal 2009. Reconciliations between GAAP and non-GAAP results are included in the accompanying financial data.

President and CEO Jim McCluney commented: "Although the third quarter started off slower than we would have liked, I’m very pleased with our overall execution during the March quarter. In addition to meeting our revenue and earnings targets, our focus on controllable expenses and maintaining a strong balance sheet resulted in lower inventories, lower accounts receivables and an increase in our cash balances by over $17 million during the quarter."

Mr. McCluney added: "Our Universal Converged Network Adapter (UCNA) announcement in February demonstrated our leadership in the emerging 10Gb/s Ethernet market and raised the bar for competitors in the converged networks of the future. Our UCNA, unlike the competition, is based on industry-leading 10Gb/s Ethernet technology, supports multiple protocols including TCP/IP, iSCSI, and FCoE, and leverages our field hardened enterprise Fibre Channel stack. Our new 10Gb/s Ethernet adapter solutions include 10Gb/s NICs and iSCSI adapters which expand our addressable markets beyond storage networking and into to the high volume local area network (LAN) market. We recognized early on that to lead in the converged data center we had to listen to our customers, be willing to create a new business model, and seek the right technology partners to create long term value. Our converged I/O strategy is the culmination of these elements and it is being embraced by our OEM customers and remains unmatched by our competitors."

Business Outlook
Although actual results may vary depending on a variety of factors, many of which are outside the Company’s control, including the economic uncertainty resulting from recent disruptions in global credit and equity markets, Emulex is providing guidance for its fourth fiscal quarter ending June 28, 2009. For the fourth quarter fiscal 2009 Emulex is forecasting total net revenues in the range of $73-$80 million. The Company expects non-GAAP gross margin will be approximately 66% and non-GAAP earnings per diluted share could amount to $0.01-$0.05 in the fourth quarter. On a GAAP basis, Emulex expects gross margin of approximately 60% and diluted fourth quarter loss per share of $0.01-$0.05 per diluted share. GAAP estimates reflect approximately $0.06 per diluted share in expected charges arising primarily from amortization of intangibles and stock-based compensation for the fourth quarter.