Xyratex: Fiscal 3Q10 Financial Results

(in US$ millions)	3Q09	3Q10	*Growth*	9 mo. 2009	9 mo. 2010	*Growth*
Networked storage solutions	208.6	317.2	52%	558.6	932.1	67%
Storage infrastructure	37.7	113.0	200%	66.3	273.0	312%
Total Revenues	246.3	420.2	71%	624.9	1,205.1	93%
Net income (loss)	7.8	37.2		(18.0)	107.2

Xyratex Ltd announced results for the third fiscal quarter ended August 31, 2010. Revenues for the third quarter were $430.2 million, an increase of 74.7% compared to revenues of $246.3 million for the same period last year.

For the third quarter, GAAP net income was $37.2 million, or $1.19 per diluted share, compared to $7.8 million, or $0.26 per diluted share, in the same period last year. Non-GAAP net income was $37.6 million or $1.20 per diluted share, compared to $10.7 million, or $0.36 per diluted share, in the same quarter a year ago.

Gross profit margin in the third quarter was 17.6%, compared to 16.7% in the same period last year. The increase in overall gross margin primarily resulted from a higher proportion of Storage Infrastructure revenue in the 2010 quarter.

Revenues from our Networked Storage Solutions products were $317.2 million as compared to $208.6 million in the same quarter a year ago, an increase of 52.1%. Gross profit margin in the Networked Storage Solutions business was 12.0% as compared to 14.0% a year ago due primarily to changes in product mix. Revenues from our Storage Infrastructure products were $113.0 million as compared to $37.7 million in the same quarter a year ago. Gross profit margin in the Storage Infrastructure business was 33.8% compared to 32.4% a year ago.

"Our third quarter results reflect our excellent execution in meeting the strong demand from customers in both of our businesses, including some pull-forward from the fourth quarter by one of our Storage Infrastructure customers. This has resulted in profit being above our expectations for the quarter and while the pull-forward has had some impact on our 4Q profitability, our overall expectations for profit and Storage Infrastructure revenues for the full year have increased." said Steve Barber, Xyratex CEO. "We continue to make very good progress in areas in which we have made strategic investments, and anticipate capitalizing on a number of these new growth opportunities. I am very pleased with the progress we have made with regard to securing new customers and programs in both businesses, which should further diversify our customer base."

Business Outlook
The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially.

Revenue in the fourth quarter of 2010 is projected to be in the range $395 to $445 million.
Fully diluted earnings per share is anticipated to be between $0.48 and $0.74 on a GAAP basis in the fourth quarter. On a non-GAAP basis fully diluted earnings per share is anticipated to be between $0.60 and $0.86. Non-GAAP earnings per share excludes amortization of intangible assets, equity compensation expense, specified non-recurring items and related taxation expense.

Comments

Abstracts of the earnings call transcript:

Steve Barber, CEO:

"We serve four of the seven tier one OEM customers who supply storage solutions to our respective markets, namely NetApp, Dell EqualLogic, IBM XIV and EMC Data Domain. Our contract with NetApp provides us with at least 75% of their volume demand through fiscal year 2011, and a minimum of 50% in the following year, recognizing that NetApp currently represents only 49% of our NSS revenues last quarter.

"In addition, we partner with strong tier two customers such as 3PAR and Compellent. And continue to see good growth from the segment of our market. We're optimistic that upon the completion of HP's acquisition of 3PAR we will serve five of the seven tier one storage providers. Similarly, we would expect that HP positions 3PAR's product portfolio within it's storage strategy. We would see increased sales demands similar to that experienced with Dell, IBM, and EMC following their acquisitions of EqualLogic, XIV and Data Domain respectively.

"We recently acquired a small team with key software development skills as part of our continued investment in strengthening our capabilities in this area.

"Compared to the last quarter, we shipped 785.22 petabytes of external storage in our fiscal third quarter, representing a 4.5% decline over the prior quarter and 81.2% growth over a year ago. For calendar Q2 on year-over-year basis, Xyratex shipments grew 98% compared to the market's 54.6% growth in capacity. And sequentially, Xyratex experienced a 12.2% increase compared to the market growth of 7.2%.

"Our third quarter '10 shipped capacity was made up of the following in terms of disk drive interface; fiber channel, 65.82 petabytes; SATA 591.4 petabytes; SAS 127.85 petabytes; and SSDs 140 terabytes.

"Next-generation energy-assisted magnetic recording technologies such as heat-assisted magnetic recording or HAMR are introduced in the inter-volume production.

"Technology transitions such as the introduction of HAMR and bit-patterned media into volume production as well as incumbent technologies reaching practical areal density limits are key top level metrics that will impact SI's model in the time horizon of four to eight quarters."