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Xyratex: Fiscal 2Q11 Financial Results

HDD capital equipment revenues decreased 67%.

(in US$ millions) 2Q10 2Q11  6 mo. 10   6 mo. 11
 Revenues 455.9 338.5 774.9  699.0
 Growth   -26%   -10%
 Net income (loss)  43.7 (4.6) 69.9 0.1

Xyratex Ltd announced results for the second fiscal quarter ended May 31, 2011.

Revenues for the second quarter were $338.5 million, a decrease of 26% compared to revenues of $455.9 million for the same period last year.

For the second quarter, GAAP net loss was $4.6 million, or $0.15 per share, compared to GAAP net income of $43.7 million, or $1.39 per diluted share, in the same period last year. Non-GAAP net loss was $1.9 million, or $0.06 per diluted share, compared to non-GAAP net income of $46.8 million, or $1.49 per share, in the same quarter a year ago.

Gross profit margin in the second quarter decreased to 12.9%, compared to 18.1% in the same period last year, primarily due to significantly lower revenues and gross margins in the Storage Infrastructure business.

Revenues from sales of Networked Storage Solutions (NSS) products were $301.2 million as compared to $343.9 million in the same quarter a year ago, a decrease of 12.4%. Gross profit margin in the NSS business was 14.9% as compared to 12.8% a year ago.

Revenues from sales of Storage Infrastructure (SI) products were $37.4 million as compared to $112 million in the same quarter a year ago, a decrease of 66.6%. Gross profit margin in the SI business was a negative 2.7% as compared to 34.6% a year ago. This negative margin was a result of the impact of fixed operating costs on lower revenues and additional provisions related to reduced customer demand in 2011.

"I was pleased with the performance of our NSS business in the second quarter. The Enterprise External Storage market remains strong, our OEM partners are gaining share and we are executing well overall to their needs.In addition, our recently announced ClusterStor 3000 product launch is receiving very positive customer reaction and enables us, through our OEM partners, to expand our accessible market into the HPC growth sector. In contrast, the disk drive capital equipment sector remains very challenged with the industry delaying incremental capital investment pending the outcome of the regulatory reviews of the proposed industry consolidations announced earlier this year. This is having a significant negative impact on our SI business in the near term," said Steve Barber, CEO of Xyratex. "Given this current environment in the disk drive industry, we are planning further reductions in fixed costs while protecting our investments in key next generation products needed to improve our competitive position. I remain confident in the overall opportunities that exist in both the market sectors we serve and we have a strong cash position and financial foundation as we work through some of the near-term challenges we are facing."

Share Repurchase Plan
During the quarter the Company repurchased 550,716 shares at a total cost of $5.3 million.

Business Outlook

  • Revenue in the third quarter of 2011 is projected to be in the range $336 to $376 million.
  • Fully diluted earnings per share is anticipated to be between $0.01 and $0.19 on a GAAP basis in the third quarter. On a non-GAAP basis fully diluted earnings per share is anticipated to be between $0.10 and $0.28. 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:

Richard Pearce, CFO:
"For our third quarter of 2011, we are projecting total revenue to be in the range of $336 million to $376 million, down 22% to 13% as compared to last year and down 1% to up 11% compared to 2Q. This is represented by revenue for Networked Storage Solutions of $316 million to $346 million and from Storage Infrastructure of $20 million to $30 million."

Steve Barber, CEO:
"The decision on May 30, by the EU Regulatory Authorities, to delay their decision on the proposed acquisition of Hitachi GST and Samsung's Disk Drive business, will, in our opinion, increased the uncertainty in the industry and further delay the addition of production capacity.
"On the transitioning businesses, and as assumed within our FY '11 plan, our NetApp business top line revenue has reduced compared to 2010, in line with the agreement terms we have explained previously. For this year, we are providing a minimum of 75% of NetApp demand with the design royalty received for the balance of demand fulfilled by NetApp's CM partner. And EMC Data Domain business remains strong in the near term, but as previously stated, it's outlook to reduce towards yearend, as the product line is anticipated to be in-sourced by EMC.
"On this growth business relationship, our initiative with IBM continues to grow, with their XIV and V7000 product ranges. We're working closely with HP, following the three-part acquisition as they integrate product range, and we align our fulfillment processes with HP's expectations. Similarly, we're working with Dell to integrate the Component business within their processes.
"NetApp was around 48%, Dell this quarter was 24%, but this quarter, we're including the Compellent business where previously, when we provided that obviously, we haven't included the Compellent side of the business. So in the comparisons, one would need to consider that. And IBM was approximately 12%. And that's obviously the NSS revenue only.
"In our fiscal second quarter, we shipped 897.2 petabytes of external storage. It was only at 10.3% decline over the prior quarter and a 9.1% growth over year-ago."

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