Xyratex: Fiscal 3Q11 Financial Results

Xyratex Ltd announced results for the third fiscal quarter ended August 31, 2011.

Revenues for the third quarter were $361.8 million, a decrease of 16% compared to revenues of $430.2 million for the same period last year.

For the third quarter, GAAP net income was $9.7 million, or $0.32 per diluted share, compared to GAAP net income of $37.2 million, or $1.19 per diluted share, in the same period last year. Non-GAAP net income was $12.7 million, or $0.42 per diluted share, compared to non-GAAP net income of $37.6 million, or $1.20 per diluted share, in the same quarter a year ago.

Gross profit margin in the third quarter decreased to 16.7%, compared to 17.6% in the same period last year, reflecting significantly lower revenues and gross margins in the Storage Infrastructure (SI) business partially offset by increased gross margins in the Networked Storage Solutions (NSS) business.

Revenues from sales of our NSS products were $336.6 million as compared to $317.2 million in the same quarter a year ago, an increase of 6%. Gross profit margin in the NSS business was 17.2% as compared to 12.0% a year ago. The increase in gross margin was primarily due to a favorable customer and product mix. Revenues from sales of our SI products were $25.2 million as compared to $113 million in the same quarter a year ago, a decrease of 78%. Gross profit margin in the SI business was 9.6% as compared to 33.8% a year ago. The decrease in gross margin was primarily the result of the impact of fixed operating costs on lower revenues. Additionally, as a result of the bankruptcy filing by Solyndra, Xyratex has recorded a bad debt provision of approximately $1 million.

During the quarter the Company repurchased 2,064,480 of its common shares at a total cost of $18.6 million. During the first nine months of the fiscal year a total of 2,615,196 shares have been repurchased, representing 8.5% of issued shares outstanding as of February 28, 2011, at a total cost of $23.9 million. The shares were repurchased under the previously announced share repurchase plan. Also, as previously announced, the Company paid its first dividend in the quarter. The cash dividend was set at $0.05 a share and totaled approximately $1.5 million. The Company’s cash balance amounted to $136.2 million at the end of the quarter, an increase of $9.3 million in the quarter and of $45.4 million in the first nine months of the fiscal year.

"Overall, I was pleased with our performance," said Steve Barber, CEO of Xyratex. "I was very pleased with the performance of our NSS business in the third quarter. The Enterprise External Storage market remains strong, and we are executing well overall to meet the needs of our customers. In addition, we continue to invest in other growth sectors that will broaden our market opportunities. Our SI business performed within our expectations but, as we have mentioned throughout the year it is being negatively affected by a number of factors, including the delay in regulatory approval of the two pending disk drive industry acquisitions by Seagate and Western Digital. As a result, the disk drive capital equipment sector remains very challenged with the industry delaying incremental capital investment. Given this current market environment, we are now implementing significant reductions in fixed costs in the SI business while protecting our investments in key next generation products needed to improve our competitive position. We have a strong cash position which will allow us to invest in strategic areas as well as continue to buy back shares."

Business Outlook

• Revenue in the fourth quarter of 2011 is projected to be in the range of $343 million to $383 million.
• Diluted earnings per share is anticipated to be between $0.19 and $0.37 on a GAAP basis in the fourth quarter of 2011. On a non-GAAP basis diluted earnings per share is anticipated to be between $0.27 and $0.45. Non-GAAP earnings per share excludes amortization of intangible assets, equity compensation expense, specified non-recurring items and related taxation expense.