Xyratex: Fiscal 3Q12 Financial Results

(in US$ million)	3Q11	3Q12	*Growth*	9 mo. 11	9 mo. 12	*Growth*
Enterprise storage solutions	336.6	223.4	-34%	972.0	773.9	-20%
HDD capital equipment	25.2	52.3	108%	88.9	119.5	34%
Total revenue	361.8	275.7	*-24%*	1,061	893.5	-16%
Net income (loss)	9.7	7.7		9.8	25.6

Xyratex Ltd announced results for the third fiscal quarter ended August 31, 2012.

Revenues for the third quarter were $275.7 million, a decrease of 24% compared to revenues of $361.8 million for the same period last year.

For the third quarter, GAAP net income was $7.7 million, or $0.28 per diluted share, compared to GAAP net income of $9.7 million, or $0.32 per share, in the same period last year. Non-GAAP net income was $10.3 million, or $0.37 per diluted share, compared to non-GAAP net income of $12.7 million, or $0.42 per share, in the same quarter a year ago.

Gross profit margin in the third quarter was 18.5%, compared to 16.7% in the same period last year and 16.5% in the prior quarter. The increase from last year primarily reflects improved gross margins for HDD Capital Equipment products.

The company also announced that its Board of Directors has approved a quarterly cash dividend of $0.075 per share, unchanged from the prior quarter. The dividend will be payable on October 30, 2012 to shareholders of record as of the close of business on October 16, 2012. This dividend represents a quarterly payout of approximately $2.0 million in aggregate, or $8.0 million on an annualized basis.

During the quarter the company repurchased 892,922 of its common shares at a total cost of $10.0 million under its previously announced share repurchase plan, bringing the total repurchases in the first nine months of the 2012 fiscal year to 1,199,275 common shares at a total cost of $13.6 million. The company’s cash balance amounted to $103.2 million at the end of the third quarter, a decrease of $28.6 million from the prior quarter due primarily to increased inventories resulting from reduced sales.

"Our third quarter proved to be a very challenging quarter due to a number of factors as we stated in our press release last month. Over the last few weeks, we have been able to resolve most of the technical and performance issues with our latest Capital Equipment and HPC products that prevented us from recognizing the associated product revenue prior to the end of the third quarter and we are working very closely with our customers to resolve the remaining issues. I am confident that we will be able to successfully meet all the required technical requirements for the respective products. With regard to the weaker than expected enterprise storage demand that impacted our quarterly results, I do believe that the industry dynamics are weaker than what was expected a few months ago and as a result we have taken a more cautious outlook going forward," said Steve Barber, CEO of Xyratex. "Over the next 18 to 24 months we have a number of new opportunities, particularly in the area of Big Data/HPC that I believe will be positive for the company. We will continue to focus on new growth opportunities while also managing our costs and investments. With a strong balance sheet, I believe we are well positioned to capitalize on these opportunities."

Business Outlook

Revenue in the fourth fiscal quarter of 2012 is projected to be in the range of $235 million to $285 million.
We anticipate recording a loss per share of between $0.15 and $0.43 on a non-GAAP basis in the fourth quarter. 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:
"(...) cash and cash equivalents at the end of the quarter was $103.2 million compared with $131.8 million at the end of Q2. This reduction was primarily related to the increase in inventories for both segments, including those related to the products where customer acceptance was delayed.
"Headcount at the end of the August quarter was 2,032 permanent employees, an increase of 29 or 1.5% over the past quarter. This was specifically related to our recently established Mexico-based operations capability.
"(...), due to both business-specific and macroeconomic reasons, we expect the fourth quarter and at least the first half of the next year to be a challenging period for Xyratex.
"My expectation for the HDD Capital Equipment revenues will be in the range of $60 million to $75 million in Q4. And therefore, using the range, which had been provided at a total level, the storage systems revenue should be in the $175 million to $210 million range.
"So in terms of the third quarter, as a percentage of our Storage Systems revenues, NetApp represented 42%, Dell represented approximately 24%, IBM represented 19% and HP represented 7%.
"Today, we fulfill 50% of the volume of a specific product line for NetApp. And that proportion of our business will be reducing as we go into 2013 to 25% of that. So within the projections and the early expectations for 2013, which we have provided - which I provided earlier, the expectation that, that NetApp number effectively comes down by 50% as we go into 2013. And then, as we look into 2014, I'd say at this stage, our expectations are that there is not significance for NetApp going into that period for Xyratex.
"EMC was one of our major customers, which we did state was coming to an end during 2012 and that has happened. So that's kind of almost now down to 0."

Steve Barber, CEO:
"Our revenues were impacted by a number of factors beyond the macroeconomic slowdown in end-user customer demand, as recently reported by a number of companies in the data storage sector, including a significant and unanticipated trend towards lower configuration systems that reduced disk drive content resulting in reduced revenue in specific programs.
"Our component supply constraints and limited shipments of certain disk drive test systems, customer qualification and acceptance of a number of our disk drive test systems was delayed beyond the quarter end as we work to optimize these new platforms. And customer acceptance of a specific installation of a high-performance computing storage system was delayed due to technical issues.
"More specifically, in our Enterprise Data Storage Solutions segment, there was a material decrease in the demand across our customer base through July and August. This is our planning forecast with many of our customers experiencing a decline in end-user demand. Secondly, we were impacted by specific component constraints for one of our disk drive test systems that prevented us from being able to recognize the associated revenue. This issue has now been resolved, and we expect to be able to recognize that revenue in our fourth quarter.
"Thirdly, we saw a delay in customer acceptance and revenue recognition for a number of our recently installed Optimus 3500 disk drive test platforms in the quarter.
"(...) we saw a delay in securing customer acceptance and revenue recognition for one of our major high-performance computing installations in the quarter.
"We reduced our R&D and associated G&A spend in a number of areas to reflect changes in the markets we serve."