Xyratex: Fiscal 2Q13 Financial Results

(in US$ million)	2Q12	2Q13	6 mo. 12	6 mo. 13
Revenues	322.1	216.2	617.8	411.8
*Growth*		-33%		*-33%*
Net income (loss)	7.0	2.9	17.9	(2.2)

Xyratex Ltd announced results for the second fiscal quarter ended May 31, 2013.

Revenues for the second quarter were $216.2 million, a decrease of 33% compared to revenues of $322.1 million for the same period in the prior year.

For the second quarter, GAAP net income was $2.9 million, or $0.11 per diluted share, compared to GAAP net income of $7.0 million, or $0.24 per diluted share, in the same period last year. Non-GAAP net income was $2.7 million, or $0.10 per share, compared to non-GAAP net income of $9.3 million, or $0.32 per diluted share, in the same quarter a year ago.

Gross profit margin in the second quarter was 22.0%, compared to 16.5% in the same period last year and 18.9% in the prior quarter. The increases from last year and the prior quarter primarily reflect a favorable variation in product mix in both our Enterprise Storage Solutions and HDD Capital Equipment product segments.

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 July 30, 2013 to shareholders of record as of the close of business on July 15, 2013. This dividend represents a quarterly payout of approximately $2.1 million in aggregate, or $8.4 million on an annualized basis.

"After three months in the CEO position, my perspectives on the important role Xyratex plays in the storage market and the significant opportunities for the company in terms of future growth have been confirmed for me. The capability and expertise that Xyratex possesses to deliver storage technology that enables its customers to be successful in their markets is proven, repeatable and verifiable. I have conducted a detailed analysis of the business with the board, including our most recently appointed board members, Vadim Perelman and Ken Traub, who represent our largest investor, Baker Street Capital. Our core businesses of Capital Equipment and Storage Solutions are both profitable and cash generative. I am encouraged by the longer term opportunities for growth in these businesses. The gradual revenue decline from our previously largest customer NetApp will cease after 2014 and this revenue is being replaced with new OEM business wins. With our new ClusterStor product line, which addresses the HPC/big data marketplace, we have achieved incremental design wins, added a number of new customers in just the last 3 months and are on course to meet our revenue target of $60 million in fiscal 2013. I am very encouraged that ClusterStor is approaching the inflection point where, as revenue ramps year over year, the product line can generate a positive contribution to the overall business," said Ernie Sampias, CEO. "I can also confirm that the board is unanimously supportive of our long-term growth strategy."

Business Outlook

Revenue in the third fiscal quarter of 2013 is projected to be in the range of $195 million to $225 million.
Fully diluted earnings (loss) per share is anticipated to be between a loss of $0.16 and earnings of $0.08 on a GAAP basis in the third quarter. On a non-GAAP basis, fully diluted earnings (loss) per share is anticipated to be between a loss of $0.04 and earnings of $0.20. Anticipated non-GAAP earnings (loss) per share in our third quarter excludes amortization of intangible assets, equity compensation expense, specified non-recurring items, the related taxation expense and an additional tax expense of approximately $2 million resulting from a reduction in the deferred tax asset caused by a fall in U.K. tax rates.

Comments

Abstracts the earnings call transcript:

Richard Charles Pearce, CFO:
"Sales of our Enterprise Data Storage Solutions products in the second quarter were $169.3 million, representing a decrease of $109.1 million or 39% compared to the second quarter of last year and down 4% compared with $176.6 million in our prior fiscal quarter. The reduction from last year, as we have discussed previously, primarily reflects changes in sourcing by certain of our major customers, particularly the proportional product volume shift as per our annually declining contract with our previous largest customer, NetApp.
"Sales of our Capital Equipment products in the second quarter were $46.8 million, up 7% compared to the second quarter of last year and up 146% compared to our prior fiscal quarter. We have experienced a significant level of customer orders in the quarter and are close to full coverage of the fiscal year plan at this point.
"Cash and cash equivalents at the end of the quarter was $85 million, down from $93 million at the end of Q1.
"Headcount at the end of the May quarter was 1,830 permanent employees, a reduction of 31 employees or 2% over the previous quarter, primarily from our operations activities, as we scaled our capability in line with demand.
"I'll give you them as a approximate percentage of the overall Storage Solutions revenue. NetApp was approximately 26%, Dell was approximately 13%, IBM was approximately 30% and HP was approximately 16%.
"In terms of the guidance that we've provided in the August quarter, I'd expect the Storage Solutions revenues to be somewhere between $150 million and $170 million, and the Capital Equipment revenues to be somewhere between the $45 million and the $55 million.
"If I look into next year, whilst we will probably lose the NetApp side of things, which is $100 million - approximately $160 million, as we've stated, I would suspect that overall revenues may only come down by somewhere between $20 million and $50 million. So really looking to backfill a good proportion of that into next year, and then that would represent growth, excluding Network Appliance, of somewhere north of 10%, and then looking to continue that trajectory as we go out then into the future years."

Ernest Sampias, interim CEO:
"In our Storage Solutions business, we are experiencing good demand across the majority of our customers, including both our Tier 1 and emerging OEM customers. Specifically, 2 of our larger OEM customers exceeded their forecast in Q2, while several of the customers who are delivering all-flash and cloud solutions saw upside.
"We continue to see strong demand for our market-leading, high-density OneStor 84-drive platform in both the storage application platform and expansion enclosure formats. During the quarter, Xyratex was awarded another high-density win at a current Tier 1 customer and expect shipments to begin in late summer to early fall. We also initiated shipments to 2 other OEM customers for the same platform. Both of these OEMs are targeting cloud infrastructure applications with the 84-drive platform. Specific to our storage application platform in 2U and 4U configurations, we were also awarded several emerging OEM account wins.
"In our ClusterStor High Performance and Big Data storage businesses, we continue to expand our position in the market and gain industry recognition from our performance leadership. We have added 14 new customers over the course of the last 2 quarters, including in market verticals such as scientific research, energy exploration and life sciences.
"We are a valued partner with all 3 HDD manufacturers and 5 of the 7 Tier 1 data storage providers, plus many emerging data storage providers."