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Xyratex Ltd. (XRTX)

Q2 2009 Earnings Call

June 24, 2009 5:00 pm ET

Executives

Brad Driver - Vice President, Investor Relations

Richard Pearce - Chief Financial Officer

Steve Barber - Chief Executive Officer

Analysts

Aaron C. Rakers - Stifel Nicolaus & Co.

Glenn Hanus - Needham & Company

Jayson Noland - Robert W. Baird & Co.

Keith Bachman - BMO Capital Markets

Presentation

Operator

Welcome to the second quarter Xyratex earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Brad Driver, Vice President of Investor Relations.

Brad Driver

Good afternoon everyone. Thank you for taking the time to join us this afternoon. I would like to welcome investors, research analysts, and others listening today to Xyratex’s fiscal second quarter 2009 results conference call. On our call today are Steve Barber, Chief Executive Officer, and Richard Pearce, Chief Financial Officer. Today’s call is being recorded and will be available for replay on Xyratex’s Investor Relations page at www.xyratex.com.

I’d like to remind everyone that today’s comments, including the question and answer session, will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in Xyratex’s filings with the Securities and Exchange Commission, including the company’s 20-F dated February 18, 2009.

Also, please note that in addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Xyratex routinely reports certain non-GAAP financial results. These non-GAAP measures, together with the corresponding GAAP numbers and reconciliation to GAAP, are contained in our earnings press release. We encourage listeners to review these items.

I would now like to turn the call over to Richard to review the financial details of the quarter.

Richard Pearce

Good afternoon everyone. I would like to thank you for joining us today. Our press release is available, both on PR newswire and our Web site.

Overall, I was pleased with our results for the quarter given the ongoing challenges posed by the global economic conditions. We reduced our expenses slightly more aggressively than I projected and I feel we are better positioned to achieve our near- and long-term financial objectives.

We have begun to see some improvement in the capital expenditure forecasts by a number of our customers for the second half of our fiscal year.

I would now like to provide you with some commentary about our results for the second quarter. Please not that all numbers are in accordance with GAAP unless stated otherwise.

Total revenue was $194.7 million, down 26.9% as compared to the second quarter of last year, and up 5.9% from our prior fiscal quarter.

Sales of our Networked Storage Solutions were $184.3 million, or 94.6% of total revenue. This is a decrease of $48.3 million, or 20.8% compared to the second quarter of last year, and up 11.2% compared to $165.7 million in our prior fiscal quarter.

The decline in revenue as compared to the same quarter a year ago primarily reflects the implementation of our license agreement with NetApp, as I previously discussed, whereby a maximum of 25% of their volume can be undertaken through an authorized manufacturer.

As compared to the prior quarter, we experienced greater demand from a number of our tier-1 and tier-2 customers.

Sales of our Storage Infrastructure products were $10.5 million, or 5.4% of total revenue, down $23.4 million, or 66.0%, compared to the second quarter of last year, and down 42.3% over our prior fiscal quarter. This performance was less than expected, primarily due to the timing of shipments across the quarter end.

The overall scale of the revenue this quarter reflects the specific industry dynamics in the disk drive capital equipment market that we outlooked in previous earnings calls.

Gross margin was 12.9% for the quarter compared to 15.3% in the same period a year ago, and 11.4% in our prior fiscal quarter. This reduction in overall gross margin, compared to the prior year, primarily reflects the lower proportion of Storage Infrastructure revenue in the quarter and the change in the sales mix of our Networked Storage Solutions products.

The gross margin for our Networked Storage Solutions products was 12.7%. This compares to 14.0% this period last year and 11.2% last quarter. The decrease in gross margin is primarily a result of product mix.

The gross margin for the Storage Infrastructure products was 18.0%, compared to 24.9% last year, and 15.2% last quarter, in line with our expectations.

This reduction in gross margin, compared with the prior year, is due primarily to the relatively low SI revenue in the quarter.

Non-GAAP operating expenses totaled $31.4 million compared to $35.6 million in Q2 of last year and $31.7 million last quarter. Expenses in the quarter included an increase in bad debt provision of $1.2 million and therefore, on a normalized basis, we have seen a material decline in our quarterly run rate as a result of our expense controls and the restructuring we have undertaken. The total costs related to restructuring are $4.2 million year-to-date.

On a non-GAAP basis, net loss was $6.7 million. This compares to $4.6 million profit in Q2 2008 and a net loss of $10.8 million in the prior quarter.

Fully diluted loss per share for the quarter, on a non-GAAP basis, was $0.23, based on there being 29.5 million shares outstanding in Q2.

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