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Xyratex Ltd. (XRTX)

F3Q09 Earnings Call

September 30, 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.

Amit Daryanani - RBC Capital Markets

Jayson Noland - Robert W. Baird & Co.

Glenn Hanus - Needham & Company

Analyst for Keith Bachman - BMO Capital Markets

Presentation

Operator

Welcome to the third quarter 2009 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 third 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 home 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, including but not limited to a forecast of future revenue and earnings and other financial and business activities. 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.

Now I would like to turn the call over to Richard to review the financials.

Richard Pearce

Good afternoon everyone. I would like to thank you for joining us today. Our press release is available, both on Business Wire and our Web site. I would now like to provide you with some commentary about our results for the third quarter. Please note that all numbers are in accordance with GAAP unless stated otherwise.

Total revenue was $246.3 million, down 12.3% as compared to the third quarter of last year, and up 26.5% from our prior fiscal quarter.

Sales of our Networked Storage Solutions products were $208.6 million, or 84.7% of total revenue. This is a decrease of $4.5 million, or 2.1%, compared to the third quarter of last year and up 13.2% compared with $184.3 million in our prior fiscal quarter.

We are beginning to see the positive effects of growth and demand as products ramp with a number of our new customers we have won over the past 18 months. I continue to be encouraged with the demand momentum we are seeing with new and existing customers and the progress we are making in regards to increasing the scale of this business.

Sales of our Storage Infrastructure products were $37.7 million, or 15.3% of total revenue, down $30.0 million, or 44.3%, compared to the third quarter of last year, and up 259% over our prior fiscal quarter. This performance included greater than anticipated revenues of test racks from one of our larger customers.

Gross margin was 16.7% in the quarter compared to 17.6% in the same period a year ago and 12.9% in our prior fiscal quarter. Whilst a positive increase over the prior quarter, the reduction in overall gross margin over the prior year primarily reflects the relative higher proportion of Networked Storage Solutions revenue in the quarter.

The gross margin for our Networked Storage Solutions products increased to 14% compared to 13.3% for this period last year and 12.7% last quarter. The increase, as compared to last quarter, is primarily due to product mix and operational efficiencies.

The gross margin for the Storage Infrastructure products was 32.4% compared to 31.6% last year and 18% last quarter. The increase, as compared to last quarter, is primarily a result of increased revenues relative to fixed costs.

Non-GAAP operating expenses were $30.3 million, a 20% reduction compared to $38.0 million in Q3 of last year and compares to $31.4 million last quarter. These expenses include $2.0 million of legal costs associated with our intellectual property litigation involving Teradyne.

I believe our decisive actions to significantly reduce costs early in the year were appropriate and positioned us well through the current economic situation. While we see growth going forward in the business, we will continue to carefully manage costs.

On a non-GAAP basis net income was ahead of expectations at $10.7 million, flat compared to a year ago, and compares to a $6.7 million loss in the prior quarter. Fully diluted earnings per share for the quarter, on a non-GAAP basis, was $0.36 based on there being 29.7 million shares outstanding on a weighted average treasury method in Q3.

GAAP net income in the quarter was $7.8 million and included an amortization of intangible assets expense, non-cash stock compensation, and restructuring costs. The reconciliation between non-GAAP and GAAP net income is provided in our press release.

These positive earnings reflect an increase in overall revenue, particularly in our NSS business, coupled with continued focus on cost management. Short-term visibility is improving and I expect this positive momentum to continue into the fourth quarter.

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