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Xyratex Ltd. (XRTX)

Q4 2009 Earnings Call

January 12, 2009 4:30 pm ET

Executives

Brad Driver – Vice President Investor Relations

Richard Pearce – Chief Financial Officer

Steve Barber – Chief Executive Officer

Analysts

Aaron Rakers – Stifel Nicolaus

Keith Bachman – BMO Capital Markets

Glenn Hanus – Needham & Company

Presentation

Operator

Welcome to the Q4 2009 Xyratex earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. Brad Driver, Vice President, Investor Relations.

Brad Driver

Good afternoon everyone. Thank you for taking the time to join us this afternoon. I’d like to welcome investors, research analysts and others listening today to talk about the fourth quarter and full fiscal year 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. 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 general accepted accounting principals, 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’d now like to turn the call over to Richard to review the financial details of the quarter and fiscal year.

Richard Pearce

Thank you Brad and good afternoon everyone, and thank you for joining us today. Our press release is available both PR newswire and our website.

I’d now like to provide you with some commentary about our results for the full year and the fourth quarter. Please note that all numbers are in accordance with GAAP unless stated otherwise.

Revenue for the full year was $867.9 million, down 17.3% compared to fiscal year 2008. Revenue for the fourth quarter was $243 million down 14.9% compared to the fourth quarter of last year and down 1.3% for our prior fiscal quarter.

Sales of our Networked Storage Solutions products in Q4 were $203.4 million representing a decline of $18.9 million or 8.5% compared to the fourth quarter of last year and down 2.5% compared with $2.6 million in our prior fiscal quarter.

The fourth quarter results were impacted by a number of component supply constraints primarily related to semiconductors that prevented us from meeting our customer’s demand requirements. During the quarter we were impacted by both unexpected delay and key component lead times extending beyond expectations following the production capacity scale backs and working capital initiatives implemented by our suppliers earlier in the year.

Revenue for the full year decreased by 11% to $762 million in 2009 compared to $855.8 million in 2008 accounting for 84.7% of total revenue and 77.6% of gross margin.

In addition to the economic factors affecting both the fourth quarter and full year ’09 over 2008, it should be noted that both periods were affected by our arrangement with our largest customer which commenced in January 2009, whereby up to 25% of their quarterly product volume can be manufactured under license by an alternative supplier.

The fiscal year performance for our NSS division reflects the significant decline in demand we experienced as a result of the global economic downturn in the first half of the year impacting the overall storage market and our OEM customer’s business.

Whilst we did see a relative recovery in demand in the second half of the year our ability to meet customer’s upside demand was impacted by key component supply constraints affecting not only Xyratex but the wider electronic sector.

Sales of our Storage Infrastructure product were in line with our expectation at $39.5 million down 37.4% compared to a year ago and up 4.9% versus our prior fiscal quarter. For the full year 2009 revenue for this business was $105.9 million down [break in source audio] compared to fiscal year 2008 accounting for 12.2% of total revenue and 22.4% of gross margin.

The fiscal year performance for our SI division reflects the challenging HDD CapEx spending environment that we experienced in 2009 as the HDD industries scaled back production capacity due to the highly uncertain HDD demand environment. The environment has however, changed significantly over the past few months as will be evidenced in the outlooks which I’ll provide in a moment.

For the full year 2009 gross margin was 14.4% as compared to 15.1% in 2008. Gross margin for 4Q ’09 was 15.6% compared with 12.5% for the same period a year ago and 16.7% for the full year.

Gross margin in the Networked Storage Solutions business was 12.9% compared to 12.5% in fiscal 2008. The gross margin for the fourth quarter was 13.2% compared with 8.4% in prior year and 14% last quarter.

For the full year gross margin in the Storage Infrastructure business was 26.6% versus 27.1% in 2008. In 4Q ’09 the gross margin for the Storage Infrastructure business was 28.2% compared with 27.3% last year and 32.4% last quarter.

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