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Xyratex Ltd. (XRTX)

F2Q10 (Qtr End 05/31/2010) Earnings Call

June 30, 2010 4:30 p.m. ET

Executives

Brad Driver - VP, IR

Steve Barber - CEO

Richard Pearce - CFO

Analysts

Amit Daryanani - RBC Capital Markets

Ananda Baruah - Brean Murray

Glenn Hanus - Needham & Company

Keith Bachman - Bank of Montreal

Presentation

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2010 Xyratex earnings conference call. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Brad Driver, VP of Investor Relations.

Brad Driver

Thank you and 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 Xyratex's fiscal second quarter 2010 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 homepage 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 & Exchange Commission, including the company's 20F dated February 23, 2010.

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'd like to now turn the call over to Richard to review the financial details of the quarter.

Richard Pearce

Thank you, Brad and good afternoon everyone. I'd like to thank you for joining us today. Our press release is available both on PR Newswire and our website. I'd now like to provide you with some commentary about our results for the second quarter. Please note that all numbers are in accordance with GAAP unless stated otherwise.

Total revenue was $455.9 million, up 134.1% as compared to the second quarter of last year, and up 42.9% from our prior fiscal quarter. Sales of our network storage solutions products were $343.9 million, or 75.4% of total revenue. This is an increase of $159.6 million or 86.6% compared to the second quarter of last year, and up 26.9% compared with $271 million in our prior fiscal quarter.

The increase in revenue reflects strong demand across our customer base. Sales of our storage infrastructure products were $112 million or 24.6% of total revenue, up $101.5 million compared to the second quarter of last year, and up 64 million or a 133.3% over our prior fiscal quarter.

The increase in revenue reflects increased demand and capacity by both of our largest customers. Gross margin was 18.1% for the quarter compared to 12.9% in the same period a year ago, and 18.1% in our prior fiscal quarter. This increase compared to last year is due to the high proportion of SI revenues.

The gross margin for our network storage solutions products was 12.8%. This compares with 12.7% last year and 15.2% last quarter, in line with our prior guidance. The decline in gross margin compared to the prior quarter reflects the expected transition to the next generation product by one of our major customers. This product contains high density and higher cost disk drives, which result in reduced gross margin percentage.

The gross margin for the storage infrastructure products was 34.6%, compared to 18% last year and 34.7% last quarter.

Turning to non-GAAP expenses, our operating expenses totaled $35.5 million compared to $27.9 million last quarter. This $7.7 million increase was in line with our expectations and consisted of approximately $6 million of investments within the two divisions, and $1.7 million of bonus accruals resulting from the quarterly performance.

Moving on to net income. On a non-GAAP basis, net income was $46.8 million or $1.49 per diluted share, compared to a net loss of $6.6 million a year ago and net income of $29.4 million in the prior quarter.

Turning our attention now to the balance sheet, cash and cash equivalents at the end of the quarter was $58.3 million compared with $53.7 million at the end of Q1. This was above our original expectations, despite certain quarter end customer payments of approximately $20 million being deferred over quarter-end as a consequence of global public holidays at the end of May.

Cash flow from operations was $8.1 million in the quarter. Inventories increased by $30.2 million to $189 million in the quarter. Inventory turns were 7.8, compared to 6.5 for the previous quarter. This reflects the increased revenue in the quarter.

Accounts receivable increased by $43.7 million in the quarter to $245.3 million. Day sales outstanding were 49 in the quarter, compared to 58 in the previous quarter. The prior quarter was particularly high due to the timing of shipments in the quarter.

Headcount at the end of May was 1,905 permanent employees, an increase of 12% or 204 employees. Over 65% of this increase has been in our global manufacturing and fulfillment operations to meet increasing customer demand, with the balance being in key technical skill areas needed to support the increased opportunities we are addressing.

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