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Xyratex (XRTX)

Q2 2011 Earnings Call

June 30, 2011 4:30 pm ET


Steve Barber - Chief Executive Officer and Director

Brad Driver - Investor Relations

Richard Pearce - Chief Financial Officer and Director


Shebly Seyrafi - FBN Securities, Inc.

Glenn Hanus - Needham & Company, LLC

Ananda Baruah - Brean Murray, Carret & Co., LLC



Good day, ladies and gentlemen and welcome to the second quarter 2011 Xyratex Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Brad Driver, Vice President of Investor Relations. Please proceed.

Brad Driver

Thank you, Melanie, 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 2011 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

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 filings with the Securities and Exchange Commission, including the company's 20-F dated February 22, 2011. 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

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 $338.5 million, down 25.7% as compared to the second quarter of last year, and down 6.1% from our prior fiscal quarter. Sales of our Networked Storage Solutions products were $301.2 million or 89% of total revenue. This is a decrease of $42.7 million or 12.4% compared to the second quarter of last year, and down 9.9% compared with $334.2 million in our prior fiscal quarter. The decrease in revenue primarily reflects the proportional product volume shift to Jabil, per our contract with NetApp, which we have discussed in previous earnings calls.

Sales of our Storage Infrastructure products were $37.4 million or 11% of total revenue, down $74.6 million compared to the second quarter of last year and up 42.1% over our prior fiscal quarter. The decrease in revenue as compared to the second quarter of last year, primarily reflects rates and expected demand last year as a result of catch up and slower-than-expected demand this year, as a result of the pending acquisitions by our 2 largest customers.

Gross margins was 12.9% for the quarter compared to 18.1% in the same period a year ago and 13.7% in our prior fiscal quarter. This decrease, compared to last year, is due to the lower proportions of SI revenues and lower SI gross margins.

The gross margin for our Networked Storage Solutions product was 14.9%. This compares to 12.8% last year and 14.2% last quarter, above our prior guidance. The increased margins, primarily reflects product mix and we expect the margins to remain in this range through the end of this year. The gross margin for the Storage Infrastructure product was negative 2.7% compared to 34.6% last year and 9.7% last quarter.

The shortfall in margins compared to our historic average annualized margins of 30% was the result of 3 main factors. Approximately $5 million of additional provisions reduced the margin by 13.5%, fixed costs relative to lower revenues reduced margins by approximately 10% and the remaining shortfall related to product mix, including early-stage products that are still in the higher cost introductory phase.

Turning to non-GAAP expenses, our operating expenses totaled $46.3 million compared to $43.6 million last quarter and $34.4 million last year. The higher-than-expected expenses included restructuring costs and incremental variable product development costs. Expenses should remain relatively flat to slightly down through the end of this year, as a result of a reduction in costs in the SI business, offset by increased investment in NSS, primarily related to the recently announced NSS ClusterStor product. On a non-GAAP basis, net loss was $1.9 million or $0.06 per diluted share compared to a net income of $46.8 million a year ago and net income of $7.5 million in the prior quarter.

Turning our attention now to the balance sheet, cash and cash equivalents at the end of the quarter was $126.9 million compared to $98.2 million at the end of Q1. Cash flow from operations was $42.3 million in the quarter. Inventories decreased by $23.8 million to $153.1 million through the quarter. Inventory turns was 7.8 compared to 7.1 for the previous quarter. This reflects stable customer forecasts.

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