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Xyratex (XRTX)

Q3 2011 Earnings Call

September 29, 2011 4:30 pm ET

Executives

Steve Barber - Chief Executive officer, Acting Networked Storage Solutions General Manager and Director

Richard Pearce - Chief Financial officer, Acting Storage Infrasructure General Manager and Director

Brad Driver - Investor Relations

Analysts

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

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Jung Pak - BMO Capital Markets

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Xyratex Ltd. Earnings Conference Call. My name is Georgina, and I will be your operator for today. [Operator Instructions] Today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brad Driver, Vice President of Investor Relations. Mr. Driver, please go ahead.

Brad Driver

Thank you, Georgina, 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 to today's Xyratex Fiscal Third 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 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 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 third quarter. Please note that all numbers are in accordance with GAAP unless stated otherwise.

Total revenue was $361.8 million, down 16% as compared to the third quarter of last year and an increase of 7% compared to our prior fiscal quarter. Sales of our Networked Storage Solutions products were $336.6 million or 93% of total revenue. This is an increase of 6.1% as compared to $317.2 million in the same quarter a year ago and an increase of 11.8% compared with $301.2 million in our prior fiscal quarter. The increase reflects good demand from all of our customers. The increase from the prior year reflects the ramp of business with certain Tier 2 customers, which were acquired by Tier 1 storage providers, offset by a proportional product volume shipped as per our contract with NetApp.

Sales of our Storage Infrastructure products were $25.2 million or 7% of total revenue, down 77.7% as compared to $113 million in the same quarter a year ago and down 32.6% compared to our prior fiscal quarter. The decrease in revenue as compared to the third quarter of last year primarily reflects the significantly lower demand for disk drives, the uncertainty regarding the pending acquisitions by Seagate and Western Digital and increased competition.

Gross profit margin in the third quarter was 16.7% compared to 17.6% in the same period a year ago and 12.9% in our prior quarter. The decrease from last year resulted from the significantly lower SI revenues offset by a favorable customer and product mix in the NSS business. The increase compared to the prior fiscal quarter primarily reflects stronger than expected gross margin in our NSS business due to favorable customer and product mix. Gross margin for our NSS business were 17.2% as compared to 12% a year ago and 14.9% in our prior fiscal quarter.

The timing of the transition of a number of customer products has had a beneficial effect on gross margin. And at this time, we do not expect the same beneficial effects next year. As a result, we expect NSS margins in 2012 to vary between 14% and 16%.

Gross margin for the SI business was 9.6% as compared to 33.8% a year ago and negative 2.7% last quarter. The decrease in gross margin compared with the previous year was primarily the result of the impact of fixed operating costs on lower revenues. Additionally, as a result of the bankruptcy filing by Solyndra, we recorded a bad debt provision of approximately $1 million. Solyndra has been a customer for approximately 4 years.

Turning to non-GAAP expenses. Our operating expenses totaled $45 million compared to $46.3 million last quarter and $37.6 million last year. We commenced actions to reduced expenses in the SI business in September, including reducing the number of permanent and contract workers. We expect to spend $4 million on restructuring costs in 4Q 2011, and these are included in the non-GAAP EPS forecasts we included in our earnings release.

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