Xyratex (XRTX)

Q2 2012 Earnings Call

July 05, 2012 4:30 pm ET


Brad Driver

Richard Pearce - Chief Financial Officer and Director

Steve Barber - Chief Executive Officer and Director


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

Glenn Hanus - Needham & Company, LLC, Research Division

David Ryzhik

Jung Pak



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Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Xyratex Earnings Conference Call. My name is Kim, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to your host for today's conference, Mr. Brad Driver, Vice President of Investor Relations. Please proceed, Mr. Driver.

Brad Driver

Thank you, Kim, 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 2012 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 24, 2012. Also, please note that in addition to reported 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 in 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

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 $322.1 million, down 4.9% as compared to the second quarter of last year and up 8.9% from our prior fiscal quarter.

Sales of our Enterprise Data Storage Solutions products was $278.5 million or 86.4% of total revenue. This is a decrease of 7.5% compared to the second quarter of last year and an increase of 2.3% compared to our prior fiscal quarter. Sales of our capital equipment products were $43.7 million or 13.6% of total revenue, up 16.8% compared to the second quarter of last year and up 85% compared to our prior fiscal quarter.

Gross margin was 16.7% for the quarter compared to 12.9% in the same period a year ago and 17.9% in our prior fiscal quarter. The gross margin for our Enterprise Data Storage Solutions products was 16.3% compared to 14.9% last year and 17.3% last quarter.

In addition to product mix, the increase from the prior year was impacted by the sale of specific products without disk drives. The gross margin for our capital equipment products was 19% compared to negative 2.7% last year and 24.7% last quarter. The prior year margin was impacted by a higher fixed cost base, product mix and inventory provisions. This quarter's gross margin was in line with our expectations relative to product mix.

Non-GAAP operating expenses in the quarter were $42.4 million compared to $46.3 million in 2Q of last year and $39.6 million last quarter. The reduction from prior year reflects the restructuring actions we implemented towards the end of last year. The increase in the current period is primarily related to the deferral of some specific product development expense from the first quarter to later in the year and increasing R&D investments in the High Performance Computing area.

On a non-GAAP basis, net income was $9 million or $0.32 per diluted share compared to a net loss of $1.9 million a year ago and net income of $11.4 million in the prior quarter.

Turning our attention now to the balance sheet. Cash and cash equivalents at the end of the quarter was $131.8 million compared with $155.8 million at the end of Q1. This reduction, as forecast, was primarily related to the increase in working capital required for the HDD Capital Equipment business and the increase in disk drive inventories where certain hubbing arrangements have been restricted in the near term. Additionally, the reduction included expenditures for share repurchases of $3.6 million in the quarter.

Cash used in operations was $15.2 million in the quarter. Inventory increased by $27.9 million to $180.3 million in the quarter as described above. Inventory turns were 6 compared to 6.5 for the previous quarter. Accounts receivable decreased by $11.5 million in the quarter to $163.6 million. Days sales outstanding were 46, unchanged from the previous quarter.

Headcount at the end of the May quarter was 2,003 permanent employees, an increase of 53 or 2.7% over the past quarter, primarily in our Asia-based operations and field service organizations in support of the increased HDD Capital Equipment production and installation, as well as our new Software Center of Excellence in Waterloo, Canada.

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