Xyratex CEO Discusses Q4 2010 Results - Earnings Call Transcript

Xyratex Ltd (XRTX)

Q4 2010 Earnings Conference Call

January 6, 2011 4:30 pm ET

Executives

Brad Driver - VP, IR

Steve Barber - CEO

Richard Pearce - CFO

Analysts

Shebly Seyrafi - CapStone investments

Gary Wey [ph] – Brean Murray

Glenn Hanus – Needham & Company

John Peck - BMO Capital Markets

P resentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter Xyratex earnings conference call. My name is Jeremy and I'll be your operator for today. (Operator Instructions)

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

Brad Driver

Thank you Jeremy 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 fourth quarter and full fiscal year 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 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 & 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 would now like to turn the call over to Richard to review the financial details of the quarter and the full year.

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 Web site.

I'd now like to provide you with some commentary about our results for the full fiscal year and the fourth quarter of 2010. Please note that all numbers are in accordance with GAAP, unless stated otherwise.

Revenue for the full year was $1.6 billion, up 84.6% compared to fiscal year 2009. Revenue for the fourth quarter was $397 million, up 63.6% as compared to the fourth quarter of last year and down 7.8% from our prior fiscal quarter. Sales of our network storage solutions products were $327 million, representing an increase of $123 million or 60.6% compared to the fourth quarter of last year and up 3% compared with $317 million in our prior fiscal quarter.

The increase in revenue compared to the fourth quarter of last year reflects strong demand across our customer base.

I continue to be very encouraged with the demand momentum we are seeing with new and existing customers, and the progress we are making in increasing the scale of this business.

Revenue for the full year increased 65.2% to $1.26 billion in 2010 compared to $762 million in 2009. Accounting for 78.6% of total revenue and 59.3% of gross margin. The fiscal year performance for our NSS division reflects very strong growth across our major customers and some catch-up demand from 2009.

Sales of our storage infrastructure products were $70 million, up 77% compared to the fourth quarter of last year and down 38% compared with our prior fiscal quarter. Revenue for the full year increased 224% to $343 million compared to $106 million in 2009. Accounting for 21.4% of total revenue and 40.7% of gross margin.

Fiscal year performance for our SI division reflects stronger demand for our capital equipment by our two largest customers and a material amount of catch-up demand after a year of very little capital investment in 2009.

For the full year 2010, gross margin was 17.5% as compared to 14.4% in 2009. The increase from the prior year was primarily due to the increase in SI revenues.

Gross margin for 4Q 2010 was 16.1% compared to 15.6% in the same period a year ago and 17.6% in our prior fiscal quarter. The change from the prior quarter was primarily due to the decrease in the proportion of SI revenues.

For the full year, gross margin in the network storage solutions business was 13.3% as compared to 12.9% in fiscal 2009. The gross margin for Q4 2010 was 13.3% flat as compared to a year ago and up compared to 12% in the prior quarter. The increase as compared to the prior quarter is primarily due to product mix, specific to this quarter.

For the full year, gross margin in the storage infrastructure business was 33.4%, compared to 26.6% in fiscal 2009. The gross margin for Q4 2010 was 29.7% compared to 28.7% last year and 33.8% in the prior quarter. The increase as compared to last year is primarily a result of increased revenues relative to fixed costs.

For the full year, Non-GAAP operating expenses increased by 17.7% to $144.6 million as compared to $122.8 million in 2009. The primary reason for the increase is the growth in the overall business. In addition to certain acquisitions undertaken during the year.

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