Xyratex: Fiscal 4Q08 Financial Results

Xyratex Ltd. announced preliminary results for the fourth quarter and fiscal year ended November 30, 2008.

Based upon preliminary, unaudited information,
Xyratex Ltd expects:

• Revenues for the fourth quarter to be $285.4 million, an increase of 15.1% compared to revenues of $248 million for the same period last year. Revenues for the full year to be $1,049.7 million, an increase of 12.7%, compared to revenues of $931.6 million for fiscal year 2007.
• A fourth quarter GAAP net loss of $63.2 million, or $2.17 per diluted share compared to GAAP net income of $11.7 million in the same period last year. A GAAP net loss for fiscal year 2008 of $55.4 million or $1.90 per diluted share compared to a GAAP net income of $28.1 million for fiscal year 2007.
• A fourth quarter non-GAAP net loss of $6.3 million, or $0.22 per diluted share compared to non-GAAP net income of $13.1 million, in the same quarter a year ago. A non-GAAP net income for fiscal year 2008 of $9.5 million, or a diluted earnings per share of $0.32 compared to non-GAAP net income of $37.5 million, or $1.26 per diluted share, for fiscal year 2007(1).
• Gross profit margin in the fourth quarter of 9.8%, compared to 18.5% in the same period last year and 17.6% in the prior quarter.

Included in both the 2008 fourth quarter and full year preliminary GAAP results, but excluded from the non-GAAP results are the following significant charges:

• A non-cash impairment of Goodwill of $34.3 million. The Company has considered the value of Goodwill as required under FAS142 and primarily as a result of the recent share price decline, associated with the current macroeconomic environment, it has concluded that a full impairment should be taken against the value of Goodwill.
• A non-cash valuation allowance against the deferred tax asset of $20.6 million. This valuation allowance relates primarily to UK tax losses which are not expected to be utilized as a result of the current economic situation, certain tax concessions in the UK and the tax structure of the overall Xyratex Ltd group. This valuation allowance does not indicate in itself that the overall Xyratex Ltd group will not be profitable in future fiscal periods.

Included in both the 2008 fourth quarter and full year GAAP and non-GAAP preliminary results are the following significant charges:

• An additional Inventory provision of approximately $5 million. This provision primarily relates to the Networked Storage Solutions (NSS) RAID products which have seen a material decline in demand associated with the current global economic situation.
• A specific provision of $9.5 million representing inventory and future vendor claims. This provision is associated with a specific NSS customer’s  product forecast which currently indicates a transition to an updated version sooner than originally planned, giving rise to an exposure on long lead time components. The value of this exposure is dependent upon product demand and final timing of this proposed transition.

As at the date of this release the Company is still assessing the extent of this specific provision and opportunities to mitigate the overall exposure. The outcome of this exercise is not expected to be finalized until the end of January at the earliest and hence the Company has provided at this point what it believes will be its maximum probable exposure of $9.5 million. This is the one area where the Company recognizes a material level of uncertainty and has resulted in all financial results in this press release being described as preliminary. Adjustment to the provision may be required once the analysis is completed, and any such adjustment will be reflected in a subsequent filing giving final 2008 fourth quarter and full year results.

Revenues from sales of our NSS products are expected to be $222.3 million in the fourth quarter as compared to $187.2 million in the same quarter a year ago, an increase of 18.7%. Gross profit margin in the NSS business is expected to be 5.0% as compared to 15.0% a year ago, having been reduced by 6.5% as a result of the provisions described in the preceding section. Revenues from sales of our Storage Infrastructure (SI) products are expected to be $63.1 million as compared to $60.8 million in the same quarter a year ago, an increase of 3.9%. Gross profit margin in the Storage Infrastructure business is expected to be 27.3% as compared to 29.7% a year ago.

“The worsening macroeconomic environment and the pace at which business conditions have changed have resulted in some significant one time non-cash and cash charges in the fourth quarter as detailed in this press release. I do however remain cautiously optimistic with regard to our long-term opportunities and competitive position. I fundamentally believe that we have the right combination of technology and financial strength to be successful in the markets we serve. And while we are not immune from constrained capital expenditure by the Hard Drive Industry, I believe our competitive differentiation and business fundamentals in both of our businesses remain strong,” said Steve Barber, CEO of Xyratex. “We will remain focused on executing in all areas of our business as we navigate through the current challenging macroeconomic environment.”

Business Outlook
Given the reduced visibility caused by the recent changes in the macroeconomic environment, Xyratex Ltd will not be providing formal financial guidance for the first quarter of fiscal year 2009.