Xyratex: Not Sorry Now

Xyratex Ltd. (Nasdaq: XRTX) may have been the reason some startups didn't file for IPO last year, but the newly public company showed no regrets when it posted year-end earnings today (see Xyratex Reports Earnings, We Pick Our Privates, and Xyratex Has No IPO Regrets).

Xyratex posted $116.7 million in fourth-quarter revenue, up 1.6 percent sequentially and 17.4 percent year-over-year. GAAP net income was $8.2 million for the quarter, or $0.29 per diluted share. Revenue for fiscal year 2004 was $459 million, up 37.5 percent year-over-year.

Revenue for the company's storage and network systems business, which accounted for 69 percent of yearly revenue, was $84.4 million for the quarter, up 25 percent year-on-year and 3 percent sequentially. This segment provides OEMs such as Network Appliance Inc. (Nasdaq: NTAP) with NAS, SAN, and nearline storage gear.

Though Xyratex owed over 50 percent of its sales to NetApp last year, CFO Richard Pearce sees "strong growth" in the storage market overall. He and CEO Steve Barber predict revenue from their OEM systems business to grow 1 to 5 percent next year.

Storage infrastructure gear, which includes equipment to help disk-drive manufacturers build and test their drives, will grow more, however, between 15 and 20 percent, according to Pearce and Barber. One reason for this is the growing popularity of "high capacity, low cost" storage, they say, in both the SATA and Fibre Channel spaces.In the infrastructure space, Xyratex has high hopes for its recent partnership with Maxtor Corp. (NYSE: MXO), for which Xyratex is helping build some newfangled RAID solutions (see Xyratex to Test Maxtor). While execs wouldn't comment too much on the new Maxtor products, since they're not due until mid-year 2005, they claim the deal is the precursor to significant technology sales this year.

There are downsides, of course. Xyratex is heavily dependent on its OEMs. And it can't hide the fact that its IPO took a bite: It posted a non-cash equity compensation expense of $181.1 million for 2004, as a result of the public offering. The posting brought GAAP net loss to $135.2 million, or a loss per share of $7.43.

Then there's the matter of margins: Gross margin in the fourth quarter was 20.8 percent before equity compensation; it was 22.7 percent in the third quarter and 22.3 percent for last year's fourth quarter. Execs attribute the firm's lower margin this quarter to product mix, shipment of gear that made money but didn't result in a lot of profit when all costs were counted in.

As to outlook: For the first fiscal quarter of 2005, revenue is projected to be $120 million to $127 million, about 1 to 6 percent more than last year's first quarter and 3 to 9 percent more sequentially.

Xyratex shares were selling at $15.07, down $1.24 (7.60%) in midmorning trading.Mary Jander, Site Editor, Byte and Switch