Xyratex Zeroes In on Growth, Changes

Xyratex turned in a solid full-year report last night, revealing increased revenues and progress with its OEMs, chiefly Network Appliance. (See Xyratex 4Q Profit Down.) At the same time, lower gross margins and a 30 percent plunge in fourth-quarter net income raised some questions.

Revenues for fiscal 2006 grew 44.7 percent year-on-year to $983.6 million. Non-GAAP net income for the year was up 38.3 percent to $64.9 million, or a diluted earnings per share of $2.17.

Of that, 60 percent came from the sale of network storage solutions, the disk-based systems Xyratex OEMs to NetApp (which accounted for 46 percent of Xyratex revenue in 2006), 3PAR, Compellent, Equallogic, and Rackable Systems, among others. The other 40 percent came from what Xyratex calls storage infrastructure gear, which includes equipment for testing and manufacturing disk drives.

Here the key OEM, Seagate, which accounted for 29 percent of Xyratex revenue in 2006, reduced some orders thanks to the use of some older equipment inherited from its year-ago acquisition of Maxtor. (See Seagate Munches Maxtor.) Analysts believe this could affect storage infrastructure profits for at least a couple of quarters in 2007.

Xyratex's quarterly revenues were $241.1 million, up 18.4 percent year-on-year and down 8.4 percent sequentially. Non-GAAP net income was $10.9 million, or a diluted earnings per share of $0.36, compared to non-GAAP net income of $15.5 million year-on-year -- a 30 percent drop."The fiscal year performance reflects strong growth of the storage market and our OEM customers," said CFO Richard Pearce on a conference call with analysts.

For the quarter, execs broke out the following information about Xyratex's two key segments:

Gross profit margin in the fourth quarter was 17.4 percent, down from 21.1 percent last quarter and from 21.7 percent last year.

Execs blamed the reductions in profit and gross margin to Seagate's use of Maxtor gear, as well as to unexpectedly high demand for JBOD gear, which carries lower margins. Also, an influx of new customers required higher spending and reduced margins.

Looking ahead, CEO Steve Barber said there are several key growth drivers affecting the data storage and disk drive markets. These include:

Barber says consumers are going to require four times the amount of storage in their systems as they move to high-definition video. He also cited the adoption of Perpendicular Magnetic Recording (PMR) in consumer gear as a factor in driving higher capacity disk drives.

As a result of all these developments, Xyratex's guidance for next year is a mixed bag. Total revenue for the first quarter 2007 will fall between $220 million and $235 million, up 15 to 23 percent year-on-year, but down 3 to 9 percent sequentially -- again, execs cite the Seagate/Maxtor situation. Of total revenues, networked storage solutions will bring in $147 to $155 million and storage infrastructure $73 to $80 million.

"We continue to see strength in Q1, but there's a lot of moving parts," said Barber.

Mary Jander, Site Editor, Byte and Switch