Xyratex Ltd Announces Results for the Second Quarter Fiscal Year 2007

Xyratex Ltd (Nasdaq:XRTX), a leading provider of enterprise class data storage subsystems and storage process technology, today announced results for the second fiscal quarter ended May 31, 2007. Revenues for the second quarter were $213.0 million, a decrease of 26.3% compared to revenues of $288.9 million for the same period last year. For the second quarter, GAAP net income was $2.0 million, or $0.07 per diluted share, compared to GAAP net income of $24.6 million, or $0.83 per diluted share, in the same period last year. Non-GAAP net income decreased 80% to $5.1 million, or a diluted earnings per share of $0.17, compared to non-GAAP net income of $25.5 million, or $0.86 per diluted share, in the same quarter a year ago (1). Gross profit margin in the second quarter was 17%, compared to 21.5% in the same period last year, primarily due to business mix. Revenues from sales of our Networked Storage Solutions products were $169.2 million as compared to $153.7 million in the same quarter a year ago, an increase of 10%. Gross profit margin in the Networked Storage Solutions business was 14.4% as compared to 13.3% a year ago. Revenues from sales of our Storage Infrastructure products were $43.9 million as compared to $135.1 million in the same quarter a year ago, a decrease of 67.5%. Gross profit margin in the Storage Infrastructure business was 28% as compared to 30.9% a year ago. "Our second quarter results were in-line with our expectations, and reflect the period of significantly reduced spending from our largest Storage Infrastructure customer as it continues to integrate capital equipment acquired as a result of its recent acquisition. We did a good job of executing to our strategic plans and customer expectations. I am encouraged with regard to our continued progress in expanding our customer base as well as our efforts in accessing new markets for our capital equipment,” said Steve Barber, CEO of Xyratex. "Despite some challenging customer requirements, I am confident that the fundamentals of the markets we serve continue to remain good and believe we continue to improve on our competitive and technology position.” Business Highlights We announced that our new HS-1235E storage system was honored with the spring Intel® Server & Storage Innovation Award, presented at the semi-annual Intel Developer Forum (IDF) to recognize technological advancements and innovation. The HS-1235E storage system is based on a third-generation Xyratex design and tightly couples the latest in storage, server and processing technologies. Intel will offer the HS-1235E as part of its next generation SSR212MC2 and SSR212MC2R Storage Servers. We demonstrated our new F5404E 4Gb FC-SAS/SATA RAID nearline storage system at Storage Networking World in the Spring. The F5404E is aimed at applications requiring large-capacity and low-cost disk storage. We secured new design wins with CorData, Dallmeier, Intel, MIC Associates, NEC, and Open Storage Solutions as well as a number of other Tier 2 and 3 customers. We secured orders for automation products supporting the photovoltaic solar industry in excess of $5 million and have commenced customer factory installations. Business Outlook The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any future acquisitions or divestitures. Revenue in the third quarter of 2007 is projected to be in the range $221 to $241 million. Fully diluted earnings per share is anticipated to be between $0.04 and $0.17 on a GAAP basis in the third quarter. On a non-GAAP basis, fully diluted earnings per share is anticipated to be between $0.16 and $0.29. Non-GAAP earnings per share excludes non-cash equity compensation, amortization of intangible assets, certain non-recurring items and related taxation expense. In the third quarter GAAP net income is expected to be reduced by $0.03 per share as a result of a reduction in taxation rates in the United Kingdom. Conference Call/Webcast Information A replay of the Xyratex quarterly results conference call will be available through July 4, 2007 by dialing +1 (888) 286-8010 in the United States and +1 (617) 801-6888 outside the United States, replay code 11738451. The full press release will be posted to the company web site www.xyratex.com. (1) Non-GAAP net income and diluted earnings per share excludes (a) amortization of intangible assets, (b) equity compensation expense, (c) specified non-recurring items, such as income from sale of a product line, and (d) the related tax effects. Reconciliation of non-GAAP net income and diluted earnings per share to GAAP net income and GAAP diluted earnings per share is included in a table immediately following the condensed consolidated statements of cash flow below. The intention in providing these non-GAAP measures is to provide supplemental information regarding the Company’s operational performance whilst recognizing that they have material limitations and that they should only be referred to with reference to the corresponding GAAP measure. The Company believes that the provision of these non-GAAP financial measures is useful to investors and investment analysts because it enables comparison to the Company’s historical operating results, those of competitors and other industry participants and also provides transparency to the measures used by management in operational and financial decision making. In relation to the specific items excluded: (a) intangible assets represent costs incurred by the acquired business prior to acquisition, are not cash costs and will not be replaced when the assets are fully amortized and therefore the exclusion of these costs provides management and investors with better visibility of the costs required to generate revenue over time; (b) equity compensation expense is non-cash in nature, is outside the control of management during the period in which the expense is incurred and in addition has not been measured consistently as a result of the implementation of FAS 123R; (c) the income from the sale of the product line is non-recurring and does not form part of the Company’s core operations; (d) the exclusion of the related tax effects of excluding items (a) to (c) is necessary to show the effect on net income of the change in tax expense that would have been recorded if these items had not been incurred. Safe Harbor Statement This press release contains forward–looking statements. These statements relate to future events or our future financial performance, including our projected revenue and fully diluted earnings per share data (on a GAAP and non-GAAP basis) for the third quarter. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward looking statements. Factors that might cause such a difference include our inability to compete successfully in the competitive and rapidly changing marketplace in which we operate, failure to retain key employees, cancellation or delay of projects and adverse general economic conditions in the United States and internationally. These risks and other factors include those listed under "Risk Factors" and elsewhere in our Annual Report on Form 20-F as filed with the Securities and Exchange Commission (File No. 000-50799). In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. About Xyratex Xyratex is a leading provider of enterprise class data storage subsystems and storage process technology. The company designs and manufactures enabling technology that provides OEM and disk drive manufacturer customers with data storage products to support high-performance storage and data communication networks. Xyratex has over 20 years of experience in research and development relating to disk drives, storage systems and high-speed communication protocols. Founded in 1994 in an MBO from IBM, and with headquarters in the UK, Xyratex has an established global base with R&D and operational facilities in Europe, the United States and South East Asia. For more information, visit www.xyratex.com. XYRATEX LTD UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   Three Months Ended, Six Months Ended May 31, May 31, May 31, May 31, 2007  2006  2007  2006  (US dollars in thousands, except per share amounts)   Revenues: Networked Storage Solutions $ 169,155  $ 153,738  $ 332,770  $ 282,568  Storage Infrastructure   43,870    135,144    116,661    196,831  Total revenues   213,025    288,882    449,431    479,399    Cost of revenues 176,804  226,853  368,175  379,801  Gross profit: Networked Storage Solutions 24,275  20,504  46,561  40,015  Storage Infrastructure 12,273  41,778  35,267  59,944  Equity compensation   (327)   (253)   (572)   (361) Total gross profit   36,221    62,029    81,256    99,598  Operating expenses: Research and development 19,209  19,402  38,002  35,864  Selling, general and administrative 14,584  15,955  29,384  28,818  Amortization of intangible assets   1,651    1,185    3,302    2,375  Total operating expenses   35,444    36,542    70,688    67,057  Operating income 777  25,487  10,568  32,541  Other income -  1,965  890  1,965  Interest income, net   774    233    1,429    438  Income before income taxes 1,551  27,685  12,887  34,944  Provision (benefit) for income taxes   (450)   3,109    771    3,931  Net income $ 2,001  $ 24,576  $ 12,116  $ 31,013    Net earnings per share: Basic $ 0.07  $ 0.86  $ 0.42  $ 1.08  Diluted $ 0.07  $ 0.83  $ 0.41  $ 1.05    Weighted average common shares (in thousands), used in computing net earnings per share: Basic   28,955    28,670    28,900    28,589  Diluted   29,855    29,739    29,832    29,511  XYRATEX LTD UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS     May 31, November 30, 2007  2006  (US dollars and amounts in thousands)   ASSETS Current assets: Cash and cash equivalents $ 61,400  $ 56,921  Accounts receivable, net 101,740  105,324  Inventories 81,024  93,111  Prepaid expenses 3,686  2,390  Deferred income taxes 2,310  2,513  Other current assets   6,790    7,247  Total current assets 256,950  267,506  Property, plant and equipment, net 35,812  34,471  Intangible assets, net 59,359  58,109  Deferred income taxes   17,052    15,594  Total assets $ 369,173  $ 375,680    LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 80,651  $ 84,896  Short-term borrowings -  4,000  Employee compensation and benefits payable 11,016  16,645  Deferred revenue 12,217  16,303  Income taxes payable 1,596  1,641  Other accrued liabilities   13,101    14,701  Total current liabilities 118,581  138,186  Long-term debt   -    3,000  Total liabilities   118,581    141,186    Shareholders' equity Common shares of Xyratex Ltd (in thousands), par value $0.01 per share 70,000 authorized, 29,015 and 28,793 issued and outstanding 290  288  Additional paid-in capital 349,958  344,686  Accumulated other comprehensive income 1,482  2,774  Accumulated deficit   (101,138)   (113,254) Total shareholders' equity   250,592    234,494  Total liabilities and shareholders' equity $ 369,173  $ 375,680  XYRATEX LTD UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     Six Months Ended, May 31, May 31, 2007  2006  (US dollars in thousands) Cash flows from operating activities: Net income $ 12,116  $ 31,011  Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,434  4,421  Amortization of intangible assets 3,302  2,375  Non-cash equity compensation 3,830  3,324  Changes in assets and liabilities, net of impact of acquisitions and divestitures Accounts receivable 3,584  (30,789) Inventories 12,087  (52,036) Prepaid expenses and other current assets (2,685) (1,219) Accounts payable (4,245) 43,058  Employee compensation and benefits payable (5,629) (1,282) Deferred revenue (4,086) 10,928  Income taxes payable (45) 185  Deferred income taxes 139  4,388  Other accrued liabilities   (476)   5,097  Net cash provided by operating activities   24,326    19,461    Cash flows from investing activities: Investments in property, plant and equipment (7,775) (10,985) Acquisition of intangible assets (4,855) -  Acquisition of business, net of cash received   (1,661)   (3,185) Net cash used in investing activities   (14,291)   (14,170)   Cash flows from financing activities: Payments of long-term borrowings (7,000) (2,000) Proceeds from issuance of shares   1,444    2,825  Net cash provided by (used in) financing activities   (5,556)   825  Change in cash and cash equivalents 4,479  6,116  Cash and cash equivalents at beginning of period   56,921    41,240  Cash and cash equivalents at end of period $ 61,400  $ 47,356  XYRATEX LTD SUPPLEMENTAL INFORMATION     Three Months Ended Six Months Ended May 31, May 31, May 31, May 31, Summary Reconciliation Of GAAP Net Income To Non-GAAP Net Income 2007  2006  2007  2006  (US dollars in thousands, except per share amounts) (US dollars in thousands, except per share amounts)   GAAP net income $ 2,001  $ 24,576  $ 12,116  $ 31,013    Amortization of intangible assets 1,651  1,185  3,302  2,375  Equity compensation 2,170  1,955  3,830  3,324  Other income -  (1,965) (890) (1,965)   Tax effect of non-GAAP adjustments (718) (255) (1,392) (953)         Non-GAAP net income $ 5,104  $ 25,496  $ 16,966  $ 33,794      Summary Reconciliation Of Diluted GAAP Earnings Per Share To Diluted Non-GAAP Earnings Per Share   Diluted GAAP earnings per share $ 0.07  $ 0.83  $ 0.41  $ 1.05    Amortization of intangible assets 0.05  0.04  0.11  0.08  Equity compensation 0.07  0.07  0.13  0.11  Other income -  (0.07) (0.03) (0.06)   Tax effect of non-GAAP adjustments (0.02) (0.01) (0.05) (0.03)         Diluted non-GAAP earnings per share $ 0.17  $ 0.86  $ 0.57  $ 1.15      Summary Of Equity Compensation   Cost of revenues 327  253  572  361  Research and development 655  534  1,146  819  Selling, general and administrative 1,188  1,168  2,112  2,144          Total equity compensation   2,170    1,955    3,830    3,324