Xyratex Ltd. Announces Results for the Fourth Quarter and 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 fourth quarter and fiscal year ended November 30, 2007. Revenues for the fourth quarter were $248.0 million, an increase of 2.9% compared to revenues of $241.1 million for the same period last year. For the fourth quarter, GAAP net income was $11.7 million, or $0.39 per diluted share compared to GAAP net income of $9.4 million in the same period last year. Non-GAAP net income increased 20.5% to $13.1 million, or a diluted earnings per share of $0.44, compared to non-GAAP net income of $10.9 million, or $0.37 per diluted share, in the same quarter a year ago(1). Gross profit margin in the fourth quarter was 18.5%, compared to 17.4% in the same period last year and 17.9% in the prior quarter. Revenues from sales of our Networked Storage Solutions (NSS) products were $187.2 million in the fourth quarter as compared to $167.6 million in the same quarter a year ago, an increase of 11.7%. Gross profit margin in the Networked Storage Solutions business was 15.0% as compared to 13.0% a year ago. Revenues from sales of our Storage Infrastructure (SI) products were $60.8 million as compared to $73.5 million in the same quarter a year ago, a decrease of 17.3%. Gross profit margin in the Storage Infrastructure business was 29.7% as compared to 27.9% a year ago. Revenues for fiscal year 2007 were $931.6 million, a decrease of 5.3%, compared to revenues of $983.6 million for fiscal year 2006. Revenues from sales of our NSS products were $694.0 million for the year as compared to $598.8 in 2006, an increase of 15.9%. Revenues from sales of our SI products were $237.6 million as compared to $384.9 million in 2006, a decrease of 38.3%. GAAP net income for fiscal year 2007 was $28.1 million or $0.94 per diluted share compared to a GAAP net income of $58.2 million for fiscal year 2006. Non-GAAP net income for fiscal year 2007 decreased 42.3% to $37.5 million, or a diluted earnings per share of $1.26, compared to non-GAAP net income of $64.9 million, or $2.19 per diluted share, for fiscal year 2006. "I am pleased with our performance for the 2007 Fiscal Year given the challenges we anticipated at the beginning of the year and duly experienced. And while we weren’t immune from constrained capital expenditure in the Hard Drive Industry, our competitive differentiation and business fundamentals in both of our businesses remain strong,” said Steve Barber, CEO of Xyratex. "The results for the year support our strong position in the industries we serve and our ongoing effort and focus in expanding our partnerships with our existing customers and in developing partnerships with new customers. We are confident that the fundamentals within the markets we serve are positive and that our technology and strong execution will benefit us over the longer term.” Stock Repurchase Plan The Board of Directors has recently authorized a stock repurchase plan. According to the terms of the plan, the Company may repurchase up to $30 million of its outstanding common stock following the cessation of the current black-out period on January 11, 2008. As of November 30, 2007, Xyratex had 29.9 million shares outstanding. Stock repurchase transactions authorized under the plan will occur from time to time in the open market, through block trades or otherwise. Management and the Board of Directors will exercise discretion with respect to the timing and amount of any shares repurchased, based on their evaluation of a variety of factors, including current market conditions. Repurchases may be commenced or suspended at any time without prior notice. Additionally, Xyratex may initiate repurchases under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company would otherwise be precluded from doing so under insider-trading laws. The repurchase program will be funded using the Company's available cash resources, and it is intended that the repurchase program will be Rule 10b-18 compliant. Business Highlights We announced an OEM agreement with NetApp to develop and supply general disk arrays for a variety of NetApp products. This agreement builds on the successful implementation of disk arrays currently provided by Xyratex to NetApp and incorporated within NetApp’s industry leading storage hardware platforms. We announced our new OneStor Extensible Storage Platform (ESP) and announced the first in a series of scalable offerings that will be available for storage and server OEMs. OneStor is a modular, standards-based architecture designed to meet diverse needs combining storage density, intelligent platform management, power efficiency and the industry’s most versatile storage system design. We secured new design wins with ONStor Inc., BlueArc Corp., transtec AG, VMETRO Inc. and EDI Technology Inc. in China. 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 first quarter of 2008 is projected to be in the range $205 to $225 million. Fully diluted loss per share is anticipated to be between $(0.17) and $(0.05) on a GAAP basis in the first quarter. On a non-GAAP basis fully diluted loss per share is anticipated to be between $(0.09) and earnings of $0.03. Non-GAAP earnings per share excludes non-cash equity compensation, amortization of intangible assets, certain other acquisition related charges and related taxation expense. These projections reflect continued capital spending constraints in the Hard Drive Industry. Conference Call/Webcast Information The company will host a conference call to discuss its results at 2:00 p.m. PT/5:00 p.m. ET on Tuesday, January 8, 2008. The conference call can be accessed online via the company's website www.xyratex.com/investors, or by telephone as follows: United States (800) 299-7635 Outside the United States (617) 786-2901 Passcode 85448933 A replay will be available via the company's website www.xyratex.com/investors, or can be accessed by telephone through January 15, 2008 as follows: United States (888) 286-8010 Outside the United States (617) 801-6888 Passcode 84081838 (1) Non-GAAP net income and diluted earnings per share excludes (a) amortization of intangible assets, (b) equity compensation expense, (c) specified non-recurring or non-cash items, such as income from sale of a product line, the effect of a reduction in the income tax rate in the United Kingdom and the effect of changes in exchange rates on the income tax benefit, 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, the income tax expense resulting from the effect on the deferred tax asset of a reduction in the income tax rate in the United Kingdom is non-recurring and the beneficial effect of changes in exchange rates on deferred tax balances is non-cash and is not comparable across periods or with other companies; (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 first 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, changes in our customers volume requirements, 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 manufacturers 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, Year Ended November 30, November 30, November 30, November 30,   2007     2006     2007     2006   (US dollars in thousands, except per share amounts)   Revenues: Networked Storage Solutions $ 187,216 $ 167,618 $ 693,990 $ 598,752 Storage Infrastructure   60,772     73,478     237,643     384,881   Total revenues   247,988     241,096     931,633     983,633     Cost of revenues 202,133 199,058 762,582 786,347 Gross profit: Networked Storage Solutions 28,165 21,814 100,573 82,762 Storage Infrastructure 18,046 20,504 69,716 115,447 Equity compensation   (356 )   (280 )   (1,238 )   (923 ) Total gross profit   45,855     42,038     169,051     197,286   Operating expenses: Research and development 19,370 17,466 77,559 71,391 Selling, general and administrative 16,532 15,867 61,977 60,449 Amortization of intangible assets   2,485     1,430     7,304     5,123   Total operating expenses   38,387     34,763     146,840     136,963   Operating income 7,468 7,275 22,211 60,323 Other income - 1,202 890 3,167 Interest income, net   1,030     295     3,283     1,162   Income before income taxes 8,498 8,772 26,384 64,652 Provision for income taxes   (3,229 )   (582 )   (1,725 )   6,474   Net income $ 11,727   $ 9,354   $ 28,109   $ 58,178     Net earnings per share: Basic $ 0.40   $ 0.33   $ 0.97   $ 2.03   Diluted $ 0.39   $ 0.32   $ 0.94   $ 1.97     Weighted average common shares (in thousands), used in computing net earnings per share:   Basic   29,100     28,762     28,985     28,663   Diluted   29,758     29,505     29,866     29,604   XYRATEX LTD UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS         November 30, November 30,   2007   2006 (US dollars and amounts in thousands)   ASSETS Current assets: Cash and cash equivalents $ 70,678 $ 56,921 Accounts receivable, net 122,327 105,324 Inventories 91,662 93,111 Prepaid expenses 2,994 2,390 Deferred income taxes 3,000 2,513 Other current assets   8,275   7,247 Total current assets 298,936 267,506 Property, plant and equipment, net 37,421 34,471 Intangible assets, net 54,175 58,109 Deferred income taxes   19,743   15,594 Total assets $ 410,275 $ 375,680   LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 96,046 $ 84,896 Short-term borrowings - 4,000 Employee compensation and benefits payable 13,280 16,645 Deferred revenue 15,212 16,303 Income taxes payable 1,165 1,641 Other accrued liabilities   11,311   14,701 Total current liabilities 137,014 138,186 Long-term debt   -   3,000 Total liabilities   137,014   141,186   Shareholders' equity Common shares of Xyratex Ltd (in thousands), par value $0.01 per share 70,000 authorized, 29,092 and 28,793 issued and outstanding 291 288 Additional paid-in capital 356,268 344,686 Accumulated other comprehensive income 1,847 2,774 Accumulated deficit   (85,145)   (113,254) Total shareholders' equity   273,261   234,494 Total liabilities and shareholders' equity $ 410,275 $ 375,680 XYRATEX LTD UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS         Year Ended November 30, November 30,   2007     2006   (US dollars in thousands) Cash flows from operating activities: Net income $ 28,109 $ 58,178 Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation 13,683 10,105 Amortization of intangible assets 7,304 5,123 Non-cash equity compensation 8,057 7,194 Loss on sale of assets 341 265 Changes in assets and liabilities, net of impact of acquisitions and divestitures Accounts receivable (17,003 ) (21,098 ) Inventories 1,449 (21,528 ) Prepaid expenses and other current assets (2,956 ) 1,138 Accounts payable 11,150 4,302 Employee compensation and benefits payable (3,365 ) 3,025 Deferred revenue (1,091 ) (131 ) Income taxes payable (476 ) 80 Deferred income taxes (1,616 ) 5,824 Other accrued liabilities   (2,266 )   2,016   Net cash provided by operating activities   41,320     54,493     Cash flows from investing activities: Investments in property, plant and equipment (16,974 ) (19,932 ) Dispositions in property, plant and equipment - 762 Acquisition of intangible assets (4,833 ) (4,000 ) Acquisition of business, net of cash received   (1,661 )   (12,252 ) Net cash used in investing activities   (23,468 )   (35,422 )   Cash flows from financing activities: Payments of long-term borrowings (7,000 ) (4,000 ) Payment of acquisition note payable - (3,000 ) Proceeds from issuance of shares   2,905     3,610   Net cash used in financing activities   (4,095 )   (3,390 ) Change in cash and cash equivalents 13,757 15,681 Cash and cash equivalents at beginning of period   56,921     41,240   Cash and cash equivalents at end of period $ 70,678   $ 56,921   XYRATEX LTD SUPPLEMENTAL INFORMATION             Three Months Ended Year Ended November 30, November 30, November 30, November 30, 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 $ 11,727 $ 9,354 $ 28,109 $ 58,178   Amortization of intangible assets 2,485 1,430 7,304 5,123 Equity compensation 2,237 1,818 8,057 7,194 Other income - (1,202 ) (890 ) (3,167 ) Effect on deferred tax of changes to UK tax rates and exchange rates (1,743 ) - (1,040 ) - Tax effect of non-GAAP adjustments (1,602 ) (523 ) (4,050 ) (2,384 )         Non-GAAP net income $ 13,104   $ 10,877   $ 37,490   $ 64,944       Summary Reconciliation Of Diluted GAAP Earnings Per Share To Diluted Non-GAAP Earnings Per Share   Diluted GAAP earnings per share $ 0.39 $ 0.32 $ 0.94 $ 1.97   Amortization of intangible assets 0.08 0.05 0.24 0.17 Equity compensation 0.08 0.06 0.27 0.24 Other income - (0.04 ) (0.03 ) (0.11 ) Reduction in UK tax rates (0.06 ) - (0.03 ) - Tax effect of non-GAAP adjustments (0.05 ) (0.02 ) (0.14 ) (0.08 )         Diluted non-GAAP earnings per share $ 0.44   $ 0.37   $ 1.26   $ 2.19       Summary Of Equity Compensation   Cost of revenues $ 356 $ 280 $ 1,238 $ 923 Research and development 711 557 2,477 1,962 Selling, general and administrative 1,170 981 4,342 4,309         Total equity compensation $ 2,237   $ 1,818   $ 8,057   $ 7,194