Emulex Announces Second Quarter Results

COSTA MESA, Calif., Jan. 31, 2013 /PRNewswire/ -- Emulex Corporation (NYSE:ELX) today announced results for its second quarter of fiscal 2013 which ended on December 30, 2012.

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Second Quarter Financial Highlights

• Total net revenues of $122.1 million, an increase of 2% sequentially and a decrease of 5% year-over-year
• Network Connectivity Products (NCP) net revenues of $96.1 million, a decrease of 1% both sequentially and year-over-year, representing approximately 79% of total net revenues
• Storage Connectivity Products (SCP) net revenues of $22.7 million, an increase of 21% sequentially and a decrease of 18% year-over-year, representing 18% of total net revenues
• Advanced Technology and other Products (ATP) net revenues of $3.3 million, a decrease of 11% sequentially and 25% year-over-year, representing 3% of total net revenues
• Non-GAAP gross margins of 63.7% and GAAP gross margins of 58.6%
• Non-GAAP diluted earnings per share of $0.19 and GAAP diluted earnings per share of $0.06
• Cash, cash equivalents and investments at the end of the quarter of  $211.2 million

Second Quarter Business Highlights

• Announced intent to acquire Endace Limited, a network performance management company that provides network monitoring appliances, network analytics software and ultra-high speed network access switching with 100 percent accuracy
• Gained more than seven points of overall Fibre Channel revenue market share over nearest competitor and accelerated leadership in emerging 16Gb Fibre Channel (16GFC) segment with more than 75% market share according to Dell'Oro Group's Q3 2012 Fibre Channel Adapter Vendor report and Crehan Research's Q3 2012 Server-class Adapter and LOM market share reports
• Announced new LightPulse® 16Gb Fibre Channel (16GFC) blade adapters for Dell PowerEdge™ blade servers to support the new end-to-end 16GFC blade solution from Dell, extending Emulex 16GFC connectivity for Dell customers across blade, storage and servers
• Delivered an integrated HP NC553i 10Gb FlexFabric adapter for new HP Integrity BL860c i4, BL870c i4 and BL890c i4 Server Blades, providing I/O flexibility, efficiency and simplicity for LAN and SAN connectivity
• Announced OneCore™ Storage software development kit (SDK), a new comprehensive solution for independent hardware and software vendors (IHVs and ISVs) and system integrators developing storage, flash/solid state disk (SSD), application and networking appliance solutions requiring low latency and high performance I/O connectivity
• First I/O vendor to support the new VMware vSphere® 5.1 Web Client with Emulex OneCommand® Manager plug-in for VMware vCenter™ Server, integrating real-time lifecycle management of adapters provided by Emulex into the VMware vCenter Server console, centralizing and simplifying virtualization management
• Won Systems Management Product of the Year award for Emulex OneCommand Vision 3.0 at the Storage, Virtualization and Cloud Computing (SVC) Awards
• Named to CRN's 2013 Data Center 100 list, recognizing technology vendors for powering, supporting and protecting today's data center services in an environmentally and economically friendly manner, while boosting efficiency and productivity
• Partnered with Gnodal to deliver a joint high frequency trading (HFT) solution using Emulex OneConnect® 10Gb Ethernet (10GbE) Network Xceleration™ OCe12000-D adapters, with FastStack™ DBL™ software, and a Gnodal GS4008 10GbE switch, eliminating  network congestion and providing industry-leading low latency
• Announced a joint live data management solution for analyzing big data with uCIRRUS using Emulex OneConnect 10GbE Network Xceleration OCe12000-D adapters, with FastStack Sniffer10G™ software, and uCIRRUS's XPRESSmp™

Financial Results

In the second quarter, total net revenues of $122.1 million represented an increase of 2% over the first quarter results.  On a GAAP basis, Emulex recorded net income of $5.6 million, or $0.06 per diluted share, compared to first quarter GAAP income of $0.7 million, or $0.01 per share.  Non-GAAP net income for the second quarter was $17.2 million, or $0.19 per diluted share, essentially flat with the $0.19 of diluted earnings per share reported in the first quarter. Cash, cash equivalents and investments at the end of the quarter totaled $211.2 million compared to $186.4 million at the end of the first quarter.  Reconciliations between GAAP and non-GAAP results are included in the accompanying financial data. 

CEO Jim McCluney commented, "I'm pleased with the solid execution we were able to deliver for the second quarter, once again meeting both our top line revenue and our earnings goals. In addition to achieving our quarterly revenue and earnings objectives, we also strengthened our balance sheet, exiting the quarter with over $211 million in available cash and investments," continued McCluney.

"Looking forward, we are well positioned in 16Gb Fibre Channel to continue the share gain momentum we have delivered over the past three quarters, and with expected completion of our Endace acquisition this quarter, we will further increase our relevance as a thought leader in connectivity and management of high performance, converged Ethernet networks," McCluney concluded.

Business Outlook

Although actual results may vary depending on a variety of factors, many of which are outside the Company's control, including uncertainty related to the macro IT spending environment, the timing of new server launches by our customers, the timing of completion of the proposed acquisition of Endace Limited and the results and related costs of ongoing patent litigation, Emulex is providing guidance for its third fiscal quarter ending March 31, 2013.  For the third quarter of fiscal 2013, Emulex is forecasting total net revenues in the range of $110-$114 million.  The Company expects non-GAAP earnings per diluted share of $0.12 - $0.14 in the third quarter.  Incremental to this guidance, we expect approximately $0.06 per diluted share related to the retroactive portion of the federal R&D tax credit. GAAP estimates for the third quarter reflect approximately $0.30 per diluted share in expected charges arising primarily from amortization of intangibles, stock-based compensation, costs associated with the proposed acquisition of Endace and the royalties, mitigation expenses and license fees associated with the Broadcom patent litigation, as well as the associated tax impact and U. S. valuation allowance.

About Emulex

Emulex, the leader in converged networking solutions, provides enterprise-class connectivity for servers, networks and storage devices within the data center. The company's product portfolio of Fibre Channel Host Bus Adapters, 10Gb Ethernet Network Interface Cards, Ethernet-based Converged Network Adapters, controllers, embedded bridges and switches, and connectivity management software are proven, tested and trusted by the world's largest and most demanding IT environments. Emulex solutions are used and offered by the industry's leading server and storage OEMs including, Cisco, Dell, EMC, Fujitsu, Hitachi, Hitachi Data Systems, HP, Huawei, IBM, NEC, NetApp and Oracle. Emulex is headquartered in Costa Mesa, Calif. and has offices and research facilities in North America, Asia and Europe. More information about Emulex (NYSE:ELX) is available at www.Emulex.com.

Note Regarding Non-GAAP Financial Information

To supplement the condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), we have included the following non-GAAP financial measures in this press release or in the webcast to discuss our financial results for the second fiscal quarter which may be accessed via our website at www.emulex.com: (i) non-GAAP gross margin, (ii) non-GAAP operating expenses, (iii) non-GAAP operating income, (iv) non-GAAP net income, and (v) non-GAAP diluted earnings per share.  These non-GAAP financial measures exclude certain expenses and reflect an additional way of viewing aspects of our operations that, when viewed with the GAAP results and the reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our results of operations and the factors and trends affecting our business.  However, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP.  We use our non-GAAP financial measures internally to better understand and evaluate our business, prepare annual budgets, and in measuring performance for some forms of compensation.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

Stock-based compensation.  Although stock-based compensation represents an important part of incentive compensation offered to our key employees, we believe that exclusion of the impact of stock-based compensation assists management and investors in evaluating the period over period performance of our business operations and in comparing our performance with those of our competitors.  Stock-based compensation expense will recur in future periods.

Amortization of intangibles. Amortization of intangibles generally represents costs incurred by an acquired company or other third party to build value prior to our acquisition of the intangible assets.  As such, it is effectively part of the transaction costs of the acquisition rather than ongoing costs of operating our core business.  As a result, we believe that exclusion of these costs in presenting non-GAAP financial measures provides management and investors a more effective means of evaluating its historical performance and projected costs and the potential for realizing cost efficiencies within our core business.  Amortization of intangibles will recur in future periods.

Site closure related expenses.  We have recognized expenses related to closure and consolidation of certain facilities.  We believe that exclusion of these expenses is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors.  In this regard, we note that expenses of this type are infrequent in nature.

Patent litigation damages, license fees and royalties. We have incurred expenses in the form of damages, sunset period royalties and settlement costs as a result of a judgment in a patent litigation proceeding with Broadcom and the related partial settlement and worldwide license agreement executed on July 3, 2012 (the Release Agreement).  We believe that exclusion of charges related to the Broadcom patent damages, sunset period royalties and Release Agreement are useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors, as this amount relates to a judgment in litigation and does not reflect a continuing cost of operating our core business.  In this regard, we note that expenses of this type are generally unrelated to our core business and/or infrequent in nature.

Mitigation expenses related to the Broadcom patents.  We have recognized mitigation expenses related to the Broadcom patents.  We believe that exclusion of these redesign, requalification and appeal expenses is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors.  In this regard, we note that expenses of this type are infrequent in nature.

Expenses related to the intent to acquire Endace Limited (LSE:EDA).  We have incurred expenses during the due diligence process for this potential acquisition.  We believe that exclusion of these charges are useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors, as these expenditures do not reflect a continuing cost of operating our current core business.  In this regard, we note that expenses of this type are infrequent in nature.

Valuation allowance for U.S. federal and state deferred tax assets.  The Company has concluded that it is more likely than not that we will be unable to fully utilize the majority of our U.S. federal and state deferred tax assets   As a result, the Company has previously recorded a valuation allowance against those assets to the extent that they cannot be realized through net operating loss carrybacks to prior tax years.  We believe that eliminating the impact of a discrete adjustment of this nature and its continuing impact on our effective tax rate is useful to management and investors in evaluating the performance of the Company's ongoing operations on a period-to-period basis and relative to the Company's competitors.  In this regard, we note that adjustments of this type are generally infrequent in nature.

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"Safe Harbor'' Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, the statements set forth above and below, including without limitation, those relating to the proposed acquisition of Endace above, those contained in the discussion of "Business Outlook" above, and the reconciliation of forward-looking diluted earnings per share below, contain forward-looking statements that involve risk and uncertainties. We expressly disclaim any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the possibility that the proposed acquisition of Endace Limited (Endace) is not completed on a timely basis or at all, the effects of the proposed acquisition of Endace, including our ability to realize the anticipated benefits from the pending acquisition of Endace on a timely basis or at all, and our ability to integrate the technology, operations and personnel of Endace into our existing operations in a timely and efficient manner. In addition, intellectual property claims, with or without merit could result in costly litigation, cause product shipment delays, require us to indemnify customers, or require us to enter into royalty or licensing agreements, which may or may not be available. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they will be obtainable on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations and financial condition could be materially adversely affected. Ongoing lawsuits, such as the action brought by Broadcom Corporation (Broadcom), present inherent risks, any of which could have a material adverse effect on our business, financial condition, or results of operations. Such potential risks include continuing expenses of litigation, risk of loss of patent rights and/or monetary damages, risk of injunction against the sale of products incorporating the technology in question, counterclaims, attorneys' fees, incremental costs associated with product or component redesigns, and diversion of management's attention from other business matters. With respect to the continuing Broadcom litigation, such potential risks also include the adequacy of any sunset period to make design changes, the ability to implement any design changes, the availability of customer resources to complete any re-qualification or re-testing that may be needed, the ability to maintain favorable working relationships with Emulex suppliers of serializer/deserializer (SerDes) modules, and the ability to obtain a settlement which does not put us at a competitive disadvantage. In addition, the fact that the economy generally, and the technology and storage market segments specifically, have been in a state of uncertainty makes it difficult to determine if past experience is a good guide to the future and makes it impossible to determine if markets will grow or shrink in the short term. Continual weakness in domestic and worldwide macroeconomic conditions and disruptions in world credit and equity markets and the resulting economic uncertainty for our customers, as well as the storage and converged networking market as a whole, has and could continue to adversely affect our revenues and results of operations. As a result of these uncertainties, we are unable to predict our future results with any accuracy. Other factors affecting these forward-looking statements include but are not limited to the following: faster than anticipated declines in the storage networking market, slower than expected growth of the converged networking market or the failure of our Original Equipment Manufacturer (OEM) customers to successfully incorporate our products into their systems; our dependence on a limited number of customers and the effects of the loss of, decrease in or delays of orders by any such customers, or the failure of such customers to make timely payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our products or our OEM customers' new or enhanced products; costs associated with entry into new areas of the server and storage technology markets; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; any inadequacy of our intellectual property protection and the costs of actual or potential third-party claims of infringement and any related indemnity obligations or adverse judgments; the effect of any actual or potential unsolicited offers to acquire us; proxy fights or the actions of activist shareholders; impairment charges, including but not limited to goodwill and intangible assets; changes in tax rates or legislation; the effects of acquisitions; the effects of terrorist activities; natural disasters, and any resulting disruption in our supply chain or customer purchasing patterns or any other resulting economic or political instability; the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions; the effects of changes in our business model to separately charge for software; the effect of rapid migration of customers towards newer, lower cost product platforms; possible transitions from board or box level to application specific integrated circuit (ASIC) solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a faster than anticipated decrease in the average unit selling prices or an increase in the manufactured cost of our products; delays in product development; our reliance on third-party suppliers and subcontractors for components and assembly; our ability to attract and retain key technical personnel; our ability to benefit from our research and development activities; our dependence on international sales and internationally produced products; changes in accounting standards; and any resulting regulatory changes on our business. These and other factors could cause actual results to differ materially from those in the forward-looking statements and are discussed in our filings with the Securities and Exchange Commission, including our recent filings on Forms 10-K and 10-Q, under the caption "Risk Factors."

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SOURCE Emulex Corporation